Retail Rubbish, Wholesale Whopper, Myths Busted, “Ghost Fleet” and More!

Untitled Document

by Addison Wiggin & Ian Mathias

  • “Juking the stats”… “Cash for clunkers” renders retail sales numbers nigh meaningless
  • Wholesale prices soar… How “cash for clunkers” shoulders part of the blame
  • The “ghost fleet” that signals an alarming economic decline
  • Enough oil for the next 2,041 years? Byron King shatters an Internet myth
  • Readers ridicule mortgage market, share their “Odyssey” outrage

 Amazing. A few weeks of “cash for clunkers”… 700,000 new cars off the lot… et voila: Retail sales jumped in August by the most in three years! Wee-hoo!

This morning’s Commerce Department release of +2.7% places August retail sales well ahead of the 1.9% “expert” consensus.

Great. Now that they’ve “pulled forward” car sales for the next 12 months… what’s next? How about… Appliances!?

Later this fall, Uncle Sam will being doling out up to $200 a pop (in borrowed money) to anyone who wants to replace an old appliance. Yeah, that’ll keep retail and GDP stats humming along.

 Wholesales prices rose last month twice as much as forecast… thanks largely to rising gasoline prices. The 1.7% jump in August followed a 0.9% decline in July.

“Core” PPI excluding food and energy rose a more modest 0.2%. But that was also double analysts’ expectations. Turns out a good amount of that was driven by higher prices for cars and trucks, too. Whaddya know… “Cash for clunkers” gave automakers an excuse to cut back on factory-to-dealer incentives.

Dealers don’t experience a squeeze without passing the costs along to customers. Which should make tomorrow’s release of the consumer price index (CPI), well, interesting too. The consensus says a 0.3% increase. We’ll see what tomorrow brings.

 Since we’re in the mood, let’s observe another moment of silence. On this date a year ago, high finance’s Gang of Four met to plot the bailout of AIG — Fed chairman Ben Bernanke, then N.Y. Fed chief Timothy Geithner, then Treasury Secretary Hank Paulson, and Goldman Sachs chief Lloyd Blankfein.

To date, AIG has gurgled down $134 billion in taxpayer money (sic)… much of which ended up in the coffers of Goldman, Deutsche Bank, and the other counterparties to AIG’s toxic swamp of credit default swaps.

But yesterday, the president promised that’s all over now, thanks to the new regulatory stew he’s cooking up. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis,” he said. “Those on Wall Street cannot resume taking risks without regard for consequences and expect that next time, American taxpayers will be there to break their fall."

Why they should expect next time to be any different from all the other times dating back to at least the bailout of Continental Illinois 25 years ago he did not say.

 And there will be a next time. Of this, our friend Nassim Nicholas Taleb is sure:

“Ben Bernanke saved nothing!” Taleb writes, “He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumor and says the patient is doing very well. The first thing I would tell Chinese officials is how can you buy U.S. bonds as long as Larry Summers is there [as head of the National Economic Council]? He’s a textbook case of overconfidence. Look what happened to Harvard’s finances [when he ran the university]. They took a lot of risk they didn’t understand, and it was a disaster. That’s the Larry Summers mentality.


“Today, we still have the same amount of debt, but it belongs to governments. Normally, debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren.”

Thanks, Ben.

 Of course, Wall Street does not share our skepticism. Go figure. U.S. stock markets opened up today, if only slightly.

Yesterday brought a day of thoroughly uneventful trading. The major indexes moved up less than a percentage point, traders refusing to buy into the notion that Obama’s new tariff on Chinese tires is the second coming of Smoot-Hawley and a tsunami of protectionism is about to inundate the world.

On that point, we tend to agree. Policywise, this is not 1931. It’s more like 1930 still.

 “More than anything else, the Street is holding its breath,” our resource trader Alan Knuckman told Bloomberg TV this morning. “The next round of earnings reports start the first week of October to give the markets more information to decipher. Until then, the momentum will be judged by continued new weekly highs in gold, crude and the stock indexes to power the current rally higher.”

Alan has already seized the ups and downs of the resource markets this year to generate an average 87% gain. His strategy is worthy of note. You can check it out here.

 Gold has slipped below $1,000. It closed in New York yesterday at $999.90 and the spot price as we write sits around $996. The longer this goes on, the more likely we get the sort of pullback we discussed yesterday.


 With gold falling, the dollar index is rising, sitting a tad below the 77 mark. Oil has firmed up about 1%, to $69.60.

 “For many years,” Chris Mayer tells us, exploring yet another out-of-the-way opportunity, “desalination was too energy intensive — and, hence, too expensive — to be a scalable solution. But better technology has been the main driver in making desal more efficient.

“The World Business Council estimates that the cost of producing fresh water from seawater has fallen 80% over the last 15 years:

“You’ll note with a casual glance over this list that these regions all have water issues. In the U.S., those issues are mainly in the arid Western states. In China, they’re in the northern part of the country. ‘Desal’ is one of the fastest growing areas in the water market, with installed capacity growing 25% annually for a decade.”

There aren’t a lot of pure plays in this space. But Chris has one company on his watch list, and another he’s already recommended to readers of Mayer’s Special Situations. He sees it fitting neatly into one of the most profitable strategies of the next decade.

 In today’s “sign of the times” file, we find this interesting nugget: An intrepid reporter for the U.K.’s Daily Mail recently came upon this “ghost fleet” of empty ships biding their time in a remote spot about 50 miles east of Singapore:

“Container ships, bulk carriers, oil tankers,” the Daily Mail asserts, “Their numbers are equivalent to the entire British and American navies combined; their tonnage is far greater.”

And they’re going nowhere. “A couple of years ago, those ships would have been steaming back and forth, going at full speed,” says Tim Huxley, one of Asia’s top ship brokers. “But now you’ve got something like 12% of the world’s container ships doing nothing.”

We shudder at how much worse the number would be without China’s shopping spree for copper, iron ore and other raw materials.

 “You are all wrong,” a reader writes in response to our discussion of the “oil squeeze” yesterday. “Read this… and please respond. Might be something your research team should look into? The American people are being fed a pack of lies.”

What followed was an e-mail we’ve seen forwarded around the far reaches of the Internet for at least a year now. It’s all about the Bakken shale in North Dakota, Montana and Saskatchewan. The e-mail claims the Bakken has 503 billion barrels of crude — “enough to fully fuel the American economy for 2,041 years. We do not need to be dependent on foreign oil!!!!!!!!!!!!!” (Actually, that was in all caps, but we figure the 13 exclamation points are enough to convey the feeling.)

The 5:

As it happens, our Harvard-trained oil field geologist Byron King worked for Gulf Oil in North Dakota 30 years ago, and some of the data he reviewed included the Bakken. He returned to the region for another up-close and personal look just over a year ago.

His conclusion: “The Bakken makes for a great story. But I assure you it’s not everything the press releases make it out to be. Yes, there are some nice wells out there, making a lot of oil and plenty of money for the owners. But in the big scheme of national energy policy, Bakken is just a small potato.”

“These kinds of pie-in-the-sky e-mails about how Bakken oil will ‘solve American’s energy problems’? Utter fiction. Better to invest in dilithium crystals from Star Trek.”

If you’re looking for energy plays with better potential, Byron has some suggestions here.

 “I tried to help my daughter to purchase a home with me as co-purchaser/borrower,” writes a reader, confirming our reports yesterday on what’s become a Bizarro World mortgage market.

“Look to buy with 20% down, 80% conventional loan. I was turned down because I did not meet their debt-to-income ratio even I have cash enough to pay for the house four times over, not to mention net worth in the mid-seven figures and credit score over 700. They cannot do ‘asset dissipation’ loan per new guidelines. They ONLY count ‘income.’ For a retiree like me, that means dividends/interest/rents. When did cash in the bank become an ‘unworthy’ asset?

“It got worse. The mortgage broker tried to obtain a ‘stated income’ loan (no, for me, it would not be a liar loan, since I disclosed everything fully). It was turned down because they only do liar loans of over $400,000. I asked for only $260,000. So it is more risky to provide a smaller liar loan than a bigger one? Give me a break.

“To get the house in time, I had to be the lender of last resort to my daughter. Instead of 10%, I could earn on something else, I am now earning 5.5% on her mortgage.”

 “I am a lawyer of 30-plus years’ practice and an old submarine officer (U.S. Navy)” responding to the latest developments with Odyssey Marine. “Someone ought to check who Spain stole the gold and silver from in the first place or what other circumstances occasioned the coins being onboard.

“I am sure someone else could make claims of rights — but then my admiralty law side says, ‘How are governments overlooking international salvage laws that would give the property to Odyssey?’ On the basis, it was Spanish government money, and it is ‘immuned’? Hate that word ‘immuned’ — breeds irresponsibility and unaccountability. Again, who is stealing from whom, and what of the salvage effort, without which there is nothing?”

The 5:

They stole it fair and square you might say of the Spanish conquistadors. But what the Justice Department is doing right now is far more subtle.

Historically, there’s a law that states any military ship on a military mission is sovereign to the nation under which flag is sails; therefore, so is its cargo. But if that same military ship is on a commercial mission, sovereignty doesn’t apply.

Before this case even goes to trial… the Justice Department is trying to get the U.S. Congress to change the interpretation of the law to include sovereignty for all military vessels… regardless of their mission. If Justice is successful, Odyssey’s half-billion-dollar find — despite the innovation, research, technology, time, energy and effort to retrieve it — would revert to Spain.

 “I think that you’ve hit the nail on the head,” another reader writes in response to our notion of using the Odyssey’s story as a case study in a new film detailing the pitfalls of entrepreneurship in an age of increasingly ambitious, aggressive and beguiling Western governments. “This theme is one which I have also noted for quite some time, and it’s a theme that has been progressing slowly and insidiously over the past few decades.”


Addison Wiggin

The 5 Min. Forecast

P.S.: How’s this for a winning streak? “Last year,” writes Steve Sarnoff, “I recommended 37 trades to my readers, every one a winner. With a total gain of 4,647%, you could have claimed $232,381…” Details here.


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