Commodities Getting Hit, The $7 Blanket, Some Rare Positive Data, The Only U.S. Real Estate Still Booming, and More!

by Addison Wiggin & Ian Mathias

  • Commodities get slammed… what’s really behind this week’s sell-off
  • Dan Denning and Chris Mayer on the future of energy and resource investing
  • Some bright news in the data patch… manufacturing sector showing signs of life
  • The one kind of real estate that’s still booming across the U.S.
  • Plus, understanding the dollar… if you were Ronald McDonald

  If you’re a commodity investor, well… it’s been a tough week already.  

Oil is the most prominent example. Light sweet crude was drifting around $124 when we spoke to you yesterday. Just before we clicked “Send,” the light sweet stuff took a dive… down $4 in a matter of minutes. See for yourself:

For a moment, we actually felt sorry (well, not really) for the talking heads on CNBC, desperate to “say something” about the sudden drop. We’ve heard all manner of explanations: a hedge fund blew up, Hurricane Edouard is no longer a threat to the supply chain, Barack Obama has changed his mind again and now favors offshore drilling and tapping the SPR. 

Markets make opinions, the old-timers say. Fact is, commodities have been due for a correction for some time. The long-term trend is still up, up, up. But this is when the commentary gets fun, because the stock market cheerleaders will come out of the woodwork and start making fools of themselves all over again. Can’t wait.

  Commodities took a hit across the board yesterday. The CRB fell 3% on Monday alone. The popular basket of commodities fell over 10% in July, its worst month since 1980.

  Gold is down $20 from Monday’s open, to $885 as we write.

  “What’s really going on?” asks resource speculator Dan Denning from his reverse vantage point down under . “With respect to commodities, we reckon this is the correction we had to have, and that you always get during multiyear bull markets. You have a slump in global manufacturing, an actual recession in the world’s largest economy and a normal profit-taking pause in the midst of what’s been a great run since 2003 — including the yearlong sideways action from May 2006-May 2007.

“That means resource shares could spend the next few months idling or sliding lower. It’s going to be tough to stomach. However, we’d maintain that you’re better being a buyer later this year and making your resource shopping list right now. By early next year, there will be renewed confidence in the primary trend driving the global economy: industrialization of the emerging economies.”

  Gas is down another cent today, to $3.87. That’s well off the $4.11 high, but a full dollar higher than this time last year. Yeah… $2.83… Those were the days, huh?

  Jet fuel costs have backed off 5% from last week, but are still up 75% from this time last year.

  But just because fuel has dropped a few points, don’t expect the airlines to pass those savings on. JetBlue announced this morning you now have to pay $7 for a blanket and pillow on all of their flights. You get to keep them when you get off the plane, but still…

Of course, it has nothing to do with high fuel costs: “Replacing our old, recycled pillows and blankets,” explained JetBlue GM Brett Muney, “with this state-of-the-art, high-quality take-home kit is an eco-conscious, health-conscious and customer-conscious decision.”

Ahhh… right. Eco-friendly. Expect this kind of goofy trend to continue. Add-ons, rather than value added. With lame excuses to justify.

   “I believe we have reached a tipping point in this energy cycle,” opines Chris Mayer. “Many businesses simply cannot function ‘as is’ with the price of oil at $130 or thereabouts. In my bottom-up rooting around, I see high energy costs nailing all kinds of businesses. The airlines are a group particularly hard hit. RV and heavy truck makers also suffer.

“There are many, many more examples. So these businesses must change the way they do business. And that’s the opportunity for companies that come in with new fuel-efficient car batteries, aircraft engines and other products promising 20% or more increases in efficiency.

“So naturally, the investment takeaway from all this is that companies in the business of reducing energy intensity stand to do well — companies that provide more fuel-efficient products will be big winners in the years ahead.”

For a list of companies Chris likes, check the Mayer’s Special Situations portfolio. If you’re not already a subscriber, you can learn more here.

  Falling oil is being blamed for a bit of a tail wind in the stock market this week . The major U.S. indexes all pushed into the black yesterday. Then a late spate of profit-taking pushed the S&P 500 and Nasdaq to 1% losses. The Dow lost 0.3%.

The Dow opened up 100 this morning. Of course, at 2:15 p.m., the Fed will release its latest rate decision. I say they shock the markets and raise by a quarter point, citing the Commerce Department’s inflation report yesterday. The Dow will drop 175 points.

Ian says: “No way. The Fed’s going to hold steady, and tomorrow we’ll be deciphering their cryptic justifications as to why.” In that case, the Dow will end about where it opened. Stay tuned.

  And I.O.U.S.A. isn’t all bad news this week… we’re seeing some solid data from the production industry lately. Last week’s ISM manufacturing survey managed to stay in growth mode — barely. The institute’s measure of July manufacturing activity scored 50 on the dot, a few tenths of a point weaker than in June. A score below 50, where the survey dwelled for much of 2008, signals a contraction within the industry.

New factory orders rose 1.7% in June, besting expectations of by a full point. That’s the most new factory orders in a single month since December 2007. The majority of factory order growth came in the oil, chemicals and agriculture industries. No surprise there.

  Prices for farmland in the heartland have hit a new all-time high. Despite the worst housing crisis since the Great Depression, agricultural real estate is worth more than ever. The USDA said yesterday that the average U.S. farmland is worth $2,350 an acre. That’s up over 8% from 2007. What’s more, most farmland in the Northern Plains — Kansas, Nebraska and the Dakotas — is up over 15% since last year.

For what it’s worth, farmland in Massachusetts carries the highest premium in the nation. Bloomberg says about $12,200 an acre. Who knew people even had farms in Massachusetts anymore?

  The dollar has been trending upward this week. The dollar index is up half a point, to 73.8. Much of the index’s gains came courtesy of euro seepage. The euro is down to $1.54 today.

A nasty retail sales report in the eurozone didn’t help matters. Sales in the 15-nation area fell 3.1% in June, the worst year-over-year decline since bean counters in the euro statistics office started keeping track in 1995. (That must be one hell of a fun place to work, we imagine.)

The pound sterling dribbled down to $1.95. The Nipponese yen bubbled up to 108.

  Still, here’s a literal demonstration of the dollar’s decline . Remember the McDonald’s “Dollar Menu”?

It’s not so much anymore. Some McDonald’s stores have started to put only one slice of “cheese” on the double burgers. Other’s have given in and boosted the price above $1.

  Keeping with the golden arches theme, The Economist just published its latest rendition of the Big Mac Index. The paper uses the index to gauge purchasing power parity (PPP) around the globe.

“The theory,” explains the economists at, ummn, The Economist, “says that exchange rates should move to make the price of a basket of goods the same in each country. Our basket contains just a single item, a Big Mac hamburger, but one that is sold around the world. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value yardstick.”

In other words, currencies of nations that sell the Big Mac for more than it costs in the U.S. are overvalued. Likewise, if it’s cheaper, that currency is undervalued. Here’s what they found this year:

Using this index, you’d want to stay away from anything in Europe, notably Norway, Denmark, Switzerland and Sweden, and the euro itself. Brazil, in the south, would be a bad bet. But you’d do well looking into Hong Kong, Thailand, Taiwan, China, Malaysia, Indonesia, Japan, Russia, Saudi Arabia, Egypt and the UAE.

  “Economics 101,” a reader teaches us. “Labor and entrepreneurship (productive population) represent 33-50% (depending on who is preaching) of the factors of production.
“Japan’s funk is at least 50% caused by the fact that its total population is declining year over year by about 0.2% (but more importantly, its productive population — 18-64-year-olds — is declining much faster). Japan has less than 4% unemployment. It only succeeds in growing at all because it is adding to its robot population.
“Compare that with the U.S., which is growing its population at close to 1% (50% due to immigration), and at much higher rates for its productive population (most immigrants are productive on day one) — which will enable it to grow out of its funk faster than Japan can.”

The 5: You’ve touched on the central theme of Financial Reckoning Day, which we published in 2002.

  “It appears everyone is looking to blame economic problems on our world shortages of precious commodities,” writes a reader, attempting to end the overpopulation debate that raged in these pages all last week.

“Greed and selfishness make up the No. 1 problem for world conditions. Why does it take so long for a country as educated as the United States to start a major shift toward natural resource preservation? For as long as I have been on this Earth, very little has been done to recycle our resources and save energy and stop pollution. Buildings are built to last 10 years and are torn down and rebuilt. Landfills are full of wasted resources. War has consumed the most valuable resources.

“Don’t blame overpopulation without describing what class of population you are talking about. We are overpopulated with people who want everything for themselves. All of the people in the world could fit in the United States and we would not bump shoulders. We are all to blame, to some degree, for our problems. My bet is I.O.U.S.A. will be a good example of what happens to a country filled with greed and wastefulness. I could go on and on, but I hope everyone will look at the problems a little differently.”

The 5: Greed and selfishness are virtues, aren’t they?


Addison Wiggin
The 5 Min. Forecast

P.S. In an effort to raise awareness for the premiere of I.O.U.S.A. on Aug. 21, we’ve arranged for a ticket giveaway at local radio stations in cities where the film is screening. If you are a radio host, let us know and we can set you up and come on the show to give it a boost. If you listen to a radio show that you think would like to participate, please let us know and we’ll contact them.

Here’s a sample of one interview we did with Bill Meyer in Medford, Ore., yesterday. 


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