Wednesday, May 4, 2011

Cramer: As Oil Falls, Buy These 3 Names

As oil prices fell on Tuesday, Cramer guessed it may only go lower.

Oil companies that work best in this environment are those with the most growth, Cramer said. He likes the "wildcatters," which are companies that drill in untouched lands. The wildcatters are some of the most volatile names in the oil space. Cramer noted they also have the most potential upside because when they find new oil, their growth skyrockets.

The "Mad Money" host ranked oil companies that he thinks will work when oil is lower, so home gamers can leg into them on the way down. These stocks need to be on your radar screen, he said, because their entry point could come soon.

To start, Cramer's fave wildcatter is Hess [HESS Unavailable () ]. The New York City-based company has found great success in its strong, yet responsible approach to drilling. Hess was the first company to discover the Bakken shale, an oil-rich region that stretches from Montana to North Dakota along the Canadian border. Hess is now producing 25,000 barrels a day in the Bakken and operating 18 rigs.

Last quarter, Hess announced a large discovery off the coast of Ghana. The stock rallied 6 percent on the news, as the project could be worth up to $7 a share, Cramer said. It could add up to 500,000 barrels a day.

Hess also has projects in Egypt, the North Sea, Brazil, Australia and the Paris Basin. Its stock has begun to pullback because it's most tied to the price of oil. Being as it's roughly 7 points off its high of $87.40, Cramer thinks investors could put on a small position. He would wait for it go to lower before buying more, though.

Cramer recommends investors also look for Occidental Petroleum [OXY 111.64 -4.10 (-3.54%) ] shares to fall. The Los Angeles-based oil company has assets around the world, Cramer said. He likes its wildcatting efforts in California, where he thinks it's changing the game. The company drills down vertically, so it can hit four to five shale formations instead of the usual one or two formations. It's already drilled roughly 150 wells in Kern County, Calif., which Cramer said could be worth up to $76 billion. Based on these unconventional California assets, Cramer thinks Occidental could double its share price. He recommends waiting for a pullback before buying OXY.

Finally, Cramer likes Anadarko Petroleum [APC 78.51 -1.84 (-2.29%) ]. He thinks it's a terrific company, but said it's stock is a little exploited. Yet he still considers it among the best wildcatters. It is an international wildcatter with international assets, including places like Ghana, New Zealand and more. He would let this stock come down before buying shares.

Part 6- The Paper Silver Manipulation Game at all time Highs

Relax, It Has Always Been This Way

Silver helps and silver hurts. Silver did its normal silver thing. As poor man’s gold, silver always gets over speculated on minimal financing among the believers.

Then, as today, believers get sold out by the short play to follow.

There is no top in gold at this time, nor in all probability in silver.

In truth, the action is beneficial to the ability of gold to scale the heights 2011-2015 defined by Alf Fields and Martin Armstrong.

Click chart to enlarge in PDF format with commentary from Trader Dan Norcini

For further market analysis and commentary, please see Trader Dan’s website at


Why One Of The World's Biggest China Bulls Is Getting Worried

Goldman's Jim O'Neill is the man who invented BRICs, and he's been a fervent China bull.

And yet in his latest monthly note, he's concerned.

Basically, he's not seeing China shift its growth strategy the way he'd like. Inflation is still torrid, and the central bank is being forced to resort to blunt instruments.

No doubt influenced by the price of their A share market, I found myself worrying somewhat about China this week. Before any of you get over excited, this is against the background of me thinking that a “happy slowdown” was in the process of being achieved in China. I entered this year strongly of the opinion that Chinese policymakers would be planning for a period of softer overall GDP growth, in which “quality” was more important than “quantity”.


A month ago, it seemed to me that most published data was starting to show signs of a slowing economy and a possible peaking in the commodity-related inflation pressures. Certainly, key lead and coincident indicators suggested to me that this was likely. Both the GS China Financial Conditions Index (FCI) and the GS China Economic Lead Indicator have suggested slower growth ahead for some time. The last batch of monthly data, however, published nearly two weeks ago suggests that growth has not apparently slowed that much and CPI inflation rose to 5.4pct, with fears of more increases to follow. Linked to this, as I discussed last week, it appears as though policymakers are searching for additional ways to tighten monetary policy further, including allowing a faster pace of RMB appreciation.

All of this seemed perfectly sensible to me. However, this past week, the China A share market suddenly gave up half its rally year-to-date suggesting something is upsetting local confidence. I hope this is temporary. If I simply look at reliable indicators that have served me well in the past, I find myself slightly worrying that China runs some risk of slowing things too much. I am sure my concerns will turn out to be temporary. Certainly today’s April PMI release showing some softening in both activity and import prices are a renewed turn for the better.

The country's move to "smarter" high-quality growth, rather than torrid GDP was at the core of its 5-year plan announced earlier this year.

And yet, people should be skeptical that the wise central planners in Beijing really know how to get the kind of growth they want.

That's what O'Neill is getting at here.

Sprott Bets On Silver Equities After "Shocking" Underperformance

After selling about $34 million worth Sprott Physical Silver Trust(NYSE: PSLV - News) units, Sprott Assett Management founderEric Sprott made clear that he is still bullish on the white metal and invested all of the proceeds from sales of units of the fund back into silver or silver equities.

Sprott has been one of silver's most strident bulls as the metal has surged higher in recent months, and when news of his sales of units in the silver trust bearing his firm's name was released on Monday when silver was already under heavy selling pressure, investors may have speculated that silver was losing a key supporter.

That's not the case, Sprott says. He told the Globe and Mail that "Every dollar of money that was raised by selling shares of [the Trust]...was reinvested in silver or silver equities." While silver itself has surged in recent months, shares of silver miners have lagged, prompting Sprott to tell the Globe and Mail "silver shares have not done as well, which is almost shocking in a way, and it looked like there were opportunities in either getting some premium on Sprott Physical Silver Trust shares and buying silver or buying silver equities."

Sprott did not specifically identify what silver stocks he bought with proceeds from the sale of Sprott Physical Silver Trust units, but at the end of 2010, his firm held positions in silver miners Silver Wheaton (NYSE: SLW- News), MAG Silver (AMEX: MVG - News) and First Majestic Silver (NYSE: AG - News). The firm also held stakes in gold miners such as Yamana Gold (NYSE: AUY - News) and Eldorado Gold (NYSE: EGO -News). Sprott says he still holds around 25 percent of the total trust units between his funds and his charitable foundation, the Globe and Mail reported.

Cracks In The Commodities

Here we have it, another drop, and despite a late rally, bigger than expected. The problem we have now is, how mych support doe we have? While 1344 might be some support, 1340 a little more, the biggest support should be at the 50% retracement of the last move up, down around 1335, which is a long way from here. Not that we have to go there, and with the relatively low volume of the last two days, we might not. Today the dip buyers came in, if not in force, enough to pull us off the bottom and stop what was beginning to get a little frightening. Until proven otherwise, I have to assume this is a minor pullback.

Oil got hit today, but is still pretty strong. It is still range bound between 105 and 115, and today bounced off the middle of the range. RSI and MACD are both starting to drop, so I would not be urprised to see it go back as far as the 50dma, but would be surprised if it went farther than that. I do see the divergence in the lower peaks in RSI, which usually indicates a weakening trend, it just doesn't predict when the trend will end.

Gold has also been taking it in the shorts for the last two day, but is still well above support, and nearly at the top of it's current range. We did not see panic buying on the way up, so we probably won't see panic selling on the way down, but I would be cognizant of the threat of margin calls both here and with oil, as the heavily leveraged gun slingers on Wall Street start taking some losses.

Here is what I am takking about - heavy leverage, and panic buying put this on nearly a straight up trajectory. It is now the subject of several margin hikes by the exchanges, and took a big hit yesterday and today. It went through a pivot point today and looks like it may hit the 50dma tomorrow. if it breaks that, then you will start to see some panic selling.

The yield on the 10 year treasury is going pretty much nowhere, which is probably a good thing, as a rapid rise here will be pretty devestating. The problem now is who will buy when the Fed stops (assuming they stop in June as scheduled).

You would expect a bounce in the dollar with market and commodity weakness, and while we are getting one, it is so far awfully weak. What is really remarkable about this chart is that the gap between the 20dma and 50dma is actually widening, meaning the rate of the drop is increasing. This is at a critical crossroads, with two key questions: Will Bernanke le this continue to drop?, and more importantly, can he stop it? We will see.

We are seeing the first signs of a crack in the commodity complex. It's way too early to call it a crashj, but it was the crash in commodities in 2008 that triggered the disaster that was to come a few weeks later. We may just see history repeat itself.

This commodity could continue to soar from China's insatiable demand

International coal prices hit $124 per ton this week, the highest levels in five months, as strong demand from reconstruction projects in Japan and reduced supply from flood-ravaged Australia has made coal supply tight. The floods in Queensland, Australia cut the country’s output of coal by 15% and other big coal producers such as Indonesia, South Africa and Colombia are experiencing similar production cuts due to floods of their own.

At the end of March 31, coal prices were 33% higher than a year ago and earlier this month, mining giant Xstrata inked a one-year deal with a Japanese utility at $130 per ton, effectively setting a floor under coal prices in the near-term. That’s up from $98 per ton the company made in a similar deal a year ago.

Perhaps no country is more affected by this development than China. With its economy powering ahead with 9.7% GDP growth during the first quarter, Chinese electricity use was up 13.4% on a year-over-year basis over the same time period, according to China’s National Energy Association (NEA). China’s overall electricity consumption is now expected to rise 12% this year, up from the 9% growth the NEA forecasted in January.

China’s Electricity Council said the country may face power shortages of 30 million kilowatts during the summer so the government has moved quickly to put restrictions in place as the peak season approaches. Big industrial provinces such as Guangdong and Zhejiang are already scaling back power consumption. These reductions are likely to hinder aluminum, cement, zinc and steel output, according to Macquarie Commodities Research.

In addition, the National Development and Reform Commission (NRDC) called a meeting this week of domestic coal suppliers such as Shenhua Energy and China Coal Energy to ensure stable supplies, the China Daily said.

Coal powers the Chinese economy. The country is the world’s largest consumer, gobbling up nearly half of the world’s coal consumption in 2009. Coal accounted for 71% of China’s energy in 2008—more than three times the United States’ share. The Electricity Council estimates that the country’s coal demand will reach 1.92 billion tons in 2011, up nearly 10% from 2010.

China hasn’t always been such a glutton for coal. In fact, coal consumption actually declined from 1996 to 2000. However, consumption has shot up 180% since then and China accounted for 80% of demand growth between 1990 and 2010, according to BP.

This is because demand for electricity exploded over that time. China’s rapid urbanization and rising middle class has led to an exponential number of new refrigerators, air conditioners and other appliances in homes.

Despite the rise in incomes and increased consumer demand, China’s electric power consumption remains relatively low. You can see from the chart on the right that the US consumes roughly four times the amount of electricity per capita than China. The world’s second-largest economy even trails Greece, Poland and Hungary.

Luckily for China, it sits atop the third-largest amount of recoverable coal reserves in the world behind the US and Russia. The country ramped up its coal production from 645.9 million tons of oil equivalent in 1999 to 1,552.9 million tons in 2009. Despite this increase, production couldn’t keep up and the country became a net importer of coal in 2009. Production jumped over 15% during 2010 but the country was still forced to increase coal imports by 42% in order to meet demand, according to the China Daily.

There are two types of coal. Thermal coal is burned in furnaces to create electricity and metallurgical coal, also called coking coal, is used to create concrete and steel. China’s coal reserves are light on the latter, which has required China to rely on countries such as Australia, Indonesia and Russia for supply.

These imports are playing a vital role in China’s infrastructure boom. The US Energy Information Administration (EIA) estimates that Australia’s total exports to Asia, which also includes Japan and India, will increase 64% to 394 million tons by 2035. This accounts for 94% of Australia’s total exports.

Coal exports from Indonesia, Asia’s second-largest source of coal, are expected to rise 26% over the same time period, according to the EIA. In 2009, China signed a 25-year, $6 billion loan-for-coal agreement with Russia that will supply the country with 15-20 million tons of coal.

The Chinese government made it clear that it wants to wean the country’s power grid from coal. That’s proven to be a difficult task. China’s 12th Five Year Plan calls for big improvements in energy efficiency and the development of additional sources including natural gas.

Massive projects such as the Three Gorges Dam have sought to increase capacity of alternatives, but hydroelectric, nuclear and other renewables combined make up only 10% of total power. In addition, low water levels due to a drought in Southern China have reduced current hydroelectric capacity.

The ongoing disaster at the Fukushima nuclear plant in Japan has delayed but not squashed China’s nuclear ambitions. The country has plans to build more than two dozen plants by 2020, accounting for 40% of new nuclear facilities around the globe.

Only time will tell if the effort will be successful. The EIA forecasts that China’s power generation from coal will increase by 2035 but will only account for 62% of total power generation at that time. However, the EIA says that absolute coal consumption will nearly double as the economy continues to grow and electricity demand remains strong.

With coal’s short- and long-term status atop China’s energy mix intact, we think some domestic coal producers stand to benefit. To participate, we’ve taken positions in several coal producers including Shenhua Energy and Yanzhou Coal which we believe offer tremendous potential for the China Region Fund (USCOX).

Jay Taylor: Turning Hard Times Into Good Times

On the Precipice of Hyper Inflation. How Do We Cope?

click for audio Hour #1 Hour #2

John Williams: Hyperinflation and Double-Dip Recession Ahead

Economic recovery? What economic recovery? Contrary to popular media reports, government economic reporting specialist and ShadowStats Editor John Williams reads between the government-economic-data lines. "The U.S. is really in the worst condition of any major economy or country in the world," he says. In this exclusive interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation.

The Gold Report: Standard & Poor's (S&P) has given a warning to the U.S. government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What's the real impact of this announcement?

John Williams: S&P is noting the U.S. government's long-range fiscal problems. Generally, you'll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That's 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.

There's good reason for fear about the debt, but it would be a tremendous shock if either S&PorMoody's Investor Serviceactually downgraded the U.S. sovereign-debt rating. The AAA ratingon U.S. Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With U.S. Treasuries denominated in U.S. dollars and the benchmark AAA security, how can you downgrade your benchmark security? That's a very awkward situation for rating agencies. As long as the U.S. dollar retains its reserve currency status and is able to issue debt in U.S. dollars, you'll continue to see a triple-A rating for U.S. Treasuries. Having the U.S. Treasuries denominated in U.S. dollars means the government always can print the money it needs to pay off the securities, which means no default.

TGR: With the U.S. Treasury rated AAA, everything else is rated against that. But what if another AAA-rated entity is about to default?

JW: That's the problem that rating agencies will have if they start playing around with the U.S. rating. But there's virtually no risk of the U.S. defaulting on its debt as long as the debt's denominated in dollars. Let's say the U.S. wants to sell debt to Japan, but Japan doesn't like the way the U.S. is running fiscal operations. It can say, "We don't trust the U.S. dollar. We'll lend you money, but we'll lend it in yen." Then, the U.S. has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you're looking at U.S. debt denominated in yen, most likely you would have a very different and much lower rating.

TGR: Is there a possibility that people would not buy U.S. debt unless it's in their currency?

JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar-denominated assets and move into currencies they consider safer. And you'll see other things; OPEC might decide it no longer wants to have oil denominated in U.S. dollars. There's been some talk about moving it to some kind of basket of currencies—something other than the U.S. dollar, possibly including gold. This would be devastating to the U.S. consumer. You'd get a double whammy from an inflation standpoint on oil prices in the U.S. because the dollar would be shrinking in value against that basket of currencies.

TGR: Different countries are starting to discuss the creation of an alternative to the USD as reserve currency. How rapidly could an alternative currency appear?

JW: That would involve a consensus of major global trading countries; but just how that would break remains to be seen. Let's say OPEC decides it no longer wants to accept dollars for oil. Instead, it wants to be paid in yen. It's done. It's not a matter of creating a new currency—it's a matter of how things get shifted around.

TGR: What other commodities or monetary issues would that create?

JW: Again, the dollar's weakness is doubly inflationary. It is the biggest factor behind the ongoing rise in oil prices. Let's say you're a Japanese oil purchaser. Oil, effectively, is purchased at a discount in a yen-based environment due to the dollar's weakness. Usually, the market doesn't let such advantages last very long. As the dollar weakens, you see upside pressure on oil prices. If, hypothetically, you're pricing oil in yen, there's no reason for anybody to hold the USD. The dollar would sell off more rapidly against the yen and oil inflation would be even higher in a dollar-denominated environment.

TGR: You've mentioned that hyperinflation will happen as soon as 2014. If that is true, wouldn't OPEC want to shift off dollar pricing as quickly as possible?

JW: From a purely financial standpoint, that would make sense. Other factors are at play, though, including political, military and unstable times in both North Africa and the Middle East. Those who are able to get out of dollars, I think, will do so rapidly and as smoothly as possible.

TGR: And how will they do that?

JW: They will sell their dollar-denominated assets. They will convert dollars to other currencies. They will buy gold. Generally, they will dump whatever they hold in dollars and sell the dollar-denominated assets they don't want. There's a market for them; it's just a matter of pricing. As the pressure mounts to get out of the USD, the pricing of dollar-denominated assets will fall, which in turn would intensify that selling. The dollar selling will intensify domestic U.S. inflation, which is one factor that picks up and feeds off itself and will help to trigger the hyperinflation.

TGR: The U.S., even in recession, is still the largest consuming economy. If the U.S. continues in, or goes into a deeper, recession, doesn't that impact the rest of the world?

JW: If the U.S. is in a severe recession, it will have a significant negative economic impact on the global economy. That doesn't necessarily affect the relative values of other currencies to the USD. If you look at the dollar against the stronger currencies, a wide variety of factors are in effect—including relative economic strength. The U.S. is probably going to have an economy as bad as any major country will have, with higher relative inflation. The weaker the relative economy and the stronger the relative inflation, the weaker will be the dollar. Relative to fiscal stability, the worse the fiscal circumstance in the U.S., the weaker is the dollar. Relative to trade balance, the bigger the trade deficit is, the weaker the currency. As to interest rates, the lower the relative interest rates in the U.S., the weaker will be the dollar.

Part of the weakness in the dollar now is due to the way the world views what's happening in Washington and the ability of the government to control itself. That's a factor that may have forced S&P to make a comment. So, even having a weaker economy in Europe would not necessarily lead to relative dollar strength.

TGR: If the U.S. experiences a continued, or even greater, recession, doesn't that impact spill over into Canada?

JW: The Canadian economy is closely tied to the U.S. economy, and bad times here will be reflected in bad times in Canada. However, I'm not looking for a hyperinflation in Canada. Its currency will tend to remain relatively stronger than the U.S. dollar. Canada is more fiscally sound; it generally has a better trade picture and has a lot of natural resources. Keep in mind that economic times tend to get addressed by private industry's creativity and, thus, new markets can be developed. For instance, you're already seeing significant shifts of lumber sales to China instead of to the U.S.

TGR: What about the effect on other countries?

JW: The world economy is going to have a difficult time. You do have ups and downs in the domestic, as well as the global, economy. People survive that. They find ways of getting around problems if a market is cut off or suffers. I view most of the factors in Canada, Australia and Switzerland as being much stronger than in the U.S. Even when you look at the euro and the pound, they're generally stronger than in the U.S. Japan is dealing with the financial impacts of the earthquake. There's going to be a lot of rebuilding there. But, generally, it's a more stable economy with better fiscal and trade pictures. I would look for the yen to continue to be stronger. Shy of any short-term gyrations, the U.S. is really in the worst condition of any major economy and any major country in the world and, therefore, in a weaker currency circumstance.

TGR: Then why are media analysts talking about the U.S. being in a recovery?

JW: You're not getting a fair analysis. There's nothing new about that. No one in the popular media predicted the recession that was clearly coming upon us, and the downturn wasn't even recognized until well after the average guy on Main Street knew things were getting bad. We have some particularly poor-quality economic reporting right now. The economy has not been as strong as it advertised. Yes, there has been some upside bouncing in certain areas, but it's largely tied to short-lived stimulus factors.

Let's look at payroll numbers and the way those are estimated. In normal economic times, seasonal factors and seasonal adjustments are stable and meaningful. What's happened is that the downturn has been so severe and protracted it has completely skewed the seasonal-adjustment process. It's no longer meaningful, nor are estimates of monthly changes in many series. The markets are flying blind—it's unprecedented, in terms of modern reporting.

Are we really seeing a surge in retail sales? If so, you should be seeing growth in consumer income or consumer borrowing—but we're not seeing that. The consumer is strapped. An average consumer's income cannot keep up with inflation. The recent credit crisis also constrained consumer credit. Without significant growth in credit or a big pick-up in consumer income, there's no way the consumer can sustain positive economic growth or personal consumption, which is more than 70% of the GDP. So, you haven't started to see a shift in the underlying fundamentals that would support stronger economic activity. That's why you're not going to have a recovery; in fact, it's beginning to turn down again as shown in the housing sales volume numbers, which are down 75% from where it was in normal times.

TGR: But we were in a housing boom. Doesn't that make those numbers reasonable?

JW: Housing starts have never been this low. Right now, they are running around 500,000 a year. We're at the lowest levels since World War II—down 75% from 2006—and it's getting worse. I mean the bottom bouncing has turned down again. We're already seeing a second dip in the housing industry. There's been no recovery there.

In March, all the gain in retail sales was in inflation. Retail sales are turning down. You're going to see a weaker GDP number for Q111. The GDP number is probably the most valueless of the major series put out; but, as the press will have to report, growth will drop from 3.1% in Q410 to something like 1.7% in Q111.

TGR: You've stated that the most significant factors driving the inflation rate are currency- and commodity-price distortions—not economic recovery. Why is that distinction important?

JW: The popular media have stated that the only time you have to worry about inflation is when you have a strong economy, and that a strong economy drives inflation. There's such a thing as healthy inflation when it comes from a strong economy. I would much rather be in an economy that's overheating with too much demand and prices that rise. That's a relatively healthy inflation. Today, the weak dollar has spiked oil prices. Higher oil prices are driving gasoline prices higher—the average person is paying a lot more per gallon of gas. For those who can't make ends meet, they cut back in other areas. The inflation of Q410, which is now running at an annualized pace of 6%, was mostly tied to the prices of gasoline and food.

You also have higher food prices. It's not due to stronger food or gasoline demand—it's due to monetary distortions. Unemployment is still high, even if you believe the numbers. I'll contend the economy really isn't recovering. At the same time, you're seeing a big increase in inflation that's killing the average guy.

TGR: Why isn't there more pressure on the U.S. government to reduce the debt deficit?

JW: When you get into areas like debt and deficit, it's a little difficult to understand. The average person, though, should be feeling enough financial pain that political pressure will tend to mount before the 2012 election; but whether or not the average person will take political action remains to be seen. I don't think you have until 2012 before this gets out of control and there's hyperinflation. It could go past that to 2014, but we're seeing all sorts of things happening now that are accelerating the inflation process.

TGR: Like the dollar at an all-time low.

JW: If you compare the U.S. dollar against the stronger currencies, such as the Australian dollar, Canadian dollar and Swiss franc, you're looking at historic lows. You're not far from historic lows in the broader dollar measure.

TGR: In your April 19 newsletter, you stated, "Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial market expectations catch up with the underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results." What do you mean by "until such time as financial market expectations catch up with the underlying reality?"

JW: A lot of people look closely at and follow the consensus of economists, which is looking at (or at least still touting) an economic recovery with contained inflation. I'm contending that the underlying reality is a weaker economy and rising inflation. I think the expectation of rising inflation is beginning to sink in. Given another month or two, I think you'll find all of a sudden the economists making projections will start lowering their economic forecasts. Instead of looking at half-percent growth in industrial production, they'll be expecting it to be flat; if it comes in flat, it will be a consensus—and the markets will be pleased it wasn't worse in consensus. But the consensus outlook will have shifted toward a more negative economic outlook.

TGR: Do you think economists will shift their outlooks before we get into hyperinflation or a depression?

JW: In terms of economists who have to answer to Wall Street, work for the government or hold an office like the Federal chairman, by and large, they'll err on the side of being overly optimistic. People prefer good news to bad news. If Fed Chairman Ben Bernanke said we were headed into a deeper recession, it would rattle the market. People on Wall Street want to have a happy sales pitch. What results may have little to do with underlying reality.

TGR: In your April 15 newsletter, you mentioned that a signal of an unfolding double-dip recession is based on the annual contraction of the M3, which was the Fed's broadest measure of money supply until it ceased publishing it in 2006. Recent estimates show that the annual contraction of M3 went down from 4.3 in February to 3.6 in March. Is this good news?

JW: No. It doesn't have any particular significance as a signal for the economy. You do have recessions that start without M3 going negative year over year. In the last several decades, every time the M3 went negative, there followed a recession—or an intensifying downturn—if a recession was already underway. If you tighten up liquidity, you tend to tighten up business conditions. Again, though, you've had recessions without those signals. When it goes positive, it does not signal an upturn in the economy. It doesn't make any difference if it continues negative for a year or two, or if it's negative for three months. The point is—when it turns negative, that's the signal for the recession.

We had a signal back in December 2009, which would have indicated a downturn sometime in roughly Q310. We already were in a recession at that point. According to the National Bureau of Economic Research, the defining authority in timing of the U.S. business cycle, the last recession ended in June 2009. So, this current recession will be recognized as a double-dip recession. The Bureau doesn't change its timing periods.

I'll contend that we're really seeing reintensification of the downturn that began in 2007. Although it's not obvious in the headline numbers of the popular media, you'll find that September/October 2010 is when the housing market started to turn down again. That is beginning to intensify. We'll see how the retail sales look when they're revised. When all the dust settles, I think you'll see that the economy did start to turn down again in latter 2010. Somewhere in that timeframe, they’ll start counting the second or next leg of a multiple-dip recession.

TGR: Does M3 have anything to do with calculating potential inflation or hyperinflation?

JW: It does; but when you start looking at the inflation picture, you also have to consider that we are dealing with the world's reserve currency and the volume of dollars both outside and inside the U.S. system. Right now, M3 is estimated at somewhat shy of $14 trillion. You have another $7 trillion outside the U.S., which is available for overnight liquidation and dumping into the U.S. markets. It's not easy to measure how much is out there, but that has to be taken into account to assess the money supply related to inflation. Again, that's where the Fed chairman's policies come into play.

Efforts have been afoot to weaken the U.S. dollar. Usually with the weakening of the U.S. dollar, you see increased repatriation of dollars from outside the system. If everyone is happy holding the dollars, the flows can be static; but when they start shifting and the dollars are repatriated, you begin to have currency problems. That's when you have the money supply and the inflation problems we're beginning to see.

TGR: This has been very informative, John. Thank you for your time.

Lear Capital: Physical Precious Metals vs. Precious Metals Stocks

When it comes to precious metals, an often discussed topic is whether one should own precious metal stocks or the actual physical metals. Here's some things to ponder if you are considering placing money into either.

Let's ask the question. Why does one own metals' stocks? Answer? Because you expect metal prices to rise. Any answer you give after this, takes second place, third, fourth, whatever!

Why does one own the physical metal? Answer? Because you expect metal prices to rise. Basically the same answer.

Here's the catch. Rising metal prices do not guarantee rising stock prices. There's a multitude of variables to weigh, when considering the best way to diversify into the precious metals market. Consider this fact first. The more of a given metal you take out of a mine, the closer you get to depleting it. I don't care what mine you own, every ounce of metal taken from it brings you that much closer to the last ounce it can produce.

This brings up the next point. If one mine produces more profit than the next, which stock would you buy? Naturally, the one that produces at the least possible cost for the highest possible profit should get the nod. Hence, a rising metal price does not guarantee all corresponding metal stocks will rise in lock-step.

Look at it this way. If a given metal goes down in value, it can put a mine out of business. But, the metal itself, will never be worth zero. There are many other variables that can affect a stock value beyond just the price of the metal it mines.

Barrick Gold, said to be the largest gold mining company in the world, may serve as an example that the value of a gold stock is, in many regards, subjective. A Reuters release, reported Barrick stock fell 6.73% the day it announced its intent to purchase Equinox Minerals, an Australian Copper mine.

"Barrick explains the move down," said Francis Campeau, broker at MF Global Canada in Montreal. "I'm wondering if the gold players are going to steer away from Barrick to get to a more gold play."

Another variable affecting the price of precious metals and metals' stocks is inflation. On one hand, inflation and inflation fears help drive metal prices higher. On the other, inflation means higher mining costs and a strain on profitability. Let's call it the Doctor Dolittle "pushmi-pullyu" effect.

Other factors that could adversely affect the price of mining stocks, may include, worker strikes, safety shutdowns, accidents, profit forecasts and PR. On the flip-side, factors that slow production, even if for a short time, could help to drive metals' prices higher. Granted, the effect may only be "transitory," but present, nonetheless. As for PR, that's just a beauty contest. May the prettiest ads win.

The bottom line is, rising metals' prices are guaranteed to increase the value of a metals' portfolio. But, when it comes to stocks, there is no rule that says rising metals' prices must raise the value of related stocks.

Commodity Pullback Could Be Good for the Economy

Stocks stumbled following a day of mixed earnings reports, although the Dow did squeak out a small gain. Higher beta stocks, particularly in technology, once again took the brunt of investor selling. Silver got pounded for a second-straight day following what had been a huge run-up, as new margin requirements forced some traders to liquidate positions. Commodities as a group, meanwhile, were generally lower. Overall, we think commodities drifting lower would be good for the economy and the market as well.

The Radiology Stocks Index was the top performing tickerspy Index on the day, led by Merge Healthcare (Nasdaq: MRGE -News) with a 21% gain. The Discrete Semiconductor Stocks Indexwas the day's worst performing tickerspy Index, with Vishay Intertechnology (NYSE: VSH - News) down -8%.

Stocks ended mixed on the day, with the Dow the only index managing a gain, up fractionally at 12,808. The S&P fell -5 points to 1,357, while the Nasdaq dropped -20 points to 2,842. Oil tumbled -$2.47 to $111.05 a barrel, while gold slipped -$16.70 to $1,540.40 an ounce.

In economic news, the Commerce Department said March factory orders jumped 3.0% to a seasonally adjusted $463 billion, easily beating the 1.9% increase economists were expecting. March's increase is the fifth straight month factory orders have increased.

Payment processor MasterCard (NYSE: MA - News) said its first-quarter profit rose to $562 million, or $4.29 per share, from $455 million, or $3.46 per share, a year earlier as revenue climbed 15% to $1.5 billion. Analysts expected a profit of $4.08 a share on revenue of $1.45 billion. New York-based MasterCard forecast full-year profit growth of 20% on revenue growth of 12%-14%. Analysts were expecting full-year revenue of $6.19 billion, implying 12% growth, and a profit of $16.71 a share, which implies an increase of 19%. Shares of MasterCard rose 2.6%.

Engineering and construction firm Foster Wheeler (Nasdaq: FWLT - News) said its first-quarter earnings plunged -68% to $23 million, or 18 cents per share, from $72.1 million, or 56 cents per share, a year earlier. Revenue jumped 10% to $1.04 billion. Excluding one-time items, Foster Wheeler earned 19 cents a share. Analysts were expecting a profit of 40 cents a share on revenue of $1.11 billion. Shares of Foster Wheeler fell -3.0%.

Agriculture commodities producer Archer-Daniels Midland (NYSE: ADM - News) said its first-quarter profit rose to $578 million, or 86 cents per share, from $421 million, or 65 cents per share, a year earlier as revenue surged 33% to $20.08 billion. Analysts were expecting a profit of 86 cents on sales of $16.88 billion. Shares of the Illinois-based company slipped -6.7%. Nearly 30 pros held Archer-Daniels Midland in their portfolios at the end of 2010, and more than 560 tickerspy members own the stock in their portfolios.

Shares of industrial conglomerate Emerson Electric (NYSE: EMR - News) fell -6.5% after the company said its fiscal second-quarter profit missed Wall Street estimates. Missouri-based Emerson said it earned $556 million, or 73 cents per share, compared with $405 million, or 53 cents per share, a year earlier. Analysts were expecting a profit of 75 cents. Revenue rose 18% to $5.85 billion topping the $5.83 billion consensus estimate. The company forecast a full-year profit of $3.20-$3.30 a share. Analysts were expecting $3.28. More than 140 pros held Emerson Electric in their portfolios at the end of 2010 and more than 540 tickerspy members own the stock in their portfolios.