Two Bull Markets, One Scary Bill, Zero Long-Term Census Jobs and More!

by Addison Wiggin & Ian Mathias

• Stocks are a drag, so The 5 finds two bull markets elsewhere -- food and bombs!
• China’s other “nuclear option” -- U.S. Treasuries… one reason why foreigners should be selling American debt
• John Williams on the suspicious “job creation” surrounding the U.S. Census
• Plus, The 5 examines a global first -- the New American Brain Drain

  Stocks went precisely nowhere yesterday. In fact, for all of 2010 so far, the Dow and S&P 500 have done just about squat -- a 2-3% gain, at best.

Traders will say they’re all holding their breath for today’s FOMC decision, which, as our pal Peter Cooper forecast last week, might include a surprise rate hike. But really… stocks are boring these days. So let’s find a bull market somewhere else more traditionally boring.

  Buy food, Chris Mayer told his Special Situations readers yesterday. “The world has an increasing demand for food,” he wrote, citing some nuggets from the CEO of one of Chris’ favorite ag stocks:

• The U.N.’s estimate that world population will grow from 6.8 billion people to 9.1 billion people by 2050, with Asia and Africa making up 80% of the increase  
• The world will need to produce an additional billion tonnes of cereal crops and 200 million tonnes of meat. That’s a 70% increase in food supply 
• Global diets are shifting from one heavily weighted toward rice to one that includes more meat, which has an exponential effect on grain demand
• Scarcity of arable land and clean water mean that most of the new production (about 80%) will have to come from increasing yields from existing farms.

“In that kind of world, a global agriculture powerhouse with a focus on bringing food to markets is the stock to own. This next chart shows you what the global trade flows for grain might look like over the next decade. Note the large import markets of South America, Africa and the Middle East and Asia.”

Chris thinks he’s found another ag stock that meets his criteria for the Special Situations portfolio. Find out what the stock is and why it applies here.

  Here’s another global bull market, this one a little more explosive -- weapons. The average volume of global arms sales rose 22% over the last five years, the Stockholm International Peace Research Institute reports.

Interesting details in this report… the U.S., the great global police force, remains the world’s biggest exporter of arms. We are responsible for some 30% of the global trade. Russia’s bombs and guns are close behind, with a 23% stake.

The world’s biggest importers rank in this order: China, India, South Korea, the UAE and Greece. South America saw a stunning 150% spike in arms sales (ahem, Hugo Chavez). Exports to Southeast Asia, notably Vietnam, are up quite a bit, too.

And just how much money is the world spending on weapons? Heh, c’mon… governments don’t disclose that information anymore. It’s none of your business anyway… right?

  Another thing “pertinent to all the Chinese rail building,” Byron King says, adding another layer to our note on 19,000 miles of rail built with stimulus funds over the past 18 months, “it's of interest that the Chinese have their nuclear weapons under the excusive military control of the 2nd Artillery Corps of the People’s Liberation Army. That is, there's very little ‘civilian’ control of the weapons, such as we've grown to love here in the U.S. and, to some extent, in Russia.
 
“China's nuclear warheads are stored deep inside a mountain of granite, far in the Chinese interior. Almost all shipments of nukes and the associated missiles are by rail.

Which rail passenger do you think is more valuable
to the Chinese government?

“Thus, a nice, new high-speed rail system serves a strategic purpose for China -- quickly dispersing nuclear missiles and warheads during time of crisis.”

Fun stuff.

  China -- executing another of its nuclear options -- cut its holdings of U.S. debt in January for the third month in a row, the Treasury announced yesterday. Chinese holdings fell $5.8 billion during the month, to a mere $889 billion.

China is -- by a long shot -- still the world’s biggest holder of U.S. debt. The Treasury mistakenly reported Japan had taken the honors last month. Sorry, not a mistake… they are just “revising” the tally. Oy…

One other worthy detail: Net foreign purchases of private corporate bonds fell $24.8 billion in January, the biggest fall on record. Perhaps we’re missing something, but that sounds like a big fat vote of no confidence in the current state of American industry.

With legislation like the following working its way through the system, how can you blame investors?

  The most ambitious financial reform bill in American history is one step closer to fruition. The soon-to-be erstwhile senator from Connecticut, Chris Dodd, unveiled the Senate version of the Financial Regulatory Reform Bill yesterday. The 1,336-page beast remains the largest financial reform since the Depression Era.

Frankly, there are simply too many provisions in there for us to recount… a new consumer protection bureau within the Fed… a new systemic risk council… executive power to liquidate “too big to fail” companies… a new “financial rescue fund” financed by big banks… derivative regulation… new executive compensation laws… MBS securitization requirements… and on, and on, and on.

There’s a summary of it here. Fair warning, though. This thing has yet to be altered by the Republican minority. Who knows how big this behemoth will get?

“We’ll try not to screw it up too badly,” one of the authors of the bill, Sen. Mark Warner of Virginia, told the concerned folks gathered at a meeting of the financial publisher’s Roundtable hosted by the Motley Fool back in October. Heh. There’s still time… 

  New home construction plunged almost 6% in February, the Commerce Department reports today. This one makes sense… given the snow around the Mid-Atlantic, Northeast and much of the South, you’d be nuts to break ground last month.

But still, building permits, which shouldn’t be affected by bad weather, fell 1.6%.

Also, the total number of homes under construction fell to 492,000, the lowest on records dating back to 1970. That’s bad for the “recovery,” but a good thing, we say… why build a new place with such a glut of cheap inventory?

  “In the last week, I have seen heavy public hype of the large jobs gains ahead,” notes government stats watchdog John Williams, “comments to the effect that Census hiring will jump-start the economy, even a wire-service story referring to the Census as a government economic-stimulus plan.

“The U.S. Census to be conducted as of April 1, 2010, will have fleeting impact on employment and negligible impact on the economy. While hundreds of thousands of part-time Census jobs will spike payroll employment in March through May 2010, they all will be lost in sharp (hundreds of thousands) payroll losses in June through September. That, at least, is the pattern of jobs change around the 2000 Census, which also was conducted as of April 1. Details of temporary Census jobs patterns seen around the last two Census periods are available from Bureau of Labor Statistics (BLS).

“I would not take seriously anyone who is touting the pending jobs surge but not adding some qualification as to the temporary nature of Census impact…

“The Census is not an economic stimulus package being put forth by the Obama administration. It is a decennial survey mandated by the U.S. Constitution and has been conducted accordingly every 10 years since 1790.”

  Meanwhile, the real jobs -- or at least the people that we need to employ -- are fleeing the U.S. In recent years, foreign students snagged 60% of engineering doctorates in the United States. If you widen the pool to doctorates in engineering, mathematics, computer science, physics and economics, foreigners still account for 50%...

There was a time when these students exited the academy and stayed stateside. No more. “The United States may be experiencing the first brain drain in its history,” Vivek Wadhwa, a professor at Duke told us.

In 2009, Wadhwa was among four researchers from Duke, Harvard and Berkeley who compiled a survey of more than 1,200 foreign-born students for the Kauffman Foundation. The number of Chinese who plan to stay is now just 54%, while the number of Indians who expect to remain is 58%.

What’s more, only 7% of Chinese students surveyed and 25% of Indian students believed the American economy’s best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believed their home country’s best days still lay ahead.

We wrote about this American brain drain -- and other major demographic shifts in the world today -- in the first issue of Apogee Advisory. Check it out for yourself, here, and pass along your suggestions accordingly. Thanks.

  “I always file my taxes in October instead of April, but always pay the taxes due on time,” a reader writes. “My accountant inadvertently sent my state taxes in with the ‘apply refund to next year's return’ option instead of ‘send me a refund.’

“I filed the paperwork with the state of Minnesota to correct the error and submitted it the last week of December 2009. The first response I received was only after having my accountant contact them in the middle of March. The response I received was that it would take them 120 days to give me a decision. That is four months on top of the 2½ months the Minnesota Department of Revenue sat on their hands waiting for me to ask about my own return.
 
“The amount I am owed is roughly $80,000, which is the probable reason for the delay, as they don't want to give that much money back. My friend who has, basically, a very decent fixed income from a top IT firm received his refund electronically within a week of filing his return. Of course, his refund was more on the order of $500.
 
“Most observers may think that there is more to the story about the delay in my refund. Sadly, there is not. I am not being audited or anything of that nature. I am on the up and up with the state, and my only error was not double-checking to make sure my accountant checked the correct box for my refund. Since my refund is a result of an ‘amended’ return, although the box being checked is the only amendment, the state is taking its sweet time, using my funds to pay back my buddy and other fixed-income people subject to withholding tax.
 
“I suppose it is politically more ‘expeditious’ to piss in one voter’s pickles and use the refund to help return other voters’ monies. By my calculations, they are able to float 160 more people like my friend, and it only costs them alienating one voter. Ah, the perversities of class warfare.

“Anyway, I went the long way around the barn to say... add Minnesota to your list of states withholding tax refunds  please.”

Thanks for the heads up… we think. Ugh.

Addison Wiggin
The 5 Min. Forecast

P.S. During both the tech bubble and bust and the housing disaster, we noticed that the personal wealth advisory business -- with those guys with all the letters after their names, i.e., CPA, CFA, etc. -- were underserved with alternative ideas about what was really happening in the world around them.

“Why should we listen to investment advice from people who never saw the crisis coming in the first place?” is a staple question we get these days during radio and TV interviews.

It’s a fair question.

Many -- or may we be bold enough to say most -- of the financial advisers who’ve hung up their shingles in your local strip mall are more concerned with what the mainstream finds acceptable than actually telling you what’s happening with your money. If they’ve given you “acceptable advice” and it turns out to be wrong, they’re safe… because “everyone was doing it.”

In one respect, we’re grateful for this willful ignorance. It allows us to make a business of publishing independent and actionable ideas where others fear to tread. On the other hand, it’s a travesty. Not unlike Congress. When we talk to members of Congress about the deficit spending in Washington or the runaway national debt, they privately agree that they need reign it in… but then party apparatchiks get involved and the system of earmarks takes over… what comes out publicly is anything but responsible.

In an effort to provide alternative ideas directly to the financial advisers themselves, we’ve partnered up with InvestmentNews -- a newspaper geared entirely for the CFA crowd. We suspect not everyone who reads that publication is going to agree with us, but we at least hope to make them think. The Daily Reckoning will be featured on the home page of the publication in an ongoing syndicated blog site. You can check it out here… and be sure to tell you friends in the business about it. Thanks.