ADP Spurs Stocks, Time to Buy Small Caps?, The Next Commodity to Boom, and More!

by Addison Wiggin & Ian Mathias

  • ADP puts wind in the trading sails… has a surprising jobs report spoiled the Fed’s next rate cut?
  • Time to buy small caps? Greg Guenthner on the “unfairly punished” penny stocks of 2007
  • Our Maniac Trader is going crazy for cotton… details on the next agriculture bull market
  • Moody’s gloomy prediction: House prices to fall as much as 35% by 2009
  • Real estate brokers lash out at The 5… our favorites, below
  • Plus… photographic proof of the pimps’ and hos’ pick for the 2008 election

 

The U.S. economy added 189,000 jobs in November, claims yesterday’s ADP National Employment Report.

The report blew projections out of the water, more than tripling the 50,000 jobs expected. And while they were at it, ADP revised October’s report — from 13,000 to 119,000 jobs added, a mere 916% adjustment.

If the Bureau of Labor Statistics adds its 2007 monthly average of 19,000 government jobs this Friday, you can expect job growth somewhere near 200,000 jobs for November. And… if you’re crazy enough to believe all that… than the probability of a rate cut by the Fed next week is significantly diminished.

But if you’re a betting man, you might think otherwise. Futures on the Chicago Board of Exchange are now giving 100% odds that the Fed will cut rates on Tuesday.

Ugh… while we said we thought the rate cut was “in the bag”… anytime investors start mentioning things like “absolute certainty” we can’t help but cringe. The same futures pit is currently giving 34% odds on a 50-point cut and nearly 100% odds that the fed funds rate will be 3.5% or lower by July 2008.

All of which might help to explain the market rally yesterday. The Dow and S&P 500 rose 1.5%, while the Nasdaq shot up 1.8%. Even the Russell 2000, which has had a difficult year and an even worse November, rose 1.8%.

“The past few weeks have tested investors’ resolve,” writes our small-cap sleuth Greg Guenthner, “especially those invested in smaller stocks. November is over. The month turned out to be one of the worst the Nasdaq and Russell 2000 have seen since December 2002. Many stocks are testing 52-week lows.

“Naturally, some of these companies are being unfairly punished. That’s where we’re looking for the majority of our penny stock opportunities right now.” Check out this chart:

“From its lowest point in early 2003,” says Gunner, “the Russell rose 60% in a little less than 10 months. We’re not saying 2008 will provide the same results. But it is clear that when small-caps bounce back, they do it in a big way. The S&P 500 only squeaked out a little more than 30% over that same time frame.” Gunner has already chosen his winners for the rally — you can follow along here.

The ADP report lit quite a fire under the dollar, as well. The euro was reduced to $1.45, the pound $2.02 and the yen was at 110.

As we suspected in yesterday’s 5, the Bank of England announced a 25-point rate cut this morning, down to 5.5%. While it may be too early to begin planning your London vacation, such news bodes well for the dollar in the short term.

The European Central Bank announced it will leave its lending rate unchanged at 4%… more tomorrow.

Gold got taken out to the woodshed overnight. It opened in New York this morning at $790.

Investors largely ignored yesterday’s Institute for Supply Management report,
which showed November to be the worst month for the service sector since March. The ISM’s services index fell to 54.1 from October’s 55.8, slightly worse than expected.

Even more telling were the three individual components of the index… new orders fell 5 points, to 51, while order prices rose from 63 to 76. And the third component from the ISM? Jobs… which fell to 50, a breath away from being “in contraction.”

For what it’s worth, the ISM estimates that over 80% of the U.S. economy lies within the service sector.

The U.S. housing market will fall into deep recession next year, with home prices dropping up to 35%, says Moody’s today. A report from Moody’s Economy.com estimated home prices will fall, on average, 13% from their 2006 peaks by early 2009. The report also suggested that some markets in Florida and California will fall as much as 35%.

“This is the most severe housing recession in the post-World War II period,” said Mark Zandi, the report’s author.

Click here to find out if your house could be worth 43% less by 2011.

This morning, luxury homebuilder Toll Brothers posted its first quarterly loss in 20 years.

“By many measures,” Chairman Robert Toll said in a statement, “Fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business. 1974 was perhaps rougher, but the difficult times only lasted one year.”

After hitting it big this fall with corn, wheat and soybeans, the Maniac Trader has picked a new obsession: cotton.

“The longer-term effect of ethanol and all the extra corn and wheat planting in the south in 2007,” Kevin Kerr speculates, “could be a cotton shortage and much higher cotton prices in 2008. The ethanol boom and subsequent global food shortage had agricultural commodities like corn and wheat going through the roof in 2007. Lack of cotton planting and booming Asian demand could spell profits for savvy traders.

“Daily volume in Zhengzhou cotton futures,” says Kevin, “which will complete their first year of trading on June 1, is now running about 50,000 contracts. Open interest at the ZCE has been running between 60,000-80,000 contracts per day since last November –- that’s just an incredible number.

“The New York Cotton Exchange reached this level only after a century of trading. The ZCE did it in less than a year. The power of China is amazing.”

“Still, even with all the global interest in cotton,” Kerr says, explaining why now is a good time to look at the cotton market, “futures have sold off heavily and there is a lot of bearish sentiment,” which is a good time to get in. For help doing so, see the Outstanding Investments December issue.

Japan’s ruling Liberal Democratic Party is spearheading the creation of a $100 billion sovereign wealth fund (SWF). That would put them on par with Singapore’s Temasek:

The group of 42 parliamentarians, led by former minister of financial services Yuji Yamamoto, hinted that it will tap into Japan’s $1 trillion-plus foreign reserve trust, $582 billion of which is held in dollars.

“You know how to get me going,” writes a reader. “Comparison of realtors to used car salesmen (OK, maybe some of them were), dishonest TV repairmen and cheating auto service personnel (NOT mechanics, who generally don’t quote the prices) really irks me. Putting my way through college as a mechanic, I later became a service manager to stop the promotion of a ‘crook’ who was being considered for the position, in order to make sure my customers were treated fairly.

“As a realtor, and a state director for the California Association of Realtors, I take pride in telling like it is, and told my agents in October 2005 to get tough or get out of the business. You shouldn’t have such a pompous attitude when the track record of some of your info is often off the mark. CANCEL my subscription of all the trash I am currently subscribed to associated with your company(s).”

The 5 responds:
Settle down. We’ll cop to the used auto salesmen charge. But TV repairmen and auto service personnel? Sounds like you have a few more chips on your shoulder than just our investment services.

As for track record, seems to me we’ve been warning people to stay away from exotic mortgages and overpriced housing since 2004… telling people to sell the dollar and buy oil, gold, commodities and alternative energy stocks since 1999… we’ve been buying oil services companies, spinoffs, special situations and single stock hedge funds… our track record has been spot on the big trends for some time — surprising as that may be, even to me.

We noticed this after the tech bust, too. On the way up, there’s a sense of euphoria in the market and people are generally nice to one another. On the way down, people lose their sense of humor and get nasty in a hurry. Good luck with that.

“I am a real estate broker in Sacramento, Calif.,” writes another who appreciates the spirit in which we offer our commentary. “I have and do receive a lot of ribbing about being a real estate broker and taking advantage of people. It comes with the territory.

“I was especially amused by the last 5’s comments from a reader and yourselves about going after the NAR for taking advantage of people and causing the latest mortgage disaster.

“I am never at a loss for amusement when the people in this country always blame someone else for their stupidity. Here are the facts as I experienced them:

“1.People were not listening to my advice about their risky mortgages or offering more than the asking price (which was already inflated), because they were going to make a fortune and sell before the note is due. Bigger-sucker theory.

“2. These buyers knew and understood the terms of these mortgages, but again, they were going to make a fortune, and besides it ‘s 100% financing and their credit already sucked, so what did they have to lose?

“3. It is the buyers that drive the prices in any market. If prices are overinflated, it’s because someone is stupid enough to pay them.

“4. No matter what I think it’s worth, it has to be appraised.

“Why does it always make more sense to people to buy anything when everybody wants it and not buy it when nobody wants it, especially in a cyclical business such as real estate? Why is it that these people were so smart when they were buying and all of a sudden became so stupid when it all blew up?

“Here’s to hoping for an America where people accept responsibility for their mistakes. Thanks for the laugh.”

The 5 responds:
Amen. For the record, however, we didn’t go after the NAR for taking advantage of people. We asked what would you expect them to do, as an agency that represents realtors, other than be a proponent of the market? We were taking issue with the reader’s comment that they should be named in a class action lawsuit.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. If anything positive can be said about this election cycle, it’s bringing out the democrat — small “d,” in the true sense of the word — in everyone:

 

rspertzel

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