|
 The Dow blasted off yesterday, soaring as high as 14,021 before coming back to earth at a teetery 13,971 -- its 31st record high of 2007.
 “When highflying stock markets are flying very high,” Eric Fry observed rudely this morning, “especially when the fuel of fundamental justification begins running very low… we worry. The Dow posted another of its successive all-time highs yesterday, despite the fact that every mortgage-related thing continued to slump:
“What this chart does NOT show is that the prices of most other mortgage-backed securities are also plummeting -- producing billion-dollar losses... and possibly triggering a multibillion-dollar credit-derivative debacle.” (For more, see your morning issue of the Rude Awakening.)
 The most visible culprit? Bear Stearns announced yesterday that their infamous duo of subprime-backed mortgage funds are worth, essentially, nothing.
After an inside leak to the press, the firm was forced to come clean on the values of their High-Grade Structured Credit Strategies Fund and the even riskier Enhanced Leverage Fund: "The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007," read a Bear Stearns letter snagged by Reuters.
Bear Stearns insiders have been quoted estimating the “better” of these two funds to be valued at 9 cents on the dollar.
“Wow, we had no idea it was going to be this bad!” exclaimed the excessively sober Dan Amoss.
“These funds were managed by a team that was widely considered to be among the savviest fixed income managers in the business. If they were completely blindsided by -- or didn’t completely understand -- the risks embedded in CDO instruments, there are probably quite a few less-experienced fund managers sitting on portfolios loaded with these things.
“It took Bear Stearns two weeks to calculate how much these synthetic securities are worth, and after all that… they’re worth pennies on the dollar, at best. I imagine there's going to be a lot more ‘recalculating’ in the coming months.”
Dan’s been doing some recalculating of his own. He’s amassing a pile of “short” recommendations for you, in an effort to catch the downdraft of the subprime meltdown. When the time is right, Dan will let us know… and you could be sitting on a windfall just as mainstream investors start wondering what happened to the market’s record highs of early 2007.
 Yesterday, the dollar was clearly the first victim of the Bear Stearns uppercut. After the bell, the greenback had fallen to the mat against 13 of the 16 most actively traded currencies. The pound skipped right over $2.04 and came to rest at $2.05. And at nearly 88 cents, the dollar is at a nine-year low against the Australian dollar.
Picture this… last year you piled your $20,000 “ultimate European vacation account” into this great new Bear Stearns High Grade fund that your broker “just loves” - after all, Moody’s gave it a sterling seal of approval. Today, you decide enough is enough and you withdrawal your funds (if BSC even lets you) and decide to take your much-deserved vacation. After BSC’s devastating downgrade, plus a record high euro conversion… you’re looking at about $1,300. Just enough to fly to Germany (coach, red-eye, by yourself), buy a bratwurst, and fly back home… bummer.
 The second victim: corporate bonds. The risk of owning corporate bonds soared to the highest in two years in Europe overnight. Credit default swaps -- used by investors to speculate on a company’s ability to pay back their debt -- increased dramatically.
“Because of the subprime problems in the U.S., the whole story has another dimension,” said Axel Potthof, a Pimco bond guru based in Munich.
 “The popping of the housing bubble is really just beginning,” says The Survival Report’s Mike "Mish" Shedlock. Mish, the psycho-sociologist, has mapped out the boom-to-bust cycle in the following stages:
- Enthusiasm
- Disillusionment
- Panic
- Search for the guilty
- Punishment of the innocent
- Praise and honors for the nonparticipants
Mish believes we’re “in an overlapping state of panic with lingering pockets of disillusionment and the beginnings of the search for the guilty now under way.” For more “analysis,” even of your own state, see Mish’s breakdown in Whiskey & Gunpowder.
 A looming labor strike is threatening to shut down West Coast ports. More than 750 clerks of the International Longshore and Warehouse Union say $37.50 an hour plus benefits isn’t enough to keep them on the job, managing cargo imports and exports along the California coast. Their deadline to agree on a new labor contract expired Monday night.
“Shipping ports in Los Angeles and Long Beach receive about half of all incoming containers to the U.S.,” reports Chris Mayer. “With a strike looming, the nation’s busiest ports face a potential crisis. If dockworkers observe the picket lines, as they've said they will, complete port operations could grind to a halt.”
In 2002, longshore workers across the West Coast were locked out for 10 days over a contract dispute. The shutdown cost the nation's economy an estimated $20 billion.
 Wal-Mart, Target, Home Depot and other big box stores use those containers to import geegaws and widgets for next to nothing with little “made in China” stickers on them. What, if anything, gets shipped back to China?
Scrap.
Scrap is the second largest U.S. export to China in dollar value, behind electronics. Go figure. The U.S. makes tens of billions of dollars sending scrap -- broken geegaws and widgets -- to China so that the Chinese can process them and sell more widgets and geegaws right back. What a wonderful symbiotic relationship, don’t you think? They build, we consume. Yummy.
[Side note: if you ever wish to acquire massive amounts of interesting yet generally useless factoids such as this, we recommend you attempt to make a nonfiction movie… you’ll quickly have more inane trivia than you know what to do with. If you’re joining us in Vancouver next week, we’ll be airing a little sneak preview of the documentary for Agora Financial Reserve members, Tuesday evening.]
 Light sweet crude reached a 2007 record of $75 yesterday.
“If you think oil prices are high now, you ain't seen nothin' yet,” comments our friend Sean Broderick. According to Sean, the three real triggers for sky-high oil prices are “the potential for another monster hurricane in the Gulf of Mexico, spreading violence in the Persian Gulf and a potential al-Qaida attack on U.S. oil facilities.
“Since the beginning of summer, oil prices have catapulted from $66 to $75 a barrel. And none of those three things has even happened. The supply/demand picture for oil is tight and getting tighter. The global economy is growing, business from Brazil to Singapore is booming, the world's population is trading in bicycles for cars and global oil demand can't keep up.
“If none of these big three events happens, we could still see $90-per-barrel oil this year. If one of them does -- prices could spike big time.”
 “I'm having some trouble with the cabbage guy's numbers,” declared a reader. “I earn my living as a farmer and my family's been in produce since 1868.”
“For starters, in most produce operations, harvest and post-harvest handling come to about 50% of costs. Establishing the crop and maintaining the crop are each about 25%. That $7/$2 split looks just plain weird. Heck, if you order by tens of thousands, a cabbage box alone will be at least a buck and a half. Maybe cutting them costs $2 a box, but that sure isn't the only ‘harvesting’ cost.
“Second, at $9 ‘cost,’ he's losing money. Yesterday's Los Angeles terminal price for cabbage (steady market) was $6.50-9.00. Not a lot of margin there, not even counting the cost of getting the cabbage to the terminal.
“Third, if the retail market spread is 59-79 cents per pound, then the terminal price is 25-33% of retail. That's not bad, though unsurprising, because although the stores must have cabbage, it's not exactly a high-end item with margin to burn.
“Finally, the fatal flaw of his logic. Produce, like most other industries, works on margin, and the final price is much too 'elastic' for his idea ever to make sense. Everybody along the line wants a cut, and if your input goes up 4 cents, you'll send it out the door at 6 cents if you're working typical margins. Next guy gets those 6 cents and passes 'em along as 9 cents. Then 14, then 20 and so on. Put a little too much cabbage into the stream -- say having a couple of plantings pile up -- and the price goes south in a hurry. Stuff goes on ad or markdown and most of it eventually finds a home. Everybody keeps making the margins, except the growers, who get pounded.
“In the meantime, that Mexican harvest labor is worth exactly what they're being paid. If they were worth more... they could get it. In construction around here, the 'chabos' start at about $13 and can be up to double that for the good ones. Farmers are price TAKERS, not price MAKERS, and it's been that way forever.”
 Buffett’s charity lunch raffle is over. Mohnish Pabrai, a legendary investor himself, will pay $650,100 to meet Mr. Buffett for a steak at Smith & Wollensky in Manhattan.
Best regards,
Addison Wiggin
The 5 Min. Forecast
P.S. Surprisingly, we’ve filled 25.2% of Gunner’s available Bulletin Board Elite slots in less than a week. Only 74.8% remain. If you’re interested, it doesn’t look like we’re going to make it to the July 30 deadline before all the slots are taken.
|
Recent guerilla attacks in western Mexico have authorities on both sides of the Mexican border scrambling to protect billions worth natural gas pipelines. Companies such as Hershey’s, Honda, and Kellogg’s are losing up to $7 million a day as local rebels bomb energy sites left and right. Meanwhile, several little known organizations are well positioned to profit from a sudden energy grab... or… worse yet, a full blown U.S. / Mexico Border War. 
