Paulson’s Warning, Crazy Agency Debt Stats, Peso’s Rise, Junior Miner Buying Opportunity, and More!

  • Paulson confesses bad times ahead… for “months” to come
  • Yet everyone’s buying financials… Dan Amoss and Eric Fry on the latest sucker rally
  • Stunning consequence of Fannie and Freddie bond sales… foreign hands own 10% of U.S. mortgages
  • Chuck Butler with a currency on the rise…
  • Ed Bugos on the possible buying opportunity among junior miners


  Welcome to The 5, “live” from the Fairmont Hotel in Vancouver, B.C. Your 5 Min. editors made it here in one piece, both in respectable shape… all things considered. Addison says he submitted a draft of the book I.O.U.S.A. this morning, but he’s also hosting this event. This editor is bruised and battered from a weekend of mountain biking in Whistler, a ski town just north of Vancouver, and has his usual 5 Min. duties to conduct… so we’ll see how respectable we are by the end of the week.

More on our annual investment symposium below, including a request for your questions for Wednesday’s Whiskey Bar… in the meantime, let’s get cookin’. We begin with a subtle admission from the Treasury Secretary.

  “I think it’s going to be months that we’re working our way through this period – clearly months,” Treasury Secretary Hank Paulson said last night. The former Goldman Sachs CEO tried to calm America by appearing all over the boob tube yesterday… but accidentally assured us that the worst might not be behind us.

“We’re going through a challenging time with our economy. This is a tough time. The three big issues we’re facing right now are, first, the housing correction, which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which are going to prolong the slowdown.”

Paulson gave particular warning to the financial sector, hinting that the FDIC’s list of troubled banks was sure to expand. “Of course, the list is going to grow longer given the stresses we have in the marketplace, given the housing correction.”

  Yet financials were on everyone’s “conviction buy” list last week. Looking back at last week’s market action, banks and brokerages stole the show… check out the biggest financial ETF, the XLF, over the past few days:

“This week, we saw a big reversal in the financial stocks,” notes our short-side analyst Dan Amoss. “This financial stock rally has all the signs of panicked short covering, rather than typical buying. Consider how the depository institutions most likely to eventually join IndyMac in federal custody — including Washington Mutual, Downey and Huntington Bancshares — are rallying the most.

“The rally has been so enormous that I think it’s nearly over in terms of price. But in terms of time, this relief rally could last for several more weeks. After that, it’s likely that the market will take a second look at the wave of future losses in the banking sector and we’ll likely see new lows before the end of the year.”

  But the market doesn’t seem quite ready to face that truth yet… investors were celebrating Bank of America’s 41% crash in profits this morning. Quarterly earnings were nearly cut in half from this time last year, as the bank struggled to cap $2.3 billion quarterly losses stemming from its recent acquisition of Countrywide.

But as with Citi and J.P. Morgan last week, losses weren’t as bad as the Street expected. Thus, BAC shares are up 7% as we write, and the financials rebound chugs along.

“Our guess – and its only a guess,” advises our investment director Eric Fry, “is that investors should keep on selling the lousy stocks they were selling two weeks ago and keep on buying the good stocks they were too afraid to buy two weeks ago. In other words, the shares of finance companies might bounce a bit — they might even bounce a lot — but investors would probably fare much better to buy the shares of companies that are GROWING, not those that are SHRINKING. The only thing growing at most finance companies is the share count, as these desperate, near-bankrupt enterprises issue gobs of new shares in exchange for cash infusions.”

Mr. Fry and Dan Amoss will both be slammin’ shooters at the Whiskey Bar on Wednesday here in Vancouver… again, more on that below.

  “It’s very early in the loss curves,” said J.P. Morgan CEO Jamie Dimon on a conference call last week. He’s talking about mortgage-related losses for the legendary brokerage house… let’s listen in for a sec:

“You saw subprime go first, and then, on a slight lag, you saw home equity and now in the lag, you’re seeing prime go. And it’s exactly the same loss factors. But remember, the components of where we are in the states…[are] very different. And we started doing more jumbos in ’07, so a lot of that is — part of that is ’07 vintage, which I think I told you at the time we were going to do and grow our balance sheet and gain share. And we were wrong. You know, we, obviously, wish we hadn’t done it…

“Prime looks terrible, and we’re sorry.”

Sorry… hmnn. That ought to do it.

  One out of every 10 U.S. mortgages is now owned by a foreign government.

We credit The New York Times for wrangling up the global tally of foreign-owned “agency debt” — the bonds issued by government-sponsored enterprises Fannie Mae, Freddie Mac and Sallie Mae. Might want to sit down for this one…

Of the $10-11 trillion U.S. mortgage market, Fannie and Freddie control over half. Since they have the actual capital to back up about 1% of those mortgages, they’ve issued bonds a few trillion times over to keep the money flowing in (to buy more mortgages, of course).

Foreign hands have snatched up over $1.5 trillion of agency debt… enough Fannie and Freddie paper to give them ipso facto ownership of about 10% of all U.S. mortgages.

  Oil continued its sell-off over the weekend. Light sweet crude fell $17 over the course of last week, plunging from record highs of $147 to as low as $129 this morning.

But buyers are starting to assemble this morning as Tropical Storm Dolly takes aim at the Texas coast. She’s expected to touch down in the oil heartland midweek, maybe at hurricane strength. Thus, oil’s up to $131 as we write.

  Gasoline had its first real pullback over the weekend. The national average at the pump dipped nearly 4 cents, to $4.07 a gallon. Still, according to the latest Nielsen Co. survey, 63% of Americans say they are cutting spending because of rising gas prices. That’s up 18% from this time last year.

For what it’s worth, 78% say they are cutting back on superfluous shopping, 52% are going to restaurants less often. We expect the slowdown in consumer spending to continue through the summer vacation months.

  Gasoline is still whacking airlines in the knees, too. American Airlines announced it will cut another 1,500 jobs. All the layoffs this time around will hit the aircraft maintenance units… after all, if AA is reducing its fleet and cutting flights, we suppose there will be less planes to fix.

American has now announced plans to lay off over 8% of its work force.

  With no juicy data to digest on Friday, the dollar kept to a tight range over the weekend. The dollar index remains at 72.2. The euro has backed off a bit from its latest record run-up, to $1.58. The pound slipped a bit, to $1.99. The yen is still at 107.

The real winner last week looked to be the ol’ peso. “Yes, the Mexican peso outperformed all other currencies last week,” affirms another Vancouver perennial, Chuck Butler, “reaching a five-year high versus the dollar. The Mexican central bank raised interest rates 0.25%, to 8%, pushing the peso to its highest level versus the dollar since 2003!

“I’ve always said that the thing that was wrong with the peso was that it didn’t pay an ‘insurance premium.’ Look back to the turn of the century, and the peso was outperforming most currencies… Why? Because interest rates were greater than 10%, there was an “insurance premium” being paid on the peso! What did it need an insurance premium?

“Ahhh, grasshopper, recall in the mid ’90s when the Mexicans just moved the decimal in the peso price? It’s a banana republic, folks, and if you are going to invest there, you need a higher interest rate (insurance premium) to help protect you from the volatility. I personally don’t think the interest rate is high enough in pesos yet. But I see what investors are doing… They are buying at cheaper levels in anticipation of higher rates.

Chuck tells The 5 he’s going to be unveiling EverBank’s new ‘Debt-Free’ CD here in Vancouver. As a reader, you’ll have first crack at it too. Details to come…

  Gold saw little action over the weekend, as well. It sells near Friday’s price this morning — $960 an ounce.

  “We’ve reached a critical inflection point for junior miners,” reports our gold adviser Ed Bugos. Ed’s looking at a chart of the Canadian Venture Index… check it out:

“A breakdown in this index could see the juniors return to 2004-05 levels, where they were when gold was still trading between $400-500. It’s possible if they follow the general stock market lower. However, they have missed so much already that if gold prices continue to soar, as I expect, the odds favor a bullish resolution, at least for the gold-related juniors.

“In this environment, it is most prudent to own bullion, or a good bullion ETF. But between the large-cap gold producers and the juniors, the risk-reward ratios today favor the latter. When the juniors wake up, your returns will be hard to beat.”

  “There is a seed crop called jatropha,” writes a reader, “that produces an oil used to make biodiesel. This crop produces much more fuel making oil than do most other crops. You might like to be aware and research this crop.”

The 5: Yep, jatropha pops up every now and then in The 5: Here’s our last mention .

  “You hit the nail on the head regarding drill ship availability,” writes a reader of our discussion on the Republican push to drill the OCS. “Right now, there are aging offshore drill rigs (all busy, please call back in 2015), no infrastructure and precious few geoscientists who point and say…drill here!

“Further to that, all of the prior exploration work (seismic surveys) are so outdated and hazy in defining drill targets they will have to be redone (where are the seismic survey ships and geoscientists, again?) before one even thinks about drilling.

“This nonsense about the U.S. drilling its way out of high fuel costs are a joke that even I cannot laugh at…but only laugh at the perpetrators and believers behind the drill, drill, drill mentality. Sounds a lot like the ‘attack Iraq’ crap that was fed to the U.S. by Fox News. Drill, by all means, but put the expectations in line, my friends.”

  “As an ‘international onlooker’ into this American’s financial state of affairs,” writes a reader from down under. “I find the Federal Reserve meddlings there… incredible. 

“The first and foremost knowledge I understand is that the American Constitution makes the ‘government’ accountable to the people. It does not seem the case today. Yet… it seems the government there has all but ripped up the precious American Constitution, doing its will at whim… and… without accountability.

“The Federal Reserve is doing its plays of favoritism, allowing ill-fated companies a financial lifeline at the expense of American taxpayers….subjecting a ‘safe’ collateral-package criterions is nothing more than ‘Big Brother’ cronyism.

“What are American people doing? Ignoring the facts? Cannot they see that its government has them in a pot of boiling water, cooking them to a miserable demise?”

The 5: James Grant asked the same question in the Wall Street Journal over the weekend: “Why No Outrage?”

The crisis born on Wall Street now has extremely tangible effects on the average person. We’re not surprised that those responsible for the bedlam are getting bailed out… but a little surprised that it doesn’t seem to be bothering anyone. But we think the reason is close to this sentiment expressed by David Walker, the former comptroller general, in the film I.O.U.S.A.

“Most Americans have never seen a rainy day. They no longer know how to save for one.”

We suspect that sentiment will change real soon.


Ian Mathias
The 5 Min. Forecast

P.S. Our high-end micro-cap letter, Bulletin Board Elite, just turned one year old today… but you’re the one who’s getting a birthday gift. To celebrate its successful first year, we’re offering you two years for the price of one… get the details on this rare offer, here.


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