Seniors In Debt, Prices Rising Everywhere, Airline Woes, A Truly Precious Metal, and More!

• June 18th, 2008
• 5 Min Forecast
• Daily Issue, Issue

by Addison Wiggin & Ian Mathias

• Startling stats on seniors in debt… bankruptcy rates among elderly soar 5-fold!
  
• Pushing salt in the wound… health care costs set to rise double inflation rate until 2010
  
• Oil ticks up another buck… 8 new ways you can become a commodity speculator
  
• More airline capacity cuts and layoffs… Byron King on how consumers have yet to feel the
  full effects of “Silent Spring”
  
• Plus, little-known precious metals skyrocket… why 3 rare metals are quickly becoming the latest “hot commodities

Here’s a disturbing trend:

That’s not a typo. Since 1991, bankruptcy filings among those 65-74 have shot up 125%. Even worse, filings of those 75 and older have soared 433%. All while younger Americans, the wild youths you’d expect to be less fiscally responsible, have greatly reduced their bankruptcy rates. What gives?

The AARP, which funded the study, says it’ll delve deeper into the matter in a forthcoming release. But from what little we know, we assume the blame resides in two camps: health care costs and inadequate personal savings practices the byproduct of such marvels of modern living as HMOs, Big Pharma, malpractice lawsuits, adjustable-rate credit cards and subprime lending.

Health care costs are expected to rise nearly 10% this year and another 10% in 2009.
A study coincidentally released by PriceWaterhouseCoopers yesterday forecasts medical costs to climb double the official inflation rate this year and next. According to the firm, hospital equipment and infrastructure upgrades will partly drive consumer costs higher. Also — here’s the real shocker — PriceWaterhouseCoopers says the government has underfunded Medicare and Medicaid the cost of which will be deferred to those who are insured.

“The price of corn and the price of beans could rise more,”
suggested Tom Jennings, head of the Illinois Department of Agriculture. If we lose a lot of corn, the prices will continue to go up.”

While farmers are feeling the immediate effects of Midwest flooding, consumers haven’t yet seen the trickledown price hikes. Looking at the numbers today, they seem imminent: The latest USDA report says only 57% of the nation’s corn crop is in “good or excellent” condition”, way down from its reading of 70% this time last year. Corn and soybean futures remain at or near record highs.

And we also see that the price of live cattle has struck a 22-year high. Makes sense corn and soybeans are the two main feed crops for most domestically raised cows and chickens.

Mix in oil and fuel costs, dollar inflation and already higher-than-normal food prices trips to the grocery store might start getting ugly.

But at least there is some relief for us consumers today: The national average gas price has backed down for the second day in a row.
It’ll still cost you $4.07 a gallon, on average. But today’s price is just a few tenths of a cent below yesterday’s and half a cent from the record high. Eh got to take what we can get.

Prices remain up 7% from a month ago and 36% from this time last year.

Oil traders pushed crude up to $134 and change this morning.
Rumors abound that today’s oil inventory report will disappoint yet again. After all, U.S. crude oil supplies have fallen by 7% over the last month that’s the biggest four-week drawdown since the preamble to the first Gulf War in 1990.

Jealous of those “evil speculators” piling up profits as commodities rise and fall? Now there’s an easy way for you to join the fun eight new commodity exchange-traded notes (ETNs) were unveiled yesterday.
Deutsche Bank and Invesco PowerShares will soon launch ETNs that track the performances of base metals (aluminum, copper and zinc) and crude oil. Each will be available in four versions: long, double long, short and double short.

An ETN, by the way, is like an ETF, except the investor buys a note, instead of pooling his or her cash in a fund with others. In this case, the debt security is backed by Deutsche Bank for $25, you can buy one note, and at the end of its maturity, you get a return based on the performance of the underlying commodity it backs. Like a bond, but more complicated and with fees. Hey, we have only 5 minutes ask your broker.

Also, if you care to place another bet, an “old-fashioned” ETF debuts today that tracks the wind energy market
. The First Trust ISE Global Wind Energy Index Fund (Ticker: FAN get it?) began trading this morning on the New York Stock Exchange.

We may be too cynical too soon, but both the viability of ETFs and the growing glee over all things “green tech” have been making your editors a little uneasy lately. Both seem too good to be true, among other things.

The broad U.S. stock market declined yesterday.
Premarket announcements of wholesale inflation and housing starts got the whole day started off on the wrong foot. Best Buy added fuel to the fire, missing earnings and giving the whole retail sector a rash. Then Goldman Sachs, moments after reporting blockbuster earnings, predicted U.S. financials will have to raise an additional $65 billion to survive the current crisis.

Financials, including Goldman, led major indexes down. The Dow fell 0.9%, while the Nasdaq and S&P 500 each shed 0.7%.

Moving markets this morning, we see Morgan Stanley has released a better-than-expected earnings report.
The nation’s second biggest investment bank eked out a $1 billion profit in the second quarter down 44% from last year, but still notably better than the Street had predicted. Coupled with the Goldman Sachs report yesterday,
it would appear that the biggest investment houses are still chugging along for now.

Another day, another flurry of bad news from the airline industry.

• Northwest Airlines announced yesterday it would cut capacity by 8.5-9.5% and fire an undetermined number of employees. (“Right-size the airline,” as the CEO Doug Steenland put it.)
• United Airlines estimated its fuel bill will total $9.5 billion this year, 58% higher than last year.
• And across the border, Air Canada said it, too, will cut capacity and reduce its work force. The country’s biggest airline will nix 7% of its international routes and 13% of flights into the U.S. Unfortunately, as many as 2,000 Air Canada employees will subsequently lose their jobs.

“Thing is, most of the airline cuts announced to date have not yet taken effect,” notes Byron King. “The plane groundings and service cutbacks will occur toward the end of the year and into 2009. As of now, almost all of the flights are still rolling down the runways.

“For the flying public, all that passengers are seeing just now is higher ticket prices and the nickel-and-dime stuff, like charging for baggage check and sodas in coach class. A lot of people who bought tickets for summer travel back in the winter are feeling no pain, really.

“Wait until people go to the likes of Orbitz and Priceline, wanting to book flights in the first quarter of 2009. Choices of flights, connections, timetables and fares will be causing serious heartburn.

“As I’ve been saying, in six months, you will not recognize the U.S. airline industry.”

“The business conditions for the airlines,”
chimes in Dan Denning, “probably won’t fundamentally improve anytime soon (or at all, if you subscribe to the Peak Oil theory). But the sentiment against the airlines might improve. Can you name any airline bulls? We can’t, either. That might be a good sign for traders.”

Because of the plight of the airline industry, the prices of many rare metals are skyrocketing.
If you think copper has swollen to bubble-esque proportions, check this out:

Rhenium is used, among other things, to create a super-strong alloy that allows jet engines to run more efficiently. As you’d imagine, there’s a strong demand for fuel-efficient aircraft these days. So strong that the price of this rare metal has increased 180% in the last two years. Chromium and cobalt have experienced similar booms.

Gold’s at $885 today.
Since its notable rally on Monday, the precious metal’s been holding steady at current levels.

The dollar has performed like gold this week, only inversely.
After the big sell-off Monday, the dollar index has been hanging around 73.6 waiting for more (likely bad) news.

The euro has ticked down just a bit this morning and now trades for $1.54. The yen remains at 108.

The pound fell a good 2 cents, to $1.95 today.
Bank of England President Mervyn King announced yesterday that the U.K. inflation rate has reached its highest level in at least 10 years and will likely continue to increase. According to the BoE and the Office of National Statistics, consumer prices are up 3.3% in the U.K., the worst inflation since 1997. King told reporters the rate will likely exceed 4% by the end of the year.

“Your reader approvingly mentioned a government attempt to ban building in flood zones,”
writes a reader in response to yesterday’s mailbag.
“This is an extremely short-sighted opinion.

“The Industrial Revolution in England and America was powered by mill wheels, all of which, naturally, had to be located not only in flood zones, but over the river itself. Every time a flood of any considerable size came along, the mill wheel would spin really well for a while before being torn away.

“Nonetheless, our countries’ early industrialists realized that without water power, there would be no industry, so they just kept on rebuilding. Eventually, mills were switched over to steam power and located at higher elevations, but the principle remained. To ban buildings that might possibly end up underwater sometime in the next 500 years would, effectively, put us back in the Iron Age.

“The solution is to make the building owners responsible for the choice of either rebuilding or moving to higher ground. As long as the government guarantees the expense of rebuilding, owners in flood plains are going to incur it.”

“It’s moronic,”
adds another reader, “to suggest the depopulation of the Mississippi River drainage basin in order to ‘save this country’s taxpayers more continually wasted tax dollars.’ Are you really so lacking in logic that you assume that the people who inhabit those regions, now inundated by floodwaters, do so because of stupidity, forgetfulness (of past calamities) or by chance?

“The floods, repeated dozens of times in history, have turned these exact flooded areas into some of the best cropland in the world! That means good returns on labor invested, productivity of capital and employment opportunities, which, in turn, demand places for workers to live — towns. Transportation issues become relevant: How do we get our bounty to market? Since it’s difficult to get much speed out of a ship on dry land, these towns tend to move close to the ships, close to the water. Hmmmm, how are we gonna fix that?

“The first problem to fix is educating lightweight logicians who promulgate such shallow analysis and miss the opportunity of suggesting real solutions. Alas, as with our energy situation, we’ve allowed the religion of environmentalism to get the upper hand and allowed its spokespeople to swiftly manipulate the dialog to their advantage. Then you come along with such nonsense! Oy vey!

“The solution is a simple plan: 1) Dredge every two-three years, 2) conduct regular maintenance of the levees, 3) stage controlled levee breaches to predetermined, approved drain areas where landowners are compensated for the temporary use of their property.”

Until tomorrow,

Ian Mathias
The 5 Min. Forecast

P.S. Today’s our editorial meeting.
Byron King, Kevin Kerr, Chris Mayer, Christopher Hancock, Greg Guenthner, Ed Bugos, Wayne Burritt, Eric Fry, Dan Amoss, Addison, myself all the editors you’ve met here in The 5, and many you haven’’t they’’ll all be here. We’ll be discussing all the major trends and our favorite investment ideas. We’ll let you know what comes of it.

In the meantime, if you want to get the best deal on all their advice, you can’t get a better one than the Agora Financial Reserve
…. now open, but not for long.