Thursday, October 17, 2013 - No Winners, No Free Lunch

No Winners, No Free Lunch

by Sinclair Noe

DOW – 2 = 15,371
SPX + 11 = 1733
NAS + 23 = 3863
10 YR YLD - .08 = 2.58%
OIL – 1.59 = 100.70
GOLD + 37.40 = 1321.10
SILV + .47 = 21.99

The S&P 500 closed at a record high. We don't celebrate a record high on the S&P. When the Dow hits a record high we have milk and cookies. No particular reason, we just don't celebrate.

“There are no winners here,” that was the declaration from President Obama this morning. He then cited the damage done: families going without paychecks, home buyers and small businesses unable to get loans, consumers cutting back on spending, businesses pushing back hiring plans, and increased borrowing costs which add to the deficit.

Washington’s budget battle could result in a $24 billion hit to the US economy. That estimate comes courtesy of ratings firm Standard & Poor’s; they say the 16-day government shutdown and the wrangling over the debt limit shaved at least 0.6%, maybe a full point, off fourth quarter GDP growth. They had been estimating 3% annualized growth in the fourth quarter; now they peg it at 2%. The $24 billion loss is substantial, especially for a self inflicted wound.

But wait, there's more. Macroeconomic Advisers says the whole fiasco likely cost 900,000 jobs and possibly more in the months ahead. And one of the little noticed side stories is that the fiscal cliff inspired sequestration cuts, inspired by the debt ceiling debates of 2011, which cut the country's credit rating, and instituted on the edge of the fiscal cliff from earlier this year; those cuts are still in place. Along with an improving economy, those steps helped U.S. budget deficits fall from 8.7 percent of GDP in the 2011 fiscal year to an anticipated 3.9 percent of GDP for the fiscal year that ended on September 30. But this has all come at a steep cost.

The Congressional Budget Office estimates that the economic benefits of eliminating sequestration “would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014 (the end of fiscal year 2014) relative to the levels projected under current law.”

Spending cuts and tax increases since 2011 have cut the deficit by about $3.9 trillion over the next ten years. The sequester accounts for $1.2 trillion of that, about a third of the total. So a rough horseback guess suggests that the total effect of our austerity binge has been a GDP reduction of 2 percent and an employment reduction of nearly 3 million.

If the economy were running at full capacity, deficit slashing wouldn't have this effect. It would be perfectly appropriate policy. Unfortunately, Republicans don't believe in cutting spending during good times and increasing it during bad times. They believe in cutting it during Democratic presidencies and increasing it during Republican presidencies.

Mark Zandi, chief economist at Moody's says: "Increasingly I'm of the view that the reason why our economy can't kick into a higher gear is because of the uncertainty created by Washington." Zandi estimates the fiscal austerity has cost 2.25 million jobs. Without those measures, the unemployment rate would stand at 6.3 percent now rather than 7.7 percent.

"Reckless", that's the word from Richard Fisher; “reckless” fiscal policy will likely force the Federal Reserve to stand pat on monetary policy this month. Richard Fisher, the hawkish president of the Federal Reserve Bank of Dallas, said that the fiscal standoff means even he would find it difficult to make a case for scaling back bond purchases at the Fed's policy meeting on October 29-30. Fisher said taper is not in play because, "This is just too tender a moment."

There are a number of factors the Fed would need to consider in deciding when to pare its $85 billion in monthly purchases of Treasuries and mortgage bonds. The government will release the September jobs report on Tuesday; you'll recall it was postponed due to the shutdown. The Fed will have to digest a great deal of data in a short time before their FOMC meeting on the 29^th; and it will be impossible to assess the full damage of the Fiscal Fiasco, without allowing more time to let everything settle. Then the Fed is scheduled to meet in December; maybe the Fed could taper by then, but they will likely wait to see if lawmakers squander the opportunity presented by the December budget conference committee to agree on measures that enhance short-term growth prospects and longer-term fiscal reforms, while simultaneously removing a recurrent threat of government shutdown and default.

Meanwhile, and notwithstanding the earlier taper talk, the Fed may now have no choice but to stay longer in its intense policy experimental mode; due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction. It appears individuals and companies are postponing important decisions, and this will likely lead to lower consumption, less buoyant hiring, and fewer investments in capital expenditures like equipment and buildings, and all that ahead of the economically vital holiday season. Call it self insurance, or merely erring on the side of caution.

It's earnings reporting season. While companies are generally reporting healthy earnings for the third quarter, an unusual number have been warning that the fourth quarter is not going to look as good, in part because of the political turmoil. Of the 105 companies in the S&P 500 that have reported earnings so far, 68 have provided negative guidance.

Today, IBM reported third quarter earnings with a revenue miss of nearly $1 billion, sparking a sell-off in after-hours trading. The company blamed most of the revenue shortfall on a 40% drop in hardware sales in China, as the country gets ready to implement a new economic plan in November.

Google reported a third-quarter profit of $2.97 billion, or $8.75 a share, compared with a profit of $2.18 billion, or $6.53 a share, for the year-earlier period.

JPMorgan has agreed to pay $100 million in fines and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation involving the bank’s multibillion-dollar trading loss in London, underscoring how far the bank was willing to go to put the blunder behind it. The fine is nothing; the admission of guilt is significant. The trading commission charged the bank with recklessly “employing a manipulative device” in the market for swaps, financial contracts that allowed the bank to bet on the health of companies. The swaps are similar to insurance, but anyone can buy, you don't have to have an insurable interest. Think about your doctor buying a life insurance policy on your life. Not comforting is it?

Steven A. Cohen's SAC Capital Advisors and prosecutors have agreed in principle on a penalty of at least $1 billion to settle a criminal insider trading investigation against the hedge fund. The potential settlement would give Cohen's firm credit for agreeing to pay more than $600 million to settle a civil lawsuit filed earlier this year against the firm by the Securities and Exchange Commission. The hedge fund and prosecutors have yet to resolve other issues such as whether the firm will admit any wrongdoing and whether Cohen may be prohibited from managing money for outside investors.

SAC Capital is in the process of returning much of the $5 billion in outside money it manages for others. About $6 billion of the firm's money belongs to Cohen and his employees.

Mark Cuban was cleared by a Texas jury of using a private tip to avoid a big loss on his 2004 sale of Internet company shares. Cuban, 55, the owner of the Dallas Mavericks basketball team, lashed out at the U.S. government and lead prosecutor Jan Folena after the verdict, saying the government had tried to bully him. The SEC brought the insider trading civil lawsuit against Cuban in November 2008. A judge dismissed the suit in 2009 but an appeals court revived the case the following year. Cuban refused to settle the case and went to trial, even though he said on Wednesday that he had spent more on fees for lawyers than the possible fines for admitting to insider trading. He could have faced up to $2 million in fines.

Taco Bell and McDonald's are welfare queens. They force taxpayers to pay for what they are unwilling to pay their workers. The fast-food industry costs US taxpayers about $7 billion a year, according to a report released this week. Researchers at the University of California at Berkeley and theUniversity of Illinois said this subsidy comes about because 52% of fast-food workers are paid so poorly that they must rely on public assistance programs such as Medicaid and earned income tax credits. The fast food industry earns profits, pays dividends to shareholders, and pretty good wages to CEO's, but they stick the low wage costs on taxpayers, whether you eat their food or not.

There is no free lunch. There is not even, really, a Dollar Menu.