The Birth of OREC, Fed Rate Cut, A Gold Forecast, and More!

by Addison Wiggin & Ian Mathias

  • Move over, OPEC… Asian countries move to form OREC and control the world’s No. 1 food
  • Kevin Kerr on why the ag boom is still alive and kicking
  • Fed cuts, investors react… our take on the latest FOMC decision
  • Gold at near 4-month lows… Ed Bugos with what to expect next for the yellow metal
  • Christopher Hancock on a major South American upgrade… and how it should change your investment strategy

Before we begin, our friends at Red Emma’s would like to wish you a happy May Day.

Five Asian nations are in talks to form OREC — an organization of rice-exporting countries. Seriously.

While they haven’t officially taken on that acronym, officials from Thailand, Vietnam, Cambodia, Myanmar and Laos announced an informal agreement to form a cartel of rice-producing nations today.

“We don’t aspire to be like OPEC,” said Samak Sundaravej, the prime minister of Thailand. “We hope to be a group of five to help each other in trading rice on the world market.”

But as OPEC does with oil, OREC (we’ll call it that until we’re told otherwise) would have a total chokehold on global exports for rice — a position of immense power. Setting the price for 50% of the world’s most important food staple is no small matter.

Thai rice still sells for about $1,000 a ton this morning, three times what it brought at the beginning of the year.

“The agricultural boom is still on,” Kevin Kerr declared definitively this morning. “Many traders, especially equity traders, regard the agriculture market as another bubble and believe that it will all implode soon. It’s happened before and it will happen again, they say.

“I have been hearing for three years that the corn price couldn’t possibly go any higher. I heard that argument at $2.50, $3, $4.50 and $5. Now here at $6.20, the same bearish absolutes are being spouted from all over the place, and my indicators tell me that it’s simply not true.

“Corn, wheat, soybeans, cotton and rice are all in demand, yet supplies are at risk, and threats include weather, financing, fuel costs, protectionism and poor farming practices.”

Kevin rang the register on a corn trade for 219% gains a few months ago. And his latest wheat trade brought in 241% profits in one month. If you’ve got the courage for this kind of action, there’s no better guide than our Maniac Trader. Learn more about your guest pass to the “Millionaire’s Market” here.

The Federal Reserve lowered their rates by 25 points yesterday. That move was a given.

But the Fed press release proved to be the real curveball of the day. For the first time in the current rate-cutting cycle, the Fed paid lip service to the value of the currency they’re supposed to be protecting.

“Uncertainty about the inflation outlook remains high,” the release said. “It will be necessary to continue to monitor inflation developments carefully.”

OK, so it wasn’t exactly a strong statement. Still… they had to leave the door open for more cuts, didn’t they?

“Recent information indicates that economic activity remains weak,” the release continued. “Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”

The Fed insisted that it “will act as needed to promote sustainable economic growth and price stability.” Heh. Good luck.

The U.S. stock market didn’t like what it heard. After two days of fence sitting, the major indexes all took a dive within minutes of the release:

Despite these late-day losses, April proved to be a significant reprieve for index investors. The Dow, for example, rose over 550 points in the month, its best performance since May 2007.

Gold initially responded to the Fed cut with a $20 rally, but as with the stock market, traders wearied as time passed. As we write this morning, gold has given up its recent gains and fallen to $850 — a four-month low.

“We’re at a critical juncture in the leg that began last August,” writes our gold adviser Ed Bugos.

“My outlook so far has been that this correction is just a short-term (one-three month) affair and that gold prices will be off to new highs again before the first half is out.

“But yesterday, gold fell through parameters that I set out as support for this thesis, and started to look more and more like an intermediate-style correction… the kind that you’d call normal — like the one that occurred in 2006, for instance. If this is the case, you could see gold fall back to the mid-$700s and consolidate under the $1,000 barrier until year-end.”

On the other hand, “If gold can hold the $850-860 level and bounce back up through $900 in the next few days, there’s still hope for a gold bull. But anything short of that kind of immediate bullish response might cause me to throw in the towel on my bullish first-half outlook.”

Oil stayed in lock step with gold yesterday. It rose after the rate cut, only to fall this morning to $114.

Then Exxon Mobil surprised the Street with a worse-than-expected earnings announcement. The oil monolith actually had a great quarter… near-record $11 billion in profits, quarterly income up 17%. But Wall Street wanted earnings of $2.13 a share, and Exxon gave ‘em $2.03. Ticker XOM fell over 4% and took the whole energy sector with it. As we write, oil is down to $110 a barrel.

“You can’t underestimate the spike in fuel prices,” Richard Anderson, CEO of Delta Air Lines, said yesterday, “and how it is fundamentally changing the industry.” Anderson suggested that retail ticket prices would have to rise 15-20% this year just to cover rising fuel costs.

On average, flights to New York, L.A., Chicago, Boston, Denver and Florida are up 18% since last summer.

Good news: Personal incomes rose an average of 0.4% in March, reports the Commerce Department this morning — better than most economists expected.

Bad news: Consumer price inflation rose 0.3%, all but negating the average of those income gains.

Yet consumer spending rose 0.2%…

It’s no surprise, then, that personal saving dropped by half in March, now at a whopping 0.2%.

The dollar index stayed put yesterday. Traders kept the index around 72.8 for the Fed decision… and then kept it there some more.

This morning, we’re seeing more profiting-taking in the euro. It’s now down to $1.54. The pound has stood still at $1.97. The yen showed a little strength today by rising to 103.

A study released today by the Boston Consulting Group shows that, postcredit crisis, China now controls the world’s largest banks:

1 – Industrial and Commercial Bank of China
2 – China Construction Bank
3 – HSBC
4 – Bank of China
5 – Bank of America
6 – Citigroup

When arranged by current market capitalization, it’s clear that the subprime debacle has altered the world’s monetary swagger…

Brazil has received what our Christopher Hancock has been waiting on patiently for some time: an investment-grade credit rating.

Standard & Poor’s slapped the coveted international seal of approval on the nation yesterday. Now with a score of BB+, Brazil’s cost of capital will fall significantly. And the already booming nation will be on track to soar even higher.

“Great credit gives you a slew of opportunities that you wouldn’t have otherwise,” Mr. Hancock writes this morning by e-mail. “If you want to borrow money to start a business or buy a second home, with great credit, you’ll have no problem finding someone willing to lend you the money at a reasonable rate.

“To a bank, you’re a low-risk investment – they’ll lend you the money, knowing they have good reason to believe they’ll get their money back, plus interest.

“It’s no different with countries — only the scale of lending and borrowing is on a much larger scale. It’s the global version of the American Express Black Card — with it, there is no limit. Just ask the American government. The cost of capital, the true driver behind real growth, decreases sharply when an issuer crosses into the investment-grade club.”

Mr. Hancock’s Free Market Investor readers are up 35% on their Brazil play. Now that Brazil has garnered this credit rating, we wouldn’t be surprised if a few more South American picks are on the way. Subscribe to FMI, here.


Retail gasoline continues its march upward. The national average reached $3.62 this morning — its 17th consecutive day of record highs.

While the U.S. consumer bellyaches over his $110 Hummer fill-ups, you might want to keep your perspective in check. Gas is still cheap in the U.S.

Really cheap.

“As an indicator of where gasoline prices are heading,” writes a reader, “consider this too — at $116 per barrel, spot market price for crude oil and the fact that there are 42 gallons in a barrel mean the crude oil content of a gallon of gas alone is $2.76.

“The difference between that and the current average pump price of $3.60 is the only allowance for crude transportation costs to the refinery; refining costs to process into gasoline; shrinkage due to the refining process; gas additives, such as detergent, to keep engines clean, and/or octane boosters; transportation of refined gas to the sales points; marketing costs (store employee salaries equipment and building overhead); and last but not least, state, local and federal taxes.

“When all those additional items get fully reflected in, the price gas does, indeed, look cheap at its current pump price today. The problem is really the spot price of crude, which U.S. oil companies have little control over — about 80% of the world’s crude reserves are now controlled, owned, operated and sold by countries, rather than by oil companies.”

“The reader who says, ‘screw ’em’ to the farmers for ‘this [ethanol] mess they helped create’ has no clue,” writes another. “Farmers didn’t do this… fuel-obsessed (greedy?) motorists like this reader did, all of whom are bellyaching about gasoline prices headed for $4. Hang on a sec… what would happen if we were importing food, as well as oil?

“Farming is one of the few genuine production enterprises left in the United States that takes raw material to finished product. It even gets exported.

“What’s more, go a couple of days without food, and the price of gasoline will be the last thing on your mind. As human beings living in the United States, we should be a lot more concerned about the viability of American agriculture than we are about keeping our freeways full of consumers in raw consumption mode.

“The old saw ‘Don’t bite the hand that feeds you’ still cuts.”

Thanks for reading,

Addison Wiggin
The 5 Min. Forecast

In I.O.U.S.A., we animated Warren Buffett’s Thriftville versus Squandervill story and had the Sage himself explain it for the audience.

Last year at Vancouver, we showed a clip of the cartoon after the opening cocktail reception. We were surprised by the response. In fact, it kicked off a debate among the 200 or so attendees who stayed for the viewing.

“The national debt and trade deficits are grave issues…” offered a number of aggressive complainants. “How can you possibly make a cartoon out of it?”

“Because, you have to make it accessible to young people,” the defenders responded, equally as passionate.

“Go for it. Don’t make this movie for us…we already know the issues. Make it for the generation that’s going to have to deal with the burden.”

As you know, over the weekend, a near-complete version of the film screens here in Baltimore at the Maryland Film Festival. We’ve done a number of interviews locally. But two stand out this morning… and illustrate just one of the problems the nation faces.

The first is a review by the local hipster rag City Paper… a motley collection of high school losers who discovered the pen after they figured out they weren’t attractive to girls in any way:

Ironically, the City Paper is targeted to young people in Baltimore. Now here’s the Baltimore Sun begging the younger generation to pay attention:

The Baltimore Sun is, like many newspapers in the country, still serving a wide audience of baby boomers, but searching for an identity in the Internet age.

Also ironic, the journalist for the Sun, Jay Hancock, will be coming to the reception we’re hosting for the filmmakers at the festival, to talk to David Walker. Andrew Yarrow, the author of the book referred to in the article, will be there too.

The jackass hipster trust-funders at City Paper didn’t even bother to ask a single question about the movie or the book. They’re too cool for this story. Unfortunately, they will also be the ones who bitch the loudest when their government ceases to fund basic services…

rspertzel

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