The Market’s Next Move

by Addison Wiggin & Ian Mathias

  • Greenspan, Geithner and Bernanke team up for recovery PR campaign, stocks soar

  • But will the rally last? Two charts say yes

  • Byron King on the benefits of the Gulf oil spill

  • Reader thoughts on the Chevy Volt and the plight of state budgets, below

  • Plus, what one oil expert thinks will be “the best investment of your life”

  What’s this… a midsummer PR campaign?

  • “We are in a pause in a recovery,” Alan Greenspan said Sunday on Meet the Press

  • “We are maintaining strong monetary policy support for the recovery,” Ben Bernanke assured an audience in Charleston, S.C., last night. Consumer spending, he says, “seems likely to pick up in coming quarters from its recent modest pace… rising demand from households and businesses should help sustain growth”

  • “We are on a path back to growth,” Treasury Secretary Geithner wrote in a N.Y. Times Op-Ed of his own yesterday, boldly titled “Welcome to the Recovery.”

Not bad coverage for a 24-hour slot. But if the “recovery” is such a sure thing… why go to all the trouble declaring it?

  Along with Mr. Geithner’s Op-Ed, this oft-repeated refrain: “The White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5% relative to what would have happened had we done nothing.”

We’d really love to get a hold of the “saved jobs” list… and the “GDP increased by stimulus” rundown, too, while they’re at it. Those numbers are fetid.

Two weeks ago, we noted the most recent estimate of the financial system bailout: Over $3.7 trillion. Mr. Geithner could have written a $264,000 check to each of the 14 million currently unemployed Americans for the same price.

  Consumer spending — the element of GDP Chairman Bernanke says will keep the recovery alive — didn’t grow in July. According to this morning’s Commerce Department, both personal income and spending were flat last month — the first time in a year the average American saw no growth in his paycheck.

  Meanwhile, the housing tax-credit hangover continues: Pending home sales fell 2.6% in June, month over month. That’s a disappointment considering the Street expected a 4% gain.

It’s especially remarkable, given current interest rates. Zillow.com says the national average rate on a 30-year fixed mortgage is down to a meager 4.3%.

Still, there is little appetite for new mortgages or refis in this market.

 

  “There never was anything resembling a real recovery,” our Bill Bonner asserts, staking out a familiar contrarian position. “You can recover from a fall. You can recover from a broken heart. You can recover from a head cold. You cannot recover from death. You can only become a zombie. The U.S. economy merely became more zombified after the crisis of '07-'09.

“Houses are underwater. People are living on food stamps and unemployment compensation. The feds control major industries. Banks are kept alive with tax money. And GDP 'growth' was pushed up by boondoggles, bamboozles and bailouts.

“But now, even the zombies are beginning to shuffle. They need more flesh… more blood…

“In this regard, Federal Reserve Governor James Bullard has let the cat out of the bag. He says the best remedy at this stage would be further doses of quantitative easing. He's right — at least within the strange context of central banker thinking. If your goal is to get the zombies moving… you need to give them some juice. And when you've already cut your rates to zero (the current rate is actually 0.25%), and you've run a deficit of $1.5 trillion, what else can you do?

“You've got to print money, right?”

  Indeed, economic cheerleading at all levels of government, surprise manufacturing data and better-than-expected earnings from European banks all gave stocks a big kick in the pants yesterday.

The S&P 500 shot up 2.2% Monday. And history favors the bulls in August:

Buckle up. Enjoy the ride.

 

  “Palladium may be giving off a clue for stock investors,” Chris Mayer writes. “John Clemmow at UBS put forward a novel idea over the weekend about the relationship between palladium and gold… and the stock market.

“The palladium market appears to be in surplus. There is a lot of palladium in stock. Mine supply is not likely to decline. If anything, it will rise. Yet the price for palladium recently jumped to $488 per ounce, the highest price since June 23. This is in sharp contrast to the gold price, which is down…

“Clemmow finds that a palladium-gold ratio tracks the stock market closely. ‘The news that palladium is rising while gold is falling is just another signal that risk is coming back to the market.’ Here is his chart:

“This a rather novel indicator,” Mayer contends, “but it’s another measure indicating the lack of fear. Right now, the palladium-gold ratio shows fear receding and risk assets rising.”

Clemmow's indicator says stocks are headed higher.

  Most commodities are registering small gains today, despite profit taking among stock investors. Gold is inching its way back towards $1,190. Oil goes for nearly $82 a barrel, a three-month high.

  If you’re looking for a free barrel of oil, there’s almost 5 million of ’em floating in the Gulf of Mexico, the government announced last night. The latest report from federal scientists puts the size of the spill somewhere around 5 million barrels… easily surpassing the previous “world’s biggest oil spill” — the 1979 Ixtoc I disaster that leaked some 3.3 million barrels.

  “Yes,” Bryon King wrote his Energy & Scarcity Investors, “you can think of the BP well blowout as the end of the road if you want to — if not the end of the world. Or you can look at how this will change the energy landscape in general, and the oil industry in particular. And then you can get out in front of it, and act and invest accordingly.

“At his presentation in Vancouver, Marcio Mello made the point — the scientific, geologic fact — that oil routinely seeps into the oceans across the world, and has done so throughout geologic history. Many — maybe most — of the world's oil discoveries have some connection with natural seeps (which is why, for example, Col. Drake drilled his famous oil well at Titusville in August 1859). And thus, due to ubiquitous oil seeps, there are oil-eating bacteria in nature that bloom in the presence of oil, and ‘eat’ the mess up.

“Marcio directed a major project at Petrobras that catalogued over 2,600 different kinds of oil-eating bacteria. Indeed, Petrobras has a huge ‘bug library’ with detailed data and specimens of oil-eating bacteria that thrive in all sorts of different petroleum environments. (Petrobras offered its expertise to the U.S. government after the BP well blowout in April, and the Obama administration turned it down.)

“The total of oil naturally leaking into the Gulf is in the range of tens of millions of barrels per year, or more than what blew out from the BP well over the past three months. Yet the Mexican seeps are not "news" — certainly not an environmental disaster — because the oil-eating bacteria somehow keep this naturally occurring Mexican oil under control.

“In Marcio's view, the oil from the BP well blowout should disappear pretty quickly, and certainly faster than most people think. Also, according to Marcio, the long-term impact of the oil will be less than most people fear.”

Whether you agree with Marcio’s science or not, there’s no disagreeing with his track record… he was one of the principal brains behind Petrobras’ incredible deep-sea discovery of the Tupi field — the largest Western oil discovery in the last 30 years. Now Marcio is involved in two other projects, both of which he claims tap into the very same geological formations that created Tupi.

Byron’s been tracking these companies relentlessly. You may recall, before the Deepwater Horizon blowout, Byron spent sever weeks training for and visiting deep-water rigs with Marcio’s assistance. You can get the gist of his analysis by watching this video presentation.

  “Here we go again!” a reader exclaims, reacting to the Chevy Volt hype. “Where do these idiots think the electricity comes from to recharge their cars? From the power companies! From where do power companies get the electricity? Coal, gas, oil, hydro and nuke power. Solar and wind are a long way off, my friends. There is really no cost savings or environmental savings in running an electric car as yet.

“Tell these idiots to put down their Playboys and pick up a Popular Mechanics or physics book once in a while and look up ‘the law of conservation of energy.’ Unless someone has discovered a perpetual motion machine, we will be using hydrocarbons for all our energy needs for a long time.”

 

  “You can buy all the electric cars you want,” another, less-irritated, reader writes. “I will keep my 2000 Dodge dully diesel. I make my own biodiesel from Chinese tallow tree seed. Ride all day with a 24,000-pound towing package. No car payment, no taxes, carbon neutral and no fueling station.”

The 5: Hey, where do you get off being so inventive and self-sufficient? A real “consumer” would have traded in that “clunker” last year for a Prius. You could have used the government tax credit as a down payment on a new, even-better Volt. What’s wrong with you?

  “I have the perfect example to go along with your ‘Son of Subprime’ article,” a reader writes, referring to a snippet from our beta issue of Apogee published in The Daily Reckoning. 

“I just got back from a water treatment plant in southwestern Minnesota, where I sold and commissioned an arsenic removal system. The original plant was a shack with a hand timer for the local business owner/part-time operator to turn the well pump on to pump water up to the tower. The tower and shack were put in around 1920. Worked perfectly OK except for the arsenic, which was above the limit of 10 parts per billion (PPB) set by the Environmental Protection Agency. The old level was 50 ppb. This town had been drinking that water for decades. 

“Now they have a new water treatment plant courtesy of grant money that cost over $400,000. Complete with a water heater just for the eye wash and shower in case a little chlorine gets on you. The heater runs 24/7. They have a microprocessor to run the plant now and a new building with all the upgrades possible, plus an extra well. 

“Who is going to pay for the upkeep on this plant with only 120 people living in the town? How many stimulus projects are going to utterly disintegrate without operating and maintenance money?

“Nobody ever thinks past the joy of easy money.”

The 5: That’s a good one. We’ve detailed the plight of states, muni bonds and pension funds in wake of the housing bust in the latest issue of Apogee. It’s not pretty. But if you’ve got the stomach for it, here’s how to access the advisory for free.

Best,

Addison Wiggin

The 5 Min. Forecast

P.S. “Visiting Rio could be the best investment of your life," Marcio Mello told us two weeks ago at our Investment Symposium. He joked about the beautiful beaches and bikini-clad ladies, but he wasn't kidding… Marcio is absolutely convinced his Brazilian-based team has found the next great oil frontier. "I don’t care what happens tomorrow, because I can not predict it. I can use data, though, I can use history and I can use my good sense." That data, as we mentioned above, led him to the Tupi field. Now he says he’s done it again. Find out where — and how you can invest in it — right here.

 

rspertzel

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