Britannia Radio

The Daily Reckoning Thursday, January 21, 2010 China gets the bubble jitters as global investors hit the eject button, A flight to "safety" into the currency of the world's largest debtor nation, Plus, Bill Bonner on centerfold senators and that "lucky bast***" in the White House... Eric Fry, reporting from Laguna Beach, California... During yesterday's trading session, the stock markets of the world served up something a little different from what has become "standard fare." The markets served up losses - large ones in China, biggish ones in Europe and noticeable ones in the Americas. The Dow Jones Industrials slumped 112 points, which was only about half as bad as its worst losses of the day. Taking a slightly longer time frame into consideration, the Dow is zero for the last eight trading days...and not very far from zero for 2010. Most European markets are in negative territory for the New Year, as is the Chinese stock market. So what gives? Do these disappointing performances point to a bad moon on the rise? Is the great big rally that ignited last March about to extinguish itself? "Probably," is the answer provided by Jay Shartsis, Director of Options Trading at R. F. Lafferty in New York. Jay begins his bearish analysis by pointing out that the world-leading Chinese stock market is now leading to the downside. "The important emerging markets of China , Russia and Brazil have topped out already and have been trending lower," he observes. "They have leading tendencies to our market, having bottomed out before ours did last March. The chart below shows that Chinese stocks (as represented by FXI, an ETF that holds Chinese stocks) [have] traced out a head and shoulder top, and is now rolling over to the downside." Corroborating this negative indicator, Jay cites a wide range of market phenomena that suggest the stock market is more likely to head south than north. "The bearish percentage of respondents from Investors Intelligence was reported at 15.6% bears," Jay observed recently. "That was the lowest since April of 1987 when 14.6% bears was reported. After that low reading in 1987, the market dropped about 9% into a late May bottom, then proceeded up to its famous peak of Aug 1987. "Furthermore," he continues, "the 21 day market-wide dollar weighted put/call ratio is now flashing bright red. At the Grand Stock Market Top recorded in Oct 2007, the gauge reflected only 58 cents traded in puts for every $1.00 in calls. That was a lot of option trader optimism. And now? A few days ago, this gauge reached 50 cents in puts for every $1.00 in calls - even more optimism than that seen in 2007! This extreme optimism seems even more worrisome, given the fact that stock prices are well below the peaks seen in the fall of 2007. I would rate this as a serious sell signal. Get out of the way." Jay's bearish prognostications attract almost no sympathy on Wall Street where bullish outlooks reign supreme. But far, far away...up above the Canadian border, another market observer voices similar concerns. David A. Rosenberg, Chief Economist and Strategist of Gluskin Sheff & Associates in Canada, fears that the US stock market is looking toppy. He notes the following: According to Investors Intelligence, there are now three times as many bulls as there are bears. Almost everyone is a performance chaser. Market Vane sentiment on equities has firmed to 57%, higher than it was in September 2007 when the market was beginning to crest. We didn't see a number of the strong in the last cycle until September 2003 when the recession was already two years behind us. By way of comparison, at the March lows, it was sitting at 32. Not one of the 12 seers polled by Bloomberg sees a down-market for 2010. The median increase in the S&P 500 is 11%. The VIX index is down to 19, right where it was when the market peaked back in October 2007. The S&P 500 dividend yield is back below 2% for the first time in over two years. Corporate bond spreads and CDS credit default swaps have collapsed to levels not seen since two years ago. Based on the Shiller normalized PE ratio, which is based on the 10- year trend in real corporate earnings, the S&P 500 is trading with a 20x multiple versus the long-run average (back to 1881) of 16x. This market, in other words, is more overvalued now (25%) than it was heading into October 1987... Investors should be aware that at this stage, they are buying into a very expensive market... Steve Sarnoff, editor of Options Hotline, agrees with Shartsis and Rosenberg. He wonders aloud: "Can gravity pull the big stock market rally, from March of 2009, back toward earth? I think it can. Late last year, gold and the euro began to slip. As we move into a new year, I think stocks will join them. Bullish sentiment is reaching extremes, my contrarian alarms are ringing, and the character of market price movement is turning negative. The market is reaching resistance and looks toppy." So what should we investors do with the worrisome observations of Messrs. Shartsis, Rosenberg and Sarnoff? Maybe nothing. After all, the markets go up and the markets go down. And no one ever knows what will happen next. But here's the problem: the markets just went up...a LOT...even though the economy did not. So maybe the markets will go down a lot, just to reunite themselves with the lackluster economy they left behind. In such a circumstance, selling a few shares of stock now would not have been such a bad idea. The Daily Reckoning PRESENTS: We saw a couple of years ago how poorly the bubble economy handled oil at $147 per barrel. Now, in 2010, the global economy is in a fragile state...to put it mildly. How might it handle another price spike? In today's guest essay, Casey's Energy Report senior strategist, Marin Katusa, discusses the inevitability of higher prices at the pump... Cheap Oil is Gone, and That's Good News By Marin Katusa, Senior Energy Strategist, Casey's Energy Report Vancouver, British Columbia Over the next year or two, you will likely find yourself paying a LOT more at the gas pump. Big changes are taking place in the oil industry. With increased global demand and declining supply, easy oil is not so easy anymore. Everything is about to get more expensive. From gasoline to anti- freeze, life jackets to golf balls, and eye glasses to fertilizer. There are very few things in the modern world that aren't made from oil, made by machines dependant on oil, or shipped by vehicles powered by oil. The implications, at first glance, appear to be the opposite of good news. In fact, it's enough to strike panic in the hearts and wallets of the average consumer. And that's exactly why the International Energy Agency just released its annual World Energy Outlook, clearly rejecting the possibility that crude output is now in terminal decline. Their attitude seems to be, what you don't know won't hurt you. For now that is. The truth is beginning to surface, however, and from an investor's perspective, the truth can mean money in the bank. Right now, the IEA's claim that oil production will be ramped up from its current level of 85 million barrels per day to 105 million barrel per day by 2030 is receiving harsh criticism. The Guardian reports, "The world is much closer to running out of oil than official estimates admit." This observation comes from a whistleblower inside the International Energy Agency who states the fear of triggering panic buying has caused them to intentionally underplay the inevitable shortage. Kjell Aleklett, professor of physics at the Uppsala University in Sweden, and co-author of a new report 'The Peak of the Oil Age', states "oil production is more likely to be 75m barrels a day by 2030 than the 'unrealistic' 105m used by the IEA." According to Professor Aleklett's research, the IEA is making a dangerous and unjustified assumption - one that is dependent upon the oil industry's ability to ramp up production to levels never before achieved. Are you beginning to see the opportunity here? Whistleblowers and scientists are not the only ones disputing the IEA's report. The folks who pump oil aren't buying its rosy scenario either. Total SA, the French oil giant, that is making its move into the Alberta oil sands, doesn't accept the IEA's optimistic claims. The company runs on the belief that oil production won't surpass 95 million barrels. Former chief executive officer of Canada's Talisman Energy, Jim Buckee, agrees the IEA prediction is nonsense. Sadad al Husseini, energy consultant and the former exploration and production chief of the world's largest oil company, Saudi Aramco, recently said, "Oil supplies have reached a capacity plateau and will not meet a growth in demand over the next decade." The Globe and Mail recently joined the debate stating, "New [oil] fields, generally smaller, are less productive than old ones - note the virtual freefall in production rates from the North Sea fields, which reached peak output in 2000. Another reason [for the decline] is development pace, or lack thereof. The yet-to-be-developed reserves in the WEO report cover 1,874 fields of various sizes that would have to come into production in the next 20 years." That works out to almost eight new fields being brought to production each month. A realistic target? Only time will tell. Even if the oil exists, the next question becomes one of money, and where it will come from in order to keep this pace of development on target. When you add in professor Aleklett's conclusion that production will shrink to 75 million barrels per day by 2030 - almost one-third less than the IEA's figure and 10 million barrels less than current production, it's easy to see why investors need to take notice. Shrinking supply and ever-growing global demand are creating an unparalleled investment opportunity. The current price of crude could be the bargain of the century. Until next time, Marin Katusa for The Daily Reckoning Joel's Note: If you're looking for a great way to capitalize on the end of cheap oil, perhaps you ought to consider a membership to Casey's Energy Report. Marin and his team over there have been on quite a roll lately and, right now, they're offering a pretty steep discount for their research services. For more information, click here. --- Outstanding Investments Special Oil Report --- Introducing... THE GREAT OIL HOAX Learn How the Saudi king made a total fool of Barack Obama... Discover the biggest lie of the last 30 years... ...revealed here by the investment newsletter rated No. 1 over a five- year period by the independent Hulbert Financial Digest. --------------------------------------------------------------- And now over to Bill Bonner, who has today's reckoning from London, England... "China's lending curb sparks a rush for safety." That's how The Financial Times describes what happened yesterday. Investors were more moved by fear than by greed. Dow sold off 112 points. Gold dropped $27. The dollar and bonds were up. The first thing we note is that investors are idiots. They're looking for safety in the wrong places. Sell gold? Buy the dollar? And bonds? It may be a good move in the short run...but this kind of safety is too dangerous for us. The second thing that comes to mind is a question: is this the beginning of the end? Today, stocks in Asia are still falling...presumably for the same reason. China is reporting such hot growth that the authorities will be forced to throw a bucket of water on it. At least, that's what a lot of investors are thinking. What we're thinking is that the Chinese economy is just waiting for an excuse to blow up. You can't grow at a double-digit rate - with such massive investments in new plant, equipment, and infrastructure - without making a lot of mistakes. In America, developers put up condos that are left empty. They begin sub-developments that are never completed. They abandon a new building from time to time. But in China, they build entire cities...which become ghost towns before they ever lived. The Chinese are human. And humans err. Corrections, recessions, crashes, bear markets and depressions are nature's way of fixing the mistakes and punishing the mistakers. And the longer the feds try to hold off these necessary corrections, the bigger mess of things they make. Here's another headline for you: "World Bank: growth may wilt as stimulus fades." Why is that? Because government spending ain't really very stimulating. In fact, it's depressing. We've explained why in past editions of The Daily Reckoning. We'll add today that the same is true, in a slightly different way, for monetary stimulus. They lower interest rates to try to revive a dying economy. The lower rates buy time - and more debt. Debtors are able to hold off the day of reckoning by refinancing at lower rates. But then what? Then, even lower rates are needed so they can refinance again. Imagine a fellow who's built a group of condos. He spent all his money...and borrowed millions more to do the project. Now, he's waiting for buyers...and paying interest. The buyers don't show up and he runs out of money. So, he refinances his old debt...adds more new debt...and he's able to keep going...waiting for a 'recovery' that brings the buyers back. But there are no real buyers. He made a mistake. In the heady days of the Bubble Era it looked like people had much more money than they really had. Now, where did their money go? He doesn't know. But no one is stepping up to buy his condos - except for a few bargain hunters, who buy at such low prices, he still can't pay his debt. So, he needs to refinance again. And so, the feds need to lower rates again so that he can get a better deal...otherwise, what's the point? But sooner or later, as the depression drags on, the feds eventually lower rates down to zero...the banks realize that his collateral is permanently impaired, not temporarily under-priced...and he realizes that the jig is up. The real problem is not a lack of affordable credit. It's a lack of able buyers. People are not really as rich as they seemed. It was a mistake, in other words; it had to be corrected. But don't expect mainstream economists, financial commentators, or the feds to understand what is going on. They are lost in their own claptrap theories and corrupt politics. What Wall Street bank will tell clients that the economy is in a depression? What Fed official...or elected politician...will admit that there is nothing they can do - except make the situation worse? What financial advisor will tell his customers that they should get out of US Treasury bonds...and the dollar...and stocks...? Not many. And so...dear reader...the depression continues. Few people have any idea of what is going on. None knows what to expect. Of course, that is true for us too. We don't know when the tools for being able to foretell the future were handed out, but we must have been out sick that day. And more thoughts... Obama...lucky bast***! The president's candidate lost in Massachusetts. There are many different explanations for why the voters went with the Republican candidate. He seemed the more likeable of the two, is the one we're seeing this morning. Maybe so. Or maybe there are a lot of voters who would like to smack down Obama himself...but had Coakley at hand. Who knows? If we could look into the minds of Yankee voters it would probably make us ill. Year after year they sent Kennedy back to Washington. And now they've sent an exhibitionist to the Capitol. Clearly there is something wrong with them. Scott Brown posed naked for Cosmopolitan magazine. His daughter was a finalist on American Idol. Maybe his wife would like to make a public spectacle of herself, too. But the papers are concerned with Obama's health plan. Now, he'll have a harder time getting it passed, they say. Lucky fellow. This puts him in a much better position. The last thing he should want is for that health care plan to go through. As near as we can tell - we haven't read it...but who has? - it is an abomination of boondoggles, corruption and poppycock. Obama promised the nation a health care overhaul. Now, he doesn't have to deliver one. Regards, Bill Bonner, for The Daily Reckoning --------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.