Markets at Critical Junction, S&P 500 Penny Stocks, Buy Gold at This Price, Automaker Bailout and More!

by Addison Wiggin & Ian Mathias

  • Markets plunge… Dow, S&P 500 technicals on the verge of either historic bottom or precipitous fall
  • Greg Guenthner on the decay of household stocks… over 100 S&P names less than $10
  • Moving markets today… a royal endorsement and a foreboding unemployment stat
  • Byron King with one of many themes emerging from the New Orleans Investment Conference
  • “Buy gold,” says David Galland… but only under a certain level
     

  Watch the market today. The Dow has been finding support around 8,000 for over a decade.

The Dow’s next historic low was set in 2003 at 7,397, and then back in 2002 at 7,181. The next level of support after that… ummm… it doesn’t really exist. Maybe 3,800?

  This morning, 101 members of the S&P 500 sell for less than $10 a share. Some of last century’s household names headline the list — Xerox, Alcoa, Starbucks, Motorola, Yahoo, E*Trade, Allied Waste, Citigroup… and, of course, Ford and GM.

In the 28-year history of the index, there have never been this many “penny stocks” among the 500. In fact, 186 stocks on the S&P 500 don’t even meet the index’s market cap qualification… to be on the index, companies are supposed to have a market cap over $4 billion.

For perspective, at the nadir of the dot-com bust, 59 members of the index dipped below $10. After Black Monday 1987, 35 had dripped that low… or lower.

  “This is pretty crazy,” notes our small-cap turned blue chip analyst Greg Guenther. “In some cases, this is a chance to hop into a time machine and buy these names before they were big. There are some real industry leaders in this bunch… some entrenched manufacturing/supply names with big market shares and proven competitive advantages.

“But there are plenty that deserve to be less than $10 a pop. Now is probably not the time to go out and buy every beaten-down household name you come across. Starbucks is a great example. SBUX is a ‘mass affluence’ play, one that sells perceived luxury to the common man in the form of $5 lattes. That kind of company will get crushed when consumers are scrambling to trim their budgets. In fact, I would be cautious toward anything resembling midrange to high-end domestic retail… there’s just no telling how the consumer will fare in the next few quarters.”

Greg’s preparing a special blue chips turned penny stocks issue for his Penny Stock Fortunes subscribers. As one of our least expensive publications, these picks are worth the price of admission. Get the details, here.

The U.S. market got a small vote of confidence today from the Middle East. Prince Alwaleed bin Talal of Saudi Arabia announced this morning he will boost his stake in Citigroup by at least $350 million. The investment would give the Saudi royalty over 5% control of the company.

  But the boost from Alwaleed didn’t last long. It was all but canceled by the worst jobless claims data in 16 years. Weekly jobless claims shot up 27,000 from last week, to 542,000 — the highest since Bill Clinton was interviewing his first round of White House interns.

The four-week average is up to over 506,000 — its highest level since 1983. We don’t get a new unemployment report from the Bureau of Labor Statistics until Dec. 5, but at this rate, 6.5% is looking like “the good ol’ days.”

  “We are beginning to pay the societal costs,” opines Dan Denning, “of a sustained economic policy that favored finance and consumption over production and savings. That policy saw the formation of a Wall Street-Treasury Dept. Axis.

“That Axis advocated running a capital account surplus. It was partly to offset the rising current account deficit. But in some ways, the surplus in the capital account came about because of policies that encouraged debt and consumption, the very things that led to the current account deficit. The result was a boom in American financial services — while American manufacturing was shipped offshore.

“The costs are higher unemployment, fewer skilled workers, greater consumer debt, more government borrowing from foreign creditors and the disappearance of a healthy industrial base. None of those costs are going to be absorbed by TARP or any other bailout planned by Congress.”

  Meanwhile, if you’ve been a Treasury bond investor this year, seeking low returns and even lower risk, you’ll likely be one of the biggest winners of 2008. The Lehman U.S. Treasury Index is up 7.4% year to date. Compared to the S&P, down over 40% — it’s looking pretty good.

  The “credit crisis” is far from being over. The lending rate between banks, aka the Libor, looked like it was returning to normalcy a few weeks back. But not so much anymore. The three-month rate has crept slowly down to 2.17% — a full point above the Fed’s target — while the overnight has flat lined around 0.44%.

But the best gauge might be the Libor-OIS spread, the difference between three-month Libor and overnight interest rate swaps:

Despite billions in bailout capital from central banks all over the planet, banks are still cautious. The markets have yet to thaw.

  Amazingly, traders are still fleeing to the “safety” of the U.S. dollar. The dollar index has quickly regained all its losses from yesterday, and then some. At 87.4, it’s about a half a point from its 52-week high.

The euro has fallen to $1.25 a pop. The pound is closer to the $1.40 technical support we mentioned yesterday, now at $1.47. The yen has strengthened to 94, as global risk aversion has taken some wind out of the carry trade’s sails.

  “I’ve spent a lot of time talking about and listening to opinions on the dollar this week,” Byron King writes, fresh off the plane from the New Orleans Investment Conference. “EverBank’s Frank Trotter was there, discussing investments in foreign currencies. And Frank Holmes — gentleman and scholar — was there from U.S. Global Investors, with his unique perspectives on emerging markets and international money flows.

“Between the two Franks, I could discern the sense that the strong U.S. dollar is due for a major correction in the not-too-distant future. This will cause many foreign currencies to appreciate. It will also probably cause the prices of both oil and gold to rise. How soon? We’ll probably be well into it during the first quarter of 2009. So it may be time to diversify a portion of your funds out of dollars.”

  The dollar’s strength is intensifying a commodity sell-off. Crude oil is the most notable victim, now barely clinging to $50 a barrel.

Thus, you can count on $2 gasoline by the weekend. The AAA national average was $2.02 early this morning, when oil was closer to $53 a barrel.

  Gold is faring remarkably well today, despite the broad commodity smack down. Still, it’s far from booming… up about $5 from this time yesterday, at $740 an ounce.

  “I have read a number of analysts,” says our colleague David Galland, of Casey Research, “who have expressed the view that gold could dip to the mid-to-low-$600 level.

“Could happen, but I think not. Already, buyers of physical gold are finding anything near $700 to be cheap, and so are helping to build a floor under the monetary metal.

“While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still. Maybe not overnight, but in the next six months to a year, certainly…or as certain as anyone can be about anything these days.

“We can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and, at under $750, a buyer.”

  So you may have heard by now, the execs for the Big Three automakers each took private jets to their testimony before Congress yesterday. Average cost for the flight from Detroit to Washington? $20,000… Northwest had flights available that day for $288 coach, $837 first-class.

"It’s almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo," Rep. Gary Ackerman, a Democrat from New York, said of the dynamic trio. "Couldn’t you have downgraded to first class or something, or jet-pooled or something to get here?"

Maybe they should have driven.

  “So Barney Frank wants to talk about income disparity?” asks a reader, responding to Frank’s allegation that the auto bailout is a form of “union busting.” 

“OK, let’s try this one. In 2006, the average hourly wage of a person with a high school diploma was $13.46 per hour. For those fortunate enough to receive insurance and other forms of compensation, the average was $17.50 per hour in total compensation. These averages encompass all age groups.

“However, if you are a Detroit auto worker with a high school diploma, your total compensation comes to: $67.78 (Ford), $70.43 (GM) or $72.59 (Chrysler) per hour.

“Now, that is income disparity.” 

The 5: Hmmn… that would be some $150,000 a year per worker. Are we sure those numbers are right?

  “All of this brouhaha” writes our last, “about bailing out the auto industry and how destructive it will be to the country — sounds a lot like the moans and groans of the steel industry (and steel unions) a few decades ago when the Japanese and Koreans were killing the U.S. companies with low prices for bulk steel. The biggies, like U.S. Steel and Bethlehem, went under.

“And you know what? Small, progressive and aggressive steel companies arose in the U.S. — not for the cheapo junk steel, but for the better grades, for alloys and for hi-tech steels. And in a few decades, the industry bounced back better than ever. The U.S. was THE place to buy the good stuff. The Far East was where you bought the cheap bulk stuff. Did it ‘hurt’? Yeah, for a while, but you know, we got over it and came through it all the better. We just forgot what we learned.

“How many innovative car companies do you think will start popping up in the U.S. when the dinosaur Big 3, and their fat-assed dinosaur management, are finally gone? I don’t think that innovation is completely dead in the U.S.; it’s just been shut down in favor of huge management bonuses paid for killing industries through blind stodginess. Let’s see, how many U.S. car companies were still trying to crank out SUV guzzlers when gas prices were scaling Everest? Let the dead die so that the living can grow.
 
“Sorry, unions and union members, but the day is over that a dumb back can command a sizeable (read uncompetitive) wage and benefit package just for showing up to do a job that, in many cases, a monkey could be trained to do. Better get some education. The new companies will be high-tech — there will be plenty of jobs for those with a reasonable education and training. Dumb backs will get to clean toilets at a commensurate wage.

“Hear that Fed and Treasury and Congress? Don’t waste money trying to resurrect dinosaur corpses. Put the money into opening up investment in new technologies, good products and well-run companies. Put the money toward training a labor force that can be part of competitive industries. And start the ‘do it or fail’ philosophy in the schools. First-grade would be good.”

What a mess…

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget to check out the next installment of our Emergency Retirement Recovery Series. It’s free, all you have to do is sign up, here.

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