September 10, 2013
- The most-cited U.S. stock index, now rendered a pitiful junkie looking for the next hit
- Markets breathe a Syrian sigh of relief… which The 5 deigns to suggest is premature
- If war breaks out, is another recession guaranteed? An eye-opening chart in context
- How to invest in a rising interest rate environment: Chris Mayer’s guidance from poolside in Uruguay
- The view from small-business owners… lining up for drone-hunting licenses… the past as prologue in one beaten-up sector… and more!
“The Dow Jones is now officially a crack-smoking, hallucinatory index of pure fantasy,” reads a pithy email this morning from Byron King.
S&P Dow Jones Indexes are shaking up the composition of the Dow Jones Industrial Average. As of Monday, Sept. 23, Alcoa, Bank of America and Hewlett-Packard will be gone. Taking their places will be Goldman Sachs, Visa and Nike.
“Who needs aluminum or electronics (or on a good day, merchant banking) in a modern economy, right?” Byron laments. “Especially when you have manufacturing powerhouses like Goldman and Visa, which print fake paper by the truckload. And of course, Nike, with its fancy basketball shoes.”
The turnover in the Dow is getting ridiculous. Any chart of the index that goes back more than a couple of years is an apples-to-oranges comparison.
Come Sept. 23, seven of the Dow’s 30 components will be new arrivals within the last six years. Two of those slots have turned over twice during that span.
This time, however, is the first three-for-three swap to take place in one fell swoop since April 8, 2004. The new arrivals then were Verizon, Pfizer and… AIG.
Ruh-roh…
Maybe this time, the keepers of the Dow are suffering what you might call “index envy.” The thought occurs to us as we examine a chart Greg Guenther passes along in this morning’s Rude Awakening…
The Nasdaq and the small-cap Russell 2000 have been spanking the Dow all summer. But that shouldn’t be any surprise if you’ve been reading us for a while. The Russell has outperformed the Dow for the last six months, the last year, the last two years, even the last five years.
And within the small-cap space lies a subniche of stocks that fly under Wall Street’s radar. These stocks “can turn a little bit of seed money into enough wealth to not only fund your dream retirement, but fund future generations of your family too,” says our newest analyst Thompson Clark, a recovering Wall Street pro.
We’ve had a tremendous response to the launch of Thompson’s new high-end advisory. A few weeks ago, we even had to shut the doors to new members. While access is once again open, the “first mover” discount we’ve been offering is set to expire at midnight this Thursday. Click here to take advantage now.
Crude has climbed down more than $3 a barrel in the last 24 hours — a barrel of West Texas Intermediate fetches $106.77 this morning — as the buildup to war grinds down to a farce.
The Nigerian-American novelist Teju Cole summed up matters as succinctly as possible — making the most of his available 140 characters in this tweet…
The conventional wisdom, reflected in the crude price, is that U.S. air strikes against Syria are now “off” and the president’s Oval Office address tonight — only his third, and only the ninth between him and his predecessor — will be one of the most anticlimactic in history.
Then again, presidents have a way of refusing to take “yes” for an answer from their targeted tin-pot dictators.
In 2002, Iraq’s Saddam Hussein agreed to Bush’s demands for unconditional U.N. weapons inspections. Fat lot of good that did him.
In 1998, Bill Clinton fibbed about Saddam’s refusal to cooperate with U.N. inspectors to justify four days of bombing — “Monica missiles” — as a diversion from a looming impeachment vote in the House.
The veteran Indian diplomat M.K. Bhadrakumar shares our suspicion the story isn’t over. From the Asia Times: “It’s check and checkmate for Obama. But he has a way with words, and his speech to the nation today, in which he is expected to present his best case for a U.S. military attack against Syria, promises to be classic one.”
“Syria is, at root, a religious war,” Byron King reminds us — a manifestation of the “Oil War” scenario he’s been suggesting for years now. “Westerners tend not to understand religious wars. Europe fought its last big religious battles — Christian, to be precise — in the 1600s.
“In the oil markets, the major concern with Syria is the prospect of open-ended Western intervention in an intra-Islam blood feud. That is, oil prices have been rising because traders discern deep-seated, long-term problems with the U.S., France and possibly other NATO allies inserting themselves into an admittedly ugly war, but one that’s more or less regionally contained.
“If Syrian fighting spreads — outward to, say, Israel, Turkey (a NATO ally) or other locales — then problems could quickly arise with global oil trading patterns. In that case, the global supply situation could tighten in a hurry. Oil prices could melt up overnight. I mean $120, $130, $140 and more per barrel.”
And in that scenario, we’d be looking at another recession — even by the addled standards of conventional economists.
A pop in oil prices as Byron describes could drive up gasoline prices by as much as $1 a gallon. As it stands, consumers are still strapped. “U.S. households continue to face high costs for essential items,” says our Dan Amoss, “leaving little room to (responsibly) spend on discretionary items.”
Dan points us to an intriguing chart from one of the top strategists on Wall Street, Barry Bannister. It shows recessions kick in whenever consumer spending on essential items — food, shelter, heat, etc. — reaches 44.5% of personal income.
Bannister reckons another $1 a gallon tacked on to gas prices would push us into that danger zone.
As it is, Americans have cut back on their credit card use two months in a row, according to Federal Reserve figures released yesterday. “The reduction in credit card debt suggests that consumers remain cautious about accumulating high-interest debt,” says an Associated Press account. “That could hold back consumer spending.”
And that’s with the nationwide average gas price oscillating between $3.50-3.70 the last six months. A dollar higher is uncharted territory — the record in 2008 was $4.11.
But for the moment, the “war is off” perception is driving up the stock market.
At last check, the “crack-smoking, hallucinatory index of pure fantasy” otherwise known as the Dow is approaching 15,200 — an improvement of about 250 points from Friday’s close.
Helping matters are robust industrial production numbers from China, further putting “China slowdown” worries in the rearview mirror.
“I’m in the lobby of the Sheraton, a Starwood property, in Colonia, Uruguay. Working conditions are tough here, and the view from where I sit is one of utter depravity.”
Chris Mayer was invited to speak at a Uruguayan investment conference: “Since it is all expenses paid, and I’ve never been to Uruguay, I figured why not?”
Thus far, he’s given a main talk and a few workshops, and sat on a panel. Despite it being a Spanish-language conference, translators mediated the discussion. “There were definite patterns of concern,” Chris writes. “There were questions that kept coming up in various ways.
“First,” he writes, “I got a lot of questions about U.S. interest rates. The big surge from the May lows has people wondering what it all means for their investing plans.”
You’re likely aware of Chris’ favorite picks: small banks and insurers that are cheap after suffering from years of low interest rates. Apart from those, though, “the effect of higher interest rates in not such an easy call,” says Chris. “Take real estate, for example.
“The consensus is that higher rates are bad for real estate. They raise borrowing costs, for sure, and the idea is this will push prices lower. And it may happen that way. On the other hand, higher rates deter new construction and raise the replacement costs of real estate assets. Growing rents can also blunt the effect of higher rates.
“So it’s not a given that higher rates equal lower real estate prices long term.
“Long term,” Chris hedges, “I like owning real estate acquired at good prices. Real estate is an asset that tends to hold its value over time.”
[Ed. Note: Another long-term play of Chris’ is his “Chaffee Royalty” program. The last time he opened this program to readers, in the midst of the dot-com bust, readers could’ve pulled in a 50:1 payout. This time around? See what kinds of gains are possible, right here at this link.]
Gold began sliding steadily overnight, from $1,380 to its present — [glancing at the screen] — $1,361.
Silver opted to take its lumps all at once, starting with the Comex open at 8:30 a.m. EDT. It’s down more than 3%, and the $23 level is but a memory.
One of the two big mining unions in South Africa has called off its strike and agreed to a new contract, but a rival union is holding out.
The monthly survey of small-business owners by the National Federation of Independent Business was a head-scratcher.
The August number was all but unchanged from July — down 0.1 to 94.0. “Job creation plans leapt to a level not seen since before the recession, and sales expectations improved,” says the NFIB’s summary, “but this optimism would appear to contravene the dramatic deterioration in quarter-to-quarter sales and profit trends.”
As for the “single most important problem” portion of the survey: Taxes are now clearly in the lead, with 23% of survey respondents saying that’s their biggest problem, followed by regulations at 21% and poor sales at 17%.
Drone Hunters: We smell a new reality TV show in the midst…
“The increased use of drone strikes abroad,” the Policymic blog begins, “and the expansion of American surveillance programs at home have triggered concern that domestic drone surveillance may happen in the not-too-distant future.
“As such, the residents of Deer Trail, Colo., have the chance to obtain a ‘drone license’ that would allow them to shoot down drones ‘known to be owned and operated by the United States federal government,’ pending a vote scheduled for Oct. 8.
“The proposal,” says Policymic, “even if the town’s citizens vote for it, is no more than a symbolic stand against what residents feel is an ever-growing surveillance state targeting its own citizenry.”
The idea came into fruition following news that the federal government is considering using drones in sparsely populated western states, including Colorado.
“Supporters of the proposal also insist that the licenses are a symbolic gesture,” Policymic goes on, “with copies being sold by proposal creator Philip Steele that state explicitly in fine print: ‘License may not be recognized by tyrannical municipal, state or federal governments.'”
The proposal also includes a bounty for $100 a drone, provided the debris is collected. The town has already received 1,000 applications for drone licenses.
Which is really impressive for a town whose 2010 census population is 546.
“The piece on REITs is spot on,” a reader writes after Thompson Clark’s analysis of real estate investment trusts in yesterday’s 5.
“I went back and looked at previous periods where interest rates spiked, the way they have since May. What I discovered was interesting. REIT ETFs did not decline during the previous episodes. The obvious conclusion is that REITs have been oversold and now represent a bargain entry point.”
The 5: Good catch. Episodes like the current one, says Thompson, “provide us with an excellent opportunity to purchase otherwise good companies at a steep discount.”
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Thompson’s analysis is helpful… but the way to make the most of it is to apply that analysis to his investment recommendations — every one of them selected for explosive, indeed life-changing, potential.
As a reminder, you can still receive those recommendations at the lowest available price through midnight this Thursday.