While You Were Sleeping
Research for Online Investors

by John Dalt

8/02/11

The House of Representatives passed the debt ceiling bill last night, and the Senate is expected to take it up today.  This news has kept the headlines full during the ups and downs of the negotiations.  It is easy to become fixated on a “big event” like the debt ceiling.  It becomes THE STORY on all the business channels and crowds out coverage of other events.  Some of these other headline stories are just as important to your financial health.  Let’s see what has happened While You Were Sleeping.

Early this morning, Italy and Spain’s borrowing costs hit record highs as investors lost confidence in the latest eurozone rescue package.  The Italian stock market hit a 27-month low.  British bonds are attracting investment funds as a safe haven.  While Italian 10-year bond interest rates rose to 6.3%, British 10-years hit all time lows of 2.76%.  Investors in Spanish 10-years were demanding 6.5% early this morning.

Not to be left out, the credit default swaps (CDS) on Portuguese bonds also rose.  Jane Foley, a currency strategist observed, in the Guardian, that British economic fundamentals are “far from attractive, but less grim than other countries.”  Sounds like the tallest midget syndrome we wrote about a few days ago.  Money is seeking out the “least bad” safe haven.

Yesterday, the market rallied early on news an agreement was reached on raising the debt ceiling.  Thirty minutes after the market gapped up the Institute of Supply Management numbers came out showing the worst manufacturing activity in three years.  The market tanked with one of its biggest swings of the year.  This manufacturing bad news came on the heels of similar data out of the United Kingdom.  British manufacturing stalled in July for the first time in two years.

Last Friday afternoon, the White House announced an “agreement” on new economy standards for U.S. autos.  Present economy standards require a fleet wide average of 27.8 miles per gallon (mpg).  By 2025, automakers will be required to meet the new standard of 54.5 mpg.  All things are possible to a bureaucrat or a community organizer.

The Administration boasted that this “agreement” was hammered out by government regulators, labor unions, California representatives, environmentalists and of course the automakers.  One automaker referred to the new standards as the “electric vehicle requirement” agreement.

No doubt the cost of vehicles will increase significantly as automakers turn to more exotic materials and invest in expensive research to try to meet these standards.  The Government will not show this as inflationary though, statisticians will count the “increased value” received with a car the size of a tin can, powered by a spring and “black box.”

The L.A. Times quotes the President as calling this “the single-most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.”  Our question is, “Why not start drilling for our own oil?”  That would be the single biggest step we could take to reduce our dependence!

Two weeks ago, Iranian media reported the military had shot down a U.S. spy drone over one of their “secret” uranium enrichment plants in Qom province.  The story was pulled back a few days later.  Last week, the Washington Times reported on Iranian missile development.  Iran is concentrating on missile development, nuclear weapons and naval capability.

According to the article, Iran presently has enough low-enriched uranium for three nuclear bombs.  They will have enough highly enriched uranium within two months for one bomb.  The Revolutionary Guards recently launched long-range ballistic missiles from missile silos.  They successfully tested two missiles capable of carrying nuclear warheads into the Indian Ocean.  Their missiles with a 1,200 hundred mile range can target Israel and all U.S. bases in the Middle East.  Iran has received missiles from N. Korea with a 2,000 mile range that can hit most of Western Europe.

Most troubling, Iran has equipped their frigates and destroyers with missile launchers.  These launchers bring the U.S. within reach of any Iranian missiles.  The article is written by an ex-CIA agent who served undercover in the Iranian Revolutionary Guard.  He writes of the danger if Iran launches a nuclear missile from the Gulf of Mexico and detonates the bomb at high altitude.  This is called an “Electro-Magnetic Pulse” (EMP) attack.  It would leave no debris to track the country that launched it, and would destroy electronic switches, streetlights, compressors and telecommunications across the country.  Goodbye, cell phone.

Robert Gates retired as Secretary of Defense last month.  He reportedly asked Israel to wait until he left before taking action against Iran’s nuclear facilities.  The rumors have been in the air for the last three years…or longer.  The arguments seem to ripen every time I revisit this topic.

The market is down this morning, is spite of the agreement to raise the debt ceiling.  There are other problems in the world economy.  Europe looks more and more like a basket case that will spread joy for the foreseeable future.  We just can’t see with clarity how bad it can get, or more importantly, we can't see how it will not engulf the world economy.

Quote:
If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.--- Milton Friedman

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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