Tuesday, July 23, 2013 - Woman Gives Birth to a Baby

Woman Gives Birth to a Baby

by Sinclair Noe

DOW + 22 = 15,567
SPX – 3 = 1692
NAS – 21 = 3579

10 YR YLD + .02 = 2.51%
OIL + .09 = 107.00
GOLD + 12.50 = 1348.70
SILV - .05 = 20.59

The Dow Industrial Average hit a new record high close. The S&P 500 was down slightly after four straight gains, including a record high yesterday. It's still earnings reporting season, and the big report today came after the close of trade. Apple reported better than expected sales and profits. Generally, we're seeing revenues are coming in pretty lackluster and profits seem to be doing a little better than gains in sales.

In the first quarter of 2013, we saw an interesting and unexpected development. While the corporate earnings of S&P 500 companies were better than expected, their revenues weren’t nearly as impressive.  Just 46% of S&P 500 companies reported revenues above estimates. And the second-quarter corporate earnings might be similar, if not worse. Keep in mind that before second-quarter earnings season began, we had 87 S&P 500 companies issue negative earnings guidance. The information technology and consumer discretionary sectors of the S&P 500 had the largest number of companies issuing negative guidance about their corporate earnings relative to their five-year average.

Many stock advisors are staying optimistic and not taking into consideration the reliability of corporate earnings. Consider the Investors Intelligence Advisor Sentiment index. It has been increasing for three consecutive periods and is closing in on highs made in mid-May of 2012.

Big-cap companies are still trying their best to boost their corporate earnings through other means—call it financial engineering. Take Yahoo!, for example. In the past few quarters, the company purchased $3.65 billion worth of its own shares back, and in its first-quarter corporate earnings announcement, the company was very clear that it plans to purchase another $1.9 billion worth of its own shares back.

These anemic revenues mean that companies are not really selling more, and deteriorating earnings combined with key stocks heading higher continues looks like an effort to lure retail investors into a topping market. I'm not saying the market has topped here, and I'm not trying to sound bearish; that would be foolish while we have record highs. Just reminding you that a trend can reverse.

The Senate Financial Institutions and Consumer Protection subcommittee convened a hearing to explore whether financial companies – the big banksters like Goldman Sachs, JPMorgan Chase and Morgan Stanley – should control power plants, warehouses and oil refineries. 

Although Congress removed post-Depression era barriers that separated commercial banking and traditional commerce in the late 1990s, a group of bipartisan senators has lately been advocating the reinstatement of those walls in part to impose tighter regulation on such actions.

The ability of those banks, or more accurately their subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars. And there is particular concern because the giant banks receive the benefit of low-rate borrowing from the Federal Reserve. That could leave taxpayers on the hook for losses caused by a collapse in commodities prices or in the event of an environmental disaster like the Deepwater Horizon oil spill.

Meanwhile, the Federal Reserve is reviewing the decades old decision to allow banks to be involved in physical commodities transport and storage. Yes, the Federal Reserve, in addition to printing money out of thin air, they serve as a banking regulator.

The 1999 Gramm-Leach-Bliley Act added exemptions for certain commodities units that previously weren’t allowed under the 1956 Bank Holding company Act. One was for businesses that the Fed could determine were complementary or incidental to the bank’s financial activities. The first of those decisions came in 2003, when the Fed allowed Citigroup to continue dealing in physical commodities.

The other exception was for firms that became banks after 1999 and had physical commodities businesses that predated Sept. 30, 1997. That rule is relevant because Goldman Sachs and Morgan Stanley converted to bank holding companies during the 2008 financial crisis. The Fed gave them five years to divest businesses that didn’t comply with the Bank Holding Company Act.

Morgan Stanley said in its 2012 annual report that it was in talks with the Fed over whether the company’s physical commodities businesses would be given a grandfather exemption or if it would have to sell any units by the end of the five-year grace period. Goldman Sachs faces the same deadline if any of its investments are deemed noncompliant.

This issue came to the forefront with a New York Times article over the weekend detailing how Goldman Sachs has been operating an aluminum warehouse operation in Detroit; the main job of the warehouse seems to be delaying delivery of the metal, crimping supplies and running up prices. We've been hearing more and more about banks trying to manipulate prices, whether through warehousing practices or manipulation of interest rates in the Libor rate rigging scandal, or the ISDAfix scandal, or the oil price scandal in Europe, or electricity scandal involving JPMorgan and Barclays. And at this point, we are accumulating more and more evidence that the banks are rigging pretty much everything.

By the way, we just marked the third anniversary of the Dodd Frank Financial Reform Act. They're now saying the thing might actually make it into law by the end of the year; so far, ti's just been bits and pieces of the legislation that has been enacted. Sort of like the road killl that's left after the lobbyists have finished with it. Since the summer of 2010, bank and financial industry lobbyists and attorneys have met with regulators more than 3,100 times to argue their positions. Reform representatives have met with regulators about 150 times. Guess who's winning?

Yesterday, we talked a bit about the problem in Detroit. I said the underfunded pensions weren't really a problem. That is true, but I should qualify. The underfunded pensions are problematic, but we could fix the problems. It would cost money. It would require hard work. That's not the path that Detroit is on. Rather, Detroit is turning into a test case for destroying pension funds and if it catches on, it will spread to other cities, and that might be a problem.

Bankruptcy or not, Detroit's emergency manager, Kevyn Orr, says the city simply can't afford the pensions it has promised tens of thousands of retired and current city workers, many of whom are counting on the checks to make ends meet.

So how much money do Detroit's retirees actually get? On average Detroit's firefighters, police officers and other city employees receive pension checks that are similar or slightly smaller in size than the national average of $30,000 a year. In Dallas Texas, the average annual police pension is around $47k, in Los Angeles it's about $58k. For different jobs the pensions vary, but a general city employee who retired in 2011 with an average ending salary of $60,000 and 40 years of service could receive around $45,000 a year.

Regardless of whether Orr's proposed cuts go through, pension checks for younger employees will be less generous. Current workers have already agreed to pension cuts. For example, in 2011, Detroit police and firefighters agreed to a roughly 15% cut for pension benefits accrued from future years of service.

While retired Detroit firefighters and police officers receive more generous pension checks than auto workers -- checks averaged almost $30,000 a year in 2011 compared to about $18,000 for UAW retirees they often don't receive the added bonus of Social Security payments. So apparently the plan is to slash the pensions, and since they aren't eligible for Social Security because they were on the city plan, ...they get nothing?

The birth of the as yet un-named prince-child of Kate and William in London has been making enormous headlines. The best headline I've seen is: “Woman Gives Birth to Baby”. The accompanying story provided details: A married woman of childbearing age has given birth to a baby boy. The event followed nine months of pregnancy. "Both mother and baby are doing well," a spokesman for the woman said. It is now expected that the baby will grow up.

Finally, a good use of austerity, at least as it applies to words.

It's been a while since we've followed up on austerity, so let's see how it's holding up. In the UK, austerity has shaved 6 percent from that country's gross domestic product over the past three years, according to estimates from Oxford economist Simon Wren-Lewis. This amounts to $143.5 billion in lost income during that time, or nearly $5,400 per British household.

Debt hawks  might argue that a little bit of economic pain now is worth it if you can avoid a government-debt blowup in the future. That was the gist of Harvard economists Carmen Reinhart and Kenneth Rogoff's oft-cited paper, "Growth In A Time Of Debt," which argued that government debt above 90 percent of GDP led to sharply lower economic growth. Reinhart and Rogoff followed up their paper with op-ed articles and even testifying before Congress to help convince governments here and in Europe to hurry up and cut government debt sooner rather than later. The only problem is that their research paper was riddled with errors and omissions, and problems with the Excel spreadhseet calculations.

The trouble is, austerity has not worked to lower government debt burdens. It has only made them worse.

Surprise, surprise: it turns out that slashing government spending and raising taxes in the midst of a recession/depression actually lowers tax revenue and raises the cost of government services for the poor and unemployed, which makes government finances even worse.

The struggling European countries that undertook their own austerity programs, as a condition of receiving bailout funds from the austerity fanatics holding the purse strings, are still seeing their debt loads rise.  In 2011 German Finance Minister Wolfgang Schäuble wrote that “austerity is the only cure for the Eurozone”; In Ireland, Greece, Spain, Italy, and Portugal, government debt as a percentage of GDP has increased since the beginning of 2011. The debt problem is worse than before the belt tightening. Public debt levels are rocketing in almost every country of the eurozone periphery. Debt ratios are already crossing the point of no return in Portugal and Italy and are nearing the danger zone in Ireland.

The latest figures from Eurostat are shocking even to those who never believed that combined fiscal and monetary contraction – made worse by bank curbs – could have any other result than a faster rise in debt trajectories.

Portugal’s debt has just blown through the upper limits set by the EU-IMF troika, reaching 127% of GDP in the first quarter of 2013. This is 15 percentage points higher than a year ago – the bitter fruit of austerity overkill. The Portuguese people have suffered year after year of cuts only to find themselves sinking deeper into a debt swamp. The finance minister resigned. Yields on 10-year bonds jumped briefly above 8%.The IMF warned last month that the debt outlook remains “very fragile” and that any external shock could push the country over the edge.

Italy’s debt has hit 130% – compared with 123% a year ago – rapidly spiralling beyond the safe threshold for a country without its own sovereign currency and central bank.

In Ireland, public debt has jumped by 18 points to 125% in a single year. This is partly “pre-funding” to cover borrowing needs for 2014 but a slide back into recession accounts for a big chunk.

The former head of the IMF’s team in Ireland, Prof Ashoka Mody, has called for “a complete rethinking” of the austerity strategy. He confirmed what the Irish trade unions and others have said all along, that fiscal overkill is self-defeating, especially if compounded by tight money.

Rogoff and Reinhart made errors when they guessed that 90% debt to GDP was the level that resulted in catastrophic meltdown, but you've got to think that anything over 125% debt to GDP can be problematic; certainly, it presents the bond market vigilantes with the hint of blood in the air. The current course is untenable. Markets may tolerate EMU debts of 130% for a while but they are unlikely to tolerate levels nearing 140%, or even any prospect of it.

The harsh reality is that the EU failed to clean up its problems. You can blame the mess on the periphery if you wish, or you can blame it on the belt tightening failed policies of the northern states, but the simple reality of the day is that austerity has not worked. Contractionary policy has needlessly pushed southern Europe into a double dip recession, or in some cases, just out and out depression.

Meanwhile, the big headline from across the pond: Woman Gives Birth to a Baby.