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The Daily Reckoning | Thursday, September 2, 2010 What not to make of a single-day stock market rally, Seeking profits in the cellular infrastructure market, Plus, Bill Bonner on lower lows ahead and gold's speculative future... ------------------------------------------------------- Strategic Short Report Presentation Reveals... Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch the new presentation now. Oblivious to the Big Picture Why stock market rallies aren't worth the hype Joel Bowman Reporting from Delray Beach, Florida... First, the good news: Stocks staged a mammoth rally yesterday. The Dow managed a 2.5% run, while the broader S&P 500 scooted ahead 3%. What a wondrous achievement this must have seemed like...to anyone who spent the previous month on the golf course, far away from their computer screen. "The recovery is humming along nicely," our casual observer might have muttered, before heading back out for another few rounds on whatever distant, disconnected island his golfing retreat is located. Taken in isolation, this would seem like fantastic news. Of course, in the grander scheme of things, there are much larger, far more alarming trends afoot. For while our once-a-month, casual market observer caught a glimpse of a seemingly robust economic recovery, the broader picture is not quite so cheerful. If one cares to stand back from the screen a little, allowing up to one month of print to enter their peripheral view, the picture becomes more than a tad gloomier. An unrelenting tide of sub-terrible economic reports dampened every corner of the "recovery" landscape during the month of August. In the four weeks leading up to that haloed first day in September, the Dow shed over 4%. The S&P 500 lost more than 4.5% and, previous to yesterday's rally, was down almost 6% year-to-date. In short, it was the bloodiest August for equities since 2001. What happened to the "Recovery Summer," workers and non-workers alike want to know. We all remember when Vice President Joe Biden, like an idiot savant minus the savant, predicted the economy would begin adding 250,000 to 500,000 new jobs a month in the near future. This is the same fellow who urged America to pass a $787 billion dollar stimulus program - later upwardly revised to $864 billion - or suffer unemployment rising above 8%. As too-many Americans know all-too-well, unemployment remains at stubbornly high levels. First time jobless claims began creeping north once again last month. Finally they edged over the half a million mark in the third week of August, a threshold David Rosenberg, chief economist at Gluskin Sheff, says can only be breeched for a few consecutive weeks before the risk of a second recession rises materially. Like a masking agent, the Fed's stimulus programs had, until recently, hidden the most incriminating symptoms of the non-recovery. But now the effect is wearing off. The latest housing data from Case-Shiller, out yesterday, showed positive year over year growth of 4.2%, but the month over month change showed signs of slowing. Why the slowdown? The Fed's bribes - in the form of $8,000 homebuyer's tax credits - ran out, that's why. As recently as July, President Obama declared the economy had begun "growing at a good clip." What was really growing at a "good clip" was government intervention, at theexpense of healthy economic growth. In Columbus, Ohio, there to commemorate the 10,000th project launch under the Recovery Act, Obama declared, "We knew that if we failed to act, things were only going to get much worse." In the coming months, as the stimulus begins wearing off, the nation will find out what will happen precisely because they did act. That's not to say there won't be individual opportunities for investors along the way, of course. It just means we'll have to look a little harder to find them. In today's guest essay, our small cap analyst, Jonas Elmerraji, does just that. His thoughts, below... Free Presentation Reveals - Government Retirement About to Belly-Flop Government-sponsored retirement is a myth. It's a great, big magic trick. Starting September 30, the government "safety net" officially begins to shrink. The smartest folks are getting ready now... For details - watch this shocking new presentation. Inside, you'll also learn how to collect thousands of dollars each year in "pension checks" from the government's "other" retirement program. You owe it to your future to watch this new presentation. To do so, simply turn on your speakers and click here. The Daily Reckoning Presents Dialing for Dollars Jonas Elmerraji With the market volatility and poor economic data ruling the market in the last few months, it's no surprise that many investors see this part of 2010 as a time to flee the scariness of stocks for more stable assets. But they're dead wrong... Many industries are starting to become oversold once again, and opportunities abound for value investors in 2010. One of those industries is wireless communications... Cellular stocks have been getting a lot of good attention of late, and it's no surprise why. The hype over the next new cell phone models - like the iPhone 4 or HTC Evo - has had consumers shelling out big bucks in both acquisition costs and high-margin data contracts. At the same time, consumers are eschewing fixed-line alternatives for their cell phones, opting to keep connected to a single number whether they're at home or in the car. In turn, that increasing reliance on cell phones has made them significantly more common in the US over the course of the last decade - where only around one in three Americans owned cellular phones in the year 2000, the number of cellular subscribers is quickly approaching a ratio of one-to-one! And the end isn't yet in sight... According to industry think tank IE Market Research, wireless subscribers are expected to grow another 27.5% in the next four years. For carriers, that accelerating subscriber growth has fundamentally changed their businesses. Where the income statements of telecom giants like AT&T and Verizon were once dominated by fixed-line services, wireless customers now make up the bulk of each company's revenues. But as the cellular market becomes increasingly saturated and wireless services become further commoditized, it's likely we'll see the margins of most carriers get squeezed. More attractive is the cellular infrastructure market - the companies that exist to build out and support the massive cellular networks that span the country. Increasing numbers of subscribers (particularly high- end, data-hungry subscribers) mean that older networks aren't keeping up with the speed and throughput requirements of US customers. To stay competitive, the carriers are forced to shell out massive amounts of cash. How much? In 2011 infrastructure spending is expected to hit $40.3 billion, a 6.7% rise over last year. And unlike the cellular carrier business, which is dominated by mega-cap blue chips like AT&T, many of the companies that service cell carriers are small, growth-oriented firms. A couple familiar names to small-cap investors would include Neustar (NYSE:NSR, $22.80), a wireless communications clearinghouse, and FibreTower (NASDAQ:FTWR, $3.63), which provides facilities-based backhaul services to wireless carriers. While I do think that all of the firms that operate in this business will see at least some benefits from organic cellular subscriber growth, I also believe that some are much better equipped to benefit from that growth than others... I recently recommended shares of a fascinating small cap telecommunications firm to myPenny Stock Fortunes subscribers...and I am actively monitoring opportunities in this rapidly growing sector. Remember, even in a slow-growth economy, a few select industries will still prosper. The cellular infrastructure industry is likely to be one of them. Sincerely, Jonas Elmerraji, for The Daily Reckoning P.S. I can offer you your own subscription to Penny Stock Fortunes for less than the cost of a single cup of coffee each month: just click here to sign-up. Penny Stock Fortunes Announces... Watch the Presentation: Secret $200 Retirement Blueprint Last year $200 could have turned into $10.1 million following 5 simple steps revealed in this secretive retirement blueprint. It's happened before, but could it happen again and could it happen to you? Click here to watch the presentation now. (Turn your speakers on) Bill Bonner Gold Speculation During the Great Correction Bill Bonner Reckoning from Paris, France... Yesterday was a good day for stock market investors. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions. Of course, we're always uncertain. But sometimes we're more uncertain than others. What seems certain to us is that stocks are a bad bet. You might find this interesting, dear reader: Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today? Well, we haven't done the calculation ourselves, but we've heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don't. But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to "risk on" mode. Back and forth...to and fro... Mr. Market is making us wait. But for what? We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn't happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us...because it is not behind us. Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what's the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn't want to invest in them anyway... But where...how...are we going to make some money in the next seven years? That is a good question, dear reader. We're so glad you asked. Do you have a good answer? Hope so, because we don't. The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we've been watching Bernanke, Jackson Hole, and stocks - gold has been quietly creeping up... ..stocks go down; stocks go up - and gold keeps moving up... ..fiscal stimulus, monetary stimulus, quantitative easing - and gold keeps moving up... ..recovery...no recovery - gold keeps moving up... ..inflation...deflation - and gold keeps moving up... Are you beginning to see a pattern? Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all. And if we're right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more. But here's the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced. Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you'll probably succeed. When the Bernanke Fed loses its grip - which it will - and when the public gets on board the gold bull market - which it will - gold speculators will probably make a lot of money. We've been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding. But the reward now is different. It is speculative...not inherent. When we bought gold in '99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought. Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean. Gold is now a speculation. A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity. We have not hit bottom yet. Far from it. When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We're happy with our gold holdings and don't really care if the price drops. Heck, we'd be happy to see the price back below $1,000; we'd buy more. But speculating on a rising gold price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top. And more thoughts... Wolf, Stiglitz, Krugman - we love these guys! They pushed the world's governments to undertake huge "stimulus" programs. Of course, the stimulus programs didn't work. They couldn't work. All they could do was to disguise the facts and delay the necessary adjustments. But these fellows don't care about that. They are the technicians, scientists, and engineers of finance. They have measures of financial health - GDP, employment, inflation, etc. They may not be able to make anyone better off...but they can damned sure move those indicators. At least, they believe they can. Spend enough money and you can move the GDP up. Hire enough people and you can get unemployment down. It's not that complicated. So, the engineers went to work two years ago. You know the rest of the story. That is how we got where we are. They turned valves. They connected wires. They adjusted dials and switches. They put at risk nearly an entire year's worth of US GDP - on the idea that an economy can be controlled and managed, just as if it were a brewery. How many cans do you want? Just work backward to figure out what inputs you need - how much grain, how much sugar, how many cans, how much electricity... It's not rocket science, for Pete's sake. The trouble is...managing an economy is not science at all. And these guys are not scientists. They have no controlled experiments. They have no test panels nor test results. They have no peer reviews. They have no proper theories - none that can be disproven or confirmed. They just have crackpot ideas and quack treatments. And now, Paul Krugman is on television in the US calling for another $800 billion program of boondoggles, bailouts and bumph. "Stimulus," he calls it. Claptrap is what it is. Regards, Bill Bonner for The Daily Reckoning