Trade of the Decade Update: Short U.S. debt at your own risk!
Chris Mayer and Frank Holmes identify TWO “cheap” buying opportunities
A contrarian call for the rest of 2010: Brace for a housing rebound
Plus, will the jobless go hungry? Senate in stalemate over benefits extension
Breaking news: Our New Trade of the Decade Is Off!
Well, half of it… temporarily.
“This is what we got dead wrong,” Rob Parenteau candidly admitted on the top floor of the Fairmont Hotel Vancouver last night, where we gathered for the second annual meeting of the Richebacher Society.
“Capital flight out of the eurozone this year has been a huge benefit for the U.S. Treasury market,” Rob continued. “Though temporary, demand for low default risk has suppressed Treasury yields, and could continue to do so through the end of the year.
“Some fear a double-dip recession forming in 2011,” Mr. Parenteau told the attendees, “when taxes climb higher. There are also people talking about more quantitative easing from the Fed, too, which I find unfathomable, but you never know… those guys [the Fed] are lunatics.
“All this has bond bulls foaming at the mouth. But I would not short Treasuries until the end of the year.”
OK, it is the “Trade of the Decade.” Rob is comfortable shorting U.S. debt over a 10-year period… just maybe not right this second. Still, with the yield on a 10-year note still below 3%… it is tempting.
Rob is the same chap who nailed the sovereign debt crisis in Greece long before it reached the headlines. And urged us, correctly, to short the euro at the start of the year…
By the time you receive this 5 Min. Forecast, our annual Investment Symposium will have begun in earnest. Former U.S. comptroller general and protagonist of I.O.U.S.A. David Walker will start the show with his plan to restore American fiscal responsibility. 5 Min. favorites Frank Holmes and Chris Mayer will deliver their presentations next, followed by marquee names like Barry Ritholtz and Rick Rule… and that’s just the first day!
We’ll bring you what we can… our favorite juicy bits. But for the good stuff — actionable advice like Rob Parenteau shared above — you’ll want to check out our Symposium MP3/CD sets. They’ll have every minute of every general assembly presentation, plus all our speaker’s favorite investment themes and stock picks. Get yours here… on sale for a limited time.
Stocks got off to a tough start today. Both the Dow and S&P opened down over 1%. For blame, look to just two companies: IBM and Goldman Sachs.
IBM slid over 4% this morning after missing Wall Street expectations. With its very notable weighting in the Dow — by far the most heavily weighted component right now — it’s all but impossible for the index to rise with IBM down by so much.
And Goldman Sachs — the financial sector writ-large — reported an 86% plunge in second-quarter profit. While we can’t pity Goldman, how’s this for an “Assault on Enterprise”: The company’s quarter was completely scuttled by $550 million in fines from the SEC and a $600 million compensation claw-back tax in the U.K.
But it’s worth noting, even without the government levies, revenue was below Street expectations.
“Since tanking after those April highs, the market has created some interesting opportunities,” Chris Mayer noted in his last dispatch to Special Situations subscribers before joining us here in Vancouver. “Stocks I have highlighted in the past, but have not bought, look much more appetizing now that they are 25% cheaper or so.
“For example, China's leading coal stocks are all down 25% or more of late. This includes China Shenhua Energy, China's largest coal producer, and China Coal Energy. Other nearby operations, like miners in Mongolia, suffered similarly.
“As far as I know, China will still need coal. China consumed 47% of the world's coal last year. The growth of that demand has been mind-boggling — so much so it is hard to wrap one's mind around it. In 2000, China consumed as much coal as the U.S. Today, it consumes three times as much as the U.S.
"China will be pressed to produce the coal it needs domestically. In fact, after being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year's total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia's coal exports — and Australia is the world's largest coal exporter — and growing.
“Oddly, Australian miners are up big — Macarthur Coal up 65% over the last 12 months, for instance, as is Aussie's Centennial Coal. It might be a good time to fade the Aussies and go long the Mongolians. China will have no choice but to import large amounts of coal.”
“Emerging market stocks are cheap these days,” Frank Holmes adds. “The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8, which is 15% below the P/E for the MSCI World Index. As you can see on the chart below, this valuation has rarely been more attractive — it is 15% below the long-term average.
“On top of that, significant sales growth is expected in global emerging markets — 15% and 10%, respectively, for 2010 and 2011. The EMEA (Europe, Middle East and Africa) region is expected to lead the way — within EMEA, Turkey is seen as the star, with nearly 30% sales growth this year and 17% in 2011…
“Emerging market companies also have cleaner balance sheets and lower leverage compared to global peers. Debt-to-equity levels are low and heading lower — UBS sees a drop to 22% in 2011 from 28% this year. This balance sheet strength gives those companies strategic advantage in raising dividends and targeting their capital expenditure toward areas with the highest potential for return.”
We’ll bring you Chris and Frank’s comments from the Symposium later today. And if you want their favorite investment ideas, they’ll be featured in the MP3/CD sets.
Since stocks are falling again, the dollar is back on the rise. The dollar index is down almost three points this month, but it’s found a little support around 82.5 this morning.
Gold’s up too. After taking a pretty good hit yesterday, falling as low as $1,175 early this morning, the spot price is back above $1,190.
Back in the States, six more banks failed last weekend, bringing the annual body count to 96. The banks, mostly from the Southeast, cost the FDIC $334 million. That fund is now about $20 billion in the red.
One lone item in the data bin today: Housing starts dropped 5% in June, bringing the rate of new home construction to the lowest level since October 2009. Just like what we saw yesterday in the plunging homebuilder confidence index — the post-tax credit hangover continues. The decline was even larger than Wall Street anticipated.
Is there a pundit alive who expects a strong housing market for the rest of 2010? Hmmm… perhaps a sign that one might be coming.
“We might be in for a home refinancing surprise,” Rob Parenteau also forecast last night — a logical byproduct of suppressed Treasury yields for the rest of the year. If the 10-year bond is cheap, most mortgage rates will be too. “It might not last more than the end of the year, but some households will be given a chance to clean their balance sheet.”
A housing rebound may have already begun: While housing starts fell in June, permits for new construction rose 2.1%, triple Wall Street’s forecast.
The Senate Democrats might force through another extension of unemployment benefits today. If you’ve been following along, their Republican counterparts have suddenly found religion and are insisting that this extension — all $34 billion worth — not contribute to the national debt.
“The same people who didn’t have any problem spending hundreds of billions of dollars on tax breaks for the wealthiest Americans,” President Obama opined, “are now saying we shouldn’t offer relief to middle-class Americans.”
How is a tax “break” considered spending? Only if you believe all the money in the world belongs to the government in the first place. First principles…
“Among D.C. elites,” our friends at Casey Research report the findings of a Politico.com poll, “49% think the country is headed in the right direction, and 44% believe the economy is on the right track. When it comes to the nation as a whole, however, a mere 27% believe the country is headed in the right direction, and only 24% think the economy is on the right track.
“To qualify as a Washington elite for the poll, respondents had to live within the D.C. metro area, earn more than $75,000 per year, have at least a college degree and be involved in the political process or work on key political issues or policy decisions.”
“If you (he) believe that the Republicans will do anything different than the Democrats if elected,” a reader writes, responding to John Mauldin’s contribution to yesterday’s 5, “I have a bridge in Brooklyn that I'll sell you cheap.
“Hasn't the recent experience with Bush/Cheney, etc., taught anything? The Republicans will do what's best for their constituents, and not the country as a whole — that's just the way it works when all you care about is winning elections. Unfortunately, that is what BOTH parties specialize in. Truly independent thinkers are few and far between. P.J. O'Rourke said it best in his latest book:
“Don't Vote — It Just Encourages the Bastards.”
The 5: Fair enough… but wouldn’t a bridge to Brooklyn be worth quite a bit?
“I'd like to clarify where the missing 2,000-3,000 psi on the BP well cap went,” a reader writes, apparently well versed on the subject. “The pressure test they are doing is a crude back-of-the-envelope pressure test, especially with so much damage and unknowns with their well construction now.
“Some shut in/flow tests can take a month to see a true reservoir pressure at the wellhead because it is sort of like an option expiry curve in reverse — most of the pressure builds up in early time and it is a slower and slower increase in the later time of the test. Another good analogy is cars stopping at a red light where the cars in front come to a stop earlier than the cars in the rear. The reverse is true when the well is opened or the green light comes on: The cars (or oil) in the rear will start to move a relatively long time after.”
In short, “It’s not like turning a knob or switch.
“The underground blowout scenario is spot on. If the casing is gone or so badly damaged, then the higher (weaker) rocks will be exposed to higher deeper reservoir pressure. Lets just all be glad for now that some time has been bought for the relief wells.”
Thanks for reading,
The 5 Min. Forecast
P.S. Just like investing: You can get this asset at a lower price now before the buzz picks up. Or kick yourself later for not buying at the bottom. Details — and the discount — available here.