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A clearer look at the jobs data, plus a few less-than-impressive records, The immense potential of RNAi...and why you can’t afford to ignore it, Plus, Bill Bonner and the folly of betting on billions of consumers who have very little money... The Daily Reckoning | Monday, April 5, 2010 Labor Pains A closer look at Friday's jobs numbers and a few ignominious  records the recoveristas would rather not mention. Eric Fry Eric Fry, reporting from Laguna Beach, California… Last Friday, the Labor Department informed the nation that the U.S. economy added 162,000 jobs in March – the biggest gain in three years. That’s goods news, of course…but not as good as it might appear. For one thing, newly hired Census workers contributed about 30% of the gain. These folks will be unemployed by summer. For another thing, the “underemployment rate” – which includes part-timer workers and people who want work but have given up looking – increased to 16.9 percent from 16.8 percent. Meanwhile, the number of workers who have been unemployed for 27 weeks or more rose to a record 44.1 percent of all jobless. Despite these blemishes, however, most Wall Street economists hailed the jobs report as a “sign the economy is rebounding.” Your editors here at the Daily Reckoning are not so sure. Then again, they are rarely sure about anything, other than their incertitude. Obviously, the economy is enjoying some kind of a bounce. But we doubt this bounce will blossom into a robust and enduring recovery. Instead, we suspect this bounce will develop into a slightly larger bounce, which gravity will quickly overcome. After that, we’ll get some kind of muddle-along economy. Nothing horrible; but nothing great either. Your editors base their forecast on an informal assessment of macro-economic data, anecdotal observations and wild guesses. As such, we bring more firepower to this economic-forecasting exercise than most professional economists. They hardly ever make wild guesses. In fact, they hardly ever make informed guesses. They just connect the two most recent data points and extend the line out three years. It’s possible the economy is commencing a powerful new upturn, but why should it? One third of the country lives off food stamps, one quarter of the country has negative equity in their homes and one sixth of the country can’t find a job. Each of these statistics is a record – or close to it. And if we were to extend the list of ignominious economic records, we would add the federal government's $1.7 trillion annual deficit and $12 trillion of total indebtedness. These great big liabilities might not cripple our economy over the short term, but they certainly won't nourish our economy over the long-term. And so your editors remain skeptical of the economy’s strength and dubious that the stock market will continue its advance. But please don't misunderstand us; skeptical is not cynical and dubious is not dour. Despite our doubts about “the market,” your editor have continuously highlighted selective opportunities. The water stocks Chris Mayer recommended in the January 7th edition of the Daily Reckoning (“The Trade of the Century”) are far outpacing the S&P 500 so far this year. One of the stocks Chris mentioned, Southwest Water, has doubled since then, thanks to a takeover offer. Incidentally, the takeout price was $11 a share – exactly what Chris estimated the company’s net asset value to be. In the February 24th edition of the Daily Reckoning (“Go Nukes”) Byron King issued a very timely buy recommendation on the Market Vectors Nuclear Energy ETF (NYSE: NLR). One week later, Chris Mayer returned (“Invest in Aviation’s Startling Growth”) with a persuasive argument for buying Titanium Metals Corporation (NYSE: TIE). The stock has been gaining altitude ever since – up a dazzling 28% in less than one month. This sampling of recent Daily Reckoning observations brings us to today’s presenter, Patrick Cox, editor of the Breakthrough Technology Alert. Patrick is, arguably, the most hopeful voice that appears in this column. He possesses an informed and inexhaustible passion for examining the breakthrough technologies of the future. It is no accident, therefore, that we kicked off the New Year with a hopeful (and prescient) message from Patrick Cox. (“The Medical Miracles of 2010”). And already this year, some of Patrick’s predictions have come to pass…to the benefit of his subscribers. On March 24, the Daily Reckoning published a missive from Patrick (“The Second Huge Stem Cell Breakthrough in a Week”) summarizing breakthrough achievements by two of the companies he had recommended more than one year earlier. Shortly thereafter, the editorial team here at the Daily Reckoning received the following email: Dear Daily Reckoning: The March 24th Daily Reckoning carried the same article that Patrick Cox emailed to all his clients concerning the status of ISCO and BTIM. My question is this: why were the names of these stocks given to the millions of readers the DR has, of whom probably a very large percentage do not pay for his service?  I've talked to several Financial Reserve members, such as myself, here in Arizona and we were appalled that these readers were given the names of these two stocks, which according to Mr. Cox himself, are in their early infancy stages with plenty of room for substantial growth. I would very much like to speak with someone in authority regarding this matter. Your California Editor replied: Dear Reserve Member, Thank you for your response to the Daily Reckoning of March 24th. And, more importantly, thank you for your association with Agora via your Reserve membership. Since I direct most of the editorial content in the Daily Reckoning, I wanted to respond to you directly, and to explain the rationale for airing Patrick's remarks about BTIM and ISCO. This column typified an editorial technique we have used for years at Agora, as a way of introducing our investment services to readers who are not familiar with them. The technique consists of providing a glimpse into the investment process that one of our editors uses to achieve his/her success. We provide that glimpse by recounting a real-world illustration that sometimes includes revealing the name(s) of a prior recommendation that has already performed well for our subscribers. In this particular case, Patrick recommended ISCO 13 months ago at 43 cents. On the day prior to the DR story, ISCO was selling for $2.02 - a 370% gain from what subscribers could have achieved. Patrick recommended BTIM 20 months ago at 75 cents a share. The day prior to the DR story, BTIM was trading for $6.99 a share - an 832% gain from what subscribers could have achieved. In other words, Patrick's subscribers have had access to this valuable information for more than one year already and have had ample opportunity to profit from this information. The Daily Reckoning reader who just encountered a sliver of Patrick's analysis for the first time on March 24 had nothing close to the same opportunity that a subscriber has had. On a related note, Patrick's bullish views about BTIM and ISCO have already appeared online in several financial blogs. I am genuinely sorry if you feel slighted by the Daily Reckoning of March 24. But I hope my explanation for airing Patrick's remarks provides some level of comfort that we don't recklessly reveal information for which subscribers are paying hard-earned dollars. Regards, Eric Fry Why are we mentioning this particular email exchange? Because Patrick Cox is returning to today’s edition of the Daily Reckoning. And once again, he will be highlighting some exciting recent developments that relate to four of the companies he has recommended to subscribers. In this case, however, we will not be divulging the names. This time around, the news is too new…and so are some of the recommendations. So in deference to Patrick’s paying subscribers, we cannot reveal any of the names of the companies involved. So if you’d like to identify the specific companies involved, call a subscriber and ask. Alternatively, you could subscribe to Patrick’s investment letter yourself. But that’s for you to decide. Our story today is not about triple-digit investment profits; it is about transformational technologies. Patrick’s analysis provides widespread application to investing in the biotech sector, not just in the specific biotech stocks he has identified. So please enjoy Patrick’s latest insights… The Daily Reckoning Presents Huge RNAi Breakthroughs! Patrick Cox Once again, huge scientific news has disrupted my plans. Last week, I put off giving you additional news on the quest for an Alzheimer's disease cure as well as some fascinating and related data on the health benefits of coffee. The reason, as you know, was that two companies in our portfolio announced truly historic breakthroughs in stem cell science. Remarkably, the same basic thing has happened again. This last week, three major scientific developments were announced regarding progress in the field of RNA interference. Once again, some of the companies involved are in our portfolio. (I will refer to them as “Company X” and “Company Z.”) As I've said many times, we know that RNA interference is one of the most important areas of scientific inquiry. The reason is that the RNAi mechanism offers us a means of controlling individual genes. This, in turn, offers the theoretical means of curing nearly every disease suffered by humans, animals or plants. Though scientists were aware of some of the actions involved in RNAi, it was one article published in the critically important journal Nature that put all the pieces together. That was in 1998, and the article was titled, "Potent and Specific Genetic Interference by Double-stranded RNA in Caenorhabditis Elegans." In 2006, two of the authors, Craig Mello and Andrew Fire, were awarded the Nobel Prize for that critical work. This article rocked the scientific world. Allow me to characterize the big picture that emerged from that article. Basically, the master genetic program in our cells, DNA, never willingly exposes itself to any outside influence. Rather, it operates behind biological fire walls that protect it from viruses and other invaders. It communicates, however, via messenger molecules. These are called messenger RNA or mRNA. The mRNA molecules, in turns, “encode” or synthesize proteins that actually spread the DNA's commands. RNA interference, as the name implies, is a natural means of disrupting that process. Our cells use a complex, but fascinating mechanism called RNA-induced silencing complex (RISC) for all kinds of natural functions. It can be thought of as part of the immune system, as it protects from viral invaders, but it is also part of our gene regulation system. It can also, however, be manipulated to accomplish other ends. I find it useful to think of this process, simplistically of course, as a kind of computer virus-protection program. Computer programs such as Symantec's Norton AntiVirus and Trend Micro's PC-cillin have large databases of “evil code.” They scan your computer, incoming data and external drives looking for code sequences that are in the database of evil code. If it finds evil code, the security program attempts to block it from interacting with your computer. Anti-virus software periodically updates by downloading new additions to its database of evil code. In a sense, RNAi offers scientists a way to hack those evil code updates and inject their own code sequences. It could be exploited to send RNA sequences that would provoke the body to block the operation of particular encoded proteins. For example, there is a protein code that enables the capillary growth that causes blindness through wet macular degeneration or tumor growth. Scientists know what code sequence to add to the evil code database that will stop excess capillary growth. Eventually, I believe, we will know what code blocks Parkinson's disease, glaucoma, kidney disease, autism and on and on and on. By introducing the right small RNA molecules, we can provoke the body to disrupt the chain of communication that results in those conditions. It is even possible to increase the production of proteins that increase health or reverse damage. Hopefully, cell biologists in the audience will forgive my crude metaphors. Regardless, when that Nature article was published, scientists began the quest to figure out just how to use RNAi to cure diseases. Universally, they encountered one enormous obstacle. These small RNA sequences are exceptionally fragile. Under normal conditions, they are quickly destroyed by the immune system. This is not dissimilar, by the way, to security and virus protection software. The ultimate goal of the “black hat” hacker is to penetrate and exploit the anti-virus security programs themselves. If a hacker could hijack the process by which these get information about new threats, the database updates, he would “own” the computer and could do anything he wanted. Consequently, your anti-virus program has a level of safeguards built into it that far exceeds those of normal programs. Because the RNAi mechanism performs similar functions, such as scanning and blocking unwanted actions, that biological system offers similar controls over the system. It is, therefore, not only scientists who want to exploit the system. It is logical target of sophisticated microorganisms that evolve constantly in an effort to hijack your immune system. As a result, we have particularly strong defenses against interfering with the RNAi process. It is extremely difficult to get small therapeutic RNA sequences past the immune system into the right cells to cure diseases. Some scientists believed that it might be possible to deliver RNA interfering sequences locally, by injection into a tumor, for example. The problems associated with developing a systemic delivery system that could be taken orally or injected but that would then act only on target cells seemed almost insurmountable. In fact, many scientists believed it was impossible in higher life-forms, particularly humans. Last week, we learned definitively that it is not impossible. In a major scientific journal, “Company X’s” scientists presented peer-reviewed proof that they have done it. Simply put, the anti-cancer drug that Company X tested is valuable. More valuable, however, is Company X's proprietary platform that produced the successful RNAi delivery solution. With this successful test of a systemic RNAi cancer drug in humans, Company X's ability to deliver other interfering sequences to target molecules will be attracting serious attention from Big Pharma. Every big pharmaceutical company has an ongoing RNAi delivery research program. Merck has admitted that it has tested hundreds of methods unsuccessfully. Company X, however, was the first to prove it could make a systemic RNAi drug for humans. I would be astonished if Company X does not sign some sort of agreement with Big Pharma within the year. While Company X has clearly scored a major coup, it is by no means alone in the quest for RNAi delivery methods. In fact, “Company Z” announced a successful delivery mechanism last week as well. Company Z tests involved local surgical delivery into the skin of rats, but the results indicate that it has found a way to beat the delivery problem. I spoke with the CEO of Company Z. He is clearly confident that further tests will show the systemic effect of this technology in humans. I think that the events of the week emphasize several crucial aspects of the field of RNA interference. One, obviously, is that progress is being made very rapidly. After I interviewed Craig Mello a year and a half ago, I told you this. Still, it's difficult even for insiders to keep up. This is the result partly of the fact that progress in so many related fields, such as human genomics, continues to accelerate. Another characteristic of this field is that it appears there will be multiple winners. The delivery mechanisms used by Company X and Company Z are quite different, but both have demonstrated efficacy. It remains to be seen which will be more effective for which diseases. Personally, I believe there will be multiple winners. In fact, as I was writing this column, two more important news stories broke concerning our other RNAi companies. Therefore, to say that developments are breaking quickly in RNA interference is an understatement. It is extremely meaningful that all this action on the RNAi front seems to be coming from aggressive small caps, not bureaucratic Big Pharma. Nobody knows, at this point, how everything will shake out in the next few years. The rational investment strategy, therefore, is to own a portfolio of the most promising of these entrepreneurial companies. It's possible that all these RNAi innovators in our portfolio will do well simply because the promise of RNA interference is so incredible. As one unnamed biotech CEO recently told me, “We're not going to run out of sick people to treat. There is, unfortunately, no disease shortage.” We now know with certainty, because of the week's events, that RNAi can be delivered effectively. There are still details to be worked out, but this is truly great news. Patrick Cox, for The Daily Reckoning Joel’s Note: As Eric already pointed out above, subscribers to Patrick’s immensely successful Breakthrough Technology Alert have enjoyed some great opportunities to cash in on the kinds of trends he tracks. But, according to Patrick, this is only the beginning. Over the coming few years, as the true significance of the work these companies are doing comes to light, Breakthrough Technology Alert readers can be safe in the knowledge that they are at the very cutting edge of developments. If you’d like to join them, our publishers are offering a limited-time introductory price. But, as usual, this offer is limited. If you want in, you’ll have to let us know by 5pm, this Thursday. Here’s a link with all the info you need. Bill Bonner Mutual Manipulation Bill Bonner Front page headline on Friday’s Wall Street Journal proclaimed a big up-tick worldwide in the manufacturing sector. According to the paper, everybody is making more and more stuff.  This helps assure that the recovery “has legs.” Auto sales, too, came in stronger than expected in March.  So it sounds like the recovery has wheels too.  What we want to know: does it have a brain?  Who’s buying this stuff and where are they getting the money? At least the economic model of the bubble era made sense.   The producers produced.  The consumers consumed.  That worked great until the consumers ran out of money.  Then, they had to borrow from the producers.  And eventually, the whole thing blew up when it became clear that the spenders had borrowed and spent too much, while the producers had expanded and produced too much. So far, so good.  But now, the world economy needs a new model, right? The consumers can’t really go back to borrowing, can they?  Nope.  Not without digging themselves deeper in the hole...or actually earning more money.  So, the producers can’t exactly go back to producing either, can they?  Nope.  Not without customers. Well, who the heck are all these manufacturers making stuff for? Darned if we know.  In theory, there are billions of ready consumers in Asia and Africa.  Except they don’t have much money.  And don’t have much credit.  And don’t have shopping malls.  And don’t have any way to get to the malls if they existed.  In India, for example, half the population lives on less than $3 per day.  You can do the math yourself...even if they spent every cent on “stuff,” it would mean total spending of $500 billion, more or less – which is less than the US trade deficit in 2007.  Of course, they can’t spend their money on ‘stuff’ – they need it just to eat. On the other hand, India’s middle class is already as big as the middle class in America – and it’s growing fast.  But how does it make its money?  By producing, we assume.  So as it gets wealthier, doesn’t it add to the world’s supply of stuff...as well as consuming it?  And since Asia is more of a producer, in general, than a consumer...isn’t it adding to the world’s supply of stuff faster than it consumes stuff?  And since labor costs are so low, doesn’t it add more cheap stuff?  The point we are making is that it takes time for one group of consumers to get out of the way and for another group to take its place.  Even if you believe that Asian consumers will replace buying from the US and the UK, you still have to admit that this ain’t gonna happen overnight. First, because Asian would-be consumers need to earn more money.  Second, because they need to change their habits – from saving to consumption.  Third, because the factories need to switch from making things US consumers want to making things that Asian consumers want.  Fourth, because they also need to set up new channels of distribution and sales. In the meantime, who’s consuming more than he is producing?  We don’t know.  But someone must be doing so...otherwise all this extra manufacturing just adds to the world’s inventory of unsold merchandise. This is just a reminder about the way an economy actually works.  The meddlers in China think they can stimulate production.  The meddlers in America think they can stimulate consumption.  Then they accuse each of “manipulation.”  We’ve seen at least four or five different arguments about what the value of the yuan ‘should’ be.  One hundred and thirty Congressmen think they know.  Paul Krugman thinks he knows.  Everyone seems to think he knows.  But the truth is – none of them knows.  Nobody can know.  Only the market knows.  And it isn’t talking.  It can’t talk.  Its lips have been sealed by government order. The yuan is supposed to be too low because it is linked to the dollar.  There is no logical reason to say that the yuan is too low at all.  You might just as well say the dollar is too high.  But once you allow yourself the fantasy of silencing the markets and reorganizing the world’s commerce, the sky’s the limit.  The next thing you know, you are taking over the auto industry...and health care... ...and fixing prices for breast implants... And more thoughts... “With all this good news coming out, Mr. Bonner, don’t you think you should admit that the Great Correction is already over?” asks a dear reader. No. Any other questions? “Too bad about their house,” said a neighbor in Maryland.  “They built a house out of straw bales.  Very pretty.  Very energy efficient.  But then it caught fire and burned to the ground. “They should have used bricks...” Back on the family farm, we’re able to see what 15 years did our handiwork.  Fortunately, we were never tempted to build a house out of straw bales (we figured they were too vulnerable to leaks)...but we tried a number of other things. For example, we were pioneers of passive solar heating.  And ferro-cement.  We built a ferro-cement workshop with insulated glass at a 45 degree angle, facing the sun.  There were problems immediately.  It was so hot in the summer that we had to roll out a blue awning...that made us feel like were underwater when we were inside. Then, we got the bright idea of planting trees on either side.  In the summer, their leaves would shield the shop from the sun.  In the winter, the leaves would fall. This worked very well.  The trees are much bigger now.  They do the job.   The trouble is that something went wrong with the glass.  It has clouded over and now needs to be replaced. On one of the barn roofs, we used something called “Onduline” – or something like that – rather than tin.  It came in sheets, but had the form of barrel tile.  It was also cheap and easy to put on.  Didn’t look bad.  We can’t remember how long it was supposed to last, but less than 20 years later it is full of holes. The tin roofs, on the other hand, are still in good shape.  The oldest ones are covered with rust.  But they can be repainted easily. In the main house, we used poplar for the floors, from trees that we had cut on the farm.  It was very pretty – still is.  But it is soft.  It has been scratched and dented in many places.  Now, we have to refinish the floors. But the biggest disappointment was the wood shutters.  The main house has real, functional wood shutters.  We love the shutters.  You can use them to control the sunlight, so the heat of the summer sun doesn’t enter the house.  And in the winter, when we’re not at home, we close the shutters to keep the carpets and drapes from fading. In the old days, almost all houses had working shutters made of oak.  The ones on our grandmother’s house are still there...and still in good shape after more than 100 years.  But when we went to get wood shutters for our house in 1993, they no longer made them in oak.  The new ones were made of pine or fir.  Nevertheless, since they were protected from the weather by several layers of paint, and set back at least two feet inside the overhang and gutter, we didn’t expect any trouble with them.  But here we are 17 years later and half of them are rotten and will need to be replaced. Unfortunately, they are unusually large...and very expensive to make. Regards, Bill Bonner, for The Daily Reckoning