Legacy Of The Hairy Brutes

The Daily Reckoning - Weekend Edition
April 9-10, 2005
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

MARKET REVIEW: LEGACY OF THE HAIRY BRUTES

"Free trade must be fair trade, and we will work to ensure
that American manufacturers and workers compete on a level
playing field."

-- Carlos Gutierrez, U.S. Commerce Secretary April 4, 2005

In Wednesday's edition of the Rude Awakening, we brought to
your attention the plight of the Neanderthals.

To our satisfaction, we beat our favorite magazine to the
punch with this one - the Economist published this story
today. Such are the advantages of daily web-based
publications like ours. But we digress…

The Neanderthals became extinct some 30,000 years ago, we
reported, usurped by Homo Sapiens. According to the
newscientist.com, it was Homo Sapiens's propensity for free
trade that may have been the decisive factor.

Last week, the Bush administration published figures
showing that imports of cotton clothing in the first
quarter of 2005 had blown away all previous records. In
some cases, imports were up 1,500% from the same quarter a
year ago.

"The Neanderthals are incensed," we wrote. "One group of
primitive cave dwellers has already asked Washington to
enact combative legislation."

So it is with utter dismay that we report to you today,
dear reader, that the Neanderthals have gotten their way. A
process to impose import quotas on shirts, trousers and
underwear from China has already begun in Washington,
reports the New York Times.

"In an abrupt policy reversal, the Commerce Department said
it would begin an investigation into the need to re-impose
trade quotas that were lifted just three months ago on a
wide variety of Chinese apparel," they wrote.

"Free trade must be fair trade"

We repeat this ludicrous example of Carlos Gutierrez's
Orwellian double-speak for emphasis.

Hirsute brutes like Carlos Gutierrez think government
intervention is the only way to free trade. This primitive
bone rattling and chest pounding is proof to us that the
Neanderthals still have no idea what free trade is, nor
fair trade.

Is it fair that we, the consumer, should have to pay higher
prices for our boxer shorts just because the savages want
to protect an inefficient industry?

"Imposing new quotas is just going to impose a hidden tax
on consumers," said Eric Autor, vice president of
international trade at the National Federation of
Retailers.

Of course, we sympathize with the 17,000 textile workers
that have already lost their jobs this year…the National
Council of Textile Organizations says 17 textile mills have
already closed since January 1, 2005. However, it should
also be pointed out that China is still only the 13th-
largest supplier of cotton trousers to the U.S., and its
gains have largely come at the expense of other low-cost
producers like Mexico, Nicaragua and Honduras, claims Mr.
Autor.

We conclude our argument with the words of economist
Michael A. Heilperin, delivered in 1952…

"It is an elementary, but often forgotten, knowledge that
policies of national governments have always been the
principle obstacle to economic relations between people
living in various countries, and that whenever these
relations were free from government restrictions,
equilibrium and balanced growth would follow by virtue of
the spontaneous and anonymous mechanism of the market."

Regards,

Tom Dyson,
The Daily Reckoning

P.S. This reader comment just landed in our inbox: "I was
amazed and very upset at your redneck article
"Backstabbed". Just for the record, I am not a Canadian.
This type of ugly American type thinking is what makes
America despised in Europe and elsewhere. Get some maturity
and stop printing nonsense like this"

Editor's Comment: Bravo! This is exactly our point. We are
pro-free trade and despise the U.S. government's market
meddling. "Backstabbed" is exactly the type of Neanderthal
opinion so pervasive in Washington, and we wished to both
highlight it and help you profit from it.

This is what we propose:

Harness the world's rising demand for oil for $1.70
http://www.agora-inc.com/reports/STA/WSTAF408

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THIS WEEK in THE DAILY RECKONING: Our usual smorgasbord of
editorial…there's oil, world improvers, a piece on
commodities by Jim Rogers and even a look at the way George
Soros's "Theory of Reflexivity" can help improve your
trading immediately…

PAVING THE ROAD TO HELL 04/08/05
By Bill Bonner
"The path that led America to its place as the biggest debtor…biggest
consumer…and most meddling military in the world was not forged alone. But,
as Bill Bonner points out, there is one world improver who stands out among
the crowd…"
http://www.dailyreckoning.com/Issues/2005/DR040805.html

THE ENERGY REVOLUTION INTENSIFIES 04/07/05
By Dan Denning
"Energy is the dominant story of the month. It's hard to
ignore when crude futures are setting new highs daily - and
there's more than just rising commodity prices and a
falling dollar to explain oil's rise…"
http://www.dailyreckoning.com/Issues/2005/DR040705.html

READING THE MIND OF MR. MARKET 04/06/05
By Mark Tier
"George Soros believes that everyone's view of the world is
'somehow flawed or distorted,' and Mark Tier shows us how
Soros turned that realization into a powerful investment
tool. Read on…"
http://www.dailyreckoning.com/Issues/2005/DR040605.html

ASSET CLASS OF THE NEXT GENERATION 04/05/05
By Jim Rogers
"Investors tend to steer clear of the commodities market,
saying that it's just 'too risky.' But, as Jim Rogers
points out, there has been more volatility in the NASDAQ in
recent years than in any commodities index…"
http://www.dailyreckoning.com/Issues/2005/DR040505.html

LESSONS IN MARKET LORE 04/04/05
By The Mogambo Guru
"There are many things that astound The Mighty
Mogambo…one that gets him really scratching his head is
why people continue to buy the ever-rising U.S. debt? Isn't
that something an intelligent person would avoid?
http://www.dailyreckoning.com/Issues/2005/DR040405.html

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HEADLINE, NEWS And INSIGHT: Top Notch Material we think you
have to read, but couldn't fit into the week's issues of
the Daily Reckoning…

ABSURD EPISODES IN AMERICAN HISTORY
By Bill Bonner
"The European powers had locked horns. Now, it was
America's chance to join the battle…and Wilson's chance
to become Alpha Male of the entire world."
http://www.dailyreckoning.com/Featured/AbsurdEpisodes.html

AN UPDATE ON INVESTOR PSYCHOLOGY
By Steve Hochberg
"Don't be fooled by reports of besieged corporate leaders;
it is only a preview of coming attractions. The latest
executive compensation surveys reveal that the infatuation
with corporate leadership reached record levels in 2004."
http://www.dailyreckoning.com/Featured/AnUpdateonInvestorPsychology.html

WHY WOMEN"S SKIRTS GO UP
By Mark Tier
"If a company is caught with inventory of clothes that are
suddenly out of fashion it has to write them off. To avoid
that, lead times between ordering, production and sale are
continually tightened."
http://www.dailyreckoning.com/Featured/WhyWomensSkirtsGoUp.html

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FLOTSAM AND JETSAM: "The risks undertaken by the GSEs, if
not properly managed, may pose a threat to their solvency,
the stability of other financial institutions and the
strength of our economy." - John Snow, April 7, 2005.

Ummm…you mean like an explosion, violent enough to remove
airplanes from the sky, John?

SOMETHING SMOULDERING
By Dan Denning

"But housing activity is red hot," I'm often told, usually
with annoyance, by someone who's read my ideas about
America's mortgage/housing bubble. Red hot, indeed. But so
was the hold of the French freighter Grandcamp, which
smoldered in the harbor of Texas City on April 16, 1947.

That accident at Texas City was not the result of a
refinery running 24/7 at breakneck capacity with no time
for repairs or for any downtime whatsoever. The Grandcamp
was piled high with ammonium nitrate fertilizer. At a
little after 9:12 in the morning, after the hold had been
sealed and the firemen evacuated, 3,100 tons of ammonium
nitrate blew up, raining debris on Texas City, causing a
15-foot tidal wave in the rest of the harbor and knocking
two airplanes out of the sky.

Which brings me to Fannie Mae, Freddie Mac, and
derivatives.

You might have heard the news that Freddie Mac reported a
42% drop in 2004 profits. Freddie managed to lose $4.5
billion on its derivatives portfolio alone - you know, the
one designed to protect the value of Freddie's mortgage
assets when interest rates are volatile. Overall, net
income fell from $6.68 per share in 2003 to $3.78 per share
last year. Analysts were expecting $6.87 per share.

Why the lofty expectations? Who knows? Freddie hasn't been
current in any of its financial reporting since 2003, when
it had to restate earnings by $5 billion after confessing
it managed earnings, although whether that was to smooth
earnings out to please Wall Street or to meet executive
bonus targets…no court has yet said.

Either way, something is smoldering in the mortgage-lending
market, and the heart of fire is on the balance sheets of
Freddie Mac and Fannie Mae. Fannie is not without troubles
of its own. The stock itself is violating a 10-year upward
trend and moving toward a serious breakdown.

Will Fannie's breakdown and Freddie's earnings crackup lead
to a wider fall in mortgage-lending and homebuilding
stocks? It wouldn't be at all surprising. The chart below
shows the performance of the Philadelphia Housing Sector
Index (HGX) and Countrywide Financial (CFC), one of the
nation's largest residential mortgage lenders. Hello
housing bubble!

There are other mortgage lenders, of course. But the big
ones are Fannie and Freddie, although they are secondary
mortgage lenders, buying up the mortgages issued by the
likes of CFC, a primary mortgage lender. These three stocks
are all excellent put buying opportunities as the story
plays itself out. But don't forget the homebuilders.

The HGX is made up of 21 of the largest homebuilding stocks
on the market. It includes the top five: Pulte Homes (PHM),
D.R. Horton (DHI), Lennar (LEN), Centex (CTX), and KB Home
(KBH). As an options trader, I'd look at all six stocks,
HGX plus the big five, as opportunities for leveraged
profit as the bubble bursts.

I'll be sending out my top five options plays for 2005,
very shortly. Click here for more information:

http://www.agora-inc.com/reports/STA/WSTAF408

But if you're not into leveraged profits, sit back and
enjoy the spectacle. Don't get too comfortable, though.
Many institutions - banks, pension funds, and even foreign
central banks - own GSE-backed bonds. The fire is
smoldering.

Good Weekend,

Dan Denning

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And the Markets… (Courtesy of the Rude Awakening)

	Friday	Thursday	This week	Year-to-Date
DOW	10,461	10,546	57	-3.0%
S&P	1,181	1,191	8	-2.5%
NASDAQ	1,999	2,019	15	-8.1%
10-year Treasury	4.48%	4.48%	0.03	0.26
30-year Treasury	4.76%	4.80%	0.04	-0.06
Russell 2000	611	620	-1	-6.3%
Gold	$426.70	$426.02	$0.15	-2.5%
Silver	$7.14	$7.05	$0.13	4.8%
CRB	304.32	306.28	-7.56	7.2%
WTI NYMEX CRUDE	$53.32	$54.11	-$3.95	22.7%
Yen (YEN/USD)	JPY 108.30	JPY 108.64	-0.68	-5.6%
Dollar (USD/EUR)	$1.2928	$1.2858	-23	4.6%
Dollar (USD/GBP)	$1.8849	$1.8699	-46	1.7%

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