Behind the “Recovery”

by Addison Wiggin – December 22, 2010

  • Third-quarter GDP still a surprise… what the numbers mean for your favorite S&P stocks

  • "Margin squeeze" and other 2011 trends worth paying attention to… plus two great shorts from our stock market vigilante

  • Euro near two-month low against the dollar… but euro woes reveal unique opportunity

  • Latest terror to U.S. citizens: 'the Prius is too quiet'… but at least federal regulators are there to save you…

  • Bloomberg ballyhoos gold bubble, tax evasion via Gold Eagles and your take on the “10 Outrageous Predictions” for 2011… all among our mailbag goodies

Given what we were expecting, the third and final revision by the Commerce Department of third-quarter GDP figures in the U.S. is a pretty good number.

Alas, the Street was looking for something higher.

Despite their best efforts, the quants on L Street could only deliver an annualized growth rate of 2.6%, a scant improvement on last month’s guess of 2.5%. Traders were betting on 3%.

Looking under the hood, we see a curious optimism for holiday spending. The bulk of the increase can be traced to businesses building up their inventories to the tune of $121.4 billion. Take that away and the increase would be less than a percent, annualized.

If holiday shoppers don’t swipe their plastic over the next eight-12 days at the rate supply managers across the country are anticipating, the third quarter won't look quite so rosy.

For the record, we’re agnostic on whether consumers are opening their wallets for the holidays. The incessant media rah-rah appears to be based on either anecdotal evidence or statistics from the retail industry. Or just holiday good cheer. Or eggnog with the good stuff in it.

In any case, corporate cash flow is slowing from a stream to a trickle. From the Commerce Department report: “Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — decreased $68.4 billion.”

And that's the real trend we've been following on for the better part of the post- autumnal equinox period: “margin squeeze.” Many firms’ costs are rising, but their ability to pass on those costs to customers is not.

The trend is especially noticeable in the food industry, rocked by rising commodity costs (wheat and corn will probably end the year up 50%). We’re hearing one earnings miss after another lately — Kroger, General Mills, Chef Boyardee, ConAgra.

“Last week,” writes Strategic Short Report editor Dan Amoss, “an American icon, A&P, filed for Chapter 11 bankruptcy. It had too much debt, a unionized work force, too many unfavorable store leases and a toxic relationship with its key wholesaler.

“Investors have yet to anticipate how bad conditions will get for grocers. Not only do wholesalers and mammoth packaged food companies have more negotiating leverage over pricing, negotiating leverage will be critical.” That’s because with food, like everything else, it’s no longer ‘all about us.’

“U.S. consumers no longer dominate the demand side of the process for determining food prices,” says Dan. “People in emerging market economies are getting richer, and one of the first things they do with this newfound wealth is improve the quality of their diets.”

Further, “grocery chains have been assaulted by new, aggressive competition from Wal-Mart, Target and even drugstore and ‘dollar’ store chains.” Dan points to a recent UBS study on rising food prices. It concludes that grocers are the weak link in the chain of passing through food price increases to stretched consumers.

“That puts grocers’ gross profit margins at risk,” says Dan. He sees one of two scenarios playing out during 2011 — neither one good for grocers:

  • “In one scenario, we have renewed weakness in GDP, driven mostly by fading fiscal stimulus. If so, almost every stock will retrace much of the rally that started in March 2009”

  • “In the other scenario, we have food price inflation bubbling up in the wake of torrent after torrent of new paper money emissions from central banks.”

“There is no ‘Goldilocks’ scenario,” he concludes.

As our resident stock market vigilante, Dan has targeted two grocers as especially vulnerable during 2011. Apply his strategy and you could potentially double your money while they tank. How can you pull it off? Find the answer here.

The major stock indexes are flat after yesterday’s gains on thin pre-holiday volume.

Nothing else is moving much, either.

Gold is about where it was 24 hours ago, at $1,388, silver at $29.29. The dollar index is also going nowhere fast, at 80.7.

The euro is steady against the dollar this morning at $1.31 — near a two-month low against the dollar, and an all-time low against the Swiss franc.

“The Swiss franc has benefitted from a shift out of the euro,” says EverBank’s Chris Gaffney, “as the sovereign debt crisis in Europe continues. The Swiss currency is still a favorite ‘safe haven’ for investors, even when the risks are based on the European continent.”

"A falling currency and massive bailouts are actually helping Germany,” adds our income investing specialist Jim Nelson.

“The majority of the supposedly at-risk PIIGS — Portugal, Italy, Ireland, Greece, Spain — bonds are held by foreign governments. Germany’s banking system holds a whopping $394 billion in PIIGS debt. That’s 9.3% of its total foreign debt exposure. So without these bailouts, the German banking system would take a serious hit.

“Merkel may seem to be losing the debate on whether to let the PIIGS fail, but her country is all the better for it.”

As the euro falls, eurozone exports should rise. “Germany, being the industrial powerhouse it is, will see even better growth,” Jim says. “With more orders comes higher demand for a number of industries, like shipping, telecommunications and energy.”

With all that in mind, Jim revealed a German income opportunity delivering a 6.1% yield… with the potential for a 237% capital gain to boot. He has the full write-up in the current Lifetime Income Report.

[Ed. Note: If you’re not yet a subscriber, you can get in today and learn about another outstanding European income opportunity. Jim likes it so much he calls it “the ‘other’ government-backed retirement program.”

In a further demonstration of Congress’ commitment to pursue extraordinary means to solve nonexistent problems, we have this: A bill to make “green” cars noisier.

When a Toyota Prius runs on its electric motor, it makes very little noise. Supposedly, this poses a mortal danger to blind pedestrians. Except that the government’s own accident data shows no increase in the deaths of blind people due to pedestrian accidents in the decade that hybrids have been around.

In fact, the overall rate of pedestrian (and cyclist) deaths and injuries has fallen steadily since 1994. No matter, the Senate recently passed a bill requiring automakers to come up with some sort of noisemaking apparatus.

Just imagine where this could go: “One opportunity for automotive marketers and startups,” according to the Green Car Reports website, “is the emerging business of supplying drivetones, the automotive equivalent of cell phone ringtones. Want your green car to rev like a Ferrari or BMW? Just buy the right drivetone and crank up the exterior volume.”

Yeah, the sound of a 12-cylinder Maybach coming from a Nissan LEAF. We’re not sure which would be louder — the noise generated by the drivetone or the laughter it would induce from passersby. But at least our roads would be safer.

Ugh.

“Yesterday, Bloomberg did a segment on gold,” writes a reader who read our 2011 gold outlook. “Their slant was that gold is a massive bubble…

“Though I was amused by their picture of a skull cleverly overlaid onto a bar of gold and their 20-year-old expert rapping on how it would certainly tumble, I wonder if it was the big banks that paid the bill for the murky advertisement or the stockbrokers. When they have to resort to these kinds of advertisements, does that mean they are getting squeezed by the glittery metal?

“I wish they'd go play in their paper world and leave us metal boys alone, because I do want my $50.00 an ounce silver… I do.”

“Silver Eagles and Gold Eagles are legal tender in the U.S.,” writes another. “Why not take a salary (or some part thereof) in the face value of those coins. Or conduct a sale in the face value?

“Your taxes would only be on the face value. You could even offer your counterparties a discount on the payment. Thoughts?”

The 5: Someone beat you to the punch… and the Feds beat him to a pulp, figuratively at least. Nevada business owner Robert Kahre tried paying his employees in Eagles, thinking the same thing you are.

He’s now doing 15 years.

A jury took only a day and a half to find him guilty last year on all 57 counts he faced for charges ranging from tax evasion to failure to withhold, among other things.

[Ed. Note: You can still buy them yourself, however. Despite our "window of exclusivity" having closed yesterday, First Federal still has X in stock and a good deal on the table. If you're interested, take a look here, and keep in mind we have an advertising relationship with the company.]

“Gold at $1,800 next year doesn’t seem that ‘outrageous’ to me,” a reader writes after seeing to our item on Saxo Bank’s “10 Outrageous Predictions” for 2011.

The 5: In a typical year, three or four of Saxo’s 10 potential black swans tend to show up… and we asked yesterday which ones you thought were most plausible. Our unscientific tally finds the highest number of readers coalescing around:

#6. Crude oil tops $100 a barrel before correcting by one-third

#7. Natural gas surges 50%

#8. “Currency wars” drive gold to $1,800.

Of course, a 50% boost in nat gas would simply bring prices back to year-ago levels.

A vocal minority spoke up for No. 1 — “Congress blocks a Fed attempt at QE3 to bail out banks and local governments.”

Heh. That would be a black swan event, for sure.

“When QE2 doesn't work,” one of the vocal minority writes, “and as situations in state and local governments worsen, there will be pressure on the federal government to step in.

“We're seeing the genesis of this here in Michigan, where there is a movement afoot to have the state assume all of the debts of, for example, the Detroit Public School District. A bailout, by the state, of the school district. And who will the state turn to?”

“They say the s*** runs downhill; well, this just may be one of those examples where it flows up… up from local governments and entities to the states, and then from the states to the federal government.

“If that happens, I do think the new Congress will be in quite a pickle! The absurdity of it all certainly should be entertaining. I am glad, however, that I exited all of my VKQ and NIO positions earlier this fall; yes, I missed the top, but avoided the mess that followed.”

“Meredith Whitney expects 50-100 major muni defaults,” adds another. “And there will no doubt be screaming by those in Congress for bailouts. Screw 'em. Let them eat what they have sown.”

The 5: Under current law, the only munis the Fed can buy are those of less than six months maturity. But it’s the longer-dated stuff that’s in trouble. Ben Bernanke could assert emergency powers to buy those bonds anyway… but would Congress let him get away with it?

No matter the outcome, we don’t want to be hanging around the muni market right now, even if the yields are tax-free. Income investors looking around for better options in 2011 can find some good ones here.

Program note: On Jan. 4, 2011, we will be releasing ALL of the Agora Financial 2011 Forecasts to AF Reserve members, along with the specific actions you'll need to take to play each forecast.

If you're not a Reserve member, but would like to be, today would be a good time to inquire within. Next week, we'll be offering the Reserve at its current price, for the LAST time.

We've added two new services this year and increased the "value" of the Reserve by nearly $1,000 dollars (published price). It's still a great deal and getting better all the time. Call John Wilkinson at (866) 361-7662 to inquire what discounts already apply to your account and to lock in at the premium rate before it goes up.

If you call John today, you'll be sure to receive all our forecasts and picks for 2011 in time to kick off the new year!

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: In addition to his annual forecast, Breakthrough Technology Alert editor Patrick Cox is putting the final touches on his latest batch of special reports. It took months of feverish research, well-placed phone calls, extended plane trips… late nights and lots of coffee.

But the results could make staggering amounts of money for early investors in his best new ideas. Watch your inbox this evening to learn about five “wealth quakes” Patrick sees coming in 2011.

rspertzel

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