Wild Market Swings, Consumer Credit Soars, Mayer on Investment Strategy, Top Funds of ’07, and More!

by Addison Wiggin & Ian Mathias

  • U.S. markets suffer wild volatility… the only believable explanation for yesterday’s sudden spike
  • FOMC minutes show a mutinous Fed… dissent among the ranks leaves traders uneasy
  • When people can’t borrow against their homes… consumer credit spikes to all-time high
  • Wall Street invents global warming index… place your bets on the fate of our planet
  • Mayer on the methods of great investors: diversification? Overrated…
  • Plus, top 10 funds of 2007… an ironic trend that should confirm your 2008 outlook


Markets suffered another volatile day of trading yesterday. The Dow had fallen nearly 150 points by 2 o’clock, but, by some market miracle, it managed to rally over 200 points in the final hour, to end the day up over 1%. The S&P 500 and Nasdaq behaved similarly, but fared even better… both rose 1.3%.

Yesterday, marked the first day in 2008 when all three indexes closed higher.

Why the sudden comeback, you ask. We searched high and low for a good reason for the sudden reversal — ironically, led by the dogs of Wall Street such as JP Morgan, Citigroup, E*Trade and Merrill Lynch. Alas, we found only one shred of evidence for yesterday’s sudden reversal of a nasty six-day losing streak, penned by Ambrose Evans-Pritchard of the Telegraph:

“On Friday [Jan. 4], Mr. Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit — officially the President’s Working Group on Financial Markets — was created after the 1987 crash.

“It appears to have powers to support the markets in a crisis with a host of instruments, mostly through buying futures contracts on the stock indexes (Dow, S&P 500, Nasdaq and Russell) and key credit levers. And it has the means to fry ‘short’ traders in the hottest of oils.”

Federal Reserve officials significantly disagreed over the rate cut decision in December, the latest FOMC minutes reveal. For the first time since the spree of rate cuts began in August, multiple Fed governors cast a vote of dissent against Ben Bernanke’s ultimate lending rate decision.

Representatives from three regional Fed banks — San Francisco, Boston and Minneapolis — desired 50 bps cuts of the discount rate, while Dallas and Kansas City wanted no change in rates. The seven remaining banks ultimately outweighed this dissent… but it’s worth noting: The Fed is becoming increasingly indecisive as the economy worsens.

Tony Blair, the former U.K. prime minister, just took a job with JP Morgan. The former world leader signed on as a part-time adviser to the investment bank… interesting times.

JP Morgan’s new face of international guidance

Citigroup and Merrill Lynch are rumored to be seeking even more foreign capital. According to The Wall Street Journal, Citigroup might be shopping for as much as $10 billion in additional funding, likely from the Middle East or Asia.

Likewise, Merrill is rumored to be looking for at least $3 billion from similar outlets.

Your skeptical editors can’t help but wonder… how deep are these sovereign wells? And when will they tire of bailing out Wall Street banks? What will happen to the credit markets when they do?

Consumer borrowing shot up to an annual rate of 7.4% in November, or $15.4 billion, reported the Fed this week. Credit card debt, as you’d expect, led the way during the start of the holiday season, spiking to an annual rate of 11.3% — the seventh consecutive monthly increase.

According to the Fed, total consumer credit has increased to a new all-time high of $2.51 trillion. Not a dime of that consumer liability includes mortgage debt… the Fed’s credit report doesn’t include it.

But lest you fret, mortgage applications soared in the holiday week ending Jan. 4. The Mortgage Bankers Association reported yesterday that despite a shortened business week, application volume spiked 32%.

The housing market will worsen straight through 2009, with a rebound unlikely until 2010, Fannie Mae chief Dan Mudd forecast before the Chamber of Commerce this week.

Mudd said he expects home prices will fall at least 10% from their 2005 peak before the market could make a comeback from “the toughest housing correction in our lifetimes.”

Afraid global warming is ruining the earth’s climate? Now you can put your money where your mouth is. UBS announced the launch of the UBS Greenhouse Index today, a derivatives index that will allow investors to bet on the impacts of rising global temps and carbon emissions.

The index is based on several funky imitative contracts like weather derivates traded on the Chicago Merc, emission stats published by the European Climate Exchange and the Kyoto Clean Development Mechanism traded on the Nord Pool. Suffice it to say, should the prices of carbon emissions credits rise, along with global temperatures, so will the Greenhouse Index.

Also, like most other indexes, those in denial of certain “inconvenient truths” can short this index to their heart’s delight. Game on, tree-huggers.

“Great investment returns often come out of portfolios made up of a few stocks held for a long time,” says Chris Mayer, imparting his seasoned market wisdom. “And over time, these stocks come to dominate the portfolio.

“Really, this is one of the key ingredients to successful investing. You should invest only when the odds tilt heavily in your favor. Since these opportunities are, naturally, rare, you ought to bet big when you find them. If you manage to avoid big losers, you will do well over time.

“There are a number of investors out there today who practice this credo. Mark Sellers at Sellers Capital is one of them. I saw him speak about this exact topic at a recent investment conference. In his presentation, he showed the following table. It lists some of the most successful long-term investors in the market today

“A cursory glance shows you how important their top holdings are. At the bottom of the chart is the Vanguard 500 Index, which represents the market. You can see that Exxon Mobil, the largest stock in the index, makes up only 3.9% of the total. By contrast, all of the top positions of these investors make up much bigger percentages of their portfolios.

“You have to have a lot of conviction about an idea to bet that big. But you don’t have to go whole-hog to apply the basic lesson to some degree in your own investing. Instead of owning 50 or 100 stocks… try to pare that list down to the best ideas. Instead of investing in blah mutual funds that own hundreds of stocks and turn them over every year, try to find those that own fewer stocks and hold them longer.”

Naturally, Chris provided a list of some recommended focus funds to his Capital & Crisis readers this month. If you’d like to see them, click here.

But for education’s sake, lets check out the list of 2007’s best performing mutual funds, as recently published by Morningstar:

Oh… sweet irony. It wasn’t long ago when emerging markets were reserved for quirky traders with deep pockets and even deeper risk tolerance. Who would have thought that putting your money anywhere in India would be safer than owning Citigroup?

Safe to say… times, they are a-changin’.

Gold continued backing off yesterday’s high of $890, falling as low as $870 overnight. As we write, the precious metal is trading around $880. While gold is a natural choice when facing a recession, we wonder, has it become overbought in the short term?

“Recession is a two-sided coin where gold is concerned,” reads the latest edition of Doug Casey’s Daily Resource Plus. “People have less money with which to buy things, including precious metals. But a recession will likely prompt the government to counter that by dropping cash from helicopters, if need be, thereby creating buying power at the same time as it stokes inflation.”

“For now, many are urging caution in the wake of gold’s big move,” Dennis Gartman, editor of The Gartman Letter, advised clients, saying to sell gold and buy the metal back around $825. “Gold has become so egregiously overbought that we wish simply to reduce our exposure,” he says.

Both the European Central Bank and the Bank of England chose to leave rates as is today. Look for the dollar to suffer even more when the Fed cuts at the end of the month.

And if so, you can bet Gartman’s target of $825 for gold will be tough to come by.

“I must not be very smart,” begins a reader. “For some 5,000 years, the world accumulated a silver surplus nearly every year. Over roughly the last 50 years, that surplus has disappeared. Today’s world production falls short of world consumption. Only recycling keeps the silver shortage from worsening. Fifty-plus years ago, there was approximately 10 times as much silver available aboveground as gold. Today, because gold is not used heavily in industry, that ratio has nearly reversed.

“So this is the part I don’t get: If silver is now 10 times rarer than gold, why is gold still 56 times more valuable? No matter how I crunch the numbers, I can’t find the answer. Can the silver shorters on the Comex really have that huge of an impact on the price of silver (it appears no more than four dealers are short some 260 million ounces)?

“Everyone seems to be a bull when it comes to gold, but what would happen if silver ever ‘trued up’ relative to the price of gold and the shorts were settled? Those numbers boggle my mind. That’s why I am putting all my spare (and increasingly worthless) change in silver.”

The 5 responds: If you’d like to place a bet on silver without downside risk, check out EverBank’s Silver CD… seems like a smart deal.

Last, we thank you for your hundreds of e-mails encouraging the development of an “investment digest.” There wasn’t a single naysayer in the whole bunch… perhaps a first for The 5 Min. inbox. We’ll put it on the front burner. Keep your suggestions coming.


Addison Wiggin
The 5 Min. Forecast

P.S. Oil has retreated down to $93 as we write today. The average blue chip oil investor has consequentially taken a beating… names like Exxon, Conoco and BP are all sharply down. As evidenced today, oil’s rise to new highs won’t come without pullbacks.

That’s another reason why we’re offering three free months of Byron King’s Energy & Scarcity Investor. Byron’s small-cap energy picks serve as brilliant hedges for those bullish on our energy future, but weary of Big Oil’s recent run-up. Learn more about our free three-month offer, as well as Byron’s latest geothermal pick, here.


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