- Chris Mayer on how all brands come and go… even the brand of the U.S. dollar
- Stocks, commodities rally on dollar unease… why “the poor man’s gold” still seems cheap
- Commercial real estate still suffering, yet REITs soar… Dan Amoss weighs in
- Two stats point to recovery in 2009… Rob Parenteau on the mid-2010 double dip
“The U.S. dollar is a sort of monetary brand,” Chris Mayer kicks off our five minutes today. Given yesterday’s much hyped “Demise of the Dollar” story from The Independent, this seems an apt way to begin our daily forecast. “And like any other brand, it can fall out of favor. Even iconic brands can lose their ‘must-have’ standing. Remember the Members Only jackets from the 1980s?”
“So it is with the U.S. dollar, a brand making lows in the financial markets. It is a brand past its apex and a replacement waits in the wings. This line of thought comes from James Grant, who presented the idea of the dollar as a flagging brand at Grant’s Fall Investment Conference in Manhattan.
“Grant dug up the example of the Deutsche mark, or DM. The DM was a hallowed monetary brand, a source of stability and a symbol of Teutonic fiscal restraint. As recently as the end of 1991, the DM made up 18% of world currency reserves. It was the quintessential strong currency. At that point, according to historian David Marsh, the DM held sway ‘across a larger area of Europe than any other German Reich in history.’
“Today, the DM does not exist. Is the dollar next?
“With this backdrop, it is not hard to imagine the U.S. dollar losing its dominance. It is especially not hard to imagine when you consider the poor stewardship of the U.S. government. The government seems as intent on creating dollars as bunnies are on creating other bunnies.”
Yesterday’s sudden loss of confidence in the U.S. dollar sparked a brushfire in just about every other asset class. Gold was the most notable, soaring to a new record high of $1,043 an ounce — though you’d be hard-pressed to find an ounce of gold anywhere that cheap. The spot price climbed up to just below $1,050 early this morning… we’ll fill you in tomorrow with the new record details.
Silver’s been off to the races this week too. Up a buck since Monday, the spot is at about $17.40 as we write. In percentage terms, that’s about 6%, actually outperforming gold’s 4% rise this week. What’s more, the gold-to-silver ratio remains around 60, the same level as when we checked in on it last month. Silver looked like a bargain then, and still $4 bucks below its credit crisis high, it still does today.
“If there are were still doubters as to whether silver should still be considered a precious metal,” adds Jim Nelson, “let’s hope yesterday’s trading session set them straight.
“The ‘poor man’s gold’ has come under fire in recent years that it just doesn’t deserve ‘precious metal’ status. 50% of the metal that’s mined every year goes into industrial uses, which leads many to think it should be considered a base metal. This week’s $1 pop makes me think we have ourselves a dollar hedge.
“Silver is still trading at just 1/60th the price of gold, or at a 48% discount to where it has historically traded. Meaning either gold is historically overpriced or silver is historically cheap.”
For more on this matter, check out our latest report on silver investing.
The U.S. stock market was another “Demise of the Dollar” beneficiary. Also aided by the surprise rate hike from the Australian central bank, major indexes rallied well over 1%.
The market story today — and another sign of the times — is Banco Santander Brasil. The Sao Paulo-based bank raised $8.04 billion for its IPO this morning, making it the biggest float of 2009 and the biggest IPO in Brazil’s history. The previous 2009 IPO record was $7.34 billion, raised by China State Construction Engineering Corp.
Sounds like a nice time to be launching a BRIC newsletter, eh? Get the details on our latest venture here… charter member discount ends tonight.
While you wouldn’t know it from watching the stock market, the commercial real estate scene is still getting worse. The vacancy rate among offices for rent has climbed to 16.5%, a five-year high, says research firm Reis Inc. today. Meanwhile, office rents fell 8.5% in the third quarter, year over year. That’s the steepest fall since 1995. Cities with big financial sectors (well, what used to be “big”) got hit the hardest… New York City, we’re looking at you. Rents there are down 18.5% over the last 12 months, the most of any U.S. city.
But here’s the part we don’t quite get: Real estate investment trusts (REITs) have turned in blockbuster performances this year, with REITs based in New York City leading the way. Check out shares of SL Green, perhaps the biggest office landlord in New York:
SL Green rocketed up 91% in the third quarter alone, the best performing large-cap REIT on the market. These guys are Citigroup’s landlords… up 334% since March?
That’s par for the course for the whole sector. The Dow Jones Equity All REIT Index rose 33% in the third quarter, the best quarterly gain since the index’s inception in 1989. According to today’s Wall Street Journal, that means REITs now trade at an average 24% premium to their net asset value, about the highest level of this entire decade.
“REITs remain overbought and overloved,” opines our short side analyst Dan Amoss. “I’ve been following the sector closely and have been amazed at the market’s desire to bid up the price of stocks with such horrible fundamentals…
“There are expectations that larger, healthier REITs will be able to keep raising new debt and equity to be vulture investors during the property fire sale that everyone knows is coming.
“I have my doubts about existing REITs becoming big winners during the impending restructuring of U.S. commercial real estate. They have enough problems of their own to deal with, including a leasing environment that will remain persistently weak.
“This may be stating the obvious, but the big rally in REITs off their oversold levels in March was a function of investors wanting to pay more for REITs. That’s all. The fundamentals are horrible, and will remain bad for years. I think the REIT index as a whole has rallied far beyond justification.
“The Moody’s/REAL Commercial Property Price Index fell 5.1% from June 2009 to July 2009. It’s now 39% below the October 2007 peak, meaning that the equity invested in commercial real estate near the peak has vanished. Bulls are delusional if they think prices are returning to anywhere near the 2007 peak anytime soon. Let’s stay bearish on REITs and wait for the crowd to acknowledge reality.”
Dan’s readers have several short-REIT plays in the Strategic Short Report portfolio. Find out which ones here.
Just one bit of meaningful economic data so far this week: The American service sector grew in September for the first time in a year. The Institute for Supply Management’s nonmanufacturing index scored 50.9 last month, just 9/10ths of a point above the growth/contraction tipping point. That certainly isn’t a booming service sector, but having contracted for the last 11 months… we’ll take it.
“The Chicago Fed’s national activity index,” notes our macro adviser and fellow data dork Rob Parenteau, “continues to point to a second-half 2009 real GDP recovery. With the September release, investors focused on the index — a composite of more than 80 monthly indicators that provides a reasonably good proxy for real GDP momentum — slipping to -0.9 from -0.46 the month before. We have never seen this index climb consistently straight up after a recession month after month, and this decline is well within the range of monthly variation we tend to observe in this series.
“To be sure, growth above the long-term real GDP trend is not signaled until this index crosses the zero threshold. Typically, it takes until year two of a recovery to get there. Right now, all we are shooting for is growth, rather than recession. As displayed below, year-over-year growth at a 1.5-2% real GDP pace is within reach by year-end, given the sharp V-shaped recovery in the Chicago Fed index to date. We believe this will be sufficient to bring actual inventory accumulation into view in Q1, which can carry the economy in to midyear 2010 or so, at which point the unwinding of the fiscal stimulus becomes more of an issue.
“We continue to believe that is much more of a second-half 2010 concern, when the fiscal tide starts to go out, revealing a U.S. private sector that will still be leery of adding to its existing debt and will still be very keen on keeping spending growth below income growth.”
That’s just a snippet of Rob’s “TRIPLE TIMEBOMB” 2009-2010 forecast… catch it all by clicking here.
“What is the best-run Indian City?” a reader asks, responding to Addison’s anecdote yesterday. “The answer is Dubai!
“It’s an old joke here in the (ARABIAN) Gulf, where I have been pounding sand for 16 years as a writer (in a nearby country that has strict censorship and deports people who write to the outside world about XX (the real magic kingdom), even complimentary stuff, although the law is variously enforced. So please do not reveal my name… ever.)
“I guess having been aced out of Hong Kong and Singapore and Malaysia, the Indians have made a stand closer to home…. UAE, particularly Dubai. So far, it has worked — 3 million Indians in Dubai and about 900,000 locals, according to local folklore.
“There are lots and lots of Kerala Indians all over the Gulf, including the oil patch, because of their talents and fluency in English, and also because they work so cheap.”
The 5 Min. Forecast
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