In Global Markets, It’s Always Five O’clock Somewhere

Today’s comment is by Jack Crooks, editor of World Currency Options and President of Black Swan Capital.

Dear A-Letter Reader,

I’m in Las Vegas for the Traders’ Expo right now.

I’m going to teach a group of investors how to cash in on currencies. Today, I want to share with you what I’m going to tell them here in Sin City…

By now you must be wondering how financial markets have continued on such a torrid pace throughout the year. After all, the world is aware of our Federal Reserve’s credit market house of cards, right? No worries, it’s always happy-hour at the easy-money bar and grill. The new bartender is a guy named Ben... but it’s the same old intoxicating game!

Maybe. But plenty of financial institutions are still losing their assets after making bad bets with this imaginary money!

Just look: Bank of America, Citigroup, Morgan Stanley, Merrill Lynch, Bear Sterns… they’re all feeling the pain of reckless investing.

Yet despite many of our “elite” banks coming clean on credit market losses, Main Street investors aren’t heeding the warnings. Then again, why should they? So far, they’ve just been stacking up chips by making risky bets.

Heck, all we’ve gotten so far are a few stock market hiccups!

As far as I’m concerned, over-confident investors are throwing good money after bad. And our central bank is merely postponing the inevitable.

The real pain will arrive when the house closes the chip window. In short, we’re at an important stage in the game.

Like I just said, a lot of investors are content with ignoring the warning shots until their portfolios come directly under fire.

They’re just following the Fed’s lead. They’re playing high stakes poker. Unfortunately, Bernanke doesn’t have an ace in the hole.

The Fed knows hiking interest rates will crush the housing market and the economy. And the Fed’s team knows cutting interest rates will further inflate the world’s asset bubbles.

In other words, the Fed is damned if they hold and damned if they fold! So they do the best they can and try to bluff their way out.          

They’re trying to stimulate economic growth rather than worry about asset bubbles.

In the process, they’re pushing the dollar lower. Mind you, I think the Fed WANTS the greenback to fade. They want the stock market to stay juiced. And they certainly want Mr. and Mrs. Consumer to keep buying into the game.

Investors figure there’s no reason to stop gambling if the house is going to keep fronting the money.

However, a turning point will come, and a whole lot of unaware people will lose their shirts…

At the saturation point, money will become less and less stimulative. The party just won’t go on any longer. This is the apex of the boom/bust cycle. It’s the turning point we have to watch out for.

A classic example: Japan, 1989.

The Bank of Japan fought hard to escape a deflationary stranglehold. However, all the easy money in the world – even a zero interest rate – did nothing to help. The Japanese economy suffered 14 years in the grips of a deflation bear.

The Fed is running the same risk today, and it needs to be careful of digging an inescapable hole out in the middle of the desert. It’s not easy to orchestrate an orderly fall in the dollar AND avoid a panic collapse.

After all, the lowly greenback is still the world’s money. Any panic run from the world’s money has major implications for every market around the globe.

We’re not there yet, but the day of reckoning is getting closer. The grand finale will most likely come in spectacular fashion. It’s what I like to call “climax selling.”

I’m watching the action very closely. And while the house money keeps flowing to the global economy, I think the best approach is to…

If you’ve ever been to Las Vegas, you know as well as anyone how easy it is to give away your money. That’s why I keep most of my chips off the poker tables and in the currency markets, where I can wait for the odds to turn in my favor.

The search for higher yields has drawn capital out of some currencies and into others. For example, the British pound, the Australian dollar and the euro have climbed to historic highs. It’s like the whole world is betting on black!

Meanwhile, currencies like the yen have been cast by the wayside. You can imagine what’s going to happen when these extreme bets reverse course. A lot of investors will lose their shirts, and a select few who were prepared will hit the jackpot!

JACK CROOKS, Editor of
World Currency Options

Hundreds of Thousands of Americans Are
Buying Offshore Property Part II

As I noted yesterday, a large number of American citizens are leaving the good old U.S.A. for new homes abroad.

The U.S. National Association of Realtors (NAR) just released an extensive study on Americans living abroad.

According to their study, the American demand for offshore vacation and short-stay foreign properties may be in the range of 370,000 to 440,000 units. Overall, their findings also suggest retirees and working Americans own approximately 150,000 foreign properties in a foreign country.

Now for the really good news: If you directly own real property in a foreign country, including a timeshare arrangement, you don’t have to report it as a foreign account to the IRS (defined in U.S. Treasury Form TD F 90-22.1).

Unfortunately, real estate holdings are generally public record in the country where your property is located. You also can’t liquidate that property easily. If you own the real estate through a holding company or trust, that entity probably will be required to file its own U.S. disclosure and tax forms.

If you wish to purchase and hold real estate in a foreign country without disclosing your ownership, you can do that by placing title in an international business corporation (IBC), trust or family foundation. This is especially useful if you set up an entity in a nation, such as Panama, where beneficial ownership does not have to be disclosed. And your IBC or trust does not have to be registered in the same nation where your real estate is located.

* To find out all about the possibilities of your owning offshore real estate, for a new home, second home or retirement, click here.

Wealth

Money Market Funds Suffering a Sub-Prime Squeeze

Money market mutual funds used to be considered some of the safest investments. They’re supposedly “safe” because they hold short-term U.S. Treasury and agency debt in order to minimize risk.

Only rarely in the history of modern finance have money market funds “broken the buck.” This means they’ve traded below the US$1 per share net asset value that all such funds seek to maintain. But that was before this year’s credit crunch.

The ongoing trauma of the U.S. sub-prime crisis has revealed plenty of risky assets in some of the country’s biggest money market funds. In fact, both Legg Mason and SunTrust Banks recently propped-up shaky “money-market funds to cushion them from possible losses on debt issued by structured investment vehicles” or SIVs, according to Bloomberg.

To recap, SIVs are off balance sheet entities. Banks and brokers set these up to buy other securities, typically risky sub-prime mortgage debt. And these major financial players buy way too much of it as it turns out. Most of the cash needed to purchase theses securities is raised by issuing commercial paper, which usually matures in 270 days or less.

As I have commented before here in the A-Letter, when the crisis intensified this summer, the market for asset-backed commercial paper crashed 30% in value. It fell from US$1.2 trillion in early August to less than US$850 billion now. This means that SIVs are stuck in a real cash-crunch. They’re unable to roll-over and repay billions in outstanding commercial paper.

OK, so how does this relate to money market mutual funds, you ask?

Well, it seems that quite a few money market funds were hungry to boost yields in a low-return environment. So they gobbled up a bit too much of the most toxic asset-backed commercial paper available today. Now, after the market crashed 30% in value, money funds are bracing for big potential losses on the commercial paper investments they hold.

According to Bloomberg, “Legg Mason invested US$100 million in one of its money funds and arranged US$238 million in credit for two others. Funds run by Legg Mason held about US$10 billion of SIV debt, accounting for 6% of the company's money-market assets at the end of October, according to its filing with the SEC.”

Meanwhile, SunTrust has petitioned the SEC to bailout two of its money market funds. These two funds purchased US$115 million in notes issued by a SIV called Cheyne Plc, that’s now in big trouble and facing liquidation.

Last month, Wachovia reported a US$40 million loss on asset-backed commercial paper it bought from its Evergreen Investment Management division. One of Evergreen’s money market funds had nearly US$3 billion in asset-backed paper at the end of March. But it has since cut back its holdings to US$1.76 billion at the end of September.

And there’s a lot more of this toxic sub-prime paper floating around in the financial system. In fact, the ten largest managers of U.S. money funds have US$50 billion in SIV debt,” according to Bloomberg.

Don’t be surprised to find even more sub-prime mortgage losses surfacing in the most unlikely places.

What’s in your money-market fund's wallet?

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. I’ll be talking about this credit squeeze during my special alert web teleconference this Tuesday at noon. I’ll explain to you exactly how to protect yourself from whatever the major banks and brokerage houses throw at us next – and show you a few ways to profit from Wall Street’s pain. I cordially invite you to join me for this special audio briefing – Registration is Free! But space is limited, so to reserve your spot for this event, you need to R.S.V.P. right away.  Click here to reserve your spot