Bernanke’s Worried, Death of the SUV, Small Cap Comeback, Closer to the “Silent Spring,” and More!

  Hmmn… what’s this… a change of heart?

“The challenges that our economy has faced over the past year or so,” Ben Bernanke told a conference in Barcelona via satellite yesterday, “have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation."

Bernanke said he is "attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”

Just like that, the falling dollar is “officially” on the Fed’s radar. But Bernanke stopped short of acknowledging the Fed’s role in influencing some of those “challenges.”

  “Ben Bernanke threw a cat among the pigeons yesterday,” comments Chuck Butler on the speech, “when he broke the long-standing tradition of relative silence for a Fed chairman on the dollar. He and his predecessor usually consider the currency to be the U.S. Treasury’s baby.

“But yesterday, Big Ben signaled to the markets that he was ‘uncomfortable’ with the weakness of the dollar, and the ramifications a weak dollar has on inflation… He actually blamed the weak dollar on inflation! Whoa there, partner! That’s putting the horse, and another horse, before the cart…

“Inflation is the result of low interest rates and money supply… things the Fed chairman controls! Now, someone on Capitol Hill needs to stand up and call him out. Anyone getting caught up in his attempt to scare the markets… into thinking that the Fed is going to intervene to shore up the dollar… should be grabbing their pitchforks, rakes and shovels and heading to Capitol Hill!”

  Currency traders swallowed Bernanke’s words hook, line and sinker:

The dollar index popped to 73 and change on the Fed chairman’s new language.

The euro, in turn, shed a cent, to $1.54. The pound lost nearly 2, down to $1.95 this morning. The yen is holding its ground at 104.

  Conversely, gold took it on the chin. The yellow metal is down about $20 from its Monday high, to $877.

  The U.S. private sector surprisingly added 40,000 jobs in May, reports the payroll services firm ADP this morning.

Wall Street, and most of the logical world, was expecting another 30,000 job losses after four consecutive months of decline. But the service sector, apparently, came through and buoyed May jobs to the upside.
 
Still, as with the Labor Department’s report, due Friday, it’s never safe to get lathered up over the headlines before digging into the details. Over the last six months, ADP has overestimated job gains (as reported by the Labor Dept.) by more than 100,000 jobs… every month.

Economists still predict the Labor Department report will show a May decline of 60,000 U.S. jobs. Frankly, we don’t give either report much credence, but it moves the market, nevertheless.

  In irony of ADP, growth in the U.S. service sector slowed in May, reports the Institute for Supply Management (ISM) this morning. Its index of nonmanufacturing activity shrank to a score of 51 in the month, slightly ahead of an all-out contraction.

The U.S. stock market succumbed to the barrage of bad news yesterday. Lousy financial news and some harsh data from the auto industry pushed the Dow down 0.8%, the S&P 500 down 0.6% and the Nasdaq to 0.4% losses.

Once again, Lehman Bros. proved to be the dog of the day. The investment house fell 15% on the rumors of emergency fund raising we whispered to you yesterday. LEH shares haven’t been this “cheap” since 2003. Keep an eye on Lehman. Our Dan Amoss recently penned a scathing report on the firm. Check it out here.

And the auto industry did some damage of its own yesterday. Aside from predictably lousy monthly sales numbers across the board, GM revealed some big changes indicative of the auto industry’s current crisis. In fact, the nation’s biggest automaker may have marked the beginning of the end of the American SUV complex as we know it… GM announced it’s closing four plants — all of which produce exclusively SUVs and trucks — and hinted that the Hummer brand might soon be for sale.

  The Russell 2000 — the most widely watched index of U.S.-traded small caps — outperformed the broader market again yesterday. Over the past month, small caps, in general, have been outperforming the market:

“For the small-cap investor,” says Greg Guenthner, “the best returns across the board come during rapid periods of recovery out of a falling market. Traditionally, small caps lead market comebacks in a big way. And judging by the recent strong performance of the Nasdaq and the Russell 2000, we could be witnessing a return of the bulls — at least in the short term.

Gunner dug up a recent study by Alpha Plus Advisors President Marvin Bolt. According to the group, the current economic environment is right in the small-cap sweet spot.

“The Alpha Plus data show that the strongest microcap returns have actually been during periods of higher inflation, growth in the U.S. gross domestic product and changes in the dollar exchange rate. This goes against Wall Street’s common knowledge, since large caps have suffered during similar periods.

“So at the moment, we’re seeing a perfect storm brewing — one that could lead to significantly better returns for microcap investors in the near term. Just look at the indicators: Inflation is higher due to price pressures on food and fuel, first-quarter GDP growth numbers were higher than expected and the value of the dollar appears to be stabilizing.”

If you’d care to wager on this small-cap recovery, Gunner has a few recommendations for you, here.

Oil fell to a three-week low this morning. Light sweet crude trades as low as $122.

  The latest spike in commodity investment, oil in particular, is “eerily reminiscent of a similar craze for ‘portfolio insurance,’ which led to the stock market crash of 1987," opined George Soros before Congress yesterday.

In Tuesday’s hearing on “energy market manipulation,” Soros fueled the fire currently burning on Capitol Hill, suggesting — like Michael Masters — that the recent commodity investments by pension funds, university endowments and other large institutions has added extra froth to the energy market… one that has the potential to bring prices crashing back down.

"In both cases, the institutions are piling in on one side of the market, and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987, there would be a crash."

In so many words, Soros called for restrictions on certain techniques used to skirt speculative limits among institutional investors. A reader expounds on these solutions below….

  Yet another all-time high gas price this morning. The AAA national average is now $3.98 for a gallon of the cheap stuff.

But consumers may soon be getting some relief. MasterCard released a report yesterday saying that U.S. gasoline demand fell nearly 5% last week from a year earlier.

Then, the Indian government — who manipulates their retail fuel prices through a series of subsidies — allowed the price of gas to rise there for a second time this year, in an effort to shelter some state-owned refineries. Demand for gas from the land of curried chicken should slacken as well.

Another major airline is helping Byron King’s “Silent Spring” forecast come to fruition. United Airlines announced this morning it’d be cutting 1,100 jobs (in addition to the 500 announced earlier this year), retiring 100 planes from its fleet and slashing domestic capacity. UAL officials said the sudden move was in direct response to an “unprecedented fuel environment.”
 
United will ground its fleet of 737s and its oldest 747s, the airline’s least fuel-efficient jets. The company also estimates that domestic capacity will be cut by 18% in 2009, international by 5%.

“With six more months of high oil prices,” Byron comments by e-mail this morning, “you will not recognize the airline system — not just in the U.S., but across the world. It will play havoc with the world’s tourism industry, the largest direct or indirect employer of people on the planet.
 
“Hawaii flights down 25%? No driving to Hawaii, eh? And pity poor Disney World and Universal Studios in Orlando… Sorry, guys. If I have to walk to get there, I ain’t coming.”

Wheat shot up to almost $8 this week. After selling off from record highs in March, wheat may be on its way to a rebound:

Word in the pits is U.S. farmers can’t seem to catch a break this year.

Corn farmers have battled with wet and cold conditions in the Corn Belt. Today’s spike in wheat has been attributed to extra-hot weather in the Midwest. Kansas, Oklahoma and Iowa are expecting triple-digit temps this week… not exactly ideal wheat-growing conditions.

  “The one thing that I would not do,” writes a reader, “is keep my gold and other valuables in a safety deposit box. With the possibility of a bank ‘holiday’ or actual gold confiscation by the federal government after a quickly passed law forbidding ‘hoarding,’ it would be far safer to bury it in the backyard or give it to a trustworthy relative.

“Just make sure that you know exactly where you buried it and don’t brag to anyone about all the gold that you bought cheaply way back when.”

  “Bullion, as Kevin Kerr recommends,” writes another, “incurs extra costs when it is necessarily divided into usable units that can be exchanged for assets. It must be either blindly accepted by the other party or, as is almost always case, assayed as to purity.

“But bullion coins, of usually 1 troy ounce, are instantly recognizable for precisely what they are, known weights of gold… or silver… or platinum. Therefore, they facilitate the exchange for other assets, rather than inhibit and hinder it. If the gold is ultimately to be used as money, buy coins, not bullion!”

The 5: We have to say, we’re not quite ready to bury things in our backyard. Although we know some folks who have… and do.

Historically speaking, the government gets up to some pretty stupid things… confiscating gold… or interning Japanese-Americans… or building walls across wide stretches of desert, but we’re either too young or not naturally paranoid enough yet to think we’re going to lose the right to own gold so soon after winning it back. In fact, we may err in optimism on the other side of the debate: It’s our country; we elect those pinheads to run it. We can still correct them when things get out of hand.

We’ll have to see how this banking crisis pans out. No doubt, the government will try something stupid again soon and we’ll get the chance to see if that optimism is misplaced.

As for the bars/coins debate, Kevin wanted to respond himself:

“Many people like coins, but if you don’t know what you’re doing, it can burn you, and it becomes less of an investment and more of a hobby. If that’s what you’re looking for, collect stamps or butterflies. When it comes to investing, I suggest buying the bars or futures and options contracts backed by gold.”

  “The Commodity Futures Trading Commission created a loophole,” writes another reader, changing the subject, “allowing the big investment banks and institutions unlimited commodities speculation.

“It exempts investment banks like Goldman Sachs and Merrill Lynch from reporting requirements and limits on trading positions. The loophole allows pension funds to use an investment bank for oil speculations. The bank then trades unlimited numbers of the contracts in futures markets for the funds.

“The U.S. Treasury Department even tracks the biggest exempt players. The Top 5 are Bank of America, Citigroup, J.P. Morgan Chase, HSBC North America Holdings and Wachovia.

“There is, however, an easy solution to this problem. One that would stop you paying anywhere from $1-1.50 a gallon extra at the pump, so some already super wealthy bankers can get mega wealthy. But this would involve congressional leadership.

“Congress could quickly pass a law that requires oil futures speculators to have as much as 50% of their bets in their margin accounts. The requirement would have two positive effects. It would slow down wild-ass speculation enough that oil prices would begin to slide back to a somewhat normal level… say, $70-75 a barrel.

“And it would prevent a banking disaster as big or bigger than the mortgage crunch.
Of course, the moment higher margin limits were proposed, the banks would howl. Their lobbyists would claim the regulation was un-American and anti-capitalistic.

“They’d be right. Because there’s nothing more American than bleeding the middle-class host to an inch of its life.”

The 5: Well, that’s what the hearings are about… closing up the loopholes and increasing margin requirements. But do you really believe $130 oil is the result of a conspiracy against the middle class? What do you have against bankers making money? What makes you think the “normal price” of oil is $75 a barrel?

Oy, we’re bringing them out of the woodwork this week.

  “Come on guys,” begs our last reader. “I love the way you try to tell it like it is, no matter where the chips fall, but using the term ‘douche bag’ is about as low-class street as you can get. All you needed to do was add ‘M.F.’ and you could break into the music business. What next, The 5 doing rap? Show a little class, although I know that’s hard for Baltimore.”

The 5: We tried rapping out today’s issue… but found it difficult to rhyme anything with Bernanke. And please note, we said we really wanted to call the reader a D-bag… but refrained from doing so.

Cheers,

Addison Wiggin
The 5 Min. Forecast