An Easy Call for 2011

by Addison Wiggin – November 19, 2010

• Amid rising stock prices and rosy earnings, a ghostly voice is heard: “Margin squeeze”

• They want gold: India, China demand rising… despite rising prices

• The deluge: Investors bail from muni bond funds at record pace

• Housing milestone: Prime mortgage borrowers at record foreclosure rate

• “Stop being sheeple”… “Never fly again”…Readers flood The 5’s inbox on airport security

Here are two words you’re going to hear a lot of in 2011: “Margin squeeze.”

Simply put, it’s when a company’s costs are rising… but its capacity to pass along those costs to customers is not. You haven’t heard much about profit margins getting squeezed this year… not with the S&P 500 up 5.5% year to date and corporate earnings reports generally rosy.

But storm clouds are on the horizon. All year, we’ve chronicled rising prices for key commodities — whether they’re oil, foodstuffs or industrial metals. And those rising prices are barely putting a dent in growing demand for those commodities on the other side of the world.

“Demand for agricultural products from China and other emerging markets should remain on a very strong uptrend,” according to Strategic Short Report editor Dan Amoss, “and the insane global monetary system will only pressure prices further.”

“This is bad news for U.S.-based buyers of commodities, especially food,” says Dan. “U.S. businesses that regularly need to buy agricultural commodities, process them and resell them to U.S. consumers have lots of new international competition in the bidding process.

“So they’ll have to raise prices of food to avoid a margin squeeze. But with so many U.S. consumers tightening budgets, this will be very difficult.”

As these companies are discovering…

• Dean Foods: The nation’s biggest milk producer turned in a cruddy earnings report last week, thanks to higher costs and weaker demand. Dairy cows consume 100 pounds of feed per day… and corn prices are up 37% this year. It doesn’t help that the company is larded down with $4 billion in debt

• Campbell Soup: Soup takes meat and vegetables, and they’re both going up in price. And soup looks expensive to a cash-strapped consumer next to other “ready” meals like mac and cheese. Campbell’s just slashed its fiscal 2011 forecast. And speaking of mac and cheese…

• Kraft Foods: Kraft stopped raising its dividend after swallowing Cadbury, the British candy maker. It might have been able to resume those increases by now… but here comes the margin squeeze with all those rising commodity prices, including wheat and milk. (It was enough to convince Lifetime Income Report editor Jim Nelson to part with Kraft a couple weeks ago, despite a solid performance.)

“It’s only a matter of months before the recently soaring prices of corn, soybeans, wheat, sugar and proteins flow through to the end consumer,” Dan Amoss continues.

“The big packaged food and cereal companies have announced that they’ll soon be pushing through a substantial portion of the recent rise in grain prices to grocery stores.”

Dan’s just finished winnowing down an extensive list of stocks that are bound to get hurt by the rising price of farm commodities. Later this afternoon, he’ll alert his readers to one with “ridiculously high valuation.”

It’s due for a big fall… and you can apply Dan’s strategies to bag a potential 50% gain. If you want to learn more about those strategies and be on board for his new recommendation, here’s where to go.

The major U.S. stock indexes are going nowhere today, putting them on pace for their second weekly loss in a row.

Traders kept their cool with the news that China is raising its banks’ reserve requirements for the fifth time this year. It’s another feeble attempt to contain some of the hot money sloshing around the Middle Kingdom that’s fueling inflation.

For now, raising interest rates — which would make a real difference — remains off the table.

Gold was up overnight as high as $1,362, fell this morning to $1,343 and sits as we write at $1,351.

We’re getting used to this kind of volatility, and more is on the way with options expiration coming next Tuesday. It’s the longer-term trend we have an eye on… as does Vancouver favorite Frank Holmes of U.S. Global Investors.

“Gold demand jumped 12% on a year-over-year basis, to 921.8 tons during the quarter,” says Frank as he peruses the latest quarterly report of the World Gold Council. Break it down, and we see jewelry demand is up 8% while investment demand is up 19%.

“It appears consumers and investors, especially in India, China, Russia and Turkey, are growing accustomed to higher gold prices. At the end of the third quarter, gold demand in India had already exceeded that of 2009 and demand levels in China were ahead of last year’s pace.”

Demand for gold bars in China jumped 45%. “Net retail investment in China reached 45 tons,” says Frank, “breaking the previous record of 40 tons set in the first quarter of 2010.” Yeah, we’d say ordinary Chinese are plenty scared of inflation at this point.

Investors bailed out of municipal bond funds at a record pace over the last week. Withdrawals have totaled $3.1 billion, according to the fund-tracking firm Lipper.

Buyers started tentatively coming back into the muni market yesterday. California, in the midst of selling $10 billion of debt, chose to raise the rate on some short-term issues from 1.5% to 1.75%.

Still, prices remain well below where they’ve been most of this year… and the “dual deadlines” we discussed on Wednesday still loom: Federal funding for Build America Bonds runs out Dec. 30… and additional federal aid to the states expires June 30, 2011.

Rocky times remain ahead for the muni market… Income investors looking for alternatives can look here.

The foreclosure rate on prime U.S. mortgages hit a record during the third quarter, according to the Mortgage Bankers Association. Of all the fixed-rate prime mortgages out there, 2.45% are in foreclosure now.

“It’s not going to turn around until we get more significant job growth,” says Michael Fratantoni, the MBA’s vice president of research and economics.

For people who do have jobs and whose homes aren’t underwater, it just got more expensive to refinance. Freddie Mac says the rate on a 30-year fixed-rate mortgage is now 4.39% — up from last week’s record-low 4.17%.

Mortgage rates tend to track the 10-year Treasury note, and yields on those have gone up big-time in the last week — something Ben Bernanke wasn’t expecting when he launched QE2 on Nov. 3, but there you have it.

Reserve members, take note: Nicaragua comes in at No. 1 in a new ranking of “The World’s Top Retirement Havens for 2011” by U.S. News & World Report.

Nicaragua is tops among countries labeled “super affordable,” while Panama comes in first among the “moderately priced” and Mexico is top-ranked in the “luxury on a budget” category.

Nicaraguan property values, “especially for beachfront property along the Pacific, reached bubble status last decade,” the article explains. “Today, prices are more realistic and more negotiable.

“In the meantime, the cost of living has remained seriously low. And last year, Nicaragua inaugurated a new-and-improved foreign retiree residency program.”

The December “Chill Weekend” at Rancho Santana is already booked… but another is in the works for next February, and still another after that in June. We’ll keep you posted.

“The "opt-out" protesters deserve support, and I wish them the best,” writes one of the many readers who nearly crashed our inbox after our brief mention of the scope-n-grope airport security measures. “It is Homeland Security and the TSA who have caved to the terrorists.”

“The TSA's efforts have never found a terrorist and never will. Their search for weapons rather than for the people who would do harm is just eyewash. Israel's El Al Airline has never had a terrorist incident. They look for people, not weapons.

“Our protesters may force government to back off a bit, but it will just be another application from the socialist takeover rulebook: ‘Take 2 steps forward toward total control; when the protests become too loud, take one step back. When things quiet down, take two more steps forward.’ And so it goes.”

The 5: We didn’t formally tote it up, but the mail ran about 15- or 20-to-1 in favor of the call for National Opt-Out Day next Wednesday, the day before Thanksgiving. More of your letters…

“I was selected to be the subject of a pat-down in Denver last week. I thought, How bad can it be? Well, I'm not going to fly again until the measures are ‘un-deployed.’ No way am I going to let a stranger grope me.

“TSA hasn't told us why they do this. It wouldn't have stopped the Christmas Day bomber. So it's not a case of fighting last year's war.”

“I will never fly again. It is absurd that some pissant GS-5 rent a cop can order me around. After the last couple of flights, I am surprised that I am not on the No Fly List. What right do they have to intimidate people into not expressing their displeasure?

“The last time, I am standing there, no shoes, no belt, my pants are falling down, and this idiot wants me to take off several thousand dollars of jewelry and turn my back on it. I got patted down.

“There has got to be a limit to this insanity. Remember when bin Laden after Sept. 11 allegedly said that he would strike fear in the heart of every American? He has succeeded, and the U.S. government is making sure that it sticks.

“I'd rather drive 1,500 miles each way, sleeping in highway rest areas crammed up into my itty-bitty car's front seat, than be fly subjected to a TSA grope-a-thon and carcinogenic levels of irradiation.

“In fact, I just did, and despite the pain still in my back after three days back home, I have no regrets for my decision and would do it again.”

“I suggest,” writes a charter Reserve member, “a far better tactic is to just avoid security checks whenever possible. In other words, don't support the bastards. Do you feel any safer now than you did prior to all that added airport security? Do you understand that the objective is control, not safety?”

“I travel between central Texas and southern California several times a year: a 1,350-mile one-way journey. I drive it in an average 18 hours nonstop (not a misprint). Yes, I'm tired at the end, but no more so than after flying.

“On the occasions that I go out of the country, I refuse to answer the customs officer when he asks the purpose of my trip. It's none of their business. They don't like my attitude, but there's nothing they can do about it.

“Just stop being sheeple and start standing up for your constitutional freedoms. The less you kowtow, the stronger we the people become. Isn't it time the jackboots understand they work for us, not vice versa?”

“Would you care to be blown out of the sky,” writes a reader in the minority, “OR be patted down or do the body scan???”

“Those objecting to the new scanners and pat-downs are just plain silly,” agrees another. “The inconvenience, relative to previous methods, is negligible. If this scares away just one passenger with a bomb in his (or her) briefs, it will have been worthwhile.

“Yes, the rules, unfortunately, give a prospective passenger the right to opt out, and this could cause delays. I propose that the TSA interpret that rule as follows: Any passenger opting out of the scanner will be sent to the end of a separate line reserved for pat-down of opt-outers. If that line gets too long, these folks will miss their flight, but the rest of us more sensible folks will not be delayed.”

“As a senior,” writes a reader with a different perspective, “who has been obligated to be frisked for over six years because I have had lots of surgery and therefore lots of metal in my body, I think it is only fair now that everyone has to suffer this embarrassment for safety.”

“I am not afraid of terrorists,” writes our final contributor, “at least not those who purportedly threaten our airplanes. Those who busily contrive more and more ways to convince us that we are subjects, rather than citizens, are another story. In any case, I am opting out by leaving.

“My wife and I are busily finalizing our preparations to move outside the U.S., and the frequency of our return visits may be in question. We have lots of family and friends here, but we REALLY abhor the attitude of our officials. Just remember, the only rights you really have are those that you can enforce. We still have the right to leave, so we are taking advantage of it while we can.”

The 5: Now you’ve done it — you’ve revived the “love it or leave it” debate that was the last time readers nearly crashed our inbox.

Thanks to everyone who wrote in.

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

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