Stock Rally Fizzles, The Value Investing Congress, Indian Gold, Another Housing Bubble and More!

by Addison Wiggin & Ian Mathias

  • Wave of good earnings reports, but stocks fall… Dan Amoss on this “rented rally”
  • Addison Wiggin shares one key takeaway from this year’s Value Investing Congress
  • Chris Mayer journeys into the nexus of the Indian gold trade
  • Commodity bulls take note: How the stock rally could bump resource prices another 50%
  • Plus, could the housing bubble be back already? Scary signs below


  Interesting day to be watching stocks… have the tables turned?

This morning had all the makings of the typical 2009 market rally. Check out these earnings, all within the last 24 hours:

· Apple reports a 46% jump in profits from last quarter, beats estimates by 17%

· Caterpillar reports 64 cents a share worth of earnings — more than 10 times Wall Street estimates

· Coca-Cola comes in line with expectations

· Dupont beats earnings

· So does Pfizer

· United Tech loses money, but revenue tops expectations

· Ditto with Bank of NY Mellon

· Texas Instruments beats estimates and provides better-than-expected forward guidance.

So that’s good news (by 2009 standards) from essentially every sector, including five Dow components. Naturally, the Dow — which has been ignoring economic fundamentals for months in favor of poor, but still better-than-expected earnings — quickly breaks its four-day winning streak by plunging 0.75%. Say what?

Looks like beating Wall Street’s estimates can no longer satisfy the mob.

“A rational, disciplined investor would be fearful about buying today,” notes Dan Amoss, “after prices have been jacked up by an unprecedented seven-month rally.

“Nearly every economic and corporate development over the past few months has been translated into a reason to buy stocks. But underneath the elation over Dow 10,000 lies the palpable feeling that this rally is to be ‘rented,’ not ‘owned.’

“Bulls see this cautious sentiment as a source of more untapped buying power, but I see it as a reflection of weak hands being the marginal buyers; at the first sign of disappointment, they’ll look to sell. My read of the sentiment surveys is that patient value investors are skeptical and bearish, while momentum investors are bullish simply because prices have been going up.”

  One the most famous “patient value investors” is now buying gold and betting on higher interest rates. Sounds like David Einhorn, famous short seller of Lehman Bros. and Allied Capital has been reading The 5:

"My instinct was to want to short the dollar, but then I looked at other major currencies — euro, yen and British pound — and they might be worse,” he told the Value Investing Congress in NYC. "Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield.

“Gold does well when monetary and fiscal policies are poor… Over the last couple of years, we have adopted a policy of private profits and socialized risks — you are transferring many private obligations onto the national ledger."

Einhorn also said he is buying long-term options that will profit if/when the fed funds rate increases. (If you’d like to follow suit, consider TBT or RYJUX.)

"Einhorn’s comments will come as no surprise to readers of The 5," adds Addison Wiggin who is attending the Congress with Chris Mayer and Dan Amoss. "But it’s not so much WHAT was said as WHO said it and WHERE. Einhorn’s point of view came as a shock and subject of some discussion among the professional fund managers here. They’re more accustomed to discussing the turnaround team being implemented at Starbucks or the value represented by Waste Management than they are discussing gold’s role as a monetary asset or long-term interest rates being forced up by reckless spending in Washington. Heh."


  The U.S. government finalized its 2009 budget deficit this week: $1.417 trillion. The fiscal year, which ended a few weeks ago, will officially go down as the worst since 1945, with a deficit of 10% of our GDP.

  Our government should “develop a fiscal exit strategy which will involve a trajectory toward sustainability,” Fed chief Ben Bernanke opined in a speech Monday. Heh, look at you, Mr. Bernanke… defender of fiscal responsibility!

  At $1,060 an ounce as we write, gold is about $5 stronger today.

  Another feather in gold’s cap: For the first time, a major global exchange will accept gold as collateral. The CME Group, the world’s largest derivitives exchange operator, will take physical gold for things like margin requirements — an industry first.

“We just visited India’s biggest gold market maker,” notes Chris Mayer, who returned from Mumbai over the weekend. “We entered a decrepit building with towering slums around it. We got in a creaky elevator little bigger than a phone booth, with an attendant who opens and shuts the door. The elevator looked about a hundred years old. We got to our floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, we got to this gold merchant’s office.

“When we got inside, we entered a modern-looking office — clean, wooden floors; air-conditioned; a wall-mounted TV playing the Indian version of CNBC. You’d never know the squalor and chaos that exists just outside the door.

“We were led to a small conference room where we waited for our man. After a short time, the gold broker walked in — he’s a big bear of man with gold hanging on his neck, his wrists — even his eyeglasses were rimmed with gold. He represented the prosperous side of Mumbai…

“We got his take on the gold market. He’s bullish, which you may discount, but remember he’s a broker. He makes money on transactions, not on the gold price. He tells us India’s gold demand is strong and growing. India has long been a net importer of gold, since it makes very little gold itself. It also makes up nearly a third of total demand for gold. ‘People here buy gold routinely, as a store of wealth,’ he said. ‘People from the villages even buy gold and bury it in their backyards.’

“It’s something we’ve found often on our New Silk Road Tour. People are increasingly buying gold — whether in Dubai or Mumbai. For these cultures, unlike for most Americans, buying gold is a social norm, a rather mainstream place to park your wealth. India, as it continues to grow in wealth, should be a steady buyer of gold for years to come.”

That will surely benefit the gold miners in Chris’ Special Situations portfolio… currently available for your review for just $1.

  American producer prices are still in a state of deflation, the government claims today. The producer price index fell 0.6% in September and a stunning 4.8% over the last year.

A fall in energy prices accounted for 90% of September’s fall… perhaps a decline we shouldn’t count on in the future:

  Crude oil hit another 12-month high of $80 a barrel yesterday.

  “The overall market and the commodities market are inextricably tied together,” notes our resource trader Alan Knuckman.

“The S&P 500, the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows, it provides insight into future moves in other markets. The Commodity Research Bureau CRB Index broke above the 267 level, making new yearly highs last week. It’s now on target for the 335 objective, which represents a 50% rally in commodities.

“Higher oil prices (wow, what a turnaround in the last two weeks, from $65 to $80) are a good sign that the global economy is on the mend. In addition, it is supportive of stocks, with Exxon and Chevron adding major points to the Dow, sending it above 10,000. Whatever the reason, it helps to note that our RTA picks are on target for now.”

They certainly are. Resource Trader Alert readers bagged 106% gains with their crude oil calls on Friday, and Alan tells us, “We’ve still got a profitable play that we’re holding for February. We’re already in the money, but as crude rallies, we’ll be set to profit even more!" If you seek resource profits, Alan’s the man… join his ranks here.

  Sigh… the dollar hit another yearly low this morning. The dollar index fell as far as 75.1, about three points from its all-time low.

  Today’s dose of sobering perspective:

“The U.S. has shed 7.2 million jobs,” reads today’s WSJ, “since the recession began in December 2007, the deepest contraction since the Great Depression. Even if the job market started spitting out jobs as fast as it did during the 1990s boom, adding 2.15 million private-sector jobs a year, the U.S. wouldn’t get back to a 5% unemployment rate until late 2017.”

  Housing starts rose 0.5% in September, less than the Street expected. The Commerce Department says builders broke ground at an annual rate of 590,000 homes last month, below economist expectations of 610,000. As we’ve said before, we celebrate any and all housing starts disappointments… what sense is there in adding more new homes in a time of historically high supply and low demand?

  And yet… could the housing bubble be back already? We’ve come across several jaw-dropping bits of news this week, all of which lead us to fear that the Wild West world of subprime lending has been replaced by too-good-to-be-true foreclosure deals and the ‘benevolence’ of the FHA. Read this article for more, or this one — a 20-year-old buys a $155,000 house with a $183,000 FHA mortgage, with 3.5% down.

Incredible, eh?

  “You asked at the end of the last 5 that the phony-baloney mortgage debacle will ‘end in tears for someone, but whom?’” a reader recalls, referring to our coverage yesterday of the housing “shadow inventory” — where homeowners have stopped paying their mortgages and banks are too afraid/weak to repossess.

“Wait, wait! Choose me! An easy one, teacher! In a word, ‘taxpayers.’ Another equally good answer, ‘the man and woman in the street.’ Finally another easy, but ominous answer, ‘the regular small investor.’ Let’s just hope we don’t hear the usual, ‘Why didn’t anyone say something?’ Or ‘We didn’t see it coming.’ Your readers, at least, will have no excuses.”

  “I know how it will end,” adds another. “It will end in tears for all of us. Some will have crocodile tears, but most of us will have real ones. The banks that are on the hook for those and other such properties were lending out my money and yours and others’. Those who took out the loans are now thieves, stealing from you and me and the rest of us. Their signatures on the ‘promise to pay back’ loan papers prove it. They have no integrity and no honor. I hope their relatives that buy the next house don’t have any either and don’t sign the new house over to them. It would serve them right.

“Perhaps you are right, we should all just buy gold with whatever money we have and let the chips fall where they may. Also, can you tell me who and where they are/live? I’d like to go by and s$*! on the hoods of their cars.”

The 5: Heh, easy…

We got quite a few e-mails berating these homeowners, and for good reason. You’re right… it’s not an honorable choice, to say the least. But not a single reader wrote in scolding the banks. What’s up with that? In Baltimore parlance, the homeowners are the junkies and the banks are the crack dealers… who is the greater villain?

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Fair warning: In less than 72 hours, your opportunity to save $495 on our “most bankable research” ends. This year alone, readers could have already made $91,127 profit. So you don’t miss out, I urge you to click here now and lock down your extra-low subscription rate, BEFORE the Thursday deadline.

P.P.S. A short mea culpa from Addison:

"Looks like the travel schedule finally caught up to us. We’ve recently made two errors in The 5, which we’d like to correct today. Upon introducing our colleague Chirag, we mentioned the gold-backed ETF he manages for Quantum Fund is backed by 10-gram units. The actual units are half a gram a piece. Apologies, Chirag.


"The second is a little more embarrassing. We published some comments by our friend Ajit Dayal, who was featured in an interview on the BloombergUTV home page. He said specifically "We believe the Indian markets will rise very sharply in the next week." Ajit was indeed correct the market did rally rapidly… but the interview was recorded back in May! Ajit was forecasting what he expected following national election results. Ugh. Here’s how we covered the event in real-time. Again, apologies, Ajit.

“For the record, that’s only the second set of serious errors we’ve had to correct in the life of The 5. We’ll continue to do our best to get the story straight for you.”



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