The Working Poor, Oil and Gold to Soar?, Soda Tax, Your New Horses and More!

by Addison Wiggin & Ian Mathias

  • Is America the new frontier of the working poor? Shocking study reveals the answer
  • More congressional madness… potential soda tax, $35 million horse pens
  • Byron King, Energy Department on recovery byproduct… time for $100 oil again?
  • Eric Fry with yet another compelling case for gold… $1,160 an ounce by Christmas?

 

  We’ll start today with another trend of the “new normal”: the working poor.

30% of Americans making $100,000 or more each year are living paycheck to paycheck, reports a CareerBuilder study this week. That’s up from 21% last year — a number that still seems awfully high.

61% of all Americans say they are in a similar bind… making just enough to finance their lifestyle every month. Just a year ago, 49% were living paycheck to paycheck.

The No. 1 way to make ends meet on a tough month? Cut savings. Check out these quick stats:

· 21% of correspondents have reduced or eliminated 401(k) contributions in the last six months

· 36% don’t put any money toward retirement

· 33% don’t save at all

· 30% that do put some away save less than $100 a month.

Puts an interesting twist on the much belabored rising savings rate, doesn’t it? The personal savings rate as reported by the government has nearly doubled from this time last year — from roughly 2.5% to 5%. But to what end?

  There’s a rumor buzzing that Congress will tax sugary drinks to help pay for the bloated health care bill. A report from The New England Journal of Medicine — conveniently released yesterday as Max Baucus unveiled his $774 billion health care reform — suggests a 1 cent per ounce tax on any and all beverages deemed “sugary.” Aside from protecting us from ourselves, the study claims the proceeds would yield almost $15 billion a year, which several bigwig Washingtonians think should go toward the national health care bill.

Assuming, of course, that people will put up with it. The tax would bump the price of a two liter of Dr. Pepper up 50%.

“I have never seen it work where a government tells people what to eat and what to drink,” Coca-Cola CEO Muhtar Kent told Bloomberg. “It if worked, the Soviet Union would still be around.”

  “Out in the plains of Wyoming, you own a very large horse operation,” reports our currency man Bill Jenkins, keeping with the theme. “Let me tell you all about it…

“The Bureau of Land Management, in its infinite wisdom, looked at a herd of wild mustangs and decided that they could no longer fend for themselves or find their own food. That perhaps the food was scarcer than it had been, and this could lead to detrimental results for the horses.

“And so, employing pickup trucks and helicopters (we’ve come a long way from the Ponderosa), they rounded up these majestic beasts into a huge pen. And when I say huge, I mean the government has currently collected 33,000 horses. Again, in its infinite wisdom, it has provided birth equine control (at no cost to the horses). In addition, it is doing DNA testing to identify the horses individually. (Again, at no cost to the horses.)

“They are housed and fed at a cost so far this year of $35 million. That’s right — 35 MILLION dollars, paid by you. But you can go adopt one if you like. You’ve paid for it. All you have to do is get there; I guess you could ride your horse home.”

Heh, the BLM just announced today the last adoption event. On Sept. 26, it’ll auction off 57 Pryor Mountain horses. Bidding starts at $125 a pop.

  But never mind these trite studies and anecdotes… government data is stoking the recovery fire again today.

First, claims for unemployment benefits registered a surprise decline last week, the Labor Department reports. New claims come in at “just” 545,000, easily ousting the Street’s guess of a rise to 557,000. The less-volatile four-week average is down too, from 571,750 two weeks ago to 563,000 now.

  Also, housing starts shot up to their highest level in nine months during August, says the Commerce Department. Housing starts rose 1.5%, to an annual rate of 598,000, roughly in line with rosy Wall Street expectations.

We don’t want to harp on housing starts too much this time. It looks like the rise was led by new multifamily dwellings — a solution that makes sense during this housing calamity. But still… why do we celebrate builders breaking ground on more new homes when there is a nearly eight-month supply of new homes already sitting empty?

  Still, that data helped bump the stock market into the black again today. The S&P 500 jumped 1.5% yesterday on similar optimism, and as we write, it’s up another few tenths of a percent, to an 11-month high of 1,071.

  “The next round of earnings reports starts the first week of October,” notes one of our resident traders, Alan Knuckman. “Until then, the momentum will be judged by continued new weekly highs in gold, crude and the stock indexes to power the current rally higher.

“It’s not blind bullishness that is guiding us, but rather an opportunistic optimism that has positioned us on this side for the present conditions. More times than not, ‘normal’ prevails — whatever that may be.”

Alan’s Resource Trader Alert readers are riding this wave smarty. Today, they bought calls on silver — a metal that has appeal during both booms and busts. For specific advice, subscribe to RTA here.

 

  Oil’s up 5% this week, to $72. The typical optimism trade helped crude up early in the week, and then yesterday, the energy department gave the light, sweet stuff a nice kick in the pants. They reported that oil supplies in the U.S. dropped by 4.7 million barrels last week — about twice as much as expected and to the lowest levels since January.

Heh, what’s that? Oil is scarce again?

  “An economic recovery in North America could rapidly hit the wall of limited energy supplies,” notes our oilman Byron King. “And watch prices spike again. Back to the future of the spring and summer of 2008.

“The world energy patch is still dealing with inexorable depletion of old, mature fields. Output from Cantarell, Mexico, for example, is falling off a cliff… national oil company Petroleos Mexicanos (Pemex) should have been spending BIG money on exploration back in the 1990s. Instead, Pemex was little more than a national piggy bank for the social welfare spending of the Mexican government

“As I look around the world, I see underinvestment in exploration, let alone in maintaining and upgrading mature fields. There’s rising resource nationalism, which may feel good to the locals, but which is not how to maximize productive investment and long-term hydrocarbon recovery. And there are rising costs and difficulties in producing oil from unconventional discoveries, such as in deep water.

“So that’s exactly why I’m happy to look at the energy plays in the Outstanding Investments portfolio. We’re positioned in the sweet spot to profit nicely from the rocky road down which the world is heading.”

  After rising as high as $1,024 an ounce early this morning, gold has settled back down to yesterday’s close — $1,017.

“Most gold mining companies are swearing off the practice of “selling forward,” notes Eric Fry in today’s Rude Awakening. Indeed, the gold industry’s hedge book, according to the FT, is set to drop to a 25-year low by the end of 2010. By then, it’ll be at 200 tons. That’s a 90% drop from 10 years ago.

“In effect, therefore, the insiders are buying…and that’s usually a bullish sign. The mining industry’s bullish stance is just one more vote of confidence in gold’s long-term investment appeal.

“Meanwhile, the shares of gold mining companies are flashing a compelling short-term buy signal. Since late July, the gold mining stocks, as represented by the HUI “Gold Bugs” Index have jumped more than 30%, while the gold price has advanced only about one-third as much.

“As the nearby table illustrates, rapid 30% rallies in the HUI tend to bode very well for the gold price. The five prior instances in which the HUI rallied more than 30% in a very short time frame, the gold price subsequently jumped an average of 27%. A similar advance this time around would land gold at $1,160 an ounce by Christmas — or about $140 higher than today’s price.

“No such rally is certain, of course. But the monetary stars seem to be aligning for both a short-term and a long-term advance in the gold market.”

  “I’d like to add to Frank Holmes’ reasons why the popularity of gold as an investment is increasing,” a reader writes, “and prices are likely to trend upward: People are getting nervous about political (and eventually social) instability in the U.S.

“The ability of the right and the left to cooperate has vanished, and the right is pretty much determined to destroy the left at any cost. It’s starting to sink in to people that this is not politics as usual; everyone I talk to is worried about the way things are going. There is little agreement on exactly what the risk is; nonetheless, it is starting to sink in that things are beginning to look scary.

“I can illustrate this by referring to the reader comment just below the bit about gold prices in yesterday’s 5: That self-described ‘optimist’ stated, ‘inflation will eliminate the middle class in America. And probably provide the backdrop for a drastic change in our government.’

“People who think this way tend to buy gold. And I’m seeing that kind of thinking everywhere I turn these days. Aren’t you?”

The 5: Depends where you turn. In our Agora HQ in Baltimore? Sure. But what about more “normal” places?

Just look at those “sell us your gold” commercials all over the TV lately. With gold prices this high, how can businesses like that be so successful right now unless the average Joe isn’t THAT concerned about the security of the U.S. dollar? Yeah, everyone’s worried… but that’s not stopping most from hawking Grandma’s earrings at a sucker rate.

Best,

Ian Mathias

The 5 Min. Forecast

P.S. Options Hotline readers have done it again. Today their Caterpillar November $50 calls are registering a 115% gain. That’s the 11th time this year that an Options Hotline pick has attained at least a 100% return… quite a winning streak. Find out how you can reap these profits too, right here.

rspertzel

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