2009 Forecasts, Gold the New Subprime? A Proven Stock Filter, Currency Shocks and More!

by Addison Wiggin & Ian Mathias

  • Fed talks "green shoots" in public, downgrades already-ugly outlook in private
  • Bill Jenkins explains today’s “tremendous shocks” in the currency market
  • Chris Mayer identifies a simple investment tactic, now proven to increase your ROI
  • Subprime’s most famous short exposes his next play… details and tickers below
  • Byron King on a silent revolution in the oil business… and the only way to play it

 

  You’ve heard the old axiom “Do as I say, not as I do”? Today, the Federal Reserve’s done one better: “Do as we say, not as we forecast.”

Despite all the mentions of “green shoots” of recovery sprouting about — the “tentative signs” that the recession is easing — the fine details of Federal Open Market Committee minutes released yesterday painted a clear picture: The worst is yet to come.

Funny how that works, eh? If Mr. Bernanke were to sit before Congress and say, “I expect unemployment, inflation and our economy at large to all deteriorate for the rest of the year; it’s even worse than we predicted back in January,” that would cause quite a commotion.

But that’s the beauty of fine print. These forecasts can be found at the end of the FOMC’s 20-page release, in a hard-to-interpret table. Only someone who’s being paid to do so would have the patience (or stupidity) to sift through the 6,800-plus words preceding it.

  “Fed Chairman Bernanke’s ‘green shoots’ are sprouting, but only for inflation,” writes John Williams, “not for a turnaround in collapsing economic activity.

“Thanks at least partially to the Fed’s efforts to debase the U.S. dollar, the greenback has been in gradual decline recently. Largely reflecting the dollar’s weakness, oil prices are their highest since early November, and gasoline prices appear likely to be up 12-13% in May, versus April, nearly double the rate of the monthly gain seen last year.

“Irrespective of any near-term market volatility, long-range weakness in the dollar should be reflected in long-range upside pressures on U.S. dollar-denominated commodity prices (particularly oil) and on related upside pressures on U.S. consumer inflation.”

  The dollar continued its slide yesterday. With a dollar index score as low as 81, the greenback is facing its lowest levels since December 2008.

But we expect the dollar’s fall to arrest today. Despite all the problems in the U.S., one of the dollar’s biggest rivals has it far worse this morning:

 

  “Currency markets have suffered tremendous shocks this morning,” reports our currency adviser Bill Jenkins, “as S&P changes its outlook on the pound sterling to ‘negative’ from ‘stable.’

“The credit ratings organization reaffirmed that the U.K. was currently retaining its AAA bond rating, but the notation of a deterioration in outlook was enough to send the currency plunging from its current high perch.

“The pound feel nearly 300 pips in 45 minutes as traders rushed for the exits.

“S&P asserts that the U.K. has a 1-in-3 chance of getting downgraded from AAA, but will wait until after the next election and into mid-2010 to make that assessment. The new government must make serious plans to counter the growing debt burden, which S&P believes could balloon to 100% of GDP by next year. Previously, they had believed it would only grow into the mid-80% range.”

Before S&P broke the news, the pound crossed its 200-day moving average, which we forecast yesterday. Bill’s Master FX Options Traders were able to ride the quick shot up for at least 66% gains, and then smartly placed trailing stops got them out before the worst of the sell-off. If you’re interested in trading currencies, this is the place to be… learn about Bill’s program, here

  The FOMC minutes, coupled with S&P’s shot across the bow have put nearly every market in a funk today. The Dow and S&P 500 opened down about 1.5%.

  “One of the many problems with today’s market,” Chris Mayer writes to his Capital & Crisis readers, “is the fact that the people running companies are not owners. A typical American CEO owns hardly any of the company he runs. Whatever shares he has, he gets through stock options, which he does not pay for. In addition, he gets paid an enormous sum of money in salary and bonus.

“Proxy statements reveal to you the compensation of the management team and directors. It also shows you how many shares each of them owns. I’m always amazed at what some of these guys make. And I always get a little cross when I see how little they have at risk in their own firms.

“In my experience, the most creative and value-creating moves are often made by management teams who own shares. Conversely, the stupid and value-destroying moves are often made by managers who don’t own shares.

“Well, now I have academic support for that general idea. A new paper by Ulf von Lilienfeld-Toal and Stefan Ruenzi states:

“‘We find that value-weighted portfolios consisting of S&P 500 stocks in which the CEO holds more than 5% or 10% of the firm’s outstanding shares generate statistically and economically significant abnormal returns of 9.2% p.a. and 13.0% p.a., respectively.’

“I often think of good investing as the accumulation of small advantages. You want as many of these advantages working for you as possible. So here is one that a lot of investors don’t pay any attention to — insider ownership — and it turns out that it has a big effect on returns over time.”

  The wind is out of crude oil’s sails today too. After climbing up to a 2009 high of $62 a barrel, light sweet crude is back down to $60 a barrel.

  “A significant portion of the world’s oil is much lower quality than the light, sweet stuff,” Byron King reminds us. “According to oil service giant Schlumberger, only about 30% of the total world oil resource is the conventional light sweet crude (technically, API gravity 22.3 and above). The company estimates that there are between 6-9 TRILLION barrels of heavy oil in the world. Big numbers, right? Especially since the current total world demand for oil is in the range of 30 billion barrels per year.

“Indeed, most oil that’s found in nature is a heavy viscous hydrocarbon with the consistency of cold molasses. This heavy oil — defined as API gravity 22.3 or less — is difficult and costly to produce and refine. That’s why people have pumped and burned the light, sweet oil for the past 150 years.

“But now conventional oil resources are drying up. The reasons have to do with geology, politics, macroeconomics and the investment cycle. Boiled down, it’s the Peak Oil argument, which focuses on the worldwide decline in output of light, easy-to-get oil. And Peak Oil is a serious matter. As light oil gets scarce, however, a lot of new heavy oil plays are coming out of the industrial shadows.

“With the breakout of heavy oil into the marketplace, the world energy business is about to change dramatically. It’s kind of like what we saw with the computer revolution that began about 30 years ago. Big, heavy mainframes gave way to small-scale, distributed and personalized computing power. At the heart of the revolution was the operating system, much of which wound up coming from Microsoft.

“Today, the energy industry is on the cusp of a revolution equally profound. And in the forefront of that change is a company I just shared with Energy & Scarcity Investor subscribers. This visionary firm is sort of an "Energy Microsoft."

Not an ESI subscriber? Gain access to Byron’s “Energy Microsoft” play, and the rest of his stellar portfolio, here.

  All these waves are giving gold a nice bump. The spot price crept up around $15 yesterday, to $940 an ounce as we write.

  Could buying gold in 2009 be the investment equivalent of shorting subprime in 2007?

Recently famous fund manager John Paulson has been piling into gold funds. If you recall, Paulson gained celebrity for his early and aggressive shorting of all things subprime and financial, a move which garnered all sorts of accolades… highest-paid fund manager of last year, Barron’s No. 1 fund, etc.

Paulson has now become the largest holder of the SPDR Gold Trust, better known as GLD. His fund owns a whopping 8.7% stake, worth over $2.8 billion. That’s his No. 1 holding, worth over 30% of his entire portfolio.

According to a recently filed 13-K, he’s also picked up super-sized stakes in the Gold Miners ETF (GDX), Gold Fields, Kinross Gold and AngloGold Ashanti.

  Another day, another bailout: The Treasury will pump another $7.5 billion into GMAC, the troubled auto lender partly owned by GM. That’ll bring the government’s total investment up to $12.5 billion, and if the Treasury takes preferred stock in exchange, Uncle Sam will be GMAC’s No. 1 shareholder.

AIG, Fannie Mae, Freddie Mac, 18 of America’s worst banks and now a majority stake in GMAC… quite a portfolio they are building on our behalf.

  Last today, bad news for our neighbors to the south: Mexican GDP contracted 5.9% from the last quarter of 2008 to the first quarter of 2009. From the first quarter of last year, that’s a nasty 8.2% decline. One look at this chart, and it’s safe to say Mexico’s economy has fallen off the wagon:

None of the numbers released today takes into account the recent swine flu mania there and the subsequent shutting down of the Mexican economy and tourist exodus… the worst for Mexico could be yet to come.

  “In reference to the census data showing there is no significant exodus of Mexicans from the U.S.,” a reader writes, responding to Tuesday’s issue, “I am a general contractor in northern California. While I have permanent employees and don’t use day laborers, many of the subcontractors I know have told me that many of their regular temps have returned to Mexico because they cannot make enough to survive here and also send money back home. Also, I have noticed fewer day laborers standing outside the supply houses and lumberyards hoping for some work.

“While recognizing that such an anecdotal sample is statistically insignificant, it can portend things to come. I remember commenting to my wife two springs ago that the lumberyards had significantly less inventory for that time of the year than in the past, which has certainly proved to be a good indicator for the building business.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Addison is nearly finished with the second edition of Financial Reckoning Day, but he’ll be taking a break this afternoon for a journey into “the belly of the beast.” Along with Bill Bonner and Bruce Robertson (the man behind our Investment Symposium), he’s headed to Washington for lunch with Ron Paul… not a bad gig, eh?

Conversation between the four of them will likely lead to where you’d expect: the Fed, politics, liberty, gold, etc. Addison told me yesterday he plans on bringing up HR 1207, Paul’s bill to audit the Federal Reserve. (Lord knows we need some kind of Fed transparency… if you need further proof, check out this video.)

After the meeting with Paul, our motley crew is scheduled for coffee with John Henry — direct descendant of Patrick Henry and steward of the Empire Salon.

Of course, Addison will bring you a few juicy details when he gets back to Baltimore… stay tuned.

 

rspertzel

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