American Consumption, Leaders of the Bull Market, Biofuels, Ted Kennedy and More!

by Addison Wiggin & Ian Mathias

  • Consumer attitudes lead stocks higher… but can retail vibes really predict market values
  • Meet the leaders of the bull market… world’s most-hated stocks account for 40% of trading volume
  • Dollar up, gold down… Byron King on staying patient for gold’s next chapter
  • Chris Mayer highlights an unlikely trend… why are biofuels still booming?
  • Plus, the only thing we have to forecast after Ted Kennedy’s passing


  So what has stocks soaring now, during this great deleveraging — this credit crunch — this historic fixing of household balance sheets?

Rising consumer confidence, naturally.

We recently vowed to stop calling our national brethren “consumers” in favor of less degrading words — like Americans, citizens or just plain-old people. Thus, we report the Conference Board printed a surprisingly optimistic gauge of American consumption attitudes (doesn’t that sound better?) yesterday. After two months of decline, the index kicked back up to 54.1, just shy of a 2009 high.

  Coupled with the latest printing of the home price index, that was enough to keep this mega-bounce alive and kicking. The news shot the S&P 500 to a 1% gain within moments of yesterday’s opening bell, which eventually faded into a 0.25% advance. The index is up almost 4% in the last five trading days. The Dow hasn’t fallen for six days in a row.

  We accept that improving consumption attitudes could bump stocks higher, especially retail. But we wonder… do consumption attitudes lead markets, or the other way around?

Seems like Joe Six-pack is routinely late to the party, no? We blew the post Lehman crash, stayed gloomy during the best of the stock rebound, got bullish in June when stocks went nowhere and lost confidence last month when the market shot up again.

So what does a big improvement in consumption attitudes tell us now? If anything, that the stock rally is about to cool off.

  “Retail is a terrible business to be in during a recession,” says Dan Denning, belaboring an obvious idea that seems lost on the world right now. “Don’t forget the primary economic and social trend right now: People are reducing their debts. They are cutting back, becoming more frugal and learning to live within their means.

“Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.”

  Here’s further proof that the market is off its rocker lately. Ladies and gents, the leaders of the new bull market:

Ah yes, worthy foundations of the next leg up. Over the last two days, these four have accounted for 40% of the total trading volume on the NYSE. Forty percent! Call us crazy, but we doubt this is mutual fund volume piling in on behalf of their long-haul clients.

  But we must admit, the data cupboard today is full of bullish reports. Here’s the rundown:

  New home sales staged their fourth straight month of gains, says the Commerce Department. Sales of new single-family homes jumped 9.6% in July, to an annual rate of 433,000. That’s the best new home sales rate in nearly a year and the fifth increase in the last seven months.

Still some scary fine print, though: Year over year, sales are still down 13%. The median new home price is down 11.5% over the last year, to $210,000.

  Orders for durable goods shot up 4.9% last month, the Commerce Department added. You’ll have to go back to July 2007 for a boost that significant.

  Heh, and what’s the market’s reaction to this genuinely positive data? The S&P opened down over 0.5%.

  That stock weakness is causing the dollar to perk up and gold to fall. The dollar index is up roughly half a point today, to 78.8. Meanwhile, gold’s spot price has fallen a couple bucks, to roughly $940 an ounce.

  “We’re still in the early chapters of the overall gold story,” Byron King reminds. “The plot is still forming, although I believe that all of the main characters are on stage.

“We have excessive U.S. government spending. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an ‘empire of consumption.’

“Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall ‘infotainment’ approach to presenting vital news to the American people.

“The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green ‘notes’ that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

“Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

“The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone. That’s why there’s the focus in Energy & Scarcity Investor on real things, like precious metals, energy and key technologies.

  Oil’s been having a tough 48 hours. Since peaking just below $75 a barrel early Tuesday, it’s down to barely $71 as we write. The sell-off accelerated today after both the Energy Department and American Petroleum Institute said U.S. inventories were much higher than anticipated.

  The biofuel industry is – amazingly — still functioning, Chris Mayer reports. “Steven Johnston at AgCapita, a firm dedicated to investing in agriculture, put together a worthwhile newsletter. In the latest update, the group shows how biofuel production is on the rise:


“This trend will surely continue, as most of the oil-producing countries have in place biofuel targets whereby they mandate that a certain amount of fuel must be biofuel. AgCapita’s own research indicated that the biofuel targets in the U.S., the EU, Canada, Japan, Brazil, India and China alone could require the use of over 400 million acres of arable land, or over 10% of the world’s total. This is in direct competition with food production and should have a significant effect on crop prices.

“What a lot of people overlook is just how fertilizer-, water- and energy-intensive these biofuels are. So agriculture remains another attractive market to invest in right now in what otherwise looks like a time of tepid growth. That means opportunities in fertilizer stocks, grain handlers, farm equipment and farmland.”

Chris’ Special Situations readers have three different plays in this investment genre… check ’em out here.

  Last today, as you’ve surely heard already, Ted Kennedy died this morning. We struggled to come up with anything to say that wouldn’t be boring or rude… we have little desire to gracefully eulogize politicians, nor do we take much pleasure in speaking ill of the dead — well, the recently dead, anyway.

But there is one thing to say for the sake of our daily economic forecasting. Byron King summed it up best in a note this morning:

“You can be sure that within the bowels of the Democratic Caucus, the politicos are trying to figure out how to spin this. They want to turn the national moment of his passing into some way of railroading national health care through… ‘The Edward Kennedy National Health Care Act,’ or something like it.

“Watch for the Periclean funeral orations, with references to ‘Ted’s dream for America’…


“Heck, G.W. Bush might not have won the election in 2004 if Ronald Reagan had not passed from the scene that summer. Nothing like a state funeral, with lots of 21-gun salutes and marching Marines, to make people want to vote for the war president. Don’t think for a moment that the Republicans failed to capitalize on RR’s death to advance the Bush II agenda.”

  “Another housing number that would be interesting to see though impossible to track,” writes a reader, responding to yesterday’s 5, “is the number of homes that have been pulled off the market (such as Timothy Geithner’s) and turned into rentals hoping the market will get better. I know of three situations in my small circle. One moved back to California and rented their house in New Jersey after six months on the market to a couple from the D.C. area who were transferred and couldn’t sell their house, or at least weren’t willing to reduce the price enough to where it would sell. A third instance is in the San Francisco Bay area. All were in the $1,000,000-plus range. My guess is they all have a very long wait.”

  “Don’t you think it’s just ‘excelente’ that Mexico has seen the light,” our last reader writes in response to a story we ran Monday, “and will no longer prosecute those in possession of small amounts of drugs? When will the great ‘free market’ north of the Mexican border and the rest of the ‘free world’ get on board this great idea? My one proviso with any type of legalization of drugs is that the buck stops with the drug user. With rights come responsibilities, so don’t come crying to me that you didn’t know about addiction. And that goes for cigarettes and alcohol too.”

The 5: Heh, that’s an awfully big fish to fry. Just like Mexico, we wouldn’t be surprised if the U.S. is one day so strapped for cash and resources that it stops locking up people caught with a couple of joints in their pockets. Would that make society more ‘excelente’? Probably. But Mexico also legalized possession of drugs like heroin, crack and meth. Those three have a pretty significant junkie population here in Baltimore, and its safe to say none of us are better off because of it.

Here’s to layin’ off the hard stuff,

Ian Mathias

The 5 Min. Forecast

P.S. The drama continues. Dan Amoss’ short of a major bank met with some delayed gratification yesterday. In deference to readers who took us up on the Short Report offer, we’re not going to reveal the name of the bank just yet. But here are the basics: At the conference call, this bank not only didn’t reduce their dividend, they dropped their loan loss provisions.

That’s good news for day traders, but “a recipe for disaster” for the long haul, Dan tells us. “I still expect a big surge in provision expenses, likely as soon as the quarter ending in October. If you don’t believe that the Canadian and U.S. economies are going to come roaring back, which I don’t, this is still an attractive short sale.” We think this story is in the early chapters… stick with The 5 for updates.

P.P.S. Check this out: A few weeks ago we offered a free book to anyone willing to write an online book review of Addison and Bill’s latest — Financial Reckoning Day Fallout. Well, here’s the first one. “We recommend that all elected officials and concerned citizens everywhere consider this book required reading,” the reviewers concluded. That’s very nice of you. Thanks.

If you would like to conduct a review of your own, our offer is still on the table. Just send your mailing address and the URL of your blog or website to:


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