Suddenly, Everyone’s a Contrarian

by Addison Wiggin & Ian Mathias

  • Suddenly, everyone’s a contrarian… Numbers disappoint, markets react

  • Manufacturing slowing down in both U.S., China

  • Rob Parenteau on why China’s currency moves are meaningless

  • Housing’s turn for the worse… Congress spits in the wind in response

  • U.S. Mint once again stiffs collectors… Where the demand will go next, and how you can get there first

 

  To make money investing, you have to be ahead of the crowd… or at least looking for the story no one is telling.

That’s a tough task this morning. Suddenly, discussing the unthinkable — a double-dip recession and a retest of the March 2009 lows — is in vogue. Even readers are bored with the end of the world as we have known it…

  With good reason, we suppose. Stocks registered their worst quarter since everything hit the fan in Q4 2008. After hesitant trading most of yesterday, the major indexes went over a small cliff in the final half-hour as soon as the S&P hit 1,040… closing the day down 1%.

As we suggested yesterday, technical analysts believe this 1,040 figure is an important line in the sand.

  “If the S&P falls below 1,040,” writes Dan Amoss, “then we’re likely to revisit the lows below 700. Who knows if this widely cited ‘if, then’ conditional probability is valid? We may find out soon enough. When universally accepted technical support levels are breached, we tend to see heavy bouts of ‘self-fulfilling prophecy’-based selling.

“Regardless of how the technical conditions play out, there’s still a big difference between current stock prices and the prices that most value investors are willing to pay to assume the risks of owning stocks. The word ‘risk’ is key. In periods of heightened economic and political risk, investors demand higher risk premiums to hold stocks.

“A simpler way of stating ‘higher risk premiums’ is ‘lower stock prices.’”

Ah, those pesky fundamentals.

 

  The growth of manufacturing in the United States is slowing — markedly. The ISM manufacturing index registered 56.2 for June. On the surface, that’s good, since anything above 50 indicates growth. But it’s yet another one of these “unexpected” numbers that keep turning up these days — well below even the gloomiest guesses of 57.6.

Recall last month our friend Barry Ritholtz found a strong correlation between the ISM and jobs — which isn’t good. ISM topped out in April at 60.4, thus it “seems to be flashing late stage before employment has had any opportunity to climb out of its ditch,” he said.

Sure enough, the jobs numbers we’re seeing this morning are still in the ditch — and on their roofs, wheels spinning.

(Barry will be joining us again this year for the Agora Financial Investment Symposium in Vancouver. As we mentioned yesterday, we have fewer than 10 “overflow” spots available, so if you can clear your schedule for the week of the 19th, you’re still welcome — call Barb Perriello at (800) 926-6575. If you can’t make it, read on…)

 First-time jobless claims rose by 13,000 last week. Once again, the “expert consensus” was expecting something rather rosier. The news comes a day after ADP crunched its payroll data and concluded the private sector added a mere 13,000 jobs last month (another number that confounded expert projections).

Tomorrow, the Labor Department weighs in with its June employment report. “The Jobs Jamboree” our friend Chuck Butler likes to call it. The headline number is guaranteed to be ugly because the Census Bureau is starting to cut loose all those temporary workers hired in the spring. We’ll dig deep tomorrow…

  With jobs and the manufacturing looking pekid, all the major U.S. stock indexes were down 1% in the first 45 minutes of trading. The Dow has breached 9,700. The S&P is now down 15% from its April 23 high. That means there’s a 4-in-5 chance it’ll reach the 20% bear-market threshold.

The following items aren’t helping matters…

  Manufacturing in China is also showing a slowdown. Indicators from both the Chinese government and HSBC fell last month, and HSBC’s figure is getting dangerously close to the expansion-contraction threshold, at 50.4.

Somehow, we have a feeling Beijing is in even less of a rush to revalue the yuan now than it was before.

 

  “You will notice,” wrote the Richebacher Society’s Rob Parenteau recently, “we have had nothing to say about the spellbinding, earth-shattering Chinese currency announcement… because it is a nonevent in our mind.

“All you had to do was read the statement issued by Chinese officials to realize they were just blowing smoke ahead of the G-20 summit in Toronto. But nobody reads anymore, and few investors know how to think for themselves anymore, present company excepted.

“Having pegged to the dollar, which means the RMB has already revalued as much against the euro in recent months as the dollar, the last freaking thing the Chinese officials want to do is revalue the RMB even higher in the face of a sputtering trade surplus — in an economy that has been running an export-led rapid development strategy, no less… with a labor force demanding wages hikes or committing suicide because conditions are a little bit too rough to handle on the 24/7 assembly line.

“How can all of this not be obvious? Because very few people know how to think for themselves anymore, and thinking independently about macrofinancial dynamics is nearly an extinct capability.”

If you do think for yourself, you are cordially invited to the Richebacher Society’s annual gathering, held the night before the formal kickoff of the Agora Financial Investment Symposium in Vancouver. We had 80 people last year listening to Rob and yours truly hold forth. This year, we’ll be joined by Richard Lee, the Society’s new currency analyst, who collaborated with Rob on 5 Ways to Play the Euro Implosion. To get your own copy of this report, go here.

  As we’ve been forecasting, the expiration of the homebuyer tax credit sent pending home sales into a swan dive in May that blew away what the experts expected. The National Association of Realtors (NAR) index of existing homes under contract fell 30%, double the consensus.

This comes on top of some other unhealthy markers we got this week on the housing front…

  • Foreclosures accounted for 31% of all home sales during the first quarter. Prices on those homes were 27% lower than homes that were not distressed sales. “The discount will probably stay between 25-30% percent as lenders carefully manage the number of new foreclosure actions in order to avoid flooding the market,” according to RealtyTrac, which crunched these numbers

  • The taxpayer rescue of Fannie Mae and Freddie Mac — already costing $145 billion — could reach $400 billion, according to the Congressional Budget Office. And that’s if housing prices hold steady. If they fall, that could rise to $1 trillion.

In another desperate effort to prop up the housing market, Congress agreed this week to give homebuyers under contract another two months to get to closing and still claim the homebuyer tax credit.

Without that extension, it would have expired yesterday.

  Well, it appears European banks will roll over 442 billion euros in 12-month loans from the European Central Bank (ECB) with relatively little trouble.

The ECB is lending about a quarter of that figure — 111 billion euros — to tide some of the banks over for another week. But they’re not the biggest banks, so traders appear unconcerned and are holding the euro steady this morning at $1.24.

  Gold isn’t getting any love this morning, even with the risk trade on. An ounce of the Midas metal fetches $1,230 as we write. That leaves Treasuries the sole safe haven in the short term, the yield on a 10-year Treasury note down to 2.9%.

Russia grew its gold stash by 22.5 tons in May, according to the International Monetary Fund. That’s four consecutive months in which Russia has added to its gold holdings, which now total 703.1 tons — the ninth-largest in the world.

  The U.S. Mint has just put out a schedule of release dates for many of its precious metals products going out to the end of this year. Noticeably absent from the list are any proof or uncirculated Gold or Silver Eagles.

No guarantees, but with half of 2010 over, it looks as if this will be the second year in a row the Mint will skip issuing these collector grades; only the bullion-grade coins will be issued, so intense is the demand. That will drive collectors toward the highest-quality bullion Eagles that have been evaluated by independent coin-grading services.

Our friends at First Federal have lined up a chance for you to snag two MS70-grade Silver Eagles — the highest grade available. One of them is dated 2009, the other 2010. Demand will undoubtedly go through the roof in light of this latest news from the Mint… but we’ve convinced Nick Bruyer and crew to make them available to you at the same price they were offered before the Mint’s announcement. Here’s where to get yours, just in time for the Independence Day weekend.

  “The reader who asked the question regarding why Al Gore would live near the coast if he believed that the seas would be rising from global warming I don’t believe was implying that you had published OR discussed what Al Gore believes OR global warming. Although I confess I kind of skimmed over the article, I believe your article was about the potential flooding of Greenland and other possible areas in jeopardy of flooding. I did notice the picture of the flooding of Manhattan.

“Surely, this scenario has implications for the result of global warming. Unless I missed your conclusion, what other catastrophic event could cause this type of flooding if global warming weren’t the cause? The reader merely was curious that someone who believes so fervently that global warming is the threat that he espouses would live in an area that would be subject to the very disaster he warns would occur because of global warming. Maybe it wouldn’t occur in our lifetimes, but it seems hypocritical to me and others that someone would espouse a cause and then do just the opposite from what he wants everyone else to get on the bandwagon for (preventing global warming).

“Funny how that last statement seems to mirror the way governments sometimes operate. Anyway, that was the reader’s intent, I believe.”

The 5: Umn, thanks for reading? I do believe there are many parallels between the rising sea level “issue” and our omnipresent discussion of the rising national debt.

  “It’s Canada Day tomorrow,” a reader wrote in yesterday, “so I’m reading my 5 a little later than usual — i.e., cut out early for a few Mooseheads. I’m Canadian, so Canada is my favorite nation. I wish the whole world’s citizens could say the same of where they live (a little healthy competition never hurt). My dad once referred to my view of all things, ‘as one picked to annoy those he was talking with,’ so please take what I say with a grain of salt.

“I’m bored of talking about collapse and the end of the world or fiat or democracy. Forgive my short attention span, but I pumped that view to my colleagues from the early 2000s until today. I realized today everyone’s on topic. Maybe I’m early. Maybe I’m just taking the other side of the bet for the sake of taking the other side of the bet, but from this day forward, I’m talking recovery and not depression.

“Don’t get me wrong: No problems have solved. But I believe some seeds have been sowed. I think the transition is in the future. I tend to be early. I may be five years early. I may be 10 years early. But as Yogi Berra once said, it’s difficult to make predictions, especially about the future.

“But talking about meltdown in 2003 was no different than talking about recovery and renewal today. To sum up my pointlessly long and Moosehead-inspired rant: I’m flipping the coin, I’m bored with the end of the world. I’m not selling my gold, but…”

The 5: You’re experiencing what Down Under Dan Denning refers to as “bear fatigue.” Unfortunately, as we’ve seen today, there’s much to be depressed about. Have another one on for us.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. We’ve heard from a number of readers who’ve said they can’t make it to Vancouver this year… but would still like some way to act on the recommendations without waiting weeks for the CDs of the sessions to be produced. We’re pleased to say we’re very close to a solution… watch this space next week.

P.P.S. More tree troubles at the Wiggin compound. When we moved into our current house, we became stewards of the largest-known specimen of black gum tree in the state of Maryland. The deck off the back of the house was built around the tree and it was so large it shaded the entire three-story structure.

 

This year, unfortunately, the tree died. Only one branch came out with new leaves. We had to cut the thing down… no small task for a tree hovering over the house sporting a trunk that measures 45 inches some five feet off the ground.

 

Doing the math, we figure the tree was somewhere between 250-280 years old. Older than the Republic itself. Go figure it would up and die on us. Let’s hope there’s no fitting metaphor lying in wait…

 

Today, we begin splitting the rounds. We’re going to have firewood for years…

rspertzel

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