by Addison Wiggin & Ian Mathias
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U.S. markets plunge again… which major benchmarks are back to 2006 levels
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Gold retreats… Ed Bugos on “the key to breaking past $1,000”
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Copper’s on a tear… Chris Mayer on the “biggest driver” behind the future of industrial metal prices
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Gas prices tie record high… Why $3.22 might soon seem cheap, and a way to invest in gas’s future
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Dan Amoss demystifies the crisis at Carlyle Capital… and how its problems could spread across the market
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Plus, The 5 “defending Prince, O’Neal or Mozilo?” Our explanation, below
After the BLS’ less-than-hopeful jobs report Friday, U.S. stocks fell to fresh lows. The Dow dropped more than 1%. The S&P shed 0.8%.
At 11,893, the Dow hasn’t been this “cheap” since October 2006. The S&P is even worse, now at August 2006 lows.
The dollar sold off all through the weekend, too. Against our favorite basket of currencies — the dollar index — the greenback sank to another record low of 72.6. The euro, for its part, climbed to a record high $1.54. The pound broke back up to $2.02.
The yen climbed as high as 101 — as strong as it’s been in eight years.
Out of step with the dollar, gold backed off its recent all-time high, all the way down to $966 this morning.
“Gold is done rallying based on oil breaking through $100,” Ed Bugos tells us, “or platinum through $2,000, or because the U.S. dollar is reeling into the abyss.
“The key to breaking past $1,000 for gold now is that the market can be driven by an increasing focus on the falling value of money. The world has yet to wake up to the fact that this is not just a dollar problem. It runs much further and deeper than that. The dollar happens to be the generally accepted reserve currency. But it is only at the center of a sea of fiat currency regimes flooding world markets with their own brands of liquidity.
“Should the market realize that the world is in the midst of a revolution in prices caused by misguided monetary policies (run by politicians) and broaden its focus beyond the Fed, or the dollar, it could easily take gold to $1,400 by June.
“All it would take for $2,000 is news that the Chinese government has begun to accumulate gold reserves.”
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Like most of the finer commodities in the world, copper is trading near all-time highs:
Speculators have been expecting the flailing U.S. housing market to slam the door on rising copper prices. After all, if McMansions aren’t being lined with copper any longer, how could prices possibly continue to rise?
Again, the answer seems to lie abroad.
“The biggest driver behind metal prices such as copper and aluminum,” explains Chris Mayer, “is the huge global demand for infrastructure. Morgan Stanley estimates that emerging markets will spend $21.7 trillion on infrastructure over the next 10 years. Power plants, roads, bridges, airports.
“One sleeping giant in all of this is India. Certainly, when you compare India’s consumption of metal on a per capita basis with that of other countries, you see enormous room for growth.
“This is not idle wondering. This has real merit, like mixing vodka and tomato juice. Increased metal consumption is practically a given. India desperately needs more power. (See chart below.) And India’s government will spend billions of dollars adding around 600 gigawatts of electricity by 2030.
“All of this infrastructure requires a lot of metal, especially copper. Hence, one of the hot growth sectors in India is its metals and minerals. Most investors tend to think of India’s famous technology companies. But here is an industry still in the early stages of growth.
India has substantial deposits of bauxite, iron ore, copper, zinc and more.
“In some of these, India’s reserves are among the largest in the world. With all the demand for metals both from India itself and abroad, India’s production has ramped up significantly. Indian companies are also among the lowest-cost producers in the world.”
After an extensive research trip to India and two long years of research, Chris recommended his favorite Indian base metals play in his recent report on investing in India. You can read it here.
China’s trade surplus plunged 63% in February. That nation’s trade surplus totaled $8.6 billion last month, way down from the $23.7 billion accrued during the same period last year. Chinese government spokespeople blamed weakening U.S. and European demand, and also that nasty winter storm that stranded tens of millions of Chinese workers over Chinese New Year.
Also, not surprisingly, imports are steadily increasing over there. The Chinese brought in 35% more goods last month from the same time in 2007.
Back in the U.S., gasoline prices hit $3.22 this morning — just short of an all-time high set last May. According to a Lundberg survey, the national average shot up 9 cents in the past two weeks, and is up 64 cents per gallon in the past 12 months.
If oil prices are any guide, you can expect to continue seeing prices rise at the pump:
While oil has jumped 45% over the past 18 months, gas has barely budged. Once refinery supplies of oil run down, you can expect gas to once again step up in line with the former’s record rise.
If you’d like to place a bet on gas prices, check out the newly launched United States Gasoline Fund (UGA), a tradable ETF on the Amex.
Victoria Bay, which overseas UGA, also runs the very successful oil (USO) and natural gas (UNG) ETFs. For what it’s worth, they’ve filed for a heating oil fund too.
As always, caveat emptor.
Carlyle Capital, an arm of the Carlyle Group, stands to lose $16 billion in the loan crisis we told you about Friday.
The company admitted today that its creditors could liquidate $16 billion in Carlyle collateral if the company is unable to squirm its way out of margin calls. We also learned today that Carlyle Capital has almost $22 billion in leveraged “AAA” mortgage debt issued by Fannie Mae and Freddie Mac in its portfolio.
Yeah, AAA, indeed.
“Fannie Mae and Freddie Mac’s guaranteed paper was thought to be bulletproof,” explains Dan Amoss, “thus, an entire industry sprouted up to invest in it. This industry, called mortgage REITs, leverages shareholder capital by borrowing short-term debt to invest in mortgage-backed securities.
“Carlyle Capital is one of these mortgage REITs. It used just $670 million of client money to buy a $21.7 billion portfolio of Fannie- and Freddie-backed mortgage securities. How could it buy such a huge portfolio? It borrowed the difference from Wall Street, which now wants its money back.”
Dan’s got his hands deep in the balance sheets of mortgage lenders caught up in this mess… and bond insurers like MBIA and Ambac, which, after putting pen to paper, he calculates are worth far less than their AAA ratings would imply. The politics alone involved with these companies sets them up to be prime “short” targets. If you want a recommendation from Dan on which company he thinks is next to hit the skids, be sure to subscribe to Strategic Short Alert.
“Please don’t forget the real losers and victims in this scenario,” a reader urges us, in reference to Bernanke’s proposed mortgage bailout, “the guy next door that didn’t take out a subprime scam mortgage has lived in his house for a number of years, pays his bills on time and never has missed a payment. His comparable (in an appraisal) is now $480,000.
“The real problem is that the subprime debacle is resetting prices for even the guys that didn’t and don’t have ANY exposure or relationship to the crisis. In the extreme, if prices go low enough and equity is scant enough, even the folks that have NO involvement will need to walk away from their properties.
“Helping out people in trouble is not a bad thing… but let’s make it fair to everyone, not just bail out the poor decisions and greedy bastards that created this situation. What a friggin’ mess! There’s nowhere to hide.”
“Well, if the banks start lopping off principal from outstanding loans,” responds another, “there’s only one thing left to do. Stop paying the mortgage!
“I would like a $100,000 drop in my loan principal too. Especially since I didn’t feel taking on a variable-rate loan was wise when I financed, so I missed out on all those years of 4% interest that apparently some people may get to continue paying, instead of the new rate their contract says they should.
“So what the heck. I’m a boomer and will never be buying another home, so why not get the same advantages that those people who don’t know how to run their finances get? Just stop paying the mortgage and the bank will lower my loan amount! Just two questions… who actually owns my loan, and do you think the guy who bought it once it was securitized will mind if I don’t pay back the original amount?
“Idiocy!”
“Why do you seem to be defending Messrs. Prince, O’Neal or Mozilo?” asks a reader in reference to our coverage of that motley crew testifying before Congress. “As imperfect as Congress is (particularly with all the contributions I’m sure they pocketed from Citibank, Countrywide, et al.), somebody needs to differentiate between capitalism and plain-old robbery.
“Not that I expect congresspeople will be forced to repay any of their ‘compensation’ after the hearings, but at least they will be on the hot seat, forced to defend their greed and shamed, if they still have any capacity for embarrassment. After all, they did rob many of their investors. Not that I was one of them. After all, I’ve been warned by you for years.”
The 5:
We’re not defending anyone. Like anyone else, these guys will get what’s coming to them. If you think the feds have a corner on dispensing justice, we note this morning that Countrywide is being investigated by the FBI. Although it’s more likely that justice, in the end, for all three men will be karmic in nature.
If you want to talk about robbery, that’s a different matter. What greater crime could there be than federal deficit spending year after year? And piling up debts a generation of Americans who aren’t even born yet will have to pay?
Nah. This next reader is probably more accurate, when he suggests:
“The feds aren’t after these guys… they want to know how it is done. The only real trouble these CEOs may have is that the feds are envious.”
Cheers,
Addison Wiggin,
The 5 Min. Forecast
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