Commodities Soar, Loonie Parity, The Short Ban, Water Wars and More!

by Addison Wiggin & Ian Mathias

  • Oil stages biggest single-day rise in modern trading
  • Chris Mayer on what’s behind the commodity spike and why it should continue
  • Byron King with one currency looking set to soar… eh?
  • “No short” list quietly grows… who’s begging to be on, and the one company that opted out
  • Water wars rage in Congress… House to outlaw taking H2O from Great Lakes
  • Want to see I.O.U.S.A. on DVD? Details below…

  Oil staged its biggest one-day rally in 24 years yesterday.  

Light sweet crude popped over $16 on Monday, as high as $130 a barrel. That’s the biggest nominal move since at least 1984, when light sweet crude began trading on the New York Mercantile Exchange. 

The October contract (above) expired at the end of yesterday at $120. Most sources today will quote November’s contract price, which is around $107… but probably not for long.

  Nearly all commodities enjoyed a goosing yesterday. Take a look at the Reuters/Jefferies CRB commodity index. The CRB had its best day in history yesterday. Jefferies has been keeping track of this one since 1956.

  The euro gained more than 3 cents against the dollar. That’s 2.4% in one session — its biggest one-day gain since its inception, in 1999. A euro goes for $1.47 this morning.

The dollar index, as you might guess, is in the dump. It fell over a point and a half in yesterday’s trading, to around 76.2 this morning.

  “If the U.S. gov’t were a publicly traded stock ,” explains Chris Mayer, “the dollar would be its shares and the value of the dollar its share price. And this huge increase in money supply is like a massive offering of stock, which dilutes the value of the shares everyone else holds. (Assets stay the same — just a lot more claims on them.)
“So it’s no wonder… The bailout tab so far could top $1.6 trillion — assuming the new $700 billion happens. Consider that M1 money supply — cash in circulation — totals only $1.39 trillion. Then consider that M2 — including certificates of deposit and such — is only $7.72 trillion… Incredible!
“Makes me think of that chart we reproduced numerous times showing the price of oil and money supply and how they move together. No surprise, then, with a huge injection of money, that oil would take off.
“Historically, all commodities move together in big sweeps over time, with oil as the lead steer… which makes sense, given that all commodity production has an energy component. So I’d expect to see other commodities enjoy similar historic leaps as we go through this.”

Chris’ Special Situations portfolio is loaded with companies controlling commodities of every stripe… most with low debt, owner-operators, competitive advantages and deep discounts to their peers. Check out our latest offer on Special Situations, here .

  “The Canadian loonie sure took the dollar to the woodshed yesterday,” adds Chuck Butler. The loonie had fallen off our radar lately, with all the noise coming from Washington and Wall Street. Looks like the march back to parity has begun again.

“A couple of weeks ago, I talked about how the loonie was remaining Steady Eddie around 94 cents. Well, yesterday, the loonie jumped out of that comfort zone and up to the 96 cent handle, and doesn’t look as though it will stop there. Of course, with oil and gold doing the Super Ball Bounce higher, the loonie was bound to finally move out of the comfort zone. I still think that loonie will be capped around parity to the green/peachback. That is, unless oil and gold take off from here.”

  After its $30 rise back to $900 Monday, gold is standing still today.

“I think the latest events have reminded investors that there is nowhere to hide,” suggests Ed Bugos, “except, perhaps, in the one asset that is ‘no one else’s liability’ — gold. The government is grabbing at straws.

“The Federal Reserve’s balance sheet is wearing so thin that the Treasury is raising money for it on Wall Street now. Talk about wash trades. It is not just the U.S. markets. Loan markets are stressed all over the world. Russian markets froze this week, too. The Chinese central bank cut rates and its government kicked off a plan to start buying stocks for its sovereign wealth fund, to stem the bearish tide.

“This move in gold does not look like a bear market rally. It looks real. My general suggestion is to buy the dips and corrections. Don’t chase the breakouts. It is not yet a slam-dunk that the Fed will inflate. But chances are good. For now, we have to adopt a wait-and-see attitude.”

  Amid the boom in commodities, the U.S. stock market swooned. All the glee from Friday’s bailout announcement was replaced by… umn, reality. Not only is this bailout likely to beget another, even crazier bailout in the future, but this beast still has to be dragged kicking and screaming through Congress.

The sell-off was swift and relentless… by the end of the day, the Dow had fallen by 3.2%, the S&P by 3.8% and the Nasdaq by an impressive 4.1%.

  Yesterday’s decline was a huge buying opportunity for a few blue chips … at least according to their management. We note that Microsoft, HP and Nike bought back a combined $53 billion in their own stock yesterday.

  The government’s “do not short” list has quietly grown by almost 100 names. The list now encompasses nearly every publicly traded company with a significant connection to financials. Some of the names on the second round are a bit surprising… Credit Suisse, Legg Mason and American Express were left off the first list of 799 companies, for some reason, but are now gleamingly present

Ford, GM and GE all snuck their way onto the list, too. Ford and GM both own banks. And GE… well… it owns everything.

Unique props to Diamond Hill Investment Group… thus far, they’re the only firm on the “no short” list that has opted out of the government’s protection program.

  Not that being on a “no short” list will help anyone in the long run, anyway. The comparison is slim at best, but look what happened after Pakistani officials tried to pull the same scheme back in August:

  “You can’t short stocks anymore in some places,” notes Dan Denning, “but you can buy commodities! With the global supply of dollars on the verge of a huge increase, investors clamored for gold and oil yesterday.

“So it turns out the ban on short selling in the financials doesn’t keep stocks from falling. It just reminds investors there are some very good reasons for selling. This confirms our basic thesis that ‘stuff’ is currently a much better bet than ‘paper.’”

  There’s still a chance that the free market actually works, too. Barclays has opened Lehman Brothers, barely a week after its bankruptcy. Barclays has offered 90-day employment to about 10,000 Lehman employees.

By the end of that period, the Brit bank figures it will know which of Lehman’s businesses overlap its own — and, subsequently, which employees will have to find employment elsewhere.

  While the Senate is stressing over the bailout today, the House is quietly waging early skirmishes in the water war. The House began debate yesterday on a bill that would outlaw any diversion of water from the Great Lakes’ natural basin.

Nearly 20% of the world’s fresh surface water rests in the region. The states surrounding the lakes are growing concerned that other states — maybe other nations — might soon be interested in nabbing their precious commodity. Under the new measure, no water would be diverted from the basin without approval from all eight states bordering the lakes.

Heh, wonder how Ontario and Quebec feel about that.

  “Do you guys really pretend to be prudent?” asks a reader. “Then ask, ‘Without investment banks, how will big projects raise capital?’

“Well, let me ask you. I am a lifelong inventor, engineer and product developer with many products behind me. What if I want to start a big project?

“The answer has always been, I must bootstrap. I must do smaller projects, earn profits from them and reinvest that capital into bigger projects. Eventually, maybe, if I’m lucky, I’ll be able to pursue one of the MANY extremely worthwhile and productive big projects I have been planning.

“The premise of your question is some group of spoiled brat, snot-nosed criminals have some kind of right to steal earnings and profits from me and other working stiffs — to play their big projects.

“TO HELL with big projects — if that’s what they require. As someone who knows what it takes to develop new technologies, I can tell you without any question whatsoever that the people who are handed large sums of cash (or credit lines) they did not earn through productive work are both utterly undeserving and utterly incapable of making wise decisions.”

The 5: That’s abundantly clear. The point Byron was making is that for 70 years, investment banks served a purpose. They provided capital and took risks commercial banks wouldn’t touch. But this current generation of investment bankers threw out the rule books in favor of getting rich off fees. The result has been exactly as you describe.

  “Went to see I.O.U.S.A. over the weekend in Irvine,” writes another, “where the Sunday Register proclaimed a 58.6% drop in new home sales in Orange County since last year and a 31% drop in sales prices on condos.

“I took my 35-year-old son-in-law, a renter, and after the movie, we actually had an intelligent conversation on mortgages, home ownership and the cost of money. He was shocked to hear that the Federal Reserve lowering short-term interest rates favored stock market speculators over savers. He and my daughter have been saving diligently to buy a home for some years now. He now wants to read Empire of Debt. Thank you for making I.O.U.S.A. Can’t wait to buy the DVD for my library, so the rest of the family can see it.”
The 5: Thank you for coming out to see the film. Our screening at the Chesapeake Film Festival over the weekend went well, too. The film played in a historic old theater with a balcony not unlike the one in which Lincoln was shot. The Q&A session was relaxed, and those who came out were engaged in the discussion.

“Why don’t you get it out to more theatres so more people can see it?” has been a common refrain.

“Why don’t more people see it so we can get it in more theatres?” has been our chicken-or-the-egg response. The economics of a movie rollout across the nation, especially a scintillating “date movie” like this one, are complicated, to say the least.

The answer to the next question is the book comes out on Oct. 6, and exclusive copies of the DVD for Agora Financial readers will hit our distribution warehouse on Oct. 21. As always, stay tuned…

Thanks for reading,

Addison Wiggin
The 5 Min. Forecast


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