Resource Wars, Dollar Thoughts, Gold Stock Opportunity, Prime Mortgage Meltdown, and More!

  “Whatever political reasons exist for what happened in South Ossetia,” says Chris Mayer, “the oil and gas markets find themselves right in the cross hairs of the whole thing. Resource wars — fought over oil and gas, pipelines, water and other key resources — seem likely to have a bigger role in the future. Politicians, though, will be quick to dress up any such war as being fought over something else. The bottom line is that for all the glitzy promise of the 21st century, human beings are still much as they were in August 1914.

“All of this only reinforces in my mind the appeal of oil and gas assets nestled in relative safety in North America. Moreover, the price of oil, while it has come down 20% off its high, is still in a market in which supply and demand wobble along a knife’s edge. It is still a market susceptible to shocking price spikes and sudden shifts in supply.”

Chris’ Special Situations portfolio is ripe with North American resource plays, most of which still trade at a significant discount. This commodity pullback is a great time to load up on some of your favorites. Get the tickers, here.

Another sign of the times: The U.S. Coast Guard Cutter Healy will leave Thursday to map American territory in the Arctic.

During the three-week mission, the crew will map the ocean floor, collect data that will help oil and gas exploration projects and define Artic borders. They may even plant an underwater flag next to the one the Russians plunked down last summer.

Yeah, that should settle the debate.

  Traders were unfazed by Putin’s head fake in South Ossetia. Oil continued to sell throughout the commotion. Today, you can fetch a barrel for $113. Gas is averaging $3.79 for the cheap stuff today.

  “The price of oil isn’t dropping,” our currency consultant Chuck Butler reminds us. “The dollar is rising, thus pushing the price of oil down. If the dollar is ‘allowed’ to return to the underlying weak dollar trend once again, the price of oil will rise and people will be throwing darts at the heads of oil companies again!”

  Indeed, the dollar is still enjoying a major rally. The dollar index pushed its way up to 76.2 today, the highest level since February. Likewise, the euro is down to $1.49. The British pound costs $1.90, and the yen goes for 109.

“So what’s it going to take to turn this puppy back around?” asks Mr. Butler. “These things have to work themselves out. I believe this massive short covering could possibly lead to dollar strength until the elections and the end of the year.

“However, I truly believe we will see one or two more financial institutions get down on their knees and beg forgiveness this year. Add that to the fact that the mortgage bill passage should begin to show chinks in the armor and the market participants will do a V8 slap to the forehead and realize the fundamentals in the U.S. are still baaaaaaaaaddddddd and begin to sell the dollar again.”

  Here’s one benefit of the falling dollar: The Commerce Dept. announced this morning that the U.S. trade deficit narrowed in June. The U.S. consumed $56.8 billion more in imports than it exported for the month — down 4% from May.

Goods and services exports rose 4% during the month, the biggest jump since 2004. Imports grew by 1.8%. Both imports and exports are at record high levels.

  Gold is getting crushed. At $820 an ounce, gold is at its lowest point for all of 2008. Looking at the chart this month, we notice gold has been sold down every single day.

“Well, back to the drawing board,” laments our gold adviser Ed Bugos. “I was flat-out wrong about support holding above $890 and then $850. In percentage terms, gold’s current pullback is still second to the one that occurred in summer 2006, but by only a few points. It would have to fall back to $765-ish to match that one.

“The gold stocks, on the other hand, are in the midst of their absolute worst correction to date, with the HUI off some 40% from its March peak and the XAU down about 35%. The chart says there could be some more downside, but my momentum indicators are all oversold in the short term. Moreover, the slide technically looks more like the final part of an intermediate capitulation than the beginning. There’s a good chance that the market will rally off an oversold condition sometime this week.

“The market’s budding love affair with the yellow metal is going through a rough spell. But the final vestiges of the ‘Goldilocks era’ in the markets are fading away, and the conditions are ripe for the market to realize that the economic good ‘money’ is just as important to the economic engine of growth as the economic good ‘energy.’

“Gold investors should come off the sidelines and back up the truck this week.”

Here are a couple of the financial institutions Chuck was talking about, begging for forgiveness:

UBS wrote down another $5.1 billion during the second quarter. That makes them one of the most crisis-stricken (or most honest?) banks in the world. UBS suffered a net loss of $331 million during the quarter.

For its part, J.P. Morgan’s third-quarter write-downs will total at least $1.5 billion. CEO Jamie Dimon has already presided over $12 billion in mortgage-related write-downs.

Forget subprime… now we have to worry about prime. Delinquencies in prime mortgages have nearly doubled since last year. The “safest” mortgages — embedded in billions of dollars worth of asset-backed paper on Wall Street — defaulted at a 2.44% annual rate in May. That’s 84% higher than the same time last year.

Defaults on jumbos — loans over $417,000 — more than tripled. “The extent of how bad these loans are doing is very troubling," a Global Insight economist told CNN today.

  And the last proof today that the economy is still in rough shape: MBA programs across the country are reporting record applications. Recently fired finance geeks, executives facing weak earnings, college grads who can’t find six-figure incomes… all casualties of an economic downturn turning to academia for answers. The latest from the Graduate Management Admission Council says 77% of full-time programs are reporting significantly higher demand this year. Registrants for the GMAT total nearly 250,000 this year alone, a record high.

  “You may be interested in knowing,” writes a reader responding to yesterday’s 5 , “that a 300-plus point up day in the Dow is more than a rarity in a bull market — it has never happened! All previous 300-plus point up days in the Dow have occurred in bear markets.”

  “The 5 is attempting to drive away what precious little of my sanity is left,” declares another, this reader referring to our coverage of China becoming the world’s biggest manufacturer.

“It is interesting to note when China, a developing country, grabs another ‘world’s largest’ title. However, China has the world’s largest population. It should have the ‘world’s largest’ of everything, including number of Internet users, factories and groups dedicated to understanding the point of nonrhyming poetry.

“What is totally odd is how long we’ve hung onto the status of world’s largest <name of x> with 5% of the world’s population. It would be nice if you changed the slant of your reporting from ‘Look what we lazy American bozos are giving up’ to something more like ‘So… what took China so long?" I’m not arguing against the idea that we are lazy bozos, because I’m pretty sure we are. I’m just saying it’s a dubious honor to have the world’s largest manufacturing base in the world’s largest country a mere 300 years after the start of the Industrial Revolution.”

The 5: We don’t think Americans are lazy or stupid. Compared to the rest of the world, the U.S. is a pretty educated and employable nation. We’re more inclined to believe the average U.S. consumer is a victim (and beneficiary) of this country’s success. Most humans, when offered “something for nothing,” will take it. Likewise, most people would spend more than they can afford if they think they can get away with it — especially if encouraged.

What ought to happen is what economists might call a “regression to the mean.” In other words, things should start making sense again. The U.S. economy should contract, because our brand of government and consumer debt isn’t sustainable. Likewise, China should become “the world’s biggest” of almost everything. There are lots of reasons why. But for starters, there are 1.3 billion of ’em.

The scary part… what happens when China goes “past the mean” the way the U.S. has?

Addison Wiggin
The 5 Min. Forecast