I.O.U.S.A., Fannie & Freddie, Chinese Drugs, College Tuition, Resource Investing and More!

by Addison Wiggin & Ian Mathias

  • Have plans tonight? Cancel ’em… The 5’s got you covered
  • Fannie and Freddie down another 45%… Dan Amoss on the U.S. Treasury’s now inevitable intervention
  • Global growth screeches to a halt… latest from OECD shows which nations fare the worst
  • Greg Guenthner with an overlooked investment opportunity in China
  • Oil rebounds back to $121… Byron King’s advice on reinvesting in the sector
  • One consumer cost rising at a breakneck rate… four times faster than energy prices!


I.O.U.S.A. hits theaters across the country tonight. If you haven’t heard, it’s a movie we made about U.S. deficits. It’s been praised by nearly every major media outlet in the country — by those from the left, the right and in between. It’s one of the biggest projects we’ve ever undertaken, and we need your help to make it a success. Tonight’s the night… find a theater near you and check it out.

The king and queen of inappropriate debts, Freddie Mac and Fannie Mae, are hogging the market spotlight again today. If you haven’t been watching their charts this week, it’s been quite a show. Both are down about 45% since Monday. First, there was the Barron’s bit on Sunday, which declared the two firms insolvent. Then, both companies paid record-high premiums in separate debt auctions Tuesday and Wednesday. Today, everyone and their mother expect a government bailout.

Looking over the past year, the chart paints a pretty clear picture: Fannie and Freddie are next to worthless.

Funny, all pundits this week point to an inevitable bailout of the two belabored GSEs… at this rate, it’ll be more like a “receivership.” The race to zero is on.

  “The market has called Hank Paulson’s bluff,” says Dan Amoss. “Since Fannie and Freddie face huge refinancing commitments in a matter of weeks, the Treasury will have to act. Most likely, this means wiping out equity holders and assuming temporary ownership of these companies.

“After this, the future for these two GSEs will largely depend on Washington politics. Rest assured that whatever the outcome, the government will inflate as much as necessary to prevent the GSE balance sheets from imploding.

“But this process will not unfold without severe consequences for many stocks. The slow-motion unwinding of the credit bubble, along with the government’s reaction, will yield many attractive short-selling opportunities.”

Indeed, it will. Dan’s Strategic Short Report readers are well positioned for such an event. If you’d like to be as well, you’ve got to check out SSR by midnight tonight. We’re currently offering three free months of this service, but our deal is off the table after 12 a.m.. Get the details, here.

  Here’s another worrisome new trend in the financial sector: Two sovereign wealth funds just took a pass at purchasing a gigantic stake in Lehman Brothers. Rumors abound this morning that Lehman has been offering to sell 50% of itself to state-owned banks in China and South Korea. Both foreign investors balked at the last minute.

  Mr. Market isn’t having a hard time dealing with the latest stress from financials. The Dow and S&P 500 rose 0.6% yesterday, led mostly by gains in the energy sector and a nice earnings report from Hewlett-Packard. The Nasdaq finished up 0.2%.

  Most of the world’s advanced economies grew at the slowest rate in the second quarter since 2001, says the OECD today. The organization claims its 30 member nations grew at a lousy 0.2% clip from the first to the second quarter. Since the same time in 2007, OECD members have expanded only 1.9%.

Not surprisingly, of all the 30 nations, the G-7 had the worst growth during the quarter. That’s the U.S., Japan, France, Germany, Italy, Britain and Canada. Together, they “grew” 0.1%. If the great decoupling theory is to come to fruition, it looks like Europe won’t be a beneficiary.

  “Big Pharma is battling for valuable market share in China,” notes our small cap adviser Greg Guenthner. While the world’s eyes are currently fixed on the Chinese athletic industry, Gunner’s been taking notes on the booming drug sector.

“The stampede of the Chinese middle class is startling. This is especially evident in the drug market. As the People’s Republic’s social status rises, so does the level of health care.

“Bayer reps say revenue from China is growing at a 40% annual clip… (that’s worth more than $500 million in 2008). That’s a lotta dough. According to Reuters, Bayer thinks it can become the biggest seller of prescription drugs in China this year, bypassing current Numero Uno AstraZeneca.

“An even better play? Generics… sales of cheaper, simpler drugs (like antibiotics) are exploding as more and more new middle-class Chinese can afford quality health care.”

To capitalize on this trend, Gunner recommends an over the counter (OTC) play to his Bulletin Board Elite readers. The stock is a pure play on Chinese generics and drug ingredients — the No. 1 supplier, triple-digit growth… everything you’d want in a potential small-cap moonshot. Get the ticker, here.

  Currencies around the world have reversed course today. The dollar’s huge rally has officially paused. At 76.2, the dollar index is now a full point off Tuesday’s eight-month high of 77.4. The euro has firmed up a cent, to about $1.48. Ditto with the pound, up to $1.87.

We pay special attention to the Japanese yen this morning. While the Nipponese currency felt the sting of the dollar rally this month, it’s held up exceptionally well. At 108 today, it’s as if the dollar rebound never happened.

“Risk aversion is returning to the markets,” notes Chuck Butler. “Fannie and Freddie shares are down about 30% overnight, as it now appears that a nationalization bailout is the real McCoy. With risk back on the table, the yen has rallied to the 108 handle!”

  Consequentially, gold remains in its recent uptrend. The spot price has drifted up another $25 today, to about $840.

  Oil is off to the races today. The light sweet stuff is up $6 as we write, to $121. Oil has risen partly because of a softer dollar. But we’re also noticing two important current events for energy — Tropical Storm Fay and the conflict in Georgia — just won’t seem to go away.

“Looking in the long term,” says Byron King, “gold and oil are headed back up, for all the familiar reasons. Really, it’s not like anyone is finding new large gold or oil deposits out in exploration land.” Byron sounds like he’s taking a closer look at some of the resource takeover targets — smaller, depressed names with proven reserves.

“Indeed, a whole lot of looking is leading to not very much finding in the exploration patch. The big gold miners are pulling ore out of the ground. But generally, they are not replacing their mined reserves through reserve growth or resource expansion. To the extent that the mining companies are expanding reserves in the short term, it’s by digging deeper. And that raises the cost structure for production.

“Rising production costs are eating into profitability. So in the medium to long term, the big guys will have to find new reserves by digging on Wall Street, if not on the TSX Venture Exchange. There is already some takeover activity occurring, but it has been hamstrung by the broken world banking system. It’s the same thing with the large Western oil companies. It’s a rare oil company that replaces its annual output with new reserves.”

  But gasoline prices in the States are still falling. The national average crept down to $3.71 today, the 34th straight day of decline. Only four states still average over $4 a gallon.

  If you thought energy prices had entered bubble territory, check out the recent history of college tuition!

Last week , we told you poor economic conditions have driven record numbers to pursue their MBA. Today, we’re reminded it will come at an incredible cost. According to the latest issue of Money magazine, college tuition rates over the last 25 years have risen “at a faster rate than costs have risen on any other major product or service — four times faster than the overall inflation rate.” As the chart the magazine provided shows, the rising cost of higher education puts ballooning energy and health care costs to shame.

Incredible, isn’t it? We have to wonder… when is college simply no longer “worth it”?

  “To notice that huge influx of immigrants,” writes a reader, refusing to let go of the immigration debate that fills our inbox, “often creates more stress and unfriendliness and degrades the quality of life does not mean one is xenophobic.

“They are just expressing what they have noticed. I have noticed it to be true, as well. There is definitely less cohesiveness, friendliness and safety with high levels of foreign immigration.

“People are tired of being called these names just for noticing the obvious. It’s immature and juvenile to do so. Maybe you should listen and respect these points of view. That would be a novel idea.”

  “Look at what’s happening in not only the U.S., but also so-called Old Europe,” writes another reader in reference to our comments yesterday. “The culture, institutions and fabric of these societies are being shredded by large numbers of immigrants (mostly legal there, mostly illegal here) who have little desire to ‘become Americans.’ I live in California, practically the epicenter of American immigration, and have since 1984. Anyone who [denies] the nature and extent of the Hispanic immigration that’s occurred over the past 10 or so years is either willfully blind, a charter member of La Raza or a pandering politician looking for votes like most of the local and state politicians in California. Of course, to my mind, the crux of the entire immigration ‘problem’ lies with the social benefits paid out to the populace as bread and circuses, as Bill Bonner is fond of saying, as well as the perverse rule that a child born of illegal immigrants in the U.S. automatically is a U.S. citizen. Gee, guess how the illegal immigrant is incentivized?

“I realize the risk of making generalizations, but today’s immigration is different than earlier immigration. I think it’s different for at least two important reasons: 1) the pox of government interventions in society and financial and other giveaways to constituencies has exploded since about the 1930s, and 2) the fact of large numbers of today’s immigrants come from across our shared border with Mexico, a country with many ‘have-nots,’ a political class not forced to address their country’s problems because so many of the dissatisfied or poorest come here and a country that at one time had sovereignty over much of what is the present-day Southwestern U.S.

“Your comment was unfair, meant to be sensational and just plain off the mark, I believe. That said, I do enjoy reading The 5.”

Glad to hear it,

Ian Mathias
The 5 Min. Forecast

P.S. “The catastrophe looming in the documentary I.O.U.S.A.,” reads the AP story on CNN’s front page today, “isn’t romantic like the doomed young love in Titanic, but billionaires Warren Buffett and Pete Peterson warn it could break many more hearts.

“The disaster they warn of could be bigger than any we’ve ever seen — bigger than an iceberg, bigger even than the current mortgage crisis.”

Heh, and people say we’re dramatic… sounds like one of our promotions! You can read the rest of the AP’s coverage of the film, here. And while you’re sipping your morning brew tomorrow, turn on the boob tube. Warren Buffett will be sharing his thoughts on the film on CNBC.

P.P.S. Addison sends his regards from the road. He’s off to Omaha for dinner with Buffett and the red carpet premiere of I.O.U.S.A. Stick with The 5 for the juicy details. We’ll fill you in tomorrow.



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