Bond Insurers in Danger, OECD Lowers Growth Forecast, What Funds are Buying, Investing in Africa, and More!

by Addison Wiggin & Ian Mathias

  • Bond insurer crisis back in full swing… after months of dithering, Moody’s ready to pull the plug
  • National accounting standard radically altered… how a new rule could plague financials
  • Bernanke talks up the dollar: Day 2, the Harvard edition
  • Hedge funds buy the farm, literally… the new destination for hot hands
  • Chris Mayer on investing in Africa


The bond insurer crisis… it’s back baby, big-time.

Moody’s all but promised to lower its ratings of MBIA and Ambac yesterday. The two bond insures have dodged the spotlight lately as commodity and energy prices have skyrocketed. But no more… MBIA and Ambac once again threaten to devastate the finance industry.

“Regulatory pressure helped push Moody’s to finally admit that the emperor has no clothes,” says Dan Amoss. “Moody’s will almost certainly follow up with a downgrade, which would force MBIA into runoff mode. Since late February, when Moody’s affirmed its rating on MBIA, house prices have been falling at an accelerating rate. So the mortgages underpinning the securities that MBIA insures will start to default in higher numbers.

“Odds are high that MBIA stock will go to zero.”

Until then, MBIA and Ambac insure over $1 trillion in municipal bonds and corporate paper, with only about $75 billion in decaying “assets” to back ’em up. That’s quite a systemic risk.

MBI and ABK have been circling the bowl since the beginning of this crisis… this latest news has put them as close to zero as ever.

Elsewhere in the finance conundrum, investors are betting against Lehman Bros. at a record level. Short interest in LEH has soared over the past month, to 13%, an all-time high for the struggling investment house, even higher than at the peak of the Bear Stearns crisis.

Lehman supporters assert that shares of LEH are being unfairly driven down by short-selling funds, namely David Einhorn of Greenlight Capital, who has waged a very public war against Lehman. More likely, short interest in Lehman is skyrocketing because… well… it’s an overleveraged investment bank with huge mortgage-related liabilities.

As with Ambac and MBIA, we couldn’t care less if Lehman went out of business. But like the bond insurers, Lehman poses a huge systemic threat… if LEH bit the dust, its portfolio would hit the open market and its array of mortgage-backed securities would go for fire-sale prices. A la Bear Stearns, if that happens, every mega bank holding similar securities will get a similar price. Tens of billions of dollars in additional write-downs — at least — will ensue.

If you haven’t read Dan Amoss’ report on this matter, it’s a must-do. Check it out here.

One more item on the second leg of the credit crisis… the nation’s top accounting standards body has altered a policy that could cripple financials. The Financial Accounting Standards Board has chosen to “eliminate the concept” of the qualified special purpose entity (QPSE). Long story short, QPSEs are a way for financials to keep illiquid assets off their balance sheets. In today’s terms, a way for banks to hide mortgage-backed securites and other dangerous assets.

So if this board of standards moves forward with the change, the QPSE will be kiboshed and banks will have to either find another way to hide untradeable assets or bring ’em onto the balance sheet. The latter could easily trigger more billions in losses.

Good news though for financials (and their investors)… even though the standardization is on the fast track, it sounds as if it won’t be relavant until this time next year. Still, we’ll keep this on the radar for you.

The Organization for Economic Cooperation and Development (OECD) lowered its global growth forecast again yesterday. Among the OECD’s 30 industrialized nations, the group now expects growth will slow to 1.8% this year and an even slower 1.7% in 2009. That’s a pretty notable revision of its previous forcasts of 2.3% for 2008 and 2.4% for 2009.

“A recession is not something that is relevant for the euro area and Japan,” said OECD chief economist Jorgen Elmeskov, “and in the case of the U.S., it doesn’t matter that much whether growth is just above or just below zero; the fact is the economy is weak and will move sideways till the end of this year.”

“We see little indication,” said Ben Bernanke yesterday, offering an economic forecast of his own, “of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward.”

Speaking at Harvard, his undergrad alma mater, the fed chairman also fired another shot across the dollar’s bow, saying, “Longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve… We will need to monitor that situation closely.”

The dollar strengthened on Bernanke’s words, just as it did on Tuesday. The dollar index has risen to 73.8 and continues to trend up as we write. Subsequently, the euro is lower, in the $1.54 range. Likewise the pound, at 1.94. The yen finally lost its foothold at 104 and plunged (remember, yen prices backward) to nearly 107.

As the dollar rises, commodities are pulling back. Oil continued its retreat by a couple of bucks yesterday, to $122. Oil investors shrugged off the Energy Department’s weekly inventory report, which showed a surprising decline in crude supply. Greenback strength coupled with demand-quelling news was more than enough to keep oil’s latest downtrend intact.

Ditto with gold. The rising dollar has pushed gold to $870 as we write this morning.

Retail gas prices don’t seem to care about a stronger dollar — not yet, anyway. The national average price at the pump registered another record high today, a tenth of a cent below $3.99. Thirteen states now feature average prices over $4 a gallon, and the national average is up 85 cents a gallon since this time last year.

But it’s worth noting demand is already waning. We told you about the MasterCard report yesterday… today, the Energy Department says Memorial Day weekend gas demand fell 1.4% from the same period last year.

Wall Street suffered another up-and-down session yesterday, as traders balanced heightened financial risks versus the relief of lower oil prices. When the dust settled, not a whole lot had changed. The Dow ended where it started, the S&P lost 0.4% and the Nasdaq shed 0.9%.

The 2008 American corn harvest is still behind schedule . According to this week’s planting progress report from the USDA, corn planting is 3% behind the five-year average. What’s worse, corn emergence, the second benchmark for planning progress, is 15% behind its normal average… not a good sign for an ethanol market insisting on a bumper crop.

“The first solid indicator of crop progress is the average silking date,” explains Kevin Kerr. Silking is, well… when the corn does this:

“When approximately 75% of the plants show silks, we record that date as the silking date. In a typical year, the average silking date for Iowa, for example, falls between July 20-25.

“That’s not happening this year, not a chance. The root systems don’t have enough time to develop in this cold, wet ground. By the time we get to July, the plant will not be mature enough to handle the withering heat. In my opinion, this is going to be a terrible year for corn yield, and it couldn’t come at a worse time for the global economy.”

And as the ag prospects wither, so comes the latest bizarre investment trend. Invest in some funds these days and you might end up owning a piece of this:

According to today’s NY Times, institutional investors are buying up literal pieces of the agricultural system, like grain elevators, tractor fleets, ethanol plants, fertilizer stockpiles or what you see above — a South African farm recently purchased by Emergent Asset Management.

Just as funds flocked to scoop up Florida condos during the housing bubble, money managers are beginning to hold farmland in similar regard. Asset allocators as large as the infamous BlackRock are buying plots of farmland all over the world. Especially in sub-Saharan Africa.

Sounds like a decent idea. But when Goldman Sachs starts offering CDOs of “farmland-backed securities,” run for the hills.

“Africa is a big part of the future of natural resource exploration and production,” says Chris Mayer, all kidding aside. Never one to forget history, Chris reminds us that Africa was once a pre-eminent trading hub of the entire known world… the proud days of Indian Ocean trading meccas like Zanzibar, Dar es Salaam, Mombasa, Mogadishu and Mumbai might soon return.

“Africa is increasingly right in the middle of the global quest for natural resources. It has the highest ratio of light and sweet crude in the world — the best-quality stuff you can find. Right now, Africa puts out only about 12% of the world’s oil output. By 2012, that could be 30%.

“It’s not just about oil, either. Africa holds tremendous amounts of natural gas, minerals and natural resources of all kinds. Much of it is in places that are easy to do business in. In fact, Africa has good harbors and plentiful fish and lots to trade with India and the Middle East. Ties between India and Africa, especially, are strengthened under the common influence of Islam and the Portuguese. Africa is also home to a large population of ethnic Indians, which helps bridge trade further.”

In the Capital & Crisis portfolio, Chris has four picks with significant exposure to the revival of Africa. In addition, Mr. Mayer recently published his favorite plays in Africa’s neighbor nation — India. If you’re at all interested, you should check out this free report here.

“All this talk about gas prices and the consumer squeeze,” writes a reader, “but nobody ever talks about the distributor squeeze. I do business with the distributors (they buy wholesale from the biggies and resell to the nonchain corner stations at a $0.025 a gallon markup). A load of fuel (8000 gallons) these days fetches $30,000. The higher the wholesale price, the quicker the station has to move it to cover the cost. To do this, it takes on ‘house accounts’ (landscapers, etc.).

“The problem is its accounts aren’t paying the bills, causing the corner station to bounce its $30,000 checks to the distributor. Now the distributor needs a loan to cover the amount due to Exxon/Citgo/whomever when he’s covering three-four defaulted loads ($100,000) worth of gas a month. The kicker is the courts aren’t showing much sympathy toward evil Mr. Distributor, mercilessly making $0.02 a gallon. It will be years before distributors can collect from the station owners, if ever. So the ‘rich’ distributor is slowly being ground out of business. Prices go up, but profit margins at the distribution and station levels don’t. More risk, same reward.

“Once the nonchain distributors are out, ‘Joe’s Cheap Gas Down the Street’ will cease to exist.”

“How ’bout… I get so cranky watchin’ Bernanke drive tha dolla’ in the tanky,” rhymed a reader.

The 5: Very nice… kind of a 2Pac-meets-Woody-Allen approach to hip-hop.

We received a flood of e-mail after our admission that yesterday’s 5 would have been delivered in rap format, save for our trouble finding words to rhyme with “Bernanke.” Thanks for your advice… turns out that “skanky,” “stanky,” “lanky,” “banky,” “cranky,” “tanky,” “hanky-panky” and “douche baganki” could have done the job.

Ever since last year’s Investment Symposium in Vancouver — where Frank Holmes insisted the entire audience stand up and chant the Snoop Dogg lyric “I got my mind on my money and my money on my mind” — we’ve been convinced that our readership, while talented in many regards, can’t rap to save their lives. But, alas, a glimmer of hope.

Ian Mathias
The 5 Min. Forecast

P.S. “I have not received the invitation to join the Agora Financial Reserve. Please send me one,” wrote a reader last night. Unfortunately, a few of our Reserve invitations failed to deliver. If yours hasn’t arrived, either, we’ve left one for you here.

P.P.S Addison sends his regards today … “The Chief” is hard at work finishing his latest book, the accompaniment to I.O.U.S.A. Rest assured, you’ll be hearing more from him soon.




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