But then earlier this month, the Federal Reserve came out and said, "Oh no, no. We didn't mean what we said about possibly easing back on our bond purchases. In fact, we're going to step back into the market."
I believe what I wrote in May... that there was no way the Fed could manipulate bond prices any higher (and bond yields any lower) than they had. When bond prices can't go any higher, they've got to go lower. And when yields can't go any lower, they move higher. Now, it appears that the Fed would like to test that hypothesis…
I think that 2% on a 10-year Treasury is the yield floor. And 5% on junk bonds and 4% on mortgages represent yield floors. I doubt they can go any lower.
Once again, our government is on the verge of shutting down...
The last time we were faced with this "dilemma" was in August 2011, when the government almost closed in the midst of a debt-ceiling debate.
The "debt ceiling" is a cap Congress sets for how much debt the government can have outstanding. And in August 2011, we were brushing up against the upper boundary... Without raising the limit, the government couldn't borrow any more money... and it couldn't pay its debts. The U.S. would face default.
Even as Democrats and Republicans on Capitol Hill approached the legal deadline... we knew their threats and demands were just posturing. The government wasn't going to put itself out of work.
Naturally, the government reached an agreement on August 2 to increase the debt ceiling by at least $2.1 trillion and cut spending by $2.4 trillion...
The deal was supposed to solve our debt problems until today. Now, two years later... we are again on the eve of another government closure.
The current disagreement is over Obamacare – Obama's health care initiative. The goal of Obamacare is to increase the number of Americans with insurance. In short, everyone is now eligible for insurance. And not just eligible... you're required to have it. All Americans must carry a minimum level of insurance by January 1. If you don't, you will be fined the greater of $95 or 1% of your annual income.
Insurance companies can't drop folks for getting sick... And they can't deny coverage. There will also be profit regulations placed on insurance companies.
It's a large entitlement program... The young and healthy pay for the old and sick. People who can't afford the new insurance will receive government money. The average cost is expected to be $328 a month.
Starting tomorrow, October 1, Americans can begin shopping for this new insurance. That is, unless the House refuses to let Obamacare go into effect...
Congress needs to pass a "continuing resolution"... essentially, a bill to allow the government to keep on spending money. Without it, the government would shut down. The Republican-led House amended its version of the bill to delay the Affordable Care Act (Obamacare's real name) for one year. The House version would also eliminate a tax on medical devices associated with the health care regime.
The Senate isn't having it. And if they can't agree, the government shuts down at midnight.
We maintain the same stance we did in 2011... This government standoff is all for show. That's not to say the country doesn't face serious financial issues. And it's true the U.S. health care system needs reform of some kind. (Though the answer isn't to burden our already broke government with more obligations.)
We simply know how the government works... And we have little faith in our politicians' ability to make the correct and tough decisions.
And keep in mind... regardless of how this drama plays out... It's really just a prelude to a new battle over the debt ceiling that Congress and the White House are due to have in a couple weeks...
Bill Bonner, founder of our corporate parent Agora Inc., is already looking ahead to that debate. He shared his thoughts today in his free, daily e-letter Diary of a Rogue Economist...
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Bill writes some of the best daily economic and social commentary in Diary of a Rogue Economist... If you haven't taken the chance to read Bill's work, we encourage you to sign up to receive it every day in your e-mail. You can sign up for free here...
Markets hate uncertainty... And we're seeing a selloff leading up to the potential government closure at midnight.
The S&P 500 and Dow Jones are down 0.6% and 0.8%, respectively.
Despite its flaws, investors are still flocking to the debt issued by the very government on the verge of closure... Yields on the 10-year Treasury were flat.
The air may be coming out of one of our favorite potential short-sale targets...
We like to short three types of companies: "frauds," overly indebted firms, and companies whose products are obsolete.
Although we never recommended selling short Tesla, in the May 24 Digest Premium, Porter argued we could have all three "boxes checked" with the electric-car manufacturer.
As Porter wrote, the car's batteries will die after five years. You can't drive the cars for long distances. The company also carries a large debt load, though it doesn't earn much money. As for "fraud," Porter wrote...
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As you can see from the following chart, Porter's doubts haven't kept shares of Tesla from soaring:
But a high price isn't reason enough to short a stock... that price can always go higher.
You need to see a catalyst that will drive the price lower before shorting a bloated stock... And recent research from Bank of America Merrill Lynch may show just such a catalyst. According to the bank's analysts...
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And even more institutional money may be about to leave Tesla. The company issued $660 million in convertible bonds in May. Investors holding those bonds, mostly professional investors, can convert them into common stock at $124 a share starting tomorrow, October 1. The stock is trading for more than $193 a share today. So a massive number of shares could hit the market starting tomorrow, which would push down the price.
New 52-week highs (as of 9/27/13): American Financial Group (AFG), Chicago Bridge & Iron (CBI), and short position in J.C. Penney (JCP).
In Friday's Digest, Porter penned another one of his famous "Letters from the Chairman of GM." He started these letters leading up to GM's first bankruptcy... And they've since been one of the most popular pieces of editorial we have produced.
Predictably, Porter's most recent essay generated tons of feedback. Most of subscribers seemed to appreciate the analysis – that the politics behind GM's last bailout are driving it to penury again. And most got the satiric device... Clearly, the actual chairman of GM isn't writing.
But as always... you can't please everyone. Send your thoughts to feedback@stansberryresearch.com.
"I live in New Zealand. I have every sympathy with the tone of your letter. We too have in our own small way similar interference by politicians. They persist in 'trying to pick winners' – a thankless task even if you are a motivated businessman with all the attendant risks attached and the motivation of risking your own money , employment etc. When will they ever learn?
"I fear they will sink the lot of us. On balance we have a growing welfare entitlement which is a similar drag on the economy and the real problem is the lack of political will to educate people to start to become financial independence. I especially like the [example] of the English in Malaya in the 1950s (whilst recognising the many terrible things on both sides that happened at that time) when they started a comprehensive national independent personal retirement scheme (funded to create defined contributions NOT defined benefits) that could be funded for a terrorist coming in from the bush and they purchased his rifle and ammunition off them at an inflated price 20% in cash to get them started and 80% to the retirement scheme.
"Who is going to war with their retirement plan?
"All it requires is innovative thinking with consequences, 'something the politicians excel at.' Misguided thoughts with no consequences to them." – Paid-up subscriber Robin Seal
"All I can say is you guys have balls, great big enormous ones, and I say that with thanks and in the most complimentary way. It's too bad the mainstream won't tell their lemming-like public the facts the way you portray them. If they did maybe the good ole US could work more like a true capitalism inspired country instead of heading straight down the socialist trail. Only wish there was a way, other than forwarded emails, for you to reach more people." – Paid-up subscriber Rick
"As a subscriber... I deeply resent how Stansberry tries to gain attention through fraud. Statements that are meant to shock... to garner more subscribers. How about a policy of ONLY disseminating TRUTH in all your letters and advisories... thus gaining subscriber confidence rather than skepticism.
"Since GM's Chairman did not write these GM letters... they are lies on their face. I don't trust any of your 'shock' letters and statements... and will cancel soon as my trial is up. Disgruntled subscriber." – Paid-up subscriber Richard Seifert
Regards,
Sean Goldsmith
Miami Beach, Florida
September 30, 2013