Future Battlegrounds, World’s Best Bank, Bernanke Speaks, I.O.U.S.A. Update, and More!

by Addison Wiggin & Ian Mathias

  • Bernanke — and economists everywhere — still fear looming financial crisis.
  • Fannie and Freddie suffer a triple dose of bad news
  • The newly crowned most profitable banks in the world, both in the world’s most controversial country
  • Chris Mayer on the “future battleground” brewing up in an unlikely location
  • Ed Bugos with a short-term gold forecast
  • Plus, I.O.U.S.A. news… attendance stats, rotten tomatoes, how to see it again and at the DNC

  “The financial storm that reached gale force some weeks before our last meeting,” uttered Ben Bernanke on Friday, “has not yet subsided."

The Fed chairman must have found inspiration for that soaring metaphor atop Grand Teton… he and a brood of monetary thinkers gathered in Jackson Hole again this year to justify current policies and have an excuse to wear fleece 24/7.

Bernanke stuck with the status quo — the Fed is still more concerned with “downside risks to growth” than inflation. In fact, Bernanke told the world he found the recent dollar rally and commodity correction “encouraging.”

"If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next."

That’s a big “if.” For whatever it’s worth, the market has largely interpreted Bernanke’s speech as a signal for rates to stay the same in the near term.

  Economists around the country agree. 46% of American economists believe a “financial crisis” is the biggest current threat to the economy , reports the National Association for Business Economics today. While that crisis remains the most popular concern among the nation’s economists, we notice a particular change from the NABE’s last survey, in March.

Specifically, that “financial crisis” group has shrunken from 52% of respondents in March. And this time around, 16% of those surveyed said energy prices were the chief economic concern, up from 5%. Likewise, 15% said inflation is our economy’s greatest threat, up from 10% in March.

  And here comes that next financial crisis: Fannie Mae and Freddie Mac are suffering from another round of bad news this morning.

First, early Friday morning, Warren Buffett puckered up for a kiss of death from the private sector. “They’re looking for help, obviously,” he told CNBC. Buffett told Becky Quick that he had been approached by Fannie and Freddie for help, and that he took a pass. “The scale of help is such that I don’t think it can come from the private sector."

Later that day, Moody’s downgraded Fannie and Freddie debt by five notches, to Baa3. That’s that lowest possible rating a company can garner and still be considered “investment grade.” In other words, Fannie and Freddie are one step away from being “junk” bonds. Think about that for a second… pathetic.

And this morning, we hear China’s second largest bank is dumping its Fannie and Freddie paper. China Construction Bank reduced its bond- and mortgage-backed securities by 37% at the end of July, CCB President Zhang Jianguo told reporters. That’s scaling back by “only” $1.2 billion, but it’s a trend we expect to accelerate in the near future.

  By the way, China Construction Bank also declared a 71% rise in first-half profits today. The bank profited $8.5 billion in the first six months of the year, led by a boom in lending and “fee-related business.”

Last week, the Industrial & Commercial Bank of China — China’s biggest commercial lender — announced similar results. Its first-half profits rose 57%, to $9.4 billion. By many measures, the ICBC and CCB are on track to be the world’s most profitable banks in 2008.

  While China booms, the U.K. announced Friday its economic growth has ground to a halt. The Office for National Statistics told Britons that GDP had slowed to 0% growth in the second quarter, below its first estimate of 0.2%. Year over year, the U.K. economy grew just 1.4%, the slowest expansion since 1992.

  Thus, the dollar rally continues. The dollar index bounced nearly a full point over the weekend, to a high of 77.1. It’s backed off a bit since then, to about 76.8 as we write. As you’d guess, the pound fared the worst during the greenback comeback. The already beaten-down British currency fell 2 cents, to $1.85. The euro lost a penny and is now at $1.47. The yen lost some ground too, now at 109. 

  The latest existing home sales data is fueling the dollar rally today. Sales of previously owned homes rose 3.1% in July, reported the National Association of Realtors this morning. Granted, it’s good to see home sales bounce off their 10-year low set in June, the fine print isn’t as cheery as the headline.

For starters, sales were still down 13% year over year. Also, the median price of those sold homes fell to $212,400, down 7.1% from July 2007. Perhaps most importantly, the inventory of unsold homes has jumped to a record high. There is currently a record glut of over 4.6 million homes on the market in the U.S., an 11.2-month supply.

  Oil suffered its biggest fall in 17 years , thanks to the dollar’s sudden rebound. The front month contract shed $6.59 on Friday, to $114, the biggest one-day dollar decline since 1991. That’s only 5.4% in percentage terms, not even in the top 50 biggest percent falls on record. Sorry… couldn’t resist the sensational headline. Crude remains at $114.

  "We have to prepare for the world coming to the Arctic," Coast Guard Adm. Gene Brooks said last week. Brooks is referring to the rapidly melting ice in the northern most portion of our planet. Whether you sympathize with Al Gore or not, there’s about half as much polar sea ice up there today than there was in the 1960s.

“At issue,” explains Chris Mayer, “are the increasingly ice-free shipping lanes that can cut shipping times by a third or more. And the oil and gas that lie in the seabed and in the shallow waters off tiny islands. The U.S. Geological Survey estimates that one quarter of undiscovered oil and gas lies in the Arctic. Suddenly, the murky borders and clouded claims long left unresolved and neglected have become important.

“A future battleground? Could be. Russians are conducting naval exercises in the Arctic. Canada sent soldiers north in the spring. More likely, at least in the short term, we’ll see a lot of novel legal arguments and history aired out in trying to establish rightful claims.
 
The shipping lanes are a big deal, not only because they shave off a lot of time compared with existing routes, but also because the existing shipping lanes are about tapped out. There are a handful of energy chokepoints that handle nearly all of the world’s oil shipments. The fate of these chokepoints, and the consequences of failure at any point, could have huge impacts on the oil markets.”

We’ve been keeping you abreast of all the drama already unfolding up there… flag planting, cutter sailing, Coast Guard patrolling. Most recently, the U.S. Coast Guard established two “temporary” stations in Alaska. We’ll let you know what happens next. For investing advice on the trend, check out Chris’ Capital & Crisis.

  Gasoline is still falling. The national average is down another cent today, to $3.68. The last time gas was this “cheap,” oil went for about $116 a barrel… so if history is any guide, we’re near the end of this decline, should oil prices remain the same.

  Gold responded well to the weekend bout of dollar strength. The spot price dipped about $15 and now goes for $823.

“I am convinced that the market is oversold in the short term,” notes our gold man, Ed Bugos. “The real uncertainty is whether this is just another bear trap, like the one that occurred in 2004 before the Greenspan Fed started to raise its policy rate off its 1% bottom, or whether it will be more like the correction of 1975-76.

“The former scenario would suggest that the worst is almost over. But if it is like 1975-76, gold prices could drop to $600 by next spring and then take another year or two before clawing their way back up to a new high and breaking toward those big numbers we keep talking about.

“I’m leaning toward the former for the following reasons,” concluded Ed with one of his signature lists.

  • “There was more upside momentum/froth preceding the 1975-76 correction
  • The current bear market on Wall Street is not over
  • The Fed is not in a position to tighten or even deflate much more than it has
  • The technicals generally look more like the 2004 situation than ’75-’76
  • Sentiment has turned too bearish too quickly
  • Anecdotal reports of shortages in fabricated product."

Ed just recommended an option play on a major gold miner. He says if gold prices firm up, this call “would translate into a 150-200% gain” by the end of the year. Get the details, here.

  “I saw I.O.U.S.A. on Thursday night in San Rafael, Calif.,” writes a reader, “and was pleasantly surprised at how well done and evenhanded it was. After attempting to read Bonner’s books and musings, and much of Agora’s output, I was expecting a strident polemic of ‘I’m smarter and know more than anyone else, and anyone who disagrees with me is stupid.’ I am, quite frankly, used to being inundated with sniping at other’s viewpoints and dismissing them outright, instead of building a strong case of your own. Kudos for a job well done…
 
“One disappointment was Warren Buffett. He came across as a dotty rich uncle whom one tolerates simply because he is very rich and has a disarming, deprecating sense of humor, but underneath it all is quite shallow. I was expecting another panel member to explain that it isn’t the growth of the size of the pie that we need to be concerned about, but the percentage of the pie left for everyone else after the rats have consumed their ever increasing and eventually all-consuming share.”

  “Buffett’s comments were really not so puzzling upon reflection,” says another reader.

“Buffett is an expert investor and was on the panel as such. From an investor’s perspective, everything WILL be OK. Buffett will continue to assess the situation as it plays out and will continue to make a lot of money.

“One should also keep in mind that Buffett has large holdings. Were he to jump on the concern bandwagon, the market might drop, reducing the value of his holdings and stock.”

The 5: We love the debate over Buffett’s comments that’s brewing in our inbox… keep ’em coming. If you missed his thoughts, you can check ’em out here.

But if you have other comments on the film, or would do us the pleasure of repeating the feedback you’ve sent us, check out the Rotten Tomatoes site. It’s a great way to share your thoughts with folks who are thinking about seeing I.O.U.S.A. or to discuss the movie with those who already checked it out. Not to mention — no kidding — the Oscar people pay particular attention to this site. We’ve already garnered a rating of 90%… 4% more and we pass The Dark Knight. Heh. Help us out!

By they way, early numbers say that the Thursday screening was a big success. With the data we have so far, attendance exceeded projections by about 50%. So thank you very sincerely for making it out on a Thursday night. It’s still too early to tell if we’ll stay in theaters around the country, but the powers that be have decided to keep the film showing in at least 10 major cities while the data is still flowing in. So if you missed it, click here to see where it’s playing this week.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Addison is at the Democratic National Convention? Say what?

After the success of I.O.U.S.A. last Thursday, Addison punched his ticket to Denver. He sat for interviews with The Denver Post, NBC and ABC today, all before breakfast. The film has been such a hit that he managed to get a screening set up for the delegates today, as well. Sen. Kent Conrad, chairman of the Senate Budget Committee and featured in I.O.U.S.A., introduced the film to the convention. We’ll let you know how it went tomorrow.

And before our inbox becomes filled with Republican hate mail… Addison said he plans on doing the same thing for the GOP in St. Paul. In fact, we’re trying to get Judd Gregg, Kent Conrad’s counterpart and also a star of I.O.U.S.A., to give us the same honor of introducing the film.

Addison couldn’t log in to contribute to today’s 5 Min., but he sent this anecdote from the road:

“My cab driver from the airport was a young Hispanic guy who’s lived in Denver for nine years. He asked if I was in town for the convention. When I told him we were screening the movie, he got really excited. He’d seen David on Good Morning America and seen the trailer somewhere. He was all excited about Steve Martin being in the movie.

“‘Good timing, man,’ he said channeling Cheech Marin. ‘Good job. I want to see your movie while it’s playing here in town.’

“‘Yeah,’ we replied hopefully with as much enthusiasm, ‘polls show something like 48% of people list the economy as their No. 1 concern during the election. Only 11% are worried about Iraq. That’s a complete flip in the numbers from this time last year."
 
"‘Ahh, who cares about the wars anymore? More people are dying on the streets of Denver every day because of the economy than die over there. If these kids had an education… a job… some hope… they wouldn’t be gang banging all day, carrying around 9 mms and acting the way they do. That’s what concerns me… yeah, I want to see your movie, man. Good luck.’"

rspertzel

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