Good day…Chuck has a bevy of doctor’s appointments today, so he decided to let me take over the Pfennig. Unfortunately it will go out a little later than usual, as I always struggle to get all of my thoughts together so early in the morning. Its not that I come in late (I was here two hours before everyone else) but it just takes me much longer than Chuck to get it all on paper. But enough of the excuses, I’ve got to get writing.

Weekly jobless claims released in the US yesterday morning fell below 600k for the first time since January but the continuing claims continue to rise, hitting another record. The slight improvement in the weekly numbers was distorted by the automotive sector. Car companies typically shut down plants in early July in order to change over to the new model year. Bankruptcy forced many of these plants to shut down much earlier than normal, and some temporarily started up production again during the past few weeks.

Chuck would have a field day with the jobless claims, as the government economists were hard at work ‘massaging’ the numbers to give everyone a more ‘clear’ picture of the data (why can’t they just report the actual number of people filing for unemployment?). As Chuck has pointed out, the Labor Department adjusts the figures using seasonal and demographic trends, creating ‘ghost jobs’. Since automobile plants typically shut down in the first weeks of July, the labor department expected a large increase in claims during this time. In order to offset these ’seasonal factors’, the brain trust at the Labor Department added back a number of jobs in order to balance out the expected temporary layoffs in the auto sector. You would think the Labor Department would realize that most of these automobile workers were already idled, and therefore keep the adjustments to a minimum. But that would be too logical, so they just went ahead and ’seasonally adjusted’ the claims as if this was a typical July for the auto sector.

The continuing claims illustrate a much clearer picture of the US job market, with unemployment spiking up to 9.5% in the US. The news from the retail sector was also gloomy, as the ICSC Chain Store Sales fell another 5.1% YOY during the month of June. Inventories also continued to shrink for a ninth month in a row in May to just over $400 billion. This is the lowest level since August of 2007, and raises some longer term inflationary concerns. Some of you are probably questioning this last statement, so I will explain.

Lower retail sales have forced stores to keep inventories down. I was in a local Walmart store the other day and noticed the shelves were emptier than what I have seen in the past, items weren’t stacked 5 deep and didn’t reach toward the ceiling. US consumers have been buying less and saving more, a very good thing! But stores have reacted by dropping the amount of inventory they are carrying (again a smart thing for retailers). Against this backdrop, the US government continues to flood the economy with cash, trying to get consumers to start spending again to jumpstart the economy. For now, the cash has been hoarded by banks and used by consumers to pay down some of their massive debt. Eventually the ‘all clear’ horn will sound, and consumers will start looking to make purchases again, but will find empty shelves. Inflation will follow, as too much cash will be chasing too few goods.

But our government has a much shorter term view, and continues to pump money into our economy with no real regard for future inflationary concerns. And some very smart economists seem to agree with the administration. Both Nouriel Roubini and Robert Shiller, respected economists, are calling for additional stimulus. In a radio interview yesterday, Roubini predicted the US recession will last another six months and be followed by a ’shallow’ recovery. On the same radio show, Shiller said the economic crisis would continue despite the $12.8 trillion pledged by the US government and Federal Reserve.

The BOE shook up the markets with a surprise announcement not to increase its quantitative easing program. The Bank’s Monetary Policy Committee put the program designed to pump extra cash into the markets by purchasing its own debt on hold after announcing it would also keep interest rates steady at .5%. The move was a major surprise to the markets, and sent the price of gilts (the UK’s treasury bonds) falling and the price of the Pound Sterling higher. The BOE was the first of the western central banks to begin the controversial program in which it monetizes its debt; hitting the overdrive button on the printing presses by monetizing its debt. We’ve never been a fan of the Quantitative Easing programs, as they are short sighted with total disregard for the future inflationary pressures the exert on the economy. But several other central banks, desperate for a way to get cash into their economies have followed the BOE’s lead.

The move by the BOE was even more surprising given the fact that the Chancellor has authorized another 25 billion pounds to be added to the program. Perhaps the Bank’s Monetary Policy Committee is finally starting to realize all of the QE which it has done hasn’t really had the desired impact. Much of the extra cash being created by the program is simply being hoarded by banks and is not making its way out into the economy via loans. Sound familiar? We have a similar situation occurring here in the US, with banks sitting on a majority of the stimulus monies which they have received. They have used the funds to shore up their balance sheets, a good thing long term, but not what the central banks intended with the introduction of the QE programs.

But enough of the economic talk, I need to let you know what happened to the currency markets overnight!! In spite of the Labor departments attempts to ‘adjust’ the weekly jobless claims, the economic data released here in the US yesterday was generally poor. This raised further concerns regarding the global economic recovery, and forced investors back into the US treasury market. As typical during these periods of uncertainty, the Japanese yen was the best performing currency. This is due to a general deleveraging as investors purchase yen to pay down debts used to invest into higher yielding assets.

We have seen this pattern repeat several times over the past year. As investors start to see some signs of recovery in the global economy, they invest into the higher yielding currencies, and borrow funds at lower rates available in Japan. But as soon as they begin to question the recovery, they move back out of the higher yielders and pay back these loans in the Japanese yen. Morgan Stanley believes the recent move by the yen is just the beginning of another big move, predicting a move to 85 yen/dollar. The foreign exchange strategists at Morgan Stanley predict the yen will continue to rally through the end of the year as doubts about the global recovery intensify. But their longer term predictions are less enthusiastic, as they feel the yen will weaken throughout 2010.

The commodity currencies took a hit over the past few days as the price of oil and metals continued to fall. Oil fell below $60 per barrel for the first time in a couple of months. Concerns over the global recovery, along with some slight calming of tensions in the gulf states have caused the price to drop. One commodity currency which has been able to hold steady during the recent selloff is the Brazilian real. A report that car sales in China surged bolstered the outlook for the commodity rich country. China’s passenger-vehicle sales rose 48% in June, pushing China past the US as the world’s largest auto market.

Increased automobile demand in China is another sign of their slow move away from an export based emerging market economy to that of a more balanced one. China’s exports tumbled for an eighth month in June, but internal demand helped by the government’s stimulus package is offsetting some of the impact of these falling exports. Imports also fell, but the size of the decrease was the least in eight months. This is good sign for the future of China, as imports are typically a leading indicator for exports in China.

China’s foreign exchange reserves likely topped $2 trillion for the first time, climbing another $67.8 billion in the second quarter. The central bank is predicted to release the number sometime today. The increase in reserves certainly cause concern in the currency markets, as officials in China continue to call for the diversification of these reserves. According to a story in the Financial Times, China launched its highest profile criticism of the dominant role of the US dollar as a global reserve currency during the last day of the G8 meetings in Italy. “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system,” Chinese state Councilor Dai Bingguo was reported to say. Western leaders tried to play down the remarks, with Gordon Brown stating that he did not remember Mr. Dai making the remarks.

Separately, Joseph Yam, chief executive of the Hong Kong Monetary Authority, said Hong Kong might consider diversifying more of its $200 billion reserves away from the US dollar. I would expect China to keep the heat on the Obama administration in order to try and get them to reign in some of their ‘quantitative easing’ programs. The Chinese officials continue to be concerned about the future inflationary consequences of these programs. But at the same time, they have to be very careful about the diversification out of the dollar, as they still hold trillions of dollars and don’t want to cause a sudden fall in their value. The big boss, Frank Trotter, constantly reminds us that China has a much longer term thought process, and has an extreme amount of patience. I would expect them to continue to slowly diversify their holdings, adding to the long slow decline of the US$.

With that I will move on to the currency roundup. Sorry to go so long this morning, but I felt like there was a lot of data to get through.

Currencies today 7/10/09: A$ .7760, kiwi .6263, C$ .8596, euro 1.3902, sterling 1.6198, Swiss .9172, rand 8.196, krone 6.5369, SEK 7.9021, forint 199.10, zloty 3.1440, koruna 18.708, yen 92.76, sing 1.4623, HKD 7.75, INR 48.97, China 6.8327, pesos 13.6408, BRL 2.009, dollar index 80.489, Oil $59.66, 10-year 3.337%, Silver $12.64, and Gold… $909.39

That’s it for today… Everyone is limping into the office this morning, as we played a double-header in our kickball league last night. We ended up splitting the two games, but as my wife continues to tell me, kickball is a game for kids, not middle aged currency traders!! One of our team had to go to the hospital last night, as he injured his shoulder diving for a catch in the outfield; I hope Joe B’s shoulder turns out to be ok!! St. Louis is getting ready for the All Star weekend, and I saw one of the blimps floating around last night. My son, Brendan and I are heading downtown to compete in the All Star Charity 5k run which begins at Busch Stadium. It will be fun to be downtown and around all of the All Star hoopla, even though we don’t have a ticket to any of the events. Hope everyone has a fantastic Friday and a Wonderful Weekend!!

Source: Frightened Investors Move Back into US Treasuries

And the green shoots brigade gained a firmer hold on investor sentiment. It has become okay to say that the global economy is out of the woods and that the rally in US stocks could be the beginning of a new bull.

Is this optimism justifiable? This is the question we’ll attempt to answer in today’s Notes.

“The whole credit collapse and the recession must have been a hoax,” writes our favorite underground analyst David Rosenberg at Gluskin Sheff.

Rosie is talking about the latest Investors’ Intelligence survey. It shows bullish sentiment at 47.7% (versus 42.5% the week before) and bearish sentiment all the way down to 23.3% (from 25.3% the week before).

Meanwhile, net inflows into US equity funds have been positive now for 12 consecutive weeks, with a total of $2.83 in fresh capital pouring in the week before last. Another sign of exuberance, as Rosie points out, for contrarian investors.

Maybe the bulls haven’t been paying attention to the catastrophe in exports. This from Rosie’s Friday missive:

The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoYo trend down to a new all-time low of -20.4% from -13.8% in March.

Maybe the bulls just don’t care. This has been our suspicion here at Notes since the current rally US stocks kicked off in March. Let us explain…

The credit crunch and the collapse of onetime Wall Street darling Lehman Brothers last September spooked investors bad. Fear spread over a 1930s style great deleveraging, and stocks plunged as a result.

But are we really experiencing a great deleveraging? The upsurge in US stocks signals that we’re not… as does the more recent rise in crude oil prices. A deleveraging is by nature deflationary. But the rise in base metals, stocks and oil reveal that traders and investors are counting on deflation’s nemesis – and the nemesis of earners and savers – inflation.

We’re learning the lessons of history not by studying it but by repeating it. Warns underground investor Bob Carver over at MarketClues.com:

When the Bankster Debt Bubble burst in 2007 and 2008, it was popular for most to think that a great period of de-leveraging had begun. This happened in the Thirties and led to the Great Depression. It wasn’t pretty, but debt was either written off or paid off. The country learned a big lesson about banksters and how their bad decisions blew up the economy. Once those who had learned those lessons were gone, we had to re-learn those lessons, not by studying history, but by repeating it.”

Or, have we learned the lessons? Today, we not only have not learned the lessons of the Bankster Bubble, we are repeating and expanding the bubble of debt. Instead of a Bankster Bubble, we have a Government Debt Bubble that subsumes the Bankster Bubble and expands it. There is no de-leveraging going on. We are simply blowing a bigger bubble, waiting for the day when our lenders cut off the flow of funds.

Total debt is still rising sharply, according to the Fed’s Flow of Funds Report. In 2008, Federal debt grew 24% and in the first quarter of 2009 grew by 22.6% at an annualized rate. Household and business debt was virtually unchanged, while state and local government debt is rising at a 4.9% annual rate in 2009. Don’t take our word for it. OptionARMaggedon did some charts which show that the debt bubble is still expanding. The last two years were simply a sneak preview of what’s coming when the, by then much larger, debt bubble blows up in the future. The longer this goes on, the worse it will be. The public is sitting idly by while this pile of explosives is being built higher and higher, just waiting for the day when someone with a match lights the fuse.

Put simply, the only way out of a debt induced depression is to pay down debt or write it off. Leveraging up only delays the inevitable.

Given this “leveraging up,” it should come as no surprise that oil prices have risen sharply recently. The black goo is now trading at over $70 a barrel, just off its nine-month high of $73.20. The rate of gain is astonishing: oil prices have risen 100% since their $38 low in January.

Underground investor David Fessler at Investment U recommends four ways to profit from oil’s price moves (three long and one short).

• 1. Certainly one of the big drillers like TransOcean  (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
  2. The United States Oil Fund LP  (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
  3. If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN  (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
  4. But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone. For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

I’ve repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit’s lifeline. From some – chiefly those who don’t understand that Detroit has largely failed to make a passing grade in an increasingly global economy – my warnings have attracted a lot of criticism.

That’s unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector “value chain” that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase “aftercare” initiatives as maintenance and repair.

The only real question, I noted at the time, was how big the lag would be between China’s acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted.

Enter the (Red) Dragon

Back in November, as GM and Chrysler tottered on the bring of complete collapse – and after Japan’s Toyota Motor Co. (NYSE ADR: TM) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers – China’s SAIC Motor Co. Ltd. and Dongfeng Automobile Co. Ltd. – were reportedly working on a play to buy the two embattled U.S. firms, Huliq News and the 21st Century Business Herald both reported. Said one China auto-industry executive (who requested anonymity): “We really want to acquire some of our global counterparts’ core technologies now, because prices are so low.”

His sentiment was echoed by Xu Liuping, chairman of Chongqing Changan Automobile Co. Ltd., Mainland China’s fourth-largest automaker, who recently said that “the longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.” For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors and, in the auto sector, auto-parts players.

Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their company’s domestic competitiveness. And with a market as big as Mainland China, that’s logical. But what might not occur to Western business leaders is that Chinese executives don’t yet view themselves has having global-branding expertise, particularly when it comes to the so-called “design elements.”
For instance, as my friend, Kishore K. Sakhrani, director of Hong Kong-based ICS Trust (Asia) Ltd., noted during a presentation to our investment group: “In the past, when a Westerner wanted a product in sea green, you often got something that was lime green. But many Chinese companies are now establishing Western design shops and closely consult [with] Western marketing experts, and the results will be obvious.” Indeed, in a sentiment that closely echoes my own philosophy, Sakhrani said that “there isn’t an industry on the planet that the Chinese won’t dominate – or at least materially affect – in the next 20 years.” My experience suggests that the biggest changes and the most dramatic expansion will occur when Chinese executives become comfortable in assuming leadership roles that push them far beyond the manufacturing stage of the value chain and into product development. And while 10 years ago I thought that process might take another two decades, the financial crisis has dramatically accelerated the timeline. And we’re seeing that now – particularly with China’s automaking industry.

China’s Shopping List

Just this March, Geely Automobile Holdings Ltd. (PINK: GELYF) bought Australia-based Drivetrain System International – a supplier for Ford, Chrysler and Ssangyong Motor Co. Ltd. – for $42.55 million (HK$329.79 million). More recently, the company has denied rumors that it’s ready to purchase Ford’s Volvo passenger car unit for between $1.3 billion and $2 billion, which would represent a catastrophic loss for beleaguered Ford, which paid $6.45 billion to buy Volvo in 1999. Three of the most prominent Chinese car makers – Geely, Dongfeng and Chongqing – are reportedly in the hunt for GM’s Saab and Opel units in deals that could be worth as much as $200 million. Clearly, the Fiat SpA (OTC ADR: FIATY) transaction complicates things a bit, but there’s still plenty of room for surprises. Said another Chinese executive, who also chose to speak anonymously: “We view [buying parts-makers, for now] as a viable alternative to acquiring good brands that have suffered from terrible management. We don’t know enough – yet. We have to build our competency in the meantime.” And you can bet that they’ll do just that – build a world-class “competency” that just adds more muscle to the growing China business juggernaut. My contacts tell me that transmission systems, hybrid technologies and power-gearing systems are at the top of the list in the immediate future. Actual manufacturing plants and assembly lines are running a distant second until Beijing gets comfortable with the suitability of overseas manufacturing as part of China’s business value chain. Many Westerners who recall the Japanese acquisition spree of the 1980s will not react favorably to this. But it’s not a one-way Street. As troubled as Detroit is, it’s clear that their representatives have been working quietly in China for months now, which is entirely logical. Chinese companies remain some of the healthiest on the planet in financial terms, and most continue to demonstrate strong domestic growth despite the softness of the overall global economy. It also doesn’t hurt that the Chinese government is backing many of these initiatives. China has a world record $2 trillion in foreign reserves, which gives it a lot of financial credibility with any deals that country’s companies may wish to pursue. In an interview with the South China Morning Post, Geely Automobile Holdings Executive Director Lawrence Ang said that “we’re constantly approached by bankers about the possibility of mergers and acquisitions [with international auto makers].”

A Long List of Deals

The auto sector has already been bustling with deals. Here are just a few that have transpired in recent years:

• 2004 – SAIC Motor Co. spends $500 million to buy an initial 48.92% stake in South Korea’s Ssangyong Motor Co., and then boosts its stake to a 51.33%.
• 2005 – SAIC purchases the design rights to the super-looking MG Rover 25 and 75 models for $99.97 million (HK$775.33 million) from kaput British carmaker MG Rover.
• 2005 – Competitor Nanjing Automobile Group buys the rest of MG Rover’s assets for $87 million.
• 2007 – Working together, SAIC, Chery Automobile Co. Ltd., and First Automotive Group Corp. (FAW) band together in preliminary buy out talks with Chrysler. No deal.
• 2009 – January – SAIC learns the hard way not to buy brands when Ssangyong goes belly up and files for bankruptcy.
• 2009 – February – Beijing says it will slow down global acquisitions and concentrate on competencies that boost local strength.
• 2009 – March – Geely purchases Australian parts-maker Drivetrain System International for $42.55 million (HK$329.79 million).
• 2009 – April – Chongqing Changan Automobile Co., Geely Automobile Holdings, Dongfeng and Guangzhou Automobile Industry Group Co., Ltd. (GAIG) announce their desire to purchase global assets from international brands in trouble. Geely’s chairman also notes at the much publicized Auto Shanghai 2009 auto show that he sees Geely being a major global brand by 2015.

At the end of the day, many Americans will fear the acceleration in China’s pace of global acquisitions. But there are two key reasons that I’m glad to see this happening. First, history shows that the markets continually weed out the financially weak in a form of financial Darwinism that is as inevitable as the dawn of a new day. And with the financial crisis serving as an extinction-level event, the imminent arrival of Chinese companies on the global scene is an opportunity. It’s also part of the solution however reluctantly people might want to view that. And second, while there will be short-term pain and probably more than a few dented egos in Detroit, I will be glad to see the era of greedy, incompetent and overcompensated executives who summarily fleeced the last of America’s once proud automotive industrial complex for all its worth is coming to an end. It will be nice to see the industry return to doing what it does best – making great cars and great parts even if it ultimately takes on a form that we cannot imagine today

If that happens, we may look back and see that China was, in fact, Detroit’s lifeline.

[Editor's Note: Money MorningInvestment Director Keith Fitz-Gerald has just completed his investing tour of China. His conclusion: Every investor has to have a China strategy. As this essay shows, the global financial crisis has re-written the rules for global investing. It’s also generating a whole host of new profit plays, having created what Fitz-Gerald likes to call "The Golden Age of Wealth Creation." Investors who ignore this "New Reality" will get left behind. But those with the courage and conviction to press ahead could well find this to be the greatest profit opportunity of their lifetime. China’s just one such opportunity. To find out about the others, click here. ]

Platinum touched its highest in six months as dollar weakness over the past couple of days prompted industrial and bargain-hunting buying, lifting palladium by nearly 6 percent to its highest in over four months.

But analysts said with sales sharply down in the auto sector, the main consumer of platinum, the rally lacked fundamentals to support it and was seen short-lived.

Spot gold rose to $938.00 per ounce at 1541 GMT, up from $933.15 an ounce late in New York on Wednesday. Oil hit its highest in four months while copper surged 3 percent.

“Money keeps pushing into commodities on concerns over the money supply in the United States,” said John Meyer, head of resources at Fairfax. “Gold is a popular place to be right now.”

Gold is used as a hedge against financial uncertainty and against inflation, which is expected to soar because of the vast amounts of money being piped into the global economy by central banks and governments.

The U.S. plan to buy long-dated Treasuries further raised those inflationary concerns and have also dented the outlook for the dollar, which in turn is supportive for bullion.

But on Thursday, the dollar was up against the euro , but trade was volatile. After earlier falls, it was up 0.28 percent against a basket of major currencies

NO BOUNCE IN CONSUMPTION

The U.S. economy contracted slightly more than previously estimated in the fourth quarter, pulled down by falling consumer spending and exports, while corporate profits plunged by the biggest margin since 1994.

With this gloomy picture of the world economy and the automotive sector among the hardest hit, analysts see little change to the grim fundamentals for platinum.

“There seems to be every week an announcement of carmakers cutting production. I can’t really see any positivity on the consumption side,” David Wilson, director of metals at Societe Generale, said.

Spot platinum touched $1,159.00 an ounce, its highest since Sept. 26 and was last at $1,1149.50 an ounce versus $1,120 an ounce late in New York on Wednesday.

“The euro being stronger against the dollar has encouraged some industrial buying,” said Commerzbank trader Rory McVeigh, referring to the dollar weakness over the last couple of weeks. “Not much but enough in a very thin market to lift it.”

Platinum’s strength lifted sister metal palladium nearly 6 percent higher to $226.50 an ounce, its highest since Nov. 11. It was at $220 an ounce versus Wednesday’s $208.50 an ounce.

Spot silver firmed to $13.66 an ounce from Wednesday’s $13.45 an ounce.

The poor state of the global economy has boosted investment appetite for gold since the start of the year, with holdings in the world’s largest exchange-traded fund hitting consecutive record highs.

But analysts said the pace of the rise was beginning to slow. “Demand for investment gold is still there, but relatively slower over the last couple of days,” Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus, said.

The SPDR Gold Trust , said its holdings remained at 1,124.99 tonnes on March 25, unchanged from the record hit the previous day.

March 26 (Reuters)

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

And in a separate story yesterday – which underscores that the auto sector’s woes are going global – Nissan Motor Corp. (ADR:NSANY) said it would cut 20,000 jobs by the end of 2010 and expects to book a net loss for the year ended March 31, which would be its first loss in 14 years.

But the outlook for Detroit’s “Big Three” is clearly worse, right now. From the time U.S. carmakers first approached Congress about obtaining bailout money for the American auto industry, GM and Chrysler have adamantly opposed bankruptcy. Indeed, as far back as their first visit to Washington – when the CEOs caused a firestorm of controversy by flying to the meeting in their corporate jets – the automakers’ top executives said the bankruptcy labels would weaken their companies’ reputations by pushing potential customers to other brands.

However, the government could force bankruptcy by applying the debtor-in-possession status to the loans, which would make debts owed to the government the top priority, Don Workman, a partner at Baker & Hostetler LLP and bankruptcy expert, told Bloomberg News.

GM and Chrysler have until next Tuesday (Feb 17) to demonstrate progress on their plans – reducing labor costs and showing how they’ll begin repaying loans – enacted in order to receive loans from the Troubled Asset Relief Program (TARP).

GM said it plans to close dealerships and continue cutting union retirement benefits. Chrysler’s CEO Robert Nardelli previously said the company would try reducing debt, Bloomberg reported.

GM is talking with parts maker and supplier Delphi Corp. (DPHIQ) – which was spun off from GM 10 years ago – about buying back assets, which will shore up GM’s supply chain, Reuters reported.

The bottom: The government wants more cost-cutting and income-generating measures from the carmakers. And if GM and Chrysler can’t do it themselves, their loans will be yanked.

Nissan Announces 20,000 Job Cuts

Across the Pacific, Nissan said it must cut jobs because of lackluster sales – including its first loss in nearly a decade and a half.

“In every planning scenario we built, our worst assumptions on the state of the global economy have been met or exceeded, with the continuing grip on credit and declining consumer confidence being the most damaging factors,” Nissan President and CEO Carlos Ghosn said in a statement. “Looking forward, our priority remains on protecting our free cash flow and taking swift, adequate and impactful actions to improve our business performance.”

The 20,000 job cuts equate to 8.5% of Japan’s No. 3 automaker, Reuters reported, and is just one of several recovery actions the company outlined in a news release. Others include:

• Launching an average of 10 new vehicles every year from 2009 to 2012.
• Reducing labor costs in line with decreased revenues. Labor costs will be cut 20% in fiscal 2009.
• Eliminate bonus payments to its board of directors for 2008 and reduce board and corporate salaries by 10% starting in March and lasting “until the situation clearly improves.”
• Negotiate and hopefully implement a work-sharing scheme for staff workers.

Source: Bankruptcy Looks Increasingly Likely for GM and Chrysler; Nissan to Slash 20,000 Jobs

• A total of 2.6 million jobs lost in 2008 – the most since World War II.
• A jobless rate that’s at 7.2% – and climbing.
• About 11 million people out of work.

As usual, however, the “official” numbers don’t tell the entire story.

“People say that they know how bad the economy is. But they don’t know how it feels to have the reality hit home,” said Stu Schweitzer, global markets strategist at J.P. Morgan Chase & Co.’s Private Bank (JPM). “It’s not the facts — it’s how the facts feel. And it feels terrible to have so many Americans losing jobs, and so many more likely to follow in the coming months.”

As it did last week with the government’s inflation statistics, Money Morning will now take an in-depth look at how the U.S. jobless situation may be a lot worse than the U.S. government statistics appear to show.

And “how it feels” comes home to roost with a behind-the-scenes look at the dramatic impact those horrific numbers have on the lives of just a few people caught in the crossfire.

Government Unemployment Numbers — Not What They Seem

The official government estimates of the current unemployment problem are staggering in their own right.

• 791,000 manufacturing jobs were lost in 2008, hitting the auto sector hardest.
• 260,110 people lost jobs in the financial sector, part of the overall service sector that accounts for some 80% of all employment.
• The construction sector shed 899,000 since peaking in September 2006.
• The retail sector shed 522,000 jobs for all of 2008.

All told, 2.6 million people lost their jobs in 2008. And, to underscore the accelerating nature of the problem, more than half of those job losses occurred in the final four months of the year. In December, a total of 11.1 million were unemployed. An additional 8 million people were working part time – up sharply from 7.3 million in November.

The average workweek in December fell to 33.3 hours. That’s the lowest average on record, dating back to 1964, and a sign of more job reductions to come since businesses often cut hours before eliminating positions entirely.

Those are the “official” government numbers. But, as a closer look demonstrates, the unemployment figures can be understated – and misleading.
The government actually compiles unemployment figures in six different categories; as you might expect, the numbers tend to minimize the bad news.
The most commonly number quoted in the media is the “official” unemployment rate – known as U3 (the bottom line of the three in the chart below) – which now stands at 7.2%.

But to get the real picture, you have to add both in what the government refers to as “discouraged” workers (U4) and “marginally attached” workers (U5) – those who have stopped looking for work, or who haven’t looked for work recently (represented by the middle line of the three in the chart).  That number (U6) depicts an unemployment rate t that’s approaching an eye-popping 14%.

And it gets worse.

If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate approaches an astonishing 18% (top line).

In other words, unemployment has insidiously spread to almost one-fifth of the U.S. work force, a number much larger than the single-digit figure commonly bandied about in the press.

If you regard unemployment statistics as an important means of gauging the overall health of a given economy, these “enhanced” statistics paint an ugly picture of just how painful this financial slump has become for the U.S. economy.

Layoffs of this magnitude are more than a mere shot across the bow of the economy; they’re actually a direct hit amid ship – below the water line, meaning that sinking is inevitable.

Fully 70% of all domestic economic activity is powered by consumer spending. People who are unemployed cannot buy homes, don’t shop heavily in retail stores, cut back on groceries, and are loath to take on added risk.

The numbers alone are bad enough.  But in America’s heartland, many of the approximately 80% of workers thatarestill working are caught in the grip of unemployment vise as well.

No Runs, No Hits, Many Errors

Not only are record numbers of Americans suffering without jobs – they can’t even tell their troubles to a human being anymore. Most now have to navigate hard-to-use electronic systems, faceless entities that are ill-prepared to help so many people file for much-needed unemployment benefits.

With about 4.5 million Americans collecting jobless benefits, state government web sites and phone systems used to file for benefits are being overwhelmed by sheer numbers.

Electronic unemployment filing systems have crashed in at least three states amid an unprecedented crush of thousands of newly jobless Americans seeking benefits. Other states are adjusting their systems to avoid being next, The Associated Press reported.

Systems in New York, North Carolina and Ohio were shut down completely in early January by heavy volume and technical glitches. Labor officials in several other states are reporting higher-than-normal use.

And even some of the systems that are holding up under the strain are leaving filers on the line for hours before asking them to leave a message.
Still others are giving them the ultimate slap in the face: “We’re sorry, all circuits are busy.”

“Regardless of when you call, be prepared to wait and just hang on. Try not to get frustrated,” Howard Cosgrove, a spokesman for the Wisconsin Department of Workforce Development, told The AP.

To stabilize a phone system that has been overloaded for weeks, his agency boosted its staffing of telephone operators by 25% last month.
“We sympathize, we’re on their side, we’re doing our best to help them out,” he said.

Job Losses Gets Personal for Truckers

Depending on your geographic location, you might not notice when an automobile plant closes – but truckers do.

Any business closing – and the resulting layoffs – represents another loss of steady work for truckers, who are responsible for the movement of about 0% of the nation’s freight, including food and hard goods.

As many as 785 trucking companies with a combined fleet of 39,000 trucks went out of business in the third quarter of last year.  Overall, more than 127,000 trucks, or 6.5% of the industry were idled in 2008, Donald Broughton, trucking analyst and managing director of Avondale Partners, told The Los Angeles Times.

That means tens of thousands of drivers previously on company payrolls are now competing with the nation’s independent owner-operators for a piece of a fast-shrinking cargo pie.

Joe Rini, from Grand River, Ohio, recently bid $3,400 to haul a load of building materials to the Pacific Northwest for one of his best customers.  Usually, the load would pay $4,400, but with possible competitors in mind, Rini lowered his bid and got the contract.

Still, before he could pick it up, another trucker low-balled him with a bid of $3,000.  Rini declined to match.

“I didn’t want to bid that low in the first place,” he told The Times. “I start down that road and I’m out of business.”

Elsewhere, fleet operators who so far have managed to survive are putting increasing pressure on their sales force to maintain revenues.

Despite being in the hauling business since the 1860s, Ventura Transfer Co. of Long Beach, Calif. is feeling the squeeze.

“Gone are the days where you can own a trucking fleet and just rely on the demand of the marketplace,” said Brian Olsen, Ventura Transfer’s chief executive officer.

California Dreamin’ No More

Even though he’s had no trouble so far staying gainfully employed in California, Mike Reilly, a 38-year-old engineering contractor, is leaving his home state’s lemon groves and beaches for the foothills of Denver.

California has often been called the “promised land” since the days of the Gold Rush.  But in 2008, many families gave up their California dream and headed elsewhere.

With an unemployment rate of 8.4% in November, and a record 236,000 foreclosures on the books in 2008, the Golden State has lost some of its allure.

Barry Hartz lived in California for 60 years before moving close to his son’s family in Colorado Springs.  Despite recent price declines from a glut of foreclosures hitting the market, he laments the escalation of home prices in the early 2000’s, “to the point our kids…could not live in the community where they grew up.”

The number of people leaving California outnumbered those moving in by a net total of 144,000 in the first six months of 2008 – more than any other state, the Associated Press reported.  For the first time ever the state could lose a congressional seat.

With the state facing a $42 billion budget deficit, further tax increases and education cuts were the last straw for Reilly, the engineer.

“You see wages go down and the cost of living go up,” he said.  Years of rising taxes, unchecked illegal immigration and bumper-to-bumper traffic have convinced him to move on.

What’s Next …

Overall, 48% of all companies downsized in 2008, and a staggering 60% are planning reductions in 2009, according to a Society of Human Resource Management survey.
Economists predict a net total of 1.5 million to 2 million or more jobs will vanish in 2009, and the “official” unemployment rate could hit 9% or 10%, underscoring the challenges that new U.S. President Barack Obama will face and the tough road ahead for job seekers.

Obama has called the jobs losses “a stark reminder of how urgently action is needed” to revive the nation’s staggering economy. His administration is planning a stimulus package costing upwards of $800 billion, consisting of tax cuts and other ways to try to help individuals and businesses.

But unemployment is feeding into a vicious cycle that Washington policymakers are finding difficult to break.  The jobless are now forcing almost all U.S. consumers – employed or not – to retrench for an uncertain future.

Source: U.S. Unemployment May be a Bigger Problem Than Government Statistics Say

Asian stocks climbed nearly 4 percent on Monday on renewed hopes the U.S. automaker industry would be rescued, strengthening willingness to take risks and knocking the U.S. dollar to a two-month low against the euro.

Investors have been funnelling capital back to emerging Asia for the last few weeks and word the White House was considering using some of $700 billion meant to rescue financial institutions for the struggling car manufacturers extended the trend.

European stock index futures were also pointing to opening gains of at least 2 percent.

However, worsening U.S. economic data, a rapidly growing fiscal deficit and the likelihood the Federal Reserve will cut interest rates again this week all combined to weaken the dollar.

“The tide seems to have turned around in recent sessions, with bad U.S. economic news now rightfully hurting the U.S. dollar rather than helping it stronger,” said Nizam Idris, currency strategist with UBS in Singapore.

“Further commentary regarding any alternative solutions to the auto sector will be closely followed during the day, and hence be key to risk sentiment,” Idris said in a note.

Oil bounced back $1 to trade above $47 a barrel on signs that OPEC members might make a deep supply cut to boost prices when they meet later this week.

The MSCI index of Asia-Pacific stocks outside Japan rose 3.7 percent on the day and is up about 7 percent so far in December, trying to pull off its first monthly increase since April.

Japan and South Korea led the region in stock performance. The Nikkei share average rallied 5.2 percent, with Honda Motor Corp stock rose 8.5 percent, one of the biggest lifts to the Nikkei.

South Korea’s benchmark KOSPI share average was up 4.9 percent.

The risk of further declines based on earnings downgrades has been clearly outweighed by the cheapness of stocks at the moment. Toyota Motor Co stock is up 9.1 percent even after Japanese media reported the world’s top automaker is likely to further cut its earnings forecasts and report an operating loss of $1.1 billion in the October-March period.

Hong Kong’s Hang Seng index rose 3.1 percent, led by HSBC and China Mobile. China Construction Bank and Bank of China (Hong Kong) Ltd were the only stocks that fell.

“I am surprised that the equity market is still holding up so well in Asia. Mutual funds are probably putting their year end cash balance to work.” said Sean Darby, chief Asia Strategist at Nomura in Hong Kong, on the overall positive market movement.

In the bond market, the Asia excluding Japan benchmark iTRAXX investment-grade index tightened by 20 basis points, after widening sharply on Friday’s news of Senate’s rejection of auto bail out.

Asian benchmark dollar bonds have not kept pace with the rally in equity markets, trading near historically wide spreads, though the cost of insurance against corporate and sovereign debt default slipped as the environment for risk gradually improved.

The White House indicated last week it is open to using part of the bank bailout package for the Big Three car companies — Chrysler LLC, Ford Motor Co and General Motors Corp . A bill that would have provided $14 billion in loans for the firms failed in the Senate on Friday.

TOO EARLY FOR RECOVERY

With some equity valuations at distressed levels, some investors sitting on cash have begun to think about a recovery at some point in 2009. However, JPMorgan asset allocation strategists said it might be too early to let go of recession trades given the global economy is smack in the middle of the worst downturn since World War Two.

“There remains sufficient uncertainty about the timing of a recovery that it is quite easy for credit and equities to cheapen further, and bonds to rally more before we start the real recovery trade,” they said in a note. “We thus stay with a portfolio of recessions trades — long duration in global rates and defensive exposures in credit and equity markets.”

However, Nomura’s Darby said corporate bonds are already cheap, given how much they have sold off this year. For the time being, bond investors are not as worried about high returns as they are about staying safe, he said.

The yen was up slightly at 90.98 per dollar , having rallied to its strongest in 13 years on Friday at 88.10 after the U.S. auto bailout initially flopped.

The euro rose to highs around $1.3490 on electronic platform EBS, the highest in almost two months.

The rally in stocks sucked money out of the bond market, pushing up the yield on the benchmark 10-year U.S. Treasury note , which moves in the opposite direction of the price, to 2.59 percent from 2.58 percent late in New York on Friday.

Kevin Plumberg and Xi Chen

HONG KONG, Reuters

U.S stocks headed for a higher open on Wednesday as news the White House and congressional Democrats reached an agreement in principle to aid U.S. automakers. including General Motors , calmed investors’ worries.

But signs of further deterioration in the world economy and the profit outlook, including big job losses at an global mining company, fueled caution a day after stocks sell-off ended two straight days’ of gains.

Without government help. investors fear that a possible failure or bankruptcy in the auto sector could send shock waves through the economy and worsen unemployment.

Backers of the $15 billion proposal for bailing out U.S. automakers could come to a vote in the House as early as Wednesday, officials said.

“Investors have been concerned about the continued acceleration of the market free-falling with significant bad news events,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

But news of the auto agreement should spur “more of a relief rally than the feeling that this is something good for the markets itself.”

S&P 500 futures were 10.90 points higher and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures climbed 84 points, and Nasdaq 100 futures gained 10 points.

Shares of GM were up 3.8 percent to $4.88 in premarket trade and Ford gained 3.7 percent to $3.35.

Also likely to lend support to the market was a rebound in oil prices, which could boost energy shares. U.S front-month crude was up 4 percent to $43.96 barrel.

Earnings news and outlooks continued to cast a pall. Shares of Eastman Kodak tumbled nearly 16 percent to $6 before the bell after the photography company warned 2008 revenue and profit will fall short of expectations.

Video game publisher Electronic Arts shares fell 10 percent to $17.40 in premarket trade a day after the company cut its outlook.

Stocks in Asia rose overnight, sending the Hang Seng index up nearly 6 percent, as investors bet on stimulus measures from Beijing. Hopes for a U.S. auto deal also contributed to the gains, but European shares edged lower.

Global miner Rio Tinto said it planned to cut 14,000 jobs and reduce capital expenditures by $4 billion in 2009. Chinese imports and exports unexpectedly fell in November, which underscored the breadth and the depth the global slump.

Year-to-date the S&P 500 is off 39.5 percent but has gained 18 percent since hitting a Nov. 21 low. From its October 2007 record high, the index is off about 43 percent.

Chuck Mikolajczak
NEW YORK, Dec 10 (Reuters)

Gold surged on Monday, helped by higher oil prices, a lower dollar and investor concern about inflationary pressures given the large amounts of money being pumped into the global economy.

Autocatalyst material platinum jumped more than 6 percent to $840 an ounce, while palladium gained more than 11 percent to $178 on growing optimism about a rescue for the auto industry in the United States.

Spot gold rose nearly 3 percent to $776.70 an ounce and was up at $773.90/775.90 at 1030 GMT from $754.60 in New York late on Friday, when it fell to $740.40, the lowest since November 20 in a commodities-wide sell-off.

To some, talk of inflation is premature given the world is currently grappling with the prospect of deflation, but forward looking investors are adding to their holdings of the precious metal to preserve the value of their portfolios.

“We will see some deflation, but that will be short lived and the inflationary impact of substantial fiscal stimulus … will inevitably lead to inflation,” said John Meyer, analyst at investment bank Fairfax.

“Gold will be an important commodity in the protection of value,” he said. Fairfax expects gold to average $900 an ounce next year compared with a previous forecast at $550. Central banks have pumped cash into the world’s financial system and slashed interest rates in an attempt to ease the credit crunch and boost confidence.

Chinese and European leaders are due to plot their next steps on Monday to move the world economy back from a precipice, while stimulus measures presented, planned or pending injected optimism into stock markets.

IMMINENT BAILOUT

Adding to investor worries about inflation was oil , which leapt 6 percent to above $43 a barrel.

Gold often rises in line with oil, which can trigger inflation, while a weaker U.S. currency makes metals priced in dollars cheaper for holders of other currencies.

“The dollar and oil are doing their bit for gold, but we are seeing a lot of investor interest in gold,” a trader said.

The U.S. Senate will reconvene later on Monday as negotiators seek to draft legislation to provide the three largest automakers with $15 billion in short-term loans.

Expectations that the plan could be agreed were bolstered after U.S. President-elect Barack Obama said the auto industry could not be allowed to collapse.

The news boosted platinum and palladium, used to make auto catalysts that cut carbon emissions.

Palladium was at $178/185 an ounce from $159.50 on Friday and platinum at $839/859 from $788.

“Having sustained substantial price corrections between July-October, platinum is currently benefiting from a good degree of bargain hunting buying, mainly from those with longer-term outlooks,” TheBullionDesk.com said in a note.

“However, with more negative auto data expected and commodities generally under pressure the short-term view is still a little negative.”

Spot silver rose nearly 5 percent to $9.91 and was at $9.84/9.82 from $9.45 on Friday.

Pratima Desai , Peter Blackburn
LONDON, Dec 8