Article Info
Jul
29
2009

Issue

Posted In
5 Min. Forecast

The Uber Contrarian Issue: Credit Crisis Is Over, Don’t Forget Deflation, The Next GM and More!

by Addison Wiggin & Ian Mathias

  • Proof, the credit crisis is over… so why are banks still in trouble?
  • Is betting on inflation too easy? Bill Bonner’s alternative forecast
  • Chris Mayer with a chance to “buy stuff on the cheap”
  • Is the China bubble back? Chinese indexes, IPOs skyrocket
  • One widely loved blue chip that could be “the next General Motors”

 

  “Ignore the crowd,” is a maxim of the Fairholme Fund, Bruce Berkowitz’ brainchild. We like the way he steers his ship, and we aim to do the same with our 5 Min. vessel. So let’s set sail straight into the wind today… welcome to an uber-contrarian issue of The 5.

  The credit crisis is over. No seriously, it is:

Banking lending rates reached a historic low today. At a wimpy 0.48%, three-month Libor is at its lowest rate since at least 1986, when the British Bankers’ Association started keeping track. Compared to its post-Lehman Brothers peak of 4.8%, banks can now lend to each other at practically no cost. Credit, it would seem, is extremely liquid.

Remember the Libor/OIS spread? It’s the complicated ratio of interbank lending rates to overnight index swaps that Alan Greenspan famously called a “barometer of fears of bank insolvency.” It peaked at 3.6% basis points in October. Greenspan said credit would be in a “normal” state when the spread hit 0.25%. This morning, it shrank to 0.29%.

That reminds us of a key theme of last week’s Investment Symposium: Interbank credit is flowing, but that’s no longer the problem. It was once about what banks didn’t have — credit. Now it’s all about what they’ve got — bad assets… and there’s no three-month swap rate for those.

  “Banks profited from lending to or servicing an overstretched consumer,” notes Dan Amoss. “Today, not only are their customer bases weak, but they all expanded fairly rapidly during the boom years and are now discovering just how bad their loans will be or how few customers will patronize them.

“To top it off, the U.S. government’s policies are acting to starve these companies and their customers even further by hogging most of the available savings to finance its deficit.

“Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.”

(By the way, Dan showed us his latest short idea the other day. It’ll be a fun one to watch… he’s targeting one of the biggest banks in North America. Stay tuned.)

  “Everyone knows that stimulus leads to inflation,” adds Bill Bonner. “And everyone knows that this is the most daring use of stimulus ever attempted. Ergo, it seems likely that we will soon see the most inflation we’ve ever seen.

“But it’s not that simple. The story is too easy to tell. It’s too obvious. Too logical. Too easy to explain and too easy to understand. Under these circumstances, inflation would be no surprise!

“Practically everyone anticipates rising rates of inflation. The adjusted monetary base of the United States has more than doubled in the past year. Deficits are staggering. The price of oil — at $65 — is telling us that inflationary pressures haven’t gone away. Gold, too, at $930, seems to be whispering — not shouting — a warning: Watch out…

“Currently, we look at that -1.4% inflation rate as a fluke… an aberration. And most people are sure the feds will stir up the inflation rate soon. But what if the feds are more incompetent than we realize? What if they can’t cause inflation? The Japanese couldn’t. And they never had deleveraging consumers to contend with. In other words, their households were never so deep in debt that they had to cut back spending in order to pay down debt. But they cut back anyway… and Japanese prices fell.

“Nor did the Japanese have an entire world economy that was deleveraging. Instead, they were able to continue supplying goods to eager consumers in the United States… and making profits.

“America’s economic situation is much more dangerous… and potentially much more deflationary. We could be entering a period of falling prices that will last for many years.”

  Consumer confidence weakened more than Wall Street expected July, the Conference Board said yesterday, strengthening Dan and Bill’s forecasts. The board’s measure of consumer confidence fell from 49.3 to 46.6. The group says a reading above 90 would signal a stabilized consumer.

  Thus, it’s no surprise to see orders for durable goods drop suddenly. Purchases of U.S. durable goods fell 2.5% in June, says the Commerce Department today. That’s the largest drop since January. “Transportation goods” led the way, with a 12.8% decline.

  Both those data points are putting the hurt on crude oil. The front-month contract is down to $63 as we write today, another $3 lower from yesterday. Could energy investing be due for another trip to the doghouse?

  “The fall in energy investing is already here,” claims Chris Mayer. “If you look at the oil picture, you find something interesting about where future supplies will come from. The IEA estimated as recently as November 2008 that the Canadian oil sands would account for nearly 70% of the increase in nonconventional oil production between 2009-2030. However, with the price of oil where it is, investment has been cut way back. Already, the Canadian Association of Petroleum Producers has revised its forecast for investment three times. It’s cut it from $20 billion to $10 billion currently.

“It begs the question, of course, where the oil will come from. These swing producers, like the Canadian oil sands, can’t stop and start very easily. They take time. And these swing producers need a higher oil price to entice them to invest in new projects.

“All of this sets up another leg-up for oil prices. The same thing is happening really across the commodity spectrum as projects are cut or delayed. From an investor’s point of view, you get a chance to buy stuff on the cheap.”

Which “stuff” should you buy? Check out Chris’ Special Situations portfolio.

  Stocks meandered about yesterday, ultimately ending flat. But the Dow and S&P 500 opened down almost 1% today, thanks to the data above, and this:

  Chinese investors turned bearish this morning. The Shanghai Composite plunged almost 5% — its worst day in eight months. The loss may have just been a profit taking after the composite’s five-day winning streak. But we’re hearing more and more talk of the Chinese government trying to reign in the market… starting to look bubbly again:

  • Stocks on the Shanghai Composite currently trade for 35 times earnings. That’s the highest since January 2008, more than double the P/E ratio of the Dow and even twice the current earnings multiple of other emerging markets
  • The Shanghai Comp is up 79% this year
  • The Chinese IPO market is booming again. After suspending public offerings for over a year, Chinese market regulators opened the floodgates this week. There have been two IPOs since — Sichuan Expressway Co., which tripled in its first day of trading, and China State Construction Engineering Corp., which staged the biggest IPO of 2009 early this morning. In both offerings, buying was so feverish that regulators had to suspend trading — twice. 

By the way, you might recognize some of China State Construction’s handiwork. They were the firm behind this beast:

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C’mon… it’s even made of bubbles!

  Today’s global market weakness is giving the dollar a boost. Just like late 2008, when the going gets tough, the market favors the ol’ greenback. The dollar index is up about half a point from yesterday, to 79.3.

That means gold is struggling. The spot price is down another $5 from yesterday’s low, to $930.

  “Could Microsoft be the next General Motors?” David Galland asks, certainly qualifying for our uber-contrarian issue. “After all, they failed to buy Google when they could, then turned down an offer to buy the company that became Google Earth — a company that subsequently spun out on the order of $11 billion in revenue for Google.

“Why did this happen? Mostly, it is the result of the company’s own success, a success that has made them arrogant. Why buy some other technology company when they can simply build the technology themselves? The problem is that they have become so large and tangled up internally that they never get around to building it, whatever ‘it’ is.

“The bottom line is that Microsoft has had a great run, probably the single greatest run in American business history. And there is little doubt that the brand will have value for decades to come. But it increasingly looks as though its upward trajectory is turning downward, as more nimble competitors run circles around it, carving off chunks of market share as they do so.

“Last week, it was reported that Microsoft’s revenues plunged 17%. Given that the company is now bloated, costly to run and has a market share that is theirs to lose across many segments, this could just be the beginning of a long downward spiral.”

  “Last week in Vancouver,” writes a reader, “was my first attendance at the Agora Investment Symposium. It was a very inspiring and enjoyable week. The ambiance at the Fairmont is fabulous and a very fitting venue for such an illustrious group of thinkers to gather. (I half expected to see William Van Horne, top hat, cigar in hand, walking down a hallway.)

“Please pass my great appreciation to all the folks who helped organize the event. They did an excellent job. I’m looking forward to next year!

“And to the readers who can’t see the bull in the bear for what it is, watch your step in the dark.”

The 5: Thanks for the kind words. Don’t forget you can revisit that “illustrious group of thinkers” with our CD/MP3 set. Hope to see you again next year.

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. Sick of getting the shaft while “too big to fail” firms get paid? Check out Jim Nelson’s latest special report on the “bailout loophole,” a perfectly legal income opportunity spawned by one of Congress’ ridiculous bailout mandates. It’s a legit chance for the average Joe to capitalize on credit crisis legislation… details here.

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