The Dove of Jackson Hole

August 19, 2014

  • “Only one thing left to do”: David Stockman on yesterday’s big rally
  • The big squeeze: Chart shows gold at a crucial inflection point
  • 100 years on, the Panama Canal is expanding: Who stands to profit?
  • No money down? Not anymore, but you can get the next best thing…
  • Consumer price numbers (any resemblance to your own cost of living is coincidental)… tracing Russia’s de-dollarization moves… satire, social media and the CIA… and more!

   “There is no reason rooted in the real world for today’s frothy stock market rally,” declares the former White House budget chief David Stockman.

To clarify, Mr. Stockman was writing yesterday while the market was open. By the time it closed, the major indexes were all up 1% on the day. The Nasdaq hit a 14-year high.

As we write this morning, the indexes are adding to those gains. The S&P sits at 1,979, less than 10 points from its all-time high three weeks ago.

   But is there any there there — to paraphrase Gertrude Stein’s line about Oakland? Do any fundamentals support the rally?

Not at all, Stockman writes: “In every single region of the planet, the post-crisis, central bank-fueled expansion cycle — tepid as it was in the global aggregate — is faltering badly.” He then proceeds to hopscotch the world for supporting evidence…

  • Japan: “Japan’s economy is only a hair bigger than five quarters ago.” That’s when Prime Minister Shinzo Abe introduced “Abenomics,” otherwise known as “insane money printing”…
  • Europe: Eurozone government debt has rallied thanks to the “whatever it takes” promise of European Central Bank chief Mario Draghi. “Soon it will be apparent, however, that the euro area economy benefited not a whit from Mario’s monetary magic”
  • China: “Stabilizing China’s tottering tower of $25 trillion in debt is far beyond the pay and grade of people who believe with Mao that power comes out of the barrel of a gun.”

   And here at home? “The usual Wall Street suspects are also busily marking down their U.S. GDP numbers for Q2 and their outlook for the balance of the year,” Mr. Stockman writes.

The Commerce Department’s first guess at second-quarter GDP clocked in at an annualized 4%. Its next guess — the agency issues three in all, and that’s before “historical revisions” later on — is due next week. Combined with the first quarter’s contraction, the U.S. economy is set for “the lowest rate of growth,” says Mr. Stockman, “since the 2009 bottom.”

“So with the global expansion cycle faltering, profit ratios at all-time highs and P/E multiples in the nosebleed section of history — nearly 20 times reported earnings for the S&P 500 — there is only one thing left for the Wall Street robots to do. Namely, vigorously buy the latest dip because the Fed has yet another new sheriff heading for Jackson Hole purportedly bearing dovish tidings.”

Heh… The Federal Reserve’s annual shindig in Wyoming is this Friday. Back in 2010, Ben Bernanke used the occasion to signal his plans to launch “QE2.” Ever since, amateur Kremlinologists on Wall Street have eagerly awaited this event, hoping for a new shot of monetary heroin, or at least the promise thereof.

Bernanke’s successor Janet Yellen takes the stage in three days. “The casino is having yet another bullish moment,” Mr. Stockman concludes, “because it expects the new monetary sheriff to keep the gamblers in poker chips for another go-round.”

   While stocks rally, nearly everything else is selling off.

Treasury yields are rising again today. The yield on a 10-year note stands at 2.4% — a level many technicians say is significant. If the yield stays below 2.4%, it might head still lower to 2.1%.

Gold meanwhile has slipped further below $1,300 — $1,294 at last check.

   “We’ve got some strong readings from the EKG machine,” says Matt Insley of our natural resource desk.

Matt’s looking for signs of life from the Midas metal… and a five-year view turns up what he calls “a lively chart formation”:

“We’re seeing strong consolidation around $1,300. Consolidation, where prices trade at lower highs and higher lows, is normally the sign of a coming breakout move.

“Of course, it’s important to note that gold’s breakout move could go either way. The last time we saw this type of formation in gold, however, we saw a strong upside jump. If we see a similar move in the next few weeks for gold, our triple play options strategy will surely pay off.

“With the way the chart looks above, we could see some sideways trade, but besides that, I’m counting on a big move. And from my perch, I’m betting on the upside.”

   “The Panama Canal turned 100 last Friday,” our Chris Mayer reminds us.

We keep missing significant historical anniversaries. Friday, we were preoccupied teasing out the implications of another anniversary — Nixon severing the dollar’s last tie to gold in 1971.

But Chris says we overlook the canal’s centenary at our own risk: “Today, the Panama Canal is undergoing an expansion,” he points out… and he’s following the money.

“The Panama Canal,” he says, “made it easier to ship goods from the East Coast to the West Coast, and vice versa. It also made it easier to ship goods from/to Europe and the West Coast, or from/to Asia and the East Coast.”

Shipping an item from New York to Seattle pre-Canal took nearly 14,000 miles, going around the tip of South America. After the canal, only 6,000 miles. Less distance, less time. And time is money: By 1922, overall shipping rates had fallen two-thirds.

   “Today, the Panama Canal’s expansion will benefit a number of ports and surrounding real estate,” says Chris.

He recently pored over research from SNL Financial that says the new locks can accommodate ships carrying 2½ times as much cargo as presently. Container traffic could grow as much as 15% at ports that can handle those big ships.

“The primary beneficiaries are East Coast ports,” Chris figures. “A large share of goods comes to the East Coast from the Far East. The upgrade will allow more goods to be shipped overseas more cheaply than by rail.

“Industrial land in the East Coast port areas will rise in value” — and the Gulf Coast, too. “To some extent, this has already happened. But there is still opportunity for real estate owners in these ports. Houston handles more waterborne foreign trade than any other U.S. port. Last year, it handled about 50% more volume than the No. 2 port in New Orleans.”

Chris’ premium subscribers have exposure to a small industrial REIT with a presence in Houston, Baltimore and New York… and paying a nice 6% dividend.

   Traders are chewing on a couple of economic numbers this morning. On their own, they say little. Together, they might say even less…

  • Consumer prices: Up 0.1% in July. The year-over-year increase works out to 2.0%. Using the government’s pre-1980 methodology, still applied by, it’s 9.73%
  • Housing starts: Up 15.7% in July, way ahead of the Street’s “expert consensus” guess. Permits — a better gauge of future activity — were up 8.1%, but most of that activity was concentrated in apartments and condos.

   Here’s a housing number we find more meaningful: $9,480.

That’s the median down payment in the low end of the real estate market — the cheapest 25% of properties sold in 2013. Back in 2007, before the onset of the “Great Recession,” the figure was $6,037. The numbers come from a survey of the 25 largest metro areas by the brokerage Redfin.

Bloomberg’s take on this survey? “The challenges facing prospective buyers of the least expensive homes in the U.S. are getting harder to overcome. Already beset by stagnant wages, growing student debt and competition from investors who are snapping up listings, those looking to purchase moderately priced houses must also provide more cash upfront.”

Sorry, Bloomberg “buried the lead.” The big news here is that after everything the economy’s been through the last seven years, it’s still possible to buy a $126,400 home with a down payment of only 7.5%.

Moving up the price scale, it’s not much better. For the middle 50% of properties sold last year, the average down payment was 8.8%. Only for the top quarter does the traditional 20% down payment rule apply… and in that segment, it applied even before 2007.

   Of course, we’re talking only about the sale of properties in which the buyer carries a mortgage.

The all-cash market is still hot: During the second quarter of this year, 38% of all home sales were to cash buyers, says RealtyTrac — down a bit from 42% in the first quarter.

In some markets, the percentage is much higher — over 45% in Kansas City, Detroit, Cleveland, Philadelphia and New York, over 50% in Las Vegas, and over 60% in many Florida locales where Latin American buyers are sweeping in.

Still, the overall trend is down, however slowly. As we’ve chronicled in Apogee Advisory, the bulk buying of single-family homes by hedge funds and private equity outfits — which turned them into rental properties — is now over. Last year, these institutional buyers accounted for 6% of all homes sold. Now it’s 4.7%.

   Thank God for Facebook: Who else will help us identify when satire is satire?

Facebook has adopted a policy of labeling articles from the satirical newspaper/website The Onion as “[Satire]” — the better to avoid instances such as…

Facebook tells Ars Technica the policy is a test run, responding to “feedback that people wanted a clearer way to distinguish satirical articles from others.”

We’re tempted to chalk this up to the dumbing down of America. Snooze. Old story. But then we scoured The 5’s now voluminous archives and came up with three instances in the last three years reminding us the best satire has a foundation in truth…

  • September 2011: The Onion sends out a tweet saying armed congressmen had taken 12 children hostage. The Capitol Police felt compelled to reply, “Conditions at the U.S. Capitol are currently normal. There is no credibility to these stories or the Twitter feeds”
  • November 2012: China’s People’s Daily picks up an Onion story about North Korean leader Kim Jong Un being named the year’s “Sexiest Man Alive” — complete with 55-image slideshow
  • August 2012: The Onion puts together a slick parody of a video news story about a congressional hearing; people believe it’s real and the video goes viral.

The big revelation to come from the “hearing”? That Facebook is a “massive online surveillance program run by the CIA.”

[Cue The Twilight Zone theme…]

   “I believe a lot of smoke and mirrors are being put forth,” a reader writes, “to mask the reasons for the USA’s sanctions and condemnations of Russia.

“These sanctions were being discussed prior to the incident with the downed airliner, but it seems that incident and the resulting blame being put on Russia finally nudged the Europeans to go along with the president.

“Several weeks ago, Russia and China announced their agreement for the purchase of natural gas in excess of $400 billion using rubles or yuan, but no dollars. Then, just before the airline incident, the BRICS nations announced the formation of their own ‘world bank,’ which again bypasses the dollar.

“If you add this to all the other trade agreements that have been finalized in recent years between countries in Asia and other emerging markets, one can see how the upper management in the USA might start to feel the pressure inching upward.

“I don’t have enough valid information to make an assessment on incidents that have happened in the Ukraine, but I believe the powers that be need to make an example of someone, and Russia has been chosen over China, as they do not hold the vast reserves of U.S. dollars like China does.

“And finally, is it possible this is some sort of payback for giving Snowden sanctuary in Russia?”

The 5: Hmmm… You’ve covered a lot of ground we’ve covered ourselves of late, but connecting the dots in a different way.

Two weeks ago, we mentioned the Shanghai Cooperation Organization — a group of nations with Russia and China at its core. The group might be morphing into an anti-dollar coalition. We’ll have a better idea when they meet next month…

Best regards,

Dave Gonigam
The 5 Min. Forecast

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