When Euphoria Wears Off

Dave Gonigam – August 16, 2011

  • Bad news blown off yesterday comes back into view today
  • How the Correction of 2011 compares to the Panic of 2008… so far
  • A surprising metric by which stocks are their best buy in 30 years… and how to act accordingly
  • Gold rebounds… The chart that points to $33,000
  • “Flash mobs” surge, fake Apple stores proliferate and a harbinger of more IRS audits

   Well, the euphoria couldn’t last forever.

After a steady climb the last three trading days, stocks are taking it on the chin this morning. The Dow is down about 100.

Yesterday, traders cheered merger news and ignored bad economic numbers. Today, they’re ignoring good earnings reports from Wal-Mart and Home Depot… and paying heed to bad economic numbers:

  • Housing starts dropped 1.5% in July to an annual rate of 604,000, according to the Commerce Department. Building permits, an indicator of future homebuilding activity, fell 3.2%
  • The mighty engine of the eurozone is stalling out; German GDP clocked in at a pitiful 0.1% in the second quarter.

For the moment, the rest of the day’s market action hinges on a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Heh, we already know they won’t do anything to substantively resolve the debt that’s choking Europe. The only question is whether the post-meeting news conference will fool the market into thinking they will.

   The downturn this summer has actually been sharper than it was at the beginning of the crash in 2008 — a point Addison underscored yesterday at the outset of an urgent teleconference, assembling our editors for their ideas about what you should do at this critical juncture.

If you like, you can click to listen to the first couple of minutes and follow along with the two charts below: From a top on July 21 at 12,724, the Dow shed just over 2,000 points in 12 trading days.

The decline in 2008 started out more gently. From a high of 11,782 on Aug. 11, the 2,000-point drop took nearly two months… an orderly rush for the exits.

The real panic came in the ensuing three weeks:

And of course, there were several head fakes before the market hit bottom in early March 2009.

   “I offer one cheery observation,” wrote Chris Mayer yesterday to readers of Mayer’s Special Situations. “The spread between the earnings yield on the S&P 500 (which is simply the inverse of the price-earnings ratio) and the Treasury yield is as wide as it has been in more than a generation.”

In plain English, this means that “relative to Treasuries, stocks haven’t been this attractive in more than 30 years. This gap is called the equity risk premium, and you can see it in this next chart:

Now… the last three times the S&P made a huge drop, the equity risk premium was negative: Treasuries offered more yield than stocks. And never has a crash occurred when stocks earned nearly three times T-bonds.

“During this panic,” Chris notes, “a lot of money flowed to U.S. Treasuries — the so-called safe haven. I can’t imagine that money stays there for long earning those puny yields. Stocks are a better bet by comparison.”

Indeed, ”one of the most remarkable things about the August market crash is how insiders are buying into it. Insider buying has reached levels not seen since the March 2009 bottom.”

   If after reading this you’re still not convinced it’s time to buy an index fund with both hands… you’re right.

“The economy is soft, at best, in the developed markets,” Chris goes on. “The emerging markets are starting to choke and slow down. The political situation is a mess in many of the biggest economies. There is too much debt, too much red ink spilled by sovereigns. Banking systems are still fragile and overleveraged.”

And yet… “These kinds of environments can be the best to invest in. You just have to get your money in the right hands” — which for Chris means companies run by the sort of “owner-operators” who care more about building their company’s value than beating analysts’ quarterly estimates.

Chris names a couple during our teleconference. Byron King offers up some resource names you can snap up at post-correction bargain prices. Jim Nelson has an eye toward the plays best suited for income investors.

Meanwhile, our trading specialists have some ideas about how to capture the upside of all this volatility — grabbing short-term gains that can make you a bundle even while everyone else is losing his shirt.

We’re cleaning up the audio and adding some helpful slides to make the whole presentation as user-friendly as possible. Reserve members will have instant access when we post this tomorrow after the market close.

As part of our 3-Part “Market Volatility” Strategy, we’re also preparing a special report featuring our editors’ best precious metals plays right now… and we’re convening an “Emergency Summit” of our editors, affording Reserve members a chance to meet them face to face in a few weeks’ time.

Invitations to this event will go out tomorrow. To make sure you receive yours, just drop us your email address here.

   Proving you can’t keep a good metal down, gold has recovered nearly $40 in the last 24 hours. The spot price at last check was $1,773.

Silver is within striking distance of $40 again at $39.57.

   Silver Eagle sales at the U.S. Mint are on a tear for the first half of August. Through yesterday, 1,959,500 Silver Eagles went out the door.

At that pace, August sales could end up reaching the second-highest monthly level this year… and the third highest of all time.

[Ed. Note: Demand is so intense that last spring, the Mint started making Silver Eagles at its San Francisco location — in addition to those already made at West Point. For collectors, this move opens up a unique opportunity.

As an Agora Financial reader, you have an exclusive window in which to snap up these San Francisco Silver Eagles, graded MS70 and certified “Early Release” by the independent grading agency NGC.

The window closes at midnight tonight. To learn more about what makes this issue so special, check this out. Be advised we may be compensated if you buy.]

   “In spite of a sevenfold increase in the gold price since 1999,” writes GoldSwitzerland proprietor and Vancouver speaker Egon von Greyerz, “only circa 1% of world financial assets are invested in gold.

“It must be unprecedented that an important asset class can go up for such a long period with so few investors participating. In my view, this is the most bullish sign ever for gold.

“There are many ways to project how high the gold price can reach. The following chart shows where gold would be if the U.S. gold reserves were at the same percentage (52%) of U.S. debt as in 1913 when the Fed was founded.

“Gold would then be $27,000 today and going up to $33,000 in 2015 with a projected increase in debt of $6.5 trillion.

OK, that’s an illustration, not a guarantee. The point is, “Gold is undervalued on any measure,” Egon concludes.

But aside from bullion holdings, what’s the best move now? That’s the question we’re posing as an essential element of our 3-Part “Market Volatility” Strategy.

We’re assembling a “Reserve members-only” report pulling together the best gold recommendations from our editorial team. Along with the aforementioned teleconference and face-to-face gathering, we’re going all out to help you preserve your essential capital while seizing the opportunities these rocky conditions bring.

Invitations for the gathering are being prepared as we speak. To make sure you receive yours, here’s where to go.

   Seems the “fake Apple Store” phenomenon is China is far more widespread than first thought.

Last month, we told you how an American blogger discovered three “Apple Stores” within a 10-minute walk of each other in Kunming. Only she could tell they weren’t for real… because, for instance, the words “Apple Store” sat beneath the logo.

Fast-forward three weeks… and China’s Administration for Industry and Commerce has uncovered at least 22 more fake outlets in China selling gray-market Apple goods.

Aw, come on… Apple ditched that version of the logo in 1997!

The ministry has sent a letter to the offending businesses, ordering them to cease and desist from using the Apple logo.

Meanwhile, back in Kunming, two of the fakes have been shut down, not for unauthorized use of the logo… but because they didn’t have the proper business permits.

Some things don’t change no matter where in the world you are.

   “The IRS audited me over a three-year period,” writes a reader who sympathizes with the subject of an audit who wrote in yesterday. “I had to account for deposits down to $100.00 — what a task.

“They tapped five bank accounts for records and spent an untold amount of money. Not sure of the result yet. My accountant told me that at a seminar put on by the IRS, they revealed 13,000 new agents were hired to audit all 1040s with Schedule C in the Western Region.

“So much for tax the rich, cause I ain’t.”

   “I’ve been following your musings along with those of Bonner and the boys over at The Daily Reckoning for over a decade now.

“It’s been profitable at times and a little costly at others, but it’s always been fun. I don’t know how many times I’ve cut and pasted some great quote out of your writings and forwarded them to others.

“Anyway, my son ships out to basic at Fort Benning in three weeks to join the Army. I have a bet with him: that he’ll point his gun at someone in Baltimore before Baghdad.

“‘London,’ coming to a city near you?”

The 5: Can’t rule it out. Effective last weekend, anyone under 18 in Philadelphia has to be off the streets by 9 p.m. on Friday and Saturday nights, at least in certain “troubled” parts of the city.

It’s the mayor’s response to the “flash mob” phenomenon — large groups of young people materializing as if from nowhere to clean out stores or mug passersby. As with London, they frequently organize their attacks via text message or social media.

Nor is it an “inner city” phenomenon. Check out this viral video of a 7-Eleven getting cleaned out last weekend in the D.C. suburb of Germantown, Md.

If this is what life is like with current rates of inflation and unemployment, just imagine what it would be like if America’s foreign creditors shut off Uncle Sam’s credit card.

Actually, you don’t have to imagine. Addison spells out the consequences… and the steps you need to take to protect yourself… right here.


Dave Gonigam
The 5 Min. Forecast

P.S.“The economy is significantly moderating right now and also over the next couple of months,” says Bart van Ark, chief economist for the Conference Board.

What makes this remark notable is that he’s not talking about the United States. He’s talking about China.

A new Conference Board report corroborates what we’ve suspected for weeks now: China is slowing “significantly” — its leading indicators rising a meager 1% in June.

A Chinese slowdown could put a serious hurt on commodities in the coming months. As it is, copper prices have been stuck at or below $4 a pound for the last week. The broad CRB commodity index is off its recent lows… but that only means it’s back where it was at the start of this year.

That’s just one more element of uncertainty we’ve been hearing about from concerned readers, with one question on their minds: “What now?”

That’s why we’re developing our 3-Part “Market Volatility” strategy — the teleconference presentation that will be ready by day’s end tomorrow… the special report detailing our analysts’ best gold-related plays… and a face-to-face summit with our editors and interested Reserve members here in Baltimore, scheduled for October.

Invitations go out later this week. To make sure you receive yours, sign up here.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More