Mr. Market is ecstatic today, but we're not sure why. The Dow is coming off its worst August in nine years... After rallying 7.1% in July, the Dow fell 4.3% last month. The S&P 500 fell 4.7% in August. And the Russell 2000, a small-cap index, posted its worst August in 12 years, down 7.5%. August is normally a strong month for stocks. This is the Dow's first negative August in five years.
But we're starting September, normally a tough month for the market, with a boom. The Dow, S&P, and Nasdaq are all up around 2.5% as I write. Oil is up more than 3% to over $74 a barrel. Gold barely budged, down 0.38% to $1,243 an ounce. Meanwhile, today's news is overwhelmingly negative...
U.S. auto sales in August will likely be the worst for the month in 28 years. An average of analyst projections (which you must take with a grain of salt... note the employment numbers below) show deliveries may be 11.6 million vehicles. That's 18% less than last year's 14.2 million. And the decreased auto sales are in the face of aggressive discounts... Auto dealers have increased discounts an average of 1%, or $2,864 per vehicle, since July.
General Motors, the largest U.S. automaker, announced a 25% sales decline last month to 185,176 deliveries – compared to last August. Last year, sales were boosted by the government's "cash for clunkers" program.
And the second-busiest shopping season of the year, back-to-school, was a dud... Shoppers spent slightly more in August – the biggest retail time besides the holidays – than last year. But almost every category was below 2008 levels. A Gallup Poll of consumers' self-reported spending showed they spent around $65 a day on average in August – less than June and July and about the same as August 2009. Total clothing sales jumped 2.6%, buoyed by an 8.4% jump in children's clothing... Adults spent much less on themselves. Electronics rose 2.3%, down 9.9% from 2008. Luxury retail fell 1%, a 13.8% drop from 2008.
Consumers, just like banks and employers, are being cautious... With such high unemployment and general economic uncertainty, they're stockpiling cash. And based on today's ADP employment numbers, that's a good thing. Payroll giant ADP today reported private-sector employment (no government jobs) declined by 10,000 from July to August. It's the first decline since January. The consensus expected a 20,000 increase.
On to the banks... The Federal Deposit Insurance Corp.'s (FDIC) troubled-bank watch list hit its highest level since 1993, though the pace is slowing. The FDIC added 53 banks to the watch list, bringing the total to 829... Almost double the 416 banks on the list a year ago. On average, only 13% of the troubled banks require an FDIC bailout (or 108 banks based on today's list).
So far this year, the FDIC shuttered 118 banks, including 45 last quarter. Bank closures this year should eclipse the 140 in 2009. And while the FDIC added $5.5 billion to its deposit insurance fund, it still has a $15.2 billion deficit. But FDIC head Sheila Bair is optimistic: "As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend." In other words, she knows the government will continue buying debt and printing money, so she's not worried.
Despite overwhelmingly negative sentiment and statistics, the market soared... always a bullish sign. But you can't read too much into it... The trading volume is low. Wall Street is just coming back from vacation.
Our bet: The market takes all of these negative economic numbers as more proof the Fed is getting ready to fire up the printing press... Next stop – Quantitative Easing II.
More kudos to Matt Badiali are in order... We highlighted Badiali's flurry of triple-digit winners in Monday's Digest. Today, his Phase 1 pick, ATAC Resources, jumped nearly 50%. The company announced great drilling results from its Osiris area mine in the Yukon. Phase 1 readers are now up more than 390% since October.
Micro-cap mining stocks like this, which we can only recommend in Phase 1 due to their size, are some of the most explosive stocks in the market. They're also a great leveraged bet on a rising gold price. To learn about Phase 1 and access Badiali's mining recommendations, click here...
New highs: Fairfax Financial (FFH.TO), Odyssey Holdings (ORH-PA), AuEx Ventures (XAU.TO), Seagate Technology (STX).
Great feedback for Extreme Value in today's mailbag. Also, if you're involved in auto dealerships or retail, we'd love to hear from you... feedback@stansberryresearch.com.
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"Your comments about Extreme Value in Tuesday's Digest were spot on. I have been an investor for 40 years. I have always liked dividend paying stocks (get paid while I wait) and, as a financial exec with a Fortune company, clearly understand that compounding is the 8th wonder of the world.
"I believe I have done well over the years. But I had never focused on world dominator-type stocks that pay out a portion of their constantly growing earnings every year. I was missing growing dividends on a constantly growing earnings base. Extreme Value has opened my eyes to this important group of companies, which now happen to be priced at bargain multiples.
"The other focus area for Extreme Value is value-oriented stocks (buy a dollar at a discount) where I wait for Mr. Market to recognize their true value." – Paid-up subscriber DR
"Re yesterday's Digest on Extreme Value. I have found Extreme Value to be the single most valuable investment advice I have ever received. I spent most of my career at a major Wall Street investment bank (like Doc Eifrig) and as the head of a major department had personal access to a number of the top analysts on the Street; Institutional Investor number one guys that I could have breakfast, lunch or dinner with.
"I have learned more about investing in the fifteen months I have been subscribed to Extreme Value than I did in 20 years on the Street. I have spoken to Porter personally in the past six months to praise Dan's work. He is great on the numbers, but so are many top analysts. What he is really great at is educating his audience on the thought and emotional process of investing in stocks. 'Study the business, not the daily stock price movements,' 'Be prepared to make at least a five year commitment to this company.'
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"I was on the phone this morning with the chief economist at one of my brokerage firms. In a lengthy conversation I found myself quoting Dan and his analysis most of the time. I took that economist to school and he said so. To any person I care about who asks me for investment advice I insist they subscribe to Extreme Value." – Paid-up subscriber RL
"In reference to Monday's S&A Digest and the luxury toy maker, I would never have considered a short position with out your encouragement, education and guidance. Thank you for all your thorough research, it is much appreciated! Thank you Sir, may I have another (short recommendation)." – Paid-up subscriber Sean B.
Goldsmith comment: We're glad you decided to try shorting, Sean. We write those pieces hoping we'll encourage a few readers to try something a bit out of their comfort zone. We know you'll be a better investor because of it. As for more short recommendations... you'll get one soon in the new Stansberry's Investment Advisory.
Regards,
Sean Goldsmith
Managua, Nicaragua
September 1, 2010Why is Mr. Market so happy?... Worst August in 28 years for autos... GM sales down big... Back-to-school retail bombs... FDIC troubled-bank list at 17-year high... Praise for Extreme Value... A reader tries shorting...