Earnings Breakthroughs, Recession Byproducts, Japan Now the Top U.S. Debt Holder and More!

by Addison Wiggin & Ian Mathias

  • Don’t look now, but U.S. companies are back… Chris Mayer on “one of the best earnings seasons on record”
  • George Soros doubles down his stake in gold… and picks up Citi?
  • Patrick Cox on two encouraging byproducts of the U.S. recession
  • China loses a “world’s No. 1” status… Japan now the biggest holder of American debt

  “We are in the midst of one of the best quarterly earnings seasons on record,” our managing editor, Chris Mayer, alerts us to a startling fact today.

John Deere, for example, beat Wall Street estimates nearly threefold this morning. Traders were ready for 19 cents a share in its fiscal first quarter. Deere gave ’em 57 cents. And that’s mostly without one-offs and special sales.

“More than four out of five companies are topping consensus estimates on profits,” Chris continues. “The S&P 500, that big index of America’s largest companies, is set to break a run of nine consecutive quarterly declines in profits.

  Heh. Not so fast.

“This doesn’t mean stocks are a buy,” Mr. Mayer cautions. “The big rally stocks enjoyed in 2009 baked in much of that recovery. However, unlike prior quarters, it’s not just cost cutting that’s driving those profits. Sales are starting to tick up again. Nearly two out of three companies are beating sales forecasts.

“What happened? The good recession happened (at least where government bailout money did not get there first). The bitter winter of recession thinned the herd. It’s an ongoing process. For instance, a recent Wall Street Journal headline reads ‘Radical Shifts Take Hold in U.S. Manufacturing.’ It pointed out that Dow Chemical would shed $2 billion worth of basic chemical factories to shift into more profitable specialty chemicals. Whirlpool is cutting 1/10th of its capacity. Yet Intel is investing billions in its U.S. plants to meet new demand.

“In a big-picture sense, what we are seeing is a squeezing of the economic sponge. The market process forces people to liquidate the bad businesses and purge mistakes. The excess capital is then free to go elsewhere and find better returns. And the capital that remains in a business earns a better return for its owners. Or put another way, capital flows out of the Whirlpools and toward the Intels. Thus, we plant the seeds of recovery.”

Discover a few of those seeds, here, for just a $1.

  Earnings surprises help explain the S&P 500’s 1.7% rally yesterday. Traders got a confidence boost from the EU over the Greece situation and were then treated to tasty earnings from Kraft, Abercrombie & Fitch and Merck.

  The Empire State Manufacturing index is even getting folks all lathered up. It blew expectations out of the water yesterday. The gauge of manufacturing in New York soared from 15 to 24 this month… not a definitive gauge for the rest of the U.S., but a leading indicator worth noting before the ISM’s nationwide manufacturing report later this month.

  What… you don’t count yourself among the lathered?

“The Great Recession is still in full force,” our Patrick Cox agrees. “Unemployment and the debt overhang are bad. The important thing to remember, however, is that this situation is neither accidental nor mysterious. It was caused by quite specific mistakes….

“Government-entwined credit institutions, especially Fannie and Freddie, were used to subsidize and encourage home ownership. People who should have rented bought. Housing prices rose. Speculators and mortgage lenders saw an opportunity and doubled down. Increasingly desperate measures to sustain an unsustainable bubble eventually failed, and the rest is history…

  “But even with public sentiments depressed,” Patrick continues with trepidation, “I’m seeing indicators that are positively uplifting. There has been, for example, a major shift in the public attitude about the debt. A few years ago, it was limited to people like Addison Wiggin and Bill Bonner. Today, there are widespread public demonstrations protesting deficit spending. This is a remarkable turn of events — a sea change with real implications.

“Another extremely positive trend is the ongoing and spectacularly rapid collapse of the global warming edifice. Until a few days ago, it was still possible to claim the overall theory was sound, despite revelations of serious errors in official climate claims. Now that is no longer the case. The high priest of climate change himself, ex-head of the CRU, Phil Jones, has admitted there has been no statistically significant warming in 15 years…

“In short, we are seeing a return to sanity in both public opinion and the realm of the scientific peer-review process. The leaked CRU e-mails and data have not only changed the politics of climate change, they have shaken scientists in many different fields.”

  Japan, Germany, China, France and South Korea all had increasing applications for international patents in 2009. The U.S. had fewer, but still dwarves the field. The innovation that often leads the way out of tough economic cycles appears alive and well:

One such leading company, Patrick is convinced, will “revolutionize the treatment of communicable disease… When sufficient third-party validation is available for this amazing technology, we’re going to see the company skyrocket.” Find out how you could be a ground-floor investor, right here.

  As tepid faith returns to the stock market, the dollar continues to trickle down. The dollar index fell as low as 79.6 early this morning and rests at 79.9 as we write.

  Gold rose as high as $1,120 yesterday, and has stayed put there since.

  George Soros more than doubled his investment in the SPDR Gold Trust ETF in the fourth quarter, says an SEC filing this morning. The billionaire bought over $421 million of GLD shares… with a net stake of $663 million.

On the other hand, Soros bought a ton of Citigroup in the fourth quarter, too. He took his first position in the bank with a hefty $313 million buy-in.

  JP Morgan has agreed to buy a big chunk of Sempra Energy for $1.7 billion. That makes the U.S. bank a notable player in global oil and metals plus European power and gas.

It bought the business units from Royal Bank of Scotland. The U.K. government had ordered RBS to jettison the company… one of many conditions of its large government bailout.

Question posed to us by Ian Mathias this morning, as he graciously mined the news for trends and forecasts: “Why is JP Morgan getting taxpayer-funded loans to go speculate in foreign energy? Shouldn’t the discount window be closed to it before it does this kind of thing?”

Hmmmn… good question.

  The FDIC gave flailing banks a pass over the holiday weekend. Not a single bank was taken over last Friday — a first since Christmas 2009. The tally of bank scalps so far this year sits at 16.

  2.4 million borrowers in the U.S. could lose their homes in 2010, says the latest forecast from Moody’s Economy.com. That would be a rise of 300,000 foreclosures and short sales from 2009. There are currently 4 million homeowners that are at least 90 days delinquent.

  Japan has quietly taken over China as the world’s biggest holder of U.S. debt.

Foreign holdings of U.S. Treasury securities fell by $53 billion in December, says yesterday’s TIC data release from the Fed. China did the lion’s share of the damage, reducing its holdings by $34.2 billion. Thus, by the government’s latest count, Japan now owns $768 billion in U.S. Treasuries, compared with China’s $755 billion.

“The endgame is beginning in the Chinese-American relationship of vendor financing,” opines Dan Denning. “China buys U.S. bonds to help keep U.S. rates low so Americans can buy what China makes.

“What China doesn’t buy, you can bet the Fed will have to monetize — unless the Congress and the president suddenly cut American spending. The long-term trade on this is to get the heck out of U.S. assets. Whether ‘risk assets’ like commodity currencies or commodities are the ultimate refuge is yet to be seen. But oil, gold and resource stocks are certainly getting a boost today on greenback weakness.”

  “I note that China did, in fact, sell a bunch [$34 billion] of Treasuries yesterday,” a reader writes. “I suspect that was meant to intimidate D.C., like sending Luca Brasi to stand outside your house for a few nights. We’ll see if it works.

“Obama can push the Chinese pretty damned far because, really, what can they do about it? Sell off their Treasury holdings? Refuse to export? Start a war? Really, what can they do about it?

“The Chinese have the proverbial ‘tiger by the tail,’ and the U.S. is the tiger. Their business model is based on manufacturing for foreign markets, the U.S. and the EU in particular. If they quickly sell off their Treasury holdings, they can inflict pain on us, to be sure. But that would likely truly crash the global economy. As badly as that would hurt the ‘foreign devils,’ it would devastate China, leading to potentially cataclysmic social upheaval.

“Same with a refusal to export to us. And as to a war, there’s no chance of that so long as we don’t do our pushing with the patented Bush/Cheney ‘I win by humiliating you’ approach, which, as ‘face’ would be at stake, might trigger something violent and very unpleasant.”

  “I think the Latin phrase ‘Auribus teneo lupum’ may best describe the U.S./China gesturing,” another writes. Translation: "I hold a wolf by the ears."

“This version from Terence indicates that one is in a dangerous situation where both holding on and letting go could be deadly.”

  “Here’s my prediction of events to soon unfold between the United States and China,” our last reader writes. “The Chinese want their errant province back (Taiwan). Since they have the power to destroy the U.S. dollar along with our economy, they’ll dump just enough U.S. bonds to really get our attention and to demonstrate their power. Then they’ll take Taiwan.

“We’ll make a bunch of noise, but in the end, there won’t be anything we can do about it… all because the US Congress has had their collective heads up their collective asses for a generation or more.”


The 5: The Dalai Lama is going to be in Washington to meet with the president on Thursday. As we noted to the French presse yesterday, Obama’s political posturing harkens to an era when the U.S. possessed a much larger global market share. The economics have moved on — politics will follow.

From the penultimate chapter in I.O.U.S.A.:

David Yepsen: “We finance these deficits and debt by borrowing from other countries, China for example. What implications does this have for our foreign policy if we’re in hock to other governments? Does that give American presidents flexibility to make foreign policy decisions, or do we have to worry about what our bankers think?”

Bob Bixby: “We have to worry about what our bankers think.”


Addison Wiggin

The 5 Min. Forecast

P.S. How ironic is this, given the tone of today’s 5: For the first time in history, the China Mint has certified a batch of Panda coins “First Strike” for both the Silver and Gold Pandas.

As the middle class develops, “the demand for collectible coins in China is skyrocketing,” Nick Bruyer told us in the rare coins and collectibles Web broadcast we hosted last month. Tomorrow, we’re going to get a primer on what “First Strike” indicates for the value of these coins. And why you can expect to get a worldwide exclusive first crack at them, guaranteed by the exclusive distributor of the China Mint… watch this space.

In the meantime, if you want to brush up on your knowledge of these coins, you can still watch the our Web broadcast featuring Nick Bruyer, here. It’s free.



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