Dave Gonigam – January 6, 2012
- The 48-month milestone: A “good” jobs report so transparent, even Wall Street can see through it…
- White House plan to punish bankers for “fraudclosure”: Make pension funds and senior citizens pay for it!
- More war games in the Strait of Hormuz: Byron King on how a shutdown would trigger “the modern mother of all Great Depressions”
- Frank Holmes on how to boost the return of an S&P 500 index fund by 37%… with almost no additional risk
- Biblical puzzlement, lazy youth and constitutional law… a peculiar stew in the mailbag…
The Bureau of Labor Statistics delivered a sunny jobs report this morning… in the sense of the sun peeking out from the clouds after a Category 4 hurricane, perhaps.
It claimed private employers added 212,000 jobs in December, while governments cut 12,000, for a net gain of 200,000.
But Morgan Stanley, among others, is already pointing to a fly in the ointment in the “seasonal adjustments.” A holiday-related glitch created 42,00 jobs in the “couriers and messengers” category that will vaporize in next month’s report.
On to the other big numbers…
- U-3 unemployment — the one you hear reported on hourly radio news — is down to 8.5%,
the lowest since February 2009 - U-6 — the figure that includes “discouraged workers” and part-timers who want to work full-time — is down to 15.2%
- John Williams’ real-world rate — which includes the discouraged workers who gave up looking for work eons ago — is down to 22.4%.
With this month’s numbers, the “recovery” in employment is now officially the slowest of the postwar era — exceeding the 48 months it took to climb out of the slowdown that started in 2001.
The chart-meisters at Calculated Risk have bowed to the inevitable and extended the bottom axis of their infamous chart accordingly…
Click to Enlarge
The two numbers the statisticians can’t fudge remain mired near lows last seen in 1984. The percentage of the working-age population in the labor force is 64%. The percentage of the entire population that has a job is 58.5%.
Color the stock market unimpressed with the numbers. The Dow and the S&P were down slightly around lunchtime. The Nasdaq and the Russell 2000 looked a bit more sprightly.
Casting a pall over the market today: news that Alcoa plans to shut down 12% of its global aluminum-producing capacity.
“Alcoa is a technology leader, not a commodity or bulk producer,” explains Byron King. “When Alcoa cuts production, it can mean only that its forecasters see less opportunity in the high-end niches.”
“That could be for many reasons…. the big taco being a China slowdown. Or a Europe slowdown. Or some sort of coming crash in major aluminum markets… like autos. Or rising electricity prices, in the face of the EPA closing down coal-fired power plants across the U.S. Or a combination, such that cutting one-eighth of capacity is prudent.”
Doesn’t bode well for the start of earnings season: As always, Alcoa is first out of the gate after the close on Monday.
To our bulging “the fix is in” file we add a substantial entry this morning: It appears the major banks are about to slither out of responsibility for “robo-signing” and a host of other misdeeds during the housing bust… and stick mortgage investors with the resulting losses.
Or at least that’s the direction that talks are going among assorted government officials and the banks, according to the Financial Times.
Let’s back up a moment: This has to do with something known as the “multistate mortgage settlement.” That little mouthful is an attempt by the White House and the 50 state attorneys general to punish bankers for things like foreclosing on homeowners when the bankers don’t actually own the note because the note was sold off in a mortgage-backed security long ago.
This has fouled up the chain of title on potentially millions of homes — to the point where people who buy their houses with cash end up receiving foreclosure notices.
Rather than pursue such fraud cases as — well, fraud cases, complete with messy things like trials and prison time — the assorted government leaders are trying to work out a settlement in which the banks would admit no wrongdoing, but instead fork over about $25 billion in principal reductions to underwater homeowners.
Except now it appears the banks wouldn’t eat the losses.
Instead, “investors in U.S. home mortgage bonds may have to swallow losses” under the deal, says the Financial Times.
Let’s make this really clear: If this deal comes about, the banks that knowingly sold off “crap” mortgages (to use the words of their own internal emails) to unknowing mortgage investors would skate… while the mortgage investors would be left holding the bag.
“It would be a Pyrrhic victory,” protests Chris Katopis of the Association of Mortgage Investors, “to settle the mortgage crisis with the money of public institutions, pension funds and seniors.”
Aw, c’mon, Chris… you ought to know by now that as bondholders, you stand at the bottom of the totem pole and your legal rights don’t mean squat. Remember General Motors and Chrysler?
“One could argue,” suggests our Dan Amoss, “that principal reduction on the mortgages could maximize long-term returns (by keeping stressed borrowers current on their mortgages, as opposed to foreclosing and liquidating the housing collateral).”
“But this is something that the investors should decide, not the banks that service these mortgages. The banks have little incentive to write down principal, because they still hold lots of second mortgages on these same properties. They are still marking these second mortgages at fantasy levels and can’t afford to take too many losses at once.”
Oil is likely to turn in its first weekly close above $100 in a month. A barrel of West Texas Intermediate trades for $101.22, as Iran announced its Revolutionary Guards would carry out a round of war games in the Strait of Hormuz starting Jan. 21.
This comes on the heels of Iran’s regular navy wrapping up its own exercises a few days ago — complete with a practice run at closing the Strait.
“Why does closing Hormuz matter?” says our Byron King. “Because in 2011, the flows through Hormuz represented about 35% of the global seaborne oil trade, or not quite 20% of the total worldwide oil trade.
“So closing Hormuz — by the Iranians or anyone else — would be an instant body blow to world oil markets.”
With oil shooting up to $220 a barrel or more, “transport costs would skyrocket everywhere. Agriculture would dry up. Manufacturing would crater. People would get laid off in droves. That’s for starters. Over time, it’d get worse. We’d be on the way into the modern mother of all Great Depressions.”
Byron considers a host of other knock-on effects — including a shutdown of the world’s electronics industry — in today’s Daily Resource Hunter.
Gold is holding on o most of the gains it picked up late yesterday. At last check, the spot price is $1,617.
Silver has been unable to keep up, surrendering the $29 level shortly after Comex trading opened this morning. As of this writing, the bid is $28.96.
“Our research,” says perennial Vancouver favorite Frank Holmes, “shows that investors can use gold stocks to enhance returns without adding risk to the portfolio.”
Frank’s team at U.S. Global Investors recently updated a 1987 study by the Wharton School showing how gold stocks can goose your long-term returns. “Between September 1971 and November 2011, the S&P 500 averaged a 9.69% annual return.”
Meanwhile, “A 15% allocation to gold equities and an 85% allocation to U.S. stocks, with annual re-balancing to maintain the allocations, would have yielded, on average, an additional 0.82%.”
So what’s that to you?
“Let’s use a hypothetical $100 investment as an illustration,” Frank suggests. “A $100 investment in gold stocks in 1971 would have grown to nearly $5,100 at the end of November 2011, while the same amount in the S&P 500 would be worth about $4,800.”
“But look what happens when you combine the two. Assuming the same average annual returns since 1971 and annual re-balancing over 40 years, a hypothetical $100 investment in a portfolio with 15% gold stocks would be worth about $6,600.
“That is 37% greater than the $4,800 for the portfolio solely invested in the S&P 500, while adding virtually zero risk.”
Frank’s insights are especially useful right now… given how our own research has uncovered an anomaly in the gold market. It’s happened only four times in 33 years… and for people who knew enough to act, it meant an average gain of 158%.
We had to run the numbers several times to make sure this opportunity was as big as we thought it was. But every time, they came out the same. We ran them by Frank… and by resource investing guru Rick Rule… and by several of our own editors, including Byron King, Chris Mayer and Michael Pento.
Yep, they said… it all adds up.
We’re convening all of these experts for an online seminar launching next Thursday. Don’t worry about having to be at a certain place at a certain time, though… You can watch whenever it’s convenient.
You don’t want to miss it… and it’s absolutely free. Access here.
“Where is Sirach 31:15 in the Bible?” a reader inquires after seeing another reader email yesterday.
“What Bible did that verse come from?” writes another. “I’ve never heard of that book.”
The 5: Oy… It’s not enough that we get sucked into the maw of politics every so often… Now we’re getting swallowed up by religion too.
“Sirach,” according to our research team, “is to be found in some Bibles and not others. It is included in both the Catholic and Eastern Orthodox Bibles.”
“Also known as Ecclesiasticus, it was written by a scribe of the second century B.C. named Jesus ben Sirach.”
“That train left the station years ago,” writes a reader interested in reviving our year-end thread about the quality of younger workers these days.
“Fifteen years ago, I had a courier company. Dependability was an absolute necessity. I finally hit on hiring older workers, as they were much more dependable than 20s and even 30s people. In the Northeast, the first large snowfall brought 20-plus no-shows for the youngsters — no such thing in the retirees.”
“I had several friends with construction companies. Same deal. No show, no call in for several days from the youngsters and ticked off when you (re-)explained the rules and consequences. Many owners just finally went to single-proprietor high-end work.
“I do hope the present situation leads to a ‘reset’ of expectations before other more dramatic events.”
“Isn’t somebody going to challenge the National Defense Authorization Act as unconstitutional?” a reader inquires.
The 5: It won’t be easy, going by the experience with the FISA Amendments Act of 2008.
That law “gives the National Security Agency (NSA) virtually limitless power to spy on Americans’ international phone calls and emails,” according to the ACLU. “It allows the NSA to collect those communications en masse, without a warrant, without suspicion of any kind, and with only very limited judicial oversight.”
The ACLU, Amnesty International and several other groups have sued… but different federal courts can’t agree about whether those groups have “standing.” That is, some judges believe unless you can prove you were actually spied on by the NSA, you have no right to challenge the law. And what are the chances you can prove something like that?
Kafkaesque? Yes. Catch-22? You bet. Apply whatever literary reference you like… and there you go.
Last September, an appeals court kicked the case back to district court, and nothing’s happened since.
“I’m just curious,” writes our final correspondent. “Which came first: ‘The 5’ from The 5 Min. Forecast or The Five political commentary on the Fox News Channel?”
We launched The 5 in April 2007 and gave it that informal appellation from the get-go. Fox News threw together its pathetic gabfest last year when it scrambled to fill Glenn Beck’s old time slot.
We could tout The 5 as “The One and Only”… but that would be giving more credit to Fox than it deserves.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. “After over a decade of research, we thought we knew everything about the gold market,” our executive publisher and 5 Min. Forecast editor Addison Wiggin impressed upon the editorial team in our meeting yesterday. “Looks like we were wrong.”
You can’t blame us for missing this one… the “rare but reliable” indicator uncovered by our research team has come only about four times in the last 33 years. We’ve assembled a free “webinar” detailing the opportunity it portends… it’s worth the entertainment value alone. Details and registration, here.