The Coming Euro Crash, A Sector to Watch, Buffett’s Dark Secret and More!

by Addison Wiggin & Ian Mathias

  • Greek tragedy goes from bad to worse… market signals imminent crisis

  • Rob Parenteau on what “will be the biggest story of 2010”

  • Chris Mayer finds a potential buying opportunity in a crowded market

  • Buffett exposes true colors, lobbies Congress hard for legislative exception

  • Plus, The 5 turns 3! Our celebratory agenda, below


  Oh, the bitter irony…

The Parthenon — a temple to Athena, first used by Greeks as a Treasury — was the site of the latest bout of Greek debt protests over the weekend. The government had to close the place down to tourists (its No. 1 source of revenue… brilliant).

As we’ve noted before, the Greek debt crisis refuses to go away. And with civil servants protesting every day of the week while Spartan 10-year bond prices zip over 12-year highs of 9.7%, we doubt it will settle down anytime soon… even with a European Union/IMF bailout.

In fact, the whole saga is getting worse, fast. Here’s the easiest way to tell that story:

Greek short-term financing costs have nearly doubled in the last week alone, and they’re still soaring today… the 2-year note is up to 14% as we write.

Pakistan can sell its debt for a lower rate than the Greeks (12.2% this morning).


  “This will be the biggest story of 2010,” says our macro adviser Rob Parenteau, “but Wall Street economists and investment analysts will be the last to really get it. The European Monetary Union had several design flaws from the get-go.

“We presume the path of least resistance will be a maxi-depreciation of the euro, on the order of another 20–30% decline in the exchange rate of the euro.”

Say again: A 20-30% euro crash.

“It begins, but does not end, with Greece (actually, it began with Latvia and Ireland, but that is another story). Band-Aids to save Greece, no matter how graciously offered by the legitimately concerned German politicians, cannot and will not paper over the cracks in the rest of the peripheral eurozone nations — which we will refer to as the GIIPS, since that seems to be the more politically correct version of the more porcine moniker.

“The math of the fiscal balances in the GIIPS is such that partial default or partial public debt renegotiation is all but inevitable. We would not touch GIIPS’ public debt until this becomes evident to more professional investors and until the potential haircuts (principal reductions) can be plausibly quantified.

“All else on the way to public debt default is shadowboxing, mostly for public political consumption only. IMF or eurozone loans or fiscal assistance only accomplish the extend-and-pretend wash/rinse/repeat cycle we have seen policymakers turn to one too many times during the recent financial and economic crisis.”

  Which GIIPS country will be next? Portugal could be on deck… credit default swaps on its debt rose to a record 288 basis points this morning.

  Another milestone in the shifting fortunes of the global economy: The World Bank drastically reshuffled its voting power scheme, giving a big nod to “emerging” markets.

China’s voting authority within the bank jumped right over Germany, Britain and France, making the Chinese the third most influential nation on the World Bank council. Only the U.S. and Japan still lay claim to more clout.

Coupled with some other adjustments, the so-called “emerging nations” now have a 47% say in the bank’s trials and errors. Perhaps we really ought to be calling them “nations that have arrived”… ahead of schedule.

  Here’s the headline most mainstream publications are trumpeting. This one from a special New York Times e-mail alert:

“Goldman Sachs Messages Show It Thrived as Economy Fell”

You don’t say?

Populist ire is arriving right on time. A deal reached late Sunday night puts the financial regulation bill just a few bated lobbyist breaths away from being introduced for debate on the floor of the House. More on those details below.

  American markets, as Rob noted, aren’t fully digesting a Greek default yet. The Dow opened up a couple tenths of a percent this morning, led mostly by solid earnings from Caterpillar.

American traders have enjoyed a hell of an earnings season thus far, actually. Over 80% of the S&P 500 companies that have reported so far have beaten Wall Street forecasts. Coupled with last week’s big housing and retail reports, it’s easy to see why traders have bumped up the Dow and S&P to a 19-month high.

Will it go much higher? We’re not betting on it. In fact, we’re still looking for a correction and arranging our recommendations accordingly.

  Here’s one warning sign: Homebuilder stocks are leading the way. Shares of Hovnanian were up about 40% last week alone, with names like Pulte and Lennar close behind.

  On the other side of the trade, “fertilizer stocks are well off their highs and are down about 10% from the start of the year,” notes Agora Financial managing editor Chris Mayer.

“What’s happened here is that the global harvest of wheat, corn and soybeans looks like it is going to be a record. As improbable as it seemed only six months ago, this is what is happening. Plus, U.S. corn stocks are starting to creep back up to 1980s levels.

“That’s great news for avoiding another food crisis, but it’s not so great for investors in fertilizer stocks, at least for the short term. Over the long term, the same old challenges remain. We face a rising global population for which we will need to boost food production by 70% over the coming decades. We have a shifting global diet that demands more proteins, which has a great impact on the grain market. We have challenges with water scarcity and quality arable land.

“So the longer-term picture looks attractive. The stocks themselves also have large net asset values (NAVs), based on replacement values.

“These stocks are also incredibly volatile. The news can change in a hurry based on unexpected turns in weather, for example. Right now, the fertilizer companies can make good money at current prices, especially if volumes pick up as they should. Farmer income is still healthy. And demand for grains is there. So let’s hang onto our fertilizer plays and see how it unfolds.”

We can’t remember the last time the world wasn’t banking on another year of record crop harvests. One of these days, it won’t happen, and we suspect Chris’ readers will do just fine. Until then, they’ve already taken 107% gains on PotashCorp. One of Mr. Mayer’s favorite fertilizer stocks just fell below his buy price. Find out the ticker, here, along with the rest of the Capital & Crisis portfolio.

  No big data releases today, but look for a busy week. The latest Case-Shiller home price index prints tomorrow, along with a consumer confidence reading. The Fed will announce its latest interest rate drivel on Wednesday. Then Thursday, the Commerce Department will offer it first crack at first-quarter GDP.

Not exactly the most thrilling stuff, we know… but it could be. But these are the kinds of numbers that move markets.

  This will be a big week for solving America’s debt crisis, too. Well… it’ll be a big week for talking about American debt, heh.

The 18-member Obama-tapped deficit hit squad otherwise known as the Debt Commission starts meeting today. Former senator and now co-chair of the commission Alan Simpson got it off to a great start yesterday on Fox News Sunday, calling his task a “suicide mission.”

Debt jawboning should hit its height on Wednesday during the 2010 Fiscal Summit, a Peterson Foundation event that we’ve been invited to attend. Based on the list of speakers — Bill Clinton, several senators, Greenspan and Volker, lots of executive branch types and marquee journalists — we suspect there will be lots of… speeches.

We’ll let you know how it goes.

  Friday was a bad day to be a banker in Illinois. The FDIC shut down seven banks there, the weekend total for the whole country. Together, they cost the FDIC’s insurance fund nearly a billion dollars. That makes 57 failed banks so far this year, still on pace to top last year’s tally of 140.

  Last, a famous Buffett-ism, turned on its head: “You only find out who is swimming naked when the tide goes out,” he famously said. Today we wonder… did Buffett himself forget his trunks?


“A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett's Berkshire Hathaway Inc.” The Wall Street Journal reports today, “potentially helping the famed investor avoid a financial hit.”


It’s somewhat common knowledge Buffett likes to sell way-out-of-the-money S&P 500 puts to the ultra-gloomy sect of investors. If those puts are ever in the money, we figure he figures, he’ll be out of business anyway — along with half the American public.

In total, it turns out Berkshire has a $63 billion book of derivatives and roughly $20 billion in cash to back it up. Of course, Buffett is nowhere near the 60-to-1 leverage common on Wall Street or over at Fannie Mae. Still, he’s not above swarming a team of lobbyists all over the Hill to be sure his own “financial weapons of mass destruction” don’t blow up.

The Sage in full CYA mode

If Buffett gets the exemption he wants, only newly purchased derivatives will be required to be offset with a regulated capital cushion. Buffett’s old portfolio would be left alone.

  “I usually agree with much of what Marc Faber has to say,” a reader writes of Friday’s 5, “but I just about lost my lunch when I read his following comment:

“‘They have a very strict compliance department compared to the others — they're like an angel.’

“Marc, I really hope you had your tongue firmly planted in your cheek when you made that remark. If not, then shame on you. I don't know, but perhaps you're holding GS stock and need to talk your book. Ding, ding, ding. Wake UP!!

“Comparing GS to the ‘others’ is equivalent to comparing the U.S. dollar to the dung heap basket of fiat of which it is a part. But perhaps the analogy holds and the Wall Street firms are in an ethical race to the bottom. But then comparing them amongst each other is a rather meaningless activity and only has relevance when compared to a ‘golden rule.’”

  “Marc Faber is an idiot when he says Goldman Sachs is an innocent business!” Didn't you guys just run an article of how most traders are 55% successful, but Goldman's traders are much, much more successful. You said the only way they could do that is by some influence — they have to get inside information. That doesn't sound fair or innocent to me.”

The 5: Perhaps you’d like to say that to his face. You can in Vancouver, July 20-23, 2010. Last year, we caught up with Faber in the hotel lounge after his keynote address. He hobnobbed with attendees for several hours. If you think his public opinions are outrageous… you ought to try him after a few glasses of wine.

We announced the confirmed speaker list last week. This week, we’re formally announcing the theme we’ll be asking all of them to address. After floating it here in The 5 first, the theme The Assault on Enterprise met with unanimous approval.

Please join us in Vancouver for what promises to be a lively discussion, replete with profitable forecasts and recommendations. Follow this link, or call Barb Perriello at (800) 926-6575, to register for the symposium today.



Addison Wiggin

The 5 Min. Forecast

P.S. On this very day, three years ago, we began publishing The 5. We hope you’ve enjoyed the experience as much as we have. Thank you for reading.

Thus, three items of business:

1) Tell us what you love and hate about The 5 Min. Forecast. What would you like to read more about? How could we be more useful in the same five minutes?

2) A sincere thanks to the people that ensure The 5 actually gets published every day in one coherent piece: Ian Mathias, Erik Kestler, Dave Gonigam, Mark O’Dell, Joe Schriefer, Andrew Ascosi, Susi Clark, Paul Tuccinardi, and Kate Harmon. Cheers.

3) If you’ve purchased one or more of the newsletters or trading services you read about here in The 5, you’re eligible for a discount on our Agora Financial Reserve. It could be substantial. With this e-mail only, to commemorate The 5’s third year, we’ll open Reserve membership up for 40% off, or more, depending on your credits. Here’s the catch: The offer applies only if you call John Wilkinson at (866) 361-7662 right now and tell him you’d like “The 5’s anniversary discount.”

Among other items, your Reserve membership includes free entry to the above-mentioned symposium in Vancouver. And special offers on coins, Rancho Santana, books and things that never see the light of day outside the Reserve.


P.P.S. “I’ve read your second issue of Apogee,” another reader writes of our latest project. “Great insight and actionable advice — keep up to good work.”

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