Good day… And a Tub Thumpin’ Thursday to you! I’m late, I’m late! I don’t believe I ever heard the alarm go off this morning! I overslept by more than an hour, and will still be here more than an hour before any sign of someone else! But! That puts me behind by more than an hour today… I’ve got to play catch-up! So, let’s get this Tub Thumpin’ Thursday going!

Well… Let’s see… G-8 never had the opportunity to shoot fireworks because China’s leader had to return home to deal with the street riots going on in his country. So… The call for a replacement for the dollar as the reserve currency will have to wait for another day! And, with that news, the dollar got to remain in the sunlight, and bask in the glory of being the reserve currency and so-called “safe haven” another day…

There was added Risk Aversion yesterday when it was reported that an Australian shipment of coal to China was cancelled… This sent bad vibes through the markets for the currencies and commodities with the thought that China was putting the brakes on their buying of raw materials, and that their recovery had not taken hold like many had believed…

But… Overnight, calmer heads have prevailed. You see, it was my opinion when I heard that news yesterday, that it was simply one bad shipment to a customer that was having difficulties… Not ALL OF CHINA! And then overnight the data came out… This was one shipment, maybe 150,000 tons of coal… Australian coal shipments to China on a monthly basis run about 3 million tons! I truly believe that Australia’s trade with China is on terra firma, and this was a one-off deal that went bad… I also believe that the sell-off of the Aussie dollar (A$) was completely overdone… Completely!

I don’t know this to be a fact… But, given the relationship of the Asian investors and the A$, I would think the Asian investors to be licking their chops to have the opportunity to buy the A$ at these lower levels! Buy on the dips, right? Don’t I always say that to be a prudent investment strategy?

Of course it didn’t hurt that U.S. stocks rebounded yesterday a bit on the news that Alcoa’s losses weren’t “as bad as expected”… Talk about setting the bar low! It’s not like ALCOA didn’t still have a LOSS! But, don’t get me started on this mental giant thought process that has a grip on stocks these days… “oh, don’t worry, you only burned down 1/2 of the house, I would have expected it to all burn down!”

I’ve got to leave that alone before I really burst! Let’s see, what can get my mind off of that subject… OH! The Bank of England (BOE) just announced that they would keep rates unchanged. Well, my goodness, what else would we expect them to do? Their base rate is .50!

Here in the U.S… The Obama administration is trying desperately to nip in the bud, the whispering campaign for another stimulus package… “No one in the administration is talking about a second stimulus at this point,” said Robert Nabors, deputy director of the Office of Management and Budget. However he also mumbled something about how the President is not “ruling anything out”…

I don’t care what they say… I’ll believe it when I see it… And I still believe that the Gov’t will believe that another stimulus is needed…

One of the discussions that I had with my fave economist the other day was about “delaying the inevitable”… I’ve talked about this before, but for new readers, I thought I would give them a dose of “Chuck’s Thoughts” this morning… (HA! As if they don’t get that every day!)

This “delaying the inevitable” is all about the TARP (troubled asset relief program) and how it all did was allow bad banks to continue to be bad banks longer, with toxic waste in their portfolio… This, even in the face of a suspension of the mark to market rules! Bad Banks should have been sent packing, then… And now, all we’ve done is let them hang on to cause even more collateral damage!

OK… I’ll get back to the daily discussion now…

It looks as though the auction of $35 Billion in 3-year Treasuries went smoothly, which is another reason the dollar was strong yesterday… Every time one of these auctions go smoothly, the “deficits don’t matter” crowd all point and say… “see, we told you, that foreigners will always come to the auction to buy Treasuries, so it doesn’t matter what we run the deficit up to”…

Right! You just keep thinking that, and see where it eventually gets you! Ty sent me a note yesterday from an article he was reading, that plays nicely with this discussion… So… Let’s play Marvin Gaye, and see what’s going on!

“For now, the Treasury continues to find takers for government savings bonds at low interest rates. But somewhere between here and infinity lies a point at which American debt reaches unsustainable proportions, at which investors will balk at continuing to finance the American expenditures absent a higher return on their investments. Then, everything could change quickly, with interest rates soaring and the value of the dollar plummeting, as foreign investors lose faith in its fundamental value.

“We’re running this $10 trillion gamble that interest rates aren’t going to rise,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard. “If they do, we could end up in a very difficult situation.”

Hey, you think so, Kenneth? My goodness, we have a new “Mr. Obvious!” I would think that we are already in a very difficult situation, given the fact that when the you know what hit the fan the U.S. had no war chest to use, like China did… Why? Because we didn’t think “deficits mattered”… Dealing with problems from a position of strength, it would have made a HUGE difference from the get-go!

However, having said that… I believe that a larger problem is still on the horizon for the U.S. and the “deficits don’t matter” flag wavers… And Hey! It’s not going to happen overnight… It’s going to be a slow, dragged out, problem that goes on for years, and then finally snaps! I’m talking about the entitlements and the retiring baby boomers… And more specifically when I’m talking about entitlements, I’m talking about Medicare!

The Big Boss, Frank Trotter, showed me a graph that he came across from the Concord Coalition the other day that illustrated this… While I wasn’t shocked, having seen this all in the movie I.O.U.S.A. and in the book of the same name, there it was again staring me in the face…

The reason I tell you all this, is that the Current Administration has no other choice but to allow the dollar to weaken considerably over the years so that these deficits that “didn’t matter” can be paid off with cheaper dollars… And it won’t be this administration that has to deal with it… That’s why this one and the previous one aren’t concerned about the size of the National Debt…

Ok, enough of all that… I didn’t mean for this to be gloom and doom! Let’s move on…

The data cupboard has the Initial Weekly Jobless Claims for us to view today… I expect for the weekly number to remain above 600,000, and the Continuing Claims to have risen… Though this all sounds bad, the markets have become comfortably numb with this unemployment data… It will take something really BIG to slap the markets in the face and say WAKE UP!

And then, finally… The Japanese yen has really been on a tear this week as the Risk Aversion crowd dominated the markets… I find it very strange that Japan is considered a “safe haven” currency, given their national debt problems… And their once “Ace in the hole” the Trade Surplus, is taking on water… But… This is what the markets do, and they are never wrong! However, there’s a road block ahead for the yen, as it trades with a 92 handle this morning… And the road block is in the form of the Bank of Japan. (BOJ).. It was reported that last night the Bank of Japan issued a statement to the markets that “they were checking FX levels”

That’s Central Bank parlance especially coming from the BOJ, for… We don’t want the currency to get any stronger, and we’re just letting you know that we’re ready to intervene if you don’t settle down. Sort of like when grandma would tell you that if you didn’t settle down she would send you to the woods to find your switch… Believe me you only didn’t settle down once!

And when the Risk Traders come back and push the Risk Aversion crowd to the back of the room… Again, we’ll see yen sell off again… So be careful here!

Currencies today 7/9/09: A$ .7845, kiwi .6305, C$ .8650, euro 1.3980, sterling 1.6260, Swiss .9250, rand 8.11, krone 6.4925, SEK 7.8590, forint 196.70, zloty 3.1150, koruna 18.55, yen 92.90, sing 1.4580, HKD 7.75, INR 48.71, China 6.8317, pesos 13.47, BRL 2.00, dollar index 80.21, Oil $61.29, 10-year 3.39%, Silver $12.95, and Gold… $915

That’s it for today… Well… I got the news from the eye specialist yesterday regarding my left eye… The tumor and the fluid on the eye is gone, they successfully shrunk it and removed it… Unfortunately it left a ring of “stuff” on my eye, and my eyesight from that eye will never get any better. Of course, I still have my right eye, so I’m not completely bummed… My cutie little granddaughter, Delaney Grace came by to see me yesterday, she wanted me to come “sit by her” She’s almost 2 now, and saying her ABC’s, and singing songs, and she showed me how she knew her right from left now… Such a little joy to be around… I’ll get to spend a whole week with her in about 10 days when we all go on vacation together… Can’t wait! Well, my lateness has put me way behind this morning, I had better get going… Don’t forget… Today is going to be a Tub Thumpin’ Thursday no matter what!

Source: Risk Returns… Slowly

But it doesn’t look like Canada will hold its edge for long. If the oil boom fades and the financial market continues to bleed money from structured product losses, then Canada might face a serious economic slowdown.

At last count, total write-downs at Canada’s six largest banks stand at approximately US$11 billion. That’s roughly 5% of the total global sub-prime write-downs to date. Once US$11 billion may have seemed like a large loss, but now it pales in comparison to the US$200 billion banks have written off their books since last summer worldwide. It’s also far less than just Union Bank of Switzerland’s (UBS) cumulative US$38 billion in losses alone.

Canada, however, is not immune to the woes now affecting its largest trading partner, the United States.

Canada Is Already Slowing – Even During a Raging
Bull Market for Raw Materials

If you can look past the bull market in raw materials that has enormously benefited Canadian exports and the Canadian dollar, then you’ll see the country is starting to show strains in lending, housing, and manufacturing.

Indeed, a slowdown has already arrived. Canada’s economy contracted in the first quarter for the first time in five years. The economy slowed mainly because the surging Canadian dollar and weak U.S. auto sales caused a slump in auto manufacturing.

Meanwhile, some Canadian banks can’t escape the relentless wrath of sub-prime and other losses tied to illiquid structured financial products.

First quarter profits at Canada’s largest six chartered banks points to an acceleration of write-downs for Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce, or CIBC.

Canada’s biggest six banks logged a first quarter profit of US$2.5 billion in the January to March period, down almost 50% from a year earlier when combined earnings were US$4.7 billion. Most of these losses, however, are tied to CIBC and Bank of Montreal – the hardest hit since 2007.

CIBC Hit the Hardest, While TD Escapes Sub-prime Wrath

Some Canadian banks have fared much better than their peers since the advent of the credit crisis last year. Of these, Toronto-Dominion Bank (TD) has almost escaped without any serious losses at all since last July. Meanwhile, the Bank of Nova Scotia has also easily absorbed modest losses tied to sub-prime and other structured products.

In fact, TD Bank ranks among one of the best-performing major banks in North America in 2008 – up 8% compared to a loss of 14% for the KBW Bank Index in the United States.

Here’s What the Best Performing Bank in North America Looks Like

But the story is altogether different for Canada’s other big banks.

RBC and CIBC now share the dubious distinction of being featured on the “sub-prime hit list.” Both banks are on the global banking sectors’ top 40 list for the largest write-downs and credit losses since the banking sector started hemorrhaging last fall. And Bank of Montreal (BMO) is ranked second only behind CIBC for posting rising losses tied to structured products and other write-downs in Canada. RBC is Canada’s largest bank by stock-market value.

From its all-time high last year, the Bank of Montreal has seen its stock plunge 31%. CIBC, which takes the booby-prize for Canada’s biggest loser in the sub-prime crisis because of its largest U.S. presence, is 33% off its best level.

CIBC has already written off a cumulative US$6.7 billion since the onset of the sub-prime crisis. That number is almost twice the figure posted by Canada’s other five largest banks put together.

Since last fall earnings have eroded and write-downs have accelerated. In short, the U.S. credit crunch that battered the U.S. housing sector has knocked the wind out of the banks’ sails. Everything from consumer and corporate lending to mortgages has been adversely affected as Canada finally begins to feel the impact of an American slowdown or recession. Over 85% of Canada’s trade is with the United States – the two largest trading partners in the world measured by the volume of goods and services.

But the news isn’t all gloomy. Dividends were largely unchanged over the first quarter while Bank of Nova Scotia actually raised its payout.

In addition to sub-prime losses, many banks were also hit by exposure in asset-backed commercial paper or ABCP. Other smaller lenders and brokers, including Canaccord Capital, saw losses in the hundreds of millions tied to illiquid short-term commercial paper.

Canada Now Slowing But Will Avoid Recession

The Canadian economy is now slowing in 2008. Stripping away booming oil and gas exports, the country’s merchandise trade balance is now in deficit. Without commodity exports, Canada would probably be in an economic recession.

First quarter GDP data confirm this trend. Manufacturing belts in Ontario and Quebec continue to suffer from a soaring Canadian dollar, up over 50% since 2002 versus the U.S. dollar while the unemployment rate is rising, housing is showing signs of slowing and commercial bank lending is gradually contracting.

The Canadian economy should escape a serious slowdown this year. The country’s trade balance and budget surpluses are indeed shrinking amid a slowing global economy but remain well managed compared to most industrialized economies.

Canada’s housing market is also in far better shape than America’s. That’s mostly because “zero-money down” was never a part of the country’s housing culture. But a continued strengthening of the Canadian dollar and more losses tied to structured investment products could tilt the nation into recession if combined with a significant decline in crude oil and gas prices.

ERIC ROSEMAN, Investment Director

Source: Even Commodity Rich Canada Is Not Immune to This Global Slowdown

Turn on the printing presses, impose lots of new taxes and regulations, eat the rich. But… America is now the world’s largest debtor nation. What will our foreign creditors and trading partners do if the dollar continues to fall? If the rice market is any indication, we will face dozens of additional export restrictions, as more and more countries refuse to accept the U.S. dollar in trade. I wonder what will happen then? Perhaps a war to gain access to raw materials? Canada, be careful.

You think that sounds crazy, I’m sure. But listen to what U.S. Sen. Chuck Grassley told reporters recently: “If part of our problem is that the Chinese are going to eat meat and you’ve got to have corn and soybeans to feed the Chinese their meat, then why isn’t it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?”

Here you have a United States senator suggesting our most important foreign creditor should eat rice so we can power our SUVs with corn-based ethanol, the production of which actually consumes more energy than it produces. It’s not often I’m surprised by the stupidity of our government officials. But this one got me. Grassley would be wise to consider that the Chinese can afford to pay higher prices for grains, because their currency continues to rapidly appreciate versus the dollar. Meanwhile, we’re going to have a hard time buying rice if the Chinese don’t lend us their savings.

I wonder what our readers make of these events – of U.S. citizens demanding to keep their homes even though they can’t pay their mortgages; of U.S. senators demanding our trading partners stop buying our corn; of major retailers placing limits on the purchase of rice; of banks blowing up day after day; and of the dollar falling from one new low to the next.

We’ve been advising people to buy gold and silver for at least the last five years as a hedge and protection against the risk of hyperinflation. Now, it has arrived. But how many subscribers, I wonder, have bought gold or silver? My bet? Less than 10%. It’s still not too late, though. And our own Matt Badiali has found a way to buy gold and collect big dividends, too. Click here for the details.

The IRS started mailing the economic stimulus checks this week, and Goldman Sachs already compiled a list of the 10 companies that will benefit most from the extra cash: Cheesecake Factory, Best Buy, Darden Restaurants, Home Depot, JCPenney, Kroger, Kohl’s, Royal Caribbean, Safeway, and, of course, Wal-Mart. Wal-Mart was an easy guess considering that 8% of U.S. retail sales already go there.

From a reader: “Why are your recommended trailing stops always 25%?”

In my newsletter, I frequently adjust the stops of my positions based on the risk of the investment and our desired holding period. But a 25% stop loss is a good place to start. With an initial allocation of 4%, a 25% stop loss puts 1% of your original capital at risk.

If you use a trailing stop loss and the position moves up at all, your principal at risk can quickly fall to zero. Using stop losses and trailing stop losses must be done in conjunction with position sizing. The goal is to minimize the impact of any loss. Once you learn to avoid big losses, you’ll find it’s much easier to make money investing.

Billionaire real estate mogul Sam Zell is buying Brazil, “It has the chance 30 years from now of being a bigger economic power than China,” Zell told the Milken Institute Global Conference. Zell said the country’s 180 million people, skilled work force, and wealth of natural resources has made it largely self-sufficient.

He also mentioned Brazil’s biggest mall operator was seeing retail sales growth of 10% annually. And what’s stopping China? The country’s one-child policy, which Zell believes will decrease the number of workers in China and “come back to bite them big time” in 2020.

International Strategist editor Tom Dyson is also hot on Brazil. He took an agricultural tour of the country earlier this year. In his travels, he found the future of the world’s agricultural production, Protein City. This mega complex will produce the world’s cheapest commodities and make an absolute fortune shipping them all over the world. Tom found the best way to profit from Protein City, and his pick is up 25% in less than two months.

Tom holds three Brazilian stocks in his portfolio, all three are up double digits. And he’s got three more Brazilian stocks on the radar. To learn more about International Strategist, click here…

Regards,
Porter Stansberry and Dan Ferris