Markets Fall, The Next Bottom, Buying Opportunities from Mayer and Butler, Record Oil and Gold, and More!

by Addison Wiggin & Ian Mathias

  • Markets plunge around the world… the blow-by-blow recap of the latest sell-off
  • Dow retests bottom, fails… two indicators of how far stocks might fall
  • One of Chris Mayer’s favorite “crappy market” investment themes
  • Chuck Butler with an oversold currency worth buying today
  • One man’s words push oil to $141
  • Not all is lost… an investment class experiencing record gains, and the first better-than-expected data point in a long time

  Here we go again…

The U.S. stock market suffered a nasty sell-off yesterday. The Dow, S&P 500 and Nasdaq all plunged around 3% on a litany of bad news.

The whole mess started in Europe… major indexes there fell around 2.5% yesterday. The same financial woes that plague the U.S. brought shares of the European Dow Jones Stoxx 600 down to its lowest level since October 2005.

Then, Goldman Sachs dropped a bomb of their own. The famous investment bank downgraded GM and Citigroup and cut their outlook on all major U.S. brokerage houses.

A flurry of lousy earnings reports delivered the death knell. Oracle and Research In Motion — both adored tech plays — had poor earnings reports and forward guidance. Homebuilder Lennar unveiled another horrible quarter, profits down 61%. Nike issued a bearish outlook, despite decent earnings.

  And so, as we predicted Monday, the Dow has retested lows from the “Bear Stearns weekend,” and failed. If you’re a Dow investor, every gain since September 2006 has been erased… ouch.

We also note that the Dow is now 19% off its record high set in October 2007. In other words, we’re just 122 points away from a technical bear market.

  Thus, the logical follow-up: how much further could stocks fall? Heh… hell if we know. But we noticed this curious comparison in The Wall Street Journal this morning… might be a reasonable place to start:

  Also, check out the VIX. The Chicago Board of Options Exchange created their Volatility Index, or VIX, back in the ’90s. Since then, through some funky equations of weighted option prices, the VIX serves as the best indicator of market volatility expectations in the next 30 days. Here’s how it’s been behaving this year:

Values above 30 are generally considered periods of high volatility. You can see them earlier this year plain as day… when the credit crisis began in earnest back in January and during the peaks of the Bear Stearns crisis in March. Usually, within days of the VIX peaking, a market bottom is found.

Even though the Dow suffered its second biggest percentage drop of the year yesterday, the VIX is at a surprisingly low level. In other words, the cost of options doesn’t quite yet reflect that desperate — either hide under your desk or jump out the window — sort of volatility.

If you believe in this sort of measure… looks like the market could get a whole lot worse, very soon.

  Yesterday’s U.S. sell-off spread across the Pacific as we slept. Asian markets were a sea of red ink at this morning’s close:

   “In what is a crappy market,” notes Chris Mayer, “I think sitting on some strong long-term themes in well-priced names (well financed, of course) is a smart thing to do for long-term investors.”

Chris’ latest “strong long-term theme” is the coming need to replace and repair America’s infrastructure. The flooding in the Midwest has pushed this issue even closer to center stage… pics like these are popping up in every paper:

The latest estimate from the American Society of Civil Engineers suggests the U.S. government will need to spend $1.6 trillion over the next five years just to bring existing infrastructure into solid working condition. At present, America spends less than 2.4% of its GDP on infrastructure, compared to 5% in Europe and 9% in China. All the while… U.S. population is expected to grow 50% by 2050.

“This issue is getting a lot more attention. The next president, whoever it is, will feel a lot of heat next year — the Highway Trust Fund runs out of money in 2009, for example — and a big spending package on infrastructure seems likely. I’m going to have a new infrastructure play in my next issue of C&C.”

Chris’ next issue will arrive soon… be the first to get his favorite infrastructure play, here.

  We imagine all of this market malaise is music to Jim Chanos’ ears. The legendary short seller — who predicted Enron’s fall far ahead of the mainstream — just plopped down $25 million on a Manhattan mansion. His firm, Kynikos Associates, is the largest short-only hedge fund in the U.S. Judging by the 14-room, three-level, Central Park-overlooking penthouse Chanos just bought… it’s a good time to be short. We hear Chanos even managed to outbid Robert De Niro for the place. Heh.

We’ve got a short selling pro of our own, BTW… Dan Amoss. His Strategic Short Report readers are up an average 57% year to date. Dan’s been betting against financials, homebuilders, mobile home manufacturers, auto parts makers… if it’s on its way down, SSR readers have a position. You can learn how Dan profits as markets fall, here.

Gold investors had their best day since 1985 yesterday. The front month futures contract for the precious metal hopped up 3.7%, the biggest one-day gain in 23 years. Spot prices are up to $920 an ounce this morning.

  Oil proved to be another big winner during yesterday’s market duress. Light sweet crude shot up about $2, to a record-high $141 during yesterday’s session. All the usual suspects were in place… a weaker dollar, trouble in Nigeria and a gloomy market. But this is what seemed to push oil into record territory:

"I foresee [oil] prices probably between $150-170 this summer," said OPEC President Chakib Khelil. “If there is real demand in the market, OPEC will take the measures necessary to satisfy this demand." But the real driver of oil price is the dollar, said Khelil. “You can see it, every time there is a strengthening of the dollar, there’s a drop in [oil] prices."

  The dollar fell yesterday as oil hit a record high. The ol’ greenback actually had a few legs to stand on yesterday… first-quarter GDP was revised up and the latest existing home sales data wasn’t as horrible as usual. But we suspect currency traders are seeing the forest for the trees — the U.S. economic outlook, market conditions and deficits are as ugly as ever.

The euro got quite a boost. ECB President Trichet reiterated that a rate hike next week is still “possible,” and the euro quickly popped to $1.57. The British pound followed suit, ticking up to $1.98. As did the yen… the Japanese currency quite often pushes higher as markets fall. This time, it’s up to 106.

“There was some strong profit taking in the Brazilian real yesterday and overnight,” notes our friend Chuck Butler. “The real had reached $1.58 yesterday, but sits at $1.60 this morning. The real was the top performer this year, and I think some investors sat up and noticed, and took profits. And why not? Paper profits don’t pay bills! We’ve seen these short-term profit-taking days in the real before. So… look at this move as a chance to buy the real cheaper than yesterday!”

   “So the Fed is confiscating economic stimulus checks?” asks a reader, this time in response to our story yesterday. “That’s very neat! ‘Since we can’t get you to pay the U.S. back the money you owe the U.S., we’ll just go ahead and pay ourselves with our money we were going to give you!’
 
“Too bad the mortgage bankers can’t do this… or did they? Actually, I am glad they are keeping those dollars — stiffs don’t deserve them. Actually, none of us does, but they least of all!”

The 5 : Heh… talk about a hidden tax. We’re not too sure how printing money to pay off overdue government invoices “stimulates” the economy.

  But as much as we’ve been poo-pooing the stimulus package, today’s personal spending and income data shows it might be “working.”

Personal consumption skyrocketed 0.8% in May, its biggest monthly increase since November 2007. Personal income shot up too, up 1.9%, its biggest move since 2005.

But the Commerce Department also said that inflation accounted for 0.4% of spending growth — it’s biggest monthly move since 2006. That inflation pressure, we predict, won’t go away anytime soon… checks from Uncle Sam will.

  “I live on a small farm in northcentral Indiana that had been fairly lucky this year,” writes a reader, “until today, that is. The majority of flooding here had been located in the southern half of the state. We had wet conditions in our bottom field that prevented planting corn this year. Instead, we planted soybeans on our just over 12 acres that we have left. We felt that the worst was over.

“Today, a gully washer like I had not seen since I went through Hurricane David back in 1979 in West Palm Beach, Fla., hit us head-on, and in an hour and a half, 60-90% of the crop was ruined, or at least will be severely damaged. Just like that. From a profitable year to one that the tenate farmer will consider a near total loss in less than two hours. All of those people who think that farming is an cash machine should come here and look at what it really means to be a farmer.”

  “I’ve been wanting to become a Reserve member ever since I found out you offered such a thing,” writes a reader, “but I could never afford it… until you offered the installment payment option.
 
“THANK YOU, THANK YOU, THANK YOU!!! I just signed up with the Reserve yesterday. It was just like a brand-new toy. I couldn’t wait to get home and get my chores done so I could play with it!”

The 5: You’re welcome… it’s our pleasure. We know the upfront price of the Reserve — despite its incredible long-term value — can be a barrier. Our installment payment option has been well received… in fact, it’s actually getting a bit out of control. We’re overwhelmed with applications.

However, we aim to keep the Reserve small, exclusive and private. So with that in mind, we’re ending the installment payment option Monday at midnight. After that, it’s back to the normal price. If you want to join the Reserve for the lowest possible upfront cost, this will be your last chance for quite some time. Click here to get the details.

Have a nice weekend,

Ian Mathias
The 5 Min. Forecast

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