Agora Financial’s Rude Awakening

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Laguna Beach, California

• Wolves at the dollar’s door, time to stock up on real assets,
• When early week bulls turns to late week bears,
• Smart investors vs. hopeful ones, a “slow volcano” energy savior and
  more…

Eric Fry, reporting from Laguna Beach, California…

Few a few fleeting moments earlier this week, investors enjoyed the delicious
delusion that “the worst was over.” Bear Stearns reported smaller losses than
feared, Goldman Sachs declared itself utterly unscathed and “smart” investors
pronounced financial stocks a “Buy.”

Apparently, a large number of hopeful investors trusted the “smart”
investors. So lots of investors – both the “smart” and the hopeful – flooded
the stock market with “buy” orders on Tuesday and produced a dazzling 300-
point rally on the Dow Jones Industrial Average.

Celebrating this return to “normalcy,” the dollar also rallied, gold tanked
and Jim Cramer “boo-yahed.” Unfortunately, the delicious delusion dissipated
very quickly. A 76-point selloff on Wednesday, followed by a 121-point
selloff yesterday, all but erased the Dow’s earlier gains.

So here we sit, just about where we sat last Friday. And your California
editor is just about as anxious as he was last Friday. He has no idea whether
the early week rally signaled a new bull phase, or the late-week selloff
signaled a resumption of the bear phase…but he would vote for the latter
interpretation.

Why? Because he cannot ignore the worrisome implications of the image
below…

The quantity of asset-backed commercial paper outstanding (ABCP) is
plummeting. This phenomenon means that creditors are refusing to finance
asset-backed entities. That’s very bad news. As long as the ABCP market
continues to contract, stresses will continue to worsen thought the U.S.
financial system…at least that’s our theory, and we see no reason to revise
it.

As noted in the October 26th edition of the Rude Awakening, “A-B-C-P may be
the four most influential letters in today’s financial environment. The fate
of those four letters over the next few weeks will determine the fate of the
U.S. stock market and the U.S. dollar. The wellbeing of the entire U.S.
economy might also hang in the balance…

“The ABCP market is struggling mightily at the moment,” we continued. “Almost
no one will provide financing to an asset-backed entity, especially not an
asset-backed entity like a ’structured investment vehicle’ (SIV) that is full
of mortgage-backed securities (MBS).

“Since almost all the investors who comprise the free market refuse to
purchase ABCP,” we concluded, “the Federal Reserve has stepped into the
breach. In other words, the Fed is now financing the very same stuff that the
world’s private investors refuse to finance. What more do you need to know
about the gravity of America’s credit crisis?”

The ABCP market, which totaled nearly $1.2 trillion in mid-August is rapidly
disappearing. Already, more than $300 billion has vanished from this
marketplace, which means that asset-backed borrowers have been forced to seek
$300 billion of financing from somewhere else. The problem is; there isn’t
really a “somewhere else” that can provide such prodigious amounts of
credit…and there sure isn’t a “somewhere else” that can provide another
$800 billion of credit.

Only the Federal Reserve can provide credit out of thin air…and that’s
exactly what it has been doing. Since early summer, the Fed has been “re-
poing” larger and larger quantities of mortgage-backed securities. In other
words, the Fed has been buying MBS on a short-term basis, thereby providing
some much-needed liquidity to the U.S financial system. The Fed’s activities
might seem like a god idea for the financial sector, but they are a very bad
idea for the dollar’s value. Any activity that conjures up cash from nowhere
is an activity that undermines the dollar’s value.

So what does this all mean? We’re not sure what it ALL means, but part of
what it might mean is the following:

1) Many of the assets that back the asset-backed securities will be dumped
on the market. (This is already happening);
2) Some ABCP borrowers will default on their CP (this is already
happening);
3) Some money market funds that owned the defaulted CP will try to absorb
the losses (this is already happening);
4) Some corporations will provide replacement financing from their overly-
stretched balance sheets (this is already happening);
5) Interest rates will rise much higher for many forms of corporate debt
(this is already happening);
6) The Federal Reserve will step in to buy some of the asset-backed
securities no one else will finance (this is already happening), as the
nearby chart illustrates.

None of these activities would seem to enhance the dollar’s value or appeal,
as Byron King explains below….

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————————————————–

More Dollar Doom
By Byron King

If the dollar were an animal, it might be a lamb…a fluffy, adorable little
lamb…surrounded by a pack of wolves. The dollar is simply no match for the
vicious influences that threaten to devour it – influences like a Federal
Reserve that promises to combat every financial crisis with ample doses of
additional credit.

Over the past year, I have spoken with numerous business and financial
reporters in the U.S. and Canada. These reporters range from employees of
small-town newspapers to my much larger hometown chronicle, the Pittsburgh
Post-Gazette. I have spoken with representatives of industry trade
publications like Oil & Gas Journal, as well as reporters from The Vancouver
Sun, Canada’s The Globe & Mail, Los Angeles Times, The Associated Press and
the Dow Jones Newswires. In addition to the print media, I have also been
interviewed on many different radio programs.

Part of a recent interview with an Orlando, Florida radio station focused on
the immense losses announced by Merrill Lynch and Citigroup, and the
departures of the top managers of both firms. Merrill wrote down over $8
billion of bad financial paper, leading to a quarterly loss of nearly $3
billion. And Citigroup has massive losses that may be in the vicinity of $13
billion or more. These are mind-boggling numbers, yet my view is that we are
just seeing the tip of a few icebergs.

It seems that over the past few years, much of the financial industry loaded
up on bad debt instruments. I will not even dignify this rotten paper by
calling it some sort of “investment,” because there was and is essentially
nothing to back it up. There are entire portfolios filled with sub-prime
loans, initiated via “no documentation” loans against over-appraised
buildings on the far side of the railroad tracks. In other words, these are
worthless loans that will never see a dime of repayment. In many cases, these
loans are evidence of economic crimes.

When the banks and investment houses acquired these bad books of business,
the risk models that they used were pure guesswork. In the real world,
engineering has made complicated structures like bridges and skyscrapers
safer over time. But the so-called modern “financial engineering” has done
nothing of the sort in the economic world. It all goes to show that just
because the human mind can come up with an idea, it does not mean that people
should act on it, let alone back it with their funds.

At this point, it is all but impossible to value much of what the financial
houses have on their books. So the write-downs are just beginning. We believe
that there are greater losses lurking in the shadows for both Merrill and
Citigroup, and for many other banks and investment houses around the world.
Several well-known banks in Germany, for example, are on the brink of
disastrous write-downs. It is just a matter of time before these losses
become public.

While on the air in Orlando, the interviewer and I cracked a few jokes about
how Merrill Lynch’s Stan O’Neal is receiving a $160 million severance package
for departing in the wake of his troubled tenure. This huge sum is surely far
more than he deserves. After all, Mr. O’Neal took some big paydays over the
past few years when things looked good at Merrill and he was firing 26,000
people to juice up the bottom line. So why does he get the big bucks again,
on the way out the door, now that his ship has hit the rocks? Good questions.

Then the interviewer asked what I anticipate for the U.S. economy and how the
individual investor should protect himself or herself from the coming
turmoil. My reply was that I believe that the U.S. dollar is in a long state
of decline. This is going to be an ongoing tragedy because so many people in
the U.S. and around the world will be caught in the riptide as the value of
the dollar washes away.

Do you remember when you would walk into a store and the owner might have the
first dollar he ever earned in a frame, hanging on the wall behind the
counter? People were proud of their money and trusted it as a long-term store
of value. Not any more. Yet most people in the U.S. know only the dollar and
understand only the dollar and their savings and investments are almost
entirely in the dollar. So what happens when the value of the dollar just
disintegrates? It is painful to think of the hardship that is coming down the
road.

No one really knows how the decline of the dollar will play out. There is no
modern precedent for what is about to occur as the world’s reserve currency
evaporates in value. Literally billions of people rely upon the U.S. dollar
as the economic rock that holds up the foundations of the world economy. Yet
that rock is turning into loose sand. How does one save, let alone invest, in
a world where the value of the dollar is in irreversible decline? A declining
dollar is the same as the destruction of capital.

My advice is to load up on gold and other precious metals and mining shares
in companies that control real ore in the ground. While you are at it, also
go for the companies that own or control real energy reserves, such as oil
and gas, coal, uranium and renewable energy systems. You could also take some
of your dollars and convert them to foreign currencies, such as through the
investments offered by our friends at EverBank, with whom Agora has a
promotional relationship. One thing is for sure. To keep dollars as “just
dollars” is to guarantee losing purchasing power over time.

As if on cue, early this week, the British newspaper The Independent launched
a story with these words:

“A new phase in the credit crunch, one of ‘$1 trillion losses,’ seems to be
dawning. The crisis at Citigroup and renewed doubts about some of the world’s
leading banks disquieted stock markets on both sides of the Atlantic
recently, with the fractious mood set to continue.”

So there are a trillion dollars of losses yet to be booked…And a company
the size of Citigroup does not have the capital to manage itself as an
ongoing entity…And the prices for gold and oil are skyrocketing as the
value of the dollar declines.

My advice is to protect yourselves, dear readers. There are wolves at the
door.

[Joel's Note: As we publish today’s Rude, Byron King is busy taking notes at
a geothermal investment conference, researching ideas for his new service,
The Energy & Scarcity Investor. We’ll be featuring some of Byron’s insights
in this weekend’s Rude Awakening but, if you simply can’t wait to invest your
dollars in something “real,” you can take a look at Byron’s geothermal report
right here. The Energy & Scarcity Investor

P.S. Byron will be releasing a report with specific plays early next week.
Due to the nature of the company he’s recommending – in particular, its tiny
market cap – we can only release a limited number of reports. Already 20% of
them are spoken for, so you’ll have to be quick. Click Here For More.

———————————————————–

Rude Endnote: If you would like to take advantage of the EverBank CD that
Byron was referring to above, here’s a link where you can get all the
information you need to do so.

EverBank MarketSafe CDs: A CD Made of GOLD

Cheers,

Joel Bowman
Rude Awakening