-- Posted Monday, 6 November 2006 | Digg This Article

The power of accurate observation is commonly called cynicism by those who have not got it.”                         - George Bernard Shaw

There will be enough pundits commenting on what the U.S. election results mean, but IMHO, voting this year is really in the end picking your own poison. The results can only lead to more division at a time when the world no longer wishes it had an Uncle Sam. Rest assured the “talking heads” on Tout-TV (CNBC-TV) will spin the elections to satisfy the “Don’t Worry, Be Happy” crowd on Wall Street. But, like the Roman Empire, the beginning of the end of the United States’ reign as the #1 world power is well under way.

Economic Overview –

I’ve used one sentence to paint the picture I see in the U.S.: “Americans have been robbing Peter to pay Paul but Peter is tapped out.”  Not a week or so goes by when I don’t meet another family that has been caught on the treadmill of keeping up with the Joneses on the false Madison Avenue/Wall Street tale that more money equals more happiness. These poor souls have been hit hard by engulfing their family in a sea of mounting debt.  They’re watching their ATM machine (known as home) now flashing “See Branch Manager” thanks to the bursting of the real estate bubble.

No matter who wins or loses in the election, don’t expect an avalanche of sobering assessments of America’s fiscal plight. However, you need to seriously appreciate the thoughts of one person in Washington who happens to have one of the most secured jobs in government and can afford to speak his mind – David M. Walker, Comptroller General of the United States.

Last month, Mr. Walker, who is basically the nation’s accountant-in-chief, described his assessment of the nation’s fiscal health as “a ship of state on a disastrous course that will flounder on the reefs of economic disaster if nothing is done to correct it.” Unlike Congressmen and Senators, Mr. Walker doesn’t create political suicide when he talks about substantially raising taxes and deeply cutting benefits if we’re to have any real chance of preventing a U.S. economic Armageddon.

Mr. Walker has been traveling the country, speaking out about the perils of out of control deficits and benefit programs. “He can speak forthrightly and independently because his job is not in jeopardy if he tells the truth,” said Isabel V. Sawhill, a senior fellow in economic studies at the Brookings Institution. In an AP story on October 2, 2006, it was stated that Mr. Walker wants to be “…talking to anybody who will listen about the fiscal black hole Washington has dug itself, the demographic tsunami that will come when the baby boomer generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government…”

While I commend Mr. Walker for having the courage to speak out, he has a major uphill battle as it’s not just TOUT-TV and the “Talking Heads” who stick their heads in the sand when it comes to the fiscal nightmare unfolding. A September CBS News/New York Times poll of 1,131 Americans found that the deficit didn’t even crack the top 10 issues mentioned.

Mr. Walker’s basic message is if we remain on this course, our national debt could grow from $8.5 trillion to $46 trillion (adjusted for inflation). That would almost be the total net worth of every person in America. Sadly, I believe Mr. Walker’s cries will be drowned out by the rhetoric from Congress and the “Don’t Worry, Be Happy” crowd.

Economic Tidbits:

n   Whoever controls the U.S. Congress is going to help decide one of the most dramatic government accounting proposals of the modern era. The Federal Accounting Standards Advisory Board (FASAB) has proposed to require the U.S. government to account for benefits accrued under Medicare and other social insurance programs in the same way corporate America does – year by year as people build up entitlements. President Bush is firmly opposed. Why? The FASAB proposal would transform the presentation of US government finances, in effect bringing forward the cost of rapidly increasing Social Security and Medicare obligations. President Bush has argued that the proposal implies wrongly that the government is contractually obliged to pay future benefits on current Social Security and Medicare rules. He fears that it would make it more difficult to reform the programs and put pressure on future governments to raise taxes. HELLO????  That’s exactly what must happen, but dare tell the average American the government is not going to honor what they believe is their right… (just another piece of the coming aging crisis).

n   Fed Chairman Bernanke recently stated, “Reform of our unsustainable entitlement programs must be a priority. The imperative to undertake reform earlier rather than later is great.” He went on to say that as the population ages, the nation will have to choose among higher taxes, less non-entitlement spending by the government, a reduction in spending on entitlement programs, a sharply higher budget deficit or some combination thereof.

Government spending on Social Security and Medicare alone will increase from about 7 percent of the total size of the U.S. economy to almost 13 percent by 2030. Mr. Bernanke declared, “The fiscal consequences of these trends are large and unavoidable.” I guess Mr. Bernanke doesn’t listen to the campaign ads we’ve endured that tell us how if elected, so and so will cut our taxes and provide better services-LOL!!!

n   Large-scale productivity gains have greatly aided economic growth in the U.S. but those days appear gone. Productivity of American workers slowed to a standstill recently while wages were rising at the fastest clip in more than two decades. I guess the average American worker is tired of doing the work of two or three people and now wants to get paid for it.

n   No one likes a party-pooper. Over the past several years, Americans borrowed trillions of dollars from foreigners so they could buy flat screen TVs, build homes and fight a war. No one seemed worried that despite mounting borrowing, the nation’s payments on its net foreign debt barely budged. I’m here to remove the punch bowl because for the first time in more than 90 years, the U.S. is paying noticeably more to its foreign creditors that it receives from its investments abroad. The “talking heads” will tell you to “party on, dude” but let me warn you this is yet another piece of the economic Armageddon coming together.

n   I wish I had a dollar (not U.S. of course) for every time I heard one of the “talking heads” talk about a “Goldilocks” economy and a “soft-landing”. First, let me remind you of the Goldilocks fable http://www.ongoing-tales.com/SERIALS/oldtime/FAIRYTALES/goldilocks.html . In the end, Goldilocks runs for her life!  And as far as soft landings go, you have more of a chance of finding a leprechaun than an actual previous soft-landing.

U.S. Stock Market –

While the financial media and general public have been fixated on the DJIA 12,000, yours truly has been writing about how such an event could set us up for one of the best selling opportunities in a long time. A whole host of negative technical divergences are now visible; while the key fundamental factor, economic growth, is clearly heading south (the payroll reporting is now a farce and likely to only add to market volatility). 

Knowing that the Wall Street talking heads will pull out all the stops to hold the market up until their big bonuses are paid, and keep the holiday atmosphere that grips Wall Street from Thanksgiving Day through New Year’s Day, we may have to wait a few weeks into January before the ultimate top is in place. But make no mistake about it; the next several weeks are strictly selling opportunities. Exposure to substantial general equities positions not related to precious metals and uranium is not warranted, IMHO.

North of The Border –

The good, the not so good, and the bad.

First the good.

• The Canadian economy created 50,500 jobs in October while the jobless rate dipped to 6.2 percent from 6.5 percent. Full-time employment continued to grow, increasing 68,000 in October. Alberta and Saskatchewan continue to outshine the rest of Canada.

•  Canada’s economy expanded at the fastest pace in six months in August.

The Not So Good

•  The annual rate of inflation matched its lowest point in two-and-a-half years in September as consumer prices eased to a 0.7 percent pace. However, core prices increased to 1.7 percent from 1.5 percent. If you take out the effect of the GST cut, the rate was 2.2 percent. The fact that greatly lower energy prices help prices ease is a double-edged sword for Canada, as producing energy is one of the pillars of its economy.

The Ugly

• Just when most Canadians closed their doors to Halloween trick or treaters, their government scared the Begesus out of them by putting forth an end to the tax privileges of income trusts. The rush by Bay Street to roll out income trusts has helped keep the Canadian stock market buoyant.

• While most still hold onto a belief that oil prices will make back all the sharp losses since August and then some, lower energy prices have softened the stock market bulls run at a time when their biggest trading partner, the U.S., is falling further down a slippery economic slope to recession.

I maintain a bearish outlook for Canadian equities except those related to precious metals and uranium.

Gold –

On October 31st, with gold at $604, I issued an alert http://www.grandich.com/docs/alert_10-31-06.pdf  that suggested gold was poised to break out above key resistance in the $610 area. It did and is now in a position to make a run to $700 before the year’s end.

My bullish argument remains the same:

n   The United States reign as the #1 world economic power that is loved by most is over. Uncle Sam is persona non grata in more places than ever before. As each day goes by, more and more of the world realizes the emperor indeed has no clothes. Like pigs in mud, Americans have rolled around in an orgy-like craze for debt and the spigot that allowed more mud to be formed is being closed as we speak. In the end, the value of a country’s currency is determined by its economic prowess, or lack thereof. The U.S Dollar has only one long-term direction—down. No single factor has a better track record than the 85% inverse relationship between the U.S. Dollar and gold.

n   Physical and Investment demand – For a few thousand years, gold has been the clear choice versus paper currencies in economic, political and/or social turmoil. There’s little doubt that we’re now in one of those periods and things are going to get worse before there’s any chance they can get better. While demand for gold as jewelry can slip if there’s a serious economic contraction, I believe it can be more than made up by demand for gold in lieu of financial assets.

n   Mine supply continues to wane and miners appear to have a major uphill battle on several fronts just to maintain past production, let alone increase it.

n   Gold has replaced the U.S. Dollar (or at least now gets equal billing) as a place to go when geopolitical tensions arise in the world. Sadly, it’s only a question of when, not if, the Middle East is again on the front page. It’s a ticking time bomb with little or no fuse left.

n   While I believe it’s fool-hearty to think gold is manipulated each and every day (that’s what some seem to say whenever it’s down or has declined from higher prices), I do believe a group or groups has in the past and is likely in the future to continue to cap or manipulate the gold price. But again, I urge you not to use manipulation as the only excuse gold is down on a particular day. There are many technical and fundamental reasons and those who only see manipulation are not doing you any favors in being blind to other reasons. This, by no means, lessens my view on manipulation. I believe it occurs, but to say it is the only reason gold declines is a form of sour grapes.

While we can still retest $610 to confirm it is indeed support, any thought that the recent decline was the end of the bull market should now be put to rest.

Silver –

Silver remains the poor man’s gold but should tag along with gold and sometimes lead the way.

Platinum and Palladium –

Talk of a platinum ETF rocked those of us who watch it like we watch paint dry. I maintain my bullish stance towards both but some healthy profit-taking near term in platinum would come as no surprise.

Copper –

As the U.S. heads toward recession (second largest user of copper), an overall slowdown worldwide in 2007 is likely. I believe that’s why despite the euphoria for copper, inventories of copper are beginning to rise. Technically, copper has formed an extremely bearish chart formation.

As you can see, copper has been making a series of lower highs since June with the $3.20 area major support. A break below $3.20 on a weekly basis could lead to a rather fast drop back to $2.40, as there’s little support until that level.

Uranium –

I thought about a heading like “Uranium explodes to the upside” or “Uranium has a glowing future,” but then I would also have to start stroking myself for a good call (even a blind squirrel can find a nut sometimes) or even thrust myself into that “legends in your own mind” debate on who the original uranium bug is. But since my remaining goal in life is to achieve the b-l-e in humble, I’ll just say it’s time to raise my uranium target to $100.

While Cameco’s Cigar Lake incident “lit” the investment world on fire (okay, so I did resort to a cheap pun after all), two key factors continue to drive uranium prices higher:

n   Inadequate mine supply (further enhanced by Cigar Lake incident), and

n   A worldwide transformation change for base load electricity generation.

It’s critically important to recognize this as a secular bull market and not cyclical. It’s also equally important to realize that unlike most other metals, a sharp rise in price is not going to dramatically cause users sharply higher operational costs. Even at $100 a pound for uranium, the average nuclear plant is likely to experience less than a 10 percent increase in overall costs.

Outside of a nuclear plant disaster, there appears little or no reason not to think the march toward far more nuclear power usage can’t continue. We’re already witnessing serious interruptions to electrical power in the world. Even the U.S. is contemplating building nuclear plants again.

The Cigar Lake incident has ratcheted up the bullish scenario for uranium several notches. While Kazakhstan and Olympic Dam remain potential new areas for supply, Cigar Lake was without a doubt the most likely resource the industry would have bet on coming to fruition and on time. Now, I think you cannot only question how much longer it will take for Cigar Lake to come on line, but will it at all? I also think it’s going to make new near surface deposits a premium.

I’ve said the uranium market, and in particular uranium junior resource stocks, could go “ballistic” before it’s all send and done.  While we’re not at that stage yet, I do think we’re all but certain to see a fast and sharp correction as many of these shares are overextended. But such a correction may not take hold before even bigger run-ups take place. I’ve noticed some giddiness in the sector, but not enough to throw out a caution flag- yet.  Personally, I am taking some profits and would likely continue to do so if we continue to go straight up without a pause. Those of us who have been in this sector from much lower levels have a luxury those just coming to the party don’t. To the latter I suggest you use a scale up and down purchasing plan because when the sharp correction comes, it usually shakes out mostly those who only arrived a short time ago.

Oil –

Oil is attempting to form an intermediate bottom above $57. I think you only turn bullish on a breakout above $65 or else wait for what looks like lower prices towards $50.

U.S. Dollar Index –

As mentioned earlier, I fully anticipated a much lower U.S. Dollar on the back of a weakening U.S. economy that is likely to spiral down as years of living way beyond our means through an orgy of debt comes home to roost.

In addition, we’re seeing numerous economic, social and political improvements throughout the Euro-zone, which should bode well for the Euro. Former Federal Reserve Chairman Alan Greenspan said last week that both private investors and central banks were shifting away from the U.S. dollar and toward the Euro. “We’re beginning to see some move from the dollar to the Euro, both from the private sector… but also from monetary authorities and central banks,” said Greenspan at a conference sponsored by the Commercial Finance Association. It’s amazing how much better he can see since leaving his post at the Fed.

The United Arab Emirates, the second-largest Arab economy, signaled that it might cut its holdings of U.S. dollars by almost half.

I also think the Japanese yen has become quite attractive and am looking for the yen carried trade to come apart in 2007.

Mining Shares –

Just when it looked like the junior resource market (not including uranium plays) would have to wait for 2007 before rallying sharply, we’ve seen a nice bounce. With gold’s correction apparently behind it and a likely top being put in by year’s end in the general North American equity markets, it may not end up being a blue Christmas after all. We shall see if Grinch is just hiding in the weeds.

-- Posted Monday, 6 November 2006 | Digg This Article

Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.

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