The Tallest Midget
Research for Online Investors

by John Dalt

7/28/11

The market is up today on hopes the House will pass a bill, send it to the Senate and then onto the President for his signature.  The House is going to vote on Boehner’s new plan that reduces the deficit by $915 billion over the next 10-years and raises the debt ceiling $900 billion.  House Leader Boehner drew up this plan rather than take the Penny Plan out of committee.

Harry Reid said the Senate would take up the bill tonight…and it would be defeated.  The president’s spokesman said aids were advising the President to veto the bill if the bill reached his desk.  Hope is not a trading strategy.

The problem in the Senate is Harry Reid’s proposal won’t pass in the Senate or the House.  He will kill the only bill other the Cut, Cap and Balance that was tabled last Friday.  Look for more “negotiations” over the weekend.

If you are like 99% of traders, you are probably short Long-Term Treasuries.  You may be short the TLT (20-year treasuries) etf or long the TBT (Ultra Short 20-year treasuries) etf.  A fair question to ask is “Why haven’t interest rates increased.”  With the threat of the debt ceiling not being increased and the U.S. Treasury running low on money to make payments next week one would think investors would pull back from buying treasuries.

Here is what is happening.  The U.S. Government is poised to lose their AAA credit rating in the near future.  This isn’t because of the debt ceiling debate; it is because of the nature of the debate.  We are looking more and more like Greece every day.

The progressives absolutely will not admit the government has a spending problem.  Harry Reid, Nancy Pelosi and others have vowed to defeat any plan that cuts Medicare or Social Security.  They, and the President, want a “balanced approach.”  This is simply a media tested phrase to engender a favorable impression from independent voters.  The President likes to combine a “balanced approach” with class warfare populist rants that “fat cats ought to pay taxes at the same rate as their secretaries.  Big-Oil companies and private jet owners shouldn’t get tax breaks.”

Would you loan these jokers money?  Sheila Jackson Lee (D-TX) made it back from Libya and Iran to denounce the Boehner Bill on the House floor.  She went on an ‘apology’ tour and denounced the United States in broadcasts supporting the dictators in those countries.  Whatever happened to treason?

The U.S. Government faces a credit downgrade because the President and Senate will not embrace cutting the growth of government and pro growth policies to grow the economy.  Until they do, we are headed down the path of fiscal ruin.

How do we know the “balanced approach” is simply empty rhetoric?  The president’s desire to raise taxes on “billionaires and millionaires” would raise approximately $3 billion dollars per year.  If the Federal Government took ALL of the assets of every member of the Forbes 400, it would total $1.6 trillion.  That would balance the Federal government budget for one year, but would leave 400 new paupers to collect welfare.  Since the top 1% pays 38% of all income taxes, who would they take money from next year?

Italy sold five billion dollars in three year bonds yesterday.  The rates jumped to 4.8%, 1.1% higher than in June.  Spain’s interest rates are rising also.  Italy sold ten-year bonds for 5.77%, which was 0.8% higher than the interest rates they were able to sell ten-year’s at in June. According to the BBC, Italy passed a $98 billion dollar austerity plan earlier this month, but it did not impress investors.  They are concerned because Italy has the largest sovereign debt in the eurozone.

Greek debt has been downgraded again this week.  CNN reports that Moody’s rates Greek Sovereign debt “Ca” with the “probability of a default on Greek government bonds virtually 100%.”

So, why are U.S. Treasury interest rates staying low?  Look at the competition.  Uncle Sam is still the tallest midget, but this is a dangerous game.  Uncle Sam is getting shorter all the time.  Every month, the Treasury has to sell another $130 billion dollars in new debt to feed Washington.

Our Long-Term subscribers sold our position in TBT this morning at a wash.  Why?  The boat is too crowded.  No matter how the debt ceiling debate plays out, there are simply too many players on the short side of treasuries.  When a ‘boat’ gets that crowded, it is in danger of tipping over and somebody is going to drown.  We have referred to this type of situation before as a crowded room with one small door.  Everyone cannot leave at once in a panic, and some are going to get hurt.  Be careful if you are betting against Treasuries for a trade right now.

The mailbag:  Penny Plan?  I’m more partial to the nickel plan myself.---Long-Term subscriber D.J.

John’s reply:  The penny plan would cut an actual $33.82 billion off next year’s budget.  2012 spending would be $33.82 less than this year in ACTUAL dollars.  Next year’s budget is set to increase $236.74 billion (thanks to baseline budgeting).  Boehner’s plan that is being debated today will cut $22 billion from the baseline INCREASE.  In other words, the Federal government will spend $214.74 billion more next year than this year.  Only in Washington would this generate so much agony over the “terrible cuts.”

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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