Lehman's next shoe... Einhorn's "light bulb moment"... Hate propaganda... The ghost of Jimmy Carter... Gag me with an ETF fork... Bill Gross is long Countrywide...

A new reason to stay short Lehman Brothers appeared in today's "Heard on the Street" column in the Wall Street Journal. It seems the $600 billion of mortgages Lehman securitized between 2003 and 2007 could come back to bite it.

New accounting rules are being proposed that would make it harder to keep securitized assets off the balance sheet. Lehman has been trying to deleverage its highly leveraged balance sheet lately... but according to today's Journal, returning just 20% of those mortgages to the balance sheet could undo all the progress Lehman has made.

Speaking of Lehman...

In late July, BNP Paribas, the largest bank in France, froze depositors' money- market accounts. Although the U.S. media barely reported the event, hedge-fund manager David Einhorn saw it. He knew immediately what a drastic step BNP Paribas had taken – shutting French workers out of accounts they counted on for ready access to money – and took it as a sign that a greater financial crisis was brewing.

Within two days, he and his analysts at Greenlight Capital compiled a list of 25 financial institutions to sell short. One of these companies was Lehman Brothers. Einhorn says he and his team began listening to all the firms' quarterly conference calls and Lehman Brothers "sounded less honest than the other firms." There's a great story about this in New York magazine.

A late 2006 poll indicates most people hate energy companies even more than they hate tobacco companies. And their hate is growing with gasoline above $4 a gallon. So what is Big Energy doing to counter the negative sentiment? Airing feel-good TV commercials. The companies and their industry associations spent $52.5 million on ads in the first quarter, up 18% from last year.

During Jeopardy last night, Goldsmith saw three different ads from Baltimore Gas & Electric telling consumers how to save money on their energy bill and warning them to stay away from power lines. Every ad featured smiling faces, bright sunshine, and lots of camaraderie. This can only mean one thing... Sean's power bill is getting ready to soar.

I wonder if any of today's crybabies and busybodies remember Jimmy Carter's windfall profits tax? Gee, that worked out just great, didn't it? We punished oil and gas companies at the exact moment the market was rewarding them. For the next couple of decades, nobody wanted to be in that business. Now look at us.

From 2004 to 2006, the top 27 oil companies tracked by the Energy Information Administration saw their tax bills nearly double, from $48.4 billion to $90.4 billion. Check out ExxonMobil's 2007 tax bill: sales, excise, and income taxes totaled $102 billion on $390 billion in sales. Think that might affect gasoline prices a little?

No one was ever taxed back into prosperity. Prosperity happens when you take the taxes and regulations away. A windfall profits tax will only make gasoline more expensive, just like it did the last time we tried it. How could it be otherwise? Add a new cost component and what are you going to get? More expensive gas, that's what. Who on Earth doesn't get this?

Prepare to suppress your gag reflex... MacroMarkets is launching an ETF tied to the average price of a home in 10 major cities including New York, Boston, San Francisco, and Los Angeles. And the funds will be levered by a factor of two. The MacroShares Major Metro Housing Up (UMM) will deliver twice the return of the benchmark index and the MacroShares Major Metro Housing Down (DMM) will deliver twice the inverse return of the index.

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Secretly, I cheer the mass proliferation of ETFs and other products aimed squarely at the know-nothing speculator. Speculation by the great unwashed herds of individual investors virtually guarantees a steady supply of mispriced securities.

In Barron's Roundtable, Bond King Bill Gross says, "Countrywide Financial trades at a 10% discount to the price that Bank of America, its future parent, has agreed to pay in an all-stock deal. The deal will close in a few months, and Countrywide yields 10% while you wait."

Gross's suggestion is called "risk arbitrage." That's when you buy announced takeover targets at a discount to the takeover price. It's risky, though, as the name indicates. What if the deal doesn't go through? The stock could plummet. Lately, Bank of America has reaffirmed its intention to go through with the Countrywide acquisition, a deal I've heard absolutely nothing good about.

I don't think the Countrywide acquisition is all about mortgages. It's also about deposits. You see, it's hard for Bank of America to grow without breaking through the deposit ceiling – the legal limit that says a bank can't have more than 10% of the country's banking deposits. But Countrywide is a savings and loan, not a bank. So Countrywide's $60 billion of deposits wouldn't count toward the cap.

The chance to pay 15 cents for $1 of deposits and increase deposits by 9% in the process, is probably more than Bank of America can resist. The question is, once Bank of America cracks open the black box of Countrywide's mortgage loans, how bad will it be? Will the deposits be worth the pain caused by the mortgages? Who knows? Not me, and I bet not Bill Gross either.

Michelle Leder's www.footnoted.org suggests the mortgage situation at Countrywide is much worse than Bank of America thinks. Michelle is keeping an eye on the Countrywide Foreclosures blog, which tracks the market prices of Countrywide borrowers' homes in foreclosure.

Contrarians are starting to buy airline stocks... Jim Rogers says he's loaded up on them. And Marc Faber is buying airlines to profit from a drop in oil. Faber argues falling prices won't really help the airlines, but it will greatly improve investor sentiment. And our own Jeff Clark advised S&A Short Report readers to buy options on a troubled airline yesterday, hoping for a quick bounce. Today, shares of Jeff's airline pick opened up almost 4%, and readers made a quick 19%. To learn more about Jeff's recent trades, click here...

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New highs: Opti Canada (OPC), International Coal Group (ICO), LaBranche (LAB), U.S. Natural Gas Fund (UNG), Comstock Resources (CRK), Potlatch (PCH).

What would our mailbag be without a steady flow of potshots and accusations? Send yours here: feedback@stansberryresearch.com.

"So, did Porter go to Italy to get 'made,' or did he go to get ordained for the religion he's thinking of starting. I would guess the second, after all he does walk on water... He does too! Just ask him if you don't believe me." – Paid-up subscriber Ignorant Dupe

"I run the Mexican manufacturing operations for a US company. My offices are in Tijuana. I now fill up frequently in Mexico. However, I did not do so until recently because PEMEX franchise operators almost universally short you at the pumps and some cut the fuel with additives that can be harmful to your engine. So until gasoline in the US hit a 20% premium above that in Mexico, I did not bother. One little known fact: Most of the fuel in Northwestern Mexico comes out of LA area refineries. If you can find a franchisee that does not cut the fuel, it is not bad gas. It is purchased by PEMEX at market rates and then sold in Mexico at heavily subsidized rates. I expected those subsidies to be reduced, or end, with the spike in oil, but President Calderon just reiterated his support for subsidies. We will see how long it can continue. Mexico is already a net importer of refined products and at current rates of usage will become a net importer for all oil products within 6 years. None of the info above is hearsay. My wife worked for years setting up PEMEX licensing agreements for franchisees and then handling their fuel purchases from PEMEX corporate. She has the inside skinny." – Paid-up subscriber Rob

Regards,

Dan Ferris
Medford, Oregon
June 17, 2008
Commodities Are Soaring... Are Interest Rates Soon to Follow?
By Ian Davis

The world is experiencing a global commodity boom.

The last time the price of commodities took a similar rocket ride was the 1970s and early 1980s. During that period, gold rose 1,397% and oil raced up 870%. To combat soaring inflation, the Fed raised interest rates. As a result, by 1982 the yield on a 30-year Treasury bond exceeded 15%.

So far, during the commodity boom – which began in 2002 and has seen gold and oil rise 224% and 550%, respectively – the yield on 30-year Treasury bonds has fallen 120 "basis points" (1.2%) to 3.9%.

So this raises the question: Is now a good time to go long Treasury bond yields... or alternatively, sell short Treasury bonds themselves?

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Actually, no... At least not yet.

The problem is, no one saves money anymore...

In 1980, the average U.S. household saved 10% of its disposable income. Meaning 10% of household earnings that weren't spent on food, shelter, or other necessities were saved for a rainy day.

Today, the average U.S. household saves only 1.8% of its disposable income. Less than one-fifth the amount they saved in 1980. The following chart tells the story...

As Fewer Americans Remember the Great Depression, the Savings Rate Shrinks

Debt is also on the rise...

In 1980, the average U.S. household spent 11.1% of its disposable income servicing debts. Today, that amount stands at 14.1%.

Again, the following chart tells the story...

U.S. Households Are Swimming In Debt

As you can see, U.S. consumers are burdened with record amounts of debt and have very little in the way of savings.

In the 1970s, the Fed was able to raise interest rates with impunity, and the U.S. public was able to dip into their savings to deal with the increased cost of their small amount of debt.

Today, if the Fed were to raise interest rates as it did in the 1970s, the U.S. public would be swamped by its debt payments... and most households wouldn't have the savings to rescue them.

Instead, I believe the Fed will leave interest rates fairly low for now... and allow the consumer's debt to inflate away.

Good investing

Ian Davis

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