Oil’s Real All Time High, Financials Due for More Pain, 2 Reasons to Buy Gold Today, U.S. Water Wars, and More!

by Addison Wiggin & Ian Mathias

  • Another all-time high for oil… why the latest is the greatest of them all
  • Dollar falls again… Chuck Butler on “the only thing” that could rescue the ailing greenback
  • More pain to come for financials… two industry insiders say one mega-bank is on verge of disaster
  • Your latest subprime vocab lesson: What are “pay option loans” and how they might wreck Wall Street
  • Gold at new record high… Kevin Kerr with two reasons it’s still worth buying
  • Plus, water wars in the U.S… government sends Army to Georgia

We begin today with another benchmark for your kitchen calendar: March 3, 2008 — most expensive oil price in the history of human civilization.

Light, sweet crude briefly touched $103.95 yesterday… its first inflation-adjusted historical high since 1980.

Courtesy of The New York Times:

 

In dollars, the 1980 high was just below $40 a barrel. But as you can see, $40 ain’t what it used to be.

“In 2007, the United States imported $331 billion worth of crude oil,” comments our oilman Byron King, citing a Department of Energy report, “at an average price of $64.25 per barrel. If the U.S. imports crude oil in 2008 at an average price of about $95 per barrel, the annual import bill could jump by about $150 billion or more, to $580-600 billion.

“That would be larger than the entire budget for the Department of Defense.

“This hemorrhage of currency will, of course, negate any effect of the Bush-Congress economic stimulus package, of about $152 billion value.”

Who could have seen that coming?

In kind, the dollar bled all day yesterday and into this morning. The dollar index dribbled down to a new all-time low of 73.3. The yen is still having its way with greenbacks… the Nipponese currency climbed on top, to 102, during the night. The euro watched and enjoyed its way further up, to $1.52.

“I think the only thing the dollar has going for it these days,” says EverBank’s Chuck Butler, “is the hope that the European Central Bank tries to play catch-up with the Fed regarding rate cuts. I don’t think the ECB will do that. But it will, most likely, cut rates this spring… probably in May. So… When that happens, it just might be a buying opportunity.”

“The dollar’s going to get weaker over time,” Warren Buffett told reporters yesterday, following the release of the Berkshire shareholders letter. “The government can talk about how it’s in our interest to have a strong dollar, but we’re not following policies that lead to that. [A weak dollar] is just a consequence [of government policy], and it’ll just continue to be.

“If you do the same thing over and over again, you’re going to get the same result… and we are doing the same thing now that we were doing two, three, five years ago, and the dollar will weaken in an irregular basis, in my view, for some time to come.”

Amen.

The stock market swooned on petty rumors yesterday.

Out of the gate, the ISM manufacturing data we discussed tripped markets up and down. They went a full 1%. But then whispers of another “secret, closed-door Fed meeting” drove markets wild. Up they rallied… but then… it turns out the meeting was actually just the same old boring regularly scheduled drivel fest the Fed usually conducts.

“Nothing out of the ordinary,” said Fed spokespeople.

A fickle bunch, floor traders smirked. After they’d slithered off for the day, the Dow and S&P 500 ended right where they started, and the Nasdaq fell 0.6%.

It’s going to take “a lot more money” to rescue Citigroup and U.S. banks, suggested Sameer al-Ansari today, CEO of Dubai International Capital.

The head of the UAE sovereign wealth fund was referring to the $23 billion in capital injections Citi has already received from SWFs in Dubai, Kuwait and Singapore. How much is “a lot more”? We think you’ll find out soon, and so will Merrill Lynch:

Citigroup will post another loss in its first quarter, analysts from Merrill Lynch predicted this morning, and take more “big write–downs.” Merrill has slashed its earnings estimate for Citi to a loss of $1.66 per share this quarter.

Citi shares plummeted to a nine-year low on the warning. If this keeps up, it might soon be a good time to buy. But not yet.

2007 brought you terms like “ARM,” “CDO” and “SIV”… here’s one for 2008: pay option loan (POL).

The pay option loan is a variation on the ARM in which the borrower can choose how much they can pay toward their mortgage each month. The loans allow you as the borrower to pay less each month if the going gets tough. Fair enough.

Trouble is, if you pay the minimum enough times, you’ll come up short of the interest owed, the remainder of which gets added to your principal. Enough of that… and you’ve got a noticeably larger mortgage than you first signed up for… with the adjustable rates about to kick in. Fun, eh?

Yeah.

Our friends at Countrywide filed an SEC report on Friday admitting they hold $29 billion worth of POLs… $26 billion of which have already grown beyond the amount of the original loan. More than eight out of 10 of these loans were made to borrowers who provided little to no income documentation. As of December, seven out of 10 of them were electing to pay less than interest-only payments.

Good grief… three guesses as to what happens next.

The Canadian government reported this morning that its economy grew less than a percent in the fourth quarter… which was a shock to some, given the commodities boom and the soaring Canadian dollar. For the year, the economy grew an anemic 2.7%.

The loonie lost parity on the news, down to 98 cents against the dollar this morning.

On cue, The Royal Bank of Canada posted the worst Canadian write-down since the start of the subprime banking massacre yesterday… a whopping C$187 million.

Not to make light of a couple hundred million bucks, but c’mon. If that’s as bad as it gets up there, you’ll never shake your moniker: United States Lite. Let’s get with it, eh?

Gold spiked to another new record high yesterday, this time to $989. Not coincidentally, the precious metal peaked the very moment the dollar index attained its latest record low. Also, as with the dollar, gold backed off its latest record this morning, and trades for about $983.

“If you’re worried about the U.S. economy,” says Kevin Kerr, “buy gold. If you’re not worried about the Chinese economy, buy some more gold.

“Gold demand in China relative to GDP is about five times higher than in the U.S. Also, for several years, Yu Yongding, a committee member of the People’s Bank of China, has advised that China use its foreign currency reserves — the largest in the world — to buy gold. He’s not the only one. Other Chinese economists are urging their government to QUADRUPLE the nation’s gold reserves.”

As we’ve noted here in The 5, China reports that less than 1% of its $600 billion in reserves are held in gold. Should the country move even a fraction of the trillion-plus in dollar reserves it has into gold, you could see a spike of historical proportions.

The CRB Spot Index, the historic global benchmark for commodities, jumped 12% in February — its highest leap since July 1974, when “stagflation” was making its debut as a buzzword for wonks. What’s more, the index is up 15% already in 2008 — its best two-month opener since Eisenhower was working on the Interstate Highway System 52 years ago.

“The American economy is definitely slowing,” comments Chris Mayer to his Special Situations readers. “Whether it is or isn’t actually contracting is a matter of debate. Just looking at how companies are doing, it’s not hard to see that North American operations are off. Overseas, though, it’s a different story. Companies with operations in China or India report that business is good. The booming CRB index is proof of that.

“So it’s an interesting market for investors here in the U.S. Sometimes, it’s like picking over a minefield, because the price swings seem so great. But it’s that volatility that creates room for the stock picker to operate.”

Mr. Mayer’s new release, Invest Like a Dealmaker, is topping the charts this morning… No. 1 on both Barnes & Noble’s and Amazon’s business lists. If you’re inclined to read books, there is no easier way to get insights from the finest value investors of our time.

You may recall we’ve mentioned the water war brewing in the Southern U.S.. For the past two years, the Georgian government has been “illegally” damning up extra water to support a booming Atlanta population — water that would otherwise have flowed to cities in Florida and Alabama.

The Army Corps of Engineers announced this morning they failed to broker a negotiation between Georgia, Alabama and Florida. Now Army engineers will employ a water-rationing plan handed down by the federal government. We predict this will get a whole lot more interesting before it rains.

“Based on my personal experience with friends,” writes a reader, “as long as we Americans have a dollar in our pocket — a single dollar — we will spend it. No matter how poor one’s financial condition, no matter how large one’s financial responsibilities/commitments loom, consumer spending will increase as long as there is a dollar left to spend. This is the pathetic truth. When that last dollar is spent — then and only then will consumer spending plummet.”

The 5 responds: The past two “recessions” prove consumers will go even further than that. They’ll spend the last dollar and any on loan from a credit card banks offering instant gratification near you.

“By the way, I rate your services a perfect 10 out of 10 — you guys are great!”

The 5 responds, again: Gracias. You flatter us.

“As Bob Dylan said, ‘When you ain’t got nothin’, you got nothin’ to lose…’” a reader reminded us after we witnessed two frame store clerks casually discussing the annihilation of the middle class.

“I think that woman showed great perception and insight with her comments. The impact of rising food and energy costs will utterly destroy the standard of living of many middle-class families, many of whom already can’t afford health insurance unless their employer provides it — an increasingly rare occurrence. A middle class will remain in name only, with a lifestyle similar to that of the lower middle class of the 1950s and 1960s that I grew up in — no home ownership, no vacations, almost no discretionary income, living paycheck to paycheck.”

The 5: This time around, however, Americans will be experiencing a first: the prospect of shrinking paychecks, rather than growing ones… and a diminishing return on those dollars comprised within.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. Today is the birthday of the nation. The Constitution was ratified on March 4, 1789. For many years, it was also the day that new presidents were sworn in — that is, until rapid transportation made it possible for the electorate to oust the outgoing louse 43 days earlier.

It’s also your eldest editor’s birthday today. For a present, his wife scheduled a physical with a new physician. At his age, you know what’s included in the battery of tests… ahem. Thank you, ma’am, are we supposed to hug now?

rspertzel

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