Markets Surge, Commodities Fall, Call for Global Recession, A New China Boom, and More!

by Addison Wiggin & Ian Mathias

  • U.S. markets surge… The 5 reviews the winners and losers of the best start to Q2 in 70 years
  • M&A activity falls dramatically… Chris Mayer on how to alter your investment strategy
  • Gas prices still at record highs… striking truckers threaten to grind highways to a halt
  • IMF says 25% odds of a global recession, calls current U.S. crisis worst since Great Depression
  • Plus, the coming China boom that’s escaped the mainstream

The U.S. stock market enjoyed a hell of a rally yesterday. The S&P 500 had its best start to the second quarter since 1938, up 3.6%.

The Nasdaq followed suit, rising 3.7%, and the Dow shot up 3.2%.

The most hated of the financial sector stocks led the way. Fannie Mae, Freddie Mac, Lehman Brothers and UBS all registered 15-20% gains on the twisted logic that revealing massive losses is a bullish indicator.

In like fashion, as investors bought stocks yesterday, they sold commodities. Gold struck a new two-month low of $875. Oil dipped below $100 per barrel. A few grains — corn, for example — managed to rally… but when all was said and done, it was a down day for commodities across the board.

“Just in the last week, we heard from some of the usual suspects,” comments our resource trader Kevin Kerr, “who perpetually claim commodities are a overblown — oil is going to go back to $30, grains will sell off 50%, etc. In fact, Barron’s cover story last weekend was ‘Get out of Commodities.’ Doesn’t leave much room for discussion, does it?

“The idea that all commodities are in some sort of bubble and that no fundamentals exist for higher demand for grains, energy, metals, etc. is ludicrous. Sure, there is a ton of speculative money, and in some commodities much more than others, but the idea that only speculative money is driving the underlying prices is simply incorrect.

“No doubt we may see further corrections for many, if not all, commodities, especially as it seems that every branch of the government is attempting to prop up the dollar. But that would actually be great news for us. If some commodities pull back even more, especially oil, it will give us much better buying opportunities. The simple reality is that eventually, sooner rather than later, prices will skyrocket again, especially in energy and grains.

“Get out of commodities? I don’t think so.”

Like stocks, the dollar index staged a notable rally, up a full point to 72.4 this morning. The euro backed off to $1.55. The pound shed a cent too, now at $1.98. And the yen is back at 101.

We’re not nearly ready to call this temporary strength a trend reversal. If you’re ready to stand in front of this freight train, be our guest:

Merger and acquisition (M&A) activity just saw its biggest quarterly decline since the tech bust. According to a Wall Street Journal report, the value of deals around the world fell 24% in the first quarter, to a “mere” $736 billion in mergers and buyouts. The sheer number of those deals rose over the same period, up 14%, to 9,195, but the value dropped.

“It’s no surprise to see M&A slowdown,” says the commercial banker turned Capital & Crisis editor Chris Mayer, “especially given the unfolding credit crisis. M&A markets feed on easy money and, despite the Fed’s best efforts, money is not so easy right now.

“What’s interesting here, though, is how the M&A markets highlight where there is still strength. While the U.S. market slowed down big time, activity in emerging markets and Europe still rose. This indicates there is still a healthy environment in those markets. With the weak dollar, I’d expect to see some of these foreign acquirers go shopping in U.S. markets.”

Chris follows the M&A market closely, “because it’s where I get my cues for what’s cheap in the stock market,” he says. Capitalizing on the difference between “dealmaker” assessments of stock value and Wall Street pricing is a core premise of Chris book, Invest Like a Dealmaker.
The book is a must-read, especially if you’re looking to pick up some bargains in this market.

Blackstone, one of the nation’s biggest dealmakers, raised nearly $11 billion yesterday to launch Blackstone Real Estate Partners VI — the biggest real estate opportunity fund in history.

Coupled with its five other siblings, the family of Blackstone real estate funds now has $25 billion ready to snatch up distressed properties. In Manhattan… perhaps.

Manhattan apartment sales plummeted 34% in the first quarter, says the NYC real estate appraisers Miller Samuel. Sales fell by the biggest margin in 18 years. Inventory grew over 4%.

Still, as the number of sales shimmied southward, the median price of your dream Manhattan pad rose 13%, to a record high $945,000. Yeah. We’ll go out on a limb and say that NYC apartments are a tad overpriced. Beware.

Gas prices remain at their all-time high across the nation today, at $3.28 per gallon. Diesel prices have steadily crept up this week too, now less than a cent from their all-time high of $4.03.

Accordingly, independent truckers across the country organized an impromptu strike.

“People aren’t seeing that the more we pay, the more they’re going to pay,” a trucker warned the AP, suggesting the costs of consumer goods hauled across U.S. highways will soon spike. According to a variety of reports, many truckers are operating at a loss when diesel prices rise above $4 per gallon.

A group of big rig operators caused a massive traffic jam on the New Jersey Turnpike in the afternoon yesterday by occupying all lanes and crawling out of NYC at 20 mph. Similar protests occurred in Chicago and Atlanta, while elsewhere, hundreds of drivers pulled into rest stops and simply refused to work.

We’re sure these disruptions will both bring the price of diesel down… and win the hearts and minds of fellow travelers. Strikes work wonders in France, after all.

There is a 1 in 4 chance of a global recession, said the IMF today.

“The financial shock that originated in the U.S. subprime mortgage market in August 2007,” reads a report from the IMF leaked today, “has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system…The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.”

The fund went on to lower its 2008 global growth forecast for the third time since July, now down to 3.7% global GDP expansion. The IMF defines a worldwide recession as annual global growth slowing to below 3%.

Secretary of the Treasury Hank Paulson called the IMF’s fears “overblown.” Of course, he did.

“It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” added Ben Bernanke today, testifying before Congress. The Fed chairman suggested that typical U.S. growth rates might return in 2009, but the “uncertainty attending this forecast is quite high.”

But, according to the World Bank, the financial crisis is only half the concern in the Far East.

“While the subprime crisis will have its impacts,” Jim Adams, a VP of the Bank, commented yesterday after a semi-annual report on East Asia and the Pacific region, ”the more immediate concern is that in virtually every East Asian country, inflation is climbing to uncomfortable levels.”

Citing inflation, the Bank cut growth rates dramatically… down to a stagnant 8.5%. Man, they’re hating it, aren’t they?

One factor in the increase is a rise in domestic demand. “Chinese retail sales have experienced a dramatic surge,” says our small cap advisor Greg Guenthner. “Domestic retail sales skyrocketed 20.2% for the first two months of 2008, to more than 1.74 trillion yuan, or about $248.1 billion. That’s more than 5% higher than last year.”

Gunner tells us that while the heavily inflated food and wholesale prices have been grabbing the headlines, non-essential goods are flying off the shelves too. Clothing sales in China are up 24%. Daily consumer goods are up more than 21%. Household appliance sales are up almost 19%.

“One of the true hallmarks of middle-class growth is the sale of these nonessential and luxury items. Even the poorest working members of a society will spend money on food staples. However, the working poor, especially in nations with less-developed economies, won’t be dropping big chunks of their paychecks at the Gap…

“Now that China’s economy is well into its adolescence, middle-class spending will continue to grow.”

One of Gunner’s favorite ways to play this trend is a small global garment manufacturer that’s “preparing to ride this “clothing boom” all the way to the bank.” You can currently try out Greg’s Bulletin Board Elite for a massive discount… $1,000 off for the next 48 hours.

Back here in the U.S., the Institute for Supply Management (ISM) did its part aiding the buying frenzy on the Street yesterday. The ISM’s monthly gauge of manufacturing activity rose from 48.3 in February to 48.6. Woo-hoo! While still in the sub-50 “contraction” range, market makers were pleasantly surprised to see the U.S. manufacturing sector halt (perhaps temporarily) its precipitous decline.

Skimming though the fine print, we note that the ISM’s gauge of material costs for manufactures shot up 10%, to 83.5, the highest since October 2005. New orders and production activity fell, while employment, exports and “supplier delivery” rose.

The private sector added a paltry 8,000 jobs in March, says today’s ADP National Employment Report. But it’s job growth all the same. Small and service businesses buoyed the survey in the face of big declines in manufacturing, goods producing and “big business.” The Labor Department jobs report comes out on Friday. If the quants at the BLS can engineer a positive number, we’re confident investors will take that number — any number — as a buy signal.

Add to the manufacturing and jobs reports this next bit… and we might be tempted to believe the U.S. is starting to get the warm fuzzies all around. “Might be” being the operative phrase here…

“The average percentage of people saying that the U.S. has a positive influence has risen to 35% from 31% a year ago,” says a BBC survey released this morning. Similarly, those who think the U.S. has a negative global influence fell 5%. Both trends mark the first positive reading in three years.

Still… in the eyes of the world, the U.S. is just above North Korea in positive feeling… and below them in negative. At least we’re in good company, yeah?

“What exactly is wrong with a Brit pointing out the problems afflicting the Mother Ship USA?” asks a reader from across the Atlantic. “As a British reader, I would have hoped you needn’t lean in this direction of becoming peeved at outside observers commenting on such matters. To be very fair to you all at AF, self-proclamation of these afflictions has been the norm and you are to be congratulated on front-running the theme for a long while, aiding, of course, my profit and loss along the way.

“What I find doubly ironic is that the U.K. is very likely to move, if it hasn’t already done so, in the same sorry direction because of the ostrich effect of hoping beyond hope things will get better soon. They won’t. The U.K. surrendered its Empire some time ago, and the U.S. is slowly going the same way. Its propensity to comment on everything worldwide from an “outside observer “perspective only serves to fuel the “clear your own backyard first” debate. Now the backyard is well and truly being cleaned with all those taxpayers depreciating dollars, rules being bent or ignored at will and politicians doing their absolute best to promote harmony and serenity during an election year.

“From an outsider perspective, it is tickling a lot of people pink to witness this debacle. But as a realist, I also see it affecting us outsiders negatively in the long run. Keep up the good, honest work. If nothing else, it makes for a good read each morning.”

The 5 responds: Amen. That’s really our point. It does take an observer from outside to highlight what most Americans would rather not see.

Cheers,

Addison Wiggin
The 5 Min. Forecast

rspertzel

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