August 16, 2012
- “Don’t get lost in abstractions”: Chris Mayer on the only China story that matters to your portfolio
- Two centuries of history can’t be wrong: The end of a 12-year bull market in sight
- Marc Faber humors the Fast Money bunch with a bullish call… but for how long is it valid?
- “I worry about anything he worries about”: Patrick Cox on the flu pandemic a top expert fears… and two companies that will be ready
- A political campaign we might actually get behind… more reader back-and-forth on you-know-who… creating your own civilization (seriously)… and more!
The word just came from the top: China’s economy is in trouble.
Not that Premier Wen Jiabao stated it that bluntly. “The foundation for economic stabilization is still unstable,” he told the Xinhua News Agency this morning, “and… economic hardships may continue for some time.”
Like Western leaders, Wen is possessed of the conceit that politicians and central bankers can push buttons and pull levers to achieve a desired outcome: “We have the conditions and capabilities, and will be sure to fulfill this year’s economic and social development targets.”
Ugh… Like it or not, China matters.
We acknowledge it’s hard enough to keep track of “fiscal cliffs” and other matters close to home… to say nothing of the world’s most-boring financial crisis in Europe. To add China to the mix is almost more than the brain can manage.
But you ignore China at your peril: “China affects so much of the world economy,” writes Chris Mayer, “especially as it relates to commodity prices — and your commodity stocks.”
With that in mind, we survey the landscape of the Middle Kingdom.
Officially, Chinese GDP is 7.6%: “Lots of people don’t believe it,” says Chris.
Among them are Charles Dumas of Lombard Street Research. “We don’t believe official data,” he says. “We think GDP slowed to a 1% rate in the first quarter.”
“The 7-8% growth rate assumption comes from China’s own GDP statistics,” Chris goes on. “GDP, which stands for ‘gross domestic product,’ is a widely accepted rough guess of economic growth. For an investor, it is almost useless, and I usually ignore it.”
Why ignore it? “Because as an investor, you’re not buying ‘the economy.’ You’re buying individual securities,” he explains. “The characteristics of those securities should be your focus. Stick to the basics and what’s in front of you. Don’t get lost in abstractions like ‘GDP.'”
Two other points about GDP that Chris has visited before but are worth revisiting now:
- “GDP figures are backward looking. They tell you nothing about the future. Even if you think they do, then you have to say the trend is not good. China’s first-quarter GDP was at a 3-year low
- “GDP as a concept is absurd. Government spending is counted as a positive. So a government that spends money digging holes and refilling them is adding to its country’s GDP.
“China’s economy is a huge, complex thing,” he writes, “It has many parts going in all kinds of directions. To boil all that down to a single number always strikes me as silly.”
Then there’s the matter of China’s corporate earnings. “There is a good case,” says Chris, “that such earnings deserve heavy discounting. Maybe 10 times earnings is the right number in today’s environment.
“There is a lot of guesswork,” Chris points out, but, “there are also things we do know.
“Despite decent Chinese import figures, iron ore prices recently hit 2½-year lows. Iron ore prices are down 17% since mid-June. Coking coal is down 23% since the start of July. Copper prices are down more than 20% from a year ago.
“Chinese steel mills are hurting,” he continues, “the China Iron and Steel Association said last week that the Chinese steel industry’s profits fell 96% in the first half of the year compared with last year.
“That’s not a typo,” he assures us, “down 96%.
“These anecdotes don’t square with the image of a booming economy.”
“Most people wouldn’t care a whit about China’s economy,” says Chris, reinforcing our sympathies.
“They care because China is such a big user of commodities and has such an impact on world prices.”
So where do we stand, 12-14 years into the current commodity bull? Across a long sweep of history, “we’re in outlier territory,” says Chris. “Not too many past bull markets have pushed much beyond where we are now.”
The chart comes from BCA Research, which concludes the long-term trend line is “testament to human ingenuity” in harnessing the good earth’s resources.
“I don’t think this dynamic is somehow suspended in our own times,” says Chris. “I think we’ve turned, or are turning, another corner. We should expect lower highs and lower lows on most commodities (in real terms) as the commodity bull market unwinds.
“It will affect everything from iron ore to oil,” Chris concludes — with the notable exception of precious metals.
“If I’m wrong, I’ll be wrong for a year or two as the commodity bull takes its last breaths. But then, so what? There are plenty of other ideas to invest in.”
Once again, major U.S. stock indexes are showing little movement today. The Dow sits a bit below 13,200, the S&P a bit above 1,400.
Traders can barely rouse themselves to react to today’s economic numbers — which are once again a very mixed bag…
- First-time unemployment claims: Up marginally last week to 366,000
- Housing starts: Down 1.1% in July. But permits, a better indicator of future activity, have reached a four-year high
- Philly Fed survey: This index of mid-Atlantic manufacturing improved from last month, but remains mired in negative territory.
There’s nothing to like in the internals of the Philly Fed barometer. New orders, shipments, employment, workweek — they’re all moving in the wrong direction.
Look for a “false rally” in stocks in late summer or early fall, suggests the estimable Marc Faber, sharing his Vancouver insights with a wider audience.
In a fit of masochism, Dr. Faber subjected himself to an appearance on CNBC’s irritating Fast Money yesterday afternoon, where he was given a surprisingly respectful hearing — perhaps because he said, “We could go to 1,450 or even 1,500” on the S&P.
“In the U.S.,” he explained, “there have been a few strong stocks such as Kimberly-Clark (KMB), Johnson & Johnson (JNJ), Merck (MRK) and Altria (MO). They have all made new highs. Also, there are some deeply oversold stocks — mostly economically sensitive companies, such as miners.”
But 1,450-1,500 on the S&P is as good as it gets, he figures: “We’re in the late stage of a mature market, and not a new bull.”
From there, it’s downhill to 1,250 — where he anticipates the Fed will swoop in with “QE3” and set a new floor.
For the record: The feds’ criminal investigation into the collapse of MF Global “is now heading into its final stage without charges expected against any top executives,” according to The New York Times.
Ex-CEO Jon Corzine, the Gray Lady reports, is thinking about launching a hedge fund.
(The white space above indicates we’re speechless.)
The FDA is gearing up for flu season, and the agency might well be caught off guard – spotlighting an opportunity on Patrick Cox’s radar.
This week the FDA approved vaccine formulas from all six of its approved manufacturers. Three strains are targeted this year… but one could creep up out of nowhere.
In recent months, dead seals have been washing ashore in New England at an accelerating rate. “According to one of the most-respected virus authorities in the world, W. Ian Lipkin, MD, of Columbia University, the culprit is a mutated form of H3N8 virus,” Patrick writes.
“This is the virus that spread from horses to dogs in 2004. Somehow, it entered the seal population and then underwent several mutations, making it more lethal and allowing it to spread more easily.
“The virus does not, at this time, spread to humans, but Lipkin is concerned that seals may, like pigs, be simultaneously infected by the H5N1 bird flu. If this is true, it could produce a virulent and deadly virus capable spreading to humans. This would be very bad news, and I worry about anything Dr. Lipkin worries about.”
Two companies in Patrick’s Breakthrough Technology Alert portfolio are well positioned to benefit in the event of a flu pandemic he sees as “inevitable.” One has a treatment that could prevent the onset of flu; the other could kill off the virus after it’s invaded the body.
[Ed. Note: We’re in the waning days of our membership drive for the Agora Financial Equity Reserve.
Full-price access to Patrick’s premium research costs $1,995 per year. You could receive that and much more, free for life, with the Equity Reserve. That includes the fruits of Chris Mayer’s globe-trotting… Byron King’s resource plays… Greg Guenthner and Jonas Elmerraji’s penny stock picks and Jim Nelson’s income recommendations.
As an existing paid subscriber, you’re entitled to a “loyalty reward” that will make this suite of services more accessible than ever. But you must act soon: Your rewards expire next Tuesday, Aug. 21.
Well… Here’s a political campaign The 5 might be able to get behind…
A cat named Hank is running for an open U.S. Senate seat in Virginia. “It’s OK to make a change,” says one of his campaign ads. “It’s OK to vote the humans out.”
Who can argue with that?
According to his website, the 9-year-old Maine Coon’s major issues are “creating jobs, spay & neuter programs with animal rescue groups and making politics more civil.” Since he’s not specifying the use of taxpayers’ money for these purposes, we’re in!
Near as we can tell, the campaign is an ingenious animal-rescue fundraising effort on the part of his owner/campaign manager Matthew O’Leary. “Hank has refused donations of any kind since Day 1,” according to Hank’s website, “and continues to instead suggest a donation to local animal rescue groups, such as Animal Allies, who rescued him as a kitten from certain death.”
Best part: Hank has nearly as many “likes” on Facebook as one of the major-party candidates…
“My confidence in you is fading fast,” a reader writes, carrying on this week’s Paul Ryan thread.
“Do not give me the line about all pols are worthless. No one — even you — is perfect. Romney and Ryan are trying to do the right thing.”
The 5: At least you understood what we were getting at. Which is more than we can say for the reader who chided us, “I did not hire you to hear your political viewpoints.”
And… confidential to the reader who dared us to run his letter today: Usually the trick works, but labeling the current occupant of the White House a “Marxist” — when he has proven himself the handmaiden of Big Banks, Big Pharma and Big Agra — is an automatic disqualifier.
“I do not know if you are pro-Obama or just anti-Ryan, but you definitely have become political,” another reader writes.
“Your excuse that ‘We’re merely amused by the many people who do have those expectations, some of whom ought to know better’ is pretty lame. Ryan on the ticket means that the budget deficit will be discussed more than it might otherwise have been. Agora has pointed out the importance of this issue, so it should be delighted that Ryan is on the ticket and thus the budget deficit will get more focus.
“That does not imply that Ryan has good or bad answers. Most of us know that it is a dilemma that has a lot to do with demographics and it is not a U.S.-only problem. I am glad the issue will be discussed. It is a lot better that some of what passes for political discourse.
“When someone says that they do not wish to discuss politics and then says but they are forced to, one has no choice but to conclude that they wish to.
“I have no intention of canceling any of my subscriptions, but I will tell you that my enthusiasm for The 5 and The Daily Reckoning is way down since you have decided to be involved with politics. What used to be joy is now dread. For the first time in a number of years, I have stopped printing out your newsletters and taking them with me to read and study. Not to be crude, but just scanning crap online is sufficient. It does not required careful thought.
“I generally delete all political email and trash all political snail mail before reading, but there remains some good stuff in The 5 and The Daily Reckoning, so I now scan it online in case there is something important there. But I, for one, am really turned off by this new side of your organization, which appears to be traceable to one or two individuals. They are not helping you.
“Mock me if you will. I have been mocked by better.”
The 5: No mockery from this corner… but you’ll have to excuse us for being something other than “delighted” at the sight of Ryan addressing the budget deficit in this fashion — with a sympathetic reporter, no less…
“OK, the fun has begun,” writes a Reserve member. “Here’s the skinny — if Ryan inherited any portion of his granddaddy’s grey matter, he will be a force to be reckoned with. He was a neighbor and built the financial empire off which Paulie lives. Unfortunately, Paulie is a Republicrat, beholden to the big-money campaign contributors that run the Republicrat machine. His ‘medical plan’ is very simple — don’t mess with the corporate welfare recipients, just cut the amount beneficiaries get.
“The idea that the election of one party’s candidate over the other party’s will result in any significant difference is just plain ignorant. EVERY administration, EVERY CONgress since World War II, has spent more than revenue and multiplied the national debt. Electing Republicans or Democrats exemplifies the theory of insanity — doing the same thing over and over and expecting a different result.
“If you vote for a Republicrat, YOU are the problem!! They will fix NOTHING. But they’ll give us one hell of a show.”
“No matter the political bent, the die has been cast,” one of our regulars suggests to fellow readers.
“Dyed-in-the-wool Dem or Repub, we will all be enjoying the fruits of the past 30 years of both parties, and it ain’t gonna be pretty. The boulder is too big and rolling too fast to stop.
“Just pay attention to the good advice in The 5 and protect yourself as best you can. It’s the best advice available for my money!”
The 5: The 5 is free, but we’ll accept the compliment in the spirit it’s intended!
If you haven’t taken steps to protect yourself, once again, here’s where to start.
“I’m enjoying the vitriol and the balm meant to soothe,” writes our final correspondent. “At least some of us are thinking. And for that, Mr. Gonnagle, I salute you.”
The 5: Salute me or slam me, I can take it… but please, get the name right!
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. On the subject of not finding salvation in politics… we kindly direct your attention to the pending release of Jeffrey Tucker’s newest book tomorrow.
“I admit it,” he writes in a blog entry at Laissez Faire Books: “The book is a rhapsodic hymn to the digital age. I want the book to reduce and end our intellectual dependency on the state. It shows that every truly valuable aspect of our lives extends not from politics and the regime, but from our own voluntary choices.”
We’re cooking up an extraordinary deal — something we’ve never offered before, and likely never will again — to put this book in your hands. Details tomorrow…