End of the Recession, China & Moly, Declassified Treasury Ridiculousness and More!

Posted On May 28, 2009 By

by Addison Wiggin & Ian Mathias

  • So it begins… influential economist, national agencies claim recession is ending
  • Consumer sentiment soars here and abroad… why stock traders are still selling
  • Chris Mayer and Frank Holmes offer ways to play the Asia re-boom
  • Plus, newly declassified notes from the Treasury’s first bank bailout meeting… unbelievable details, below

  We’ve entered the next stage of the sucker’s rally.

First the data became “less awful.” Then the market rallied. Now — lo and behold — prominent economists are competing with each other to be the first to call the bottom. At the head of the pack, this fellow:

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That puppy-choking economist is Robert J. Gordon, one of the seven members of the Business Cycle Dating Committee at the National Bureau of Economic Analysis. In less stuffy terms, he’s one of seven folks who officially declare the beginning and end of a recession.

Just recently, he unofficially called the end of the mess we’re in. At the crux of his argument is this chart:

Gordon notes that, in the week of April 4, the four-week moving average in initial claims peaked. Thus, if this recession is like the last few, we’re through the worst of this downturn.

But is it? Hard to believe jobless claims in the “worst downturn since the Great Depression” won’t surpass those of the early ’80s. And even Gordon himself (proof that this guy is a worthy economist) says, “Probably, we’re going to be wrong." Whether he’s called it or not, we’ll keep an eye on this unemployment claims trend… should be interesting.

  With that in mind, initial claims for unemployment benefits declined again this week, to “just” 623,000. The four-week moving average has almost flat-lined around 626,000.

Continuing claims — those seeking unemployment benefits for more than one week — set another all-time high. 6.78 million Americans are on Uncle Sam’s jobless tab, the 17th consecutive week of record highs.

  “Past business cycle recessions have ended in a matter of months after peak IUCs are in place,” notes our macro adviser Rob Parenteau, echoing Gordon, “so we continue to target Q4 2009 as the most likely first positive real GDP print. The unemployment rate typically keeps rising for three-four quarters after IUCs have peaked, and we would not be surprised if manufacturing job losses remain heavy into 2010.”

  The National Association for Business Economics is calling for the recession to end in the second half of 2009. Its panel of 45 economists expects GDP to turn positive sometime in the second half and unemployment to peak in early 2010.

  Economic confidence is Europe is picking up too… the index of executive and consumer sentiment there rose to a six-month high in April, the European Commission reports today. Coupled with an even better American consumer confidence reading earlier this week, it’s safe to say the glass is suddenly half full in the Western world.

  But the global rise in consumer sentiment couldn’t keep stocks out of the red yesterday. As we’ve been noting all week, investors have affixed their eyes on bond yields. The steady rise of long-term bond yields has put a serious damper on the market mood, as it should. The 10-year yield rose as high as 3.72% yesterday, up 33 basis points from Tuesday’s low.

Largely because of this, the Dow and S&P 500 fell over 1%.

Today could be a big day for this trend. The Treasury is slated to sell $26 billion in 7-year notes, the longest-dated bond offering this week. We’ll let you know how it goes tomorrow.

  The T-bond crisis doesn’t bode well for the dollar. Despite a small rally yesterday during the stock sell-off, the dollar index is still stuck around 80, just off its lowest levels of 2009.

  Meanwhile, holders of good old gold are sitting pretty. The spot is up $15 today, to a two-month high of $965 an ounce

A weak dollar and booming global sentiment have done wonders for oil prices. The light, sweet crude variety is up to $64 a barrel, a year-to-date high. Crude is getting an extra boost today, courtesy of OPEC. The cartel, fresh out of its latest gathering yesterday, said output levels will stay the same. The group maintained its price target of $75-90 a barrel.

What’s more, oil found even more bullish support late this morning. The Energy Department’s latest inventory report showed a greater decline in supply than traders anticipated. As we write, crude is just below $65.

  “For the first time in years, the Chinese have become net importers of molybdenum,” reports Chris Mayer in his latest Special Situations alert. Moly, if you are unfamiliar, is a lynchpin of the energy complex. It’s a vital resource for oil pipelines, nuclear reactors and fuel refiners. Above all, moly is used to strengthen steel.

 

“China recently became a net importer of moly because its mines are too costly to run profitably at current low moly prices. Various estimates put about half of China’s moly production at costs north of $13 a pound. The current moly price is only $8 and change — down from $30-plus last year, mainly as energy markets softened. So there have been a lot of shutdowns in China, as Chinese producers can’t make any money.

“China is the world’s largest producer of steel, by far. No one’s even close. China produces nearly 40% of the world’s steel. It makes twice as much steel as the No. 2 guy, the European Union. Much of that steel will need moly.

“Therefore, any rebound in moly is bound up in the China growth story. In fact, over the past five years, Chinese demand for moly has grown 27% annually, compared with only 4% globally. China alone now makes up 25% of the global demand for moly — about 110 million pounds.”

Thus, if you believe in the China boom, concludes Chris, “molybdenum is a winner, albeit one that is temporarily resting, like a basketball player taking a breather before he steps back on the court. All the elements that pushed moly to $30-plus per pound in the first place are still in place for yet another run at three sawbucks or better. Molybdenum is cheap at $8 per pound.”

So how should you invest? Read your latest issue of Mayer’s Special Situations for the answer. If you’re not a subscriber, you need to check this out — we’re currently offering a one-month trial of MSS for just $1.

  “Despite this year’s slowdown, we continue to believe strongly in the Asia story,” adds our colleague Frank Holmes, just back from a trip to Singapore. “Rapid urbanization, an expanding middle class and government policies that promote prosperity are among the factors that we see as driving future growth in that region.

“China’s spending to build out its infrastructure has gotten a lot of attention, but that emphasis is a key government initiative in many Asian countries. Construction cranes are a common sight in Singapore, where the government has committed to spending more than $40 billion over the next three years on new roads, public housing and other infrastructure projects

“One of the biggest projects now under way in Singapore is the Marina Bay Sands hotel and casino, which I could see from my hotel window. Look at all of the cranes:

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“This will be the country’s first casino, following a change in its gambling laws last year, and its first step toward its goal of becoming the Monte Carlo of Southeast Asia.

“This construction, which is valued at more than $3.5 billion, is providing jobs for thousands of workers and consuming many thousands of tons of steel, cement and other commodities. Similar work is under way across Asia, and many more projects are in the pipeline.”

Frank will be on of many can’t-miss speakers at our Investment Symposium this year. The deadline to sign up is approaching rapidly… get the details here.

  Last today, the government has released Treasury documents surrounding Oct. 13, 2008 — the day the U.S. government launched TARP. After a long battle between Judicial Watch and the Obama administration, the government has finally coughed up some details of the infamous meeting between the Treasury and the heads of the U.S.’ biggest and most troubled banks. Oh, my… take a seat for this.

First and most interestingly, the documents show that Former Treasury Secretary Hank Paulson gave the nine bailed-out banks NO CHOICE but to accept the government’s cash-for-equity deal. “Your firms need to agree,” his talking points read. “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”

What’s more, there’s all kinds of ridiculous Gestapo-style secrecy surrounding the meeting. Treasury officials asked for Secret Service assistance to keep the press in the dark. The White House launched a PR campaign to crush public fears of bank nationalization. And the coup de grace: In all the released documents, all remarks by current Treasury Secretary Tim Geithner are either censored or missing. After all, they have to protect their golden boy.

“How is it,” asks our executive publisher, Addison Wiggin, unable to resist, “that the Treasury secretary, chairman of the Fed and their minions have risen to the level of national security that the military has traditionally claimed?”

If you would like to delve deeper into this matter, some of the documents and transcripts can be viewed here.

“We have also been trying to find property in Florida,” a reader begins in response to yesterday’s reader mail. “What we found in the public records was alarming. Homes that were worth $95,000-125,000 had been given mortgages for $600,000-800,000! These were not isolated instances, but one after another after another. Hundreds of them. Probably thousands, but my brain started hurting.

“People got this money, foreclosure occurred and… the people walked away with all that money. Many still kept their other speculative properties. Banks aren’t trying to get the money back. Taxpayer pays in bailout money and with these new toxic asset swaps. Neither the bank nor the leveraged speculator loses. Just the taxpayer, who doesn’t know all this is going on.

“In the meantime, people willing to take a hit and go for a short sale to preserve their credit (and morals) can’t get the deal made. Either the bank can’t find the note, they don’t have time to make the deal, it’s not in their interests because they could do a ‘swap’ instead and just lose 7% — who knows. We have cash and can’t get a deal done.

“Love your 5 forecast! Keep up the good work.”

  “I also live in South Florida,” adds another reader, “a happy renter for the last 3½ years, after selling my home in October 2005. I do not say this to boast, but to lend some validity to what I’m about to say. I am just as bearish today as I was five years ago on housing, and it’s true that resets today would lower the rate due to the Libor and other short-term indexes, but not necessarily the payment.

“Most loans that were originated — I know this firsthand as an originator myself — were of the interest-only and option ARM variety. Also, by definition, when a loan is reset, the borrower will now be paying both principal and interest versus interest-only or 1% teaser rate. Many borrowers, being that they are so far underwater, have no chance of refinancing and will have to rely on a low Libor rate indefinitely. Don’t see that happening.”

  “Thank you for the Webinar invite/notice for May 29,” our last reader writes. “However, the notice says it is scheduled for 3 p.m., but does not specify the time zone (3 p.m. EST, CST, MST or PST?). I assume EST is the correct time zone, but I suggest reader confusion could be easily prevented if the typist would include a reference time zone to the scheduled hour.”

The 5: Sorry for the confusion. The latest edition of the Retirement Recovery Series will air at 3 P.M. eastern time. If you haven’t signed up, do so here. Don’t forget, it’s totally free.

Thanks for reading,

Ian Mathias

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P.S. We hope you picked up on our offer above… it’s something we’ve never done before. We’re so convinced you’ll love Mayer’s Special Situations, we’re offering one-month trials for just $1. Seriously — a no-obligation one-month subscription for the price of a Hershey’ bar. That’s as sweet a deal as we can muster… details here.

 


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