Thursday Oct 12, 2006

Twin Deficits

Taipan Group's Dynamic Market Alert

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Twin Deficits

by J. Christoph Amberger

Last year around this time, in one of our monthly strategy meetings, I had the Taipan Group editors and analysts give me their predictions where they were seeing the Dow moving in 2006.

I remember that my own prediction of a Dow moving past 11,000 was soundly derided -- especially by certain ladies and gentlemen on the WaveStrength team. Only my overinflated ego prevented me from suffering a body blow to my self-esteem.

Who’s laughing now?

It’s me, all right. And with the Dow blowing past 11,900 today and trading closer to 13,000 than to 10,000, it’s time for another daring prediction. Here we go:

The Dow will crack 12,000 before the end of the year -- if not the first week of November. There may be some back and forth that could take it down to 11,500 -- but the overall trend will remain up.

Now, I know that my colleagues at WaveStrength may disagree with me on that. That’s what I pay them for. I am by nature a long-term bull -- and I am bullish on the American economy. (If I weren’t I wouldn’t be living here!) And while WaveStrength has proven invaluable in predicting technical and even catastrophic short-term retreats in the major indices, I am a long-term, big-picture kind of guy. (That’s what they pay me for.)

So why do I think we’re in for a bullish ride? I’ve got two words for you:

Twin Deficits.

-- You may associate this term with the mantras of the permabears: Those who have been prognosticating the immediate demise of the American Way of Life because we import more than we export and we borrow to finance our spending.

Now, let’s look at the latest budget deficit numbers. I mentioned last Monday that at $250 billion for fiscal 2006, the talking heads are bemoaning this last deficit as “one of the highest on record.” If you’re looking at it from a dollar-and-cents perspective, they’re right -- $250 billion buys a lot of candy. But in relation to the United States economy, it comes in at 1.9% of 2005 GDP. In other words, it’s as if a guy grossing $50K a year in a good job takes out a $9,000 loan to pay for jet skis, a vacation and a flat-screen TV.

Compare that to Germany, which after selling part of the family silver still had to borrow 2.6% of GDP (after years and years of borrowing more than 3%). Compare it to Japan, which chronically borrows between 5-6% and thinks nothing of taking out 7% of GDP in new debt. Compare it to China, which despite record growth typically borrows over 5% of GDP. The Bush administration’s 1.9% suddenly doesn’t look all that bad – and cannot be credibly made responsible for the low exchange rate of the U.S. dollar against currencies like the yen and the euro.

In fact, given the 40-year new debt average for the United States is 2.3%, the 2006 budget deficit is not a bearish factor by any means.

-- Now take the current account deficit, which today came in at yet another record level.

Current account deficits mean that a country buys more from abroad than it exports. In a global economy, where you export jobs, pollution and manufacturing capacity to re-import products that are exponentially cheaper than those you could produce at home, spikes in buying signal one thing:

Consumers are buying.

They are buying because they have money. And they have money because they work.

At this point in time -- three weeks prior to the nationwide outbreak of the holiday shopping season -- a record current account deficit means mainly one thing: There’s going to be a whopper of a retail season ahead. Which means earnings galore for retailers and fat margins for manufacturers.

All of this -- a drastically reduced federal budget deficit and a productive last quarter -- should result in upward pressure on the dollar and on the major U.S. indices... both of which will combine in making U.S. markets and equities more attractive to foreign capital, triggering a virtuous self-reinforcing cycle.

-- If there was one aspect about the budget numbers, it is that they did not include the $130 billion or so in Social Security surplus, which was spent on other expenses.

Pilfering Social Security cash flows to finance spending is not restricted to the Bush administration; every government everywhere in the world does it. Even Al Gore -- despite his pious fantasies of a “lock box” -- would be spending the dough right now if he had been voted into office.

But the lack of political will to build a financial backlog against the ticking “age bomb” is a nonpartisan characteristic.

That’s bad news for us. Social Security will continue to be an income tax. If you’re in your forties and fifties right now, don’t expect the state to bankroll your golden years. You’re on your own, buddy!

The good news: This may be the best opportunity to take charge! We’re at the beginning of the last big bull market we can expect for the coming two decades. This is a perfect time to get into the market if you haven’t done so already!

-- Taipan Inner Circle Members: We have put our TaipanFinancialNews.com October “War Room” video up at the VIP Web site.

Be the fly on the wall during our monthly strategy session... listen to the assessments and predictions of Adam Lass, Andrew Snyder, Andrew Mickey, Chris DeHaemer as if you’re right in the room with them.

Yours for the taking at http://www.taipaninnercircle.com/

(Make sure you have your user name and password handy!)

Earnings Announcements Friday, October 13, 2006

First Niagara Financial Group Inc, General Electric Company, Regions Financial Corporation, and Sensient Technologies Corporation are releasing earnings.
 
Brought to you by http://www.AmericanCapitalist.net  

Unlock Dates for October 2006

10/23/06 – Corel Corporation is unlocking 6.5 million shares.
10/31/06 – Delek US Holdings is unlocking 10 million shares.

Brought to you by http://www.vixtrader.com  

Upgrades and Downgrades

BCE Corporation downgraded by Citigroup from Buy to Hold.

Genesis Microchip downgraded by Wedbush Morgan from Buy to Hold.

Healthways downgraded by Avondale Partners from Market Outperform to Market Perform.

Pactiv Corporation downgraded by JP Morgan from Overweight to Neutral.

BCE Corporation upgraded by UBS from Reduce to Neutral.

Global Payment upgraded by Robert W. Baird from Neutral to Outperform.

Palm upgraded by Matrix Research from Buy to Strong Buy.

Brought to you by http://www.gressor.com  

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Quote of the Day:

“Life is a communicable disease spread by intercourse, which always ends in death.”

- Th. Schaad

“You may deserve whatever you get if you vote frivolously in this year’s election. But surely the next generation, which has no vote, deserves better.”

- Thomas Sowell, October 10, 2006

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