Enemy of Finance?

May 7, 2012

• So will the Greeks leave the euro... or will the Germans beat them to the punch? Dan Amoss with the investing take-aways from European elections
• Chris Mayer unearths the story China bulls refuse to see in U.S. earnings
• Oil prices slump, but a wedding shoot-’em-up highlights a new crude threat... Food prices retreat, but for how long?
• Going for “mock trade” winner No. 10... reader worries about being put on “the list”... unprecedented access to Chris Mayer’s high-end advisory... and more!

“My real enemy,” declared the president-elect of France, “is the world of finance.” The world of finance, for its part, seems rather unconcerned.

For a few hours last night after the election results from France and Greece, index futures looked ugly, indeed. But in the end, traders have gone all Alfred E. Neuman on us.

The Euro Stoxx 50 index ended the day up more than 1.5%. Here in the States, the S&P sits where it did at Friday’s close. The Dow is holding on, however tenuously, to 13,000.

And with that, stocks have yawned in reaction to a new phase of the most-boring financial crisis in world history. Beneath the surface, however, lurk some new threats, indeed...

“In France,” says our macro strategist Dan Amoss, “there’s no political appetite for even mild spending cuts (like raising the retirement age by a year).”

“The new president will push for Keynesian stimulus spending that could ultimately push France into the PIIGS league.”

France is already so badly in hock that interest on the debt is the second-biggest line item in the budget, after education. And M. Hollande, the new president, plans to dig even deeper into an empty pocket for 60,000 more education jobs.

For the moment, France’s CAC 40 index already priced in the news; it closed the day up 1.7%. But make no mistake; the election result could prove “a sharp turning point in the ongoing eurozone crisis,” says Dan — “perhaps a hyperinflationary endgame for the euro currency and a return to the deutsche mark for Germany.”

“The Greek election results increase the chances of a ‘hard default’ on its debt in 2012,” Dan adds.

“Many Greek political parties want to renegotiate the terms of their bailout, and they will find a cold reception from core countries like Germany.”

The results from the Greek parliamentary elections might prove instructive wherever you live: For months, the parties generally considered “adult” and “responsible” had insisted the only way to solve Greece’s crushing debt load was to take on even more debt as a condition of securing additional bailout funds from the European Union and the IMF.

A few voters, recognizing this plan isn’t working, opted for the far left and neo-Nazi right — handing those parties enough seats to deny anyone a majority.

Traders can deal with “the devil they know” in France. But they can’t handle uncertainty; Greece’s ASE index was crushed another 6.7% today. From its October 2007 high, it’s down 88% — a drop on the scale of the United States, 1929-32.

“Bottom line,” says Dan: “Germany may decide to bite the bullet, leave the euro and recapitalize its own banks.”

“If so, the euro would go the way of the numerous French currencies of the 20th century. The PIIGS plus France would be left in a Latin American-style inflationary depression, while Germany would find its export powerhouse hamstrung (but not overcome by) the strength of its own currency.”

The investment take-away: “Avoid all European stocks, especially banks.”

Something’s different about earnings season this quarter, says Chris Mayer: “There are a number of companies citing China’s slowdown as the cause of earnings shortfalls.”

There was Caterpillar, the big earthmoving equipment maker. It overestimated Chinese demand. “Its inventories in China were so high it was now moving machines to other developing countries where demand was still tight,” says Chris. “Caterpillar is now forecasting Chinese construction demand to fall 5-10% this year.”

Then there was UPS: Demand volumes to and from Asia are, to use its own words, “flat.” So it’s cut 10% of Asian capacity, and it may not be done yet. “‘Asia’ pretty much means ‘China,’” Chris points out.

“There were others,” he says, “but these two stuck out because they are good bellwethers of broader activity. In the other camp, you still have delusional executives such as the team at Vale — the big Brazilian iron ore miner. They think demand from Chinese steel mills will accelerate, despite all evidence so far that, if anything, Chinese steel demand is falling.”

Chris warned of a China slowdown in this space more than nine months ago. “Now there is no doubt of a slowdown,” he says.

“The debate is how low it will go. Right now, officially, China is growing 8% — if you believe government numbers. (I don’t.) And this is what consensus falls back on: ‘Well, China is still growing 8%...’ But that is hard to square with what we see coming out of companies there.”

“Meanwhile, the U.S. seems to be getting attention as a positive” in the same earnings reports, says Chris. “UPS was upbeat on the U.S. economy. Oddly, that’s where all the good news was in its report.”

“In an update on the competitiveness of U.S. manufacturing, GE CEO Jeff Immelt said: ‘The sheer competitiveness of the U.S. is better than at any time in the past 25 years.’”

“GE wants to build up its industrial businesses. In the last decade, it’s become more of a finance company. So this was another meaningful snippet on the brighter outlook for U.S. manufacturers.”

Thus, an opportunity Chris has unearthed — a U.S. company already beating China at the manufacturing game. By his calculations, it could deliver a 143% gain in the next 24 months. And you can learn all about it only minutes from now with Chris’ high-end advisory, Mayer’s Special Situations. We’re making it available at in a remarkable “2-for-1” offer for the next few hours. Details here.

Like most of the eurozone stock indexes, the euro currency is holding up under the weight of the election news — down, but not overwhelmingly, to $1.306. Thus, the dollar index is up slightly to 79.6.

Precious metals are reacting little to the news. Gold is off a couple of bucks to $1,639. Silver’s holding the line on $30, barely, at $30.08.

But the euro-scare has dealt another blow to crude. A barrel of West Texas Intermediate is down more than 1%, to $97.29.

For a few moments last Friday, it traded below $96 — a dramatic move that our market-sentiment maven Abe Cofnas says can’t stick.

“This week,” he writes, “our mock trade is U.S. crude. Its huge drop on Friday presents a great opportunity for a double-digit return.”

Indeed, Abe expects crude to end the week above $98.25. If it does, it would mean a four-day gain of 108%... based on a price move of only 0.4%.



“I call it vibrating your way to profits,” he says. Indeed, tiny moves can deliver big gains in the market Abe follows, unique among North American trading advisories.

Abe’s had nine winners in 10 plays here in The 5. If you think you’d like to try his trades for real, here’s your chance.

A gunfight at a wedding party in Africa over the weekend spotlights one of the ongoing threats to oil prices.

“Separate attacks in northeast Nigeria targeting a village and a wedding party killed at least eight people Saturday,” reported The Associated Press, “in a region that remains under near-daily assault by a radical Islamist sect, authorities said.”

Nigeria’s a messy, complex place. But two things are for certain: It’s one of the United States’ top five oil suppliers. And there’s a huge Christian-Muslim divide there.

The two factors are slowly coming together: “Nigeria’s oil production is under threat,” says UPI, “because of escalating piracy off West Africa, a simmering insurgency in the Niger Delta, the theft of up to 150,000 barrels a day by militants and pirates and deadly Islamist terrorism linked to al-Qaida.”

Food prices worldwide took a breather in April... but they’re still sky-high and new threats loom, says the United Nations Food and Agriculture Organization, or FAO.

The FAO food price index fell for the first time in three months... but it remains at a very high level by recent standards.



What’s more, weather threats remain. The corn and soybean crops are especially vulnerable.

“Although the production outlook for corn has improved, it will unlikely be enough to compensate for the low stocks-to-use ratio,” warns FAO grains analyst Abdolreza Abbassian. “The upcoming summer will be critical to U.S. yields and if there are any weather problems, this could push up the price.”

Persistently high food prices open up a unique investment space, one Chris Mayer has spotlighted before: phosphate. You can’t make fertilizer without it. And supplies are having trouble keeping up with the world’s growing food demand. It’s the “gravest resource shortage you’ve never heard of,” says Foreign Policy magazine.

Chris has identified a phosphate play set to deliver big gains as the chart above stays near historical highs. He’s also found an oil play — far from Nigeria — with 200% or more profit potential over the next 12 months. Plus the aforementioned U.S. manufacturing play that’s putting China to shame.

He’s eager to tell you about all three of them... and we’re eager to provide you access to his premium advisory, Mayer’s Special Situations. In the last two years, readers have collected gains of 77%... 136%... even 463%. You can join their ranks and secure an unprecedented deal — including a year of free access — through midnight tonight. It’s available at this link.

“That,” says a reader who caught our item about 600,000 people leaving the U.S. workforce last month, “can only mean the simple fact that fewer people need to support more people whether through government plans, retirement plans, charity plans, family plans or some other plan.

“Good thing there are so many plans to take care of the problem!”

“I am surprised,” a reader writes, “you missed the story of the college student detained by the DEA for four days in San Diego!”

“He was thrown in a cell and forgotten! He drank his own urine to survive, and finally was taken to a hospital barely alive! That is the scariest scenario I have read about; even Guantanamo residents are fed. It sounds like a story of someone that had been kidnapped by the Taliban!”

“Now I am scared, and will have to hide food and water in my underwear going back to the USA. I am sure that I am on the LIST now for getting Agora!”

The 5: We only have so much room for the government’s outrages in our mere 5 Mins.

As for “the list”... you might as well go “all in” and join the (intellectual) resistance.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. “The teachings of the principles of economics,” writes professor Peter Boettke, “should inform as much on what not to do, perhaps even more than providing a guide to public action.”

In other words, hands off. Or laissez faire.

“His new book,” writes Laissez Faire Books executive editor Jeffrey Tucker, “which ought to be read by every college student who secretly suspects that economics is not as dreary as they say, is Living Economics, just published by the Independent Institute. It’s a big book, but a luxurious read from Pages 1 to 450.”

Mr. Tucker’s review got a ton of traffic over the weekend from Marginal Revolution, one of the most widely read economics blogs out there. You can read the review for yourself at this link. Just click under “editorial reviews”... and then get yourself a copy!

P.P.S. Final reminder: You can get a full year of Chris Mayer’s premium advisory, Mayer’s Special Situations, absolutely free... if you act before midnight tonight.
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