Worst June Since 1930’s, How to Escape the Credit Crisis, 2008 Growth and Inflation Forecast, The New Milk Jug, and More!

by Addison Wiggin & Ian Mathias

  • The 5 wishes bon voyage to the worst June since 1930
  • Has any nation escaped the credit crunch? The many that didn’t, and two that did… sort of
  • Banking think tank calls for “uncomfortably long period” of inflation and slow growth
  • Jim Rogers on where to invest during the market mayhem
  • Could a penny stock breakout be around the bend? Two charts provide ample evidence
  • Chuck Butler with the latest currency on track to reach parity with the dollar

 

  Congratulations! If you can read our daily forecast today, we gather you have at least enough cash to pay your monthly utilities. Thus, you’ve survived the worst June for stocks since the Great Depression. Kudos. 

The Dow has fallen 10.2% this month, a technical correction and the worst June performance since an 18% tumble in 1930. What’s more, the Dow opened 19.9% below its 2007 high today, just a breath away from a textbook “bear market.”

  But really, in terms of major stock indexes around the world… there are few places to hide. The Euro Stoxx 50, a gauge of the big indexes in the eurozone, is down 24% this year. Germany’s DAX has fallen 20%. The CAC in France is down 22%. Britain’s FTSE is doing the “best,” down 15% YTD.

Asia is faring no better. The MSCI Asia Pacific Index just closed out its first half of 2008 down 13%… its worst performance since 1992. For all the oohs and aahs over Chinese growth, the Shanghai Composite is down around 50% this year. Indian markets have fallen closer to 40%. Japan’s Nikkei 225 is down 12% year to date, its worst first half since 1995. Australia is in the dumps too, down around 16%. The “All Ordinaries” wrapped up its fiscal year this morning… the worst year for Aussie stocks since 1982.

True, there are a few “winners” in the bunch… Canadian markets are up about 5% this year and Brazil is close to break-even. And we’re surely forgetting a few breakout smaller markets in our global roundup. But you get the point… the world’s in trouble.

  “We should not expect a quick and spontaneous return to normalcy,” reads the latest from the Bank for International Settlements. The BIS issued its annual report today, calling for a “deeper and more protracted” economic downturn than the world expects.

“The current market turmoil in the world’s main financial centers is without precedent in the postwar period. With a significant risk of recession in the United States, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point. These fears are not groundless.”

“Given the possibility of such a worsening economic and financial environment, it would not be surprising if asset valuations also came under further pressure,” along with an “uncomfortably long period of high inflation, along with slower growth.”

  “Now could be the best time in years to buy small caps,” says Jim Nelson from the Penny Sleuth desk.

“Check out the market recovery in 2003:

“The Russell 2000 fared worse than the Dow all through the tech bust. Once it turned the corner in 2003, it not only signaled broad market recovery, but it also vastly outperformed blue chips for the next five years. Fast-forward to 2008, and a year-to-date chart of the same two indexes shows similar pattern beginning to emerge:

“Small caps classically lead the market out of downtrends,” continues Jim. “The Russell’s been hit the hardest over the last nine months, but now the Dow is leading the way down. Who knows if we’re anywhere near the bottom… but in the past, by the time the Dow finds its lowest lows, the Russell 2000 is already on its way back up. If this Russell strength continues, think about adding to your favorite small-cap positions.”

We’ll keep an eye on the Russell for you. If you’d like some daily advice on all things small cap, you should check out Jim at the Penny Sleuth.

  “The best investments in 2008,” Jim Rogers said in Shanghai today, “are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.”

Rogers, speaking at a conference in Nanjing, provided a myriad of forecasts, including: “Crude oil prices are not high enough to stop people from consuming more energy… the bull market will not go to an end until supply and demand come to a balance.”

The legendary investor also urged to listeners to “not give up” on Chinese stocks, even though the Shanghai Composite is 50% off its 2007 high. Rogers said he has barely sold a single Chinese stock since he began buying in 1999.

Stay out of the dollar “at all costs,” he added.

Don’t forget, Mr. Rogers will be speaking at our Investment Symposium next month. If you want his firsthand account of where he’s putting his money and why, you’ll have to join us. At our last count, only 15 seats remain. Act now.

  No surprise to Rogers, oil investors are a little bit richer today. Light sweet crude popped to another record, this time $144 a barrel. A typically weaker dollar set the stage, but these two sound bites stole the show:

"Oil prices are expected to reach $170,” said OPEC President Chakib Khelil, “as demand for fuel is growing in the U.S. during the summer period and the dollar continues to weaken against the euro.” In an interview with Bloomberg on Saturday, the OPEC leader said, “There is more than enough oil in the market to meet the international demand… The decisions made by the U.S. Federal Reserve and the European Central Bank helped the devaluation of the dollar, which pushed up oil prices." (Gasp… blasphemy!)

“The problems are above ground, not below it,” added BP CEO Tony Hayward today. Speaking to the World Petroleum Congress, Hayward declared the era of “cheap energy” to be over, saying that “This is not a speculative bubble… supply is not responding adequately to rising demand."

While the marriage of those comments brought us another record oil price, markets have since backed off a bit. As we write, the price of oil is $141 a barrel.

  The price of gas has hit another record high, as well. The national average price at the pump eked up to $4.08 today, after staying steady last week.

  So it can’t be too big of a shock… the latest consumer sentiment reading fell more than expected, to another 28 year low. The Reuters/University of Michigan June survey of consumer sentiment fell to 56.4, the weakest level since 1980, the group reported Friday. For perspective, the average score in 2007 was around 85.

Strangely, consumer inflation expectations abated in June. Consumers polled said they expect prices to rise an average 5.1% over the next year — still a nasty rate of inflation — but less than May’s expectations. The other two facets of the survey, current fiscal condition and six-month consumer expectations, fell dramatically.

  And how’s this for an investor confidence indicator… not a single venture capital-backed IPO hit the market in the second quarter. That’s never happened in the 30 years the National Venture Capital Association has been keeping track. 

  The dollar’s been trending down since we left you on Friday. The dollar index scores 72.3 this morning, thanks mostly to that ugly consumer sentiment report on Friday.

The euro seems to be benefiting the most from the dollar’s decline. The European Central Bank is expected to raise interest rates when it meets Thursday, so traders are buying up the multi-nation currency. It’s up over a cent this morning, to $1.58. Look for language from the ECB this week… any hint of more hikes could send the euro through the roof, or vice versa.

The pound and yen are up this morning versus the dollar, too. They sell for $1.99 and 105, respectively.

  “The recent rebound and rise in commodity prices has really put some wind in the Aussie dollar’s sails,” notes our money-man Chuck Butler. The Aussie took quite a hit earlier this month when the U.S. dollar rallied. But over the past few weeks, the Aussie as revived its record-setting rise… it’s just a hair short of a 25-year high this morning:

“As the bull run in commodities continues, it could underpin the Aussie all the way to parity to the greenback!”

  Elsewhere in the commodity world, the Agriculture Department estimated that Midwest floods have destroyed 7% of the U.S. corn crop. The latest from the USDA estimates U.S. farmers will yield 87 million acres of corn this year, down about 6 million acres from 2007.

Futures for corn and soybeans remain just below record highs struck on Friday, when weathermen across the Midwest called for rain this week.

  Last, as food prices get inevitably higher, we’re enjoying seeing the advent of things like this:

The traditional milk jug is giving way to this funky rectangle. The new, taller, flattop design allows milk cartons to be stacked on top each other on skids, bound only by shrink-wrap. We’re told that will significantly reduce shipping and recycling costs while improving storage capacity and shelf life. Pretty neat… although we also hear that pouring milk out of the thing requires above average balance and coordination.

Maybe the surging costs of food will spur other packaging redesigns… say, for example, the ridiculous trend of selling dry goods in a half full plastic bag kept inside a marketing-laden cardboard box. But we may be getting ahead of ourselves…

  “I am an American living and working in Montreal, Canada, for the last 35 years,” writes a reader. “Now, even though I never have to pay anything, Quebecers being the highest taxed in all of North America, I still file my U.S. return every year. Recently, my accountant told me I was getting $300 from Bush’s economic stimulus package! Now, I do have a U.S. Social Security number, but I have never worked a day in the States. I came to Montreal directly out of the university. Incredible, is it not? I broke out into peals of laughter, the insanity of it all! Thanks, George, that $300 will be invested in some junior Canadian mining operation — probably gold.”

  “Your comment making light of GM’s stock price and Chinese car sales was completely off base and uninformed!” exclaims another. “GM is the No. 2 highest-volume car company by sales in China, behind Volkswagen.

“The biggest problem for GM in China is that it cannot expand capacity in the plants there fast enough to match demand. Unlike the U.S., China has a 25% tariff on all totally assembled cars and trucks coming into the country. As a result, GM cannot use all the excess capacity it has here in the U.S. and export cars to China — GM must build the units in China itself in order to remain cost competitive.”

The 5: That’s a better way of putting it: Not that GM isn’t selling enough cars in China, but that it doesn’t seem to be making much money from the ones it sells… anywhere. Whether it’s the No. 2 seller in China or No. 20… GM is in a world of trouble. Before the credit crisis, more than one analyst worth his salt doubted GM would find the money to pull itself out of its slump. Now that its market cap has shrunken to about $7 billion, we don’t see how GM will get out of this simply by “making more cars than trucks” and selling to emerging markets.

But still… thanks for setting us straight.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. This is your last chance to save thousands of dollars… at least. At midnight tonight, we’ll revoke our new payment plan for the Agora Financial Reserve. This is the first time – and maybe the last – we will grant this sort of opportunity. If you are interested, better check it out today.  

rspertzel

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