Italy now officially a problem... Euro cracks... Debt deal passes – and one person likes it... Another record for gold... South Korea and Thailand buy gold... Jeff Clark's latest trade...
"Suddenly, Italy joined the other peripherals," said Justin Knight, a strategist at UBS AG in London, as reported by Bloomberg.
Not exactly, Justin... As we've commented many times in these pages, Italy was always with the peripheral "Euro PIIGS." It was always a disaster waiting to happen. The market just didn't realize it yet. Now, it does.
Italy's Financial Stability Committee will meet today to discuss the country's rising funding costs. There's no way Italy can fund its debt at current levels, but the meeting is a nice gesture. Yields on 10-year Italian bonds rose six basis points to 6.06%. And the spread over German bunds rose to 385 basis points – the most since the euro was introduced in 1999. (On a side note... Spanish 10-year debt rose four basis points to 6.24%. The spread over bunds is now 404 basis points.)
Italy's blue-chip index fell to its lowest in more than 27 months today. The index has fallen around 13% over the past month. Bank stocks, which are loaded with toxic debt, are leading the plunge. Our favorite Italian bellwether, UniCredit, is down 5.27% today, to 1.13 euros.
The European turmoil is finally pressuring the euro (perhaps China has stopped propping the currency). The euro hit $1.421 today... And over the short term, it has put in a bearish series of "lower highs and lower lows." When the euro breaks $1.40, billions and billions of dollars of hedge-fund money will be put to work on the short side. You could see a huge move lower in a hurry. Also... don't forget, when priced in gold, the euro is at an all-time low.
Now, on to something closer to home... Congress approved a deal yesterday to raise our national debt ceiling by $2.1 trillion – supposedly enough to fund the government through 2013 – with conditions for automatic spending cuts to reach a goal of cutting $2.4 trillion in spending over the next decade. As of this writing, the Senate vote is still outstanding (though we could guess what the decision will be).
As we've been saying since this debacle started, we're not surprised the government reached an agreement. What other choice did it have? We're also not surprised this agreement only solves the shortest-term problems (default and avoiding a downgrade). The only other thing the members of our government achieved through this process is exposing how petty and absurd they are. We've written plenty on the topic over the weeks, but what are other folks saying?
Yesterday, we highlighted PIMCO co-CEO Mohamed El-Erian's thoughts on the debt crisis. Today, El-Erian's partner, Bill Gross, weighed in via his monthly investment outlook. He feels like we do...
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The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They'll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet "A" for budgetary "Abuse," that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. |
Gross says the biggest shortcoming of this deal is its failure to address the "debt men walking" – the 330 million living Americans with promised entitlements. While the U.S. claims $10 trillion in liabilities, the present value of these future obligations is an additional $66 trillion. With no severe spending cuts or revenue increases, the government has no way to fund its current liabilities, much less Gross' "debt men walking."
To protect yourself, Gross says to invest in countries with cleaner balance sheets and higher real interest rates: Canada, Mexico, Brazil, and Germany. He also says to avoid investments in dollar-based indexes and again favor developing nations with growth prospects. Finally, Gross says to "purchase commodity-based real assets before reserve surplus nations do."
Wilbur Ross, another billionaire investor, is equally skeptical of the deal... Ross, speaking to the Wall Street Journal, said the deficit reductions planned in the deal amount to "rounding errors." Ross believes it's better that we reached a deal than if we hadn't. And he believes talks of a recession are overblown.
Instead, he sees the economy "stumbling along," much like Gross and El-Erian's "new normal." As for alternatives, Ross likes Ireland. He recently invested in Bank of Ireland, as he believes the country will recover faster than other European nations.
After much searching, we found one pundit with a positive view of the debt deal... "It will be good for the economy long term. It avoids doing more damage in the short term because the president refused to accept the types of deep spending cuts that many in Congress wanted." This comes courtesy of our friend, Treasury Secretary Tim Geithner.
The gold market doesn't have much faith in the new debt deal... gold hit another record today, trading near $1,643 an ounce. Silver is still above $40.
Jeff Clark sent a "trade alert" to S&A Short Report readers this morning saying they will "double their money with this bargain stock." His track record over the past couple months is incredible. He's recently booked gains of 80% in a day off Gold Fields (GFI), 80% in a week off the gold miners exchange-traded fund (GDX), and 55% in a week off Kinross Gold (KGC)...
Jeff also made 80% in less than two weeks on one of his June trades. And he sees a similar setup in the stock today. But the conditions are even better this time. Not only is this stock an "absolute bargain," but the S&P 500 is flashing a buy. Jeff wrote:
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Stocks are oversold. Investor sentiment is wildly bearish. And after trading below its lower Bollinger Band on Friday and then again yesterday, the S&P 500 rallied back to close inside the bands. So we have an S&P 500 "buy" signal. |
The last two times the S&P sent this buy signal, it rallied 75 points in a few weeks. And even better, a major investment bank just placed a "buy" rating on this stock, with a price target around 30% higher than today's prices. To learn more about the S&A Short Report, and potentially double your money on Jeff's latest trade, click here...
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New 52-week highs (as of 8/1/11): Vanguard Inflation-Protected Securities (VIPSX).
In today's mailbag, a subscriber who's actually taking our advice. We wish him the best. How have we pushed you outside your comfort zone and made you money? Let us know... feedback@stansberryresearch.com.
"Keep teaching! I love reading the information you disseminate. The knowledge helps me shut up the annoying know-it-alls I seem to run into." – Paid-up subscriber Steve
"I am putting one of your core investment strategies to work in real time. I am accumulating shares of Intel (a World Dominator with a growing dividend) and at the same time attempting to juice up the income stream by writing covered calls and selling naked puts (I want to own more shares at a lower price) on the stock. I will update you monthly and let you know how things are progressing. Talk to you again in September!
"PS Intel just recently increased its dividend from 18 cents to 21 cents a share. That's a 16.7% increase!" – Paid-up subscriber Peter
Goldsmith comment: We always love when a subscriber tries a new investment strategy. Much success to you, Peter.
Regards,
Sean Goldsmith
Baltimore, Maryland
August 2, 2011