Break out the Crystal Ball
Research for Online Investors

by John Dalt

3/30/10

Last year we called crude oil the ‘Trade of the Year’; we recapped the performance of the trade on 12/31/09 when we recorded a 79% gain on the year.  What do we think will be the Trade of the Year for 2010?

There are so many areas to choose from.  Should we look for a contrarian play, like health care?  A Blue Chip, like Apple, that is taking over the world or large macro trends?  An argument can be made for each one of these, but I don’t think these will hold the biggest gains.  Let me explain.

The U.S. has spent money for the last eighteen months we do not have, ON A SCALE NEVER SEEN BEFORE.  Last year’s budget required borrowing 49 cents out of every dollar spent.  Congress just passed a health care bill that will raise taxes and balloon spending in the future.  Social Security is now paying out more than it brings in.  Seniors are taking earlier retirement because of high unemployment.

Federal tax receipts are approximately $1 trillion per year, every dollar spent over this amount has to be borrowed.  A few years ago, the treasury started selling more short term notes, which reduced interest expenses.  The yield on short term notes is almost always less than borrowing long term.  This helped keep the budget deficit as low as possible at the time, but now is coming back to haunt us.

This debt must be rolled over, or refunded, and will create a tidal wave of debt that must be sold into the fixed income market.  In addition to the $1 trillion the government needs to fund current annual expenditures, we estimate over $3 trillion is going to rollover in the next two years.

Earlier this year, Treasury had its first $100 billion week.  We sold more treasuries in one week than we used to sell in one year.  There are more of these weeks scheduled.

Added together, over the next two years the Treasury will have to borrow at least $5 trillion dollars.  This amount does not include off-budget items that are likely to move on-budget.  How much more money will Fannie Mae and Freddy Mac need?  Case-Shiller reports this morning lower prices on homes in the last month.  The FDIC is closing banks every week.  The FDIC collected advance insurance fees from banks last year to handle all the bank closings, and they are closer to insolvent than ever before.  The FDIC can borrow money from the Treasury, but where does that come from?  More Treasuries to sell!  These three entities could easily require another $500 billion in the next year or two.

Within three years, interest expense will be our largest budget item.

In fiscal year 2009 the U.S. paid $187 billion in interest on the national debt, with $1 trillion in tax receipts.  This year the estimate is $383 billion in interest expense.  We have added more money on the debt, and interest rates are starting to push higher.  The national debt ceiling now stands at $12.39 trillion.  If interest rates rise to 5% in the next year on a mixed maturity basis, the interest payments in 2011 will be $619.5 billion, again on one trillion in federal revenue, or 61.9% of cash flow!

CNN reported on March 20 that the congressional budget office projected deficits “averaging almost $1 trillion every year for the next 10 years.”  In three years our debt will be more than $15 trillion.  Tax receipts may increase by 3% per year, as the economy recovers placing them at almost $1.1 trillion.  Interest rates will continue higher as we sell more and more debt.  At a 6% mixed maturity basis, annual interest expense in the Federal Budget will be $900 billion.  Do you see a trend here?  These projections anticipate a slow trend higher in interest rates, as we borrow more and more.  What happens if the market gets spooked?  Greece paid over 6% interest yesterday for 7 year notes.

Tomorrow we will reveal our Trade of the Year for 2010.

T o the mailbag:
Will you to create an investment group that starts with slightly over $100,000 and turns it into several hundred million?---paid up subscriber C.F.

John’s response:  Good idea, I’ll work on it. How much would you pay, how long do I have?

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process."---Alan Greenspan, 1966

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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