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 Forget Shanghai… this time it’s Europe. Economists at Morgan Stanley issued a rare “triple sell” recommendation on European equities yesterday.
Morgan Stanley has issued this warning only five times since 1980. On average, the MSCI index -- comprised of 600 popular European and British equities -- has dropped by 15% over six months after each of these five strong sell suggestions.
 All the major U.S. indexes fell yesterday, from the Dow to the Wilshire 5000. Mainstream analysis of the sell-off goes something like this: Ben Bernanke told the world that the U.S. market is on a path of “moderate growth.” But many investors have been betting that the economy’s lackluster performance in the first quarter 2007 would inspire the Fed to cut rates. Moderately encouraging words from the Fed chief yesterday mean no rate cuts on the horizon… investors get spooked and head for the exits.
We think that, with the Dow and S&P making news almost daily with market highs, investors are just nervous and want to take profits. Any excuse will suffice.
 “We are going to see two quarters of negative GDP by the time we get to mid-2008,” said Steve Leuthold, chief investment strategist of The Leuthold Group, “which would be the official definition of a recession.
“It looks like maybe the consumer, for the first time in my lifetime, might actually be tapped out. I'm not expecting a huge decline or a new secular bear market. But we certainly could see a 25-30% kind of a correction, which would be a normal cyclical bear market.”
Eric Fry, with the help of Marc Faber, unpacks Leuthold’s comments in today’s Rude Awakening.
 Milk prices hit an all-time high early this week. The Chicago Mercantile Exchange traded milk at $21.30 per hundred pounds Monday… the highest price ever. And thanks to demand at home and overseas, more records are on the way.
“Consumers haven’t seen ‘high’ prices yet… they will really hit in June, July and August,” says Mary Keough Ledman, a dairy economist. She predicts a 50-75-cent surge by August. “I think by Labor Day, average milk prices will be over $4 a gallon.”
 “Oh man, Oman, don’t underestimate Gonu!” Kevin Kerr warned the world yesterday. Cyclone Gonu is on a crash course for the Gulf of Oman, perhaps even as far as the Strait of Hormuz -- one of the world’s most significant oil “choke points.”
“No cyclone has ever entered the Gulf of Oman,” reports AccuWeather, “And there are no custom ‘storm surge’ models available for that area. Considering the region has never experienced a hurricane, let alone a strong one, it is highly unlikely the loading facilities or platforms were constructed to withstand the forces -- both wave action and wind force -- that they will experience. Significant damage will occur. How much long-term damage, and the volumes associated with it, cannot be determined at this time.”
“A significant portion of the world's petroleum exports goes through the Gulf of Oman,” Kevin, who is on retainer with CNBC to explain these events, reminded us. “The world production of petroleum is peaking around 85 million barrels a day. A sudden change in supply or exports could be felt across the globe.”
Chuck Watson, a researcher with Kinetic Analysis Corp., estimates some oil terminals will be shut down for up to a month. Aside from obvious issues in Oman, Kevin warns us that this storm might also affect Iranian, U.A.E., Indian and/or Pakistani shipping and infrastructure industries.
Hurricane season is an extraordinary season for speculative profits in commodities. Don’t miss Kevin’s next pick in Resource Trader Alert. If you’re not a subscriber, see: The Trader’s Code
 This week’s G8 summit is huffing with greenhouse gas reduction talks. We’ll leave the Bush administration’s “about face” on the subject aside and focus on emerging markets, like China:
“China sports an export-driven economy,” Christopher Hancock, editor of Free Market Investor, tells The 5. “Chinese officials are arguing this week that countries importing energy-intensive Chinese exports should assume some of the responsibility for their pollution. They burn a lot of coal to run the factories that make the junk Wal-Mart sells.
“Furthermore,” he notes, “China argues that the developed West that had their coal-burning days without reproach should grant a developing nation like China a chance to catch up.
“These arguments have substantial merits on many levels,” he argues. Christopher came back from his MBA program in Hong Kong with a pretty nasty respiratory issue. We’re left suspiciously wondering how much water either of the two arguments will hold.
 Water is a bigger issue. US News & World Report, MarketWatch and Newsweek are sporting cover stories on the global water crisis this week. And the big Asian bank CLSA Capital Partners recently released the Clean Water Asia fund.
“China alone,” said fund manager Andrew Pidden, “has allocated $132 billion to water infrastructure, wastewater treatment and irrigation over the current 2006-2010 five-year plan. Traditionally, governments have been the drivers in water management, and to date, there has been limited private-sector involvement. This is changing, and we are seeing China and India encouraging the interest of small listed companies and large multinationals.”
That’s encouraging. But we raise this issue to illustrate a more important point. Our Chris Mayer returned from a trip to China in late 2005 devastated by the state of water supplies there. He immediately set to work writing his analysis of the global water crisis, a full year ahead of the mainstream press. The five stocks he recommended in the report are up 77%, 36%, 63%, 46% and 23%, and stand to gain more as the issue peaks in the news cycle.
You can follow along in Mayer’s Special Situations.
Across Agora Financial we expect to catch similar gains with our plays on Peak Oil, “deathanol,” solar and alternative energies, the dollar demise, the global infrastructure buildout, natural resource demand… as the stories you read about first here in The 5 first get absorbed and promulgated by the mainstream media.
 Here’s another. Jim Chanos, the man who called foul at Enron and earned a starring role in the documentary The Smartest Guys in the Room, recently took aim at Macquarie Bank.
The Australian firm has been buying up toll roads in the U.S., among other activities. According to Chanos, Macquarie can currently “generate profits at will” and “justify overpaying for assets” based on the way it revalues its asset purchases. But he doesn’t think the model will last.
“If Macquarie overpays for so many of its assets,” says our Craig Walters, “it’s because they have an unbelievable knack for locating greater fools to buy them at even higher prices. Between 1994-2007, it sold eight assets worth over $8 billion… with every single one fetching more than Macquarie’s own ‘lofty’ valuations. The weighted average annual return, MacBank’s executive director notes, was 28%.”
But Craig finds the “Chanos factor” to be too much. “The guy heralded as calling the Enron debacle to perfection is now staring suspiciously at Macquarie Bank. I don’t think it’s worth it to us to ride out the possible maelstrom that might ensue.” If you’re a Small-Cap Strategy Report reader, Craig suggested you lock in Macquarie for a 49% gain yesterday.
 Yesterday, we reported on a government ban on mad cow testing. “This approach is entirely consistent with a long-standing tendency of the U.S. (and state) government to protect large-scale food producers by preventing smaller operations from differentiating their products on the basis of intrinsic quality,” wrote a reader in response.
“The second prong of this effort is to impose costly regulations on ‘all’ producers, knowing full well that the smaller operations cannot swallow the increased overhead. It would not surprise me one bit if the current administration uses the recent problems with spinach to impose a full HACCP (hazard analysis and critical control points) regime on the produce business, in which my family has been involved since 1868.
“For at least 25 years, Republicans (particularly) have been more than happy to impose regulations -- and deny differentiation -- if it will assist their corporate friends in stifling the emergence of high-quality alternatives to the mass-produced crap they repeatedly foist on the American consumer.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. We also announced an award program to our editors yesterday. The editor who produces the most consistent gains for readers in the next year will win $10,000. The award will be announced at our annual Investment Symposium in Vancouver. If you’d like to attend this year’s event, July 24-27, you can find a list of speakers, events and activities here.
P.P.S. If you’d like to attend the event for free, but are not currently an Agora Financial Reserve Member, you can join here >>
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While working with Citigroup in Hong Kong,
