It all boils down to COLA — the government’s cost-of-living adjustment. Since consumer prices are — in theory, at least — deflating, the Social Security administration announced this weekend that they do not plan on a COLA for the next two years. Should that forecast come true, it’ll be the first time that’s happened since at least 1975, when automatic increases were first implemented.

That will probably equate to a net monthly loss for millions of beneficiaries. Medicare prescription drug premiums are on track to bump up a few bucks next year — a major cost for most retirees. And until the Obama administration jams through their health care reform, medical expenses will continue to rise, as well. Who knows… they might go even higher after Obamacare. Either way, tens of millions of seniors are about to face stagnant income and rising monthly costs… could get politically interesting.

Source: Seniors Beware: Deflation Hits Social Security

The biggest news to hit the markets yesterday was the Treasury Department’s report that the deficit in June totaled $94.3 billion. This monthly deficit pushed the deficit for the fiscal year to over $1 trillion dollars for the first time, and we still have another quarter to go until the fiscal year ends in September. It comes as no surprise to readers that the deficit is above $1 trillion, but what is a bit unnerving is the speed at which the red ink is flowing.

According to the Treasury department’s report, spending in June surged 37 percent to $309.7 billion while revenue fell 17 percent to $215.4 billion. June is typically a good month for revenues, and the reported deficit was the first since 1991. Individual and corporate tax receipts are falling while unemployment continues to rise. But the revenue picture isn’t nearly as bad as the other side of the ledger. The administration is just starting to ramp up the spending from the $787 billion stimulus package President Obama signed into law in February. And as Chuck has reported, the administration has already started to lay the groundwork for another big stimulus package.

Congress seems to be turning a blind eye to the deficit, why let some red ink keep them from accomplishing all they set out to do? Just this morning, the day after we surpassed the $1 trillion deficit mark for the first time, the democrats have unveiled their long awaited health care reform. The program, by most estimates will add another $1 trillion to the deficit over the next several years. Sure, I think we all would like to see an improvement on the current health care system, but what a time to try and shove it through congress! I’m sure you will start to hear a chorus of ‘deficits don’t matter’ by the media; as they try to convince all of us that these new programs are just too important to let a little thing like red ink keep them from passing.

But deficits do matter! Other than the fact that someone is eventually going to have to pay all of this debt off, financing this shortfall is going to continue to get more difficult. Interest rates will certainly rise from their current low levels, and for the fiscal year to date, the interest expense on the government’s outstanding debt was $320.7 billion. As rates rise, this interest component will also rise, chewing up a larger percentage of our overall spending. Rising interest payments will continue to push out spending for other, more productive programs and force either a reduction in government services, or a dramatic increase in government revenues. Look out for some dramatic tax increases!

The huge deficit continues to worry our foreign investors, who have thus far financed all of our free wheeling spending. China, Russia, and some of the oil rich Arab states have all expressed their concerns regarding the security of US debt and the stability of the US$. Japan’s opposition party, leading in polls ahead of next month’s election, is the latest country to question the long term viability of the US$ as the global reserve currency. Japanese investors are the biggest foreign holders of US Treasuries after China, so the talk of diversification away from the US$ could have a big impact on the currency markets. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” said the opposition party’s finance minister in an interview. “Many countries are starting to diversify their reserves.”

The biggest currency gainers vs. the US$ yesterday were the commodity currencies of the Canadian dollar, Brazilian real, New Zealand dollar, and the Australian dollar. Yesterday Chuck let everyone know he had finally put the finishing touches on our latest index cd. It just so happens that the new index combines three of these top performers. The new index CD, named the Global Power Shift Index is a combination of the Australian dollar, Canadian dollar, Brazilian real, and the Norwegian krone. Chuck designed this new index CD to take advantage of commodity price increases which are bound to occur as the global economy starts to recover. Call the desk for more information on this newest addition to our stable of offerings.

The Australian dollar got a boost from the business sentiment which turned positive in June for the first time since December of 2007. This should help convince the central bank to keep interest rates stable as the Australian economy starts to show signs of a recovery. The kiwi also got a boost as Reserve Bank Governor Alan Bollard said “Early signs of a global recovery have now emerged.” Rates in New Zealand will likely remain stable as the commodity driven economies turn the corner.

Today and tomorrow will bring us a plethora of data, with PPI, Advance Retail sales, Business Inventories, and the ABC consumer confidence numbers today followed by the release of the CPI numbers, Empire manufacturing, Industrial production, Capacity utilization, and the minutes of the June 24 FOMC meeting to be released tomorrow. Thursday we will get the weekly jobs data along with the TIC flows and Philadelphia Fed index. We will close the week out on Friday with news on the US housing market with the release of Housing starts and Building permits. All of this data could bring some excitement to the currency markets, which have settled into a fairly stable summer trading pattern.

Currencies today 7/14/09: A$ .7878, kiwi .6336, C$ .8742, euro 1.3983, sterling 1.6317, Swiss .9227, rand 8.1989, krone 6.4653, SEK 7.8388, forint 197.26, zloty 3.1216, koruna 18.6183, yen 93.14, sing 1.4590, HKD 7.7505, INR 48.84, China 6.8328, pesos 13.654, BRL 1.9782, dollar index 79.97, Oil $61.10, 10-year 3.45%, Silver $12.935, and Gold… $926.19

That’s it for today…The home town favorites, Albert Pujols and Ryan Howard couldn’t quite get it done at the derby last night, but it sure looked like everyone had a great time. Three of the guys on the desk went down to the derby last night, and I actually saw both Mike Meyer and Tim Smith in the right field bleachers scrambling for one of Cecil Fielder’s 16 homers. My wife and I were lucky enough to get invited to tonight’s game by a good friend. I’ve heard we will have to be heading down a bit earlier than normal with President Obama in town to throw out the first pitch. Should be a great time; I just hope the rain holds off. Should turn out to be a Terrific Tuesday! Let’s go National League!!

Source: Blood in the Streets

After yesterday’s major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” answers former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating biz is… well… corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA… housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too.

But even Moody’s is starting to hedge their bets. They recently created three subdivisions within their AAA rating: resistant, resilient and vulnerable… a corporate way of saying the good, the bad and the ugly. While the U.S. isn’t in the worst of the bunch, it’s certainly not the best.

Not the best time to be Ireland or Spain, eh? S&P has already downgraded both nations, and just this morning Spain unveiled its worst recession in over 40 years. GDP shrank 1.8% there in the first quarter, after a 1% drop in the last three months of 2008. From a year earlier, GDP is down 2.9%, the worst annual contraction since at least 1970, when Spain’s National Statistics Institute started keeping track.

Since we started today’s issue with a tough question, how about another: How much further can Spain and Ireland fall (Greece too) before the euro enters crisis mode?
Stocks suffered Wednesday, as the Dow shed 2.2% and S&P 500 lost 2.7%. Traders looking for a reason to take profits found their excuse in the worse-than-expected retail sales number.
“I’m very encouraged by this pullback,” our resource trader Alan Knuckman told CNBC this morning. “We’re coming back to a breakout point in the S&P 500. 875 is a pretty important level. Once we got through that, we had a nice acceleration, so we’ll see if that can hold.

“Regardless, the pullback is healthy for the overall market. It’s something that markets often do. It’s important to see how we recover after a big sell-off, which we haven’t really had yet. I need to see a day where everyone has negative opinions again. I want to see how the market reacts to a BIG push to the downside….”

When that big sell-off comes (and believe us, it will), Alan says, “Watch the next day or two. Will that pessimism overwhelm people again, or will people look at that as a buying opportunity? That will be more of a (market) indicator than anything.”

To get Alan’s full take on today’s market, you can check out his CNBC interview here. But for his priceless trading advice, there’s only one place to look — Resource Trader Alert.
Buyers are drifting back into the market today after yesterday’s decline. The Dow and S&P opened up about 0.5%.
Two worse-than-expected data releases have tamed today’s equity buyback.

First, producer inflation inched up 0.3% in April, says the Dept. of Labor. Contrary to everything you might have heard from the Federal Reserve, inflation can exist in this market.

Second, unemployment claims rose by 32,000 last week, to 637,000, about 20k more than Wall Street was anticipating. Continuing claims, people filing for unemployment for more than one week, climbed 6.56 million. That’s the 15th consecutive week of record highs.
Financials beware: The Obama administration formally announced its intention to regulate the derivatives market today.

“The financial crisis was caused by — and exposed – significant gaps in oversight,” opined Treasury Secretary Geithner. “We are committed to working with Congress to create a more comprehensive system.”

No firm plans yet, but at the core of the government’s scheme is the creation of a centralized clearinghouse for derivatives. Credit default swaps and other derivatives are very much an over-the-counter matter currently, and the Obama team wants to, essentially, create an NYSE for these complicated contracts. We’ll let you know if it comes to fruition.
“Sell Chinese banks, buy Chinese commodities,” declares Chris Mayer, armed with your pair trade of the day.

“China’s banks are hiding more bad loans than the Appalachian Mountains hide moonshiners. Yet the stock prices seem to say Chinese banks are perfect. China’s banks make up 18% of the market of global banking stocks, but hold only 5% of the assets. Further, as a percentage of deposits, the market caps of Chinese banks are four times higher than Japan’s and 60% above the global average.

“As economic woes continue to linger, these outliers won’t likely hold up. Chinese bank stocks are for selling at today’s prices. ‘When these banks crack and come clean,’ says Chris Burn of Goshen Investments, ‘it will be one of the last phases of the [current] cycle.’

“On the other hand, there’s China’s massive urban migration. I can’t emphasize this enough. There is a migration of hundreds of millions of people from China’s rural areas to its budding cities. Just within the next 15 years, China will add some 60 new cities with between 1.5-5 million people. The U.S. doesn’t even have 10 cities today with a million people in them.

“The financial crisis will not undo this migration. It is bigger than that. It is a history-making event and the world will probably never see anything like it on this scale again. As China builds out these cities, it will consume great amounts of commodities — for roads, power systems, houses and more.

“Don’t let the nasty crater that was 2008 take you off the scent of commodities. China is still as big and voracious as ever in the commodity world. There is certainly a pause here, just as that old Chinese saying points out that every meal must end. But every ending also has a new beginning. China will be back for lunch, so to speak.”
Commodities are starting to feel the pinch of the recent stock decline. Oil had been holding steady, but over the last 24 hours, it has succumbed to renewed pessimism on Wall Street. The front-month contract fell from a 2009 high of $60 a barrel to $57 today.

Copper has it even worse. It fell through the $2 mark early this morning, and now at $1.96 a pound, it’s down almost 10% from last week’s high.
Gold is the exception (heh, isn’t it always?). The spot price hit $925 Tuesday and has flat-lined since. That’s a six-week high.
After a nearly full-point rise yesterday, the dollar index is holding steady at 82.8, waiting for the market’s next move. The euro dropped a penny Wednesday, and rests at $1.35 as we write. Ditto the pound, at $1.51.

The yen is the outlier of the bunch, growing stronger all week long as the world’s appetite for risk fades away. It’s at 95 today, nearly a two-month high.
“Do you remember when the Internet was viewed as interesting, but with little financial potential?” asks our technology adviser, Patrick Cox. “That’s where the robotics industry is now.

“Already, low-end robots like Roomba are exploding into new markets. Even as consumers cut back dramatically last quarter, Roomba sales were up 69% compared with the first quarter of 2008. This trend will continue. Within a few years, truly sophisticated consumer robots will be common in high-income households. Before you know it, incredibly capable general-purpose robots will be seen as essential appliances.

Don’t snicker… fortunes have been made with far less

“Moreover, military spending on robotics continues to expand and buoy the industry. The proposed Obama budget increases funding for the DoD programs that move robotics forward. The trend toward unmanned robotic weaponry is unstoppable. Military conflict will not go away, and robots offer many developed nations a way to reduce battlefield casualties.

“As Moore’s Law continues to improve computer technologies, the decision to risk robots, rather than humans, will be easier and easier to make. Regardless of consumer spending trends, we will see far more advanced robots in the battlefield and on crime scenes. Those advances will, in turn, accelerate the domestic and industrial robotic industries.

“Believe me. You want to own robots.”

Of course, Patrick’s readers have a robotics play, which you can get here. That’s just one of the transformational opportunities he’s expecting soon… for more, be sure to check out today’s P.S.
“Let’s see,” a reader begins, “we can put billions toward shoring up banks, stock brokers, auto companies and their suppliers, but there’s no money for Social Security or Medicare??

“What does that say about our government’s concern for the ‘common man’? I thought Obama was a man of the people.”
“Isn’t government, especially Social Security” a reader asks, “the biggest Ponzi scheme of all time?”

The 5: No. In a scheme, the victim has to choose to hand it over. SS is more like a Ponzi stickup.
“All the focus on Social Security and Medicare shortfalls,” writes the last, “has allowed another ‘balance of payments’ issue to slip under our radar. What will happen to the stock markets as the same baby boomer generation draws down their collective 401(k)s and the like without a countering infusion from new investors? I’m definitely out of that trust-the-market-to-make-you-a-million-for-retirement fraud!

“Thanks for the great insights!”

Source: The Mighty AAA, A Pair Trade, More Gov. Intervention, Buy This Future Tech and More!

Thanks to the recent stock market crash, we have the opportunity to pick up seriously cheap shares that were flying high until mid-September. In some cases, this is a chance to hop into a time machine and buy these stocks before they became household names. Until recently, these stocks were the darlings of Wall Street. And when the market stabilizes, these stocks could quickly return to favor…

There are few defensive plays like health care – after all, people don’t stop getting sick, and health benefits aren’t something that cost-conscious employers can cut without enduring the wrath of angry employees. But despite health care’s promise for weary investors, the sector hasn’t been immune from the losses seen across the board in the last year.

As a whole, the health care sector has fallen almost 30% since the beginning of 2008. Health insurers have had it worse – these names dropped 40% in the last quarter alone.

If you’re wondering why one of the most regularly profitable sectors in the market has taken such a beating, you’re not alone. Billionaire Carl Icahn is among the many investment pros that have seen their health care losses mount this year. So are Warren Buffett and George Soros.

Explains BusinessWeek’s Ben Steverman:

“On a basic level, investors are worried that Democrat-led health care reform in Washington is going to shake up the health care sector and hurt profits. But it’s actually more complicated than that. The U.S. health care system is astonishingly complex and few people know exactly what President-elect Barack Obama may propose nor what Congress would approve. And few can predict how that legislation (if it passes at all) would impact particular subsectors, industries and individual companies.”

That doesn’t mean that moves in Washington won’t impact the health care sector – they will, though not necessarily in a bad way. Analysts recognize that whatever plans are put into place will most likely involve the private sector. Government changes could actually be good for scores of health care companies, especially health insurers.

Buying into the Health Care Comeback