Spotting a New Bubble

Dave Gonigam – May 20, 2011

  • Stocks slide… as a new indicator of a market top roars up a chart
  • Gold pushes above $1,500 as a new No. 1 emerges among the world's buyers
  • Three reasons the dollar is surging today… and the one thing they have in common
  • Dead-tree media try to be relevant… by putting all the dead trees on a server

   Stocks are sliding as the second cup of coffee kicks in late on a Friday morning. The Dow is down nearly 100 points, the S&P 500 down nearly 10.

So far, the cliche "Sell in May and go away" is holding up nicely. The S&P peaked two days after Ben Bernanke strode before the cameras to announce "QE2" would end on schedule.

Ever since, it's been a story of lower highs…

   The downward trend coincides with a surge in stock buybacks among the S&P 500… at the same moment corporate bond issuance is off the charts. Clearly, companies are taking advantage of The Bernank's cheap money to reduce their share counts.

This is a bullish sign, according to WJB Capital Group, in a report pimped by columnists and bloggers who ought to know better. "With shares set to shrink 5% or more a year," the report tells us breathlessly, "earnings per share estimates three years out may be 15% too low!"

Our editors beg to differ: "Record buybacks are a sign of a top," says Capital & Crisis editor Chris Mayer. "Like investors, companies often buy their stock after it has already gone up a bunch."

In the third quarter of 2007, S&P 500 companies spent a record $172 billion buying back stock. The index reached its all-time high only a couple of weeks after that quarter ended.

Indeed, companies spent $589 billion on their own stock that year… when earnings totaled $587 billion.

   "What a simplistic analysis," adds Strategic Short Report's Dan Amoss. "News flash to WJB: the bottom-up earnings estimates for the S&P 500 already include projections for diluted shares outstanding.

"Sell-side analysts tend to extrapolate recent trends in share count shrinkage, if any, into their forward earnings-per-share estimates. Plus, much of the buyback dollar amounts wind up offsetting growth from stock option grants.

"History actually shows that stock buybacks usually surge near the end of bull markets, after valuations become high. The same goes for acquisitions, too. Near the March 2009 lows, when many stocks and entire companies could be acquired for cheap valuations, activity dried up. Corporate executives get scared when things get cheap, as most individual investors do. They also get overconfident when assets get expensive, as they are now, and wind up destroying untold millions of shareholder value near the peak of the market cycle.

"It's even worse if we're talking about debt-financed dividends or buybacks. Exhibit A: Dean Foods' (DF) debt-financed dividend in 2007 had nearly killed the stock by 2009," Dan concludes.

The buyback frenzy is a compelling reason to be cautious in the current environment. It's times like these that are tailor-made for Dan's recommendations. The newest one came out first thing this morning. For access — and for a glimpse into his research methods — check this out.

   There are no market-moving economic numbers out today… which affords us the chance to revisit one of our favorite real-world indicators.

Rail volumes are one of those things that can't be substituted, geometrically weighted or hedonically adjusted. Behold…

After a 2008-2009 swoon, volumes have consistently kept pace above year-ago levels. That trend is in danger of reversing… maybe before the month is over.

Next week, we'll get the April numbers on trucking volumes from the American Trucking Association. The March figures were up… but not enough to make up for February's losses.

   Gold is surging as the week draws to a close — shooting past $1,500 and up to $1,511 as of this writing. Silver is struggling to keep up, at $35.21.

   To its list of No. 1 rankings in the world, China adds this today — world's leading buyer of gold for investment.

Investment demand for gold in China more than doubled in the first quarter, to 90.9 metric tons, according to the World Gold Council. As a result, China now accounts for 25% of investment demand for gold. India, long the world leader, is at 23%.

If you throw jewelry demand into the equation, India still leads the pack. But even here, China may overtake India. "In March 2010, we predicted that gold demand in China would double by 2020," says the council's Albert Cheng. "However, we believe that this doubling may, in fact, be achieved sooner."

And why not: Chinese stocks are underperformers right now, and the government is clamping down on real estate investment. Gold is the logical place they can shelter their money from an unofficial inflation rate of 10%.

Add in the fact the Chinese central bank aims to grow its gold reserves nearly eight-fold… and you have a powerful long-term catalyst to propel gold far beyond today's $1,511. If you haven't gotten serious about gold, it's not too late… as Outstanding Investments editor Byron King makes clear in this presentation.

   Gold's surge is independent of the greenback today: The dollar index has surged two-thirds of a percent, to 75.6. The euro has sunk to $1.416 as new worries about Greece come into view…

  • Fitch Ratings dropped Greece another notch deeper into junk status, skeptical about whether the government's austerity measures will be enough to avoid insolvency
  • The European Central Bank is threatening to stop lending to banks that put up Greek government bonds as collateral if Greece ends up having to stretch out its bond payments
  • Norway has frozen a $43 million grant to Greece, claiming Greece isn't living up to the promises it made to obtain the money. Norway doesn't belong to the European Union, but the news has a canary-in-the-coalmine quality regardless.

Yields on 10-year Greek bonds surged to a record 16.75%.

Meanwhile on the credit default swap market, Greece has surged far ahead of Venezuela as the world's biggest sovereign default risk. Traders give it 67% probability of default in the next five years. Contra Meat Loaf, in this case, two out of three is pretty bad.

   Nearly four out of 10 working age Americans say they've hit on the ultimate retirement plan — continuing to work far past their forebears' gold-watch retirement age.

According to an annual survey by the Transamerica Center for Retirement Studies, 39% of workers say they'll work past 70 or never retire; 54% are still counting on somewhere between ages 60-69… while 6% figure on retiring in their 50s.

Meanwhile, 40% of workers say they'll postpone retirement because of the recession — up from 28% a year ago.

The worst part is… most of the 4,080 people surveyed probably don't realize what horrible shape Social Security and Medicare are in. It underscores the need to line up alternate sources of income — no matter what you plan to do once you reach retirement age. Lifetime Income Report editor Jim Nelson has some new ideas along those lines, right here.

   Here comes the most pitiful attempt for old media to stay relevant since… well, since The New York Times erected its paywall two months ago.

Playboy has put its entire archive — editorial, pictorial and otherwise, dating back to its 1953 debut — online.

The too-obvious quip: Readers "no longer have to store 57 years — 682 issues — of Playboy under their mattress," says the company's Jimmy Jellinek, who's definitely hip and up to date, because he carries the title of "chief content officer."

Well, it does conserve shelf space…

Playboy freely concedes this isn't an attempt to bring in new customers… It's a new way to monetize old ones who want to relive history.

But at $8 a month — or $60 a year? Good luck keeping them in the tent…

   "Thanks for fixing the video link," a reader writes, pivoting neatly from Playboy to the national debt video we mentioned. "You proved Detroit automakers right — pretty girls do sell.

"I now have 'bought' into the problem of the debt. Can't wait to meet her when she comes to collect from me. Bring it on!"

   "Your comments and insight relating to world economic affairs are appreciated by this writer," says another of the complimentary emails that have crossed the virtual transom this week, unsolicited.

"I pass these gems along to my children and grandkids."

The 5: You're setting the bar mighty high for us. But that's a good standard for us to keep in the back of our minds, so thanks.

   "Good luck for eternity," writes the final correspondent in a nearly empty virtual mailbag, "if the religious folks are right about May 21, 2011. We should all be going short and having one of those Doomsday parties Friday.

"In a way, it relieves us and the IMF of any further responsibility."

The 5: So that's why no one in Washington is concerned about blowing through the debt ceiling this week. Now it all makes sense…

Have a good weekend (should we survive it),

Dave Gonigam
The 5 Min. Forecast

P.S. Patrick Cox calls it "the last stock you'll ever need." Once you watch this presentation, you'll know why. In case you missed it in your inbox last night, take a look.

rspertzel

Recent Alerts

Beyond the Good Job Numbers (Bad for Social Security)

When you drill down into January job numbers — among certain age brackets — a more interesting picture emerges. Read More

Artificial Intelligence Gets Woke

I can’t help wondering if today is the day ChatGPT jumped the shark. Read More

Two Defensive Plays for a Debt Ceiling Crisis

“Here we go again,” says our income-and-retirement specialist Zach Scheidt. “The United States is facing another budget crisis.” Read More

I Don’t Give a Flying Flip About AI

On a basic level, I don’t give a flying flip about AI… But there’s gotta be an investing angle somewhere, right? Read More

The New Recession Is Now

“It’s clear that the U.S. economy entered a new recession in late December,” asserts Paradigm Press Group’s macroeconomics maven Jim Rickards. And for confirming evidence of this recession call, Jim points to stresses in the trucking industry. Read More

So Now EVs Are Evil Too…

Here at Paradigm Press it’s not good enough for us to shake our heads at the hubris of the control freaks and power trippers… We seek to follow the money. Read More

“A Radical Environmentalist Government”

A spate of wind turbine collapses is indicative of Canada’s “Just Transition” legislation… Read More

The Weaponized Dollar Misfires

The weaponized dollar keeps misfiring… So what do you do about it? Read More

S&P 500 on Steroids

Why is the S&P holding up so well when everything else looks terrible? Read More

Update: Four Years (Max) to China War

If China were to make a move on Taiwan… this week might be as good a time as any. Read More