Debt-ceiling woes continue to pressure equity indexes downward as investors await a consensus from Congress regarding the matter. Stocks have wildly fluctuated this week as a whole given all of the uncertainty plaguing financial markets as the U.S. government faces a potential default next week. To make matters worse, credit-rating agencies, including Standard & Poor’s, have warned that the U.S. could lose its coveted AAA rating without a credible plan to slash deficits and bring spending more inline with revenues. Amid all the confusion and doubt, gold continues to shine bright and the precious metal kept its head above $1,600 an ounce on Thursday, managing to set an all-time high at $1,631 an ounce earlier on Wednesday. Meanwhile, crude oil was fairly flat on Thursday as it struggled to hold support above $97 a barrel, after tumbling more than 2% during Wednesday’s trading session.
The latest rounds of housing, manufacturing, and employment data have all been a bit dismal to say the least, and likewise investors will keep a close watch on the U.S. GDP report slated to come out later today, prior to Wall Street’s opening bell. A bullish surprise to the upside is much needed to restore some confidence back in the American economy and analysts are expecting 2Q GDP to come in at 1.6% growth, versus the previous reading of 1.9%. An upbeat GDP report will likely restore some confidence in the U.S. dollar as well, which has gotten crushed lately (especially by the yen), which makes the PowerShares USD Bullish Index Fund (UUP) our ETF to watch for today.
UUP is the most popular Currency ETF on the market and the fund’s underlying index is designed to replicate the performance of being long the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc [see UUP Fact Sheet].
Chart Analysis
Consider the 1-year daily chart for UUP below. The U.S. dollar is undoubtedly in a long-term downtrend and it is quite clear that the fund has been making lower-highs and lower-lows [see ETFs To Watch As Debt Ceiling Deadline Nears]. Notice the fund’s most recent decline and the fact that it has been able to hold support above the previous low at $20.84 a share (5/4/2011).
Click to Enlarge
UUP appears to have established a triple bottom (see blue line) assuming that it holds support after the GDP report, in which case it’s very probable that the fund will bounce higher. If UUP holds its head above $21 a share level it’s very likely the fund will climb back to $21.50 a share, if not even higher towards $22 a share.
Outlook
A worse-than-expected GDP report can easily send UUP down below the $21 level and into new uncharted territory. Investors should note even if support holds above $21 a share it doesn’t necessarily mean that UUP will reverse its ongoing downtrend [see UUP Fundamentals]. If the currency winds turn in favor of the greenback over the next week or so, UUP may easily get to $21.50 a share, however, it’s highly unlikely that it will be able to break-out past the $22 level.
In terms of downside, investors should consider closing their long positions if shares slip below the previous low of $20.84 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
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Disclosure: No positions at time of writing.
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If nothing else, the Republicans’ hostage taking over the U.S. debt ceiling is full of ironies. After all, Republicans voted seven times to boost the borrowing limit and double the national debt under George W. Bush. The biggest deficit drivers going forward - the Bush tax cuts, two unfunded wars, and the Medicare prescription drug plan – all enjoyed GOP support. And as it turns out, simply by doing nothing and leaving current laws (most of all, the 2013 expiration of those Bush tax cuts) on the books, annual deficits will disappear well before 2020. Regardless, despite all their grandstanding, every GOP budget proposal, including the draconian Paul Ryan spending cuts backed by 98% of Congressional Republicans, will require the United States to raise the debt ceiling repeatedly in the years to come.
All of which means that the GOP’s threats of national economic suicide over the looming August 2 default deadline are about slashing government spending and gutting the social safety net.
Appearing on the Charlie Rose show, Oklahoma Senator Tom Coburn provided a case in point. Coburn, as you may recall, walked out on the so-called Gang of Six deficit negotiations. At a time when the federal tax burden is at its lowest since 1950, Coburn like his GOP colleagues refused to countenance raising new tax revenue. And when fellow Gangsta Dick Durbin balked at Coburn’s demand to slash another $150 billion from Medicare on top of the $400 billion pledged by President Obama, Coburn stormed out.
Now, Coburn is back, pushing his plan co-authored by Joe Lieberman to drain $600 billion from Medicare over the next decade. Those savings come from raising the eligibility age from 65 to 67, means-testing wealthier beneficiaries, adding new co-pays and a $550 deductible, and instituting a new $7,500 maximum for “out of pocket” expenses. On Monday, Dr. Coburn tried to explain why his plan is necessary:
ROSE: You resigned from the Gang of Six because there was an impasse. What happened?
COBURN: Well, look, the whole purpose for bringing three on each side together was to actually come up with a plan that we could sell to an equal number of Senators on each side that would actually fix the problem. And we got to a point where we could not get to a point at which we could actually fix the problem…
ROSE: In the end are we talking about Medicare?
COBURN: We're talking about Medicare, Medicaid and Social Security. A lot of people want to discount Social Security, but we're going to have to borrow $2.6 trillion to fund Social Security over the next thirty years. And that's what we've stolen from it and spent on other things.
And even if you have all that money and even if you have the capability of borrowing it, which I doubt seriously we have the capability to borrow right now, even if you've done that you still have to reform it because our life expectancy has gotten longer and the number of people supporting each person on Social Security has gotten much smaller. And so it doesn't work.
There are so many problems with Coburn’s sales job, it’s hard to know where to begin.
For openers, it’s worth noting that since its inception in 1965, Medicare has been the major factor in the dramatic reduction of poverty among the elderly. But raising the eligibility for Medicare threatens to reverse some of those gains. For starters, life expectancy varies significantly by income, by geography and for minorities. Worse still, as the Incidental Economist noted in a review of studies of the topic, “Those without insurance prior to Medicare eligibility spent much more money on health care after they became Medicare eligible. In other words, people wait to get care until their Medicare kicks in. This is bad both for health and for the federal government’s bottom line.”
And the federal government’s bottom line will be impacted for another reason: private insurance simply costs more. As Paul Krugman lamented in reviewing the Coburn-Lieberman proposal:
The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.
But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.
(It’s worth noting that Coburn’s plan is only made possible by the Affordable Care Act, which makes it possible for older Americans to qualify for and afford private health insurance.)
Sadly for Coburn, the math and the market belie his assertions regarding the Social Security trust fund.
As the continued low rates on U.S. Treasuries reflect, Coburn is wrong that “I doubt seriously we have the capability to borrow right now.” And as Krugman again explains, “Rising Social Security benefit payments might be one reason for that [budget] crisis, but it’s hard to make the case that it will be central.”
But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when – in 2018 or later – benefits start to exceed the payroll tax, why, that’s a crisis. Huh?
I don’t know why this contradiction is so hard to understand, except to echo Upton Sinclair: it’s hard to get a man to understand something when his salary (or, in the current situation, his membership in the political club) depends on his not understanding it.
That describes Tom Coburn and his Republican Party perfectly. As Nancy Pelosi concluded in rejecting the Coburn-Lieberman plan, “It is unfair to ask seniors to get less in benefits and wait longer to get onto Medicare — all while Republicans back tax breaks for big oil and corporations that ship American jobs overseas.”
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