The 2009 Financial Darwin Award, What’s Really Driving the Dow, A Commodity for 2010 and More!

by Addison Wiggin & Ian Mathias

  • The Daily Recokoning’s Financial Darwin Award for 2009
  • Phil saw his shadow, but Joe Sixpack did not… some warmer data punctuates our economic chill
  • Alan Knuckman offers a “clear-cut” case for what’s really driving the Dow
  • Better than gold? A rare metal to watch for 2010
  • Byron King on one big biz showing “shades of Circuit City, GM and Chrysler”

 

“We are ready to bestow the 2009 Daily Reckoning Financial Darwin Award,” our Joel Bowman proclaimed yesterday. “The winner is a company that, through a lethal combination of union concessions, bloated bureaucracy and an unrivaled dedication to fiscal and automotive inefficiency, last year became the largest industrial bankruptcy in American corporate history.

“The award goes, if you haven’t guessed by now, to General Motors — also known, since July of 2009, as Motors Liquidation Co.

“By the time it became eligible to contest this year’s Daily Reckoning Financial Darwin Awards, GM was at Washington’s door, begging for handouts, bridging loans and credit extensions. Bush gave more money. Obama gave more time. But the ride was over. Shares of GM, which had peaked in 2000 at around $94, fell to 75 cents. What was once the richest company on the Fortune 500 was now a penny stock awaiting bankruptcy.

“Much has happened since then…GM sold Hummer to China and Saab to the Swedes… dealerships across the country were closed by the hundreds… and yes, tens of thousands of GM workers now cash food stamps in Detroit.

“Ideally, marketplace extinctions would occur quickly and quietly, with little or no life-support financing from the poor ol’ American taxpayers. Alas, it was not to be the case for GM. General Motors Corp. is now General Motors Co…. and the majority owner is the government of the United States of America.

”Congratulations to Washington. Commiserations to taxpayers.”

  Well, at least consumer spending in the U.S. is back on the rise. According to the Commerce Department, in December, consumers spent more than the prior month for the third month in a row. It was a puny little gain, just 0.2%, but November’s spending was revised up to 0.7% at the same time. The Commerce Dept.’s measure of consumer incomes inched up 0.4% in December as well.

Even adjusted for inflation, spending and wages were up in January… barely.

  Curiously, American manufacturing grew at its fastest pace in 5½ years, too.

The Institute for Supply Management’s index of the sector rose from 54 to 58 in January — the best clip since August 2004. You’ll be hard-pressed to find any warts on this report… prices paid, employment, inventories, production and were all up notably from month to month.

January is the third month in a row this index has managed to stay above 50 — the ISM’s turning point of contraction/expansion. If we’re not careful, stock investors might actually get the impression the recovery is real. Egads!

  Meanwhile, China’s gauge of manufacturing activity (purchasing managers’ index) expanded for its 11th straight month in January, the Chinese press reported yesterday.

Interesting though, the Chinese PMI scored just 55… a point lower than the month before, and now even lower than its “we think, they sweat” American counterpart.

  Still, two notable events happened in the past week that are worth watching.

China is now the world’s biggest importer of Saudi oil, said Khalid al-Falih, CEO of Saudi Arabian Oil Co., late last week. “We are already exporting more to China than to the U.S.,” said Khalid, who runs the biggest oil biz in the world. “We are prudent and careful about where to invest, but our eyes are focused on China…”

China imports about a million barrels of oil a day from Saudi Arabia. That rate is expected to grow 50% by 2015. You can expect a commensurate level of political clout on the Arabian Peninsula to follow.

  And just in time, too. The U.S. inked a $6.4 billion arms deal with Taiwan on Friday. The Pentagon announced U.S. firms will be sending helicopters, missles, mine hunters and information technology to China’s rogue state.

In tandem, these two events bear watching.

  Positive news in the U.S., especially the ISM data, was a delight to the markets Monday. The S&P 500 shot up 1.4%. Of the Dow’s famous 30, only 3M and Walt Disney ended the day lower.

  “Here’s MY Dow theory,” offers our resource trader Alan Knuckman. “Chevron and Exxon are two of the highest-priced stocks in the Dow. This means they weigh heavily on the index in both up and down markets (the Dow 30 is computed based on share price, not market capitalization).

 

“So it’s not just merely my opinion that oil drives the Dow; instead, it’s pretty clear-cut. Chevron was down on Friday and the Dow followed.

“Yesterday, the quarterly numbers for Exxon showed the fifth straight profit drop, from the ALL-TIME corporate records set in 2008, but results beat analysts estimates and have stopped the overall market decline for now. It’s very early in the week, but basic materials as a sector are up 3% and energy is up 2% — these are the same sectors that dragged the market down in the last two weeks of January. So a rebound may still be in the cards.”

Up market or down, we trust Alan will keep his Resource Trader Alert readers well prepared. They’ve already cashed in one winner for 2010…  a 67% gain by trading the Canadian dollar. You too could join his ranks, right here.

  If the global economy really is recovering, 2010 could be the year for platinum, says our friend Frank Holmes. “Platinum lagged other industrial metals in 2009, but an improving global economy and a new investment vehicle may give it a lift this year…

“Since industrial use — mostly automobile manufacturing — makes up about 70% of platinum demand, a rise in global output would be expected to stimulate demand growth.

“Another reason for optimism is the first exchange-traded fund (PPLT) backed by physical platinum debuted earlier this month. More than 160,000 ounces were accumulated in just its first two weeks.

“It’s unlikely this pace is sustainable, but we’ve seen what can happen when the doors open to investing in attractive hard assets. Net retail investment in gold has jumped about 250% since 2004, when the first bullion-backed ETF was introduced.

“Investment demand makes up only about 8-9% of total platinum demand, according to Deutsche Bank. Like gold, the metal possesses both ornamental and industrial value, which makes it appealing.”

If you want more, the best place to hear Frank in person is at the Fairmont Hotel in Vancouver, British Columbia. That’s HQ for our annual Investment Symposium, right in the middle of one of the world’s most beautiful cities. Commit now and save a bunch.

  Gold rose alongside stocks yesterday. The spot price climbed about $20, to $1,110 as we write.

  The dollar is one of the few losers so far this week. The dollar index is down about half a point from yesterday morning, to 79.1.

  Insurance giant Allstate announced it’s cutting a stunning 20% of its agents. Citing a fall in car sales, a weak housing market and tough competition, Allstate corporate is now expected to slash nearly a fifth of its front-lines work force.

“Shades of Circuit City,” foretells Byron King. “Shades of GM and Chrysler, gratuitously cutting dealerships, even if the dealerships were profitable.

 

“Car sales are down, so there are fewer cars to insure. Foreclosures are up, so there are fewer homes to insure. Jobs are down, so there are fewer people who can afford to pay premiums — no matter what. Incomes are tight, so people are not looking for more ways to pay cash for intangible risk-coverage benefits — no matter how worthy it is to be insured.

 

“Allstate is cutting agents and agencies, even when the players are ‘down’ less than the regional economies in which they work. The sudden event of numerous insurance businesses going up for sale has depressed overall agency prices, in essence compounding the destruction of wealth within the agent community.

 

“I have a hunch that this will all come full circle and return to bite Allstate right in its corporate ass.

“Just a hunch.”

  “You wrote a fair, balanced article about the good Dr. Paul,” a reader writes. “I misunderstood the context of your original comments… However, I think the claims from Mr. Wiggin that Ron Paul supporters are a ‘cult of personality’ are inaccurate. I don’t think many people ever considered Ron Paul as having a flashy personality. It is his common-sense message of liberty that drives his loyal followers. I think it would be more fair to say they are a ‘cult of principled integrity with respect for the Constitution.’”

  “Geez, looks like those guys who ‘bashed’ Ian Mathias need to vent their anger elsewhere,” a reader wrote of the “robust” response to our interaction with Ron Paul. “I think you guys said it right: There’s too much ‘personification’ of politics and/or policies; a person might come up with an idea, but he/she certainly couldn’t have pushed it through to implementation alone.

“I thought the whole episode with Ron Paul was pretty funny. I actually thought to myself, ‘Well, at least he thinks book signing sessions are a waste of time too, just an extension of PR. LOL.”

The 5: We got a laugh out of it too… guess we’re among the minority.

“And then there’s Paulson,” the same reader continues, “I don’t want to ‘bash’ the fellow; while I certainly disagree with the policies he implemented before/during the financial crisis in 2008 and also want to beat the crap out of him for not seeing this coming, I cannot fault the man for his efforts.

”I remember vividly during many of the press speeches/conferences seeing Paulson looking really ragged and tired. Think about it: BSC, FNM, FRE, LEH, AIG, MER, BAC etc… all the problems came hitting the markets like a boxer hammering down his opponent for the knockout punch. If Paulson’s objective as a Treasury secretary then was first and foremost to prevent the markets from collapsing, I think he gave the market enough ‘steroids’ during the break to stand up and recover from the hammering.

“But if long-term objectives, economic health, justice and integrity are taken into consideration, his actions certainly leave a lot to be answered and must be questioned.

“I hope the courts don’t think Paulson’s work was done after he stepped down as Treasury secretary and wrote a book. There’s a heck of a load of questions to be answered — before, during and after the financial crisis… and don’t throw him in jail, either; there’s no point in doing that, unless the sole objective is to appease the masses.

“Which brings things back to the original point: We really mustn’t personify policies.”

The 5: There’s more to Paulson than the 2008 crisis. As we hinted at yesterday, it’s his backstage business that’s really interesting/insulting/quasi-legal. We’ll flush it out… stay tuned.

Best regards,

Addison Wiggin

The 5 Min. Forecast

P.S. At least one Reserve member has already sent in a deposit for an ocean-side condo at Rancho Santana. That means there are only four left. Marc Brown has prepared a special set of instructions if you’d like to do the same. Watch your inbox today.

If you’re not a Reserve member, but would like to learn more about becoming a member or the special Reserve-Only “Chill Weekend” we have planned for March 24-28, please call John Wilkinson at 1-866-361-7662.

 

rspertzel

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