Worst January Ever, Wall St. Bonuses, American’s Saving Again, China’s Plan and More!

  • Worst January for stocks ever… Chris Mayer with a pocket of strength for you portfolio
  • Americans start saving… but now that’s a bad thing?
  • Penny stock team looks into American infrastructure… what needs the most help, and how to invest accordingly
  • Government tells banks how to profit, now how to market? Congressional petition to stop “Citi Field”
  • China to the “rescue”… World’s biggest materials user tries to scoop up Rio Tinto 
  • Plus, why are we defending Wall Street bonuses? Readers ask… our response, below

  If you’re a stock market investor, congratulations, you just survived the worst January for stocks in U.S. history. With declines of 8.6% and 8.8%, the S&P 500 and Dow are off to their worst new year beginnings since, well, ever. 

If you’re superstitious, it gets even worse. The S&P 500’s January result (up or down) has indicated the entire year’s performance in 60 of the last 80 years. It fell around 6% in 2008, and you know how that turned out.

Scanning the sectors, it’s a sea of red so far in 2009:

  “Where to invest is the question,” pontificates Chris Mayer, who has been poring over the best sectors… and the worst. “In pockets of strength is one answer. Where might these be?

“The railroads are interesting because they have put up increases in earnings despite declines in freight volume. Union Pacific reported a 35% rise in fourth-quarter earnings, despite a 12% decline in carloads. CSX reported a 16% gain in earnings. Burlington Northern reported a 19% increase. Canadian National Railway chipped in an 11% increase.

“A good chunk of those increases is due to a lag effect in fuel surcharges. When those fuel surcharges come down, as the price of oil is now much lower, so too will some of those earnings. But not all.

“In fact, railroad executives have been pretty confident in their ability to continue to raise prices on their customers. Railroads have to compete with truck and other means of transport in many cases. The railroads say that even with the increases, it’s cheaper to ship by rail than it was 28 years ago — adjusted for inflation.

“Railroads are also pretty green. One rail car can carry freight 436 miles on one gallon of fuel, according to the American Short Line and Regional Railroad Association. And it emits far fewer carbon emissions than a truck, at a time when that could be very important.”

What’s more, Chris assures us, is that railroads are trading on the cheap. The industry as a whole trades for about 9 times earnings. And the icing on the cake? “Warren Buffett likes railroads,” Chris adds, “and recently upped his stake in Burlington Northern. He now owns 22% of the company.”

For Chris’ favorite New Year’s picks, you should check out his “paycheck portfolio.” You can find it here.

  With these numbers, it’s no wonder, Americans are saving again.

According to data from the Fed, the American savings rate bumped up to 2.9% in the last quarter of 2008. Of course, that’s a scary prospect for a consumer-driven economy. It’s a “downward spiral,” says the AP. “For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.”

What a travesty.

  American consumption has actually fallen for the last six consecutive months, the Commerce Dept. confirmed today. Spending by individuals fell 1% in December, finishing off a nearly 9% consumer spending crash in the last quarter of 2008.

Unfortunately, incomes are falling too. Personal income fell 0.2% in December.

  Jeez, since no one’s buying… guess the government’s gotta do it.

The nearly $900 billion “economic stimulus” bill hits the halls of the Senate this week. Channeling a vestigial sense of fiscal responsibility, Republican senators are promising to scuttle the bill unless tax cuts are added and “wasteful” spending is stripped away. Where were the “nay” votes when they were promising to spend money on failing banks?

If the first bailout bill is any indication of outcome, they don’t have the stones — or the clout — to reign in this behemoth.

  We also suspect infrastructure spending will remain a centerpiece of the bill. For good reason, reports our small-cap team today:

“The American Society of Civil Engineers finally released its much-anticipated 2009 Report Card this week,” reports the Penny Stock Fortunes tag team, Greg Guenthner and Jim Nelson. “According to the group, the United States’ infrastructure is still graded a D.

“The study, which comes out every four years, finds a grand total of $2.2 trillion in needed repairs to get the country back on track. That’s up from $1.6 trillion in 2005.

“We first wrote about the ASCE’s quadrennial report in July 2008. We noted that highway spending would have to increase to $94.5 billion annually to get us back on track. Apparently, the past four years were rough on roads. In the new report, the engineers estimate spending would have to jump to $186 billion per year. That’s 165% more than what we currently spend on highway improvements.

“Roads weren’t the only category to fall deeper into disrepair. Aviation and transit also dropped a their pluses and scored D’s. It appears that while the rest of the country’s infrastructure is in poor shape, traveling in this country is getting even worse.

“As you can see, there weren’t too many changes except the price. $2.2 trillion is slightly under three times the size of Obama’s stimulus plan. We may not see that kind of money anytime soon, but we suspect the areas in the worst shape will see the largest portion… you know, the squeaky wheel gets the grease.

“Roads, water, and wastewater are the absolute worst. You can’t build, fix or maintain any of those three without large equipment, so we’ve added a leader in that field to the PSF portfolio.” Want the ticker? Just click here.  

  It’s Monday… let’s see…. hmmmn… which banks failed over the weekend? Looks like a few in Utah, Florida and our home state Maryland gasped their last breath late Friday.

The FDIC was able to find buyers for Florida’s Ocala National Bank and MD’s Suburban Federal Savings, but we note there were no takers on the one in Utah — MagnetBank. The FDIC will have to pack up the bank’s assets and mail checks to its creditors. All told, the three failures will cost the FIDC around $225 million.

Side note: Our first mortgage was originated by Suburban Federal. But before we even made the first payment, it was gobbled up by Wells Fargo, with whom we’ve been ever since.

  The dollar is still on the rise. Despite all the news moving the markets, I.O.U.S.A. is still considered one of nations best suited to cope with this worldly downturn.

At $1.27 this morning, the euro is at a two-month low versus the dollar. The pound, now $1.42, is squarely in the doghouse as well. The dollar index remains around 86, about 3 points below its credit crisis high.

  And in spite of dollar strength, gold is still looking strong. An ounce sells for $915 today, just below its recent fourth-month high.

  Oil bulls aren’t quite so fortunate. Light sweet crude has been in steady decline over the last week, and continues to trickle down today. As we write, it’s clinging to $40 a barrel.

  Rio Tinto, the Aussie mega-miner, is in talks with the government of China for an emergency loan. Chinalco, China’s state-owned aluminum company, will kick Rio as much as $9 billion, if the deal goes through. In exchange, China would nearly double its stake in Rio Tinto to 15%, easily making it the company’s biggest shareholder.
The world’s biggest material consumer slowly taking over the world’s second-biggest materials miner… could get interesting.

  Punxsutawney Phil saw his shadow this morning, thus forecasting another six weeks of winter. What else would you expect? Phil sees his shadow every year. In fact, the little rodent has “not seen his shadow” only 15 times since 1887.

  “What’s up with defending bonuses to people who have run their companies into the ground?” asks a reader responding to Friday’s issue . “I understand the hesitation to have a U.S. president dictate the terms of profits and bonus. However, I’m pretty sure the companies in question asked for it by begging for and receiving government help. The golden rule applies: They who have the gold make the rules. If you don’t want government interference, don’t ask for taxpayer money.

“And if we were completely ruled by free market economics, instead of the old boy network, all those CEOs would have been run out of town on a rail by their shareholders, rather than receiving ‘less’ of a bonus. Either way, I don’t see how bonuses to incompetent executives gets any sort of rational defense.”

  “I feel that you have taken the position,” adds another, “that it has been OK for these companies to give outlandish salaries and bonuses to CEOs who have steered their companies into huge debts that the American public is being made to bail them out of. I hope that I have misunderstood your comments on this subject.

“Any company that is receiving BAILOUT MONEY should not be allowed to give out any bonuses, and the CEO’s salary should be cut to ZERO till they show they can guide the company they work for in a responsible manner. They should derive their pay from selling their second, third and fourth homes and their multiple yachts and their airplanes, etc. They should be required to lower their idea of excesses in living and learn what it is that the people of this country are dealing with. Until they are required to do this, their arrogance and throwing it in the face of the people who are now paying to keep their companies afloat will continue.

“If a CEO doesn’t feel he wants to do this, he should obviously be fired and blackedballed from getting a job any higher than a janitor. No Bail-OUT MONEY to any company that doesn’t want to adhere to these rules.”

The 5: Hell, yes, you have misunderstood our comments. And you raise others. The federal government should not have bailed out those banks in the first place. That would have eliminated any bonuses due to CEOs who ran failing enterprises. The CEOs who managed to make good decisions and kept their companies afloat would have been due their bonuses anyway.

Obama was outraged at the aggregate total of bonuses paid out by good or bad firms. And you’ve taken the bait. With “taxpayer” bailout money going into the banking sector at large… the government is now going to extend further regulation over the whole industry, rather than just focusing on routing the bad eggs. In fact, by injecting taxpayer capital, they’re keeping bad firms alive… in effect punishing those who avoided toxic assets.

And because people are too shallow, lazy or stupid — or have conflicting interest — to draw the distinction between the good and the bad firms, the president can assert the moral high ground and whip up emotional support for government advances into the private sector. Even among people who would generally support free markets. (Ahem.)

All of which leads to morally self-righteous comments like this:

  “When it’s my tax dollars bailing them out,” declares the last reader, “you bet your ass we get to decide these things. And if not the president making the decisions, let’s find someone else competent to do so, because these banker morons have certainly proved their incompetence. I wouldn’t let them decide what color to paint my bathroom.”

The 5: So you wouldn’t let a banker pick the color of your bathroom, but you’d like to appoint a bureaucrat, with your taxpayer money, to run a bank?

How about a congressman? Like this:

  The New York Mets will soon move into their new ballpark, and Citigroup has pledged to pay $400 million over the next 20 years for the rights to name the place “Citi Field,” a deal inked back in 2006.

Not happy with simply regulating the banks, two congressmen want to actually get in there and make business decisions on their behalf.

Dennis Kucinich, D-Ohio, and Ted Poe, R-Texas, wrote a letter to Treasury Secretary Geithner insisting that “Citigroup ought [not] to spend $400 million to name a stadium at the same time that they accept over $350 billion in taxpayer support and guarantees."

Sure, on the surface, they’ve got a point. But who’s to say slapping Citi on the new field won’t help the company drum up more business among baseball fans… and get back to being solvent faster… thereby paying the money back to the “taxpayers”?

Maybe the $400 million for that marquee is a good decision. Maybe it’s a crappy one. But by injecting bailout money into Citi’s coffers, we’re no longer saying Citi will benefit for the good decision, or pay for the bad ones. Now we’re inviting populist meddlers in Congress to choose for them.

And where does it stop… Bank of America, Raymond James, Comercia, M&T Bank and PNC all have their names on stadiums around the country, and they’ve all at least applied for TARP funding. Do we really want the Treasury to dictate whether those firms too can put their names up on stadiums? How about advertisements in bus stops? Should we tell them to stop that too? Free toasters… pens with their logos?

Where does it stop? This is the slipperiest of slopes.

We’re not defending corrupt CEOs. In fact, if they’ve stolen money — taxpayer or otherwise — they should go to jail. But we’re not about to let that spill into morally self-righteous tyranny. We always wondered what it would have been like to live in the 1930s. The history books have always made it seem like people lost their senses. Looks like we’re getting a good taste of that now.


Addison Wiggin
The 5 Min. Forecast


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