Addison Wiggin – January 4, 2012
- The 5’s outrageous 2012 forecasts: How to profit from the Fed’s and Treasury’s perpetual bailouts…
- How to know when the market’s turned… why gold stocks are set to shine (finally!)…
- A cautionary tale: geopolitical tensions and rising oil prices… and more!
- The real story behind Tom Cruise and that building in M:I …
- J’accuse: “Addison Wiggin continues to print lies” … real progress with the New Trade of the Decade… and your final chance at our most-elite level of service.
Uncle Sam entered the new year with a national debt of $15.22 trillion.
Worldwide, the governments of the largest economies have to “roll over” $7.6 trillion in the next calendar year.
“Where’s the money come from?” asks our publisher Joe Schriefer. “Printing presses… and forced retirement account investing of some sort?”
“It’s gonna be a very entertaining to see what happens,” a reader opined in this morning’s mailbag. He says he’s “all in” with the sell side of our New Trade of the Decade — sell U.S. Treasuries.
“Let’s see, at around a $1.3 trillion per year deficit and eight years to go, the U.S debt ceiling should be raised to, let me see here, hmmm, $25.8 trillion — give or take a billion or two. But hey, who’s counting.”
Who, indeed? But that seems like a good number. We’ll take it.
It’s not as outrageous as some of the other New Year’s forecasts we’ve run across — “New global currency announced”… “Extended bank holiday”… “Wheat prices to double”… but it feels plausible. It feels right.
With that in mind, we delve into five other forecasts contributed by our editors today. None of them meet the definition of “outrageous.” They won’t make you spit your preferred beverage over the computer screen. But we expect all of them to prove themselves profitable.
“The Federal Reserve and Treasury Department have wasted vast resources propping up a failed financial system,” says our Dan Amoss — teeing up a host of New Year’s predictions from our editors this morning.
“Five years after the credit bubble popped, we still suffer from an imbalanced economy. Rather than recognize this, ‘policymakers’ are trying to puff the economy back to the way it was in 2007, and the result will be disastrous.”
Specifically, “CPI will rise by more than 3% in 2012,” says Dan. “This will surprise most investors.”
“A necessary part of the ongoing bailouts plan is keeping interest rates near zero, so both the banking system and government can borrow at low cost.”
“Zero is, obviously, not the market-clearing price of money. As lenders and savers have slowly realized that zero interest rates are practically a permanent fixture of the investing landscape, they’ve not offered as much of their capital as loans in the real economy as they would have if rates were higher.”
“We’ve seen this play out as institutions continue to follow a defensive, barbell investing strategy: a hefty allocation to…”
- U.S. Treasury bonds, and
- Inflation hedges like precious metals, energy and farmland.
“This preferred menu of investment choices among institutions should continue, until we see tighter Fed policy (which may be at least five years in the future).”
“The Fed/Treasury bailout policy,” Dan goes on, “has left capital stranded in banks and businesses that now have incentives to defend their existing positions, rather than grow and innovate. These businesses are slowly merging with the state.”
“As a result, we’re left with excess capacity in most areas of the economy (like finance and construction) and insufficient capacity in others (like agriculture and energy). This is especially true if you view these sectors in the context of the global economy, not just the U.S. economy.”
“Persistent strength in oil and food prices — despite chronically high U.S. unemployment — is evidence that these sectors still suffer from shortfalls in investment.”
“As an investor,” concludes Dan, “you can profit by owning stocks that will earn high returns on capital in sectors that still require heavy capital investment. Also, you can profit by selling short stocks that are earning falling or negative returns on capital in glutted industries.”
U.S. stock indexes have spent most of the morning down, although at last check the Dow is nearly back to break-even from yesterday’s close.
Depending on whom you want to believe, the slump is being attributed to new jitters about the eurozone. A Greek government spokesman warned his country would leave the eurozone if it couldn’t finalize a second bailout of 130 billion euros by March.
“As investors usher in the new year,” says our resident technician, Jonas Elmerraji, “Wall Street’s inclination is going to be to forget about 2011 and expect 2012 to be different.”
“Albert Einstein is famous for saying that the definition of insanity is ‘doing the same thing over and over again and expecting different results.’”
“Volatility and uncertainty are going to continue to be major factors in this market. That means that investors are going to need to take a more-tactical approach than just buying and holding and hoping. There are a couple of tactical funds out on the market today that offer a direct way to add that strategy to your portfolio.
“While I think it’s likely we’ll see a return to directional (normal) trading at some point in 2012, just because the calendar year changed doesn’t mean that we’re seeing a different market.”
“The biggest news in the market in 2012 will still come from the search for yield,” suggests our income specialist Jim Nelson. “Just like the second half of 2011, investors will be climbing all over themselves to find better returns, higher yields.”
“Corporate bonds, at least the ‘safer ones,’ have all been gobbled up. Companies like Procter & Gamble and PepsiCo are able to sell large bundles of notes for next to nothing. Any bet on so-called safe sovereign debt yields squat. 2012 investors will instead take on more risk to outpace inflation. They’ll continue looking outside of bonds for income. Income-paying stocks — anything paying more than 2% or so — should take off.”
“But because growth will be slow across the board, some of those bets will turn sour. Dividends are still at risk of being cut in many corners of the market. I’d say the best bet for 2012, at least the first half of the year, will be blue chip dividend payers with cash flows large enough to cover their shareholder payments.”
After dropping below $1,600 in overnight trading, gold has rebounded to $1,612. The move comes despite firmness in the dollar today: The dollar index is up to 80.1.
Silver, however, is surrendering some of yesterday’s epic gains; the bid is currently $29.41.
“Gold stocks will finally have a great year,” our Chris Mayer ventures to forecast.
“The market hated gold stocks in 2011, especially the juniors. The MarketVectors Junior Gold Miners ETF (GDXJ) is made up of small mining stocks. It fell 38% in 2011. This despite gold itself finishing the year modestly up.”
“The market is offering low multiples on gold stocks right now. Price-to-cash-flow multiples, for instance, linger near generational lows. Gold doesn’t have to go up for these stocks to make a lot of money.”
“However, I think gold will make another run at $2,000 an ounce in 2012 — and exceed it. All the factors that drove gold to new highs in 2011 are still in place. The world’s monetary system is still a mess. And its leading brand, the U.S. dollar, is not well. Combine a rising gold price with low multiples and you have a kind of financial rocket fuel.”
Oil is holding on to most of yesterday’s Iran-driven gains. A barrel of West Texas Intermediate goes for $102.50.
“The headline-driven surge in oil,” says our keeper of the market’s emotional pulse, Abe Cofnas, “is a leading indicator of what is likely to be a key driver of market sentiment in the coming months.”
But you probably could figure that out on your own. “What is more important,” says Abe, “is determining how to shape a trade in the context of major uncertainty that centers around oil.”
Abe recalls trading oil futures after Iraq invaded Kuwait in August 1990. “At the time, crude oil prices were in the low teens, but futures options on crude were in the $30-40 range. There was fear that the Saudi oil fields were threatened. The crowd-mind of the market saw a pure, irresistible bullish environment.”
“Yet when Gulf War I broke out, crude oil options collapsed. The threat to the oil supply was a misperception.”
Lesson: “The information set available to traders,” says Abe, “is not nearly as accurate as we want to believe. Oil can, in fact, collapse at the onset of any hostilities.”
Don’t get the wrong idea: Energy remains a long-term profitable theme. But “trading oil to cash in on rumors of impending war,” says Abe, “is an invitation to a being caught in a short squeeze.”
Abe supplied short-term trading guidance today to readers of Strategic Currency Trader. In addition, Chris Mayer has three gold juniors he likes… Jim Nelson has developed strategies to generate high single-digit income from ordinary blue chip dividend payers… Jonas Elmerraji is watching for new trading opportunities to open up… and Dan Amoss has a host of plays, long and short, based on his endless-bailout scenario.
Furthermore, Greg Guenthner is eyeing his charts for new penny plays… Patrick Cox and Ray Blanco have their favorite high-tech and biotech picks to profit from the future… Byron King has a host of resource recommendations at bargain prices… and Michael Pento has some plays based on his macro outlook.
An elite group of our readers has access to all of them via the Agora Financial Reserve.
“If you are looking to put some of your portfolio into great ideas coming from really smart folks with different investment approaches,” says Reserve member Edward G., “go with Agora Financial. [They] cover the market from many angles — much more than anyone could do alone. The Agora Financial Reserve is one of the best decisions I have ever made.”
“I did not know what to expect from the investment in the Reserve,” writes member Joan H. “It has definitely been an eye-opener and has greatly exceeded my expectations.”
“I think my membership will pay for itself in the future,” adds member William H., “because I am more in tune with the macro economic outlook, so I feel well prepared going forward.”
On that point, we’re pretty confident… because we also get emails like this one: “The FIRST year of my membership I made enough money from only two of the services in the Reserve to recover ALL moneys spent on my membership, get myself up to Vancouver for the July conference (which was and still is free with my membership) and buy a couple of ounces of gold to stick away for a rainy day.”
We open up Reserve membership only a couple of times a year… and the current membership drive closes tonight at midnight. That’s ample time to review this invitation and take advantage of a way to see if membership is right for you… without forking over the full price upfront. Take a look.
Don’t get the wrong idea from the new Mission: Impossible movie, advises Peter Cooper, our eyes and ears on the ground in Dubai.
“Anybody watching Tom Cruise dangling on a rope near the top of the world’s tallest building, Dubai’s Burj Khalifa, will know that Dubai has its fair share of skyscrapers.”
“But astonishingly, Dubai is fifth in the global league table for skyscrapers,” he says, pointing to a ranking of buildings 100 meters or taller. That’s 328 feet, or roughly 32 stories.
Dubai is making tracks, though. The second-, third- and fourth-tallest buildings in the city are under construction. “One day soon,” says Peter, “Dubai will overtake Chicago.”
“I unsubscribed from your fake 5 Min. Forecast,” a reader writes, “because it’s apparent that you’re more interested in publishing political garbage than doing real economic forecasting. Ugh.”
We presume the reader took exception to our mention yesterday of the 40,000 new laws now in effect. Or maybe just the one providing for indefinite detention of U.S. citizens.
“The National Defense Authorization Act,” chimes in a reader on that subject, “includes in Section 1022 (b)(1) an exclusion for American citizens. Am I missing something?”
Another wrote in the subject line: “Addison Wiggin continues to print lies.”
“The requirement to detain a person in military custody under this section,” he says, “does not extend to citizens of the United States.”
He then cites this language in the bill: “The requirement to detain a person in military custody under this section does not extend to citizens of the United States.”
But that applies only to Section 1022 of the bill, providing for what happens to people captured “in the course of hostilities.”
“It doesn’t apply to [section] 1021,” says Christopher Anders, senior legislative counsel for the ACLU. That’s the section providing for the detention of people the president thinks belong to al-Qaida, the Taliban or “associated forces” or who lent them “substantial support.”
“And so it is that the U.S. slips into the long, dark night with…hardly a whisper,” comments another reader.
“Do I think Obama is going to immediately start ordering wholesale military detentions? No. Maybe not even this year, but it will come — history says that it invariably does. This is the final nail in the coffin of a free and secure America.”
“Good job, Americans. What greater tribute to the life, person and philosophy of the late Kim Jong Il of North Korea could there be than Barack Obama signing the National Defense Authorization Act into law.”
“I’m up just over 10% since the recommendation inclusive of dividends,” writes a reader on our New Trade of the Decade.
“Bought the Fidelity Japanese Smaller Companies Fund, symbol FJSCX. Not bad considering the volatile Nikkei. In eight more years… who knows, but I’m in for the duration. No complaints here.”
Thanks for The 5. The only thing I read completely each day.
The 5: Thank you. As for the other side of the trade — sell U.S. Treasuries — we see that long-term Treasuries as represented by the ETF TLT rose 33.6% last year.
This side of the trade will require patience… but with that $15.22 trillion national debt, we’re confident it will be rewarded.
The 5 Min. Forecast
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