Dollar Rally, Gustav Aftermath, Invest in Batteries?, Another Bank Failure, and More!

by Addison Wiggin & Ian Mathias

  • Dollar soars… Chuck Butler with a “lone wolf” currency fighting the dollar comeback
  • Gustav’s illogical aftermath… flooding, refinery shutdowns, extensive damage cause commodity sell-off?
  • Byron King on an often-overlooked energy investment
  • Another bank bites the dust
  • U.S. manufacturing industry back in contraction… two data readings disappoint

  The dollar is soaring again today.

The last time the dollar was this high relative to its global competitors, the Dow had just hit another all-time high. And…

  • Credit crisis? Totally under control
  • Bear Stearns? Great company, $115 a share
  • Crude oil? Cheap… at $80 a barrel
  • Average U.S. home prices? Down a mere 6% year over year.

  So what’s up? Why did the dollar hit a new ’08 high? The same reason Bush and Cheney bailed on the Republican National Convention, of course: a hurricane in the Gulf!

Underwater homes = stonger U.S. dollar, naturally

Ugh, hold onto your hat for this gust of illogical trading: Hurricane Gustav trampled the Gulf while most of the U.S. enjoyed a lovely Labor Day. There’s lots of flooding, early projections of over $10 billion in damage, 800,000 homes without power and significant trouble in the U.S. refinery and offshore drilling industries.

But… it wasn’t as bad as meteorologists predicted, certainly no Hurricane Katrina. That’s reason enough to buy all things I.O.U.S.A. this morning.

Today, we see broad declines in commodities (more below) and a big swing up in the dollar and U.S. equities. The greenback is up a full cent versus the euro, now selling for barely $1.45. Having fallen 6.4% in August, the euro just capped off its worst month versus the dollar in the short history of the currency. The British pound is worse off, as usual this year, at $1.78.

  The yen is the only major currency to buck the trend this morning. It rallied to 108.

“Japanese yen is the lone wolf bucking the dollar’s rally,” says our friend Chuck Butler. We’ve been yen bulls for some time now… over a decade of lousy Nipponese economic performance and ultra-low interest rates put the yen at a seemingly reasonable value. Not to mention Japan is one of not many nations with a — gasp — trade surplus.

Nevertheless, we were surprised to see the yen stronger still this weekend. Especially since the country’s prime minister up and quit this morning — their second fallen P.M. in the last 12 months.

“I’ll tell you why I believe this is happening,” continues Chuck. “So many Japanese investors held Aussies and kiwis (high-yielding commodity currencies) versus their base currency (yen). And when commodities started their free fall, these Japanese investors began to close out those positions, which meant they sold Aussies and kiwis and bought yen.”

Did you get our note over the weekend about the debt-free CD? It’s one of EverBank’s latest and greatest, and currently available only to 5 Min. readers. Click here to learn how you can use the yen and five other debt-free currencies to protect your wealth.

  Oil is plummeting this morning. Hurricane Gustav shut down 14 refineries this weekend, at a cost of some 2.6 million barrels of oil per day — somehow, a compelling reason to sell oil mercilessly. Light sweet crude was down over 6% this morning, to a mere $107 a barrel.
Browsing the headlines today, we notice that Hanna, Ike and Josephine are all rolling around in the Atlantic, too. At this rate, that ought to pull oil back to $75 a barrel.

  Gold is in the doghouse today too. As we write, it’s barely clinging to $800 an ounce.

“In spite of what happened in August,” notes GoldMoney’s James Turk, “gold and silver continue to be among the world’s best performing asset classes. Gold is up 23.2% over the past 12 months, while silver has climbed 12.8% during this same period. It is a distinction the precious metals have held throughout this decade, regardless of the occasional bumps along the road like the one this past month

“Only time will tell whether August 2008 will mark an important turning point for gold this year, just as August 2007 did last year. But regardless, the problems with fiat currency are getting worse. Inflation, banking problems, trade imbalances, etc. are symptoms of a global monetary system on the brink, which is a reality that makes gold and silver ever more important. So continue to accumulate the precious metals, because saving sound money makes good sense.”

  In the meantime, safe to say all commodities are being sold today. At 376, the Reuters/Jefferies CRB Index of commodities has fallen to new lows.

  As such, most nonresource stocks are off to the races this morning. The Dow opened up nearly 200 points, led by the dogs of 2008 — airlines and financials.

  We’ll be stocking up on our favorite resource names today. Whether that makes us smart or stubborn remains to be seen. But if you’ve run out of patience for commodity and energy stocks, Byron King recommends you look into stocks that save energy — literally:

“For as much as we talk about energy, few people pay attention to battery technology,” says Byron. “Within 20 years, the U.S. will probably get 20% of its electricity from windmills and another large percentage from solar.

“So the electric system designers have to figure out how to keep power levels flowing in the grid even when the wind is quiet, or at night, or during seasons when there just is not a lot of blazing sunshine falling to the Earth.

“In the future, we’re going to run the windmills and solar systems and generate as much power as the wind and sunshine will allow. Then we’ll store the renewable power and later discharge it down the wires when the load demands. So the world is going to need a lot of new batteries and battery systems. This will directly benefit any company that can be a world and market leader in battery technology.”

Byron laid out an impressive case for investing in batteries, including his favorite play, in the latest issue of Energy & Scarcity Investor. Get the details by subscribing, here.

  Hmmm, it’s the first issue of the week — what are we forgetting… oh, right, another bank failed over the weekend.

Perpetuating their weekend ritual, the FDIC bailed out Integrity Bancshares Inc. over the holiday. Regulators sold all of Integrity’s ironically named assets to another Georgia bank, Regions Financial. If you’re keeping tabs at home, that’s the 10th bank to go under this year. The FDIC estimates this’ll cost it as much as $350 million.

We don’t know if Integrity was on the FDIC’s problem list. We certainly hope it was. But we do note that the bank occupied the top rung of the “Texas ratio” list we published in July. So if you lost money on this one, it’s your own damn fault. And if you haven’t checked out our list of banks that fail to pass this simple test, don’t forget we archive every 5 Min. Forecast, here.

  The U.S. manufacturing sector is back in a state of contraction. The Institute for Supply Management gave August manufacturing activity a score of 49.9, the organization announced today. That’s the first sub-50 score in three months, and hence the ISM’s official signal that the industry is back in contraction.

  And in a similar fold, construction spending declined more than expected in July, says the Commerce Department. According to today’s report, builders spent 0.6% less in July than in June. Private home building led the way. It fell 2.3% during August, its 16th consecutive monthly decline, to a seven-year low.

Total spending fell to an annual rate of just over $1 trillion, the lowest since February.

  Last, we note today that the builders in Dubai have upped the ante for the “world’s tallest building.” The Burj Dubai was announced to be 2,257 feet tall today, ousting the previous record held by… Burj Dubai circa April 2008. The 164-story (and rising) building is set to be completed sometime next year.

  “I fail to understand,” writes a reader responding to Friday’s issue , “why you emphasize the increase in household debt, apparently with an implication that it is bad. Please explain.

“I expect that household debt is dominated by home mortgages. I further suspect that most of your readers, excepting young couples with ‘starter homes,’ will tend to view a mortgage simply as a convenient, very low-cost way to finance stock market investments.

“Hence, my decision to get a mortgage on my new home, rather than paying cash, is a simple statement of faith in the stability and long-term growth rate of the economy, and, therefore, of the stock market. I’m betting that my investments will increase at a rate well above the 5.5% (less tax deductions) cost of my mortgage.”

The 5: We see your point. But according to the latest from the Fed, U.S. consumer credit has risen to $2.5 trillion. That’s a bigger figure than the entire annual GDP of France, the world’s sixth biggest economy. And that number doesn’t include mortgages.

  “Great film,” responds another, this one to I.O.U.S.A. “Took a friend who was quite shocked at the depth of the problem. Would leave out the panel and Buffett, for reasons already better stated by others. Also, the DVD could be offered, at a price, for downloading. Many of us have the capability to burn our own and could greatly help in the distribution. I believe this could turn the election, but will do NO good if it doesn’t come out until October. Now is the time to get people talking and interested. Otherwise, look forward to four or more years of Obamania and the resulting damage. Pretty hard to climb back up after you fall off the cliff. Much better to open eyes to the danger even at the prospect of losing some potential revenue from film sales.”

  “So you are telling me with a straight face,” writes the last reader, also referring to I.O.U.S.A., “that you think there is a chance members of the U.S. public — now beginning to feel the credit crunch — will organize demonstrations, carrying placards reading, "Later Retirement for All!" and "Higher Taxes, NOW!"?
“Excuse me, but I am having a little trouble getting my mind wrapped around this scenario.
“If it happened (and believe me when I say I cannot even remotely imagine its happening), would that be a good thing? And for whom? To me, the answers are not forgone conclusions.”

The 5: No one here is arguing for higher taxes or demonstrations. The subtitle of our book Empire of Debt, which was the inspiration for the film, is The Rise of an Epic Financial Crisis. People generally don’t change their behavior until they’re forced to. And when historians look back, they call it a crisis. We’re merely documenting the rise… and trying to help you get out of the way with a little dignity left intact.

Addison Wiggin
The 5 Min. Forecast

P.S. We’re writing today from Minneapolis. Just across the river, in a few hours, we’ll be screening I.O.U.S.A. for delegates of the Republican National Convention. We’ll have a rousing comparison of the two conventions tomorrow. But for now, get a load of this:

That’s Patrick Creadon, the director of the film, singing “Levon” by Elton John at a piano bar downtown last night. Somehow, we ended up at the Wisconsin Republican Delegation’s private party… and this is the result. A few readers and Ron Paul supporters were in attendance, as well. More to come…


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