Sunday, January 09, 2011

9 January 2011 Que Sera Sera


9 January 2011 Que Sera Sera
 What ever will be will be. So what the heck will be? Most of you know me and I am an optimistical or optimistic kinda guy. We are going to give you a few pointers to what will be going on this week and for the most part they should be positive. In my reading this weekend I was directed to a letter written by Tim Geithner last week to the Congress, which would be the US Congress. The letter linked here from the US Treasury web site is provided so you can be assured this is not just my ramblings on a Sunday Night.
 This letter is a RESPONSE to Congress of the Treasury’s expectations of when we will reach our debt limit and be in default. Note the WHEN. Here is a scary snippet of Geithner’s letter back to Harry Reid:

“Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades. Failure to increase the limit would be deeply irresponsible. For these reasons, I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.”

Wow. Geithner is by nature a conservative kinda guy. For him to communicate this and use this verbiage, I have a feeling he is not crying wolf, but genuinely warning Congress that we need to extend out debt ceiling or else. Remember my comment about the US dollar no longer being the Global Reserve Currency, a Default of our debt would make that happen, immediately.

Last February Congress extended the debt ceiling (That basically means they print more money) to 14.29 trillion (yes with a T) and our current debt is 13.95 trillion. That is a buffer of 350 billion and change. That is lunch money for the last 4 Congresses.

In a subsequent paragraph, Geithner explains what has happened in the past when Congress delays the debt limit extension. It’s a fun cheery read worth sharing: “At several points in past years, Treasury has taken exceptional actions to delay the date by which the limit was reached in order to give Congress additional time to raise the limit. These extraordinary actions include: suspending sales of State and Local Government Series (SLGS) Treasury securities[1]; suspending reinvestment of the Government Securities Investment Fund (G-Fund)[2]; suspending reinvestment of the Exchange Stabilization Fund (ESF)[3]; and determining that a “debt issuance suspension period” exists, permitting redemption of existing, and suspension of new, investments of the Civil Service Retirement and Disability Fund (CSRDF)[4]. Treasury would prefer not to have to engage again in any of these extraordinary measures. If we are forced to do so again, these measures could delay the date by which the limit is reached by several weeks. Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations.”

So, you might ask, when would this issue need to be addressed? By the end of 2011? NO. Ok by the end of the government fiscal calendar September 2011? No. Giethner estimates we will reach our debt ceiling by March 31, 2011. Tim also gives us some ideas of will happen if Congress does not address the issue and I give you a final quote from the letter: “I am certain you will agree that it is strongly in our national interest for Congress to act well before the debt limit is reached. However, if Congress were to fail to act, the specific consequences would be as follows:

• The Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.

• A default would impose a substantial tax on all Americans. Because Treasuries represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs. Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.

• Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.

• Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including:

o U.S. military salaries and retirement benefits;

o Social Security and Medicare benefits;

o veterans’ benefits;

o federal civil service salaries and retirement benefits;

o individual and corporate tax refunds;

o unemployment benefits to states;

o defense vendor payments;

o interest and principal payments on Treasury bonds and other securities;

o student loan payments;

o Medicaid payments to states; and

o payments necessary to keep government facilities open.”

Needless to say, it would be the proverbial excrement making contact with the oscillating air motion device.

What would this look like in the market. No one knows, but you could see gold, which by default of the default would become the global reserve currency, reach 2500-4000 an ounce. The VIX, the volatility indicator of the market would sky rocket past its highs of October 2008 of 89. It is currently at 17 ish. The S & P 500 could see a 40-50% drop putting it in the 600-700 range.

Now remember, I am an optimistic kinda a guy. If you were a half empty person, imagine what you might imagine. The good news is we expect the Congress will do the right thing and extend the debt ceiling (print even more money) and avoid this crisis. Ok they will delay this crisis and possibly make it worse. Ya see, unless we have GDP growth of 7-11% we will not create jobs and put a dent in the current debt. Any takers with that kind of growth? Show of hands. Didn’t think so. Ok then if we can’t grow our way out of this mess than we can reduce our spending. The republicans took some major real estate in DC by saying they will cut spending by 100 billion. (Perhaps they did not know the debt is 13.9 trillion, but they are new.) Representative Paul Ryan from Wisconsin and kin of one of our occasional readers, is the new chair of the congressional budget committee and he announced last week that the cuts will be closer to 60 billion instead of 100 billion. So they lied, what’s the big deal. So much for cutting expenses to get out of this mess.

So what is our game plan? We have been telling you that over the last few weeks. Have a good position in gold (and silver), at least 10% of your portfolio maybe even up to 20%. Play the VIX game. At 17, you can get the tradeable tracking ETN VXX for 36 a share. When the market was causing the VIX to get into the 70-80 mark VXX was selling for $450 ish. We have been adding to our VXX position and telling you that here. Also and very important, place your stops and trailing stops in place and protect the nice gains we have worked so hard to gather over the last year. If a default happens, you will not have much warning and global reaction will be immediate. Maybe not as fast as the flash crash last May, but you could see market drops of 3-10% a day over several days.

The week ahead.

Ok let’s shake off all that negativity and see what this week will bring. There are about 15 relevant data points coming up this week, but its getting late and except for a couple of retail reports, none of the important ones happens until Wednesday so we will go over those later in the week, contractor willing.

Last night we mentioned that AA Alcoa kicks off the earnings season with a hope for 19 cents a share and we thinkest not. Look for 15 cents a share, and a pall over the market. Butch, one of our readers likes that word so I use it when ever I can. APOL, Apollo Group the education company is looking for $1.35 a share. Now they and a few other education companies have been answering some questions from the Justice department as these “school” had been approaching the down and out having them sign up for classes and applying for education grants in their names. Oh yeah these are distant learning programs so being a homeless person was not an issue for these campuses. We do not follow this stock any more though we made some decent money in 05-06. Look for a miss of about a nickel. They might make $1.30 a share. If your portfolio is a little tight and squeaky, you might want to keep an eye on WDFC WD-40. They have an obscene margin and a great brand. They have had a great year with their stock scooting from 30 to 40 ish over the last 10 months. It is really pretty. They are looking for 61 cents a share and barring any surprises look for a nice beat to 65 cents a share and a run up to 42 a share over the next few weeks. DO YOUR HOMEWORK. We do not own this one. On Tuesday look for SVU Supervalue Grocers to miss. Escalating commodities cost are making grocers raise prices while competing with each other cause some real nasty margin squeezes. They are hoping for 31 cents a share, but we think they will be lucky to draw 28 cents.

No artwork tonight, sorry its late.

Salve Lucrum


Post a Comment

<< Home