Time to Buy? National Debt Spikes, Second Stimulus, Commodities Suffer and More!

by Addison Wiggin & Ian Mathias

  • Famous perma-bear turns quasi-bull… details on a surprising change of heart
  • National debt rises at unbelievable rate… on track to add $7 trillion this year alone
  • Two more nations announce massive interventions
  • U.S. stocks soar… Bernanke, Pelosi endorse second stimulus package
  • The sudden shift in sentiment for commodities… why gold and copper suffer as the dollar booms
  • Penny stocks

In the start of third-quarter 1998 — 10 years ago — Jeremy Grantham, self-proclaimed “perma-bear,” forecast that the S&P 500 would return minus 1.1% annualized over the next decade.

He was laughed at and labeled an extremist. Ten years later, the proof is in: He was dead wrong… it took 10 years and three days for the market to average his projected return.

Geesh, some forecast, what an alarmist.

Today, Grantham says the time has come for “hesitant and careful buying” of equities. Grantham, who also correctly called a global bubble among all asset classes last year, told his $120 billion worth of clients that this is the quarter to start buying.

“On Oct. 10, we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will, therefore, be steady buyers at these prices. Not necessarily rapid buyers — in fact, probably not — but steady buyers…

“History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look OK for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.”

“That’s no small statement,” notes Chris Mayer. “He is not wildly bullish and couches his declaration with caveats about probable new lows and the difficulty of timing things just so.

“But stocks are cheap. At least many of them seem to be. Fear is running the show right now, but that won’t always be the case. When the money comes back into the market, I think it will be more careful money, and it will look first at these cheap stocks in good companies. Investors will pay attention to fundamentals again, and we should get our rewards then.

“Earnings reports will start to roll in here in a few days, and I can’t wait to dig into them. I think we’ll see some pretty strong results from our companies.” Good companies at good prices… learn more about them here.

Another notable contrarian is making waves this morning, too…

Bill Gross’ $129 billion Total Return Fund, the biggest bond fund in the world, is now composed of 79% mortgage-backed securities. Pimco’s flagship fund hasn’t been this mortgage heavy since 2000.

“With the economy likely to be weak for several quarters,” suggested Ben Bernanke, “and with some risk of a protracted slowdown, consideration of a fiscal package by Congress at this juncture seems appropriate.”

Of course, Speaker Pelosi jumped on the endorsement, urging Republicans to “once again heed Chairman Bernanke’s advice” and help enact “a targeted, timely and fiscally responsible economic recovery and job creation package.”

Since the first one worked so brilliantly, why not try another?

Hmmn… this might be one reason to consider:

The national debt has grown $300 billion in the first 16 days of this fiscal year — an annual rate of 75%. At this pace, the US government will owe $17 trillion by this time next year.

We shared a stage at the New Hampshire Film Festival with Sen. Judd Gregg, R-N.H., on Friday night. Sen. Gregg is the ranking Republican of the Senate Budget Committee. Prompted by a question, he took the time to explain how the bailout — excuse us, recovery plan — will work, if they have their way.

The plan will come in three parts: First, they’ve negotiated preferred shares in nine banks. Wells Fargo, it has been reported, didn’t want to go along, but it was heavily suggested they do. The taxpayers will get a guaranteed 5% dividend. No warrants.

Second, they’ll start with $50 billion and buy up mortgage-backed securities by “reverse auction” in which other private buyers can also participate. They hope to establish a price for the securities, thereby jump-starting the market for them… at a discount, so that when they start trading again, the government can sell them for a profit.

Third, for the mortgages they’ve purchased that are totally worthless, they plan to renegotiate the interest rates and draw at least some capital out of the pocketbooks of those who are facing foreclosure.

According to the senator, the whole package was contingent on profits being used to pay down the national debt. “So,” he told the audience, “there will be a short blip in the deficit and concurrently the national debt. But over the long term, the taxpayers will make money.”

We have only two comments at the moment. When Warren Buffett bought into Goldman, he negotiated a 10% guaranteed dividend on his preferred shares, plus warrants at the current price good for five years.

Second, the last time the government ran a surplus — a true surplus, in which they didn’t have to borrow from Social Security — barely a penny went to paying the debt before deficit spending went through the roof all over again.

A big thank-you, by the way, to Katherine McDonnell, J.P. Pontbriand and Brad and Julie Wiggin for getting the word out in New Hampshire. We had some of our largest and most successful screenings of the film in Portsmouth… which no doubt helped to bring home the Best Doc Award! Thanks, guys!

Thanks to Nicole Gregg and Chris Proulx of the NHFF, too. We had a great time.

Two other governments have taken a page from I.O.U.S.A. and announced massive financial interventions.

Sweden announced Monday it will shoehorn $205 billion into the Swedish financial system. The program will boost liquidity in markets there and buy direct stakes in banks.

And today, France announced it’s injected about $14 billion into its top six banks. The French will not own shares of the banks — Credit Agricole, BNP Paribas, Societe Generale, Credit Mutuel, Caisse d’Epargne and Banques Populaires — instead, the six financials will receive subordinated loans, which the banks will be obligated to pay back after other debts have been honored.

Once the bastion of free trade, the U.S. dollar has, ironically, become the de facto symbol the belief all this market intervention will work. The greenback soared to an 18-month high overnight.

Despite Bernanke’s warning yesterday of a long and slow recovery, investors continue to flee to the world’s reserve currency. The dollar index is up a point and a half from yesterday’s low, to around 83.7.

The euro is down to a two-year low versus the dollar… and like gas at $3, the euro is almost palatable at $1.31. The pound is down a full nickel from yesterday’s high, at $1.70 as we write. The yen is still looking strong at 101.

The U.S. stock market isn’t quite so enthused. The Dow opened down 200 points today.

Yesterday, the Dow and S&P 500 shot up 4.7% apiece. The Nasdaq remained a laggard of late, rising “only” 3.4%. Traders were excited about the easing of interbank lending that we discussed yesterday. Oil’s pop to nearly $75 gave the energy sector a shot in the arm, which in turn led the market to another lofty gain. Exxon Mobil and Chevron both leapt over 10%.

Commodities are getting cheaper today, too. The conventional wisdom goes like this:

Yay, dollar!
America to the rescue!
Inflation on the run!
Emerging markets, not emerging so fast now, are you!?
Construction getting strangled by credit constriction!
Commodities… down and out!

Gold is down $30, to $770. Oil gave back most of yesterday’s gains, now at $71 a barrel.

Copper is a real standout today… take a look at this landslide:


Copper prices have been cut in half over the last six months. The last 30 days have been particularly rough for copper bulls, as the spot copper price has fallen 33%. That’s certainly music to the ears of the world’s builders, but tragedy for miners.

Freeport-McMoRan, for example, the world’s largest copper producer, announced their profit down 33% for the year this morning. Overall revenue is down 9%. Meanwhile, copper production costs are up 23%. The company has suspended share buybacks and announced “significant uncertainty about the near-term price outlook for principal products” copper and gold.

Freeport’s stock is down 7% today… 66% for the year.

But the upside for consumers, of course, is the price at the pump. The national average gallon sank below $3 this week for the first time in nine months. Now at $2.88 a gallon, prices are simply plummeting… down 87 cents in the last 30 days alone.

If gas falls another 8 cents, it’ll be cheaper than it was this time last year.

“It seems to me there are still plenty of ‘experts,'” writes a reader, “talking about stocks being cheap since the P/E ratio of the S&P is now well below its historic average. How long has it been below average? A month? A year? What about the last five, 10 or 15 years, when it was trading above average?

“Also, is the S&P trading at 10 times real earnings or at 10 times the new operating earnings method of computing P/E ratios? Because if the experts are using the new method, then comparing the current P/E ratio to the historic average is like comparing apples and oranges.

“Haven’t Japanese stocks been ‘cheap’ for closing in on 20 years now?”

“Please, please, please stop reporting what Warren Buffett says!” begs a reader. “The first reason is: He has totally sold out, and says only what will benefit him and his funds. The old geezer has ZERO respect for honesty.”

“The second reason is you certainly don’t need to quote Buffett to tell your readers the value of the dollar is being trashed, or that stocks at a P/E of 7 are better than stocks at a P/E of 47” (as you did today/yesterday).

“The bastard knows his time on Earth is growing short and is taking advantage of his fame EXCLUSIVELY for personal gains and jollies. Stop encouraging him. Just report the facts, and don’t mention him again UNLESS he says something that is important AND you didn’t know already.”

“In 1970,” recalls another, this one referring to Byron King’s forecast yesterday, “I was at a power plant on Long Island, N.Y., to replace a camera in one of the boilers. The camera was used to watch the gas igniters inside the boiler. I told the superintendent that he had to shut down the boiler so that I could remove and replace the camera.

“You would have thought that I had slapped one of his kids. He jerked upright and told me, ‘Are you crazy? I’m having to pipe power from Tennessee now. How in the hell can I shut it down?’

“So they continued to operate that boiler in the blind because power demand for New York was more critical than being able to see the boiler operation.

“Increased power demand has been with us a long, long time.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. We had so much interest in our Free Emergency Retirement Recovery Series this morning at 11 a.m…. it crashed our servers! If you couldn’t get in to see it, don’t worry. We’ve recorded the entire program and will make it available for the rest of the week… go to this Web page and sign up to see it on your own time. Don’t you love technology?

rspertzel

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