December, Tuesday 27, 2011

DOW – 2 = 12,291
SPX +0.1 = 1265
NAS + 6 = 2625
10 YR YLD -.02 = 2.01%
OIL +1.59 = 101.27
GOLD –14.70 = 1593.00
SILV -.40 = 28.83
PLAT +2.00 = 1437.00

How do you feel? Good, yeah? You not only made it over the river; you made it through the woods; you’ve almost made it holidays and you are oh so close to surviving 2011 – no small feat. The Conference Board index of consumer confidence jumped to 64.5 this month from a revised 55.2 in November. Consumer confidence is up nearly 25 points in the past three months and now sits at its highest level since April. Consumers are more optimistic that business conditions, employment prospects and their financial situations will continue to get better. Yep, the American consumer is unfazed and confident – maybe it’s that $41 billion in unspent gift cards we’ve squirreled away for a rainy day.

Apparently holiday cheer is contagious. Each year the Associated Press surveys top economists, strategists, and analysts to peer into their crystal balls and prognosticate. The big thinkers say stocks will gain 10% in 2012. U.S. companies are generating record profits. Americans are spending more than expected and factories are producing more. The job market is showing a pulse – weak, but a pulse. The economy has generated at least 100,000 new jobs for five months in a row -- the longest such streak since 2006. The economists expect the country to create 177,000 jobs a month through Election Day 2012. That would be up from an average 132,000 jobs a month so far in 2011, but not enough to push the unemployment rate under 8%.

 The S&P 500 is trading at 12 times its expected earnings per share for 2012. It typically trades at 15 times, meaning stocks appear cheaper now. Still, the S&P is essentially flat for the year – the last time the S&P was this flat was back in 1970, when it slipped 0.1%.

Congratulations. I’d like to take my 10% right now, and I’ll see you in a year.  Just one problem; the big thinkers tend to lay big eggs. They expected big stock gains in 2011, right around 9%, and got nearly zero instead.

In December 2007, economists expected the economy to grow an average 2.4 percent in 2008. It shrank 0.3 percent instead. For 2009, they forecast the economy would shrink 0.8 percent. It shrank 3.5 percent. Now they say the economy will grow 2.2 percent next year. Now, they expect the economy to grow 2.4 percent next year. In 2011, it likely grew less than 2 percent.

 

On the flip side, there are some big thinkers who believe that the world wide financial system will be struck by a meteor, inundated by a tsunami, crash like a Corvair, meltdown like Chernobyl, and generally be crushed like all good dreams. The public has no voice in a nation where wealth buys votes, a naive public is easily manipulated, and elected officials have a price. Industries that used to provide value for money are corrupted. Europe stumbles and the United States falls. The Euro debt is destructive and lest we forget, the US debt is insatiable. Toss in a liquidity crunch (think Italy) and you have to wonder if 2012 will end up looking like 2008.

It turns out the case for a crash is about as strong as the case for 10% returns, which just reinforces the case for the crash – kind of a self-fulfilling prophecy. The problem is that a crash could be so very, very painful. If there is a crash, it won’t be a repeat of 2008.

As we head into 2012, the economy is far weaker than four years ago. This weak growth is happening even though the US federal deficit for FY 2011 was $1.3 trillion, or more than 10% of GDP. If that's how anemic the economy is with that level of deficit spending, where would it be with less?

The problems of 2008 were never fully addressed and there has been precious little effort to correct the systemic abuses. Also in 2008, governments had more leeway to stimulate economies and bail out banksters. Now public finances are stretched thinner and the sovereign backstop is less clear. Also, public sentiment for bailouts is less forgiving. Fool me once, shame on you. Fool me twice, shame on me. And yet, it seems we don’t really mind being fooled, or maybe it’s just a case of inertia.

The Euro bosses spelled out the game plan - the ECB would give the banksters 489 billion euros (and call it a loan); the banksters use the money to buy government bonds (and call it an investment).

This arrangement suits the banksters. They make profits without taking real risks. They borrow from the ECB at 1% interest and lend to European sovereign nations at 6%? Even a stupid bankster could make money under those circumstances. Want proof?  Use of the European Central Bank's overnight deposit facility reached a new, all-time high Monday, as euro-zone banks increasingly turned to the ECB as a safe-haven for extra funds. Banks deposited 411 billion Euro overnight Monday, up from 346 billion Euro deposited overnight Thursday ahead of the Christmas holiday. At least this time around, the bailout plans aren’t scrawled out in longhand on three pages, in a back of the envelope style.

Still, much of the hope in Europe rests upon carefully crafted bailouts that rest upon assumed rates of economic recovery and growth in order to pencil out. Without the assumed rates of growth, the plans fall apart, and more rescue funds -- or outright defaults -- lie in the future. Just what might derail growth assumptions? How about higher oil prices? How about Italy not being able to slough off its bonds? How about the Greeks saying they’ve had enough of the Euro austerity plan? How about any number of possible scenarios that could lead to a meltdown?

Can you name the 7 largest economies in the world? Should be fairly easy, we’ve been hearing about the G-7 for years. The US is the largest economy, followed by China, Japan, Germany, France, and at number six – Brazil, and then the UK. The Center for Economics and Business Research (CEBR) forecasts that within the next 10 years, the UK will slip to 8^th place, falling behind Russia and India. The European Union will remain the largest collective trading bloc, unless it falls apart.

Italian retailers had the worst Christmas in 10 years. The appointed Prime Minister, Mario Monti, secured final passage last week for 30 billion euros of austerity and growth measures as he seeks to cut the euro region’s second-biggest debt. The measures, include a tax on luxury goods, a levy on primary residences, higher gasoline prices, and apparently coal in Christmas stockings. Meanwhile, ten-year Italian bond yields rose 8 basis points on the day to 7.10 percent.

Meanwhile unemployment in France climbed to a 12-year high of 9.3%.

Hundreds of tourists were blocked from visiting the Acropolis on Christmas Eve after the site’s guards called a strike to demand overdue weekend pay. Visitors had to resort to taking photos of themselves outside the monument’s shuttered gates. I tell you, the whole continent is in ruins.

Currently, the debt limit for the USSA is $15.194 trillion. We’ll probably hit that limit this weekend. And so the President will take step0s to notify and get approval to increase the debt limit by $1.2 trillion to $16.394 trillion.

Meanwhile, the United States and European Union are looking at plans to restrict Iran’s ability to sell oil, its most important export, as part of their increasingly strict economic sanctions in response to Iran’s uranium enrichment program. European Union ministers have said they will take up the question over whether to boycott Iranian oil in coming weeks, and the United States Congress passed a measure this month that could potentially choke Iranian oil exports. Although the United States does not buy Iran’s oil, the measure could discourage other buyers, even those who have friendly relations with the United States, by restricting their access to the American market if they do business with Iran’s Central Bank, the principal conduit for Iranian oil transactions. In response, today Iran conducted war game exercises with Iran’s naval forces and the Iranian Vice President warned that if Iran oil is banned, not a single drop of oil will pass through the Strait of Hormuz.

One big story of 2011 was the United States switched from being a net importer to a net exporter of petroleum products. On average in 2008, we had been importing about 1.8 million barrels per day more than we exported. So far in the second half of 2011, the difference has swung to an average positive net export balance of 0.4 million barrels per day. The exports are coming in the form of diesel and gasoline. The first thing to understand about this number is that it refers only to net exports of refined petroleum products, calculated for example by subtracting the amount of gasoline that the U.S. imports from the amount of gasoline that we export. These imports or exports of refined products are far smaller in magnitude than the imports of crude oil, which is the raw material from which refined products are made. The small positive net export balance on petroleum products is still completely dwarfed by the huge negative balance on crude petroleum.

If you have been traveling over the river and through the woods, there’s a good chance this holiday season includes a trip to the airport, and if so, there is a good chance you don’t really know what you are spending for airline tickets. Beginning Jan. 24, the Transportation Department will enforce a rule requiring that any advertised price for air travel include all government taxes and fees. For the last 25 years, the department has allowed airlines and travel agencies to list government-imposed fees separately, resulting in a paragraph of fine print disclaimers about charges that can add 20 percent or more to a ticket’s price. The price will not include baggage fees, though, because they are optional. And there will be a few other “optional” fees that might not show up in the advertised price, but generally speaking, it should make it easier to compare prices.

The Mortgage Bankers Association National Delinquency Survey showed that, after declining for three consecutive quarters, the foreclosure rate rose in the third quarter of this year. The Federal Housing Finance Administration Home Price Index Home reports prices will end 2011 4.1 percent below a year ago for the second year in a row. Prices will lose a total of 8.2 percent over two years running

The S&P/Case-Shiller 20-city composite index fell 1.2% in October to moves its 12-month drop to 3.4%. After five straight months of gains starting in April, prices have started to cool. The gauge isn’t seasonally adjusted, and there is generally greater interest in buying homes during the spring and summer. Nineteen of 20 cities saw price drops during the month. The only city where prices were up in October – Phoenix.