The Company We Keep

March 22, 2012

• What? We’re not alone seeing similarities between the Tea Party and Occupy? Then again, we’re not sure about the company we keep...
• No longer an emerging-market phenomenon: The unlikely country that just joined the “we don’t want to trade in dollars” club
• Chris Mayer on how an exploding cigarette 150 years ago is still yielding lucrative gains today
• A mixed bag o’ numbers... Readers chime in on a debt-limit constitutional amendment... Your last chance to listen in on The Rancho Santana Sessions at a discount... and more!

“Diverse groups ranging from the Occupy Wall Street movement to the Tea Party argue that government-assisted bailouts of reckless financial institutions are sociologically and politically offensive.”

On the one hand, it’s heartening to see other people corroborate The 5’s thesis, first suggested in October, that there’s more common ground between the two groups than either would like to admit.

On the other hand, the other people in this case are... the Dallas Federal Reserve.

“From an economic perspective,” says a report by Dallas Fed chief Richard Fisher, “these bailouts are certainly harmful to the efficient workings of the market.”

The Tea Party/Occupy parallels were incidental to the report’s main point: More than half of the banking industry’s assets are in the hands of only five “too big to fail” banks — Bank of America, Citi, JP Morgan Chase, Wells Fargo and Goldman Sachs.



So much for the reform that was supposed to come with the Dodd-Frank law. “I am of the belief personally that the power of the five largest banks is too concentrated,” says Fisher. His solution in light of Dodd-Frank’s failure: Break up those banks.

The notion that banks should go out of business if they make stupid decisions? That’s nowhere to be found in Fisher’s 34 pages.

Add an unlikely member to the club of countries fleeing the U.S. dollar — Australia.

The government Down Under has agreed to a $31 billion currency swap with China. That makes Australia the biggest economy yet among 20 countries now bypassing the greenback in at least some transactions with China.

“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation,” says a statement from the Reserve Bank of Australia.

The buzz in currency markets this morning is that the U.K. and Japan might be next to strike deals with China.

It’s a risk-off day for stocks. The major indexes are adding on to yesterday’s losses. Among the numbers in traders’ sights today...

• China’s “flash PMI” figure rang in at a four-month low of 48.1, indicating economic contraction in the Middle Kingdom
• A similar measure for the eurozone fell to a three-month low of 48.7. Contraction there, too.
• Stateside, first-time unemployment claims fell last week, but almost imperceptibly, to 348,000. But it qualifies as another four-year low
• Leading economic indicators: Up 0.7% last month, according to the Conference Board. The big factor? Fewer unemployment claims

It’s looking a bit more touch-and-go for Abe Cofnas’ mock trade this week. He’s counting on the Dow ending the day tomorrow above 12,975. At last check, it’s only about 75 points above that number. But if 12,975 holds, it’s good for a 19% payout.

Oil’s down more than 2% today — perhaps not a big surprise in light of the Chinese and European numbers. A barrel of West Texas Intermediate is back to $105.13.

“One year after the Japanese energy disaster,” writes Byron King, “it’s clear that we’re living in an altered energy reality.”

Before Fukushima, nuclear provided one-third of Japan’s electricity. Now it’s 7%. And falling. So Japan is importing as much liquefied natural gas as it can. It’s paying through the nose, up to $20 per thousand cubic feet. In the United States, gas currently runs about one-eighth that price.

Meanwhile, “you should expect that Japanese demand for diesel and fuel oil will remain strong. Thus, don’t expect much relief in oil prices anytime soon. More Japanese demand for oil will help keep oil prices firm, if not rising. You’ll see it at the gas pump and in the grocery store, not to mention when you go to buy an airline ticket.”

“This Japanese aspect of strong oil demand is over and above the strengthening oil demand from a stronger U.S. economy, or any improvement in the eurozone economy or continuing growth in demand from the developing world.”

What’s more, the fact almost all of Japan’s nuclear capacity is offline is having almost no effect on uranium prices. A pound of the stuff has traded between $49-57 for most of the past year. This week it’s $51.

“Prices are firm for uranium due to continuing demand for other reactors worldwide,” Byron adds. “Indeed, I expect uranium prices to remain solid and actually increase in the next couple of years — Japan or no!”

Precious metals have been dealt another setback this morning. Spot gold is down a bit to $1,639, and silver is once again getting it in the teeth. At last check, the white metal’s down 2%, to $31.50.

“One of the great resource booms of South America began with a man trying to put out his cigarette,” says Chris Mayer, shuffling through notes from his recent travels.

In 1866, a miner in Chile snuffed out the stub of his cigarette on a rock. The rock promptly sparkled and burned. He’d come upon caliche ore — the source of nitrate, from which we get fertilizers, and explosives.

“All around, for miles and miles, were rich fields of nitrate,” says Chris. “The great nitrate boom that created modern Chile was on. Even today, the Chilean desert is an important source of nitrate, iodine, potassium and lithium. It is also home to the world’s largest producing copper mine.”

Chris has researched three U.S.-traded Chilean companies, and likes all of them — with a caveat...

• Sociedad Quimica y Minera S.A. (SQM). “It turns the raw material of the desert — nitrate, iodine, potassium and lithium — into a long list of useful things,” he says. It’s up 300% since 2007
• Concha y Toro (VCO) is the country’s biggest wine producer. “It has grown sales at an 18% clip annually over the last decade,” and its share price is up 237% during that time
• Arcos Dorados (ARCO) is Spanish for Golden Arches. Not strictly a Chilean company, it holds exclusive rights to McDonald’s franchises throughout Latin America and the Caribbean. “Arcos Dorados serves a young and growing population that is getting richer every year.”

So what’s the caveat? “As much as I love these ideas, I simply can’t pull the trigger on any of them at these prices.” They don’t meet the “C” part of Chris’ CODE standards. They’re not cheap. But “should they stumble, say with a bad quarter or some temporary blip, I would be interested.”

Chris is presenting some ideas that do meet his standards down here at Rancho Santana this week. It’s part of The Rancho Santana Sessions — our intimate gathering for 30 Reserve members interested in giving their precious capital an overseas refuge.

Not all the ideas presented here are exotic; you’d be surprised how accessible some of them are. And we’re making this information as accessible as possible. You might not be listening in on these sessions in real-time, but you can get the next best thing — recordings of these Sessions. We’ll send all interested readers MP3 files of everyone’s talk here on or around March 31. Best of all, if you move on this before midnight tonight, you get the best-available price.

“Interesting to read that states are wising up to the national debt,” says the first of several emails about the proposed National Debt Relief Amendment.

“However, if I were writing the amendment, I would have made approval of two-thirds of the states, rather than a simple majority.”

“The states can only call for a convention,” one reader protests. “They cannot propose amendments.”

“All they can do,” adds another, “is force Congress to call a convention for the purposes of amending the Constitution. It does not relate to specific amendment proposals other, perhaps, than to terrify Congress into action. Once you get to a convention, there’s no telling what amendments would be proposed, but any of them would, indeed, require the approval of 38 states (three-quarters).”

“A constitutional convention,” chimes in a third, is a dangerous idea. Remember 1787 in Philadelphia? The Articles of Confederation were thrown out, paving the way for today’s democratic tyranny. Its not called a con con without good cause or reason.”

The 5: “The amendment uses an ‘emergency cord’ embedded in the Constitution by the Founders,” Ralph Benko writes. “Article V allows a supermajority of states to call for constitutional amendments.”

Ralph points to a recent piece by columnist Rachel Alexander: “In Federalist No. 85,” she writes, “Alexander Hamilton explained that states did not need to call for a full constitutional convention since Article V provides full power to amend the Constitution.”

“James Madison specifically supported the use of Article V in Federalist No. 43. Accusations that an Article V amendments convention will result in a full-blown ‘constitutional convention’ or ‘con-con’ are not correct.”

Concludes Ralph: “Any amendment to the U.S. Constitution must be ratified by 38 state legislatures. State legislators are far more likely to discover that the Article V process is the way to restore constitutional protections dismantled by a power-hungry Congress and a perfervidly imaginative Supreme Court rather than making it a threat to our liberties.”

“I am wondering how Washington might react,” one reader muses about the amendment, “and I imagined the following conversation: ‘The States will not authorize raising the debt limit. We are really gonna have to cut spending somewhere this time! If we cut off all the money we send to the States, that should cover it!’”

“I still recall how some states did not like the feds insisting they lower the speed limit to 55 in the ’70s. The feds threatened to withhold highway funds. We all know how that ended. Sounds like more political posturing to me.”

“The reader who thinks you should stick to true facts and not include political opinion is 100% wrong,” writes our final reader, chiming in on a perpetual debate in these virtual pages.

“If he thinks that politics don’t have influence on investing and the markets, he is lost for sure. The Republicans and the Democrats have run this nation for over 150 years and run it into the ground, they have.

The 5: That’s one of the reasons we’re here at the ranch this week, exploring overseas alternatives. It doesn’t necessarily entail buying overseas real estate... although it doesn’t hurt.

It can be as simple as finding ways to park some of your IRA assets in overseas investments. It’s possible, it’s legal and it’s easier than you think.

What’s more, this protective measure is one of dozens we’re exploring during The Rancho Santana Sessions. If you’re getting itchy about what Uncle Sam has up his sleeve next, you can’t afford to miss out on the information being presented here. We have every speaker miked up, and sound techs on duty.

You can have recordings of the Sessions in your email inbox only days after they wrap up — in all likelihood, at the end of next week. And best of all, if you act before midnight tonight, you save 20% off the full price.

Cheers,

Addison Wiggin
The 5 Min. Forecast