May

9

Trade Deficit Narrows, Oil and Gas at New Highs, Buffett In Jail, and More!

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Trade deficit narrows more than expected… is the U.S. on a path to greater economic prosperity?
Dollar resumes losing streak… how the Fed’s latest deal is only making matters worse
Oil hits another record high… the events that sent crude to a stunning $126
Fuel prices at all-time highs too… airlines tack extra $20 on every flight
House passes housing bailout bill
Plus, Warren Buffett in prison? Details below…

The U.S. trade deficit fell by nearly 6% in March, to $58.2 billion. That’s good news, right?

Not really.

Imports declined by the greatest margin since 2001, the last time the economy was in recession. The U.S. bought a “mere” $206 billion worth of goodies from overseas in March of this year. The drop was likely caused by a pullback in consumer spending… and the rising price of energy.

Exports also broke the trend. After months of record high exports, the U.S. exported only $148 billion, nearly 2% less than the month before — the steepest monthly decline in exports since 2005.

And get this… the average price of an imported barrel of oil in March was only $89. That’s a record high, but it’s not even close to the $125 barrels you’ll read about below. The real effects of $100-125 barrels have yet to be felt.

Hmmmn… this dollar-debasement strategy is really working well.

The weary dollar abandoned its recent rally yesterday. The dollar index shed nearly a point, back to 73. The euro has edged a bit higher, into $1.54. The yen is a bit stronger too, at 103.

The British pound is out of sync with the euro lately. The two often move up and down together, but the pound’s been getting beaten all by its lonesome lately. It has lost 3 cents against the dollar since Monday. Today, the queen’s own money trades for $1.94.

The Fed isn’t helping matters much. The U.S. central bank exchanged $29 billion in prime AAA U.S. debt for worthless mortgage-backed securities yesterday. And this time around, the auction was expanded to include asset-backed securities, as well, like bundles of student loans.

The Fed could earn as much as $72 million in profits for the effort. Isn’t it nice to know they have the nation’s best interest in mind while they clean up Congress’ mess?

Oil hit $125 last night, another record high. Rebels in Nigeria are putting the kibosh on any meaningful exports from that country.

“There is clearly no shortage of oil in the market,” OPEC chief Abdalla Salem El-Badri says, defending his collective bargaining chip. “The turmoil in some global equity markets and the considerable depreciation in the U.S. dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher.”

Oy… make it $126. As we write to you this morning, light sweet crude is simply on fire. This week has seen the biggest percentage gain in oil prices in over two years.

Gold got a kick in the pants last night too, as oil set new highs. The metal rallied $20 in New York trading yesterday and kept the party going this morning in Asia. An ounce of the stuff trades for $886 as we write.

Work it.

The U.S. House of Representatives has approved a housing bailout plan. Yesterday, the men and women who ostensibly represent your interests passed a proposal sponsored by Barney Frank, D-Mass., to rescue homeowners on the verge of default.

It goes something like this: Congress would allow the Federal Housing Administration to insure $300 billion in new loans — but only on loans for which lenders have agreed to lower the principal. In reverse, homeowners in an overpriced home about to default would receive lower monthly payments. If the borrowers still default… Congress will pick up the tab. Rather, you and your kids will.

This is a little like Congress trying to get into the business of selling fire insurance to arsonists… with bad credit… whose homes are already on fire… and using your money to do it.

The bill still has to make it though the Senate. And President Bush has already promised to use his dusty veto on the thing. But just the fact that the House has enough dimwits to pass it ought to give you pause.

Gas is up to $3.67 today — a 3 cent jump overnight. Diesel is at a new high too… $4.25. We hope the conspiracy theorists are right… and the White House has enough control over the situation to correct prices before the election. Holy crap.

Airlines have to pay more for fuel, too. If you had the occasion to buy one this morning, a gallon of jet fuel would set you back $3.57… 78% more than it would have on this day last year.

Conversely, ticket prices have risen only 18% over the last year. So it’s not too big of a surprise to see the U.S.’s three biggest airlines have chosen to pass those costs onto you.

Delta, American and United all raised their fuel surcharge this morning by $20.

Since the first fuel surcharge last year, the three major airlines have tacked on up to $130 in extra fuel costs per ticket. In other words, if you find a cheap ticket on a long flight, you’ll likely pay more in fuel charges than for the price of your seat.

We nicked the chart above from The New York Times… nearly all of the fare hikes have some connection to rising energy costs.

After taking a breather last week, grains in Chicago are taking a run at new record highs today. Corn shot up to $6.20 a bushel, less than a nickel shy of its all-time high set in late April. Rice is now trading for $23 a hundredweight… that’s up 12% this week alone and rapidly approaching the $25 record set on April 24.

The U.S. stock market eked out some small gains yesterday… after getting abused on Wednesday. Traders bought shares on what seemed to be an absence of bad news. The only bright spot was a solid earnings report from Wal-Mart.

But judging by premarket trading this morning, traders have plenty of reasons to sell today.

AIG, the world’s biggest insurance company, laid down a disaster of an earnings report yesterday. The company reported a net loss of $7.8 billion in the first quarter.

Still troubled by bad investments and losses on credit default swaps, AIG says it will need to raise $12.5 billion more to keep its balance sheet above water. At least $7.5 billion of that will be raised in a common stock offering.

AIG shares fell 2% yesterday, over 10% after market and another 5% this morning. Throw in record-high oil, and the Dow opened down nearly 1%.

You’ll want to keep an eye on Citigroup today, too. Citi investors will meet to get the 411 from CEO Vikram Pandit at an “Investor’s Day.” A few wrong words from the new chief and Citi could get sent to the woodshed.

Finally, today, what the heck is this?

Susan Lucci and Warren Buffett conspiring in prison

Long story short, Warren Buffett appeared on the ABC soap All My Children today.

Lucci’s character, Erica Kane, got herself in some trouble… again. This time, insider trading has landed her in an orange prison jumpsuit, and she desperately needs financial advice from the only businessman she can trust: Warren Buffett, playing himself.

This isn’t Buffett’s first stint on All My Children. Agnes Nixon, the show’s creator, is a fan and has been an owner of Berkshire Hathaway shares since Buffett’s first year as the company’s CEO.

We’re not sure, but we think he wore the same suit in I.O.U.S.A.

“I pray I am not the only one asking this question,” writes a reader, “but when will I.O.U.S.A. be in my local theater? Or be available on DVD? I am one of the ‘great unwashed’ who have a busy job, a wife and kids and the other scheduling woes of most folks. I wish I could, but I can’t tool up to a film festival that runs for two days in a nearby city to catch this movie. I hope to see it on a regular run (one, two, three weeks), or in video stores soon. Will this happen?”

The 5 responds: Depends who you ask. The critics say the movie is akin to An Inconvenient Truth for the national debt, which you’d think would bode well for a wide theatrical release. But then you’d be thinking wrong. At last count, there were 11 attorneys poring over documents relating to the film. Our target is Aug. 15 for general release in theaters nationwide. But at this point, it’s anyone’s guess if that will happen.

Lawyers, we’ve come to know, are a lot like our comment about politicians yesterday. Except, of course, our own.

“The ‘smart’ countries know how to handle the coin clipping,” writes another reader, in response to our story yesterday about the U.S. Mint losing money on printing pennies and nickels, “yet keep the population happy: Punch out the middle of the coins!

“If they cost 25% more to produce than they are worth, then the hole is at least 25% of the volume. The idea will eventually catch up with coin production costs when only the rim will be produced. Then we are then left with changing the type of metal to a lower value and the hole becomes smaller.

“The hole has other uses that many of your clever readers will no doubt let you know. One is they can be threaded on a cord and hung around the neck, thus not only being coinage, but a necklace for those that require this type ornamentation.”

“Maybe it’s time to follow the lead of New Zealand,” writes another, “which did away with 1 cent, 2 cent and 5 cent coins altogether in 1989 and 2006. Charges at the POS are rounded up or down to the nearest multiple of 10 cents. Saves having to keep a pocketful of small change weighting your pocket down.”

“For 60 years now,” writes a third, “things made of metal have been remade of plastic. Why not our coins? Coins have no actual melt value, since it is criminal to melt them. Thus, while their metal value increases, their legal value decreases. So why not plastic? No temptation to melt, but best of all, no more embarrassing pocket jingles.

“And Congress has already provided a potential increased domestic supply of plastic… corn oil can be extracted before the ethanol fermentation process begins. And the best thing about plastic coins is that the Fed and Congress could no longer deny what their polices are doing to the country.”

“I have been arguing for nearly 10 years,” chimes a fourth, “that it was time to ditch the penny — long before it became truly worthless. I will not give or take them in any commercial transaction. I have yet to find a merchant who fails to forgive the couple of pennies over and I refuse them in change — won’t touch ’em.

“While we’re at it, let’s drop those wadded-up cellulosic petri dishes called ones. Love the antiseptic dollar coins — bacteria cannot survive on them, but they will last for decades. Paper ones last barely 18 months before wearing out and buy less than a quarter did 20 years ago, when no one objected to carrying a few coins.”

“It amazes me,” argues a fifth, “how upset people get when they hear that it costs more than a nickel to make a nickel. That might be a valid point if the nickel were used only once, but a coin can last decades. It would also be ridiculous to spend $30,000 on a car to drive to work only once, but if you consider you may drive that car back and forth to work for seven or eight years, it makes more sense, right?

“Exact same principle with the nickel.”

The 5: Except… what do you suppose the purchasing power of that nickel will be after seven or eight years? The currency isn’t a machine. If the Fed were to do its job right, a nickel would maintain its value over time. But under the current regime, it’s not only acceptable, but policy that a penny… a nickel… a quarter… a dollar all lose at least 2% of their value year over year.

Have a nice weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. We added another 30 attendees to Vancouver this week on the announcement that Jim Rogers will be joining us. If you know anything about investment conferences, you’ll want to join us this year. We’re hosting an event so stellar, we’re even surprised by it ourselves. Details within.

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