China Leads the Way, The Trade of the Next Decade, CEO Pay and More!

by Addison Wiggin & Ian Mathias

  • American markets at a standstill… can the Far East drive stocks forward?
  • Chris Mayer on buying “what China needs, but can’t make for itself”
  • Dan Denning’s pair trade for the next decade
  • Bill Bonner and Goldman Sach’s CEO on the current “bull market”
  • Plus, a CEO pay debate fills our inbox… your letters and our response, below


  The Dow crashed 1.4 points yesterday, wiping out Monday’s 1.3 point moonshot. Desperate for something beyond these 0.014% “swings,” the market’s putting China in the driver’s seat today… and these guys still have quite a lead foot:

  Chinese auto sales soared 34% in May, year over year. According to the China Association of Automobile Manufacturers, the Red Nation scooped up 1.12 million vehicles last month, outpacing any nation in the world. Consider the course of the last 12 months, and then look at this chart… is China even part of the global slowdown?

We don’t want to get too excited about this growth, as much of these sales are a product of Chinese government stimulus. But I.O.U.S.A. is certainly throwing a bunch of money at this crisis as well, and the same meausre of auto sales here fell 34% in May… so they must be doing something right over in Beijing.

  Chinese property sales rose 45% in the first five months of 2009 compared to the same period in 2008, their National Bureau of Statistics announced today. Heh, notice a trend?

Again, these numbers are manipulated by government intervention… but 45%? That’s pretty big. We also note that real estate investment over the same period rose 6.8%, a rise the U.S. certainly can’t claim.

  Thus, the market story today is “buy whatever China wants.” Namely, commodities. Oil’s up to $71, a 2009 high. Copper is at an eight-month high of $2.36 a pound. Aluminum, lead, zinc and nickel are all in the same boat.

Stocks like Alcoa and Exxon Mobil helped the Dow to open up 1%.

  “Buy what China needs, but can’t make enough of for itself,” Chris Mayer urges, taking this investment theme to the next level.

“In other words, as an investor, buy what the Chinese have to buy. Conversely, don’t compete with China. Sell what the Chinese make plenty of. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.


“You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

“As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

“More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food.”

And it’s also why Chris has selected a few worthy stocks in this tiny sector for his Capital & Crisis readers. Get the tickers, here.

  Global oil reserves have fallen for the first time in a decade, says BP today, throwing another feather in oil’s cap. Reserves totaled 1.25 trillion barrels at the end of 2008, reads the company’s annual Statstical Review of World Energy. A year earlier, reserves totaled 1.26 trillion barrels.

Thus, at the current rate of consumption, production and supply the world has enough barrels in reserve to last 42 years, says BP.

  American oil supplies declined by 4.4 million barrels last week, the Energy Department said late this morning. That’s yet another bullish indicator for crude today, as the Street was expecting an 800,000 barrel increase in inventory.

  Higher oil prices helped bump up the U.S. trade deficit to $29.2 billion in April, the Commerce Department reports today. The deficit is up for the second straight month, this time by 2.2%. But the global crisis’ damper on international trade and U.S. consumption is still in full effect… the trade deficit is on track to exceed “only” $361 billion this year, about half of 2008’s.

  “Sell bonds, buy energy,” is Dan Denning’s latest pair trade.

“It’s not technically a new decade yet. But if the trade of the last decade was to sell stocks and buy gold, then maybe the best trade for the next 10 years is to sell bonds and buy energy. Gas, coal, oil, conventional, unconventional, renewable, alternative. You have a whole portfolio of choices.

“Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the "high-low" strategy.

“This time around, though, we would add energy stocks to the mix, along with gold… There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long run, it’s the smaller-than-expected oil supply growth that will drive the market.”


  But before anthoer bull market in energy and commodites kicks in… don’t you think we’re due for a bit more pain?

It’s the dumb money,” writes Bill Bonner, “that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment.

“Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.”

  “Why would this be the recovery?” asked Goldman Sachs CEO Lloyd Blankfein this morning, clearly puzzled by the idea. "There is no reason to think this is it … So many things have to be sorted out.

"I think it’s going to be a long protracted recession.”

  Thus, we’re surprised that traders in Chicago are now giving 70% odds that the Fed will raise interest rates to 0.5% by November. We suspect the Fed will be pumping nearly free cash into this economy into 2010, at least. Perhaps this is Chicago’s way of saying there’s just too much money floating around.

  With that in mind, today’s the big day for the U.S. Treasury market. The Treasury will announce the results of its $19 billion auction of 10-year notes today at 1 p.m. Eastern. If it doesn’t go well, it could get ugly for the government’s stimulus plans, mortgage rates, stocks, the dollar, etc. Check us out tomorrow for the details.

Before the auction, the yield on a 10-year note rose to 3.9%, its highest level since November 2008

  The dollar is nervously trading up today, along with stocks. The dollar index bottomed (for now) around 79.5 and trades just above 80 as we write.

  Heh, and what’s with the dollar strength? Looks like China is controlling nearly every asset class this morning:

“Nobody is talking about dumping the dollar. I don’t think this is realistic," said China’s Vice Foreign Minister He Yafei. The world’s largest holder of dollar reserves wants the U.S. to know it won’t be selling them… not soon, anyway.

  Gold is just a bit weaker today, down $10, to $950 and change.

  “I agree with the reader who wrote to you about outrageous executive salaries,” a reader writes, responding to yesterday’s inbox. “Your rather smug-sounding advice was to sell the stocks of companies whose executives’ salaries offended the reader.

“Come on, guys, not reasonable advice, although that’s probably the only remedy that came to your mind. It really is a vast old boys’ network. We outsiders rarely know the true scope of their ‘I’ll scratch your back if you scratch mine’ mutual aggrandizement system, and it’s hard in some sectors to find good stocks whose CEOs are not part of this piggish rip-off system. It’s a clever in-joke kind of thing, and it won’t be ended without punitive action from someone from outside who has serious clout, someone like the president. It certainly won’t be reformed because a few disgruntled stockowners sold their stocks… and it should be reformed. I too find these overcompensated executives arrogant, offensive, not worth what they are paid and assuredly not nearly so brainy as they pretend to be.”

The 5: We received many e-mails like yours. Sorry, but we still don’t get it.

If you don’t like the CEO’s salary in the first place, don’t buy the stock. If it changes for the worse, vote your proxies. Still bad? Sell the stock. If you rode a stock all the way down while the CEO cashed in, that’s a shame…and we can sort of understand you feeling cheated and outraged. But are you really going to go cry to Big Brother? We support initiatives for shareholders’ legal rights and activist investors that put shareholders first. But man… isn’t the government meddling with us enough already?

And we argue there are plenty — plenty — of great stocks out there with CEOs worth investing in. This morning we gathered some of Agora Financial’s long-term investing advisers for an off-the-cuff poll: How many companies in your portfolio are paying their CEOs so much that you feel like shareholders are getting screwed?

Chris Mayer: “I can think of two, but in both cases, the CEOs are exceptionally talented and bring a long-term track record of success.”

Jim Nelson: “Less than 40%. Some are barely making six figures.”


Greg Guenthner: “Since I deal with penny stocks, I really don’t have to worry about ‘fat cat’ CEOs. Most have very moderate salaries when compared to the big boys out there, and some are even paid what could be considered ‘working man’ money.”

Patrick Cox: “None.”

Byron King’s out in Colorado at the American Association of Petroleum Geologists convention… we suspect he’d say much of the same.

  “Ultimately, stockholders are the voters who put the directors on the board,” writes our last reader. “Considering that they are also voters in national, state and local elections, is it any wonder that boards of directors screw the stockholders as they do?! Rule by sheeple.”


Ian Mathias

The 5 Min. Forecast

P.S. Some bad news for long-suffering readers of The 5: Odyssey Marine, the treasure hunting crew we’ve followed closely over the last few years, might not get to keep its $500 million find. An American judge ruled that the treasure should go back to Spain, the country of the bounty’s origin. You can get the 411, here.

So will you be able to get your hands on some of these amazing, centuries-old Spanish gold coins? The verdict isn’t out yet, says our numismatist colleague Nick Bruyer:

“I’m shocked that the judge chose not to compensate Odyssey for the phenomenal job they did in locating and recovering this lost treasure. My reaction is that the ruling doesn’t seem fair or equitable. I hope their case gets a fair hearing in a higher court.”

As always, we’ll keep you up-to-date.



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