Uncle Sam’s Blank Check, The Yield Curve, History Says Buy Oil and More!

by Addison Wiggin & Ian Mathias

• Best Christmas gift ever? Treasury offers Fannie and Freddie unlimited funding
• Dan Amoss on a dangerous trend for stocks… and the American Empire
• Soft commodities enjoy banner year… history says bet on oil now
• Plus, Chavez returns! Venezuela threatens to nationalize automakers

  Say what you want about the U.S. Treasury, but this much is true: They give damn good Christmas presents.

Just ask Fannie Mae and Freddie Mac. If you haven’t heard – which many people haven’t, since the Treasury quietly pushed this through on Christmas Eve – Fannie and Freddie now have access to unlimited government funding. Seriously, limitless. 

After being put into conservatorship in September of last year, Fannie and Freddie were given a nice $200 billion government cushion. (The two mortgage misfits have already managed to burn through $111 billion of that bailout.) The Treasury announced on Christmas Eve that it has removed the $200 billion cap, “to accommodate any cumulative reduction in net worth over the next three years.” It’s a slimy move, but we’re a tiny bit impressed… what’s the point in pretending that either of these institutions will ever be allowed to fail?

As taxpayers we had no say in the matter, but as investors we take note: It would be hard to bet against any company in 2010 that’s just been written a government-backed blank check. (Shares of Fannie and Freddie opened up over 15% this morning.) Also, isn’t this an implicit Treasury forecast of more housing hurt? 

  Thus it’s no big surprise to see the yield curve remain at record levels. The trend we noted in last Wednesday’s 5 remains intact today: The yield on a U.S. 10-year note rose 5bps to a four month high of 3.85%, while the yield on two year paper is at 1.01%. So that’s a 2.84% spread, just one basis point off of last week’s record. 

  “Now that fears of a deflationary spiral have waned, a rising Treasury note yield is bearish for stocks,” notes Dan Amoss. “Rising Treasury yields increase mortgage rates and decrease the attractiveness of rate-sensitive stocks like utilities, banks, and REITs.

“A rising trend in Treasury yields is especially dangerous when you consider that the biggest threat to the economy in 2010 is the backlog of mortgage foreclosures that have yet to work their way through the system. As these homes work their way through the system, it will be another deflationary shock to the banking system. In this deflationary shock, I doubt we’ll see Treasury yields move anywhere near their 2008 lows. Higher Treasury yields will keep pressure on interest rate-sensitive stocks, while the continued deflationary pressures in housing will keep pressure on credit-sensitive stocks.

“All of this adds up to a much more hostile environment for the stock market than we’ve seen in 2009. With valuations high, long-term interest rates heading up, and credit stress still an issue, the environment for short selling is growing more favorable.”

  And so the U.S. Treasury is “gettin’ it while the gettin’s good.” They will auction $44 billion in two-year notes today, the first of three auctions this week that will net a record-tying $118 billion in IOUs.

“Since the Fed has jawboned interest rates in the shorter end of the yield curve down to record low levels,” Dan adds, “the Treasury is finding it incredibly cheap to finance the deficit. But this will not last forever – especially at the longer end of the yield curve. It will gradually become more expensive to refinance the national debt, which will suck capital away from the private sector.”

  The mighty American shopper is growing hesitant. Christmas spending actually rose this year compared to last, MasterCard reports. But there is a glaring asterisk next to this year’s number. There was an extra shopping day in this holiday season (from Black Friday to Christmas). Without it, MasterCard says sales might have been down 2-4%.

  Stocks are treading water today. Out on holiday last week, facing another day off this coming Friday and with most books nicely balanced for the remainder of 2009, traders don’t have much incentive to make any big wagers today… the S&P is right at breakeven as we write.

Commodities, though, are a different story. Even in spite of some dollar weakness this morning, gold lost about $10 an ounce. The spot price is now barely above $1,100.

  Oil has been on the winning side of the only real “Santa Claus rally” this year. From a low of $72 early last week, light sweet crude has leaped back to $78 a barrel this morning. Should it remain higher today, crude will have rallied four days in a row – it’s longest winning streak since October. We’re told some good data from last week, that faux-positive retail report mentioned above and a pause in the dollar rally has oil buyers excited. Here’s another feather in their cap:

  “If 2010 follows the pattern of the past 15 years,” notes Frank Holmes of U.S. Global Investors, “we are approaching the start of a seasonal climb in the price of crude oil that could present a good investment opportunity in energy-related stocks…

“As the 15-year chart above illustrates, much of the recent drop in the price of oil can be explained by commodity price weakness that typically occurs from October through December, and thus does not represent a cyclical downturn.

“These seasonal factors include a reduction in driving during the fall and more moderate temperatures between the summer cooling and winter heating seasons. During the 15-year period, January has typically been the month in which the seasonal oil price trend starts back up again as markets prepare for the summer driving season.

“It is interesting to note that, while crude oil prices are usually soft during this time of year, energy stocks begin to strengthen in December, offering nimble investors an opportunity to capitalize on favorable seasonal strength to come.”

  Soft commodities were the some of the stealthiest winners of 2009. Cocoa is up 28% this year to a 31-year high. Sugar rose 165% in 2009 to a 28-year high. Orange juice rallied about 90% this year. Most gauges for the price of tea are at all time highs, too.

We don’t mean to brag, but these trends must have made for some very comfortable Christmases for our Resource Trader Alert readers. RTA editor Alan Knuckman went 19 for 24 this year, with his average recommendation – including the few losers – rising over 70%. If you’re looking for big profits in 2010, RTA is a great place to start.  

  Last, some lessons on big government and a sign of the times from our favorite presiden-tator.

And his color coordinated parrot…

Hugo Chavez is now threatening to nationalize Toyota operations in Venezuela – maybe even the whole auto industry. Mr. Chavez says the automaker isn’t producing enough of the off-road SUVs the nation craves, nor is it sharing enough of the manufacturing technology with the local governments as he has deemed appropriate.

“You tell the people at Toyota,” he said, “that they have to produce this model and we are going to impose a quota, and if they don't meet it, we will punish them… We'll take it, we'll expropriate it, we'll pay them what it is worth and immediately call on the Chinese.”

At least for the sake of Venezuelans, we hope Mr. Chavez’ foray into automaking goes better than the government ventures (total nationalizations) in electricity, cement, oil and coffee. Chavez also noted, in calm passing, that a U.S. spy plane recently flew in Venezuelan airspace and that if it happens again the military will try to shoot them down. Great idea! 

  “Maybe I'm just getting old, or old enough to at least have a longer view of things,” a reader writes, off to an interesting start. “But your unnamed reader who says, ‘The United States of America will cease to exist as we knew it 50 years ago,’ displays a naivete that's all too prevalent in the good ol' US of by God A.

“[He thinks] that there is some magical America, perfect in all its parts, that can be preserved in amber if not for those evil, nasty (pick your poison: Tories, ignorant frontiersmen, slavers, robber barons, anarchists, city folk, bankers, commies, Democrats, Republicans, Catholics, Blacks/Latinos/Jews/et al, imbibers of alcohol, arms merchants, oil barons or some other group) intent on "destroying America". 

“Of course the USA will cease to exist as we knew it 50 years ago. It already has. And the USA of 50 years ago was unimaginably different than the USA of 1909, which was a vastly different nation than the USA of 1859, which was... well, you get the point. The USA isn't just some abstraction (though it is that, to be sure).  It is a society made up of human beings whose aspirations, abilities, limitations and just plain human cussedness defy the cut-and-dried academics. 

“In sum, it's a dynamic and ever-evolving place, one that outwardly would probably befuddle the Founders were they to make a re-appearance this week (and wouldn't that be fun).  But oddly enough, they would not be one bit surprised that the joint has changed with "new management," nor that there was ferment, conflict and change… because they anticipated precisely this sort of society. Indeed they encouraged it. That is the essence of their genius. That is there ever-renewing gift to us, the great, grubby, unwashed masses of the most amazing social experiment in the history of mankind. Long may it live in all its frustrating glory.”

Cheers,

Ian Mathias
The 5 Min. Forecast

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