American Spending, Data Galore, The Holy Grail of Trading and More!

by Addison Wiggin & Ian Mathias

  • Americans back to the same old tricks… spending soars, savings suffer
  • Bill Jenkins’ No 1. trading rule… “the holy grail” of the short-term speculator
  • Doug Casey with a sector that’s “going to be explosive”
  • Byron King reads the G-20 communique… and suggests you buy this stock


  We’re up to our scowling eyebrows in data today… here’s our favorite:

  Personal spending soared 1.3% in August, the biggest monthly leap since 2001, the Commerce Department announced today. Of course, this $129 billion jump in consumption “shows strength in August, indicating some economic improvement,” as CNN writes. A quick look at the chart reveals that the once sober American consumer is starting to fall off the wagon yet again.

As always, the drama’s in the details. “Cash for clunkers” was by far the biggest driver of new spending, almost single-handedly pumping up durable goods orders 5.8%. Interestingly, August’s rise was the biggest since October 2001 — right after Sept. 11, when retailers slashed prices and President Bush urged us to go shopping and “Get down to Disney World.” Heh… looks like only government decree can whip us into such consumption frenzies.

And for our 1.3% leap in spending, American incomes rose just 0.2%. In fact, when adjusted for inflation and taxes, what the government calls “real disposable income” actually fell 0.2%. What’s more, we as the collective “consumer” spent over $129 billion more in August, but chose to save $112 billion less. Savings as a percentage of personal income is now down to 3%, from 4% in July.

This “indicates economic improvement”? Must be reading the wrong release…

Elsewhere in the data patch, pending home sales rose 6.4% in August, says the National Association of Realtors. With their index now at 103, the NAR is celebrating their seventh consecutive month of pending sale improvement and the highest level since March 2007.

"The rise in pending home sales shows buyers are returning to the market and signing contracts,” said the famously optimistic NAR chief economist Lawrence Yun, with a very curious caveat: “but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules.”

Heh, and what’s this… has Mr. Yun been reading The 5?

“No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month… Sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession.”

Here, here! Sounds just like Addison’s latest special report.

  U.S. manufacturing worsened just a bit in September, but is still in a state of growth, the Institute for Supply Management reports. The ISM’s manufacturing sector index scored 52.6, a few tenths of a point lower than August but still above that contraction/growth score of 50. The index got goosed a bit by “cash for clunkers” as well, but we note that gains in September were led by the wood, paper and appeal industries. Construction spending rose too, up 0.8%.

  European and Chinese manufacturing is on the up and up, too. The EU said its purchasing managers index for the region climbed to 49.3 in September, a breath from growth. China claims its PMI rose to 54.3, its seventh straight month of growth.

  So with all this “good” news, the U.S. stock market should be flying high, right? Of course not… traders have seen right through the rise in personal spending, shrugged off pending home sales and are pouting because the ISM number came in lower, not the score of 54 the Street had anticipated. Major indexes are down 1.5% as we write.

  “The holy grail of trading is money management,” says one of our resident traders, Bill Jenkins… an important point on a day like today.


“Good money management will make you money, even in tough times. And it will save you tens of thousands, perhaps even hundreds of thousands, of dollars, if you reach the rank of successful trader.

“And it all boils down to this. You must take trades that have at least a 1-to-2 risk-to reward ratio. Of course, 1-to-3 (or higher) is even better.

“In options trading, that is easy to ascertain. If I stand to make 100% but limit myself to a 50% loss, then even if I am only 50/50 on my trade selection, I’m going to come out ahead. Think of it this way: If my risk capital is $500 and I double that once, I have $1,000. If I risk $500 on my next trade and it is a loser, I still have $750 left at the end of that trade.

“Keep risking only $500 until your account is up 300%. Once you have reached $2,000, you can double your risk capital to $1,000. If you ever fall below $2,000, just go back to risking $500 until you reach $2,000 again….

“By only seeking to grow incrementally, always managing your risk, you can even go on a bad streak of 66% losing trades and still break even. Nobody wants to do that. But you better plan on it happening, because it will.”

For more of Bill’s trading advice, look here.

  As usual, a falling stock market equals a rising dollar. The dollar index is more than half a point higher than yesterday’s low, at 77.1.

  “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency," said World Bank President Robert Zoellick this week, yet another shot across the dollar’s bow. “Looking forward, there will increasingly be other options."

  Gold is holding its ground today. The spot price is down just $5, to $1,000 on the dot.

“Gold stocks, as a class, are going to be explosive,” opines Doug Casey, a favorite at our annual investment symposium and a longtime gold bull. “Now, you’ve got to remember that most of them are junk. Most will never, ever find an economical deposit. But it’s hopes and dreams that drive them, not reality, and even without merit, they can still go 10, 20 or 30 times your entry price. And the companies that actually have the goods can go much higher than that.

“At the moment, gold stock prices are not as cheap, in either relative or absolute terms, as they were at the turn of the century, nor last fall. But given that the mania phase is still ahead, they are good speculations right now — especially the ones that have actually discovered gold deposits that look economical…

“At the particular stage where we are right now in this market for these extraordinarily volatile securities, if you buy a quality exploration company, or a quality development company (which is to say, a company that has found something and is advancing it toward production), those shares could still go down 10%, 20%, 30% or even 50%, but ultimately, there’s an excellent chance that that same stock will go up by 10, 50 or even 100 times. I hate to use such hard-to-believe numbers, but that is the way this market works. When the coming resource bubble is ignited, there are excellent odds you’ll be laughing all the way to the bank in a few years.

“I should stress that I’m not saying that this is the perfect time to buy. We’re not at a market bottom, as we were in 2001, nor an interim bottom like last November, and I can’t say I know the mania phase is just around the corner. But I think this is a very reasonable time to be buying these stocks. And it’s absolutely a good time to start educating yourself about them. There’s just such a good chance a massive bubble is going to be ignited in this area.”

  Another week, another massive Treasury bond sale. Somewhat satisfied with last month’s record $112 billion bond sale, the U.S. Treasury announced today it’ll auction off “just” $78 billion next week.

"At a time when global indebtedness is causing vertigo for most observers with U.S./U.K. debt-to-GDP running at 200-350%," writes our new friend Peter Cooper, "it is remarkable to observe that bond markets in the Middle East are so incredibly underdeveloped that debt-to-GDP is only around 3%."


Peter’s an interesting character. He’s a Brit expat who built a media business in Dubai and then sold it for millions to a Western conglomerate. He wrote a book about how to do it called Opportunity Dubai and has since pitched your editors on a similar joint venture. Addison and Chris Mayer are on their way to Dubai this weekend to explore.


To get your juices flowing, Peter sends this video of the new Dubai metro humming along, sped up to 474 mph by the miracle of video editing. If you scroll down a bit, you’ll also see video of the Burj Dubai, the world’s tallest building, where Addison and Chris will be staying. Peter also debunks some myths about Dubai and doing business in the Middle East, right here.

  Like gold, oil isn’t backing down to a stronger dollar today, either. A barrel goes for $69 as we write, just a few cents below yesterday’s close.

“In the G-20 communique,” Byron King reports, “the U.S. said that it would take the lead in phasing out subsidies for fossil fuels. The rest of the world said, essentially, ‘Yeah. Right. Go ahead. Do it. Whatever that means.’ What does it mean, by the way? It’s not entirely clear. I think that ‘phasing out subsidies’ is a smoke screen (whoops, bad metaphor) for raising taxes on oil companies.

“As sure as the sun rises in the east, you can count on the current U.S. political class to raise taxes on oil companies. There’s a political class in the U.S. that just HATES oil companies. Must be something in the water, so to speak. The rest of the world doesn’t care. ‘Go ahead, U.S.,’ they say. ‘Tax your oil companies into the dirt.’ That just makes it easier for other up-and-comers like Petrobras to compete and profit — which is why it’s in the Outstanding Investments portfolio.” 

  “I am convinced that the economy and the markets will resume heading south,” a reader writes. “I have many friends invested in mutual funds who are now of the opinion that the worst is over and that their retirement planning is back on the tracks. When the opportunity presents itself, I talk about fundamentals — employment, housing, debt and government spending.

“But I sound like the voice of doom and gloom, and pretty soon people don’t want to hear it anymore. It is difficult because I care for them and am concerned that they are being set up for a great deal of harm. I am resigned to the fact that there is little I can do except to get my own house in order and be informed when they do ask for my opinion. Thank you for your assistance in doing so.”

  “As a father of an incoming freshman at the University of Washington,” writes another, “I can attest to the fact that our son is one of the ‘uncounted’ unemployed. He tried in vain, throughout summer to get a job, and the only comment I got from him, as he grunted, some older guy got the job. I’m assuming by that he meant a family man going for the jobs at the newly opened theater in our neighbor.

“At least his hard efforts in high school (good GPA) led to his being one of the ‘chosen few’ that were accepted at UW… As his economics teacher told them all last year, ‘Hopefully, you’ll be in school for the next fours years and by the time you graduate, this ‘recession’ will be over.’”

Best of luck,

Ian Mathias

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