Tuesday, June 22, 2010

Leftovers -- Radio Show 5/22/2010

Bank analyst, Meredith Whitney, said investors should avoid bank stocks at all costs.  In the second half of 2010, she expects job losses and a housing double dip.  The drop in reported credit card delinquencies was actually the result of new credit card rules which took effect earlier this year.  She thinks the financial reform bill will "be very bad" for banks".

When it comes to credit cards, the banks are gaming the payments, because, under the new laws which were designed to appear to protect consumers from self-serving billing practices, only the amount of the payment in excess of the minimum must be applied to higher rate balances.  The minimum payment is applied by the banks to lower interest rate balances first.

Elizabeth Warren continues to argue that the loopholes in financial reform which allow the big interstate banks to escape tougher state laws and rules on banks and credit unions create unfair competition, a destruction of a level playing field, and subjects consumers to higher interest rates if not usury.  Senator Whitehouse's amendment would close these loopholes and make big banks subject to stronger state laws if they want to do business in those states.

Another financial reform amendment by Senator Durbin would require credit card companies to cease charging transaction fees if the business also accepts debit cards.  This will help businesses, but it is expected the credit card companies will pass the lost transaction fees in higher card fees to credit card holders.

April CPI went down one-tenth just as it went up one-tenth in March for an annual inflation rate of 2.2%.  Core inflation was unchanged at .9%.  Using the 1980's calculation for inflation, inflation would be approximately 9.5-9.6%.  Using the 1990's calculation for inflation, inflation would be approximately 5.5%.

In the April meeting minutes of the Federal Open Market Committee meeting of the Federal Reserve, it was observed that business conditions are improving but most anticipated the pick up in output would be slower relative to past recoveries.  It is unlikely that consumer spending will be driving economic recovery and the savings rate has dropped.  The housing market appeared to have stalled.  Commercial real estate activity continued to to fall on deteriorating fundamentals.  Small businesses continue to have continuing difficulty in obtaining bank loans.  Small and regional banks are vulnerable to commercial real estate loans.  If European countries expand fiscal consolidation (cut deficits), the result would likely be slower growth in in Europe and a weaker global economy.  As I have noted on several occasions, and as one participant in the FOMC commented, core inflation appears to have been held down in recent quarters by unusually slow increases in the price index for shelter (its composition was changed)  and the recent behavior of core inflation might be a misleading indicator of the underlying inflation trend.  While inflation remains low to flat, expectations of inflation are increasing among market participants.  Again Mr. Hoenig was the sole dissenting vote on "exceptionally low levels of the federal funds rate  for an extended period", because he fears it will lead to a build up of future financial imbalances increasing the risks of longer run macroeconomic and financial stability and limit the FOMC's flexibility in when and how it begins to raise rates.

David Beckworth has concluded that a current high unemployment is not cyclical but structural, which means there are thousands of jobs which are permanently gone and will never be refilled.  In my opinion, this also means those unemployed over 55 years old will particularly have a hard time find comparable work or comparable pay to their former jobs.

The SEC suspects ETFs fueled the May 6th drop.  ETFs accounted for 70% of the securities that fell 60% or more from their price at 2:40 P.M.  Bond ETFs did not see sharp drops.  Many of the trades involved stub quotes or place holders (one cent) as the result of computer programs.

John Hussman in his weekly commentary is concerned that the ECB's pledge to buy sovereign bonds from European banks will place weak assets on their balance sheet just as the Fed did with toxic mortgage backed assets.  I personally do not think they are comparable assets.  Hussman sees monetary policy as being only as good as fiscal policy.  Unfortunately, the eurozone has removed monetary policy from its member nations control and the Stability and Growth Pact has significantly crippled member nations' fiscal policy applications consistent with internal economic needs.  Hussman is also ignoring the current account imbalances within the eurozone.  He believes that without a central taxing authority, the eurozone lacks the ability to control deficits.  Consequently, he thinks Greece will have to restructure debt, but he is ignoring that the IMF/EU bailout forbids restructuring.  He actually thinks Greece and other countries will pull out of the euro, but he is not acknowledging that that would require withdrawal from the European Union in totality, which is very unlikely and difficult to happen.  He sees tepid wage growth for the next several years and inflation not being a factor until the last half of this decade.

Congress will be considering a mish-mash conglomerative bill which includes several diverse issues: a 30 day extension of jobless benefits, retroactive reinstatement of expired tax cuts, summer jobs, police and teacher jobs, and increased taxes on investment fund managers from 15% capital gains to 35% as well as other oil barrel tax, a three year delay in Medicare payment cuts to doctors, etc.  These bills are designed to have a little something for each party and often end up either mired in controversy.or whisked by the wind.

Hundreds of cases have been referred to the Justice Department over several years involving bid rigging of municipal bond sales by financial advisors and traders, including banks.  This also involved the sell of interest rate swaps to local governments that backfired.  The process was pervasive and may have involved many, if not most, of the largest banks.

Pinalto, Cleveland Fed President, sees a gradual recovery and low inflation.  She sees high unemployment and overwhelming cautiousness by consumers and businesses as a major impediment ("headwind") to recovery.  Kohn, Fed vice-chairman, sees keeping future price expectations intact as vital with interest rates are very low.  Unanchored expectation would be risky and far too costly.  He addressed the uncertainty of determining proper price stability, asset bubbles, asset purchases and sells, and balancing financial stability.  Dudley, New York Fed President, said the recovery will not be robust, household deleveraging started last year, and the transitory inventory boost to GDP is over.  Tarullo, Fed Board Governor, in Congressional testimony said the European credit crisis could spill over and cause U.S. bank losses on credit exposures.

The passage of the Senate financial reform bill has a variety of winners and losers, but it is going to Conference Committee with the vastly different House version and in conference committee anything can happen and a bill could emerge which is vastly different from the two which went into Conference Committee.  You can expect many amendments which were not debated publicly and the bank and financial services lobbyists will have their knives out and counter attacks washing across the Conference Committee like the waves of the ocean.

Economic information we did not get to on the show:

The IMF said the European Union fiscal tightening will slow recovery.

The new UK government will cut $8.75 billion in spending.

Japanese core machinery orders were up 5.4% in March.

EU plans hedge fund crack down with rules to control pay and borrowing as well as force disclosure of investing information.  Some think this will discriminate against U.S. hedge funds and other none EU funds.

Germany unilaterally and without consultation with other EU countries banned short selling of equities and sovereign debt swaps.  It had negative effect on the markets, but it is essentially meaningless without action by other countries as the trades will just be executed in other foreign markets.

Eurozone CPI was up .5% in April on rising energy prices.  CPI was up 1.5% vs year ago.

UK CPI was up 3.7% April vs year ago with higher food and tobacco/alcohol taxes.

Chinese CPI is expected by the government to rise 3% vs year ago in May and June.

Dubai World reached a tentative agreement with creditors to restructure $28.5 billion in liabilities.

Japan's economy grew 4.5% (expected 5.4%).

Spain's lar4gest union may call for a general strike.

Greek demonstrations were mild after last week's violence,


Print Page

Friday, June 18, 2010

Financial Reform is a Dirty, Corrupt Process

While many, including myself, labor and desire financial regulatory reform in the United States which will protect the American public, defuse systemically risky financial companies, provide a practical liquidating process of multiple financial companies during a financial crisis, and enter the 21st Century with respect to the need for fiduciary duty and how that is distinct from a watered down wolf in sheep's clothing fiduciary standard.

What can be said of a country that will not even debate the need for fiduciary duty and the ethically incompatible functions of selling financial products?  In the United Kingdom, Canada, and Australia is illegal to provide financial advice and sell financial products.  Period.  Are they more civilized or more democratic or just more pro consumer protection oriented than regulators and congressmen in the United States?  Are their regulatory agencies more conflict free and less corrupt than the United States?  In the United States not even the main line bloggers think fiduciary duty is worth discussing.  I have made my position very clearly and I have not minced words.

It is more popular to talk about "too big to fail" when the topic should actually be the "systemically dangerous".  Obviously, a Volcker Rule which addresses financial companies of any size which are systemically dangerous is necessary.  The fight for an independent consumer financial protection agency is lost with its imprisonment in the Federal Reserve.  Stripping commercial banks of derivatives, private equity, and hedge fund trading and product development is fundamentally necessary.  Taxing financial companies for excessively risky behavior is perceived as too much to ask; after all, it might actually curtail excessive risky behavior and limit the compensation of investment bankers/traders who live to devour the competition much less the unsophisticated.  If, during a financial crisis multiple financial companies need to liquidated or restructured simultaneously, we are doomed, because the resolution process proposed in the United States addresses single companies and will not work if initiated. 

Stiglitz has recently listed what financial reform should do and what it is not doing in a recent article.  He shows that the House and Senate versions are both inadequate, the pressures of the financial lobbyists, and the need for a resolution process, and reforms to prevent another financial crisis like one we continue to experience.  He falls into the "too big to fail" myth while he has written about systemically dangerous as the proper term, because it is not about size; it is about excessive risk and being a systemic threat.  But, then, he also falls into the fiduciary standard trap.  Perhaps he is just trying to be inclusive in an attempt to promote reason.  His article covers a lot of territory with little substantive argument in an attempt to show the problem and the need for solution.

Exemplifying the extreme focus on what many consider "the" important issues, Rortybomb compared the House and Senate versions of resolution authority, bank capitalization, derivatives, and auditing the Fed only.  He does mention he is also concerned at the loss of the ratings companies being subject to an independent agency which assigns raters to debt issuances and auto dealers exempt from consumer protection disclosures.  What he does not mention is fiduciary duty, the consumer financial protection agency, the exemption of many small banks, and the provisions which make the largest banks more powerful than before the current crisis. 

The inadequacy of the Orderly Liquidation Fund is well discussed in this article by Jennifer Taub on The Baseline Scenario.  The proponents of the financial elite want no part of any law which would actually make the financial elite pay for their mistakes, when the losses can be so conveniently dumped on the American public in a pious contrition towards the unspoken state of corporate socialism.  The Baseline Scenario has many other posts on financial reform.

The attack upon any type of Volcker Rule which addresses the issue of systemically dangerous financial behavior is unrelenting.  Rortybomb, which is an excellent source on financial reform, recently wrote about how any form of the Volcker Rule is not being taken seriously in the Conference process.  Some congressmen are concerned that stripping private equity, derivatives, and hedge fund activities from banks will put them in unregulated entities.  Are they being obstructionist?  Without divorcing commercial banks from trading excesses, we will be primed for the next financial crisis and nothing will stop it.

Do we live in a corrupt society?  Do we desire a society feudalistically dominated by financial corporations?  Is the general welfare of the people a dominant concern or just a phrase which money from financial lobbyists allow congressmen to ignore?  Do we need to go back to the Constitutional mandate of a U. S. Representative for every 30,000 citizens and have a larger lower House like other developed democracies, like the United Kingdom?

Print Page

Thursday, June 17, 2010

Leftovers --- Radio Show 5/15/2010

We discussed the use of stop loss orders and stop loss limit orders.  In liquid markets, stop loss orders are usually sufficient, but on May 6th we saw how stop loss orders would have been more appropriate given high frequency and computer program trading gone awry.  A stop loss order is a market order after the stop loss is reached.  A normal stop loss is 8% from either the original basis or a higher gained level after purchase.  In a stop loss limit, you might have a stop of 4% with no execution below an 8% loss.  This would save you from a precipitous drop from which the market then recovers; if the market does not recover your loss is even greater, because there was no execution.  Those people, who followed my consistent advice, would have been completely out of stocks and stand alone ETF positions by May 5th, because the market went into correction on the 4th and they would have sold any positions in which there stop loss orders had not yet executed.  You do not stay in stocks and stand alone ETF positions in a correcting market.

The major securities exchanges agreed to create a uniform system of circuit breakers to slow trading during intense market volatility.  Part of the problem on the 6th of May was a slow down on the NYSE and trades routed to electronic exchanges.

U.S. Senate voted to force credit card companies to cut transaction fees to businesses that accept debit card transactions.  This will help businesses more than the public as the cost of the cuts is passed on by the credit card companies to the card holders.  The Senate also stripped the right of banks to directly engage ratings agencies to rate bonds.  The Senate wants the SEC to set up an independent board to decide which ratings agency provides ratings for a bond issue.  The New York Attorney General has subpoenaed eight banks for information on their dealings with ratings agencies: Goldman Sachs, Morgan Stanley, Deutsche Bank, Merrill Lynch, UBS, Citigroup, Credit Suisse, and Credit Agricole.  Moody's received a Wells notice from the SEC, because there is concern Moody's 2007 initial application to become a nationally Recognized Statistical Ratings Organization (NRSRO) was misleading.  Morgan Stanley is being investigated by the Justice Department to determine if they misled investors on mortgage derivatives it helped create, market, and sometimes bet against.  The New York Attorney General is suing a unit, Ivy Assets, of NY Mellon alleging they kept clients in the dark about problems with Bernie Madoff of which they had knowledge.

The U. S. Senate approved an audit of the Fed, but only of the emergency actions since December 2007.  It is not a full audit.

FHA commissioner David Stevens urges private mortgage insurers to not ease standards.  They have seen a massive drop in business, but prices are falling and the mortgage insurers want to do more business and the bailout of Fannie and Freddie, with their higher costs, is pushing private mortgage insurers out.  The FHA intends to maintain lending volume until capital comes back.

The ECB is committed to the survival of the euro and is buying sovereign bonds in the secondary market with a $1 trillion fund.  While this is portrayed as necessary steps to strengthen the eurozone, the bond purchases will primarily help European banks by taking the sovereign bonds off their balance sheets while increasing their liquidity.  The ECB pledged to keep the bonds for their full maturity.

There is a fake SEC being operated by con artists under the name of "U.S. Securities and Equities Administration", "U.S. Securities Administration", and the U.S. Securities Bureau enticing investors with offers to remove supposed restrictions on stocks they own or release funds being held by the government for a fee.  They had a global counterpart, an address shared with Deutsche Bank and Standard and Poor's in Boston.  They even set up a website with detailed investor alerts and warnings.

Parallel criminal and civil probes have been launched by DOJ and CFTC into whether JPMorgan through its trading activities actively suppressed the price of silver.  There has also been some speculation that big bullion dealers and ETFs do not have the physical bullion they claim to possess.

According to a study from the Center for Retirement Research at Boston College, if a couple turned 65 last year and at least one spouse suffered from a chronic disease, they would face lifetime health cost of $220,000.  A healthy couple without any chronic diseases would have lifetime health care costs of $260,000.  For 5% of the unhealthy couples, the cost can be as high as $465,000 compared to $570,000 for 5% of healthy couples, because a healthier couple will live significantly longer lives.

In the past we have said several times that a sustainable recovery is usually preceded by a strengthening dollar.  Since 2008, commentators have been extolling the export benefits of a weak dollar as the road to recovery.  The increase in exports and a significantly declining trade deficit has not been happening.  A strong dollar encourages foreign investors to invest in the U.S., bring money into the United States.  A stronger dollar makes imports cheaper and helps control inflation.  Services and production outsourced to other countries may find economic reason to return to the United States.  The strength or weakness of the dollar is always a double edged sword.

Lacker, Richmond Fed President, again said the Fed must not wait too long to raise rates given public inflation expectations despite low inflation.  Economy is slowly improving but it will take some time to make substantive progress in high unemployment, although he sees progress.

Kohn, Fed vice-chairman, said economic rebalancing prevents turmoil. in addressing the problem of global financial imbalances in the emergence of global financial crises.  In my opinion this is exactly the problem within the eurozone.  It is unfortunate that Germany and China are not interested in global rebalancing.

Hoenig, Kansas City Fed President, who also wants the Fed to raise interest rates and to move back to a more neutral policy, was profiled with a explanation of his monetary beliefs by The Wall Street Journal online.

Elizabeth Warren of the Congressional TARP Oversight Panel said she remains infuriated that TARP has failed to funnel some of the $700 billion to small businesses.  Big bank lending to small businesses actually dropped 9% from 2008 to 2009.  Small banks still remain constrained by exposure to commercial real estate.  In my opinion the banks which have profited the most from the government bailout are lending the least to promote economic recovery.  A study by the Panel found that several TARP initiatives were ineffective in getting money for small business.

The National Federation of Independent Business monthly economic trends survey showed more optimism but still weak economy with spending at record low levels.

FINRA is focusing its enforcement priorities on selling-away cases, municipal disclosures, structured products, and leveraged exchange-traded funds.

John Hussman in his weekly commentary is of the opinion that no repetition of game theory will produce a result that will keep Greece from needing to restructure its debt despite the EU/IMF bailout, which was designed to last three years.  In his opinion it might give Greece only 18 months relief from seeking capital in the open market.  Unfortunately, he appears to be to focused on deficits and not enough on the current account imbalances among the eurozone countries.

Rob Parenteau of the Levy Economics Institute, for whom I have been doing economic research on the eurozone crisis and European and U.S. bank exposure as well as hedge fund investment opportunities, wrote that the Greek bailout will fail for three reasons: 1) higher taxes and lower public worker wages create discontent, 2) Greeks have borrowed from French, German, and Swiss banks not just Greek banks compounding the problem, and 3) Greeks will have less money to spend and countries and businesses with business ties to Greece, like Germany and the Netherlands, will also suffer.  He also indicated the euro will fall at least 20-30% this year.


The IRS has issued average premiums by state for the new small group tax credit.
Chinese prices were up 2.8% for the year to April; industrial output was down 17.8% vs year ago; bank lending is still pumping despite monetary tightening at $113.4 billion in April.

French economy may see a .4% growth in Q1 and .5% in Q2 according to the Bank of France (the forecast is 1.4% and is now in doubt).

China April trade surplus is $1.7 billion after a March trade deficit of <$7.2 billion>.

Keeping children until age 26 on parent's insurance will raise employer premium costs by 1%.

UK production was up 2% in March; output was up 2% vs year ago.

US retail sales, ex autos, were down 2% in April with all sales up .4% in April; all sales were up 8.8% vs year ago.  March was revised up to 2.1% from 1.9%.  US trade deficit was up to 19% in March.  It grew by 2.5%, $40.4 billion, in March.  Imports were up 3.1% led by oil.

US industrial output was up .8% in April with capacity utilization up to 73.7%, which is still 6.9 below the average.

China April producer prices were up 6.8% and property prices were up 12.8%.

Hong Kong GDP Q1 was 8.2%.

U.S. Treasury auctions:

3 year Treasury, $38 billion, yield 1.414%, bid-to-cover 3.28, foreign 51%, direct 16.5%.

10 year Treasury, $24 billion, yield 3.548%, bid-to-cover 2.97, foreign 59.6%, direct 24.96.

30 year Treasury, $16 billion, yield 4.49% (higher than current market which means this yield is "tail"), bid-to-cover 2.60, foreign 32.5%, direct 17.5%.  This was a weak 30 year auction.


Print Page

Tuesday, June 8, 2010

Illinois Has No Political Will; Fiscally and Ethically Bankrupt

Moody's downgraded the State of Illinois credit rating for its General Obligation bonds from AA3 to A1 citing the State's continued inability over years to confront mounting debt with a balanced budget as required by Illinois Constitution.  This is one in a series of debt downgrades which will undoubtedly continue.  Moody's observed that Illinois is making only stop gap steps by borrowing against the tobacco settlement funds, an economically questionable tax amnesty program, and dependence on Federal stimulus funds which are running out.  Moody's also stated the economic recovery in Illinois will lag the Nation.  The Illinois political leadership in the House, Senate, and Executive has failed to solve large unfunded pension liabilities, exceptional retiree health benefits, and a chronic disparity between revenue and spending.  Moody's commented that the larger the deferral of action lasts the harder implementation of a solution will become.  Conservatively, the FY 2010 budget deficit will be approximately $13 billion, although I have long maintained it may be closer to $15 billion after all non-recurring funds are considered.  Illinois is fiscally bankrupt.

The primary response of the State of Illinois to the budget problems has been to not pay its bills to vendors, universities, local government, private social service agencies, and school systems.  Some have not been paid for over a year.  In fact, there are at least $5 billion in unpaid bills, which is twice the amount one year ago and almost ten (10) times the amount of unpaid bills in 2008 ($512 million).

The primary and absolute cause of this fiasco is the failure of the Democrat and Republican elected representatives and senators to work together and perform their governmental duties in the best interest of the people rather than political posturing and partisan combativeness aimed at no results.  Results, decisive political leadership, would require acceptance of votes.

The Governor submitted a budget which attempted to show the value of a 1% income tax increase for education with significant education cuts if not passed, examples of what 10% agency cuts might mean, and more borrowing to make pension fund payments as well as massive fund sweeps of dedicated funds.  All of this was artfully constructed for political effect, but in no way adequate in resolving the debt problems of Illinois government.  A prior proposal for a 2% income tax increase to a flat 5% was never seriously considered in 2009.  The Republican party has been adamant that operational cuts must be made but have failed to provide concrete cuts for consideration.  The opposing candidate for Governor has proposed, in the past, across the board 10% cuts but has equivocated recently as it is widely acknowledged such cuts would not be enough to solve the debt problem and could be destructive of the services government is expected to provide its citizens.  The current Governor has spoken of making cuts and cost savings but they have yet to materialize beyond words.

One bill passed in 2010 would raise judicial retirement ages from 55 to 67 after January 1 and reduce annual pensions from 85% of ending salary to 60% of social security wage base.  This is a significant cut, yet, the General Assembly was unable to make other pension reforms or increase retiree health premiums to levels still below the private sector.  The president of the Illinois Judges Association objected to the pension changes for judges appointed after January 1, 2011 and said judges need to provide for their families and educate their children.  Does this logically mean other, average, people do not need to provide for their families and educate their children?  The annual pension of a current associate judge making $165,588 would be $140,750.  If appointed after January 1, 2011 the annual pension at current salaries would drop to $64,080.  The average State employee (the regular joe --- not the special, politically connected elite) pension is approximately $20,000 according to AFSCME. 

Democrats control both houses of the General Assembly but refuse to take action by their majority only.  Republicans demand cuts but refuse to be associated with cuts affecting public services.  There have been demands for a forensic audit despite the estimate of a cost in excess of $60 million and the existence of State Auditor reports on all State agencies, departments, and boards.

Illinois pension systems are the most under funded state pensions in the United States in excess of 50% (almost 60%)  under funded.

Over 3000 State employees are exempt from the civil service and there has been an absolute refusal to assure these employees positions are evaluated for cost effectiveness and individual performance as any competent organization would do annually.

The sad fact is that, after so many years of incompetent and corrupt political administration have transpired, the debt problem cannot be resolved by cost savings, efficiencies, and spending cuts alone but also require tax increases.  This creates a situation which is unpalatable to both political parties as well as unions, local governments, public employees, retirees, and diverse public interest groups of all political spectrums.


Some civic organizations have proposed radically differing proposals.  The Center for Tax and Budget Accountability traditionally proposed a wide adoption of service taxes, because Illinois is a State which taxes few services, despite the disposable income regressive nature of sales and service taxes, but this year embraced a variety of income and sales taxes combined with some tax relief for lower income groups proposals.  The Illinois Policy Institute saw the solution in significant public sector labor and wage cuts and freezing spending for coming years.  The Civic Federation has consistently advocated the need for an income tax and significant pension system reform as well as full funding as well as detailing other budget proposals.
During the Democrat primary there was a good debate on flat rate income tax and a progressive income tax, but unfortunately most of it revolved around exemptions and taxing the "rich".  However, a progressive income tax would require a Constitutional amendment, which would mean a new Constitutional convention which would open up a wide variety of political controversies.  The flat rate increase was hobbled by high personal exemptions, an assumption of a four person family size, and no consideration of the regressive nature of sales taxes on disposable income.  Neither proposal would have generated enough money to solve pension funding or cover current spending.  When it comes to actual per capita taxation, Illinois is relatively low ranked compared to other states.

Illinois tax revenue is decreasing at serious levels during this period of financial crisis and fragile economic recovery.  Sales tax revenue alone is down $494 million for the year and all revenue is down $1.456 billion through May.

The budget as passed by the General Assembly is acknowledged to not be in balance.  Consequently, it is unconstitutional.  It does give the Governor authority to transfer funds, not restricted by Federal or State mandates, within the budget. 

And all of the politicians and the candidates want to wait until after the election.  Whoever wins will still face the same bureaucracy and fiscal problems.  How do you get qualified veterans hired with their legal preferences much less other qualified management personnel if all state job opening descriptions contain a requirement for specific knowledge and experience in specific department and program rules and regulations and statutes?  This limits hires to current state employees or the politically connected who get to bypass the process.  How can needed cuts be done if every special interest group with enough political campaign contribution clout and/or voting voices dissuade what needs to be professionally and reasonably done?

What needs to be done is obvious to any trained professional.  1) Make cuts based on top down evaluation of program spending and revenue efficiencies provided by an intergovernmental team which is independent of any department working out of the Governor's Office.  2) Make efficiency cuts based on cost savings and target possibilities to increase current revenue programs, such as uncollected or unenforced fines.  3) Professionally evaluate all exempt personnel and positions for competence, organizational necessity, and cost effectiveness.  4) Implement all State Auditor report recommendations and findings in past department, board, and agency audits and terminate those people who cannot get it done.  5)  Make a choice as to what programs are economically and socially safety net and growth necessary and which are not and prioritize each category and the programs within each category.  6) Increase the flat rate individual income tax to 5.5% from 3% with 1/2 percent directly deposited in the pension funds for an increase of $5.7 billion in general revenue and $1.425 billion for pensions; leave the personal exemptions unchanged but provide a sales tax credit for the 40 % lowest taxpayers.  7) Increase the corporate flat tax rate from 7.3% to 8.5% (same as Indiana) with 1/2% directly deposited in the pension funds.  8) Reform pension and retiree health benefits and ages consistent with actuarial needs and private sector costs; create a two tier system for current participants and new hires after reforms.  9) Create the necessary changes and review process to properly terminated or demote and reassign any civil service or union employee for documented inadequate job performance in an expeditious time frame.  10)  Reform legislative and elected official pensions to eliminate double dipping and limit pension amounts to no more than 60% of final social security wage base with service years prorated to state employee vesting period (if full vesting is 30 years for state employee and elected official has ten years in any state government elected office that would equal 1/3 of the 60 of final social security wage base as a pension).  11) Create a luxury sales/service tax which applies to luxury items starting at specified dollar amounts for each type of item adjusted for CPI (inflation) but not declining.

No wonder politicians prefer handpicked "experts" to professionals.  The ethical pursuit of serving the best interests of the people is obviously not as rewarding as not getting things done right or not done at all.

Print Page

Friday, June 4, 2010

Leftovers -- Radio Show 5/8/2010

On the 4th of May the stock market went into correction and this meant, if you listen to me, you would have been out of individual stocks and ETFs (which were not part of a well diversified portfolio or fully hedged portfolio) by the end of May 5th.  This would have meant that the wild flash decline and subsequent recovery would not have affected your positions, because all 8% stop-loss or stop-loss limit orders would have been executed by the end of 5 May or sold manually.  The wild crash and recovery on 6 May is from unknown causes but appears to have resulted from several factors starting with a NYSE slow down in trading which caused orders to be sent for execution to electronic markets, a large S&P 500 mini sell order, and algorithmic computer trading programs kicking in and/or defaulting to 1 penny prices as the result of electronic market, with no market makers, sell volume.  Tupperware, which had been a subject of a listener question a few weeks ago, fell 14.8% for the week.

NYSE subsequently decided to cancel orders executed within an approximate 20 minute time period on 6 May if the price was substantially below the immediately prior market prices.

Monthly Jobs report showed an increase of 290,000 jobs minus 66,000 Census temporary jobs equals an increase of 224,000.  Official unemployment increased to 9.9% from 9.7%.  Official discouraged workers is 17.1%, but, if you use the 1994 calculation, discouraged workers are approximately 22%.

U.S. retailer sales were weaker than expected up only .5% at stores open at least a year which was far below the 1.5% expected.  Even discount stores saw a decline in sales.  This continues to show the recovery is too dependent on consumer spending and consumers are not spending with continuing long term high unemployment.

The number of people working part time for economic reasons was unchanged at 9.2 million.  The Employed to population ratio went up to 58.8% from 58.6%.

Tom Duy in his Fed Watch blog said that the inventory drain has become apparent and prices are edging up again.  He doubts that consumer spending can be sustained, because it has been heavily supported by falling savings rate, while income growth less transfer payments remains stagnant.  We have growth but it is growth which leaves the economy limping along and heavily dependent on policies which stimulate consumer spending.  He stated the opinion that outsourcing over the last twenty years has left the U.S. structurally dependent on trade deficits.  Inflationary growth continues in China and other Asian countries like South Korea and Indonesia, while the U.S. needs to decrease imports.  With the Fed is keeping interest rates low , there is not sufficient growth to alleviate unemployment.  He sees a declining value of the dollar as necessary to spur exports, but I have to disagree, because increased exports would require competitive products being sent to countries that are decreasing exports.  I do not see that happening.  A stronger dollar would bring foreign money into the U.S. as a safe haven for investment and would provide more buying power for U. S. businesses abroad..He also cannot understand that the eurozone countries will not benefit from euro devaluation, because the current account balances of each country are not fiscally adjusted within the eurozone.  Rather than internal devaluation (cut wages, raise taxes) those eurozone coutnries with current account balance deficits need targeted investment to stimulate growth and adjust nominal wages and labor units.

The Pragmatic Capitalist noted that the rise in the Libor parallels the spike in Greek sovereign CDS.  It is happening because banks are starting to not trust each other.  It is apparent that the Libor is reacting to counterparty risk.

China raised required bank reserves 50 basis points to 17% for big lenders and the banks were told to reign in credit issuance.  The central bank is stepping up its open market operations in the attempt to drain liquidity.  It wants to reduce new lending this year by 22%.

It appears the bailout of Greece by the EMU and the IMF will encompass approximately 110-115 billion euro available over three years with 80 billion from EMU and 30 billion from the IMF.  The Greek parliament passed an austerity package needed to receive the bailout and Germany approved their first year payment of funds for the bailout.  The money will be in the form of loans at approximately 5%, which is high.  The ECB suspended its minimum credit rating threshhold on sovereign debt to allow Greece to participate in ECB lending programs, even if their debt is further downgraded.  Trichet, the ECB chairman, said Greece is a special case and he is confidant Greece will do what it must do.  French President Sarkozy said the EU needs a mechanism in place to defend the euro.  Germany reiterated there needs to be more rigorous enforcement of the deficit limitation rules and a closer monitoring of sovereign government finances by the EU.  Germany sees speculation against the euro and a repetition of the 1931 currency crisis in its insistence on deficit reduction rather than targeted investment to spur growth in those euro countries with current account balance deficits, because they have non-competitive exchange rates and there is no method for fiscal adjustment within the eurozone.

Hussman sees the Greek problem as a violation of transversality in which there needs to be a well defined  present value of debt in order to credibly pay off debt.  Greece has insufficient economic growth; it is accruing high interest rates payable in a currency it cannot devalue.  Without transversality, the price of a security can be anything the investors like.  Transversality forces the price of an asset to be equal to the discounted cash flow value. He thinks the Maastricht Treaty would have to be changed to allow for larger budget deficits to achieve anything from the bailout other than short term results.  He believes the budget discipline imposed upon Greece will be hostile to GDP and tax revenues making it more difficult for the bailout to succeed.

Martin Wolf, in "A bailout for Greece is just the beginning" published in Financial Times (copy the title and Google search to get past the Financial Times paywall), thinks the 110 billion euro bailout will be enough to take Greece out of the debt market for two years only.  The agreement specifically prohibits any debt restructuring.  The plan sets 2014 as the year in which deficit will be less than 3%.  To get to that Greece will have to endure a cumulative decline in GDP of at least 8%.  He believes Greece may be unable to avoid debt restructuring.  "Given the huge fiscal retrenchment now planned and the absence of exchange rate or monetary policy offsets, Greece is likely to find itself in a prolonged slump."  While Greece needs to fiscally adjust nominal wages, the debt burden will actually become worse.  In his opinion more money will be needed is restructuring is ruled out.  In my opinion, the bailout should be closer to 140 billion euro and Greece should be allowed to restructure debt by extending the maturity dates of all debt by five years.  Wolf sees the bailout as rescuing European banks and not Greece.  Wolf believes the eurozone must either allow sovereign default or create a true fiscal union and funds sufficient to provide fiscal adjustment when needed.

The eurozone has a single central bank tied to disparate national fiscal policies and there is no mechanism within the EU to respond to fiscal adjustment needs of individual countries.  There are no EU taxes, no EU distributed spending, and no EU bonds or debt.  Some would like a common tax policy and EU review of sovereign budgets.  I believe there should be a Euro bond and, rather than being tax based, guaranteed by the sovereign nations of the eurozone combined with a Fiscal Adjustment Fund to respond to the special needs of individual countries in need of GDP growth and fiscal adjustment of nominal wages and labor units or in need of more internal consumption like Germany.

Spain sold 3.09 billion euro of 5 year bonds with a yield of 3.6% up from 2.8% from the issue sold in March.  The bid-to-cover was 2.4 up from 1.5.  The spread between Spanish bonds and German bonds has grown from 80 basis points to 160 basis points in two weeks.

Bullard, the St. Louis Fed President, said a sovereign default in Europe could threaten the continuing recovery in the U.S.  However, Greece cannot default without totally withdrawing from the EU, which would be a potentially greater bombshell than default in my opinion.  Rather than a debt crisis, this is, in my opinion, a credit crisis and the risk is that interbank lending may become frozen in Europe and create a global crisis.

Nomi Prins had an excellent article on how proposed financial reforms are basically not touching hedge funds, private equity and trading abuses of banks, and the lack of proper risk management in the financial banking system.

The Consumer Metrics Institute had an very good article on how the collection and time period of GDP numbers are ancient history by the time the quarter of record is completed and shifts of just two weeks in either direction could have profound effects using their sampling during Q4 2009 and actual Q4 2009 results.  In their opinion demand side numbers are continuing to contract indicating a possible double dip.

Roubini had a strange fear inspiring article in which he fears U.S. debt will result in either inflation or default, but it is not true, in my opinion, that debt equals inflation.  Inflation expectations are high and may be growing although we are presently in a deflationary situation.  However, in my opinion, there is the risk of inflation as the Fed exits from its $2.3 trillion balance sheet by selling mortgage backed assets after all liquidity programs have ceased.  It has tried very hard to increase U.S. banks capital ratios and liquidity at the expense of long term continued high unemployment.  This will be a very difficult balancing and timing act that may go in spurts as the Fed adjusts to market response.  As long as the Fed continues low rates, it cannot begin an exit and sell assets.  I think Bill Mitchell would agree with me.

Bank analyst Meredith Whitney is steadfast in her opinion there will be a double dip in housing and that banks are "under-reserved".

AIG Q1 profit was $1.21 per share or $1.45 billion net.  Just one week ago it drew down another $2.2 billion from the New York Fed loan facility for a total net loan of $21.6 billion plua $5.8 billion in interest and fees.

According to the Fed, banks have tightened credit card terms and loan standards for small businesses which is tightening credit and restraining the economy, although consumer and business demand for laons has declined.

Consumer spending is up as savings is going down.  Savings are being spent.  U. S. personal income was up .3% in March, but spending was up .6%.  This is not sustainable without jobs and income growth.

ISM U.S. service sector index was flat at 55.4 for April and march; employment was down to 49.5 from 49.8.

ISM manufacturing index was up to 60.4 from 59.6; new orders were up to 65.7 from 61.5; inventory was down to 49.4 from 55.3; production was up to 66.9 from 61.1; customer inventory was down to 33.0 from 39.0; prices were up to 78.0 from 75.0.

U.S. factory orders were up 1.3% in March and February was revised up to 1.3% from .6%.

GM sales were up 6.4% April vs year ago.
Ford  was up 24.7%.
Toyota was up 24.4%.
Hyundai was up 30%.
Chrysler was up 25%.

According to a Hewitt study, retirees will need 15.7 times final annual salary with 4.7 times coming from Social Security and only 18% will have that.  On average workers accumulate 13.3 times annual salary leaving 2.4 times as a shortage.  Defined Benefit participants are likely to have 74% of needs.

Consumer borrowing was up 1% annualized for March ($1.95 billion).

Canada's finance minister, Jim Flaherty, said high unemployment and fears of a renewed credit crunch could harm economic recovery and there is need to be cautious.

German retail sales were down 2.4% in March but up 2.7% vs year ago.

Producer prices in the eurozone were up .6% in March and up .9% vs year ago.

Brazil's industrial output was up 2.8% in March.

China's National Bureau of Statistics sees 9% growth and a 4% increase in consumer prices.

Indian consumer prices are projected to rise 7.5%.

Australian retail sales were up .3% in March (expected .8%) after dropping 1.2% in February.

German industrial output was up 4% in March for its biggest gain in ten months.

The Federal reserve FOMC policy makers have agreed to sell some of its $1.1 trillion MBS assets but remain divided on timing and extent as too soon and/or too much too fast will hurt recovery.

Australia increase interest rates by 25 basis points to 4.5% for the sixth time in seven months.

Moody's placed Portugal on review pending a credit downgrade.

ECB held its interest rate to 1%.

Spanish GDP was up .1% in Q1 (first in six quarters) and it is seen as exit from recession by some.  I prefer to see two successive quarters and, if Spain adopts a EU austerity program, it will go back into recession.

Vanguard ETFs are now commission free at Vanguard.

GMAC changed its name to Ally Financial.  2010 Q1 profit is $162 million vs <$675 million> year ago.  Its troubled mortgage unit --- Residential Capital --- had a $110 million profit.

Two money losing airlines (United and Continental) will merge.

Pending U.S. existing home sales were up 5.3% in March and February was revised up to 8.3%.

U.S. personal bankruptcies were up 15% in April.

Freddie Mac Q1 was <$6.7 billion> and wants another $10.6 billion from the U. S. Treasury.



Print Page

Share This