Chris Mayer on the sudden opportunity born of an Asian bear market
Foreclosures rise to staggering heights… more than 1 in 100 U.S. metropolitan homes at risk
John Williams on the Fed’s attempt to “fire wall” the U.S. economy
Bond insurer shares plunge… what’s behind their rejection of Buffett
Chavez cuts off Exxon oil supply… why neither oil traders nor Exxon shareholders seem to care
Early this week, Goldman Sachs analysts upped their projections for U.S. federal deficits in 2008 and 2009, to $425 billion and $440 billion, respectively. Yep, we’re definitely heading in the right direction there.
But rather than dwelling on the negative, we begin today with a buying opportunity:
As you may know, we’ve been watching India closely. You’ll recall we sent Chris Mayer and Karim Rahemtulla on a two-week mission there in October… the third such mission in as many years. Agora Inc., our parent company, opened an office in Mumbai last year. And while we found companies we like, we’ve been hesitant to pull the trigger, because the Sensex had rallied well beyond our buying range.
Yesterday, we got the retrenchment we were looking for. The Sensex has fallen over 20% in about a month. As “investors” flee, Mr. Mayer tells us prices are starting to look good.
“India is really in the early stages of a massive secular boom,” Mayer offers by way of explaining our excitement. “It begin with liberalization in 1991.” If the Sensex’s five-year chart is any indication, pullbacks such as this latest bear market are little more than brief reprieves in a strong growth trend.
The Indian middle class is multiplying over 20% per year. Indian home prices have risen 16% annually for the past four years. Around this time last year, India received the coveted AAA debt rating.
“Like any emerging market,” Chris warned when he was on the ground in the subcontinent, “there will be plenty of growing pains. There is still an immense poor population here, and many environmental/infrastructure problems — including a severe water crisis. But these warts make the opportunity what it is — an immense fiery cauldron of a market just starting the process of industrialization and billions of people wading into the rolling waters of globalization for the first time.
“I’ve gathered what I think are the three best ways to play the rise of India. Each takes advantage of long-term trends building in India. Along the way, there are bound to be some shakeouts. But for those who stick with them, I think these investment ideas will bring enormous returns.”
If you subscribe to Capital & Crisis, we suggest you read Chris’ India report today. You should have already received the link. Otherwise, click here to learn more about the three picks we recommend to capitalize on this opportunity.
Back here in I.O.U.S.A., foreclosures in the top 100 metropolitan areas of the U.S. surged 78% in 2007, reports RealtyTrac today. A remarkable 1.3% of all homeowners in these areas filed for foreclosure last year. California, Nevada, Florida, Ohio and Michigan led the way.
In response to the ongoing trouble caused by the staggering foreclosure rate, the Federal Reserve injected $30 billion of ready cash into the banking industry yesterday, via short-term loans. That’s the fifth “loan auction” conducted by the Fed since the practice began late last year. So far, the auctions have accounted for $130 billion in emergency funds for the reeling U.S. banking system.
“We need to remain very focused on the downside risks to the economy,” said San Francisco Fed President Janet Yellen yesterday. “Our job is to make sure we create enough of a fire wall … so fire doesn’t hurt innocent bystanders.”
Translation: “Forget price stability, we’re going to manage the entire economy.”
In one statement, she single-handedly repurposed the charter of the Fed. According to Yellen, the Fed’s doing a good job, thank you very much. In her view, it’s “most probable” that the U.S. economy would avoid recession.
“I have contended for some time,” notes John Williams of shadowstats.com, “that the Fed will do everything in its power — create whatever money/liquidity is necessary — to prevent any portion of the financial system from collapsing. The Fed cannot allow any sector to fail, given the heavy interrelationships and leverage built upon leverage within the broad U.S. financial markets and industry. Failure in one area quickly would implode the entire system.
“No one has been through a crisis of the current magnitude for three-quarters of a century. Coming into the Great Depression, the United States was on the gold standard and enjoyed fiscal and trade surpluses, which offered some meaningful policy options to the government.
“Today’s environment has had the meaningful options fully depleted, leaving only gimmicks and the government’s ability to print money.”
U.S. markets finished higher yesterday, fueled almost entirely by Warren Buffett’s offer to “bail out” struggling bond insurers, just one of the areas threatening to implode.
The Dow gained 1%, the S&P 500 rose 0.7% and the Nasdaq ended unchanged.
But while most stocks enjoyed a Buffett-driven rally, the shares of the very stocks he offered to rescue absolutely tanked. Both MBIA and Ambac stocks fell 15% on the rumors that one, or both, had denied Buffett’s offer.
Ambac did, in fact, give Buffett the cold shoulder. His offer “would result in little to no net capital relief to support Ambac’s ratings,” the company complained. A closer look reveals why. The Oracle offered to take on $6 billion in muni bonds — classically stable investments — for a $3 billion fee.
Elsewhere in the world of super-sized bond investments, legendary bond house Pimco revealed this week that it has begun taking stakes in Bank of America and Citigroup.
“The fact that the banking sector has attracted fresh capital in the last couple of months is huge,” said Mark Kiesel, an executive VP at Pimco. “We’ve been playing defense for the better part of two years, and the question we’ve been asking ourselves is when to go on offense. In the banking sector, we’ve started to do that.”
Classic. These are vulture investing strategies from impresarios Berkshire and Pimco. Like a stunning round of 18, it’s fun to watch from the clubhouse, even if you’re not out on the links yourself.
U.S. retail sales rose 0.3% in January. Wall Street was looking for a 0.3% retail decline, but the Commerce Department says otherwise. Sales in January were driven almost exclusively by auto and gasoline sales. In fact, minus those two retail categories, sales during the month were flat.
Despite the Fed’s bravado on the subject, the big “R” still looms, but it’s not baked into the cake just yet.
The International Energy Agency (IEA) cut its 2008 global oil demand forecast this morning, blaming a coming U.S. slowdown. The IEA now expects the world to consume a mere 87.6 million barrels of oil each day, bringing annual consumption growth down to 1.9%. The IEA had predicted 2.3% growth earlier this year.
Should the IEA’s forecast come true, growth would shrink to its slowest pace since 2003. Light, sweet crude fell a buck, to $92.
Still smarting from his loss in international court, Hugo Chavez threw a tantrum this morning and cut off oil shipments to Exxon Mobil. Global oil traders greeted the news with little more than a yawn and a stretch. Exxon shares rallied over 1% on the news. Venezuela accounts for a very small percentage of Exxon’s business.
“This is not to defend China’s behavior,” writes a reader regarding China’s “gag order” to Olympians, “but please remember (or look up, if you’re too young) what happened to Tommie Smith and John Carlos at the 1968 Olympics in Mexico City when they dared to exercise their right of free speech to protest U.S treatment of African-Americans during a medal ceremony.
“Most countries view the Olympics as a public relations event as much as a sporting event, and they frown on any athletes who try to use the Olympics as a platform for political expression.”
“Man, I would call their hand,” suggested another. “The last thing China wants is an Olympics where no one shows.”
“Many thanks for the heads-up,” writes a reader, “from Kevin Kerr in today’s 5 regarding changing conditions in the wheat trading market and commodities in general. I took his advice and ‘secured’ some profits in DBA. Here’s hoping these timely posts from Kevin keep coming in The 5. As an Outstanding Investments
subscriber, I enjoy reading his updates there also. But The 5 is quicker.
The 5 responds: Our pleasure. Wheat continued to back off its recent $11 high overnight, down to $9 in Chicago.
In a related vein, retail prices of Maxwell House, Folgers, Yuban, and Chock full o’Nuts coffee brands were all raised this week. Both Kraft and Procter & Gamble, the parents of the brands, cited a rise in global demand for coffee thanks to a shortage of resources, falling output in Vietnam and energy costs. On average, prices will hop up about 10-20 cents per pound.
Be warned, this latest development could hinder production here at The 5.
Cheers for now,
The 5 Min. Forecast
P.S. Last week, we mentioned the act passed by Congress requiring “In God We Trust” be prominently displayed on all new dollar coins. When it goes into effect… it’s only going to make the “godless” dollar coins we told you about last month even more valuable. Good thing our friends at First Federal still have a few sets on hand, eh? If you’d like to investigate, do so here. Having read about the congressional act here, Nick has agreed to give readers of The 5 a special price, this week only.
P.P.S. Check this out… below are few of Steve Sarnoff’s Options Hotline winners from 2007. We calculate Steve’s track record on the highest possible gains returned by each recommendation. Thus, attaining gains this huge is a difficult task. Still, it’s easy to see… Steve has quite a winning streak going.
Granted, trading options isn’t for everyone, and neither is Options Hotline. But for the next 5 days, you can sign up for 4 free months of Options Hotline and give it a shot, on the house. Learn about our offer here.
300% on Bristol-Myers Squibb March $25 calls on Jan. 29, 2007
220% on American Standard April $45 calls on Feb. 26, 2007
165% on Monsanto April $55 puts on March 5, 2007
130% on Allstate April $60 puts on March 14, 2007
107% on Exxon Mobil May $80 calls on May 20, 2007
151% on Schlumberger August $80 calls on June 22, 2007
283% on TLT September $89 puts on June 12, 2007
122% on Target October $65 calls on July 12, 2007
225% on Intel July $22.50 calls on July 17, 2007
205% on Coca-Cola September $55 calls on Aug. 9, 2007
612%…and still counting on Newmont Mining Dec. $45 calls on Nov.8, 2007
114% on General Electric $40 calls on Oct. 2, 2007
366% on SPY $152 puts on Nov. 12, 2007
137% on Merrill Lynch $55 calls on Dec. 10, 2007.