Financials Back in the Spotlight, How to Buy Gold, Yuan Outlook, and More!

by Addison Wiggin & Ian Mathias

  • Financials back in the spotlight… markets of the world retreat
  • S&P’s shot across the bow… outlook on financial sector “now predominantly negative”
  • Kevin Kerr on the best way to buy gold
  • Famous trader dragged to Capitol Hill, but hard numbers show traders not to blame for $133 oil
  • Chuck Butler on one currency likely to break its latest winning streak 

  Washington Mutual chairman Kerry Killinger got the axe yesterday. He’ll remain on WaMu’s executive team, but joins the ranks of bank CEOs who’ve gotten canned for really bad leadership during this mortgage fiasco. 

It’s really hard not to be cynical about these guys. 

Seriously, you’ve been in finance your whole life and you didn’t know that teaser rates to poor people were going to cause problems down the road? 

Thanks, jackass. A free market requires responsibility… without it, you’re stuck with government. And who among us wants that?

  Jump-started by yesterday’s bank failure and the nightmare at U.K. home lender Bradford & Bingley, the markets are getting a good housecleaning.

Both the S&P 500 and Dow lost more than 1% yesterday. In Asia, while we were sleeping, the major indexes, in Hong Kong, Taiwan, Japan, South Korea… even Australia, fell by 1.5% or more.

  “The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,” reads a statement from Standard & Poor’s this morning. The once venerable ratings agency downgraded credit ratings and issued “negative” outlooks yesterday for Lehman Bros., Merrill Lynch and Morgan Stanley.

“The downgrade primarily reflects our concern,” say S&P spokespeople, “that the pace and extent of earnings improvement could be considerably more muted than we previously anticipated."

Uhhh… speechless.

 Lehman Bros., the most vulnerable of the three houses downgraded, got it the worst. Traders pushed LEH down 8% during yesterday’s session.

This morning, the suits at Lehman are putting together a plan to raise more emergency capital. Having already raised $6 billion over the past year, Lehman is far and away the most likely candidate to play the role of “next Bear Stearns” during this encore production of the credit crisis.

Mark June 17 on your investment calendars… Lehman’s earnings announcement could be quite a bombshell.

  Gold backed off yesterday. It’s down to $880 this morning.
 

  “While I have been a commodities trader for 20 years,” admitted Kevin Kerr to an audience at MarketWatch.com yesterday, “I’m not a gold bug.”

“But still…” he then recants, “the case to own gold is as relevant as ever. We live in changing times, and the global economy has brought with it some very positive aspects, but also many potential catalysts for conflict. Already, battles over various resources are happening around the planet, and as a growing, hungry world demands more of almost everything, supplies will tighten and countries will become desperate.
 
“We can envision a world in which paper currency becomes less desirable and a shift to tangible assets (such as gold) becomes far more portable. Is it really that hard to accept that the U.S. dollar’s reign may be coming to an end, or at least is taking a serious pause?”
 
If you’re interested in adding to your portfolio, Kevin recommends you “go all in and buy the actual metal. That’s right, not paper or plastic, but gold, the real deal. Get a safe-deposit box and then accumulate bullion in bar form.”
 
For what it’s worth, Kevin’s gold target is $1,400 within the next nine months.

  Crude oil held its ground yesterday. The price per barrel remains just off recent highs, at $127 this morning.

  George Soros is being dragged to Capitol Hill today to testify in a congressional hearing on “energy market manipulation.” Along with Terrence Duffy, head of the Chicago Mercantile Exchange, Soros will play the role of either the demented international speculator or the heavily accented billionaire who lights cigars with $100 bills and profits from the pain of the poor U.S. consumer. Either way, Nancy Pelosi, the hero, will whip him for private success.

“Shame on you for making money in the land of the free,” she will say. And mean it.

Still, Soros is a big supporter of the anti-Bush crowd, so he’ll likely take his public tongue-lashing with a grain of salt and then go about his business.

 Just in time for the hearing, the Commodity Futures Trading Commission (CTFC) announced results from its probe of the hedge fund industry.

Heh… get this: Funds and traders have reduced their long crude oil positions by 80% since peaking last July. Back then, nearly a year ago, market speculators owned a record 127,491 long oil contracts.

Today, with oil at its manipulated, speculator-juiced price of $127 a barrel? They own about 25,000 contracts. In other words… it’s not the traders. They’re out of the market because… well… oil is too expensive now.

   Thus, the CFTC plans to monitor evil speculators’ other activities, instead. Under pressure from Congress after the Michael Masters testimony , the CFTC now requires energy traders and large funds to submit monthly reports on their index trading.

“Where were the nation’s top legislator-inquisitors,” asks investment director Eric Fry, “when the Nasdaq bull market of 1999 and 2000 was powering higher? Where was the outrage over the ‘speculation’ that produced obscene ‘windfall profits’ for the Wall Street firms?

“And where were the congressional hearings during the housing boom of 2004-2006? Where were all the sanctimonious, finger-wagging senators who might have berated the National Association of Realtors (NAR) for making too much money? And why didn’t Congress drag members of the NAR into a hearing and accuse them of colluding with mortgage lenders to manipulate homes prices?

“When share prices soar, we call it a ‘bull market.’ When home values soar, we call it ‘healthy price appreciation.’ But when oil prices soar, we call it ‘speculation’ and ‘manipulation’…and then we gaze around for someone to blame.”

  Another record high average gas price this morning … yawn. The AAA national average crept up a bit higher than $3.97 as we slept, the 26th day of the last 27 we’ve seen record highs.

We paid $3.99 at a gas station in Baltimore this morning after dropping the kids off at school. At these prices, gas stations are going to have to reset their mandatory shut off price… $60 just isn’t enough to fill up a Land Rover anymore.

   The dollar ended its recent rally this morning. Fresh worries over the U.S. financial sector and an uptick in oil prices yesterday put the kibosh on the dollar’s comeback. The dollar index now scores 72.7.

  The euro is looking strong this morning on the heels of an upwardly revised eurozone GDP report. Like the U.S. last week, the ECB revised first-quarter GDP… up from 0.7% to 0.8%. The revision doubles Europe’s fourth-quarter GDP of 0.4%. Thus, the euro is up a cent, to $1.56.

The pound rode its coattails, rising to $1.97 this morning. The yen is stuck in mud at 104.

  “I’m expecting a major slowdown in the appreciation of the renminbi,” says our friend and defiant currency guru Chuck Butler of the Chinese currency this morning.

Over the past year, the renminbi (or yuan, whichever you prefer) has managed to gain only a cent or so on the dollar, due largely to China’s tight trading band with the greenback.

Still… you might be able to spot a trend here:

That trend, speculates Chuck, might be ready to take a break. “A just printed report shows that China’s monthly increase in foreign exchange reserves reached a new high of $74.5 billion in April. That’s more than triple the trade surplus and recorded foreign direct investment inflows combined in the period.
 
“The Chinese don’t have many options here. This hot money flowing into China is causing major problems with inflation. The only thing the Chinese can really do is slow down the appreciation of the renminbi to ‘scare’ away the hot money flowing into China.

“Hot money is not good for a country, and usually causes major pains when it leaves.”

  Today’s a big day for the auto industry. But not for the usual car and truck sales data, printing at noon… although that data isn’t, in and of itself, likely to help sentiment much.

No, today GM holds its annual meeting. Wall Street expects all kinds of changes from the nation’s biggest automaker… plant closures, job losses and production alterations, to name a few. We’ll fill you in tomorrow.

  “I’m sick and tired of everyone in all areas of the media,” writes a reader, “even The 5.

“You keep touting this $600 stimulus for single taxpayers. Everyone in the media keeps saying, ‘When everyone gets their $600 check from the government, we’re all going out to stimulate the economy.’ What a bunch of bull.

“Because of this scam, millions of us have been waiting to get our $600. Imagine my surprise when I opened my government envelope and discovered that my share was only $300. I soon discovered that this so-called stimulus was based on my 2007 income, and not a blanket $600, as we were all led (by the media and government) to believe. Another single friend of mine received $412. I, like the majority of us, will be using it for gas or food.”

The 5: You’re kidding, right? You think we’re touting the rebates? We’re trying really hard not to call you a douche bag right now.

  “This might be more to vent than anything,” warns a reader, “but maybe it’ll be good for a laugh for you too.
 
“51% of consumers will use their stimulus checks to pay down debt? Why doesn’t the Fed just loan us the extra $200 billion or so directly, and skip over the big boys playing dice (or god) with the world financial system? I propose consumer Treasury auctions.

“Who’s to say that my consumer debt is less respectable than the ridiculous mess that the ‘professionals’ have gotten themselves (and us) into? The government might as well carry our individual debt, maybe secure it against future tax refunds. People who seem willing to file bankruptcy as fast as anything nowadays might still respect (I use that term loosely) the IRS.”

 “I don’t care if people are for Mr. Greenspan or against his ideals,” writes our last reader. “The point is the man decided to retire. Usually, when you retire, you are not making public statements about your former job position.

“So, Mr. Greenspan, it was your choice to retire. Could you please go play golf, cribbage or whatever you find entertaining and let the officials who were willing to take on from where you left off do their job?

“If Mr. Greenspan still wanted to put in his 2 cents, he should have stayed in his position.”
 
The 5: Again, trying to restrain from calling you juvenile names.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Starting this evening, the Agora Financial Reserve will begin accepting new members. Keep an eye on your inbox for an exclusive invitation.

rspertzel

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