by Addison Wiggin & Ian Mathias
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Fannie and Freddie, worse by the day… Government plans taxpayer-funded takeover
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Oil hits new high… OPEC chief on the event that has “unlimited” upside for crude prices
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Chris Mayer’s found a booming venture capital market amid geopolitical tinderbox
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The great global decoupling… fact or fiction? One chart with a compelling answer
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Greg Guenthner on the biggest source of electricity supply on the planet, right under our noses
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Plus, readers rush to Boone’s defense… can “Pickens Plan” really make a difference?
Are you ready to pay — literally — for the failure of Fannie Mae and Freddie Mac?
“Markets should be assured that the federal government will stand by Fannie Mae and Freddie Mac,” declared New York Sen. Chuck Schumer yesterday. The two companies are “too important to go under”… Congress “will act quickly,” if necessary.
“They must not fail,” chimed in John McCain from the campaign trail. Fannie Mae and Freddie Mac “are vital to Americans’ ability to own their own homes.”
Call us crazy, but that sounds like two implicit government guarantees from senior members of the Senate. What’s more, The New York Times reports this morning that the Bush administration is planning a government takeover of one or both of the companies. The NYT’s sources say if either Freddie or Fannie becomes “critically undercapitalized,” the government would likely place the companies in a “conservatorship.”
“Under a conservatorship,” explains the NYT source, “the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.”
Ugh… yeah… that’s freaking huge.
“The insolvency of the Fannie Mae and Freddie Mac,” says Dan Denning , “is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it … the collapse of Bear Stearns and the whole credit crisis would look like mere child’s play should a genuine crisis unfold in the quality of the debt owned and guaranteed by Fannie Mae and Freddie Mac.
This week alone, shares of Fannie and Freddie have fallen over 40%. Both plummeted this morning in the premarket and opened down an additional 40%.
“Our primary focus is supporting Fannie Mae and Freddie Mac in their current form,” added Treasury Secretary Hank Paulson today, trying to quell the rumors of a government bailout. He and Ben Bernanke appeared before Congress yesterday, looking a little worse for wear:
Both were on Capitol Hill to urge Congress to expand the government’s regulatory role in financial markets. The two support a plan that would give federal bodies the authority to set standards for the capital, liquidity and risk management of banks and brokerages. Juuuuuust a bit late on that one.
The dollar is getting shellacked on all this news. The dollar index has fallen a full point since Wednesday, to score of 71.8 as we write. That’s barely a point above its all-time low. Likewise, the euro, at $1.59, is quickly approaching another record high. The British pound is back at $1.99, and the yen has strengthened to 106.
No surprise… the U.S. stock market is looking gloomy today. Despite a decent rally yesterday, the Dow opened down around 160 points this morning, almost entirely due to Fannie, Freddie and higher oil prices.
Too bad, unless you know how to short stocks. Dan Amoss’ Strategic Short Report readers sold their Lehman Brothers position today… for an incredible 450% gain in less than 3 months. There’s plenty of downside left in stocks around the world… will you profit as the bear market claims its next victims? Dan can teach you how, here.
There’s a glimmer of hope in the market today for long-term investors, too. GE, a mega-conglomerate whose tentacles stretch into seemingly every industry, reported decent earnings this morning. The company managed to lose less than 6% over the second quarter, and earnings came in line with estimates. You might recall the bomb GE dropped at the end of the first quarter… seeing the classically stable stock return to relative normalcy ought to give investors something to hang their hats on this morning.
And if the collapse of Fannie and Freddie weren’t enough for markets to deal with… oil is back at a record high. At $146 a barrel this morning, light sweet crude has totally recovered from its pullback earlier this week. If June oil prices focused on supply and demand, July — so far, at least — is all about… fear.
If there is a military attack on Iran that damages its oil industry, “We really cannot replace Iran’s production — it’s not feasible to replace it,” said Abdalla Salem El-Badri, the OPEC secretary-general. The world seems especially concerned these days about a coming conflict with Iran. First, we heard rumors that Israel was considering attacking Iranian nuclear facilities. Then, as we reported Wednesday, Iran flexed its military muscle by testing new medium-range missiles designed to reach Israel. And yesterday, Condi Rice assured the world that the U.S. “will defend American interests and the interests of our allies.” Terrific.
Ugh… we only have 5 min., so we’ll leave it at this: If Iran were to go to war and stop exporting energy, “prices would go unlimited,” said OPEC el-Badri.
Iran produces 5% of the world’s oil and, through the Strait of Hormuz, could choke off at least 30% of the world’s oil supply.
Speaking of Israel… did you know that Israel has the second largest number of venture capital startups in the world, just behind the U.S.?
“Israel, as it turns out, is a hotbed of technological activity,” notes Chris Mayer in his latest Special Situations alert. “The country’s technology sector is a bustling hive of activity, with companies on the leading edge of geothermal and solar power, water purification and more. I suppose it makes sense, since Israel is in an arid region and has little in the way of natural resources. Yet it does have an awful lot of sunshine.
“Over 90% of the homes and buildings in Israel use rooftop solar power collectors, mainly for heating water. Israel’s also adding solar capacity at a rapid rate, such that within 10 years, solar power could provide 35% of the country’s energy, compared with only 6% now.
“Israel is also incredibly water efficient, as it must be. Already, Israel recycles more than 75% of its water. It has led the way on all kinds of innovations in everything from desalinating seawater to reverse osmosis for water filtration.”
Chris recommends checking out a fledgling venture capital company based in Israel… currently priced at a serious discount. For the ticker, subscribe to MSS, here.
Gazing even further abroad, we notice the great “decoupling” theory is so far a bust. Check out this chart, courtesy of Casey Research:
For all the hype over China — the plethora of speculators insisting that as the U.S. crumbles, China will forge ahead — it’s looking like China is feeling the pain too. In fact, when comparing an ETF of China’s 25 biggest stocks to an ETF of the S&P 500, as you see above, China is clearly the bigger loser in this “credit crunch.”
(BTW, we managed to get our hands on some of the soon-to-be sold-out Beijing 2008 Olympic Series II gold and silver coins. If you’re into that sort of thing, they’d make a great addition to your collection. Check ’em out here.)
China’s coal crisis is growing worse by the day. We mentioned yesterday that far too many Chinese coal-fired electricity plants have dangerously low reserves. Today, we hear the Chinese government has been tremendously unsuccessful in reopening thousands of the country’s small coal mines. Government officials are on a campaign to quickly boost coal production… thousands of small mines that were shut down for safety reasons are now being urged to reopen.
But no one is willing to take the chance. The government fixed coal prices earlier this year, destroying capitalist incentive to reopen closed mines. Not to mention… Chinese coal mines are, generally speaking, dangerous as hell. Over 30 Chinese coal miners were killed in work-related accidents this week… a tragedy that would be hitting the headlines here in the U.S. Last year, around 3,800 Chinese coal miners died on the job.
Maybe China could get a hand from I.O.U.S.A…. “The U.S. has the largest coal reserves on the planet,” Greg Guenthner reminds us. Last week, T. Boone Pickens suggested that the U.S. was the “Saudi Arabia of wind power.” According to Gunner, U.S. coal is in even more immediate and impressive abundance.
“The coal supplies in the U.S. account for 95% of its fossil fuel reserves and a whopping 60% of the fuel reserves in the world, according to the American Coal Foundation.
“The idea of a U.S. coal shortage is virtually unthinkable. We have roughly 275 billion tons of recoverable coal, enough for us to burn for the next 2½ centuries if we needed it. So while the next generation might not have the oil to run their cars and trucks, the lights at the house will stay on thanks to coal power.
As Gunner is well aware, coal’s Achilles’ heel is its toxic emissions. At the same time, “we’re not going to stop using coal to generate power — it’s simply not possible right now, especially on the energy-starved West Coast.” That’s why he’s about to recommend a small-cap company that specializes in cleaning up this dirty business. Check out Gunner’s Penny Stock Fortunes for more.
Last, if you don’t own some gold yet… shame on you. As the stock market and dollar plunge this morning, gold is sitting pretty. It’s up another $20 since yesterday, to $965.
“Your wind energy hater, aka ‘jam a pickle in your creme brulee,’ really got my dander up,” writes a reader of yesterday’s mailbox. “His fear of natural forces such as tornadoes disrupting the wind turbines would suggest that Greensburg, Kan., shouldn’t put up solar panels or wind turbines because nature may strike again. We shouldn’t drill for oil in the Gulf of Mexico because another hurricane might strike. Why build anything in California when an earthquake or wildfire may occur?
“Why turbines in North Dakota? A great wind source, plenty of open space, far enough north to be out of Tornado Alley and the state would appreciate the additional revenue. Turbines are only “uglier than sin” if you have a mind-set against them. Studies have shown that the average wind turbine kills two birds per annum. Wind turbines are now being built that have a production capacity of 3,250,000 watts, a significant contribution to our energy needs.
“I’m all for drilling for oil, nuclear energy AND renewable energy. Let’s keep an open mind.”
“Turbines are generally rated for 150 mile per hour winds,” says another. “As wind speed picks up, there is a decoupling and the blades freewheel to minimize damage. A sophisticated design cold easily change the rotor pitch like a helicopter and spin at a lower speed than the wind. Not that it’s much of an issue. Despite what the second reader thinks is possible for a hurricane, 250 mph is not. Such a speed would cause worries far beyond a few turbines, since structures are not rated for speeds that high. A Category 5 hurricane is necessary for wind speeds over 150 mph. There have been only three in the U.S. in the last century.
“Wind is not the only answer, nor is PV, carbon-based fuels or anything else. There are multiple answers, including hydro and geothermal. Everything where it makes sense, ethanol from sugar, solar in the desert, wind in the hills — apply more logic and less politics!
“As for wind turbines being ugly, is there any piece of oil equipment that wouldn’t qualify as ugly?”
“Here is a photo of a wind generator in a row of six in southern Minnesota,” writes our last reader. “I believe they are owned by Xcel Energy.
“Tell Mr. T. Boone Pickens (any relation to Slim Pickens?) he can probably buy them cheap. Looks like lightning got them. I don’t think wind is the answer, but if it is, then Washington, D.C., and Ted Kennedy’s house should be ringed by these eyesores.”
The 5: For more on the Pickens’ Plan, check out the Daily Reckoning Blog … pretty interesting conversation cropping up there.
Have a great weekend,
Ian Mathias
The 5 Min. Forecast
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