by Addison Wiggin & Ian Mathias

• Deja vu all over again… are stocks just following the 2008 playbook?
• Bill Jenkins shares his favorite global currency
• Gold bugs beware: Gold chart forecasts a sell-off
• Yet league of famous funds (and Chris Mayer) are buying up gold stocks
• Plus, are we reading this right? A bank bails out the government?

  We’re scanning markets of the world today and scratching our heads… haven’t we heard this before?

  There was a scare at the start of the year -- banks were in trouble, the housing market was crashing and unemployment was rising. The S&P fell at a rate unseen in a long, long time. But then, a sucker’s rally! The worst was likely over, they said… stocks were oversold. The U.S. consumer, China and oil companies promised to lead us out of this mess. And of course, the current administration’s new multibillion stimulus plan will kick in any second.

After bottoming in early March, stocks soared well off their lows. With the S&P 500 at break-even for the year, stocks now face an inflection point.

Wait a second… what year is it?

We need not remind you of what happened in the second half of 2008. But it’s not worth worrying about… it’ll be different this time!

  Stocks took quite a tumble Thursday. The worse-than-expected jobs report gave traders more than enough reason to be short into the three-day weekend. The S&P 500 fell nearly 3%. Since reaching its 2009 high in early June, the S&P is down 5%.

  Major indexes are in trouble again today. The Dow and S&P opened down 0.75%, mostly thanks to sour moods left over from Thursday.

  And just as in 2008, the smart money says there is more pain ahead:

“You may have green shoots, whatever you want to call them,” said market sage and author of The Black Swan Nassim Taleb. “You may have temporary relief, but you are still in a world that's breaking. We're in the middle of a crash. So if I'm going to forecast something, it is that it's going to get worse, not better."

And the root of all our woes, Mr. Taleb? “The monkey on our back is debt.”

Amen. This should be deja vu to our most dedicated readers…Nassim shared a similar sentiment at the 2007 Agora Financial Investment Symposium. We expect equally prophetic forecasts from our speakers this year. If you haven’t signed up to join us, better get on it right now… the show starts in two weeks.

  Just like in 2008, the logical move is to sell dollars and buy useful assets, like gold. But just like last year, the current trade du jour is buy greenbacks, sell everything else. After Thursday’s, stock sell-off, the dollar index broke out of its recent range. It had been hovering just around 80 and now goes for 80.7.

  “The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Medvedev told the international press today, yet another call from a BRIC nation to ditch the dollar. He’ll meet with President Obama this week. We wonder if he’ll have the stones to bring this up:

“In the long term, we must also think about a single unit of payment such as the International Monetary Fund’s Special Drawing Rights. We cannot be hostages to the economic situation of a single country, as is happening today with the United States.”

  “Of the major world currencies, I have to say that Australia’s dollar is my favorite,” writes our currency man Bill Jenkins. “It has an edge because of its commodity-related economies and currencies.

“Now, Canada has the same edge. In fact, you may hear the Canadian and Australian dollars called the CommDolls (commodity dollars) for short. But Canada is inextricably tied to its neighbor to the south (namely, us), and that’s more than just a little problematic.

“Australia, on the other hand, is not tied to the United States. Instead, it’s better placed to trade with another resource-hungry nation -- China.

“As China attempts to lift itself up by its own bootstraps, Australia comes into the picture. It has been widely understood that Australia is a little China. Not in culture, custom or language, but in economics. A significant part of Australia’s commodities flow into China, and the more the Chinese move ahead, the better it is for Australia.

“Also, let’s consider that Australia’s central bank is still holding its interest rates at 3%. In a fairly stable country, with a fairly stable currency, that is one heck of an attractive rate. Why, it is downright appealing!

“Indeed, Australia may now become the benefiting member of the next carry trade. After all, if can you borrow money at 0.25% and invest it at 3%, you stand to make a decent haul. And as risk appetite re-enters the market, you can bet your bottom dollar that Australia will likely be a real beneficiary.”

That’s just a snippet from Bill’s latest special report, which his Master FX Options Traders received over the weekend. Only subscribers have access to this report, which includes his provocative new short euro trade. If you want in on the action, click here.

  From a technical standpoint, gold looks set for some short-term pain. Just like stocks, the gold chart is taking a page from 2008. Check it out:

When it hit the fan last year, gold failed to deliver the righteous moonshot many had forecast. It certainly was a better place to be than stocks, but gold still suffered. Until further notice, the same playbook appears to be in use today… gold may be the once and future money, but the dollar and U.S. Treasuries remain the ultimate flight to quality when the going gets tough.

After sticking to a tight range the last few weeks, gold fell today along with stocks. The spot price shed $10, to $925 an ounce.

  “I see everything coming up roses for gold and those who mine it,” says Chris Mayer, armed with proof he’s not the only value hound with his eye on gold.

“For the first time in a couple of decades, some of America's most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time.

“And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis. Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He's also got a big position in Kinross Gold.

“Peter Munk, the 81-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold's broadening appeal. ‘I have had more phone calls in the past six months than ever before -- from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,’ he says. ‘I am not saying George Soros, but people of that caliber have told me they are buying gold.’

“You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world's greatest investors may be the leading indicator for a quick 116% climb -- to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.”

Chris just gave his Capital & Crisis readers another gold stock for the long haul. He tells us it’s “a miner in a in politically safer area with a growing production profile, falling costs, a good balance sheet and a stock that is cheap on the face of it.” Sounds hard to beat, eh? For access to this pick and the rest of the C&C portfolio, click here.

  Oil’s down today, too. The front-month contract is off $2, to $66 a barrel.

  The American service industry contracted again in June, the ISM reports today. Their monthly gauge of the service sector scored 47 last month, 3 points below a “growth” reading of 50. At least that’s an improvement from May’s score of 44. In fact, June was the third straight monthly increase… we’ll keep on an eye on this one.

  The FDIC closed down seven banks late Thursday, a single-day record for the credit crisis. That brings the total to 52 for the year. Considering the five bank failures the week before, it’s clear the pace of bank busts is accelerating.

  Last in today’s deja vu issue, a role reversal that doesn’t remind us of the last 18 months whatsoever. Get this: A struggling bank bailed out a municipality over the weekend.

In an unfortunate sign of the times, many communities across the country canceled fireworks shows for the Fourth. You know the drill… budgets are tight, revenues are down, savings are nil.

New Providence, N.J., was one of those towns, until its local bank stepped in. Investors Savings Bank blew the dust of its wallet and wrote New Providence a $12,000 check to finance the fireworks display. That’s a tiny sum, even for a community bank, and probably equal parts philanthropy and marketing. But good grief… it’s the first such role reversal we’ve heard in a long time.

  “How can we expect a heavily debited consumer-based economy to ‘recover’?” asks a reader, with a barrage of rhetorical questions. “When borrowing and spending drives the economy and unemployment soars and credit shrinks, how can we expect an increase in spending? When our goal is to recover and we have issues like this to deal with, can we really get there from here? I don't see how it's possible. In my opinion, we have been in a depression for over a year and our path from here is down, not up. What am I missing? How can our consumer economy recover? What will a recovery from here look like?

“By the way, paying a million dollars to have lunch with Buffett, who just lost $30 billion, is beyond stupid. Buffett can make it in good times, but in bad times, do just the opposite of what he does and you will get some of his money!”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• Bad signs for the economy’s two most important measures
• Since it’s working so well already… Obama administration widens housing rescue plan
• Bill Bonner on what the years ahead will most likely resemble
• A 50-year chart that looks right into our future
• China, IMF hit the dollar with a one-two punch

  We’ve said it before: This depression will be defined by two measures. Housing -- most people’s largest store of wealth and employment -- the backbone of any economy. Millions of people without jobs stuck in homes they can’t afford will not be able to “put the economy back on track,” as the current administration likes to say. This morning, we see big news on both fronts… and it’s not so good.

  First, as we forecast yesterday, the Labor Department issued a worse-than-expected jobs report this morning. The U.S. economy shed 467,000 jobs in June, they claims. As this chart shows, the Street was betting on the current trend to stay intact. Job losses have decreased every month since their January peak… until now.

B-list data points from this morning’s jobs report were equally lousy: The average hourly workweek fell to 33 hours, but hourly wages stayed the same. Those out of work for six months or more now exceed a record 4.4 million. And continuing claims for unemployment benefits remained at 6.7 million, just below an all-time high.

By the government’s count, a record 14.7 million people are now unemployed. That makes for a 9.5% unemployment rate, a 26-year high.

  On the housing front, mortgage applications have fallen to a seven-month low. According to the Mortgage Bankers Association, requests for new home loans fell 19% last week while refis plunged 30%, both to levels unseen since November. While mortgage rates are well off March’s 4.6% record low (30-year fixed), they’re still at a reasonable 5.3%, a full 100bps below the average rate this time last year.

  And since it worked so well the first time around: The Obama administration announced they will expand the “make home affordable” program to an even wider range of deadbeat borrowers. Previously, homeowners with mortgages worth more than 105% of their home’s value did not qualify for President Obama’s manipulated refi rates. That limit has been bumped up to 125%… incredible.

Even more amazing: One in five mortgage borrowers are “underwater,” meaning the value of their loan is worth more than the price of their home. That’s nearly 20 million homeowners.

  “Housing and jobs are the two cornerstones of American middle-class wealth,” reiterates Bill Bonner. “If they can't hold the weight of a building economy, there is little chance of a broad recovery in the United States... or Britain.

“In Britain as in America, the real economy is falling off just as investors, analysts and commentators think they see a recovery. They think rising stock prices – U.S. stocks are up 40% since March 9 -- predict and precede a growing economy. Stocks, they say, ‘look ahead.’

“People will believe anything. If stocks had been watching where the economy was going, they never would have traded at such high levels in '07. They clearly had no idea what was ahead. Nor do they now…

“What we see is this: The United States prospered in the 20th century not because of the Roosevelts, but in spite of them. The American economy was expanding... it was still young, strong, competitive and prosperous. The empire grew with economic power.

“But the years ahead are not likely to resemble the post-Roosevelt years. America's position relative to the rest of the world is weak and in decline. She is not a creditor; she is a debtor. She is not a low-cost competitor; she is a high-cost competitor. She no longer has a free and flexible economy; she has one freighted with central planners, regulators and busybodies.”

Year in and year out, Bill is a consistent crowd favorite at our Investment Symposium. This year might top them all, as we help him celebrate The Daily Reckoning’s 10-year anniversary. There will be speeches, libations, food, music, friends and much more… but only if you’re with us in Vancouver. If you haven’t signed up yet, the time is now. Please join us at our annual Investment Symposium.

  The unemployment scene in Europe is turning ugly too. The unemployment rate in the 16-nation eurozone hit 9.5% in May, the EU statistics office announced early this morning. That’s a 10-year high.

If you’re looking for work over there, steer clear of Spain. Spaniards rank at the top of the EU’s jobless list, with an unemployment rate of 18.7%. Job seekers are better served in the Netherlands, where only 3.2% are unemployed. (How one currency can represent all these nations is still beyond us.)

The European Central Bank chose to keep lending rates at 1% this morning, a record low.

 China wants to add a new global reserve currency debate to next week’s G-8 meeting. Unnamed Chinese officials asked the organizers of the G-8 gathering to include such a discussion yesterday. Whether or not they’ll get it, we’re not so sure… but that’s not the point. Last year, we heard little hints here and there of China’s dollar unease. Now they are practically shouting it from the rooftop. This could get interesting soon.

  In a similar vein, the IMF announced today it will issue more bonds denominated in Special Drawing Rights -- a fancy phrase for a basket of global currencies. After much demand from BRIC nations, the IMF said it will print bonds worth $150 billion, each denominated in a basket consisting of the dollar, euro, pound and yen. China, Brazil and Russia have already promised to buy $70 billion worth of the bonds… a convenient way to diversify out of the dollar and gain some say in the governance of the IMF’s war chest.

  China’s call for an alternative global reserve currency put the dollar index down almost a full point. But traders refuse to leave their recent range… after falling as low as 79.5 yesterday, the dollar index is already back up to 80.1.

  The American stock market reacted harshly to this morning’s jobs report… no surprise, given the Street missed the number by nearly 100,000 jobs. The Dow and S&P 500 opened down over 2%.

  “If asset prices accurately reflect all the available information,” writes Rob Parenteau, “about future cash flows and the appropriate discount rates on those cash flows, as is required under the efficient market view, then we have to ask ourselves, what has the roller-coaster ride of the past decade and a half been all about? Compare the difference between the ratio of household net worth to disposable income before and after 1995 in the chart below.

“If you lived through this roller-coaster ride as an investor -- especially as an investor approaching retirement -- the experience is seared into your mind, and it has probably left a few scars on your heart as well. So we have to ask ourselves, what has changed so dramatically in the ability of capital equipment to generate profits or houses to generate rental income to homeowners over the past decade and a half? Alternatively, what has changed so dramatically in the long-run yield on Treasury bonds, considered the default risk-free rate, and therefore a key component of the discount rate on future cash flows?

“The answer, my friend, is indeed blowing in the wind, because the answer is basically as empty as air. What changed was the approach toward a decidedly asymmetric directive (no intentional popping allowed, just mopping up the mess afterward), and the remarkable skewing of the incentive structure facing investment professionals -- incentives that basically encouraged the pursuit of asset bubbles regardless of the state of the fundamental factors like reasonable estimates of future cash flows and reasonable discount rates on those cash flows. As evident in the opening chart, there was no Great Moderation in asset markets -- only a greater corruption of asset-pricing mechanisms. In retrospect, it is truly remarkable that the financial system held together as long as it did through the last years of Dr. Richebächer’s illustrious career.”

For Rob’s 2009-2010 forecast, be sure to check out his latest special report.

  The California budget crisis continues. Gov. Schwarzenegger declared a state of fiscal emergency today and ordered many state offices to close for three days each month (without pay) until June 2010. His administration will also issue a new swath of IOUs today… if you get one, let us know.

In the oil patch, light sweet crude finally fell out of its recent range. The front-month contract is down two bucks and change as we write, to $66 a barrel. That’s no matter to you, of course, ’cause you followed Byron King’s advice last week to take some oil profits off the table.

  Gold is still consolidating. An ounce goes for $930 as we write.

  “The comments of your readers,” writes a reader today, “regarding having all of their eggs in one Madoff basket and the stupidity of doing so is curious. How many Unites States investors have diversified their investment portfolio away from all dollar-based investments? If you think about it, our life insurance, stocks, bonds, real estate, Social Security and other retirement programs are all dollar based. A few of us might have a little gold/silver or some foreign bonds, but I bet over 80% of your readers have made the Madoff mistake and not recognized it.

“If/when the dollar collapses, the losses Madoff incurred will be a speck of fly s%*$ compared with what happens to U.S. investors. Thanks for a great read.”

The 5: Amen.

For years, we’ve been sending our readers to EverBank, which has a truly unique array of products that help everyday folks attain true financial diversification. They’re currently putting the final touches on a product that’s garnered our attention: The MarketSafe BRIC CD. In short, it’s a principal-protected CD that allows investors to gain exposure to the real, ruble, rupee and yuan. If you’re interested too, stay tuned… details will emerge in the next few weeks.

(Our legal department would like to remind you that we have a business relationship with EverBank. We know that may shock you, but yes, we like to partner with people that sell useful things.)

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. The market is closed tomorrow, so we will take the day off as well. We wish you a revelrous Independence Day.

P.P.S. By the time we write you again, we may run out of Byron King’s limited-edition report -- Set for Life: Eight Keys to Getting “Miserable Rich” With Gold.

We only have a few handfuls left on our virtual shelves… grab yours here before we run out.

by Addison Wiggin & Ian Mathias

• The 5 wraps up the first half… can the rally continue for the rest of the year?
• Venture capital shrivels… Patrick Cox on why that’s a good thing
• ADP, John Williams suggest tomorrow’s jobs report could be a doozy
• China stops stockpiling commodities… Mayer and Amoss on whether you should worry

  Adios, first half of 2009. Quarters three and four, mucho gusto.

Although stocks drifted down yesterday, the S&P 500 finished the second quarter of 2009 with a 15.2% gain, its best quarter since 1998. Since March lows, the index is up nearly 35%. For all of 2009, the S&P is just above break-even.

So the obvious question: Where do we go from here? Was the second quarter a fluke -- a simple snapback of oversold stocks? Or a new bull market? For an answer, we sought out the “stars” of the second quarter… take a look:

Heh, let’s see: U.S. auto and manufacturing, financials, commercial real estate, retail, insurance and health care… all dead, dying, disabled or at least dubious sectors of 2009. Of all the 10 stocks you see above, only Ford is anywhere near a 52-week high. In other words, the leaders of the second quarter were the pariahs of the previous three. Are these the seeds with which market growth is sown?

  "The champagne cork-popping performance of the second quarter,” adds Eric Fry, "obscures a few trends that should be worrisome to the celebrants. First, the S&P 500 has gained no ground whatsoever since May 8, the first trading day after the Federal Reserve triumphantly announced the results of its banking sector ‘stress tests.’

“Second, the BKX Index of financial stocks has DROPPED more than 16% since May 8. As we have noted in prior editions of the Rude Awakening, the finance sector has been leading the overall stock market -- both to the upside and downside -- for the better part of four years. So the sluggish recent performance of the BKX index is probably not a ‘nothing.’

“Lastly, most gauges of investor sentiment -- like the VIX index of option volatilities -- are flashing readings of extreme investor optimism. Typically, as contrary indicators, such readings presage a market sell-off.”

  Even with the stock rebound, the second quarter was the worst quarter for U.S. venture capital investment since 2003. Overall venture-backed investment fell 57% from the second quarter of 2008, says Dow Jones’ VentureSource today. That’s roughly $3.6 billion worth of VC out of the market.

“Venture capital investment has all but dried up,” writes our tech adviser Patrick Cox. “There are two primary causes. One is purely psychological. In a steep downturn like this, investors who should know better get nervous and hold capital. The other, which will be longer lasting, is the ‘crowding out’ effect. With government debt at record highs, capital is being sucked up by the Fed to finance its borrowing.

“This, ironically, presents an enormous opportunity for the VC players who are still investing. With so little VC money on the table, those who are willing to make deals are making great deals. This is exactly the time to be in the VC business.”

Patrick’s service, Breakthrough Technology Alert, is a great way to enter the VC market without putting millions of dollars in play. He finds tiny, unknown stocks on the verge of technological breakthroughs… the kind of ground-floor investing that venture capitalists seek every day. For his latest breakthrough play, click here.

  But the venture capital market in Brazil is alive and kicking. VC investment has more than quadrupled there since 2004, says the Brazilian Association for Private Equity & Venture Capital today. The market was a measly $6 billion then. VC investment totaled $28 billion in 2008.

  The American private sector lost 473,000 jobs in June, says the oft-followed but questionably reliable ADP employment survey today. The payroll manager’s number came in well above the Street’s forecast of 393,000. In theory, that bodes badly for tomorrow’s government jobs report. The Labor Department is expected to announce 400,000 lost jobs and a 9.6% unemployment rate.

  “Based on underlying indicators, June employment/unemployment should disappoint market expectations,” forecasts John Williams. “From the standpoint of political and financial market needs, results near or better than consensus would be consistent with the current hype that ‘the economy has turned.’ The Bureau of Labor Statistics (BLS) can bring in the headline numbers anywhere that it desires, so odds have to favor such reporting, net of any prior-period revisions.

“That said, underlying employment indicators continue to show deteriorating circumstances, consistent with a payroll jobs loss of much greater than 500,000 and an unemployment rate increase of more than 0.2%…

• “May newspaper help-wanted advertising (Conference Board) returned to its record-low reading of 10, following an upside revision from 10 to 11 in the April index. May was down by 42.6% year-to-year change on a three-month moving average basis, with the revised annual decline in for April at 43.1%
• “A similar annual falloff pattern was seen again in the Conference Board’s nascent online help-wanted advertising measure for June, down 36.5% year to year, versus a 36.6% annual decline in new online help-wanted ads in May
• “Annual growth in new claims for unemployment insurance has remained near a record level, with the 17-week moving average up by 71.2% as of June 20, down from the near-term high of 77.0% hit in the period ended May 9. A year ago, growth was 17.8%. So far, the annual rate of increasing claims has remained just shy of the historical peak growth rate of 78.8% seen in March 1975
• “As reported for May, the employment readings for purchasing managers continued deep in recession territory for the manufacturing (May was 34.3, versus 34.4 in April, where readings of 50.0 and above are considered positive) and nonmanufacturing (May was 39.0 versus 37.0 in April) purchasing managers surveys.”

  Elsewhere in the data patch, some mixed signals:

American manufacturing is back to pre-crisis performance, says the ISM today. Their index of manufacturing activity rose from 42.8 to 44.8 in May, the highest level since September 2008. Still, a score below 50 indicates the sector remains in contraction.

  At the same time, construction spending fell more than expected in May. The Commerce Department says spending fell 0.9% last month, almost double what the Street expected. Spending in April in March was revised down, too.

  Another sign of life in the housing market: Pending home sales inched up in May for the fourth month in a row. The National Association of Realtors’ pending home sales index crept up 0.1% in May and is now up 6.7% from May 2008… not too shabby.

But we must add, the government is actively manipulating mortgage rates and home prices (like the $8,000 tax credit), and we still haven’t seen that wave of Alt-A and ARM resets touch land.

  The dollar’s trading range keeps getting smaller and smaller. The dollar index has been bouncing between 79-81 all week, and this morning rests at 80 on the dot. This kind of consolidation begs for a breakout move… we’ll keep an eye on it.

  The dollar’s foot-dragging has lead to a dull trading week for commodities as well. Oil’s been within a buck of $70 a barrel since this time last week. Today, it’s on the higher side, at $71.

Gold’s spot price is caught between $925-940. As we write, you can score an ounce for $938.

  Commodity bulls take note: China has stopped stockpiling nonferrous metals. According to Yu Dongming of China’s National Development and Reform Commission, over the last quarter, China has accumulated 235,000 tons of copper, 590,000 tons of aluminum, 159,000 tons of zinc and 5,000 tons of titanium. Because of this commodity grab, “nonferrous metals prices have rebounded," he said. “Given these circumstances, we don't expect the state will continue to build its reserves."

“I don’t know about the stockpile arguments,” Chris Mayer assures. “Seems too neat. There was a lot of stockpiling going on in molybdenum on the way up… and now the stockpiling is declining and the price is recovering.
 
“If all it took to forecast commodity prices was to peek through to stockpiling, then commodity investing would be easy. The real world is messier… Stockpiling happens when prices rise and when they fall. I don’t know how good a predictor stockpiling is. Count me deeply skeptical.
 
“The more relevant question is not so much about stockpiling, but how daily production has been taken out of the market.”
 

  “You also want to consider what Bernanke and Geithner will do to debase the dollar in the coming years,” adds Dan Amoss. “If you're a foreign creditor facing with this constant portfolio decision, which has higher marginal utility?:

1) US$2.32

or

2) 1 pound of copper

“The Chinese will probably go with No. 2, especially because copper (and oil, and iron ore) can be stored and used in infrastructure projects to keep the population somewhat placated with infrastructure jobs. Interestingly, we could actually see stockpiling/U.S. paper divestment accelerate if Chinese exporters remain in recession (which is likely).

“I think they'll be in the market to stockpile on every dip and diversify out of U.S. paper as discretely as possible.”

(BTW, we’re currently running a helluva sale on Dan’s Strategic Short Report. Its currently 50% off… details here. His readers pulled in an average 103% gain on 23 trades over the last 18 months. You should check it out.)

  Last today, several states failed to reach budget agreements last night. Arizona, California, Illinois, Ohio, North Carolina and Pennsylvania have still not approved their budget for 2010, in spite of last night’s deadline.

As a consequence, states will be scrambling to stay afloat… California will issue an estimated $3 billion in IOUs for various creditors this month. Pennsylvania state employees will get partial paychecks until July 24, after which pay will be withheld altogether. Good old Illinois has no plan for paying its employees or keeping the lights on.

Even some of the states that “succeeded” in approving a budget may have failed their constituents: Hawaii, Nevada, New Jersey and Oregon all approved substantial tax hikes.

  “I believe the state of California started issuing IOUs last Friday,” a reader writes. “The state cannot, by law, declare bankruptcy, but municipalities can. The absence of any state assistance will likely be the death knell for bondholders from municipalities like Vallejo and Stockton, where the tax revenue base is rapidly evaporating due to the massive decline in housing prices.

“I know for a fact that the Stockton assessor's office has been inundated over the last year with requests by homeowners to lower the assessed values of their homes. The assessor's office in Stockton is targeting completion of a round of reassessments by August, following which they will likely have to do it again. They are, in effect, writing down their tax base with each assessment. That does not bode well for their ability to meet bond payment obligations that were floated pursuant to budget projections assuming much higher property tax revenues.”

  “Reading the responses to your statement about the victims of Bernie Madoff,” another reader writes, “I must admit I was struck by the same sentiment. How could people put ALL of their investing funds in one place? Especially folk who have (had) millions to invest? My net worth does not require seven figures to tally, and I have it spread among three caretaker firms.

“There are many lessons to be learned from Madoff, but the 'eggs in one basket lesson' may be the main one. Second place would be 'Before you trust, verify.’ I think 'Trust, but verify' no longer applies in today's financial landscape.

“The 5 is the one e-mail where I read every edition. Thanks for the informational, and occasionally provocative, reporting.”

The 5: It’s our pleasure.

   “Regarding the Madoff victims, two proverbs come to mind,” writes our last reader:

“‘A fool and his money are soon parted.’

“‘If it sounds too good to be true, it probably is.’

“I have personally participated in both of these. There is nobody to blame but myself. To be sure, the people whose schemes I invested in are responsible for their deceptions, but I am just as responsible for allowing myself to be deceived. Hmmm, that brings up another proverb: ‘You can't con an honest man.’

“One final thought. Without citing the law, can anyone tell me the difference in Madoff's scheme and Social Security?”

The 5: Yeah, you don’t have to give Bernie your money.

Cheers,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• A day of reckoning… on eve of fiscal new year, states scramble to fill record budget gaps
• Have we dodged a Greater Depression? Chris Mayer with a compelling chart
• U.S. housing shows signs of life… a turn in the charts, and The 5's caveat
• Should you buy gold today? Jeff Clark presents a historic signal

  Today, June 30, 2009… another financial reckoning day.

Midnight tonight marks the end of fiscal 2009 for 46 states in the U.S, and various state constitutions require 45 of ’em to have a final budget by tomorrow morning.

Thus, 10 states are facing a true blue crisis -- California, Connecticut, Pennsylvania, North Carolina, Delaware, Illinois, Ohio, Indiana, Mississippi and Arizona do not have budgets in hand on the eve of the new fiscal year.

Of those 10, California and Arizona are looking particularly dire. Arizona faces a $3 billion budget shortfall, or around 30% of its annual budget. California needs to fill a whopping $24 billion gap, roughly 26% of its annual tab. Gov. Schwarzenegger says without a budget, he’ll be forced to start writing IOUs tomorrow to the state’s creditors… scary stuff. Once one of the richest states, California now has the worst credit rating of them all.

  “Whenever I talk about the Great Depression and compare it with what is going on today,” says Chris Mayer, “I get a lot of skepticism. I hear a lot of people say, definitively, ‘This isn’t as bad as the Great Depression.’

“What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! -- bread lines, Hoovervilles and hobos.

“Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

“Take a look at this chart, from economists Barry Eichengreen and Kevin O’Rourke. In terms of industrial output, we’re tracking the Great Depression’s path pretty closely.

That’s just one of several charts Chris recently shared with his readers. Unfortunately, we have neither the time nor space to run them all.

But for just $1, you could have Chris’ best advice for one month. We’ve been dishing out $1 one-month trials for Mayer’s Special Situations for the last 30 days, and at midnight tonight, we’re taking the offer off the table. If you’re even the slightest bit interested, it might be a long time before you get an offer on MSS this sweet… check out our $1 trial, here.

  Geesh… even the Queen is running out of money!

According to a report today from Sir Alan Reid, “Keeper of the Privy Purse” for Queen Elizabeth, her majesty will run out of reserve funds by 2012 -- her 60th year as Britain’s monarch.

Keeping Britain’s monarchy afloat cost the Queen (in reality, British taxpayers) $69 million in the fiscal year ending in March. That’s a $2.5 million bump from last year. What’s more, new expenses and decreased income “forced” the Queen to pull $10 million from her reserve fund. Should the status quo remain, that well will run dry in less than three years.

  The U.K. economy shrank 2.4% in the first quarter, its worst showing in 50 years. Like the U.S., the British government finalized its first-quarter GDP this week. But unlike the States, Great Britain revised its numbers down, to the worst quarter since 1958. Year over year, the U.K. economy shrank 4.9%. That’s the worst contraction since at least 1948, when British bean counters started keeping track.

  Back in America, a cause for celebration, albeit a very subdued one: The U.S. housing market has finally stopped accelerating into the abyss. Check out the latest from Case-Shiller:

Both home price indexes delivered an annual return of negative 18% in April, S&P and Case-Shiller report today. While that’s still a lousy number, it marks the third month in a row of flat-to-rising annual rates of return… neither the 10- or 20-city index has set an yearly record decline since January.

We hasten to note that home prices are still falling -- S&P/Case-Shiller say home prices are down roughly 33% from their 2006 peak. But at least “the pace of decline has moderated,” as S&P likes to say.

“Every metro area, except for Charlotte, recorded an improvement in monthly returns over March,” adds David Blitzer of S&P. “While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions. We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.

“The stock market bottomed in March and measures of consumer confidence have turned upward. This report shows that these better spirits are also appearing in the housing market.”

Funny Mr. Blitzer should mention consumer sentiment. The Conference Board’s measure of consumer confidence unexpectedly fell in June, the group reports today. Their index of consumer vibes slipped to 49.3, from a downwardly revised 54.8 in May… the Street was expecting a slight increase to 55. That’s the first fall in consumer confidence since April.

  Stocks advanced about 1% yesterday. While we’ve seen some big moves up and down over the last week, trading is range bound and volume is pretty light heading into the three-day weekend. In fact, for all of June, the S&P 500 has registered a measly 0.05% loss.

  Heh, feel like watching a fight? Then head over to AIG’s HQ for their annual shareholder meeting today. We suspect there might be an unhappy investor or two in attendance.

  The dollar index remains in a tight range. Yesterday it dwelled just below 80. Today, thanks to perverse market reasoning, the dollar index is up to 80.1… falling consumer confidence would suggest coming consumer withdrawal, thus the value of cash inches up.

“Dollar action is still the key driver for commodities,” writes our resource trader Alan Knuckman. “After a modest rise in the past two weeks, the dollar index has moved below 80 once again. A test of the December lows at 78 can lead to a BIG BREAK to last summer’s lows of 72. Rates are not going up anytime soon, and the dollar is still heavy, with continued new Treasury issuance scheduled to finance government projects and spending.

“This all bodes well for commodities, which, for the most part, are priced in U.S. dollars.

“Dollar goes down, commodities go up and energy prices will lead the way higher. Not to a destructively high price that chokes economic recovery, but to levels that send energy stocks on a bullish move and support the stock indexes with increases in their share prices.”

  Oil’s down two bucks today, back to $69 a barrel.

  If history is your guide, you might want to buy some gold today -- this last day of June.

“In our current eight-year bull market,” writes Jeff Clark for Casey Research. “June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

“However, keep in mind that these are price tendencies, and not certainties. There were Junes when gold was up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

“Don’t lose sight of where we are at this point in the recession -- in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment -- and markets -- could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

“How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.”

You can view Jeff’s full thoughts on the matter here. For our take, check out Byron King’s latest special report, Set for Life: Eight Keys to Getting “Miserable Rich” With Gold. He mentions some thinly traded stocks in this report, so we can only distribute so many copies… get yours before our virtual shelves are empty.

  Last today, a sign of the times: McDonald’s announced this morning its expansion in India. The world’s largest restaurateur has evidently dabbled in India with great success. Citing India’s rapidly growing middle class, McDonald’s now plans to add 25% more burger shacks. We’re especially impressed, since 70% of the world’s vegetarians live there.

  “I have at least a partial explanation for the numerous bank failures in my state,” writes a reader from Georgia, the state with the highest number of bank failures this year.

“For many years, Georgia had a law prohibiting a bank from opening a branch in an adjacent county. Hence, many small banks sprang up in every county and town in the state. The law no longer exists, and for decades, the rather tiny banks chugged along, but no more! They got caught up in the credit crisis, and defaults also, and thus are failing in large numbers. I would expect at least a few more. I don't really know about the Atlanta housing market -- things are not too bad here in Evans, Ga.”

  “I live outside Atlanta,” writes another. “From my understanding there are two main reasons why Georgia banks have failed in higher numbers.
 
“1) From my understanding, the banking/mortgage regulations in Georgia are very lenient in comparison to other states. I've heard it referred to as the ‘Wild West’
 
“2) Metro Atlanta was a huge spec home market and the builder/developer bankruptcies took the small banks down with them.”

The 5: We love those frontline perspectives. Thanks.

  “Your forecast yesterday made my jaw drop,” another reader writes, “with your comment about the Madoff victims... implying they were ‘fools’ with 'sob stories.'

“That sort of commentary is not only sickening, but inaccurate. The people who trusted Madoff may not have been financial experts in their own right, but that hardly makes them fools. They were lied to, deceived, misled. Hundreds of people at all levels were fleeced, and none of them deserved it, and the fact that you weren't among them makes you in no way superior. Show some compassion for very real people who lost everything.”

  “Wow, so it's the victims' faults in the Madoff rip-off!?” shouts another. “And every investor out there who has all those eggs in one basket (account) are ripe for the picking? Must be nice to sit on your high horse and wiggle your finger at all those who lost everything.”

The 5: Madoff victims have our pity. We take no pleasure in their demise. And it’s been a long time since we’ve ridden any kind of horse, let alone a tall one.

But sorry, we aren’t budging on this one.

“We cannot ensure success, but we can deserve it,” John Adams once wrote. That’s a theme tossed around our offices quite a bit, and the inverse is just as true.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. We say again -- this is your last chance to pick up a $1 trial month of Mayer’s Special Situations. At midnight tonight, the deal’s off. Really, it’s just a dollar for a month of Chris Mayer’s advice… why not give it a shot?

by Addison Wiggin & Ian Mathias

• House passes climate change bill… Byron King on what it means for America’s energy future
• Don’t ignore Iran… how their crisis could affect your portfolio
• Millionaires migrating… The 5 charts the great wealth shift of 2009-2013
• Madoff gets 150 years… and the SEC gets more money?

  We like to give issues of The 5 a theme once in a while. You might recall our “commodity issue” last week or “the everyman’s issue” earlier this month. We’ve got a theme for you today, but it doesn’t exactly roll of the tongue. Oh well, it needs to happen:

Welcome to a “hot-button issues we can no longer avoid” edition of The 5 Min. Forecast.

  First up, climate change. We’d love nothing more than to leave this debate to Al Gore and Wall Street Journal editorialists. And for the most part, we will. But as you know, the House passed their climate change bill late Friday, and the entire energy industry is targeted for reform. Here’s the rundown in case you didn’t get to read its 1,200 pages -- as all of our representatives in Washington surely did:

• Greenhouse gasses must be cut 17% by 2020 and 80% by 2050. Emissions from factories, power plants, refineries and energy distributors will make up most of the cut. The infamous cow fart emission cap was taken out
• A cap-and-trade system will cut these emissions. The government will issue a limited number of 1-ton permits each year, which companies will have to obtain if they wish to emit greenhouse gasses. Each year, the government will issue fewer permits. Thus, companies will have to clean up operations, use more green alternatives or invest money in “offset projects” -- like a paper mill planting more trees
• 12% of power from electric utility companies must be from renewable resources by 2020 
• New office buildings must be 30% more efficient by 2012
• The Congressional Budget Office expects the current rendition of this bill to cost U.S. households $175 a year. We’ve heard alternative estimates as high as $2,000.

  "Rome is burning," says our energy man Byron King. "Well, maybe not. This could alter our culture’s use of the metaphor. Burning Rome? Sorry, not without your carbon permit.

"After a millennium of merely tossing sticks and logs into burn pits, the Industrial Revolution was when mankind finally figured out how to use ancient forms of stored energy -- coal, oil and natural gas -- to build and maintain a vast manufacturing economy. In consequence of the carbon-fuelled revolution in productivity, the earth went from a population of about a billion, to near seven billion today.
 
"And now, per the House bill, our government has started on the way to reversing THAT Industrial Revolution. The new Big Idea is that there will be another, 'carbon neutral' Industrial Revolution, based on harnessing solar, wind and geothermal energy. Carbon is sooooo 20th century. Carbon neutral is the new black.
 
"The House legislation is 1,200 pages of special deals and giveaways, grafted onto a Soviet-style 40-Year Plan. (I should note that even the Soviets, for all their ambitions, worked in 5-year plans.) Cap and trade will be the largest tax increase in U.S. history. It's the triumph of the tax raisers, central planners and controllers, and an arrow into the chest cavity of free market capitalism.
 
"So with higher energy costs throughout the economy, plus an immense new level of state control over economic activity, can the U.S. -- at least as we know it -- make the transition to that mythical carbon-neutral energy economy? My hunch is no. Cap and trade will breed more problems, which will lead to more taxes and even more regulations. There's never just one cockroach. And while we live through the consequences of what's going to happen, there will be a lot of misallocation of resources throughout the economy.
 
"I hope your subscription is current to Outstanding Investments, because that's where I'll be showing you how to invest your way around the consequences of our national hubris."

Oil futures haven’t been fazed by the climate change bill. After all, it still needs to slither its way through the slimy halls of the Senate. Oil’s up $2 today, to $71 a barrel.

  Unrest in Iran could accelerate a global energy breakthrough, reports our tech analyst Patrick Cox. We’ve been avoiding Iran’s issues lately as well. While fascinating, and certainly dynamic, it’s just not our beat… or so we thought:

“The central tension in the Iranian situation is the nuclear issue,” Patrick tells us. “That country's autocracy is dead set on getting nuclear capabilities -- and not without reason. Iran does need nuclear energy to promote economic growth. Contrary to popular wisdom, the country's petroleum is not a good source of electrical power.

“The problem, of course, is that the technology being pursued by Iran can also be used to create nuclear weapons. This, naturally, worries a lot of people who fear the regime's threats to destroy both Israel and America might actually lead to war. Many Iranians, in fact, are unhappy about the nuclear plans of the country's rulers. Israel and Iran's Sunni Arab neighbors are also plainly anxious.

“Iran's relationships with the rest of the world would be an order of magnitude less stressful if it were not producing weaponizable fuels. This is why my sources tell me that thorium is enjoying a significant increase in interest lately. As we've discussed, thorium is not only a superior nuclear fuel from the technical and economic perspectives, but it solves the proliferation problem because it produces no waste products useful in weapons.

“Like every other sector, energy development has taken a big hit during this downturn… Ultimately, I believe, the superior nuclear technology will win out. In some ways, the financial meltdown has made pragmatism even more important than it was when tax revenues were flowing far more freely.”

Want to learn about Patrick’s favorite thorium play, along with the rest of his breakthrough technology picks? Check out Breakthrough Technology Alert.

  “Iran has a bigger place in the global economy than most people know,” adds Chris Mayer

“The first thing that I don’t think many people appreciate is how big the country is. The population of Iran is 66 million. That makes it the 19th most populous country on the planet -- more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth.

“Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Take a look the next chart, which shows the sharp growth in trade:

“Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

“Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. As Ilan Berman notes in a recent issue of the Far Eastern Economic Review: ‘Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing’s energy plans.’

“No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field. I am sure the Chinese are watching what happens in Iran with great interest. It makes for a complicated political situation.”

  The world’s rank and file of millionaires are in for quite a shake-up. Here’s some takeaways from our latest read: The 2009 World Wealth Report, by Merrill Lynch and Capgemini.

First, the number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world’s millionaire population, now at just 8.6 million “high net worth individuals (HNWI),” as Merrill puts it. The total worth of the world’s wealthy fell about $7 trillion last year, to $32.8 trillion.

North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. Of course, we’re still at the top… but for how long? Check out this chart:

We should hedge this chart a bit: First, it’s from Merrill Lynch… need we say more? They use some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years is the same kind of Ivy League MBA thinking that caused Merrill’s collapse and subsequent fire sale to Bank of America.

That being said, we wouldn’t be surprised if their forecast comes true. Simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans are millionaires. Only one in about 1,700 Asians can say the same.

(This would be one of many reasons we’re burning the midnight oil on a BRIC report, just for you… stay tuned.)

  Five banks failed this weekend, bringing the 2009 running total to 45. The five failures this weekend cost the FDIC another $264 million.

And what’s up with Georgia? Two of the weekend’s failures were there, bringing the Peach State up to 14 for the year -- the most of any state. We’ve been told the lending market in Atlanta was hit exceptionally hard by the housing bust… if you’re from the area, let us know what’s going on.

  Stocks are cautiously rising today after their first weekly loss since early May. The S&P 500 fell 2.6% last week, but as we write, it’s up about 1%.

  The dollar index is right were we left it on Friday, just under 80.

  Another sign of the times: Warren Buffett’s annual charity lunch sold Friday for 20% less than 2008’s price. Last year, a Chinese fund manager proudly bought the lunch for $2.1 million. This year, a currently anonymous Buffett disciple picked it up for $1.68 million.

 No economic data to speak of today, but the next three days of this shortened trading week are jampacked with juicy numbers. We’ll see new consumer confidence and Case/Shiller home price index details tomorrow. Then there’s ADP’s employment count, construction spending, the ISM manufacturing index, pending home sales and auto sales on Wednesday. Then Thursday -- the infamous Labor Department jobs report, where the unemployment rate is expected to reach 9.6%.

All interesting stuff… stick around -- we’ll keep you in the loop.

  Last today, one more issue we love to avoid: Bernie Madoff. He was sentenced to 150 years in jail today. CNBC spent most of their morning debating whether the 71-year-old should get 25, 50, 100 or 150 years in prison and recounting the sob stories of his victims… those fools whose mothers never told them, “Don’t put all your eggs in one basket.”

Our take: Why not park the cameras outside the SEC, instead of the ninth-floor courtroom in lower Manhattan? Where’s the outrage toward a government arm that scams us all -- our tax dollars in exchange for financial security… the kind that routinely arrives too little, too late. Not only is there no blood in streets in front of the SEC, but they’re on track to get more funding… crazy.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• The elephant in the room… government admits debt crisis just around the corner
• Bill Jenkins on the new reserve currency… and why BRICs should be careful what they wish for
• An oil reserve discovery “in the same scope as those of Saudi Arabia”
• Since it worked so well before: Congress pushes Fannie and Freddie to slacken standards
• Plus, Greenspan on inflation, your thoughts on Warren Buffett and more!

  It’s Friday… why not start with some good news? Americans are saving at the highest rate in 15 years. According to this morning’s personal income and spending report from the Commerce Department, the consumer savings rate is up to 6.9%, its best since 1993. Americans have stashed away an estimated $768 billion, an all-time high. Bravo… now if only our government would follow suit…

  “Under current law, the federal budget is on an unsustainable path,” begins the latest report from the Congressional Budget Office. The report, titled The Long Term Budget Outlook, was about as bad as you’d expect… maybe even worse. At the heart of the matter, this chart:

The CBO (which is a government arm, mind you) predicts that, under the most likely scenario, our national debt will exceed 100% of our GDP by 2023… 200% by the late 2030s. Man, who could have seen this coming?

In formulating their projections, the CBO used two scenarios. The first, the “extended baseline scenario,” assumes things will remain about the same over the next decade… all scheduled changes under current law will occur and all budget projections will be met. The second, their “alternative fiscal scenario,” accounts for budget changes widely expected to occur… like preserving Bush tax cuts for the middle class, reigning in the alternative minimum tax and failure to drastically cut Medicare costs.

Both scenarios paint a dark picture for our fiscal future. No CBO report has ever predicted this much debt, accumulated at such a rate. And we hasten to add, the CBO is assuming -- like the rest of the government -- that the worst of the recession is largely behind us.

  So can we stop this runaway train? Sure, says the CBO… but it won’t be easy. Even under the less severe scenario, “an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2% of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century.”

If we’re reading this right, that means Uncle Sam will need to cut spending or raise taxes by about $440 billion and maintain those adjustments every year for a long, long time. Under the CBO’s worse, more likely scenario, it’s closer to $740 billion.

  So are you really surprised to hear this?

“To prevent the deficiencies in the main reserve currency,” reads a report released today by the People’s Bank of China, “there’s a need to create a new currency that is delinked from the economies of the issuers.”

That’s right, another call from China to ditch the dollar as the world’s reserve currency. “Special drawing rights of the IMF should be given full play,” said the state-run bank, “and the international body should manage part of its members’ reserves.”

We took note a few weeks ago when Brazil, Russia and China cleverly announced an $80 billion swap of IMF bonds for U.S. Treasuries. Factor in today’s report from China and previous similar calls from Russia… perhaps the IMF will be the nexus of this monetary overhaul.

  “As BRIC nations have sent up a hue and cry for a supranational currency,” ponders our currency adviser Bill Jenkins, “I have to wonder if they have really learned any lessons at all. First, their complaints have centered around a single manipulated currency at whose mercy they find themselves. They seem to intuitively know that a fiat currency system is flawed. It is flawed because men are easily corrupted.

“But what is their solution? More of the same. Another fiat currency. Actually, a currency made up of a basket of currencies. This should really strike us as hilariously funny, if it weren’t so sad. And by sad, I mean stupid. It’s like draining bad oil out of a motor and replacing it with equally bad oil. Or like removing a tire that has a nail in it, only to replace it with one that is dry-rotted.

“What’s more, both India and Russia still receive foreign aid from the United States. They're rather like a rebellious teenager who takes potshots at their parents while holding out their hand for cash and car keys.

“Beyond that, consider that the BRIC nations hold over 30% of the U.S. Treasury market. That's a lot of eggs in one basket. So when they start grumbling about policy, they can really strike a fire. On the other hand, upsetting the basket breaks a lot of their own eggs.

“BRIC nations are still reliant on the American economy, as well as highly connected to dollar-based difficulties. So as they chop away at the tree, they had better be careful, lest it fall on them.”

Bill’s the man behind one of our newest services: Master FX Options Trader. He’s done a fine job guiding readers through profitable, easy to understand currency trades without the nail-biting leverage commonly associated with the forex game. If you’d like his help trading currencies, learn more here.

  “The oil resources off Brazil are in the same scope as those of Saudi Arabia,” adds Byron King. “The oil potential is huge. Beyond huge. It’s a game changer for the world of energy. No, the Brazilian resource doesn’t mean that Peak Oil is history. But it does mean that history is about to change. Indeed, the angel of history is favoring the nation of Brazil.

”The problem with the oil offshore Brazil is that the hydrocarbons are far out -- up to 200 miles into the open ocean. They’re under one-two miles of seawater, and then buried under three-four miles of rock and salt. It won’t be easy to define the resource, or to extract it. Still, the investment opportunities are there.

”One of the strongest investment sectors of the next 20 or 30 years will be drilling for oil and natural gas offshore, in the deep water of the world. Offshore Brazil is right on the cusp of a monumental oil boom. That deep-water offshore boom will eventually migrate to offshore West Africa, even more than the relatively near-shore development of the past 30 years. Eventually, the deep-water development will move into the Arctic Ocean.”

The title of Byron’s presentation at our Investment Symposium this year is “Is God Brazilian?” Heh, c’mon… how can you miss that?

  Oil’s down a few cents today, to $69 a barrel.

  The dollar is under some substantial selling pressure, thanks to the CBO’s report and China’s continued call for a new reserve currency. The dollar index has slipped under 80 again, a longtime level of support, to 79.8 as we write.

That bumps the euro back to $1.40, just off its weekly high. Ditto with the pound, at $1.65.

  “I see inflation as the greater future challenge," said the master of easy money himself, Alan Greenspan. "If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012… earlier if markets anticipate a prolonged period of elevated money supply.”

Of course, Dr. Greenspan was quick to offer his advice in his latest FT Op-Ed: “The U.S. is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation."

You know, don’t keep rates too low for too long or else it will simply fuel the next crisis… sound familiar?

  Today’s not so bright idea: Congress is urging Fannie Mae and Freddie Mac to relax its standards on condo mortgages.

Believe it or not, Fannie Mae made some smart policy changes back in March (though they would have been exceptionally more useful in March 2007). The company said it would not back mortgages on condos in developments where fewer than 70% of units have been sold, up from their old policy of 51%. Fannie Mae also decided to not guarantee mortgages in condo communities where more than 15% of the condo owners were delinquent, nor will they entertain condo mortgages in which one borrower owns more than 10% of the community.

Reasonable, don’t you think?

Not so, say representatives Barney Frank and Anthony Weiner. The two issued formal letters to Fannie and Freddie saying that such stringent practices “may be too onerous” and urged both companies to “make appropriate adjustments.” Otherwise, these outrageously conservative policies would have “a real chill on the ability to get these condos sold,” said Weiner.

Ugh… fools.

  No surprise, gold is up today. The spot price has inched up $10 from yesterday’s average, to $945 an ounce.

  The stock market -- not yet ready to address the looming crises we’ve mentioned today -- rallied strongly yesterday. The S&P 500 broke its three-day streak of dull trading with a 2.1% leap. As a matter of fact, that’s just enough to bump the index into the black for 2009… for now, anyway.

Stocks got a boost thanks to some good news from beaten-down companies… Lennar Homes and Bed Bath & Beyond both issued way-better-than-expected earnings reports. Also, Ben Bernanke managed to not incriminate himself while testifying before Congress about his role in Bank of America’s shotgun marriage with Merrill Lynch, and another auction of 7-year bonds went swimmingly.

  Jobless claims have suddenly popped to their highest level in a month. The Labor Department said yesterday that initial claims for unemployment benefits rose to 627,000 last week -- well above Wall Street estimates of 600,000. Rest assured, though, the government arm was quick to point out that the sudden jump was due to the end of the school year and subsequent teacher layoffs… since those kinds of job losses really don’t count.

Continuing claims for unemployment now rest at 6.7 million, just under the previous week’s record of 6.8 million.

  “Here's my bid for lunch with Warren Buffett: $3.50,” a reader writes, clearly none too pleased with the Oracle of Omaha. “That's for my lunch. I assume Uncle B. can afford his own. Bring your own Coke. And I want the CEO of Moody’s there. I have a few questions for him and his owner. Warren pays for his lunch too.”

The 5: Heh. That might get you a lemon wedge at Smith & Wollensky. Hope you eat a little beforehand.

It is worth noting that Buffett has gotten the pass from most major media outlets as far as his ownership of Moody’s is concerned. It’s hard to picture the lovable old fella at the top of one of the world’s most hated, most dubious companies. He told shareholders this year at the annual meeting that Moody’s “made a huge mistake, and the American people made a huge mistake,” and that’s about the closest thing to a mea culpa we’ve ever heard from him on the matter. Berkshire Hathaway still owns about 20% of the company… even after Moody’s stripped them of their AAA rating back in April.

And that charity lunch for Buffett is going for $456,000 as we write, just a hair above your three bucks and change, but down a whole lot from last year’s wining bid of $2.1 million. The auction ends later tonight… we’ll let you know the gritty details Monday.

Have a nice weekend,

Ian Mathias
The 5 Min. Forecast

P.S. Is your portfolio prepared for another market fall? Learn our favorite way to play the next leg of the bear market here… The Fear Factor Strategy.

by Addison Wiggin & Ian Mathias

• Fed sees the bright side… Bernanke says worst it over, inflation not a worry
• Warren Buffett can’t see any green shoots… even after eye surgery
• Alan Knuckman on how to survive a sideways stock market
• Byron King says now’s a good time to book profits on this sector
• Housing still out of whack… one chart foreshadows the market’s next move

  Take two days off and look what happens… the recession has bottomed.

At least that’s what “they” would have you believe. While we locked ourselves in our bimonthly editorial meeting the last two days, we missed some new “the worst is over” calls. Here’s the rundown:

  “The pace of economic contraction is slowing,” declared the Federal Open Market Committee yesterday after emerging from a two-day meeting of their own. Even though Mr. Bernanke and his brood say, “economic activity is likely to remain weak for a time,” the vibe from the FOMC statement was decidedly rosy.

Of course, inflation “will remained subdued for some time” and the group will leave rates near zero “for an extended period.” Same old story at the Federal Reserve. The rest of the Fed announcements were nonevents… new age lending programs and quantitative easing will neither increase nor decrease before their next meeting in August.

  Despite all the data out this week -- new and existing home sales, GDP, jobless claims -- only one has given the Street a jolt: durable goods.

Orders for items meant to last a few years increased 1.8% from April to May, smashing Wall Street’s expected 0.4% growth. Never mind that orders in the first five months of 2009 are down 27% compared to 2008… May’s number is another green shoot! Hooray!

“I get figures on 70-odd businesses, a lot of them daily,” said Warren Buffett yesterday. “Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true…

“I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.”

  Speaking of Buffett, his annual charity lunch auction is proving to be an annual sign of the times. Last year, the oversized $2.1 million winning bid for a lunch with Buffett came from a Chinese fund manager -- three times the previous year’s winning bid. This year, with only one day remaining, bids for the eBay auction are up to “just” $350,000.

  The U.S. economy didn’t contract quite as much as reported in the first quarter, the Commerce Department announced today, adding to the optimistic mood. The government arm finalized first-quarter GDP numbers today. Their initial report detected a 6.1% contraction. The first revision was a 5.7% fall, and now Commerce claims the economy shrank just 5.5% in the first quarter of the year.

  The OECD has drastically revised its growth expectations for the U.S.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said Jorgen Elmeskov, the OECD’s acting chief economist. The group now forecasts a 2.8% U.S. economic contraction in 2009 and 0.9% growth in 2010 -- a huge revision from their most recent call of a 4% decline this year and zero growth in 2010.

  As far as the stock market goes, we timed our two-day break well… since Monday’s swift sell-off, major indexes have gone nowhere. Despite all the data and the latest FOMC meeting, the Dow sank 0.2% Tuesday and 0.3% yesterday… yawn… stretch.

  “This sideways trade for the last few weeks is typical of summer markets,” writes our commodities trader Alan Knuckman, “even in an anything but a typical year for investors. Everyone is so conditioned for strong moves in either direction it has left many unable to handle an undefined trend.

“The stall has disappointed many market watchers -- with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend, and that’s where we’ll stay here at Resource Trader Alert.

“Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel -- with lows last week at the 899 level (as a support level) and highs at 925-plus -- is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets.

“For now, let’s wait and see what trend develops. Have some wine, and let the market sort things out.”

When the next trend emerges, will you know what to do? Have Alan be your guide, here… at Resource Trader Alert.

(For a closer look into the psyche of our resource trader, be sure to check out today’s P.S.)

   Commodities have succumbed to selling pressure. Since peaking at $987 in late May, gold has been in a state of steady decline. It found a temporary bottom early this week at $919 an ounce and has since inched back up to $935.

Oil fell from a recent high of $72 a barrel to as low as $66 this week. While the front-month contract has recovered to about $68 this morning, we detect a dark cloud forming over the sector.

  “Oil had a strong climb,” reports Byron King, “and pushed up over $70 per barrel just a few weeks ago. Then oil met with market resistance. So the price of oil retreated into the current $60 range. Could oil go lower? Yes, at least in the short term. Oil could drop back into the $50s, despite its traditional strength during the summer driving season. You might see gasoline prices pull back 10-20 cents per gallon, which will make that trip to the gas station a buck or two cheaper.

“A pullback like that in oil prices will take the steam out of recent stock market gains for oil producers and oil services. So if you want to take any oil profits, now is probably a good time.

“No, this is not a sell recommendation for the oil sector, or any company in the energy side of the Outstanding Investments portfolio. What I’m saying is that we might have a pullback in an otherwise long-term, generally rising trend for energy. Thus, if you are of a trading mind, then take your recent energy gains now. Book some profit, and hold onto the cash for later buying opportunities. Otherwise, don’t be shocked if the energy stocks take a summer swoon.

“Longer term? Oil is headed upward in price. That’s just plain baked into the cake. Half of the world’s daily oil use is now going to developing countries. And by definition, developing countries are… developing. They are using more and more oil, or how else do you think they are developing? So even if oil use in the developed world just stays flat, that oil will still find a market.”

Outstanding Investments remains one of the greatest values of our industry. If you’re not a subscriber, get with the program,here.

  The U.S. housing market is back to underperforming expectations. We saw the latest existing home sales and new home sales numbers this week -- both failed to meet the Street’s forecast.

The National Association of Realtors reported 2.4% growth in existing home sales Tuesday, to an annual rate of 4.7 million. The stock market -- no longer satisfied with meager housing growth -- wanted a rate of 4.9 million and suffered a small sell-off.

Even though sales managed to increase in back-to-back months for the first time since 2005, existing home prices are still plummeting, distressed sales are still booming and the market is still saturated with a 9.6-month supply of homes… a positive sign that the free market still works, but hardly reason to call a bottom.

  And new home sales are still slipping into the abyss. Sales of new houses fell another 0.6%, to a 342,000 annual rate, the Commerce Department said yesterday. That’s down 32.8% from last year -- we hasten to add, a time when the housing market was already in the dumps. Making matters worse, Wall Street analysts were calling for a 2% rise in new home sales. And like existing home sales, the price of new homes is still falling (down another 3%, to $221,600), and inventory is still at a lofty 10-month supply.

Check out this chart of new versus existing home sales. Both have historically moved in near lock step, with the exception of last two years. If this trend is destined for a “regression to the mean,” we wouldn’t be surprised to see new home sales level out and existing sales take a turn for the worse.

  The dollar’s still stuck in a range. The dollar index took a quick trip below the infamous 80 score yesterday after the FOMC’s announcement, but has since climbed back up to 80.6… not far from where it’s been for the last two weeks.

Today’s “take it for what it’s worth” dollar quote, from IMF chief economist Olivier Blanchard:

“For the U.S., it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar.” Hmm…

  “I’m a raving fan of The 5, but come on,” writes a reader, referring to Monday’s issue, “couldn't you muster a better defense of capitalism to the latest apologist?

“It is not capitalism that allowed derivatives and excessive debt levels. It is the distortion of a fractional reserve fiat currency system that is a statist addition to it that did. In a free market with a gold standard, every security bought must be funded with actual value, rather than leverage levels being allowed to explode. It is the printing press, credit creation and the statist monetary system, and not capitalism, that is the source of this crisis.”

The 5: Heh, well, there you have it.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. We feel obligated to share this photo with you, if only to legitimize Addison’s recent iPhone purchase. During our marathon editorial meeting yesterday at 14 West, the fire alarm sounded. The whole building cleared out to a nearby park. Most were content with a break… we’d been vetting our ideas nonstop for the last few hours, and the alarm was a welcome excuse to relax, grab some coffee, have a smoke, etc.

Not for Alan Knuckman, editor of Resource Trader Alert. We didn’t ask how many trades he managed to fire off during the 10-minute alarm, but it was quite clear that he was in the zone. You can take the man out of Chicago… but don’t expect him to stop trading:

Curbside commodity options, fueled by Big Gulp

P.P.S. Did you learn from 2008? If so, you’re actively seeking ways to hedge your portfolio from another market fall. We’ve gathered our favorite strategies for playing the next bear market here, in our latest special report.

by Addison Wiggin & Ian Mathias

• States on the brink… hard numbers on another crisis yet to come
• Chris Mayer on a recent energy crossroads, centuries in the making
• The end of an impressive streak… popular commodity rises for 54 days in a row
• Commodities and stocks sell off… Rob Parenteau on what’s gotten into Mr. Market
• Plus, Dan Amoss on the credit crisis: Can the free market be blamed?

  “These are some of the worst numbers we have ever seen,” said Scott Pattison over the weekend.

Who is Mr. Pattison? Not a man you should know, but certainly one worth listening to: He’s the head of National Association of State Budget Officers, and he’s rightfully freaked out.

The fiscal year will close in about two weeks for all but four states -- New York, Texas, Michigan and Alabama. The 46 others have until midnight June 30 to figure out how to wrangle the $121 billion budget gap coming due over the next fiscal year. That task is so daunting, states have stopped increasing spending for the first time since the S&L crisis in 1983:

Cutting state government spending by a whole 2.2% certainly won’t save our states. Personal income tax revenues are down 6.6% and cooperate tax revenues have fallen 15.2%. The proposed $24 billion in new state taxes and fees for the fiscal year 2010 won’t even cover a quarter of the projected shortfall -- a projection, we hasten to add, that’s counting on the recession to bottom sometime in the current calendar year.

We’ll keep an eye on this crisis yet to be. In the meantime, watch for some bizarre budget tricks. Proposals in various states include: Furloughs, pay cuts, park closures, early prisoner release (seriously), benefit cuts and odd new taxes (Kentucky is looking into taxing the purchase of cell phone ring tones.)

  California, the state in the most fiscal hot water, is in danger of a “multinotch” credit downgrade, Moody’s warned late Friday. The ratings agency, oddly still relevant, says that “if the [California] legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most nonpriority payments in July.”

If the Golden State can’t mend its budget woes, Moody’s is threatening a credit downgrade of at least two notches. California is already rated A2, Moody’s sixth highest grade and the worst of any U.S. state. A2 is also just five notches from “junk” status.

If California were a country, it would be the 10th largest economy in the world… and almost a junk bond? Scary.

  The global economy will shrink 2.9% this year, forecasts World Bank today. "The global recession has deepened," read a report from the group, which revised its March projection of a 1.8% global contraction.

(For a detailed look into this report, check out Joel Bowman’s sarcastic synopsis in today’s Rude Awakening.)

  “Energy consumption from non-OECD countries has passed OECD countries for the first time ever,” reports Chris Mayer, with BP’s latest Statistical Review of World Energy report in hand. “OECD stands for the Organization for Economic Cooperation and Development. There are 30 members. Essentially, it is a group of “Western” countries, including the U.S and U.K., along with several other European countries.

“Non-OECD countries include everyone else -- most notably, China, India, Russia and Brazil. So you can look at the OECD broadly as developed countries versus the developing countries of the non-OECD.

“The Asia-Pacific region alone accounted for 87% of consumption growth. China by itself accounted for 75% of the increase. Even through the economic bust, Chinese demand for oil still rose 7% in 2008.

“My guess is that these lines won’t ever cross again, unless the membership of the OECD shifts. The world has changed in a fundamental way. The focus is east, not west.”

  The price of oil is backing down a bit today, along with just about every other commodity. Barrels of light sweet crude are down to $67 a pop as we write. News like you’ve read above has taken its toll on the whole “global rebound” story… copper’s down 3% today. Aluminum’s fallen 4%.

  Gold’s under pressure today too. The spot price is down $15, to $920 an ounce.

  But today’s commodity sell-off has also snapped gasoline’s 54-day hot streak. The national average price at the pump rose every day for nearly two straight months, from $2.05 a gallon at the end of April to $2.69 this morning. That’s down 3/10ths of one cent from yesterday… whoppededoo!

  Stocks are in trouble today as well. The S&P 500 opened down about 1.5% this morning, as the same commodity-oriented companies that led the last leg up are now heading back down.

“Equity investors,” writes Rob Parenteau, “appeared to have recognized that rising interest rates and commodity prices might pose some challenges to the trajectory of any economic recovery they have begun to anticipate over the past few months. We have been discussing this feedback loop for several weeks now, as massive Treasury issuance and a shift in institutional investors toward inflation hedges do pose challenges to the extent they lead to rising input costs and greater consumer discretionary income drains.

“FedEx coming up short on revenues and lowering guidance for the upcoming quarter added some bottom-up confirmation that, green shoots aside, the reality is that the global economy is still struggling to escape a rather severe recession.”

  Another bad sign for stocks… insiders at the S&P 500’s 252 companies have been sellers of their stocks at the highest rate since the rebound began. According to insiderscore.com, execs at S&P companies have actually been net sellers for the last 14 straight weeks -- as clear a sign as any that insiders have little confidence in the next few quarters.

The site says the ratio of sellers to buyers was around 1-to-1 at the start of the rally. At the end of last week, the ratio was nearly 9-to-1. That’s the highest rate of insider selling on the S&P in two years.

  Despite today’s sell-off, Breakthrough Technology Alert readers are sitting pretty. They own shares of Medarex Inc., which is up 17% today after the company announced a successful trial on prostate cancer patients. Basically, the company’s breakthrough treatment allows aggressive, inoperable prostate tumors to be reduced to an operable size.
 
"Medarex currently has magic bullets,” editor Patrick Cox told readers back in December, “aimed at lupus, hepatitis C, rheumatoid arthritis, Hodgkin's and non-Hodgkin's lymphoma, leukemia, lung cancer, kidney cancer, prostate cancer, ulcerative colitis and other diseases… This company, I truly believe, has the potential to join the ranks of legendary earners such as Genentech.”
 
Breakthrough Technology Alert readers are now up 87% on this pick, thanks to Patrick’s recommendation. Medarex was just one of several stocks he mentioned in his recent special report on the future of medical technology investing… check it out here.

  Another Monday, another batch of failed banks. Three bit the dust this weekend, the FDIC announced, taking a $363 million chunk from the regulator’s war chest.

That makes 40 bank failures this year, costing the FDIC over $11.5 billion.

  The U.S. dollar is one of very few asset classes on the rise today. When the world sells, it gets dollars in exchange… thus, the dollar index is up about half a point from Friday’s low, to 80.7.

  “Friday’s reader comment and Addison's return shot,” writes a reader today, “causes me to wonder -- which fox is worse? While Greenspan toiled away at the Federal printing presses, Wall Street created funny money of its own. Even recent attempts by ‘Helicopter’ Ben to catch up to the Street's profligacy have been meager. Though the deficit numbers and acronymic (TARP, TALF) promises are staggering to behold, they pale in comparison with the obligations implied by the notional value of derivatives issued by the investment bankers. Put a number in front of 12 zeroes and hope that your counterparty doesn't call seemed like an easy way to make money. Having learned nothing about black swans (or even white ones) from the LTC brain trust fiasco, Wall Street and its less well-informed cousins in the insurance business bet scads of money it didn't have on products it didn't need (to paraphrase Bill Bonner).

“I don't believe the government will do a wonderful job of managing risk in the financial marketplace, but it may as well give it a try. It's obvious now that the average overpaid C-level managers didn't do very well at it. Since the Feds and, by extension, the public are funding the rescue, shouldn't we be able to dictate the terms?”

The 5: “The popular narrative,” Dan Amoss inadvertently responds in his latest Strategic Short Report, “is that that the financial crisis was a failure of the free market, but this narrative glosses over the fact that banking is far, far from a free market. Those who describe the banking business as a wild, woolly free market simply do not understand how banks operate -- especially how, with government subsidies and backstops giving them the confidence to make insane loans, banks had grown large enough to blow up the entire global economy.

“Last year was less of a failure of free markets than it was the failure of the ‘shadow’ banking system built on a weak foundation: bankers’ lack of connection with the risks they underwrote, government guarantees and tax incentives for mortgages and misapplication of statistics to exotic fixed-income securities, to name just a few things. The shadow banking system could not have grown as large and dangerous as it did without banks’ subsidies from taxpayers and the Fed’s manipulation of the price of money. The Fed’s interest rate targeting creates illusions about default and liquidity risks and distorts the natural relationship between savings and capital investment.

“The banking system shares much in common with the federal government, especially in their common isolation from the discipline of the free market; Free market discipline refers to the fact that if you make mistakes, your customers will let you know about it by leaving, and if you don’t reform and improve your product or service, you’re out of business. By promoting competition, free market discipline imposed on business has done more for ‘the little guy’ than any government handout by spurring advances in productivity and living standards.

“The banking system hasn’t been subject to free market discipline for decades, and it’s still not.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Bryon King’s latest report on gold investing is nearly out of stock. In it, he explains all the ins and outs of investing in gold miners, from definitions to screens to value traps… even what he calls “An Owner’s Manual” for junior miners. But since he also specifically recommends eight ways to play the next gold rush -- some of which are small and thinly traded -- we’re forced to limit the number of reports we distribute. Fewer than 150 remain today… get yours here, before we run out.

P.P.S. We’ll be taking a quick break from our daily forecastin’ tomorrow and Wednesday. Our editors and analysts are once again gathering at our Baltimore HQ for our bimonthly editorial meeting. Over the next two days, we’ll vet our latest and greatest investment ideas and economic expectations… much of which we’ll share with you when we return Thursday.

Until then, we suggest a ruder alternative to our daily 5 Min.
 

by Addison Wiggin & Ian Mathias

• U.S. government to make history yet again… record debt sale announced
• The 5 succumbs to peer pressure… a story you’ve begged us to cover
• Eric Fry on a curious connection: The “better” banks get, the more traders sell them
• Byron King asks, “Is God Brazilian?”
• 2009’s biggest IPO on deck… thousands of miles from the NYSE

   Ready to be a part of debt history? You’re going to be soon… like it or not.

  The U.S. government announced yesterday it will auction a record $104 billion in debt next week. Despite obvious warning signs that the world has had its fill of American paper, the Treasury will forge ahead: $40 billion in 2-years Tuesday, $37 billion in 5-year notes Wednesday and $27 billion in 7-year garbage on Thursday.

They must “get it.” Last week’s sharp rise in 10-year yields was as sure a sign as any that investors everywhere are getting cold feet. A prudent government would take a break… let things cool off. But there’s no rest for Uncle Sam, or his Treasury. They’ve got the mother of all Ponzi schemes to run:

The government chalked up a $189 billion budget deficit last month alone, another record and the eight-straight monthly deficit. We suspect they’d love to take a break from force-feeding the market notes and bonds, but they can’t… the Treasury will have to auction $2 trillion in debt this year just to keep the lights on.

(An interesting aside… funny how government savings started circling the bowl at the precise moment the gold standard was abandoned.)

  “Note the absence of 30-year bonds in this auction,” adds Dan Denning from his Aussie perch. “Whether by design or by accident, this confirms that U.S. borrowing is become a lot more interest rate sensitive. Creditors, we think, are beginning to shy away from lending to the U.S. at fixed rates for longer than 10 years. They want their money back before the value of their investments is inflated away by quantitative easing. This makes funding U.S. debt more expensive...and vulnerable to a spike in yields.”

  Speaking of Treasury notes, we can’t ignore this bit any longer:

“I want to know about the briefcase with the $134 BILLION in bonds,” a reader writes. “Read about the $134 billion?” asks another.

It’s pretty rare to see you writing in, begging for our comment on a story making rounds… between all our letters and e-mails, we suspect you get plenty of our thoughts as is. But you wouldn’t leave us alone about this one, so here we go:

As you may have heard,  two Japanese citizens were caught crossing the Italian-Swiss border recently with a suitcase full of over $135 billion in U.S. Treasuries. The story is as ripe with secret agent-style conspiracy… as well as shady details and too-good-to-be-true coincidences that commonly plague viral Internet hoaxes: The bonds were found in a sophisticated, false-bottom suitcase… some of the individual bonds were worth $1 billion -- a value only available to sovereign nations… the U.S. government claims the bonds are phonies… is Japan creating a secret black market to sell U.S. debt? Is it all an Italian Mafia scheme?  

True… fake… conspiracy… who knows? If anything, we’re impressed that so many people and news outlets even care to talk about it. If the whole world wasn’t worried about the future of U.S. debt, we doubt this bit would have made its way through the circles of viral Internet news.

BTW, if you’re planning a scheme like this of your own, maybe chose a different brand of paper money… the Treasury hasn’t issued tangible bonds in over 20 years. 

  Treasury yields have been backing down over the last week, thanks mostly to stock weakness. You’ll recognize this move from late 2008… when stocks start to falter, the Street piles into bonds, pushing yields down. The 10-year note arrested its fall yesterday at 3.69%, from nearly 4% a week before.

  Thus, mortgage rates are inching down again. According to Bankrate.com, a 30-year fixed has fallen to 5.76% from 5.95% the week prior. That’s a far cry from the 4-4.5% range the Obama administration has openly targeted. We’re not at all convinced we’ve seen the end of government manipulation here.

  Stocks scored some reasonable gains yesterday. Somehow emboldened by the government’s latest financial reform, traders bumped indexes about 1%. Health care stocks were notably outperforming, as doubts are beginning to circulate over how quickly or effectively President Obama’s health care reforms will come to fruition.

Today looks to be another day of mediocre gains, at best. It’s also a quadruple witching Friday… one of four days a year when options and futures on both stocks and indexes expire on the same day. The last hour of trading might be interesting.

  “Bank stocks have gotten worse, ever since the government told us things are getting better,” notes Eric Fry. “Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the "better than expected" results of its stress tests on America's 19 largest financial institutions.

“The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

“Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

“Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market -- both to the upside and the downside -- during the last year and a half.

“Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let's call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.”

  Commodities are jogging in place today. At $935 an ounce, gold remains in its recent range. Oil’s still at $71 a barrel, just off a 2009 high. 

  “The title of my talk at this year’s Investment Symposium will be 'Is God Brazilian?'” our resident oilman, Byron King, tells us. “So that ought to give you a clue about what I think lies under all that water column and rock down there.

“But whether you come to Vancouver or not, you need to know that the South Atlantic is one of the world’s greatest petroleum provinces.

“Some experts think that the hydrocarbon resources in the pre-salt formations off Brazil may rival those of Saudi Arabia in magnitude. We’ll see about that. But it’s beyond dispute at this point that Brazil and its energy resources are a complete game-changer for that nation, and the rest of the energy-consuming world.

“The big downside (and it’s big and down, to be sure!) is that today all that oil is under a mile or two of South Atlantic seawater, covered by three or four miles of rock and salt beds -- it depends where you’re located on the continental shelf and slope.

“But that’s why it takes companies with phenomenal technical and managerial skills, plus deep pockets, to play in this great game. The bottom line is that with the right companies working at it, there’s enough oil down there to make it economic to invest and recover. And that development is going to be the 21st-century national project for Brazil, and one key area of investment for Outstanding Investments.”

Is your portfolio prepared for a Brazilian oil boom? Check out Byron’s ideas on the matter, here.

  Brazil is also about to take the prize for the biggest IPO of 2009. Visanet SA is slated to go public on June 29, raising up to $3.6 billion in the process. Should the credit card company pull it off, it’ll be the biggest in Brazilian history and easily top the current largest IPO of 2009 -- China Zhongwang Holdings’ $1.2 billion float onto the Hong Kong exchange.

The Ibovespa, Brazil’s benchmark stock index, is up 36% this year.

  Keep an eye on the Chinese IPO market too. The Chinese government ended a nine-month moratorium on public offerings today. They halted IPOs late last year when the violent 60% sell-off was already flooding the market with unwanted shares… the Red Nation feared new offerings would just make matters worse. At the time of suspension, 37 companies were planning on going public, many of which we assume will be racing to do so soon.

The Shanghai Composite is up 57% year to date.

(BTW, we're hard at work in the back room assembling our network of analysts for a BRIC report. Stay tuned.)

The dollar’s been range bound for the last few days. The dollar index scores 80.5 as we write.

  “Firms like AIG and even JP Morgan,” a reader writes about financial reform announced yesterday, “with many tens or hundreds of trillions of dollars in derivatives could actually bring down vast swaths of the American financial landscape if the ‘invisible hand’ of capitalism were allowed to work its cleansing response.  As easy as it is to say that we should let the chips fall as they may, grotesque and violent mayhem would ensue, undercutting the very integrity of the republic. 

“Hence, we must have some sort of distasteful supervision of the natural propensity of capitalism to reach high baroque levels of extreme greed, just as we have laws against monopolies which too are the natural consequences of unfettered capitalism. The real question is who shall be the fox for the henhouse, and how to keep its hand lightly on the tiller, and then only when necessary.  Unfortunately, given the wily nature of the capitalist mind, and the members of Congress, we must settle for the inept 2,000-pound gorilla.  Rather than argue, as it seems you do, for no oversight, thought should be given to what might constitute the most effective version, under the circumstances.”

The 5: “Who regulates the regulators?” Addison Wiggin asks, unable to stay on the sidelines for this debate. “They were at least as culpable in the encouragement of speculation as any of the firms they're being given enormous authority over. Where's the logic in that?

“We’re all better off under rule of law and the enforcement of contracts… otherwise, free markets couldn’t exist. What we don't need is arbitrary and capricious rule by bureaucrats, which is basically what they're proposing.”

  “My God.  That must have been Bill Bonner impersonating Larry Kudlow,” a reader writes, responding to a video we shared yesterday. “Mainstream cable news spouting the Bonner/Wiggin religion? Could this be the contrarian indicator we have all been waiting for? Should we be backing up the truck and buy S&P calls until our lines of credit are maxed out again? Dead cats only bounce so high.  Keep up the good work.”

The 5: Heh, we don’t know what’s gotten into Mr. Kudlow. Frankly, he was a lot more fun in his“Goldilocks economy” days.

And we’d be happy to sell you all those S&P calls.

Have a nice weekend,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• The biggest financial reform of our generation… The 5 dives headfirst into Obama’s new plan
• Stock market sell-off pauses… Wayne Burritt with the next short-term technical target
• Dollar dips on new government reform… Chris Mayer on the near certainty of inflation
• Paul Van Eden packs some sober advice on gold
• Plus, feeling frustrated by the Fed’s free reign? A cause worth supporting, below

  Are we reading this right? The new president wants to give the Federal Reserve... more power?

The very body that’s easy credit policies over the past 15 years helped fulminate the largest speculative bubble in history… could soon oversee nearly every major company in the U.S.?

  In a surprisingly brief (for Washington standards) 88-page plan released yesterday, President Obama revealed the first steps toward the biggest financial overhaul since post-Depression reform. We could fill the next five minutes with juicy bits from the plan, but here are just the ones that made us choke on our morning brew:

• The Fed -- already the controller of money supply and interest rates -- will be given “authority and accountability for consolidated supervision and regulation of Tier 1 FHCs.” And what the hell is a Tier 1 FHC? Glad you asked… it’s ANY company “whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.” In simple terms, the Fed will become the master of all things “too big to fail”

We’re with you, Ben… scares us too

• The FDIC (and maybe the Treasury) could have a third option for failing companies. Not content with just the “big bailout” or “let ’em fail” options, the plan proposes to allow federal regulators to overtake failed companies and sell their assets to investors, much like the FDIC already does with dead banks
• The private sector gets the regulations you’d expect… higher capital requirements at banks, tighter borrowing standards at mortgage lenders, lots of restrictions on complex derivatives and so on… typical reactionary reform. But one notably absent smackdown: rating agencies will be untouched
• The Office of Thrift Supervision is the fall guy. The OTS will be abolished under the plan, thus taking the blame for nefarious companies it oversaw like AIG and WaMu. Years of free money interest rates from the Fed, all the blundering bailouts at the Treasury and the total inadequacy of the SEC will go unnoted. In fact, all three of those agencies are getting more money and responsibility. Par for the course in 2009… the bigger your failure, the greater your reward.

  And just one more… we can’t resist. A whole new bureaucratic arm will be created: the Consumer Financial Protection Agency. You see, it’s not our own fault that millions of Americans signed up for liar loans, high-interest credit cards and no-money-down adjustable-rate mortgages. It’s those damn predatory lenders! Thus, this new office will be tasked with saving us from ourselves. Best of luck.

  We’re premature in passing judgment on this reform. After all, it’s yet to pass through the slimy halls of Congress. When Hank Paulson proposed the three-page, carte blanche TARP, it came out of the Senate 448 pages heavier, with such memorable additions as the “exemption from excise tax for certain wooden arrows designed for use by children.” We’ll let you know how they manage to “improve” this proposal.

For more, and how you can voice your opinion on this matter, check out the reader mail at the end of today’s issue.

  Oy… even Larry Kudlow gets it.

  The stock market gave lukewarm approval to the new array of reform. Its announcement pulled markets from a loss to a flat close yesterday. And this morning, Tim Geithner’s explanation of the various regulations before Congress is helping pull indexes up to about a 1% gain.

Still, for the week, the S&P 500 is down 2.5%.

  “No market goes straight up,” says one of our options traders, Wayne Burritt. “That’s why pullbacks like the one we’ve experienced over the last few days are not only natural, but welcome.

“When markets take a break, they give new traders and investors a chance to jump in at lower prices. That provides new buying pressure for a new bull run down the road. Plus, they give traders a chance to bank some cash, another positive for sure.

“The S&P 500 has had quite a challenge getting and staying above the important 944 level. That level -- which the market first failed to eclipse on Jan. 6 -- has proved to be a stubborn resistance level. In fact, if you take a good look at the market’s action prior to the recent pullback, you can clearly see that 944 continues to be a sticking point.

“But here’s the key: While we’d love to see the market blow through 944, the fact that it continues to take shots at that level is a positive: Repeated attempts -- even if they haven’t yet succeeded -- are a clear sign that U.S. stocks aren’t about to give up. And that means it’s only a matter of time before 944 is history. And once that happens, hold onto your hats . The charge higher could be spectacular.”

If you’d like to be prepared for another leg up, Wayne’s Easy Money Options would be a great place to start. It’s an affordable, simple guide to the complicated options trade. Details here.

  Traders understandably sold the dollar yesterday. Right as President Obama announced his financial reform, the dollar index plunged half a point, to just above 80, where it remains today.

  “The dollar lost over 95% of its purchasing power in the 20th century,” notes Chris Mayer. “And arguably, that was during a century when it was harder to debase the currency than it is now, as the gold standard -- or some variation of it -- served to check government spending at different points along the way. It seems hard to do worse in the 21st century, but I think we will manage it.

“Inflation -- rising prices, or a drop in the purchasing power of the dollar -- will soon rise to the very top of economic concerns. I can’t understand why there are pundits who insist we can’t have inflation while the economy is weak. There are plenty of examples of weak economies with high inflation. After all, I don’t think they are hitting on all cylinders in Zimbabwe, where inflation is thousands of percent.

“As an investor, the way to bet is for the dollar to lose value as it has for a century. A couple of places that look to hold their value in the face of a dollar decline: agricultural goods and energy assets.”

You can find lots of those assets in Chris’s Special Situations portfolio… currently available for just one dollar.

  But just because the dollar is down today doesn’t mean the euro is sitting pretty. The euro is bogged down at $1.39, nowhere near its recent highs, thanks mostly to this:

  Banks in the eurozone could face another $283 billion in write-downs this year, warned an European Central Bank report this week. It’s latest “Financial Stability Review” found, well, anything but financial stability in the region. The ECB said “uncertainty prevails” over the whole system… hundreds of billions in losses could still be around the bend.

“Some news sources are reporting that the eurobanks’ toxic exposure liabilities are at $5.3 trillion,” adds our currency man Bill Jenkins. “Now, my figures, based on other research, were considerably higher, but if we take the more conservative stance, that $5.3 trillion is greater than the GDP of Germany, the eurozone's largest economy, and fully 25% of the whole ball of wax.

“And folks still feel they will fare well in a race against the dollar? I'm thinking I might leave my $2 on Uncle Sam's entry. Of course, I'm not a big U.S. dollar fan, but we're in this to make money. And pulling bets off a horse with a bum leg is a dumb move if you put your money on a horse with two bum legs!”

  This part we don’t get: Give the Fed -- the world’s most prominent debaser of the U.S. dollar -- extra power and gold doesn’t budge? Alas, that’s the case today… the spot price has been bouncing between $930-940 for the last few days.

  “My fair value of gold for 2008 was $763 an ounce,” Paul van Eden wrote in The Daily Reckoning. “Using the average of 2008 and 2009's inflation rates for the U.S. dollar, and gold's inflation rate for 2008, I come up with an approximate average value for gold of $815 for 2009. Please note that this is an estimate of the average value for the year, and not a year-end estimate.

“Clearly, the gold price is well above $815 an ounce, and has been so for quite some time. The macroeconomic environment has probably never been so obviously in favor of gold, and it is my belief that the market has already priced much of this into the gold price. While I fully recognize gold's lure at these times, and the probability that the gold price could still increase quite substantially, I remain cautious about gold. Recall that investors who bought gold when it was grossly overpriced during 1979 and 1980 and then forgot to sell suffered severe losses.

“I would personally prefer gold to sell down to around $800 an ounce, where I know it represents good value, than buy gold at overvalued prices and hope that it keeps going up.”

You can count on the same sober, well-reasoned advice from Paul at this year’s Investment Symposium, where he’ll be one of many esteemed speakers. Seats to our July shindig are filling up fast… reserve yours, here.

  Other commodities are struggling to forge ahead today. Oil’s stuck at yesterday’s price, $71 a barrel. Ditto with more industrial commodities like copper, lead and aluminum… all at a near-standstill.

  Standstill is the name of the game in economic data today too. The only A-list release, jobless claims, remained almost exactly at last week’s levels. Initial claims for unemployment benefits rose just a bit, to 608,000. The Labor Department said continuing claims fell a skosh, to 6.68 million.

That would technically end the remarkable 19-week streak of record-high claims for unemployment… but we’re not taking the bait so easy. The Labor Department pulled the same move two weeks ago, only to later revise their number and keep the streak alive. We’ll keep an eye out for changes next week.

  “Obama's plan,” a reader writes, “to give the Federal Reserve Bank the power to regulate the entire financial sector is completely outrageous. This is the classic ‘fox guarding the henhouse.’ I do not want a bunch of greedy private bankers getting any more power than they already have, I am talking about the private Federal Reserve, for those out there who don't know that the Fed is a private institution. Alan Greenspan admits on CNN's Larry King Live that the Fed is above the law. This is why Ron Paul’s bill to audit the Federal Reserve is so important. Its books have never been opened to anyone outside the Fed.”

The 5: We’re with you… support his bill, HR 1207, right here.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

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