November 8, 2012
- Chinese leaders begin their supersecret People’s Congress: What it means for Treasuries, the dollar and gold…
- “Clearly something is wrong…” Jonas Elmerraji picks apart yesterday’s huge sell-off…
- A boon to Big Tobacco? The reefer referenda in Colorado and Washington… and ways to play it…
- Catching Alzheimer’s decades before symptoms appear: Cox on the breakthrough announcement that could stop the disease in its tracks…
- Victory in the “War on The 5” (but for whom?)… welcoming a future 5 reader into the world… a few nitpicky corrections… and more!
The city is on lockdown. Street vendors are closed. Taxi drivers have been ordered to seal their windows to prevent seditious material from being leafletted in the main square. Known troublemakers? Locked up… just in case.
Another G8 or NATO summit in the West? Heh. No, it’s the once-every-decade gathering of the Chinese Communist Party’s congress. The event starts today… and could have immediate ramifications on U.S. Treasuries, the U.S. dollar and, by extension, the price of gold.
The Chinese view of our own national election… 
“The [Chinese Communist Party’s] meeting’s more than 2,000 delegates choose a central committee,” explains the BBC, “which then chooses the country’s highest decision-making body, the Standing Committee of the Politburo. The process takes place behind closed doors, with the makeup of the top bodies in reality decided ahead of time.”
If the procedures are, umn, less than transparent, today’s outgoing speech president Hu Jintao was refreshingly upfront by Western standards. “If we fail to handle this issue well,” Hu lamented the rampant corruption inherent in their system, “it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.”
Then again, Hu’s predecessor Jiang Zemin said the same thing 10 years ago. The party was “heading for self-destruction” if they failed get corruption under control. Apparently, the Chinese take a long-range view on all plans… not just those involving economic domination of the planet.
Corruption (and snarky comments) aside, “China has a long list of challenges,” says our macro strategist Dan Amoss. But the investment implications for you are real.
“Its manufacturing companies face sluggish international markets,” Amoss asserts, “its banks are dealing with the fallout of a burst credit bubble; its imbalanced economy still depends on a destructive level of construction activity; and, of course, it’s undergoing the first change in political leadership in 10 years.
“Considering these challenges, China’s currency management policy has shifted. The People’s Bank of China is not nearly so concerned with providing vendor financing to China’s U.S. customers (by recycling export earnings back into the Treasury market).
“Chinese leaders acknowledge that the country already has enough U.S. Treasuries, and have allowed their Treasury portfolio to shrink slowly in recent months. What they are accumulating (unofficially) is gold, which we can see in the soaring gold imports through Hong Kong.”
Chinese imports continue to soar. In September, they totaled 69.7 metric tons — up an impressive 22% from a year earlier.
“Gold is the perfect hedge for the slowly eroding value of China’s U.S. Treasury portfolio,” Dan concludes. “After the U.S. elections revealed a country likely heading more towards a European economic model, the shift into gold should accelerate.”
Gold proved remarkably resilient as virtually every other “risk asset” sold off hard yesterday. This morning, it’s still holding up at $1,717.
The major stock indexes are stabilizing, with the Dow currently at 12,952. Likewise, oil is at $84.63. Little of yesterday’s sell-off can be attributed to a rising greenback; at 80.8, the dollar index has held steady in the last 24 hours. This morning, traders are digesting a flurry of news and noise:
- The Bank of England is leaving rates unchanged
- Ditto the European Central Bank, whose chief Mario Draghi says the eurozone’s growth trajectory will stay weak into next year (Gee, ya think?)
- First-time unemployment claims fell 8,000, to 355,000 — but the figures are even more meaningless than usual because Hurricane Sandy disrupted some of the reporting
- The U.S. trade deficit narrowed in September to $41.5 billion.
“Clearly, something is wrong,” says technician Jonas Elmerraji, “when people are basically making a bet that the incumbent isn’t going to win when he’s ahead in the polls… and they’re putting their money on that.”
Fact is, a falling market the day after an election is almost a nonevent. Data from Bespoke Investment Group reveal that, since 1984, only two postelection trading days saw a rising market (1996 and 2004). Yesterday’s 2.4% drop was on a par with 1940. Worse falls came in 1932 and 2008.
“The stock market dropping the day after an election is a news network’s ideal scenario,” Jonas says. They get to talk about the markets moving lower and they get to talk about an election at the same exact time.” But in a wider context, each new month since May has brought on a new trading environment:
Click chart to enlarge…“Since we’ve been correcting,” Jonas concludes of this month’s action, “there’s a strong probability we won’t continue to correct — especially since we’re at this important support level at 1400. It’s important for traders not to read too much into yesterday’s fall and not to take this price action out of context.”
[Ed Note: Jonas and Greg Guenthner are only seven days away from launching their trading “experiment.” Take it from their petty and impatient publisher, they’ve been perfecting the experiment for months… and now they’re ready to get started!
Right now, they’re looking for at least 75 hardy souls to take part. A large enough sample to prove you can still take a $1,000 grubstake and turn it into $5,240… even in these uncertain markets. If you’re at all curious… you’ve got nothing to lose by taking the challenge — it’s absolutely free.]
“Estimates indicate that the market in legalized marijuana might be as high as $10 billion annually” — so read an intriguing report commissioned by tobacco-maker Brown and Williamson… in the 1970s.
Adjust for inflation, and we’re talking more than $38 billion.
Voters in Colorado and Washington voted on Tuesday to legalize marijuana — for recreational use. In their experiment, ganja will be regulated and taxed like booze. “These are not just the first two states to do this,” says Ethan Nadelmann from the Drug Policy Alliance. “They’re the first two political jurisdictions in the world to do this.”
“This is the dream tobacco companies have had since at least the 1970s,” says a 2010 Washington Post article, “when consultants issued a secret report to Brown & Williamson touting a future product line in marijuana.”
“The use of marijuana today by 13 million Americans is socially the equivalent of the use of alcohol by some 100 million Americans,” said the secret report, dredged up during the endless tobacco litigation of the 1990s. “The trend in liberalization of drug laws reflects the overall change in our value system,” it went on. “It also has important implications for the tobacco industry in terms of an alternative product line.”
A bonanza in bud… if the feds can keep their grubby mitts off it.Of course, “federal law still says marijuana is an illegal drug,” cautions Colorado Gov. John Hickenlooper, “so don’t break out the Cheetos or Goldfish too quickly.”
Indeed. The question now is: How the feds will react? “The Obama administration has quietly unleashed a multi¬agency crackdown on medical cannabis that goes far beyond anything undertaken by George W. Bush,” Rolling Stone reported last February.
“The feds are busting growers who operate in full compliance with state laws, vowing to seize the property of anyone who dares to even rent to legal pot dispensaries and threatening to imprison state employees responsible for regulating medical marijuana.”
Curious, if you consider the president’s own “Choom Gang” history.
We don’t expect the Fed policy to change during Obama’s second term. Nor do we expect a state’s rights standoff with U.S. troops marching on local cops in the Centennial State.
More likely they’ll endure an army of whimpering bureaucrats: Four academic experts on the subject suggested to Huffington Post that Obama could apply the soft totalitarianism of withholding federal highway funds — the same way Ronald Reagan, that tireless champion of limited government, imposed a national drinking age of 21.
Bummer, dude… don’t load up on tobacco companies to catch this trend just yet.
From our breakthrough tech desk: Researchers have figured out how to detect Alzheimer’s disease decades before the first symptoms show up — an intriguing development in the high-stakes race to bring an Alzheimer’s drug to market.
A study published this week in The Lancet Neurology finds that young people with a gene linked to early-onset Alzheimer’s “showed differences in their brain scans when compared to those who didn’t have the gene,” CBS News reports.
“These findings,” says Dr. Eric Reiman of the Banner Alzheimer’s Institute, “suggest that brain changes begin many years before the clinical onset of Alzheimer’s disease. They raise new questions about the earliest brain changes involved in the predisposition to Alzheimer’s and the extent to which they could be targeted by future prevention therapies.”
We bring it up for an important reason: Alzheimer’s treatment is likely to be a $20 trillion drain on the U.S. economy over the next 40 years. Big pharmaceutical firms have repeatedly struck out on Alzheimer’s drugs that work… because they’re going after the wrong target.
“It has been obvious for some time,” says our biotech maven Patrick Cox, “that amyloid plaque and tau tangles are not the root cause of Alzheimer’s, but an adaptive response.”
Human trials are underway on a drug that tackles Alzheimer’s in a whole new way. Rather than tackling amyloid plaque in the brain, it targets sigma receptors. “You might think of them,” Patrick explains, “as chemical radios that receive mobile messages from the greater metabolism.
“Whoever gets to market with an approved drug first,” he adds, “will reap enormous benefits.” Research from Barclays estimates that first mover could snag $5 billion in annual sales. Patrick believes he’s on to the company with the inside track; you can learn much more about the research and the wealth potential. Read more here: Robert Has Alzheimer’s.
“In a photo caption,” writes a reader with not so much a new front in the “War on The 5,” but a correction, “you attribute the quotation that an election is an advance auction of stolen goods to H.L. Mencken.
“I believe that this came originally from Ambrose Bierce. Bierce made the unfortunate mistake of visiting Mexico in 1913 during the Revolution. If he wrote anything after that, it has been lost to us.”
The 5: Au contraire, the quotation comes from Mencken’s Prejudices: First Series. Here it is in full:
“The government consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get and to promise to give it to them. Nine times out of 10, that promise is worth nothing. The 10th time is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is sort of an advance auction sale of stolen goods.”
You may also like to know that Mencken’s seminal essay “On Being an American” made the cut for The Idea of America – the volume edited by Bill Bonner and Pierre Lemieux, with essays spanning the centuries from Jefferson to Rothbard. It’s a must-read and available in our Laissez Faire catalog for 20% off.
“Not to nitpick, gentlemen,” writes another petulant reader, “but the picture of the ‘shoulder fired missile’ in Tuesday’s 5 appears to be a run-of-the-mill RPG. These are available by the thousands and have their origin in the old Soviet bloc countries, not the U.S.”
The 5: Darn. Markets, economics… history. OK. Weaponry? Not so much.
“Let one jetliner be shot down by one of those 20,000 missing missiles,” writes a reader underscoring our original point, “and you might as well close down all the civilian airports, as well as all the airlines.
“Who would willingly fly anywhere anymore? Maybe buy stock in shipping lines — at least until a couple of Iranian submarines go missing.”
“Please declare victory in the ‘War on The 5‘,” a reader implores, “and just give us a full 5 minutes of what you guys think about the world around us.
[We thought that’s what we were doing when the war broke out!]
“I might stop reading if you keep using up valuable 5 space on whining enemy opinions. Love your 5!
“I dare you to print this!” reads our last “war” entry (for a while).
“OK, whilst you miserable lot were fishing for compliments last week, I was on the verge of writing in when my wife went into labor with our first little boy. Anyway, little James made his appearance courtesy of my wife and her incredible strength and endurance without so much as an aspirin for her troubles. Got me to thinking even more about The 5 and Agora in general.
“Planning one’s own life is one thing, giving your kids a great start an entirely different thing. Being 41 now and just figuring out this money stuff, mainly courtesy of you, I might add, there is NO WAY IN HELL that little James is going to be starved of your insights, your knowledge and your enthusiasm for what you do. If only I knew way back when what you teach.
“James may not understand a thing yet, but in time, God willing, he will. Freedom is partly a state of mind, partly financial, partly intellectual and always to be defended. I think you guys do an incredible balancing act — and I sincerely hope your legacy continues to keep my James informed when he is a young man embarking on his own journeys. There’s your compliment for today, hopefully not your last.”
The 5: Victory is ours! (Good luck, James.)
Thanks for continuing to read,
Addison Wiggin
The 5 Min. Forecast
P.S. To further demonstrate that markets… and not weaponry… are our beat: While the market tanked yesterday, Options Hotline readers are up 60% in only two days on Steve Sarnoff’s latest play. Steve issues a new recommendation nearly every Sunday. Given his track record of late, you could make money on your very first trade… See the proof right here.