Manufacturing Rebound, A Contrarian Play, Rare Earths and More!

by Addison Wiggin & Ian Mathias

  • Is the recession technically over? The strongest argument for recovery we’ve seen yet
  • Rob Parenteau shares his new macro economic forecast
  • “Told you so!” writes Byron King — “breaking news” he and The 5 scooped in March 2008 
  • Plus, Chris Mayer’s latest contrarian play

  Our forecast today: The government and mainstream media will soon be calling the end of the recession. Leading this feeble cause is the latest ISM manufacturing index, probably the most powerful argument for recovery we’ve seen yet:

This morning, the ISM said its gauge of manufacturing activity had risen to 52.9 in August — out of contraction for the first time since the recession began and the highest score since June 2007. Of course, things are a bit different now, but over the last 60 years, when the manufacturing sector returns to growth, the recession has already ended. That prospect is enhanced by the capacity utilization data we mentioned earlier this month — another recession-ending indicator now glowing green.

  What’s more, pending home sales rose 3.2% in July, the National Association of Realtors also reported. With an index score of 97.6, that’s a 12% rise from this time last year, the highest level in two years and the sixth straight month of improving pending sales conditions.

  Factor all that in with rising consumer sentiment, home price and stock indexes and we suspect now is around the time when the government will eventually declare the recession ended… which will make way for all kinds of shelved legislation and the political agendas that popularized the current administration in the first place. Then there’s that whole “double dip” dilemma… but we’ll save that for another five minutes.

  Yesterday’s gloom from China helped push U.S. stocks down. The S&P 500 fell 0.8%. Today looks like it’ll be even worse. The market got a little bump from the manufacturing and housing data this morning, but as we write, traders are “selling the news” – big time. The S&P had fallen 2% by lunchtime.

  “Cyclical equities, commodities and commodity currencies have already moved,” notes our macro adviser Rob Parenteau, “first to reflect the end of the Armageddon bet back in March, and then to reflect the end of the recession bet in July. We suspect investors will seize on the mounting evidence of an economic recovery to redouble their efforts to increase their positions in these asset classes.

“We will be surprised if 10-year Treasury yields do not break 4% by mid-October as this recognition spreads, and we suspect Chairman Bernanke, with the president’s nod for another term at the Fed, will be forced to start talking about normalizing the fed funds rate in Q4 (before actually doing something about it in Q1 2010) if he wishes to keep Treasury bond investors from heading for the hills. A Fed promising a near-zero fed funds rate from here to eternity will surely look far from appetizing to Treasury bond investors if a 4% real GDP growth environment unfolds.”

Wait, 4% GDP growth?

“If we were to naively use the experience of all the recessions of the post-World War II period as a guide, the nearly 4% peak-to-trough decline in real GDP to date in this recession would be the prelude to a first-year recovery growth rate close to 8.5%. This, of course, is unthinkable given the current mess. But if we got only half of that historically normal bounce — which we believe is the correct handicap, given the private sector deleveraging under way — the resulting 4%-plus real GDP growth over the next year would prove nearly twice the current 2-2.25% consensus expectation. Chairman Ben might just want to stick around for that.”

A better life through proven economic thought – that’s the Richebacher Society credo, which Rob has done a fine job carrying on. Find out how you can join their exclusive ranks here.

  It’s worth noting, despite yesterday’s sell-off, the S&P ended the month up 3.4%. That spells a 51% shot since March, the best six-month run since 1938. Of course, the last thing you’d want to do now is take some profits… after the most notable winning streak in our lifetimes, the S&P will likely rise another 50%. It’ll probably go up forever.

  China is celebrating a stronger manufacturing sector today, too. Its purchasing managers index (like our ISM) rose from 53.3 to 54 in August, signaling its sixth straight month of expansion and the best score in over a year. But is the China boom just a product of too much easy money? It’s starting to seem so… we’ll keep an eye on it.

  Here’s another story fanning the economic recovery’s flames: The much-delayed Boeing 787 Dreamliner might finally take flight this year. Late last week, Boeing said that its long saga of delays and frustrations with the much-hyped jet are coming to an end. The first Dreamliner is now on track to leave terra firma by the end of the year, and the jet will actually be delivered to various international airways by the end of 2010.

Just how late is the Dreamliner? Japanese airliner All Nippon will get the first in 2010… since they were originally promised delivery by the start of the Beijing Olympics.

“My next buy recommendation is based on some of the historic changes happening in air transportation,” notes Chris Mayer, who chronicled the Dreamliner saga in the latest Capital & Crisis alert. “One of the key drivers of this change is what I call the Silk Roads of the sky. The aerospace industry has a $6 trillion backlog for new aircraft — which will double the global fleet over the next 20 years.

“In large measure, new and booming trade routes will link all kinds of cities and markets flung all over God’s green footstool. There are hundreds of new airports planned and thousands of new planes that will connect China to Africa to the Middle East and more.

“The thing about the new aircraft is that they are titanium intensive. Titanium is a silvery, lustrous metal that is corrosion resistant and has the highest strength-to-weight ratio of any metal. Aircraft manufacturers love titanium, especially now that the market has crushed the price of titanium, along with everything else.

“That creates some space for us to buy a quality operator now. Titanium prices are way down. Sentiment is terrible, with most analysts only lukewarm to the idea. Most of the near-term news is bad. That gives us a great price to get in on a promising long-term story. Of course, this is already in the process of changing, thanks to the Dreamliner announcement.”

So what’s the best play on this trend? Check out your latest Capital & Crisis alert.

  The Canadian economy contracted more than anticipated in the second quarter, the Canadian government admitted today. GDP contracted 3.4% in the period, compared to the 3% Canadian traders anticipated. The first-quarter GDP decline was also revised downward to 6.1% — the worst annualized drop on records dating back to 1961.

  “I told you so!” Byron King exclaimed to us in a one-line e-mail sent very early this morning. He’s really not the shouting/gloating type, so we quickly clicked the link he sent along and saw this, the headline of today’s New York Times business section:

“China Tightens Grip on Rare Minerals”

The Old Gray Lady is “breaking news” today on China’s rapidly increasing dominance of rare earth metals… those bottom of the periodic table elements crucial to producing just about every high-tech gadget. The NYT noted that the Chinese government is just shy of cornering the market of rare earths, and that its export quotas have been shrinking every year, with this year on track to be the smallest yet.

Readers of The 5 or Byron’s Energy & Scarcity Investor will likely yawn and turn the page… they have been reading about this since March 2008.

“There are more than a few stock pushers out there,” notes Byron, “explaining to people how to ‘profit from the squeeze in rare earths.’ But there’s really only ONE decent publicly traded company that will give you a long-term return in rare earths.”

 

That company is in the Energy & Scarcity Investor portfolio. Learn about it here.

  Speaking of rare metals, gold’s been keeping an awfully low profile lately. Over the past 30 days, the spot price has kept to a $35 range, bouncing mostly between $940-955. The spot price is in the higher end of that paradigm today, at $952 an ounce.

  The positive manufacturing numbers stopped the oil sell-off today. After a nearly $3 fall yesterday, light, sweet crude arrested its fall at $69 a barrel.

  The dollar is just a bit higher. Up a few tenths of a point, to 78.2, the dollar index is still less than a point above its 2009 low.

  “Inflation or deflation?” a reader asks, referring to Bill Bonner’s forecast that betting on inflation feels too easy. “I can tell you this…

“I live on a very strict budget, and I am not stretching on this statement. In the last 18-24 months, my bills have gone up considerably. I will give you some examples. Thirty-nine ounces of Maxwell House Coffee was about $5.50 a year ago, and today it comes in a smaller (34.5 oz.) package for about $8.00. WOW! A 5 lb. bag of sugar was around $1.99. Now it is $2.29. Dry cereal used to come in a larger package also, and went from $2.00 a box to a whopping $2.39. Soft drinks: A six-pack of 24 oz. bottles was $3.00 and NOW it is an unbelievable $4.29! Dog food from $8.99 to $10.99.

“My cable bill has gone up two or three times in the last two years (includes Internet and TV). My electric bill has gone up just a little.

“What went down? My homeowners insurance and natural gas bills

“The problem here is that the difference between what has increased in price and what has decreased still leaves me in the hole. In other words, after all the bills are paid, I am paying MORE this year!”

Uncle Sam responds: That’s simply not possible, madam. Consumer price inflation is down 2.1% over the last year, the largest decline since 1950. If people like you were right, it would undermine our whole methodology. There must be something wrong with your budget.

  “Given the data from the Rasmussen poll you mentioned,” a reader writes of Rasmussen’s great “throw the bums out” poll, “I guess if there were an all-or-nothing choice when people voted we might finally make some progress in fixing Congress. I think the data are misleading, though, since polls have shown these types of numbers in the past, but of course, when it gets right down to it, people re-elect their local pork provider (over 90% of incumbents win in Congress).

“One poll I saw probably 10 years ago asked if Congress was corrupt, and 90% replied yes, but when asked about their own local rep, people said he was one of the few good politicians. This is the problem: All these guys are just horse-traders for their local projects, many of which we don’t need, especially with trillion-dollar deficits staring us in the face for the foreseeable future. Who knows, as the fallout from the never ending bailout programs recedes, perhaps people will start voting some of these idiots out of office — Rep. Rangel, with his forgotten income and taxes, might not be the best guy to run the Ways and Means Committee for starters. Keep up the great work.”

The 5: Thanks, it’s our pleasure.

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. If you’d like to check out the latest from our executive publisher Addison Wiggin, click here. He recently discussed the future of the U.S. economy and the dollar — and how he became an economic commentator by way of the Grateful Dead — with FOX Business News. His interview starts at 16:35.

rspertzel

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