by Addison Wiggin – January 26, 2011
Keep politics out of it, a reader urges… We try to oblige as we analyze the State of the Union
President seeks to “encourage American innovation”… Soaring rhetoric smacks into wall of reality
Dow 12,000 as traders await new Fed proclamation
First, an export squeeze… Now Chinese plan a rare earth stockpile
Crippled by credit bubble, done in by shifting sands… Dubai archipelago literally going under
“My business is writing for corporations (mostly Microsoft),” writes a reader kicking off our State of the Union edition of The 5, “so I pay close attention.
“Even though I agree with your politics, I prefer not to see anyone’s political views in my financial newsletters.”
Our reader goes on to suggest these reasons why we should omit politics from our writing:
Including political views instantly loses you half your potential readers. And it doesn’t really endear you to the rest
Including political views panders to your political preference, and curries favor. That’s uncomfortable and patronizing.
“Worst of all,” says our reader “it makes me wonder if you ever unconsciously — God forbid, consciously! — shade your financial advice to conform with my political views.
“You make me doubt your veracity and research. Do you ever give me financial advice you think I emotionally want to hear, rather than giving me your best, coldhearted financial research?”
Ahh to provide coldhearted research. We humbly submit… politics are the problem, and you ignore them at your peril.
Exhibit A: The “Republican response” by Rep. Paul Ryan (R-WI).
“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe… Their day of reckoning has arrived. Ours is around the corner. That is why we must act now.”
We couldn’t agree more. We published the first edition of Financial Reckoning Day in 2003. Two months before a Republican Congress passed a Republican president’s plan to create a vast new entitlement program called Medicare Part D. Which, according to the Medicare Trustees has exceeded its projected $1 trillion price eightfold, adding $9.4 trillion to the pile of U.S. government’s unfunded liabilities.
It passed with the enthusiastic support of Rep. Paul Ryan.
Mr. Ryan has since scrubbed this press release from his website, but it’s still floating in cyberspace.
“I am convinced that this is a step forward for Wisconsin seniors,” he said at the time, “and that it will help save Medicare for future generations, including the 77 million baby boomers who will begin retiring soon.”
Sure they “saved” Medicare, but at what cost? The true cost never gets discussed. We wonder is pointing this out a political view?
For his part, the president offered to freeze “some” discretionary spending that would trim the deficit by $400 billion… over the next 10 years. That met with some applause and approval during the speech.
But let’s do the math. $400 billion over 10 years is $40 billion per year. The Congressional Budget Office (CBO) announced this morning they project the 2011 deficit to come in at $1.5 trillion. So the cut in discretionary spending works out to just 2.7% of this year’s deficit.
Our 5 Min. Forecast: This proposal will get about as far as the promise he made last year to freeze “some” discretionary spending for three years, saving $250 billion. Is making that observation a political view?
The president also threatened to veto any bill with “earmarks.” The promise went over well with the “Bridge to Nowhere” crowd, yes, but earmarks typically make up just 1-2% of overall federal spending.
Even that’s a side note. Eliminating earmarks actually does nothing to cut the overall amount of spending.
“Because earmarks are funded from spending levels that have been determined before a single earmark is agreed to,” wrote our friend Dr. Ron Paul (R-TX) two years ago, “with or without earmarks, the spending levels remain the same.”
The president promised to get the infamous 1099 provision of the health care bill repealed. But if it’s such a bad idea, why did it pass both houses of Congress and get signed into law in the first place?
Too, there’s a pledge to cut the corporate tax rate, second-highest in the world behind Japan. It’s not the first time the administration has talked about this.
These are two good ideas. But what, if anything, is on the table for addressing the deficit? The debt? Unfunded promises to provide security, health care and retirement over the next 75 years?
”We know what it takes to compete for the jobs and industries of our time,” says the president. “We have to make America the best place on Earth to do business… The first step in winning the future is encouraging American innovation.”
“Novel concept,” wrote our friend Mark Gordon of Odyssey Marine, a true innovator in the use of robotic technology to recover sunken treasure. “The government needs to support American businesses that are creating innovation breakthroughs that in turn will create employment and strengthen our economy!”
We can forgive Mark for feeling a little churlish, seeing how both the Bush and Obama administrations sided with the Spanish government in a court case over the $500 million “Black Swan” treasure that Odyssey found in 2007.
Some of the WikiLeaks cables released in December reveal the fruits of Odyssey’s labor were offered up by the State Department to the Kingdom of Spain in exchange for a painting a wealthy political family from California says was stolen by the Nazis and now hangs in a museum in Madrid.
“I know that that I sure feel like the beneficiary of that government support!” Mark says.
“Our free enterprise system is what drives innovation,” the president continued. “Throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need.”
But what does this really mean? The answer may well lie in something the president didn’t even touch on last night.
Uncle Sam is getting into the business of developing new drugs. The Obama administration is launching a $1 billion agency called the National Center for Advancing Translational Sciences.
Seems someone in the White House has decided the pharmaceutical industry isn’t developing new drugs fast enough. “The center will do as much research as it needs to do so that it can attract drug company investment,” The New York Times explains.
“Nothing good will come from this,” says one of Patrick Cox’s contacts — a scientist who’d been in charge of new drug approval for a Big Pharma firm.
“I’m not telling you his name or the company, however, because everybody lives in fear of the FDA,” Patrick says. “If you irritate the gatekeepers to the market, the regulators who control the drug approval process, you are in serious trouble.”
The “problem” isn’t that drug companies are failing to innovate… rather, they have a miserable time running their innovations through FDA’s gauntlet.
Example? A weight-loss drug called lorcaserin. “It was denied approval,” Patrick explains, “because rats in the test has a minuscule, within the margin of statistical error, increase in cancers. On the other hand, obesity causes huge and verifiable health problems in people, but the FDA decided we can’t have lorcaserin. Madness.”
“The beneficiaries” of the new federal agency “will almost certainly be Big Pharma companies that supported the President’s health care plan. They also benefit from the high regulatory barriers because small drug startups can’t afford to go through the regulatory process. As a result, they are forced to cut bad deals with Big Pharma.”
We could go on, but we wouldn’t want politics to interfere with our coldhearted research.
Stocks are inching up this morning — just enough to push the Dow past 12,000 for the first time since June 2008, which is not exactly the same as saying we’re back to June 2008 levels — the first time the Dow crossed 12,000 was October 2006.
US Airways turned in a strong earnings report: shares are up 10% over the last week… and March call options are up 47%. Penny Momentum Trader editor Jonas Elmerraji recommended both… Not bad for seven days. Learn more about his strategies here.
Any big moves likely won’t come until the Federal Reserve makes its next “Big Announcement” at 2:15 p.m. EST. We’ll parse any changes in language from its December statement tomorrow… assuming it makes any difference.
New home sales jumped more than 17% from November to December, totaling 329,000 according to the Commerce Department. That’s the highest monthly figure since the homebuyer tax credit expired in April.
Startlingly, 85% of that activity was in the South and West. We realize house hunting isn’t a favorite activity in snowy climes between Thanksgiving and Christmas, but where’s the demand coming from for new homes in regions already saturated with housing?
For all of 2010, new home sales were down 14.4% from the dismal year of 2009.
Gold has been languishing at $1,327 an ounce. The spot price of silver is $26.76. The metals are losing ground even as the dollar index also moves lower, currently at 77.9.
This can’t be good news: The Chinese government now plans to start stockpiling rare earth elements this year, according to Caijing magazine.
The report is thin on specifics… but considering how China controls 97% of world production, and it plans to cut its export quotas 35% this year, it’s clear the Chinese want to ensure a steady supply for years to come.
The news is yet more supporting evidence for the non-Chinese rare earths company that’s likely to come into production first… and it’s not any of the familiar names that have already had a substantial run-up.
“In my 30-year career as a geologist and researcher,” says Byron King, “I’ve never been more excited than I am about this little-known mining company’s bonanza in a place you’ve most likely never heard of before.” He tells you why here.
Last year, after a trip to Dubai, we wondered what future historians and archaeologists would say about this:
Perhaps, now we won’t have to worry about it. “The World” is — or was supposed to be — a series of man-made islands off the coast of Dubai, shaped like the world. Now it’s eroding back into the sea.
The navigational channels between the islands are silting up, according to the company that was supposed to provide inter-island transportation. So the firm, like many others, have gotten in line and is suing the state-run developer.
“Small businesses get screwed on a daily basis,” writes a small business owner who read yesterday’s issue, “but that doesn’t stop us from succeeding in spite of all the forces working against us. It is a 48/7 job (yes 48) — compressing time is a must!
“Thankless, but I wouldn’t want to live any other life.”
“I am a daily reader of The 5. Bravo! I just want to add oil on the fire of small business easiness of surviving in the U.S. Here is another major wall: patent cost.
“Years ago, the cost of patenting a new utility product was probably around three times lower. We are talking about thousands of additional dollars here. Patent application is an ongoing bill. The patent attorney charges you to answer patent office questions. The patent office charges you for changes to the application.
“And now, the patent office charges ‘maintenance fees’ at three, seven and 11 years. Why the maintenance fees? After the patent is approved, what effort do the clerks do? Save the document? Manage the database? Hmm, one more way to suck the last drop of entrepreneur’s blood.
“For a small business that wants to protect its uniqueness and market in a competitive world, having to pay $6,000-20,000 to get a patent, plus the maintenance fees of over $4,000, this is expensive. Hey, and this is just for the U.S.!
“Imagine that to protect your exclusive market in the U.S. you need 10 or 20 patents: The bill rises to hundreds of thousands of dollars. And to cover your ass worldwide? Did anybody tell Obama that the federal vampire-like debt machine is through the patent office sucking the inventive entrepreneur’s blood?”
The 5: After reviewing his speech last night, we’d say probably not.
The 5 Min. Forecast
P.S.: Seven Florida congressmen are asking the Justice Department to withdraw its support for Spain in Spain’s dispute with Tampa-based Odyssey Marine.
As we noted above, the Justice Department filed a friend-of-the-court brief on behalf of Spain. Following the WikiLeaks revelations of the swap offer for the stolen painting, Odyssey has asked the court to strike that brief from the record.
We’ll keep you posted.