Entitlement Bomb About to Explode

Entitlement Bomb About to Explode

It's no secret that investors are furious with the recent passing of the democrat's health care bill.

Fox Business' David Asman sounds off on the guarantees the government is making, citing that an entitlement bomb is about to explode into the US economy causing the price of everything to skyrocket.

We know it's coming. The US government knows it's coming. And there's nothing they can do about it.

Believe us, they are trying.

In our last issue (see The Story Without a Happy Ending), we talked about the second wave of foreclosures that are set to begin this spring triggered by the Option ARM resets and why debt will be the catalyst for a strong market correction in 2010 (see The Crash of 2010). This past week, the Obama administration acknowledged this through the introduction of another $50 billion modification effort to help with upcoming foreclosures.

That's because the original Home Affordable Mortgage Program (HAMP) that was supposed to save millions of homeowners from foreclosure, did nothing but waste taxpayer money.

When the program was introduced last year, the administration said by the end of 2012 it would help 3 million to 4 million homeowners "avoid foreclosure" by "reducing monthly payments to sustainable levels."

So far only 170,000 borrowers have had their loans permanently changed under HAMP. But even this may just delay the foreclosures and spread them out over time, as many analysts predict.

A record high of more than six million Americans are now late on their mortgages and sales of existing homes have dropped for the third month in a row. With up to 48% of American homes potentially heading underwater next year (see The Story Without a Happy Ending), many of these borrowers will just walk away - as many have already done.

As one of the worst problems in US economy, the continual decline in the US housing market makes us inclined to believe the markets are headed for a strong reality check.

The US government knows the mortgage crisis is far from over. They know their efforts in preventing foreclosures has done little but waste taxpayers' money. And this newly revised modification program will be no different.

It's becoming apparent that little can be done, or has been done, to prevent this second wave of foreclosures which is directly intertwined with unemployment numbers. Combine this with Obama's reckless spending via ridiculously loose monetary policies, you can see why the future wealth of America and its kids is slowly being sucked dry.

For months, we have been big supporters of precious metals and junior mining stocks because we believe the US dollar is not only in trouble, but getting worse.

Much worse...

The Health Care Bill

The healthcare reform bill has finally passed and the only thing standing in its way from becoming law is the Senate. Sure the outraged Republicans will put up a fight, but it's highly unlikely that they'll succeed. This bill, unlike most, requires only a 51% vote as opposed to a 60% (see Video Here).

This has many Americans outraged.

Less than 24 hours after the U.S. House of Representatives gave final approval to a sweeping overhaul of healthcare, attorneys general from several states have already said they will sue to block the plan on constitutional grounds. (see States Launch Lawsuit)

Democrats are already being threatened with violence by opponents of health care reform legislation. (see Video Here)

Take a look at the different arguments for, and against, healthcare in the following videos:

• Michael Moore on the New Health Care Bill
• Making Lemonade Out of Health-Care Lemons
• Entitlement Bomb About to Explode
• Healthcare Debate with Senator Judd
  

We're not here to argue whether this bill is right or wrong. Americans do deserve a healthcare system not dictated by insurance companies.

What we're here to do is see how this affects the markets and how we can use it to our advantage.

Among the many questions that surround the healthcare legislation, nothing is more important to the market than its cost and how it will affect corporations.

At a time when the US budget is already plastered with red ink and the economy in shambles, you would think this may be the worst time to announce such a bill - a bill that will cost close to $1 trillion over the next 10 years and quickly generate an additional deficit of $562 billion in the first 10 years, according to former CBO director, Douglas Holtz-Eakin.

As shown in the above video (Healthcare Debate with Senator Judd), Senator Gregg Judd thinks it will end up costing taxpayers close to $2.5 trillion.

We already know this healthcare bill will be bad news for the US dollar, but there are more immediate effects to large corporations who now have to fork out millions of dollars to accommodate this bill.

Just take a look at some numbers announced from the corporations already affected:

• $150 million, Deere & Co.
  
• $90 million, 3M
  
• $100 million, Caterpillar Inc.
  
• $1 billion, AT & T
  

This will undoubtedly have an effect on the share prices of these companies, especially when you consider that much of the blue chip stocks have valuations based on Earnings Per Share (EPS).

The additional expense and higher taxes from this bill could damage the recovery efforts of companies such as Caterpillar, who lost more than 75% of their profit in 2009. When the recovery efforts of corporations are damaged by the healthcare bill, it disables their ability to hire new workers and thus add to the unemployment problem. This will then lead to further foreclosures and become yet another death spiral in the US economy, and thus a further decline of their dollar.

But wait. There's more.

Last week, we mentioned of a headline that could significantly damage the US dollar, send financials crumbling and send gold through the roof. Take a look at this:

Court Orders Fed to Release Bailout Records

A few weeks ago, a federal appeals court said the U.S. Federal Reserve must disclose records on emergency lending programs to banks bailed out by the government in the financial crisis.

The Fed argued against disclosure, citing an exemption that it said allows federal agencies to refuse to disclose trade secrets and commercial or financial information.

It also contended that allowing disclosure of participants in the programs and the collateral they posted could cause "competitive and reputational harm," perhaps triggering bank runs, and impede the central bank's ability "to effectively manage the current, and any future, financial crisis."

Of course, we're not sure how this will pan out. The affects of such disclosure will dramatically hurt the US economy and more than likely be thrown in the back burner and over turned. But if it's not, lookout.

As you can see, the problems with the U.S. dollar is only getting worse.

Throughout our newsletters, we cited many other bullish factors that will contribute to a higher gold price in the long-term (see the report that shocked the world). This amount of spending and mass accumulation of unsustainable debt from the U.S. government is showing us strong signs of bullishness for those with positions in precious metals such as gold and silver.

When you look at the situations we see unfolding around the world, there really hasn't been stronger evidence for gold and silver to move forward.

So while these metals may have their ups and downs in the short-term, the fundamentals of junior precious metals miners and physical metals itself remain strong.

That is why we continue to maintain our positions in gold companies such as Trueclaim Exploration (TSX-V: TRM), and look to increase our position in the coming weeks. The trading patterns show technical signs that a bottom has formed. With a current market cap of less than $5 million, a historical resource of 130,000 ounces (non 43-101 compliant), and recent drill results of 19m of 12.9 g/t (see news release), we will continue to follow this one in the coming months. More on this story as it unfolds.

Anticipation has also been building for our other featured company, Arctic Star Diamond Corp (TSX-V: ADD), after they announced that they have begun the drill program for both the nickel and diamond targets (see news release). If you haven't been following Arctic Star's (TSX-V: ADD) progress, you may need to see our initial report (see the Triple Play) to understand the significance of this drill program. It's going to be a very interesting April...