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 The Bank of England chose to raise interest rates to 5.75% yesterday, while the European Central Bank kept rates steady at 4%.
“The pound sterling will continue to strengthen, as interest rates in the U.K. are the highest among the Group of Seven industrialized nations,” writes Chris Gaffney at EverBank, “and the euro will continue its climb toward $1.40.”
 Yet… the dollar rallied overnight. The Institute for Supply Management bumped its U.S. business activity index up to 60.7 – a 14-month high. The score was 2 full points higher than Wall Street’s prediction. The pound and euro fell versus the dollar accordingly, down to $2.00 and $1.35, respectively.
 Whither the dollar in the short term is anyone’s guess. Here’s Mike "Mish" Shedlock with his:
“With the dollar index currently trading near 81.5, it is halfway between two critical points. If the index rallies above 83, we could see a sizable countertrend rally that ends in the 95-105 area -- or 15-30% above today's level. If the index falls below 80, all bullish bets are off and the cellar door would be open to a substantial decline in the dollar index.
“Keep an eye on 83 and 80 in the dollar index,” Mish suggests. “The next move should be big, and you'll know which way -- bullish or bearish -- ahead of time if you keep those levels in mind.”
 And the markets? How’d they fare the day after the holiday? “So lame,” writes our trusty sidekick "Extreme" Ian over IM this morning, “they’re barely worth mentioning. Very flat, but mixed.”
 “Institutional investors’ appetite for junk bonds is spoiling just as Wall Street tries to serve them heaps of acidic securities,” reports Dan Amoss. “Proliferation of collateralized debt obligations, or CDOs, has enabled the best salesmen on the Street to stuff all manner of debt down the gullet of formerly unsuspecting institutional buyers.”
But now that CDO funds like Bear Stearns’ infamous duo are washing up DOA, commercial banks and institutional buyers are taking deals off the table. A $1.15 billion bond offering to fund a buyout of ServiceMaster Co. was canceled yesterday. And last week, the $3.6 billion meant to be raised for U.S. Foodservice was postponed. Another $540 million deal for Thomson Learning was pulled.
And in yet another deal, underwriters for a buyout of Dollar General Corp. were left holding $725 million in bonds after that deal was called off. They plan to liquidate the bonds in a separate public offering. Good luck.
“The CDO structure has revolutionized the credit markets,” Dan tells us, “by establishing links among borrowers and lenders that previously would have been impossible. Yet CDOs have not lessened default risk; they’ve merely transferred it to unsuspecting lenders. Those lenders are beginning to push back.”
 Gold traded as high as $656 yesterday, and then dropped a full $10 in overnight trading. This morning, it opens at $5 down from yesterday’s high.
 Newmont Mining Corp, often seen as a proxy for the gold market, announced yesterday they are liquidating their entire 1.85-million-ounce gold hedge position. The restructuring will spell a $531 million loss for the company. But…
“With the elimination of our gold hedge book,” explained CEO Richard O’Brien, “we have renewed our commitment to maximizing gold price leverage for our shareholders. In addition, we are focused on delivering improvements in our operating performance and cost structure going forward.”
Huh? It sounds like O’Brien has been taking speech lessons from a certain (former) Fed chair. Here’s what we think he meant: “The price of gold is going up. And we want our shareholders to get a piece of the action.”
 Food prices will rise between 20-50% over the next decade, says a new report jointly published by the U.N. and the OECD. The worldwide frenzy for biofuels and surging demand from emerging markets are to blame.
“Despite record crop planting, demand is even greater,” comments Chris Mayer, who just yesterday added another ag stock to the Mayer’s Special Situations portfolio. “In the last 12 months, the price of corn, for example, is up 60%.”
Yet despite the surge in production, grain supplies are declining rapidly:
“It’s not hard to see how agricultural prices could stay high and get higher,” says Chris. “After all, the surge in demand for biofuels is something that virtually did not exist five years ago. Now, all of a sudden, ethanol production eats up 20% of the U.S. corn crop.
“Either governments back off on their support of biofuels or the price of oil has to come down. Or 2 billion people in China and India have to stop eating. In my view, none of these things seems at all likely in the near term.”
 “The chairman of Emirates Airlines,” reports the IHT this morning, “Sheikh Ahmed Bin Saeed Al-Maktoum of the ruling family of Dubai -- has grand ambitions, and a bankroll to match.
The sheik “has a huge pot of money to spend, $82 billion from his government, the airline and other financiers. He loves large planes and has ordered 55 superjumbo A380s to create the biggest fleet of these double-decker planes in the world. And he wants to make Dubai, a sheikhdom by the sea, the busiest airline hub in the world, overtaking London, New York and Singapore.”
We’ll have a lot more to say about Dubai on Monday. Plus, some of the coolest pictures we’ve seen in a long time. Watch for ’em…
 “Gentlemen, may I remind you,” writes a confused fan, “that it wasn't Jimmy Carter who controlled the interest rates and kept raising them. It was Volcker, probably the worst Fed Reserve chairman in history. But most of us attribute the economic problems we had in the ’80s to Carter, and Volker escaped criticism. By the way, I am not a Jimmy Carter fan, but I do believe he takes undue blame for the country's woes in the ’80s.”
Carter tried to wreck the economy in the ’70s. While Volcker was appointed by Carter, he was really the Fed chair under Reagan. He had to raise rates to stem inflation that had gotten out of control on Carter’s watch. He’s actually kind of a tough guy, too. He forced the country to take the bitter medicine it needed at the time.
 “I am tired of hearing from you ‘doomsayers,’” our insistent pal continues. “Yes, the dollar is in a precarious situation, but it is different from other currencies in history, which many of you ‘doomsayers’ want to compare it to. Yes, all of you who waste my time crying wolf -- eventually, the wolf will show up.
“But what makes the U.S. currency situation different from all others is that it is the ‘world's reserve currency.’ So we have central banks all around the world, who MUST take steps to support the dollar or their own economies could come crashing down. So in essence, we have a ‘world conspiracy’ that will always step in to support the dollar, until the day the world recognizes an alternative currency to take the dollar's place. And that WILL NOT happen in my lifetime or yours!”
And yet it is happening… go figure.
A historic trade deficit approaching 7% of GDP… $56 trillion in unfunded federal promises on the books already… a blank check to fight the so-called “war on terror”… a personal savings rate that’s been negative for the longest stretch of time since the Great Depression… what’s not to love?
Funny you should bring up Volcker too. When we met him last year at the Grant’s conference in NYC, he said he didn’t know when the dollar crisis will resolve itself. But that it will he’s certain. “The crisis developed on our watch,” he said “it will likely end on yours.” Volcker was 78 at the time.
The Spanish, Dutch, French and British all enjoyed “world reserve currency” status at one time in their histories. The only thing that makes the dollar different “this time” is the level of hubris practiced by its worshippers. But that goes with the territory, we suspect. There’s nothing gloomy about it. Just make sure you place your bets accordingly.
Warm regards,
Addison Wiggin
The 5 Min. Forecast
P.S. “Dear Sirs,” writes a polite reader. “Why are you sending repeats of earlier ‘5 Min. Forecasts’?”
Er, we screwed up. Many of our Yahoo readers are having trouble reading The 5, and while testing old editions to our own Yahoo accounts, we accidentally sent the old issues to about 40,000 unsuspecting recipients.
On any other day, this would have only been a source of embarrassment. But yesterday, as we’re sure you’re aware, was the final day of our Reserve membership drive. Good timing on our part, eh?
If you intended to sign up by midnight last night but got waylaid by our onslaught of e-mail, we’ll give you one last shot. We’ll extend the deadline for 12 hours after you receive this issue of The 5…. but only if you use this link.
Our apologies… |
