Addison Wiggin – January 17, 2012
- Downgrade? What downgrade? Market rallies despite latest euro drama: Why the charts might point to even higher levels
- European banks on pace to unload $1.8 trillion in assets: Chris Mayer on how you can profit from “the biggest fire sale in history”
- Byron King on $2,012 gold in 2012… Michael Pento on why the dollar rally is no big deal
- When gold becomes a drug… the only way the newspaper business is still profitable… readers take on the Fed transcripts… and more!
By all accounts, the stock market should be in free fall after a holiday weekend in which “the cosmic Brink’s truck of free money went over a cliff,” as Vancouver veteran James Howard Kunstler put it.
Alas, so much for the latest euro-driven meltdown.
After the close in Europe on Friday, Standard & Poor’s downgraded nine European countries, including heretofore AAA-rated France. Then on Monday, as a coup de grace, it downgraded the eurozone rescue fund.
But if S&P was trying to send a message, nobody listened.
European bond yields have come down. European stock indexes have stabilized, and many are rising.
Meanwhile, the holiday-shortened trading week has begun with major U.S. indexes up close to 1%. The S&P 500 might break 1,300 at day’s end.
For a glimpse at the seamy underbelly of 21st-century Europe, look no further than Hungary. It belongs to the European Union, but is yet to adopt the euro currency.
The ruling party there — elected in 2010 with a two-thirds majority — has cheesed off leaders in both Brussels and Washington big-time. So much so that this morning Bloomberg reports the EU is threatening the nation with a lawsuit.
Among the “sins” of Prime Minister Viktor Orban, as recounted by Rep. Ron Paul’s foreign policy aide, Daniel McAdams: “…using his mandate to bring the Hungarian central bank under the oversight of elected officials, rather than remain the purview of highly paid bureaucrats who more often than not do the bidding of their foreign counterparts at the expense of those who pay their salaries.”
“It is not quite an ‘end the Fed’ movement in Hungary, but it certainly could be seen as a move to curb the seemingly limitless power of an unelected Hungarian Ben Bernanke.”
But Orban has his limits: With Hungarian bond yields soaring, a Moody’s downgrade to junk status, and the forint sinking 15%, he sent an envoy to Washington last week to seek a bailout from the International Monetary Fund. He might have to bend on the central-bank law to get that bailout… and stave off the EU lawsuit.
Meanwhile, “The price of a bailout to Hungary’s creditors,” McAdams writes, “will be a new austerity program on its population. It seems the government is in a panic and will agree to anything for IMF assistance, but they would do well to have a look at Greece, where IMF ‘reform’ is producing its usual results.”
“Why should the current population be squeezed to death to repay the endless borrowing by the communist regime in the 1970s and 1980s? The great Bill Bonner suggested last year, ‘Why Greece Should Default and Go Broke With Dignity.’ He could be writing for Hungary as well.”
“It’s going to be the biggest fire sale in history,” says our Chris Mayer, eyeing opportunity amid the smoldering remains of Europe. “And it begins in 2012.”
“Europe’s banking sector needs cash — mountains of cash.” It will likely sell off $1.8 trillion in assets over the next 10 years. “There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from” — as Chris knows well from his banking days.
“I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers.”
That is, banks want to get bad assets off their books quickly — often knowing they could hold on a little longer and turn a tidy profit. “As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen.” They have to set aside more capital for the bad loan. The regulators might come knocking. The shareholders might sell. “So the usual way to deal with bad debts is to clear ’em out as fast as possible.”
Typically, such fire sale opportunities are limited to the big-bucks crowd. But Chris has unearthed an opportunity he says even a schoolteacher could afford. “I think the EU crisis, as boring as it is, is about to get a lot more interesting as investors get a chance to pick up cheap assets from the biggest fire sale in the history of earth.”
Chris reveals how to do so in the current issue of Capital & Crisis. Access here.
The cheer in U.S. markets today is driven in part by China. Fourth-quarter GDP there rose 8.9% year over year.
That’s slower than the previous year’s performance… but faster than the “expert consensus” of economists polled by outfits like MarketWatch and Bloomberg.
Thus, the “soft landing” China thesis reinforcing conventional wisdom was affirmed. Buy!
More cause for cheer: Three straight months of positive readings on the Fed’s Empire State Manufacturing Survey.
At 13.5, the index shows factory activity in New York state recovering from a mid-2011 slump.
“We’re still sitting right below the 1,290 resistance level in the S&P 500,” our resident technician, Jonas Elmerraji, wrote his readers over the weekend. “A breakout above that level would be a very bullish signal.”
“All told, stocks moved less than 1% last week, providing investors with one of the least-volatile trading weeks in recent memory. That tight range is a good thing — it means that the market is getting more rational when it comes to weighing potentially market-moving news. But a tight range also potentially means that we could see a volatility squeeze sometime in January.”
A volatility squeeze takes place when markets swing suddenly — and temporarily — to low volatility, followed by a return to high volatility.
“With Europe back in the headlines this week,” Jonas warns, “a volatility squeeze becomes a very real possibility” — even that will take something other than an S&P downgrade to make it happen.
Heh.
The numbers from China are helping fuel an oil rally today. A barrel of West Texas Intermediate is back above $100, at $100.42
Gold is sharing in the risk-on trade. The bid is currently $1,659 — a five-week high.
Silver has again reclaimed $30 an ounce, trading for $30.40.
“Count me among the ones who believe we’ll see gold priced over $2,012 per ounce in 2012,” says Byron King, unconvinced by our case that gold is due for a rest before resuming its epic bull market.
“A temporarily stronger dollar makes for a nice opportunity to buy precious metal assets on a relative dip,” Byron goes on — a point on which we agree. “That is, silver under $30 per ounce and gold in the $1,600 range is cheap over the long term.”
“Do you somehow believe that the politicians will solve the global debt problems? Or will they continue to inflate currencies across the board? And what will that do to your stash of cash?”
“Looking ahead, the only thing that’ll keep gold prices down over the long haul is a massive outbreak of fiscal sanity and ‘strong currency syndrome’ across the world. How could that possibly occur? It can’t happen.”
On that point, we’re in firm agreement. Want to get your portfolio aligned with gold’s long-term bull? Here’s an excellent starting point.
With the safety trade off today, the greenback is down. After touching a one-year high yesterday at 81.5, the dollar index, or DXY, is back to 81.1.
“The DXY,” cautions Michael Pento, “will tell you only what the dollar is doing against a basket of six other flawed fiat currencies.” And as we’ve noted before, the euro accounts for 57% of the index’s weighting.
“In order to truly access the intrinsic change in the value of the dollar, you must first determine the level and direction of real interest rates, the rate of growth in the money supply and the fiscal health of the government. When analyzing the dollar using those metrics, it is clear that the intrinsic value of the dollar is eroding in an expedited manner.”
“Since the intrinsic value of the dollar continues to deteriorate, investors would do well to ignore the dollar’s temporary and beneficial measurement against the euro and focus on its true fundamentals, which are forcing investors toward gold.”
We figured the day would come, but not so soon: gold as contraband. Gold transported the same way drugs are.
Seems that eight guys from South Korea have been busted trying to smuggle gold into Japan to avoid Japanese import taxes… using a rather, um, cheeky method.
“The Korea Customs Service said Monday the men allegedly transformed $260,000 in gold bars into small beads,” according to an Associated Press account, “and smuggled them in their rectums to Japan two times in 2010 to avoid import taxes.”
Hmmm… $260,000 at $1,650 an ounce is 158 ounces. Eight guys doing this twice works out to an average of 10 ounces per person per attempt.
They were caught by Japanese customs. How, we’re not told. Metal detectors or X-rays on arrival?
Strange stuff…
And while we’re on the bizarro beat… we see the one remaining way that stodgy old newspapers might still be a good investment.
Northwest Trustee Services — the Pacific Northwest’s largest foreclosure trustee — has bought up or started six weekly newspapers in the region. It might buy as many as 50 more.
“Owning newspapers,” reports the Portland Oregonian, “will reduce costs for Northwest Trustee’s lender clients and could make foreclosures more profitable for [the] firm.”
That’s because Oregon — indeed, most states — require a series of legal notices in the local paper before they auction a foreclosed property. “These legal ads, which generally cost $500-2,000, are one of the largest expenses of the foreclosure process… For many small-town papers, foreclosure notices have become one of their largest revenue sources.”
keeping this paper alive?
For whatever it’s worth, the ink-stained wretches now working under Northwest Trustee have health insurance and a 401(k) match… which they didn’t before.
“Was there anything,” writes a New Hampshire reader about the transcripts of the Fed’s 2006 meetings, “that indicated the dynamic duo got anything right?”
“Is there any credit due? Any ‘redeeming social value’?”
“The 5 is the best five of the day.”
“The comments about our ‘leaders’ at the Fed,” a Texas reader adds, “indicate confusion about what they are: They are bureaucrats!”
“A bureaucrat is ‘an official who is rigidly devoted to the details of administrative procedure.’ Bureaucrats are not expected to be ‘thinkers,’ innovators, or ‘men of action’ (such characteristics were never present, or have been discouraged out of the successful bureaucrat).”
“They simply plod along each and every day filling in all the squares. To give them decision authority is foolish and dangerous. We, therefore, are a nation of fools!”
“If all we can put forth,” adds another, “is housing and the FED (Federal Economic Disaster), we don’t have much hope.”
“We need more housing like we need more highways and malls. We (should) know that housing bubbles, central banks and socialized economies don’t work. Yet the reactionary elements keep trying to move us in just those directions… more of what doesn’t work.”
“You give Geithner too much credit,” says a fourth. “When he said, ‘We just don’t see troubling signs yet of collateral damage [from the housing market on the broader economy], and we are not expecting much,’ he was certainly lying. He isn’t a fool.”
The 5: Ah, the core debate when it comes to government: Is it stupidity, or just part of the plan?
It’s hard not to examine the totality of the transcripts and conclude that the operative mindset at work was cluelessness… not mendacity.
“With regards to Lame-Ass Smith’s website violating his own bill,” writes a reader about the author of the Stop Online Piracy Act, “surely you do not suggest that he also violate the first commandment of a banana republic: No lawmaker shall be bound by the laws he creates.”
“I am getting up-to-date after holiday travels,” a reader writes, “and read the excellent comment in the Jan. 10 newsletter describing the profound and irrefutable connection between politics and economics.”
“I could not possibly understand one without the other. I too believe The 5 does a great job of … well… walking that rope. Bravo.”
The 5: Thank you. We’re sure that if we ever wobble, the ground will be waiting to greet us.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “I’m working on two new ideas I’m excited about,” Jim Nelson wrote his Total Income Alert readers on Friday.
“One yields around a fixed 7.8% as I type and comes with a full investment-grade credit rating. The other is a massive double-digit income idea. That one derives its cash flow from some of the safest investments you could imagine.”
The sorts of plays Jim unearths for Total Income Alert aren’t for everyone. But if you have substantial assets and want to lock in rock-steady returns, they’re absolutely worth a look.