Wednesday, April 02, 2014 - Speak Your Mind by Blowing Your Wad

Speak Your Mind by Blowing Your Wad
by Sinclair Noe

DOW + 40 = 16,573
SPX + 5 = 1890
NAS + 8 = 4276
10 YR YLD + .04 = 2.80%
OIL – 33 = 99.29
GOLD + 10.10 = 1290.90
SILV + .22 = 20.08

The S&P 500 closed at another record high.

The Commerce Department reported that orders to US factories rose 1.6% in February, the most in five months. January's durable goods orders were revised to show a larger drop of 1.0% instead of the previously reported decline of 0.7%. Yesterday, the Institute for Supply Management said its manufacturing index rose in March.

A private survey showed that US companies stepped up their hiring in March. Payroll processer ADP said private employers added 191,000 jobs. ADP also revised February's job creation up to 153,000 from the 139,000 figure reported earlier. The report comes ahead of the government's monthly jobs report, scheduled to be released on Friday; the over-under number for Friday is 200,000 net new jobs.

We know the Federal Reserve will be watching the jobs report. St. Louis Fed President James Bullard speaking to reporters at his branch of the central bank, said a formal rate rise is "still a considerable distance away." Federal Reserve Bank of Atlanta President Dennis Lockhart said today: “Based on my working medium-term outlook, I see the latter half of 2015 as the likely time frame for the first move to higher rates,” but if the economy doesn’t grow as he current expects, Lockhart thinks, “a later liftoff date… will likely be appropriate.”

Lately bad weather was cited as the reason that Walmart and FedEx and Delta’s earnings were disappointing.  If it isn't one-time charges that happen every quarter being removed from reported results, it's the weather being blamed. Of course, even if the weather truly was awful enough to prevent people from shopping, or buying a house, that demand should simply show up in a later month. A certain amount of productive capacity is lost, but pent up demand should rev things right back up again. The March jobs report won’t be the final word on the weather and the economy, but if we don’t see some sort of significant improvement, then we are running out of bad weather excuses.

Russian, American, and European diplomats continue to talk about settlement talks that might halt further Russian military action in Ukraine; Crimea is a done deal, but Ukraine is another matter. NATO will suspend "all practical civilian and military cooperation" with Russia because of its annexation of Crimea, saying it has seen no sign that Moscow was withdrawing troops from the Ukrainian border.

Meanwhile, Gazprom, the Russian energy company has fired a shot across the bow, raising the price it charges Ukraine for natural gas. The price jumped from $268 per 1,000 cubic meters of gas to $385, or about a 44% increase. Gazprom execs attributed the price increase to an unpaid debt for gas. This is not the first time energy has been used as an economic weapon, nor will it be the last.

The US has been undergoing an oil and gas renaissance; the White House has promoted exploration and drilling, and output has jumped. When it comes to natural gas, the US is being compared to Saudi Arabia, or Saudi America. Of course, that provided no advantage to thwart Putin’s aggression in Crimea. One reason Saudi America has failed to instill fear in Russia is that we lack the capacity to export LNG to Europe, and probably won’t be able to export in any significant quantities for a few more years; and then it would probably be a few more years before Ukraine could build facilities to receive such exports.

Meanwhile, we ran into a rash of reports in the past week or so, all telling us that our reliance on fossil fuels is killing us. The American Association for the Advancement of Society, the Intergovernmental Panel on Climate Change, and the World Meteorological Organization all confirmed that the planet is getting hotter; 13 of the past 14 years have been the hottest ever recorded. The Antarctic ice shelf is melting, Greenland too; the rain forests are dying and the Gulf Stream is collapsing. It’s not just the melting ice and the poor polar bears; the reports warn of very human problems of hunger, disease, drought, flooding, refugees, violence, and war.

Necessity is the Mother of Invention, and the time is now for innovation; and the good news is that there are inventors who have been working on these problems and have created solutions; the bad news is that the status quo and the powers that be are entrenched. This is a defining moment, and energy is being used as an economic weapon, and that weapon is pointed directly at our own foot.

And the entrenched powers just became more entrenched. The Supreme Court has struck down the aggregate campaign contribution limits, opening the gates for even more money to flood into the political system. The good news is we have the best politicians money can buy. The bad news is we have the best politicians money can buy. The 5-4 ruling in McCutcheon v. Federal Election Commission was penned by Chief Justice John Roberts and joined by justices Anthony Kennedy, Samuel Alito and Antonin Scalia; Justice Thomas went a step further and called for a complete end to campaign finance reform.

The decision relies heavily on the assertion in the 2010 Citizens United ruling that influence and access are not a corruption concern. This means that a single donor will soon be able to contribute millions of hard dollars in limited contributions, to political parties, candidates and political action committees.

Federal law sets certain limits, so you can't just go write a candidate a check for a million dollars and call it a day. That means you can't give more than $2,600 to any one candidate per election. Even if you were to donate once in the primary election and again in the general, the absolute most you could give to an individual candidate's campaign is $5,200. And you can’t, or couldn’t just spread money across the board. For the 2013-2014 election cycle, Federal Election Commission rules state that a donor can give no more than $123,200 to all political committees, with two sub-limits of $48,600 to candidates and $74,600 to political parties and political action committees. In other words, there was a limit, a cap on aggregate spending. Those limits are no more.

 Now, a single donor can now give more than $5 million in individually limited contributions to every House candidate, every Senate candidate, every state party committee, every national party committee and every leadership PAC connected to one political party. The McCutcheon ruling also did away with the aggregate limit on donations to political action committees, or PACs, which can give money directly to candidates. While there's a limit on how much PACs can give to each candidate, there's no limit on the number of PACs that can exist. Without the aggregate limit, one donor can now give $5,000 each to 1,000 different PACs. And those 1,000 PACs can turn around and funnel that money straight to one candidate. Which means that one candidate could haul in $5 million in direct contributions from one donor, funneled through a network of PACs.

So, if you have a big wad of money that you would like to waste on buying politicians, the Supreme Court has just ruled that you can blow your wad just a freely as you can speak your mind.

The new Michael Lewis book, “Flash Boys” looks at High Frequency Traders front running trades, using technology to jump in front of a trade and skim some profits. The uproar from Wall Street has been hilarious. There are claims that front running isn’t really bad; it doesn’t hurt ordinary investors; it may actually add to liquidity, blah, blah, blah. This is kind of like saying a mafia hit man is good for the neighborhood because he spends his money at the local grocery store and he hasn’t killed anybody on my street.

As we said the other day, High Frequency traders front running the market is not new; it has been going on for years, but the book and the 60 Minutes interview and the publicity finally caught the attention of otherwise somnambulant sleuths at the FBI who are investigating front running, which is a criminal offense. Where this could get interesting is that the High Frequency Trading firms set up shop in close proximity to the stock markets in New York, and they pay for high speed access to the exchanges’ computer systems and data.

The New York Stock Exchange calls it “fully managed co-location space next to the NYSE Euronext’s US trading engines in a new state of the art data center”. The NYSE is the landlord. And they can set up the “super high density” fiber optic connections for an initial fee of $7,000, or a onetime upgrade fee of $9,200. In other words, the New York Stock Exchange and the Nasdaq are complicit in the skimming operation. I didn’t hear Lewis or 60 Minutes talk about that, but that is the ugly truth.

The other funny thing about the Michael Lewis book and interview is the notion that some clever fellows, backed by hedge fund guru David Einhorn and a few other Wall Street big dogs, had come up with a clever technical fix in a new and better exchange called IEX.  Protected by a spool of fiber to ward off the high frequency traders like garlic against vampires. Free market triumphs, mission accomplished. Don't even think about a minimum transaction tax, a speed bump rule such as a minimum order duration, or anything more comprehensive than that.

Thursday, September 05, 2013 - Mustering Support

Mustering Support

by Sinclair Noe

DOW + 6 = 14,937
SPX + 2 = 1655
NAS + 9 = 3658
10 YR YLD + .08 = 2.98%
OIL + 1.23 = 108.46
GOLD – 23.90 = 1368.70
SILV - .25 = 23.31

The war hasn't started, yet.

President Obama is in St. Petersburg Russia for the G-20 summit, he received a cordial but cool greeting from Russian President Vlad Putin, however Putin had harsh words for Secretary of State John Kerry, calling him flat out a “liar”, referring to his testimony regarding Syria, a close ally of Russia.The United States has given up trying to work with the U.N. Security Council on Syria, accusing Russia of holding the council hostage. Russia, backed by China, has used its veto power three times to block council resolutions condemning Assad's government and threatening it with sanctions. 

Yesterday, a Senate panel authorized military action in a “limited and specified manner”. A full vote is expected next week. Syria is dominating a summit with an official agenda focused on economic growth, monetary policy and global banking and tax rules. Obama began meeting with other leaders of the Group of 20 nations, trying to persuade allies to give the US a measure of political cover even if they withhold military support. Obama has already met with Shinzo Abe of Japan, Francois Hollande of France – who may be the only US ally taking part in a strike against Syria, and also a meeting with Dilma Rousseff of Brazil.

Brazil won't be part of any military action, and Rousseff might even cancel a planned trip to the White House in October 23^rd; the reason has nothing to do with Syria. Rather the Brazilian President is a bit ticked off about information leaked by Edward Snowden that shows the US spied on communications between Rousseff and her top aides. Brazil’s Senate is creating a committee to probe the spying allegations and seek federal police protection for Glenn Greenwald, the journalist who revealed the documents from Snowden. Brazil's foreign minister said: “This represents an inadmissible and unacceptable violation of Brazilian sovereignty. This kind of practice doesn’t live up to the type of trust needed to have a strategic partnership.”

Indeed, the pressure for military action in Syria will find reluctance from several countries as it follows in the footsteps of the Snowden allegations. And if Obama can't muster international support for military intervention in Syria, it will make the job of Congressional support more difficult. Various handicappers believe the resolution would go down to defeat if the vote were held today. So far, the Administration has been unable to make much of a case, beyond moral outrage. In a post Iraq world, people are actually asking pertinent questions like: how long will it last? What is the objective? How much will it cost? So far these are unanswered or inadequately answered questions. It's interesting that they can always find money for military action isn't it?

It is entirely possible that we could soon witness the amazing spectacle of Congress defeating a war resolution backed by the president and every top elected leader.

Of course, a resolution can be defeated and not killed outright. Remember TARP? The first vote for TARP was defeated and it took a market swan dive, a second TARP vote, and the addition of lots of pork to reverse the initial vote. But also bear in mind that the reason TARP was initially voted down was the barrage of voter phone calls and e-mails against it, reportedly 99% opposed until financial services firms started getting employees to call in favor of the bill, which shifted the tally to a mere 80% or so of callers opposed.

Even if the President musters enough votes to strike Syria, at what political cost? Any president has a limited amount of political capital to mobilize support for his agenda, in Congress and, more fundamentally, with the American people. Time and again we have seen domestic agendas succumb to military adventures abroad — both because the military-industrial-congressional complex drains money that might otherwise be used for domestic goals, and because the public’s attention is diverted from urgent problems at home to exigencies elsewhere around the globe.

We've mentioned before that Syria is a minor player in the oil markets, but geographically any action there would have an affect on oil prices. The rarely noticed reason is that Syria is closely allied with Iran, and indeed this whole Syria thing may have more to do with Iran than Syria. Anyway, if something happens, we'll likely see a spike in oil prices. We've been seeing oil over $100 a barrel and gasoline above $3.40 a gallon for much of the last 3 years. Those prices would have shocked many Americans a few years ago, but have now become the new normal.

What changed? Well, Americans are breaking their addiction to driving, at least a little. We own fewer cars per household than just a few years ago. Unfortunately, some of the reduction in motor gasoline consumption directly relates to massive under-employment, especially among those under 25, as well as lower wages among the employed. And the cars we own are more fuel efficient. The average fuel efficiency for new cars sold in the US just six years ago was only 20.8 miles per gallon; today it's 24.8 MPG. That may not sound like much, but it's about a 20% improvement.

Higher domestic production and lower American consumption have meant declining imports of crude oil and petroleum products-- a reversal of another once seemingly inexorable trend. The economic burden of imported oil is represented not by the number of barrels, but instead by the real value of the resources we must surrender in order to obtain the oil. The dollar value of petroleum imports as a share of GDP has come down a little as a result of recent gains in production and conservation, but still remains significantly elevated relative to the levels of a decade ago.

Let's get back to economic news.

Tomorrow we'll see the monthly jobs report for August. We got some clues today. Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 3. Employers seem to be holding the line on dismissals. Meanwhile, ADP, the private payroll processing firm issued their monthly report which showed companies increasing employment by 176,000 workers in August. The ADP report does not always match with the government report, but folks like to use it for guesstimates anyway. It's widely expected the economy added 175,000 to 180,000 jobs last month, up from July's gain of just 162,000. Anything over 200,000 would tilt the odds heavily in favor of the Fed beginning to taper QE security purchases at the FOMC meeting in two weeks.

 

Bill Gross, the head of PIMCO, in his September letter to investors says that central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy."

Gross writes: "Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?"

Gross added that liquidity will be "challenged" when policymakers start to tighten easy money policies and stocks may also be "at risk" when the Fed ends its bond-buying program. In other words, the Fed's exit from QE might not be baked into the cake just yet.

If you've been listening to the Financial Review for more than a day or two, you know that I think the banking system poses a systemic threat to the economy. A few years ago I wrote a book called “Eat theBankers”, and you can follow these daily broadcasts at the website EattheBankers.com. So, it is reassuring for me when I hear others jumping on the bandwagon. I'm not going to go into detail, but Simon Johnson, the former chief economist for the International Monetary Fund, recently wrote an article for Bloomberg, and I'm posting the link: The title is: Bank Leverage is the DefiningDebate of Our Time.

The basic idea of the article is that excessive leverage could bring down the world economy again. And the next financial collapse could be even worse than what we experienced in the fall of 2008. The debate is between the Too Big to Fail Banks that want to take more risks precisely because they can draw on implicit or explicit government guarantees, and on the other side are sane people who realize that the banks could destroy the economy.

The banks don't want to set aside safe, reserves, they'd rather take that money and gamble. Letting banks calculate their own risk weights or develop their own methodologies makes no sense -- conflicts of interest predominate when you are too big to fail. But asking rating companies or government officials to come up with meaningful risk weights also is doomed to fail. They lack the information, motivation and compensation incentives to do this right.

We've had this debate before; at the beginning of the 20^th century Teddy Roosevelt brought a case against JPMorgan's Northern Securities Company as part of the anti-trust movement. The case was ultimately decided by the Supreme Court in the government's favor. Had the monopolists won, instead of enjoying a vibrant competitive economy and a century of unprecedented growth that made the U.S. the world’s greatest power, we would have likely ended up like other unfortunate countries where a few oligarchs rule to the disservice of the broader public and the greater good of the economy. 

Friday, August 16, 2013 - Who Knows?

Who Knows?

by Sinclair Noe

DOW – 30 = 15,081
SPX – 5 = 1655
NAS – 3 = 3602
10 YR YLD + .07 = 2.83%
OIL + .62 = 107.95
GOLD + 11.10 = 1378.20
SILV + .25 = 23.36

The Dow fell 2.2 percent for the week, its biggest decline since June 2012, while the S&P 500 dropped 2.1% for the week and the Nasdaq dropped 1.6%; their biggest weekly losses since June, 2013. It was a second week of losses for the major indexes. The yield on the 10 year note climbed to the highest level in 2 years. Gold settled at its highest price in almost two months.

The productivity of US workers rose more than projected in the second quarter. The measure of employee output per hour increased at a 0.9% annualized rate, after a 1.7% decline in the prior three months. Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff. So, we're at a point where any increase in demand could prompt more hiring, but we're not seeing an increase in demand.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 80.0 from 85.1 in July. We're all consumers aren't we; that's how we are measured; that is our value to corporate America. Earlier this week I repeated the old idea that consumer spending is 70% of overall economic activity. One listener took me to task, writing: “Why do you keep perpetuating the lie that consumer spending makes up 70% of GDP when the federal government alone accounts for more than 20% State and local government accounts for more than 10%. Then there is business spending.  You are supposed to be the one busting these lies.”

By the way, if you would like to take me to task, the email is sinclair@moneyradio.com

The consumer spending thing is like a whole bunch of other statistics, which is to say, it's not very accurate. What government statistics call consumer spending is not what most people consider consumer spending. Most of it isn’t, anyway. Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to about $2 trillion a year,which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets.

Other examples of not really consumer spending include money spent by nonprofits, for instance, along with political parties and campaigns. I think that bank fees and such are included in consumer spending numbers, and who knows what else, and it's a certainty that interest compounded into the economy accounts for about 30% of what we pay for everything; and I really don't know how the consumer spending numbers try to reconcile that data.

Never mind, for the moment, that a big chunk of that actual consumer spending goes to things like clothes and electronics and shoes made abroad, and the consumption of stuff made in China has little direct impact on domestic economic activity, the truth is that consumer spending, in reality, represents less than half of US economic activity, probably around 40 percent.

There is a formula for consumer spending, and almost anything can get tossed into the mix, and the formula has changed over time. It's estimated consumer spending was around 75% of the economy in 1929; it grew to 83% in 1932, largely because business spending dropped. Consumer spending dropped to 50% in World War II because of large expenditures by government and very low expenditures by individuals.

I think this gets back to the idea of whether demand or production drives consumption, and as a consequence, economic growth. I tend to think it is demand. Otherwise, the Fed's spending a couple of trillion dollars on Quantitative Easing would have resulted in real economic growth, rather than just inflating asset bubbles. A few trillion in Fed monetary stimulus never really found its way from Wall Street to Main Street. But back to original complaint; you have a point, the consumer spending numbers are skewed. But then GDP is also skewed; if someone buys cigarettes and gets cancer; the cost to treat the cancer is considered as part of GDP, as if it is adding to the growth of the economy rather than watching a part of the economy die. Meanwhile, they are just starting to factor in movies as having some economic value; and we're still a long way from having a poem contribute to GDP. So, yea, the consumer spending numbers are a myth and every economic number is skewed. You and me, we're kind of stuck with the numbers we get.

Anyway, today on Wall Street, retailers took a beating. From Wal-Mart and Gap to Macy’s and McDonald’s, chains that cater to middle- and lower-income Americans. Nordstrom, the luxury department store chain, reported lower-than-expected revenue in its second quarter Thursday, prompting the company to trim its full-year sales and profit forecasts. Nordstrom's has products in their stores, they just aren't finding demand for those products.

Everyone wants to talk about recovery, but it's more like the unrecovery. Look no further than Macy's for a snapshot of the consumer. For its namesake mid-tier department stores, Macy's reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That's a contrast with Macy's upscale Bloomingdale's, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its sales at stores open at least a year unexpectedly fell 0.3 percent last quarter, a second decline in a row, prompting the world's largest retailer to lower its sales forecast for the year.

Last week, a group of retailers including Costco and Gap reported modest gains in July same-store sales, thanks largely to bargains. Adding to the pressure, Macy's said many shoppers are redirecting their spending to their cars, housing and home improvement.

Automakers reported a 14 percent sales increase in July from a year earlier. Home improvement chain Home Depot is expected to report same-store sales rose 7 percent. Outside of home improvement and cars, many retailers say economic conditions were less than ideal.

In July, U.S. employers slowed their pace of hiring, with the number of jobs outside of farming increasing less than economists expected. The average price for a gallon of gasoline in the United States was still high: at the end of July, it was $3.67 compared to $3.51 a year earlier, according to the Lundberg survey. And the problems in Egypt could push the price at the pump into an upward spiral at any moment.

As of May, 47.6 million Americans, or one in seven, received food aid - highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010. Real wages are also stagnating: they fell 0.1 percent between June 2012 and June 2013, according to the Bureau of Labor Statistics, excluding inflation and civil servants and military personnel.

Wal-Mart Chief Financial Officer Charles Holley told reporters on a call: "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have."

A recent government report showed 5.7 percent of Americans who had jobs in July could not get enough hours to qualify as full-time workers, the same percentage as in June. While the unemployment rate has fallen steadily over the last year, the share of part-time workers who want more hours has barely dropped, according to BLS statistics. Workers are not doing well. They're losing ground because wages are not growing in real terms.

And so, consumers are holding onto their purses. Macy's said shoppers at its namesake chain were holding back on anything nonessential, adding it didn't expect to make up the sales shortfall this year and cut its forecasts. Kohl's said comparable sales had slid for purchases paid for with a credit card, transactions typically made by people on a budget. And both Wal-Mart and Costco said sales of higher-ticket items such as electronics and games have been soft. Several companies have said shoppers are waiting longer to buy back-to-school items, suggesting they are waiting for deals and that they see no urgency to hit stores. This week's results may presage more of the same next week, when big chains like Target, J.C. Penney and Sears report earnings.

Consumer spending may not account for 70% of the economy but the consumer is weary these days. If there really is a recovery, it hasn't made it to Main Street, and without demand, there won't be growth. And for now, the beatings will continue until morale improves.

Tuesday, July 02, 2013 - Summer Swoon

Summer Swoon

by Sinclair Noe

DOW – 43 = 14,932
SPX – 1 = 1614
NAS – 1 = 3433
10 YR YLD - .02 = 2.47%
OIL + 1.65 = 99.54
GOLD – 10.20 = 1243.40
SILV - .27 = 19.48

Stocks started the second half of the year with a lukewarm rally yesterday; then the rally fizzled as the day wore on; still, yesterday was an up day. Today, stocks started in slightly positive territory, and as the day wore on, stocks sputtered. On a technical basis, the Dow and the S&P tried to break above the 50 day moving averages and failed. So, the 50 day MA is serving as a level of resistance, and stocks are not demonstrating the ability to break out.

It's easy to think stocks are still in an uptrend. The first half of the year posted solid gains, but those gains were slammed in June. Over the past week, prices started moving higher, but there's no conviction. Trading volume has been down. Tomorrow, the markets close early, and then stay closed for July 4^th, and Friday will be a low volume day. So, it's hard to be enthusiastic about stocks right here. Another failed rally could send prices lower, quick. It's easy to slip into summer slowdown mode, but this is not a time to be complacent if you are still in equities.

Since the FOMC’s June 22nd meeting, markets have been in turmoil. Commentators and Fed watchers have been speculating about exactly what Chairman Bernanke was trying to say on behalf of the Committee. Bernanke had indicated the asset purchase program might begin to be phased out when unemployment reached 7%. Actually, he indicated that by the time the program had ceased, unemployment would be at 7% sometime in the middle of next year. The import of this remark is critical, especially given that the publicly available FOMC central tendency forecast for unemployment by the end 2013 is 7.2-7.3% and by the end of 2014 the central tendency is an optimistic 6.5-6.8%. 

The Fed actually has a handy online calculator, the jobs calculator tool to estimate how many jobs per month will be needed to reach a certain unemployment level.
As an example, for the unemployment rate to decline to 7.3% in December (the high end of the Fed's forecast), with the participation rate staying steady at 63.4%, would require about 150,000 jobs per month for the next seven months.  This seems very possible. If the participation rate increases to 63.6%, than the economy would need to add 210,000 jobs per month for the unemployment rate to fall to 7.3% in December.
You can put in your own assumptions to the calculator. 

In economic news, CoreLogic reports home prices, including distressed sales, rose 2.6% in May and were up 12.2% for the past 12 months; the fastest annual increase in 2006. In addition to boosting household net worth, which supports consumer spending, the housing recovery has spilled over to manufacturing by fueling demand for construction materials and consumer items like stoves and refrigerators.

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May. Manufacturing slowed in recent months, weighed down by deep government spending cuts and slowing global demand

The Commerce Department also revised up the increase in new orders for durable goods - manufactured products expected to last three years or more - by a tenth of a percentage point to 3.7 percent. Even more encouraging, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 1.5 percent instead of the 1.1 percent rise the department had reported last week. That might lead to a slightly higher revision for 2Q GDP

Car makers posted stronger sales in June. General Motors posted 6.5% growth, Chrysler rose 8.2%, and Ford sales were up 4.4% from May. The automakers are back to pre-crisis levels in the annual sales rate. Auto sales account for about 16 percent of the country's overall retail sales. Part of that can be attributed to pent-up demand for cars. Part of it might be consumers looking for better fuel efficiency.

Oil prices broke above $98 a barrel a couple of week's ago; an area that had been resistance; at the time I said it seemed to be a breakout. Oil prices dropped with almost everything else on concerns about the Fed taking away the punchbowl of monetary stimulus, but now, we're back above $99 and poised to break into triple digits. And some of that is a risk premium, associated with unrest in Egypt; not a big producer, but a strategically located Middle East country.

Egypt's president has rejected an army ultimatum that the country's crisis be resolved by tomorrow;there are widespread and deadly protests across the capital. In a late-night televised appeal for calm, Mohammed Morsi admitted he had made mistakes, pledging his loyalty to the people, but he insisted on his constitutional legitimacy as president and said he would not be dictated to.

The army earlier leaked details of its draft "roadmap" for Egypt's future. Morsi was put under pressure by the resignation of six ministers from his government on Monday Military sources told the BBC the president's position was becoming "weaker" with every passing minute and suggested that under the draft plan, he could be replaced by a council of cross-party civilians and technocrats ahead of new elections.

On Sunday, millions of flag-waving supporters of the opposition movement behind the protests had rallied nationwide, urging the president to step down. Demonstrations that had been jubilant when the army's ultimatum was interpreted as a coup-in-the-making turned increasingly confrontational later in the day.

With a 20% shift in our annual infrastructure spending from 20th century technology to 21st century technology we can drive a new global $10 trillion economy by 2020. That was an undercurrent in a powerful speech President Obama delivered last week, demanding EPA set new standards for climate change to reverse its effect on our health and the environment. That action will help set goals to meet the desire of many to clean the environment. The president also noted: “A low carbon clean energy economy could be an engine for growth for years to come,” asserting that deploying American innovation by using our natural resources more effectively help boost the economy.

As impressive as the speech was, the president passed on the opportunity to focus on how the United States will compete with Germany and Japan as the largest climate-based wealth creators.  It's estimated that the technology needed to meet carbon emission reduction targets by 202 would require investment of about $10 trillion globally; that represents a shift of 20% in our global infrastructure spending.

The challenge is that while the technology exists we still don’t have the business model and financial innovation necessary to attract the $10 trillion by 2020. The president  made clear that he believes in our entrepreneurs, investors, and corporations who bringing climate change solutions to market. What he did not do is inspire thousands more to join them to unleash a climate wealth economy. These folks are all motivated to do well by doing good.

Our inspiration is not to just fix climate change, it is to ignite the next economy by meeting our energy needs using climate change solutions. Climate change is a trillion dollar opportunity masquerading a crisis. The next step for the president is to jump-start this next economy with the federal government taking the lead.

Congress failed in a last-ditch effort to reach a deal on student loans, and so yesterday, the rates doubled from 3.4% to 6.8%. Not all student loans are affected. Only rates on new, subsidized federal Stafford loans doubled from 3.4 percent to 6.8 percent on July 1. Rates on existing subsidized Stafford loans will remain at 3.4 percent. Rates on new and existing unsubsidized Stafford loans will remain at 6.8 percent. 

The doubling of interest rates means most monthly payments will increase by about 16%. About two-thirds of students take on debt to finance education; the typical debt load works out to about $30,000. Even if Congress can work out a deal, a retroactive change in rates, back to lower levels, seems unlikely. This is one more mistake by Congress; increasing the cost of education, rather than investing in education. Stupid, really.

According to new statements from Bank of America employees, the lender offered employees incentives for sending homeowners into foreclosure rather than modifying their loans. The BofA employees stated under oath that they were “told to lie to homeowners about loan modifications and were rewarded for sending homeowners to foreclosure rather than modifying their loans”. The allegations and incriminating statements are part of the evidence being presented in a federal class-action lawsuit brought by homeowners against BofA. The homeowners say that the lender deliberately “thwarted their attempts to take advantage of the federal Home Affordable Modification Program (HAMP).”

Former employees of BofA involved in the suit testified that they were “instructed to deny modifications for no reason, to pretend they had not received documents they received, to hold documents and then claim they were too old, and to cancel trial modifications for ‘nonpayment’ even when all payments had been received.” The employees also reported that the bank “drilled” into them that the longer loan modifications were delayed, the more fees the bank could collect, even if this meant “lying to customers.”

The mortgage workers reportedly received cash bonuses and gift cards for meeting quotas for sending distressed homeowners into foreclosure. Not surprisingly, BofA has denied all of these allegations.

I was thinking about saying at the beginning of this story that “According to shocking new statements from Bank of America employees”.., but you're not shocked by this are you?

Tuesday, May 07, 2013 - Good Times Roll

Good Times Roll

by Sinclair Noe

DOW + 87 = 15,056
SPX + 8 = 1625
NAS + 3 = 3396
10 YR YLD + .01 = 1.78%
OIL - .64 = 95.52
GOLD – 17.70 = 1453.60
SILV - .08 = 24.06

The fun started in Asia as a weak yen sent Tokyo stocks to their highest level in almost five years while Australian shares closed lower after briefly erasing declines following the Reserve Bank of Australia's to cut key interest rates. The yen has now lost one percent since Thursday; the result is a rally in the Nikkei, supported by upward revisions in earnings expectations for Japanese companies. Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008. This is known as Abenomics, named after Shinzo Abe, the Japanese prime minister who has instituted a very aggressive form of monetary easing, much more aggressive than what the Federal Reserve is doing in the US; the plan will double Japan's monetary base by the end of 2014.

Later in the week, we'll see if Abenomics is gaining traction as Japanese automakers report earnings; of course, it may still be too early to see Abenomics result in stronger earnings, but over time, a weaker yen should result in more car sales for the likes of Toyota and Honda. The world has done OK while Japan has stagnated. If Japan were to go back to something like a 3% growth rate, that would make a big difference to the global economy. This might be a potentially serious opportunity to improve the pace of global growth.

Then the fun spread to Europe. ECB President Mario Draghi has said he'll do whatever it takes to push the euro zone economy forwards. Last week the ECB cut rates, keeping downward pressure on the euro although the stronger German data pushed it back above $1.31 against an easing dollar. Germany, the region's largest economy, reported a rise in industrial orders in March, confounding expectations for a drop. The German DAX Index finally topped the highs of 2007. For the first time in a couple of years, Portugal completed a sale of 10-year bonds. The bond sale puts Portugal on course to exit its bailout on time, and qualifies it for a ECB debt support program. The 10-year note yields 5.6%, safely below the 6% level that is considered a danger zone. The MSCI Global Index edged past its June 2008 high.

The good times then spread to the US, where Wall Street saw new record highs. There isn't much economic news to move the markets this week. The economic news last week wasn't great but it was better than expected, and so everything is moving higher. Small caps moved to new highs; Dow Transports are confirming with new highs; even emerging markets are pulling out of a skid; the S&P 500 has been up 11 out of the past 13 sessions; we've seen 10 record highs this year. It has been an impressive run. Will it last forever? Of course not. Will it continue longer than you think? Probably, or it could end tomorrow.

More than 400 earnings reports from S&P 500 companies are now in the books, with 47% beating estimates on sales, 72% beat on earnings per share; the aggregate earnings per share beat is 5.4%, and year to year earnings per share grew by 2.5%. Annual sales growth is negative 1.4%; that indicates companies are still cutting costs; there are limits to this strategy.

Of course, it's difficult to make sense of earnings reports these days. A new report from Ernst and Young surveyed 3,500 staff in 36 countries; 20% said they had seen financial manipulation in their companies in the last 12 months. In addition 42 percent of board directors and top managers surveyed said they were aware of "some type of irregular financial reporting".

And despite scandals and regulatory failures in the wake of the credit crunch, almost a quarter of top financial services staff surveyed said they were aware of manipulation and almost 10 percent of all staff said their companies had understated costs, overstated revenues or used unprincipled sales tactics.

At some point demand has to increase or the fun stops. Consumer credit expanded at a slower pace in March. Non-revolving debt led the way; things like auto loans and student loans. Credit card debt fell by 2.4%.

In a follow-up to last Friday's jobs report, today the Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary, also known as the JOLTS report. There are about 3.8 million job openings in the country; there are about 12 million unemployed people looking to fill those jobs. Employers aren't firing people any more, but they're not hiring people, either. Employers still see demand as too weak to justify ramping up hiring. Consumers have been too busy picking through the wreckage of their finances to spend a lot of money.

So the stock market is flying high even as customers are pulling in their wings. What's keeping the markets at these highs? Central banks keep pumping up the bubble. This year is a year where all market behavior is basically nonsense. In an environment where you have the central banks pushing down all yield levels on whatever is supposed to be a fixed-income investment. With key economies like the United States seeing a patchy recovery but others struggling to maintain growth, major central banks around the world have shown over the last few weeks they intend to keep stimulus flowing freely for the time being. Let the good times roll.

A follow-up to reports that New York Attorney General Eric Schneiderman will sue Bank of America and Wells Fargo for violating terms of the National Mortgage Settlement; this was the $25 billion dollar settlement for allowing banks to overcharge people, use fake documents and otherwise abuse customers; and it wasn't really $25 billion because the banks could write off full amounts of short sales and loan mods; and this will shock you – most of the write-offs are short sales. Part of the deal would require the banks to actually respond to loan modification requests and to stop losing paperwork and stop abusing customers. This has proved to be too much for Bank of America and Wells Fargo, so the New York AG has said he'll sue; not for money; apparently he'll sue for equitable relief.

What is equitable relief? Apparently it would be an injunction to force BofA and Wells to comply with the servicing standards in the Settlement. Now, they didn't comply with the original settlement, so why would they comply with an injunction? Who knows.

“I'm going to put if very bluntly. I regard the moral environment as pathological...these people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients... to counter-parties in transactions. They are tough greedy aggressive and feel absolutely out of control...and they have gamed the system to a remarkable extent.”

That's a quote from a recent speech by economist Jeffrey Sachs. It's only remarkable because Sachs is considered part of the establishment; a former economic advisor for the IMF and the United Nations. But the abuses by the banksters have become so blatant that they can't be overlooked. The Too Big To Fail Banks have admitted to money laundering to the worst drug cartels and terrorist organizations. No indictments. The banksters admit to millions of separate counts of perjury in the robo-signing scandal. No indictments, instead they reach a settlement and then violate the settlement. Again, no indictments. 

And if the Big Banks don't comply with the injunction to make them comply with the settlement..., well, I'm not sure but I'm guessing there won't be any indictments, just another limp wet noodle lashing.

Thursday, March 28, 2013 - The Good Shepherd

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

The Good Shepherd

by Sinclair Noe

DOW + 52 = 14,578
SPX + 6 = 1569
NAS + 11 = 3267
10 YR YLD un = 1.85%
OIL + .59 = 97.17
GOLD – 8.90 = 1597.50
SILV - .33 = 28.46

For the week, the Dow rose 0.4 percent, the S&P 500 advanced 0.8 percent and the Nasdaq gained 0.6 percent.

Thursday marked the end of the trading week. The US stock market will be closed tomorrow in observance of the Good Friday holiday.

For the month of March, the Dow climbed 3.7 percent, the S&P 500 rose 3.6 percent and the Nasdaq added 3.4 percent.

For the first quarter, the Dow shot up 11.2 percent, the S&P 500 jumped 10 percent and the Nasdaq climbed 8.2 percent.

The best performing stocks in the S&P since the start of the year: Netflix, Best Buy, Hewlett-Packard, H&R Block, and Micron Tech. The worst performers included: Cliffs Natural Resources, JCPenney, US Steel, Garmin, Apollo Group, and Newfield Exploration.

For the Dow Industrial Average and the S&P 500 it was a record high close. Whoopee! The last all-time closing high for the S&P 500 occurred on October 9, 2007 at 1,565.15. The intraday all-time high was reached a couple of days later, on October 11, 2007, at 1,576.09. But just so we avoid any double standards, let's look at the real value versus the nominal value. The real value refers to the inflation adjusted price of the S&P compared to the nominal value, which is not adjusted for inflation. Using the Bureau of Labor Statistics CPI Inflation Calculator; the 2007 intraday all time high of 1576, when adjusted for inflation would be 1,764.

But wait, there's more!

For those of you old enough to remember, we were setting highs in the S&P back in March 2000, at the 1553 level. There has been quite a bit of inflation over the past 13 years, and if we adjust that 1553 number for inflation, the S&P 500 would need to reach 2093 in order to hit a real all time high. Don't hold your breath. We're about 30% shy of the real record. What this really means is that the S&P 500 has a really big, negative real return over the past 13 years.

Maybe the market does reflect the economy after all. It looks like the economy is just barely slogging along. The Commerce Department revised the fourth quarter Gross Domestic Product to show the economy growing at a 0.4% annual rate. The early guess at GDP had been slightly negative, so this is an improvement, but it isn't good enough to help the labor market. Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. Consumer spending expanded at a 1.8 percent annual rate. The report showed business investment rose at a 13.2 percent rate, a bigger gain than initially estimated. The extra growth was mostly from more construction spending by businesses.

A fairly orderly open for the banks in Cyprus. The longest lines were journalists gathered in anticipation of a bank run which didn't happen. For depositors on the street it was orderly resignation.

The implications are less than orderly. European officials are hurriedly denying that the Cypriot bail-in is a "template". Markets know otherwise. The good bank/bad bank model adopted in Cyprus shows how banks can be recapitalized without government funds while still protecting insured depositors - thanks to senior bondholders and uninsured depositors taking losses. And some are even claiming this is an acceptable template. In the case of Cyprus, it was a way for the European Troika to go after tax dodging Russians, Putin's henchmen.

The larger template is that bondholders and depositors are now on the hook for gambling banksters. For bondholders there is always a certain amount of risk, and a need for due diligence. For the rest of the uninsured depositors, we now hear that it the responsibility of the depositor to have certainty about the institution where they make deposits.

The problem is that individual or even corporate depositors don't know the soundness of a banking institution; nor do the banking regulators, and in many cases, the management of the banks are clueless. If there is to be any hope of trust in financial institutions, there is a definite need for restructuring; for smaller banks that can safely and securely hold deposits, not take the deposits and go gambling in the nearest credit market casino.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. In most legal systems, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. And if you think the banking system in the US is safer than the banking system in Europe, think again. The big US banks have not changed their ways since the crisis of 2008. The big US banks can actually use deposits to fund derivatives exposures. And remember that depositors are unsecured creditors, and remember that the 2005 Bankruptcy Act made derivatives counterparties senior to unsecured creditors.

And the recent investigation into the JPMorgan London Whale trade should serve as notice that any attempts at regulation are at the best, incomplete. JPMorgan is the largest derivatives dealer in the world, gambling tens of trillions in the derivatives casino. We did learn that when the London Whale started losing billions, the bank sought to hide that information, and doubled down on bad bets. The ease with which the bank hid losses and fudged valuations should set off flashing red lights for investors, and now for uninsured depositors.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers; you know, the same bunch that usually have a “get out of jail free card”.

Now that the Cyprus banks have re-opened, it looks like the crisis wasn't much of a crisis. Cyprus is so small that I was telling you it really shouldn't make much of a difference. The Euro-Union has a printing press, they could have printed enough currency to resolve the Cyprus Crisis before brunch. It was just a tiny crisis, like the island itself. Forget about it. Move along.

Except for the brief moment when the president of the Eurogroup let slip that Cyprus could be a model for future European bailouts. He quickly retracted that comment, but the cat was out of the bag. And even if confiscating deposits won't be the template for bank bailouts, the model is in place. We know that tool is in the toolbox. As for the crisis itself; this is the new model for effecting change; declare a crisis; manufacture a crisis; scare people; the Euro is collapsing; the sky is falling; we're going over a fiscal cliff. Whenever you hear the fear you can bet that somebody is trying to slip something past you. When someone cries wolf, someone is trying to herd the flock.

A good shepherd only cries wolf when there is true danger.

Monday, March 04, 2013 - The Strange Disconnect

I will be speaking at the 2013 Wealth Protection Conference April 5 & 6. Click here for more information or call 800-494-4149 or 480-820-5877.

The Strange Disconnect

by Sinclair Noe

DOW + 38 = 14,127
SPX + 7 = 1525
NAS + 12 = 3182
10 YR YLD +.02 = 1.88%
OIL - .62 = 90.06
GOLD – 3.00 = 1574.80
SILV - .06 = 28.62

It seemed like a long weekend, and then suddenly it was over. So, just to make sure we're still on point, let's start with a brief recap of last week.

One week ago, there was widespread concern about the Italian elections, which ended in gridlock. Fifty-seven percent of the Italian vote went to parties that have vowed to tear up the European Union's austerity script. It might send a signal of an end to economic reforms in Italy, that could undermine confidence in Italy, that could result in higher borrowing costs; which could result in a new bout of Euro-zone sovereign solvency fears, which could send markets lower until such fears are removed.

In the US, Fed Chairman Bernanke testified on Capitol Hill that Fed stimulus would in fact continue into the foreseeable future, and the economy was doing much better, according to Bernanke. The housing and auto sectors and consumer sentiment data showed continuous improvements. The Fed will keep the free money spigot wide open and the banks will be flooded with cash, or some rough equivalent. If there was ever a good excuse to rally off a dip – Bernanke provided the excuse.

Europe continued to be flummoxed by the Italians, and it even affected Japan, in a weird way. The concern was that the Japanese Yen would be considered a safe haven for cash fleeing from the Euro-zone. The Japanese want a weak Yen to juice their export driven economy.

And then we wrapped up last week with the Sequester; the draconian automatic spending cuts that kicked in over the weekend. It will take some time to feel the negative consequences of the sequester. There was no apparent panic on Wall Street in response to the Washington DC Keystone Cops fire drill. A likely reason for the upbeat market may be found in the earlier news from Chairman Bernanke. Yes, the sequester will have a detrimental impact on the economy; in turn, this will force the Fed to maintain its Zero Interest Rate Policy, which, in turn, will continue to force investors into riskier assets to try to achieve positive real returns. Slow economic growth, combined with a loose monetary policy will likely increase market volatility, even with the Fed's safety net for Wall Street. No safety net for individual investors. Interest rates, although normally  much higher when loose monetary policies are being implemented, will not be allowed to rise in the Treasury and banking market. Bank lending will stay restrained because of repressive rates. In other words, it is not to Wall Street's advantage to see a robust economy, not as long as the Fed sees a weak economy as reason to keep the free money flowing.

Meanwhile, there will be increased pressure on the European Central Bank to increase stimulus; they need some new Quantitative Easing measures. Now, you probably recall the Euro-Zone, like everywhere around the world, has been involved in a stimulus war; they don't like it when you call it a currency war; but part of the Euro-Zone problem is that their QE measures remain purely theoretical. They call QE, OMT and the conditions that must be met to get the stimulus have scared off any country that actually needs it; the net effect is that OMT is nothing more than jawboning. And Italy and Spain are two countries in need of help and they are also TBTF. Too Big To Fail. So, the ECB meets this week; also the Eurogroup Finance ministers; also Central Banks hold meetings in Canada, Japan, Australia, and the UK. If you are looking for a race to the bottom – this is the week; just don't call it a currency war. Actually, what we will likely hear is the ongoing and likely coordinated importance of global stimulus. Don't expect big announcements of any kind. With economic indicators remaining tepid, if not worse, the central banks are only expected to lay the groundwork for further easing. If any central banker surprises by being neutral, their currency is going to appreciate.

This is the strange disconnect right now between the markets and the economy. With the Dow Jones industrial average flirting with a record high, the split between American workers and the companies that employ them is widening. With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers. So far in this recovery, corporations have captured an unusually high share of the income gains. The corporate sector is in a lot better health than the overall economy; it's almost a golden age for corporate profits, especially among multinational giants that are also benefiting from faster growth in emerging economies like China and India.

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966.  Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation.

And then Friday will bring the monthly jobs report here in the US, which always has the potential to move markets. A strong bullish or bearish surprise can be significant, because jobs and spending remain the two metrics that are most influential on Fed policy. A very bullish result that beats the consensus 160-thousand figure by over 15% would revive speculation that the Fed might unwind QE sooner. That would boost the dollar because QE is considered dilutive for the dollar. The affect in stocks is less obvious. On the one hand more employment should be good for growth and earnings. On the other, if markets believe that in fact stimulus might now end sooner, they could actually fall. The ideal result for risk assets would be to see improvement, but not enough to change belief in continued QE.

And no, the jobs report will not reflect the cuts from the sequester. Yes it will hurt the economy; estimates vary on headwinds to the economy but most seem to fall around 0.5% - a big number when one considers the economy only grew 0.1% in 4Q2013; but it will be a gradual mess. The jobs report looks back one month to February. Also, none of the 800,000 potentially furloughed federal employees loses any pay until April, because they get 30 days paid notice of furlough or dismissal; so it won't show up in the jobs report for two more months. Also, there is still a chance Congress will stop acting like spoiled brats, or an even better chance they will realize this sequester nonsense hurts their chances for re-election, and they just might get a deal done. I'm not holding my breath, but it could happen.

Over the weekend, House Speaker John Boehner said he and President Barack Obama had made no headway on a deal to avoid automatic budget cuts. Meanwhile, House Republicans are expected to introduce a bill to extend government funding through September, to avoid a government shutdown at the end of the month.

Doesn't seem to matter much, the markets moved higher today, and the Dow Industrials and the S&P 500 are each within about 50 points of all time highs. The market may be able to shake off the implications of sequestration but we're not out of the woods yet.   Looming in our immediate future is March 27th's deadline to strike a Continuing Resolution deal to avoid a government shutdown. There are already signs of erosion in the economy. The recent declines in crude oil, copper and other commodities is evidence that traders see growth starting to slow. Some of that is coming from Europe as evidenced by the stream of suddenly weak data, but the slide is also a function of the negative impact a Continuous Resolution battle and ensuing government shutdown would have.

The sequester is no big deal compared to a government shutdown. The Sequester is only $85 billion dollars, Bernanke can print $85 billion without taking a lunch break. Undoing a government shutdown wouldn't be so easy.

I keep looking for alternatives to the meat cleaver approach of the sequester. One idea that will take effect in Europe later this year is the financial transaction tax, or the Robin Hood tax. There have now been bills introduced in the US Senate and House calling for a tax on the Wall Street speculators responsible for the worst recession since the 1930s. The tax would generate an estimated $352 billion over 10 years, according to the Congress's Joint Tax Committee.

Ordinary, long-term investors would not be affected by the measure, which would place a small financial transactions tax (three cents per $100 in value) on non-consumer financial trades in stocks, bonds and other debts after an initial public offering. For example, there would be no tax on a loan to a company, but if the financial institution traded the debt, the trade would be subject to the tax. The fee would also cover all derivative contracts, options, puts, forward contracts, swaps and other complex instruments at their actual cost.

By setting the tax rate so low, the measure would not impact the market's traditional role supporting economic activity. It would, however, reduce certain speculative activities like high-speed computer arbitrage trading. A speculation fee could help to shift Wall Street away from short-term trading. Given the very high volume of financial trading, it will raise considerable funds, badly needed to protect Medicare, Medicaid, and other important federal investments and for reducing deficits.