Posted By thestatedtruth.com on January 9, 2010

John Mauldin’s  “Thoughts from the Frontline Weekly Newsletter”

Those who are invested in the idea of a “V”-shaped recovery became excited over the jobs report last month. Unemployment rose by only 11,000 jobs, if you did not look at the underlying numbers or ignored the household survey. And the consumer confidence surveys have begun to rise. The Index of Leading Economic Indicators has now risen for six months in a row. Productivity is up. And surveys indicate that consumer spending is up. GDP growth in the fourth quarter looks to be in the 3%-plus range.

All reasons to be bullish, if you are looking for a reason to be bullish. If you don’t examine the underlying data, you can feel good. The problem is that when we look deeper into the data than just the headlines, there are concerns.

For instance, take the contention that consumer spending is rising. I called Philippa Dunne at The Liscio Report. They survey the various states about taxes, among other things. “Sales taxes are not up and the current survey we are doing is pretty bad.” She used the word “horrified” when commenting on some of the respondees’ replies at the various state tax offices. Further, today we find that credit card lending dropped $17 billion last month, the largest drop in history. And this was during Christmas!

Savings are up. Credit is down. Where did the rise in consumer spending come from? Remember, these are mostly surveys and/or comparisons with a disastrous 2008. And they compare same-store sales for chains like Best Buy, which no longer competes with the bankrupt Circuit City, or for chains that closed stores, forcing buyers to the remaining stores. The key to watch is sales taxes. When they are rising, consumer spending is rising.

Consumer confidence is rising, but from truly awful levels. The levels are still well below any level in previous recessions and certainly do not indicate a robust economic rebound.

A challenged consumer confidence survey is not surprising, given the fact that roughly 8% of the working population is getting some form of unemployment assisance. One in eight children in this country is living on food stamps. By the way, the total number of people on unemployment is about 300,000 worse than most media accounts report. The Extended (and Emergency) unemployment claims for those out of work more than 26 weeks are not seasonally adjusted. To get the total number of people on unemployment insurance of all kinds, you have to add the non-seasonally adjusted number of continuing claims, which is currently about 300,000 higher than the seasonal adjustment. Here is a chart from Philippa, at www.theliscioreport.com.

She explained, “For the week ended 12/19, 10.42 million Americans were receiving unemployment benefits, With 5.44 million Extended claims (week ended 12/19) and 4.98 million Continuing claims.

“But NSA jobless claims show a far different story. The advance number of actual initial claims under state programs, unadjusted, totaled 645,571 in the week ending Jan. 2, an increase of 88,000 from the previous week. There were 731,958 Initial claims in the comparable week in 2009… The advance unadjusted number for persons claiming UI benefits in state programs totaled 5,479,110, an increase of 388,729 from the preceding week. A year earlier, the rate was 4.0 percent and the volume was 5,317,388.

“So the actual, the real benefits paid (Initial, Continuing, and EUC claims) hit another record of 11.268 million.” (source: The Big Picture)

Today’s employment report was just terrible. The headline said we lost 85,000 jobs. That is from the establishment survey, where they call up larger businesses and ask them about their employment. They also do a household survey, where they survey about 400,000 households. That report reveals a much worse situation.

Last month, single women who are heads of households saw their unemployment ranks rise by a massive 127,000. The number of employed men fell by 214,000. The total number of unemployed in the survey rose by an enormous 589,000. Those classified as not in the work force (due to the fact that they did not look for jobs) rose by 843,000! That now means that in 2009 3.5 million people were dropped from the potential labor force count because they were discouraged.

If you add those to the 15.3 million who are unemployed, you get a much higher unemployment number than 10%. Getting that exact number is tricky, because if you are back in school (as some of my friends are) you are not looking for a job but are going to want one soon. And if the economy does rebound and jobs start to become available, then it is likely a large number of the discouraged 3.5 million will start looking for jobs and therefore be listed in the work force. Ironically, a recovering economy could see the unemployment number rise. During the recovery, it will be important to look at the total number of employed and not just at the unemployment rate.

Sidebar: As noted above, a large number of people were dropped from the official labor force. What that means is that even though the number of employed people fell, the unemployment rate did not. It will be interesting to see if a lot of those people just decided that December was not a good time to be looking, spent time with families, or decided it was too cold to get out. How many will start looking as we get into the new year? We could see a rise in the unemployment rate next month if a large number do look for work.

Look at the chart below from my friend Greg Weldon. (It just hit my inbox.) It shows the percentage of people who are participating in the work force. ( www.weldononline.com) It is sadly dropping, which means that incomes to families are dropping. The number of people I know who are looking for work or are struggling increases each week. It truly saddens me.

The Statistical Recovery

So why, if the employment picture looks so bad, are we getting positive GDP numbers? I coined the term “Statistical Recovery” last summer to describe an economy where the statistics are positive but it certainly doesn’t “feel” like a recovery. So, how is it that we see a rise in the statistics?

First, year-over-year comparisons are looking better, since 2008 was horrific. Second, inventory levels are about as low as they will go. In the way GDP is figured, a reduction in inventory reduces GDP. That was a negative figure for most of this recession. Simply because inventories not falling any more, it is easier to get a positive GDP.

Second, as I have written, there are one-time benefits for GDP from the federal stimulus. Roughly 90% of the 2.2% growth in GDP in the third quarter was attributable to the stimulus, and we will see a similar affect in the 4^th-quarter numbers and at least through the first half of next year.

A reduction in imports is also a positive for GDP. Ee are buying less “stuff” from abroad, so that helps statistically.

Martin Feldstein, one of the great economists of our time, was quoted last week as saying that the recession is not over. Indeed, it you look at past recessions, it is not all that unusual (8 out of 11 times) for there to be positive GDP quarters in the midst of an ongoing recession.

The Great Experiment

So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year. States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next (more on that in a few weeks). Valuations on stocks are in the high range, and do not portend well for long-term returns.

Further – and this is the most important item to me – Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for heath care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP.

Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher. Christina Romer’s work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama’s Chairwoman of the Council of Economic Advisors. This is not a partisan idea.)

This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst). And there are those who contend that the economy did just fine in the Clinton years before the Bush tax cuts and that we will do just as well if we take them away. And further, taxing the rich a little more is not really going to change their behavior.

My contention is that if such a tax increase is enacted all at once, the economy will at a minimum dip back into a nasty recession. If I am wrong, then I will have to abandon one of my long-cherished beliefs. I will have to stop arguing that tax cuts are as important as I think. Right now, when I read the data and studies, they confirm my tax-cutting bias. But I have to be willing to change my mind if The Great Experiment proves me wrong.

But if you think unemployment is high now, you will really not like what happens if we dip back into recession. It could go a lot higher. They are truly risking a great deal if they decide to pursue this experiment.

Thus, I am faced with a great deal of uncertainty as I look into the future with my forecasts – and we will get into the bulk of the actual forecasts next week. I almost titled this letter “The Year of Waiting,” because there are so many important developments we are waiting on. Will they actually raise taxes in such a soft economy, or will cooler heads prevail and the increases be postponed, or at least phased in over 4-5 years? What will the health-care bill look like? There are so many things that could significantly change any predictions.

As I have written for years, the stock market drops an average of over 40% during a recession. If we go into a recession in 2011, it is highly unlikely that there will be an exception to the bear market rule. But this market seemingly wants to go higher. Smart people like my partner Steve Blumenthal argue with me that the technicals say we could go a lot higher in the short term. And he may very well be (and probably is) right.

This is a trader’s market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the “shoe to drop” is frustrating, I know. However, that is the situation we find ourselves in.

We will go into this next week, but the current environment is quite different than 1982, when the last bull market started. Rates were falling; they are now likely to rise over time. Taxes were going down. Valuations were at historical lows, not high and rising. Inflation was coming down. And on and on. The current environment is not one in which bull markets are born.

Whither the Fed?

The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.

The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier.

The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market. What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.

It’s getting close to my eight pages, so let me end by saying that, as we face the next crisis – and we will (there is always another crisis) – we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank’s bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that’s because it was. But it means we will have to face the same problems all over again. But that is another story for another day. Next week we look at the dollar and other currencies, gold, commodities, bonds, emerging markets, and more.

John Mauldin

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Posted By thestatedtruth.com on January 8, 2010

Jan. 8 (Bloomberg) — Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The series of 10 straight declines was the longest since record-keeping began in 1943.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=axUfVp0dw8wA&pos=1

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Posted By thestatedtruth.com on January 7, 2010

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Posted By thestatedtruth.com on January 7, 2010

Top Banks Invited To Basel Risk Talks

By Henny Sender in New York

Published January 7, 2010

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Posted By thestatedtruth.com on January 7, 2010

Jan. 7 (Bloomberg) — Tax credits designed to revive the U.S. housing industry are costing taxpayers as much as $80,000 for every additional home sold, according to Michael R. Widner, a Stifel Nicolaus & Co. analyst.

The federal program is “an exceptionally inefficient use of tax dollars,” Widner wrote yesterday in a report. He estimated the total cost through last November at $17 billion, “a high price to us for relatively little benefit.”

The CHART OF THE DAY shows existing-home sales would have fallen at a 2 percent annual rate in the three months ended in November without the credits, based on his estimates. Instead, the pace rose 28 percent, according to data from the National Association of Realtors. Resales accounted for 92 percent of homes sold during the past 12 months.

Widner estimated that 1.83 million new and existing homes were sold to first-time buyers last year through November, and only 303,000 of them changed hands because of the tax benefit. The $80,000 figure reflects his assumption that 30 percent of the added sales would have been made this year, not in 2009.

President Barack Obama’s extension and expansion of the program in November will do little to bolster this year’s sales, the analyst wrote yesterday in an e-mail. First-time buyers got another five months, until April 30, to obtain an $8,000 credit. Buyers who owned a home became eligible for a $6,500 credit.

“People who were going to be lured in had a good nine months to make their decisions before the last-minute extension and acted before it,” he wrote.

More at http://www.bloomberg.com/apps/news?pid=20601109&sid=awb9FaECLYt4&pos=15

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Posted By thestatedtruth.com on January 7, 2010

Jan. 7 (Bloomberg) — U.S. regulators including the Federal Reserve warned banks to guard against possible losses from an end to low interest rates and reduce exposure or raise capital if needed.

“In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates, the Federal Financial Institutions Examination Council, made up of agencies including the Fed and the Federal Deposit Insurance Corp., said in a statement today.

Several U.S. central bankers have called for raising interest rates at a faster pace than increases in the past, while the Fed hasn’t said when or how quickly it plans to lift borrowing costs from a record low.

The regulators told banks to run stress tests with scenarios including instantaneous and significant changes in rates and substantial changes in rates over time, including shifts of as much as 4 percentage points.

“Institutions should ensure their scenarios are severe but plausible in light of the existing level of rates and the interest-rate cycle, the advisory said.

Financial stocks lost ground after the release. The Standard Poor’s Supercomposite Financials Index was up 2.2 percent at 224.5 at 3:24 p.m. after rising as much as 2.5 percent.

Fed Governor Kevin Warsh said in September that rates may need to rise with greater swiftness than is modern central bank custom. Philadelphia Fed President Charles Plosser said the same month that officials need to be prepared for the possibility they will have to raise interest rates in steps of 0.50 or 0.75 percentage point, as policy makers did when they cut rates.

More at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayR_RKqdq93c

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Posted By thestatedtruth.com on January 7, 2010

If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009. Now, however, the Fed tells us that they’re “fed up,” or that they think the economy is strong enough for them to gracefully “exit,” or that they’re confident that private investors are capable of absorbing the balance. Not likely. Various studies by the IMF, the Fed itself, and one in particular by Thomas Laubach, a former Fed economist, suggest that increases in budget deficits ultimately have interest rate consequences and that those countries with the highest current and projected deficits as a percentage of GDP will suffer the highest increases – perhaps as much as 25 basis points per 1% increase in projected deficits five years forward. If that calculation is anywhere close to reality, investors can guesstimate the potential consequences by using impartial IMF projections for major G7 country deficits as shown in Chart 3

  

Using 2007 as a starting point and 2014 as a near-term destination, the IMF numbers show that the U.S., Japan, and U.K. will experience “structural” deficit increases of 4-5% of GDP over that period of time, whereas Germany will move in the other direction. Germany, in fact, has just passed a constitutional amendment mandating budget balance by 2016. If these trends persist, the simple conclusion is that interest rates will rise on a relative basis in the U.S., U.K., and Japan compared to Germany over the next several years and that the increase could approximate 100 basis points or more. Some of those increases may already have started to show up – the last few months alone have witnessed 50 basis points of differential between German Bunds and U.S. Treasuries/U.K. Gilts, but there is likely more to come.

 Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of “check-free” elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond.

Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this “juice” was being squeezed into financial markets. If so, then most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.” There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be “so fine” in 2010.

William Gross
Managing Director

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Posted By thestatedtruth.com on January 7, 2010

There was a lot of buzz around Wall Street about a report released by TrimTabs yesterday.  In the report, Charles Biderman goes through a lot of potential fund flows to fuel the rally that spiked market cap $6 trillion since March.  He found them all wanting and speculated whether the rally had been funded with buying by either the U.S. Treasury or Fed or both.                                                                                                        

OUTFLOWS from U.S. stock funds all year!

RECORD AMOUNT ($311 billion) of new stock offerings (includes IPOs, secondaries, and converts, but particularly a large offering of secondaries in the second half of the year);

Announced cash M&A, as well as corporate stock  buybacks,     LOWEST LEVELS FOR ANY YEAR THIS DECADE. 

 U.S. stock funds: $32 billion OUTFLOWs………………………

1. U.S. ETFs: $18 billion OUTFLOWS
2. International stock funds: $26 billion INFLOWS
3. International ETFs: $35 billion INFLOWS
4. U.S. bond funds: $370 billion INFLOWS
5. U.S. bond ETFs: $39 billion INFLOWS  

             This Via CBS Marketwatch:

• Charles Biderman, chief executive of TrimTabs Investment Research,a research firm that tracks liquidity flows in the market. He is the latest and most credible person to charge that the Federal Reserve and the Treasury (in league with top Wall Street firms) is rigging the stock market.
• We cannot identify the source of the new money that pushed stock prices up so far so fast,” Biderman said in a statement Tuesday. 
• The source of approximately $600 billion net new cash necessary to lift the market’s overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, didn’t come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.
• “We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?”  The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index on a monthly basis.
• “The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets.”
• “While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs,”
• From this seat it is not the degree of the market rally that strikes me as “suspicious” – as I believe in reversion to mean and the drop in 2008 and early 2009 was SO dramatic; hence a huge rebound would be expected.  Instead it’s “how” it has happened that causes the senses to tingle – especially if you’ve watched the market day after day for years upon years..  So much of this epic move has been overnight or premarket.  Whenever a key technical level was about to be broken to unleash the sell orders in the computers, a mass of buying occured from out of the blue – even on days there is limp volume. We had months on end mid 2009 where “3:30 PM” buying set off fireworks (remember that?)  And “V shaped” moves after any sell off usually are seen once every year or two.  We now see them almost every month, stocks were never consolidating after minor selloffs; they simply rocketed back up. Repeatedly…… So it’s not the SCOPE of the rally that raises this writer’s eyebrows; it’s the COMPOSITION of the rally.

A market that saw net outflows in equities, along with massive new share issuance, and very low corporate stock buybacks, et al – and you have to question the “coincidences”.

   Charles Biderman, Chief Executive of TrimTabs Investment Research

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Posted By thestatedtruth.com on January 7, 2010

Jan. 7 (Bloomberg) — U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said.

Revenue dropped 13.3 percent, or $80 billion, compared with the same nine months of 2008, to $523 billion, the institute said. Collections in the third quarter alone sank 10.9 percent to about $162 billion, according to the report released today by the Albany-based body. It was the fourth straight quarterly decline. The institute is the public policy research arm of the State University of New York.

“The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections, Rockefeller analysts Lucy Dadayan and Donald J. Boyd wrote in the report. The institute explores ways to help state and federal governments work better.

The worst economic slump since the Great Depression has forced states to cut spending, raise taxes and pass down costs to local governments to cope with $193 billion of combined budget deficits in the current fiscal year, according to a Center on Budget and Policy Priorities report issued last month.

Budget gaps have opened in 31 states since fiscal year 2010 began, Dadayan and Boyd wrote, citing a National Conference of State Legislatures study.

“2010 is going to be very difficult for the states and the next year is likely to be significantly worse,  Rockefeller Deputy Director Robert Ward said in an interview.

California’s deficit is going to total $20 billion for the next 18 months, Governor Arnold Schwarzenegger said in a speech yesterday. Schwarzenegger, a Republican, is scheduled tomorrow to release his budget plans for the state, the largest issuer of municipal debt.  New York is grappling with an $8 billion budget deficit, Governor David Paterson said in his state-of-the-state speech yesterday.

“The great recession hit virtually every single source of tax revenue and pushed a number of states to revise revenue forecasts numerous times throughout fiscal 2009 and 2010, with significant impacts on services,  Dadayan and Boyd wrote.

State income tax revenue was down 11.8 percent in the third quarter, sales tax collections were down 8.9 percent, and corporate income tax declined 22.6 percent, according to the study.

The Obama administration’s $787 billion stimulus package made up as much as 40 percent of the revenue losses states suffered, Ward said by telephone.

“It is a very significant amount of compensation but by no means eliminates the problem, he said.  Ward said economists are split over whether the economy is recovering. He said taking an optimistic view states still have some way to go just to stop the losses.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5OM27Cn39Yk

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Posted By thestatedtruth.com on January 6, 2010

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Posted By thestatedtruth.com on January 6, 2010

The FOMC’s Great DebateÂ
Todd Harrison   JAN 06, 2010 3:30 PM
	            There are two potential downside catalysts: exhaustion and exogenous shock.         Â	Â

The following was posted originally in real time on the Buzz & Banter
The FOMC minutes have been released and there seems to be some dissension in the ranks, with a few officials favoring increasing and extending asset purchases and one seeking a reduction. I suppose we can’t blame them for the confusion as there’s a whole lot riding on their shoulders.

The tidbit that caught my eye however, wasn’t the dissension; it was the agreement. And I quote:
 

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Posted By thestatedtruth.com on January 6, 2010

Jan. 6 (Bloomberg) — Federal Reserve officials last month debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their last meeting showed.

Policy makers also differed over whether risks are greater that inflation will speed up or slow down too much, the Fed’s Open Market Committee said today in minutes of its Dec. 15-16 meeting in Washington. Some officials said “quite elevated” slack in the economy would damp prices, while others saw a risk of faster inflation from the Fed’s “extraordinary” stimulus, the central bank said.

Fed Chairman Ben S. Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery and reduce unemployment, which is now close to a 26-year high.

“To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place,” the minutes said.

“A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter,” especially if the economic outlook or mortgage market deteriorated, the minutes said.

One member said the Fed could reduce planned asset purchases because of improvement in financial markets and the economy, and “that it might become appropriate” to start reducing asset holdings “if the recovery gains strength over time,” according to the report.

The Fed is buying $1.25 trillion of mortgage-backed securities issued by housing-finance companies Fannie Mae, Freddie Mac and federal agency Ginnie Mae. The central bank began the program in January 2009.

The Fed separately purchased $300 billion of Treasury securities from March through September 2009 and is buying, through March, $175 billion of corporate debt issued by government-backed Fannie and Freddie and the government- chartered Federal Home Loan Banks.

Some officials said there was a risk that the end of Fed purchases and federal homebuyer tax credits may “undercut” improvements in the housing market, the minutes said.

Officials “generally thought the most likely outcome” was for economic growth to “gradually strengthen over the next two years,” helping reduce joblessness and slack. Still, the “weakness in labor markets continued to be an important concern,” the Fed said.

Fed staff economists “modestly increased” their forecast for economic growth in 2010 and 2011, predicting a “very gradual reduction in economic slack,” the minutes said without giving specific figures.

At the same time, Fed officials “noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching,” the central bank said.

Meeting participants also approved a suggestion by open market desk officials to not reinvest the proceeds from maturing agency debt or prepayments on mortgage debt as an interim approach pending further discussion.

More……….http://www.bloomberg.com/apps/news?pid=20601087&sid=ah8T1oCq1IkA&pos=1

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Posted By thestatedtruth.com on January 6, 2010

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Posted By thestatedtruth.com on January 5, 2010

Jan. 6 (Bloomberg) — Toyota Motor Corp.’s Lexus posted a 22 percent surge in December U.S. sales, finishing its 10th consecutive year in the top spot for luxury autos after fending off a challenge by Bayerische Motoren Werke AG.

Lexus sold 28,565 vehicles last month and 215,975 for the year, the Toyota City, Japan-based company said in a statement yesterday. BMW’s namesake brand reported a December increase of 11 percent from a year earlier to 20,128 and an annual total of 196,502.

The Toyota division retained its title after falling behind BMW through July. The December gains for the brands capped a year in which sales slid 17 percent for Lexus and 21 percent for Munich-based BMW, as the U.S. total for cars and light trucks tumbled 21 percent to 10.4 million, the fewest since 1982.

Lexus “finally had availability on the RX – it’s their defining car. That’s helping them out,” said Jim Hall, principal of consulting firm 2953 Analytics in Birmingham, Michigan. “And the deals that are available are also convincing buyers to come in.”

Luxury autos may have benefited from an expiring sales-tax credit offered by the federal government that expired Dec. 31, said John Wolkonowicz, an analyst at IHS Global Insight Inc. in Lexington, Massachusetts. Last month also had two more sales days than December 2008.

“December is generally a really strong luxury month,” said Jessica Caldwell, an analyst at research firm Edmunds.com in Santa Monica, California.

U.S. industry sales rose 15 percent in December, led by Ford Motor Co.’s 33 percent increase.

Mercedes-Benz, third in U.S. luxury-auto sales, reported an 8.2 percent increase in December to 20,025 vehicles. The unit of Stuttgart, Germany-based Daimler AG posted a full-year drop of 15 percent to 190,604.

General Motors Co.’s Cadillac rose 11 percent to 14,745. The annual total fell 32 percent to 109,092, the Detroit-based company said.

Volkswagen AG’s Audi said it sold 9,030 vehicles last month, a 17 percent increase. Sales for Ingolstadt, Germany- based Audi dropped 5.7 percent to 82,716 for the year.

Ford’s Lincoln gained 16 percent to 10,467 vehicles. The brand fell 23 percent to 82,847 for the year, the Dearborn, Michigan-based automaker reported.

Nissan Motor Co.’s Infiniti gained 10 percent to 9,108 for December and declined 28 percent to 81,089 for the year, according to the Yokohama, Japan-based company.

Sales at Acura, Tokyo-based Honda Motor Co.’s luxury brand, slid less than 1 percent to 10,575 in December and 27 percent to 105,723 for the year, the company said.

The Jaguar and Land Rover brands, owned by Tata Motors Ltd., said sales jumped 33 percent to 4,841 in December and fell 14 percent to 38,261 for all of 2009.

More at  http://www.bloomberg.com/apps/news?pid=20601087&sid=aGLsW4k3ObEc&pos=7

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Posted By thestatedtruth.com on January 5, 2010

Jan. 5 (Bloomberg) — Google Inc., aiming to take on Apple Inc.’s iPhone and defend its dominance in Web search, introduced a touch-screen mobile phone called Nexus One and opened an online store for the handset.

The device is 0.45 inches (11.5 millimeters) thick, about the same as the iPhone, and has a larger screen than its rival. The phone costs $179 with a T-Mobile USA contract and $529 without it, Mario Queiroz, a Google vice president, said today at an event at Google headquarters in Mountain View, California.

Google, owner of the most-popular Internet search engine, is boosting investment in the mobile-phone market as growth in its search-advertising business on desktop computers slows. The new device’s voice-activated functions, higher-resolution camera and graphics differentiate it from the iPhone, said Aaron Kessler, an analyst at Kaufman Brothers LP in San Francisco.

Estimating the future market share for the new phone is difficult, though “if they had little single digits by the end of the year, they’d probably be happy,” he said.

The phone runs on Google’s Android operating system, which is also used by phone makers such as Motorola Inc. Google plans to offer other devices using the software at its online store later on. The site is available for U.S. shoppers and Google is testing sales in Singapore, Hong Kong and the U.K.

In addition to T-Mobile USA, which is Deutsche Telekom AG’s U.S. wireless unit, Vodafone Group Plc and Verizon Wireless will offer the Nexus One later this year. Google is in talks to get other carriers on the site.

Compass, Navigation.   Like the iPhone, the Nexus One has a compass and navigation features. The phone was designed with Taiwan’s HTC Corp., which became the first manufacturer to sell Android devices in 2008.

The new device has a 3.7-inch screen, and it weighs 4.6 ounces (130 grams). It uses Qualcomm Inc.’s Snapdragon processor. The iPhone 3GS, which starts at $199 with a contract, is 0.48 inches thick and has a 3.5-inch screen.

The new handset reflects Google’s effort to expand advertising sales on mobile devices, a market that may reach $2 billion to $3 billion in the U.S. by 2013, up from less than $1 billion now, according to Sanford C. Bernstein & Co.

Full article at…..http://www.bloomberg.com/apps/news?pid=20601087&sid=abkClK1HhJa8&pos=6

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Posted By thestatedtruth.com on January 5, 2010

This chart speaks for itself…………..

Despite an abysmal 10-years of zero wealth creation and zero job growth, betting on a second consecutive Lost Decade seems like a bad wager.  And yet, it happened in Japan…

But let’s not dwell on the negatives so early in this promising New Year. Instead, let’s consider the potential positives – the upside of the downside. According to Patrick Cox, editor of The Breakthrough Technology Alert, adversity truly is the mother of invention:

“Historically, downturns have been enormously creative times technologically. Our current economic mess will be no exception. Economic pressures are forcing reassessments and hard, creative choices. The result will be an explosion of breakthrough technologies…

“In the early 1400s, German goldsmith Johannes Gutenberg invented the movable-type printing press. This invention did far more than facilitate book production and increase the availability of knowledge. It started an information technology (IT) revolution that continues to accelerate even today.

“In Gutenberg’s era, his advances in lithography not only increased access to the world’s greatest thinkers, they also put practical business and technical knowledge in the hands of commoners. This seemingly insignificant invention smashed monopolies of thought and political power. The result was exponential growth in science, technology and democratic ideals. The Renaissance and the Enlightenment followed, on up to our present era.

“We’ve already seen a series of printed circuit lithography technologies revolutionize the electronics industry. Every electronic device you own – from your television to your mobile phone – contains a lithographically printed circuit board of one form or another. Like many of the transformational technologies of the last century, it was invented during the Great Depression. The timing was not a fluke.”

The Daily Reckoning 

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Posted By thestatedtruth.com on January 4, 2010

What To Expect in 2010

 

by J. R. Nyquist

 

Weekly Column Published: 1.04.2010

In Roman mythology, Janus was the god of gateways, portals and bridges. He has been used to symbolize the march of time, the transition from one age to another. He is often represented as having two faces: one peering into the future and the other into the past. Janus was the god of beginnings, and so we have named the first month of the year January. The Roman temple to Janus was a small wood building located on a street connecting the Roman Forum to residential areas. This same street was used by Roman consuls who were leaving the forum to make war on Rome’s enemies. It is no wonder, then, that the temple to Janus had a set of double doors called “the gates of war,” always kept open during times of military conflict. The ancient biographer Plutarch wrote that the temple was rarely closed because peace “was a difficult matter, and it rarely happened, since the realm was always engaged in some war.

Peace, indeed, is a difficult matter. If America had a temple to Janus, its “twin gates of war” would be flung open at this very hour, exposing (in the words of Virgil) “the dread presence of heartless Mars.” As strange as it sounds, the United States is fighting a war in Afghanistan, though Afghanistan is on the other side of the world, a landlocked country. Stranger still, American troops  must trace their line of supply through territory controlled by enemies or potential enemies. This situation is unprecedented. Only an American general of the present generation would think it acceptable to deploy so many troops into a battle where they could be so easily cut off.    
There are four ways into Afghanistan: (1) through Russian-dominated South-Central Asia, (2) through China, (3) through Pakistan, (4) or through Iran. To secure a route through Central Asia, the United States government has named Russia as an ally, even though Russia actively supports anti-American forces in Latin America and Africa (especially, in Venezuela and Cuba). The route through China is not practicable, and China is no more an ally of the United States than Russia. Iran is openly hostile to America which the Iranian clerics have denounced as the “Great Satan.” Tracing the U.S. supply line through Pakistan may be ill-conceived as well, since Pakistan is allied with China and sympathetic to the Taliban (which was supported by Pakistan in the past). An August 13 Pew research poll shows that 64 percent of Pakistanis regard the United States as an enemy.

Last year President Barack Obama went to Cairo Egypt and gave an apologetic speech, confessing to his Muslims listeners that they had been abused by Western colonialism and treated as proxies during the Cold War. He went on to describe himself as a Christian sprung from generations of Muslims, without realizing the Muslim implications of this stated apostasy. “The situation in Afghanistan demonstrates America’s goals, and our need to work together,” he told the Muslims. “Over seven years ago, the United States pursued al Qaeda and the Taliban with broad international support.” (Quite clearly, the support has largely evaporated.)

About 1900 years ago the Roman historian Tacitus wrote that the substitute for wisdom adopted by most men was to wait on the folly of others. Such has been the policy of al Qaeda and the Muslims who support bin Laden. President Bush could not win over the Muslim world, and neither can President Obama. “Make no mistake,” Obama advised his Muslim listeners in Cairo: “we do not want to keep our troops in Afghanistan. We seek no military bases there. It is agonizing for America to lose our young men and women. It is costly and politically difficult to continue this conflict. We would gladly bring every single one of our troops home if we could be confident that there were not violent extremists in Afghanistan and Pakistan determined to kill as many Americans as they possibly can. But that is not yet the case.”

There is no escape by admitting the agony of it all. The logic of war is the logic of history. People want to kill you, so you must fight. As the temple of Janus was kept open during wartime, it was seldom closed because peace — as Plutarch explained — “rarely happened.” If we look back into history we see war. If we look ahead, we must also see war. The past is prologue to the future. The great Edmund Burke once wrote, “In history a great volume is unrolled for our instruction, drawing the materials of future wisdom from the past errors and infirmities of mankind.” Burke further explained that, “History consists, for the greater part, of the miseries brought upon the world by pride, ambition, avarice, revenge, lust, sedition, hypocrisy, ungoverned zeal, and all the train of disorderly appetites, which shake the public with the same.”

If you want to know what is coming, it is best to know what always comes.

Copyright © 2009 Jeffrey R. Nyquist
Global Analysis Archive

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Posted By thestatedtruth.com on January 4, 2010

 

by RYAN J. PUPLAVA, CMT | January 4, 2010

It’s a new year, and for newsletter writers and portfolio managers it means the bar has been reset. It’s time to put on our thinking caps and make grandiose predictions for the year to come. After watching CNBC for three days last week, I found it remarkable how much of a consensus has formed for 2010. There seems to be such an aligned consensus that we can already see the new trends forming in December as hedge funds and portfolio managers put their money where their mouth is. 2010 will be a key year for the U.S. dollar and U.S. bonds.

Will the Federal Reserve Bank raise short term rates in 2010? The consensus is moving from early 2011 to mid-year 2010. The reason for this has been stronger economic data over the past month with better results in unemployment claims, the Chicago PMI, Case-Shiller, employment, and consumer spending. Bond investors are already reacting to the change in interest rate expectations by selling long term bonds and driving long term interest rates higher. As bond investors help raise interest rates with their selling, they’re forcing the yield curve to steepen while short term rates are kept artificially low. Eventually, the Federal Reserve will have to react to rising long term rates and positive economic data by raising the Fed Funds Rate.

“A sharply upward sloping, or steep yield curve, has often preceded an economic upturn. The assumption behind a steep yield curve is interest rates will begin to rise significantly in the future. Investors demand more yield as maturity extends if they expect rapid economic growth because of the associated risks of higher inflation and higher interest rates, which can both hurt bond returns. When inflation is rising, the Federal Reserve will often raise interest rates to fight inflation.”¹

The U.S. dollar will struggle between two powerful forces in 2010: (1) stronger economic data (bullish) and (2) a year ahead of sizeable debt offerings from the U.S. Treasury (bearish). The U.S. dollar is rallying as a result of those economic readings in December in addition to being long overdue technically on the charts. If leading, coincident, and lagged economic indicators continue to improve in 2010, it will serve as support for the U.S. dollar. The bearish forces looming over the dollar are coming from issuance risk. “Primary dealer Morgan Stanley expects the Treasury to sell $2.6 trillion in fiscal 2010, which began in October. That’s a 40% increase year-over-year.”² This isn’t a problem as long as we have ample bids to cover the treasury auctions, but recent events show that there has been a drastic decline. The last 30-year bond auction was held on December 10. The bid-to-cover ratio was 2.45. This means there were 2.45 times the dollar volume of bids versus the volume of Treasuries sold. At 2.45, that’s much lower than the recent peak of 2.92. We can see the same thing in the 10-year auction in which the bid-to-cover ratio has fallen from a peak of 3.28 to 2.62 on December 9th. Additionally, indirect bidders (consisting of foreign central banks) have lowered their percentage participation in the auctions from 50% in July to 40% in December for the 30-year bond auctions and from 55% in September to 35% recently in the 10-year bond auctions.

How does one invest with such an outlook as this for the dollar and interest rates? Let’s go over a few intermarket points first:

Predicated on continued economic recovery, and given the current interest rate environment, commodities and stocks should continue to perform while bonds should underperform. Concerning stocks, I believe mid to late-cycle sectors such as industrials and energy should do well. Where else can an investor find high dividend yields and low P/E multiples but in energy stocks? Technology tends to do well at the beginning stage of a recovery (2009) and market performs in the midst of a recovery.

Any bond portfolio will want to hedge against interest rate risk through various open or closed mutual funds that aim to achieve that objective. Even in the bond asset class, corporate bonds should outperform most bond metrics due to the economic recovery.

Concerning commodities, I’ve turned from bullish to neutral on precious metals based on a rally in the dollar. On the other side of the commodity spectrum, I think the outlook for basic materials and energy should continue to perform as the economy improves. While the dollar rallied in December, precious metals fell while energy and basic materials held their ground. I think 2010 will be much of the same barring any new financial, economic, or political crisis that could spark a flight towards gold.

The financial markets act as a discounting mechanism. They are currently telling us that we are in the midst of an economic recovery with the stock and commodity rally we saw in 2009 along with the current steep yield curve. Price to earnings multiples have expanded without the accompanying rise in earnings. 2010 will be a year for earnings to catch up to price (underlined for emphasis). If earnings do not catch up, well then Houston, we’ve got a problem. The financial markets are also telling us that we may have seen a trough in interest rates as the Federal Reserve Bank begins to remove its overly accommodative monetary policy in 2010. The change in monetary policy will likely cap any substantial chance the stock market has to continue its trend much higher. 2010 looks to be a range-bounded market much like we saw in 2004. Additionally, higher rates will not help the housing market that got us into this mess in the first place as a significant portion of adjustable rate mortgages reset in 2010. It will be interesting to see in 2010 just how much accommodation the Federal Reserve Bank will remove from its mortgage-backed security purchases as bond investors drive rates higher.

Ryan Puplava, cmt

² Levine, Deborah. Treasury yields to rise in 2010, dealers say. Market Watch, December 30, 2009 (accessed January 4, 2010). http://www.marketwatch.com/story/treasury-yields-to-rise-in-2010-dealers-say-2009-12-3

Copyright © 2010 All rights reserved.   www.financialsense.com

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Posted By thestatedtruth.com on January 4, 2010

The big question……Is this a lagging indicator or a trend.

AP: 2009 bankruptcies total 1.4 million, up 32 pct

By MIKE BAKER, Associated Press Writer

RALEIGH, N.C. – U.S. consumers and businesses are filing for bankruptcy at a pace that made 2009 the seventh-worst year on record, with more than 1.4 million petitions submitted, an Associated Press tally showed Monday.

The AP gathered data from the nation’s 90 bankruptcy districts and found 1.43 million filings, an increase of 32 percent from 2008. There were 116,000 recorded bankruptcies in December, up 22 percent from the same month a year before.

While experts believe some of the increase is due to a natural recovery as consumers and attorneys become accustomed to a recent overhaul of bankruptcy laws, the numbers indicate clear correlations to recession-weary regions. Arizona saw the fastest increase, a jump of 77 percent from the year before, followed by Wyoming (60 percent), Nevada (59 percent) and California (58 percent).

Emile Harmon, who owns a law firm in Tempe, Ariz., said the firm has doubled its staff to handle the surge in bankruptcy filings. The lawyers have been steadily shifting away from their other areas of business, civil lawsuits and divorce cases.

“Bankruptcy is kind of swallowing the whole practice.” Harmon said. “There’s little time to do other stuff.”

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Posted By thestatedtruth.com on January 4, 2010

Actually we’d like to see this press the upside a couple more thrusts; interspersed by sell-offs (perhaps even early Tuesday), before complacency surrenders to the upside and sets-up a pattern which could result in a fall from that wall of resistance. However all things in time; and if this takes a couple days to develop, so much the better really.Covert monetization . . .as so many believe the Treasury and Fed are involved with notwithstanding; there is plenty to worry about in these markets. Hyperinflation is not one of the near-term concerns; although the reasons for that (contrary to Gold bug or similar pitches) are a little bit more distressing, with respect to what may yet occur. 

Elsewhere; Chairman Bernanke made a weekend speech, though I have no idea why the Fedhead thinks he can get tough with monetary policy this year. Whether it’s the ‘Carry Trade’, or other factors that interject, you may well have higher rates imposed on the Fed, rather than ordered by them; but not necessarily for favorable recovery or similar reasons. The subtleties in his remarks can also move markets; while they for the most part seemed to be an attempt to defend the Fed decisions during the bullish years of 2002-2006 during which we were persistently bullish calling it a reflation with the piper to be paid later. At the end of 2006 we warned of the end of the rebound as nearing; and the rest you know. While this year’s extended rebound is persistent for sure; it too faces uphill struggles that the first hour’s out of the gate of 2010 obscure.

 

Of course the concern is Deflation that deepens; reversing collapsing yield spreads in normal times a healthy sign; not to mention the unanimity of opinion about strength in the first half of 2010 before any correction risk (that’s conventional wisdom and likely is ridiculous, as if indeed a whiff of higher inflation and rates is subsequently foreseen who in the world is going to wait for them to ring an ‘official’ bell to mark the point that everyone heads for the exits?); plus the prospect of a massive regional war nearing it seems in the Middle East; having nothing at all to do with Israel or historic concerns.

One point: we’re not taking our guard down; as complacency and ‘resignation’ has a way of causing a capitulation into the market ‘by default’, just before it does what has an historical record of some magnitude and importance; and that is a growing risk.

Covert monetization . . . as so many believe the Treasury and Fed are involved with notwithstanding; there is plenty to worry about in these markets. Hyperinflation is not one of the near-term concerns; although the reasons for that (contrary to Gold bug or similar pitches) are a little bit more distressing, with respect to what may yet occur.

Of course the concern is Deflation that deepens; reversing collapsing yield spreads in normal times a healthy sign; not to mention the unanimity of opinion about strength in the first half of 2010 before any correction risk (that’s conventional wisdom and likely is ridiculous, as if indeed a whiff of higher inflation and rates is subsequently foreseen who in the world is going to wait for them to ring an ‘official’ bell to mark the point that everyone heads for the exits?); plus the prospect of a massive regional war nearing it seems in the Middle East; having nothing at all to do with Israel or historic concerns.

One point: we’re not taking our guard down; as complacency and ‘resignation’ has a way of causing a capitulation into the market ‘by default’, just before it does what has an historical record of some magnitude and importance; and that is a growing risk.

www.ingerletter.com

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Posted By thestatedtruth.com on January 4, 2010

                             The Austrian School’s 7 Commandments:

-The Austrian free-market economists use common sense principles.
-You cannot spend your way out of a recession.
-You cannot regulate the economy into oblivion and expect it to function.
-You cannot tax people and businesses to the point of near slavery  and expect them to keep producing.
-You cannot create an abundance of money out of thin air without making all that paper worthless.
-The government cannot make up for rising unemployment by just  hiring all the out of work people to be bureaucrats or send them unemployment checks forever.
-You cannot live beyond your means indefinitely.
-The economy must actually produce something others are willing to buy.

     Ron Paul

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Posted By thestatedtruth.com on January 4, 2010

OUTLOOK FOR ECONOMIC GROWTH AROUND THE WORLD

Guild Investment

In our opinion, stock market appreciation is a function of corporate profit growth.  Corporate profit growth depends upon the industry or industries in which the company operates and the growth rate of the countries in which the company operates.  A summary of the markets which we believe are attractive for investment in 2010 and their estimated growth rates.

Asia Pacific (faster growing countries)

Another category is slowly growing countries where investments in exporters may be successful.

Japanese currency declines are good for exports. Even though the Japanese economy is slow growing.

The following countries produce commodities. Corporate profits in export and commodity related industries may exceed national economic growth.

Europe

Latin America

North America

www.GuildInvestment.com

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Posted By thestatedtruth.com on January 4, 2010

The COT chart of the Dollar is linked below. It is extremely overextended internally and if any technical support levels get violated on the downside, a significant amount of long liquidation is going to occur. We got just a taste of that in today’s session as the Dollar came under strong pressure with year-end positioning now completed and managed money taking positions across a variety of markets for 2010.

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Posted By thestatedtruth.com on January 4, 2010

Robert Rubin: All Hell Could Break Loose Because of the Huge Government Debt

The ultimate insider, Robert Rubin, who is a former secretary of the Treasury (1995–99) and now serves as co-chairman of the Council on Foreign Relations and is a fellow of the Harvard Corporation, in a Newseek opinion piece had this to say:

The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.

The conventional concern here is that private investment will be crowded out, which would result in a reduction of productivity, competitiveness, and growth. In addition, the very early 1990s showed that unsound fiscal conditions can have a symbolic effect that broadly undermines business and consumer confidence. But finally, and far more dangerously, our bond and currency markets could react with severe distress to fears about imbalances in the supply and demand for capital in the years ahead or about the possibilities of inflation. Those effects have been averted so far by a number of factors: large inflows of capital from abroad into Treasury securities; concerns about other major currencies; the low level of private demand for capital; and the psychological state of the market. But this cannot continue indefinitely, and change can occur with great force—and unpredictable timing.

 http://www.economicpolicyjournal.com/2010/01/robert-rubin-all-hell-could-break-loose.html

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Posted By thestatedtruth.com on January 4, 2010

Merced Sun-Star

 

Lifeline For Homeowners

 

California and four other states lead the nation in

 ‘Underwater’ mortgages.

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Posted By thestatedtruth.com on January 4, 2010

Jan. 4 (Bloomberg) — To understand the meaning of no good deed goes unpunished, Treasury Secretary Timothy F. Geithner can look no further than Wall Street where the banks that received the biggest taxpayer bailouts are seeking to reap trading profits from securities rescued by the government.

Only months after it was started, the U.S. program designed to purge debts of no immediate discernable value from the balance sheets of troubled banks has helped transform the frozen debt into a money-maker as the bonds have rallied. Bank of America Corp. and Citigroup Inc., who received 22 percent of the $418.7 billion American taxpayers loaned to troubled financial institutions, boosted holdings on their trading books of home- loan bonds that lack government guarantees while investors were raising cash for the program, according to Federal Reserve data.

Charlotte, North Carolina-based Bank of America along with Citigroup, Morgan Stanley and Goldman Sachs Group Inc., all based in New York, added a combined $2.74 billion of the debt, for which there were few buyers as recently as March, to their short-term trading assets during the third quarter, up 13 percent from the second quarter, the most-recent data show.

Prices of these securities may slump again, leaving the banks exposed to potential losses that the Treasury Department’s rescue plan was designed to mitigate, said Joshua Rosner, a managing director at New York-based Graham Fisher & Co., which advises regulators and institutional investors.

“It’s a trade that will likely work out, but it’s still a speculative trade, which is not what a taxpayer should want from firms that have only recently come out of critical care,” Rosner said.

‘Making a Killing’

The Public-Private Investment Program was introduced in March by Geithner as a means of helping struggling banks by reviving the market for unpackaged loans and mortgage securities that aren’t backed by government-supported institutions, such as Fannie Mae or Freddie Mac. Under the program, asset managers were supposed to raise money from investors and, with additional capital and loans from taxpayers, buy as much as $1 trillion in toxic assets from U.S. banks, freeing up money for lending.

It’s “absolutely ridiculous” that banks, which were expected to reduce their holding of such volatile mortgage securities, bought them before the government program was running and may now profit, said Michael Schlachter, managing director of Wilshire Associates, the Santa Monica, California- based investment-consulting firm. “Some of them created this mess, and they are making a killing undoing it.”

Geithner, 48, scaled back PPIP as the Fed declined to provide additional financing and banks balked at selling non- agency mortgages at a loss. It wasn’t until July that the Treasury chose New York-based BlackRock Inc., Invesco Ltd. in Atlanta and seven other firms to start PPIP funds.

To date, funds participating in the program have raised about $6 billion of equity capital from private investors, which the government has matched. The Treasury also provided $12 billion of debt capital, bringing the funds’ purchasing power to $24 billion. Prices for some of the securities that the funds were supposed to buy have almost doubled since March. The rally was fueled in part by traders jumping in before PPIP funds could get off the ground, said Steve Kuhn, who helps oversee about $440 million of mortgage-bond investments for Pine River Capital Management LLC in Minnetonka, Minnesota.

“Anytime people know there’s a buyer coming, they position for that, and that’s clearly what happened here,” said Kuhn, who is co-manager of the Nisswa Fixed Income Fund

The rally was boosted further by investors seeking riskier fixed-income assets to offset record low yields on Treasuries and by the stabilization of the housing market, he said.

Typical prices for the most-senior bonds backed by hybrid Alt-A mortgages stood at about 58 cents on the dollar by mid- December, up from lows of around 35 cents in mid-March, according to Barclays Capital data.

Prices rose as high as 60 cents on the dollar in November. Fixed-rate prime jumbo mortgage securities were at 84 cents, up from 63 cents in March.

Before the credit crisis, senior non-agency home-loan securities didn’t typically trade below 95 cents on the dollar, JPMorgan Chase & Co. data show.

Bank of America, the largest U.S. bank by assets and deposits, added the most non-agency debt on its trading book in the third quarter, with an increase of $945 million, or 34 percent. The value of securities designated held-to-maturity or available-for-sale also rose, by 8.2 percent to $37.3 billion.

Without new purchases, bank holdings tracked by the Fed usually decline as the underlying loans are refinanced or default. That shrank the overall market by 5 percent in the third quarter and by 30 percent since its peak in mid-2007, separate Fed data show.

At Goldman Sachs, CEO Lloyd Blankfein increased non-agency home mortgage bonds designated for trading by $593 million in the third quarter, to $2.71 billion, and Morgan Stanley’s jumped $785 million to $4.25 billion, the Fed data show. Goldman Sachs’s other holdings climbed $76 million to $449 million. Morgan Stanley, now overseen by CEO James Gorman, classified all its holdings as trading assets, according to the Fed data. Both companies are based in New York.

Eric Petroff, director of research at Wurts & Associates, a Seattle-based firm that advises institutions on $30 billion in investments, said it’s no surprise that banks added to their holdings following the unveiling of PPIP.

“Any time the government says, ‘We’re going to buy something in the securities market,’ they’re putting out a sign that says, ‘Free money, come and get it’,” he said.

The renewed interest by banks in holding the bonds has helped restore liquidity, said Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago. Higher prices have also eroded potential profits of PPIP funds and increased the risk of losses, making it harder for asset managers participating in the program to attract investors, he said.

“Managers are trying to figure out whether the rally in residential mortgage-backed securities is sustainable, or if there will be some sort of pullback,” Papier said.

Bill Eigen, manager of the $5.4 billion JPMorgan Strategic Income Opportunities Fund, said he bought residential mortgage- backed securities in the spring. Since then, he has sold and begun shorting both residential and commercial mortgage-backed securities, anticipating that their price would fall.

“This stuff was supposed to trade on fundamentals and will again trade on fundamentals,” he said in an interview. “PPIP is not going to fill up buildings.”

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Posted By thestatedtruth.com on January 3, 2010

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Posted By thestatedtruth.com on January 3, 2010

  JANUARY 2, 2010      

How A Supposed Boon Has Become A Fiscal Burden.

Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.

The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.

First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state’s money.

For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.

 More…..http://online.wsj.com/article/SB10001424052748704152804574628633460370644.html

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Posted By thestatedtruth.com on January 3, 2010

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Posted By thestatedtruth.com on January 3, 2010

Jan. 3 (Bloomberg) — Federal Reserve Vice Chairman Donald Kohn said tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets.

“Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow,” Kohn said today in a speech to the American Economic Association in Atlanta.

Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent for a year to support an economy that is recovering from the worst recession since the Great Depression.

“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said. He also said the central bank won’t keep rates low to help finance government spending.

“A large and growing federal deficit will not stop the Federal Reserve from exiting from current policies when that’s needed to keep prices stable and the economy on a path to sustained high employment,” Kohn said.

The U.S. central bank, attempting to restore liquidity and credit, has expanded its balance sheet to $2.24 trillion from $858 billion at the start of 2007. As a result of the Fed’s purchases of $1.7 trillion in mortgage-backed, federal agency, and Treasury bonds, banks hold more than $1 trillion in reserves in excess of what they’re required to hold against deposits.

Central bankers are discussing how they will eventually exit their low-rate policy and drain excess cash in the banking system to head off inflation. At their December meeting, they said they would shut down emergency lending programs for commercial paper issuers and bond dealers in February as credit has become more available.

“We have no shortage of tools for firming the stance of policy, and we will be able to unwind our actions when and as appropriate,” Kohn said. “The appropriate use and sequencing of these tools is under active discussion by the FOMC.”

Banks haven’t started to circulate the reserves. Loans and leases of commercial banks in the U.S. declined to $6.8 trillion in November from $7.2 trillion a year earlier, according to Fed data.

More at…..http://www.bloomberg.com/apps/news?pid=20601087&sid=a6jsKMNzpqH0&pos=3

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Posted By thestatedtruth.com on January 3, 2010

Jan. 2 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist and Columbia University professor, said economists are among those at fault for the financial crisis, which exposed “major flaws” in prevailing ideas.

The now-flawed premises include the ideas that economic participants behave rationally and that financial markets are competitive and efficient, Stiglitz said in a slide presentation prepared for a speech today to the Allied Social Science Associations meeting in Atlanta. The housing bubble was fueled by the idea that prices would go up forever, Stiglitz said.

The bursting of the bubble resulted in the recession that began in December 2007 and is now the worst since the Great Depression, having claimed more than 7 million U.S. jobs. Homeowners, investors and “probably” financial executives showed “marked irrationalities” and may have “bought into their own false arguments,” Stiglitz said.

“Economists should be included in the list of those to ‘blame’ for the crisis,” Stiglitz said in the presentation, which Bloomberg News obtained via e-mail. There’s now a “window of opportunity” to build new theories “based on more plausible accounts of individual and firm behavior,” he said.

In one slide, Stiglitz repeated criticism of Alan Greenspan, the Federal Reserve chairman from 1987 to 2006, for recommending consumers take on variable-rate home loans. Greenspan responded to Stiglitz two years ago that he meant to suggest that a “narrow segment” of customers might want an alternative to long-term mortgages.

In the market for securities tied to mortgages, the products were so complex that investors couldn’t determine the quality of the underlying assets, “inducing large incentives for asset quality deterioration,” Stiglitz said. “Globalization had opened up a global marketplace for fools.”

Stiglitz, 66, a professor at Columbia University in New York and a White House economic adviser under President Bill Clinton, shared the Nobel Prize in 2001 with George Akerlof and Michael Spence for work on problems that arise in markets when parties don’t have equal access to information.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a69Q211j7yV8&pos=7

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Posted By thestatedtruth.com on January 1, 2010

                  Index          P/E        Est. P/E     Div %   Price/Book   Price/Sales

Source: Bloomberg

Key Interest Rates

Key Commodity Prices

Bloomberg.com

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Posted By thestatedtruth.com on January 1, 2010

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Posted By thestatedtruth.com on January 1, 2010

“Be at war with your Vices, at peace with your Neighbors, and let every New Year find you a Better Man.”      

                                   Benjamin Franklin

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Posted By thestatedtruth.com on January 1, 2010

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Posted By thestatedtruth.com on January 1, 2010

                         Could Commercial Real Estate Trigger A Double-Dip?

 

 

CHARLES HUGH SMITH

 

Reports that commercial real estate (CRE) is suffering from a double whammy of soaring vacancies and declining valuations have been making news recently with sobering regularity. DailyFinance addressed the risks that CRE meltdowns pose to banks in early December. And in a stunning confirmation, just weeks later Morgan Stanley announced it was “walking away” from five San Francisco office towers, giving them back to the lenders. These accounts address the impacts on real estate investors, banks and hard-hit locales such as Southern California. But a bigger, often-overlooked, risk is the potential for CRE to remain a drag on the U.S. economy for years to come, or its potential to trigger a slide back into recession — the so-called double dip that many fear.   Four primary factors are behind the tumble in CRE prices — and they’re eerily similar to those that powered the residential housing boom and bust:

• Overbuilding in marginal locales that lacked adequate jobs and services to support massive new commercial construction (malls, hotels, business parks, resorts, etc.)
• Excessive valuations fueled by low interest rates and easy credit
• Highly leveraged bets on future appreciation
• A banking sector that’s extremely vulnerable to write-downs and losses from foreclosures

How much have prices tumbled? According to Moody’s/REAL Commercial Property Price Index, CRE prices have plummeted 41% from the peak in 2007. Or in many cases, even more. For example, a hotel in Hawaii that sold for $250 million with a $230 million mortgage a few years ago is now only worth about half that amount.

It Starts With the Banks

In a recent research report, Deutsche Bank analysts expect 75% of current CRE loans won’t qualify for refinancing. With more than $2 trillion in CRE debt maturing from now until 2013, that suggests $1.5 trillion cannot be “rolled over” into new loans. Part of this crunch stems from the fact that commercial property loans are typically shorter-term than residential mortgages; most common are terms of five to seven years.

Of course, speculators aren’t the only ones who are losing big. The banks that provided the mortgages are in trouble, too — and that’s where the problems in CRE can start weighing down the entire U.S. economy.

Over the next few years, the Deutsche Bank analysts estimate CRE losses to lenders of $200 billion to $300 billion. With banks already reeling from losses stemming from U.S. residential real estate’s 30% decline from its 2006 peak of $20 trillion (a value set by Federal Reserve data), the analysts believe that “hundreds of banks, mainly smaller community and regional banks, are likely fail.” These losses will hit vulnerable regional banks especially hard because they loaded up on commercial loans in recent years.

Don’t Bet on Another Bailout

Will the banking sector once again require taxpayer bailouts as these huge losses start draining regional banks’ reserves, pushing them toward insolvency? It’s unlikely the public will support another TARP-type rescue. It’s perhaps even more unlikely that politicians will risk their careers in an election year by supporting yet another massive bailout of lenders that knew — or should have known — the risks inherent in highly leveraged CRE loans.

What will happen as banks absorb billions of dollars in new losses, thanks to the meltdown of CRE? They’ll have much less money to lend to other borrowers. And that contraction of credit in a fragile economy could trigger a double-dip recession. Anyone believing that banks are “on the road to recovery” hasn’t factored in the hundreds of billions of dollars in CRE losses forecast by industry analysts.

Property values are another problem. In that area, CRE faces significant structural headwinds to a recovery. Perhaps the single most important one is the contraction of the consumer economy that supported seemingly endless expansion of malls and other retail space. Consumers’ net worth has fallen by about $12 trillion, their incomes are either flat or declining, taxes are rising across the board (income, sales, property, etc.) and baby boomers face the generational task of saving far more for their retirement than seemed necessary at the top of the housing bubble.

That boils down to less money available to spend on discretionary goods and services, and hence less demand for retail space and for resorts and hotels.

Cyberspace Means Less Commercial Space

The steady growth of Internet shopping also saps the demand for bricks-and-mortar retail space. Web-based shopping has already reordered the bookselling industry and is well on the way to permanently reducing demand for other retail outlets.

Beyond retailing, the Net is also transforming demand for office space, as increasing numbers of knowledge workers telecommute from home, cafés or other decentralized locations. That means less need for office cubicles — and for conference rooms, considering that teleconferencing and other Web-based communications are eroding the old model of business travel and meetings. This also means less demand for business-related hospitality services, such as hotels and restaurants.

Add these structural headwinds to the unavoidable heavy losses and write-downs facing CRE lenders, and you get a recipe for a major drag on lending, banking profits, property taxes, employment, construction and all the other sectors of the economy.

Whether these forces will tip the U.S. into a double-dip recession depends on many other factors, but they certainly have the potential to add to the contraction of credit that’s bedeviling wide swaths of the economy. And we all know what happens when credit disappears.

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Posted By thestatedtruth.com on December 31, 2009

Dec. 31 (Bloomberg) — Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages, Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the government struggled to prevent a meltdown of the financial system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case- Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited amount of assistance to the companies as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest source of money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans, Wallison said.

“It turns out it was impossible to regulate them, he said. They were too powerful. He said no one knows how much will be needed to keep the companies solvent.

More…….http://www.bloomberg.com/apps/news?pid=20601087&sid=a2Z5GnTAPcuo&pos=7

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Posted By thestatedtruth.com on December 31, 2009

“Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%.”

State, Local Tax Revenues Decline 7%
By CONOR DOUGHERTY

State and local tax revenues fell 7% in the third quarter of 2009 from a year ago, the Census Bureau said in a report underscoring how the economic downturn is stressing government collections.

Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue.

“We expect continued weakness well into 2010 if not further,” said Lucy Dadayan, an analyst at the Rockefeller Institute of Government at the State University of New York.

Property taxes increased 3.6% in the third quarter compared with a year ago. But as property assessments catch up with falling residential and commercial real-estate values, property-tax revenues are expected to be weak. That will have a particularly severe impact on local governments, which fund much of their operations from property taxes.

“At minimum, cities will be working through the catastrophic drops in revenue for the next 18 months to two years,” said Mark Muro of the Brookings Institution’s Metropolitan Policy Program.

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