Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Of course, if GM – which has already received $15.4 in government loans – were to pick up stakes, the political fallout would be epic. What could be more “un-American” than a 101 year-old American automotive company that’s being propped up by taxpayer dollars moving to a communist nation?

But the reality is that American consumers aren’t buying GM vehicles and Chinese consumers are. That means if the company is going to remain viable, China, not America, is GM’s land of opportunity.

GM CEO: Bankruptcy ‘Probable’

GM still has two weeks before the government imposed deadline to demonstrate sustainable viability expires on June 1. But even GM Chief Executive Officer Fritz Henderson has admitted that bankruptcy is “probable” at this point. And in the minds of analysts, it’s almost certain.

“[Bankruptcy] is looking like a real high probability,” Brett D. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times. “Chrysler is the best indicator at this point of where we’re heading with GM.”

GM reported a first-quarter net loss of $5.98 billion, compared to a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47% drop from 2008. The company burned through $10.2 billion in cash in just three months. GM has now lost $88 billion since 2004.

Last year, GM lost its crown as the world’s largest carmaker to Japan’s Toyota Motor Corp. (NYSE ADR: TM). And a company that 40 years ago produced one out of every two vehicles sold in the United States, has seen its U.S. market share slide to just 19%.

On Friday, GM notified 1,100 of its 6,000 U.S. dealerships that it is terminating their contracts, and it plans to cut its network down to 3,600 dealers by next year.

“This company is sick,” Charles Ballard, an economics professor at Michigan State University told Michigan NBC television affiliate WILX 10, “they’re likely going to file for bankruptcy.”

Investors are equally pessimistic. GM stock has plunged 70% since the Obama administration announced it would give the company 60 days to restructure outside of bankruptcy court. GM has lost 94% of its equity value in the past year.

Is China the Right Cure for GM?

So if GM is sick, what then is the medicine? Many analysts believe it’s a healthy dose of China.

While its U.S. sales have plunged, sales in China continue to grow exponentially. In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the U.S., a 36% decline from a year ago.

And while global car sales continue to plunge, auto sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

And unlike the United States, there is actually a strong demand for GM model cars. In China, where the company is neck and neck with Volkswagen for the market-share lead, GM set a monthly sales record of 151,084 vehicles in April. That’s a 50% increase from its April 2008 results.

“Within 10 years, this will be our largest market in the world,” Kevin Wale, president of GM China, told TIME magazine.

GM has been so successful in China it is reportedly negotiating plans with U.S. lawmakers that will send the carmaker’s production overseas, the U.K.’s Telegraph reported.

GM will start shipping cars to the United States from Shanghai in 2011. The company plans to export slightly more than 17,000 vehicles in the first year before ramping up to 50,000 by 2014.

Backlash from GM’s China Plan

While many carmakers import components from China to save on labor costs, GM would be the first company to import whole cars from the Mainland.

Of course the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

Two weeks ago, GM CEO Henderson said his company would cut an additional 21,000 factory jobs, close 13 plants, eliminate about 2,600 dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% of its workforce – by 2011.

But the company expects to open a new factory in mainland China within the next few years and continues to build upon its 21,000 Chinese employees.

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

On the other hand, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the Associated Press.

Plus, GM already imports cars from other countries, just not China. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8 comes from Australia. The Saturn Astra comes from Belgium, and the Vue from Mexico.

Harvard Business School professor Clayton Christenson – who was also a consultant to Richard Wagoner, the architect of GM’s China strategy – told TIME that inexpensive, Chinese-made Chevys, exported to the United States could be the “disruptive” force the company needs to resuscitate North American sales.

“It’s exactly the right thing for them to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, TIME reported.

MSU professor Charles Ballard says that while the notion of outsourcing more jobs to China may not be pleasing, it is also in GM’s best interest.

“I think everyone needs to keep in mind that if this company fails, that’s the worst case scenario,” Ballard said. “It would be really good for the people of Michigan and for Lansing for GM to become a viable company. Right now, it’s not.”

And perhaps that’s the root of the issue. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the two diverged. Now, they’re too far entangled for there to be an amicable solution to this problem, and the Obama administration is left with a political powder keg.

The government stepped in to fire former GM chief Richard Wagoner, but it doesn’t want to be too heavy-handed in its treatment of the private sector. It has already spent months sidestepping questions about whether or not it would nationalize U.S. banks.

“We didn’t think in America that the President could fire the CEO of a private company,” one Chinese executive told TIME. “For us Chinese it was very confusing.”

But if the Obama administration lets GM move ahead with its plans, it must confront the unpleasant reality that it is subsidizing the outsourcing of U.S. jobs with taxpayer money.

“Production location is a corporate decision, but when it’s on the taxpayer dime, there are different sensitivities, so the notion of billions for a rescue package and offshore production, I think, could be politically combustible,” Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues, told the AP.

Source: General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

Consider the airport. While more subdued than it was just prior to the 2008 Summer Olympic Games, it’s still humming. And the airplane on the flight over here was packed, with nearly a vacant seat in sight. Of course, having my luggage actually beat me to the carousel was a big plus – just like it always is. There’s a policy that all bags are unloaded in 12 minutes.

From my hotel room in the Beijing Central Business District, I can see no end of sleek black cars, including the latest VWs, BMWs, Audis and Toyotas. Even Mini Coopers are becoming a common sight. But to many a guy’s dismay. According to my friend Chris Choi, a longtime Beijinger, the girls actually prefer big SUVs, including Range Rovers, Toyota FJs and, of course, the ubiquitous Jeep.

Speaking of cars, the Shanghai auto show kicked off here in China with the world’s automakers vying to get a foothold in this market, which is one of the fastest-growing in the world. Volkswagen AG (ADR: VLKAY), Porsche SE (soon to have closer ties to VW), Bentley Motors Ltd. are all here – and are enjoying record sales in China.

Some carmakers – such as China’s Geely Automobile Holdings Ltd. – are making noises about their global ambitions, too. To those who think that’s unlikely, take a moment to remember how dismissive American consumers were about the prospects of Japan’s automakers back in the late 1960s or early 1970s. And now Japan dominates the American market.

Are you listening, Detroit? I hope so.

I took a quick stroll around the block to shake off some jet lag. In that short time, I noted two new malls filled with Prada, Gucci, Versace and other upscale brands. Gone are the Citigroup Inc. (C) advertisements, but in their place are Deutsche Bank AG (DB) branches, as well as those of domestic China banks, which remain spectacularly liquid – meaning they’ve escaped the vast majority of the credit-crisis contagion.

Then there’s the media. Recent liberalization of media ownership and usage requirements have created a form of Wild West capitalism that our industries once dreamed about, but now only visit in the museums of their boardroom minutes. With ownership restrictions being substantially relaxed, companies that possess global brands are stepping up their efforts to reach consumers through increasingly direct advertising channels that are already making them known.

I’m excited about what I expect that I’ll be able to bring you over the next several weeks.

Stay tuned.

Source:  Despite Rumors to the Contrary, Beijing Economy Continues to Boom

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is one of the world’s biggest experts on Asia, especially China. Right now, Fitz-Gerald is leading an investment tour of the Red Dragon, and he’ll be sending along regular investment travelogues to update Money Morning readers on his latest observations. This is the first installment of that series.]

So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.

Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.

Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.

Bank Lending Still Anemic

Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.

According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported.  In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.

For its part, government officials say the current situation could have been a whole lot worse without TARP funding.

Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.

But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.

JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%.  But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”

Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.

The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.

Increased Savings Rate Could Slow Rebound

Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.

U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.

But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.

In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.

But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.

In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.

Banks and Obama Still Not Out of the Woods

Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.

JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.

Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.

The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks.  The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.

That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.

In order to avoid another capital infusion, the government might elect to take equity in return for previous loans.  Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.

Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.

[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]

Source: A Look at Liquidity: The Real Reason Banks Aren’t Lending

These stocks act as an early warning for what is to come and you don’t need the data from the U.S. Labor Department to give you the figures or warning.

This from the Team:

During most recessions, the auto sector has traditionally taken it on the chin. This week, we found out some interesting news that gives us some new insight into the changing buying habits of American consumers, and perhaps, new insight on investing.

AutoZone (NYSE: AZO) reported increased sales and profits as customers lined up to fix old vehicles instead of purchasing new ones. It’s a logical and expected result of consumers saving more and splurging less.

Another lesser-known indicator, this time on jobs and joblessness, are the numbers coming from payroll heavy Automatic Data Processing (Nasdaq: ADP). From the ADP Employer Service gauge we know that 697,000 jobs were cut from payrolls in February.

What these data streams tell us is that we can find investment information outside sources like the U.S. Labor Department and industry sales figures. And for astute investors, these “canaries” can give us fair warning before the official data is released.

For example, if we find out how severely some of the biggest online advertisers are cutting back, wouldn’t that information be important to know before online advertising juggernaut Google (Nasdaq: GOOG) reported it’s numbers? I would think so.

So keep your eyes and ears peeled and maybe you’ll stumble across the Holy Grail for today’s market… The sign we’ve hit bottom.

Source: AutoZone and ADP, Non-traditional Indicators

This from Investor’s Daily Edge:

Consumers drive the American economy. Give them confidence in their jobs and they work hard, create value, make money and exchange it gladly.

Take away their jobs, and it all stops.  The flow even stops when people who still have jobs become worried by the trouble they see around them. And that is exactly what is happening today.

This week, the Institute for Supply Management released numbers that should frighten consumers and freeze the economy even more. The ISM’s monthly index of manufacturing activity fell to 36.2 for November. Any reading below 50 means the economy is shriveling, and these numbers are extreme. It gets worse. The new orders index fell to the lowest level in 28 years.

And jobs… The ISM employment index fell to 34.2. It has fallen four months in a row, without a sign of improvement anywhere in sight.

Meanwhile, financial pundits and columnists who should know that two-thirds of the U.S. economy is rooted in consumer spending applaud every layoff and plot for more… they think this creates shareholder value.

Worse, they invent plans to save the world by inflicting more pain and job loss.

I’m not sure where they think consumer dollars come from, but it’s a crazy idea to kill the golden geese if you expect them to spend their nest eggs. And they promote this nutty notion by repeating crazy or outright false facts…

For instance, they think they could save Detroit if it weren’t for those $70 an hour autoworkers.

Aww, gee… The problem with their plan is that union autoworkers don’t make $70 an hour. Not even close. Do you want to know the real numbers?

In 2007, the United Auto Workers union renegotiated the base union wage to $14 an hour for new “second tier” hires. That was a full 50% cut from what pre-2007 (first tier) workers got.

This is old, old news—the pundits with the plans should know this. I’m not sure whether they missed the news or they just prefer to overlook it because it doesn’t fit their philosophy that labor is always the problem.  In the military, spreading stuff like this is called disinformation. In politics, it’s called propaganda. Out here where I live, it’s called stubborn.

But you still think that $70 an hour number must have some truth if everybody is spouting it? Well, it must be those fabulous benefits, then, huh? Sure… but if you think a blue-collar $28 an hour bolt tightener is really making $70 an hour, let me show you how to prove a $7 an hour burger flipper really makes $18.

You start with your actual base pay of $7.25 an hour at Hamburger McHeaven. Then you add the national average for benefit expenses such as health insurance, retirement and vacations. That would be 29% of his base pay (U.S. Department of Labor, Small Business Administration data). Now you’re up to $9.35 an hour in wage costs (not all pay!).

We still have a long way to go… but we can use the “evil autoworker” ploy—we’ll include the pensions for four ancestors in the burger flipper’s salary.

That’s how you get a $70 an hour autoworker. You take his salary, plus his benefits like Social Security, FICA, workers comp, and health. And then you add full benefits and pension costs for four retired workers to the total.

That’s the germ of the “truth” in the $70 number, even though UAW workers don’t personally make anything close to that figure.

True, pensions are a big overhead. In 1962, GM (NYSE:GM) employed 460,000 American workers, and provided retirement benefits to about 40,000 former employees. But by 2005, GM had about 140,000 employees and 450,000 retirees.  Their past success and size led to this upside-down mess.

But the current worker’s pay? Truth: the actual average for manufacturing workers in Big Three auto plants is $67,480 a year. Turnover is very low. Half of these workers are over 45 and have been on the job more than 20 years. So they’re up to $32.44 an hour, just a 16% raise from what a new worker hired in 2006 would get. (Source: Center for Automotive Research data, 2008.)

And what does a retiree get? The average is $31,000.

These numbers, by the way, include both skilled and production workers… the designers, engineers, programmers and mechanics as well as the bolt-tighteners.

Detroit and other auto towns may lose hundreds to thousands of jobs. We may not be able to avoid it. But don’t imagine for a minute it’s good.

Fire ‘em, furlough them, poison them or ship them to the moon and you are still not going to save $145,000 every time you get rid of a GM, Ford (NYSE:F) or Chrysler worker.

But you will lose a consumer, who might lose a house, who will pay less in taxes at state, local and federal levels.  You will gain a family that doesn’t buy a new car, take a Disney vacation or eat steak and go out to Red Lobster once in a while. Why the media propose that creating massive sudden unemployment is going to fix Detroit’s mess—or ours—is a mystery to me.  Maybe they don’t like blue-collar workers who make more than they do.

That’s just the obvious example of the day. Ditto the same in a dozen other industries and states.

Job losses eventually harm us all indirectly. Maybe even your own city’s budget—even if you live in Maine or California instead of Detroit. The New York Times reports that in October alone, 20,000 employees of auto dealerships lost their jobs nationwide. The auto dealers association estimates that new-car dealers produce a $54 billion annual payroll for 1.1 million workers. These dealers bring in nearly 20% of the retail sales and sales taxes in small and large communities alike, according to the Times.

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And there’s something else you should know about those autoworkers if you think the middle class matters. They’re college grads, too

That’s right, as of 2007, over 74,000 of the Big Three’s 129,000 manufacturing workers in Michigan had college degrees. The ratio is continually rising. Unskilled positions are becoming very hard to find in the industry.

Even among skilled workers with no college degrees, attaining their skilled job status required 8,000 hours of on the job training, plus 700-800 hours of classroom time. If you were applying for a US government job, that would constitute the “equivalent” of a bachelor’s degree at the very least.

“They” are us. Different part of the country, different industry, different work, but real, true middle class people. That was Henry Ford’s plan. And Henry Ford was a heck of a capitalist.

Ford paid his autoworkers $5 a day back when a machinist’s pay was 22 cents an hour and less skilled workers made 15 cents to 20 cents an hour. Ford wanted his workers to reach middle class and buy cars.

We’ve lost his vision. He understood that good jobs led to widespread prosperity. Trying to hire U.S. workers at mythical pay scales of Third-World countries that sell third-rate cars within their own borders, or even their Japanese counterparts over here is not the solution.

In fact, non-union autoworkers at the foreign carmakers in the U.S. now make just about the same as the Big Three’s union workers.

Of course they do. Supply and demand, baby. If they didn’t, every Toyota (NYSE:TM) plant in the country would vote to go union tomorrow. Why don’t the media know this? Are they eating the magical mushrooms?

But the disinformation campaign rages, and you should ignore it. These people got their theories from books, and think they are better than average working people, because as long as the AC is working they don’t sweat while sitting at those desks.

It’s simple. The economy will not turn around while unemployment is rising. We may have to lose jobs, but it’s like losing a leg to prevent the spread of gangrene. It’s a deterrent; it’s not a blessing.

So, let’s not be so quick to applaud every time we read about layoffs.

And let’s not be too high-minded about preferring desk-bound white-collar jobs to production-line jobs. Only some of those white-collar jobs are truly skilled, and most are learned on the job just like in factories—except the training period is shorter in the white-collar world.

These days, companies hire college grads to be customer service order takers, salesmen and marketing assistants—none of which truly requires 16 years of education. College grads are a dime a dozen. The average machinist is far more explicitly job-skilled and has much greater direct job training than the average new bank teller or loan officer.

And just look where all those loan officers got us, anyway.

We may not bring back the housing bubble that sent the economy into overdrive, and we don’t want to. But we do need to put most of the people who lose jobs in this recession back to work as quickly as possible. Only then can we get the momentum to create real, new jobs once spending unlocks again.

My only hope is that if state or federal governments do create jobs with infrastructure spending to get things going the money will be tightly managed. I’d suggest two criteria:

• Funding only projects that are “shovel-ready,” not in planning.
• Earmarking for projects that serve security needs, high-density areas, major shipping routes or critically worn infrastructure such as old water and sewer systems.  We don’t need more outer-outer beltways, airport parking lots, stadiums, or highways through nowhere.

And by the way, give those autoworkers some credit for a lot of good things the rest of us enjoy. If you are going to screw them, at least snap off a respectful salute first.

Because you owe a lot of benefits to organized labor–paid vacations, 40-hour standard weeks… and your health insurance. Almost nobody had it till unions fought for employee health insurance when President Harry Truman’s plan for national healthcare failed in the 1940s.

Source: A Consumer Economy Can’t Run Without Consumer Income

The people of the United States of America prayed for a political messiah. Now that he has stepped forth, we are left to wonder, what next?

Politics is not really our beat here at the Rude Awakening, so we won’t be offering up any four-legged sacrifices for the promise of financial salvation. In the harsh light of economic reality, miracles are hard to come by, even for those claiming to posses the kind of optimistic foresight that defies rational explanation.

A cursory glance toward the economic horizon reveals some perilous obstacles ahead. As we walk through the valley of 5-year market lows, the shadow of the death of consumer spending looms particularly large. American consumers, upon the backs of whom almost two-thirds of the world’s largest economy rests, cut spending by an annualized 3.1% for the third quarter. For perspective, that marks the first quarterly decline since 1991, as well as the largest quarterly decline in 28 years, according to the U.S. Commerce Department.

Meanwhile, prices of goods and services purchased by US residents jumped 4.8%. That’s on top of a 4.2% increase in the second quarter. Even excluding food and energy, prices were still up by 3.1% in Q3.

As the consumer-driven economy grips the emergency brake and higher prices put the squeeze on employers, jobless rates continue to skyrocket. The Department of Labor is expected to announce the loss of 200,000 jobs for the month of October when it meets on Friday. That would drive unemployment to 6.3%, up 0.2% from September.

Shrugging off all these annoying statistics, however, the market continue to mount a herculean rally. After posting its worst month since 1987, the Dow surged an impressive 300 points Tuesday in anticipation of Obama’s victory, topping off double-digit gains for indexes across the board last week.

Could we be witnessing a miracle in the making here? Is it possible that a new tablet of financial commandments might render the age-old saws of saving and producing nothing more than outdated or even, dare we say, profane?

We wouldn’t dare offend any divine and future superintendent of the financial universe by asserting otherwise…but we reserve the right to remain unconvinced.

In the absence of proof that what goes up need not come down, we will continue to seek our financial guidance from within the “boring” confines of reality. And so, we turn to the inimitable Rude Readership for the results of our latest Group Research Project.

A couple of weeks ago, we asked readers to submit their favorite “chicken longs.” Put simply, we wanted to know what stocks readers would like to have in their portfolio should the heavens open up and curse the earth with a great financial flood. Such stocks might derive their buoyancy by paying a large dividend, enjoying a competitive position in a relatively “high ground” sector or through some other means of protection.

We have no clue as to whether the President Elect will perpetuate the current state of fiscal delusion or merely usher in a winter of slightly milder discontent…but it is probably best to be prepared for either scenario.

Reader “Bradbarb69″ kicks off our newest Rude Awakening Group Research Project with the following cheerful suggestion:

“I like prison stocks. There will never be a shortage of lawbreakers at any level, and governments must maintain prisons for the public good. As crime rises (as it inevitably will) these stocks will be good holdings. I also like [the cemetery operator] Stonemore Partners L.P. (NASDAQ:STON) for its high dividend and for the fact people will always die no matter what the economy does. Personal protection stocks are also on my list of “buy at the right price.” I’m thinking in particular of Smith & Wesson (NASDAQ:SWHC) and Taser International (NASDAQ:TASR).

[Editor's Note: Although Bradbarb69 did not provide any specific names in the prison sector, a couple that come to mind are Geo Group (NYSE:GEO) and Corrections Corp. of America (NYSE:CXW).]”

Reader Tom Winstanley recommends Weir Group, a Scottish company that trades in the U.S. over-the-counter market under the symbol, (PINK:WEIGF).

“This company makes boring old pumps,” Tom explains. “Energy and Water are two areas that simply will not wait upon the recovery of the world economy. Come hell or high water, governments know that if they cannot keep the lights on, provide as much fresh water as their people are used to having available and treat waste water to high standards, then they will be more trouble than they can handle. Pumps might be boring but try getting by without them – whatever the state of the economy!” [Editor's Note: Weir trades for less than eight times estimated earnings and yields 4%].

Reader Susan Vander Voet likes the Brazilian oil giant, Petroleo Brasileiro (NYSE:PBR), also known as Petrobras. The stock was trading around $21 when Susan submitted her email to us. Today, the stock is around $30.

“I’ve been watching this company for about a year,” Susan writes, “and the reasons for my recommendation are:

1. Active and with interests in several Latin American countries (Brazil, Ecuador, Chile, Peru) in exploration, production, distribution and retail;
2. Huge offshore resources discovered in Santos Basin;
3. Active in several African countries (Angola, Tanzania);
4. Stock is trading well below the moving average, which has trended upward for 5 years;
5. As oil prices are projected to recover (in 2009), I see this stock at least doubling its current value ($21).”

Reader David Myrhre identifies Harvest energy Trust (NYSE:HTE), a Canadian investment trust, as his “current fave.” The stock, which was trading below $8.00 when David submitted his email to us, is now north of $11. But even at the current quote, the stock is well below the $18 price tag it fetched in September. What’s more the indicated yield on the stocks is a whopping 27%.

“I’ve heard worries that the dividends will go down because oil prices have gone down,” David explains “But these oil producers sell on annual and multiyear contracts.  Dividends didn’t go up when spot oil prices spiked and they won’t go down just because spot prices did.”

Elsewhere in the Canadian investment trust sector, reader Greg McLean highlights Peyto Energy Trust (PINK:PEYUF), a stock that yields about 14%. Greg also likes Hanfeng Evergreen, “HF” on the Toronto Stock Exchange. “Hanfeng is a small Canadian company that makes slow release rice fertilizer in China,” explains Mr. McLean. “Hanfeng has decent earnings and cash, little debt and is trading close to book. I feel confident betting China will continue to grow rice.”

Another high-yield energy stock is Atlas Pipeline (NYSE:APL), which is a stock that reader Don Gish favors. “My favorite bear market stock is Atlas Pipeline (APL),” Gish writes. “The sudden drop of the energy market and other market sell-off factors have driven APL unrealistically down.  [At the current quote, the stock yields about 20%].  I believe APL’s focus on natural gas pipelines with no exploration/development costs and long term contracts has created an excellent long term dividend with significant potential for future stock price upside.  I love this position, so I have to resist my desire to buy more.”

Lastly, reader Scott Lovinghood writes: “I have a suggestion for a chicken long: Blackrock Municipal Income Closed End Fund (NYSE:BKF).  It is primarily invested in tax free municipal bonds.  At current prices the yield is just a hair under 8% TAX FREE!!  The fund covers many different states and markets.  California is the largest concentration at only 11% of the fund.  The majority are longer dated bonds, so unless municipals are totally wiped out, the monthly pay outs should continue.  The shares were hammered recently due to the credit freeze. The stock’s NAV is $10.15.  But the stock is only $9.20…Not a bad deal.”

And so concludes Part I of our newest Rude Awakening Group Research project.

Source: Chicken Longs

More from Bill:

What MUST happen DOES happen. Sometime it takes longer than you expect. And often it doesn’t happen exactly the way you expect. But it is a relief to know that gravity still works… what goes up still comes down. ‘Regression to the mean’ is another old law still in force; when things become extraordinary, you can bet they will go back to normal sooner or later.

But what does this mean for stocks? And what about gold? The dollar?

Hey, you’re asking a lot from a free publication. But what the heck… we’ll make some guesses and remind the reader that he is likely to get no more than he paid for:

Stocks typically regress to the mean, along with everything else. The ‘mean,’ depending on how you measure it, would put the Dow between 6,000 and 9,000. But Mr. Market can be a devilish fellow. He usually causes stock prices to regress beyond the mean, before he lets go of them. This could take the Dow down to 5,000… perhaps to 3,000… before it finally reaches a bottom.

And before we make guesses about gold and the dollar, we will tell you another thing that MUST happen.

Fish gotta swim. Birds gotta fly. And the feds gotta try to pump more liquidity into the system. All over the world, government officials are taking command of the situation. Well, they are taking command of banks… of trillions of dollars worth of bailout funds… interest rates… and financial rules.

Yesterday [Thursday], for example, Japan announced that it would spend 5 trillion yen, about $273 billion, in a “stimulus” package. Also, the Bank of Japan told the world that it, too, was cutting rates. This news came as a surprise to us. We didn’t think Japan had any rates left to cut. But the BOJ nevertheless announced that it would shave the short stump of its main rate down to 0.3% and that henceforth it would make commercial loans at 0.5%.

By contrast, the US Fed still has 100 basis points to work with. And the US Congress is said to be planning another stimulus package of its own – surely wrapped in bright Christmas paper. The price tag might be another $400 billion, according to our sources.

Not only are the feds trying to bail out the US economy, they’re also lending $120 billion to a group of foreign countries in order to help them swap their currencies for dollars. At least, that’s what it says in the paper… the actual transaction is a mystery to us.

The Russians are bailing out their own rich people. At least they’ve got some real money to work with – a fund of $200 billion. And the IMF has pledged to lend $100 billion to wherever it is needed.

You can also count on more rate cuts… trillion-dollar deficits… show trials… giveaways… and grandstanding. There will no doubt also be a “jubilee” movement – demanding forgiveness of debt.

The big questions are when and how will these things affect the feds’ ability to borrow? We don’t know the answer… but we have watched Treasury yields rising ominously over the last few days. That could be a sign that the worst is over for the economy. Or, it could be a sign that lenders are worried about US public finances.

If the world economy continues to weaken… and turns into the FWD (First World Depression), as we think it will… none of these measures will do any good. Finally, the US government will run out of credit, out of money, out of time, and out of luck.

Then, the Bank of Ben Bernanke will do what it has promised to do: it will print money. And when that happens… or even when investors begin to suspect that it might happen… the dollar will collapse and gold will rise.

Source: Everything Is Happening As It Should

Martin Hutchinson in Money Morning blames Fed inspired inflation and speculators:

The reason for this intense advance in commodity prices is that the Fed and its European counterpart have been pumping money into their respective economies to prevent the collapse of several major banks. The St. Louis Fed’s “Money of Zero Maturity” (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in March 2006), is up at an annual rate of 17.6% during the last six months. In Europe, Euro M3 is up at an annual rate of 10.8% during the same period – still double the growth seen in nominal gross domestic product (GDP).

In the key emerging markets, the money supply has been rising even faster – 19% in China over the past year, and 21% in India. Not surprisingly, those countries’ inflation rates are taking off, with India into double digits and China quickly getting there.

He goes on to say:

It’s fairly clear to me that concerted speculation by hedge funds and pension funds is what’s been pushing up oil prices. But that may be playing out – and reaching its limit – as the huge price increases we’ve seen in “black gold” over the past year is finally dampening consumer spending both here in the United States and in other key markets worldwide…

Dave Gonigam in Daily Reckoning sees oil supply as the problem:

…Oh, and those darn speculators. OPEC loves to blame them, and has blamed them, going at least as far back as $92 oil eight months ago.

BP (NYSE: BP) chief Tony Hayward is having none of that, calling the notion of speculators driving up the oil price a “myth.” More relevant, he told the World Petroleum Congress, is that “supply is not responding adequately to rising demand.” But then Hayward goes off the rails when, according to Reuters:

He added that politics rather than geology was the reason. “The problems are above ground not below it,” he said.

Now it’s true enough, as Hayward complains, that OPEC nations don’t like having Western oil majors like BP working OPEC oil fields the way they did in decades gone by. But the fact oil-rich nations are giving BP less access than they used to doesn’t change the fact that the world’s biggest oil fields are in decline, and new ones aren’t coming online nearly fast enough to pick up the slack. I can understand why OPEC doesn’t want to fess up to that reality, but why is Tony Hayward so reluctant?

Surely, these three factors of inflation, speculators, and lagging supply are the primary causes of rapidly rising prices. But, will any of these factors fall off or fade in the near future? Speculation is most likely to wain according to Hutchinson. Demand may well slump with consumer spending, but inflation will likely worsen… Bill Bonner says:

Talk is cheap. It’s action that is dear. And the action the Fed needs to take – raising rates – will be so potentially costly for the lame U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping inflation will go away so they can continue the battle against the slump, without having to worry about their unprotected flanks. Most likely, they will make a gesture towards raising rates – perhaps a quarter of a point. But then, when the mob starts howling for his head, Ben Bernanke will drop them again.

It’s evident that the Fed does not have the will or the tools to ward-off looming inflation. With inflation eating your dollars and commodities most likely set to rise higher, there are still many opportunities to profit…

Implications

Martin Hutchinson says:

Investing in the late stages of a bubble is highly speculative. Nevertheless, I reiterate my prediction of a few months ago that gold will reach $1,500 an ounce. Even if the Fed begins to act against inflation in August, it is very unlikely that its initial actions will be effective. Don’t forget that in the last great inflationary bubble of 1980, gold hit a level that’s the equivalent of $2,300 an ounce in today’s money.

I would consider SPDR Gold Trust (formerly StreetTracks Gold Trust) shares (GLD) about the most efficient way of getting a pure gold play. As an alternative, you might consider a silver investment: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (SLV) seems the best way to play silver directly.

Also see other commodity ETFs such as:

S&P GSCI(TM) Commodity Indexed Trust (GSG)

PowerShares DB Agriculture (DBA)

Market Vectors Global Agribusiness (MOO)

The chart below is from the highly recommended John Williams’ Shadow Statistics website (www.shadowstats.com). You can fall for most any government statistic or you can search and think for yourself.

The blue line shows rising prices according to previous historic accounting methods. The yellow-orange lines show recent spin statistics emanating from the NY/DC axis of weasels. Either way, no falling consumer prices are apparent.

Oops, something went wrong here.

The non-Federal non-Reserve is what went wrong. They and their elitist cronies have all but destroyed the American dream. The idea of stable or falling prices will not happen on their watch.The non-Federal non-Reserve is what went wrong. They and their elitist cronies have all but destroyed the American dream. The idea of stable or falling prices will not happen on their watch.

Those of you with memories short of 100 years might want to check out how the Fed has fared since inception. Its stated purpose was to create “price stability” as well as economic growth.

The 1800’s clearly demonstrate it is possible to have stable prices when honest and Constitutional money is in effect. And this was the case for an entire century, no less. How about the 20th century?

The “Creature” known as the Fed came our way in 1913. International bankers have had their hooks into the American populace ever since. Here is the master demonstrating to the pupil the long-term chokehold the Fed has on the American populace.

The Fed’s original charter demanded they provide stable prices. Then they decided to target maximum employment. Now their target seems to be benefiting their closest friends. Whatever they target you can bet they’re aiming at you in the end.

Technological advances and astoundingly cheap foreign labor should have brought forth falling US consumer prices over recent decades, but the Fed inflated it all away. They printed money at will and took advantage of a situation that demanded falling prices. We lost out.

These guys are heavily responsible for our presently escalating food and energy costs.

What’s the solution? Boot out the Fed. Rescind the unconstitutional income tax and the Gestapo like IRS. Scale back an oppressive and imperial government. Empower individual citizens.

Rest assured the government will screw up anything they propose to fix.

See the big picture.

Invest resourcefully,

Rusty

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Dr. Russell McDougal has dedicated years of study and investing in the natural resources exploration sector. During that time he has closed out DOZENS of gains of 500%... 1,000%... 2,000% and more! Currently he is sitting on multiple thousand percent winners, including one stock that is up a whopping +5,000%. And for a select group of investors, Rusty has agreed to share his secrets of success... and his top stock recommendations. Click here to learn more... ]

Source: Stable Prices? Don’t Make Me Laugh

Demand from overseas for U.S.-made products is helping to keep factories running even as spending by American consumers and businesses slows. The improvement signals the U.S. may be able to avoid a deep and protracted economic slowdown as the housing slump worsens and food and fuel prices soar.

“Worries over a US recession are turning into fears of inflation,” says William Patalon III in Money Morning.

“And suddenly those increased water cooler discussions about the dreaded “I” word are starting to move from speculation to reality. Dow Chemical announced a 20% across the board price increase to “mitigate the effects of raw material costs.” German-based DHL soon will be “outsourcing” its North American delivery biz to competitor UPS as its seeks to reduce costs. Discounter airline JetBlue will not be adding to its fleet as expected because it too suffered the ill-effects of rising fuel prices that have prompted major changes throughout its industry (can you say consolidation?). Likewise, automakers continued to struggle from consumer activity (rather inactivity) as both Ford Motor Co. (F) and General Motors announced major reductions to their respective workforces.”

“My friends and I have been debating the ‘recession’ topic for a while now”, says Wayne Mulligan in The Penny Sleuth. “Are we currently in one? Will we run into one this year or next? What will the effects be?

“But when I read that Warren Buffett thinks the US is already in a recession and it will be ‘longer’ and ‘deeper’ than any we’ve seen for quite some time, I definitely began to think less about ‘what if we go into a recession’ and more along the lines of ‘What should I do with my money now?’”

Click here to find out which recession-proof discount retailers Wayne reckons are worth digging into.