Monday, December 10, 2012 - The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

by Sinclair Noe

DOW + 14 = 13169
SPX +0.48 = 1418
NAS + 8 = 2986
10YR YLD -.01 = 1.62%
OIL -.25 = 85.68
GOLD + 8.10 = 1713.60
SILV + .16 = 33.37

Economic reports due this week are not likely to be market movers. Tomorrow we'll see data on wholesale trade, plus the trade deficit; a report on how many new job opening exist. Later in the week, we'll find out about retail sales. The big event this week is the Federal Reserve FOMC meeting Tuesday and Wednesday. The Fed will be looking at the unemployment numbers from Friday. The unemployment rate fell to 7.7% from 7.9%, but that was because more people dropped out of the labor force. Usually that’s not a good sign because it means jobs are harder to find. Ultimately the Fed wants to see the jobless rate fall to 6% or less, the same levels that prevailed before the 2008 meltdown.

Nobody seems to think there will be a big uptick in new jobs. Lackluster hiring means consumer spending is unlikely to rocket higher. Too many people remain out of work and the growth in the average worker’s paycheck isn’t even keeping up with the low increase in annual inflation. Business are waiting for the consumer to spend, consumers are waiting for businesses to hire. Something needs to happen to kick start the economy, a jolt of stimulus, but don't hold out for any major announcements from this week's FOMC meeting. Bernanke should be able to point to the fact that a much-needed recovery in the housing sector has taken hold. And that's partly due to the Fed's effort to reduce mortgage rates and keep them low. Hiring has continued at a modest pace; in other words, nothing that would cause the Fed to do anything dramatic.

The Fed will need to make a decision on Operation Twist. The policy, set to end this month, let the Fed sell short-term Treasuries it already owns in order to buy longer-term bonds. The basic goal of Twist has been to lower long-term interest rates without having to increase the dollar amount of the assets on its books. Here's the problem though. The central bank is quickly running out of short-term bonds available for it to swap in a one-for-one exchange. So, the Fed might just look at some kind of an outright bond purchase program.

The Fed could double down on its purchase of mortgage-backed securities, which currently totals $40 billion a month. That program puts downward pressure on mortgage rates. The Fed announced this third round of quantitative easing, or QE3, in September.

Or, the Fed might say it will buy more Treasury bonds as a way to keep longer-term interest rates low, maybe $45 billion a month in bond purchases. Treasury purchases without offsetting sales would expand the Fed's bond portfolio, pumping more cash into the economy but also making it more difficult to eventually sell the bonds to head off inflation.

Or, the other option is the Fed waits until the new year and to see how Congress handles the fiscal cliff, and then they'll know whether they need to do something dramatic or not.

President Obama and House Speaker Boehner held closed door meetings at the White House yesterday. No announcements were made; your guess is as good as mine. President Obama traveled to Michigan today to push for his proposed extension of tax cuts for middle class earners. The president's message in Michigan will be that the economy is rebounding and Congress should not risk that progress to save tax cuts for the rich. Meanwhile, there is a political battle in the state about union recognition.

President Obama threw his support behind labor unions opposed to a Republican-led drive for "right-to-work" laws in Michigan, saying efforts to pass such measures were not about economics but about politics. Obama used a visit to an auto plant to weigh in on the controversial push in the state legislature to impose new restrictions on unions.

Obama told a crowd of workers at the Daimler Detroit Diesel plant in Redford, Michigan: "What we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. These so-called right-to-work laws, they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

Union members and others opposed to Michigan becoming a right-to-work state plan major protests in the state capital, Lansing, this week. Organizers expect thousands at a rally tomorrow when the state legislature reconvenes. With Republicans in control of the legislature and the Republican governor committed to sign the laws, Michigan could become the 24th right-to-work state by the middle of the week.

The rest of the world watches to see if the fiscal cliff can be resolved, and with the International Monetary Fund's managing director Christine Lagarde warning of "zero growth" in the US as a worst case scenario: The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1%, and Lagarde reiterated that the implications of going over the cliff would be precipitous. She said, "If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero."

Italian equities and bonds sank after Prime Minister Mario Monti's decision to resign stoked concern about who will lead the euro zone's third biggest economy out of its debt crisis. The euro initially weakened on the news out of Italy, but it managed to rebound against the dollar and pared most losses versus the yen; the reaction to Monti's resignation may have been overdone. Monti announced over the weekend he would resign once the government's 2013 budget is approved, potentially bringing forward an election due early next year. Monti became an investor favorite over the past year as he spearheaded a reform agenda to rescue Italy from the threat of a Greek-style collapse.

Commodities markets rose on data that showed factory output in China, the world's No. 2 economy accelerated to an eight-month high in November. Copper prices hit their highest level in almost two months.

A new intelligence report says that by 2030 Asia will overtake North America and Europe combined in global power based on gross domestic product, population, military spending and technological investment.

China alone will probably have the largest economy, surpassing that of the United States a few years before 2030. Meanwhile, the economies of Europe, Japan, and Russia are likely to continue their slow relative declines.

The report, "Global Trends 2030: Alternative Worlds,"  www.dni.gov/nic/globaltrends. was issued by the National Intelligence Council, an analytical arm of the U.S. government's Office of the Director of National Intelligence. The report says that despite the economic power of China, the United States is expected to retain its superpower status because it still is the only country able to pull together coalitions and mobilize efforts to deal with global challenges.

The report claims China isn't going to replace the US on a global level,and while being the largest economic power is important, it isn't necessarily the largest economic power that always is going to be the superpower.

China recognizes that it cannot play that role of organizing across regions and across state-nonstate boundaries. The health of the global economy increasingly will be linked to progress in the developing world rather than the traditional West.

HSBC is apparently ready to settle money laundering charges for $1.9 billion. The settlement with HSBC stems from accusations that the British banking giant transferred billions of dollars on behalf of sanctioned nations like Iran and enabled Mexican drug cartels to launder money through the American financial system. The deal will force the bank to forfeit more than $1.2 billion in ill-gotten gains and pay additional penalties.

Since January 2009, the Justice Department, Treasury and the Manhattan prosecutors have charged six foreign banks, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.

Earlier today, federal and state authorities announced a $327 million settlement with Standard Chartered. The British bank, which in August agreed to a larger settlement with New York's top banking regulator, admitted to processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information

The Doha Climate Change Conference wrapped up this week. As Doha kicked off, we had just seen the effects of Hurricane Sandy, meanwhile environmental groups were prepared with a lineup of grim studies on just how far the world has fallen short on its environmental efforts. Carbon dioxide emissions hit a record high last year. Yet nations around the world, despite a formal treaty pledging to limit warming, and 20 years of negotiations aimed at putting it into effect, have shown little appetite for the kinds of controls required to accomplish those stated aims. There were no new emissions targets up for discussion at Doha. Commitments of monetary aid have been drying up.

Friday, December 7, 2012 - A Date Which Will Live in Infamy, Plus the Jobs Report

A Date Which Will Live in Infamy, Plus the Jobs Report

by Sinclair Noe

DOW + 81 = 13,155
SPX + 4 = 1418
NAS – 11 = 2978
10 YR YLD +.05 = 1.63%
OIL - .27 = 85.99

GOLD + 4.50 = 1704.50
SILV + .08 = 33.11

Today marks the 71^st anniversary of the attack on Pearl Harbor. There were of course, memorials in Hawaii and around the country. I've seen a few of the pictures. Each year the number of Pearl Harbor survivors that attend these memorials, their number grows smaller and their ranks thin. If you know a veteran of World War II, be sure to take time to recognize their stories, be sure to say thanks.

Today's major economic data was the monthly jobs report; widely expected to be weak due to the effects of Hurricane Sandy. Instead, it came in relatively strong. The headline numbers: the economy added 146,000 jobs in November, and the unemployment rate dropped to 7.7%, a four year low. The Labor Department claimed that the effect of Sandy on the report was minimal, saying in a statement, “Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”

In other words, we should not look at this report as surprisingly good given the effect of the hurricane. Rather, the Labor Department claims that the jobs numbers should be analyzed without taking the storm into account at all. And by that standard, not only were the job numbers weak, there were some underlying problems. To be counted, a person would needed to have been out of work for three weeks or so on Nov. 12. The storm hit Oct. 29. Only a few workers met the length criteria. So, some of the storm's negative effects will likely show up next month.

This month's number beat expectations of 75-80,000 jobs, but that was considering the hurricane. Taking out the effects of the hurricane the number was below the average job growth per month of about 150,000 over the past two years. It is growth but it is sluggish and not enough.

First, this is the initial report; there will be revisions. Each month, the Labor Department issues its estimate for the previous month’s job growth, but it also issues revisions for the two months prior to that as well. And this report showed a net downward revision of 49,000 jobs. So really this report gave us a net job gain of 97,000 — a much less impressive figure than the headline 146,000; and there will be revisions.

The report also showed a decrease in construction employment of 20,000 jobs. If Sandy did in fact have a minimal effect on the report then this is strange, because recent housing start data has been positive; just this week the Commerce Department announced that construction spending increased in October, showing the continuance of a positive trend. So, if construction spending is increasing it should show up as jobs, unless construction spending isn't really increasing or perhaps because Hurricane Sandy had a bigger impact on these numbers than the Labor Department’s statement suggests.

After showing a solid 0.3% gain last month, the participation rate — or the percentage of adult workers in the workforce — declined once again by 0.2%. That drop in the participation rate appears to be the primary reason the unemployment rate dropped to 7.7%, as the household survey actually showed a net decline in jobs. While some of the overall decline in the participation rate has been driven by demographic reasons — an older country is going to have fewer people able to work — that only tells part of the story. Some of the decline in participation is undoubtedly a product of a depressed economy, and a true jobs recovery would have this number moving upwards, rather than the other way around.

Roughly 350,000 Americans left the labor force in November, lowering the rate, partly due to bad weather keeping Americans from working. The ranks of the long-term unemployed—those without a job for 27 weeks or more—fell only slightly to 4.8 million from 5 million.

One thing not indicated in the report is a negative effect of the fiscal cliff. But November's figures also show that jobs are growing too slowly to significantly lower unemployment or boost the economy's overall growth, which faces headwinds. To keep up with population growth, the economy needs to add about 120,000 new jobs every month just to keep the unemployment rate from rising. While any slowdown could prove temporary, even a brief stall will hurt job creation—one of the main things keeping consumers confident.


A survey by the University of Michigan, also released Friday, suggests consumers this month are already feeling markedly less optimistic about the economic outlook, after being more confident than they have been in five years. The Thomson-Reuters/University of Michigan consumer sentiment index's preliminary reading for December slumped to 74.5 compared with 82.7 at the end of last month.

The jobs report revealed a bifurcated economy. Service-related businesses, a broad category including retail, health care and other areas, are fueling much of the nation's job growth. Retail employment alone added more than 50,000 jobs last month. However, the goods-making part of the economy, manufacturing and the housing market, didn't contribute to job growth in November. Construction employment fell by 20,000 and manufacturing lost 7,000 jobs. Government hiring was roughly flat, but declined by about 50,000 in October.

An unusually high number of workers—more than 1 million—worked part-time instead of full-time because of bad weather, the government said. That suggests that some of the 350,000 decline in the labor force, and the drop in the unemployment rate, could be linked to Sandy.

In February, 2011, President Obama went to Silicon Valley and participated in a breakfast meeting of high tech bigwigs. Obama interrupted Steve Jobs to ask what it would take to make iPhones in the USA. Jobs answered: “Those jobs are gone and they're not coming back.”

Well, time change, and a few of those jobs are coming back. Apple will resume manufacturing in the US next year, not much but a few Mac computers will be made here, about $100 million in manufacturing.

Meanwhile, GE is spending some $800 million to re-establish manufacturing in its giant, and almost abandoned facility at Appliance Park, in Kentucky. In February 2012, GE opened an all-new assembly line to make water heaters. In March 2012, GE started a second assembly line to make refrigerators. Another assembly line is under construction make a new stainless-steel dishwasher starting in early 2013. Whirlpool is bringing mixer-making back from China to Ohio. Otis is bringing elevator production back from Mexico to South Carolina. And Wham-O is bringing Frisbee-molding back from China to California.

Chinese wages are five times what they were in 2000 and are expected to keep rising rapidly. And labor is a steadily decreasing percentage of the cost of manufacturing.  Oil prices are three times what they were in 2000. Natural gas in the US is a quarter of what it is in Asia. By moving manufacturing back to the US, time to market also improves dramatically. As a result, that water heater that GE makes, they can now sell it for 20% less.

We have seen a very short-term and I think very poor decision by companies to outsource labor in pursuit of maximizing shareholder gain; and in the short-term it worked, but there was a cost. These executives also outsourced innovation and design and quality, and they decimated the core of their domestic customer base, and they debased their good name and reputation in exchange for a quick pop to the spreadsheet and a boon for bonuses. Most of these firms that outsourced didn't consider the externalities, the hidden costs.

They missed the fact that management needs to have a close working relationship with workers to insure quality and innovation. They also missed the costs and risks of an international supply chain, which is increasingly out of step with the shorter, faster product cycles; and as labor becomes an ever smaller part of the overall process, labor savings become less and less relevant. As products become more high-tech, production is more complicated, and the quality, rather than the cost of labor, becomes a priority.

As it turns out, maximizing shareholder value in the short-term leads businesses to do things that detract from maximizing long-term shareholder value, such as outsourcing, favoring cost-cutting over innovation, the destruction of brand equity, and excessive executive compensation. Outsourcing isn't an isolated event. It's the result of the underlying philosophy of shareholder value.

Fiscal cliff negotiations have devolved into direct talks between President Obama and John Boehner, cutting other congressional players out in effort to streamline the talks. House Speaker John Boehner and House Minority Leader Nancy Pelosi sparred in dueling press conferences today.

Boehner declared there was no progress in the talks. He accused the White House of enacting a deliberate strategy of”slow-walking” the economy toward the fiscal cliff. Pelosi took umbrage at that term. She said Republicans are the ones who have not acted on a bill that’s cleared the Senate, which would extend the Bush-era tax cuts for 98% of the population. Mitch McConnell was apparently too befuddled and so he just filibustered himself.

Today’s jobs report shows an economy that’s still moving in the right direction but way too slowly, which is why Washington’s continuing obsession with the federal budget deficit is insane. Jobs and growth must come first. The fact is some 350,000 more people stopped looking for jobs in November, and the percent of the working-age population currently employed continues to drop — now at 63.6%, almost the lowest in 30 years. Meanwhile, the average workweek is stuck at 34.4 hours.

The slowness of the jobs recovery isn’t because of Hurricane Sandy, and it’s not because of any uncertainty over the looming “fiscal cliff.” Businesses won’t create more jobs without enough customers. But consumers can’t and won’t spend because they don’t have the money. Until the private sector is able to boost the economy we need to invest in the economy. Now is the time to invest. The cost of borrowing is low; the yield on the ten-year Treasury is near historic lows, and the need for more jobs and better wages so high, and our infrastructure needs repair. We need to invest in infrastructure to improve productivity, and that means an investment in jobs.

Thursday, December 6, 2012 - Dude, Watch Out for That Cliff

Dude, Watch Out for That Cliff

by Sinclair Noe

DOW + 39 = 13,074
SPX + 4 = 1413
NAS + 15 = 2989
10 YR YLD -.01 = 1.58%
OIL – 1.44 = 86.44
GOLD + 5.70 = 1701.00
SILV + .12 = 33.13

So, Barack Obama and John Boehner have figured out a way to deal with this whole fiscal cliff, man. There going to go to Seattle, Washington and they're gonna smoker reefers and drink coffee until they come up with, like a really great idea, dude.

Why not? It wouldn't be any worse than what they're doing now.

In economic news:

New applications for unemployment benefits dropped for the third straight week, but we're still not back to the levels before Hurricane Sandy. Initial jobless claims declined by 25,000 to a seasonally adjusted 370,000 in the week ended Dec. 1. Tomorrow is the monthly jobs report; don't expect it to reveal any long term trend; it will be distorted by the Hurricane and also by the holiday shopping season. The guess is for about 75,000 new jobs in November, well below the average for the past few months.

The Federal Reserve issues a quarterly flow of funds report; the most recent volume shows households trying to cut back on debt in the third quarter; or at least cutting mortgage debt, while student loan debt and car loan debt piled up. When factoring in inflation, American households have deleveraged by about 13% since the meltdown of 2008.

In the third quarter, a 3% drop in mortgages more than offset the 4.3% increase in consumer credit, namely student and car loans. Household net worth, the difference between assets and liabilities, rose $1.7 trillion to $64.8 trillion.

Companies again built up debt, with non-financial debt leaping 4.4% as firms hit the corporate bond market with interest rates so low. Corporate stockpiles of cash hit a record $1.74 trillion, up 2.6% from the second quarter. After rising for the first time in a year and a half in the second quarter, state and local government debt slipped 0.1%. Federal government debt climbed 6.2%, which marked the smallest rise since the second quarter of 2008. All told, households, businesses and governments saw debt expand by 2.4% in the third quarter, which is the smallest increase since the fourth quarter of 2009.At $39.28 trillion, that’s just less than 2.5 times the nation’s annualized output in the third quarter.

Debt may well be one of the biggest drags on economic growth: 35-40% of everything we buy goes to interest; 29% of business profits go to the financial industry; 21-32 trillion are hidden in offshore tax havens.

You don't have to be paying interest on anything directly to be paying interest. Interest is built into the product; 40% of public projects, on average, goes to interest;12% interest for garbage collection; 38% interest on water processing; 70+% interest as part of public housing costs. US debt has not been paid off since 1835. In past 24 years US has paid $8.2 trillion in interest on $15 trillion in debt.

And Now – Banks Behaving Badly:

The British bank, Standard Chartered say it expects to pay $330 million to settle claims by United States government agencies that it had moved hundreds of billions of dollars on behalf of Iran, in violation of American sanctions against Iran. The estimated settlement payment would come in addition to a $340 million settlement the bank reached in August with the New York State Department of Financial Services, which charged Standard Chartered with scheming with Iranian companies and banks for nearly a decade to hide 60,000 transactions worth $250 billion from regulators.

Last Month, HSBC Holdings, another major British bank, set aside an additional $800 million to cover potential fines stemming from a money laundering investigation, bringing its total provisions for the case to $1.5 billion. HSBC is still negotiating a settlement. Last summer, ING Bank, reached a $619 million dollar settlement with the Treasury Department over claims the bank violated American sanctions against Iran, Libya, and other countries.

Now, we have another example of why corporations are not people. While several big banks set aside hundreds of millions of dollars, while neither admitting nor denying guilt, we present the strange tale of Gustl Mollath, a German man, who seven years ago, may the accusation that staff at the Hypo Vereinsbank (HVB) – including his wife, then an assets consultant at HVB – had been illegally smuggling large sums of money into Switzerland. Mr. Mollath was committed to a high-security psychiatric hospital after being accused of fabricating a story of money-laundering activities. He remains in that hospital to this day, against his will. But recent evidence brought to the attention of state prosecutors shows that money-laundering activities were indeed practiced over several years by members of staff at the Munich-based bank, the sixth-largest private financial institute in Germany, as detailed in an internal audit report carried out by the bank in 2003. The report, which has now been posted online, detailed illegal activities including money-laundering and aiding tax evasion. A number of employees, including Mollath's wife, were subsequently fired following the bank's investigation.

Asked why the bank kept the report to itself and did not approach the authorities, a bank spokeswoman said: "In 2003 HVB initiated extensive investigations via internal audits in response to information provided by Mr Mollath on transactions that had taken place a long time before … It was determined that employees had acted contrary to their instructions regarding Swiss banking transactions". While the findings did result in some firings, the audit "did not produce sufficient evidence indicating criminal conduct … that would have made a criminal charge seem appropriate". There are now calls for the judiciary to reassess Mr. Mollath's case, but nothing yet.

And that brings us to Argentina. You may recall that Argentina suffered a major financial crisis in 2001; the country successfully managed an external debt restructuring; they said no to the standard austerity package, and the result was a fairly remarkable economic recovery. But they're not out of the woods just yet. Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, Elliott Capital got a judge in Ghana to seize an Argentine navy ship. Then a judge in a district court in New York ruled that the Argentinian government must pay $1.3 billion to the same vulture fund, the full face value of their holdings plus accumulated interest starting in late 2001.

Elliott and other vulture funds are not conventional investors. They buy bonds at discount rates during a crisis with the explicit intention of taking the distressed countries to court in foreign jurisdictions, while also holding out for payment in full with no renegotiation of the debt. Obviously vulture funds are not concerned with niceties such as how the debt was accumulated, the principle that debts should be served according to the debtor's capacity to pay or how the enforced payments will affect the well-being of the most vulnerable. They represent global finance in its most nakedly aggressive and exploitative form.

The New York ruling also contained an injunction that prohibited third parties from "aiding and abetting" any violation of his order, thereby preventing Argentina from being able to continue payments to the creditors that had accepted the restructuring. This has far-reaching implications beyond this case, because it calls into question all debt restructuring deals that are not just likely, but also necessary to preserve international finance. For example; why would those holding Greek bonds accept a debt restructuring plan that might be necessary for a solution and beneficial to all, if they know that vulture funds can hold out and receive judicial support in international courts?

The ruling also contradicts US internal bankruptcy laws, which force minority creditors to confirm to deals accepted by 70% of creditors. If this ruling is supported in the higher courts (both Argentina and other creditors have already appealed) it will create an unviable situation for global bond markets. Creditors will only be making one-way bets if no possibility of restructuring is accepted, making the only options all (full payment) or nothing (complete default).

And then the credit rating agencies stepped in this week and cut Argentina's rating to slightly above junk status. Is Argentina at risk of default? Well, the current account is in balance, international reserves are above $46bn and the ratio of debt service payments to exports is less than 20%. Unemployment has gone from a high of around 22% to about 7%. Argentina has been one of the fastest growing economies in the world.

After 2002, Argentina reversed the austerity measures promoted by the IMF, renationalized key productive sectors like aviation, pensions and most recently oil, increased social protection and income transfers to the poor, and reduced poverty substantially. Real wages have increased, and wage inequalities have been reduced. In other words, Argentina is a dangerously successful story. It shows that there is life after a default, and that austerity is not the best way out of a crisis. These are two lessons that clearly frighten financial markets and their allies within the judicial system, and obviously there is concern that other countries in financial distress could seek to emulate this example. Remember Iceland? It's a safe bet that the Greeks, and Spaniards, and Italians remember.

Wednesday, December 5, 2012 - I Have Copyrighted the Term "Fiscal Cliff". Pay Up!

I Have Copyrighted the Term "Fiscal Cliff". Pay Up!

by Sinclair Noe

DOW + 82 = 13,034
SPX + 2 = 1409
NAS – 22 = 2973
10 YR YLD - .02 = 1.59%
OIL - .62 = 87.88
GOLD – 2.50 = 1695.30
SILV unch = 33.01

Let's take a look at the economic news.

The ISM services index moved up to 54.7% in November from 54.2% in October; indicating expansion in the services side of the economy. Earlier this week, the ISM said its manufacturing index fell back into negative territory for the fourth time in six months.

Third quarter productivity rose a revised 2.9%, the fastest rate in two years, compared to a first reading of 1.9%. Workers produced goods and services more efficiently than the first estimate suggested. This is an important number because it gives the Federal Reserve some wiggle room to continue to pump money into the Mortgage backed securities market, without the fear of inflation. It also means businesses are squeezing more output out of each worker, and so it reflects a reluctance to hire or raise wages.

Payroll processor ADP says employers added 118,000 jobs last month. That’s below October’s total of 157,000, which was revised lower; mostly because Hurricane Sandy shut down factories, retail stores, and other companies. The ADP report might provide clues about the Labor Department's monthly jobs report due on Friday. That report is expected to show the unemployment rate climbing to 8% from 7.9%. There is little sign yet that business concerns over potential tax hikes and government spending cuts next year are weighing on hiring.

Citigroup announced it will fire 11,000 workers. Hewlett-Packard leads the list of corporate layoffs for 2012, with more than 27,000 pink slips. Share of HP are down 45% for the year. They kind of missed the whole idea of mobile devices. Hostess Brands fired 18,500 workers as the company slid into bankruptcy court. They kind of missed the whole idea of healthy food. AMR, the parent corp for American Airlines planned to cut 14,000 jobs as the company slid through bankruptcy and looked for a possible suitor. They kind of missed the whole idea that travelers and their baggage should arrive at the same place at a specific time. And then comes Citigroup. They kind of destroyed the banking sector 13 years ago, pushing through the repeal of Glass-Steagall so they could purchase Travelers and become a mega-bank. In a way, this is just karma.

Henry Blodgett had a nice article saying that big American corporations aren't sharing the wealth with the rank and file. Big American companies now have the highest profit margins in history. The companies are now paying the lowest wages in history as a percent of the economy. If you happen to be an owner of a big American corporation, these charts could be construed as good news: You’re coining it!

If you happen to be a rank-and-file employee, however–or someone hoping to be such an employee–this is bad news: You’re sharing less than ever before in the success of American industry.

This situation, by the way, is only temporarily good news for the company owners. Because, by pumping so little back into the economy in the form of employee wages (and capital investments–the other area where companies are scrimping), our companies are constraining the growth of the economy.

Why?

Because the rank-and-file employees of America’s corporations are also mainstream American consumers–the folks who account for ~70% of the spending in the economy.

And so, today, Citigroup announced that they were facing tough times and their response is throw as many employees as possible under the bus.

Clerical workers and longshoremen at the ports of LA and Long Beach,the nation's largest port complex are back on the job, eight days after they walked out in a crippling strike that prevented shippers from delivering billions of dollars in cargo across the country. At issue during the lengthy negotiations was the union's contention that terminal operators wanted to outsource future clerical jobs out of state and overseas - an allegation the shippers denied.

Combined, the Los Angeles and Long Beach ports handle about 44 percent of all cargo that arrives in the U.S. by sea. About $1 billion a day in merchandise, including cars from Japan and computers from China, flow past its docks. Shuttering 10 of the ports' 14 terminals kept about $760 million a day in cargo from being delivered. The cargo stacked up on the docks and in adjacent rail yards or, in many cases, remained on arriving ships. Some of those ships were diverted to other ports along the West Coast.

Treasury Secretary Tim Geithner has laid down the gauntlet, saying there must be tax increases for the top 2% of wage earners or the debate will go over the cliff. So far, Wall Street has been largely unaffected by the fiscal cliff debate. A little up, a little down; no great sense of impending doom; no overwhelming urgency.

The rest of the world thinks the fiscal cliff makes the United States look pretty pathetic. Communist China calls the US irresponsible and hypocritical. The US tells other countries to be responsible and then...well. Out of Britain, the Financial Times is blaming the Republicans for being stubborn. In Germany, a newspaper compares the US economy to Greece. Another latched onto the hypocrisy of some economists and politicians, saying, if you're worried about the fiscal cliff, that means you're worried that tax hikes and spending cuts will hurt the economy when it's still weak, which is another way of saying you believe in Keynesian economics, which is another way of saying the fiscal cliff is an austerity crisis. Or as Jeff Foxworthy might say: If you think it will hurt to go over the fiscal cliff, you might be a Keynesian. Which is another way of saying that a lot of people are going to be unmasked.

Of course, the real solution to this fiscal cliff thing would have been for the government to put a copyright on the term “fiscal cliff” and anytime anybody said “fiscal cliff” they would have to pay maybe one-tenth of a penny. We'd have a budget surplus.

Freeport-McMoRan Copper & Gold says it is buying oil companies Plains Exploration & Production and the two-thirds of McMoRan Exploration they don't currently own, for about $20 billion combined. The additions of the oil and gas drillers are expected to create a natural resources conglomerate with assets ranging from oil rigs in the Gulf of Mexico to mines in Indonesia and Africa. The deals are expected to close in the second quarter

Thanks to new drilling technologies, we are unearthing vast new supplies of natural gas in underground shale formations across the country. The increased supply has pushed prices lower. And lower natural gas prices improve the profitability and competitive edge of many American industries – including chemicals, plastics, cement making, steel, power generation, and transportation.

Cheap natural gas produced from the U.S. shale revolution is transforming America into "the low-cost industrialized country for energy." Savings on input costs can increase profits. German and French manufacturers are now paying three times as much for gas as U.S. plants pay. Japanese companies pay even more. Japanese natural gas prices have routinely been six to seven times more than recent U.S. prices. In June, when U.S. natural gas was just over $2, Japanese natural gas sold for $17.

The low prices are a boon, especially for the plastics, chemical and fertilizer industries; a new steel plant is going up near Youngstown, Ohio. The plants cost $650 million to build, and 400 construction workers are currently building it. The 1 million-square-foot plant will make 500,000 tons of steel tubing per year, the kind used to produce natural gas from shale.

An Egyptian fertilizer manufacturer is building a $1.4 billion fertilizer plant in Iowa. It's the largest U.S. fertilizer plant built in 20 years. Dow Chemical and Chevron Phillips Chemical Company are both planning new multibillion-dollar chemical plants in Texas and Louisiana. Royal Dutch Shell is planning an ethylene plant in Pennsylvania. Fertilizer maker CF Industries will spend $2 billion boosting its U.S.-based production through 2016. Occidental Chemical Company, Chevron Philips Chemical, Formosa Plastics, LyondellBasell Industries, and Eastman Chemical have all announced plans to either build or reopen new energy and chemical plants in the U.S.

Pipeline operators own the assets needed to transport and store the massive amounts of fuel entering the market. They own assets that can't be replicated. And their profits are not tied to natural gas prices. They simply collect tolls.

The technology to pump out the natural gas, fracking, has problems, but for now, those problems are secondary; for better or worse. A study by Cornell University's College of Veterinary Medicine shows livestock in areas where hydraulic fracturing, fracking, is occurring are getting sick and dropping dead in alarming numbers.

Fracking a single well requires up to 7 million gallons of water, as well as an additional 400,000 gallons of additives. A 2011 study compiled a list of 632 chemicals used in natural-gas production and determined that 75% could affect the skin, eyes, other sensory organs, and the respiratory and gastrointestinal systems; 40-50% could affect the brain/nervous system, immune and cardiovascular systems, and the kidneys; 37% could affect the endocrine system; and 25% could cause cancer and mutations.

The new study finds that cattle are dying after being exposed to fracking fluid or wastewater; multiple cases in multiple states. And if cattle are getting sick because of fracking, what about the health of people who later drink their milk or eat their flesh?

According to the AAA Fuel Gauge Report, the national average for a gallon of regular is $3.38, which is about 4¢ less that it was a week ago, 10¢ cheaper than a month ago, and roughly 50¢ lower than the 2012 high. Gas in California now averages $3.69, roughly a fully $1 cheaper than in early October. The country as a whole is paying, on average, 10¢ more than we were exactly 12 months ago. 2012 will go down as the most expensive year ever for gas prices; the national average for the year stands at about $3.63.

Tuesday, December 4, 2012 - The Clock is Ticking

The Clock is Ticking

by Sinclair Noe

DOW – 13 = 12,951
SPX – 2 = 1407

NAS – 5 = 2996
10 YR YLD - .02 = 1.61%
OIL - .71 = 88.38
GOLD – 19.20 = 1697.80
SILV - .75 = 33.01

So, President Obama presented an opening offer in the fiscal cliff talks; Speaker Bohener said it wasn't serious and the financial and political reporters passed along the complaint that it was a recycled version of an old plan; before the election those same reporters spent the year passing along the complaint that Obama had no plan. Then Obama complained that the Republicans didn't have a counter offer, and they finally came up with a counter but it didn't have any specifics, but one area is that they want cuts to Medicare, even though before the election they were outraged that Obama was cutting Medicare. The current Republican position seems to be that the fiscal cliff’s instant austerity would destroy the economy, which is odd after four years of Republican clamoring for austerity, and that the cliff’s military spending cuts in particular would kill jobs, which is even odder after four years of Republican insistence that government spending can’t create jobs. And remember, this is all about the debt ceiling and tax cuts and spending cuts.

And the political and financial reporters pass all this stuff on, with a countdown clock ticking in the lower right screen. It’s irresponsible reporting. Mainstream media outlets don’t want to look partisan, so they ignore the BS hidden in plain sight, the hypocrisy and dishonesty. It's a big cliff, taxmageddon scam. This year the Big Apple ball will slowly drop down on Time Square to ring in the destruction of the economy. The Big Pine Cone will drop in Flagstaff and it will fall over the cliff. Malarkey.

Let all this serve as a reminder that the news in this country most of the time doesn't have the sensibility to know when they are being lied to and so they pass along the lies as news. And the whole game is a big masquerade, a three card monte scam. Does anyone recall how the Bush tax cuts were passed? The 2001 cut was passed based on the claim that the government was running an excessive surplus; the 2003 cut on the claim that it would provide an economic boost. Then the surplus went away, and the economy did not perform very well. The worst example was the Campaign to Fix the Debt. You remember the 71 CEOs that went to the White House and said it was imperative to cut Social Security and Medicare. If you have no defense, you have to go on offense.

The 71 Fix the Debt CEOs who lead publicly held companies have amassed an average of $9 million in their company retirement funds. A dozen have more than $20 million in their accounts. If each of them converted their assets to an annuity when they turned 65, they would receive a monthly check for at least $110,000 for life. The Fix the Debt CEO with the largest pension fund is Honeywell's David Cote, a long-time advocate of Social Security cuts. His $78 million nest egg is enough to provide a $428,000 check every month after he turns 65. Forty-one of the 71 companies offer employee pension funds. Of these, only two have sufficient assets in their funds to meet expected obligations. The rest have combined deficits of $103 billion, or about $2.5 billion on average. General Electric has the largest deficit in its worker pension fund, with $22 billion.

That's right, 2 out of 71 major corporations have actually funded their pension plan promises to the people who make the companies run. Only 2 out of 71 intend to fulfill their contractual obligations to their workers. So, what is their big concern? Well David Cote, the CEO of Honeywell says: “We have a significant problem with entitlements. Medicare, Medicaid in - in particular. Those things need to get resolved together. If we could actually develop a four trillion dollar credible market plan that would cause everyone out there to say, wow, we can govern again.”

Got it? If you've underfunded your pension plan, don't focus on that, instead attack the government health care plan. Here's an even better idea; let's broaden the debate on entitlements, by bringing in the fact that state and local governments give away about $80 billion per year to companies as enticements to create jobs that often later vanish. And the federal entitlement programs to big corporations? Five of the corporations whose CEOs signed the Fix the Debt letter paid ZERO federal income taxes on $62 billion in total profits and received $27 billion in tax subsidies over the last four years. Six of the corporations whose CEOs signed the Fix the Debt letter were members of the WIN America Coalition, which lobbied Congress to pass legislation (S.1671) that would allow U.S. companies to dramatically reduce their tax rate on $1 trillion in foreign profits brought back (“repatriated”) to the United States. The measure would reduce the 35 percent corporate tax rate to an 8.75 percent effective tax rate on the repatriated profits. How about we end the corporate welfare to the CEOs in limosines?

The companies are glad to take government money in the name of job creation. But then they talk about the "free market" when shuttering factories and firing workers. If we're going to be talking about "makers" and "takers," we should broaden that discussion, too.

For all of the noise they make about the federal budget deficit, US companies are not exactly doing much to help. In fact, many of them have been making the problem worse in recent weeks by quickly shoveling cash to investors to take advantage of low tax rates before they rise, potentially costing the government billions of dollars in much-needed tax revenue. All told, companies so far have given shareholders roughly $24.2 billion in special or early dividend payments, potentially saving those shareholders -- and costing the government -- $6 billion or more in taxes. So far, 144 publicly traded U.S. companies have announced special one-time dividends to give cash to shareholders before an expected increase in the dividend tax rate next year, amounting to $21.4 billion. Oracle just made an announcement today; Oracle CEO, Larry Ellison stands to pocket about $200 million. Maybe he can go buy another island.

These are just some of the reasons why these corporate leaders have no credibility when they blather on about "fixing the debt." They bankrolled the politicians that created the debt through a tax system that gave them myriad ways to avoid paying their fair share to support the country. Then they shipped good-paying jobs overseas and depressed the wages of the jobs left behind so that workers had less that they could afford to pay in taxes as well. All in the name of shareholder value.

There is a way to fix the debt, but it is not their way.

Meanwhile, there are some problems with the economy that have been moved to the back burner, or even off the stove. Don't forget; people got no jobs, or they have part-time work, and people got no money, or not enough money, or they're buried in debt, mortgage debt, student loan debt. Of course, if we actually did worry about growth and did something about it, that would go much further toward reducing the deficit than cuts to social programs. "The boom, not the slump, is the right time for austerity.” 

 Maybe we should invest in the country. Maybe we could invest in infrastructure, maybe we could invest in education. Maybe we don't have as big a financial crisis as a crisis of innovation. There is a serious innovation crisis, the consequences of which will be with us long past the financial crisis. In 1950 we got the transistor, in 1960 we got the integrated circuit and in 1970 we got the microprocessor. Not much lately, (and those were all minor compared with Bessemer, internal combustion and electrification). Nobody's footing the bill for the big breakthroughs, we're not getting the big breakthroughs. Looks like we starved that beast!

Maybe we should all tune out the fiscal cliff nonsense for a while, and stop believing the insanity that the deficit will eat us whole and swallow our little children. The fiscal cliff is an artificial demon. Even though we've known the deadline was approaching, it wasn't until after the election that the fiscal cliff narrative took over the media discourse. One all-consuming narrative ended, and another instantly took its place.

Each day we move closer to "the cliff," the media will breathlessly report on how the White House and Republicans are defiantly squared off against each other. The debate the country should be locked in right now isn't about the fiscal cliff and the deficit but about how to grow the economy; how to employ people in productive jobs; and the only way to grow the economy is to grow the debate beyond the artificial playground the politicians and the corporate welfare queens would have us believe the game is being played. 

Monday, December 3, 2012 - Still in the Woods and Other Economic News

Still in the Woods and Other Economic News

by Sinclair Noe

DOW – 59 = 12,965
SPX – 6 = 1409
NAS – 8 = 3002
10 YR YLD + .02 = 1.63%
OIL +.01 = 88.92
GOLD + .80 = 1717.00
SILV + .22 = 33.76

Let's start with the economic news. Business among manufacturers contracted in November and fell to the lowest level in more than three years. The Institute for Supply Management's index of purchasing managers dropped to 49.5% from 51.7% in October. Any reading below 50 indicates contraction in the manufacturing sector. The decline in the overall ISM index largely reflected a steep drop in new orders but companies remained active fulfilling prior orders. Only six of the 18 U.S. manufacturing industries surveyed by ISM said they expanded somewhat faster in November. Nearly twice as many said their industries contracted.

In the euro zone, manufacturers contracted for the 16th straight month, according to Markit. China’s manufacturing sector expanded slightly.

In a separate report, the Commerce Department said spending on construction projects advanced 1.4% in October to the highest level since September 2009.

The big economic news will come on Friday with the monthly jobs report. The best guess is that the economy added about 75,000 jobs in November, but that is just a guess; Hurricane Sandy has distorted some of the economic numbers. The fourth quarter of 2012 has clearly gotten off to a slow start. Consumer spending, by far the biggest source of economic growth, fell in October for the first time in five months. And orders for expensive, long-lasting goods, or durable goods, were flat in October. Sandy disrupted economic life in the Northeast in late October and contributed to the decline in spending, but consumers were reluctant shoppers last month even when the effects of the storm are discounted; the reason is simple – lack of money. And that brings us back round to jobs; more jobs means more income and more spending.

Last week we saw the revision to the estimate that U.S. real GDP grew at a 2.7% annual rate in the third quarter, up from the initial estimate of 2%. Sounds good, but deeper analysis shows it's far from good.

The revised figures do show an improvement of 0.4 percentage points in the contribution of exports, which are now claimed to have added about 0.2 percentage points to the 2.7% growth figure instead of subtracting 0.2% as originally reported. But this was erased by a 0.4 percentage point reduction in the contribution of consumption spending. More than all of the reported improvement from 2% to 2.7% GDP growth could be attributed to a higher rate of inventory accumulation than previously estimated. To put it another way, real final sales for the third quarter were originally reported to have grown at a 2.1% annual rate, whereas the new numbers have the figure at only 1.9%. The bottom line is that growth in demand for U.S. goods and services overall remains weak, even weaker than originally reported.

The new report also gives us the first look at an alternative estimate of third-quarter GDP that is built up from separate data on the income people are earning rather than goods and services being produced. Conceptually, an estimate of GDP constructed using either method should produce the identical number. But in practice, one arrives at different numbers using different data sources. The bad news is that if you strip out the GDI, or Gross Domestic Income, the economy only grew at a 1.7% rate in the third quarter and actually fell 0.7% in the second quarter. Not so great but probably not enough to say we are headed for a significant downturn, unless.

Last week, Treasury Secretary Tim Geithner presented the White House plan to avert the fiscal bluff, or fiscal cliff, or whatever. In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. Republican leadership didn't like it, but they didn't offer an alternative, until today; when they kind of mumbled through a reply.. The alternative remains a little light on specifics, but it calls for $800 billion in new revenue achieved through closing loopholes and capping deductions; $900 billion in health care and other mandatory spending cuts; $300 billion in spending cuts for discretionary spending, which includes social programs such as food stamps; and $200 billion gained by changing the way the government calculates cost-of-living adjustments for Social Security and Medicare; and raising the eligibility age for Medicare benefits.

Where does that leave us?

The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

The stock market was essentially flat in November but the S&P 500 has chalked up some decent gains - over 12%, year to date. That's only partially accurate. A new report from Morgan Stanley chief equity strategist says that 90% of the profit growth has come from just 10 stocks in the S&P500. Those 10 stocks are: Apple, Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan, Citigroup, IBM, General Electric, and Western Digital. Striking that the profit growth is concentrated among banks and insurers. It helps to have friends in the Fed. Also, make note that this report referred to profit growth, not stock price.

The banks should be making money, the yields on agency mortgage-backed securities are really low, which leaves some wiggle room for the banks to build in some profits. And the banks have been wiggling. Which is not a really good thing for a couple of reasons. First, if the primary desire of Fed policy is to get people to buy houses, be rich, etc., and if its primary mechanism for doing so is buying MBS, then the inefficiency in transforming that mechanism into that desire is rather macroeconomically important and bad. Second, if money is coming out of the Fed and not ending up in homeowners’ pockets, that leaves only so many pockets it could be ending up in, and it is easy enough to observe that big banks (1) sit between the Fed and the homeowners and (2) have lots of pockets.

So the Fed held a conference on the matter today, and they produced a research report that basically said the banks make profit from charging more for a mortgage, than they are charged with Mortgage-backed securities; the banks pocket the difference, or the spread. The spread was 30-50bps in the ’90s and early 2000s, but rose to 150bps in September and is around 120bps now. So where banks used to make $10,000 on a $500,000 mortgage, now they make $25,000. Of course most of the loans are a better quality than years back, and most are refi's, with federal guarantees, but it seems the banks are making up for lost..? Maybe making up for the lost ability to rig rates elsewhere.

Swiss Bank UBS is reportedly near a settlement with American and British regulators for its role in the Libor rate rigging scandal. UBS is expected to pay $450 million and admit that some employees reported false rates to increase profit; if so, it would match the settlement and fine Barclays agreed to pay earlier this year. When the scandal broke at Barclays, it led to the CEO’s resignation and a shakeup in the company’s highest offices. So far, there have been no shakeups at UBS. The fine amounts to a blip on the $32 billion in annual revenue at UBS. Even though there were actual individuals scamming the Libor, there have been zero prosecutions. Nine figures sounds like a big amount but it is a pittance for the bank, especially because it will be passed on to shareholders, who can't be very happy. Shares of UBS are off nearly 70% since the financial crisis, the result of several scandals that included accusations that UBS helped wealthy clients dodge taxes and a $2.3 billion loss from the actions of a rogue trader.

Meanwhile, British lawmakers have announced plans to crackdown on tax dodgers; part of a campaign against “offshore evasion and avoidance by wealthy individuals and multinationals.” The push, the Treasury said in a statement, was expected to yield £2 billion in additional annual revenue. The drive comes amid growing criticism in Britain and elsewhere in Europe of the fiscal policies of several American companies that pay little tax on the billions of pounds and euros in sales that they generate in the region. The report focused on the tax practices of Starbucks, Amazon and Google, criticizing their policy of using lower-tax jurisdictions within Europe, like Ireland, Luxembourg and Switzerland, to record much of the revenue they generate in higher-tax countries like Britain, France and Germany. Companies like Google then transfer money they earn in Europe to Bermuda or other locations, thereby deferring or avoiding U.S. taxes as well. The companies say it's all perfectly legal

Ships are backing up, a kind of traffic jam off the coast from the ports of Los Angeles and Long Beach; freighters with no place to unload their cargo are line up at anchorages. The 800-member clerical workers unit of the International Longshore and Warehouse Union walked off the job last Tuesday, with some 10,000 longshoremen and other union members refusing to cross picket lines, forcing a shutdown at 10 of the twin ports' 14 container terminals. Four other container terminals remained open, along with facilities for handling shipments of automobiles, liquid fuels and cargo such as raw steel. The overall economic impact of the strike has been estimated to run at more than $1 billion a day, including lost wages of dock workers, truckers and others idled by the walkout, and the value of cargo rerouted by shippers.

The ports of Los Angeles and Long Beach together handled more than $400 billion in goods arriving or leaving the West Coast by ship last year. The strike  marks the largest disruption of cargo traffic through the two southern California facilities since a 10-day lockout at West Coast ports in 2002.