Curb Your Enthusiasm, Leading Indicator, Big Names Buy Gold, Goldman Analysis and More!

by Addison Wiggin & Ian Mathias

  • Wayne Burritt delivers some short-term investment advice
  • One little-discussed ratio that’s been known to forecast the end of a downturn
  • Drama in the details… two data points shaping today’s trading
  • Chris Mayer on why even the “big name” investors are buying gold
  • Traders grasp at Goldman earnings… why the latest from GS is not what it appears


  “The economic data in the U.S. is quite grim,” said Dallas Fed Gov. Richard Fisher in Hong Kong early today, “and I expect a contraction at a equally dazzling rate in the first quarter.”

And so begins the “curb your enthusiasm” issue of The 5.

  “U.S. shares have been on a tear lately,” writes our own Wayne Burritt commenting on one glimmer of hope. “From a low of 667 on March 6 to a high of 857 on April 9, the S&P 500 has soared a mind-blowing 28.5%.”

“We’ve also seen some improvement in the real estate sector, including sales and affordability data. We’ve seen some positives in earnings here and there. And retail sales in January and February weren’t as bad as expected, either.

“But with housing prices still falling like a lead balloon, the hurt is far from over. Fact is, these data points — while certainly a step in the right direction — don’t spell recovery… at least not yet.”

  “During this recession,” notes Rob Parenteau of the Richebacher Letter, looking at another, albeit more obscure, positive indicator, “we’ve seen the largest spike in U.S. wholesale inventory/sales (I/S) ratios since the 1981-2 recession. Despite ‘just-in-time’ inventory systems, the slowdown was simply too sharp and swift for firms to adjust orders and production quickly enough.

“Here’s the bright spot: The inventory/sales ratio may have peaked.

“Inventory/sales ratios tend to peak during recessions, with the bulk of the drawdown accomplished in the early recovery phase of the business cycle. The inventory adjustment does not need to be complete to end a recession — the I/S ratio merely needs to peak, which appears to be under way.”

Still, companies slashed inventory for the sixth month in a row in February, this time by 1.3%.

At the end of the tech bust, U.S. businesses cut inventory for 15 straight months. So you can expect at least nine more months of declining inventory… that is, if this bust is as mild as the 2001-2002 “recession that wasn’t”.

Which it’s not… 

  To make matters worse, we got this nasty report from the Commerce Dept. today:

Wholesale prices fell 1.2% in March, bringing deflation fears back on the carpet. The producer price index (PPI) is down 3.5% year over year —  its steepest 12-month decline since 1950.

Retail sales fell 1.1% in March, too. For the entire first quarter, retail was off 1.2%, dashing hopes that American consumers would tap their plastic and save the world (again). Retail sales last month were WAY worse than the Street expected, led mostly by a lack of auto sales.

  “The [global] crisis has not touched its bottom,” Chinese Premier Wen Jiabao said over the weekend, continuing a theme. Jiabao was happy to report “better-than-expected positive changes” across his giant land, but he was clearly hedging… China is “in a process of gradual recovery,” he said.

“We can hardly say that the Chinese economy alone has got out of the crisis.”

  Singapore’s GDP crashed 19.7% from the last quarter of 2008 to the first quarter of 2009, its government reported today. The latest GDP reading obliterated expectations and set the record for the worst three months in the country’s recorded history. Exports from Singapore during the period plunged 17%. Manufacturing dropped 29%.

"With most of Singapore’s key trading partners still in recession,” said the country’s Ministry of Trade and Industry, “the manufacturing sector will continue to remain weak for the rest of the year.”

Today’s GDP reading led the Singaporean government to double its economic contraction forecasts for 2009. The country’s GDP is now expected to fall as much as 9% this year, putting it among the worst Asian economies.

  Then there is Thailand. Oy… we could fill a whole 5 Min. with all the madness: political corruption, violent unrest, a shaky economy and today — an S&P credit downgrade.

  “Dollar sins are coming home to roost,” notes our currency man Bill Jenkins. “The BRIC — Brazil, Russia, India, China — were on the wires over the weekend with more IMF-backed SDR chatter too. It seems, at least so far this week, the biggest risk is the U.S. dollar itself.

“That being said, I would not make too many decisions based on the action yesterday, as it was still, practically speaking, part of the Easter holiday, and currency volumes are thin. Movements tend to get exaggerated. But we’ll see if there is any follow-through today and Wednesday.

The dollar index remains near yesterday’s levels today, at 84.8

  “Can a global economy this screwed up get fixed in a few months?” asks Byron King. “I doubt it. We are witnessing a structural transformation of the ‘old’ way of doing things into something new. What is the new? It’s too early to tell. We still might see the equivalent of a multigenerational crash… something that’ll break all the records.

More on this shifting paradigm below… in today’s p.s.

“For the short term, you should hang onto your cash. And have 5-10% of your portfolio in gold. And if you want to own stocks, be sure to own a core of good gold miners. And own another core holding of well-run energy players.”

  Indeed, “for the first time in a couple of decades,” notes Chris Mayer, “some of America’s most successful, big-name investors are buying gold.

“David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis. Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He’s also got a big position in Kinross Gold.

“Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. ‘I have had more phone calls in the past six months than ever before — from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,’ he says. ‘I am not saying George Soros, but people of that caliber have told me they are buying gold.’

“You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb — to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.”

  Today, however, gold is giving back some of yesterday’s gains. The spot price peaked right at $900 yesterday, but has since dropped back to $887.

  Crude oil is back up to $50.

  The U.S. stock market dodged another bullet yesterday. Goldman Sachs announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

That’s $3.39 a share, more than twice as much as the market had anticipated.

The Dow managed to end the day with less than a 1% loss. The S&P 500 and Nasdaq both pulled off small gains.

Curious how the markets work, though, isn’t it?

In reality, Goldman benefited from a quirk in its new reporting schedule. “Its fourth quarter ended in November 2008,” reports the Financial Times, “but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first-quarter earnings, a month in which it sustained $1.3 billion in pretax losses.”


So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

  And since its stock is so “strong,” Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

Oh, boy. “Buyer beware,” warns our short side specialist Dan Amoss. “The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.

“Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.”

  The S&P cut GM’s credit rating again yesterday. America’s biggest automaker now gets the CCC- rating, nine notches below investment grade. Ouch. The bonds fell to a new all-time low yesterday, too. Notes due in 2011 currently go for 11 cents on the dollar. Stock in the company is trading at $1.73 this morning.

  Today, the Dow opened down over 100 points, but is quickly battling toward break-even. Traders, high on the vapors of the last few weeks of gains, refuse to go quietly into that good night.


Addison Wiggin

The 5 Min. Forecast

P.S. A lot of people in the rest of the world are counting on credit card-carrying American shoppers to jump-start the global economic engine… all over again.

But consider this: Right now, total private consumer debt is nearly $2.5 trillion. The way "trillion" gets tossed around these days, it’s hard to imagine how dangerous that is.

But you can already start seeing the massive paradigm shift:

  • On New York’s Madison Avenue, shops that used to sell $2,390 bedsheets and $2,400 handbags have packed up and slapped "For Rent" signs in their windows
  • Last holiday season was the slowest in 4 decades. Meanwhile, luxury products are out and showing off how budgetwise you are is back in
  • Big-box stores continue to close at record rates too, while department store sales are down as much as 24%. The Gap? Sales are down 23%. Other clothing chains are down 22%
  • U.S. cars now sell slower than in 1982. For the first time in history, China sells more cars that we do. Keep in mind about 20% of all the retail in the U.S. comes from car sales
  • Planes can’t sell seats in business or first class, either. Not to mention a 20% drop in airline freight shipping. Meanwhile, train and truck shippers are in free fall
  • Even FedEx and UPS — slammed by the double-whammy of crashing buyer demand and no-shipment digital book, document and movie delivery — have seen overnight shipping profits vaporize.

Total U.S. retail sales have rolled back to levels we haven’t seen since 2005. Imagine if every single retail shop opened in the last three years shut down overnight. It’s already that bad. What’s next? That’s what we aim to find out, here.



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