The average being what it is, some did better, some did worse. The question now is whether a year’s worth of negative super returns will lead more people to explore the option of a self managed superannuation. There are already 378,000 self managed superannuation funds in Australia with 730,000 members, according to the Australian Tax Office.

To be honest, as an American, we know very little about Australian Superannuation. The whole idea of retirement is a Prussian concept courtesy of Bismarck that we don’t expect to survive the next thirty years. Nonetheless, we’ve been studying up, asking around, and shaking the trees, though.

At a basic level, Aussies are beginning to ask a simple question: can I manage my money better than a fund manager who charges a fee of 1.5% to 3% regardless of how my fund does? When markets go up, no one complains about performance. You hardly notice the fee when the share market itself is growing at double digits.

Also, the Super industry-which would very much like you to stay in actively managed funds-says that Super averages a negative return once every seven years. The sample size of this performance data is statistically very small, since Super’s only been up and running since 1992. In other words, there’s no real proof that investing for the long-term in shares is the way to secure your retirement.

So who is the best person so manage your super? Well, a doctor can help your manage your health. A mechanic can help you manage your car. And maybe a priest (shaman/rabbi/ imam/ psychologist, bar tender) can help you manage your soul. But when it comes to your own money, we reckon no one is going to care about it as much as you.

By the way, if you have thoughts or ideas on self-managed super, drop us a line at dr@dailyreckoning.com.au You’ll be hearing more from us on it in the future.

Is it really possible the RBA will signal its intention to lower rates in September when it meets tomorrow? Well sure. Anything is possible. Look at Keanu Reeves’ career. A string of lay-off announcements in the labour market and the weakest retail sales figure in six years may give the Bank evidence that consumer demand has slowed.

But so what? Has inflation slowed? Are prices rising less fast? Is money supply growing less fast? Those are the real important questions. Australia, like America, is now on stagflation alert. You can have slowing growth in the real economy (even recession) AND rising prices.

If you accept the premise that it was excess consumer demand driving inflation, then sure, lowering rates once consumer demand is logically consistent (if economically irrelevant). But if you accept the premise that inflation in Australia has its origins in money supply (not consumer demand), then the Reserve Bank will not pay attention to demand…but to its own open market operations.

In any case, it’s far from certain that the RBA will cut in September. A lot can happen in a month. It will be interesting to read the notes from the meeting to see what the Bank has to say for itself. If it looks like a rate cut is on the way, the share market will like it. Don’t expect bank credit to get much cheaper though.

It’s just four days to go until the Olympics begin. Was it just your editor, or did the travelling outfits of Aussie athletes look like prison jumpsuits, with those black and white stripes? Also worth watching…how China shows itself off to the world, and whether anyone wants to spoil the party.

It’s appropriate that the games are in China right now. The government their wants to use the games to show off China’s emergence on the world stage, something the Chinese people can be justly proud of. However the government itself is going to have a tough time showing off China while keeping protests out of the public and out of the headlines. Look here! Don’t look!

In terms of symbols though, it looks to us like Adam Smith’s invisible hand of market forces is giving way to the visible fist of State power in economic life. Globalisation has dispensed all of its advantages (lower prices in the developed world for manufactured goods, higher wages in the developing world.) Now come the disadvantages.

There’s a backlash growing. People all over the world aren’t so sure they want their uncompetitive industries exposed to foreign competition. After all, look what it did to General Motors in the U.S. Couple that with the bear market in credit-really the end of Age of Financialisation-and you have a growing sense of hostility toward trade and free markets.

This should make for some excellent buying opportunities in the share market over the next six months.

Speaking of economic and psychological cycles, we had a look at the Art Deco exhibit at the National Gallery of Victoria this weekend. What a great show. It was combination of industrial design, architecture, fashion, and advertising from the period between the World Wars.

Not that we know much about art, but we liked the clean lines, symmetry, and neo classical references in a lot of the Art Deco work. But as the name itself suggests, it was a period that focused on decoration more than function. But it certainly is aesthetically pleasing compared to a lot of the garbage you see in architecture and advertising today.

You also get a sense of optimism from looking at the buildings and advertisements. It was an exciting age, where new technologies like the radio, electricity, commercial aviation, massive ocean liners, and impressive sky scrapers captured the public imagination.

It’s also worth noting how commodities-intensive this kind of styling was. It used aluminium, stainless steel, glass and other metals. If there’s ever a nouveau Art Deco phase, it should be good for base metals prices.

Dan Denning
The Daily Reckoning Australia

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Source: Self Managed Superannuation Funds on the Rise

Just kidding. Obama looks like he has locked up the Democratic nomination today. Wall Street may not like the prospect of an Obama Presidency.

It’s kind of amusing to watch CNBC as analysts try to explain why the market has taken a sudden turn for the worse. Lehman Brothers is down 8%. Uh oh. GM’s monthly sales were off by 30%. Uh oh.

Of course none of this should have too much of an affect on Australian stock prices. The Reserve Bank elected not to raise the cash rate from 7.25%. The RBA concluded that the last eight rate hikes have made borrowing sufficiently expensive that household and business credit will not contribute to overheating in the economy. Phew!

But if people can’t or won’t borrow more, that doesn’t meant they won’t have more money in their pockets. There’s always an increase in income to drive domestic spending. That income—in the aggregate—comes from Australia’s record terms of trade, as we mentioned earlier this week. As far as we know, there’s not a lot the Reserve Bank can do about that. Wage pressures have to be building.

The share market didn’t find the rate news much of a relief from the weakness in U.S. financial stocks. The Aussie financials were down and so were the miners. If the miners and the banks are down in Australia, the index is down. The only exception is energy, where Santos is making waves in the LNG market.

For the record, we still think banks stocks are dogs. Globally, banks continue to de-leverage and raise capital. You might make a spirited argument that the worst of the housing-related losses have been taken. But, even if that point were generously granted, you’d still have to ask where in the heavens bank earnings are going to come from?

The only possible answer is that the credit cycle is reversing and interest rates are headed lower. This may possibly be true in Australia. But it can’t possibly be true anywhere else in the developed world. The ECB remains hawkish. The Fed never got tight in the first place. And the Bank of Japan is in no position to raise rates with the Japanese economy in a fragile state of expansion.

So once again, Australia is the weird looking kid on the global block, with a cycle that seems to be at odds with everyone else’s. What will it mean for the Aussie dollar? Well, the RBA won’t cut rates until it sees signs that inflation is slowing down. And it’s going to be months before that happens (if it does happen, that is.)

In the meantime, you’d expect traders to sell the Aussie dollar if they don’t think interest rates are headed higher. Yet that did not happen en masse yesterday. On the economic front, building approvals were up 7.8% on a seasonally adjusted basis. This gave the Aussie a little nudge and countered the prospect that interest rates may have topped out.

Since we’re going on the record today, we can’t see the Aussie getting a lot weaker against the greenback this year. The rate differential between the two currencies favours the Aussie. And if rates aren’t driving the pair, then it would economic growth.

You can go ahead and forecast a bottom in housing, a top in oil prices, and a major rebound in the U.S. in the second half—all of which would drive the greenback higher and probably lead to a significant rally in U.S. stocks (and selling in BRIC and emerging markets, including Australia.) But it is easier to write out that scenario and actually believe it.

Still, there are some folks who believe that the U.S. is scraping along the bottom, albeit in prolonged fashion. We think these people fail to realise that the world is witnessing a structural reallocation of capital away from Western markets and toward developing markets. Granted, this theory allows for big rallies in U.S. shares.

However, for our money, it’s best to focus on the long term compound growth in earnings available in the emerging and developing world, than trying to trade rallies in the U.S. stock market, where a decade of managing corporations for short-term profit has put U.S. companies on the back foot in global competition. The game has changed.

There was more perplexing news on the economic front. Australia’s current account deficit was up 4% to $19.49 billion, according to the Australian Bureau of Statistics. The deficit on goods and services rose by $1.4 billion, or 22%.

It’s pretty strange that you have a country in the middle of arguably the greatest export boom of all time—and you’re running a current account deficit. The trouble is, despite its continental size, Australia is small in terms of population. It is hard for an economy of this size to produce the diversity of goods available in the world. There are not enough human resources for a truly diverse economy.

And with globalisation, why would you produce things locally you can buy on international markets? There are some things you want to do locally so you don’t have to rely on trading partners (energy, food, banking). But Australia’s trade and current account deficits seem to be structural in nature. The country will always import capital goods, textiles, and consumer electronics—things not likely to ever be made competitively in Australia.

Is it time to look at base metals again? Zinc, lead, nickel, and copper all came off the boil last year. Meanwhile, energy and bulk commodities (coal, iron ore, phosphate) all zoomed ahead. But now, maybe things are heating up in the base metals again.

Melbourne-based Jervois Mining announced that is has been approached by a Chinese consortium to develop the Young nickel deposit in NSW and produce 50,000 tonnes of nickel a year. When we get back to Melbourne next week, we’ll ask Gabriel and Al what they think of base metals prices and base metals stock and report back to you.

Dan Denning
The Daily Reckoning Australia

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Source: Australia’s Current Account Deficit Up 4%

So, this morning, we write to you in a puddle of our own regret. We lacked foresight, and water-proof pants. We’ll try to exhibit a bit more of it as we map out where the money is today (foresight, not water-proof pants).

Foresight, of course, is a quality everybody wants and nobody has. Who couldn’t do with a little more of it? It’s one of those constants that you always need to constantly invest well…foresight, hard work, patience, a bit of luck here, some good timing there.

Meanwhile, the only news that matters in Australia today seems to be takeover-related…

Western Juniors Could Create 4th Biggest Iron Player in Australia

Here’s some foresight. Investors who jumped on the iron ore train are getting their dividends. Yesterday Murchison Metals (ASX:MMX) gave iron cousin Midwest (ASX:MIS) an all-share merger offer worth . The market loved it. Midwest leapt 12.3%. Murchison flew 8.3%.

Everybody won, except Sinosteel. The Chinese giant was closing the net around its prey, Midwest. The nerve of another prey to go and outdo it.

Together, the two iron diggers would have a market cap of AU$3.2 billion. That’s bigger than Portman (ASX:PMM), Mount Gibson (ASX:MGX) or the other second-tier contenders. It’d leapfrog the companies up to fourth place in the industry, behind Fortescue (ASX:FMG).

The structure of the deal, though, tells you a little more about the whole matter.

Sinosteel already has 19.9% of Midwest. That’s the maximum you can own without bidding.

In a direct response to the stake, Murchison has proposed a reverse-takeover. It has offered itself up as a sacrifice to the deity of iron ore. Under Australian corporations law, a reverse-takeover means the deal only needs 50% acceptance from Midwest shareholders to go through. Otherwise, a standard takeover would’ve meant a minimum of 75%.

Ergo…the two do not want to be bought. Not by China. Not at any price near what Sinosteel is offering. The Australian iron sector is combatting external consolidation with internal consolidation. Both mean share prices are going up. Here the five top juniors’ performance this year. They’ve made gains of between 21% and 65%.

Midwest’s management has recommended that shareholders accept the deal. You’ll find out in the next three months what they think of it.

You’ll also find out exactly how desperate China is to get its paws on our iron. The ball’s in your court, Sinosteel. The company will most likely withdraw, and reassess. Perhaps it’s content to pay huge spot and contract prices for iron in Asia. Or perhaps it’d like to own the next best producer after Fortescue.

St George Accepts Westpac Bid…Almost

A much bigger takeover is slowly plodding towards the finishing line. St George (ASX:SGB) signed a scheme of agreement with Westpac yesterday. It had prudence enough, though, to add some fine print to the contract. We’ll do a deal you, Westpac. As long as your shares stop dropping

So far, Westpac’s bid is 10% smaller than when it came into the world. The stock is at a year-low. If the fall that began last week in the All Ordinaries accelerates, Westpac’s shares may continue to erode. Maybe the finishing line is a little further away than we thought.

Two takeovers are evolving parallel to each other. There’s the iron story in the hard-asset market, and the banking story in the financial sector. Both are mergers, involving shares only. No cash. Analysts tell us that the prices are good. Yet the parties involved have reacted entirely differently.

Midwest said “Yes” and left it that. St George said “Maybe. Just don’t let your share price fall.”

Sadly, Westpac doesn’t have a lot of control over that. And those two reactions might reflect the underlying businesses, we reckon. Iron ore miners are willing to jump on the front foot. They’re merging to create more scale in a growing industry. Banks are on the back foot. They’re merging as a defense against falling earnings margins.

Westpac’s interest margin has fallen from 2.6% in 2003 to 2.25% last year. It won’t have improved since the last report, filed in November. Bankers aren’t making as much as they used to. That’s the bottom line. There are better companies to invest in.

Al Robinson
The Daily Reckoning Australia

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Source: The Fourth Biggest Iron Player in Australia

It’s an acronym for the emerging economies of Brazil, Russia, India, and China. Goldman rightly believes these populous nations will be far more prosperous and powerful in 2050 than they are today.

A long-term commodity bull might say, “Forget the BRICs… Give me the ABCs.”

The ABCs in this case are the ultimate destinations for resource investors… Australia, Brazil, and Canada. Each is blessed with awesome energy, metals, and agricultural wealth… and each ABC currency is soaring right now. Our chart of the week is the “A” currency of the group, the Aussie dollar.

Due to the soaring prices of coal, gold, copper, uranium, oil, iron ore, and natural gas, the Aussie dollar has climbed 50% since 2002. This is a huge move for the currency of a stable nation… and another sign the age of the ABCs is here.

Source: Forget the BRICs, It´s the Age of the ABCs

The news that’s all the rage today is Westpac’s $19 billion bid for St. George. It would create the biggest bank, by assets, in Australia. So… should we care? Big five? Big four? Big deal!

Is it a big deal if you’re an investor? That depends on whether you believe the banks are a buy. If one bank is buying another bank, then at least one bank thinks banks are a buy. But why? And is what’s good for one bank good for the investor?

The question, as always, is where earnings growth is going to come from? In that light, the Westpac move is all about growing the loan book through acquisition. Growing the loan book means putting more Australian in debt. We’ll get that in a minute. But let’s take a quick look at the details first.

First, if you exclude non-recurring items, cash profits at Australia’s big five banks grew by just 1.1% in the first half of 2008 compared to the year before. During the biggest credit crunch of the last thirty years, that’s not awful. But it’s not good either. By the way, all the data that follows, unless otherwise indicated, is taken from the KPMG survey “Major Banks: Half Year 2007/08.” It’s an excellent read. Seriously.

Aussie banks didn’t face massive losses from bad housing loans (although at least one bank, ANZ, took big losses on loans to stock brokers). So what ate into profitability? The “net interest margin” declined for all five banks in the first half of ‘08. The interest margin is the difference between what Aussie banks pay to borrow and what they pay out interest on deposits.

The credit crunch has raised the cost of “wholesale borrowing.” ANZ’s interest margin decline from 2.24% to 1.99%, Commonwealth Bank’s from 2.22% to 2.17%, NAB’s from 2.33% to 2.18%, Westpac’s from 2.25% to 2.05%, and St. George’s from 2.07% to 1.92%.

So here’s the question, dear reader: if you’re making less money lending money because the cost of money has gone up, how do you make more money? You make it up on volume.

Despite the decline in net interest margins, total net interest income actually increased by 9.8% in the first half to $17.6 billion. The banks managed that by growing assets by 19.9% in the first half compared to ‘07. Growing assets by that much is an accomplishment during a bear market in credit. How did the banks do it?

The banks grew their lending portfolios by 16.1% in the last twelve months ended March. Consumer lending (housing, credit cards, personal loans) grew by 11.2%. Business lending grew by 24.5%. Total bank assets in Australia now exceed $2 trillion.

Now THAT’s how you grow your way out of a credit crisis. You lend more. It could, of course, be troublesome if you look at bank assets as other people’s liabilities. Debt levels are already high at the household level. For banks to grow assets, household debt levels would have to grow even more and business borrowings would have to rise as well.

The trouble with growing your assets to drive your earnings is that you take increased credit risks to do it. This was the problem for the Government Sponsored Enterprises in the States and led to massive blow outs in their balance sheets (the regulators came in late to restrict the growth in balance sheet assets).

Eager to drive earnings and please shareholders (and make some money on stock options tied to earnings growth) bank managers in the States grew the balance sheet with little to no regard for asset quality. That is one simple explanation for how a mortgage lending bubble gets started.

Here in Australia, if banks are going to continue growing assets, the housing boom will have to keep booming. This is problematic too, with housing already so unaffordable. For example, the Australian Bureau of Statistics reported today that the number of home-loan approvals fell by 6.1% in March.

Higher interest rates are discouraging demand for housing loans. Yet the banks have to loan more to make up for declining margins. But the more they loan, the bigger the risk they take that the loans will be non-or under-performing.

Is there any way out for the banks? Well, they could hope for an increase in net interest margins. This would lead to a decline in the cost of borrowing money. The banks could leave the interest rates they pay on deposits fixed, and benefit from the lower cost of funding. An end to the global bear market in credit would help, then.

Of course, there’s another way banks can grow earning without growing loan volumes. You know it well! Fees!

If profitability on loans is declining (and it is), the banks could make it up charging you more fees (not that they would ever do that). The growth rate in bank fees has actually declined, if you peruse the data from the Reserve Bank. But bank fees, as you can see from the chart below, contributed nearly ten billion to bank’s income in 2008-basically half of a full year’s profit.

Source: Reserve Bank Statistical Tables, Domestic Banking Fee Income, Table F6
http://www.rba.gov.au/Statistics/Bulletin/index.html

There’s consolation in that massive income from fees if you’re a bank shareholder getting a dividend and some capital appreciation. But if the worldwide model of growing asset values through debt is under massive attack in the U.K. and the U.S., then why would it be terribly different in Australia?

I’ve made the trip several times now on my way to Singapore and other destinations in Asia, Europe, and Africa.

Out the plane window, it looks like a lot of nothing… But all that space you fly over between Melbourne and the northwest coast… now that’s what today’s investor needs to know about.

In America, some people jokingly call it “flyover country,” as if everything between New York and Los Angeles was just an afterthought.

America’s so-called “flyover country” is home to rich corn and wheat fields, the massive coal deposits in Wyoming, the remnants of the Mesabi iron range in Minnesota, and of course, what’s left of the producing oil and gas fields in Texas and Oklahoma.

Australia’s “flyover country” today is on the verge of the same kind of boom that took hold in America 100 years ago. You see, Australia is home to nearly all the valuable mineral and metal deposits needed for the industrialization of China and India.

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Australia ranks No. 1 globally in Economically Demonstrated Resources (EDR) of zinc, nickel, lead, thorium, tantalum, and mineral sands (rutile and zircon). It ranks in the top six EDR for bauxite, black coal, brown coal, copper, gold, iron ore, manganese ore, niobium, silver, and uranium. The Olympic Dam Mine (in South Australia) is home to nearly 476,000 tons of uranium – 18% of the world’s known reserves.

Let me be clear, though. It’s not just what Australia is capable of producing that excites me so much. It’s what the country is already producing. Amid rising commodity prices, resource producers in Australia are benefiting right now from the scorching supply/demand dynamic.

Export earnings from Australian commodities should rise by 30% in 2008, thanks to demand for iron ore, coking coals, gold, and crude oil. And Australia is the world’s single largest shipper of coal, iron ore, and wool.

As an investor, you must pay attention to two factors at work here. First, many small and unknown (at least in the U.S.) Aussie companies are sitting on assets that are rising in value. That alone is extremely bullish.

The second factor is that the companies that own the assets and can produce them will almost surely report massive earnings growth in the last three quarters of 2008. The stocks of these producers – based on our analysis – don’t fully reflect that earnings growth.

It’s clear that the bull market in resources is alive and well. I see three main factors driving this bull market. The first, as you probably know, is that commodities are coming off a low base. The bear market in commodities lasted 20 years. The second reason is supply has still not caught up with demand. A decade of low commodity prices resulted in chronic under-investment in new productive capacity. The third factor is what makes this resource cycle different from the rest – it’s the strength of new demand from China.

How can you participate in this opportunity in Australia’s resource stocks?

Of course, you can buy the big institutional favorites, like BHP Billiton (BHP). But I think the really huge money will be made here by owning junior miners and mining infrastructure stocks.

The iron ore juniors and coal companies aren’t hated, like my friend Steve Sjuggerud likes to see… but they are even better… unknown! Throw in cheap and at the beginning of an uptrend, then you get two out of Steve’s three factors.

The nice thing about the resource sector here is that there are far more stocks than analysts. With all the underlying resource prices in an uptrend… it’s just a question of who’s willing to do more homework to find small companies with economic resource assets.

I think the opportunity in small Australian resource shares is so exciting, I actually moved here to learn as much as I can and find the best investments. While I don’t expect you to do the same, I can encourage anyone interested in making money in resource stocks to become familiar with the place immediately.

Good investing,

Dan Denning

P.S. I’ve just completed a full report on the best opportunities in Australian mining stocks. I guarantee you won’t find in-depth research on these companies in the U.S., which makes them an outstanding, undiscovered way to make money in the resource bull market. Click here to read more about this report.

–That’s the percentage increase in the annual iron ore contract price Aussie producers charge major Chinese steel makers. It includes the much sought after “freight premium” which recognizes that its cheaper to ship ore from Australia to China than from Brazil to China.

–So what does it mean? Well, Chinese producer were hoping to NOT have pricing power in the ore industry lie with suppliers. But that hope seems to have faltered. Time for plan B. Plan B is to take equity stakes in a large number of smaller Aussie ore producers (see yesterday’s DR, and don’t discount the possibility of China Inc. taking a large stake in BHP a la Chinalco in Rio Tinto).

–Plan B also includes raising steel prices. Granted, as you can see from the chart below, courtesy of Macquarie Research, steel prices are already up 65% this year alone. But as you can also see, Chinese steel prices trade at about a US$400 discount to U.S. and world export steel prices. Whether this is how the Chinese subsidise domestic steel consumption or not, we can’t really say.

–But we can say that Chinese producers will increase exports this year and raise prices. Prices for domestic steel in China might differ from export prices. Who knows? But either way, you can be sure the Chinese steel producers aren’t simply going to absorb the huge increases in coking coal and iron ore. Chinese steel is going to get more expensive, whomever the buyer is.

–Normally, you’d expect to see higher commodity prices curtail demand. But for both steel and oil (see below) you haven’t seen any evidence yet that higher prices are slowing down demand. In fact, as this second chart from Macquarie shows, Chinese steel production is slated to grow by 10% this year. It even looks like the double bottom in steel production growth rates is in. Is it the beginning of a new steel boom?

–One company that hopes steel prices keep going up is Aquila Resources (ASX: AQA). The company told investors yesterday that it could produce about 25 million tonnes of iron ore per year from its ore bodies in the Pilbara…for the tidy sum of $4.1 billion.

–Welcome to the iron ore boom, Aquila (a company which also has coal and manganese assets). The company’s announcement was a little like a new doctor in a small town hanging out his shingle right across from the old doctor. The company isn’t producing anything yet. But like the other ore hopefuls in the Pilbara, it believes that with a little capital and a little deep water port facility at Cape Preston, its pre-feasibility study indicates it would have a nice little business.

–What is the difference between a shingle and a “for sale” sign?

–Meanwhile, the original third wheel in the Pilbara, Fortescue Metals (ASX:FMG), begins loading its ore for shipment to China this week. It’s been a long time coming. But FMG’s business has opened the door in the Pilbara and the Mid West for a long roster of other, smaller ore producers. The good old days of just BHP and Rio are long gone.

–What about oil? It just keeps going up. It reached nearly US$123 in New York trading over night. The Masters of the World at GoldmanSachs repeated their claim that a ’super spike’ in oil could drive it to US$200, on the back of red-hot demand in the developing world and the “non-recession” in the U.S. Supply bottlenecks won’t help.

The Jobs Jamboree… Can you believe that so much attention and drive to the markets is tied to this?

The dollar is a bit softer this morning going into the Jobs Jamboree, and rightly so, given the forecast. However, the dollar is still swinging a mighty hammer and I’m a bit perplexed by this. Last night I was up late (for me) and decided to put down some thoughts that were bouncing around in my head.

Well… How about that U.S. dollar? That’s some currency, Rudy! Why, look at it rallying against the euro (EUR) and other currencies as if it’s on a mission from God! It looks as if the United States has turned things around. The deficit no longer needs to be financed with over $2 billion a day in foreign investment… Interest rates are where they need to be to fight this soaring inflation… The government has stopped spending wildly, and the budget is balanced… The mortgage lenders have recovered all of their losses… There is no longer a credit crunch… And finally, the war is the Middle East is over.

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that… These things haven’t happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

You’ve got me on this one. Folks, for once, I’ll admit that I have no idea what the heck is going on here… Serenity Now! Is this the pullback in the euro that I said we should look for in January, but never saw? If so… When will the tourniquet be applied to this gushing wound? Hmmmm… Good question! And I don’t have an answer to that either! I thought back in January when the euro was around 1.45, that we could see it fall back to 1.40, before moving ahead again… But that never happened. Instead we saw the euro climb to 1.50, then 1.55, then 1.60 in a little over three months time. Was it too quick? Is that what we’re seeing, merely a technical correction? Or is there something else in the works here?

Again… I don’t know the answer… But I’m hoping that in the days to come, it becomes apparent, and when it does, I’ll be Johnny on the Spot in reporting it to you! (Notice I said, “I’ll be Johnny on the Spot”, and not I’ll be “A” Johnny on the Spot! HAAHAHAHAHA)

This dollar rally has got the “naysayers” coming out of the woodwork too. Oh, the whole lot of them are pointing fingers and claiming they knew the dollar was undervalued, and blah, blah, blah… Where were these guys when the euro hit 1.60 about 10 days ago? They were hiding under the sheets!

Forgive me for this but this reminds me of when I coached my darling daughter Dawn’s girls softball team. The girls would do these chants on the bench that drove me nuts! But there was one that would just make me want to scream! We would be getting beat unmercifully, and the girls would be chanting something that ended with, “We can beat your team any old time.” UGH! But that’s what the naysayers are reminding me of right now. They are chanting about the dollar, when it has gotten beaten unmercifully for six years.

OK… Onto other things… The U.S. ISM Manufacturing Index remained well below the 50 level for the third consecutive month. I saw a news story yesterday where the writer was seriously talking about how Manufacturing will pick up due to the stimulus checks, as the receivers of those checks go out and spend them. Folks… The writer was serious…

I’ve told you over and over again that these stimulus checks might get spent by some… But I don’t see the checks getting spent by most. Instead, I see them using the money to pay down a credit card, or some form of debt, as the past couple of months has been quite sobering to the U.S. consumer.

Hey! You’ve got to feel good this Fantastico Friday, as U.S. Treasury Secretary Paulson is telling anyone that will listen, that we are “closer to the end” of the credit crisis. Oh, now that gives me a warm and fuzzy, given his track record of spouting off stuff like that in the last year!

I’ll bet him a shiny quarter that we’re only halfway through the credit crisis! The Bank of England (BOE) said yesterday that they feel as though the “worst is over” . Hmmm… Maybe these guys know something I don’t!

Down Under in Australia, retail sales surprised on the upside, printing at +0.5% versus the +0.3% that was forecast. Retail sales account for 40% of private consumption, which in turn accounts for around 60% of GDP… So this is important data for the Reserve Bank of Australia (RBA). The RBA will not need any excuses to keep rates at current levels given the strength of this data… And that thought should be a good underpinning for the Aussie dollar (AUD).

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday. All this euphoria in stocks has the carry trade going great guns once again… This is being reflected in the price of yen (JPY) and Swiss francs (CHF)… I just don’t see how this can continue to go on and on and on. The carry trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards… At least that’s my opinion.

There was another story yesterday about the Gulf States ending their dollar peg. This is getting out of control! About every three months these guys get together and make big plans to drop their dollar peg, and the media goes hog wild over the story. Shoot Rudy, I used to get all caught up in it too until I realized they were just being the boy who cried wolf.

–Hold everything. How about a reality check?

–”Brazil’s plan to become one of the world’s biggest oil exporters hinges on exploiting crude 6 miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants,” reports Joe Carroll in Bloomberg this morning. It gets better (or worse, depending on your perspective).

–”Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.”

–The oil industry is becoming metals-intensive. And not just any metals. Our friends at Diggers and Drillers call them ’super metals,’ which sounds about right. It takes a special kind of metal to withstand the heat and temperatures you find in off-shore, deep-sea oil operations. That’s probably the better investment angle than, say, buying Petrobras (NYSE:PBR).

–Think about this for a second. To produce oil from Carioca, Brazil will have to drill to a depth of 10,000 metres (32,000 feet). That is twice as far down as the world’s deepest current production hole. It’s also deeper in the ocean than Mt. Everest is high in the sky. It may as well be Mars or Venus or the moon for as otherworldly as the conditions are.

–The oil industry sure has come a long way from when Colonel Edwin Drake drilled his first well in Titusville, Pennsylvania in 1859. Drillers are going to places they’ve never gone before, and it’s not cheap. For example, Exxon had to develop special pipes for its Sakhalin II project in Siberia because steel pipes were shattering at the temperatures engineers encountered. Bloomberg reports that Chevron destroyed more than a dozen drill bits costing US$50,000 each in a $4.7 billion oil project in Tahiti.

–Where do you even buy $50,000 drill bits?

–Incidentally, did you know that Howard Hughes made his money in drill bits? We didn’t know it either until we researched the subject this morning. Cemented carbide cutting tools, or tools made of tungsten and diamond, are in great demand these days. But in the oil business, it was Howard Robard Hughes Sr. who introduced rotating steel cones to the wildcatters in East Texas in the first two decades of the twentieth century.

–Hughes held the patent on the first rotating tricone bit for 17 years, between 1934 and 1951. This was the peak of exploring and drilling in the Continental U.S. It made Hughes and his more famous and eccentric son Howard very rich. You can afford to be weird when you reach a certain level of wealth. It doesn’t make it right, though. If you want to see a picture of the Hughes drill bit, check this out.

–Resources Minister Martin Ferguson told the ABC that contrary to reports in The Australian last week, the Federal Government has not told Chinese companies to “back off” in their pursuit of their Australian quarry.

–Right. You don’t imagine the Federal Government could come right out and tell China to get lost. It doesn’t want that to happen. But in an interesting coincidence, Stephen Wyatt reports in yesterday’s Financial Review that the, “Chinese may relent in iron-ore negotiations.” This refers to the reluctance of Chinese steel producers to pay a ‘freight premium’ for Australian iron ore (over and above what China pays for Brazilian ore).

–We called the Foreign Investment Review Board (FIRB) ourselves yesterday to see if they publish any information on foreign companies seeking to acquire $100 million or more of an Australian publicly listed company.

–”No we do not,” we were told.

–Fair enough. Here’s what we know. In early April the FIRB shot down a bid by the Shougang Group (China’s sixth largest steel maker) for Mount Gibson Iron Ore (ASX:MGX). We know that Shenzhen Zhongjin Lingnan Nonfemet Co Ltd has a joint bid with and Indonesian firm Herald Resources Ltd (ASX:HER). We also know that China’s state-owned MCC Mining has bid A$400 million one Cape Lambert Iron Ore’s Ltd (ASX:CFE) iron ore projects.

–There are other deals in the works. China Shenhua Group, China Coal Energy, and Yanzhou Coal Mining Co Ltd (listed in Hong Kong and China’s third biggest coal producer by market cap) are all interested in Australian coal. And Chinese iron ore trader Haoning Group would like to buy a stake in iron ore producer Brockman Resources Ltd (ASX:BRM).

–That’s what we know. What we don’t know is what Australia and China are saying to each other behind closed doors. And we don’t know what other Aussie companies might be on Chinese watch lists.

–If the FIRB isn’t going to tell us, there are other ways of prospecting around. Gabriel has been working on some technical and fundamental stock screens that produce at least ten new trading ideas each day (five momentum up, five momentum down).

–We’re experimenting with the variables, but this morning we asked him if a stock with symbol UMC had shown up on any of his screens. “Yes, yesterday it did. On the momentum up screen.”

–The stock came up on our computer screen last night when we were reading up on news from the bauxite market. UMC is the United Minerals Corporation (ASX:UMC). Please read this next note. We are not tipping it and have done no diligence on the stock at all.

–We do note, however, that the company is chasing both iron ore and bauxite in the Pilbara. That got our attention. We aren’t tipping it, but we wanted to know more.

Good day… And a Happy Friday to one and all! This weekend can’t get here fast enough for me. I’ve just been beat to all get-out this week, going home in the afternoon to sleep, waking up for a few hours, and then going right back to sleep at night. Much like last summer when I was recovering from those surgeries… Just a difficult week for yours truly.

It was made even more difficult with this dollar buying that’s going on, even if there isn’t any strong fundamental reason to do so! I’m still thinking that the Fed will cut 25 or maybe even 50 BPS next week. The markets seem to think that this will be the last rate cut by the Fed in this cycle, but I’m not in agreement with them on that. I still believe that rates will bottom out at 1.50%, which is 75 BPS from where we are now.

The dollar rallied most of the day yesterday but found a high late in the day and stopped rallying… But then in the overnight market, the dollar was bought again, with the dollar index rising to a one-month high – so it gained against all of the majors. We’ve seen this type of dollar frenzy before, but calmer heads have always come back to the table to point out the awful fundamentals that the dollar carries around like an albatross around its neck.

Last night was a holiday in Australia and New Zealand to celebrate ANZAC Day, which led to some of the dollar bull’s brashness. Without those two high yielders in play, the focus was on Japanese yen (JPY), and that didn’t prove to be good for yen, as the dollar pushed hard against yen, which then carried over to the euro (EUR), once London opened this morning.

Euros are more than 3 cents lower than there were on Tuesday. Shoot Rudy! Even the Chinese renminbi (CNY) has lost ground to the dollar this week, falling back to 7. I don’t think Mssrs. Schumer and Graham will like that!

The data in the U.S. yesterday wasn’t responsible for the dollar rally, as it once again just didn’t have the stuff that a strong currency can build on. March Durable Goods fell 0.3% (versus +0.1% forecast), but the previous month’s -1.7% decline was revised up to -0.9% – as if -0.9% is “good!” Durables weren’t exactly a great picture for the economy.

New home sales were atrocious, sinking 8.5% to a 17-year low in March. That’s absolutely crazy folks! And this guy, Richard Moody, chief economist for Mission Residential said, “There is little to support any claims that the housing market is stabilizing, let alone forming a bottom.” That’s right! And it’s about time somebody besides me was banging this drum and trying to get the government’s attention on this! But hey! We’ve got Big Ben Bernanke with his “What me, worry?” look, telling us this housing meltdown bottomed last August.

With this dollar strength, the price of oil has come down a bit, as if $116 is anything to get excited about… However, it is better than the $119 it traded at earlier this week. Then I saw something on TV last night that made me sit up and take notes. (And believe me that rarely happens.) There was an oil analyst talking, and when it got down to the cheese that binds, he blamed the high price of oil on the dollar debasement… WOW! Finally! Somebody besides me, talking about dollar debasing!

Here’s the thing that made me sit up and take notes… The price of oil when measured in dollars is up 319% in the past couple of years… But, against the euro it is only up 92%… (OK, 92% is a lot, I’m not sweeping that under the rug.) The point here is that look at the difference!

There are a lot of directions I can take here… Like… So much for those that keep spouting off that deficits don’t matter… Well… If we didn’t have the monstrous deficit that we do have, that requires over $2 billion per day in foreign investment to finance it, we wouldn’t have to allow this debasement to happen. OK, follow me on this…

As I’ve explained before, the deficit has to be financed… Either now or later, print money, bonds to sell, whatever, it HAS to be financed. The United States has had difficulty attracting enough foreign investment to finance the deficit in the past year… So… They could either raise interest rates aggressively to attract foreign investment, risking bringing the economy to a screeching halt, or… Allow a debasement of the currency, which would allow the foreigners to buy U.S. assets at a discount.

This debasement has been going on for six years now. It started slowly, gained momentum in 2004, only to see a dollar rally (because of props to slow the decline) in 2005, then the debasement picked up again in 2006 and 2007, and the first quarter of 2008. So… If you want to blame somebody or something for this mess… Blame the debasement of the dollar, which is needed because DEFICITS DO MATTER!

Whew! I’m tired after writing that; you should have seen my fat fingers flying (how about that alliteration?) across the keyboard! I was loaded for bear with that one!

So… Where do we go from here? Well… I for one, believe we’ll see this dollar rally last until the Fed meets next week. Once the markets get a strong dose of “Chuck was right” and the Fed cuts rates, the dollar rally will end. At least that’s how I see if from the cheap seats!

Today… We only get to see the color of the latest U. of Michigan Confidence report for the second half of April. You may recall that earlier this month this confidence index fell to 63.2, which was a low last seen in 1982… This second half of the month report is expected to remain at that low… I would think it would show more weakness, but then the stock market has recovered a bit in the past two weeks.

Bill Bonner here at The Daily Reckoning yesterday, called this “Noisy Markets” and that description fits what’s going on right not very nicely!

Yesterday, I talked about the rationing going on with rice… A reader in Kuwait, (yes, I have a reader or two in Kuwait, in fact I have readers all over the world!) sent me a note to tell me that “in Kuwait you can’t buy Indian rice for love nor money because India has put a total ban on all rice exports!! This happened in early April.”

But yesterday, we saw a story on the telly that said that there was no shortage of rice in the United States and that it was simply media hype… Hmmm, those are the same people that tell us that deficits don’t matter, and that we have little or no inflation too!