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May
18
2009

Issue

Posted In
5 Min. Forecast

India Booms, Dubai’s Ft. Knox, A Contrarian Indicator, A Short Play and More!

by Addison Wiggin & Ian Mathias

  • Bombay stock market has its best day ever… should you join the buying spree?
  • Dubai builds its own Fort Knox… Byron King on the world’s new “natural home” for gold
  • Contrarian alert: Infamous sovereign fund sells U.S., buys China
  • Chris Mayer identifies a 60-year trend… that’s about to reverse
  • Dan Amoss provides a sector worth shorting… for the rest of 2009

 

  History’s in the making this morning, on the other side of the world… check this out:

That’s the biggest one-day gain in the history of the Indian stock exchange. Buyers were so ravenous this morning that the guardians of the exchange had to halt trading — twice. Once the buyers broke the circuit breakers a second time — seconds after trading resumed — regulators shut the whole exchange down for the rest of the day. So what’s gotten into traders in Mumbai?

Or not what… but who?

This guy…

  Dr. Manmohan Singh was elected India’s prime minister over the weekend. As finance minister in the early ’90s, he was largely credited for breaking India out of its statist funk and introducing modern capitalist principles (which, for better and for worse, caused the Indian economy to quadruple over the following 20 years). Suffice to say, traders are betting he’ll do it again.

“We don’t want to sound like party poopers,” warn our Indian partners at equitymaster.com, “but the fact remains that the changes that investors and corporate are yearning for will not happen overnight. Although the re-election of the UPA government with Dr. Manmohan Singh at the helm, and most importantly without the baggage of the left parties, does set the ball rolling in the right direction, investors are advised to go overboard at their own peril.

“The problems that India Inc. is facing — like demand slowdown, leveraged balance sheets and a poor exports scenario, to name a few — do not get washed away with the election results. Hence, we urge investors to do a thorough bottom-up analysis and invest only in those stocks that boast strong fundamentals from a long-term perspective.”

Sounds just like the companies in Chris Mayer’s India portfolio. Now is a good a time as any to check out his favorite strategies in the region… details here.

  India’s stock surge has suddenly vaulted it from the worst-performing BRIC nation to the best. The Sensex is now up 48% year to date, the second-best national index on the planet Earth.

The world’s No. 1 market index thus far in 2009? Peru.

  The above news has also put the rupee in the spotlight today. The Indian currency is up 4% versus the dollar since Friday, or about eight-tenths of a cent. That’s the best run for the rupee since 1986.

But the dollar index grew stronger over the weekend, thanks mostly to the euro’s decline. Lousy German and euro GDP data put the euro back in the doghouse. It fell more almost 2 full cents against the greenback, to as low as $1.34.

  Gold is holding steady today around $930. Despite continued stock strength and renewed economic optimism in the U.S., gold’s been inching up the entire month of May, slowly rising from $890 an ounce at the month’s outset.

  “The Dubai Multi Commodities Centre (DMCC),” reports Byron King, “has finished building a state-of-the-art precious metals vault, with world-class tracking and security systems. Think Fort Knox, but in the desert and without the trees and pretty landscaping we see in the hills of Kentucky.

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The new DMCC… as understated as you’d expect

“The new vault will become the home for the exchange-traded fund (ETF) of Dubai Gold Securities. Also, ‘It’s a natural home for the central banks in the region to store their gold in Dubai, rather than in London, where they have typically held their gold,’ said a Dubai-based gold dealer INTL Commodities DMCC’s CEO Jeffrey Rhodes. Yep. ‘Natural home.’ (Margaret Mead, call your office!)

“A DMCC official stated that the new vault will be used to store precious metals associated with precious metal-based ETFs that are on the drawing boards and scheduled for launch later in 2009. This can only add to worldwide demand for gold and silver, especially from the traditionally gold-friendly Middle East.

“The bottom line: When the American people realize that the dollar is in for another round of inflation, they’re going to look for a way out. When people envision the future decline in their purchasing power, we’ll see a rush for the monetary exits. It’ll be the ‘Gold Panic’ of 2009, or 2010 or 2011… whichever year gets the naming rights.”

If you agree, better subscribe to Byron’s Energy & Scarcity Investor today. His forthcoming issue will contain six, as in 1, 2, 3, 4, 5, 6, brand-new precious metal investment ideas. Get on board in advance… here.

  Temasek, Singapore’s sovereign wealth fund, sold its entire stake in Bank of America. Heh… ouch!

The state-owned fund declined to comment on the specific sell price, for good reason. Not only did Temasek lose an estimated $4.6 billion on the BoA/Merrill Lynch investment, but the nature of their SEC filing insists they sold their shares before March 31. In other words, they missed out on most of the “bull market” in financials over the last six weeks. Since they sold, shares of BoA are up 66%.

(Note to Temasek fund managers: It’s really never too late to consider a career change. Everybody needs a good bartender.)

Based purely on the horrific timing of Temasek’s investing, both at the entry and exit, we’re forced to wonder… could Bank of America be near a bottom?

Also of interesting note, Temasek used what little money was left to buy shares of China Construction Bank… which perks our short interest in Chinese banks even more.

  As SWFs jettison their bank shares, Warren Buffett is scooping them up. Berkshire Hathaway’s latest 13-K revealed hefty purchases in Wells Fargo (a longtime Buffett favorite) and US Bancorp. The world’s most famous investor also picked up shares of Johnson & Johnson and Burlington Northern. He sold sizable chunks of Constellation Energy, ConocoPhillips and CarMax.

  American indexes are back on the rise today after Friday’s sell-off. The Dow popped up 100 points at the open, led by Indian companies and Lowe’s, which beat estimates and issued rosy 2009 guidance.

  “I think a 60-year trend is about to reverse,” forecasts our maestro of both Capital & Crisis, Chris Mayer.

“For the past 60 years, corporate debt has grown faster than the economy,” Chris continues, “4.1% annually for debt, compared with only 2.7% for the economy as a whole. In short, more and more debt went toward buying a given dollar of assets.

“If 2007 was the peak of the credit expansion over the last 60 years, then 2008 is the first step down the other side of the mountain.

“In fact, I think that is the likely scenario. And the deleveraging will take some time. While the government has been pumping all kinds of money into the system, that money won’t immediately go back toward leveraging up banks and homes and real estate, just as a cat that burns itself on a stove won’t sit on one again, not even a cold one — at least not for awhile.

“Deleveraging puts pricing pressure on leveraged assets. Banks must raise capital, diluting their shareholders and hurting their stock prices. Real estate owners must sell property to raise capital to defend other properties, thus putting pricing pressures on real estate assets. And so on…

“So as an investor, it will pay better to stick with the unlevered assets, which face no such head winds. After all, there is no pressure to sell an asset with no debt, no ticking clock.

"What are the most underleveraged assets?" you ask. QB Partners gives the answer: hard assets and natural resources. And the ultimate unlevered hard asset may be humble old gold.

  “General Growth Properties’ senior loans effectively liquidated for 44 cents on the dollar,” reports Dan Amoss, with a tangible example of the great deleveraging. We discussed GGP’s peril last month… essentially, the U.S.’ biggest commercial property owner was also the first to bite the dust. Last week, its default swaps were settled at auction, and the results weren’t pretty.

“This means that lenders are demanding extreme discounts and high yields to hold debts secured by mall collateral. That indicates serious pain to come for mall REIT owners.

“REITs may appear cheap, but they are very dangerous to hold right now. Most REITs cannot float unsecured debt at anything less than 10% or 12%, so their cost of capital is high and rising. At the same time, due to the glut of supply in commercial real estate supply, and waning demand from stressed tenants, the returns on incremental investment in new capacity are very low — possibly negative.

“REITs will be destroying shareholder value until supply and demand for commercial real estate reaches equilibrium. I’m confident that the trend for REITs will be down through the end of 2009.”

  The data cupboard is empty today. If you seek the latest economic indicators, tomorrow will be your day… April housing starts and building permits come out at 8:30 a.m. EST — likely the biggest numbers of the week. Of course, check out tomorrow’s 5 for the highlights.

  “Why the "ugh" on your reader’s proposal for fixing Social Security?” a reader asks in response to Friday’s inbox. To refresh your memory, another reader suggested that the real problem with SS is perspective… he recommended we view entitlements as a form of faithful charitable giving, and then simply remove those from the system that don’t need it.

“Many conservative types in this country argue that our nation is based on Judeo-Christian principles. The Bible — both Old and New Testaments — has over 2,000 admonitions to help the poor, give to those less fortunate, etc, so conservatives should have no problem recognizing SS for the social safety net that it should be.

“Liberals are there already with their bleeding hearts so what’s the problem? I agree with your reader (even though I got a whiff of the sardonic) — let’s call it what it is, cut off those who don’t need it (including me) and get on with it.”

  “There is nothing in the Bible,” responds a reader, this one a reverend, “that requires (or even supports) using force to take property from one person to give it to another, whether within or outside of the church — giving should be done voluntarily. The ‘church’ that requires membership fees doesn’t know what a true church is. The idea that stealing is a ‘Judeo-Christian ethical scheme’ is ludicrous.”

  “Churches don’t throw you in jail and confiscate all your assets if you refuse to contribute,” another reader quips.

The 5: Amen.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

 

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