Bernanke's Forecast, Buffett's Green Shoots, Can't Miss Data, Taking Oil Profits and More!

Posted On Jun 25, 2009 By

by Addison Wiggin & Ian Mathias

  • Fed sees the bright side… Bernanke says worst it over, inflation not a worry
  • Warren Buffett can’t see any green shoots… even after eye surgery
  • Alan Knuckman on how to survive a sideways stock market
  • Byron King says now’s a good time to book profits on this sector
  • Housing still out of whack… one chart foreshadows the market’s next move

 

  Take two days off and look what happens… the recession has bottomed.

At least that’s what “they” would have you believe. While we locked ourselves in our bimonthly editorial meeting the last two days, we missed some new “the worst is over” calls. Here’s the rundown:

  “The pace of economic contraction is slowing,” declared the Federal Open Market Committee yesterday after emerging from a two-day meeting of their own. Even though Mr. Bernanke and his brood say, “economic activity is likely to remain weak for a time,” the vibe from the FOMC statement was decidedly rosy.

Of course, inflation “will remained subdued for some time” and the group will leave rates near zero “for an extended period.” Same old story at the Federal Reserve. The rest of the Fed announcements were nonevents… new age lending programs and quantitative easing will neither increase nor decrease before their next meeting in August.

  Despite all the data out this week — new and existing home sales, GDP, jobless claims — only one has given the Street a jolt: durable goods.

Orders for items meant to last a few years increased 1.8% from April to May, smashing Wall Street’s expected 0.4% growth. Never mind that orders in the first five months of 2009 are down 27% compared to 2008… May’s number is another green shoot! Hooray!

“I get figures on 70-odd businesses, a lot of them daily,” said Warren Buffett yesterday. “Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true…

“I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”

  Speaking of Buffett, his annual charity lunch auction is proving to be an annual sign of the times. Last year, the oversized $2.1 million winning bid for a lunch with Buffett came from a Chinese fund manager — three times the previous year’s winning bid. This year, with only one day remaining, bids for the eBay auction are up to “just” $350,000.

  The U.S. economy didn’t contract quite as much as reported in the first quarter, the Commerce Department announced today, adding to the optimistic mood. The government arm finalized first-quarter GDP numbers today. Their initial report detected a 6.1% contraction. The first revision was a 5.7% fall, and now Commerce claims the economy shrank just 5.5% in the first quarter of the year.

  The OECD has drastically revised its growth expectations for the U.S.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said Jorgen Elmeskov, the OECD’s acting chief economist. The group now forecasts a 2.8% U.S. economic contraction in 2009 and 0.9% growth in 2010 — a huge revision from their most recent call of a 4% decline this year and zero growth in 2010.

  As far as the stock market goes, we timed our two-day break well… since Monday’s swift sell-off, major indexes have gone nowhere. Despite all the data and the latest FOMC meeting, the Dow sank 0.2% Tuesday and 0.3% yesterday… yawn… stretch.

  “This sideways trade for the last few weeks is typical of summer markets,” writes our commodities trader Alan Knuckman, “even in an anything but a typical year for investors. Everyone is so conditioned for strong moves in either direction it has left many unable to handle an undefined trend.

“The stall has disappointed many market watchers — with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend, and that’s where we’ll stay here at Resource Trader Alert.

“Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel — with lows last week at the 899 level (as a support level) and highs at 925-plus — is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets.

“For now, let’s wait and see what trend develops. Have some wine, and let the market sort things out.”

When the next trend emerges, will you know what to do? Have Alan be your guide, here… at Resource Trader Alert.

(For a closer look into the psyche of our resource trader, be sure to check out today’s P.S.)

   Commodities have succumbed to selling pressure. Since peaking at $987 in late May, gold has been in a state of steady decline. It found a temporary bottom early this week at $919 an ounce and has since inched back up to $935.

Oil fell from a recent high of $72 a barrel to as low as $66 this week. While the front-month contract has recovered to about $68 this morning, we detect a dark cloud forming over the sector.

  “Oil had a strong climb,” reports Byron King, “and pushed up over $70 per barrel just a few weeks ago. Then oil met with market resistance. So the price of oil retreated into the current $60 range. Could oil go lower? Yes, at least in the short term. Oil could drop back into the $50s, despite its traditional strength during the summer driving season. You might see gasoline prices pull back 10-20 cents per gallon, which will make that trip to the gas station a buck or two cheaper.

“A pullback like that in oil prices will take the steam out of recent stock market gains for oil producers and oil services. So if you want to take any oil profits, now is probably a good time.

“No, this is not a sell recommendation for the oil sector, or any company in the energy side of the Outstanding Investments portfolio. What I’m saying is that we might have a pullback in an otherwise long-term, generally rising trend for energy. Thus, if you are of a trading mind, then take your recent energy gains now. Book some profit, and hold onto the cash for later buying opportunities. Otherwise, don’t be shocked if the energy stocks take a summer swoon.

“Longer term? Oil is headed upward in price. That’s just plain baked into the cake. Half of the world’s daily oil use is now going to developing countries. And by definition, developing countries are… developing. They are using more and more oil, or how else do you think they are developing? So even if oil use in the developed world just stays flat, that oil will still find a market.”

Outstanding Investments remains one of the greatest values of our industry. If you’re not a subscriber, get with the program,here.

  The U.S. housing market is back to underperforming expectations. We saw the latest existing home sales and new home sales numbers this week — both failed to meet the Street’s forecast.

The National Association of Realtors reported 2.4% growth in existing home sales Tuesday, to an annual rate of 4.7 million. The stock market — no longer satisfied with meager housing growth — wanted a rate of 4.9 million and suffered a small sell-off.

Even though sales managed to increase in back-to-back months for the first time since 2005, existing home prices are still plummeting, distressed sales are still booming and the market is still saturated with a 9.6-month supply of homes… a positive sign that the free market still works, but hardly reason to call a bottom.

  And new home sales are still slipping into the abyss. Sales of new houses fell another 0.6%, to a 342,000 annual rate, the Commerce Department said yesterday. That’s down 32.8% from last year — we hasten to add, a time when the housing market was already in the dumps. Making matters worse, Wall Street analysts were calling for a 2% rise in new home sales. And like existing home sales, the price of new homes is still falling (down another 3%, to $221,600), and inventory is still at a lofty 10-month supply.

Check out this chart of new versus existing home sales. Both have historically moved in near lock step, with the exception of last two years. If this trend is destined for a “regression to the mean,” we wouldn’t be surprised to see new home sales level out and existing sales take a turn for the worse.

  The dollar’s still stuck in a range. The dollar index took a quick trip below the infamous 80 score yesterday after the FOMC’s announcement, but has since climbed back up to 80.6… not far from where it’s been for the last two weeks.

Today’s “take it for what it’s worth” dollar quote, from IMF chief economist Olivier Blanchard:

“For the U.S., it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar.” Hmm…

  “I’m a raving fan of The 5, but come on,” writes a reader, referring to Monday’s issue, “couldn’t you muster a better defense of capitalism to the latest apologist?

“It is not capitalism that allowed derivatives and excessive debt levels. It is the distortion of a fractional reserve fiat currency system that is a statist addition to it that did. In a free market with a gold standard, every security bought must be funded with actual value, rather than leverage levels being allowed to explode. It is the printing press, credit creation and the statist monetary system, and not capitalism, that is the source of this crisis.”

The 5: Heh, well, there you have it.

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. We feel obligated to share this photo with you, if only to legitimize Addison’s recent iPhone purchase. During our marathon editorial meeting yesterday at 14 West, the fire alarm sounded. The whole building cleared out to a nearby park. Most were content with a break… we’d been vetting our ideas nonstop for the last few hours, and the alarm was a welcome excuse to relax, grab some coffee, have a smoke, etc.

Not for Alan Knuckman, editor of Resource Trader Alert. We didn’t ask how many trades he managed to fire off during the 10-minute alarm, but it was quite clear that he was in the zone. You can take the man out of Chicago… but don’t expect him to stop trading:

Curbside commodity options, fueled by Big Gulp

P.P.S. Did you learn from 2008? If so, you’re actively seeking ways to hedge your portfolio from another market fall. We’ve gathered our favorite strategies for playing the next bear market here, in our latest special report.


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