| Friday, August 6, 2010 |
Wall Street's Gold Mine
is Main Street's Shaft
by Sean Brodrick
I don't have to tell you how bad things are in the real world. For example ...
- Private construction spending — down 62% from the peak!
- ISM Manufacturing Index — close to stalling.
- New home sales — worst June on record.
- Factory orders have dropped twice in a row, down 1.2% June and 1.8% in May.
- Unemployment is stubbornly high, and claims are starting to increase — again!
- And California ... ay-yi-yi! The bad news is that bankrupt state may start issuing IOUs this month. The worse news is California may be the canary in the coal mine for the other states, and struggling municipalities.
This is why many Americans are mystified and left wondering why the market can go up when the real economy is going down.
I completely understand. But I have to go with the trend of the market. And when the market buys good news ... AND buys bad news ... you really don't want to stand in the way of that bus.
Let me show you five reasons why Wall Street is celebrating ... and indeed, even higher prices may be down the road.
#1) U.S. Companies Make More Money Overseas. Earnings have topped estimates at 77% of S&P 500 companies that already reported results this quarter. So they must be making money somewhere, right? Bad news for Main Street — more and more of the earnings of U.S. companies comes from overseas and is not really dependent on Main Street's economy.
U.S. companies have good reason to invest overseas — that's where the growth is. Between them, the economies of China, India, Russia and Brazil account for 13% of world trade and have been responsible for about half of global growth since the start of the financial crisis in 2007, according to data from Goldman Sachs. The BRIC economies are expected to average 9% growth this year compared with 2.6% in advanced nations.
And the less companies have to pay in taxes, the bigger their profits.
#3) The rise in stock prices is relative ... relative to the falling U.S. dollar, I mean. The once-mighty greenback has been sliding lower since early June, and the U.S. dollar and the stock market are on a see-saw of pain — when one goes up, the other often goes down. For example, in 2009, the S&P 500 rallied 68% from early March 2009 to late November. At the same time, the U.S. dollar slumped by 17%.
To be sure, the market and the dollar don't have to move in opposite directions — they just do it a lot. That's because the market is an asset priced in dollars. As the dollar falls, it takes more dollars to buy the market.
In extreme cases, you can get a Zimbabwe market. The Zimbabwe stock market rose 300,000% in 2007 as that country's currency collapsed. I'm not saying that will happen — I'm saying that if your currency is going down, as the U.S. dollar is, the stock market has to go up just to keep its value.
#4) Bond yields are low ... and stock yields are high. The yield on a 10-year note is now about 2.9%. And bond yields may not be done falling. Meanwhile, there are good, solid stocks that pay 4%, 5%, 6%, 7% or higher! Many investors need income, and there are some great high-yielding stocks out there ... a strategy we're putting to good use in Crisis Profit Hunter.
And heck, many dividend-paying stocks are so flush with cash they're raising dividends. This is happening even in gold miners, which traditionally don't pay great dividends. Two big names in the gold space, Newmont Mining and Barrick Gold, both recently raised their dividends.
#5) The Off shoring Trend Continues. Multinational companies with American names are eager to sell you products and take your money, but they're just as happy to ship your job overseas. And this trend is accelerating. A 2008 Bureau of Labor Statistics report found that over 30 million (one-fifth) of service industry jobs were vulnerable to off shoring.
These aren't just call-center jobs. Along with telemarketers and data entry, the BLS also included high-paying, highly skilled, knowledge work — scientists and engineers to architects and fashion designers, managers and business analysts.
The BLS study found that the at-risk service jobs were higher-paying ($61,473 vs. $41,610) and more highly skilled — more than half of them (54 percent) required college degrees and eight in 10 required "some college."
When a corporation can pay someone in China 60 cents an hour to do your job, there's no real competition. That's one reason why I'm in favor of "fair-wage" tariffs on goods and services.
So, small businesses and Main Street should continue to get squeezed. And Wall Street gets to party with the money it's saving.
Change We Can Believe In
It's time to change — it's time to start looking out for yourself. The next time you get an urge to send a politician your hard-earned money, do yourself a favor and invest that cash in something real instead.
Here are three investment choices you might consider ...
- WisdomTree Dividend ex-Financials ETF, symbol DTN. This fund holds a broad swath of stocks in every sector but financials. It pays a 3.9% yield, and those payouts could rise as a host of companies are raising dividends. And dividends are one thing Wall Street can't lie about.
- Physical Gold and Silver. Wall Street and Washington consider gold a "barbarous relic" because they can't control it, and gold's continued outperformance shines the light of truth on the lies peddled in the corridors of power. Owning physical gold is an act of rebellion. Maybe it's time you joined the revolution.
- The Best Gold and Silver Stocks. You can buy individual stocks, and many of the best ones are tracked in the Market Vectors Gold Miners ETF (GDX). By the way, some of the miners in the GDX, like Barrick Gold (ABX) and Newmont Mining (NEM), are raising their dividends. Owning a gold miner that pays and is raising dividends is the best of both words — you'll own a stock that pays you and you can ride what should be a great rally to come in gold.
Good luck, and good trades,
P.S. If you want to read my daily updates, check out my blog at http://blogs.