by Addison Wiggin & Ian Mathias
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Markets end January with a bang… why 2008’s first month was still a record bust
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Gold creeps back to record highs… Frank Holmes on why gold remains an “attractive investment”
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OPEC denies output boost, U.S. government prepares for $225 oil
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Russia launches SWF… how baby boomers could learn a lesson from Mother Russia
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Jobs report falls negative, far below expectations… why the latest BLS reading is even worse that it seems
U.S. markets capped off January with a nice rally yesterday. The Dow, S&P and Nasdaq all shot up 1.7%.
It must have been the huge loss posted by MBIA…or perhaps the worst consumer spending number in over a year… or maybe even the warning issued by S&P that it plans to cut its ratings on $534 billion more in CDOs and mortgage-backed securities.
One of these bits of cheery news surely lured “investors” back into stocks.
Alas, even with yesterday’s rally, January will go in the books as one of the worst in history. The Nasdaq finished the month down 10%, the worst January in the 37-year history of the exchange.
The Dow dropped 4.6%, its worst January since 2000. And the S&P 500 fell 6.9% — its lousiest year opener since 1990.
Microsoft offered up a $45 billion hostile takeover bid for Yahoo this morning. That ought to be fun to watch.
Gold has been the real story this month. After falling from Wednesday night’s all-time high of $936 per ounce, gold has crept back up to $934 this morning.
“Despite the assertions of some,” comments our friend and perennial Vancouver attendee Frank Holmes, “today’s gold is not the tulip of 400 years ago. The ‘wise crowd’ around the world has been buying gold as a safe haven from currency risks and the trillions of dollars invested in derivatives and as a way to recycle petrodollars.
“What we’re seeing in the market is not a bubble-blowing frenzy fueled by crowd madness. Below is a chart of gold in 1980. In January of that year, the price went up 40% in seven trading days, to its peak, and over the next five days, nearly all of that gain was lost. Now, that was a bubble.
We’ve added the gold chart over the last six months for comparison:
Today, “There are many plausible ways to explain,” says Holmes, “why gold is an attractive investment in the current environment: gold’s positive correlation to the price of oil, its inverse relationship to the dollar, rising wealth and demand in emerging markets, the unknown depth of the escalating derivative crisis, prospects of a U.S. recession and more.”
Frank is the CEO and chief investment officer of U.S. Global Investors and has given riveting speeches every year at our annual Vancouver event. This year will be no different. If you haven’t made plans for summer travel yet, we recommend you work Vancouver into your schedule. It’s easily the best investment conference you’ll attend this year.
Last night, OPEC ministers chose to keep oil output at present levels. The group decided to maintain its 29.6 million barrels per day flow until March 5, citing concerns that a global slowdown — particularly in the U.S. — will stunt demand.
Light sweet crude currently trades for just under $92.
Meanwhile, the U.S. government is pricing oil at $225 per barrel in the not-too-distant future. “No less an oil-burning institution than the Department of Defense,” says our oilman Byron King, “is planning for a future of $225, and higher, oil.
“The U.S. Navy, for example, is currently designing future ships using $225 per barrel as a baseline for the price of fossil fuel. In fact, the Navy, under the direction of Congress, is also planning to use nuclear power for all future large surface combatants. And the Air Force is designing engines and fuel systems to work on synthetic jet fuels derived from coal and natural gas.
“There is an astonishingly complex engineering process for qualifying synthetic fuels to work in military-grade engines, at high altitudes, high G-forces and supersonic speeds. But all of that is happening even now. The Air Force knows that it cannot lose any time in getting this done. And the Army and Marine Corps are looking hard at the fuel-efficiency of ground combat vehicles.
“Post-Iraq, the Army and Marines will be re-equipping their forces with much new gear. So the planners are hard at work figuring out how to design and procure ‘mobility systems’ that have the best possible fuel-efficiency. This is all because the DOD planners are forecasting oil prices of $225 per barrel and more.”
Exxon Mobil announced earnings of $40.6 billion for 2007 this morning — the largest income for any company, ever. Exxon income rose 14%, to $11.6 billion, in the fourth quarter, another all-time high for any U.S. company.
Assuming Exxon’s still bringing in profits at its 2007 rate, it’s banked about $15,600 in the 12 seconds it took you to read this bit.
Shell reported earnings of $27 billion in 2007, a new all-time high for any British company. We’re sure Shell employees and shareholders were delighted… but the rest of Great Britain seems, well… pissed.
“Shell shareholders are doing very nicely while the rest of us… are paying the price and struggling,” said Tony Woodley, leader of the U.K.’s largest trade union, who labeled Shell’s $75 million daily revenue “obscene.”
Yesterday, we reported Japan’s intention to open a multibillion sovereign wealth fund. Today comes word the Russkies are right on their tail.
The Russian Finance Ministry launched two sovereign wealth funds overnight, with a total purchasing power of nearly $190 billion. The nation has split oil proceeds into funds labeled the Reserve Fund and Fund for National Well-Being. (Sweet titles.)
The Reserve Fund will control $125 billion and will be used to hedge against a possible drop in oil prices, as oil revenues serve as Russia’s No. 1 income stream
The Fund for National Well-Being will begin with $32 billion in the bank, and Russian finance officials have said that the fund will invest in foreign stocks and bonds. The whole “well-being” bit alludes to the beneficiary of the fund — the Russian pension system. As with the U.S. and our boomers, Russia is facing a huge demographic shift.
Thus, now over 40 international SWFs are up and running, with a net worth of over $2.5 trillion. Chris Hancock has assembled a report on the matter… a must-read for any long-term investor. Check it out here.
In the currency world, the dollar whipsawed through some big ups and downs overnight, but this morning trades a skosh away from yesterday’s familiar lows. The euro is still at $1.48, the pound at $1.99 and the yen at 106.
Mexico cut its 2008 economic growth forecast this week. The Mexican Finance Ministry now expects 2.8% GDP growth this year, down from its previous forecast of 3.7%. Ministry officials specifically cited recessionary woes in the U.S. — the country’s No. 1 trading partner — as the largest driver behind the lower forecast.
Despite Mexico’s GDP revision, growth there is still likely to double the U.S.’ 1.5% expansion in 2008, as predicted by the IMF.
Back here, north of the border, jobs fell by 17,000 in January — a number far below the 70,000-plus jobs analysts’ expected to see. Unemployment fell slightly, down to 4.9%, which makes perfect sense… only the U.S. government can report an unexpected loss of jobs and lower unemployment in the same breath.
Assuming the BLS doesn’t “revise” the number back to positive growth next month, this will go down as the first monthly payroll decline since August 2003.
And much as we hate to rain on your Friday, the jobs number is far worse than it seems. The number of long-term unemployed — those seeking a job for more than six months — now stands at over 1.3 million — up 22% from this time last year.
The number of people who’ve given up looking for work is nearly double the same reading for 2000, the last time we feared a looming recession.
“Yes, I totally agree,” responds a reader — facetiously, we think, “it is an outrage, those Chinese coming into America, and buying the place up. How dare they?
“For years and years, those unfair Chinese would work away diligently, supply America with anything it desires, provide it cheap — nay, unfairly below market value — and to boot, all they wanted in return are little pieces of paper, something about an IOU and deeds to American houses and businesses and factories and land. So here we are, busily preparing for the next Super Bowl, and next thing you know, we find out that we don’t own the place anymore.
“Those evil little workers have finally arrived, and they have come to collect their debts. They want to trade some of those little pieces of paper for something more substantial, because, well, those little pieces of paper aren’t worth as much as they used to be anymore, and it’s only going to get worse. Too many little pieces of paper, not enough goods.
“Can you imagine such a thing? Workers wanting to be paid ‘in kind,’ if not in specie, for their work? Outrageous. Intolerable. For 20 years, they were working for what we thought was basically nothing, never living it up like us, never traveling all over the world like us, never getting involved in any conflicts trying to bring democracy to the world like us, never consuming what they produced, and suddenly, they feel like they own the place.
“I think there ought to be a law to make this illegal. I think foreign workers should be forced to only ever be able to accept little pieces of paper for their work, but never be able to trade those little pieces of paper for anything else. Yes, we need a law. Hillary? Mrs. Clinton? Help, please.”
The 5: Heh. No doubt she’ll be soliciting advice from Charlie Rangel. Lord help us.
“Regarding the suggestion,” adds another, this one a little more seriously, “that the U.S. government should contract with American companies to build a renewable energy economy… We could pay for it by closing several foreign military bases each year.
“That money could be used to subsidize investment in these technologies. It’s time to take care of numero uno and let the rest of the world take care of itself. I’m tired of paying to protect the world’s oil supply. Let China and India step up for a change.”
Enjoy your weekend,
Addison Wiggin,
The 5 Min. Forecast
P.S. Maybe the U.S. government should open its own sovereign wealth fund to invest in resources around the world and then dedicate the proceeds to Social Security, Medicare and to pay down the national debt. Oh, wait, that would mean the guv’ment would actually have to have some money to fund the darn thing. Right.
Too bad. You’re on your own.