Extend and Pretend, Understanding The Fed, Biometric IDs and More!

by Addison Wiggin & Ian Mathias

  • “Extend and pretend” enters public sector… Senate bumps homebuyer credit, unemployment insurance
  • Rob Parenteau on the Fed’s real objective: Keeping you in stocks
  • Greg Guenthner with a big government build-up and an emerging tech… all in one!
  • Another sign of the times… M-I-C, K-E-Y moves to C-H-I-N-A


  “Extend and pretend” will go down as one of the famous financial phrases of 2009. It has permeated the commercial real estate business… instead of realizing the loss on a bad loan, bankers are “extending” the terms and “pretending” the borrower will be able to pay in another week, month or year. In more poetic parlance, “a rolling loan gathers no loss.”

We start with this idiom today because it’s been taken to a new level… by our government.

  Yesterday the Senate passed extensions of the unemployment insurance benefits — and the first-time homebuyer tax credit. We’ve seen this coming for some time. With a moribund economy, what else can they do? The whole thing still needs to get the OK from the House and President Obama, but here’s the deal as-is:

  Senators want to extend unemployment insurance by 14 weeks in all states, 20 weeks in most. This will kick the can down the road for as many as one million people whose benefits are set to expire by yearend. Should this bill become aw, some Americans will be able to collect unemployment for up to 99 WEEKS, an all-time high.

The $2.4 billion cost of this extension will be funded by more unemployment taxes already paid by businesses. The logic: A business pays the government for every employee they hire… the government, in turn, gives money to people the company didn’t hire, hoping they will get hired by a different company… who will then pay more taxes for hiring that person. Brilliant.

Even the most conservative estimates don’t expect unemployment to peak until 2010… those benefits might even get extended again.

  The Senate also agreed to extend — and expand — the homebuyer tax credit. The $8,000 in free money for first-time buyers will be extended for at least seven more months. And now current homeowners who have been living in their house for at least five years will be eligible for a $6,500 credit if they buy a new place.

The cost? At least $10 billion… but hey, whatever it takes to “get this economy back on track,” right?

  “At a town hall meeting focused on ‘Recession Recovery’ last night,” Addison Wiggin writes, “we tried to explain that while on the surface the 3.5% GDP growth in the third quarter looked good, much of that figure was comprised of one-off government programs like ‘cash for clunkers’ and the housing credit. If the GDP were to continue to ‘rise’ Congress would have to go back to the public teat for more tax incentives and rebate programs. At least until the private economy started producing goods and jobs again.”

“’Really?’ was more or less the collective response. ‘How do we go about getting our share of those programs?’

“Oy. The town hall was hosted at the Sheppard Pratt mental health facility here in Baltimore. When you drove into the parking lot, the attendant asked you which event you wanted to attend, ‘Recession Recovery’… or a symposium on ‘negligence and alcoholism.’”

  We see one silver lining in the Senate’s new bill. There’s a provision that will allow businesses that incurred losses in 2008-2009 to get refunds on taxes they paid on profits in the five years prior. We’ll keep an eye on this measure, and the rest of the bill, as it slithers through the House and Oval Office.

  Keeping with our “extend and pretend” theme, the Federal Open Market Committee kept interest rates near zero again yesterday. Ben Bernanke and his brood stuck with the usual statement… that rates will remain “exceptionally low” for an “extended period.” The only real news from the FOMC was this statement  that the crazy-low rates will depend on “low rates of resource utilization, subdued inflation trends and stable inflation expectations.” With all those items at generational lows, safe to say cheap money is here to stay.

  “One of the key objectives of the Federal Reserve in pursuing these policies,” notes our Fed watcher Rob Parenteau, “has been to drive investors back into riskier asset classes. By lowering the fed funds rate below 0.25% and promising to maintain a near-zero policy rate for an ’extended period,’ the yield on near-cash instruments has all but evaporated. No surprise, then, that net outflows from money market mutual funds have exceeded a $50 billion clip in recent months.

“Furthermore, by adding $262 billion to Treasury holdings, $79 billion to agency holdings and $515 billion to mortgage-backed security holdings from March through mid-October, the Fed has also suppressed the yields available to households in these segments of the fixed-income market. In effect, we believe the policy gambit has been to herd investors into equities and corporate bonds by reducing yield opportunities in other asset classes. By doing so, we believe the Fed has sought to induce wealth effects designed to cushion the blow of the past year’s financial crisis on real economic activity.

“Thus we face some incompatible truths. Demographically [think baby boomers], more investors should be migrating to lower-risk portfolios and looking for asset mixes that provide some combination of high-income yield, security of principal and inflation protection… Policy-wise, central banks have responded to the economic carnage wrought by a major financial crisis by lowering short-term interest rates, which reduces yields on near-cash instruments like money market funds and Treasury bills. Through quantitative easing measures, they have been bidding down yields in a variety of longer-term fixed-income classes, like government bonds, mortgage-backed securities and, in some cases (as with the Bank of Japan), even corporate bonds.

“Investors who demographically are at a stage of life when they need to earn high yields with fairly secure principal while maintaining a good hedge against inflation risks are finding central banks have clipped the menu of many opportunities. We suspect this portfolio incompatibility may not end well.”

Learn to protect yourself from that “incompatibility” by reading Rob’s latest special report.

  Stocks are off to the races today. We’re seeing three catalysts:

1) Big earnings surprise from Cisco.

2) The Labor Department reported “just” 512,000 new claims for jobless benefits from last week, about 11,000 short of expectations. In theory, that bodes well for tomorrow’s jobs report.

3) And the government also reported that average worker productivity soared 9.5% in the third quarter, the biggest rise in six years. (That tends to happen when companies fire weak employees and crack the whip on the rest.) For stocks, again in theory, that means higher profits while still maintaining low employment costs.

Put all that together and the S&P is up 1.2% as we write.

  That’s bad news for the dollar. The dollar index is down another few tenths of a point today, to 75.7

  And that’s good news for commodities. Gold flatlined after hitting a record $1,092 yesterday and remains just below $1,090 today. Oil is holding steady at $79 a barrel.

  “The FBI is currently engaged in a massive overhaul of its security and identification systems,” our small-cap advisor Greg Guenthner reports with today’s investment opportunity. “The key to this overhaul, and the future of high-tech security, will involve biometric identification.

“We’ve all seen the science fiction movies in which police and other authority figures employ powerful and complex biometric identification methods. Mobile fingerprint detection and iris scans are the first to come to mind. Now these tools are moving from the big screen to reality.

“Right now, the FBI is developing its Next Generation Identification System, an expansion of the agency’s Integrated Automated Fingerprint Identification System. The feds are moving beyond traditional fingerprinting databases — opting instead for sophisticated biometric identification techniques.

“This new strategy for the FBI comes at a price. Of the nearly $8 billion in the agency’s FY2010 budget request, $97.6 million was reserved for the development of a biometrics technology center. The private biometric industry is growing rapidly, too. In 2009, industry-wide revenue is estimated at $3.4 billion. By 2014, this number is expected to grow considerably, to $9.4 billion, according to the International Biometrics Group.

“I just gave information on my favorite biometrics play to Bulletin Board Elite readers. This company is quickly establishing itself as the leader in fingerprint-based biometric identification. And it’s ready to reward early investors who recognize its potential when it comes to lightning-fast next-generation fingerprint technology… get the ticker by subscribing here.”

  Lastly, another sign of the times: Shanghai will be the site of the next Disney theme park, the Chinese government announced yesterday. Not much else to say here, eh? Disney can take their Mouseketeers anywhere in the world, and they chose China. We’re sure Disney will pull it off with class and avoid cliche stereotypes…

Heh, whoops… too late.

  “The press seems to say,” a reader writes, “that Warren Buffett was making a statement on the recovery of the U.S. economy with the purchase of his favorite railroad. But I read a quote that he didn’t know when the recovery would occur. What would a rational person with over 20 billion in U.S. cash do when the dollar is about to collapse? Buy railroads or other tangible stuff. And he thinks the cost of energy will go up radically. Sell trucking, buy rail.”

The 5: Good points. It’s also worth noting Buffett offered lots of BRK shares to complete the deal. In other words, he’s implicitly saying that the assets of the Burlington railroads have more value than the stocks in the Berkshire portfolio.

  “Buffett betting on the economic future?” another asks. “I say he expects gasoline to cost about $10 a gallon and trains will be the only transportation we impoverished peons can possibly afford to use. Best regards, keep up the excellent work.”


Ian Mathias

The 5 Min. Forecast

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