Monday, January 17, 2011

Is Illinois the State Most Likely to Default?

At the end of December, credit default swaps for the State of Illinois had reached a five month high and were more expensive than those of California, indicating Illinois was the State most likely to default.   Actually, this was nothing new as Illinois has had the most expensive credit default swaps since early July 2010.  Bill Gross of PIMCO said he would not buy Illinois bonds.

The budget problems in Illinois are not new and have grown from root causes starting in the second term of Governor Edgar.  I have talked and written about this for over a year and been adamant fiscal year budget deficits would be close to $15 billion; I have reviewed budget proposals from different sources and made several suggestions towards a rational budget solution; and I have particularly stressed the  immense problem of pension underfunding, of which no budget solution can omit, here, here, here, and here.

During the election both candidates made statements about the budget problem, which I did not take as reliable.  One would cut government by 10% across the board and the other wanted to increase the 3% income tax to 4% with the extra 1% going to education.  Neither of these would come close to solving the budget problems.  The tax increase was not high enough and the spending cut was not practical much less sufficiently deep.  Both were good attempts to frame the question and promote public discussion but I do not know that I would have used them in a campaign where they could be mistaken as promises.  When, during the campaign, Governor Quinn's Budget Director said there would be an increase to a 5% income tax after the election, it did not surprise me.  Yet, the New Year dawned and the State had done very little with days left in the Legislative Session.  In 2010, it had passed a two tier pension system for State employees and then certain municipal employees.  While I have never been fond of a two tier pension system, I supported its creation as economically necessary.  Still, there was over $8 billion in unpaid vendor bills and disbursements, no payment to the pension funds of $3.7 billion for FY 2011 (which are among the most under funded in the nation), a looming Fiscal Year 2011 budget deficit of $15 billion, an end of a national economic stimulus to the States which was too little, an end to the Build America Bond program which put even more pressure on municipal bonds and state and municipal funding, and the prospect in Fiscal Year 2012 the State will have to start paying back interest on loans from the Federal government for unemployment insurance.  Less money would be available going forward, future interest payment were increasing for the coming fiscal year, and debt costs for Illinois on any new bond placements were going up on Illinois' deteriorating credit condition.

Consequently, even the preliminary movement towards a partial budget solution moved the credit default swap prices down a little and, while Illinois's historical use of borrowing can be troublesome if it does not come with sustainable economic growth, the more rational recognition that default is not very likely (the Bond Girl links within this link are particularly good).  The public discussion has never been well served by a shallow public understanding of the role of government spending in growing income and employment in the private sector. This had been preceded by the Governor talking about the need for bonds to pay the FY pension funding, which he never got.  No pension funding.  Then, the Legislature put forward an increase to 5.25%, with .25% to go towards an annual property tax rebate of $325 per home owner, which would have been a much larger rebate than more than 80% of homeowner's currently receive.  I t would have also increase cigarette taxes $1 per pack and raise $377 million annually going to education, although economic studies have shown that such a tax decreases overall sales taxes collected adjusted for inflation and population growth.  The corporate tax would go up to 8.4% (it may have been only 8% as there was confusion in this number in printed reports).  That proposal had replaced an old proposal for 5% individual income tax and expansion of service taxes (which I have always opposed as regressive --- I prefer looking at luxury taxes, but nobody has done a study --- although Illinois does not tax as many services as some other states).  It was immediately criticized as a huge 75% tax increase and little discussion of how to otherwise solve the budget problem.  In the end, the Legislature did not provide any borrowing for unpaid bills or pension funding, but it did approve an individual income tax rte of 5% and a corporate tax rate of 7% for the next four years only and a 2% spending increase annual cap with reversion to old tax rates if violated.  This immediately drew criticism from individuals and business owners as well as comments from the Governors of neighboring states inviting businesses to migrate despite their tax rates being similar or more.  In fact, tax rates are hard to compare with other states, because they involve income tax, sales tax, services tax, property tax, and other taxes.  Some income taxes are flat and some progressive.  Some have different taxes on the municipal level or income tax on the county as well as state level.  Governor Quinn's message in signing the bill listed savings implemented by his administration which are not significant in demonstrating competent efficiency effort and some of which may not be independently verifiable.

The deficit hawk, which was predictable, and deficit dove, however well intentioned but too general, reaction was not helpful in promoting what is needed in Illinois and what will work and what will not work in Illinois.

The bottom line is very stark and difficult.  Using information (read it all) from the Institute of Government and Public Affairs, if the deficit were to be attacked through individual and corporate income tax rate increases, the individual tax rate would have to be 7.1% and 11.3% for corporations with each !% increase from 3% and 4.8% generating $2.5 to 3 billion annually.  Borrowing by itself will increase expenses and the problem.  To attack the problem with spending cuts, all government spending by the Legislature, Judicial, and all Constitutional officers would have to be cut by 26% or more.  Such spending cuts would be disastrous with respect to employment (thousands of state jobs would be lost) and to essential government services (this includes economic safety net service unless you believe children and adults deserve to suffer and die) serving the general welfare of all citizens of the State.  The people would not accept such cuts nor should they.

This means, besides the tax increases, Illinois needs to rationally cuts spending to create efficiency (not just cuts to make cuts) and needs to borrow prudently at reasonable interest rates and yields.  The exempt and double exempt personnel positions (some of these people go back to at least the Ryan administration) need to be professionally evaluated for economic efficiency and competency.  Yet, Governor Quinn has removed only two high profile people and given preferential treatment to others, who would have been fired in the private sector, because they apparently know people.  Governor Quinn's people have demonstrated they prefer politics to properly managing state government.  Spending increase by 3.4% annually, but the spending cap in the new law is 2%.  This means at least 1.4% will have to be cut annually on top of efficiency cuts as soon as possible.  This requires professional management.

 Political management is not competent professional management.  Paying vendors will provide growth and employment, but under this budget law it will require borrowing. No one is going to be happy with what has to be done and promote an economy which provides growth.  No one is going to be happy with the factual fiscal situation and options unless government takes the necessary actions to provide the services for which government exists and the people demand for all citizens without respect to income level.

The economic issues have been confused by partisan public positioning which has not been focused on getting things done for the people.  The state is not economically bankrupt, but it has a serious solvency problem.  It can be solved.  In fact, the U.S. Bankruptcy Code allows municipalities and counties to declare bankruptcy but not states.  Political ideology has used differing economic theories to avoid dealing with the factual situation in the public arena.  Cutting by itself will alienate the people who expect government to provide services to all segments of society.  Political management will alienate people who expect government to provide services to all citizens and not just benefit an elite.  We need to work together.

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Saturday, January 8, 2011

Economy & Market Week Ended 12/18/2010

In this commentary we look at the tax cut (again, we had a detailed in analysis in our prior commentary) and possible challenges for Social Security, the continuing problems of unemployment and deleveraging, whether growing income inequality precedes financial crises, the Fed, inflation, the failure of HAMP, the foreclosure mess and other bank issues, attempts to skirt around financial reform, some possible concerns in Canada, the continuing problems of the eurozone and what some people want to do about them, Ireland, the problems in Spain, Germany's troublesome positions and reasoning, China's importance, and market conditions (warnings?) as well as U.S. and international data.

Inflation (CPI) in the United States for the month of November came in at 1.14% (1.17% in October).  If the 1990's calculation was used it would be approximately 4.3%; if the 1980's calculation was used it would be approximately 8.8%.  From October to November it rose 0.04% but December may show a larger increase as December 2009 was <.18%> and may also be affected by QE2.

As we have mentioned, the new tax cut bill does nothing for those who have been unemployed for longer than 99 weeks and they will slide off into uncounted anonymous limboHere are the unemployment figures by state.  Illinois has 9.6% unemployment.

The deleveraging process has been a subject of interest for some time and I have often commented on it.  The sad fact is that the develeraging process by consumers is being driven by debt default just as I have written in the past that business deleveraging is fueled by write-offs of bad loans and asset values.

1.6 million Americans have put off retirement to continue working as the result of falling asset prices.

The cut in the payroll tax is being seen by some Republicans as a means to change Social Security, which has been a concern to many economists as the result of the President's Deficit Commission Report, despite it not receiving the necessary 14 votes to be recommended to Congress.  It is interesting to note that one of the 11 votes for the Deficit Commission Report was Illinois Senator Dick Durbin who said "It is just a step forward in the debate."  Considering how close Dick is to President Obama and the rumors we mentioned last week that the President's State of the Union speech may contain a call for Social Security reform.  This is the wrong focus.  The focus should be on Medicare fraud and escalating health care costs which were not addressed in the very limited and poorly designed PPACA health care bill (another example of political compromise and poor economics which ignored the models of universal health care provided through private insurance companies at significantly lower cost in France, Switzerland, and the Netherlands).  In the past, we have covered two economic discussions on making social security and taxes more equitable by either extending payroll taxes to all income without limits or through income taxes on all income earned or unearned.  However, the political agenda appears to be to cut taxes to benefit the wealthy and to cut programs the wealthy do not need or use under the pretext of deficit reduction. 

We have written on numerous occasions about the economic necessity to stimulate the economy with targeted spending which creates jobs now in order to grow the economy out of this disinflationary, slow growth, and high unemployment long term economic condition.  The original stimulus was too little, too slow, the failure to reform the financial system which precipitated the financial crisis is setting up the next financial crisis, and the tax cut bill stimulus is meaningless, if not welfare for the wealthy.  Nothing is well served by increasing economic inequality within a republican democracy; it diminishes and eventually destroys the middle class and the middle class is essential in any sustainable democracy.  We have written about studies showing growing inequality since the 1960's and now studies are showing economic inequality may be either one of the causes or an indicator of impending economic crises, because there was significant growth in economic inequality prior to both the Great Depression and this most recent financial crisis.

There is a lot of hype about possible municipal bond defaults in the near future.  Much of this is overblown, but there are some towns, cities, and counties under significant stress as the result of insufficient stimulus from the Federal government and, in some instances, mismanagement and/or corruption on the local level.  There has been a lot of political talk that some states should be forced into bankruptcy as a means of cutting retirement, health care, and social welfare programs.  While municipalities and counties can declare bankruptcy under the Bankruptcy Code, there is no provision allowing a state to declare bankruptcy.  With the failure to extend Build America Bonds, there will be more pressure and less liquidity in the municipal bond market, but that does not deter quality investing.

The attempts to banish facts from the economic and political debate extended to the Financial Crisis Inquiry Commission in which a partisan vote resulted in a minority report which banishes the use of any terms which might cast blame for the Financial Crisis on banks and Wall Street choosing to ignore the unpunished financial fraud which caused the financial crisis and, in fact, to show solidarity with those political leaders who would have government serve the bankers.  It is unfortunate when facts are inconvenient.

The Federal Reserve Open Market Committee released its December meeting statement in which it reaffirmed the interest rate of zero to 25 bps for an extended period, reinvesting principal payments of securities held, and will begin a $600 billion purchase at $75 billion per month of longer term Treasuries.  The sole vote against the monetary policy action was Mr. Hoenig again, who remains concerned about increased risks of future economic and financial imbalances increasing long term inflation expectations over time.  While there is some encouraging data, the Fed has still not addressed the demand needed to bring unemployment down and long term interest rates will rise as this slow recovery progresses, but one should not expect the Fed to change direction any time soon.

The Federal Reserve provided approximately $140 billion more in loans to foreign banks during the financial crisis than it disclosed publicly earlier this month.  The Fed may be trying to make changes to the rescission and disclosure provisions of the Truth in Lending Act as the pressures build, as the result of the mortgage and foreclosure mess/fraud, on the banks and their servicers to potentially make good on deceptive mortgages and, in fact, the banks are pushing the Fed to do just exactly that.

As many economic and financial commentators have been writing, the HAMP foreclosure prevention and modification program has been failing, if not an outright failure, as the result of banks dragging their feet in the application process (some real horror stories out there), of people whose applications were pending being foreclosed on anyway, and of the government not sufficiently pushing and regulating the process.  People are dropping out of the program faster than are they are joining.  The Congressional Oversight Panel has issued a pretty nasty report on the Treasury program.  Bank of America is being sued by Nevada and Arizona, because the bank proceeded on foreclosures while applications were pending in violation of a 2009 agreement with Arizona.

PricewaterhouseCoopers, LLP has issued two audit reports for two different banks which support contradictory positions in which MBIA is asserting a large asset in the form of refund demands on Bank of America, while Bank of America has not made any reserve provisions to pay the contractual claims of $2.2 billion.  This is obviously an example of auditor's reliance upon management to determine value.  This deferral to management, when no readily determinable value exists, is a serious and fundamental audit problem from which no professional good will result.

The Dodd-Frank Bill mandated that derivatives will be traded through regulated clearinghouses, but the bankers who control at least two of the risk committees of the two largest clearinghouses are determined to keep transactions through banks and defeating proposals which improved and make more transparent the way derivatives are traded.

Despite consumer protection laws, the banks are desperate for profits and, with the additional protection of the 2005 bankruptcy reform, they are seeking out and actively marketing to risky credit card customers to whom they charge higher fees and interest rates until they hit the wall.  The Federal Reserve has the power to stop this if they wanted to do so.

The Ohio Attorney General Richard Cordray has been named to head up the enforcement division of the Consumer Financial Protection Bureau, which will not make the banks happy.

The Bulls minus Bears sentiment index is again approaching +40 (as of December 12).  The last time it broke above +40 was October 2007 when the market proceeded to crash. Another reason to be cautious right now is that no one else is; the VIX is approaching levels (as of December 13) of high complacency and, as the VIX goes below 17, investors are leaving more of their portfolios exposed to risk.

The ratio of household debt to disposable income in Canada in Q3 was 1.48 which exceeds the United States ratio of 1.47 and caused Canadian central bankers and finance officials to publicly voice concerns that the growing debt level could threaten recovery.  The Bank of Canada sees the vulnerabilities of households as high and the debt levels unprecedented.

The Canadian dollar dropped for the second week as investor's turned to U.S. government debt as safety against the potential problems of the eurozone.

The Governor of the Bank of Canada, Mark Carney, indicated that the current European difficulties are not over and the pattern of global economic growth is changing.  Canada should adapt to a world were their will be inflation in emerging markets and disinflation in developed markets.

The eurozone core is more complicated and problem laden than many wish to recognize with political instability in Belgium and Italy, issued debt which has to be periodically rolled over (from which France is not immune), and the German bund has been caught in the sell-off of U.S. Treasuries.  All of these factors show the liquidity risks going forward and how vulnerable the eurozone is to any market shock or perceived weakness.

On December 14th, the Spanish 10 year debt yield exploded.  Spain and its banks will have to refinance 265 billion euro ($345 billion) in 2011 and Moody's has indicated Spanish banks may actually have $177 billion euro losses on their books, which caused the Spanish Finance Minister, Salgado, to defend the solvency of the Spanish banking system.  On Thursday, bond auction yields rose even higher from between 80 to 140 bps from prior auctions for the same maturities.  On Friday, the Bank of Spain reported that bad loan ratios for Spanish banks were at a 15 year high.  Of importance is the fact that Spanish debt is largely held in European hands and the eurozone crisis has seen an unwinding of the euro carry trade and the funding positions of the Swiss franc, which has seen significant increase in value despite the Swiss Central Bank intervening on numerous occasions to keep its value down.

Trichet, ECB President, said the European nations should extend and broaden the bailout fund.  He also reiterated his adherence to deficit reduction while maintaining the European nations should share a larger burden in tackling the fiscal crisis.  Some ECB officials were indicating the ECB may need more capital while Trichet refused to comment.  However, an analysis of ECB assets (covered and government bonds and potential problem assets) shows the ECB had almost exhausted its 2009 capital funding.  Eurozone central banks have lost 5 billlion euro on the ECB's government bond purchases.  By the 16th, it was announced the ECB would almost double its capital base by 5 billion euro ($6.6 billion) to protect it from losses as it continues to buy government bonds.

Ireland's Dail approved the bailout which includes more support for Irish banks.  The United Kingdom will earn 440 million pounds on its 7.5 year 3.25 million pound loan to Ireland at 5/9% for the first eight tranches.
While the European Union is supplying the bulk of the bailout to Ireland, the EU Commission, in its Autumn forecasts, is not very supportive of the economic possibilities of Ireland obtaining its GDP and budget goals.  The Bank of England entered into a foreign exchange swap agreement with the European Central Bank to provide up to 10 billion pounds ($15.5 billion) for euro which would be made available to the Central Bank of Ireland which could provide Irish banks with pounds and UK banks, with their exposure to Irish banks, with euro.  With the deteriorating conditions in Ireland, the Lloyds Banking Group will have a 2010 impairment charge with respect to Irish loans of 4.3 billion pounds, which is approximately a 54% increase during 2010.

Prior to the Thursday Euro Summit, Germany's Merkel was trying to stake out a more moderate nine point plan, but still maintaining a resolute position on deficit reduction, on the need to work together with more harmony and asserting that Germany was not trying to dictate to anyone.  Germany has begun to recognize the international concern that it needs to address the choices Germany has within the eurozone which revolve around more European integration, a realistic appraisal of financial aid to eurozone members to maintain economic growth or fiscal balance, and how to address the rollover, reduction, and /or restructuring of debt.  Despite Germany's reiteration that the euro must be defended, many economists still insist the structure of the euro is directly responsible for the economic problems in the peripheral countries.  Internally, political opposition has surfaced in Germany on Merkel's prior hard line policies against the euro bond concept and fiscal integration with a firm opinion piece by two former German ministers on the necessity of Germany to lead the fight for integration despite the costs to Germany.  This has "coincided" with Merkel's attempt to protect German interests while moderating her positions to be more accommodating, within fiscal policy boundaries, towards common European interests.

At the European Summit, EU leaders committed to establishing a permanent debt-crisis mechanism by 2013, which has two problems: one, it is too late and two, it remains incorrectly focused on debt and not economic stability and growth.  Germany nixed any current addition to bail out funding or providing economic aid to Portugal and Spain, reinforcing market skepticism about eurozone support of the euro.  Luxembourg Prime Minister Juncker wanted more flexible use of the emergency funds, but Germany was unwilling to speculate on more flexible uses at this time.   The yet to be created European Stability Mechanism will replace the European Financial Stability Facility (EFSF) and will only be able to grant loans on strict conditions to member nations in distress with private sector bond holders sharing the burden.

Germany continues to oppose the creation of a common euro bond based on the fear that Germany, who has prospered the most from the creation of the euro, will have to bear the highest burden of any "joint and several" guarantee and is contradictory of a fiscal/debt policy perspective for which each nation is on its own as if a monetary union did not exist.  The Italian Finance Minister, Tremonti, and the Luxembourg Prime Minister, Juncker, have jointly been pushing a euro bond to eventually replace national debt.  This is something Germany can never endorse.  I have long held that a euro bond is necessary, but I have always envisioned it as separate from national debt and perhaps funding programs for economic growth at the European Investment Bank (although this would require a change in the way they do business), economic stability programs through a stability mechanism, and purchasing and lending programs of the ECB.  This seems beyond the current framing of the discussion.  Gavyn Davies, who has a better understanding of sectoral balances and a balance sheet economy, is arguing that the failure to address the need for a euro bond will result in the break up of the eurozone.  He has discussed two euro bond possibilities other than "joint and several" with one being a proportional guarantee based on GDP, which Germany is likely to oppose as it has the largest GDP and its yields would be higher than the bund, and a second being the creation of blue and red debt with blue debt jointly guaranteed by all eurozone members and red debt remaining national debt.  He proposes the necessity to create a default trigger and a ratio of blue debt to red debt for each nation, creating the refinancing of current debt at lower rates improving liquidity and the creation of a bond restructuring plan, and providing the means for all new debt issued during financial crisis situations to be blue debt.  While this would broaden the discussion, it still keeps the focus erroneously on fiscal/debt policy rather than economic stability and growth.

The need for structural reforms from member nation to member nation is pointless without an integrated economic stability mechanism which acknowledges that a lack of fiat national money deprives a nation of fiscal policy consistent with its national economic growth and stability needs.  Munchau has proposed a mini fiscal union which appears, at best, to be a temporary compromise, because a true fiscal union or mechanism must deal with economic instability directly.  He would shift all regulation of banks to the EU.  Why not by laws passed and enforced by the EU and regulated by the ECB?  He would address asymmetric shocks with EU six month unemployment insurance.  He would attempt symmetry by taxing current account balance surpluses and deficits equally to finance a bail out fund.  The use of a six month EU unemployment insurance to counteract asymmetric shocks is not a realistically sufficient or broad enough economic stabilizer model.  The focus on current account balances, while a significant indicator of the current dysfunction of the euro structure, is the wrong focus for creating symmetry as a fiscal mechanism which responds to member nation economic growth and structural stability needs could make the current account balances irrelevant between an integrated eurozone.  How such a mechanism would be funded besides a euro bond is the question. 

Bill Mitchell has been an ardent opponent of the euro and long maintained the euro nations would be better off economically if they were to withdraw from the eurozone and have their own fiat money and monetary policy powers.  While withdrawing from the eurozone is probably an extreme position and could possibly generate a global economic shock, his argument that the fiscal fallacy of the eurozone leaders has led to a loss of economic perspective is compelling.  The fiscal myth has become ingrained to the degree that economic theory and thought has been limited to only one "politically correct" thought process.  "The relevant question is never asked – what is the role of fiscal policy and how can governments use this unique capacity (when they are fully sovereign) to improve the lives and outcomes of the citizens. That sort of debate is circumvented by the logic of the fiscal councils and the rules it is charged with enforcing directly or via moral suasion. It results in the sort of austerity madness that we are now seeing."  The idea that nations are financially constrained and that government surpluses are government savings is self-destructive.  The role of the gold standard in worsening the Great Depression is well documented.  The present day attempt to re-institute a pseudo gold standard through the euro is creating the same currency crisis conditions.

The current eurozone policies and compromises are too obviously temporary to assuage the market which judges on decisive actions or lack thereof in pricing swaps and yields.  This continued austerity destroys economic growth and increases the risk of a double dip recession globally.

United Kingdom owned banks worldwide reported an increase in consolidated foreign claims of $176 billion in Q3 to a total of $3971.5 billion.

United Kingdom unemployment rose unexpectedly by 35,000 to 2,502,000 or 7.9%.  This sudden increase was mainly the result of public sector employment layoffs as the result of austerity.  The government projects 330,000 government jobs will be lost in the next four years.

The IMF complimented Greece on its reforms and austerity progress and granted it another payment of $3.3 billion (2.5 billion euro).  Greece's GDP is continuing to contract more than expected (which quite bluntly is no surprise) and bond yields remain high.  Greek GDP is expected to decline 4.25% in 2010 and 3% in 2011.

China has continued to expand its influence in the EU investments and purchases of government debt primarily in Greece, Spain, Italy, Portugal, and Italy.  This is also allowing China to invest their stockpile reserves of euro.  Given the austerity policies of the eurozone, member nations are seeking Chinese investment and purchases of debt.  Germany has indicated it will support China being recognized by the EU as a market economy within five years, which would make it difficult for the EU to levy anti-dumping duties on Chinese products.

Slovakia's Speaker of the Parliament said Slovakia should be ready to leave the eurozone if the credit crisis continues to spread.  It is the most recent member with Estonia to be the 17th member on January 1st.  The Slovak government stomped on this idea as impractical, but some Slovak economists are arguing that it would be better sooner than later, despite the temporary investment disruption, as it would have a less important impact on the eurozone.

On the 13th, the Financial Times speculated why China, in the face of rising inflation, is pursuing an anything but rate hikes strategy.  November CPI was 5.1% up from the prior month's 4.4% and well above the 3% target.  With last weekend's economic conference, Chinese leaders are making a very public display of intent to control inflation with bank reserve requirements, lending restraints, and the need to head off asset bubbles.  At the same time, China wants to give the market more sway over rates within the next five years to further China as a global financial center.

Not only has China recognized the importance of a healthy Europe, but Europe is beginning to recognize the importance of China on European recovery and the risk of an emerging Asia slowing down with a hard landing on the European economy, especially Germany, as well as globally.

John Hussman in his weekly commentary dated Monday the 13th listed five conditions which capture basic over valued, over bought, over bullish, rising yields and then lists ten historical periods corresponding to those conditions with December 2010 being the last one.  He is hard defensive and suffering for it.  He provides a mathematical explanation of why, when one uses per share dividend growth rate to calculate estimates of long term expected equity returns, you should not double count by adding repurchases to dividends as if they were a separate cash flow.  He estimates the expected ten year total return of the S&P 500 to be about 3.7% annually.  He agrees with Grantham that high quality large caps will most likely present the best prospects for total returns  in the coming years.  It should be noted that in the past year, and continuing, small caps have presented the best total returns.  In response to the sharp spike in Treasury yields, he changed the duration of the Total Return Fund to just under 1 year from 2.5 years.

Doug Short graphs and details the Treasury yields have increased since the November 3rd Fed FOMC meeting announcing the details of QE2 and its longer term Treasury purchases.

Market: There were 6 bank failures for a total of 157; the unofficial problem bank list is 920.

                        DOW/Volume                                     NASDAQ/Volume
Mon:            18.24/up 5.7%                                        <12.63>/down 1.4%
Tue               47.98/down 0.4%                                       2.81/down 0.8%
Wed            <19.07>/up 16.5%                                   <10.50>/up 2.2%
Thu:                41.78/down 9.8%                                    20.09/down 8.2%

Fri:                  <7.34>/up 80.0%                                      5.66/up 41.2%

Total                    81.59                                                    5.43

Mon: Oil was up 82 cents to $88.61; Dollar weaker; rally fizzled.

Tue: Oil was down 33 cents to 88.28; Dollar stronger but weaker against the pound; lagging market volume; retail sales up but Best Buy is big disappointment; no surprises in the Fed statement; 10 year Treasury up 16 bps to 3.4% - highest since May breaching technical support.

Wed: Oil was up 34 cents to 88.62; Dollar stronger; bond yields rising as spread between 2 year and 30 year Treasuries reached a record 395 bps; oil supplies were down 9.9 million barrels (8 year largest drop), gas supplies were up 800,000, and distillate supplies were up 1.1 million.

Thu: Oil was down 92 cents to 87.70; Dollar weaker; credit card companies down in lower volume market with thin traded stocks up; Treasuries start back up; weekly jobless claims were down 3000 to 420,000, 4 week moving average was down 5250 to 422,750, and continuing claims were up 22,000 to 4,135,000.

Fri: Oil was up 32 cents to 88.02; Dollar stronger but weaker against the yen; quadruple options and futures expiration day; new 2010 yearly high for the NASDAQ and S&P 500 with little movement in price.

United States: 10 year Treasury yields (3.36%) at 6 month high as they tumbled in the Asian markets.

A Virginia Federal judge invalidated parts of the PPACA (healthcare) which required individual participation without choice but did not rule on other parts; this will be appealed.

U.S. business inventory for October was up 0.7% to $1.42 trillion -- highest since February 2009 but less than the expected 1% (up 1.3% in September).

Retail sales were up 0.8% in November  --- expected up 0.6%; ex-auto it was up 1.2%; October was revised up to 1.7% from 1.2%.

PPI (Producer Price Index) -- wholesale prices -- was up 0.8% in November -- more than expected as the result of energy prices; core prices were up 0.3% which was more than the expected 0.2%.

Best Buy Q3 profit was down 4.4% citing weaker demand for tv and entertainment systems.

A Hartford study found 38.8% of Americans 45 years of age or older will rely on Social security as the primary source of retirement income; this is up from 26.7% in 2006.  27.1% will work for as long as they are healthy.  37.2% are unsure if they will ever be able to retire.

Industrial production was up 0.4% in November (down 0.2% October) to 93.9; capacity utilization was up to 75.2.

New York Fed Empire State Manufacturing Survey for December showed general business conditions were up 22 to 10.6 (it was down 27 in November indicating contraction);  prices paid were up 6 to 28.4; employment was down 13 to <3.4>; new orders were up 27 to 2.6.

Bank of America credit card loss rate was down to 9.92% from 10.15%; delinquency was down to 5.47% from 5.6%.  J.P. Morgan charge offs were up to 7.16% from 7.0%; delinquencies were down to 3/68% from 3.81%.  CapOne delinquencies were down to 4.26% from 4.45%; charge offs were up to 7.56% from 7.26%.

FDIC is proposing bank holding companies maintain the same capital levels as their federally insured banks.

Moody's said it may move closer to cutting U.S. rating if the Republican compromise tax package (which was subsequently passed) is passed.

CoreLogic house prices for October were down 3.93% vs year ago -- third month down.

U.S. housing starts for November were up 3.9%.

Philly Fed Manufacturing Survey for December business activity was up to 24.3 from 22.5, which is a five year high (expected down to 17.5); prices paid  were up to 51.2 from 34.0; prices received were up to 10.7 from <2.1>; new orders were up to 14.6 from 10.4; inventory was down to <5.9> from <2.0>.

Oracle EPS was up 33% to 51 cents per share; revenue was up 47% to $8.6 billion.

U.S. current account deficit was up 3.3% in Q3 to $127.2 billion.

30 year mortgage rate was up 22 bps to 4.83%.

Global mergers and acquisitions were up approximately 20% in 2010 to $2.25 trillion with emerging markets involved in 17% of the deals and the energy sector was involved in 40% of the deals.

ECRI Weekly Leading Indicators (WLI) was <0.1> from last week's <1.4>.

Unemployment was up in 21 states, down in 15, and steady in 14.

International:  The Chinese selective reserve requirement of 19% for the six largest banks was extended 3 months.

BIS (Bank of International Settlements) and the EIB (European Investment Bank) both said Germany's call for bond holder haircuts in bank bonds intensified the euro crisis.  The ECB may as for more capital from the eurozone nations; it bought 2.667 billion euro ($3.5 billion) in government debt last week.

Canadian industrial capacity utilization was up 1.2% Q3 to 78.1, which is a two year high; output of manufactured goods was up 0.6%.

The Japanese Prime Minister is proposing a 5% corporate tax cut (currently at 40%).

UK November inflation was 3.3% (CPI) with the expectation it will reach 3.5% in early 2011; core inflation was stable at 2.7%.

China will raise export duties on rare earths in 2011 to curb shipments.  It will target 4% inflation rate for 2011 (up from 3% target) and 8% growth (economists expects 9%).

China attracted $91.7 billion in foreign direct investment in the first 11 months of 2010, which is up 18% from the same period in 2009.

Moody's cut Spain's debt rating to Aa1 citing mounting debt and funding needs as well as worries the central government will not be able to control local authorities in achieving structural improvement.

S&P may cut Belgium's credit rating in 6 months if political impasse is not resolved (very little progress is being made).

Germany said it would give the ECB more capital if it was needed to combat the "debt" crisis.

ECB will almost double its capital base effective 12.29 by 5 billion euro to 10.76 billion euro.
Sweden raised its interest rates 25 bps to 1.25% and boosted its economic growth forecast this year and next.  It sees continuing rate hikes coming.

UK retail sales in November were up 0.3% (October was revised to up 0.7%) on food, toys, and jewelry.

Ireland's GDP Q3 was up 0.5% (down 1% in Q2) with exports up 3.6%; GDP vs year ago was down 0.5%.

Moody's slashed Ireland's credit rating 5 notches to Baa1 from Aa2.  Last week Fitch lowered it 3 notches to BBB+.

RIM sales were up 40%.

Eurozone PMI (Markit Purchasing Manager's Index survey) was down 1.7 in December to 53.7 for services and up 1.5 to 56.8 for manufacturing.  Eurozone trade surplus was up to $6.92 billion in October; up 7.7% from September.

Spanish Prime Minister Zapatero said he was determined to raise the retirement age to 67 from 65 to slash the deficit despite opposition of labor unions.

Moody's palced 6 Greek banks on review for possible downgrade: National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece, and Attica Bank.

China's CPI was up to 5.1% in November vs year ago.

Swiss National Bank held interest rates at zero to 0.75% on concerns the European crisis could derail economic recovery.

Bank of Montreal will acquire Marshall & Isley for $4.16 billion.

The IMF said Ireland might grow 0.9% in 2011.

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