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 As we suspected, investors on the prowl for silver linings helped the sun burst through the U.S. market’s clouds on Monday morning. The Dow gained 0.7% and the S&P 500 a solid 1%.
But what’s this? The mainstream media, including in this case CNN/Money, would have you believe the market regained its balance with the steadying hand of “cooling credit markets fears and a bit of deal making on Wall Street.”
C’mon, now… how can the credit crunch disappear over the weekend? And does one successful deal -- Ingersoll-Rand sold Bobcat to South Korea for about $5 billion -- make all the broken ones go away?
In the real world, the highly anticipated Chrysler/Cerberus has stalled. The First Data, Alltel and TXU deals are all still up in the air. Between those four deals alone, there’s over $115 billion in “leveraged buyouts” on ice. And we just reported yesterday that 230 IPOs scheduled for 2007 may never see the warm glow of morn.
Sure, the market had a fun Monday. But until we see what tightening credit can do to the leveraged buyout binge… until the bean counters fumble their way through the mortgage-backed derivatives maze… any “rebound” is just the sound of dead felines bouncing.
 Gold, on the other hand, seems due for a proper rebound. A week ago, the precious metal was well into the $680 range, but when the stock market corrected, gold mysteriously followed suit. Now, at $665, gold is hovering near its one-month low.
But fundamentally speaking -- with the struggling dollar, bearish market, easy-credit backlash and a global flight to quality -- gold should be flying through the roof.
So what gives? The European Central Bank has been selling their stash. They’ve unloaded at least 30 tons of gold since the beginning of June. International law prohibits them from ditching more than 500 tons a year, but their current pace appears to be enough to keep a lid on the gold price even in the face of so much uncertainty.
“Governments still seem intent in trying to cap the gold price,” our friend James Turk from goldmoney.com says, “which is the reason for its underperformance.”
 “The big winners in all of this market volatility have been the Japanese yen and Swiss franc,” Chris Gaffney from EverBank reminds us, “both of which are benefiting from the reversal of carry trades.”
The dollar managed to stop the bleeding last week while the euro and pound retreated slightly. While the long-term outlook for a bearish dollar and a bullish euro/pound remains, the currency gurus at EverBank like the yen and franc in the short term.
“With volatility moving back up,” guesses Chris, “I would expect to see more of this unwinding, and additional strength from funding currencies like the yen and franc.”
Look for investors taking their carry trades off the table and boosting these low-interest-lending currencies.
 Consumer spending rose at a snail’s pace in June. We consumers spent only 0.1% more in June than in May… the slowest increase in spending since September 2006. All told, second-quarter spending increased by 1.3%, the worst spending quarter since Q4 of 2005. Perhaps the mighty consumer has finally started reading the headlines.
 “I am writing to request that Congress raise the statutory debt limit as soon as possible," wrote Treasury Secretary Hank Paulson yesterday in a letter to Congress. In a letter to Sen. Reid, Paulson urged lawmakers to heighten the debt ceiling before we pass the $9 trillion mark in October.
Seriously?!? The $8.9 trillion cap (please recall our “how much is a trillion” lesson from yesterday ) must not be enough debt for our nation to bear… why not throw another log on the fire?
“And for what?” you might ask… a rainy day fund? The war on terror? Entitlement programs? The coming energy crisis? No… Paulson seeks more debt allowance so that the U.S. government can borrow money to pay outstanding bills. The money Congress grants him (which it surely will) has already been spent.
What an amazing country we live in. In order to keep up appearances, the man we all “trust” to run the nation’s Treasury would rather sink the nation deeper in debt than dare rattle the world’s cage by questioning the true worth of our Treasury notes, the real purchasing power of our economy and the actual “value” of the dollar.
Finding a way to pay U.S. bills without indebting this country more “would create unnecessary uncertainty for the financial markets and result in costs to the government," said Paulson. Right. So it’s better to go deeper into debt than pay your bills. Where did this idea come from? Oh, yeah, we figured that out in our book Empire of Debt.
Such actions, he said, "should be reserved only for extraordinary circumstances, and should be avoided." Of course, owing the world $8.9 TRILLION dollars is not extraordinary.
Unbelievable.
 Chinese officials have ordered banks to curb lending and increase reserves in hopes to brace the economy for whenever China decides to stop growing at this astounding pace.
Starting Aug. 15, lenders must put aside 12% of their deposits as reserves, compared with the current 11.5% law. Along with three interest rates hikes already in 2007, Chinese officials are doing everything they can to slow down their uber-hot economy.
 Meanwhile, what are U.S. “officials” up to?
The Senate Finance Committee has passed a bill that will essentially punish China for providing cheap credit to the U.S. The committee passed the bill 20-1, which, if made into law, will penalize “countries” (meaning China) that fail to revalue their currency after a partisan board of U.S. lawmakers deems it “fundamentally misaligned.”
In other words, this is the U.S. government’s way of getting back at the Chinese for lending consumers the money they need to buy “stupid plastic salad shooters,” as James Howard Kunstler so delicately put it last week in Vancouver.
“I've grown very concerned about a trade bill aimed at China,” says Chuck Butler. “There are no guarantees that this will ever come to a law. But the fact is there are many more of these where this one came from AND it comes at a time when credit in the U.S. is drying up like a marathon runner in Las Vegas. Oh... Why is this a problem, you ask? Because... Who has been providing credit to the U.S. by the boatload? Ahem... It's China... Uh-oh!”
 “Sugar could be the big sleeper play for late 2007 and early 2008,” Kevin Kerr tells us. While the whole world predicts oil prices to surge any minute now, not everyone knows that sugar prices have historically followed oil like a puppy following a 3-year-old with a hot dog smothered in ketchup.
“Ironically, sugar is highly crude dependent,” says Kevin. “I see sugar heading back to at least 13 cents. The big factor will be crude oil prices, which are far more likely to move higher than lower. After all, we have had plenty of crude on hand during this most recent rally right back up to the record level, but now the oil matrix has changed and the relations with the Arab countries are deteriorating.” (Recall in yesterday’s 5 where we highlighted arms deals proposed by the U.S. and Russia to nations in the warring Middle East.)
“Let's not forget either that we haven't had any storms in the Gulf yet,” reminds Kevin. “We are a long way from being able to breathe a sigh of relief. A jump in current sugar prices from 10 to 13 cents could happen fairly quickly if we see crude continue to trend higher. For as cheap as you can still pick up some of the March 2008 calls, it's worth it to just stick a few in the portfolio and let them percolate.”
Resource Trader Alert -- Trader’s Code
 The subprime fiasco is even hitting millionaire fund managers’ wallets… in a big way. John Devaney, CEO of United Capital Markets, a hedge fund that focuses on buying subprime ARM-backed securities, has been forced to sell his $23.5 million 145-foot yacht and his $16 million Aspen vacation home.
Looks like John had his own skin in the game. Early this month, he stopped granting investors’ requests to withdraw their investments in the United Capital Markets fund. Soon after, the value of Bear Stearns’ dashed funds were revealed. Mr. Devaney has yet to reevaluate his fund… but what’s inside must be crotte, too. How much financial trouble would you have to be in to sell your house and your boat?
And the ironic icing on this sardonic cake? The boat’s name: “Positive Carry.” We bet investors in John’s fund might call it something else… like “Lost My Shirt,” or “Holy Sh*t, What Happened to My Money?” Or simply: “Bad Idea.”
Regards,
Addison Wiggin,
The 5 Min. Forecast
P.S. We were overwhelmed with orders last night for Greg Guenthner’s new service, Bulletin Board Elite. We filled all but 58 spots during the exclusive limited-time offer. A few readers of The 5 were interested in the Elite, but not at its full annual price tag. So… while we wouldn’t dare bring the price any lower, we’ve put the last 58 spots on sale for a low quarterly payment. These will definitely sell out today. If you’re interested, we’d recommend you “jump” on it right now.
P.P.S. We’re off this morning to interview Ron Paul in Washington, D.C., for our documentary project. We’re interested to hear his reaction to the success of the Paul campaign thus far, and the amount of coverage it’s getting on the Internet. We’ll let you know what he says… tomorrow.
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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. 
