by Addison Wiggin & Ian Mathias
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Investor theme of the day: Manufacturing… which worldly nations have the edge
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China and India grow hungry… Chris Mayer on feeding the booming Far East
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One trend that could choke up the “new normal”… a study in demographics, below
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Plus, readers pile in… your thoughts on Social Security and our campaign to discredit GM (?)
Ahh, July was fun, wasn’t it? It was the best month for U.S. listed stocks in a year. 75% of S&P 500 companies beat estimates in the second quarter… leaving little room for upside surprises for those remaining.
Alas now, with that sudden rally and last week’s long awaited GDP behind us, August begins… and doubts return.
Later this week, the government will release its monthly jobs report — the first of the second half of 2010 — and the general consensus is that even their seasonal fudging, birth/death adjustments and wide margins of error won’t be able to produce any new jobs in the United States.
Today, we look at another cause for concern: Manufacturing.
Though U.S. manufacturing slowed for the third month in a row in July, today’s ISM manufacturing report actually exceeded expectations.
Many reputable sources believed the index would fall from 56 to 49, a state of contraction. Not so. At 55.5, the index of domestic manufacturing activity barely slipped. With that, and some positive results from European banks earlier this morning, U.S. stocks began August with a boom. The S&P 500 opened up over 1.5%.
Australia and India turned in some better-than-expected manufacturing data, too. The Aussie manufacturing sector enjoyed its seventh-straight month of expansion. Their index rose 1.5 points to 54.4, according to today’s release.
And India’s Purchasing Manager’s Index topped them all, rising a few tenths of a point, to 57.6.
Strangely, the world completely shrugged off China’s lousy manufacturing report early this morning. Their purchasing managers index (very much like our ISM) sank from 52 to 51 in June. That’s a 17-month low for them… worse yet, the great growth power of the world is just a hair from entering a state of contraction.
Another thorn in the side of the Great Chinese Boom: 82% of Beijing land auctions this year have been won by state-owned companies. Perhaps their government can spend its way into prosperity, but such a strategy didn’t work so well here… or in Greece… or Japan… or Britain… or ancient Rome.
“We won't bore you,” our man in Australia Dan Denning wrote today, “by reciting our theory again about how a bursting Chinese property bubble could do serious damage to Aussie resource investors. But it IS our story, and we're sticking to it. And the relatively encouraging Aussie manufacturing data released today (which also show expansion) don't change our mind.”
Whether manufacturing in India and China is growing or not, they will still need to eat, Chris Mayer asserts in his latest Capital & Crisis alert. Here’s his take-away from the latest PotashCorp earnings report.
“As we talked about before, China is now a net importer of corn for the first time ever. The chart is stunning:
“As you can see, China used to export millions of tons of corn every year. No longer. That's a potential big catalyst for corn producers. Also, the chart to the right of that shows you China's climbing imports of soybeans. This, too, is a commodity that China used to export. Needless to say, China is a big market with a lot of mouths to feed. So if China is now regularly coming to, say, the corn market as a buyer, where it once was a seller, that's a tectonic shift.
“Another chart was about India, another big market. It shows you how prices for food have risen sharply and how Indian crop yields — in this case for rice — trail those of the rest of the world.
“One way to make up that difference is to apply more fertilizer. Fertilizer use in India is below recommended levels, so it will be another big market. China may be the largest market for fertilizers and is further along than India. But as India catches up, that's a lot of potential potash.”
So… is PotashCorp still a buy? How else can you capitalize on this trend? Find those answers and more by subscribing to Capital & Crisis. It’s one of our staple publications, and a helluva deal.
Speaking of corn… while Chris and your 5 Min. editors are busy looking at the distant realities of global food trends, our resource trader Alan Knuckman is making his readers some fast money. They filled their corn trade today for 79% profits after holding the position for barely a week. That’s a $1,000 profit per contract… good work, if you can get it. For Alan’s next trade, and the secrets to his success, look here.
Commodities are rising alongside stocks today. Indeed, if the market wishes to forestall our “deflation now, inflation later” forecast, commodities ought to rise. Oil is the most notable beneficiary of the equity jump… it’s up over $2, to $81, a barrel. Gold is up $15 since the U.S. market opened this morning. An ounce goes for almost $1,190 as we write.
Another five failed banks over the weekend. The FDIC shuttered doors in Oregon, Washington, Florida and Georgia late Friday, bringing the 2010 body count to 108. Ho-hum.
“Capitalism itself may be in part dependent on a growing population,” Bill Gross writes this week, picking up on a theme that should be no stranger to readers of The 5 or those that read Addison and Bill’s first book, Financial Reckoning Day, back in 2003… demographics can often upset even the most well-laid plans.
“Our modern era of capitalism over the past several centuries has never known a period of time in which population declined or grew less than 1% a year,” Gross continues. “Currently, the globe is adding over 77 million people a year at a pace of 1.15% annually, but slowing…
“Capitalism, I would assert, thrives on more, more and more, but not so well when there is less or an expectation of less. This is not the Malthusian thesis, which maintained that at some point the world would run out of food to satisfy a growing population; it is an assertion that capitalism depends upon final demand and that if there ever comes a time when population growth slows, then the world’s most efficient economic system will be tested…
“The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the head winds of a structural demographic downwave, as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do. Prior deleveraging periods such as what the U.S. and European economies experienced in the 1930s exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth.
“Things did not go well then.”
No. They didn’t. And we suspect they won’t this time, either.
Last today, another hip New York City restaurant is boasting it will accept euros… except this time, it’s a joke.
“That’s right, your euro is not trash here,” read the press release from Reunion Surf Bar, a 44th Street joint that just opened this weekend. (An upscale tiki bar in Hell’s Kitchen? NYC has come a long way.) You can pay for your “hollowed-out baguette packed with Chinese meatballs, French fries, caramelized onions and Gruyere,” with euros, though we get the impression they’re not taking it very seriously. The restaurant is named after an island in the Indian Ocean, where euros are the mainstay money.
Geesh, even Zagat can see what’s coming: “If the euro dips below the dollar,” they wrote in their initial review, “don’t expect this boozy currency exchange to last.”
“I loved your readers ‘fix’ for Social Security,” a reader writes, referring to a means test for SS.
“Just cut out everyone that has been careful with their money and worked hard to save and earn and give it to those that haven't bothered to work or produce. Hmmm… that sounds fair. Just another example of greed on the part of the lazy or stupid. I have worked many hours, often 70-80-plus per week, to have what money I do. Means testing would effectively steal most, if not all, of my benefits to give to someone else. If we are going to give money to anyone, let's make the cutoff based on number of hours worked in your life, not on how much you ultimately failed to accumulate.
“Let's call these decisions for what they are, theft. It is wrong to steal other people's money, but somehow that metric gets lost on politicians and greedy people. Somehow, it's OK to steal someone's money to give to others when we call it a ‘tax.’ In my mind, taxes are needed, but I should receive a service in return: defense, roads, police and fire protection, etc.
“While I worked hard to get good grades and an education, many of my friends were out getting drunk and partying. Now the joke is on me. Because these people outnumber me in the polls, I am forced to give up ever-increasing amounts of income to pay for their laziness and poor planning. Again, theft is the correct term, although not politically correct. But hey, what has political correctness gotten me anyway?
“By the way, I came from a family in which no one else bothered to finish college, much less a graduate degree. My father never made more than $12,000 per year and left me nothing. So you can't claim a legacy of money and privilege as a source of my income.
“The politicians that promote these programs, and the voters that support them, are immoral and thieves. It's no more complicated than that, no matter how you dress up the language.”
“As is so often the case with the hype that comes out of Agora,” a jilted reader writes, “the comments about the Chevy Volt were misguided and misleading, according to my engineer who is trying to buy one. This was no doubt done in your attempt to discredit GM and I am not defending Obama or his socialism and nationalization of GM. Here is what my engineer's research has concluded:
1. The price difference between the two is because the Volt is a much nicer, more optioned and slightly bigger car. It also has a ‘range extender,’ which is a four-cylinder gasoline generator. This means that if you run out of battery power (it will go for 40 miles on battery power alone), you can run on the gas engine for up to 300 miles before you need to get more gas (just like a regular car). Thus, the volt is a ‘plug-in’ hybrid. The LEAF is purely electric (no engine) and will go for 100 miles on electricity before it needs to be recharged. If you have a 440v charger, this takes about an hour. On 220v, it takes about four hours, and on 110v, it takes about 10 hours.
2. As far as the extra $5,000 rebate from California goes, it is only for zero-emissions vehicles. Same with the HOV lanes. Since the volt has a gasoline-powered range extender, it is no longer a ZEV after the range extender kicks in. So it does not qualify for either the $5,000 rebate or the HOV lane.
So [The 5] is really comparing apples to oranges. I think both cars are very good and both companies are redefining the automotive world as we know it. These cars are like the first PCs. Pretty soon, we all will be driving electric. However with today's battery-charging technology, if you can only own one car, it has to be the Volt, unless you never drive more than 50 miles from home.
The 5: What an odd reaction. We think the Volt is a good idea. Once the price comes down and the quirks are ironed out, it’s probably a buy. But you seem to take our comments about its failure to pass eco-muster in California personally. Why would we want to… or how could we even… discredit GM? They’re doing a fine job of it on their own.
Cheers,
Ian Mathias
The 5 Min. Forecast
P.S. If geologist Byron King has it right, there is one great oil frontier remaining in our world that our technology can access right now. And — if his forecast comes true — one Canadian company owns the rights to 90% of it. Where’s the oil? What’s the company? Can you invest in them? Byron lays out the whole case, right here.