- Ratings agencies open fire… Greece, Dubai, U.K. and U.S. in their sights
- Bill Bonner and Alan Knuckman offer forecasts for gold and silver
- Rob Parenteau with the overlooked news that will likely be “the story of our time”
- Oil, gas, nuclear, solar AND wind… Byron King on the one product they all crave
- Plus, readers from both sides bicker over the “death tax” extension
Credit ratings are the soup du jour… the ratings themselves, and the characters who are handing them out.
Front and center is Greece. The “G” of the PIGS nations — a group of troubled EU countries threatening to blow up the euro — Greece’s credit rating was knocked down from A- to BBB+ this morning. Fitch did the deed, and also noted that Greece’s “outlook is negative”… as if there could possibly be a positive outlook after issuing a downgrade.
Anyway, at BBB+, Greece is now just dangling from its “investment grade” status. Bad for Greece. Bad for the euro. Bad for the “global recovery.”
Not to be outdone, “the question of a potential downgrade of the U.S. is not inconceivable,” Moody’s warned this morning. Moody’s issued a note that the U.S. and U.K. may “test the boundaries” of the coveted Aaa rating… they even included this complicated, literal interpretation:
In short, that shaded zone of debilitating debts (the one we’re plummeting toward) is the Aaa boundary Moody’s is squawking about. Unless we come up with a “credible fiscal consolidation strategy” in the next few years, Moody’s warns, the U.S.’ Aaa could fly the coup.
One more ratings note: Nearly every agency is slashing ratings left and right on companies in Dubai. In specific danger are those with fuzzy connections to the Dubai government. Moody’s and S&P cut the ratings of Dubai Electricity & Water Authority, Dubai Holding Commercial Operations Group, Emaar Properties, DIFC Investments and DP World — all companies that have heavy ties to the state. While they were once believed to have the implicit backing of the Dubai government, Moody’s made it clear today that they “are now viewed on a very much stand-alone basis.” More on the Dubai debacle in a minute.
But first, isn’t it fascinating that credit rating agencies still have any clout whatsoever? These are the same companies to slapped Aaa on AIG, Lehman Bros. and countless securities that are now commonly called “toxic assets.”
“It was the near universal agreement,” reads today’s New York Times, “that potential conflicts were embedded in the ratings model. For years, banks and other issuers have paid rating agencies to appraise securities — a bit like a restaurant paying a critic to review its food, and only if the verdict is highly favorable.
“So as Washington rewrites the rules of Wall Street, how is the overhaul of the Big Three coming? It isn’t…”
Nevertheless, the euro might be the biggest victim of this morning’s ratings moves. Greece’s instability has cost it nearly a full cent, now at $1.47.
The euro’s fall, along with American stocks, is a boon for the dollar today. The dollar index is up about half a point from yesterday’s low, to around 76.
Thus, gold is under pressure again. It’s been a rough ride since Dubai’s default warning… up to a record $1,227 an ounce, and then as low as $1,136 yesterday… then back up to $1,160 last night… and now back down to $1,145 on this dollar strength. Strangely, there appear to be just as many traders ready to take profits as there are gold bugs waiting to buy the dips.
“Is this the correction we’ve been waiting for?” Bill Bonner asks. “Maybe. Maybe not. We won’t know for a few days. If it is, we could see the price of gold slip below $1,000 again. We doubt that will happen…not with the stock market moving up.
”As long as stock prices keep rising, and bankers keep pumping up speculative investments, we’re still in ‘phony recovery’ mode. And phony recovery includes a fear of inflation… which pushes up the price of gold.
“Wait ’til we get in Real Depression mode! Then, you’ll see stocks collapse… along with gold. That will be the correction in the gold market we’re waiting for.
“Hey wait…we own gold. Why are we waiting for a correction in the gold market? So we can buy more! Our ‘Trade of the Decade’ is still the best trade around. Sell stocks on rallies. Buy gold on dips.”
“Gold has had such an exhausting move, I think there may be an additional shakeout before it goes higher,” our resource trader Alan Knuckman told CNN Money this morning. “But I still think that gold can get to $1,500, if not $2,000 [over the next year]… We’d have to get to $2,200 just to hit the inflation-adjusted highs of the ’80s.
“If we can hold $17 in silver, I’m looking for highs above $21. To me, that’s a great risk/reward play.”
For more, watch Alan’s interview here. For his advice — how to leverage these possible gold and silver gains with the limited risk of options — check out Resource Trader Alert. Mind you, this is the very strategy that has landed his readers gains of 89%, 148% and 214% in 2009.
More fodder for Bill’s “phony recovery” thesis: What happened to the Dubai default story? Talk about yesterday’s news…
“The Dubai World debt restructuring last week sent little more than a 24-hour flu through investors around the world,” notes Rob Parenteau of The Richebacher Letter. “We think that tells us that investors remain hungry for risk (which should not be confused with the strength of entrepreneur risk appetite, although the two are, of course, related). While it does look like central bank injections plus a degree of forbearance from the creditors will contain the damage, the reality is, as Addison Wiggin and Chris Mayer confirmed in their recent trip through the region, that the underlying issues are not confined to Dubai.
“The story in Dubai is one of excess credit, malinvestment, soft budget constraints arising with government participation and, eventually, insufficient cash flows to validate the original business projects, which in the case of Dubai centered on a massive urban construction boom. It is a story with themes similar to the U.S. housing malinvestment. It is also a story writ large in China, where the European Union Chamber of Commerce has recently catalogued the many branches of Chinese industry currently displaying excess capacity.
“This is not a story likely to go away in 24 hours, and how nations deal with the credit and capacity excesses still in place will no doubt be the story of our time.”
The great American consumer deleveraging continues, the Fed announced yesterday, but at a curiously slower pace. Consumer credit shrank for a record ninth month in a row in October. But by reducing lines of credit at an annual rate of just $3.5 billion, U.S. consumers came short of Wall Street estimates by nearly a factor of three.
“We still have some ways to go before we can be assured that the recovery will be self-sustaining,” hedged Fed Chairman Ben Bernanke yesterday. The Street was looking to him for some hint of optimism and higher interest rates, especially in light of Friday’s jobs report. He gave them neither and stuck with his “extended period” line on super low rates.
“The world needs cable and wire, now and as far into the future as one can see,” Byron King summarizes his latest investment opportunity. Indeed, with all the talk of renewable energy and “drill, drill, drill,” we don’t hear much about getting the goods from Point A to Point B.
“For example, let’s look close to the Outstanding Investments thesis that focuses on the value of oil and natural gas. Just this market alone — oil and gas — uses about $4 billion per year of cable and wire. It’s a strong and growing market niche, with high — and profitable — specifications for safety and reliability.
“Nuclear power is also a significant new source of demand for cable. There are currently 435 nuclear plants operating worldwide, with many more on the way over the next 20 years. Westinghouse-Toshiba forecasts 821 nuclear reactors worldwide by 2030. As a rule of thumb, each new plant uses about $10-12 million worth of cable and wire — all of it nuclear certified to exceedingly high specifications. So about 400 new plants means a $4-5 billion market just for the generation sites, let alone to hook these plants to the grid.
“Meanwhile, in the growing wind power industry, there are significant new investments required for transmission cable and wires to connect the generating capacity to the grid. Solar power is also an embryonic market. According to the U.S. Department of Energy, the U.S. solar capacity by 2030 could be 150 times (no typo) the current level. And solar power requires four-five times the amount of cable and wire as wind power per megawatt of power. Then there are markets for communication systems. The backbone of global high-speed interconnectivity is submarine optical fiber cables.
“In their own way, cable and wire are critical for human societies everywhere to function… no matter what the market does. So while it’s not an energy or resource play in the strict sense, I’m adding my favorite cable and wire company to the Outstanding Investments portfolio. It’s a world-class firm that manufactures wires for electrical transmission, as well as cables for communications and other specialty applications. Get the full story by subscribing here.”
Last today, an interesting credit crisis byproduct: Of Americans aged 23-33, 25% currently plan on staying with one employer their entire life, says a study from Fidelity Investments. That’s nearly double the same percentage from 2008. “Attitudes and views toward their employer and finances are now more conservative and reflective of their parents’ generation,” said Fidelity’s Brad Kimler. “Yet this generation will be faced with different challenges, including higher debt, greater responsibility for costs associated with benefits and less access to traditional pensions.”
Sounds great if you’re the Jack Welch, toilet cleaner-to-CEO type. But for everyone else… hmmm.
“My father was a member of the New York Stock Exchange,” a reader writes in response to our coverage of the estate tax extension. “He made a lot of money in the late 1920s and early 1930s. My mother furnished our large house with antique furniture and purchased fine silverware.
“DEATH TAX NO. 1 — When father died, the IRS appraised the estate, putting higher-than-market values on the furniture and silverware. We had to sell securities to pay the taxes.
“DEATH TAX NO. 2 — My two sisters inherited the furniture and silverware. When my older sister died, the IRS again overvalued the furniture and silverware and my other sister had to pay the tax, again by selling retirement assets.
“DEATH TAX NO. 3 — When my surviving sister dies, the furniture and silverware will be taxed a third time. We would be better off selling everything at a loss rather than risk being taxed at the max the third time, but then we won’t have furniture or silverware for Christmas dinner.
“I have another family estate tax horror story to share, but this is enough for now.”
“Oh, the woes of the wealthy!” another reader cries, with just a hint of sarcasm.
“Most of the world is in abject poverty. And you guys are crying about losing money after the first $3.5 million passed onto the family.
“As someone with extensive training in estate planning, I can tell you that with very simple estate planning, the number goes to $7 million, and with a little more money spent on legal and accounting tricks, not to mention life insurance trusts, the estate tax goes away.
“It is a nonissue.
“If they are smart enough or cunning enough (think CEOs who’ve screwed their employees), they’ll find a way around the damn estate tax.
“In many countries, the estate tax is far greater, but those societies also pay for education for the WHOLE population, so that poor kids who are smart and study hard can make a contribution. Rather than have Bush-like dynasties of stupid, corrupt fools who keep their position to exploit since they keep passing on the money (in Bush’s grandfather’s case, stock from German companies that used concentration camp labor).
“Stop whining about the death tax. Rather tax these evil OLIGARCHS to death!”
The 5: Wow… that got a little disturbing, eh?
No matter which side of this argument you may be on, you should still do what’s within the boundaries of the law to keep the state out of your pocket. We just wrapped up an interview with renowned numismatist Nick Bruyer to help you out with this matter. He discussed at length how the IRS keeps track of your investments in gold and gold coins.
We’re just about ready to set a date for the release of his upcoming webinar… sign up for it in advance here. Don’t forget – it’s free.
The 5 Min. Forecast