The one real trend affecting markets now
By
Bill Bonner Jun 24, 2011
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Oil down to $91 a barrel. Stocks down again yesterday... with a loss of 65 points on the Dow. The 10-year note yield dropped to 2.90...
... and gold? The yellow metal lost $32.
What to make of it?
We don't know any better than anyone else. But we have a feeling that the ‘stocks are cheap' crowd has yet to discover how cheap stocks can become. And the ‘inflation is around the corner' crowd is going to look around the corner and not see much coming. And the ‘bonds will crash when the Fed stops buying' crowd will be surprised too. QE2 ends in about a week. If bonds were going to crash you'd think bond investors would have begun to sell by now. What are they, stupid?
Instead, bonds are becoming more expensive. It's gold, stocks and real estate that are becoming cheaper.
So far, these are not even trends. It's too early for that. They're just guesses. But they could turn out to be good guesses.
Because the one thing this market has not fully reckoned with is the Great Correction. All this ‘recovery' talk has masked the real, underlying trend. That is this: we're correcting 60 years' worth of credit expansion. How far? How much? How fast? We don't know... but households are not spending like they used to. So, it doesn't make sense that businesses should be worth what they used to be worth... or that people should have the jobs they used to have... or that economic policy should work the way it used to work.
That much is obvious.
But we've been making the point, this week, that the Great Correction might be part of something much bigger. Real GDP growth slowed to medieval levels in Japan after 1989 and in the US 10 years later. Japan has not added a single new job in 20 years; America has not added a single new full time job in over 10.
Why?
Well, no one really knows. The explanation might be a simple one. After a big bull market came a big bear market. In both Japan and US, the authorities decided to fight the downside of the financial cycle... wasting trillions of dollars and preventing the economy from healing itself. This resulted in a long period of stagnation.
In the last century, the political authorities in Russia and China caused real GDP to go backward for 70 and 30 years respectively. Couldn't central financial planning achieve the same perverse effects in the US and Japan today? Maybe.
Or, maybe it is something more profound. Yesterday, we looked at what an economic flop the Internet Age turned out to be. Since the introduction of the worldwide web growth rates have gone down, not up. While the web has certainly made a lot of things more efficient, and made a lot of people rich, it has not led to growth.
Which is not necessarily a bad thing. Maybe we've had enough of growth. Maybe we're now more concerned with efficiency... time saving... and leisure. But that doesn't do much for the 25 million people who lack decent, full-time jobs in America. And it doesn't do much for the millions who struggle to pay their mortgages, while house prices go down every month.
The internet may be a great thing, but it is not like the discovery of fire. When ancient man discovered fire it gave him an opportunity for above-trend growth. All of a sudden, he was able to use calories that did not come from his own digestive system. He moved into colder areas. His numbers increased (we imagine).
Every major advance for mankind has been made possible by using more energy. First, he used the energy from wild plants and animals - eating them; converting them to useful calories. Then, he found that he could grow the plants that he wanted... and domesticate the animals that were most useful. This further increased the number of calories available to him. Human populations grew again.
Then, in the 18th and 19th centuries, he got his biggest break ever. He discovered that he could use coal and oil - thereby drawing on energy that had been condensed and stocked up by the earth itself. This gave him a huge advantage over other animals. It allowed his numbers to soar. It increased GDP growth rates from almost negligible to over 5%. Finally, he went forth and multiplied so much that it looked like even these new advances could not keep up with him.
But there are limits to everything. After two centuries it may be that the easy, accessible and cheap sources of fossil fuel - at least of oil - have been exploited. It may be, too, that the human population has expanded to the point where further increases will be costly and difficult. It could be that the advanced economies - those that got onto oil first - have already squeezed most of the growth juice out of it. That is, perhaps they have reached the point where further growth will be slow, incremental, and expensive... just as it was through most of human history?
As we noted yesterday, all the great technological advances happened at least a half a century ago. They all involved new and better ways to use fossil fuel. Since then, the only big advance has been the internet... and it looks like a dud from a growth point of view.
If this is so... perhaps we are not doomed to a "lost decade", as the papers warn. Perhaps the whole century will be lost. We have lost one decade already.
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More after this from our colleagues in London...
If you're going to buy stocks, buy stocks with big stories. Don't just buy the market - you'll be on a hiding to nothing.
Some stocks have stories. They have the potential to prosper even when markets are going nowhere. Because their businesses have the potential to grow even when the world economy is not growing.
The health sector is a great example. People don't scrimp on health. Pharmaceutical companies are defensive because we will always pay for drugs. And if you get a pharmaceutical company with a revolutionary drug - a game changing drug - then that company's share price can certainly move higher - even when general stock market growth is stalling.
We've been told about one such stock by one of our top stock analysts. It's got a breakthrough drug that's already on sale... but it's about to move into a major new market that could be the catalyst for a surge in sales, profits and share price.
Our colleague believes that over the next month its shares could make a major move upwards.
You see, this business - based right here in the UK - operates in a highly specialised niche within the pharmaceutical industry.
It has spent the past 13 years developing a radical new product - a new, and completely unique painkiller that could have a major impact on its market in the coming months.
It's already launched the drug to a few small markets extremely successfully, boosting revenues considerably.
This company has lots going for it:
A great management team; a unique product; no debt; a significant cash pile; a ‘support network' of expertise extending around the globe...
What's more, it's managed to shrewdly position itself within the pharmaceutical sector - securing the backing of three multi-billion dollar pharmaceutical firms.
In short, it's a stand-out British business, adding genuine value to the UK economy and promising the potential for some very healthy returns for investors in the coming months and years.
Just look at the year this firm has already had...
In January, it received a $4 million cash injection as one of its radical drugs began clinical trials.i
In February, the business signed a major contract with a large European Government securing a valuable new source of income worth millions in the years to come (and triggered an immediate $2.5 million windfall).ii
Then, in March, the European Mutual Recognition Procedure recommended SIX more countries begin licensing.iii
In April the firm secured an exclusive contract to commercialise its product in Australia, New Zealand, Asia and Africa - that's almost half the planet!iv
Straight after that the US patent office granted the company a watertight patent - making a family of 35 patents - protecting the company's revenue streams from competition.v
Off the back of all that, revenue leapt by close to 50% year on year.vi
That's the kind of genuine growth most businesses can only dream of achieving. And it's only the beginning.
The fact is, each development has pushed the company towards its ultimate aim of becoming a major player in the multi-billion pound pharmaceutical industry.
And the momentum behind the business is building to a head...
Within the next few weeks, a massive new development could well light the touch-paper under this firm's share price.
You could be very well positioned to potentially profit if that happens...
You see, next month the business is due to launch its unique product to the biggest market in Europe.
You'll know what that means: new customers, more newsflow and potentially a major move in its share price.
Not only that, the next few months are going to be immensely busy - there's a whole series of other launch dates, any one of which could trigger another jump in shares.
As any good investor will tell you, those major product launches could create a tremendous opportunity for you to profit.
Our suggests investors who get in soon could stand to make 55% on this one within the next year.
Over the longer term, the outlook is even better...
In fact, he believes you could potentially bank a 500% gain on this business in the next 2-3 years!
That's the kind of potential that could turn even a small investment - money you can afford to put into a higher risk play - into something much more substantial.
Whilst there are no guarantees this firm's unique drug will be sell as they anticipate, this is an opportunity we believe you should definitely take a look at.
Daily Reckoning readers like your self know well about the risks that come with investing in small company shares, and this company is no exception - even with its bright prospects, it's still a risky play.
But here's the clincher...
Remember we told you above that the drug that this business has developed is considered fairly radical?
Well this revolutionary new painkiller is so potent that if a competitor dared to conduct research into it without Government permission, they'd be imprisoned for 14 years.vi
In fact, the Home Office strictly oversaw its development - it's that powerful.
No doubt you'll want to get full details on this opportunity. So here's what you need to remember:
With the launch so close, there's really no time to lose. So you should take a look at this research report now.
Of course, there are no guarantees. But this is exactly the sort of stock that could still deliver substantial growth, even if the market remains week. You should definitely check it out.
And more thoughts...
*** Are people turning against the zombies?
Here's a report, from the Telegraph, that describes the mixed-up, confusing scene in Greece:
"Families swelled the ranks of those camping permanently in the square, some carrying children on their shoulders.
"It's for my children that I have found a voice," said Yiannis, a taxi driver with five children. "They face a bleak future unless they can get educated and get out of Greece but I want them to know that we didn't just give up and accept this disaster - that at least I put up a fight."
Some groups were notable in their absence - there were no demonstrators marching under union banners after crowds turned against them last week labelling them "traitors".
"Part of the problem is the huge number of public sector workers who enjoy special privileges while the rest of us can't find jobs," said one 27-year-old graduate.
"I have been unemployed for two years and hold no illusions that I will find a job soon. I am trapped living with my parents with no independence. There has been mismanagement on so many levels and now we pay the price."
*** Here's another thing that has gone wrong in the 21 st century - the stock market. The last 10 years have produced real rates of return that are the worst ever. If you'd put in money a decade ago you'd have less real money now than you did then.
explains why:
Market cheerleaders keep ratcheting up expected earnings, failing to note that much of the recent earnings growth is simply not sustainable.
Reasons for Unsustainable Earnings Growth
Much of the recent earnings growth is directly related to federal stimulus that will eventually end.
Much of the earnings in the financial sector are a mirage, based on assets not marked-to-market and insufficient loan loss reserves. The Fed and the FASB have repeatedly postponed rules changes for the benefit of banks and other financial institutions.
Earnings in both the financial and non-financial sectors have margins outside historical norms, based on very low headcounts and outsourcing.
Please consider the following snip is from the Sitka Pacific 2010 Annual Review:
Depending on how closely you follow the financial markets, it may be surprising to learn that profits are at new highs even though stock prices, as measured by the S&P 500, are still 20% below their highs. In other words, new highs in profits haven't translated into new highs in stock prices. If we go back even further, after-tax corporate profits soared 175% from the first quarter of 2000 through the second quarter of 2010. However, during that same time, stock prices fell roughly 15%.
In fact, there is nothing novel about a period of falling stock prices and rising earnings. Since the end of World War II, corporate profits have more or less trended continuously higher, with only minor interruptions during recessions. However, stock prices have gone through long periods in which they trended sideways or down, even though earnings continued to rise. From 1966 to 1980 after-tax corporate earnings rose 244%, but the price of the S&P 500 rose only 18% during that period. In contrast, earnings grew only 112% during the next 14 years from 1980 to 1994, but the S&P 500 rose 327% over that time.
Although very short-term returns are influenced by corporate earnings, beyond the short-term it is not trends in earnings but valuations and trends in valuations that determine stock market returns. In short, when valuations are low and increasing, long-term stock market returns are high. When valuations are high and decreasing, long-term stock market returns are low-even negative at times of peak valuations.
Until Monday.
Sources
i Company RNS release: 17 th January, 2011
ii Company RNS release : 17 th February, 2011
iii Company RNS release: 22 nd March, 2011
iv Company RNS release: 11 th April
v Company RNS release - 20 April 2011
vi Company RNS release - 17 May 2011
vii The Crown Prosecution Service Sentencing Manual
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