A Contrarian Indicator, Buffett Braced for Inflation, Fuel of the Future and More!

by Addison Wiggin & Ian Mathias

  • “You can bet on inflation,” says Buffett… how he plans to profit from the dollar’s fall
  • Global lending rates sink further… Rob Parenteau on why the cheap money strategy won’t work this time
  • Contrarian Alert: Famously wrong fund manager says buy banks
  • Chris Mayer on the fuel “that’s going to eat coal’s lunch”

  Today’s contrarian indicator: Bill Miller is bullish and buying shares of banks and credit card companies.

The Legg Mason “legend,” based right here in Baltimore, famous for beating the S&P 500 15 years in a row, is now quite infamous… for buying Fannie Mae, AIG, Bear Stearns, WaMu and Wachovia all the way to the bottom.

This morning, all we can do is cringe. Miller is setting himself up as the historical proxy for the mainstream disaster of the day.

The current “bull market,” reasons Mr. Miller, grasping at straws, is behaving “much more like the rally that ended the 1973-1974 bear market or the one that began off the bottom in 1982 or even that which erupted in March 2003 from the last debt deflation scare.”

Banks, he believes, “have the biggest potential to outperform.” Wells Fargo, Capital One and American Express are his favorite speculations. This guy will chase anything. In response, we’d like to announce our latest additions to the short watch list: Wells Fargo, Capital One and American Express.

  Media mogul Rupert Murdoch thinks “the worst is over” too. “There are emerging signs in some of our businesses that the days of precipitous declines are done,” said the man behind Fox yesterday, “and revenues are beginning to look healthier.”

Still, News Corp. is forecasting a 30% drop in profits in 2009.

  “The response to the sharp collapse in asset prices, private spending flows and production around the world,” Rob Parenteau reminds us, right on cue, “has been one of aggressive monetary ease and fiscal stimulus to contain and reverse debt deflation dynamics.

“Policymakers are acting as if the old consumer debt-financed growth model can be revived, yet the prior distortions in the production structure remain to be addressed, and these cannot be easily papered over. The productive resources allocated over the years to the auto, housing, financial services and luxury goods sectors of the U.S. economy still need to be written off or shifted to more useful purposes.”

  And here we pause to unearth some corroborating notes from the Berkshire Hathaway meeting over the weekend. You’ll note that these comments failed to make headlines:

“You can bet on inflation," Warren Buffett said. Despite playing the “token Pollyanna” at the premier of I.O.U.S.A. last August, Buffet’s comments this past weekend sound like he could have been reading from the script!

 

"It’s wrong for politicians and others to keep saying they’re using [U.S.] taxpayers money,” Mr. Buffett explained all too cogently. “My taxes haven’t gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you’re going to repay them with…

“Anybody who holds [U.S.] dollar obligations from outside this country is going to get back less in purchasing power in future.”

So what’s an investor to do? The classic Buffett solution: "The best protection against inflation is your own earning power. If you are the best at what you do, you will get your share of the national pie no matter what inflation does. The second best protection is owning a wonderful business that does not need capital.”

  “While Buffett is no big fan of gold, his inflation forecast is bullish for the yellow metal,” notes our friend and fund manager Frank Holmes. “Historically, gold has fared well during inflationary periods as investors rush to hard assets as a store of wealth.

goldduringinflation

In eras when inflation passed 5% in the U.S., gold performed best of all asset classes.

“We think gold has more room to run in 2009. If tangible signs of inflation start to show in the second half the year — a period that is seasonally strong for gold — we could really begin to see gold prices strengthen.”

Frank will be one of many “must-see” speakers at this year’s Investment Symposium in Vancouver. Once again, we’ve assembled an all-star cast of characters and some great events for attendees. If you’re interested, get details here… seats are filling up quickly.

  Gold’s up again today. The falling dollar and another rate cut from the European Central Bank helped push the spot price up to $925 this morning. In addition to joining us in Vancouver, you can find your strongest gold plays in 2009 right here:

Gold $2,000

The dollar doesn’t look so hot today. The dollar index is around 84 as we write, just off a one-month low. The European Central Bank helped keep the dollar index afloat this morning, after cutting its main lending rate by 25 points, to a record low 1%. That’s put a bit of a dent in the ol’ euro, down over a cent, to $1.33.

  The Bank of England kept its rate the same after its meeting today — a measly 0.5%.

  Not ironically, the yield on a 30-year U.S. Treasury bond is up to 4.16% today, the highest level in over five months. We suspect it will come back down when this stock rally comes to an end. Until then…

“Get out of the way,” urges Alan Kunckman, “bond sellers are coming. Money has started to move into hard assets from safe haven treasuries.  The quantitative easing only makes the unwinding uglier. This will fuel stocks, but commodities will be big winners from the cash flow.” For proof, check out today’s P.S.

  But never mind all those hard-to-understand monetary policy issues and market fundamentals… Wal-Mart sales are up!

The Dow opened up 0.6% this morning, thanks in part to a 5% jump in same store sales at Wal-Marts around the U.S. That’s about double what the Street expected.

Stocks are also getting a bump from Treasury Secretary Geithner, who assured us last night that none of the 19 “stress tested” banks were in danger of insolvency — regardless how much capital they might need to raise.

The bull run in stocks is making oil look spiffy, too. The front-month contract has popped up to $58 a barrel, another 2009 high.

  But despite the recent rise of seemingly every asset class, we note natural gas is still in the doghouse:

  “The drop in natural gas prices,” writes Chris Mayer, “may be one of the best things to ever happen to natural gas long term. That’s because natural gas is taking market share from coal. Low prices bring new buyers to the table.

“I was thinking of this after reading a piece about the big natural gas discovery in northern Louisiana. The so-called Haynesville Shale could hold 200 million cubic feet of natural gas. That is about 18 years worth of current U.S. oil production. And those estimates could well be too low.

“This adds to a list of huge new fields in recent years in Texas, Arkansas and Pennsylvania. One study says the U.S. has enough natural gas for 100 years of current demand.

“Well, this is one heck of an opportunity. You looking to cut our dependence on foreign oil? Think natural gas. You want to reduce carbon emissions? Think natural gas. In fact, natural gas is setting up to be the fuel of choice over the next several years. It is already cheaper than coal in most parts of the country. Already, of the 372 power plants we’ll build in the U.S., 206 will use natural gas, versus only 31 using coal. Natural gas is going to eat coal’s lunch.”

Of course, Chris’ Capital & Crisis readers are well prepared for a natural gas bull market. Are you?

  A sign of things to come… the Cuban government just inked its first lush hotel deal with Qatar. The oil-rich nation said today it will build a $75 million five-star luxury hotel on Cuba’s Cayo Largo, partly due to the U.S. government’s immanent loosening of travel restrictions to Cuba. Sure, $75 million is a drop in the bucket for an oil emirate like Qatar, but still… times are a-changin’.

"We want to send the clear message to the world that Qatar is at Cuba’s side,” said Ghanim bin Saad al-Saad, head of the state-owned investment trust that’s funding the project.

  “Yep, fun to watch the bull run this year,” a reader writes, wondering aloud about all that troubles the market. “Aren’t there a few more things involved here? Like the falling dollar; the banks still not lending; the credit markets just getting torn apart; the housing market with a ‘high,’ but due mostly to selling foreclosed homes; and the untold story so far: commercial real estate dying on the vine.

“Still, the market continuing to ride ‘hopes and dreams’ seems like it may continue for awhile — maybe until the China ‘buy’ of gold actually affects the market, or until the losses begin to register for the second quarter.”

The 5: We suspect — at the least — the market will retest March lows. But not before this bull market gets laughably overbought.

  “When I was growing up, I was lead to believe that America was the greatest,” writes a reader, responding to yesterday’s inbox. “The communists were the ones using propaganda, and we had a right to have WAY more than most of the rest of the people on Earth (because we were the good guys, because we worked harder, because we had a democratic government that took care of its people).

“We are no longer the good guys, having set an example that the world blindly followed. Our citizens, especially our younger ones, don’t know how to put in a good day’s work (see Mexican illegals), and our government is unable to offer health care to its people. This leads me to offer this mathematical solution to our current problems:

“Reduced Expectations + Working Harder = Sustainable Happiness”

Uh, cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. Congratulations are in order to Resource Trader Alert readers. Editor Alan Knuckman suggested they sell their silver and coffee trades today, for 80% and 72% gains… not bad at all for just a few months’ work. If you’d like Alan’s help negotiating this millionaire’s market, be sure to check out Resource Trader Alert.

P.P.S. Feel like ripping your hair out? Check out this video, a brief and worthy look into the bumbling bureaucracy of the Federal Reserve.

 

rspertzel

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