Joel Bowman, with a few quick words from the shores of the South China Sea... Stocks up... Gold down... Dollar holding on to gains. That was the basic story yesterday. Many investors have had enough of the market for one year. They've packed up and left the office for '09. Either they're annoyed because they missed the bounce...or nervous because they caught it, in which case they may be quietly looking for an exit strategy. In today's issue we bring you thoughts on inflation and gold, on small caps and market psychology, on little trains that couldn't and investors who certainly could...and did. We'll start the story in Baltimore, where The 5-Minute Forecast's Addison Wiggin explains why inflation is heading up and the housing market is heading down... Rob Parenteau, editor of The Richebächer Letter, sees inflation rearing its head in 2010. Yes, Rob still sees a host of numbers that indicate weak economic growth. Nevertheless, he observes that "nonfood materials prices, excluding energy, are up over 20% from a year ago." In theory, producers should have to eat rising wholesale prices when the economy is sluggish. In theory, producers can't pass on those rising prices to consumers who are still losing jobs and servicing high debts. "But that is not what we are observing at the moment," says Rob. "Pass-through of those price increases to wholesale finished goods prices is no less than it was just two years ago when the unemployment rate was half of the current rate and capacity utilization was closer to 80%... Inflation took only a brief vacation.
"The Fed can pretend that inflation poses no problem whatsoever. But if GDP in the fourth quarter of 2009 comes in around 4% or higher, as now appears highly likely, interest rates could start climbing rapidly. My concern is that Q1 2010 could see a backup in Treasury bond yields, with the 10-year breaching 4%... If the new housing market is barely stable now, imagine what higher mortgage rates might add to the picture." Higher mortgage rates sure won't do much for the high end of the residential real estate market. Homeowners with mortgages of $1 million or more are now defaulting at nearly double the national average.
That 12% figure compares with less than 5% a year ago. Ouch. In large part, that's a function of the fact that Fannie Mae and Freddie Mac can't buy "jumbo" loans of more than $729,750. In other words, once you reach the high six figures, you don't have Fannie and Freddie propping up the market with artificially low interest rates. So prices can fall more quickly to a more natural level...and high-end homeowners can find themselves way underwater. | |||
| The Daily Reckoning PRESENTS: How did you do in '09? Up a little? A lot? If you outpaced the broader markets by more than double, you're probably enjoying a pretty sweet holiday season. Here to tell us how he did just that is one of favorite value guys, Chris Mayer. Please enjoy his guest essay... (Some) Small Caps Are Still Cheap by Chris Mayer Gaithersburg, Maryland What can investors expect next year? We can expect that the crowd will probably be wrong. Or as Fred C. Kelly put it more emphatically: "The crowd always loses because the crowd is always wrong. It is wrong because it behaves normally." Kelly wrote this in a little 1930 book titled Why You Win or Lose: the Psychology of Speculation. We'll see what Kelly meant below. We don't know all that much about Kelly. We know he was a writer, traveler and breeder of dogs. He also played the stock market. "For several years now," he tells us in his book, "including much of 1929, I have had the astounding experience of being in the stock market most of the time without losing anything. It would have been a wonderful adventure even if I had lost, for I had opportunity to learn of quirks and foibles of human nature in the greatest human laboratory on earth. It was like going to college, tuition free, with an occasional bonus for encouragement." We should all be so enthusiastic in our pursuits. Kelly's main interest was in what goes on between the ears. As the subtitle of his book suggests, he was interested in the mental aspects of speculating in markets. Kelly's key to success, in his estimation, largely turned on his ability to not do what everyone else was doing. In other words, he didn't follow the crowd. This is what he meant by the crowd behaving normally. Normally, people tend to do what other people say they should do. Normally, people like to look for a consensus of expert opinion and then back that consensus. In most things in life, that works much of the time. If ten home inspectors tell you that your house needs a new roof, you can safely conclude that it does. If eight out of ten auto mechanics tell you need to replace your timing belt, you probably should. But trusting in the consensus opinion tends to work poorly in financial markets. If 10 out of 10 experts say you should buy tech stocks, you probably shouldn't. And if eight out of 10 say you should avoid utilities, then you should probably take a look at buying them. That's why a recent poll by Barron's makes me a little nervous about 2010. Barron's asked 12 experts - all strategists from blue-blood firms like Goldman Sachs and JP Morgan - what they like and don't like for the next twelve months. There were lots of mixed opinions, but every single one of the experts predicted the stock market would advance in 2010. The consensus was almost as universally bullish in the late 1990s, just as an epic bear market was about to begin. During the late 1990s, stocks were as popular as they were expensive. In 1999, the S&P 500 traded for 44 times earnings - an all-time high. During the ensuing ten years, the S&P 500 delivered a total return of approximately zero! As we head into 2010, the stock market trades for about 20 times earnings. That's not cheap. But it's also not horribly expensive, either, especially if you consider that we are in a recession and profits may well improve big-time over the next few years. Either way, I do not make investment decisions based on the valuation of the overall stock market. I look at individual stocks. There is nearly always something worthwhile to buy in any market. Sometimes good ideas are more plentiful and sometimes they are more scarce, but I let my bottoms-up rooting around tell me what's what. At the moment, my research is turning up more bargains in the smaller- cap stocks than the big stocks. In my investment letter, Mayer's Special Situations, I focus on small and underfollowed stocks. During 2009 only one of the stocks I recommended to my subscribers had a market cap greater than $1 billion. We picked up a debt-free emerging iron ore producer, now up 119%. We also grabbed a debt-free nat gas producer with lots of shale gas, now up 120%. We're up 91% on a small Brazilian gold miner. We closed out a double on a Mexican silver miner earlier in the year. Those were some of the best picks, but we had many other solid market beaters with great upside remaining. I look forward to finding more such small-cap goodies in 2010. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: In his final alert for the year, Mr. Mayer wrote the following to his subscribers. (We don't think they'll mind us sharing it with you.) "This is the last alert of the year. We had an excellent 2009, rebounding after a difficult 2008. Just looking at the 2009 picks alone (including four closed positions), we enjoyed an average gain of 50%. That's more than twice the return of the overall market. That average also includes stocks we've hardly owned. If you weighted the average in some way, the return would be even higher..." Readers interested in joining Chris for the new year might like to take advantage of the special $1, one-month trial offer we have going right now. Here's a direct link to the sign-up page. --------------------------------------------------------------- And now over to Bill Bonner who has today's reckoning from Paris, France... The financial world is slowing down. Analysts...economists...and blabbermouths are getting ready for the holidays. The news flow is quieting. The noise is abating. So, let's talk about gold. But first...a note about the little train that couldn't. The Eurostar connects London and Paris. Last Friday, several trains entered the tunnel and stopped. According to the press reports, the weather was unusually cold in France and unusually warm in the tunnel, causing some sort of malfunction and stranding 2,000 travelers under the dark water and thousands more on both sides of the channel. It was a blow to France's pride; the French consider their train technology to be the best in the world. Yesterday, President Sarkozy called the head of the Eurostar and chewed him out...and this morning, the trains were meant to be running again. We rose at 5AM to rush to the Gare du Nord, so we could get the 6:43 to London. "You're going to take the Eurostar," said the taxi driver with a laugh. "Well...good luck..." When we got there, it was obvious something was wrong. Passengers weren't lining up in an orderly fashion. Instead, hundreds of travelers who had been waiting three days for a train formed a miserable, complaining mob. We were just trying to figure out what was going on when a phalanx of police came down the steps, followed by another group of Eurostar staff members. They wandered around...formed up the passengers into lines...answered questions and then, nothing happened. We waited. We waited. "This is intolerable," one French passenger yelled at a young woman in uniform. "You people have no respect for your customers. We've been waiting days to get back to our families...and you treat us like cattle. It wasn't our fault the trains didn't run as they were supposed to. It was your fault. And you should have done a better job of dealing with the trouble you caused." A murmur of approval went up from the crowd. The clerk walked away. We waited. Finally, after half an hour, your editor gave up. His business in London could wait. We walked over to our office, only about 20 minutes away on foot. Now...back to gold... The price fell $15 yesterday, to close below $1,100. We expected a correction in the gold market. But we thought it would come along with a correction in the stock market. Stocks rose 85 points on the Dow yesterday. We take this as a warning: something is going on that we don't understand. That said, there's a lot going on that we don't understand. But the broad patterns generally make sense. Boom was followed by bust. As dear readers know, the force of a correction is equal and opposite to the deception that preceded it. The deception of the Bubble Era being exceptional, the correction would be exceptional too - even under the best of circumstances. But these are not the best of circumstances. Because several other things are happening...things that need to be reckoned with, too.
What will happen? Don't know. Wish we did. A series of mini-disasters? Or one big planet-wide blow-up? Or, are the authorities so smart that they can engineer trouble-free solutions to these challenges? If you have confidence in Obama...Bernanke...Geithner...Congress...the European Central Bank...the Bank of China...and so forth... Well, you have no business reading The Daily Reckoning! Heck...let them figure it out. Everything will be fine. Go back to the TV... If, on the other hand, you have a sly suspicion that the authorities are headed for the rocks...you should own some gold. Traditionally, gold is what people buy when they are afraid things might not work out as planned. More below... --- Outstanding Investments: Buying Gold on Dips --- From Hulbert's No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... GOLD $2,000 "I'm so sure gold will soar higher I'll even make you a guarantee... Plus, I'll give you five entirely new ways to play the trend... "Including one hidden way to snap up gold...for less than one penny per ounce..." How can that be possible? Give me the next four minutes and I'll show you how... Your Full Step-by-Step Gold Investing Report Here. --------------------------------------------------------------- As near as we can tell, gold is fairly priced. It will buy about as much as it would have bought 500 years ago...or 2,000 years ago, for that matter. That's what's nice about it. It doesn't make you any money, but it doesn't lose you any money either. Of course, the price of gold can still vary substantially. In the last bull market in gold - from the trough in '67 to the peak in '80 - gold rose 1550%. That was a good time sell. The next two decades saw the price sawed in half...and then sawed in half again. Now it is going up again. Most likely, it is merely adjusting to the inflation of the previous three decades. Or perhaps it is anticipating more inflation ahead. As to the inflation ahead, we're not so sure. There's probably a long, dark, cold period of depression to go through before we get to the heat of hyperinflation. But then...who knows? As those challenges listed above hint, anything could happen. Here at The Daily Reckoning we are neither bullish nor bearish on gold. We don't know whether it will go up or down. But as to our confidence in human beings, we have no doubt. In our opinion, the world's most popular economists - notably Ben Bernanke and Paul Krugman - would probably make fine bartenders. They are good at providing 'liquidity,' and not much more. They have no idea what is happening in the world of finance...and their idea of what to do about it will almost surely make things worse. Meanwhile, we feel we can count on Congress and the president too. The nation may already have a net worth of MINUS $70 trillion (according to John Williams of ShadowStats)...but they will surely keep spending until the nation goes broke. Typically, power begets gold...then gold begets power...and then both gold and power are begotten by someone else. The world never stands still, even for someone with a million dollars' worth of Krugerrands in his home safe. The BRICs - Brazil, Russia, India and China - are begetting power. Their economies are growing much faster than the developed, mature economies of the west. They grew by selling products - often in dollars. This left them with dollars as financial reserves. They have little gold. For a very long time, dollars were 'as good as gold' - or almost. But now the power equations need to be reworked. The BRICs are gaining power...but find themselves still hostage to America's paper money. Inevitably, they're going to follow India's recent example...as well as the example of practically every nation to gain power throughout history; they're going to add to their supplies of gold. A rising power acquires gold. A fading gives it up. The US has more than 8,000 tonnes of gold...nearly 80% of its reserves. Meanwhile, China - America's most likely rival for superpower status - has only 600 tonnes of gold. It keeps less than 1% of its reserves in the yellow metal. Put all the BRICs together and you get 1,500 tonnes, less than a quarter of the US hoard. And the BRICs have 10 times as many people. Official purchases of gold by central banks have been negative for many years. They still are. In the 2nd and 3rd quarters central banks sold more than they bought. Imagine if they suddenly went positive! If the BRICs wanted to bring their reserves up to just half the level of the US, they'd have to buy 2,500 tonnes. Until tomorrow, Bill Bonner The Daily Reckoning | |||
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