An Irrelevant Truth

May 30, 2013

  • “Follow the money,” says Byron King… who’s uncovered a sequester-proof item in the defense budget that could prove lucrative
  • Blue chips or small caps? That’s the wrong question, says Jonas Elmerraji…
  • Neil George tracks down a cozy spot where all those health care dollars are flowing — good for a 5% yield
  • One sign the squeeze on physical gold bullion is easing up
  • A regulation that’s too much even for the bureaucracy-crazed Europeans… a couple more “If I ran the IRS” musings… some truly foul suggestions to alter U.S. currency… and more!

  “Sequester Drags on GDP,” reads the groan-inducing headline at Reuters.

The headline is thoroughly factual… and completely meaningless.

The Commerce Department graced us with its second guess at first-quarter GDP this morning: an annualized 2.4%, down from its earlier guess of 2.5%. “A drop in government spending dragged more on the U.S. economy than initially thought in the first three months of the year,” Reuters sums up unhelpfully.

Government spending is one of the four elements that go into the basic GDP formula.

And because government spending isn’t growing as fast as it was before the sequester kicked in on March 1, it’s a “drag” on GDP.

As if it matters. “If the government spends lots of money, GDP goes up,” Chris Mayer mused in our virtual pages last winter. “The government could hire lots of people to dig holes and refill them again. Well, GDP would go up and economists would cheer.”

It would not, however, mean that new wealth was created or your standard of living is any better. In the end, GDP is “an abstraction,” as Chris put it eloquently. “You can’t wear it. You can’t spend it. It doesn’t change your life or your job. It’s just a number that economists can play with.”

  The real story — and the resulting investment opportunities — emerge only when you start peering at the line items within month-to-month budget figures.

Miserable duty… but our military insider Byron King has been doing just that with the defense budget.

In April, the Pentagon awarded $19 billion in contracts — down from $39.4 billion in March. But the priorities look a little, well, skewed. “At first appearances,” says Byron, “the spending list is even kind of strange.

“For example, the largest DOD contract with any single company in April was for $830 million, awarded to Lockheed Martin to provide jets for Iraq’s air force.” You know, to replace the jets the U.S. shot down when Saddam was still running the joint. Makes perfect sense, right?

Another example: “The Defense Logistics Agency awarded a contract to a third-string refiner for jet fuel at $59 per gallon. It’s not just any old jet fuel, mind you, like airlines use at about $3.75 a gallon. No, this $59 elixir is made from algae.”

Who knew the Pentagon was so serious about trying to “go green”?

100  “Over time, if you follow the DOD’s money, you get a feel for what’s important,” Byron goes on.

And in the long run, one of the Pentagon’s biggest priorities is ASW — antisubmarine warfare.

“ASW isn’t something that the U.S. defense establishment has worried about over the past 20-plus years, since the demise of the Soviet Union.”

That’s changing now. “Across the world,” says Byron, “more and more nations are acquiring submarines, and they’re usually quite good as warships.” Russia’s building them for itself and other countries. “We might never fight the Russians, but the U.S. military could certainly wind up going against Russian-built Kilo submarines.

“China is building subs as well. Indeed, China is building several classes of nuclear and diesel-electric vessels, the better with which to project power out into those ‘island chains’ that the Chinese view as their natural defense barriers. Any questions on that? Ask our friends the Japanese.”

Result: “The DOD has a major program with many years of solid procurement ahead, sequester or no.” For starters, the Navy plans to acquire 117 P-8A Poseidon aircraft — a design based on the Boeing 737. They’ll be armed with Mk-54 lightweight torpedoes.

Poseidon, dropping an Mk-54 lightweight torpedo

“Poseidon is a collection of technologies. It’s a system of systems, in which there are innumerable suppliers, vendors and subtier component providers — all the way down to the mines and mills.” Only yesterday Byron recommended one of the contractors to readers of Military-Tech Alert.

For the moment, this new premium advisory is available only as part of a package deal with some of our other premium services. For a few more hours, you can apply the “loyalty rewards” on your account to collect a handsome discount. These rewards points expire tonight at midnight.

  Major U.S. stock indexes are all in the green this morning. At last check, the Dow has recovered about half of yesterday’s loss, sitting at 15,373.

  “This broad-based stock rally has been impressive in 2013 — as I write, the S&P 500 index is up 15% year to date,” writes Jonas Elmerraji. “That’s almost as good as the rally in small stocks over the same period.

“When stocks are going up, small caps historically go up bigger and faster. And that’s exactly what we’re seeing this year. But broad strokes are worth only so much — this is still a stock picker’s market. That means that the performance we’ve seen in individual names this year has been even more impressive.

“I’m talking about gains like the 442% that we’re up on Tesla Motors since I recommended buying the stock. Or the 161% we’re up on a small homebuilder play. Or the 113% gain that we locked in this morning when one of our open positions got acquired by a bigger name.

“Who’s going to acquire Procter & Gamble or Exxon? Nobody.

“There are some serious advantages to small caps in this market, and some serious bargains are still out there. Now’s the time to start picking them up before someone else does.” For Jonas’ expert guidance choosing the most lucrative names, look here.

  “Walking through the lobby,” our income strategist Neil George begins, “I couldn’t believe my eyes.

“The check-in area was new and modern,” he marvels, “glassed off and surrounded with dark wood panels. The receptionists were wearing spotless uniforms, eagerly awaiting their next guests.”

A chic new hotel? An exclusive country club? No. “Instead,” he writes, “it was our next big income opportunity.”

It was a hospital… St. John’s in Creve Coeur, Mo., to be exact.

“Saint John’s hospital is just part of a new national trend,” Neil writes. “This trend has forced both for-profit and not-for-profit hospitals to not only invest in upgrading and building nicer facilities — but also to seek new arrangements to market the better facilities.

“Why settle for a shared room with a linoleum floor and a plain side table when another nearby hospital seems more like a luxury hotel?”

Why, indeed?

“And it’s paying off,” Neil writes, “as hospitals — even those that scrimped a bit during the recession — are seeing the advantages of deals that upgrade their facilities.”

  Enter the income opportunity…

“You’ve probably heard all about the effect aging baby boomers are having on health care,” says

Neil. “There are over 78 million Americans over the age of 65 right now — and that number swells by 8,000 every day. It’s predicted that 60% of them will eventually require ongoing hospital care.”

Keeping up with this boom is expensive, and is beginning to pinch out many not-for-profits, religious or other organizations that traditionally ran and operated hospitals in the past.

“Meanwhile,” Neil writes, “for-profits have noticed the supply-and-demand condition of the hospital market and have taken at aim at private-payer patients — the people who seek upscale facilities. Today, 17.9% of the nation’s hospitals are investor-owned.

“And one has caught my eye,” Neil announces. “It’s a leader in an industry that has limited supply, rising demand and a high barrier to entry.”

Neil’s latest pick is a way to collect 5% paychecks from one of the fastest-growing players in a red-hot health care industry. You can learn more about other picks in Neil’s portfolio — and how you can take advantage — right here at this link.

  Maybe this will be the day gold can sustain a move above $1,400. The Midas metal has hefted itself to $1,414. Silver, meanwhile, sits on the cusp of $23.

Dollar weakness relative to other fiat currencies is in play here. The dollar index is on the verge of breaking below 83 for the first time in three weeks.

  The U.S. Mint has resumed sales of 1/10th-ounce Gold Eagles.

Buyers cleaned out the Mint’s supply late last month after the gold price smash and the rush for physical metal that followed. This morning, our thoroughly unscientific survey of one online dealer finds the coins fetching a 12% premium over spot.

With two days remaining in May, overall Gold Eagle sales stand at 61,500 ounces — not even one-third last month’s total.

Silver Eagle sales look perkier at 3,458,500 — similar to the pace in May 2010 and 2011. The Mint is still rationing Silver Eagles to its dealer network.

  It was the “weirdest decision since the legendary curvy cucumber regulation,” says Germany’s newsreel Sueddetsche Zeitung.

“A doozie,” the U.K.’s Guardian writes.

And it’s “exactly the sort of thing that Europe shouldn’t even be discussing,” the British leader David Cameron announced at a recent EU summit.

Apparently, the EU is quite concerned about “hygiene” and “consumer protection.” So concerned, they’ve introduced a proposal to ban jugs and dipping bowls of olive oil in European restaurants.

“Meanwhile,” Honor Mahony from the “everything EU” blog euobserver writes, “commission spokespeople, minutes after the proposal was announced, had to field questions on whether consumers were not themselves well able to judge the quality of olive oil.

“And whether there would be a special olive oil squad team to ensure it was being enforced.”

Barely a week later, Mahony reports, EU commissioner Dacian Ciolos “rushed to the same press room on Thursday (23 May) to announce he was withdrawing the measure.”

Due to the “quite strong reactions,” Ciolos said, he made the executive decision to “not submit it for adoption.”

But the olive oil saga is far from over, says Mahony: Ciolos “plans to consult with both consumers and producers before coming up with a new oil initiative.”

As they say, everyone needs a hobby.

  “To my fellow reader who seems to think the IRS should profile,” reads one of our ongoing stream of emails responding to a reader in Tuesday’s episode: “You are completely missing the point that ALL taxation is nothing but unadulterated theft.

“What makes you think that any form of government has any right to inject itself in the voluntary transactions of any peaceful person? Just saying.”

  “If I were in charge of the IRS,” says another, “I would shut the whole place down and fire all the bloodsucking communists.

“Then I would replace it with a flat tax so everyone gets to share in the support of this great country.

“Why should half of us pay through the nose while the other half bleeds us dry with one failed social program after another? As far as auditing/favoring one group over another? We all share in this country’s benefits. We all need to pay the same rate.”

  “Those Canadians may be on to something,” a reader writes after our account of the bank notes that smell suspiciously like maple syrup.

“If the U.S. is going to add an aroma to our currency, I propose that we imbue our notes with the stench of corrupt politicians.”

  “Watch yourself,” adds another. “You might give the government the idea to treat our dollars to have the odor of dog feces and they could score two hits with one action. Force people to quickly spend rather than carry in their wallet and to not save in coffee cans, etc., around the house.”

The 5: Now there’s a way to ramp up the “velocity” of money and get us closer to the Fed’s 2% inflation target!

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. Final reminder: Your current round of loyalty rewards expire tonight at midnight. Claim them here.

rspertzel

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