by Addison Wiggin & Ian Mathias
- Bond bubble remerges… details behind the gov’s latest debt struggle
- The slow demise of snail mail… USPS forecasts record losses
- Customized drugs: Patrick Cox on a breakthrough set to revolutionize health care
- Bill Jenkins with another sign the euro is overvalued… his price targets below
Just when you thought the bond bubble was being saved for another day…
The government managed to auction $39 billion worth of 5-year debt yesterday… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week — yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.
So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today, which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.
The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today… might be worth keeping an eye on.
The proceeds of some of those bond sales will go straight to the U.S. Postal Service, which is on track for a record $7 billion deficit this year. That’s more than double last year’s loss.
Postmaster General John Potter bumped up his previous projection by a billion bucks yesterday, citing the growing expenses of six-day delivery and employee retirement/health care plans. Potter and his team are scrambling to cut costs left and right — from a yearlong hiring freeze to early retirement offers to branch closures. But we wonder… will it even matter?
The Government Accountability Office recently labeled the USPS a “high risk” federal program, and while we’re hard-pressed to think of any risk-free government program, we’re inclined to agree.
The Postal Service is facing a perfect storm of business risk: The business is already loaded up with debt. Minimum wage and benefit costs are rising while revenues are plummeting. For example, they are expected to handle at least 27 million fewer pieces of mail this year than in 2008. Is there any business in America that isn’t looking to cut shipping costs? (There’s this new technology we’ve heard about called “e-mail.”)
Then there’s UPS and FedEx, two worthy private-sector rivals. And what about Peak Oil? A summer of 2008 redux could cripple the whole industry. Above all, the USPS is run by the government… c’mon.
Snail mail might not be dead, but we suspect the USPS is going the way of Amtrak, at best.
They can’t even deliver our mail without losing money, yet the public looks to the government to manage our health care? Oy…
“Personalized medicine will revolutionize the medical field with a huge array of technologies,” reports our breakthrough technology analyst Patrick Cox.
“We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.
“This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, we are often denied incredibly effective therapies simply because they are not universally effective.
“This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven’t precisely known how a particular drug’s chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup.
“This is rapidly changing. Just a few short years ago, the human genome was first mapped. The genome, as you know, is the entire collection of genetic code that defines us at a biological level. Now scientists are studying single genes and their individual expressions.
“It is meaningful, from the investor’s perspective, that Dr. Francis Collins, the head of the Human Genome Project, has just been selected by the Obama administration to head up the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.
“Incidentally, Collins has stated that genomics is currently where the computer industry was back in the 1970s — at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the ’70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies. Those who did so, despite claims that it was too risky or early, were made rich.”
Want to learn more, including how to get in on the ground floor of this blossoming tech? Check out Patrick’s Breakthrough Technology Report.
No debt woes or health care debates can stand in the way of today’s stock rally. Major indexes opened up 1% this morning and are sitting on 2% gains as we write.
On what news? Heh… mostly Goldman Sachs, which upgraded GE from “neutral” to “buy.” Other than a slightly better-than-expected earnings report from Motorola and a not-so-terrible jobless claims number, that’s it.
“And after months of research, development and testing,” says one of our small-cap analysts, Jonas Elmerraji, “the Small-Cap Recovery Index is finally ready to be put to work.
“Historically, penny stocks lead the stock market out of recession. Small stocks are nimble and able to adapt — and a recovery in our sector is usually a telltale signal to mainstream investors that it’s a bit safer to test the waters of the market.
“So we’ve created an index to forecast market recovery. The index is made up of 100 small caps from a number of different industries. Each stock is equally weighted, but we’ve chosen to weight some industries more than others (by including more stocks from certain sectors). We gave more potency to industries that either signal to us that growth is under way (based on experience) and/or have a bigger impact on the economy. For instance, retail, the biggest sector of the U.S. economy, is also the biggest industry in our index.
“Our database collects fundamental data on the companies as well as market data and combines it with economic indicators like savings rate and employment numbers. Every day, the database spits out a number that represents our index on that given day. We’re still in the process of collecting data to get a statistically significant range to start making inferences from.
“Right now, we’re waiting to get a statistically significant amount of data before we go public with the index. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.”
Since forecastin’ is our business, we’ll be keeping an eye on this one… stay tuned.
Today’s stock rally has put the kibosh on the dollar. The greenback had been on the rise this week, given the return of market pessimism. But the dollar index came to a screeching halt today, around 79.5. That puts the pound at $1.65, the yen at 95 and the euro at $1.40.
“We have established a number of longer-term positions based on a weakening euro scenario,” says our currency trader Bill Jenkins.
“The euro has made several efforts at the 1.4300 mark, but has never been able to hold above that. As a matter of fact, given the rebuffed price action from early this week, the euro may be setting up an impressive double top on the hourly chart.
“We suspected something was afoot when Monday’s release of the U.S. housing numbers didn’t even elicit a yawn from the currency market. In case you missed them, here’s the skinny: Economists expected new home sale to be up by 3.8%. The actual number was 11%! That is a HUGE upside surprise.
“Since many forecasters presume that the U.S. housing market must recover before anything else positive happens, the numbers should have shot the risk currencies to the moon.
“But they didn’t budge. Why not? In a word — reluctance.
“The housing numbers should have inspired investors to believe that the recovery is well under way. The very fact that the market refused to respond is telling us that there is some real hesitation about pushing this risk rally further.
“The euro fell to a key support level, the 1.4120-30 area. Over the next few days, we will look to see if it drops below there. If so, a violation of that level would have the euro looking down toward 1.3750. Should that become the case, we may be looking at a double top on the daily chart, which would portend a deeper slide.”
If you’d like to trade this trend, look no farther than Bill’s Master FX Options Trader.
What other currencies of the world are mispriced versus the dollar? Here’s one clue:
“The index is based on the idea of purchasing power parity (PPP),” explains The Economist, “which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap.”
Of course that’s a pretty simple study of PPP, which is probably why it’s so interesting. But as Bill Bonner often notes, things have a way of “regressing to the mean.” We won’t be too surprised if China slowly grows more expensive while Scandinavia comes back down to earth. Great Britan is a good example of this tendency… just a year ago, the Big Mac Index claimed the pound was 25% overvalued versus the dollar.
Commodities are on the rise today. The stock-buying spree has added $3 to crude oil, now at $66 a barrel. And the dollar’s reprieve has stopped gold’s decline. The spot price is up $10, to $940 an ounce.
“The government has started a ‘cash for clunkers’ program,” writes a reader, “to encourage car sales into the slumping U.S. economy. This program may cause some people to buy cars today, instead of next year, but what does that do to next year? The program may give a bump up in car sales this year, but can’t we expect a slump next year? Wouldn’t it be better to have level sales, even if they are low, rather than a bump today and a crisis tomorrow?
“Seems to me the government better be ready to issue the car companies more bailout funds next year. Perhaps the ‘clunkers’ are the car companies, rather than the older cars that qualify for the program. At the end of the day, we have two ‘clunker’ programs: The ‘cash for clunkers’ old car program and the ‘cash for clunkers’ car companies that are too big to ‘NEVER’ fail.”
Cheers,
Ian Mathias
The 5 Min. Forecast
P.S. Check out this track record: 200% gains on the Canadian dollar. 148% with silver calls. 152% betting against U.S. bonds. 59% gains on crude oil. 200% profit on the Aussie.
And that’s just in June and July!
Our resource trader Alan Knuckman is making millionaires of his readers… trade, after trade, after trade. Learn about his strategy here.