Greece’s Near Miss, Spending Reform, Volatility Returns, The New Oil Frontier and More!

by Addison Wiggin & Ian Mathias

• Eurozone dodges two bullets… why it’s far from “all clear” for the euro and pound
• Obama announces surprising spending reforms (unsurprisingly small)
• Alan Knuckman on trading the return of market volatility
• Plus, one of Byron King’s big takeaways from his trip to Brazil

  We can hear the sigh of relief all the way across the Atlantic. The euro survived its gravest test since inception early this morning. Greece, nation of olive groves and ancient myths, successfully issued about $13 billion in debt at auction.

In a foreshadowing event for all nations with heavy debt loads, the Greek treasury will have to pay 6.2% interest on the notes -- half a point higher than when the auction began and nearly three points higher than the German equivalent.

This is the first auction since the country was downgraded by all the most reputable rating agencies (sic) on Wall Street. We suspect the Greeks are not out of the woods just yet. Greece still has to sell almost $75 billion -- about 20% of its national GDP -- more debt this year. But at least for now, the government will stay afloat…

Ergo, the euro won’t have to suffer the repercussions of a member state default.

  For its part, the U.K. economy managed to grow in the fourth quarter of 2009, says the Brit government this morning. A whole 0.1%!

“What a snail’s pace,” our currency adviser Bill Jenkins bemoans. “Headlines around the world are blaring that Britain has emerged from recession. Based on the recent level of economic activity and data releases, which have been fairly buoyant for the pound, forecasters were calling for an advanced GDP reading of +0.4.

“The result? A paltry +0.1%... essentially, reaching only 25% of its expectations. And knowing there are revisions to be had in this figure, it is certainly not impossible for it to turn south once again.

“This poor showing was also a factor in other currencies overnight as virtually all the risk pairs ended in favor of the dollar. Such negative surprises increase the amount of flow into the dollar as money seeks a safe haven. But there is a lot of terror just below the surface.”

  The dollar index is up about half a point from yesterday’s low, to 78.6.

   On this side of the pond, the Washington rumor mill is abuzz this morning. Obama, the whispers say, will announce a spending freeze on programs deemed “discretionary” -- education, transportation, national parks and the like -- in tomorrow night’s State of the Union address.

Few, if any, of the president’s freezes will take place this year, however. The 2010 fiscal year budget deficit will come in around $1.3 trillion -- just shy of last year’s $1.4 billion record, the CBO estimated today.

It’s all moot really, isn’t it? As one reader of The 5 posted to our blog yesterday: “No one who knows how to count thinks Obama and Congress can reduce the deficit or debt anytime soon. Eighty percent of the U.S. budget goes to five WILDLY popular programs that will never be cut: Social Security, Medicare, Medicaid, interest on the debt and defense. They’ve tried ‘cutting the budget’ before, but nothing ever comes out of it. It will take a BIG commitment from the Greatest & Silent (born 1930-1945) generations to reduce their benefits and scale back our military. Otherwise, it is all just smoke.”
 

  On the housing front, some hesitant signals from the latest Case-Shiller home price index.

“While these data do show that home prices are far more stable than they were a year ago,” notes S&P’s David Blitzer, “there is no clear sign of a sustained, broad-based recovery.”

  The fallout of the Stuyvesant Town and Peter Cooper Village foreclosure is claiming some familiar victims. Turns out some perpetual losers had their hands in this honey trap… the California Public Employees’ Retirement System (CalPERS), a Florida state pension fund and the California State Teachers’ Retirement System are set to lose about $850 million. A handful of hedge funds will take some big haircuts, too, along with bizarre government entities like the Church of England and one of Singapore’s sovereign wealth funds.

  The American markets could not care less about the world’s largest foreclosure, apparently. After last week’s sell-off -- the worst in nearly a year -- the S&P bounced back 0.2% yesterday. Major indexes opened down just a little bit this morning.

  But there is definitely fear in the air. After bottoming out on the Jan 11, the Volatility Index climbed over 55% -- from a low of 17 to as high as 27 late last week.

“I believe we’re still at a reasonable level of volatility,” notes our calm and collected resource trader Alan Knuckman. “If anything, last week’s correction was long due. The 5% S&P sell-off was the worst since March 2009. Put in perspective, though, 15-month S&P highs were made Monday, Jan. 19 -- a mere five trading days ago.

“Last week has definitely gotten our attention, but remember, we have seen this action repeatedly before. For the last 10 months, every time the market looks like it will turn down, it has responded with a rally to new relative highs. Take a look:

“One component in pricing for the options that we trade here at Resource Trader Alert is volatility. For our purposes, it helps us determine simply to buy an outright option if prices are cheap or to purchase a spread if they’re expensive. An increase in volatility is an increase in price movement -- and don’t forget we need the markets to move in order to make money on our positions.

“It may be cliche, but my nearly 20 years of experience makes me most afraid when others are not and gives me a sense of calm when the public is frantic and unhinged… Risk is always quantified and controlled with our strategies and that does not change as volatility increases, but opportunities do.”

Harnessing last year’s volatilty, Alan called 19 winners out of 24 recommendations, with an average gain of 70%. So far in 2010, he’s delivered a 67% return on a Canadian dollar play. Learn more about Knuckman and Resource Trader Alert here.

  For all the dollar strength today, gold is holding its ground. It’s down just a few dollars from yesterday, to $1,095 an ounce. Oil is just a bit lower too, down to $74 a barrel.

  “Namibia is the new frontier oil province,” Byron King reports from the frontlines in Rio. “I’ve been meeting with senior executives of the oil service industry. I’ve toured the facilities of Halliburton and FMC Technologies. I’ve met players from all over the world. And I spent a long afternoon discussing both oil field history and current events with a retired member of Brazil’s national petroleum agency, ANP.

“The consensus: The offshore regions of Namibia are absolutely -- as the saying goes -- ‘hydrocarbon prospective.’ The pros showed me seismic, geochemical and satellite data. I saw gravity and magnetic maps. If there’s a frontier spot on earth where you can say that drilling risk is low for wildcat development, it’s offshore Namibia.

“Nothing is easy, of course. There aren’t a lot of wells offshore Namibia. Just a handful. But we know there’s a giant natural gas field at Kudu in the south, immediately north of the Namibian territorial line with South Africa. So there’s a hydrocarbon system out there. Now we know there’s gas, so where’s the rest of it? As Marcio Mello says, “If I see a little baby, I look for its mama.”

Byron has one company in the Energy & Scarcity portfolio perfectly poised to profit from a Namibian oil boom. Early investors in Saudi Arabia and offshore Brazil got plenty rich from similar investments. Keep up with Byron’s escapades here. 

  “As a business owner, I am the last to get paid,” a reader writes. “If I don't make a profit (a real profit... positive cash flow), I don't get paid. A lot of small business owners don't get a pay check; they just keep what's left over. Therefore, they don't pay FUTA/SUTA and don't show up on the unemployment role, because they probably are eligible for benefits.

“I assume that there are a bunch of 1099ers, consultants, contract employee-type folks that aren't counted as unemployed that haven't made a dime in months. Think about all the people that do a Schedule C on their 1040s as self-employed (“Joe the Plumber") who never pay SUTA/FUTA, and therefore aren't counted as unemployed.”

  “Do you guys ever fact check anything?” another reader asks. “Take a look at these statistics:

Farmers as percentage of the work force in 1930: 21%
Farmers as percentage of the work force in 1940: 18%
Farmers as percentage of the work force in 1950: 12.2%
Farmers as percentage of the work force in 1990: 2.6%

“Farmers had dropped under 50% of the work force as early as 1880. While the trend is clear, to say that "half the people in the country were still farmers" during the 1930s is poppycock. That makes you poppycock peddlers. Sheesh.

“Additionally, more farmers today have nonfarm income from other work. If they lose that work, they are counted among the unemployed as well, though they are still farmers. These numbers become so squishy they become almost meaningless when you attempt to compare them to the past. The point may still be valid, but the reasoning behind it is not.”

The 5: You’re right. Facts are stubborn things. Doug Casey’s argument was not so much that the unemployment numbers are unreliable (which they are), but that today “unsustainable patterns of production and consumption have become far more ingrained.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Poppycock? Seriously?