First Half Wrap Up, Second Half Preview, China’s Commodity Stockpile, Data Galore and More!

by Addison Wiggin & Ian Mathias

  • The 5 wraps up the first half… can the rally continue for the rest of the year?
  • Venture capital shrivels… Patrick Cox on why that’s a good thing
  • ADP, John Williams suggest tomorrow’s jobs report could be a doozy
  • China stops stockpiling commodities… Mayer and Amoss on whether you should worry


  Adios, first half of 2009. Quarters three and four, mucho gusto.

Although stocks drifted down yesterday, the S&P 500 finished the second quarter of 2009 with a 15.2% gain, its best quarter since 1998. Since March lows, the index is up nearly 35%. For all of 2009, the S&P is just above break-even.

So the obvious question: Where do we go from here? Was the second quarter a fluke — a simple snapback of oversold stocks? Or a new bull market? For an answer, we sought out the “stars” of the second quarter… take a look:

Heh, let’s see: U.S. auto and manufacturing, financials, commercial real estate, retail, insurance and health care… all dead, dying, disabled or at least dubious sectors of 2009. Of all the 10 stocks you see above, only Ford is anywhere near a 52-week high. In other words, the leaders of the second quarter were the pariahs of the previous three. Are these the seeds with which market growth is sown?

  "The champagne cork-popping performance of the second quarter,” adds Eric Fry, "obscures a few trends that should be worrisome to the celebrants. First, the S&P 500 has gained no ground whatsoever since May 8, the first trading day after the Federal Reserve triumphantly announced the results of its banking sector ‘stress tests.’

“Second, the BKX Index of financial stocks has DROPPED more than 16% since May 8. As we have noted in prior editions of the Rude Awakening, the finance sector has been leading the overall stock market — both to the upside and downside — for the better part of four years. So the sluggish recent performance of the BKX index is probably not a ‘nothing.’

“Lastly, most gauges of investor sentiment — like the VIX index of option volatilities — are flashing readings of extreme investor optimism. Typically, as contrary indicators, such readings presage a market sell-off.”

  Even with the stock rebound, the second quarter was the worst quarter for U.S. venture capital investment since 2003. Overall venture-backed investment fell 57% from the second quarter of 2008, says Dow Jones’ VentureSource today. That’s roughly $3.6 billion worth of VC out of the market.

“Venture capital investment has all but dried up,” writes our tech adviser Patrick Cox. “There are two primary causes. One is purely psychological. In a steep downturn like this, investors who should know better get nervous and hold capital. The other, which will be longer lasting, is the ‘crowding out’ effect. With government debt at record highs, capital is being sucked up by the Fed to finance its borrowing.

“This, ironically, presents an enormous opportunity for the VC players who are still investing. With so little VC money on the table, those who are willing to make deals are making great deals. This is exactly the time to be in the VC business.”

Patrick’s service, Breakthrough Technology Alert, is a great way to enter the VC market without putting millions of dollars in play. He finds tiny, unknown stocks on the verge of technological breakthroughs… the kind of ground-floor investing that venture capitalists seek every day. For his latest breakthrough play, click here.

  But the venture capital market in Brazil is alive and kicking. VC investment has more than quadrupled there since 2004, says the Brazilian Association for Private Equity & Venture Capital today. The market was a measly $6 billion then. VC investment totaled $28 billion in 2008.

  The American private sector lost 473,000 jobs in June, says the oft-followed but questionably reliable ADP employment survey today. The payroll manager’s number came in well above the Street’s forecast of 393,000. In theory, that bodes badly for tomorrow’s government jobs report. The Labor Department is expected to announce 400,000 lost jobs and a 9.6% unemployment rate.

  “Based on underlying indicators, June employment/unemployment should disappoint market expectations,” forecasts John Williams. “From the standpoint of political and financial market needs, results near or better than consensus would be consistent with the current hype that ‘the economy has turned.’ The Bureau of Labor Statistics (BLS) can bring in the headline numbers anywhere that it desires, so odds have to favor such reporting, net of any prior-period revisions.

“That said, underlying employment indicators continue to show deteriorating circumstances, consistent with a payroll jobs loss of much greater than 500,000 and an unemployment rate increase of more than 0.2%…

  • “May newspaper help-wanted advertising (Conference Board) returned to its record-low reading of 10, following an upside revision from 10 to 11 in the April index. May was down by 42.6% year-to-year change on a three-month moving average basis, with the revised annual decline in for April at 43.1%
  • “A similar annual falloff pattern was seen again in the Conference Board’s nascent online help-wanted advertising measure for June, down 36.5% year to year, versus a 36.6% annual decline in new online help-wanted ads in May
  • “Annual growth in new claims for unemployment insurance has remained near a record level, with the 17-week moving average up by 71.2% as of June 20, down from the near-term high of 77.0% hit in the period ended May 9. A year ago, growth was 17.8%. So far, the annual rate of increasing claims has remained just shy of the historical peak growth rate of 78.8% seen in March 1975
  • “As reported for May, the employment readings for purchasing managers continued deep in recession territory for the manufacturing (May was 34.3, versus 34.4 in April, where readings of 50.0 and above are considered positive) and nonmanufacturing (May was 39.0 versus 37.0 in April) purchasing managers surveys.”

  Elsewhere in the data patch, some mixed signals:

American manufacturing is back to pre-crisis performance, says the ISM today. Their index of manufacturing activity rose from 42.8 to 44.8 in May, the highest level since September 2008. Still, a score below 50 indicates the sector remains in contraction.

  At the same time, construction spending fell more than expected in May. The Commerce Department says spending fell 0.9% last month, almost double what the Street expected. Spending in April in March was revised down, too.

  Another sign of life in the housing market: Pending home sales inched up in May for the fourth month in a row. The National Association of Realtors’ pending home sales index crept up 0.1% in May and is now up 6.7% from May 2008… not too shabby.

But we must add, the government is actively manipulating mortgage rates and home prices (like the $8,000 tax credit), and we still haven’t seen that wave of Alt-A and ARM resets touch land.

  The dollar’s trading range keeps getting smaller and smaller. The dollar index has been bouncing between 79-81 all week, and this morning rests at 80 on the dot. This kind of consolidation begs for a breakout move… we’ll keep an eye on it.

  The dollar’s foot-dragging has lead to a dull trading week for commodities as well. Oil’s been within a buck of $70 a barrel since this time last week. Today, it’s on the higher side, at $71.

Gold’s spot price is caught between $925-940. As we write, you can score an ounce for $938.

  Commodity bulls take note: China has stopped stockpiling nonferrous metals. According to Yu Dongming of China’s National Development and Reform Commission, over the last quarter, China has accumulated 235,000 tons of copper, 590,000 tons of aluminum, 159,000 tons of zinc and 5,000 tons of titanium. Because of this commodity grab, “nonferrous metals prices have rebounded," he said. “Given these circumstances, we don’t expect the state will continue to build its reserves."

“I don’t know about the stockpile arguments,” Chris Mayer assures. “Seems too neat. There was a lot of stockpiling going on in molybdenum on the way up… and now the stockpiling is declining and the price is recovering.


“If all it took to forecast commodity prices was to peek through to stockpiling, then commodity investing would be easy. The real world is messier… Stockpiling happens when prices rise and when they fall. I don’t know how good a predictor stockpiling is. Count me deeply skeptical.


“The more relevant question is not so much about stockpiling, but how daily production has been taken out of the market.”


  “You also want to consider what Bernanke and Geithner will do to debase the dollar in the coming years,” adds Dan Amoss. “If you’re a foreign creditor facing with this constant portfolio decision, which has higher marginal utility?:

1) US$2.32


2) 1 pound of copper

“The Chinese will probably go with No. 2, especially because copper (and oil, and iron ore) can be stored and used in infrastructure projects to keep the population somewhat placated with infrastructure jobs. Interestingly, we could actually see stockpiling/U.S. paper divestment accelerate if Chinese exporters remain in recession (which is likely).

“I think they’ll be in the market to stockpile on every dip and diversify out of U.S. paper as discretely as possible.”

(BTW, we’re currently running a helluva sale on Dan’s Strategic Short Report. Its currently 50% off… details here. His readers pulled in an average 103% gain on 23 trades over the last 18 months. You should check it out.)

  Last today, several states failed to reach budget agreements last night. Arizona, California, Illinois, Ohio, North Carolina and Pennsylvania have still not approved their budget for 2010, in spite of last night’s deadline.

As a consequence, states will be scrambling to stay afloat… California will issue an estimated $3 billion in IOUs for various creditors this month. Pennsylvania state employees will get partial paychecks until July 24, after which pay will be withheld altogether. Good old Illinois has no plan for paying its employees or keeping the lights on.

Even some of the states that “succeeded” in approving a budget may have failed their constituents: Hawaii, Nevada, New Jersey and Oregon all approved substantial tax hikes.

  “I believe the state of California started issuing IOUs last Friday,” a reader writes. “The state cannot, by law, declare bankruptcy, but municipalities can. The absence of any state assistance will likely be the death knell for bondholders from municipalities like Vallejo and Stockton, where the tax revenue base is rapidly evaporating due to the massive decline in housing prices.

“I know for a fact that the Stockton assessor’s office has been inundated over the last year with requests by homeowners to lower the assessed values of their homes. The assessor’s office in Stockton is targeting completion of a round of reassessments by August, following which they will likely have to do it again. They are, in effect, writing down their tax base with each assessment. That does not bode well for their ability to meet bond payment obligations that were floated pursuant to budget projections assuming much higher property tax revenues.”

  “Reading the responses to your statement about the victims of Bernie Madoff,” another reader writes, “I must admit I was struck by the same sentiment. How could people put ALL of their investing funds in one place? Especially folk who have (had) millions to invest? My net worth does not require seven figures to tally, and I have it spread among three caretaker firms.

“There are many lessons to be learned from Madoff, but the ‘eggs in one basket lesson’ may be the main one. Second place would be ‘Before you trust, verify.’ I think ‘Trust, but verify’ no longer applies in today’s financial landscape.

“The 5 is the one e-mail where I read every edition. Thanks for the informational, and occasionally provocative, reporting.”

The 5: It’s our pleasure.

   “Regarding the Madoff victims, two proverbs come to mind,” writes our last reader:

“‘A fool and his money are soon parted.’

“‘If it sounds too good to be true, it probably is.’

“I have personally participated in both of these. There is nobody to blame but myself. To be sure, the people whose schemes I invested in are responsible for their deceptions, but I am just as responsible for allowing myself to be deceived. Hmmm, that brings up another proverb: ‘You can’t con an honest man.’

“One final thought. Without citing the law, can anyone tell me the difference in Madoff’s scheme and Social Security?”

The 5: Yeah, you don’t have to give Bernie your money.


Ian Mathias

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