Trouble Ahead

Dear Reader,

I didn’t use to be a “cat” person, primarily because when I was young, I suffered from terrible allergies – the very archetype of the runny-nosed kid. Over time, however, I came to appreciate that cats are wonderful creatures in so many ways – most notably their Terminator-like ability to resolve mice problems with extreme diligence.

That special quality comes to mind this morning, in that at some point within the last few days, a mouse has shed its mortal coil in the vicinity of my desk. Even though I can’t find its remains, I know they are there – probably wall-bound – because of the growing intensity of the stench. While a burning stick of incense and an open window are able to mask the odor to some degree, it’s still there.

Likewise, the smell of a rotting economic corpse is in the air, although masked to some extent by the government’s statistical smoke. Even so, the stench is still there, and as I write, Mr. Market is rediscovering it.

How healthy the economy actually is, is a topic we are going to delve into at greater depth tomorrow, in a “special” edition of this service in which our own Bud Conrad will provide his quick analysis on what the data are now telling us.

Jumping the gun somewhat, I will weigh in with my own opinion that, yes, the economy is improving. But I quickly add that it is, as Louis James of our Casey’s International Speculator so correctly termed it, an “Iron Lung” recovery. To wit: pull the plug on the government’s over-the-top spending, and the patient will relapse.

On that topic, David Rosenberg of Canadian money manager Gluskin Sheff recently ran simulations on what 2009 U.S. GDP would have looked like absent the government’s fiscal and monetary stimulus. He concluded…

Instead of real GDP contracting 2.4% for all of 2009, it would have been close to a 4.0% decline. And, as for the last two “positive quarters” — well, Q3 would have been -1.0% QoQ at an annual rate and -1.5% for Q4 (as opposed to the +5.7% annualized print). Still no sign of organic private sector growth and here we have the Fed discussing exit strategies and the Obama team about to soak it to the rich (for anyone who makes over $250k). This is what is otherwise known as a ‘low quality’ recovery.

Even so, in my incessant questioning of pretty much everyone I come in contact with, I definitely perceive signs of life in the economy, but only faintly and selectively. A few anecdotes from the past couple of days…

• A furniture store manager. “Not great, but still a lot better than the first two quarters of 2009. Then, there were no sales. My wife is a real estate attorney, though, and she is really busy.”
  
• An industrial designer. “I had my own company for five years, but just gave that up to take a job for the security.”
  
• A top sales rep for high-end construction equipment. “Had a great 2009, because of orders already on the books. The phone didn’t ring, and I didn’t make a single sale, in all of January.”

Of course, while interesting, such anecdotes provide little in the way of tangible evidence of the state of the broader economy.

Yet personally, I find them useful. For instance, the furniture store manager’s remarks point to some improvement in the real economy – furniture is one of those big-ticket items you typically only buy when feeling somewhat confident about the future. The real estate attorney’s increased activities likely points to people deciding to deploy funds into more tangible assets. And the pick-up in local real estate sales could be helping out the furniture sales.

The industrial designer’s experience suggests there are jobs for qualified and talented people, but also that people remain risk averse when it comes to their careers – not good news for an economy that depends heavily on new business formation.

The experience of the sales representative, whose territory covers a broad swath of the Northeast, confirms that the construction sector is still in duck-and-cover mode.

As I write, the market is ratcheting down hard, due to bad news on many fronts. On unemployment claims, on growing troubles in the Eurozone, on soaring sovereign debt around the world. The smell of a global economy in trouble is everywhere.

In the U.S., while the weekly new unemployment claims are getting all the attention, it is the monthly unemployment report that is most hotly anticipated, as well as the Labor Department’s adjustments to the prior month’s report, both of which are due out tomorrow. If these disappoint, then today’s market turmoil could get much worse.

For an advance peek at what the monthly numbers are likely to be, Bud Conrad turns again to the ADP data, which he discusses below.

First, however, I want to restate words of caution about the markets right now.

Doug Casey’s Crash

On January 13, my dear partner Doug Casey warned of a serious and imminent correction – maybe even a crash. Since then, the equity markets have come under a lot of pressure, and today we are seeing more of the same.

As my only “traditional” equity holdings are in deeply, deeply undervalued energy companies (as recommended in The Casey Report), I’m feeling rather indifferent when it comes to Doug’s dire prognostication.

Or I should say, I was, until I glanced at the one-month chart of the S&P 500 (green) vs. gold (yellow) below. As you can see, equities and gold are now acting in very close concert. This is not all that surprising, as gold tends to do better in a rising stock market than a falling one – though it also frequently moves independently.

The point I am making, again, is that you need to be aware that we may be in for some stormy weather ahead. That goes especially for the resource stocks, as those tend to amplify the underlying moves in the commodities.

Marin Katusa, who heads up our energy division, has lately been especially outspoken on the fact that the popularity of commodities over the last year has led to a tremendous amount of financings. That has brought the institutional investors back into the game in a big way. In the 2008 resource stock crash, which was even worse than that of the traditional equities, most of the institutional players – folks with big wallets but little real commitment to anything other than a quick profit – were forced to dump big positions in small stocks, greatly exacerbating things to the downside.

This past weekend, I spent time with an institutional money manager here in the Northeast whose typical investment is between $10 million and $40 million. I was surprised to learn that his firm was an investor in one of the smaller-cap renewable energy plays we’re now following in our Casey’s Energy Report, and that he knew management on a first-name basis. While he likes the sector and the company, make no mistake that his first and foremost task upon arriving at work each day is to make a quick return – and to avoid a quick loss. To the extent that he has participated in financings and those financings are coming free trading, it would be foolish to expect him not to dump his shares in order to enjoy the upside, but next to no downside, by riding the warrants.

Repeat this scenario with money managers and financiers across the board – and, again, last year was a very active year for financings – and a sneeze in the market could lead quickly to pneumonia.

Of course, we try to account for inputs such as this in our stock selections and ongoing monitoring for our paid services – but you need to do your own due diligence as well. If I sound like a broken record on this topic, it is only because of my concern. Know what you own and why. That way even a steep correction won’t chase you out of your position. Also, it is very important that you don’t overcommit to any one stock or any one sector. Don’t chase stocks on a tear, but be patient and try to fill in positions only on corrections.

Whether we like it or not, for the time being, commodities and equities are linked at the hip – and with concerns about the stock market rising daily, we should be concerned about commodities as well. The good news is that the time will come, and soon, where you may be able to buy truly stunning values for little money.

And now, for an advance peek at what tomorrow’s unemployment numbers should look like, here’s Bud Conrad…

Monthly Jobs Jamboree

Bud Conrad

Perhaps the most watched report from the government is the monthly report on jobs from the Bureau of Labor Statistics (BLS). That is because jobs are crucial to the whole economy. Without jobs, people can’t spend and the economy can’t expand. Unfortunately, it is probably the most obviously manipulated report, and I’ll give a few hints about that shortly.

In preparing for the report, we get an early warning from the largest producer of payroll checks from how many checks they are dishing up. ADP produces payroll checks for 22 million employees at 360,000 companies. Last month they predicted 83,000 jobs would be lost, which was close to the actual of 64,000. Here is a long-term comparison of the ADP and payroll numbers:

They also revise their number for the preceding two months, as well as their data each year. If employment weren’t so important to the whole economy, we wouldn’t make so much of one month’s report, because the revisions are big. They came out February 3, estimating that only 22,000 jobs were lost in January. The Bureau of Labor Statistics will produce its estimate on Friday, Feb. 5. ADP revised December’s number from a loss of 83,000 to 61,000, and November from 145,000 to 121,000. The conclusion is that we still have a problem, as we are still losing jobs rather than making the new 150,000 needed to match population growth, so the economy is weak but not collapsing as it was in 2009. I developed a more detailed look at the right-hand part of that data in the chart below with the latest revisions:

The blue line is the number of jobs in the country as estimated by ADP. It is off from 115 million in 2008 to 108 million now. That is still very serious, but at least not getting much worse this month.

A special additional part of the BLS report tomorrow is that it will announce revisions for the last year and has already warned us that is likely to be 823,000 jobs worse. It comes from a flawed method of attempting to add jobs for small business that are not collected by the BLS survey. The Birth/Death Model from which these estimated additions are made is flawed because it has been adding jobs in this recession when obviously small businesses have been closing.

To say they have been getting this wrong is an understatement. They have been continuing to get this wrong, and they will probably have to add another correction amount equivalent to this revision after the correction period to April 2009.

Conclusion

We are not losing as many jobs as in previous months but still have many unemployed left from the accumulated losses. The long-term problems of too much debt and lingering unemployment are still with us. The unanswered question is whether we will have a continued recovery or a drop back down as in a “W.” The stock market drops are telling us that we are still facing problems, and tomorrow’s actual jobs report will tell us a little more about how serious the ongoing problems are.

The Fall of America and the Western World

A review by Doug Hornig, Casey Research

Throw together a feminist progressive, a former assistant secretary of the Treasury, and an anarcho-capitalist, and what do you get?

If you answered discord, you’d probably be right nine times out of ten. Sparks would fly, feathers would ruffle. But the tenth time, you just might get… agreement. And in fact that’s what filmmakers Brian Kraft and James Petulla found as they assembled their new 9-DVD box set, The Fall of America and the Western World.

It’s an ambitious project, aiming to sound the loudest possible alarm for U.S. citizens, to catch their attention and alert them as to what’s happening to their country and the civilized world. Before it’s too late.

The discs feature impassioned monologues by the aforementioned trio -- Naomi Wolf, Paul Craig Roberts, and our own Doug Casey – along with eight other authors, publishers, political activists, and media personalities, including: Alex Jones, Mark Crispin Miller, David Icke, Mickey Z, G. Edward Griffin, Doug McIntyre, Ken Klein, and Joseph Farah.

Over the course of more than eight hours, this highly opinionated group weighs in on an array of topics related to the abyss into which Americans suddenly find themselves staring. Addressed in depth are such things as the machinations of the Federal Reserve, the construction of the police state, the war on liberty and rise of neo-fascism, the makeup and goals of the global power elite, and the prospect of a financial Armageddon.

The participants represent widely diverse political and philosophical points of view. But from the far left to the far right and everything in between, they all subscribe to one central idea: that civilization as we know it is at a crossroads. Do nothing, or do the wrong things, and we face catastrophe. Do what must be done, and there is still a lot of tough sledding ahead.

Subtitled A Survival Guide, the compilation details what’s gone wrong, along with what’s going to go wrong, then offers ways of trying to effect change, as well as prescriptions for maximum personal protection, of oneself and one’s family.

Naturally, we’re partial to the segments that feature Doug Casey. No one is better at articulating the causes of our current problems, nor of projecting the inevitable result – the Greater Depression that’s unfolding before our eyes.

But even longtime Casey subscribers are apt to learn a thing or two here. And for those new to Doug’s thinking, it’ll likely come as a revelation. More information on the discs can be found here.

That’s It for Today – and What a Day!

And that, dear readers, is it for today. As I dash, stocks are way off, but so are most of the commodities – especially gold and silver. The correction we have feared is upon us. To quote one of my favorite sayings, “This, too, shall pass.”

Until tomorrow, thank you for reading and for being a subscriber to a Casey Research service.