China Takes Another #1, Brazil Rebounds, Stocks Overbought, Dollar Milestone and More!

by Addison Wiggin & Ian Mathias

  • China takes another “World’s No 1.” title from U.S.
  • Brazilian market recoups credit crisis losses… Bryon King on the re-emerging nation
  • Investors take profits… a few historic ratios to note before you buy again
  • Dollar hits significant milestone… has the greenback rally come to an end?
  • John Williams on the fishy Friday jobs report


  China has overtaken the U.S. in yet another category of global influence this morning.

This time it’s Brazil. China is now Brazil’s No. 1 trading partner, snapping a nearly 80-year tradition of Brazil depending primarily on exports to America.

Brazil announced over the weekend it had conducted $3.2 billion in business with China during April — a 12-fold increase in Sino-Brazilian trade from 2001. April also marks the second consecutive month that the U.S. has ranked No. 2.

What’s the trade? Iron ore. Brazilian officials say the Chinese have been buying the stuff hand over fist since the start of 2009.

  As one consequence, Brazil’s stock market, the Bovespa Index, is outpacing the American equity rebound. Brazil’s version of the Dow has recouped the majority of its crisis losses. Check it out:

Brazil and China are just two areas of rich investment opportunity we’ll be focusing on with the new BRIC report we conceived with our Indian partners last week in London. Specific details on the report are forthcoming.

  “The Brazilians are gearing up for the first battle of the next war,” says Byron King. “They intend to survive as a prosperous, industrialized country in the 21st century, despite intense future competition across the world for energy fuels and other natural resources.

“Down in Brazil, they’re in something like national rapture at the prospect of drilling up the deep pre-salt hydrocarbon plays in the offshore basins. The estimates are that the deep basins off Brazil hold between 20-100 billion barrels of oil. Maybe more.

“The entire nation of Brazil, apparently, revels in the prospect of investing over $120 billion in offshore development in just the next eight years. They have a plan. It’s their moonshot. The Brazilians believe that the offshore environment will bring their industries firmly into the modern era. Brazil wants to be a world power in the 21st century. And the oil? Well, of course they have plans for that oil.

“Petrobras has plans to emplace HUNDREDS of subsea systems on the deep ocean bottom to bring that oil into production. The Brazilians will lay thousands of miles of underwater pipeline, with all the associated ship support and other equipment that entails.

“The Brazilians are not living in the frozen past. They’re not hostage to paralyzing myths. The Brazilians envision a future for their nation, and they’re acting on it. They see hundreds of deep-water oil wells pulling petroleum out of the crust from many miles down and piping it ashore to their refineries and industries. Indeed, Brazil plans to win that first battle of the next war. And it’s cutting the steel with which to do it.”

  While Brazil may stand a chance, “China is basically screwed,” opines the always subtle James Howard Kunstler. “They have less oil left than the U.S. has (which is saying not much at all) and they won’t corner the rest of the global oil market without starting World War III. Meanwhile, they’re running out of water and food. Good luck becoming the next global hegemon. Oh, and Japan imports 90% of its energy; India over 80%. Fuggeddabowdit.”

JHK has much more to say on the matter… but we only have 5 minutes. For the full dose of Mr. Kunstler, there’s no better place than Vancouver, B.C., from July 21-24. That’s when we’ll be hosting our annual Investment Symposium, where he’ll be one of our many esteemed speakers. For a sneak peak at the list, look here.

  But despite its imminent demise, China is forging ahead… this morning, China’s state-owned chemical company (ChemChina) said it wants to buy Dow Chemical’s agro-chemical and “specialty chemical” business units. The two businesses will cost China up to $11 billion, which Dow desperately needs after its ill-timed acquisition of Rohm & Haas.

  Back in the States today, the stock market is taking a breather after its remarkable run last week.

Lousy stress test results, half a million lost jobs and higher-than-usual oil prices… none could faze investors last week, as the Dow and S&P 500 raged ahead 4-5%. Since the rally began two months ago, the S&P 500 is up a withering 37.4%.


So can you blame traders for taking profits today? Looking at historic P/E ratios, stocks are hardly a bargain anymore: In terms of earnings over the last year, S&P 500 companies were priced at a trailing P/E ratio of 14.7 last week. That’s up a ton from the 10.5 ratio in February and far too close to the average of 17 over the last 25 years.

Forward-earnings ratios are at 14.5, almost on par with their average of 15 over the last 25 years, too.

So, we wonder, are stocks likely to outperform their 25-year norm over the next 12 months? Hmmm… it’s possible. But not likely.

  The U.S. dollar failed an important technical test recently. Roll the videotape:

“This move has really lit a fire under the dollar bears,” says Chuck Butler. “Many institutional investors use the dollar index as their means of trading the dollar. And to see it fall through its 200-day moving average was enough proof for them that the dollar is heading south.

“The 200-day moving average, for those of you unfamiliar with this term, is a long-term moving average that helps determine the overall health of the asset, which, in this case, we’re talking about the dollar. It is, for all practical purposes, a dividing line, if you will, between as asset being healthy and one that is not.”

  The dollar selloff has given a nice boost to other worldly monies. The euro popped to $1.36 over the weekend, and trades just a hair below that level this morning. Ditto the pound. It’s up as high as $1.52, just off its 2009 high. The yen is slowly growing stronger, now “down” to 97.

  Your less valuable dollars will by you fewer stamps today. The USPS jacked up the price of stamps by 2 more cents today, to 44 cents a pop.

Lord knows they need those 2 cents… the USPS suffered a $2.8 billion loss in 2008, and is already sitting on a $2.3 billion loss year to date. At this rate, you can expect more office closures, early retirement incentives and a move to five-day mail delivery.

Today’s stock pullback is putting a damper on commodity prices. Oil is down a buck and change, to $57 a barrel. Copper is down too, about 3%, to $2.05.

  Gold is proving to be the exception. The dollar’s dive and today’s rush from stocks is giving gold an extra glimmer today… the spot price holding steady around $915 despite profit taking in almost every asset class.

  “The better-than-expected April jobs report had a bad odor to it,” declares government stats watchdog John Williams of Friday’s unemployment report.

“Continuing a pattern seen in the last seven monthly payroll reports, Friday’s estimates included negative revisions to the previously reported February and March payroll changes. There also was an unusual surge in birth-death modeling bias. Separately, unusual seasonal adjustments were apparent in the unemployment report, which, unlike the payroll reporting, was exactly as bad as expected by consensus forecasts.

“Reinforced by the ADP report, however, the government’s better-than-expected 539,000 April payroll decline happily will be touted as ‘confirmation’ of the administration’s recent shift to a rosy scenario for the economy and of Wall Street’s sales pitch that the worst is behind us.

“Unfortunately, later reporting should confirm that the worst is not behind us. Even if Friday’s data were accurate, the news in the April report remained bleak, with steep ongoing monthly and annual deterioration. Despite the pabulum put out for public and market consumption by the Fed, Federal Reserve Chairman Bernanke should have a pretty good understanding by now of both the ongoing and deepening economic and systemic solvency crises. Accordingly, the chances should be very close to nil for any near-term Fed tightening.”

  “The BLS’ black box birth/death model,” a reader writes, “accounted for 226,000 new jobs this report, offsetting what would actually have been a larger loss than the previous. These jobs were mainly in the hospitality, professional services and housing.

“Does anybody really believe this? I didn’t think so, but nobody ever digs beneath the headline number.”

  “Ron Paul’s bill to audit the Fed has 143 sponsors now,” a reader notes, “You might give your readers some encouragement and maybe give them a link to see if their congressman has sponsored it… The number of sponsors was less than 50 a month ago, and now there are 143, so things are moving! Here’s the link where they can go to check on the cosponsors.

The 5: Consider them encouraged. That video of Rep. Alan Grayson chastising the Fed inspector general now has over 115,000 views. Heh.

“First $100 million wasn’t enough,” a reader writes referring to Obama’s budget cuts, “because it was just a drop in the bucket (and yes, you provided all sorts of illustrations of just how small it was) — and NOW you are continuing to bellyache at cutting $17 billion?”

“I don’t recall Bush making even a head fake in that direction during his eight years of hell! I, like you, am VERY unhappy with the amount of spending going on — but come ON guys! — can’t we have a little patting on the back for a move in the right direction?

“Give me a break.”

The 5: We’re giddy about the $17 billion. But as our Eric Fry pointed out, that’s only a 10th of the billions they gave to AIG.

“Obama’s new budget will also include numerous ‘nonsaving’ items that, taken together,” Fry also points out “will produce a projected budget deficit in 2010 of $1.38 trillion — a figure that is 82 times greater than the $17 billion savings that Obama triumphantly proclaimed.”

You can pat the president on the back all you want. But treating those numbers as anything other than a fraction of the hole they’re digging is not something we intend to do. It does put in to perspective, though, how difficult it’s going to be to balance the books, provided the administration ever gets the wild hair up its arse to do it.


Addison Wiggin

The 5 Min. Forecast

P.S. We’re expecting some big announcements from six tiny companies later this week. They could be so monumental that one of our analysts is calling it “the story of our era.” We’re trying to keep as much of a lid on it as we can, as this thinly traded bunch could easily blow up in anticipation… but if you’re interested in being one of the few early investors, you better check out this report today.



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