New Bank Superfund, China’s Bear Market, Silver on the Rise, and More!

by Addison Wiggin & Ian Mathias

  • Global banks unite for another bailout “superfund” — who’s the target and how it’s moving markets
  • More Shanghai shellacking… Mayer on opportunities still remaining despite a recent Chinese bear market
  • Dollar flirts with all-time lows… Chuck Butler on the greenback’s next move
  • Our Maniac Trader on silver’s sudden breakout… just the beginning or time to take profits?
  • Plus, food inflation threatens global hunger relief funds… what a perfect time for a biofuel jumbo jet!

Oy, here we go again… A consortium of the world’s biggest banks is discussing the creation of another bailout superfund — this one for struggling bond insurer Ambac.

Citi, UBS, Wachovia and Royal Bank of Scotland are all rumored to be in talks with the New York State Insurance Department. The AP reported on Friday afternoon the banks may plan a bailout of Ambac and its belabored bond portfolio.

A Goldman Sachs analyst recently estimated that Ambac would need some $3.5 billion in capital just to maintain its AAA rating, and who knows how many billions more to cover all the assets it insures. Perhaps this new banking conglomerate superfund will be more attractive than the similar, but utterly useless $100 billion fund abandoned last year just before Christmas… we’re not holding our breath.

Still, Ambac shares shot up 16% Friday.

And on the news, the U.S. markets staged a surprise turnaround.

Benchmarks were in the dumps most of the day. The Dow and S&P were down over 1%. In fact, the Nasdaq fell as low as 1.5% intraday, re-entering an official bear market territory by falling 20% off its 2007 high.

But the Ambac news caused traders a bit of late-day euphoria. With 30 minutes left before the closing bell, the Dow and S&P 500 both rallied to positive territory. The Nasdaq dissed its bear, too, breaking even for the day.

For all of last week’s ups and downs, swings and throes… the market essentially went nowhere.


On the other side of the world, however, the story was a little more dramatic. The Shanghai Composite fell again by over 4% last night, even as markets all over the world rallied. The benchmark Chinese index is now at a seven-month low, 30% off its all-time high set in October:

Winter weather and drought have damaged some 23 million hectares of Chinese farmland.

A severe drought in northern China, coupled with abnormally frigid temps in south and east China, has scared a plot of land collectively the size of Idaho… one-sixth of China’s entire farmable landscape. Unless Mother Nature provides a quick turnaround, much of this land may not be usable for the 2008 growing year, and some may not recover for years… if at all.

Add this to last week’s reports of Chinese consumer prices spiking to 11-year highs of 7%, a massive recent global run-up of grain prices, a current bear market in Chinese stocks and the ever-looming “global economic slowdown.”

This could get interesting.

On the other hand, “The Chinese transportation industry is booming,” Chris Mayer tells us, finding opportunity in the midst of a growing number of Chinese crises.

“China now has the second longest highway network in the world, behind only the U.S. But it will add to that significantly over the next decade. Then there is the railway expansion. The Economist calls it ‘the biggest expansion of railway capacity undertaken by any country since the 19th century.’ Then there is air travel: From only 7 million air travelers as recently as 1985, China topped 185 million last year. Then there is sea container capacity: Over the next decade, China plans to expand this by 85%.

“And on and on it goes. That’s a lot of metal and concrete to consume. That’s a lot of fuel. All of that infrastructure supports a growing appetite — in the many senses of that word — of over a billion people. That’s just China. Add India to the mix. Add Russia.

“So you see, it’s not hard to imagine where the scarcity comes from. We need to produce a lot more of the basics, and we need to use what we have more efficiently. Those are powerful trends in the world today.

“For investors, then, the playbook seems obvious. Own what’s scarce. Own what helps alleviate that scarcity.”

Mr. Mayer’s latest Capital & Crisis recommendation owns just that… a budding petroleum refiner with an attractive, undervalued agricultural asset. Learn about it by subscribing, here.

In the U.S., gas prices have crept up again. They’re now just short of all-time highs.

The national average price at the pump rose to $3.11 over the weekend, a dime short of last May’s record high of $3.21 and 75 cents higher than this time last year. The U.S. Energy Department recently raised its forecast for spring gas prices up to $3.40. If you ask us, that’ll be a bargain by 2009.

The dollar index continued its recent fall over the weekend, sinking deeper into the 75 range and now less than one point from its all-time low. The euro dug deeper into $1.48, and the pound rebounded to $1.96. The Canadian dollar is little more than a whisper below parity, at 99.7 cents. The yen rallied too, back to 107.

“If you’re keeping score at home,” notes Chuck Butler, “that’s two consecutive down weeks for the dollar, after spending most of the early part of this year on the black side of the ledger. There were just so many pundits out there talking about a ‘dollar rebound’ in 2008 that the markets had to test the waters to see how it looked. And it just didn’t look very good! The fundamentals just aren’t there for a dollar rally in 2008.

“But hey! Stranger things have happened, eh?”

Gold’s price held steady all through the weekend, around $950, just off recent record highs.

To put that price in perspective, each Oscar statuette last night cost “the Academy” $100 more this year than it did in 2007, says Bloomberg. Gold has shot up 40% since the last Academy Awards, and according to Oscar spokespeople, each legendary trophy now costs a record $500. But even an enterprising Oscar winner won’t be able to profit from gold’s rise: By accepting an Academy Award, winners are required to never sell, trade or alter the Oscar before offering to sell it back to the Academy… for $1.

We met Alex Gibney, btw, the guy who won the Oscar for best documentary, when we were at Sundance a couple of weeks ago. He came to a party hosted by our agent. His current film is about the life of Hunter S. Thompson, but a couple of years ago he took us behind the scenes of the meltdown at Enron. Nice chap, if a little intense.

The silver spot price busted through $18 this morning, setting mulitdecade highs and continuing an impressive recent run. Year to date, the metal is up 22%.

“Silver has moved up to its new highs on several factors.” says our resource man Kevin Kerr. “Fear of inflation, the drop in output in South Africa and prospects of U.S. rate cuts are all helping to lift gold too.

“The market is supposedly now anticipating another 50 point cut by the Fed. Meanwhile, inflation is surging at every turn. While gold positions itself for a run at $1,000, silver is just catching up and is probably fairly valued at around $19 per ounce.

“Strong global demand for both retail and industrial uses is supporting a strong silver price and will continue to for some time to come; however, at these levels, for those of us who have been long since 12 and 13 bucks … well, $17 and over offer very nice profits, and in my opinion, it’s a good time to cash out and then observe.”

You can ride along with our Maniac Trader, here.

Richard Branson flew the first biofuel-powered commercial jet across Europe over the weekend. Virgin Atlantic flew a 747 from London to Amsterdam using a fuel supposedly derived from Brazilian nuts and coconuts. The bizarre tropical cocktail made up 20% of the plane’s fuel for a flight Branson labeled a “vital breakthrough.”


Branson getting high on biofuel

Virgin officials maintain that none of the fuel’s bio-ingredients will compete with staple food sources… that is, until every Brazilian farmer slaughters his cattle and burns down his sugar cane field to plant coconut trees to sell to Sir Richard.

Meanwhile, the World Food Program, the United Nation’s agency that aims to alleviate world hunger, will most likely halt aid to several locales because of rising food prices.

“Our ability to reach people is going down just as the needs go up,” said WFP exec Josette Sheeran. She told the FT over the weekend that the WFP’s budget was rising by millions each week, thanks entirely to rising food costs.

“We are seeing a new face of hunger in which people are being priced out of the food market… Situations that were previously not urgent — they are now,” she continued, specifically citing Indonesia, Yemen and Mexico. Barring a sudden wave of short-term donations, the WFP will be forced to consider “cutting the food rations or even the number or people reached.”

Hmmmn…

“OPEC is taking political/economic advantage of a geological imperative,” writes a reader in response to OPEC’s recent threat to cut production. “It has to cut production because its enhancement techniques are beginning to lose the ability to keep up.

“After 30 years in oil field servicing, I have worked most of the fields — 12 in the Gulf — and know when fields enter decline. From what I have seen, there are none left there that have capacity to economically increase production — even at $100 per barrel. Beyond $150, there is some untapped reserve that could be produced with expensive tertiary enhancement, but even that would not significantly increase exports.

“It is time to realize that the peak has passed and that while there will be oil coming out of the ground for many years to come, it cannot possibly sustain the consumption levels that continue to be ignored by economists and politicians.”

The 5 responds: Peak sustainability — not just in oil fields, but in resources, water, food, etc. — is in some ways a more interesting challenge for the global economy than the debt and demographic picture that we’ve been obsessing over for the past decade.

In an effort to gain some perspective, this summer, we’re convening an entire conference on the subject at the Vancouver Fairmont from July 21-25. We’ve invited economists, traders, politicians, presidential candidates, authors, entrepreneurs, “diggers and drillers” and analysts of all stripes to come to share their views on building wealth and security during this “time of risk and scarcity.”

If you’re not already signed up for A View From the Peak and you know you’d like to attend, call Barb Pariello at 1-800 926-6575. If you’re not sure, we’ll follow up in a week with more specific details.

“I just forwarded Friday’s letter to six people,” a reader tells us, “among them a Ph.D. in economics, a Ph.D. in business, a former director of engineering at a major auto OEM and a manufacturing expert who heads up the Manufacturing Innovation Technology for Industry (MITI) and the National Association for the Collaborative Development of Manufacturing Sciences (NCMS). Needless to say, all are worried about the decline in America’s manufacturing base and lack of competitiveness, particularly in the automotive industry.

“First and foremost, manufacturing is critical to national defense. Second, we’ve been transferring the product value chain overseas, and in doing so, building up the economies of other nations at our own expense. Unless we reverse this decline quickly with a national manufacturing policy that keeps value — and jobs — in this country, America will become a third-world nation that prints worthless currency as its core product and seeks succor from the powerbrokers in China, India and the Middle East, where much of our debt increasingly resides.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

rspertzel

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