Tuesday, April 24, 2012

Tuesday, April 24, 2012 - As the Euro Turns, Counting Protesters at Shareholder Meetings

DOW + 74 = 13,001
SPX + 5 = 1371
NAS – 8 = 2961
10 YR YLD +.03 = 1.96%
OIL +.20 = 103.75
GOLD + 3.20 = 1642.50
SILV -.03 = 30.93
PLAT – 14.00 = 1550.00

Yesterday's edition of “As the Euro Turns” included the collapse of the government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt. All that was absorbed today. After all, the Dutch still have a Triple-A credit rating; they will probably pay their bonds.

It does appear, at least for today, that the Euro has turned; as if a sudden transformation has swept the continent. Austerity is dead. Keynes has been resurrected and placed on a pedestal in Brussels, right next to a chocolate covered waffle. There was a mass awakening that countries cannot cut their way to prosperity. Angela Merkel is fighting back against the austerity backlash; she argues the “credibility” of the Eurozone is at risk without more austerity and continuing cutbacks. But austerity isn't working and its hard to maintain credibility in the face of failed policy.

Here is the problem: If a government (say Greece) has a massive deficit and now they are trying to balance their budget, the government will be making the situation worse by imposing cuts, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to make their economy contract, which would then have a negative impact on tax collection, and consequently make the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Sisyphus never had it this tough.

The Europeans have tried austerity and it hasn't been fun and the overall economy is now probably in a second recession, largely caused by slowing demand, caused by (drum roll please) austerity! And, worst of all, the economy may be entering a negative feedback loop: low demand leads to more unemployment which leads to lower demand ... you get the idea. As for the whole "confidence will return" argument: businesses don't invest in slow-growth environments when there is obviously slack demand.

And Merkel is facing opposition. A criminal lawsuit has been filed against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. It's thought the bailouts could leave the Germans on the hook for trillions of euros. And the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors; not exactly the original idea behind a European Union. Merkel’s reputation as a hardliner for fiscal reform is wobbly. She’s about to lose her only ally (Sarkozy) in the push for austerity. And this is happening while inflation is rising in Germany, the economy is contracting – possibly heading into recession - and Germans are openly outraged regarding the EU bailouts.

The French still have a couple of weeks to decide if they want to dump the far right conservative Sarkozy in favor of the far left socialist Hollande.. The rhetoric is getting interesting: Francois Hollande, the Socialist presidential front-runner in France, doing his best Andy Jackson imitation: “Let me tell you who my rival is. It does not bear a name or have a face, it’s the finance industry. In the past twenty years, the financial industry has taken control of our societies, of our lives and threatens our states.”

Sarkozy set the standard for France’s approach to bank regulation by passing a 0.1 percent tax on all financial transactions within the country. Sarkozy tried to promote the tax worldwide but his proposal was too far to the left for the.... (wait for it) Obama administration. Hollande, meanwhile wants to go even further, separating retail and investment banking, banning “toxic” financial products, and preventing French banks from operating in tax havens. The third place in the runoff election went to Marine Le Pen, considered very far right. After the vote of Sunday she said: “We have blown apart the monopoly of the two parties of banking, finance and multinationals.” The far right is running against big business and the financial industry.

Wells Fargo held its annual shareholder meeting in San Francisco today. Depending on who you read, a couple of hundred, or 500, or a thousand or thousands (plural) of protesters showed up. Some of the more clever protesters actually hold stock certificates and they were able to get inside. I still haven't seen reports on what they may or may not have said inside the meeting. Six protesters were arrested.

Protests are planned for General Electric's shareholder meeting in Detroit tomorrow. A couple of thousand are expected to protest. Protesters interrupted a speech by GE Chief Executive Jeff Immelt in Detroit today, yelling "pay your fair share," before being escorted out of the event. A Citizens for Tax Justice report released in February said GE had an effective tax rate of 11 percent in 2011. GE disclosed in filings with the U.S. Securities and Exchange Commission that its overall tax rate - on both foreign and US earnings - was 7 percent in 2010 and negative 12 percent in 2009.

Morgan Stanley says U.S. high-yield obligations, otherwise known as junk bonds, were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade. Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe’s fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody’s Investors Service says the figure will stay below historic averages.

The Justice Department says a BP engineer intentionally deleted more than 300 text messages that said the company's efforts to control the Gulf of Mexico oil spill were failing, and that the amount of oil leaking was far more than what the company reported. Criminal charges have been filed against the engineer, Kurt Mix of Texas. Two years after the explosion that killed 11 men and spilled millions of gallons of toxic oil into the Gulf, and destroyed unknown amounts of marine life and crippled the livelihood of millions of residents of the Gulf – and we finally have a criminal charge – the first criminal charge - for obstruction of justice.

The Federal Reserve's top policymakers are meeting behind closed doors for two days, tweaking their economic forecasts and reevaluating their game plan for boosting the US recovery. Or maybe they'll order pizza and play pinochle. And then tomorrow morning, they'll announce the same thing they announced a few weeks back. They can't raise rates; they will continue to have a very accommodative monetary policy which they will not call QE3

A new case of mad cow disease has surfaced in a dairy cow in California. Mad cow disease, or bovine spongiform encephalopathy (BSE), can be fatal to humans who eat tainted beef. The World Health Organization has said that tests show that humans cannot be infected by drinking milk from BSE-infected animals. The disease is always fatal in cattle, however. There have been three confirmed cases of BSE in the United states, in a Canadian-born cow in 2003 in Washington state, in 2005 in Texas and in 2006 in Alabama.

Apple sold 11.8 million iPads in the last quarter, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million. Apple sold 35.1 million iPhones - which accounts for about half its revenue; and that was a little better than expected. Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share. There margins are freaky high and they just might take over the world at this rate.

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