Sovereign Wealth Funds Get Wealthier

Germany reported a drop in industrial production for October. Greece and Ireland both received downgrades on their debt. Economic growth in Europe is not strong. In fact, I think the potential for a double-dip recession for Europe is high. And that’s a big reason why the U.S. dollar has been rallying lately.
When push comes to shove, global investors will seek the safety of the U.S. dollar and Treasury bonds. Of course, a stronger dollar will not be good for stock or commodity prices.
Gold is down today, as well. But I think gold is the one asset that can overcome the strength of the U.S. dollar. That’s because, like the dollar, gold is a safe haven investment. If the global economy continues to show signs of weakness, then I expect gold will resume its advance. 
And I just recommended what has to be the cheapest gold mining stock on the planet to my SmallCapInvestor PRO readers. It’s only $1 a share, it has 1.5 million ounces of gold reserves, and the market cap is just $189 million. That’s $1.7 billion worth of gold selling for just $189 million!

Not only that, but this little beauty may even make the jump form the obscurity of the OTC market to the NYSE! I’ve got a $2 price target for the stock, but it could easily do even better than that…

Taking Profits

The Dow Industrials continues to struggle with resistance at 10,500. Every time it peeks above that level, the sellers step in. Friday was a great example. Stocks were up big on the surprise employment numbers. The Dow made it to 10,549. And then, even though that data was evidence that the U.S. economy is improving, stocks sold off.
What does this tell us?
In my opinion, it tells us two things. The first is that the positive employment news (and a range of other improvements to the economy) is priced into stocks. In other words, stocks are priced for the earnings gains implied by unemployment dropping to 10%.
It’s important to understand that once stocks are priced properly, there isn’t much upside. It’s already priced in. When stocks appear to be priced to perfection, investors stop focusing on the upside potential and, instead, start looking for threats to the upside scenario.
Like right now, we can see that unemployment is improving (or at least stabilizing), consumer spending is stabilizing, and the housing market is bottoming,
What are the threats to these developments? Well, there are a lot of delinquent mortgages facing foreclosure. If they hit the market, housing prices could tank again. Consumer spending, while not exceptionally strong, has been about as good as could be expected so far this holiday season. What if it’s just a matter of people blowing off some steam, spending a little after the year we’ve had? And what if interest rates rise in the next 6 months? How will that affect stocks and the economy?

Fed Funds Futures

Fed Chief Bernanke has been adamant that rates will stay low for a while. But that doesn’t mean forever. And we know he’s already testing the waters for removing stimulus.
The best possible outcome here is that employment and the economy grows without sparking inflation and the Fed can raise rates without having to acknowledge that inflation is a threat.
*****That’s probably wishful thinking, though. Oil prices are very sensitive to economic numbers, even more so than to the U.S. dollar. When the economy shows signs of strength, oil prices automatically rise because investors assume a stronger economy means more demand for oil.
It’s no surprise that oil prices are higher today. And as the economy improves, tthey will go even higher. I’d say it’s likely that by the time the Fed raises rates, oil prices will be over $100 a barrel and we’ll be seeing oil-related costs (like food) on the rise.
It’s hard to imagine oil trading significantly lower at this point. Oil either rallies as the economy improves or it at least stays stable as the economy struggles and the dollar remains weak.
*****Gold will be another asset to watch carefully. Gold’s off sharply today as the dollar rallies on the good employment news. But like oil, it’s hard to paint a truly bearish picture for gold going forward.
It’s likely that inflation will pick up at some point, and that will support gold prices. Plus, we are seeing central banks from India, Russia and China adding to their gold holdings to help diversify their foreign currency reserves. And finally, it should not be forgotten that global economy is far from healed.
New shocks to the economic system could very easily arise. Europe could enter a recession, U.S. banks could falter again under the weight of delinquent loans and foreclosures, commercial real estate could collapse – there are any number of crisis situations that remain in the realm of possibility. And any of these could send gold prices much higher…

Dow Struggles at 10,500

One pillar of hope for the U.S. economy continues to deteriorate. Early estimates are that 169,00 jobs were lost last month (I assume this is a net number, accounting for total lay-offs and hires). Estimates were that 150,000 jobs were lost.
It should be clear that the unemployment rate will head higher. And rather than focus on increasing employment, economists seem to be focused simply on signs of stabilization. So while the rate of job losses may be declining, unemployment is still on the rise.
Right now, improvement in the jobs picture is priced into the stock market. Analysts imagine that some improvement to employment will help earnings. The longer unemployment numbers are rising, the more precarious earnings estimates become going forward.
*****We can turn to the retail sales numbers from Black Friday for an example. 195 million people came out to shop ont eh Friday after Thanksgiving. That’s a significant improvement over the 172 million shoppers from last year. And the overall sales numbers showed some improvement.
But spending on a per capita basis fell. Spending per person was $343.31 this year, compared to $372.57 last year.
There’s no doubt the sheer number of shoppers is good news. But the level of spending is a result of a weak economy. And we should expect overall levels of spending to remain depressed.

Why Deutsche Bank is Wrong About Oil

*****Deutsche Bank is out with its oil forecast for 2010. It believes reduced demand will keep oil prices at an average of $65 a barrel in 2010. The banks analysts believe that demand in the U.S. has peaked and that greater “oil efficiency” around the world will mean that demand will not rise much.
The term “oil efficiency” basically means that we get more use out of every gallon of oil. Like with higher MPG cars. We might drive just as many miles, but we use less gas to do so. That clearly makes sense. But there are also many assumptions included in Deutsche Banks’ theory.
One is that rising Chinese demand for oil will not continue on its current path because Chinese growth at current levels is not sustainable. Personally, I’m very hesitant to say that China can’t keep growing at an astounding pace. As we know, China can continue to support its economic growth for quite some time simply by deploying its foreign currency reserves. It doesn’t have to go into debt to support its economy like the U.S. does.
Also, let’s not forget that at some point, domestic demand in China will pick up and China’s economy can begin to transition away from its export orientation. When this happens, China’s growth becomes self-sustaining, the standard of living rises and you can bet that means oil demand will rise.
As it happens, there is an important catalyst for domestic demand in China we can watch for. Right now, China has a ridiculously high savings rate – around 39%. That’s because China has no social security type of retirement plan. It’s up to individuals to prepare for retirement. At some point, China’s government will implement some form of social security. And that may be the key that unlocks domestic demand in China because it will mean that Chinese citizens can spend more money.

Dubai: Crisis Averted?

Speaking of debt, AIG (NYSE:AIG) is actually paying back some of the $180 billion it owes the U.S. government. The company announced today it’s paying back $25 billion raised by selling two insurance subsidiaries.

That’s nice, but it’s hard to imagine AIG will ever make good on the balance. The Treasury owns $40 billion in preferred AIG stock. The company is currently worth about $6 billion. And selling off profitable business units is certain to lower income going forward.
*****Bloomberg reports that China’s manufacturing sector is growing at the fastest rate in five years. That’s helping to support economic recovery and stock prices around the world. Asia’s growth is being credited for a rise in European manufacturing and a drop in Germany’s unemployment rate.
As you know, I’ve been extremely bullish on China for most of 2009. And that bullishness is paying off for my SmallCapInvestor PRO members. We have several Chinese companies in the SmallCapInvestor PRO portfolio. We’ve got gains like 121% and 67%. And today’s news that China will grow at 10.5% this quarter makes me confident that there’s a lot of upside ahead for our Chinese stocks. For more about how you can profit from high-quality, undervalued Chinese stocks, click HERE.
*****The Dow Industrials has been locked in a tight range between 10,200 and 10,470 since November 9. As you know, I’ve had a 10,500 target for the Dow for months. So what happens now that the Dow has essentially met that target?

Back to the Grind

The big news from Friday was the potential default from Dubai’s sovereign wealth fund, Dubai World. There can be no doubt that Dubai is a poster child for excess. I mean, dredging part of the ocean and building palm tree-shaped islands with ridiculously expensive communities is the very definition of excess.
And now that real estate values have been cut in half in Dubai, it’s no surprise that it’s having trouble meeting its debt obligations. Sure, maybe there’s not much direct exposure to Dubai’s debt here in the U.S. But don’t forget that we in the U.S. and Europe participated in excess that was similar. And just like in Dubai, we may not have seen the full consequences of that excess yet.
Holiday retail sales got off to decent start on Friday. At stores, sales were up 0.5% from last year. Considering how much the unemployment rate has risen in the last year, this is good news. Online sales did even better, up 11% from last year.

Still, the National Retail Federation is sticking to its forecast that overall holiday sales will be down 1% from last year. At this point, that still sounds like a victory…

Russia Goes Loonie

The holidays are here! Food, family, fun – and football! Before I get on with today’s message, I want to wish all Daily Profit readers a wonderful – and safe – Thanksgiving holiday. I’m sure we’ve all been working very hard during these challenging times. A few days off to spend with family and friends, a time to reflect on the blessings in our lives, that’s just what the doctor ordered.
And speaking of thanks, I want to thank you for reading and thank you for your insightful questions and comments that keep making Daily Profit such a success. As a token of my gratitude, I’m offering Daily Profit readers a Black Friday special for my SmallCapInvestor PROadvisory. You can get 50% off the list price of $199 for an annual subscription. That’s 12 months of top-performing stock recommendations for just $99. This offer will be good till Friday, November 27 at 10 pm. If you’re interested, click HERE.

From Export to Import

Goldman’s chief Latin America economist, Paulo Leme, called it unnecessary roughness. He was referring to the Fitch Ratings Agency downgrade for Mexican foreign debt.
Yesterday, Fitch put Mexico’s debt in the same league as Russia and Thailand. That’s BBB. That’s the second-lowest investment grade rating, down from BBB+.
Mexico’s economy has been hit hard by recession. GDP will likely shrink 7.5% this year. Goldman’s Leme disagreed with the downgrade, saying that Mexico has done "…a lot…" to improve its finances. But Leme is missing the point.
If you read Daily Profit, from last Thursday, you already know what I’m about to say. Mexico’s financial problems are not simply due to recession. The bigger issue here is that Mexico’s oil production is declining sharply. Two years ago, Mexico’s Cantrell oilfield was producing 2 million barrels of oil a day. Today, it’s producing less than 500,000 barrels per day

England’s $325 Billion Problem

The U.K.’s opposition Conservative Party leader David Cameron has been railing against Prime Minister Brown’s stimulus policies. But Cameron saw his lead in popularity polls take a nosedive this week. Cameron has been pledging to freeze the pay of public service workers and make voters work and extra year before retiring.
If Cameron is surprised that these aren’t popular positions, well, I don’t know what to say.
The U.K. is grappling with many of the same issues as we are, here in the U.S. Its budget deficit is the highest since World War II. But there’s an underlying issue for England’s budget that no one is talking about: oil.
England takes in roughly 5-7% of its $2.65 trillion in GDP from oil revenue, mainly from North Sea reserves. That’s around $185 billion dollars. But North Sea production has peaked. In the last two years, England has gone from being a net oil exporter to a net oil importer. And since oil revenue supports a considerable portion of England’s social spending, the budget issues that Brown and Cameron are grappling with will be even more difficult to fix.