by Addison Wiggin & Ian Mathias
- Health crisis yields financial opportunity? Mayer looks behind swine flu headlines
- The Fed’s unicorn strategy: If you can’t be paid to borrow money, what’s the next best thing
- Gold holds above $900… Alan Knuckman’s next key level to watch
- Getting past the media’s happy talk on the housing numbers
- BRIC countries flex their muscles… IMF to issue its own bonds
“It might be nothing,” comments Chris Mayer this morning, “like the bird flu. Or it might be something bigger. But it is definitely hitting the Mexican markets today, in particular the airport stocks.”
We begin with Chris’ comment today to illustrate a point: While it doesn’t often make sense, the news cycle does offer up the rare opportunity.
“We doubled our money on a Mexican airport stock back in the day,” Mr. Mayer continues. “They are great businesses and when you buy them at the right price, it is hard to lose with them. This swine flu stuff might be just the kicker to make for a nice entry point – but not yet, it is still early. Let the news cycle do its thing and work this up into a frenzy. But keep an eye on this.
“In Capital & Crisis, we bought Gold Kist in the heat of the bird flu fever. It was a holding that tested our nerves. At one point, we were about down by half. But we wound up netting a 40%-plus profit from our original entry price after the bird flu stuff subsided and Pilgrim’s Pride bought Gold Kist.
“Crisis presents opportunities. It is the core idea behind our investing philosophy.
“Another interesting relationship,” Mayer continues, “Seaboard versus Smithfield Foods.”
“They both make pork. SEB is in the Capital & Crisis portfolio. It is a winner versus SFD because the flu apparently originated in one of SFD’s pigpens. In fact, pork from Kansas has been banned in some places already. SEB is in Oklahoma. Cowboy up!
These are exactly the kinds of things we’ll highlight in the upcoming Crisis Recovery Report too. Stay tuned for more on that…”
If you’re not currently a Capital & Crisis subscriber, there really isn’t a better time to become one than right now. Read how, here.
The other reason we begin with opportunity this Monday? We want to keep our mind off stories like this: A study released this morning reveals that if it had its way six weeks ago, the Fed would have paid you to borrow money. How nutty is that?
But what else can a central bank do when it’s already brought interest rates to near zero? A study prepared for the last Fed Open Market Committee meeting six weeks ago suggested the optimal interest rate would be minus 5%.
Heck, we would love to get paid to borrow money. We would also love a world of unicorns and vampires (at least the friendly kind). But since even Fed researchers recognize none of those things is practical, they recommend instead the Fed keep up other “unconventional” policies that would have the same effect as negative interest rates.
That’s why the Fed’s announced at the time it’d buy up $1.15 trillion in mortgage-backed securities and Treasuries. The research suggested an even higher figure than a trillion, but the Fed governors decided to play it safe… “conservative” as only a Fed governor could define it.
The Fed meets again this week. Who knows what chicanery is in store for us this time around?
The Chicago Fed’s latest National Activity Index, which crunches dozens of numbers to come up with a near-term economic forecast with a not bad track record, shows the economy still hovering near the lows of the 1973-75 recession.
“The message, as we have seen in other key cyclic indicators,” says The Richebacher Letter’s Rob Parenteau, “is that free-fall phase of the recession appears to be done in the United States. But that should not to be confused with ‘the recovery has begun.’”
“Could this be a head fake?” Rob asks. “We know that the auto production recovery under way in Q1 will peter out this summer, as GM has announced a nine-week furlough to reduce inventory, and set off another round of equity investor fear and uncertainty. We also know Treasury issuance will be ramping up through the rest of the year as fiscal deficit spending increases.
“Who, besides the Fed, will be willing to take up all these Treasury bonds?”
Heh. Who, indeed? The Chinese? We believe they’re now buying gold.
The president’s chief economic adviser, Larry Summers, chimed in with his own near-term outlook yesterday.
Sleepy figures the U.S. economy will contract “for some time to come.” The head of the president’s National Economic Council also expects “sharp declines in employment for quite some time this year.” But apparently, that prospect bores him.
Of course, he is the only member of the Committee to Save the World still collecting a government paycheck.
As Chris intimated above, the markets have begun the new week spooked by the swine flu outbreak. 103 people have died in Mexico. Many more have the heaves worldwide. The major U.S. stock indexes opened down 1%, tracking the action in Asia and Europe. Airline stocks, hotel stocks, cruise lines – if it has anything to do with travel, it’s taking a beating today.
And since travel relies on energy, it figures oil is down more than $3 a barrel, sitting a little above $48.
With stocks down, the safety trade is back in play. The dollar index is back above the 85 mark. Gold is fading a bit, but still holding above $900.
“Gold has been a great example of cycling,” write our resource trader Alan Knuckman, “with the initial surge in November and the subsequent highs in February that failed to make new all-time highs above $1,000. A second run is now under way after gold lost its allure to some and declined to form a base at $860. The rebound was fueled with dollar weakness, instead of safety, and has now pushed prices solidly above $900 once again, with $930 KEY to make another attempt at the highs.
“Silver has performed similarly as well with a sell-off to under $11.80 shaking out the weak hands and setting up the rally above $13 an ounce. Some believe the Fed’s printing actions will lead to inflation, if not hyperinflation, down the road (and I’d have to agree).”
Alan is taking an unorthodox approach to profit from recent bullishness among the commodities. For access to his latest strategies, check this out.
The G-7 central bankers and finance ministers wrapped up a meeting in Washington over the weekend by agreeing to have the International Monetary Fund (IMF) sell bonds for the first time in its history.
This story just gets better all the time, don’t you think?
“The new bonds will be denominated in the quasi-currency,” explains Dan Denning from down under, “the IMF uses internally (the special drawing rights, or SDRS, that both Russia and China have floated as a possible new global reserve currency).
“Of course, how the bonds will actually work still has to be sorted out. But the internal logic of the whole arrangement is now clear: Creditors hold the whip hand. Debtors are going to get whipped.”
“The balance of power in the global economy is clearly shifting from the borrowers and spenders toward the savers and producers. Advantage BRICs (Brazil, Russia, India, China). Disadvantage Gordon Brown and Barack Obama.”
New home sales numbers for March came out Friday. What was trumpeted in the media? The fact that inventory fell at a record pace. There’s only 10.7 months of inventory hanging over the market now, instead of the 11.2 a month before. The biggest drop in 45 years. We’re back to October ’08 levels. Yippee!
But the actual sales numbers, you ask? Well, not so good. There was a tiny blip upward from the month before, so small to be within the Commerce Dept.’s margin of error. Year over year, new home sales fell 30.6%. Ouch.
Barry Ritholtz, author of Bailout Nation, due for release next month, is a kindred spirit who saw this whole mess unfolding even as Alan Greenspan was urging Americans to get an adjustable-rate mortgage. He heaps scorn on pundits who declare the housing market near a bottom.
“None of the factors outside of price and interest rates are constructive to home sales,” he writes. “Outside of the $8,000 buyer’s tax credit, all of the rest of the factors impacting sales are deeply in the red.” Things like job losses, lenders who’ve started asking for 20% (or even 30%) down payments and prospective borrowers whose debt-to-income ratios are too high.
Barry will be joining us at the Agora Financial Investment Symposium this July in Vancouver. Slots are filling up fast, and this is the final week you can take advantage of an early-registration discount.
“I find it quite amusing,” writes an amused reader, “that you quote a ‘former economic adviser to George W Bush’ when discussing current efforts to cut spending. The false conservatives from the GWB era have no credibility.”
“Wow,” chimes in another, “having ‘former economic adviser to George W. Bush Greg Mankiw,’ or, for that matter, having any former Bush administrator, say anything bad about the Obama policies is really a stretch. Sorta like having Cheney say they didn’t torture, but if they did, it was OK since there was valuable information gathered and disclosing the memos was bad for national security, but how about releasing more memos so that I can include them in my book (paraphrased).”
The 5: I believe we wrote ‘ironically’ when characterizing Mankiw’s statement. On purpose.
“The sad truth is the climate change debate, renamed from ‘global warming’ after the globe stopped warming in 1998, has nothing to do with science. There is little correlation between temperature and atmospheric carbon dioxide and powerful correlation between temperature and solar activity.”
“Solar activity passed its peak in the early 1990s and is expected to decline quite sharply to a minimum around 2030. The cooling that has already begun probably will not be like the cooling of the 1940s-1970s that inspired the global cooling scare stories about an impending new ice age. It is more likely to lead to a replay of the Little Ice Age, with its attendant repeated crop failures and famines.
“The Little Ice Age forced families facing starvation to choose which of their children to abandon in the forest in order to stretch food far enough for the rest of the family to survive until spring, a la the tale of Hansel and Gretel. The relentlessly bad weather confined weakened, malnourished people indoors in close quarters, setting up perfect conditions for the Black Plague to ravage Europe from 1347-1351.”
The 5: Nice. And you thought the credit crisis was bad.
Thanks for reading,
Addison Wiggin
The 5 Min. Forecast
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