Another Debt Record, Bond Smugglers, Brazilian Oil, Larry Kudlow and More!

by Addison Wiggin & Ian Mathias

  • U.S. government to make history yet again… record debt sale announced
  • The 5 succumbs to peer pressure… a story you’ve begged us to cover
  • Eric Fry on a curious connection: The “better” banks get, the more traders sell them
  • Byron King asks, “Is God Brazilian?”
  • 2009’s biggest IPO on deck… thousands of miles from the NYSE


  Ready to be a part of debt history? You’re going to be soon… like it or not.

  The U.S. government announced yesterday it will auction a record $104 billion in debt next week. Despite obvious warning signs that the world has had its fill of American paper, the Treasury will forge ahead: $40 billion in 2-years Tuesday, $37 billion in 5-year notes Wednesday and $27 billion in 7-year garbage on Thursday.

They must “get it.” Last week’s sharp rise in 10-year yields was as sure a sign as any that investors everywhere are getting cold feet. A prudent government would take a break… let things cool off. But there’s no rest for Uncle Sam, or his Treasury. They’ve got the mother of all Ponzi schemes to run:

The government chalked up a $189 billion budget deficit last month alone, another record and the eight-straight monthly deficit. We suspect they’d love to take a break from force-feeding the market notes and bonds, but they can’t… the Treasury will have to auction $2 trillion in debt this year just to keep the lights on.

(An interesting aside… funny how government savings started circling the bowl at the precise moment the gold standard was abandoned.)

  “Note the absence of 30-year bonds in this auction,” adds Dan Denning from his Aussie perch. “Whether by design or by accident, this confirms that U.S. borrowing is become a lot more interest rate sensitive. Creditors, we think, are beginning to shy away from lending to the U.S. at fixed rates for longer than 10 years. They want their money back before the value of their investments is inflated away by quantitative easing. This makes funding U.S. debt more expensive…and vulnerable to a spike in yields.”

  Speaking of Treasury notes, we can’t ignore this bit any longer:

“I want to know about the briefcase with the $134 BILLION in bonds,” a reader writes. “Read about the $134 billion?” asks another.

It’s pretty rare to see you writing in, begging for our comment on a story making rounds… between all our letters and e-mails, we suspect you get plenty of our thoughts as is. But you wouldn’t leave us alone about this one, so here we go:

As you may have heard, two Japanese citizens were caught crossing the Italian-Swiss border recently with a suitcase full of over $135 billion in U.S. Treasuries. The story is as ripe with secret agent-style conspiracy… as well as shady details and too-good-to-be-true coincidences that commonly plague viral Internet hoaxes: The bonds were found in a sophisticated, false-bottom suitcase… some of the individual bonds were worth $1 billion — a value only available to sovereign nations… the U.S. government claims the bonds are phonies… is Japan creating a secret black market to sell U.S. debt? Is it all an Italian Mafia scheme?  

True… fake… conspiracy… who knows? If anything, we’re impressed that so many people and news outlets even care to talk about it. If the whole world wasn’t worried about the future of U.S. debt, we doubt this bit would have made its way through the circles of viral Internet news.

BTW, if you’re planning a scheme like this of your own, maybe chose a different brand of paper money… the Treasury hasn’t issued tangible bonds in over 20 years. 

  Treasury yields have been backing down over the last week, thanks mostly to stock weakness. You’ll recognize this move from late 2008… when stocks start to falter, the Street piles into bonds, pushing yields down. The 10-year note arrested its fall yesterday at 3.69%, from nearly 4% a week before.

  Thus, mortgage rates are inching down again. According to, a 30-year fixed has fallen to 5.76% from 5.95% the week prior. That’s a far cry from the 4-4.5% range the Obama administration has openly targeted. We’re not at all convinced we’ve seen the end of government manipulation here.

  Stocks scored some reasonable gains yesterday. Somehow emboldened by the government’s latest financial reform, traders bumped indexes about 1%. Health care stocks were notably outperforming, as doubts are beginning to circulate over how quickly or effectively President Obama’s health care reforms will come to fruition.

Today looks to be another day of mediocre gains, at best. It’s also a quadruple witching Friday… one of four days a year when options and futures on both stocks and indexes expire on the same day. The last hour of trading might be interesting.

  “Bank stocks have gotten worse, ever since the government told us things are getting better,” notes Eric Fry. “Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the "better than expected" results of its stress tests on America’s 19 largest financial institutions.

“The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

“Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

“Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market — both to the upside and the downside — during the last year and a half.

“Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.”

  Commodities are jogging in place today. At $935 an ounce, gold remains in its recent range. Oil’s still at $71 a barrel, just off a 2009 high. 

  “The title of my talk at this year’s Investment Symposium will be ‘Is God Brazilian?’” our resident oilman, Byron King, tells us. “So that ought to give you a clue about what I think lies under all that water column and rock down there.

“But whether you come to Vancouver or not, you need to know that the South Atlantic is one of the world’s greatest petroleum provinces.

“Some experts think that the hydrocarbon resources in the pre-salt formations off Brazil may rival those of Saudi Arabia in magnitude. We’ll see about that. But it’s beyond dispute at this point that Brazil and its energy resources are a complete game-changer for that nation, and the rest of the energy-consuming world.

“The big downside (and it’s big and down, to be sure!) is that today all that oil is under a mile or two of South Atlantic seawater, covered by three or four miles of rock and salt beds — it depends where you’re located on the continental shelf and slope.

“But that’s why it takes companies with phenomenal technical and managerial skills, plus deep pockets, to play in this great game. The bottom line is that with the right companies working at it, there’s enough oil down there to make it economic to invest and recover. And that development is going to be the 21st-century national project for Brazil, and one key area of investment for Outstanding Investments.”

Is your portfolio prepared for a Brazilian oil boom? Check out Byron’s ideas on the matter, here.

  Brazil is also about to take the prize for the biggest IPO of 2009. Visanet SA is slated to go public on June 29, raising up to $3.6 billion in the process. Should the credit card company pull it off, it’ll be the biggest in Brazilian history and easily top the current largest IPO of 2009 — China Zhongwang Holdings’ $1.2 billion float onto the Hong Kong exchange.

The Ibovespa, Brazil’s benchmark stock index, is up 36% this year.

  Keep an eye on the Chinese IPO market too. The Chinese government ended a nine-month moratorium on public offerings today. They halted IPOs late last year when the violent 60% sell-off was already flooding the market with unwanted shares… the Red Nation feared new offerings would just make matters worse. At the time of suspension, 37 companies were planning on going public, many of which we assume will be racing to do so soon.

The Shanghai Composite is up 57% year to date.

(BTW, we’re hard at work in the back room assembling our network of analysts for a BRIC report. Stay tuned.)

The dollar’s been range bound for the last few days. The dollar index scores 80.5 as we write.

  “Firms like AIG and even JP Morgan,” a reader writes about financial reform announced yesterday, “with many tens or hundreds of trillions of dollars in derivatives could actually bring down vast swaths of the American financial landscape if the ‘invisible hand’ of capitalism were allowed to work its cleansing response.  As easy as it is to say that we should let the chips fall as they may, grotesque and violent mayhem would ensue, undercutting the very integrity of the republic. 

“Hence, we must have some sort of distasteful supervision of the natural propensity of capitalism to reach high baroque levels of extreme greed, just as we have laws against monopolies which too are the natural consequences of unfettered capitalism. The real question is who shall be the fox for the henhouse, and how to keep its hand lightly on the tiller, and then only when necessary.  Unfortunately, given the wily nature of the capitalist mind, and the members of Congress, we must settle for the inept 2,000-pound gorilla.  Rather than argue, as it seems you do, for no oversight, thought should be given to what might constitute the most effective version, under the circumstances.”

The 5: “Who regulates the regulators?” Addison Wiggin asks, unable to stay on the sidelines for this debate. “They were at least as culpable in the encouragement of speculation as any of the firms they’re being given enormous authority over. Where’s the logic in that?

“We’re all better off under rule of law and the enforcement of contracts… otherwise, free markets couldn’t exist. What we don’t need is arbitrary and capricious rule by bureaucrats, which is basically what they’re proposing.”

  “My God.  That must have been Bill Bonner impersonating Larry Kudlow,” a reader writes, responding to a video we shared yesterday. “Mainstream cable news spouting the Bonner/Wiggin religion? Could this be the contrarian indicator we have all been waiting for? Should we be backing up the truck and buy S&P calls until our lines of credit are maxed out again? Dead cats only bounce so high.  Keep up the good work.”

The 5: Heh, we don’t know what’s gotten into Mr. Kudlow. Frankly, he was a lot more fun in his“Goldilocks economy” days.

And we’d be happy to sell you all those S&P calls.

Have a nice weekend,

Ian Mathias

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