July 31, 2011

 

The Deficit talks have come a long way. Let's review. The President wanted a clean debt ceiling bill with no spending cuts. That's not going to happen. President Obama called for tax increases on the rich. That also looks unlikely. What is being talked about is a 2-3 trillion dollar cut in the increase in spending over ten years which would result in about a 6-7 trillion dollar increase in the national debt over that period. That’s not enough, but it is the first time this country is requiring spending cuts equal to the amount the debt ceiling is raised.


 

It's a move. Not a large one, but a move. It at least reduces the increase in government spending, and more important; it puts tax reform on the table. A committee could recommend reduced tax rates in exchange for limiting or eliminating deductions, subsidies, and corporate welfare. And even better (if it is true) is the rumor of a “trigger” that would cut government spending across the board if these objectives are not met. This is the scuttlebutt coming out of Washington at this hour.

 

If this is indeed what is going to be passed, I would consider it more a down payment on deficit reduction. Having been one of the first to call for using the debt limit as a leverage tool to get spending reductions and no tax increases, I’m not too disappointed with the bill and tax reform being talked about. But it is only the beginning. Next come the elections…

 

I have not heard such negative talk about a President since Richard Nixon. There is across the board disappointment with Barack Obama’s presidency from the right as well as the left. His chances of being re-elected grow dimmer by the day. And so do those of the Senators seeking re-election. This is in no way the end of the story—it is merely the end of chapter one.

 

I want to remind everyone of the actual context we are in here. The economy is not in trouble, the government is in trouble. Corporate profits are beating estimates. The stock market is near all time highs. Many companies’ stocks are breaking all time highs. Individual Americans are reducing debt and increasing savings. Sadly, we cannot report the same for our government.
 

This year—and next—the government will increase spending, regardless of income, to the highest amount any nation has ever spent in history. Yet the politicians are unable to curtail this new spending in more than a token way. This has threatened the US bond rating. So much so, that there is talk of US government bonds being downgraded by rating agencies, even with an agreement to raise the debt ceiling.

 

The downgrade would have an immediate negative market effect, but I think it will be limited. The reason is two-fold:

 

First, the market rates bonds minute to minute. Rating agencies are inferior to the market, and serve as academic ratings,only. Agencies can downgrade US bonds, but would that prevent people from buying them? It's like the dollar. People all over the world use dollars as their currency of choice. Citizens of the world may some day shun the dollar and use other currencies, yet the dollar at this minute is the one piece of paper that everyone recognizes and accepts. Second is the Euro, but it is not a people’s currency. It is a government’s currency.
  
The same holds true for US bonds. They are the most acceptable investment in the world. Everyone knows the financial problems of the US government. A rating agency's downgrade will simply confirm what everyone already knows. So other than a temporary negative reaction, nothing will have changed. The market rating is what to watch, not some rating agency that always lags the market.
 
The second reason that a downgrade is no big deal? It has happened many times before. When Japan was downgraded from AAA to AA, nothing happened. Japan's markets, currency, and interest rates were never affected. Its currency has risen since despite a debt burden soaring to twice that of the US. And Japan’s interest rates have remained near zero.
 

I expect a downgrade. I do not see it as a threat, but a trading opportunity. I’ll gladly take whatever the market offers. We must never lose sight of the fact that the US government is on a different planet than the private sector. It is a story of “two different worlds,” the government who struggles to pay its bills and is technically broke, and the private sector which is making more money than any other nation on earth—by far!

 

Apple Inc. has more cash on hand at this moment than the US Government. Its income is larger per year than the GDP of most nations. And that is just one company. No company in China or Japan comes anywhere near the profits of US companies. While the GDP in this country averaged less than 1% the first half of the year, US profits rose about 15% higher than expectations. Companies like Boeing, Caterpillar, and Netscape, just to name a few, are making more money than most governments could ever dream of.

 

California, one of the worse fiscal nightmares in the country, is where 90% of the world’s innovation comes from. Never take your eye off the ball, and remember, there are two different worlds out there; the public sector and the private sector. The US makes its money off the private sector. The government is simply a drag on us all. It can create havoc, like it has, but even in a 1% economy; look at what this nation’s companies are capable of.

 

That is why I am concerned about the amount of regulation about to descend on American business. Yes I’m concerned about the slowing growth rates around the world, but the dollar is not crashing, nor are US Bonds. The demand for US bonds is 2-3 times the supply of them. And that is in these times. With everything going on today, the price of gold (in real terms) is still lower than it was in 1980. This all may seem like a giant contradiction, but again it is testimony to the strength of the private sector, and America as a country.

 

Market Update:

The market moved up a 150 points at the open, then down about the same as more evidence of a slowing economy was released. The market has it's eye on Europe, as interest rates climb and bank stocks continue to fall. It has its eye on world growth as it continues to slow; and American growth, as it fell under 1% in the first half of the year.

Interest rates continue to fall here in the US, the dollar remains steady, and earnings continue to come in stronger than expected for most US companies. Most strong earnings are coming from international profits. Wal-mart, McDonald’s, and Netscape's entrance into world markets are among standout expansion stories.

 

Gold continues to make all time high's, yet gold stocks are still underperforming. One exception is Rubicon Minerals (RBY) which has been under a cloud of suspicion, due to an unexpected re-evaluation of gold reserves. Last week, Agnico-Eagle, (AEM) took a 700 million dollar position in RBY, supplying it with both capital for further exploration, and a new found confidence from investors who figured if AEM is willing to invest in RBY, they were. RBY soared 30% on the news. It is still over 30% off its yearly high, and I'm looking at it for a possible add.

 

I sold CDE at a profit and placed the money into NSU, which I thought could out perform. Today it is up twice what CDE is up. HUM hit my stop of 77.50, and while I took a small loss I am not in it today as it broke 71. That is what protective stops are all about.
  
Portfolio:
 
Cash and cash equivalents, CXS, MFA, & TWO
(Average yields are about 12%)
 
Nevsun Resources
 
Verde Potash
 
RBY
 
US Silver Corp
 
Aurizon Mines