The Dow logged its second best one-day point gain, 889 points, in its even more storied history yesterday:

Percentage wise, at 10.8%, the rally ranks sixth. The S&P and Nasdaq trundled alongside the old lady like puppies.

After finding a new “credit crisis” low on Monday, traders on Wall Street snapped back with vengeance. But it’s not the higher highs we’ll be watching for the rest of the week — but lower lows. During each sell-off since extreme volatility began three weeks ago, we’ve reached all-new lows.

The Japanese market performed in a similar way through the entire decade of the ’90s. It rallied at least 30% higher five times since 1992, before finding new lows again, and again… and again.

Extreme volatility is a good thing if you’ve got the stones for it. “You do know someone who does seem like they know what the hell they’re doing, day to day,” Steve Sarnoff wrote to us after reading yesterday’s 5.

Steve included his gains sheet from Options Hotline, noting that his Intel calls triggered yesterday. Any of his subscribers with filled orders profited about 97% in a single trading day. Yawn… stretch… not as exciting as his 439% gains on QQQQ puts two weeks ago. But still…

On the short side, Dan Amoss told his readers yesterday to pocket 94% gains on their Fleetwood Enterprises short sale. Shorting a financially distressed manufacturer of recreational vehicles… who’d have thought that would be a good play?

If you’re interested in options or shorting stocks, let us remind you both are extremely risky ventures. But we’ve got a couple of ringers to help. Check out Options Hotline and/or Strategic Short Report for ideas. Both are included in your Reserve Membership. Or available a la carte.

Despite yesterday’s monster stock rally, the credit markets are still moving cautiously. The rate at which banks lend to one another (Libor) did decline again today, the 13th day in a row, but only by a little.

The three-month dollar Libor fell just 4 points overnight, to 3.46%. Considering an all-but-certain rate cut from the Federal Reserve today, commercial banks had every excuse to relax lending rates significantly… but guards are still up around the world.

“We are not going to say, ‘Yahoo, this is over!’” explained JPMorgan Chase CEO Jamie Dimon, “and extend credit like we did without fear. If you’re not fearful, you’re crazy.” That coming from the guy who was fearless enough to buy Bear Stearns with little more than a wink from Ben Bernanke over Sunday tea.

The Fed will announce its latest interest rate decision today around 2:15. Anything less than 75 point cut and we suspect a sell-off. 1% or lower, here we come. We’re turning Japanese… we really think so.

After a decade and a half of practically free money, the Bank of Japan is considering its interest rate again, too. It’s already at the 0.5%. How much lower can the Japanese go?

The reversal in the equity market yesterday reverberated in the currency world.

The dollar took a pretty good whack. The dollar index fell two full points from yesterday’s high, now at 85.5. Thus, the euro enjoyed a nice bounce, up 3 cents, to $1.27. The British pound is back up nearly a nickel, to $1.60. And yen traders took profits, bringing the Japanese currency back to 97.

“The eventual cost to the U.S. financial and economic system,” says John Williams, “will be much higher inflation.

“The monetary base has seen an unprecedented surge, reflecting total reserves of depository institutions jumping from an average of $47.1 billion (seasonally adjusted) in the two weeks ended Sept. 10 to $328.6 billion in the period ended Oct. 22.

“Using the St. Louis Fed’s adjusted monetary base (effectively total reserves plus M1 cash in circulation), the year-to-year growth in the latest period was an unprecedented 38%. In the period since 1919, the previous high growth rate was 28% in September 1939, as the U.S. was building up industry for the evolving war in Europe.

“Back in the days when the Federal Reserve targeted money supply growth, the monetary base was the measure it adjusted. The current surge in the base is a direct result of the ongoing, extraordinary actions taken by the Federal Reserve and the U.S. Treasury aimed at preventing a collapse of the U.S. financial system. The higher monetary base growth will result in sharp spikes to domestic money supply growth and will intensify inflationary pressures in the year ahead, irrespective of wild gyrations and sell-offs in oil and of strength in the U.S. dollar, which otherwise should prove very short-lived going forward.”

Meanwhile, the U.S. government is beginning to advertise for new bailout money: “We are making it clear to sovereign wealth funds,” Deputy Secretary of the Treasury Robert Kimmitt said yesterday, while seeking help in the Persian Gulf, “that we are open to investments that are done on a commercial, not political, basis, and that do not raise security concerns.”

Kimmitt hinted he may have found some takers already: “We think that they are continuing to look very closely at opportunities in the United States. We have a number of cases before the Committee on Foreign Investment right now… Every investor that I’ve spoken with here and elsewhere had been in the United States within the past month, looking for opportunities.”

Who would have thought even three months ago — besides your cranky editors of The 5, I mean — that Wall Street would be holding a global garage sale this fall?

Orders for durable goods, surprisingly, jumped in September. According to the Commerce Dept. today, orders for things meant to last more than a few years increased 0.8%, well above the expected fall of 1.2%.

Before you celebrate (we know how durable goods data get you percolating), the actual details weren’t so optimistic. The Commerce Dept. revised August data to show a 5.5% fall in orders, the worst month in almost two years. And all of this month’s improvement came from transportation equipment, a sector so depressed it hardly has any more room to fall.

Since the dollar has pulled back, commodities have pushed forward. Gold continues to inch up this week, and has now struggled back to $760 an ounce.

Oil is creeping back up, too. Crude is up $4 today, on a weaker dollar and the fleeting image of a stronger U.S. economy. A barrel goes for $66.

“Energy development is exploding in Africa,” reports Byron King. Our energy adviser made the long trip to South Africa for a conference on African energy development.

“In the past decade alone, the number of companies actively looking for energy deposits in Africa has soared from under 100 to over 500. By 2018, there may be 800 or so companies exploring for and producing energy in Africa. Expect to see $350 billion spent in Africa by 2020, just on energy development.

“There are over 100 billion barrels of discovered oil reserves in Africa. And there may be as much as another 100 billion barrels left to be found. And even more natural gas, in terms of energy content. Plus, heavy oil. And coal and coalbed methane. Which makes Africa more of an energy development target than Russia, or the even the Arctic — without the weather issues that we find up north in such frozen climes…

“For now, oil prices are down, but investment is still flowing into a lot of energy projects in Africa. Some companies are having trouble with short-term credit, but this is not the biggest issue for the energy industry and its efforts in Africa. When the economic logjam breaks up, among the first things that will happen is that worldwide energy supplies will tighten. And eventually, the world will confront its long-term lack of investment in the energy industries.”

Even though oil has perked up, gas prices are still plummeting. The national average is now at $2.58 a gallon. That’s a level unseen since March 2006. The national average has shaved off a full dollar and change in the last month alone.

The IMF officially bailed out Hungary today. The country is getting a $25 billion loan. That’s the third IMF nation rescue in this crisis, and bigger than the first two — Iceland and Ukraine — combined.

Six percent of U.S. employers have cut 401(k) contributions this year or plan to do so in the coming months. According to a study by human resources firm Watson Wyatt, that number is likely to grow, as many firms surveyed refused to comment, as admitting to a 401(k) slash stinks of fiscal weakness.

Notable companies that have already nixed their 401(k) contributions include Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, Entercom and rental car agency Dollar Thrifty.

“I, for one — also a Reserve Member — am totally thrilled,” writes a reader, responding to yesterday’s inbox, “that not one word of ‘asset allocation,’ ‘time horizon,’ ‘risk tolerance,’ ‘cost averaging’ or other such drivel and pablum of the financial industry is to be had among the Agora publications. I hope it stays that way. If it’s advice on those subjects he’s looking for, well, it’s even more abundant than the rivers of worthless paper flowing out of the Fed. Just ask for it from almost any investment adviser.

“As Buffett aptly notes, those are all methods for how to be average — and average right now is downright scary. The degree of risk that one assumes is directly proportional to how much one understands the fundamentals of an investment, sees the obvious and acts accordingly. It was largely due to the steady stream of spot-on, if not conventional and frequently unpopular, commentary coming from the crew of Agora doomsayers, who often ran against the mainstream financial media and consistently pointed to the buildup of ugly economic data, that I became convinced to do the obvious.

“Last year, I exited nearly all long positions and loaded up on puts in the financials and in the consumer stocks and indexes and barricaded myself with inverse market positions, with many of these either recommended or inspired by Strategic Short Report and the late Survival Report. And yes, I even did this for my retirement account. I couldn’t be happier with the results.

“While I’m still waiting for gold to have its day, Mr. Bernanke and friends have been very hard at work ensuring my eventual returns there. Had I asset allocated according to my time horizon and risk tolerance (gag…cough…) I would no doubt be enjoying the wonderful returns on bonds and cash, instead.”

The 5: Nice work.

Cheers,

Addison Wiggin
The 5 Min. Forecast

Source: Can the Mega-Rally Hold? The “True Cost” of the Crisis, An “Exploding” Energy Market, and More!

The Five Reasons Why Now’s the Time to Buy Junior Miners

Gold could be ready to end the summer doldrums even before summer begins.

The most relevant area of resistance in the way of this outlook is the 30-point range between $890 and $920. If gold can break through and find support at these values it will be poised to rise for the summer.

With that said, I think we’ve had our seasonal low and now it’s gold’s turn to shine…as the most preferable commodity…and better yet, to become money again.

Just writing that makes me realize how early in the game it still is. Who today would believe gold will become money again? Yet, at the top of the market everyone will.

Here is the best opportunity for us right now…

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Doing nothing while collecting royalties has to be one of the best — and easiest — ways to get rich. For instance, David Sengstack does nothing and collects royalty paychecks of $2 million per year…just because his dad was smart enough to buy the commercial rights to a song you’ve sung a hundred times, “Happy Birthday to You.”

Michael Jackson does nothing and collects royalties every time a Beatles song plays on the radio (he bought the rights years ago). But Paul McCartney — now a billionaire — does nothing and collects even more on the 3,000 song rights from other artists that he owns.

Today, you can do the same…and you don’t have to buy song rights. We got something even better. Check it out here…

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The Five Best Reasons to Buy Good Quality Precious Metal Juniors

Most of the small-cap and junior resource market has been in decline since gold first broke the $700 level back in 2006. But that’s all about to change, I have five reasons why you should buy juniors now before the window closes — lets get started…

Reason #1, is that, several depressing factors have come together to produce an early seasonal low, at least for the precious metals sector.

Reason #2, as implied in the introduction, gold has lagged the commodity cycle because the market is infatuated with the growth in developing countries, and has inferred a “realness” to their demand for commodities. I’ve never disputed that the growth exists… just that there is a lot more inflation, and that inflation is what drives prices higher.

I believe the gold market is at a bullish inflection point — a point of recognition of sorts.

Reason #3, the precious metal juniors have hardly benefited from the bullish trends in these commodities to date, especially since 2006, never mind the future.

Lots of money found its way into the junior segment over recent years, to be sure, but this expansion in capitalization has been dilutive. The Canadian Venture Exchange (CDNX) has had a hard time keeping up with gold itself, and is at its lowest level relative to gold since 2002. Simply put, the juniors should be tracking gold — and right now they have a lot of catching up to do. The result is a widening gap between the values of majors and juniors. In my mind, that gap will soon contract.

With that said I think it’s the best buying opportunity in this segment since 2002.

Reason #4, The money that has poured into the junior precious metals segment over the past few years has been soundly invested. I am impressed with the value that I’ve seen many juniors create throughout this cycle — the development of assets discovered back in the nineties has been astonishing.

Finally, the best reason to own these juniors now…

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Why Has Oil Surged?

Dwindling value in the dollar, a crisis in U.S. credit, rising demand from overseas. These are all explanations for the recent surge in oil prices. But that’s not the whole story.

There are more dangerous and deadly reasons for the rise in oil prices, and the real truth explains why we can expect this surge to last for a long time to come. Click here to read about the “bloody backlash.”

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Reason #5, the next takeover wave!

Many of the large-cap producers are priced for growth, and they know that if they want to sustain those multiples, they’ll have to buy or find reserves. That’s the incentive.

Meanwhile, the juniors spent lots of investment dollars proving up their assets, and the market has ignored them. So they are ripe for acquisition.

And, the majors have plenty of cash, thanks to the latest run in gold prices.

Some, such as Agnico Eagle have said they’re on the hunt, while others like Gold Fields are obviously in need of assets outside of South Africa. Corrections in the price of gold won’t discourage them.

There’s your ammunition, five Solid reasons to make sure you are small-cap and junior miners. These miners won’t remain at these levels long, so now is your chance to get in!

I’m working on a more comprehensive target list as we speak. I see a window of opportunity between now and the end of this gold price correction to buy the good quality small-caps and juniors before they take off. The window could close earlier than you think.

Regards,
Ed Bugos

P.S.: So now you know the reasons why you should be in the small-cap and junior miner game. There has been a recent downtick for gold, but that should not last. Readers of my Gold and Options Trader service have seen not only the reasons to buy junior miners, but they’ve gotten my personal recommendations instructing them which miners to buy and when. Want to know what I told them? Click here to find out…

Source: Small Cap and Junior Miners

–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.