Paper Airplane Time

Dave Gonigam – May 31, 2012

  • Investors bail from stock mutual funds (again): Chris Mayer on how we’ve been here before, and why it’s no reason to give up on stocks altogether
  • A trio of disappointments: jobs, GDP, Midwest business activity
  • Hopscotching the world: One of Asia’s wealthiest men spots a bigger trend than China’s “hard landing”… while Jeffrey Tucker waxes on the vibrancy of Brazil
  • Gluing the neighbor’s locks to keep the neighborhood nice… Readers unload on fellow readers who insist they “paid in” to Social Security… a special notice for readers of Addison’s Apogee Advisory… and more!

   Gosh, could it be the Facebook effect?

Investors yanked $7.02 billion out of stock mutual funds last week, according to the Investment Company Institute. That’s the most since the first week of 2012.

Domestic stock funds account for nearly all of the outflow; that category has seen net outflows for 14 straight weeks.

The total withdrawn so far this year: $45 billion, which puts us on a pace to easily exceed the $85 billion total for all of last year.

But then, this is nothing new. “People have been yanking a lot of money out of the market,” Chris Mayer points out, “something like $1.4 trillion since 2007.”

   “Some people will use these outflows,” Chris adds, “to say the market can’t or won’t rise. I think that’s a lot of baloney.”

Chris points to new research from the Leuthold Group. “A new market high could potentially occur with no help at all from the public,” writes Leuthold’s Doug Ramsey.

After all, the S&P more than doubled from its March 2009 low, even as the outflows proceeded apace.

   There is precedent for this: the bear market of the 1970s.

You want to talk about “weak volume” and “no public participation” in today’s market? Old-timers like technician Ralph Acampora will regale you with tales of traders flying paper airplanes on the New York Stock Exchange floor in the ’70s — so little trading there was to do.

Within the 1966-82 bear, there was a stretch from 1974-80 when the broad market rose 120%. Small caps did even better.

And within that six-year span, there was a vicious shakeout. “The sharp market declines of mid-2010 and mid-2011,” Leuthold’s Ramsey writes, “have probably served the same purpose as the 1976-77 decline — flushing out retail investors just as they were finally preparing to tiptoe back in.”

“It’s an interesting observation,” says Chris. “Stocks, as a class, then, perhaps are getting a bad rap.”

“People remember the headline-grabbing stories — and usually they are the stocks that blew up. Meanwhile, there are many stocks that just keep plodding along.”

“There are enough companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.”

Chris shares some of his favorites right here.

   Meanwhile, the “headline-grabbing stories” bring little joy today.

As we write, U.S. stocks are reversing big losses early in the day on “news” that the International Monetary Fund will spend out of an empty pocket to fill the black hole known as Bankia. That’s a giant and busted Spanish bank cobbled together from a bunch of smaller and busted Spanish banks 18 months ago.

No, the eurozone is no closer to being fixed now than it was a few hours ago… but the S&P has managed to recover 1,300.

(Facebook, meanwhile, could sink below $27 before day’s end. Heh.)

   Tomorrow’s market action will be “data-driven”, with the Labor Department’s monthly jobs report issued before the open and the ISM manufacturing survey after.

In a preview of the jobs report, we have the following numbers this morning:

  • Private-sector jobs: up 133,000 this month, according to the payroll firm ADP. Manufacturing jobs, however, turned in a second straight month of decline
  • Small-business jobs: up 40,000 in May according to Intuit… but that’s fewer than April’s 60,000. Hours have been cut, too
  • First-time unemployment claims: up 10,000 last week, to 383,000. That breaks several weeks of stagnant numbers… and in the wrong direction

All of those numbers were worse than the vaunted “expert consensus.”

   For further evidence of a U.S. slowdown, we have the Commerce Department’s latest guess on first-quarter GDP.

The initial guess a month ago came in at an annualized 2.2%. This morning, it’s 1.9%.

   To complete the trifecta of disappointments, the “Chicago PMI” number, reflecting business activity in the City of Big Shoulders and its environs, came in way below expectations.

At 52.7, it’s still above the 50 dividing line between expansion and contraction. But here too the Street was counting on something much better. The figure is now the lowest since September 2009.

   Gold is holding steady after recovering lost ground yesterday. The spot price is currently $1,561.

Silver, however, is still stuck below $28, at $27.79.

   Hot money is again flowing into the dollar and Treasuries today. The dollar index just crested 83; the yield on a 10-year T-note is down to… drumroll, please… a record 1.58%.

   One of Asia’s wealthiest businessmen isn’t giving up on Chinese real estate yet.

“Li Ka-shing Stays Long on Mainland Property,” reads the headline by Dee Woo, a contributor to the fledgling Chinese edition of The Daily Reckoning, and republished at — a site read by many affluent Chinese. (You can read a poor English translation at this link.)

At age 83, Li — known in Hong Kong as “Superman” — has an estimated net worth of $25 billion. And despite the talk of a “hard landing” in mainland China, Li is moving full speed ahead with property development there.

The reason? The Chinese central bank is cranking out unlimited quantities of yuan to keep pace with the Fed’s unlimited quantities of dollars. Real estate, in contrast, still has a limited supply… and Li is playing for the long haul.

   “Brazil is a marvelous and massive country,” writes Jeffrey Tucker, continuing a quick hopscotch around the world. He’s back from a recent trip speaking to the Instituto Ludwig von Mises Brasil.

It’s a place “where private wealth thrives without embarrassment, where well-protected and healthy familial dynasties form the infrastructure of social and economic life, where technology is popular and beloved by everyone, where the police leave you alone and where Americans can feel right at home.”

“My most-surprising findings in Brazil, aside from the amazing fruits that I didn’t know existed because the U.S. government doesn’t think I need them, were the young American kids who have moved here to find economic opportunity. This I had not expected, but now fully understand.”

“The world is changing fast. Freedom in America is slipping away so quickly that we are already seeing a wave of young people leaving in search of new opportunities, just as people from around the world once came to America to live the dream.”

   Back in the States, people find themselves resorting to teenage pranks just to keep their neighborhoods from going to hell.

Last fall, someone moved into a vacant foreclosure house in the high-end Palmer Woods section of Detroit. Ordinarily, this would be good news. Unfortunately, he didn’t buy the six-bedroom Tudor revival; he was a squatter.

“Neighbors took matters into their own hands,” says a post at the Consumerist site. “First they got the utility company to cut off gas and electric service to the house.”

Didn’t work. Enter the teenage pranks. “One neighbor spent an entire day placing large rocks in the property’s driveway. Another thought that putting glue in the locks would do the trick.”

In the end, the only thing that worked was the filing of 11 felony counts against the squatter. He stands accused of filing false paperwork claiming ownership of three Detroit properties.

The real estate broker trying to unload the joint says the inside of the house is in fine shape and he expects a bidding war once the house goes up for sale.

Good luck with that: There are 10 vacant homes, says The Detroit News, in a neighborhood of about 300.

   “I just got my first $1,600 Social Security check last week,” writes a reader stirring the pot in reply to yesterday’s mailbag. “I am 64 and expect to live to, say, 88. So I am anticipating 24 years x 12 months x $1,600 = $460,800 in government checks.”

“I was self-employed for 40 years and thus earned and put in all of the taxes myself toward Social Security and Medicare. Most of your Social Security crybabies probably only put in half their own payments and had their bosses pay in the other half for them. I believe I paid in around $120,000. Can any of your email complainers that say ‘I am not receiving a government handout, I paid into the system, it hurts my feelings when you speak meanly about me’ do any frigging math?”

“OK, so my first $120k I get back will be my own money I paid in. So ask your ‘feelings hurt crybabies’ where does the rest of my, and their, extra money windfall come from?”

“They neglect to mention they are probably going to receive three times more dinero than they, and their employers, paid in — from their government. ‘Not receiving government handouts?’ My arse.”

“How in the hell can such a badly designed system ever be sustainable?”

   “I never got unemployment or any other benefit from any governmental agency, federal, state or local,” writes another.

“Now at age 72, I get Social Security, which represents only a small percentage of the total amount which my employers and I paid into the Social Security fund over the more than 50 years I worked. I did get about $150 per month from the government for serving in the U.S. Army in the U.S. and Korea.”

“I did not sign up for Part B Medicare coverage at age 65 so I now pay about $150 per month for Part B plus about $16 per month for Part D. All in all, considering all the money paid into Social Security and Medicare, my return on investment is the worst of all the investments I ever made except one I made in a company that subsequently went bankrupt.”

“I just pray the Social Security Administration doesn’t do the same. If my Social Security and Medicare benefits are a drain on the U.S. economy, just give me back the money I paid for these benefits and we’ll call it even. By the way, I am still paying into Social Security and Medicare as I write this email.”

   “I get a Veteran’s disability pension and soon I’ll be getting Social Security payments. In addition I have a very small computer consulting business that doesn’t earn enough money to pay taxes, but it keeps me supplied with computer equipment and software, which is my hobby/occupation.”

“The VA pension isn’t enough to live on in Southern California, nor would Social Security or my business be. All combined, I just scrape by, and I even was able to earn enough from my business to subscribe to the Equity Reserve, and later on, by selling some gold and silver and a small loan to open a brokerage account, to do some meager investing. (The loan has since been paid back.)”

“While I am partially living on the dole, I have no illusions about where the money comes from. As you and many others have pointed out, the money comes NOT from some fund, but from general revenue. The taxes I paid ‘into the system’ were merely another TAX that went into the same general fund.”

“I also realize that the days of my or anyone receiving these ‘benefits’ (aka stolen money) are numbered not in decades, but in months or even days. So in answer, I’m getting mine while I still can. I am steadily buying precious metals and other valuable goods in preparation for the coming currency collapse.”

“I make no excuses for my ‘larceny, nor do I apologize for it. What others may call entitlements (I paid into it, or I’m poor, etc.) are, in fact, financed by the many taxes, fees and other extortions and the borrowing, which in effect results in the devaluation of the dollar which is ipso facto just another tax of the most insidious sort.”

   “It is somewhat sad to realize,” writes our final correspondent, “that there are some who read The 5 Min. Forecast who actually think that they are ‘collecting what is due’ when no such contract exists between the government and you as a payer into the Social Security system.”

“The Social Security Administration owes you nothing regardless of how long or how much you have paid into the system. There are no guarantees you will receive or are entitled to anything. To stress the point, please refer your readers to the Supreme Court case of Flemming v. Nestor in 1960.”

“In its ruling, the Court established the principle that entitlement to Social Security benefits is not contractual right.”

“Also note that Congress can change the law anytime it wants. If anyone thinks that Congress cannot reduce what you think you should get as a ‘government benefit’ or make you pay more into the system, they should think again.”

“While in my 40s, I would have completely agreed with the writer who said he’d be a millionaire if he did not have to pay into the system, I am now nearly 56, and when I finally start receiving ‘what is due,’ I promise to suck as much of those government benefits as they will allow me to until the system collapses.”

The 5: The Social Security Administration was also refreshingly blunt in the “annual statements” it used to send out. “Your estimated benefits are based on current law,” it said in fine print. “Congress has made changes to the law in the past and can do so at any time.”


Dave Gonigam
The 5 Min. Forecast

P.S. The word is spreading: Chuck Butler’s kind words in praise of Addison’s The Little Book of the Shrinking Dollar were picked up by Business Insider. And the publisher, Wiley, is launching a publicity campaign in the United Kingdom; it’s not just Americans who’d do well to heed the warning contained in the book’s pages.

If you’re an existing Apogee Advisory reader and you’d like a copy of the book, watch your U.S. mail for a special offer soon. If you can’t wait, we’ll send you a copy as soon as you agree to extend your subscription. Just give our capable customer service team a call at (800) 708-1020.

If you belong to the Agora Financial Reserve, you’re already entitled to a copy free. Once again, call (800) 708-1020 and just let them know.

If you’re not a current Apogee reader… a subscription offers you the best value, hands down, if you want your own copy of the book. Here’s where to go.


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