Tuesday, September 8, 2009

Why the Greatest Investors Love Recessions...

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September 8, 2009  

Don't believe the hype…

The Wall Street Journal found a way to give last week's dismal retail numbers an encouraging spin. "Retailers Show Best Results in a Year," read the headlines on Thursday.

We have been telling you for some time to be wary of reports that the economy is turning around. Our economy is fueled by consumer spending. And Americans just aren't buying anything.

The minutes from the Fed meeting in August say the same thing: "Consumer spending has been on the soft side lately."

That would be putting it politely. The most recent same-store sales figures for August were released last week. Here is a short list:

  • Abercrombie and Fitch: -29%
  • American Apparel: -20%
  • Hot Topic: -8.1%
  • JC Penney: -7.9%
  • Gap: -3%

Overall, sales at stores open more than a year slipped 2.9%. And that's compared to a very weak August last year.

The economy isn't going anywhere until consumers feel comfortable spending again. And that won't happen until jobs recover and disposable income increases. Neither of which appear to be on the horizon.

But great investors love recessions… and they embrace bear markets

When investors are hopeful and enthusiastic, it's very difficult to find values in the market. But when investors are fearful, even the greatest companies can be driven to absurd valuations.

Such is the nature of markets and human emotion. Great investors relish these opportunities. In fact, many of the world's greatest fortunes were made during times of economic distress.

Great companies make the most of these opportunities as well. This is when the strongest companies gain market share, overtake their competition and set the stage for future growth.

For these very reasons, IDE analyst Steve McDonald is prepared for the next major downturn in the markets. In this quick video, Steve outlines his strategy for buying when most investors are scared to death.

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It's not just the U.S. consumer that has stopped shopping…

The near future for industrial commodities is looking shaky. China spent the first half of the year buying everything in sight, including record amount of coal and iron ore.
But kiss those days good-bye.

For July, China's purchases of copper fell 23%. They imported 13% less coal. And iron ore imports fell 16%.

Lloyds's List, the leading newspaper for the maritime industry, reported last week that China's steel mills will reduce output by 20-30%. Europe and Japan will see steeper decreases.

And a recent report by Macquarie Research says that "there's no evidence of an increase in demand for steel in China." Meanwhile, 55 vessels are anchored off Chinese ports waiting to be unloaded.

Re-stocking of inventories can only lead to sustained buying when demand is rising. But that is not happening. And that means, industrial commodities are unlikely to get a second wind in the near term. Investors in China-dependent countries like Australia and Brazil should take note.

The Baltic Dry Index (BDI) is an index of global shipping prices. When the BDI is rising, it indicates that global trade is increasing… at least it used to.

When the credit markets collapsed in 2008, global shipping nearly came to a halt. This caused the Baltic Dry Index to fall 94% in less than six months.

In 2009, the BDI recovered some of those losses, soaring almost five-fold from the lows. Investors took this as a sign of recovery. After all, the BDI has always served as a reliable proxy for global trade.

But the gain in the BDI did not reflect a global recovery. Instead, it was a reflection of the massive stimulus in China. The BDI rises and falls with China's metal and coal purchases. What used to be a reliable indicator of global trade has become an indicator of Chinese imports.

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So what is the Baltic Dry Index telling us today?

At its peak in May, the BDI was still down 64% compared to the high last year. Since then, however, the index has fallen 43%.

That indicates that the only thing which recovered in the first half of this year were China's steel and other metals inventories. And those purchases are clearly winding down.

Apart from slowing demand in China, 146 new "Capesize" dry bulk ships will set sail this year. These ships are three times the size of the Statue of Liberty. And this number of ships represents 28% of the entire fleet.

Bad timing. More ships and less cargo will push shipping rates even lower.

A falling BDI will spook Wall Street traders who still go by the quaint notion that it's a proxy for global growth. The bulls pointed to the BDI as it was going up. The bears will point to it as it's going down. The BDI doesn't deserve all that attention. But it's getting it. And it will help push the U.S. stock markets down in the second half of the year.

For those of you worried about the dollar… here's an anecdote worth pondering.

Metals and mining analyst Paul Mylchreest has lived in Latin America for 25 years. In a recent issue of his Thunder Road Report, he notes that for the first time ever, aren't clamoring to be paid in dollars. They prefer their own currency.

What's the lesson here?

As Paul says, "If a fellow with no education, a poor diet, and inadequate medical treatment, living at 3,500 meters above sea level can figure out that the U.S. dollar is undesirable as a store of wealth, how much longer do you think it can last as the world's reserve currency?"

Investor's Daily Edge options expert, Ted Peroulaukis, is well prepared for the dollar's decline and the rise of gold. In fact, Ted's subscribers just closed a 100% winner on the gold ETF in less than a month. Not to mention recent winners of 116% in 10 days... 100% in a week...117% in three weeks... and open gain of 70% and 123%. And Ted's subscribers are well positioned to profit if the U.S. markets fall from here. To learn more about Ted's Options Power Trader click here. 

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

We want your feedback! Let us know your thoughts on this article. Email us at Email: feedback@investorsdailyedge.com

Market Window

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor


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