The Summer of Ugly

Posted On Jun 24, 2013 By Dave Gonigam

June 24, 2013

  • Ecuador? Why the country is an outstanding expatriation choice, even if you’re not a former NSA contractor on the run
  • “The most beloved breakdown in history,” now underway: Elmerraji pegs his downside target on the S&P
  • A $200-million-per-day windfall: Byron King on how the “shale gale” makes the Fed’s job easier
  • Rogers tiptoeing into gold… profiting from the designation of obesity as a “disease”… the wackiest warning labels of 2013… and more!

  We’re told Edward Snowden didn’t make the 2:00 flight from Moscow to Havana.

Based on what’s been publicly reported, the world’s most wanted whistle-blower has done a bang-up job of giving the feds the slip. For all we know, the guy was never in Moscow to begin with.

We do know the government of Ecuador says it’s considering a request for asylum.

  Good choice on Snowden’s part: Ecuador tops the 2013 Global Retirement Index, as compiled by our compatriots at International Living.

“Ecuador’s major cities have top-notch hospitals, clinics and well-trained physicians,” they write. “All residents are eligible to participate in the country’s social security health care system for incredibly low monthly premiums.

“You’ll have dinner out for $2.50, an hour-long massage for $25… a beer costs 85 cents and some couples say they are living on less than $900 a month, excluding rent.

Andean Shangri-La: Snowden’s final destination?

“And if you want to keep busy with work, it’s one of the best countries for an expat startup.”

You can also import your household goods duty-free. Although we’re fairly certain Snowden won’t be able to take advantage of that particular perk…

100  The Summer of Ugly is in full swing on Wall Street.

Overnight, the People’s Bank of China weighed in for the first time on the cash crunch at Chinese banks. It said liquidity remains at a “reasonable level” and the onus is on banks to better manage their balance sheets.

Oooh… tough love.

The Shanghai Composite Index promptly tanked 5.3%, and the contagion spread westward. Major European indexes closed down about 1.5%. Ditto the major U.S. indexes: At last check, the Dow rested uncomfortably near 14,600… while the S&P was down 1.5%, to 1,568.

  “I am less convinced that we actually know what is driving these markets than most of us believe,” Vancouver stalwart Barry Ritholtz cautioned before the open.

“QE tapering, lots of earnings pre-announcements, China’s credit crisis, even just a market that has run too far too fast are all equally valid explanations. Some combination or perhaps none of the above are also just as valid explanations as why the rationales are likely right or wrong.”

  “I think lower ground looks likely in the short term,” says our own Jonas Elmerraji.

“This was the most hated rally in history on the way up,” he explains, “so you’d better believe that we’re going to be looking at the most beloved breakdown in history on the way down.”

The “orderly” rally that Jonas has talked about going back to mid-November? Gone.

But that’s short term, Jonas hastens to point out. “Longer term, we’re still very much in an uptrend — and an orderly one, at that. Here’s what the S&P looks like when you zoom out to a weekly chart:

“The uptrend that’s been intact since the 2009 market bottom is still very much intact.” That is, every time the S&P hits the 50-week moving average, it bounces.

So that’s the level to watch. At the moment, it’s 1,488. “I think,” says Jonas, “that’s our worst-case downside target from here.”

[Ed. note: Despite the broad sell-off today, Jonas’ Penny Stock Fortunes readers were able to book a 26% gain in three months, thanks to a buyout in the tech sector. For access to Jonas’ picks, look here.]

  Bonds are no refuge today; Treasury rates are popping again.

The yield on a 10-year note is up to 2.62% — a level last seen when rates were plunging after the debt-ceiling debacle of August 2011.

  “Ben Bernanke has probably done more to harm the markets and the economy in just two days than nearly anybody on Wall Street or on Capitol Hill has done in years,” says our income specialist Neil George.

At Bernanke’s news conference last week, “he did a poor job persuading the press corps that the Fed wasn’t going anywhere when it came to interest rates and the bond-buying stimulus.

“At no time,” Neil points out, “did he tell anyone that the bond-buying stimulus was ending, being reduced, tapered or even tapired — nor was the Fed’s interest rate policy anywhere near being changed or tightened.”

But perceptions were all that mattered: “We’ve seen good stocks with good businesses, no issues and paying good dividends sold off sharply.”

Who’s afraid of a tapir?

Neil advises his readers to sit tight: “The key is to know thy stocks. So I’ve looked at the impact of rising interest rates on each of our holdings and how they will impact the underlying businesses and the cash flows and the dividends.”

  “The ‘fracking’ revolution in the North American oil patch has created immense monetary flexibility for the Fed,” says Byron King, looking at Fed policy through the resource lens.

“There’s nothing like an ‘extra’ 2 million barrels of oil per day to help the Fed chairman manage U.S. monetary policy,” he explains. “That’s a net gain of $200 million per day to the domestic economy, at $100 oil. And since oil is foundational to the rest of the economy — in the form of motor fuel, chemicals and the entire downstream industrial ladder — there’s a multiplier effect.”

But Byron cautions the phenomenon also works in reverse. If the Fed ever gets serious about tightening, and interest rates rise, “we’ll likely witness fewer wells drilled, first of all. They’ll be more expensive wells. We’ll see worse economics at the well head.” After all, “fracking is capital-intensive. Those fancy wells are expensive, and they deplete fast.

“Eventually, we’ll see a plateau in U.S. oil output.

“Easy money helped increase the U.S. energy supply. Tighter money will scale things back out in the oil patch. The Fed is powerful, but it can’t have it both ways.”

[Ed. Note: Whatever the Fed does, we’re clearly entering a period when you need to pick your stocks carefully. Which is why we’re making it easier than ever to access every one of our stock recommendations — Byron’s resource plays, Neil’s income opportunities, Jonas’ penny stock picks, Chris Mayer’s value plays and the breakthrough technology opportunities from Ray Blanco and Patrick Cox.

That said, only a few more hours remain in which you can access all this research for a low one-time fee. The offer expires tonight at midnight. To sweeten the pot, our publisher has cut a live check for $2,044, which he’ll send right to your doorstep once you send word. To do so before the offer comes off the table, simply click here.]

  Precious metals are no refuge this morning. After reaching nearly $1,300 late on Friday, gold has retreated 1%, to $1,284. Silver’s down to $19.63.

Elsewhere in the commodity complex, oil is steady at $93.51, while copper is perilously close to breaking below $3 a pound.

  Jim Rogers is finally adding to his gold position.

“I bought more today,” he told Hard Assets Investor last Tuesday. “I bought a little bit, not much, over the last few days, in case this was the bottom.” He still says he’ll be a more aggressive buyer at $1,200.

A gold bubble? That’s still to come. “Long bull markets always end in a bubble or mania before it’s over with. And when there’s a bubble in gold, I hope I’m smart enough to get out. We haven’t seen a bubble yet.

“Until recently, if you went around any U.S. city, you would see signs outside many jewelry stores saying ‘We buy gold.’ And the American people line up to sell gold. Later, there’ll be signs there saying, ‘We sell gold,’ and people will be lining up to buy it in big ways. That hasn’t happened yet.”

  The American Medical Association declares obesity as a disease…

Eek… No way are we taking sides on this one. But our tech arbiter Ray Blanco has a surefire way to profit with one company already tackling the issue. His readers have already logged big gains in one company developing an anti-obesity compound.

The next one, according to Ray, could be even bigger: “At current pricing,” he wrote this morning via email, “marketing their breakthrough weight loss drug would put shareholders up thousands of percent, in my view.”

  “The AMA’s decision to classify obesity as a disease,” tech blog FierceBiotech writes, explaining the implications, “is a direct attempt to persuade biopharma companies to develop new therapies by making it harder for payers to decline coverage, while applying pressure on the FDA to approve more drugs faster.”

The AMA’s Council on Science and Public Health agrees: “More widespread recognition of obesity as a disease,” they wrote concerning the positives of the new classification, “could result in greater investments by government and the private sector to develop and reimburse obesity treatments.”

This classification could also, the AMA explains, increase the pressure on the FDA to approve medications for obesity, and reframe their focus on a drug’s ability to decrease adipose tissue (the technical term for fat), rather than merely improving metabolic health.

  Here’s the rub: It so happens that Ray’s “thousand percent” company has developed a drug that does exactly that. It has already been shown to trigger rapid weight loss in mice and monkeys.

It works by singling out specific blood vessels that supply the adipose tissue with blood. This causes the vessels between to shrink and the fat cells once nourished by those vessels to undergo a process called programmed cell death (PCD), or apoptosis. [For access to all our premium biotech recommendations, give this a look.]

  America’s Wackiest Warning Labels Contest, sponsored by nonprofit Center for America, is now in its 16th year… and the results are in.

Here are the five finalists:

“Wash hands after using.” A label on a common indoor extension cord.

“Not for contact lenses or direct use in eyes.” A warning on a small bottle of spray-on, anti-fog cleaner.

“Not for human consumption.” A warning on a package of rubber worms made for fishing.

“Company will not be held responsible for any illness or injury that is incurred while using the pedometer.” A label on a commonly used pedometer.

 

“Combustion of this manufactured product results in the emissions of carbon monoxide, soot and other combustion byproducts which are known by the state of California to cause cancer, birth defects or reproductive harm.”A warning on a box of matches.

Step at your own risk.

  Turns out three of the five above — the extension cord, rubber worms and matches — can be traced back to California’s Proposition 65 — a “clean water” referendum dating to 1986.

“For those of us that call CA our home,” one Californian writes on a Friday.com message board, “we are used to seeing stupid Prop 65 warnings on everything from cans of foaming goo to etched into a window on hotel entrances to stuck on the side of the occasional garbage truck. A sort of legal graffiti that is as ignored as the stupid ‘massage cheap’ and ‘earn money at home’ phone post signs.”

Have no fear, the resident writes. Each label is hedged with this:

Oy.

  “In 2007,” a reader writes, “you had your hurricane warning flags flying because you saw the subprime crisis coming from a mile away.

“Six years later, we have five years of Chinese boondoggle loans festering and you are barely cognizant of this Ponzi scheme economy. Forget about gold… it’s for sale and you can’t stop it. Take off your blinders and recognize the imploding China economy and what its implications are.

“Your commentary has been useless for months on end. Try to be relevant again.”

The 5: “There are going to be setbacks in China,” says the aforementioned Jim Rogers. “Goodness knows no economy or market goes straight up. They all have setbacks. China will have many setbacks. In the 19th century, America had a horrible Civil War. We had several depressions, very little rule of law, very few human rights. And yet we became a pretty successful country in the 20th century.”

Anyway… why the sour grapes? Friday wasn’t the first time we’ve sounded a warning about China: We’ve been spotting signs of a slowdown there for nearly two years.

But if you’re looking for us to scream from the rooftops that China will trigger the next Epic Financial Meltdown, worse than 2008, and it’s time to retreat to 100% cash… well, we’re liable to disappoint. If you’re looking for what Barry Ritholtz calls “recession porn,” Google can steer you to many willing purveyors.

We, on the other hand, are eager to play both sides of the trade implicit in the theme of our Vancouver symposium this year: “A Tale of Two Americas.” We’re eager to pursue strategies to protect ourselves from the idiocy of politicians and central bankers… but we’re also eager to seek out the innovators who thrive despite the damage done by the do-gooders.

We still have a few dozen seats left; the conference gets underway four weeks from tomorrow. For a full lineup of the speakers who will help make sense of the contradictions and cross currents, your formal invitation is right here.

Best regards,

Dave Gonigam

The 5 Min. Forecast

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