Tell Me You're Coming Back to Me

Is Miss Market a changeling, one of those offspring of elves and fairies that the wee folk exchange for human babies? Why, just the other day we danced merrily through a meadow of green shoots with her. But when the sun arose the next, we found a slain rabbit in our pot when we attempted to make our morning oatmeal. And there she was, tangled hair and pointed ears, hissing like Catwoman in a field of burnt straw.

Suspicions that the economic recovery on the horizon was a mirage were roused by the Empire State survey of manufacturing conducted by the New York Fed. The data showed a decline in May after two months of improvement. Oil prices fell, as did interest rates, the most recent fear of the financial press. These are not indicative of green shoots. Kev is of the opinion that rising commodity prices and higher interest rates should be cheered as a sign of acceleration in the real economy, not brakes on the recovery.

But the familiar arc of expansion and recession that has marked the post-war period has turned unfamiliar. That’s because the model has been revealed as a changeling as well. As the United States turns from consumption to saving, incomes decline as jobs vanish, which reinforces contraction and the great hunkering down. So despite all the reserves the Fed has pumped into the system, banks find fewer viable businesses to loan to. The liquidity trap is not a tender one.

Yet policy makers surely know this. The cleansing power of a collapse in economic activity and the erasure of iconic American enterprises some call for would be so great as to cut serious gashes in the cord that binds a society together. So Bernanke, et al., must keep pushing on the string, hoping that the trauma of change from consumption to saving doesn’t entirely dissolve the rope to which we are hanging by a thread. The effort of government spending and Fed largesse is aimed at supplying a parachute to slow the descent so the pilot can live to fly another day.

For the investor, this means rewiring the brain. Look for things “to begin stop worsening” as the Bank of Japan said was happening in its latest dispatch. Being nimble and not too greedy will be prized attributes. Waiting for GMGMQ, DXO (oil) and SLV (silver) to get cheap again, keeping PALM and F in the portfolio. Plaxico Burress and Michael Vick look as if they will get a second chance in the NFL soon. So shall we. Miss Market will comb her hair, don the cocktail dress and take our arm.

As we heard Jean Arthur say to Cary Grant the other night: “I’m hard to get, Jeff. All you have to do is ask.”

All that glimmers

For all you "Caddyshack" fans, there is no god. But I do have a fleeting affinity for the one who enriches me, because it enables me to pay taxes and thus pay my share for civilization, enriching others. However, I will turn to Odin, Thor and Loki and the rest of Norse mythology, which, by the way, is my favorite explanation for the universe, before I bow to something buried in the ground. Yes, it's the gold bugs that bug me.

Gold investors, whether they admit it or not, denominate their investment in paper dollars. It is that conversion into something that can purchase goods and services that calibrates its worth. Until western society collapses and only a sliver of the metal, not a five-dollar bill, will buy a Big Mac and french fries, then gold is just a place to park dollars in the hope of making more dollars, the reason for all investments.

As George Bailey told Clarence, when the guardian angel remarked money wasn't needed in heaven: "Well, it comes in awfully handy down here."

All the gold in the world would not buy a Big Mac in such an outcome because the hamburger flippers and all the rest of us would be brigands bent on medieval-style looting and freebooting anyway. A kind of "we don't need no stinking badges" world.

To buy and hold it as the only true store of value seems irrational when the only way to realize the benefits is conversion into dollars. Should the fanciful apocalypse come and paper currency lose its power to persuade our republic to cohere, which some paranoid holders of gold expect and indeed appear to wish, then we are all in the soup.

A cellarful of it will hardly keep one warm and safe in a world lit only by the fire of torches and ruled by the mobs with pitchforks and machine guns.

I guess I've buried the lead, as we used to say in the newspaper trade, because it brings me to my latest "Manginius" point (more on the Jets and professional football culture in a future post).

I've taken the plunge and put my money where my mouth is. Recovery and inflation are coming and oil prices have bottomed. Yesterday, bought PowerShares DB Crude Oil Double Long ETN (DXO) at $2.24. This is a double-down (for all you blackjack players) on the price of oil. This exchange traded note is designed to go up or down twice as much as crude oil futures. I think it's going up. When (if) it does, I'll be looking to add alternative energy names.

I'm not buying oil because I think it's a superior god but because I expect its price in dollars to increase beyond the rate of inflation, enabling me to buy more goods and services and pay more taxes than otherwise would be the case. If you think the price of gold will increase, by all means buy and reap the benefits of more dollars. But genuflecting before a commodity (precious as it may be) is bad form. Just ask Moses.

Crude Instincts

Stop the presses! This just in! Analysts at JPMorgan have lowered their oil price forecast to an average of $43 a barrel for 2009 from $69. Oil prices are falling, they say, due to "the ongoing deterioration in the world economic environment and the ensuing sharp contraction in global oil demand in both 2008 and 2009." (Source: Marketwatch).

What a clairvoyant bunch. We are lowering our forecast, they seem to be saying, because we stuck our heads out the window and saw which way the wind was blowing. We'll change our forecast when we stick our heads outside the window again and notice the wind is blowing the other way. And guess what. They also think voaltility in the oil market will subside once a supply/demand balance is reached. Thanks for the heads up.

For the record, WTI for January delivery fell $3.84 to end at $36.22 on the NYMEX today.

The time to get back into oil and gas names and sell the airlines may be coming soon. Reflating the economy is on the horizon and will probably work down the road. I'm keeping my eyes open, hoping not to be too cut up by the falling knife. I'll let you know when I decide to try and catch it.

Update on Kev's portfolio:
Ford (F) ended today at $2.84, down $0.30 on the day, up 147% since purchase on 11/20/08.
Advanced Micro Devices (AMD) closed at $2.23, down $0.06. on the day, up 1.8% since purchase on 12/15/08 at an intraday price of $2.19.
Palm Inc, (PALM) unchanged on the day at $2.20, up 7.8% since purchase at intraday price of $2.04.

Coming up: thoughts on football (including the return of the single wing, greatest games attended and the death of Slingin' Sammy Baugh and his connection to an ancient high school all-star game many years ago).