Bond Madness, Fed Breaks the Rules, Auto Opportunity, Cheese Bailout and More!

Posted On Dec 10, 2008 By

by Addison Wiggin & Ian Mathias

  • Bond craze enters new level of insanity… how Buffett is “positioned” to profit
  • Federal Reserve, tired of printing money, seeks to issue Fed bonds
  • Why it still makes sense to buy the greenback… fundamentals be damned
  • Chris Mayer with a contrarian play… time to bet on autos?
  • Plus, the most delicious government bailout to date: Italians rescue cheese industry

  “With great foresight,” noted a sarcastic Warren Buffett yesterday, “I long ago entered the mattress business in a big way through our furniture operation”(Omaha Bedding, Nebraska Furniture Mart). 

“Now mattresses have become fully competitive as a place to put your money, and sales will soon take off.”


Buffett: Lying in repose, not lying in state

  What’s the old duffer referring to? The U.S. Treasury issued $32 billion worth of 4-week bills yesterday, at a rate of 0%. Not 0.2%. Not 0.001%. “Investors” paid 0% for the right to have the government borrow their money for one month. In the history of the American bond market, that’s a first.

Investors lined up around the block for these things. The Treasury received $126 billion worth of bids for the bills — four times the amount available. Buying was so zealous yesterday that, for a brief moment, the rate on the 4-week bill was actually negative… a few traders paid the government to take their money.

This morning, the 3-month T-bill yields a pathetic 0.01%. The two-year note comes with a 0.8% coupon. Your reward for lending money to the government for the next 10 years? A rockin’ 2.6%… work it.

  Not to be outdone, the Federal Reserve is organizing a debt sale of its own. And who can blame them? Traders are crazy enough to give the Treasury “money for nothing,” so why not the Fed?

Not content with their limitless ability to print money… or the $476 billion in Treasury bonds they hold in reserve, the Fed has approached Congress for permission to issue bonds. Bond issuance, you can almost hear the Fed thinking, could be a whole new wicked-fun way to bolster its $2 trillion-plus balance sheet.

Wait… the Federal Reserve Act prohibits the Fed from issuing any notes beyond the U.S. currency.

Details.

  Among other commitments, the Fed needs another $10 billion today to pile on top of the debt slag heap they’ve reserved for AIG.

Apparently, AIG failed to mention a couple billion in "credit protection instruments” when rescued by Uncle Sam. Those trades have since gone bust, and Wall Street firms sent AIG a bill for $10 billion this week.

The government’s $150 billion bailout package isn’t supposed to cover this sort of thing.

Details.

  Stock traders stripped some profits out of the Obama Rally yesterday. And why not? The Dow and S&P have shot up over 20% from their late November lows. For the day, the Dow ended the day down 2.5%. The Nasdaq and S&P 500 fared a bit better. They fell only 1.2% and 2%, respectively.

  But it looks like the good vibes may be returning to the market today. Despite the incredible risk aversion on display in the bond market, traders bumped up the Dow almost 100 points at this morning’s opening bell.

  Before you decide to join the party… global growth will probably slow to its lowest level since 1982, the World Bank forecast today.

The bank lowered its 2009 GDP estimate to 0.9% growth for next year, the worst in 26 years. What’s more, World Bank guessed that global trade would actually contract in 2009, by 2.1%. Trade hasn’t shrunk significantly since 1975, and should the bank’s prediction come true, 2009 will mark the biggest trade contraction in its history.

Details.

  The U.S. dollar remains irrationally lofty today. The index is just a hair below yesterday’s levels, around 85.6.

“Remember,” our new currency man Bill Jenkins reminds us, “the U.S. dollar is still the ‘one world currency.’ More than 70% of all FX transactions involve the USD. More companies have to transfer their currencies into U.S. dollars than any other currency worldwide. So it becomes, essentially, the currency of choice, of safe haven. Don’t be deceived, it isn’t stronger than other currencies in terms of its fundamentals, but it just becomes, by default, the paper of choice

“Thus, the last run-up in equities has produced a small dollar sell-off. With the announcements of more money being poured into the economy through an auto bailout and through more public works projects, it seems the U.S. has all systems go, and risk appetite then appears. But these have been only small multiday countermoves.

“When the dollar is seen for what it is, at that point, it will no longer be the darling, and the outflows of capital will be so strong, it’ll seem like a dam with the floodgates open. But that’s not today. And frankly, it’s hard to say when that will be. So in the meantime, as currency traders, we will still have to bet on the strengthening dollar.”

Jenkins, by the way has been helping readers of his Master FX Options Trader take profits on the recent big swings in the currency market. Currently, you can get the Master FX only as a part of your Financial Reserve membership… on offer right now with a “one-time only” dividend rebate. Get the details here.

  The spot price for gold jumped $35 yesterday, to $805 an ounce this morning. Oil is up another couple bucks today, but it’s still cheap at $44 a barrel.

  “We may be on the cusp of a great global boom in the automotive industry,” notes Chris Mayer, commenting on the $15 billion automaker bailout potentially hours away from the votes it needs to get passed. “That may be hard to believe given all the ink spilled on the troubles at the mossbacked mastodons known as GM, Ford and Chrysler. But there are reasons to believe something big is afoot here in the land of wheels. And the investment opportunities it opens up are surprising.

“For the first time ever, consumers in Brazil, Russia, India and China (the BRIC countries) bought more cars than U.S. consumers. The year, despite all its troubles, may still hit 59 million vehicle sales, an all-time record. By the end of this decade, which is not far off, China will pass the U.S. as the world’s largest auto market.

“All that must give even the most gloomy mind reason to pause. It gets better, though. Yes, all those cars will need roads. But perhaps even more interesting is to think about what will power the cars of the future.

“Someday, most of these new cars may be electric or hybrids. This is not some pie-in-the-sky vision. China — and the rest of the emerging markets — has an opportunity to leapfrog technologies here, just as it did with communications. China isn’t laying out miles and miles of phone lines. The country is going wireless. In the same way, don’t expect China to invest heaping piles of money in gas stations.

“The bigger idea is that we’re moving into an era when electric cars are going to be a big part of the pie, rather than a novelty. It is only a matter of time.”

  As if central bankers hadn’t done enough damage in Iceland this year… news erupted last night that a huge portion of their herring catch is infected with some disease that makes it unfit for human consumption.

An estimated 40% of the 150,000 ton catch has the bug — a pretty big deal for Iceland, where fishing makes up 70% of the export income. Haddock are infected too. Nasty stuff.

  The Italian government announced it’s going to rescue the makers of the “king of all cheeses” today. The recent global downturn has put already struggling Italian cheese makers in dire straits, the family-owned makers of this Parmigiano-Reggiano in particular.

So the Italian government is going to buy 100,000 75-pound wheels of the stuff, for about $64 million. The cheese wheels will go to charity.

We’re not sure how the value of Parmasean will increase when the market becomes flooded with government cheese, but we’re certain a shortage would mean sang in the streets.


Italian mozzarella makers are pissed.

  “I am surprised,” writes a reader, “you haven’t mentioned the recent shutdown of the Canadian Parliament after some idiotic attempts by opposition politicians to overthrow the minority government for not throwing money at the automobile companies and other pork projects. It’s wonderful news for the Canadian economy, as it makes it almost impossible for the politicians to do silly stuff for nearly two whole months. How about that, eh?”

The 5: We have been amused by the crisis in America-lite, eh? In fact, last week we were supposed to be on a Canadian radio program forecasting the impact of a slowdown in the U.S. on the Canadian economy, but we got bumped. The prime minister was pleading his case live… directly to the people.

  “Trace amounts of the metals rhodium and platinum are used in catalytic converters,” writes a reader, responding to recent details we offered suggesting a further decline in civil society. “Apparently, they are melting these things down to recover the metals. Have you checked the price of rhodium lately? Lock up your catalytic converter.”

“I’m assuming that it was a Toyota pickup,” writes another. “Most others don’t have enough precious metals in them to make it worthwhile. Hopefully, your friend got a new ‘aftermarket’ converter that has little platinum in it. If he got another Toyota converter, he’ll probably lose it again, as they are worth about $200/300/400 at the salvage yards.”

  “I think you did your readers a service,” the last continues, “by warning about the next big leg down. I think it is going to be a doozy and agree few will be laughing then. Hopefully, your readers will use that next top to unload their stocks and mutual funds. Those that heed your warning should be very grateful!”

The 5: We’ll see… we will see.

Addison Wiggin
The 5 Min. Forecast

P.S. We’re having a debate here in the Baltimore HQ… one we were hoping you might help us out with. We’re going ahead with our Vancouver symposium next year in July. But we’re trying to get a bead on how big it’s likely to be. About 150 of the 1,000 attendees last year are returning for sure… but how many more? Let us know ASAP.

And if you’re definitely going to attend but haven’t told us yet, there’s an early registration deal you shouldn’t miss. You’ll save $300 a seat… call Agora Travel at 800-926-6575.

P.P.S. The event has been phenomenal each year. This week, we’ve been showing you short video snippets of Agora Financial Reserve members who attended a cocktail reception during last year’s event. Here’s another , hosted by Eric Fry…

Of course, if you’re a Reserve member, you can come to the symposium for free. It’s a well-liked, much-appreciated feature of the Reserve benefits package. For more details on our "one-time only" dividend rebate offer for Reserve membership, click here.


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