Sovereign Debt Still in Crisis, Apple Overtakes Wal-Mart, A REIT Update and More!

by Addison Wiggin & Ian Mathias

  • IMF warns of sovereign debt risks… Greece, Japan, U.K., U.S. deliver on cue

  • Uncle Sam puts a number on his 2010 debt binge… Why it’s too low

  • Two assets that just hit two-year highs

  • Dan Amoss on the unwelcome surprise waiting for REIT investors


  For a brief, shining moment yesterday, all seemed well with the world. The International Monetary Fund issued its biannual World Economic Outlook: A “global depression” has been averted. World GDP will grow 4.2% this year.

  Of course, the day before, the IMF issued another biannual report everyone chose to ignore, the Global Financial Stability Report. It said the banks have stabilized, more or less, but now the global fund has “concerns about advanced country sovereign risks could undermine stability gains and prolong the collapse of credit."

Oh yeah. That sovereign debt thing. Funny that boil should fester now…

  New numbers from the European Union statistics agency reveal Greece’s 2009 budget deficit will be even higher than previously expected. Five months ago, the EU projected a deficit totaling 12.7% of GDP. Now, it’s 13.6%.

And “uncertainties” about the quality of Greece’s data could bump it up past 14% before all is said and done. Those “uncertainties,” by the way, include the swaps engineered for the Greek government by everyone’s favorite investment bank, Goldman Sachs, aimed at hiding the deficit’s actual size.

So here we go again. Yields on 10-year Greek bonds are up to 8.45% this morning. And markets everywhere are swooning. Hot money is fleeing to the greenback. The dollar index is back above 81.5.

By the weekend, we’ll probably get another announcement from the IMF and the EU about an aid package that’s available for Greece should it be necessary, but they’re “confident” it won’t ever come to that. Yawn, stretch.

At some point, all this can kicking will come to an end. But we see no sign of it yet.

  Scary sovereign debt stories abound this morning…

  • Fitch says Japan’s debt rating is in danger unless the economy recovers and the government gets debt under control. This is the second warning from Fitch about Japan’s creditworthiness in six months

  • Over the previous fiscal year, Britain set a peacetime borrowing record — £163.4 billion. Public sector net debt as a percentage of GDP grew 44% from a year ago.

  Right here at home, the U.S. Treasury hopes to sell a record amount of debt next week — $128 billion, by one estimate. That eclipses the previous record set in February.

Remember, this is how much Treasury needs just to stay current on Uncle Sam’s bills. And this torrid pace won’t let up until August, according to Brian Edmonds, the head of interest rates at Cantor Fitzgerald — one of 18 “primary dealers” that bid at every auction.

At that point, he expects “modest reductions.”

“With the economy doing better,” Edmonds suggests hopefully, with a hint of desperation, “receipts are better and there’s not as much pressure on Treasury for cash needs.”

Primary dealers surveyed by Bloomberg yesterday figure Treasury will have to float or refinance $2.4 trillion in debt during this calendar year. Yowza.

Last month, the Treasury Department was figuring only less than $2.1 trillion, give or take a few hundred billion:

  As we discussed yesterday on Baltimore’s local NPR station, the problem with numbers like these is they almost always end up on the low side. To wit:

  • When we began filming I.O.U.S.A. in 2006, the Congressional Budget Office figured Social Security payouts would outpace revenue come 2019. This year, CBO concedes it’s happening… this year

  • When the Medicare prescription drug program was passed in 2003, the projected cost was $395 billion over 10 years. By 2005, the projected cost tripled to $1.2 trillion… and that was before the program was formally launched in 2006

  • The original Medicare program, when passed in 1965, was forecast to cost $12 billion by 1990 (after adjusting for inflation). Actual figure in 1990: $107 billion.

So Treasury is playing its own game of kick the can. It has to keep borrowing, unless some new source of revenue turns up. What could that possibly be?

  President Obama floated a trial balloon on CNBC yesterday about a value-added tax. Or at least he refused to rule it out as a revenue-raising possibility. "Before, you know, I start saying 'this makes sense or that makes sense,' I want to get a better picture of what our options are,” he said.

Shortly afterward, one of his flacks issued a statement saying the White House is “not considering” a VAT. Not now, anyway. Once his bipartisan deficit commission comes back with its recommendations after the midterm elections, we’ll see.

This would add a whole new dimension to the triple swindle we spelled out in one of our recent reports. If you haven’t checked it out yet, here’s your chance.

Next week, on the 28th, we’re taking part in a summit organized by the Peterson Foundation with a few of the members of Obama’s blue-ribbon panel. After it’s over, we’ll let you know what shade of rose their glasses are colored.

  For the stock market this morning, it’s still all about Greece. The Dow is in danger of falling back below 11,000, and the S&P has already fallen below 1,200.

Neither did traders take any cheer from the news that first-time jobless claims fell more than expected last week. They’ve also been mellowed by iffy earnings releases from Nokia, Qualcomm and eBay… stocks all dependent on a consumer recovery.

Even phenomenal numbers from Apple couldn’t generate much excitement during yesterday’s trading.

With yesterday’s release, Apple vaulted past Wal-Mart to become the No. 3 American company by market cap. Exxon Mobil and Microsoft still hold the first two spots. Where’s GM these days… ha! We’re not even going to look, even though, ostensibly, we own a piece of that company.

  A surge in the producer price index (PPI) last month didn’t help the markets much either. An increase of 0.7% in March wiped out a 0.6% decline in February. Blame it in part on cold weather damaging vegetable crops, like tomatoes in Florida. Blame it, too, on institutional denial at the Fed.

  Gold, curiously, retreated on the latest Greek scare too. Still, an ounce of the yellow metal will set you back $1,134, just a skosh higher than when we first started recommending it at $253 over a decade ago. Silver is back below $18.

  Two other precious metals are just coming off two-year highs reached yesterday. Platinum sits at $1,724 an ounce, and palladium at $553.

Palladium in particular is on a roll. Both investment demand and industrial demand are strong. China may be heading into a bubble, as Marc Faber observed here yesterday, but for the moment, it still needs a lot of palladium for electronics, catalytic converters and fuel cells.

  “Haven't heard much chatter about the health of REITs lately,” a reader writes. “Do you folks have any prognostications on the pros and cons of investing in some now?”

The 5: Look for the REITs to start issuing a boatload of new shares, says Dan Amoss, who follows the sector even more closely than hard-core football fans will follow the NFL draft tonight.

“REITs will have to divide up their shrinking rental cash flow among lots of new shareholders,” says Dan, “most of whom invested capital just to delever balance sheets. This capital staved off bankruptcies. It’s defensive capital; it won’t be deployed as growth capital.

“The flood of new REIT shares will act as strong resistance against further rallies in the REIT sector and has permanently diluted the sector’s per share earnings power.

Too, “there’s still a huge wall of ‘un-refinanceable’ commercial mortgage maturities over the next several years. These maturities will occur at a time when property values and rents will remain weak.

“Yet REIT investors aren’t expecting this type of chronic weakness; most REITs have priced in a typical cyclical rebound in rents. REITs are now almost as expensive as they were near the 2007 peak, and will only become cheaper if rents quickly return to their peak levels.”

If you want to play the slow-motion meltdown in commercial real estate, Dan’s your man. And you can still give Strategic Short Report a test-drive for just $1. Start here.


  Oil clings to $82 this morning. Like everything else, it’s been hammered by Greece. What’s more, traders are trying to untangle a series of contradictory statements from the Pentagon about Iran.

Yesterday, Michele Flournoy, the undersecretary of defense for policy, said a military attack on Iran is off the table in the “near term.” Coming from someone rumored as a successor whenever Defense Secretary Robert Gates might decide to hang it up, that was pretty significant.

But not unlike the talk about a VAT, a Pentagon flack walked it back later. "It clearly is not our preference to go to war with Iran, to engage militarily with Iran. Nobody wishes to do that, but she also makes it clear it's not off the table."

Status quo. And that just scratches the surface of the Iran story, and its potential impact on oil prices. For the rest, Byron King’s special report is still available for your review.

  “Much better!” a reader writes after reviewing the second beta issue of our new monthly newsletter Apogee Advisory. “It is the first newsletter I've read from 'cover to cover' in quite some time. Interesting commentary and analysis with concrete, actionable ideas.”

  “I have read both Empire of Debt and Financial Reckoning Day,” chimes in another. “While each was well researched and written, I waited breathlessly for some specifics as far as how to protect myself from the coming storm. I was disappointed that I was left with only generalities.

“I was pleasantly surprised by the Apogee Advisory. While I sometimes cringe when I see or hear ‘The Trade of the Decade,’ you fully explained the position and supplied recommendations.”

The 5: Excellent. Our intent with Apogee Advisory is exactly what you spell out. It will fill in the gaps left between our books and our daily e-mails… the space that cries out for concrete steps you can take to fortify your finances in the face of Washington’s debt tango with the goombas running Wall Street.

That’s why we included four recommendations in the current issue. There’s still time to check out Apogee Advisory with no obligation and send us your feedback as we fine-tune the publication for its formal rollout this summer. If you haven’t done it yet, now’s the perfect time.

  “The reader that said that AIG took $170 billion neglected to mention that it didn't take a dime. Congress GAVE AIG the money. I have more of an issue with the fools in Congress than Wall Street."

The 5: With the game of musical chairs being conducted between Lower Manhattan and Foggy Bottom these days, we have trouble separating them from one another. Still, AIG was just the conduit by which money was sent from you the taxpayer to Goldman Sachs, Deutsche Bank and AIG’s other counterparties.


Addison Wiggin

The 5 Min. Forecast

P.S. “As you know, I normally don't concern myself with ‘timing’ plays,” reads an alert this week from our high-tech/biotech maven Patrick Cox. “The focus of Breakthrough Technology Alert is long term, and I honestly don't pay much attention when a stock only doubles or triples.

“We want companies with the potential to increase in value by tens of thousands of percent, not hundreds of percent. In this unique sector, we know that some companies will be superseded and disappear. Others, however, will win so big that they will raise the average far beyond the rest of the market.

“Nevertheless, there are times when it's fairly obvious that the general public is poised to catch onto a big tech story.” And now is one of them. Get the story here.


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