The Great Deleveraging, China’s Bubbly Data, The U.S. Bread Line, A Breakthrough Development and More!

by Addison Wiggin & Ian Mathias

  • Americans saving, cutting down debt… is this just the beginning of the great deleveraging?
  • China produces bubbly first-half data… loans triple, auto sales up 36%
  • The bread line grows longer… food stamp enrollment, claims for unemployment hit record highs
  • Patrick Cox on a “critically important” pharma development
  • Plus, readers at odds… “great call!” exclaims one. “Room for you in hell” says the other


  Americans are taking on less debt and saving more… really?

Now anything’s possible!

U.S. consumer credit fell for the fourth straight month in May, the Federal Reserve reported late yesterday. Credit inched down at an annual rate of 1.5% during the month — a $3.2 billion drop to a total consumer debt load of $2.52 trillion. Coupled with the previous three months, we’re now experiencing the biggest and longest consumer deleveraging since 1991. We even have a somewhat respectable savings rate — 6.9%, the highest since 1993.

While we welcome this deleveraging, it still doesn’t seem legit. With unemployment at a 26 year high and the sudden disappearance of easy-money credit, we wonder if this balance sheet restoration is a matter of choice… or if the lowly American consumer is just playing the hand he’s been dealt.

Then there’s this chart:

“The U.S. household sector is currently saving more and deleveraging,” adds Rob Parenteau, “while lenders both here and abroad remain wary of lending, except, apparently, in the case of bank loan officers for high rollers in China.

“To be clear, the household and business sector debt reduction is still in its early stages and has been dwarfed by the massive deleveraging of the financial sector itself as the so-called ‘shadow banking system’ has either collapsed or moved onto the Fed’s balance sheet.”

  While U.S. credit tightens, new loans in China more than tripled in the first half of 2009. The People’s Bank of China reported overnight that lending reached $1.07 trillion by the end of the first half. That’s more than three times bigger than the same period in 2008… lending doubled from May to June alone.

Double in one month? Heh, looks like the credit bubble has found a new home.

  Chinese auto sales are soaring too, up 36% from this time last year. The Chinese snapped up 1.14 million cars, trucks and busses in June and 6.1 million in the first half, says the China Association of Auto Manufacturers. Both of those numbers easily top U.S. auto sales.

  Back in the U.S., the employment picture looks just a bit rosier today. New claims for unemployment benefits fell to “just” 565,000, the lowest number since the start of 2009. We’re certainly not hanging our hat on this weekly change, but its worth noting that there were far fewer claims than we’ve become accustomed to… a good 48,000 fewer than the Street anticipated.

Continuing claims — those people on the government tab for more than a week — rose to 6.88 million, another record high.

  Thus, the U.S. food stamp program now has a record enrollment of over 33.8 million people. Food stamps helped one in nine American’s buy groceries in April, says the latest from the Agriculture Department, at an average benefit of $133.28 per person.

April was the fifth month of record enrollment in a row.

  Meanwhile, state balance sheets are faring no better… Illinois’ budget crisis has become so desperate they’re considering releasing up to 10,000 prisoners. Gov. Pat Quinn said such a release could save more than $100 million and/or the jobs of roughly 1,000 corrections officers on the verge of layoffs. Illinois residents can take comfort in knowing that most of the proposed inmates have nonviolent convictions and less than a year left to serve. Heh…

  Hey, at least this recession might help you score a cheap apartment (perhaps next to a newly freed inmate). American apartment vacancies are at a 22-year high, said real estate research firm Reis Inc. this week. 7.5% of all apartments are currently vacant, up from 6.1% this time last year. Effective rents are down 1.9% from last year, to an average of $975 a month.

  “Something happened last week that I predicted many months ago,” reports our tech analyst Patrick Cox. “Big Pharma initiated a collaboration with one of the stem cell companies I recommended to my Breakthrough Technology Alert readers. The deal is to develop and sell drug-discovery technologies derived from two stem cell lines approved by the Bush administration.

“I don’t write this to crow about being right. I write this because it is critically important that you understand that this is just the tip of the iceberg. For anybody familiar with the way pharma interacts with disruptive startups, it was inevitable. New products from Big Pharma have slowed to a trickle in recent years. The old platforms have largely played out. Slowly, recognition is dawning on the world’s medical giants that it’s time to invest in the most disruptive technology the world has ever seen — stem cell technologies.

“Pharma is a lumbering behemoth. It may take years for the industry to change focus, but it spews cash wherever it turns. This recent deal is only the first.”

Patrick’s amassed a worthy array of stem cell picks for his Breakthrough Technology Alert readers. If you’d like to learn more about his favorite of them all, click here.

  As we forecast, stocks ended flat yesterday in anticipation of Alcoa’s earnings announcement — the first of its kind for the second quarter. The aluminum producer ended up topping expectations with a loss of 26 cents per share, not the 38 cent shot the Street anticipated.

Thus, coupled with that less awful jobless claims report, the market opened to the upside today. The S&P 500 opened up about three quarters of a percent, at 885.

  “I’m watching for 930 and 950 on the S&P,” says one of our options analysts, Wayne Burritt.

“930 has become the S&P’s resistance level — a sticking point that just won’t give way. Since October, the market has hit 930 numerous times and each time turned right around to the downside.

“But most recently, the market behaved a bit differently. It hit 930, retreated a bit and then made another attempt at the same level. And while it did manage to successfully break through 930, it quickly stalled just a few points higher at 950. Then, numerous attempts at 950 began failing as well. So resistance now sits at the 930-950 range.

“Because of all the failed attempts, the next break above 950 would have to be convincing and long lasting. In other words, it would have to move with significant strength — and in a powerful uptrend — in order to prove itself. Plus, it would have to stay above that level for a few trading days.

“If that were to happen, then my take on the market would be bullish. And if this were a stock, that breakthrough would be an excellent signal to look at buying calls.”

If you’re interested in giving the options trade a shot, definitely check out Wayne’s Easy Money Options. It’s an affordable, easy-to-understand introduction to this highly profitable market.

  Stock traders should also keep an eye on the $11 billion auction of 30-year Treasury bonds today. Long bond yields have been falling steadily since the stock market started drifting down a few weeks ago. In fact, the yields on a 10- and 30-year paper are at their lowest level in seven weeks, 3.3% and 4.2%, respectively. We doubt today’s long bond auction will make a fuss… but it will one day.

  In the currency world, the Japanese yen is the money du jour. Since hitting a low of just under 101 per U.S. dollar in April, the yen’s been steadily regaining ground, particularly in July. It started the month at 96; today, it’s even stronger at 92. You know the drill… as trader risk appetite leaves the market, the yen carry trade deflates and speculators scramble to buy back cheap Japanese loans.

“There’s a roadblock ahead for the yen,” writes our friend Chuck Butler. “And the road block is in the form of the Bank of Japan (BoJ). It was reported that last night the Bank of Japan issued a statement to the markets that ‘they were checking FX levels.’

“That’s central bank parlance (especially coming from the BOJ) for, ‘We don’t want the currency to get any stronger, and we’re just letting you know that we’re ready to intervene if you don’t settle down.’ Sort of like when Grandma would tell you that if you didn’t settle down, she would send you to the woods to find your switch… Believe me, you only didn’t settle down once!

“And when the risk traders come back and push the risk aversion crowd to the back of the room, we’ll see yen sell off again… So be careful here!”

  Against its other competitors, the dollar is a bit weaker today. The dollar index is down about half a point, to 80.1. That translates to a $1.40 euro, $1.62 pound and an 86 cent loonie.

  Last today, gold looks to have found a temporary bottom. As we forecast Monday, the spot price has taken a beating, falling from $940 from the start of the month to $905 yesterday. Buyers are back today, and gold’s up to $915 an ounce.

  In the inbox today, both sides of the emotional spectrum.

  “Stop pushing your ability to steal from the innocent,” writes a reader, not happy with the fact that we do not fully support the CTFC’s proposed limits on commodity futures trading.

“When there are true shortages, commodity speculation allows the poor folks to be held for ransom or freeze or starve. The only answer for them is price controls or to go to forward contracts by principals only.

“Shame on you (I hope they have a room for you in HELL).”

The 5: Heh. That’s not very nice. Commodity shortages (and subsequent price controls) have been around a whole lot longer than mainstream commodity speculation. We can see the CFTC’s point, but as Dan Denning pointed out yesterday, there’s a whole lot more in this trade than just greedy traders “stealing from the innocent.”

  “You saved my ass!” exclaims our other reader. “I really look forward to your comments in the morning. You saved me at least $10,000 when you cautioned everyone about a possible breakdown on the gold charts. Sure enough, it CRASHED!!! GREAT CALL!!!!”

The 5: We wouldn’t say that gold’s crashed, but yes, we will allow this pat on the back. Glad you were able to bank some profits.

But the tough question… if you were willing to sell some gold at $950, when will you start buying again?



Ian Mathias

The 5 Min. Forecast

P.S. Have you heard about Dan Amoss’ “Pinpoint” investment strategy? It just netted one of our readers $200,000 in just 78 days. Check it out, here.


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