Stocks Back to Breakeven, Coming Inflation, How to Pick a Junior Miner and More!

by Addison Wiggin & Ian Mathias

  • Market now at break-even for 2009… what’s boosting stocks back to the black
  • John Williams reveals the “key driver” for the market’s next move
  • Funds scramble: Famous forecaster prepares for inflation, infamous SWF buys commodities
  • Byron King offers a 5-layer screen for picking winning junior miners
  • Plus, Chris Mayer on a sector Mr. Market may have overbought


  Yesterday’s rally brought us to another pivot point… 2009, take two:

The Dow and S&P 500 climbed 2.5% yesterday, bumping the broader index into the black for the year, with the Dow close behind. Tech stocks crossed this break-even point long ago, as the tech-heavy Nasdaq is up almost 15% year to date.

It takes a “special” kind of market to rally over 2% the day GM sold the farm. So what’s gotten into traders this week? In a word: manufacturing.

The ISM’s measure of American manufacturing scored 42.8 in May, the group reported yesterday. That’s its fifth straight monthly rise and the best reading since September 2008. At the current rate, the index will be out of the sub-50 contraction range by the end of summer… reason to buy the S&P 500 hand over fist, evidently.

  Construction spending unexpectedly rose from the void too, popping 0.8% in April. According to yesterday’s Commerce Department release, that’s the biggest gain in eight months. Like the ISM, this gauge is still on its knees, down 10% from this time last year. But also like the ISM… better to buy now and ask questions later… right?

  Alas, the only truly positive manufacturing data yesterday came from China. The red nation reported its manufacturing purchasing managers index (like our ISM) scored 53 in May, its third straight month of expansion.

  “The U.S. dollar remains a key driver of what lies ahead,” writes government stats watchdog John Williams. Despite the recent market recovery, John suggests, “The U.S. economy and systemic-solvency issues are getting worse, and so are Federal Reserve efforts to debase the U.S. dollar. Inflation fears appear to be surfacing anew, with the U.S. dollar under selling pressure, with oil prices (and related gasoline prices) spiking partially in response to the dollar, with gold prices rising (partially dollar and safe-haven effect) and with mounting global concerns over the creditworthiness of the United States.

“Mr. Bernanke’s dollar-debasement program is helping to fuel the near-term pressure on the greenback, and the resulting higher oil prices are setting the stage for serious nondemand-driven inflation in the United States. For the two weeks ended May 20, the St. Louis Fed’s adjusted monetary base was up a record 113.4% from the same period last year, versus a 102.8% gain in the prior two-week period.

“Investors increasingly will not want to purchase or hold U.S. Treasuries as federal debt explodes and the hyperinflation threat nears. Ultimately, the Fed will serve as the lender of last resort to the U.S. government, monetizing government debt at an accelerating pace, which in turn will accelerate the pace of decline in the greenback and the pace of increase in U.S. inflation.”

  “Policymakers have no control over the outcome of their actions,” said famous “Black Swan” investor and Agora Financial Investment Symposium speaker Nassim Nicholas Taleb yesterday. Taleb announced his next fund will focus entirely on profiting from U.S. hyperinflation. He’ll likely take a page from his own playbook… buying deeply out-of-the-money options, this time calls on commodities and commodity stocks.

His firm, Universa Investments, more than doubled last year betting against the market… we’ll be interested to see if this new effort can follow suit.

Two years ago, Taleb delivered an enlightening presentation on rare market events at our annual Investment Symposium. This year, we’ve assembled an even more impressive cast of characters for our annual get-together… check ’em out, here.

The dollar index is now stuck in a choppy range. Since trading began Monday, it’s been bouncing between 79.5 and 78.5.

  Gold looks to be taking a rest too. After an $80 rise in May, the spot price has been hovering around $975-980 this week.

  “This is a great time to pick up some cheap junior mining shares!” declares Byron King. “Juniors are severely undervalued. Many of them just plain got SMASHED in the market meltdown of 2008 and early 2009. Companies with literally billions of dollars of ore under claim were selling for an utter pittance.

“Now with the price of gold on the rise, we’re coming into a time when major gold producers are starting to get up off the mat and make acquisitions. So by purchasing a range of shares in these junior miners, you’ll be giving yourself the opportunity for windfall profits.

“I came up with a set of concepts that I always look for in my junior recommendations. In grading a junior miner, I have five main concepts. They include:

  • Management assessment: track record, interview, insider buying/selling records and word of mouth — I try to determine whether management is an asset or liability (only assets pass)
  • Share structure: A good share structure is one that hasn’t seen any chance for distribution yet, and where insiders and key people still have a meaningful enough stake in the company
  • Capital structure: Does the company meet my solvency tests (past and future)?
  • Scope: risk versus reward: Is there enough upside relative to the risk category of the deal — for risky juniors, I like a 10-to-1 ratio… for blue chips, a 3-to-1 ratio… etc.
  • Valuation: absolute and relative. This is not really objective. Typically, I will want to understand the reason for the market’s current valuation — relative and absolute — and if the reason for an expected favorable change in valuation is plausible. I’ll be looking for areas in which the junior is undervalued — in which you can pick up shares for a hefty discount.”

That’s just a snippet from Byron’s brand new special report on precious metals investing. It’s currently available for pubic consumption, but since some of the stocks he mentions in the report are very small, we’re limiting the number of copies we distribute. As we write, there are about 480 left. Better get yours now… right here.

  Commodities continue to soar… which is starting to make us nervous. Crude oil rose to $68 yesterday, up 54% for the year and to its highest level since November. Copper shot up 5.5% yesterday alone (thanks, China) to $2.31 a pound — its highest level since October. Grains are off to the races too. Corn, wheat and soybeans are all at 2009 highs.

The CRB index of commodities just wrapped up its best month on record. The Baltic Dry Index is up 21 days in a row. Up 5.4% yesterday alone, the index is at an eight-month high.

  Another contrarian alert: Singapore’s sovereign wealth fund is shifting its focus to commodities. Temasek snatched up $303 million worth of Olam, a Singaporean agriculture player. That will give the Singapore government a 13% stake in an ag name that operates in its own borders… could get interesting. Given Temasek’s recent investment history in Merrill Lynch and, subsequently, Bank of America, is the SWF inadvertently calling a commodities peak?

Maybe not… Temasek wisely axed its former CEO, Ho Ching (wife of Singapore’s prime minister), and replaced her with Chip Goodyear. That name should sound familiar to longtime commodity bulls… he’s the former CEO of BHP Billiton.

  More fodder for a coming “zombie bank” financial sector: The TARP banks are lending less. Among banks that have received any form of federal assistance this year, lending contracted 0.8% during March, the Treasury announced yesterday. Amazingly, this is the Treasury’s first study of lending activity among the 500 financials that used the Capital Purchase Program.

  The FDIC has restricted interest rate levels at banks it deems to be “not well capitalized.” Banks around the country are trying to attract new investment with high-yielding checking and savings accounts. But if your bank is struggling, it won’t be allowed to follow suit. The FDIC wants the banking sector to stop jettisoning failed institutions… even if it means the survivors are left scraping by. Letting banks set rates as they please could be… risky! Gasp! What if the stupid ones fail?

  “It seems Mr. Market believes the financial crisis is behind us,’ observes Chris Mayer. Indeed, the financial sector has more than doubled since its March lows.

“Though it may be hard to imagine a return to those March lows for bank stocks, this credit crisis is, in the words of James Grant, ‘the story of unimagined things.’ First, consider that bank failures are sure to rise.

“As Grant pointed out in his newsletter, Grant’s Interest Rate Observer, 36 banks have failed this year, at a cost to the FDIC of $10.6 billion. If that pace should continue, we’ll have 179 failed banks, the most since 1992. That seems reasonable, especially as this crisis is much bigger than the blip of the early 1990s.

“In dollars, the costs to the FDIC would top $27 billion, the most since at least 1990. The FDIC, too, is low on funds and will need refueling. Such funds come out of the hide of the banks covered by the FDIC. And so amid bank failures, the banks still standing have the prospect of higher FDIC assessments hanging over their profit-and-loss statements.

“What these might be is anybody’s guess, but as Grant points out, delinquencies are on the rise and more losses are coming. In the first quarter, credit card delinquencies shot up nearly 15% from the fourth quarter. For commercial loans, delinquencies were up 21%. This latter category of loans is bigger than subprime. Credit card debt is only slightly behind subprime. So both categories have the potential to spell new (and large) disasters for banks.”


Have you heard? You can try Chris’ high-end service, Mayer’s Special Situations, for just $1. Seriously… one dollar for a one-month trial.

  More optimistic data today: Pending home sales are up for the third month in a row. The National Association of Realtors reports today that pending homes jumped 6.7% in April. That’s way better than the Street expected — and get this — it brings pending home sales 3.2% HIGHER than they were this time last year.

We can’t recall the last time we reported a housing stat up year over year. But take into account the recent spike in mortgage rates, and our bet is that loads of these “pending” sales won’t stick.

  Watch shares of DeVry over the next few weeks. The educator’s stock will replace GM on the S&P 500… should bring some extra attention, for better or worse.

  “The only part of your pie chart that represents actual debt is the ‘federal debt’ slice of 10%,” writes a reader in response to yesterday’s 5.  “The other 90% represents future benefit promises, not debt. If I promise to buy my son a Porsche when he turns 21, that’s a promise, not a debt. Yes, a debt represents a promise to pay, but it’s a promise to pay back money that the lender already lent me. And yes, promises to tomorrow’s retirees to pay their Social Security, Medicare and military pensions are probably no less solemn promises than the promise to repay debt.

“But here’s the critical difference: The latter are promises that can be broken because the promises (retired folks) have no real leverage to enforce the promises. Oh, sure, they can vote for only those who will refuse to reduce their benefits, but ultimately, it’s the ‘bond vigilantes’ who have the greatest leverage. The system will creak along until it stops, as that which is not sustainable always ends on its own. Exactly when that moment arrives, nobody knows. But as we Californians saw last week, such a moment can arrive sooner than we think. And when it does, the ‘problem’ of unfunded liabilities is no longer a problem — the ‘liabilities’ just disappear.”

The 5: We see your point, but those “liabilities” won’t disappear — they’ll turn into something else. We can think of all sorts of fun words to put in quotes to replace them… “insolvency,” “crisis” or “revolution,” for starters.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Don’t forget, our latest installment of the Retirement Recovery Series will broadcast tomorrow at 3 p.m. eastern. Sign up here… it’s 100% free.



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