The Bottom, IPO Resurgence, Dry Ships, Tax Day Tea Parties and More!

by Addison Wiggin & Ian Mathias

  • Investors cheer the Beige Book… but is the economy improving or just worsening slower?
  • IPO market revives, I-Banks turn profits… Byron King on whether to trust the market’s reaction
  • Data downpour… latest details on housing, industrial production and unemployment
  • Chris Mayer with a sector so beaten down it’s worth buying
  • A frontline report on a “Tax Day Tea Party”

 

  The U.S. economy is bottoming out… at least according to the Fed it is.

"Five of 12 districts noted moderation in the pace of decline,” reads the “money” line of yesterday’s notoriously optimistic Beige Book, “and several saw signs that activity in some sectors was stabilizing at a low level." And that was that. Some parts aren’t dying as fast as others. A few aren’t getting worse at all. Yee-hah!

“Isn’t this what happens in a coma?” asks our friend down under, Dan Denning, not really joking. “Leading indicators are breaking down, but less badly. Is that good?”

Consider the alternative, here.

  The mob on Wall Street was willing to take the bait, at least. The Beige Book release helped push the Dow and S&P 500 up over 1.3% yesterday, their fourth rally in the last five days.

Bad news from Intel and UBS was overshadowed by nice earnings from CSX, a dividend boost by Procter & Gamble and this news from American Express: Growth in souring credit card loans slowed in March. It’s still growing, of course, but focus on the “slower” part… and buy!

  The decrepit IPO market showed a sign of vitality yesterday, too. Rosetta Stone, the folks who promise to teach you French or Swahili with software, went public yesterday at a price above its expected range. That hasn’t happened in 11 months. Underwriters had set a range of $15-17 a share, but bidding ended up starting at $18 a pop.

This morning, the stock opened at $25. Formidable!

That’s the third successful IPO in April. Not bad, considering there have been only two others since August of last year.

  And JP Morgan is making billions again!

The bank earned $2.1 billion in the first quarter, it announced this morning, beating estimates just as Goldman Sachs did earlier this week. (Interesting side note: After all the credit crisis shakedowns, JPM is now the biggest bank by revenue in America.)

Coupled with so-so numbers from Nokia, the buyers have gained control of the market again today. The Dow opened up 50 points.

  Even home builders have recovered a bit of their former euphoria. The National Association of Home Builders bumped its builder sentiment up from 9 to 14, the biggest gain since 2003 and highest level since last October.

Still, a reading of 50 or higher suggests true optimism among builders. At this rate, it will be at least seven months before they regain a positive outlook.

  In all, lousy, but not horrific characterizes most of today’s economic news. Here’s a rundown of the most notable nuggets:

  • Initial jobless claims improved last week from their 27-year high. First-time filers for unemployment benefits declined by over 50,000, to 610,000. But continuing claims, folks seeing benefits for 2 weeks or more, broke through the 6 million mark — an 11th straight weekly record
  • Foreign nations were net buyers of U.S. debt in February, says the Treasury, sighing with relief. Foreigners are, apparently, still interested in propping up the U.S. government. Still noteworthy: China curtailed its purchase of U.S. bonds for the 2nd month in a row. They bought just $4.6 billion in February, bringing their total to a massive $744 billion
  • And housing starts fell last month, despite February’s surprise uptick. New construction fell 10.8% in March, to the second slowest pace since records began in 1959. Permits for future construction fell another 9%, to a record low. (And home builders are slightly more optimistic… because?)

  Here’s the exception to the “bad, but not that bad” that proves that data rules: Industrial production in the U.S. fell for the fifth quarter in a row, led by a massive decline in capacity utilization.

National output slipped another 1.5% in March, the Fed announced yesterday, to its lowest level in at least 10 years. For all the first quarter, industrial production was down 20%, making it the worst-performing quarter of the past five.

Capacity utilization has now fallen to just 69%, the lowest since at least 1967, when the Fed started keeping track.

“Capacity utilization is one of my fave data prints,” notes our friend Chuck Butler, “in that it is one of the few that is forward-looking. Most data is old, stale and backward- looking. But capacity utilization is forward-looking. The capacity utilization rate reflects the limits to operating the nation’s factories, mines and utilities.

“So if this is this a ‘forward-looking’ piece of data… the future doesn’t look so bright. Guess we won’t have to wear those shades, eh?”

  “I don’t trust today’s market,” says Byron King. “When the market goes up, I look for fundamental reasons. And right now, I don’t see the fundamentals in place. There is too much smoke in the stock market. There are too many mirrors. The con jobs are still happening. The other day, for example, the market rose after Goldman Sachs released first-quarter earnings for 2009 showing a profit of $1.88 billion. And we all know what’s good for Goldman Sachs is good for America. Right?

“There are a few sectors that I like, such as the large, well-capitalized precious metals miners with increasing output and cash flow. These ought to offer some protection in our predestined inflationary future.

“I’m paying most attention to great companies with superb management, with solid reserve positions. They must be excellent operators who know how to dig gold and sell it into a strong investor-driven market. (Jewelry sales are down for gold. Investor demand is up.) Those kinds of mining stocks could take off in the short term if the fear of future inflation hits the marketplace. But these companies are also medium- and long-term plays, say, three-five years out, because inflation IS already baked into the U.S. economic cake.”

Byron named five such miners in his latest issue of Outstanding Investments… check it out, here.

  “The market for containerships is downright depressing,” notes Chris Mayer, our maestro of opportunity amid crisis, “which is creating some very compelling pricing.” Exhibit A, the Baltic Dry Index:

 

“The earnings of dry bulk shippers have fallen more than 80% from their peak,” says Chris, “which was just last May. Ships earning $300,000 per day now get about $15,000. Demand for key dry goods — coal and iron ore, in particular — fell dramatically. Making everything worse, the industry ordered a bunch of new ships, thinking more good times were ahead.

“And making everything even worse again, debt fueled much of the new shipbuilding. Since ordering those new ships, asset values have been cut half or worse. Since banks lent 80% against the value of the ships, you can quickly see that they are now underwater on those loans. In some cases, bankers — wise they are not — lent 90-100% on the value of the vessels.

“Why care about dry bulk shippers? Money.

“The market for these ships will self-correct. Old ships are being scrapped. Orders are being canceled as the shipowners fail to take delivery. Newer shipbuilders are going under, too. By some estimates, 50% of the ships on order will never materialize into physical ships. I don’t know what the number will ultimately be, but there will surely be a lot of deferrals, defaults, cancellations and the rest.

“Any whiff of a rebound in trade will light a fire under these stocks, because they have been beaten down so much. All the doom creates some very compelling pricing.”

You can find Chris’ favorite shipping stocks in Mayer’s Special Situations.

  China’s economy grew a scant 6.1% in the first quarter, its government admitted today. That’s the slowest pace in nearly a decade, but still… 6% growth these days is still remarkable. In fact, it’s almost too good to be true.

  Industrial output in the eurozone plunged a record 18.4% in February, says the EU statistics office today.

  The dollar — that piece of paper that should act as a proxy for government malfeasance — gained again yesterday and today. European Central Bank minister Alex Weber gave the dollar an extra nudge when suggested the ECB will soon engage in “nonstandard” monetary policy to rescue the euro economy.

Did he mean quantitative easing and cutting rates to zero like in I.O.U.S.A.? Traders didn’t wait for the answer… they sold the euro down a penny to $1.32. Obversely, the dollar index is climbing above 85 as we speak.

  Oil is down to $49 a barrel today, thanks in part to another dark forecast from OPEC. The cartel cut its 2009 global demand estimates again today. The sentiments echoed similar ones expressed by the International Energy Agency and the U.S. Energy Dept. yesterday.

Oil producers aren’t expecting much in the way of increasing demand this year.

  "Bring back the Brits — they taxed us less!" read one of many signs at the Tax Day Tea Party yesterday in Annapolis. Two of our resident Whiskey shooters, Sam Buker and Gary Gibson, made the short trip to our state’s capital to catch the hoopla.

“Working through the crowd, 2,000 people thick,” Sam reports, “we came upon sign after sign and more than a few odd characters. A man pulled his private historic schooner into the harbor with the help of friends. Left on the ship, in full view of the assembled multitude, were wooden crates stenciled ‘TEA’ — and a few more were scattered on the docks.

“Another fine touch that only Annapolis could offer: a patriot in his Revolutionary garb (shirking duty from statehouse tours) to take a stand today. His trusty mount: a Segway. Poised high and proud, he held a flag aloft. (We drank our morning espresso with him in the coffee shop nearby before penetrating the dense brush of demonstration… he was delightful…and said, in parting: ‘See you on the other side of the breech!’)

Yeah, that ought to scare the bejeezus out of ’em

“The cries of the crowd: ‘Throw the bums out!’ ‘Cut our taxes!’

“After braving two hours of wind and torrential rain, your hardy Whiskey & Gunpowder staff called it a day and headed for the bar for warm Irish coffees and carried on a heated political discussion with our fine barkeep… who gave Gary a free beer.”

  Gold has broken out of its range… but in the wrong direction. After hovering at $890 for a couple days, the spot price plunged almost $25 this morning. With traders and investors sighing, “It’s not as bad as we think” in unison… what should we expect?

  “Gold, in terms of human benefits,” writes a reader, matter of factly, “is probably one the most useless of the elements. We are wasting valuable resources to mine it… only to store it underground again.

“Back in 1930, in the one room school I attended, the district school inspector posed this question to us: Which is the more valuable, gold or iron? Of course, we all said the obvious: ‘Gold.’ Wrong. Gold is more expensive, but not more valuable. Iron touches almost everything we use in life.”

The 5: Yet FDR confiscated all the gold in the U.S. just three years later. Hmmmn…

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. For a more accurate reading on where the economy is headed, please see the newly revised Richebacher Letter.

P.P.S. Apropos of nothing, the president welcomed the surviving members of the Grateful Dead to the White House on Monday night. The band credits Obama with getting them back together after the death of their longtime frontman Jerry Garcia.

 

rspertzel

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