Profit in Treasuries, Iran and North Korea

The U.S. Treasury is auctioning $104 billion in bonds this week: $40 billion in 2-year notes yesterday, $37 billion in 5-year bonds today, and $27 billion in 7-year notes on Thursday. The Treasury is on track to sell over $2 trillion this year, with the Fed buying $300 billion with money from under Bernanke’s desk.

It looks more and more like the Treasury is trying to avoid selling 20 and 30-year bonds. Are they afraid of what the market will tell them? We will get some 10s and 30 on July 8-9. The prospect of a failed auction in U.S. debt should cause sleepless nights at the White House. It is not too late to bet on interest rates rising with TBT.

The Europeans are at it too. France, Belgium and Ireland will sell their bonds through banks, thus reducing the chances of a failed auction. Germany and Britain both had failed auctions this year, and syndication is one way for countries to avoid the bad publicity of a failed auction. The banks will underwrite approximately 10 billion euros worth of bonds this week.

The U.S. and European Union each filed an unfair trade complaint against China yesterday with the WTO (World Trade Organization). The case involves the export of raw materials for production outside of China. By restricting exports, China gives its producers an advantage in price and availability. The raw materials include bauxite, coke, magnesium, and silicon metal. It is against WTO rules to restrict exports. China exported 336 million metric tons of coke in 2008; annual exports this year are only 12 million metric tons. Read more about China's trade practices here.

Watch this case as it develops; it may be bullish for steel producers. Of interest would be U.S. Steel (X), and Posco Steel (PKX) of South Korea. An additional consideration for U.S. Steel is the cost of importing cheap steel. As energy costs increase, shipping cost rise. Domestic production of many items should become more competitive domestically as the transportation costs of imports increase.

North Korea is ratcheting up their language and calling the bluff of the U.N. Security Council. North Korea has declared enforcing the sanctions would be an "act of war". Maybe not. The U.N. Security Council is a joke. China lives in a different world. They are afraid to cause any reason for North Korea to implode, as they fear it would mean a rush of refugees flooding over their border.

The latest Security Council sanctions allow inspections of ships, if a member state has “reasonable grounds” to believe that its cargo contains banned weapons or materials. First, you have to get permission from the country whose flag the ship is flying. Will North Korea allow us to inspect their ship? If permission to inspect is refused, the ship is directed to a port. Member states have been ordered not to provide services.

China is North Korea’s enabler. The best scenario is if China is involved and pushes North Korea to the brink. North Korea will not go against China, as the Chi-coms are the only benefactors the little dictator has left.

Our subscribers have a position in USO (crude oil) now. One mistake in Iran or North Korea could shoot oil to $100. There is no terror premium in oil, which could change in a moment. Crude oil moved higher 3% after Oh! Bama seemed to take a harder stance on Iran during his news conference Tuesday morning.

Disclosure: Long USO

Comments

[The Geoffster:]

Black Swans aloft.

Jun 24 09:11 AM

[In Debt We ...:]

Political volatility would make the dollar and yen go up - which negatively affects oil.

Jun 24 09:19 PM

[Moon Kil Woong:]

North Korea can't affect oil prices. They have none, can't afford to buy much, and are not in the Middle East. Also technically N. Korea has been at war with S. Korea since the Korean war. Sadly, asides from counterfitting and nukes the world asides from S. Korea has little reason to care what it does. As Team America puts it. Kim Jung Il is feeling lonely now. His threat of holding the world hostage over the threat he will develop nuclear capabilities is now blown.

He should have thought of that before he tried blowing up a low grade yield one in his own impoverished nation. Now all he can ask for is punishment and no reward. The risk of helping the starving citizens of N. Korea who are hostage to their own government are now clearly outweighed by the worry that N. Korea will use any assistance to keep funding its self destructive pursuit of weapons of mass destruction. I suppose harsh treatment is what everyone should have been doing to the N. Korea's puppet military dictatorship all along. Bush Jr. should have never released the N. Korean money being frozen by the US.

The world and the impoverished N. Korean people can only hope that a peaceful unification with South Korea will occur sooner rather than later. The 38th parallel is another cold war wall that needs to be torn down.

Jun 24 11:36 PM

[Mad Hedge F...:]

Hears the way to play it. For those who missed the 70% move in the TBT this year, the double short Treasury bond ETF, another window is setting up for you to get in. After running up from $35 to a meteoric $60, we have backed off to $50. Similarly, the bond futures, which plunged from 142 to 112, have bounced back up to 118.5. I think the prospect of a retest of this year’s stock market lows triggered a lot of flight to safety buying of government paper in the last few weeks. If we don’t get that retest, which I think is unlikely, then it’s back to the races for the TBT. Things certainly aren’t getting any better on the fiscal front. According to the Congressional Budget Office, the national debt is now growing so fast, that it will reach 100% of GDP by 2023, seven years earlier than was predicted only 18 months ago. Some 90% of the increase came from burgeoning Medicare and Medicaid spending. It seems that hardly a week goes by without Congress passing another humongously expensive package that has wonderful long term benefits for the economy and society, but has to be paid for with hard cash dollars up front. Watch the TBT.

Jun 26 01:26 PM