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The 27 were born with a silver spoon .. the 397 are the cautious non spending consumers taking cover until the dust settles, could take decades to clear up and with a nation built around service sector jobs and consumer spending, I just do not see how that could be good for anybody... This is why the wealthy are not spending either, be it on goods and services or US investment.
If you can trade around this trash of a market, more power to you. You are one of the few...
Otherwise, buy PMs and commodities, the only real bull market for the last 10 years.
Cycle work has become less and less reliable. I like and follow cycles, but when you have a hand fed trading society as opposed to a free market, cycles are just not as reliable as they once were...
Very good 8^)
Sell some if he needs some cash or would just like to cash in on some winnings, but silver set to outperform gold (on a pct value) otherwise metals still have a long way to run.
For melt values, go here (very cool website):
Scroll down page for melt values
http://www.coinflation.com/
Sorry for being MIA the last 5 days people, had an episode with some of my meds. All straightened out now, looking forward to getting caught up and posting again... 8^)
Gold Fever Strikes Mom and Pop Prospectors in US West
By: Thomson Reuters
Wednesday, 15 Sep 2010 | 10:37 AM ET
When John Brewer's construction business soured along with the economy, he sought to replace lost income by prospecting for gold from the river valleys of central Idaho to the wilds of Alaska.
Armed with the tools of the trade -- a metal detector, gold pan and sluice box, a series of screens that sort gold from alluvial material like sand and gravel -- the Montana man represents the new face of a pursuit that once paved the way for settlement of the Western frontier.
The poor economy and a record price of gold have renewed interest in prospecting in Western states where public lands are rich with deposits and small-scale operators are all but free from government regulation.
What Brewer has in common with 19th century prospectors is a drive for gold equaled in intensity only by the instinct to keep quiet about its location and volume.
"Asking a miner where they found it and what they found is like asking an angler about his secret fishing hole," said Brewer. "We're not going to tell anybody. As soon as you tell anybody, there will be a crowd—and that would be counterproductive."
Gold prices [XAU=X 1273.8 8.15 (+0.64%) ] hit a record $1,275.20 per ounce Tuesday.
Some gold mining sites economically feasible for the first time in years, prompting mid- and large-scale operators to apply to mine on national forests and on acreage overseen by the U.S. Bureau of Land Management in the Rocky Mountains.
"When gold goes over $1,000 an ounce, everybody becomes a miner," said Russ Bjorklund, minerals manager with Salmon-Challis National Forest in Idaho.
He is among federal land managers reporting a marked resurgence in gold mining, from amateurs armed with pans to corporations working hardrock mines.
Susan Elliott, geologist with Humboldt-Toiyabe National Forest in Nevada, said the rush is on in a state that is the fourth largest producer of gold in the world.
Elliott linked a 75 percent increase in mining activity on the 6.3 million-acre forest to the rise in gold prices in recent years.
"We've got all types: individuals out there with pick and shovel and companies with heavy equipment," she said.
Jon Cummings, who promotes gold-mining adventures at his Idaho resort, says finding what prospectors call "color" in the pan ignites a passion.
"You start finding a little gold in the pan—that's when gold fever kicks in. It's like a drug and you're ready to work all night," he said.
International gold-mining giant Barrick Gold in February gained approval from the federal Bureau of Land Management to expand its Bald Mountain mine in northeastern Nevada.
Bald Mountain represents one of the company's 25 operating mines, eight of which are in the western United States.
Large-scale operators like Barrick must clear a number of hurdles in advance of gold mining, often a years-long process.
But Ray TeSoro, minerals specialist for the U.S. Forest Service region that includes Montana, also described an influx of "mom and pop operations."
Those small-time prospectors, like Brewer, mostly engage in low-impact, stream-side mining like gold panning and sluicing, techniques which rely on gravity to separate heavy gold from sediment.
In the mountains of central Idaho, gold fever is behind trespassing incidents.
Beverly Cockrell, a rancher near Salmon, Idaho, has confronted strangers with "sticky fingers" on her creek-side land, including one who reportedly raided a sluice box.
"We're having to run people off," Cockrell said.
And some economists take a dim view of the gold rush.
"You've got this pretty metal—what does it do?" said James Hamilton, economics professor at University of California, San Diego. "It doesn't create dividends, it doesn't create more productivity; it's a hedge against certain kinds of risks."
But it will take more than discouraging words to dampen the enthusiasm of gold hunters like Brewer, who declined to say what profit he turns from prospecting.
"It doesn't replace a full-time job with benefits, but you work hard enough at it, you might get lucky," he said.
Copyright 2010 Thomson Reuters. Click for restrictions.
http://www.cnbc.com/id/39189036
Obstacle to Deficit Cutting: A Nation on Entitlements
By SARA MURRAY
SEPTEMBER 14, 2010
Efforts to tame America's ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.
At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.
A little more than half don't earn enough to be taxed; the rest take so many credits and deductions they don't owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.
"We have a very large share of the American population that is getting checks from the government," says Keith Hennessey, an economic adviser to President George W. Bush and now a fellow at the conservative Hoover Institution, "and an increasingly smaller portion of the population that's paying for it."
The dimensions of the budget hole were underscored Monday, when the Treasury reported that the government ran a $1.26 trillion deficit for the first 11 months of the fiscal year, on pace to be the second-biggest on record.
Yet even as Americans express concern over the deficit in opinion polls, many oppose benefit cuts, particularly with the economy on an uneven footing. A Wall Street Journal/NBC News poll conducted late last month found 61% of voters were "enthusiastic" or "comfortable" with congressional candidates who support cutting federal spending in general. But 56% expressed the same enthusiasm for candidates who voted to extend unemployment benefits.
As recently as the early 1980s, about 30% of Americans lived in households in which an individual was receiving Social Security, subsidized housing, jobless benefits or other government-provided benefits. By the third quarter of 2008, 44% were, according to the most recent Census Bureau data.
That number has undoubtedly gone up, as the recession has hammered incomes. Some 41.3 million people were on food stamps as of June 2010, for instance, up 45% from June 2008. With unemployment high and federal jobless benefits now available for up to 99 weeks, 9.7 million unemployed workers were receiving checks in late August 2010, more than twice as many as the 4.2 million in August 2008.
Still more Americans—19 million by 2019, according to the Congressional Budget Office—will get federal aid to buy health insurance when legislation passed this year is implemented.
The expanding federal safety net has helped shelter many families from the worst of the downturn. Charlene A. Mueller-Holden doesn't fit the stereotype of a person on benefits. Laid off from J.P. Morgan Chase & Co. in January 2008, Ms. Mueller-Holden, 38, drew unemployment for 99 weeks.
The Newark, Del., resident knocked $40 a month off her mortgage payments through the federal Making Home Affordable Program, designed to keep people in their homes by helping them modify or refinance their mortgages. But when her unemployment benefits ran out, Ms. Mueller-Holden and her husband, a government employee, couldn't afford the $1,008 monthly payments.
She turned to the Delaware State Housing Authority which, under a federally subsidized program aimed at helping families with children stay in their homes, gave her $1,000 a month for five months toward mortgage payments. She and her two sons ate lunch for free at the local school this summer, and she has applied for free lunch for one of her sons who will be a first grader this year.
Ms. Mueller-Holden's family earned too little to pay federal taxes last year, and received an extension on their state taxes. "Quite frankly, I don't care about the deficit," says Ms. Mueller-Holden. "It's going to take years upon years upon years to pay this all back," she says, so it's better to focus on job growth now and deal with the deficit later.
Government data don't show how many of the households receiving government benefits also escape federal taxes. But there is certainly some overlap between the two groups, since many benefits are aimed at those earning too little to pay income taxes and at people who don't have jobs, and who thus don't pay payroll taxes.
Cutting spending on these "entitlements" is widely seen as an inevitable ingredient in any credible deficit-reduction program. Yet despite occasional bouts of belt-tightening in Washington and bursts of discussion about restraining big government, the trend toward more Americans receiving government benefits of one sort or another has continued for more than 70 years—and shows no sign of abating.
An aging population is adding to the ranks of Americans receiving government benefits, and will continue to do so as more of the large baby-boom generation, those born between 1946 and 1964, become eligible. Today, an estimated 47.4 million people are enrolled in Medicare, up 38% from 1990. By 2030, the number is projected to be 80.4 million.
The difficulty of restraining benefits when so much of the population depends on them is now on view across Europe, where efforts to rein in deficits are forcing governments to cut popular entitlements. European countries have traditionally provided far more generous welfare benefits than the U.S. has, including monthly allowances for children regardless of income, free college tuition and universal health care. Public retirement programs are also bigger, since the combination of aging populations and low birth rates means fewer workers are paying into the system.
In recent months, political leaders in Europe have struggled to convince voters that change is necessary. German Chancellor Angela Merkel has exempted pensions from her government's planned budget cuts, reflecting the growing power of the retiree vote. French President Nicolas Sarkozy is facing mass protests, including a national strike week, as he tries to raise France's minimum retirement age from 60 to 62. Greece's government had to face down demonstrations this year when it slashed pension benefits, as it was forced to do to get bailout money from other European countries and the International Monetary Fund.
Still, Europe does offer examples that change is possible. Germany slashed benefits for the long-term unemployed in 2004, a step that analysts credit with prompting more Germans to get jobs as well as improving the country's budget balance. Cuts to entitlements are politically possible, says Daniel Gros, director of the Center for European Policy Studies, a nonpartisan think tank in Brussels, "but societies need some time to get used to the idea."
The U.S. government first offered large-scale assistance during Franklin Delano Roosevelt's New Deal. The Social Security Act, passed in 1935, created the popular retirement program as well as unemployment compensation, the early stages of what became known as "welfare" and assistance to the blind and elderly. In the 1940s, the G.I. Bill offered unemployment benefits, education assistance and loans to veterans. That same decade, Washington began offering free or reduced-price lunches to children from low-income families and, a decade later, monthly benefits to the disabled.
Lyndon Johnson's Great Society programs brought food stamps plus Medicare and Medicaid. In the 1970s, Supplemental Security Income was created on top of routine Social Security benefits for the poorest of the elderly and disabled, and so-called Section 8 vouchers began subsidizing rental housing. The earned-income tax credit was launched in 1975 to offer extra cash to low-wage workers, and grew in the 1990s to become one of the government's principle antipoverty programs.
Benefits for children were expanded in 1997 with the State Children's Health Insurance Program during the Clinton administration—and were expanded again in 2009. Shortly after President Barack Obama took office, Congress passed the American Recovery and Reinvestment Act, the stimulus bill, which among other things extended unemployment compensation and offered incentives for states to cover more workers.
All this is expensive. Payments to individuals—a budget category that includes all federal benefit programs plus retirement benefits for federal workers—will cost $2.4 trillion this year, up 79%, adjusted for inflation, from a decade earlier when the economy was stronger. That represents 64.3% of all federal outlays, the highest percentage in the 70 years the government has been measuring it. The figure was 46.7% in 1990 and 26.2% in 1960.
When the economy recovers, some—but not all—current recipients of federal aid are likely to lose their benefits, which some say is reason enough to keep them going for now.
"If there became an expectation that government was going to provide over half of the population's well-being to a significant degree without requiring anything of the recipients, there would be reason for concern," says Robert Reischauer, a former Congressional Budget Office director and now president of the Urban Institute, a liberal-leaning think tank in Washington, D.C. "I don't think that's where we are or where we're headed."
The public appears divided on what to do. A new Allstate/National Journal poll found that 35% of voters want the government to make sure future retirees receive all the benefits they've been promised even if it means raising taxes. Another 34% said the government should make retirement programs "financially sustainable" by making some cuts to those benefits and raising some taxes, and 22% said they'd be willing to see benefits cut to restrain the programs' rising costs.
The call for restraining benefits resonates with voters like Robert Letherman. "You name it, someone is lining up to get bailed out, or a handout, courtesy of the hard-working American taxpayer," says Mr. Letherman, 39, a real-estate developer in Elkhart, Ind.
Mr. Letherman says he has struggled through the recession like many others, but doesn't qualify for government assistance. His income has declined 40% since 2007. Some $4 million in development projects percolating in the spring of 2007 have since been shelved.
He supports helping people in need, says Mr. Letherman, but believes many people game the system. Extended unemployment benefits, for example, give some Americans an excuse not to go back to work, he says. If it were up to him, government would be half the size it is now.
He favors eliminating pensions for all government workers, excluding military and intelligence personnel, and would impose a nationwide sales tax to pay off the country's debt. "If we continue down the path of deficit spending, the great recession of 2008 will be nothing compared to what we will face in five, 10, 20 years," he says.
Cutting federal benefits while the economy is still weak would be a mistake, some analysts say, because it could hinder recovery by giving consumers less money to spend.
Paul Hester has relied on government benefits since he lost his job in June 2009. The 54-year-old microbiologist has a master's degree and was earning a salary of $50,000 at the Indiana State Department of Health. He says he regularly looks for jobs, but has landed only two interviews in the past year.
Influenced by the credit wariness of parents who lived through the Great Depression, the Indianapolis resident has always been thrifty. He once watched his dad walk into a dealership, "plop down $10,000 in cash and buy a car." Mr. Hester has one credit card, and before he was unemployed, he tried to pay it off every month.
He lives on $375 a week in unemployment checks and his health-insurance premiums are subsidized by the federal government under a provision in the fiscal stimulus enacted by Congress in February 2009. His daughter, a college sophomore, pays for part of her schooling with Pell Grants, a federal program for low-income students that is set to expand because of new legislation that increased the number and size of grants.
"I don't like taking government money," says Mr. Hester, but "what else is there?"
—Marcus Walker contributed to this article.
http://online.wsj.com/article/SB10001424052748703791804575439732358241708.html?mod
MBA: Mortgages Applications Drop For Second Week
by RTT Staff Writer
9/15/2010 7:53 AM ET
(RTTNews) - U.S. mortgage applications dropped to their lowest since early August last week, as extraordinarily low interest rates failed to spark demand for home purchases, industry data revealed Wednesday.
Refinancing activity also tailed off, as most qualified homeowners wishing to lower their monthly mortgage costs have already done so.
The Mortgage Bankers Association's (MBA) Market Composite Index for the week ending September 10, 2010 decreased 8.9 percent on a seasonally adjusted basis from one week earlier, when mortgage apps slipped 1.5 percent.
The results include an adjustment to account for the Labor Day holiday. On an unadjusted basis, the Index decreased 27.4 percent compared with the previous week.
The Refinance Index decreased 10.8 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier.
The average contract interest for 30-year fixed-rate mortgages decreased to 4.47 percent from 4.50 percent. 15-year rates decreased to 3.96 percent from 4.00 percent.
http://www.rttnews.com/Content/USEconomicNews.aspx?Id=1419398&SM=1
Crude Stocks Fall In Line With Expectations
By Naureen S. Malik
09-15-10 11:15 EST
US OIL INVENTORIES:Crude Stocks Fall In Line With Expectations
NEW YORK -(Dow Jones)- U.S. crude inventories fell in line with analysts' expectations last week, according to data released Wednesday by the U.S. Department of Energy.
Crude oil stockpiles fell by 2.5 million barrels to 357.4 million barrels for the week ended Sept. 10, right in line with analysts' estimates. Late Tuesday, the American Petroleum Institute, an industry group, reported a 3.3-million- barrel increase.
On the New York Mercantile Exchange, crude oil futures maintained early losses, with October contracts recently down 1.7% at $75.51 a barrel. October futures for gasoline were recently down 1.2% at $1.9464 a gallon and heating oil was 0.4% lower at $2.1207 a gallon.
Inventories of crude oil and petroleum products remain at unusually high levels for this time of the year.
Gasoline stockpiles decreased by 694,000 barrels to 224.5 million barrels, the department's Energy Information Administration said in its weekly report. That compares to the forecast calling for a decrease of 1.1 million barrels in a Dow Jones Newswires survey of 12 analysts.
Distillate stocks, which include heating oil and diesel fuel, fell 340,000 barrels to 174.5 million barrels. Analysts projected an increase of 200,000 barrels.
Refining capacity utilization declined by 0.6 percentage point to 87.6%. Analysts had expected a 0.7-percentage point decline.
API pegged the refinery utilization rate at 85.6% of capacity last week, also a 0.6 percentage point drop. The industry group's data showed a 1-million decline in gasoline inventories and that distillate stocks fell by 1.5 million barrels.
U.S. Oil Inventories:
For week ended Sept. 10:
Crude Distillates Gasoline Refinery Use
EIA data: -2.5 -0.3 -0.7 -0.6
Forecast: -2.5 +0.2 -1.1 -0.7
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>>> At least that 4 trillion is given back to the taxpayer >>>
Sounds good, NOT...
Republicans now claim top 2% tax cut necessary for economic rebound
http://www.examiner.com/special-interests-in-chicago/republicans-now-claim-top-2-tax-cut-necessary-for-economic-rebound
Rich Americans Save Tax Cuts Instead of Spending, Moody's Says
http://www.bloomberg.com/news/2010-09-13/rich-americans-save-money-from-tax-cuts-instead-of-spending-moody-s-says.html
Related Story: Republicans pledge to fight to preserve Bush-era tax cuts
http://www.washingtonpost.com/wp-dyn/content/article/2010/09/13/AR2010091303980.html
This is from the Your Economy board and posted by kismetkid .. Unbelievable... #msg-54416182
http://tinyurl.com/2587ffa
Wow! That's amazing .. very sad.
BP could not possibly ever make up for the amount of destruction they've created. Even worse is they could have prevented this if they had followed protocol and replaced the faulty equipment.
I am sure a lot of fisherman are out of work and a lot of sea life that may not ever be replaced.
OT: (sort of) Patriotism as a Threat to Capitalism
Sep 13, 2010 - 10:29 AM
By: Kel_Kelly
From The Case for Legalizing Capitalism - Having learned that the government acts in ways detrimental to its citizens economically, and by causing wars, we should ask exactly why we support our politicians, why we support most of our military operations, and why we support our very national identity. In short, we should ask ourselves why we are patriotic.
What is patriotism? What exactly are we supporting when we are patriotic? If the answer is "our country," does that mean a geographical region that our government has artificially and arbitrarily identified as its own? If so, does our patriotism change when the boundaries change? Should we not have been patriotic toward the southwestern states before we stole them from Mexico? Should the residents there have been patriotic toward the United States once they were forced to be citizens? Should the citizens of the various countries of the Soviet republic have been patriotic to the USSR after they were forced at gunpoint to be countrymen? Should the citizens of Czechoslovakia — who were forced together by Woodrow Wilson — have been patriotic toward the Czech republic or to Slovakia after the nation split up? Geographical borders are only imaginary, temporary, lines.
Is patriotism instead the act of being loyal to the land itself, specifically the land upon which one grew up? If so, should someone who grows up in Nevada but moves to Connecticut for their career be patriotic toward Nevada or Connecticut? One might reply that the answer is both, because one lived in and identified with both regions.
If that's the case, what if one grew up in the United States, but had a career overseas in South Korea teaching school or working for a multinational corporation? Is it bad if such a person is also patriotic toward South Korea? What if I have lived in France and learned to love the people and the land and actually prefer France to the United States? To whom should I be patriotic, to France or to the United States? Am I unpatriotic to favor France?
If so, were our forefathers unpatriotic to want independence from their native Britain and make America their new home? We Americans don't seem to think so now. But if the Latinos of Miami wanted to make Miami their own new Cuba by seceding, or if the southwestern states wanted to secede from the nation as a separate country or once again become part of Mexico, we would call them traitors.
Or is patriotism based on a connection to the people of a nation, to our fellow citizens? If so, should I be loyal to Americans because they are my compatriots? Why should I? It is my very patriotic neighbors who democratically vote to take my property and give it to someone else against my will. It is my neighbors who vote for regulation and government intervention that makes my life worse. It is my fellow citizens who vote for politicians that create wars and send millions of their own citizens to die.
Naturally, our government leaders call stealing from our neighbors patriotic. In 2008, Joe Biden said, "it's time [for the rich] to be patriotic … time to jump in … time to be part of the deal … time to get America out of the rut." Many people in fact do believe that the rich need to pitch in and help us innocent workers who are in this rut — a rut created by Biden and other government officials by their policies of printing money, spending more than they can steal from citizens, and in many other ways destroying our wealth and bringing on economic crises. It is a rut that was created because we voted yet again for the same bad policies of the last 100 years.
Biden implicitly says the wealthy are using too much of their money to provide us with goods and jobs. They should instead turn their assets into cash and give it to us to consume. Thus, according to Biden, it's unpatriotic to provide the things that improve our lives. Conversely, it's patriotic to squander all our wealth.
If this is patriotism, we should all be anti-American. Most Americans support these terrible ideas and support terrible politicians like Biden who cause this harm. The same applies to politicians and citizens in every country. Why should one be loyal to such people?
The people of Argentina — and other Latin American countries — face massive economic crises caused by their thieving politicians every decade, crises that involve hyperinflation that wipes out their life's savings, creates banking crises, mass unemployment, massive national debt, and general suffering. They have endured human-rights abuses, political persecution, subservient judiciaries, lack of accountability, widespread corruption, virulent demagoguery, social upheaval, and the absence of individual economic rights for centuries. Yet Argentineans are incredibly patriotic and proud of their nation.
Citizens of Mexico and Cuba risk life and limb to escape to the United States in order to find work and survival, because their fellow citizens and government offer them few opportunities at home for prosperity. Yet both of these peoples proudly display their native flags while in exile.
Citizens of Germany and Austria have been led into war over and over with millions of fathers and brothers killed, yet they are historically always patriotic and ready for the next war (though since World War II they have been largely antiwar). Why should any of these people be patriotic? Exactly what are they supporting by being devoted to their country?
"National borders mean nothing."
Patriotism is an abstract notion with no real substance. It means nothing; it's just a façade, a fake, imaginary glue that keeps a people naively devoted to causes, countries, governments, and neighbors who usually bring them harm (the phrase "come together" is similarly ambiguous and empty). National borders mean nothing. They would not exist without government force, and they are usually laid out for reasons of politics and power, not in accordance with the religions, identities, culture, or preferences of individuals.
Time and again, decade after decade, borders change. The people on each side of a new border are supposed to be loyal to people within their new border, and to the new government forced upon them. They often resist and want their previous identities back. It is for this reason, and for reasons of freedom and self-rule, that regions such as Chechnya, Georgia, Palestine, Quebec, Northern Tibet, Taiwan, Sri Lanka, and Kosovo, among many others, often fight for independence. More often than not, those who fight for freedom (and for socialism, incidentally) are called freedom fighters, but they are labeled terrorists by those who oppose their separation.
In today's America, patriotism, effectively, is the act of aggressing upon other nations; it is the act of stealing from our fellow man in the name of furthering our prosperity, while in fact destroying our prosperity. It is under the name of patriotism and supposed freedom that it is justifiable for the United States to attack citizens of any country, including its own.
Patriotism is usually the cause of many of our problems, not the solution to them. And as time passes, we become more obsessed with it. Now, a government official, or even football players and referees, cannot appear in public without an American flag on their lapel or jersey. Soon, it will be required that each of our cars have the red-white-and-blue ribbon plastered on it (for the few left that don't already) — and such things have certainly happened in this country previously. We must all show that we are, as Biden said, "part of the deal." It is reminiscent of Nazism, where all citizens swore allegiance to their ruler and proudly saluted and waved the Nazi flag in the name of nationalism; they lived and died for the glorious fatherland. We are only several steps behind them.
The right-wing radio hosts further this cause by obsessing about why we need to protect ourselves from aggressors and terrorists and fight for our freedom. In truth, there would be little to no protection needed if we would just leave the rest of the world alone. And not only do Republicans not offer us freedom through the economic and social policies they propose, but they cause us to lose freedom at rapid rates during the wars they sucker us into.
The patriotism charade is now at the point that these talk show hosts tell each caller (that they agree with) that they "are great Americans," and each caller, in return, tells the host that he, too, "is a great American." One wonders how they don't feel just a bit silly with such melodramatic antics.
And when all of "our boys," our "heroes," are at war, willingly taking money to go and kill other people around the world, many of us blindly "support our troops." It does not matter whether our troops are actually helping or harming us, or saving people or destroying them: because they are American troops, we should support them … just as the German people blindly supported their Nazi troops simply because they were German.
Patriotism leads people in each country to think that their country is superior to others, and that their country must survive and prosper at all costs — even if it means death to people in other countries. Patriotism breeds an "us-versus-them" attitude. Without the notion of patriotism and national borders, people would live wherever and however they prefer, practice the religions they want, marry whomever they desire, and produce, exchange, and prosper in whatever way they see fit. (There does need to be, and there would be, a governing body, just not a single one with monopoly powers of enforcement and control.) We would not see ourselves so much as members of particular groups (nationalities), but as various people of the world. And yet we are forced by law to "celebrate" diversity in our government-controlled world.
"No one should be loyal and patriotic to someone who allows them to be mostly free."
In absence of government borders, people would more easily mix and mingle in the world and not look at each other as "those other people" but instead naturally look at them as their neighbors. Those who wanted to be racist or simply to keep to their own kind would be able to do that, too, on as much property as they could peacefully acquire through exchange.
People could quickly rush to judge me as unthankful. They could say that I should be grateful that my country has permitted me the level of freedom that it has, which is in fact far in excess of most countries, even if it diminishes by the month. Indeed, I am grateful to be lucky enough to live in a place that offers relative freedom. But this is not a reason to be loyal. If it were, we could also argue that a wife who gets beaten up periodically by her husband who threatens to bring much greater harm to her if she tries to leave him, but is otherwise treated well and quasi lovingly by him, should also be loyal to him. She should in this case be thankful that he allows her a relatively normal life, even if he threatens to use force against her and periodically does.
This thinking is wrong. No one should be loyal and patriotic to someone who allows them to be mostly free but still treats them unfairly. Freedom from harm and coercion should be a natural right, not something granted by those good enough not to kill us or keep us as slaves. This is why, for example, it is still illegal and unacceptable to forcefully hold women against their will or to strike a fellow man as an initiating aggressive act. Aggression is aggression, even in a free society.
The Ills of Democracy and Political Parties
Political parties in every country have their shticks, and each one usually entails some form of socialism. In the United States, the Republicans' agenda consists of imposing their hypocritical and extreme religious beliefs on our country and causing wars, killing, and setting up dictators in other countries. The Democrats' agenda involves deliberately trying to destroy our means of increasing our standards of living, and trying to equalize everyone by dragging us all down to the lowest economic common denominator. These issues are the things each party merely focuses on; but, in fact, both parties promote most of the same policies. Both of these groups, along with every other form of government, engage in the use of force to make people live and act differently from what they would otherwise choose, and to make them hand over much of their personal property once it's been fairly earned.
Regardless of the fact that Republicans (and Democrats to a lesser degree) claim to be about free markets and capitalism, they are not. Republicans are socialist and totalitarian just like the Democrats. Individuals fervently support their respective Republican and Democratic parties, and see the other party, which they detest, as supporting reprehensible views. In the bigger picture, Republicans and Democrats are virtually side by side on the political spectrum that runs from communism (full socialism) on one side, to free-market capitalism (complete freedom) on the other. Both parties, for example, recently had their respective plans for government bailouts, and for nationalizing our healthcare system.
Our society is always proud to support "democracy" as though it automatically equates to freedom. But freedom is not necessarily related to democracy and may or may not coincide with it. A dictator, such as Pinochet in Chile, can create largely free markets, and a democracy can create near or complete totalitarianism, as was the case with the democratic election of Adolf Hitler and more recently with that of Hugo Chavez. Democracy can really be reduced simply to a method of voting, one that allows the expropriation of the property of others — "the tyranny of the majority."
Though it is socialists of one stripe or another, be they fascists, dictators, communists, or Democrats who have begun every war in the last century, killing hundreds of millions, who have strictly and often violently controlled and directed individuals in their respective countries, and who have caused starvation, unemployment, and suffering of millions for decades, it is socialism that most people in the world cling to as something that will help them. Mild socialists (your average Democrat or environmentalist), curiously, think that extreme socialists (communists) are bad, even though communism is just an advanced state of the policies socialists adamantly support.
After World War II, our economists and government officials were impressed with the socialist system that destroyed Germany's economy, and they wanted to replicate it for the economy of the new West Germany. Thankfully, West German leaders, aware of this, and aware of the destruction that Nazi economic policies had caused, through twists and turns, set up a system of relatively free markets that brought dramatic economic growth for the next 30 years (overcoming the negative effects of the Marshall Plan[1]).
People support the evil of socialism because, ironically, they fear that individual companies — which have rarely, if ever, had anyone killed, and which, absent government regulation, have never taken anything forcefully from anyone, and could not only not bring harm, but provide improvements for our lives — can somehow hurt them. All because they don't understand what capitalism is and how it works.
The Patriotism of Politicians
While politicians claim to be patriotic and to do what's best for America, they do the opposite. How could they know what would truly help or hurt American citizens? Have they spent years studying economic cause and effect? Have they learned production techniques that could result in greater output? Have they read numerous books on organizational behavior, so that they can "plan" the economy? Of course not!
They have spent their days kissing babies, polling to find out what voters want, learning to be actors, and making emotional, passionate speeches that appeal to the masses who will be suckered into such antics. In short, politicians are equivalent to game-show hosts. If they were really patriotic, they would spend their time figuring out how truly to help people, instead of simply figuring out how to win votes.
We naively believe politicians are there to "lead us." We believe that the president, in "running the country," has the toughest job on earth. This is partly because people who do not understand economics believe that a country cannot "run" on its own. But it can.
It is the individual people and businesses that progress our lives. The president does not get up in the morning and turn on the factory lights or start the machines. He does not determine how much should be produced that day. He does not decide who should work where. Individuals, capital, and market prices run the country.
"The president does not get up in the morning and turn on the factory lights or start the machines."
President Obama is not "leading" us through this crisis — he's simply manipulating the economy further than it was already manipulated. Had he not done so, the market (i.e., individuals) could have already fixed itself.
We have seen that the government's planning does not help an economy. We have seen that regulation does not protect citizens from companies, and that military actions do not protect citizens from foreign aggressors (except in special circumstances). Of course, some of the actions the president engages in involve setting or adjusting laws pertaining to protecting our legal rights and our legal property. But most of his actions involve just the opposite — taking our property or preventing our free-will choices.
For example, there are laws that prevent gangs from barging into our homes and kicking us out of them; but, at the same time, there are many more laws linked to how our homes will be taken from us by the government if we fail to pay one of the myriad taxes forced upon us — taxes that legally allow our property, our paychecks, to be given to others, including these very gangs, via wealth redistribution.
The same type of "work on behalf of the people" is done by all members of Congress and the Senate, and to a lesser degree by state and local government. The country would get along quite fine in any given year if Congress and the president ignored all of the "work" it would otherwise do, except for focusing on the 1 percent or so of the decisions that involve truly protecting citizens and providing basic services that we want and need. Most of the other 99 percent of their work involves imposing implied or actual government force for the purpose of benefiting one group at the expense of another. The government is simply an institution — an instrument — that is used to bring about these iniquitous actions.
Politicians' "work" involves doing what is needed to please their constituents. Their constituents, in turn, usually want government subsidies, regulation, wealth transfers, or some other government force imposed, so that they can benefit from the suppression of others when they otherwise could not.
Almost everything we see government doing today consists of this: bankers, car companies, airlines, and steel companies are subsidized at the expense of taxpayers so that they don't have to go out of business; workers are protected from having to receive market wages; poor workers are protected with a minimum wage; companies are regulated so that they don't harm consumers; government forces the negation of contracts such that borrowers can benefit at the expense of lenders; inflation is generated so that more money can be taken from taxpayers and given to others; environmental legislation is imposed in order to let environmentalists "protect our environment" at the expense of the rest of us; one industry is prevented from producing a particular product so that another industry's profits will not be affected. The list literally goes on and on for tens of thousands of pages (in the national register).
Though all of these actions are detrimental to society, politicians don't care. What they care about is getting votes. They care about getting re-elected. They will therefore do what appears to help voters, even though their actions usually harm voters. The long-term health of the country is not in their interest; the short-term success of their career is. They do not know exactly what would help or what would harm, but they need not be concerned with such immaterial matters.
This is why it is so vitally important for voters themselves to understand what helps and harms them. If voters would demand of politicians the things that would truly benefit them, politicians would give it to them, for they will pass or not pass whatever laws will get them votes.
If people demanded that government quit printing money, quit regulating businesses, quit taxing, and stopped stealing from the rich, the government would cease these operations. Then, all members of society would see a dramatic increase in their standards of living, with jobs available to everyone and prices falling by the day.
But there is a catch: those of us who earn less than the average — those who are net beneficiaries of wealth redistribution — would have to clearly understand how they would benefit from refusing to vote for free money. They would have to understand that, instead of having money handed to them, they would instead earn money in the form of a salary. But this change in structure would result in significantly increased wealth for this group. This issue is likely the biggest challenge free markets face, for it is very difficult to convince someone that if they refuse free money they will be better off.
Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe, and the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail.
http://www.marketoracle.co.uk/Article22657.html
The Samson Indicator
By Robert Morley
September 14, 2010
Hindenburg Omens, inverted yield curves, cardboard boxes and a better economic indicator.
Everybody has their idea on where the economy is headed. And there are many economic indicators that claim to predict America’s economic future. Some work better than others. The Samson Indicator beats them all.
Consider America’s economic pillars—the columns supporting America’s economy.
Pillar 1: Housing Market
In August, America’s unsold housing inventory increased for the eighth straight month. At the current rate of sales, it would take 12.5 months to sell the houses already on the market. In the past, housing inventory averaged between six and seven months’ supply. During the boom years, there was sometimes less than a four-month supply.
The volume of house sales is simply crashing. In July, sales were down 27 percent from the previous month, the National Association of Realtors reported. Compared to last year, sales are down 25 percent—no small feat considering last year’s dismal numbers.
Why is the housing industry so important to the economy? During the euphoric years, the housing market and related industries, including investment bankers, mortgage brokers, realtors and appraisers, created up to 40 percent of all jobs. Now those jobs are gone, and some say for good.
Manias and Ponzi schemes—like America’s housing bubble—burn many people when they burst. And when they do, they drastically alter national psychology. Smaller is now better. Property taxes do matter. Lower rent is preferred. No upkeep is vogue. Increased mobility is valued. In short: Renting is in and buying is out.
The “get rich from housing” mantra is replaced by the “I will never buy a house again” creed.
Keeping their job is now the priority for most people. But jobs are not so easy to find anymore.
Pillar 2: Industry
After World War ii, America became an industrial superpower. “American made” was shipped around the world. Americans exported products, and in return, imported gold as payment.
The world needed what America produced, and America became rich. Employers couldn’t find enough workers, and thus the prosperity trickled down.
But wealth led to complacency and consumerism.
American culture no longer values production. America has allowed its manufacturers to go out of business or relocate overseas to low-wage, low-union locales. Recently General Electric announced that due to new government regulations requiring energy conservation, it would close its last incandescent light bulb factory in the U.S. Two hundred employees will lose their jobs when this last plant closes. Instead, the government has decided that consumers should purchase fluorescent light bulbs.
Unfortunately, florescent light bulbs are only produced overseas—so Americans will be forced to send money overseas to import them (so much for the promise of all those green jobs).
Yes, America manufactures a lot less of the things people want or need these days.
Take a look at Boeing—perhaps one of America’s most strategic companies. Where does Boeing produce its new Dreamliner aircraft?
The wings are produced by Mitsubishi in Japan. The horizontal stabilizers are made by Aeronautica Italy. The wingtips are contracted out to Korea and the wing flaps to Australia. The fuselage is fabricated in Japan, Italy and the United States, while the under-fuselage is made in Canada. The passenger doors are made in France, while the cargo and crew escape doors are stamped “made in Sweden.” The floor beams are manufactured in India. The wiring and landing gear are also made in France, while the engines are produced both in Britain and America.
Is Boeing really even an American company?
There was a time when the whole aircraft—from drawing board to factory floor—was made in America, providing jobs to tens of thousands of Americans, and hundreds of thousands more within the supply chain.
Those days are gone. In July, America lost 47,000 more manufacturing jobs, according to the Bureau of Labor Statistics
Even many of the minerals used to build the planes are imported. Although carbon fiber is produced in the United States, all the aluminum and about 70 percent of the titanium has to be imported because America’s mining industry has been allowed to atrophy. There is a whole host of other strategic minerals that America no longer mines too.
Ever wonder why China gets 10 percent growth and America gets 10 percent unemployment, as Historian Niall Fergusson commonly notes?
Because we are a nation of consumers, while China is a nation of producers!
Actually, the economic divide is far worse than what Fergusson says. In August, China reported that its industrial production grew 13.9 percent, and that retail sales grew 18.4 percent—while back in America, the real unemployment rate is closer to 20 percent, according to John Williams at Shadowstats.
Pillar 3: Middle Class
But not all people are suffering.
The top 5 percent of income earners account for 37 percent of all consumer spending in America. Ten years ago, the top 5 percent accounted for 25 percent of spending. The top 1 percent of households own about 35 percent of the nation’s wealth. The top 20 percent own approximately 85 percent, according to sociology professor G. William Domhoff at the University of California–Santa Cruz. And the percentages have increased since 2007.
The gap between the rich and poor is growing. The middle class is getting crushed.
Forty million Americans, or one in eight people, are now on food stamps. An astounding 10 million workers are receiving unemployment benefits. So it is no surprise that recent studies show that a shocking 15 percent of Americans now live beneath the poverty line.
A large middle class is something that has set America apart from much of the rest of the world.
The middle class is said to be much of the power behind America’s dynamism and innovative spirit. These are people who build and create and are responsible for starting thousands of small businesses each year. They are the brains within the mega corporations. Think of all the products and inventions over the years that were the product of middle-class Americans. Think Bill Gates and Henry Ford. These men are products of middle-class America.
If you are reading this, you are probably a product of middle-class America. But look around you: The middle class is being destroyed. Your friends and colleagues, if they are like most Americans, are saturated with debt. Students are graduating universities with useless degrees and tens and hundreds of thousands of dollars of debt. Americans act like they are wealthy, living beyond their means, but it is really all a sham—an expensive, unsustainable, debt-powered sham, but a sham nonetheless. And it is coming to a crashing end.
Cracked and Buckling
America’s economic pillars are snapping like small twigs. No matter where you look—our massive debt, state debt, local debt, personal debt, our dependence on foreign lending, our addiction to oil, the Federal Reserve printing money to fund the Treasury, our sick currency, the economic quagmires in Iraq and Afghanistan—the stress lines are showing.
It doesn’t take a genius to see which way the economy is headed.
The Samson Indicator is this: When the pillars break, the roof collapses. As it is, what is left of America’s support columns is barely holding up. It is almost as if some invisible force is just barely keeping the building together.
America could quickly be thrust back into the Great Depression or worse. It wouldn’t take much more of a push for it all to come crashing down: a failed bond auction or two, a surprise banking failure, a new war. It could be any number of things, because America’s whole economic house is shaky.
Yet, as depressing as that may sound, America’s looming economic collapse will not last forever. The system is headed for collapse, but once the current unsustainable system is wiped out, and once people are fed up enough with the current system, then a new honest and affluent system will be built.
http://www.thetrumpet.com/index.php?q=7471.6052.0.0
Gold: Heads You Win, Tails You Win
Bsspoke Investment Group
Thursday, September 9, 2010 at 05:40PM
If someone came up to you and said that they were going to flip a coin and if heads came up you win and tails came up they lose, you would probably walk away and tell the person to get lost and go try to con someone else. In terms of gold, though, we are increasingly beginning to hear people argue that gold will rise no matter what happens!
Today we read one article that quoted an analyst as saying "Either a swift economic recovery or further dismal economic performance should bring new buyers into the market." We realize that there are certainly some valid arguments for buying gold, but a comment like this is not one of them. Now, we wouldn't necessarily go as far as to say that gold is in a bubble. After all, unlike a lot of recent asset bubbles where prices skyrocketed even as supply expanded, the supply of gold is relatively constrained. That being said, arguments presented as a win win regardless of the outcome are usually found closer to the peak of a move than the beginning.
http://www.bespokeinvest.com/thinkbig/2010/9/9/gold-heads-you-win-tails-you-win.html
Restaurant Stocks Shoot Higher
Bespoke Investment Group
Wednesday, September 8, 2010 at 01:20PM
Below is a list of the 30 biggest restaurant stocks in the Russell 3,000 run through our trading range screen. The rally in McDonald's (MCD) has received a lot of attention recently because it is the biggest of the bunch, but the entire group has been doing very well. As shown below, only 2 of the 30 names listed are currently trading below their 50-day moving averages (Sonic and Red Robin), while 23 are trading in overbought territory. Well-known names like Buffalo Wild Wings (BWLD), Chipotle (CMG), Brinker (EAT), PF Changs (PFCB), Panera (PNRA), and Yum! Brands (YUM) are all trading more than 2 standard deviations above their 50-days. While the S&P 500 is still down for the year, the average stock in this group is up 24.25% in 2010. Chipotle (CMG) is up the most at 88.97%, followed by Domino's Pizza (DPZ) and DineEquity (DIN). Sonic (SONC) is down the most at -22%.
http://www.bespokeinvest.com/thinkbig/2010/9/8/restaurant-stocks-shoot-higher.html
Year-End Consensus S&P 500 Price Target Drops to 1,205
Bespoke Investment Group
Wednesday, September 8, 2010 at 11:31AM
A number of Wall Street strategists have recently lowered their year-end S&P 500 price targets in Bloomberg's weekly survey. This has caused the average target to drop to 1,205, which is 20 points below where it started the year. Five of the twelve strategists have now lowered their targets after raising them earlier in the year. At 1,205, the consensus is still looking for a gain of 9.47% from current S&P levels to the end of 2010. Have a look below at all the changes that have been made to the target throughout the year. It's bad enough to try to predict where the market will be a year from now, and now they have to go changing them all the time?
http://www.bespokeinvest.com/thinkbig/2010/9/8/year-end-consensus-sp-500-price-target-drops-to-1205.html
Stocks with the Highest Short Interest
Bespoke Investment Group
Tuesday, September 7, 2010 at 05:31PM
Below is a list of the stocks in the Russell 1,000 with the highest short interest as a percentage of float (SIPF). For each stock we also provide its year-to-date change as well as its change since the start of the month. Generally when the market is rising, the most heavily shorted stocks outperform, and we've seen that so far this month as well.
In the Russell 1,000, AutoNation (AN) has the highest short interest as a percentage of float at 40.74%. With a gain of 25%, AN has hit the shorts pretty hard year to date. Alliance Data Systems (ADS) and MGM Resorts (MGM) rank second and third in terms of short interest and are the only other names with SIPF above 30%. SunPower (SPWRA) and Sears Holdings (SHLD) round out the top five with SIPF of 27.65% and 26.05% respectively.
Netflix (NFLX), MBIA (MBI), and Las Vegas Sands (LVS) are all on the list as well, and the shorts have gotten killed in these names this year. All are up more than 100% year to date. Shorts have had a field day this year with SunPower (down 52%), Comstock (down 48%), and ITT Education (down 43.7%). Some other notable names on the list include Green Mountain Coffee (GMCR), US Steel (X), First Solar (FSLR), Jefferies (JEF), AIG, Newell Rubermaid (NWL), and Garmin (GRMN).
http://www.bespokeinvest.com/thinkbig/2010/9/7/stocks-with-the-highest-short-interest.html
Key ETFs Farthest Above 50-Day Moving Averages
Bespoke Investment Group
Friday, September 3, 2010 at 10:23AM
Below we highlight the key ETFs that we follow that are currently trading the farthest above their 50-day moving averages. As shown, the Internet stock ETF (HHH) is currently on top of the list at 10.31% above its 50-day. Malaysia (EWM) ranks second at 9.29%, followed by Base Metals (DBB), Australia (EWA), and then REITs (IYR). A lot of times we'll see ETFs from one asset class clustered at the top of the most overbought list, but it is currently pretty diverse.
Below is a chart of the Internet ETF (HHH) that is currently trading 10% above its 50-day. As shown, the ETF has made a huge move over the last four days. We also provide a table of the stocks that make up HHH. As shown, Amazon.com (AMZN) and eBay (EBAY) collectively make up about 60% of the ETF. Both have been soaring lately and are now trading more than two standard deviations above their 50-days. They're the reason HHH has done what it has done this week.
http://www.bespokeinvest.com/thinkbig/2010/9/3/key-etfs-farthest-above-50-day-moving-averages.html
The Hemline Index
By Barry Ritholtz
September 13th, 2010, 11:30AM
With NY Fashion Week over, perhaps its time to take a look the hemline index, which we last looked at in June.
Here is the math behind the psychology, via Baardwijk & Franses of the Econometric Institute:
“Urban legend has it that the hemline is correlated with the economy. In times of decline, the hemline moves towards the floor (decreases), and when the economy is booming, skirts get shorter and the hemline increases. We collected monthly data on the hemline, for 1921-2009, and evaluate these against the NBER chronology of the economic cycle.
The main finding is that the urban legend holds true but with a time lag of about three years. Hence, the current economic crisis predicts ankle length shirts around 2011 and 2012.”
Intriguing...
Sources:
The hemline and the economy: is there any match?
THE ECONOMICS OF HEMLINES AND CLEAVAGES
A Hemline Index, Updated
http://www.ritholtz.com/blog/2010/09/the-hemline-index/
7 Things To Do To Improve
The Kirk Report
Wednesday, September 8, 2010 at 10:18 AM
In celebration of my 7th anniversary, I would like to share with you 7 simple things I think you can do to improve your performance in the markets for the remainder of the year:
1. Stop believing the market is logical – The market is primarily moved by both perception and emotion far more than reality or logic. Trade what you see, not what you think you should or want to see. There’s a reason why most people stink at trading as they fail to understand that markets are often illogical and influenced by emotion rather than reality. Whenever possible, try to adopt and hold an “opportunistic” mindset rather than a dominant bullish or bearish posture.
2. Concentrate your holdings – If you have more than 5 to 10 positions in your portfolio, you are hindering your performance without even realizing it. With the availability of ETFs now, you can diversify as much as you need. Likewise, even if the best of environments, you probably should only be able to find a handful of really good opportunities that offer the most upside with the least amount of risk. Frankly, if you are able to find more than that, then you really don’t understand what it means to find a true low risk/high reward opportunity!
3. Stop chasing performance – The very best opportunities before you now are in stocks and sectors that no one is talking about or even knows to look at. Likewise, stop looking to chase the hot hand of others. The media and far too many investors are always focused on what is working well now and who is making the most money while the best opportunities are frequently elsewhere. Go where the market is quiet and which no one is interested in and you’ll find more opportunity. In addition, being patient when you don’t find anything that really fits your eye is more than half of the battle.
4. Turn off the noise – Information may be the world’s most precious commodity, but 99% of the information at your disposal is not. In today’s age of real-time information, opinions, analysis, etc. it is my strong belief that information overload and noise is hindering performance far more than it is helping. The first step is to stop watching all TV and to place severe restrictions on all media. In addition, to perform better this year you must stop wasting time on seeking out advice and opinions that only serve to confirm what you really want to hear in order to justify your positions. If anything, what time you spend in social media should be devoted to looking for ideas that challenge your positions and/or offer unique insight you can really learn something from.
5. Understand your limitations and strengths – Not everyone can be a short-term trader nor do they have to be. The mistake that many make is copying another’s strategy that doesn’t fit them nor one they truly understand. This is why they also readily abandon those strategies when the pressure is on which really hurts performance. So, figure out how much time you can devote, what skills you already have, and formulate a strategy that works best for you based on that. Keep in mind also that the best strategies are often so simple that you should be able to explain how they work to those who aren’t intimately involved in the markets.
6. Accept you will make many mistakes – Those who learn how to minimize the damage when they are wrong and who readily own up to the mistakes they make will do far better over the long haul. Making mistakes is a part of this game, but knowing how to handle them is everything. Likewise, if you attach your ego to your portfolio’s performance you are destined for failure. The market absolutely loves to kill those with big giant egos and who look for the markets as a place to prove how smart they are. Markets chew and spit out these folks routinely for good reason and they will continue to do so at every available opportunity.
7. Become a specialist, not a jack of all trades – You don’t have to know everything about everything to do well. In fact, those who focus on a specific setup, chart pattern, program pattern, industry group, or even just trade only one ETF frequently perform far better than those who know a lot about a lot of things but have no real discernible edge. I run into people all of the time who know a great many things, but are not an expert of any one thing and that is to their clear disadvantage. So, find something that interests you more than anything else and concentrate all of your time and focus on that one thing. That path will lead you to developing an clear edge that will provide huge profits to you down the line.
If you follow these 7 tips, I’m confident you will see a meaningful improvement in your bottom line results this fall!
http://www.kirkreport.com/category/freereports/
On a Yield Basis...
Ticker Sense
September 09, 2010
Many of the DJIA members have pretty attractive dividend yields versus bonds.
http://tickersense.typepad.com/ticker_sense/2010/09/on-a-yield-basis.html
Blogger Sentiment Poll
Ticker Sense
September 13, 2010
The poll is at the highest bullish levels of the year for the first full week of trading in September.
Blogger Sentiment Poll Participants:
24/7 Wall St (+) Carl Futia (+) Dash of Insight (+) Elliot Wave Lives On (+) Fallond Stock Picks (-) In the Money Learning Curve (-) MaoXian Millionaire Now (N) Peridot Capitalist (N) StockAdvisors.com Smart Money Tracker (+) Traders-Talk (-) Wishing Wealth (+)
http://tickersense.typepad.com/ticker_sense/2010/09/september-13th-blogger-sentiment-poll.html
Geithner Urges Action on Economy
SEPTEMBER 12, 2010
By DEBORAH SOLOMON
WASHINGTON—Treasury Secretary Timothy Geithner said Washington is at risk of undercutting an already sluggish economic recovery if it fails to provide quick, additional support to business and individuals.
Mr. Geithner said the biggest challenge facing the economy right now was Washington paralysis. He urged Congress to take up the White House's recent proposals to give tax incentives to business and fund new infrastructure projects.
"If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth," Mr. Geithner said during an interview with The Wall Street Journal in his U.S. Treasury office, citing the example of countries who "shift too quickly to premature restraint" after a crisis, including the U.S. in the 1930s.
Mr. Geithner's comments are part of a White House campaign to convince a nervous public that the administration understands what ails the economy, and to push lawmakers to act on its prescriptions, including extending tax cuts for the middle-class. Coming ahead of the November midterms, his comments also echo the Democrats' emerging election pitch: that they are better stewards of the economy than Republicans.
Congress returns this week for its final session ahead of the November midterm elections to confront a series of contentious issues, including the expiration of the Bush tax cuts and a $30 billion package to aid small business.
On Sunday, a top Republican lawmaker signaled there might be room to compromise on extending the Bush tax cuts for high-income earners but, in a sign of how fraught the issue is, his words drew immediate skepticism from Obama administration officials. "I want to do something for all Americans who pay taxes," House Minority Leader John Boehner of Ohio said on CBS' "Face the Nation." "If the only option I have is to vote for some of those tax reductions, I'll vote for it. But I've been making the point now for months that we need to extend all the current rates for all Americans if we want to get our economy going again, and we want to get jobs in America."
Austan Goolsbee, the newly appointed chairman of the White House Council of Economic Advisers, said of Mr. Boehner's comments: "I noticed the qualifier, 'if my only choice is'."
Mr. Goolsbee, speaking on ABC's "This Week" added: "If he's truly saying that we can, as the president called for, get a broad consensus to extend the middle-class tax cuts, we should do it."
Some Democrats have joined Republicans in urging an extension of all the tax cuts, including those for high-income earners, while others want all the cuts to expire. President Barack Obama has said he wants to extend all but the top two brackets. Lawmakers may put off the issue until after the elections.
“[The] typical error most countries make coming out of a financial crisis is they shift too quickly to premature restraint. You saw that in the United States in the 30s, you saw that in Japan in the 90s. It is very important for us to avoid that mistake. If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth.”
--Timothy Geithner on risks to the U.S. economy
Mr. Geithner, in the interview, rejected the view of many economists that allowing taxes to rise is unwise at this point in the recovery. The White House estimates the one-year cost of extension at $35 billion and the 10-year cost at $700 billion.
"We don't have unlimited resources," Mr. Geithner said. "We just don't think it would be responsible for this country, given the size of our future deficits, and given the substantial burden the middle class has been bearing over the past decade in particular, to go out and borrow $700 billion from our children so we can sustain those Bush tax cuts that only go to the wealthiest 2% of Americans."
He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for business investment and exports.
"We can't go back to a situation where we're depending on a near short-term boost in consumption to carry us forward," he said.
Last week, Mr. Obama rolled out a package of proposals aimed at spurring business investment and job creation, including making a research tax credit permanent, allowing companies to temporarily expense 100% of capital investments and funding $50 billion in new infrastructure projects. The administration says the proposals would be paid for by ending other corporate tax breaks and closing loopholes.
Business groups and some economists embraced portions of the package, particularly the tax incentives, but there is little consensus among lawmakers and no clear indication that any of the ideas will find traction in Congress. Some Democrats, including Michael Bennet of Colorado, have already come out against more infrastructure spending.
Douglas Holtz-Eakin, a Republican economist and president of the American Action Forum think tank, said the tax incentives were a good idea but questioned ending other corporate tax breaks to pay for them.
"Expensing probably would be a bonus and would send something like the right signal to the business community. But they're not willing to just do it," he said. "The business community won't support" ending other tax breaks to pay for new ones, he said.
http://online.wsj.com/article/SB10001424052748703897204575488053602454926.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
At Goldman, Partners Are Made, and Unmade
By SUSANNE CRAIG
Published: September 12, 2010
On Wall Street, becoming a partner at Goldman Sachs is considered the equivalent of winning the lottery.
This fall, in a secretive process, some 100 executives will be chosen to receive this golden ticket, bestowing rich pay packages and an inside track to the top jobs at the company.
What few outside Goldman know is that this ticket can also be taken away.
As many as 60 Goldman executives could be stripped of their partnerships this year to make way for new blood, people with firsthand knowledge of the process say. Inside the firm, the process is known as “de-partnering.” Goldman does not disclose who is no longer a partner, and many move on to jobs elsewhere; some stay, telling few of their fate.
“I have friends who have been de-partnered who are still there, and most people inside think they are still partners,” said one former Goldman executive, who spoke only on the condition of anonymity. “It is something you just don’t talk about.”
Goldman has roughly 35,000 employees, but only 375 or so partners. The former Treasury Secretaries Henry M. Paulson Jr. and Robert E. Rubin, and former Gov. Jon S. Corzine of New Jersey, now chief executive of financial firm MF Global, were all partners.
It can take years to make partner, and being pushed from the inner circle can be wrenching.
“Being partner at Goldman is the pinnacle of Wall Street; if you make it, you are considered set for life,” said Michael Driscoll, a visiting professor at Adelphi University and a senior managing director at Bear Stearns before that firm collapsed in 2008. “To have it taken away would just be devastating to an individual. There is just no other word for it.”
The financial blow can be substantial as well. Executives stripped of partnership would retain their base salary, roughly $200,000, but their bonuses could be diminished, potentially costing them millions of dollars in a good year.
While gaining the coveted status of partner, and then losing it, is certainly not unheard-of at private financial and law firms on Wall Street, Goldman’s partnership process stands out for its size and intricacy.
Goldman weeds out partners because it is worried that if the partnership becomes too big, it will lose its cachet and become less of a motivational tool for talented up-and-comers, people involved in the process say. If too many people stay, it creates a logjam.
The average tenure of a partner is about eight years, in part because of natural attrition and retirements. Goldman insiders also note they have what they call an “up-and-out” culture, leading to the active management of the pool.
The process of vetting new candidates for partner and deciding which existing partners must go began in earnest in recent weeks, according to people with knowledge of the process, which takes place every two years. They spoke on the condition of anonymity. The 2010 partners will most likely be announced in November.
Candidates are judged on many qualities, primarily their financial contribution to the firm. But lawyers and risk managers — who are not big revenue producers — can also make it to the inner circle.
The executives responsible for running the partner process this year are the vice chairmen, J. Michael Evans, Michael S. Sherwood and John S. Weinberg; the head of human resources, Edith W. Cooper; and the bank’s president, Gary D. Cohn.
Goldman typically removes 30 or so partners every two years, said those people who described the process. The number is expected to be significantly higher this year because fewer senior executives have left the firm as a sluggish economy and uncertain markets limit their opportunities elsewhere.
Removing partners like this is unique to Goldman among publicly traded firms. When companies go public, they shed the private partnership system, and ownership of the company is transferred to shareholders. Goldman’s ownership was also transferred to shareholders, but it created a hybrid partner model as an incentive for employees.
Those whom Goldman does not want to keep are likely to be quietly told in the coming weeks. Each situation is handled differently, the people with knowledge of the process say. Some partners are given time to find other jobs outside the firm. Others are told they will not be made partner and are asked to consider what they want to do next within the company.
While Goldman is on track to remove many more executives than usual, the process is in its early stages and no final decisions have been made, these people caution.
A Goldman spokesman declined to comment on how it selects and removes partners.
The process is at the heart of Goldman’s culture, a way for the firm to reward and retain top talent. Goldman was one of the last of the big Wall Street partnerships to go public, selling shares in 1999.
When it was private, the partners were the owners, sharing in the profits, and in some cases having to put in money to shore up losses. To retain that team spirit as a public company, Goldman continued to name partners. In 1999, there were 221.
Yet there are differences from past practices. When Goldman was a private partnership, it was rare that a partner would be asked to leave.
“Once you made partner, you typically retired as a partner,” said another former Goldman executive who used to be involved in the process. “If we asked someone to leave, it was because we had really screwed up and the person wasn’t pulling their weight.”
It has been a rough year for Goldman. In July, it paid $550 million to settle civil fraud accusations that it had duped clients by selling mortgage securities while failing to make critical disclosures. The firm did not admit or deny guilt.
Still, even in the worst of years, the chance to ascend into the private partnership at Goldman is a huge honor. Candidates can be up for partnership two or even three times before finally being chosen.
Partners get investment opportunities not offered to other employees, and are typically the highest paid at the firm. Goldman will even book tables for them at fashionable New York restaurants.
A big payday is not guaranteed, however. When the firm does not do well, partners tend to bear the brunt of it.
Top Goldman executives did not receive bonuses in 2008, the peak of the financial crisis. But in 2007, a banner year for Goldman, the firm set aside $20.19 billion for compensation and benefits, and its chief executive, Lloyd C. Blankfein, took home $68.5 million in stock and cash.
Candidates for partner are vetted by current partners. The review process is known inside Goldman as “cross-ruffing,” a reference to a maneuver in bridge. A few hundred people are typically nominated within the whole company, and the number is eventually whittled down to about 100.
Each department compiles a list of potential candidates, with photos and performance reviews. Partners in another department review it. Candidates are not interviewed, and in many cases are unaware they are even up for partner.
When final decisions are made, it is usually Mr. Blankfein who breaks the good news to the new partners. Few candidates ever find out why they missed the cut.
And Goldman announces only inductees, not those who have been removed. Still, there may be a few telltale signs this year.
Goldman recently moved to a new building, just steps away from the Hudson River in Lower Manhattan. Outer offices are hard to come by, and typically given only to partners. Goldman insiders are already speculating that de-partnered executives who decide to stay will have to give up their window view.
http://www.nytimes.com/2010/09/13/business/13partner.html?_r=2&ref=business&pagewanted=all
Bank Stocks Climb as Basel Gives Firms Eight Years to Comply
By Michael J. Moore and Yalman Onaran
Sep 13, 2010 7:40 AM PT
Bank stocks rose worldwide as regulators gave firms more time than analysts expected to comply with stiffer capital requirements aimed at preventing future financial crises.
JPMorgan Chase & Co. and Bank of America Corp. led the KBW Bank Index to a 3.3 percent gain at 10:30 a.m. in New York as all 24 companies climbed. France’s Credit Agricole SA and Dexia SA led gains in the Bloomberg Europe Banks and Financial Services Index, which rose 1.9 percent in London to a one-month high. The 224-company MSCI AC Asia Pacific Financials Index rose 1.8 percent, its biggest gain since July 8.
At a meeting in Basel, Switzerland yesterday, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply in full. Germany had sought to give firms a decade to make the transition, while the U.S., U.K. and Switzerland pushed for a maximum of five years.
“Extending these deadlines -- liquidity, buffers, capital definitions -- should be a relief to banks,” said Frederick Cannon, an analyst at KBW Inc. in New York.
Of the 24 U.S. banks represented in the KBW Bank Index, seven, including Bank of America and Citigroup Inc. would fall short of the new ratios based on calculations using the revised definitions of capital, Cannon said in a Sept. 10 report. Sixty- one of the 62 largest U.S. banks would meet the new standards, Richard Bove, an analyst at Rochdale Securities LLC, said in a Bloomberg Television interview. He didn’t identify which one didn’t meet the standards.
Longer Than Expected
“The implementation period is much longer than expected, which is generous to the sector,” Credit Suisse Group AG analysts including Jonathan Pierce wrote in a note to clients today. “The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst.”
The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.
‘Positive Step’
“The agreement reached is a very positive step forward which will create a much more resilient banking system in the future while ensuring that banks will be able to maintain lending to the real economy,” U.K. Financial Services Authority Chairman Adair Turner told reporters in Basel. “It’s a very, very balanced package.”
The decision will reduce uncertainty about banks’ capital, and allow some to raise their dividends, Morgan Stanley analysts Henrik Schmidt and Huw van Steenis said in a report today.
“Nordic banks will be the first to raise dividends, followed by the Swiss,” they wrote. JPMorgan, U.S. Bancorp and Northern Trust Corp. may be among the first U.S. firms to increase their dividends, according to Morgan Stanley.
JPMorgan climbed 4 percent to $41.33 at 9:48 a.m. in New York Stock Exchange composite trading. Bank of America jumped 3.5 percent to $14.03, while Marshall & Ilsley Corp. rose 6.2 perecent to $7.39 and Zions Bancorporation increased 5.7 percent to $20.96.
Greece, Italy
Credit Agricole rose 6.2 percent to 11.64 euros and Societe Generale gained 5 percent to 46.12 euros. Dexia advanced 6.5 percent to 3.42 euros in Brussels. Deutsche Bank AG rose 2 percent to 48.62 euros and Commerzbank AG, Germany’s second- biggest lender, advanced 3 percent to 6.48 euros.
The cost of insuring bank bonds against default plunged to a five-week low. The Markit iTraxx Financial Index of credit- default swaps on the senior debt of 25 banks and insurers fell 9.5 basis points to 120 as of 1 p.m. in London, the lowest level since Aug. 10, according to JPMorgan.
European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Agricultural Bank of Greece, Banco Popolare SC, Credito Valtellinese Scarl and Banca Monte dei Paschi di Siena SpA may fail to meet the 7 percent ratio in 2012, analysts at Goldman Sachs Group Inc. said in a report to clients today.
Italian Lenders
Eugenio Cicconetti, an analyst at UniCredit Corporate and Investment Banking in London, said Italian banks, which have some of the lowest capital levels among European lenders, will benefit from the extra implementation time. Monte dei Paschi rose 3.2 percent to 1.04 euros and Banco Popolare advanced 4.6 percent to 4.91 euros in Milan trading.
The rule-making process, which began in 2009, has pitted nations against each other. Some, including Germany, said higher capital requirements would hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.
“We have very precisely agreed upon the transition period which will permit that this standard won’t hamper the recovery,” said European Central Bank President Jean-Claude Trichet, speaking on behalf of central bankers from the G-10 nations in Basel today. “It’s good for the global economy, good for growth.”
Deutsche Bank
Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank, may need about 105 billion euros ($134 billion) in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.
While Germany didn’t get the deadlines extended all the way, it won some concessions for its state-owned banks, which may find it harder to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to rules tightening the definition of capital.
“German banks should have more breathing room,” Citigroup analyst Ronit Ghose said in a note to clients today. “French banks such as Societe Generale and Credit Agricole should now have more time to augment capital adequacy.”
Deutsche Bank, Germany’s biggest lender, is seeking to raise at least 9.8 billion euros in a stock sale. The lender expects to fulfill the Basel requirements no later than the end of 2013, and won’t need fresh capital to meet requlatory standards after its stock sale, Chief Executive Officer Josef Ackermann said today.
Transition Phase
Axel Weber, president of the German central bank, who attended yesterday’s meeting in Basel, expressed satisfaction with the outcome. Germany, which had withheld its signature from the committee’s July agreement, signed up for yesterday’s plan.
“The gradual transition phase will allow all banks to fulfill the rising requirements for minimum capital and liquidity,” Weber said in a statement. “The unique characteristics of German financial institutions that aren’t stockholder corporations are thus appropriately catered for.”
Germany’s VOEB association of public sector banks, which represents the country’s state-owned Landesbanken, said today the transition times are “too short” and the new requirements will place a “heavy burden” on German banks.
End to Uncertainty
Other European banks will fare better. Credit Suisse, whose losses from the credit market meltdown were about one-third those of its main Swiss rival UBS AG, said in a statement yesterday that it expected to comply with the new rules “without having to materially change our growth plans or our current capital and dividend policy.”
U.K. banks are unlikely to have difficulties meeting the capital requirements, JPMorgan Cazenove analysts led by Carla Antunes da Silva said in a report.
“We expect the market to respond positively to a more regulatory-certain environment and we would expect investors to focus on capital return for those banks where we see the strongest balance sheets,” the analysts wrote. HSBC Holdings Plc, Europe’s biggest bank, may boost its dividend, they said.
Banks in Asia have high capital ratios and will be able to avoid the degree of fundraising needed elsewhere to meet a new international standard, said Zhu Min, a special adviser to the International Monetary Fund.
Asia Banks
“Today if you look at the whole of Asia, Tier 1 capital is more than 10 to 12 percent,” and as a result “I don’t think Asian banks at the moment will go to the markets to raise a lot of capital,” Zhu, a former deputy governor of China’s central bank and vice president of Bank of China Ltd., said on Bloomberg Television from Tianjin.
Commonwealth Bank of Australia, the nation’s biggest lender, rose 1.6 percent after Australia’s Treasurer Wayne Swan said the nation’s banks will “comfortably meet” the new requirements. Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, led banks higher in Tokyo, rising 2 percent.
The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard wouldn’t be implemented until the beginning of 2015. While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier.
The Association of Financial Markets in Europe, which represents banks on that continent, welcomed the extended transition periods provided to its members for compliance. The group said it still has “significant concerns,” including the possible outcome of the Basel committee’s continuing work on the largest financial institutions.
With yesterday’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios. The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.
To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Michael J. Moore in New York at Mmoore55@bloomberg.net
http://www.bloomberg.com/news/2010-09-13/banks-climb-as-regulators-allow-eight-years-to-meet-capital-requirements.html
Why some gloomy investors are bullish on stocks
Bernard Condon, AP Business Writer
On Sunday September 12, 2010, 2:52 pm EDT
Why some gloomy investors hate the economy but love stocks. Their secret? Stick to blue chips.
NEW YORK (AP) -- Can you make good returns in a lousy market?
If you believe a few respected money managers, there's opportunity aplenty in stocks now. If you find that surprising, wait until you hear where they think the bargains lurk: big blue chips that almost always fetch premium prices.
Legendary bear Jeremy Grantham of GMO LLC in Boston says the U.S. faces "seven lean years" of meager growth, but he has been pounding the table about blue chip bargains with big dividends. Steven Romick of FPA Crescent predicts rising taxes and an economic malaise but is singing the praises about "bigger is better" stocks now, too.
"If you're worried about a feeble economy you want to own companies with strong balance sheets," says T2 Partner's Whitney Tilson, who is loading up on big, multinational companies though he doubts the market will rise much for a while. "The beauty today is those companies are on sale."
Blue chips are always in the news. They're widely owned by pension funds and by individual investors in index funds, and heavily covered by Wall Street analysts. They're the companies that sell beer and medicine. They're the banks where people put their money. They make tractors and computer software. And they typically trade at premium prices, so sometimes are shunned by contrarians like the three above who have been bearish when others are bullish.
Better to troll in "more obscure waters" to find cheap stocks, as FPA's Romick explained to investors in a recent letter.
But now the bargains are staring them in the face -- no trolling required.
Tilson of T2 Partners says Microsoft Corp. is a steal. Its stock has lost 4 percent in the past year, while the rest of market has risen. Yet the company has little debt, $37 billion in cash and dominates the operating system and software businesses, giving it pricing power competitors don't have. Translation: Customers won't flee if it has to raise prices in an inflationary environment or decide not to cut them as wages fall along with everything else in a deflationary one.
The kicker: You can follow in Tilson's footsteps and buy Microsoft's stock for 11.35 times the last reported annual earnings, or less than 10 times if you subtract cash from the stock price. Tilson says that's nearly the lowest ever. The stock closed Friday at $23.85, near its 52-week low.
Tilson's two mutual funds -- Tilson Focus and Tilson Dividend -- have posted annual returns of 4.2 percent and 7.7 percent since startup five-and-half years ago. The Standard & Poor's 500 is down 0.3 percent.
Tilson also recently bought Pfizer Inc., Kraft Foods Inc. and Anheuser Busch InBev NV, the world's largest beer company. As it turns out the latter is a holding of Romick's FPA, too. He notes in his letter that the company's big presence overseas means it can grow even when the U.S. is not.
Tempted? The Dow Jones industrial average of 30 big stocks, a proxy for blue chips, rose for a second straight week on Friday. But jitters over European debt troubles and slowing U.S. economic growth have taken a toll. The index is down nearly 7 percent from April.
Bill Miller, the chief investment officer at Legg Mason who beat the broader market for 15 straight years before a much publicized stumble recently, is jumping in. In a July investor letter he called blue chips "bargains," and urged investors to seize this "once in a lifetime opportunity."
Among Legg Mason's top holdings in its flagship fund, The Value Trust, are blue chips Goldman Sachs Group Inc. and IBM.
Of course, even if the pros are right that some stocks are cheap, they may get cheaper still. That's especially true in an age of computerized trading where everything tends to get swept up in the big market moves, and even sharpshooters picking off stocks one-by-one can get hurt.
"That style of investing isn't working now," says Cleve Rueckert, a strategist at Birinyi Associates, which has data suggesting stocks are moving in lockstep like rarely before. "When the market goes up, most stocks go up, and when it goes down, most go down. The traders are running the show."
Tilson, for one, isn't deterred.
"The stock market has jerked people around so much, they don't want any part of it," he says. "But that's music to my ears. To be a successful investor, you have to buy things that aren't popular."
http://finance.yahoo.com/news/Why-some-gloomy-investors-are-apf-1503189425.html?x=0&.v=2
How Often Should You Change Your Oil?
By Mark Huffman
ConsumerAffairs.Com
September 13, 2010
If you're driving a new car, changing every 3,000 miles could be wasteful
It has been an article of faith a among drivers, passed down from one generation of motorists to another: change your oil every 3,000 miles.
But do you really have to? It all depends on the age of the vehicle you're driving, automotive experts say.
"There was a time when 3,000 miles was a good guideline," Philip Reed, senior consumer advice editor for the car site Edmunds.com , told The New York Times this week. "But it's no longer true for any car bought in the last seven or eight years."
So, if you're driving a 2002 model or older, you should probably stick with a 3,000 mile oil change. But beyond that, the automotive experts at Cars.com say how often you should change your oil is an inexact science.
Factors like how you drive, the condition and age of the engine, the external environment you drive in, and stop-and-go versus highway driving, all come into play. Since most owners manuals recommend changing oil between 3,000 and 10,000 miles, the Cars.com experts split the difference.
Splitting the difference
"We recommend that you change your oil and filter every 5,000 miles," the experts say on the website. "That's our best estimate. It may be too soon for many people and too late for a few, but for the vast majority, 5,000-mile oil changes will help your engine last to a ripe, old age."
Reed says drivers can probably get 7,500 miles between oil changes, depending on driving conditions.
At about $35 per oil change, your automotive shop would like you to stay on the 3,000 mile schedule. But environmentalists take a different view. When newer vehicles entered the market extending the time between needed oil changes, the California Integrated Waste Management Board ran public service announcements about the "3,000 mile myth," urging drivers to get more mileage out of their engine oil.
Oil is replaced in engines because, over time, it undergoes thermal breakdown due to high operating temperature. When this happens, the oil becomes less effective as a lubricant. When the oil stops lubricating properly, the engine parts can quickly wear out.
Sometimes, regular oil changes might not help. Consumers who drive particular vehicle models have reported problems with "sludge" forming in their engines, even though the oil was not old.
Sludge problems
Sludge occurs when oxidized oil builds up in an engine. It forms a mucky goo that can cause the engine to seize up. The problem can be caused by failure to change the oil, but also by other factors. And sludge problems seem to occur in some models more than others.
"My 2003 Toyota Sienna started smoking," Manny, of Seffer, Fla., told ConsumerAffairs.com. "My mechanic looked at it and said the engine was full of sludge, which is a common problem with Toyotas. He said the repairs would be extensive and to contact Toyota since I had less than 60,000 miles on it and had changed oil on a regular schedule."
Toyota owners aren't the only consumers to report the problem. In the mid-2000s, some Volkswagen owners reported similar experiences.
"I have a VW Passat with 1.8 Turbo engine," reported Mikhail, of Branson, Mo. "The oil pressure light came on at 60k miles, with the stop engine sign. It was VW's famous engine sludge problem."
While changing your oil every 3,000 miles or so is still a good idea if you drive an older model vehicle, check your vehicle's owners manual for advice on changing the oil in newer cars. Increasingly, you'll find they recommend more miles between changes, and at $35 or more per oil change, that can add up over the life of your vehicle.
http://www.consumeraffairs.com/news04/2010/09/oil_changes.html
Gold Miners Stacking Dollars Faster Than Ever, Acquisitions Roll
Scott Nystrom
09.09.10, 10:44 AM EDT
Thanks to a rising gold price, miners are printing money despite higher costs.
Several large gold producers reported banner earnings for the second quarter on record gold prices and despite rising operating and capital expenditure costs. Average gold prices have risen 19 percent averaging $1,158 in the first half of 2010 compared to $973 an ounce in 2009 according to the World Gold Council.
Newmont Mining ( NEM - news - people ) reported a 34 percent year-over-year increase in sales. Goldcorp ( GG - news - people ) increased net income in the second quarter of 2010 by 457 percent compared to the previous year’s second quarter. Kinross Gold ( KGC - news - people ) showed 25 percent growth in earnings per share. Boosted by a banner season for earnings, gold producer share prices surged 11.6 percent in August as measured by the Market Vectors Gold Miners ETF ( GDX - news - people ).
Some gold producers even boosted their dividends including Yamana Gold ( AUY - news - people ) (with a 33 percent increase in the quarterly payout from 1.5 cents to 2 cents. Newmont Mining raised its quarterly dividend 50 percent, from 10 cents per share to 15 cents. And Barrick Gold ( ABX - news - people ) enhanced its quarterly dividend from 10 cents to 12 cents, a 20 percent increase. Even junior gold producer Gold Resource recently initiated a special cash dividend of 3 cents per share. Rising dividends are a sign of confidence by management in the ability of a company to continue to improve the bottom line.
With the price of gold regularly making new all-time highs this year, the confidence of gold producers around the world is rising fast. Over the past ten years, the price of gold has increased from about $250 per ounce to $1,250 an ounce, a five-fold increase. Gold producers should be printing money faster than the Federal Reserve, shouldn’t they? Well they are, despite increases in operating costs and development costs. Free cash flow (operating cash flows minus capital expenditure) is the best measure of the improved earnings trend. Large gold producers have created more free cash flow for the first half of 2010 than for the entire calendar year 2009. In addition, cash on hand is beginning to pile up.
Barrick Gold, a conservative pick in my Gold Stock Strategist newsletter, is a good example of this trend. Barrick created $1 billion in operating cash flow for the first half of 2009. In the first half of 2010, operating cash flow doubled to $2 billion. A rising price of gold is adding to free cash flow and sharply improving earnings for the company. Barrick’s cash on hand represents a large war chest, poised to acquire quality gold mining projects.
The trend towards rising free cash flow is showing up across the industry. Newmont Mining reported free cash flow for the first half of 2010 of $853 million; Kinross has free cash flow of $237 million; Goldcorp posted $69 million; and South African miner Gold Fields ( GFI - news - people ) reported free cash flow of $291 million.
Cash on hand has also been rising throughout the industry. For example, Newmont’s cash on hand was $3,602 million in the first half of 2010, up from $3,215 at the end of 2009.
In contrast, Goldcorp’s cash has already been put to use through acquisition or organic growth. The organic growth at the recently completed Peñasquito project in Mexico was a large and expensive undertaking. Cash on hand at Goldcorp was at $497 million halfway through 2010, down from $875 million at the end of 2009. If approved, Goldcorp’s most recent bid to acquire Andean Resources will likely reduce cash on hand further for the company.
Operating costs are increasing in the industry, driving cash cost per ounce of production to higher levels. Over the 12 months spanning Q1 2009 to Q1 2010, average cash costs for large gold producers rose $90 an ounce from an average of about $460 in the first quarter of 2009 to an average of about $550 an ounce in Q1 2010, a 19.5 percent jump.
The good news for gold investors is that a rising gold price has offset the trend towards higher operating costs, allowing gold miners to expand margins. The price of gold averaged $909 an ounce for the first quarter of 2009, compared to $1,108 an ounce in the first quarter of 2010, a rise in price of $199 or 22 percent. The math of increasing profits is pretty simple. If average cash costs are rising by $90 an ounce and receipts are rising by $199 an ounce, margins are expanding.
Development projects to backfill maturing mine production are also pushing capital expenditures higher for large producers. Several majors have expensive mine development projects underway. Moreover, there are few multi-million ounce development projects ready to move into production.
The lack of multi-million ounce development projects raises the cost of acquisition as shown by the recent buy out of African gold miner Red Back Mining by Kinross Gold, paying about $7,000 an ounce for current gold production levels. Of course, what Kinross really paid for was resource expansion and the promise of higher future production at Red Back’s Tasiast mine in Mauritania. Tasiast is a world class gold deposit with 5 million ounces of gold and significant upside in resource expansion. Kinross shareholders will vote to approve the acquisition of Red Back at a September 15 meeting.
One way to counter rising costs is to co-produce base metals along with gold rather than be a pure gold play, a strategy adopted by companies like Goldcorp. Large gold producers may look for junior gold acquisitions with base metals like copper and zinc.
When all is said and done, August was a great month for gold producing stocks after a banner earnings season in the second quarter. Despite the cost challenges faced by miners, a rising price of gold should continue to push margins and share prices higher in a long-term bull market for the price of gold.
Scott V. Nystrom, Ph.D., is editor of Gold Stock Strategist newsletter. He has worked as a policy advisor and economist for 25 years at the White House Office of Management and Budget, the U.S. Congress, academia and in the private sector.
http://www.forbes.com/2010/09/09/goldcorp-kinross-barrick-gold-markets-newmont-mining.html?boxes=Homepagechannels
Bankrupt Companies: Pay Us Back
Vincent Ryan - CFO.com | US
September 10, 2010
Bankruptcy trustees are aggressively seeking to reclaim payments made by insolvent firms to vendors and other unsecured creditors.
While corporate bankruptcies have stalled in 2010 (only nine large public companies filed in the second quarter), the fallout from the explosion of filings in 2008 and 2009 is still being felt. Almost two years on, the huge number of cases from that period is creating big headaches for one group: the suppliers to those bankrupt companies. Bankruptcy estates are now attempting to claw back monies paid to these suppliers during the 90-day run-up to the insolvent companies' filing.
Cases are flooding corporate in-boxes. Three hundred and forty-five companies with nearly $1.8 trillion in assets at the time of their filing declared Chapter 11 or Chapter 7 in 2008 and 2009, according to BankruptcyData.com. The statute of limitations for these so-called preference claims is two years after the bankruptcy, so lawsuits arising from the recent surge in bankruptcies are just beginning to be filed. The estate of Quebecor World, a bankrupt printing company, alone has filed about 1,700 preference claims.
Preference claims from other large Chapter 11s loom. General Motors, for example, had hundreds of billions of dollars in unsecured debt when it filed for bankruptcy in June 2009, owing tens of billions to such trade creditors as Starcom Mediavest Group, Delphi Corp., and Robert Bosch GmbH. While the estate has yet to file any preference claims, there's no indication that it won't pursue this avenue of recovery.
"I have not seen this level of actions being filed ever before — and I've been doing this for 30 years," says Hal Schaeffer, president of D&H Credit Services, who often acts as an expert witness on either side of bankruptcy cases.
Enabled by Section 547 of the U.S. Bankruptcy Code, preference claims are intended to prevent near-insolvent companies from favoring one creditor over others in the run-up to a filing. The suits are brought to force vendors that were paid within the 90-day window to return the payments. Presumably, the money goes back into the estate, from which all unsecured creditors may get a settlement.
Not all bankrupt companies pursue preference claims, preferring not to damage supplier relationships because the bankrupt entity is continuing as a going concern. The current cycle of claims, however, is especially costly and disconcerting for small creditors to now-bankrupt firms.
For one, compared with the 2001-2003 cycle of bankruptcies from the dot-com bubble, estates in the current wave are going after even the smallest payments made to vendors, whether it's "$50 million, $5 million, or even [a few thousand dollars]," says Schaeffer. The minimum claim is $5,850, a number set by the five-year-old Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and tied to a cost-of-living index. Schaeffer says the aggressiveness is a result of the "dry time" between 2004 and mid-2007, when trustees had very few dollars to go after because bankruptcies were scarce.
Smaller preference claims, of course, tend to fall in the laps of smaller companies. Larger companies, with armies of lawyers, can more easily intimidate trustees into taking pennies on the dollar. But if a small supplier is hit with a $30,000 preference suit, says Schaeffer, it can spend nearly that much to hire an attorney and an expert witness and to unearth invoices and records. It can be cheaper for the supplier to simply offer the bankrupt company 50 cents on the dollar, which he calls "not a good settlement," considering that unsecured creditors typically recover only 5 cents to 7 cents on the dollar from the estate. "It won't be anywhere near what they put in," he says.
Smaller creditors also usually don't have a good defense to a preference suit, in which the burden of proof is on them. For example, in the "ordinary course" defense, the vendor has to prove that the credit terms extended to the insolvent company in the prebankruptcy period were consistent with the way the two normally conducted business. "The best defense is consistency," says Schaeffer. "If the numbers are inconsistent, you will lose every time." The problem is that small companies selling to large companies often bend over backward to keep the business, to the point of loosening credit terms to customers on the brink of insolvency.
Other preference-claim defenses provide small companies with some measure of protection. Under the "new value" defense (Section 547(c)(4) of the Bankruptcy Code), if the creditor shipped another order or supplied services to the debtor after it received the payments that the bankruptcy trustee is seeking to recover, the creditor can offset the preference claim by the value of the new order or services.
Finally, the BAPCPA established a new protection to suppliers that ship goods to insolvent companies in the period right before a bankruptcy filing. These "reclamation claims" (Section 5039(b)(9)) award first priority, administrative status to claims by creditors that ship the insolvent company goods within 20 days of the bankruptcy filing. Administrative claims have to pay 100 cents on the dollar before other unsecured creditors see a dime.
Charging that the preferences section of the Bankruptcy Code leads to "abusive preference recovery suits," the National Association of Credit Management is petitioning Congress to change the code. It is "common practice for trustees," the NACM says, "to send out a blanket demand and complaint to every creditor who received payments within 90 days of the bankruptcy filing," and they do so with "little or no prior investigation other than to review the debtor's check register." It's rarely cost-effective for the creditor to defend against the action, the NACM contends.
The NACM also says a study by the National Bankruptcy Review Commission found that more than 90% of preference recoveries are not dedicated to satisfying the needs of unsecured creditors but instead go to funding recovery activities.
Of course, the best defense to the risk of being sued in a preference action is to keep customers on a regular payment schedule. "If a customer has been paying net 45 [days] on average and they start slowing down, you have to pull back on the reins and get them back into the 45-day area," says Schaeffer. "The finance department that is more alert to customers' financial problems and treats all customers the same reduces its exposure to [bankruptcy risks]."
http://www.cfo.com/article.cfm/14523329/c_14523752?f=archives&origin=archive
Can the Bulls Establish Control?
by Price Headley
Weekly Market Outlook
Two back-to-back winning weeks? Yep, even if the second of the two was a 'just barely' situation. The positives are starting to roll in as frequently as the negatives when looking at major index charts, and maybe (if we can just catch a break from some of this week's economic data) the bulls can finally take control again. They aren't quite there yet though.
The details of that contest are detailed below in our index discussions, but first, let's poke and prod the economy.
Economic Calendar
Looks like a week of minimal economic data was just what the doctor ordered; stocks managed to rally any the absence of any landmines. Too bad this week we're back to the long laundry list of data to work through.
As for last week, the biggie was unemployment claims - new claims fell to 451K, while ongoing claims fell to 4478K. Though the market celebrated, neither number was below the recent range, and as such isn't celebration-worthy yet. In this environment though, 'not losing' is the same as winning.
The only other data nugget of interest isn't even all that impacting.... consumer credit levels contracted (again) by $3.6 billion. It's still better than the expected $5.2 billion contraction, but fairly meaningless in the grand scheme of things.
Economic Calendar
As for this week, look out - it's going to be a wild ride.
The fireworks start on Tuesday with August's retail sales numbers. Look for slight increases (of 0.30%) with or without autos.
On Thursday we'll once again get initial and continuing unemployment claims data. The pros are basically looking for flat numbers, but given last week's overly-pessimistic expectations, that'll be news worth watching. On the other hand, it's news worth watching no matter what the expectations are.
We'll also get two other monster announcements on Thursday.... capacity utilization, and industrial productivity. We call them monsters simply because they have such a strong and consistent correlation with long-term market trends. And, both have been trending higher - with the overall market - since the middle of last year. Both are also expected to inch higher this time around, which is good news for the true long-termers.
On the inflation front, look for a very modest increase in producer prices on Thursday (+0.3%), and a modest uptick of consumer inflation on Friday (+0.2%). So far, we've yet to see any indication that last month's deflation panic has any merit.
Industrial Productivity Index, Capacity Utilization
S&P 500
As of last week, one of our biggest complaints about the S&P 500 was that it hadn't been able to hurdle the 100-day moving average line (gray) despite the huge rally.... a particular worry, considering that the 100-day line was the ultimate beginning of the pullbacks in June and August. Well, at least that problem was solved last week - the 100-day line is at 1102, while the S&P 500 closed at 1109.55.
On the other hand, the 200-day moving average line (green) - which is the more meaningful of the two - still lies ahead at 1115. And of course, the ultimate ceiling at 1130 (dashed) looms above as well. If they seem familiar, it's because that's the same list of pitfalls we've been dealing with for months now; we really didn't make any meaningful progress last week, and we're still under any key breakout levels.
Likewise, the CBOE S&P 500 Volatility Index (or VIX) hasn't actually made any meaningful progress lower. The close at 21.99 last week is still holding above the recent floor at 21.50. Until that floor is broken, we can't assume investors are feeling confident enough about stocks to take a big bullish plunge.... just a small one.
S&P 500
NASDAQ Composite
Not much to add about the NASDAQ... despite a little progress last week, the major hurdles still lie ahead. The 100-day line (grey) is at 2260, and the 200-day average is resting at 2273. And as we've mentioned before, the ultimate ceiling is 2311. Until that's cleared, don't get too excited.
Like the VIX, the VXN has also failed to sink enough to suggest traders are feeling significantly more comfortable with the market. Until and unless the VXN can move under 22.90, any market bullishness will be a little bit questionable.
NASDAQ Composite
Sector Performance
Technically speaking, the healthcare sector won the week last week with a 1.9% pop, though the runner up - telecom - may have been the most noteworthy leader. The average telco stock gained 1.6%, widening the lead developed since the April 23rd top (and subsequent rebound). In third place were the industrials, with a 1.0% advance.
At the bottom of the barrel you'll find utilities, with a 0.7% dip last week - a stark change of character for the group, which had otherwise been very bullish. Technology and financials were also bottom dwellers last week, turning in losses for the week.
The S&P 500 gained about 0.5% last week, just for reference.
With all that being said, energy and consumer staples may actually be the most compelling plays here. The energy sector overtook the tech sector on an intermediate-term performance basis, while the staples sector has simply continued to (quietly) outperform. Plus, the energy group has some of the most recovery potential here.
Sector Performance
Industry Performance
No real surprises here. It's clear why healthcare was at the head of the class last week - healthcare services and managed health care placed in the top five (of about 200) groups. Industrial conglomerates, internet retail, and aluminum were in the middle of the leaders' pack. Though the basic materials group wasn't especially impressive last week, aluminum's leadership is curious in that it's been a severe underperformer for so long.
At the bottom of the barrel is consumer electronics, and then real estate development. The biggest turnaround, however, is the sudden weakness in leisure facilities. It's ripe for a tumble after a string of persistent strength.
Industry Performance
http://www.bigtrends.com/articles/weeklyoutlook/13719-can-the-bulls-establish-control-weekly-market-outlook.html
There's One Thing We Can Always Count On in the Long-Run: 2% Growth in Per-Captia Real GDP
by Professor Mark J. Perry
Posted on 09/10/10 at 2:20pm
Over the last 200 years going back to 1809, the chart above shows that the growth in real GDP per capita in the U.S. has been amazingly constant at an average of 2% year, with fluctuations around that long-term secular trend. The National Bureau of Economic Research has documented 33 recessions since 1857, including a few major ones that are easily identifiable in the chart above: a) three severe contractions in the 1865-1880 period following the Civil War, with the last one lasting more than five years, and accompanied by a 20-year period of below-average growth, and b) the Great Depression with two official recessions (August 1929 to August 1933; and May 1937 to June 1938) and a ten-year period of below trend growth.
Despite the vagaries of the business cycle and unexpected periods of recessions in the U.S. economy, there's one thing we can always count on in the long-run: 2% real growth in per-capita GDP, meaning that that output per person in the U.S. doubles every 35 years, or almost twice during the average person's lifetime. And for that, we can be thankful.
http://www.benzinga.com/10/09/467871/theres-one-thing-we-can-always-count-on-in-the-long-run-2-growth-in-per-captia-real-gdp
Tax Wars
by Laura Saunders
Monday, September 13, 2010
Washington Is Bracing for a Historic Battle Over U.S. Tax Law. Here's What You Should Do Now
(Please see Corrections and Amplifications below.)
Not since the Great Depression has Congress had so much tax work to do in so little time.
From the income tax to the estate tax, from the alternative minimum tax to levies on capital gains and dividends—plus much more—nearly every area of individual taxes is in limbo. Come January, for example, the top federal rate on dividends could be as low as 15% or, if nothing is done, as high as 40%.
It gets worse: Lawmakers have only four weeks to tackle these massive issues before Columbus Day, when they adjourn until November. During these weeks, each party will be looking for opportunities to make political theater ahead of the coming elections. The drama will likely slow things further, especially in the Senate, where lately it has been tough to muster a filibuster-proof 60 votes for any measure more controversial than a flag raising.
This past week, President Obama gave a barnstorming speech in favor of dropping the 2001 tax cuts for those making more than $250,000, and House Minority Leader John Boehner (R, Ohio) countered with a proposal to extend them for all taxpayers for two years.
Despite the theatrics, says veteran analyst Clint Stretch of Deloitte Tax LLP, "The unprecedented uncertainty on taxes is unlikely to be resolved until December." What's more, he warns, lame-duck sessions are unpredictable as well.
Already the uncertainty has been a costly distraction for many. Laura Wilson, an owner of Asheboro, N.C.-based Pyramid Services, a building and road-maintenance firm with 700 employees, regrets two moves she says were prompted by the current void. This year, she says, she and her co-owner brother, who inherited the firm from their father, plan to distribute its first-ever dividend. "We'd prefer to leave the money in the business," she says, "but considering how much the rate could go up, a distribution made sense."
Ms. Wilson says she and her brother also are paying more than $100,000 to buy "key man" insurance that would help pay taxes if either one dies suddenly. (Currently there is no estate tax but heirs may owe significant capital-gains taxes, while next year the estate exemption is slated to be only $1 million.) If Congress reimposes 2009's much larger $3.5 million exemption, she says, "that would do a lot" to lower her premiums.
Other taxpayers feel overwhelmed just trying to keep up. "A typical question from my clients is whether the expiring Bush tax cuts will affect their 2010 or 2011 returns," says Leonard Williams, an accountant in Sunnyvale, Calif. (The answer: 2011.)
Despite lawmakers' foot-dragging, one fact is sure to galvanize their attention, says Mr. Stretch. It is the certainty that if Congress doesn't act this year, the "Bush tax cuts" will expire and early in 2011 tens of millions of paychecks, at incomes high and low, will shrink as a result of higher withholding.
That's because the changes of 2001 lowered tax bills for millions of taxpayers with modest incomes as well as for the rich. So the expiration is far more politically volatile than this year's estate tax lapse, which—although stunning—will affect the heirs of perhaps 50,000 people.
Here is a guide to where things stand, along with suggestions for what to do—or not do—in order to cope:
Income-tax rates
•Status: The "Bush tax cuts" of 2001 expire at the end of 2010. The top nominal income-tax rate would revert to 39.6% and the current 33% rate would rise to 36%. Taxes on millions of low- and moderate-income taxpayers will rise as well.
•What's ahead: a fierce battle. President Obama is demanding the 2001 cuts be extended only for those making less than $250,000. But some in his own party, plus many Republicans, want to extend them for all taxpayers, perhaps for two years. Many political analysts don't expect resolution until late this year.
Given that most of the benefit of a tax-cut extension for those making more than $250,000 goes to taxpayers with incomes over $1 million, some are wondering whether lawmakers may wind up imposing a "millionaire's tax," while preserving the cuts for those making less.
•What to do: Watch and wait. Prepare to take bonuses or accelerate income into this year and defer deductions into next year, when they will be more valuable, if it becomes clear that rates will rise. Mr. Stretch from Deloitte Tax points out that whatever happens next year, taxes for upper-income taxpayers are all but certain to be higher by 2012 or 2013, especially with the 3.8% investment income tax that will take effect in 2013, so plan accordingly.
Stealth income taxes
•Status: Two provisions that used to limit benefits for upper-income taxpayers aren't in current law. One is the personal exemption phase-out (PEP), which erodes the $3,700 deduction per family member for singles with income above about $170,000 and joint filers above about $255,000.
The other is the "Pease haircut" (named for the congressman who pushed it), which shrinks the value of itemized deductions for taxpayers with incomes above about $170,000. The Pease haircut often adds about 1% to the tax rate of affected taxpayers, according to Roberton Williams of the nonpartisan Tax Policy Center.
•What's ahead: Both limitations will return unless the Bush tax cuts are extended. Mr. Obama's budget reinstates them, as would expiration of the cuts.
•What to do: These back-door tax increases are hard to counteract, but affected taxpayers should remember that absent extension of the 2001 cuts, their tax rate will be higher than advertised.
Capital gains
•Status: The current top rate on long-term capital gains is 15%, which expires at the end of this year.
•What's ahead: Unless Congress acts, the top nominal rate will revert to 20% in January, which is the rate Mr. Obama's budget has called for. A temporary extension of current law would leave the 15% rate in place. The issue will probably be decided along with income-tax rates.
•What to do: "Don't let the tax tail wag the dog on investments," says Kenneth Kossoff, an attorney with Panitz & Kossoff LLP near Los Angeles. The big exception: He and others are advising clients with transactions involving large capital gains to complete them in 2010 if possible. Remember that if tax rates rise next year, so will the value of long-term capital losses carried forward from the past decade's market slaughters.
Dividends
•Status: The current top rate on qualified dividends (generally, those held longer than 60 days) is 15%. It expires at the end of this year.
•What's ahead: Unless Congress acts, the top nominal rate on these dividends will revert to the top rate on ordinary income of 39.6%.
A temporary extension of current law would leave the 15% top rate in place. Mr. Obama's budget calls for a top tax rate of 20% on dividends, rather than 39.6%. This issue will probably be decided along with income-tax rates.
•What to do: Owners of C-corporations who normally distribute dividends after the new year may want to accelerate them into 2010, and those who don't typically pay a dividend may want to consider it.
Alternative minimum tax
•Status: The "patch" to narrow this tax's reach for the 2010 tax year hasn't been passed yet by Congress. Thus the exemption for married joint filers is currently $45,000, as opposed to nearly $71,000 last year. If the patch doesn't get done, 32 million taxpayers will owe AMT in 2010 versus 5 million last year.
Clint Myers, an investment actuary in Georgetown, S.C., figures it would raise his tax bill 10%—more than the expiration of the 2001 tax cuts would.
•What's ahead: Congressional tax staffers say they think the patch will get done when Congress addresses income-tax issues.
•What to do: People who owe estimated taxes are supposed to be paying at higher "nonpatch" rates until Congress fixes the problem. You can avoid paying at these higher rates or risking penalties by using an IRS "safe harbor," such as paying 110% of last year's taxes.
•Also: if tax rates go up next year, it becomes harder to fall into the AMT. Thus deductions may become more valuable, says Douglas Stives, an accounting professor at Monmouth University in New Jersey.
Charitable donations
•Status: No radical changes are imminent. Congress hasn't, however, reauthorized a provision allowing taxpayers older than 70 1/2 to donate directly from individual retirement accounts to charities for 2010.
•What's ahead: The IRA provision is part of an "extenders" bill that with luck will pass before the new year. But Mr. Obama has proposed limiting the value of donation deductions for upper-bracket taxpayers to 28%.
•What to do: Prof. Stives is advising taxpayers who want to make large contributions in 2011 to consider making them in 2010 instead.
Retirement funding
•Status: This is the first year all taxpayers have been allowed to convert regular IRAs into Roth IRAs, which allow tax-free withdrawals and have other benefits. In addition, there are several proposals before the Senate that would broaden retirement plan options. One would allow employees to convert regular 401(k) assets to Roth 401(k) accounts.
•What's ahead: These proposals are part of a small-business bill that may be passed before Congress adjourns in October.
•What to do: Consider whether to convert IRA assets to a Roth account, which means accelerating income taxes. The good news is that 2010 converters may undo such conversions until Oct. 15, 2011.
Estate taxes
•Status: Because of Senate inaction, the estate tax lapsed as of Jan. 1, 2010, and it returns in 2011 with a $1 million exemption per individual and top rate of 55%. Although there is no estate tax this year, heirs of those dying in 2010 may owe full capital-gains tax on sales of inherited property if the total estate is more than $1.3 million (plus $3 million if the heir is a spouse).
By contrast, 2009 and 2011 laws tax heirs only on gains from the date they inherit an asset. Current law requires extensive recordkeeping and actually raises taxes on many heirs affected by 2010 law.
•What's ahead: Many believe Congress will return the estate tax to its 2009 level—a $3.5 million exemption per individual and a top rate of 45%—with an outside possibility of raising the exemption.
There also is sentiment for giving heirs of those who die in 2010 the choice of using 2009 rules. Congressional staffers have said they expect lawmakers to address estate taxes at the same time as income taxes. Tax returns for those who die in 2010 are due April 15, 2011, or Oct. 15 with a six-month extension.
•What to do: The IRS hasn't yet published a form or guidance for 2010 law. Many advisers are telling heirs of those who die in 2010 to gather records and, if possible, put off irreversible actions until the outcome is clearer. But some executors of estates that benefit under 2010 law have taken the opposite tack and settled them quickly, vowing to sue if Congress makes retroactive changes raising their tax.
Gift and generation-skipping taxes
•Status: This year the top gift-tax rate is 35% and there is no generation-skipping tax. In other years the latter imposes a second layer of tax when donors or trusts make very large transfers to someone two or more generations removed.
•What's ahead: Unless Congress acts, the gift-tax rate will rise to 55% in January. If Congress extends 2009 rules, the rate will be 45% instead. The generation-skipping tax also returns in January. It is unclear how lawmakers will treat these issues when they deal with the estate tax. This late in the year, it would seem unfair to impose these taxes retroactively for 2010, says Carol Harrington, an attorney with McDermott, Will & Emery in Chicago.
But, she adds, "if they are hunting for pennies in the sofa cushions, who knows what will happen?"
•What to do: Many advisers, including Ms. Harrington, are suggesting that wealthy clients plan for taxable gifts in 2010 but not pull the trigger until late December. This minimizes the chance of the donor dying shortly after the gift, which would mean paying unnecessary tax. In addition, the law might be clearer.
Corrections and Amplifications
The Tax Foundation has an online tax calculator that can be found at www.mytaxburden.org, and the Web address of a Tax Policy Center calculator is calculator.taxpolicycenter.org. A previous version of the chart accompanying this article incorrectly gave the Tax Foundation address as www.mytaxbuilder.org and the Tax Policy Center link as www.calculator.taxpolicycenter.org, which works in some Web browsers but not others.
Write to Laura Saunders at taxreport@wsj.com
http://finance.yahoo.com/banking-budgeting/article/110649/tax-wars?mod=bb-budgeting&sec=topStories&pos=6&asset=&ccode=
CEO Confidence Index
Chief Executive magazine
August 2010
Despite small gains from the previous month, CEO confidence in the economy remains weak.
Chief Executive magazine’s CEO Confidence Index, the nation’s only monthly CEO Confidence Index, rose slightly in August, gaining 9.4 points to 89.2.
While all five components of the index showed modest gains, the index has gained only 3.8 points over the December, 2009 level. The government stimulus package has failed to stimulate CEO confidence.
Employment remains a significant hurdle. The Employment Confidence Index gained 3.2%, from a low level, rising to 79.1. Several CEOs commented on the importance of employment growth to a full economic recovery. One CEO stated, “Unemployment continues to be a major obstacle to growth of the economy. The politicians have forgotten this issue”. Wess Schmidt, President and CEO of Strategic Business Planning and Development, told Chief Executive, “The government has run out of stimulus ideas and the country's economy is still in bad shape. What they should have focused on immediately is the employment numbers and that would have bolstered the rest of the economy… Employment is like a train effect, fix the locomotive and the rest of the cars will follow.”
The Business Condition Index rose to 89.4, a gain of 6.6%.
The Future Confidence Index rose 6.9% to 105.8. The Future Confidence Index, which measures the outlook on employment, and capital spending opportunities over the next quarter, remains the highest scoring component of the index.
The Investment Confidence Index increased to 96.9, a gain of 18.5%. CEOs rating the current investment opportunities as “good” increased from 15.0% to 27.4%. Access to capital for small businesses remains a challenge. “The issue is not a demand for credit, but the availability of credit for small businesses. There is no effective equity market for a small business, the only hope for most of them is the Small Business Administration,” declared a CEO.
The Current Confidence Index rose 19.6% to 64.7. While this component showed the largest percentage gain of all of the indexes, it remains the lowest index in actual point value, and reflects a bleak mood by most CEOs. John Davies, CEO of JLD Enterprises, commented, “I feel that the economy will stay pretty much at the same level as it is currently”. Added another CEO, “Despite the news from D.C., unemployment is high, availability of capital is down and the economy is doing poorly.”
One Chief Executive Officer expressed optimism, “For those that do have strong balance sheets and access to capital and liquidity, the environment is ripe with opportunity for acquisition, organic growth and capturing market share.“ The majority of CEOs were not so upbeat. “Given the direction of government growth, regulation, taxation, foolish spending and lack of accountability or responsibility, I believe the U.S. economy has a very rough road ahead,” observed one CEO. Another added, “I just went to Cedar Point to ride roller coasters, so I can be ready for the next 12 months.”
CEO Confidence Index, August, 2010
Respondents: 267
http://tinyurl.com/24eozd3
The Last Half
By: John Mauldin
Sun, Sep 12, 2010
There are a number of economic forces in play in today's world, not all of them working in the same direction, which makes choosing policies particularly difficult. Today we finish what we started last week, the last half of the last chapter I have to write to get a rough draft of my forthcoming book, The End Game. (Right now, though, it appears this will actually be the third chapter.) We will start with a few paragraphs to help you remember where we were (or you can go to www.2000wave.com to read the first part of the chapter).
But first, I recorded two Conversations yesterday, with the CEOs of two biotech firms that are working on some of the most exciting new technologies I have come across. I found them very informative, and we will post them as soon as we get them transcribed.
For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to "listen in" on my conversations (or read the transcripts) with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I call one or two friends every now and then; and just as we do at dinner or at meetings, we talk about the issues of the day, back and forth, with give and take and friendly debate. I think you will find it enlightening and thought-provoking and a real contribution to your education as an investor. Plus, we throw in a series I do with Pat Cox of Breakthrough Technology Alert, where we interview some of the leading up-and-coming biotech companies; and I also do a Conversation with George Friedman of Stratfor 3-4 times a year. Quite a lot for the low price.
I recently recorded a Conversation with Mohamed El-Erian, CEO and co-CIO of PIMCO, who is one of the smartest human beings I know, as well as one of the nicest. As you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html . Click on the Subscribe button, and join me and my friends for some very interesting Conversations. (I know the price says $199 on the site, but for now you will only be charged $129 - I promise.)
All of the previous Conversations are posted and available, as well as most of the speeches from my Strategic Investment Conference a few months ago. I do work hard to make sure my subscribers get more than their money's worth. And now, to the letter.
The Last Half
A $1.5-trillion-dollar yearly increase in the national debt means that someone has to invest that much in Treasury bonds. Let's look at where the $1.5 trillion might come from. Let's assume that all of our trade deficit comes back to the US and is invested in US government bonds. That could be as much as $500 billion, although over time that number has been falling. That still leaves $1 trillion that needs to be found to be invested in US government debt (forget about the financing needs for business and consumer loans and mortgages).
$1 trillion is roughly 7% of total US GDP. That is a staggering amount of money to find each and every year. And again, that assumes that foreigners continue to put 100% of their fresh reserves into dollar-denominated assets. That is not a safe assumption, given the recent news stories about how governments are thinking about creating an alternative to the dollar as a reserve currency. (And if we were watching the US run $1.5-trillion deficits, with no realistic plans to cut back, we would be having private talks, too.)
There are only three sources for the needed funds: either an increase in taxes or people increasing savings and putting them into government bonds or the Fed monetizing the debt, or some combination of all three.
Leaving aside the monetization of debt (for a later chapter on inflation), using taxes or savings to handle a large fiscal deficit reduces the amount of money available to private investment and therefore curtails the creation of new businesses and limits much-needed increases in productivity. That is the goose we will kill if we don't deal with our deficit.
But It's More Than the Deficit
We talked earlier about how increasing government debt crowds out the necessary savings for private investment, which is the real factor in increasing productivity. But there is another part of that equation, and that is the percentage of government spending in relationship to the overall economy. Let's look at some recent analysis by Charles Gave of GaveKal Research.
It seems that bigger government leads to slower growth. The chart below is for France, but the general principle holds across countries. It shows the ratio of the private sector to the public sector and relates it to growth. The correlation is high. (In the book we will show the same graph for other countries.)
That is not to say that the best environment for growth is a 0% government. There is clearly a role for government, but government does cost and that takes money from the productive private sector.
Charles next shows us the ratio of the public sector to the private sector when compared to unemployment (again in France). While there are clearly some periods where there are clear divergences (and those would be even more clear in a US chart), there is a clear correlation over time.
And that makes sense, given our argument that it is the private sector that increases productivity. Government transfer payments do not. You need a vibrant private sector and dynamic small businesses to really see growth in jobs.
And at some point, government spending becomes an anchor on the economy. In an environment where assets (stocks and housing) have shrunk over the last decade and consumers in the US and elsewhere are increasing their savings and reducing debt as retirement looms for an aging Boomer generation, the current policies of stimulus make less and less sense. As Charles argues:
"This is the law of unintended consequences at work: if an individual receives US$100 from the government, and at the same time the value of his portfolio/house falls by US$500, what is the individual likely to do? Spend the US$100 or save it to compensate for the capital loss he has just had to endure and perhaps reduce his consumption even further?
"The only way that one can expect Keynesian policies to break the 'paradox of thrift' is to make the bet that people are foolish, and that they will disregard the deterioration in their balance sheets and simply look at the improvements in their income statements.
"This seems unlikely. Worse yet, even if individuals are foolish enough to disregard their balance sheets, banks surely won't; policies that push asset prices lower are bound to lead to further contractions in bank lending. This is why 'stimulating consumption' in the middle of a balance sheet recession (as Japan has tried to do for two decades) is worse than useless, it is detrimental to a recovery.
"With fragile balance sheets the main issue in most markets today, the last thing OECD governments should want to do is to boost income statements at the expense of balance sheets. This probably explains why, the more the US administration talks about a second stimulus bill, the weaker US retail sales, US housing and the US$ are likely to be. It probably also helps explain why US retail investor confidence today stands at a record low."
This is the fundamental mistake that so many analysts and economists make about today's economic landscape. They assume that the recent recession and aftermath are like all past recessions since WWII. A little Keynesian stimulus and the consumer and business sectors will get back on track. But this is a very different environment. It is the end of the Debt Supercycle. It is Mohammed El-Erian's New Normal.
As we will see in a few chapters, the periods following credit and financial crises are substantially different. They play out over years (if not decades) and are structural in nature and not merely cyclical recessions. And the policies needed by the government are different than in other cyclical recessions. We will go into those later in the book, as they differ from country to country. But business as normal is not the medicine we need, even though that is what many countries are going to attempt.
Not Everyone Can Run a Surplus
The desire of every country is to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself. But let's look at yet another equation to show why that might not be possible this time. It is yet another case of people wanting to believe six impossible things before breakfast.
Let's divide a country's economy into three sections: private, government, and exports. If you play with the variables a little bit you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong.
Domestic Private Sector Financial Balance + Governmental Fiscal Balance - the Current Account Balance (or Trade Deficit/Surplus) = 0
By Domestic Private Sector Financial Balance we mean the net balance of businesses and consumers. Are they borrowing money or paying down debt? Government Fiscal Balance is the same: is the government borrowing or paying down debt? And the Current Account Balance is the trade deficit or surplus.
The implications are simple. The three items have to add up to zero. That means you cannot have surpluses in both the private and government sectors and run a trade deficit. You have to have a trade surplus.
Let's make this simple. Let's say that the private sector runs a $100 surplus (they pay down debt), as does the government. Now, we subtract the trade balance. To make the equation come to zero there must be a $200 trade surplus:
$100 (private debt reduction) + $100 (government debt reduction) - $200 (trade surplus) = 0.
But what if the country wanted to run a $100 trade deficit? Then either private or public debt would have to increase by $100. The numbers have to add up to zero. One way for that to happen would be:
$50 (private debt reduction) + (-$150) (government deficit) - (-$100) (trade deficit) = 0. (Note that we are adding a negative number and subtracting a negative number.)
Bottom line: you can run a trade deficit, reduce government debt, and reduce private debt, but not all three at the same time. Choose two. Choose carefully.
We are going to quote from a paper by Rob Parenteau, the editor of The Richebacher Letter, to help us understand why this simple equation is so important. Rob was writing about the problems in Europe, but the principles are the same everywhere.
"The question of fiscal sustainability looms large at the moment - not just in the peripheral nations of the eurozone, but also in the UK, the US, and Japan. More restrictive fiscal paths are being proposed in order to avoid rapidly rising government debt-to-GDP ratios and the financing challenges they may entail, including the possibility of default for nations without sovereign currencies.
"However, most of the analysis and negotiation regarding the appropriate fiscal trajectory from here is occurring in something of a vacuum. The financial balance approach reveals that this way of proceeding may introduce new instabilities. Intended changes to the financial balance of one sector can only be accomplished if the remaining sectors also adjust in a complementary fashion. Pursuing fiscal sustainability along currently proposed lines is likely to increase the odds of destabilizing the private sectors in the eurozone and elsewhere - unless an offsetting increase in current account balances can be accomplished in tandem.
"...The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard-won and well-deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export-led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation its father?), so perhaps current-account-deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer." - Rob Parenteau, CFA [1]
This has profound implications for those countries struggling to deal with large government deficits, large trade deficits, and a desire on the part of individuals and businesses to reduce their debt, while wanting the government to curtail its spending. Something in that quest has to take a back seat.
The time-honored (and preferred) way a country digs itself out from a debt or financial crisis is to grow its way out. And that is what Martin Wolf, the highly regarded columnist for the Financial Times in London, suggests that Great Britain should do. Wolf argues, rather cogently, that the answer is to increase exports and aim for a further weakening of the pound. Quoting:
"Weak sterling, far from being the problem, is a big part of the solution. But it will not be enough. Attention must also be paid to nurturing a more dynamic manufacturing sector. With the decline in energy production under way, this is now surely inescapable."
When Martin Wolf writes, he reflects what the cognoscenti of Britain are thinking. The pound is already down by 25% against the dollar as we write. We think it could go down even further. John has long been on record that the pound could reach parity with the dollar (and was saying so when the pound was much stronger).
How can Britain accomplish this? By printing money to help the current deficit crisis even as the government institutes austerity measures. We see a hand waving in the back. The question is, "Wouldn't that be inflationary?"
Of course it would. That's the plan. A little inflation along with decreasing deficits will result in a weaker currency and therefore (hopefully) more exports, and you "grow" your way out of the crisis. Of course, inflation means you can buy less with your currency, especially from foreign markets. And those on fixed incomes get hurt, and maybe even savagely hurt, depending on the level of inflation. But of course the hope is that it will be "mild" inflation and spread out over time, which is better for people who owe debt (as in governments).
Here is their dilemma. In order to reduce the government's fiscal deficit, either private business must increase their deficits or the trade balance has to shift, or some combination of the two. Lucky for them, they can in fact allow the pound to drift lower by monetizing some of their debt. Lucky, in that they can at least find a path out of their morass. Of course, that means that pound-denominated assets drop by another third against the dollar. It means that the buying power of British citizens for foreign goods is crushed. British citizens on pensions in foreign countries could see their locally denominated incomes drop by half from their peak (well, not against the euro, which is also in freefall).
What's the alternative? Keep running those massive deficits until ever-increasing borrowing costs blow a hole in your economy, reducing your currency valuation anyway. And remember, if you reduce government spending, in the short run that is a drag on the economy, so you are guaranteeing slower growth in the short run. As I have been pointing out for a long time, countries around the world are down to no good choices.
Britain's is a much slower economy (maybe in another recession), with much lower buying power for the pound and lower real incomes for its workers, yet they have a path that they can get them back on track in a few years. Because they have control of their currency and their debt, which is mostly in their own currency, they can devalue their way to a solution.
Pity the Greeks
Some of my fondest memories were made in Greece. I like the country and the people. But they have made some bad choices and now must deal with the consequences.
We all know that Greek government deficits are somewhere around 14%. But their trade deficit is running north of 10%. (By comparison, the US trade deficit is now about 4%.) Going back to the equation, if Greece wants to reduce its fiscal deficit by 11% over the next three years, then either private debt must increase or the trade deficit must drop sharply. That's the accounting rules.
But here's the problem. Greece cannot devalue its currency. It is (for now) stuck with the euro. So, how can they make their products more competitive? How do they grow their way out of their problems? How do they become more productive relative to the rest of Europe and the world?
Barring some new productivity boost in olive oil and other agricultural produce, there is no easy way. Since the creation of the euro in1999, Germany has become some 30% more productive than Greece. Very roughly, that means it costs 30% more in Greece to produce the same amount of goods. That is why Greece imports $64 billion and exports $21 billion.
What needs to happen for Greece to become more competitive? Labor costs must fall by a lot. And not by just 10 or 15%. But if labor costs drop (deflation) then that means that taxes also drop. The government takes in less and GDP drops. The perverse situation is that the debt-to-GDP ratio gets worse, even as they enact their austerity measures.
In short, Greek lifestyles are on the line. They are going to fall. They have no choice. They are going to have to willingly put themselves into a severe recession or, more realistically, a depression.
Just as British incomes relative to their competitors will fall, Greek labor costs must fall as well. But the problem for Greeks is that the costs they bear are still in euros.
It becomes a most vicious spiral. The more cuts they make, the less income there is to tax, which means less government revenue, which means more cuts, which mean, etc.
And the solution is to borrow more money they cannot at the end of the day hope to repay. All that is happening is that the day of reckoning is being delayed in the hope of some miracle.
What are their choices? They can simply default on the debt. Stop making any payments. That means they cannot borrow any more money for a minimum of a few years (Argentina seemed to be able to come back fairly quickly after default), but it would go a long way toward balancing the government budget. Government employees would need to take large pay cuts, and there would be other large cuts in services. It would be a depression, but you work your way out of it. You are still in the euro and need to figure out how to become more competitive.
Or, you could take the austerity, downsize your labor costs, and borrow more money, which would mean even larger debt service in a few years. Private citizens can go into more debt. (Remember, we have to have our balance!) This is also a depression.
Finally, you could leave the euro and devalue, as Britain is going to do. Very ugly scenario, as contracts are in euros. The legal bills would go on forever.
There are no good choices for the Greeks. No easy way. And then you wonder why people worry about contagion to Portugal and Spain?
I see that hand asking another question. Since the euro is falling, won't that make Greece more competitive? The answer is yes, and no. Yes, relative to the dollar and a lot of emerging-market currencies. No to the rest of Europe, which are their main trade partners. A falling euro just makes economic-export power Germany and the other northern countries even more competitive.
Europe as a whole has a small trade surplus. But the bulk of it comes from a few countries. For Greece to reduce its trade deficit means a very large lifestyle change.
Germany is basically saying, you should be like us. And everyone wants to be. But not everyone can.
Every country cannot run a trade surplus. Someone has to buy. But the prescription that politicians want is for fiscal austerity and trade surpluses, at least for European countries. That is the import of Martin Wolfe's editorial we mentioned above. He is as wired in as you get in Britain. And in a few short sentences he has laid out the formula Britain will pursue. Devalue and put your goods and services on sale. Figure out how to get to that surplus.
Germany has been thriving because much of Europe has been buying its goods. If they are forced by circumstances to buy less, that will not be good for Germany. It's all connected.
Yet politicians want to believe that somehow we can all run surpluses - at least in their own countries. We can balance the budgets. We can reduce our private debts. We all want to believe in that mythical Lake Woebegone, where all the kids are above average. Sadly, it just isn't possible for everyone to have a happy ending.
Before we leave this part of the chapter, a few thoughts about the situation in the US. The mood in the country, if not in Washington (at least before the elections last November), is that the deficit needs to be brought down. And consumers are clearly increasing savings and cutting back on debt. But those accounts must balance. If we want to reduce the deficits AND reduce our personal debt, we must then find a way to reduce the trade deficit, which is running about $500 billion a year as we write, or about $1 trillion less than the deficit.
If the US is going to really attempt to balance the budget over time, reduce our personal leverage, and save more, then we have to address the glaring fact that we import $300 billion in oil (give or take, depending on the price of oil).
This can only partially be done by offshore drilling. The real key is to reduce the need for oil. Nuclear power, renewables, and a shift to electric cars will be most helpful. Let us suggest something a little more radical. When the price of oil approached $4 a few years ago, Americans changed their driving and car-buying habits.
Perhaps we need to see the price of oil rise. What if we increased the price of oil with an increase in gas taxes by 2 cents a gallon each and every month until the demand for oil dropped to the point where we did not need foreign oil? If we had European gas-mileage standards, that would be the case now.
And take that 2 cents a month and dedicate it to fixing our infrastructure, which is badly in need of repair. In fact, the US Infrastructure Report Card ( www.infrastructurereportcard.org), by the American Society of Civil Engineers, which grades the US on a variety of factors (the link has a very informative short video), gave our infrastructure the following grades in 2009: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).
Overall, America's Infrastructure GPA was graded a "D." To get to an "A" would requires a 5-year infrastructure investment of 2.2 trillion dollars.
That infrastructure has to be paid for. And we need to buy less oil. And we know price makes a difference. The majority of that 2 cents would need to stay in the states where it was taxed, and forbidden to be used on anything other than infrastructure.
(And while we are at it, why not build 50 thorium nuclear plants now? No fissionable material, no waste-storage problem, and an unlimited supply (at least for the next 1,000 years) of thorium in the US. The reason we chose uranium was to be able to produce nuclear bombs, among other reasons.) We'll get into this and more when we get to the chapter on the way back for the US.
The Competitive Currency Devaluation Raceway
Greg Weldon likened the competitive currency devaluations in Asia in the middle of the last decade to that a NASCAR race. Each country tried to get in the "draft" of the other ones, keeping its currency and selling power more or less in line as it tried to market its products to the US and Europe. This is a form of mercantilism, where countries encourage exports and, by reducing the value of their currencies, discourage imports. It also helps explain the massive current-account surpluses building up in emerging-market countries, especially in Asia.
There is the real potential for this race to become far more "competitive." Indeed, Martin Wolf's few sentences are the equivalent of the NASCAR announcer saying,
"Gentlemen, start your engines."
We touched on Britain. But there are structural weaknesses in the euro as well (again, in later chapters). In the early part of the last decade, when the euro was at $.88, John wrote that the euro would rise to $1.50 (seemingly unattainable at the time) and then fall back to parity with the dollar by the middle of this decade. He was overly optimistic, as the euro went to $1.60 but is now retracing that rise.
The title for our chapter on Japan is "A Bug in Search of a Windshield." While the currency of the Land of the Rising Sun is very strong as we write, there are again real structural reasons, as well as political ones, why we predict the yen will begin to weaken. At first, its fall will be gradual. But without real reform in government expenditures, the yen could weaken substantially. A fall of 50% or more against the dollar by the middle of the decade (if not sooner) is quite thinkable.
The euro at parity. The pound at parity. The value of the yen in half. What will be the response of other countries around the world? Do they sit by and allow their currencies to rise, making it more difficult to compete with Europe and Japan? The Swiss are clearly not happy with the rise of the Swiss Franc. The Scandinavian countries? The rest of Asia?
And what of China? Europe is an extremely important market to them. Do they sit by and let their currency rise (a lot!) against the euro and hurt their exports? But if they react, that makes the US unhappy and starts another competitive devaluation throughout Asia.
What does the US do? US senators are mad enough about the valuation of the Chinese yuan. Do Schumer, Graham, et al. start talking about tariffs on European goods? On Japanese goods?
The US and the world went into a deep recession in the early 1930s, but it took the protectionist Taft-Hartley bill to stretch it out into a prolonged depression. It was a beggar-thy-neighbor policy that swept the world. It was disastrous and sowed the seeds of World War II. There was an unintended consequence on every page of that bill.
In a few years, the world will be at significant risk of protectionist policies damaging world trade. Let us hope that cool heads will be in the lead and avoid the policies that so clearly would hurt us all.
This chapter has been a kind of introduction to the macroeconomic forces that are at play in the world in which we find ourselves. While much of the developed world has no good choices, we (each country on its own) still must decide on a path forward. We can choose between bad choices and what would be disastrous choices. We can make the best of what we have created and move on. If we make the correct choices to solve the structural problems, we can emerge into a brighter future for ourselves and our children. If we choose to avoid the problems, we will hit the wall in spectacular and dramatic fashion.
As Ollie said to Stan (Laurel and Hardy), "Here's another fine mess you've gotten me into!" A fine mess indeed.
Amsterdam, Malta, Zurich, Mallorca, Denmark, and London
I leave for Europe tomorrow evening, and will be flitting here and there, packing a lot into a few days. I will be meeting with Jonathan Tepper, and we will finalize the rough draft of The End Game and send it out to a few friends for comments. There is a lot of editing, going back to findi that missing piece of data, adding footnotes, etc. The plan is to be done with it by the end of September. I am so ready to move on.
John Grisham (who knows a thing or two about writing) recently had this to say about his first book:
"I had never worked so hard in my life, nor imagined that writing could be such an effort. It was more difficult than laying asphalt, and at times more frustrating than selling underwear. But it paid off. Eventually, I was able to leave the law and quit politics. Writing's still the most difficult job I've ever had - but it's worth it." ( http://www.nytimes.com/2010/09/06/opinion/06Grisham.html?_r=2 )
It is time to hit the send button. I look forward to the next few weeks, as I will be with old friends and meet new ones in interesting places. But I will be remembering another 9/11 just nine years ago as I get on an American Airlines flight to London. And take a moment to remember those who did not make it home.
http://www.safehaven.com/article/18146/the-last-half
Bubble Thesis Update
By: Doug Noland
Fri, Sep 10, 2010
For the week, the S&P500 gained 0.4% (down 0.5% y-t-d), and the Dow added 0.1% (up 0.3%). The Banks slipped 0.2% (up 9.0%), while the Broker/Dealers declined 0.2% (down 9.3%). The Morgan Stanley Cyclicals declined 0.8% (up 2.6%), while the Transports added 0.3% (up 7.4%). The Morgan Stanley Consumer index gained 1.0% (up 1.9%), while the Utilities lost 0.6% (up 0.4%). The S&P 400 Mid-Caps dipped 0.4% (up 5.1%), and the small cap Russell 2000 declined 1.1% (up 1.8%). The Nasdaq100 gained 1.2% (up 1.7%), and the Morgan Stanley High Tech index rose 0.4% (down 4.3%). The Semiconductors dropped 3.8% (down 12.0%). The InteractiveWeek Internet index gained 0.4% (up 11.0%). The Biotechs jumped 1.5%, increasing 2010 gains to 21.0%. With bullion little changed, the HUI gold index declined 1.1% (up 12.1%).
One-month Treasury bill rates ended the week at 9 bps and three-month bills closed at 14 bps. Two-year government yields rose 5 bps to 0.54%. Five-year T-note yields jumped 10 bps to 1.53%. Ten-year yields jumped 10 bps to 2.80%. Long bond yields increased 8 bps to 3.86%. Benchmark Fannie MBS yields rose 13 bps to 3.60%. The spread between 10-year Treasury yields and benchmark MBS yields increased 3 bps to 80 bps. Agency 10-yr debt spreads narrowed one to 23 bps. The implied yield on December 2010 eurodollar futures rose 5 bps to 0.445%. The 10-year dollar swap spread increased 0.5 to negative 1.5. The 30-year swap spread increased one to negative 37. Corporate bond spreads were little changed. An index of investment grade spreads narrowed one to 103 bps. An index of junk bond spreads narrowed one to 554 bps.
Debt issuance picked up markedly. Investment grade issuers included Hewlett-Packard $3.0bn, American Express $2.0bn, Dell $1.5bn, Aon $1.5bn, Medco Health Solutions $1.0bn, International CCE $1.0bn, US Bancorp $1.0bn, Burlington Northern $750 million, Nabors Industries $700 million, Allergan $650 million, Goodrich $600 million, Pacific G&E $550 million, Home Depot $500 million, Oncor Electric Delivery $475 million, Health Care REIT $450 million, Duquesne Light $450 million, Unum $400 million, Parker-Hannifin $300 million, City National $300 million, Nevada Power $250 million, and Gulf Power $125 million.
Junk issuers included Linn Energy $1.0bn, Metropcs $1.0bn, Alliant Techsystems $350 million, Scientific Games $250 million, and Powerlong RE $200 million.
I saw no converts issued.
A long list of international dollar debt sales included Bank of Vale Overseas $2.75bn, Societe Generale $2.0bn, Tokyo-Mitsubishi $2.0bn, Lloyds Bank $2.0bn, Canadian Imperial Bank $1.5bn, Ontario $1.25bn, Teck Resources $1.15bn, CIE Financement Foncier $1.0bn, Total Capital $1.0bn, Telemar $1.0bn, JBS Finance $900 million, Banco Credito Peru $800 million, Lithuania $750 million, France Telecom $750 million, Korea Hydro & Nuclear $500 million, Hospira $500 million, Odebrecht Finance $500 million, Caisse Centrale Desjardn $1.0bn, and Grupo Kuo $250 million.
U.K. 10-year gilt yields jumped 12 bps to 3.12%, and German bund yields increased 5 bps to 2.40%. Greek 10-year bond yields surged 42 bps to 11.73%, and 10-year Portuguese yields rose 17 bps to 5.76%. Ireland yields increased 6 bps to 5.81%. The German DAX equities index increased 1.3% (up 4.3% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.15%. The Nikkei 225 rallied 1.4% (down 12.4%). Emerging equity markets were mostly higher. For the week, Brazil's Bovespa equities index slipped 0.2% (down 2.6%), and Mexico's Bolsa added 0.1% (up 1.6%). Russia's RTS equities index gained 1.2% (up 2.9%). India's Sensex equities index jumped 3.1% (up 7.6%). China's Shanghai Exchange increased 0.3% (down 18.7%). Brazil's benchmark dollar bond yields jumped 14 bps to 4.18%, and Mexico's benchmark bond yields rose 4 bps to 4.16%.
Freddie Mac 30-year fixed mortgage rates increased 3 bps last week to 4.35% (down 72bps y-o-y). Fifteen-year fixed rates were unchanged at bps to 3.83% (down 67bps y-o-y). One-year ARMs were down 4 bps to 3.46% (down 118bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 11 bps to 5.37% (down 81bps y-o-y).
Federal Reserve Credit was little changed at $2.287 TN. Fed Credit was up $66.7bn y-t-d (4.3% annualized) and $217bn, or 10.5%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 9/8) jumped another $9.9bn (13-wk gain of $145bn) to a record $3.221 TN. "Custody holdings" have increased $265bn y-t-d (13.0% annualized), with a one-year rise of $393bn, or 13.9%.
M2 (narrow) "money" supply jumped $30.7bn to $8.690 TN (week of 8/30). Narrow "money" has increased $157bn y-t-d, or 2.7% annualized. Over the past year, M2 grew 3.1%. For the week, Currency added $1.6bn, and Demand & Checkable Deposits surged $31.6bn. Savings Deposits gained $4.8bn, while Small Denominated Deposits fell $5.2bn. Retail Money Fund assets dipped $2.1bn.
Total Money Market Fund assets (from Invest Co Inst) increased $10.6bn to $2.839 TN. In the first 36 weeks of the year, money fund assets dropped $455bn, with a one-year decline of $705bn, or 19.9%.
Total Commercial Paper outstanding declined $5.5bn to $1.059 TN. CP has declined $111bn, or 13.7% annualized, year-to-date, and was down $115bn from a year ago.
International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.375 TN y-o-y, or 19.1%, to a record $8.572 TN.
Global Credit Market Watch:
September 10 - Bloomberg (Sapna Maheshwari and Kate Haywood): "Global high-yield bond sales are poised to exceed 2009's record issuance as the riskiest companies take advantage of plunging borrowing costs and investor demand for greater returns to refinance debt. Ally Financial Inc., the lender previously known as GMAC Inc., and the lending arm of Ford Motor Co. led $206.9 billion of speculative-grade debt sales in 2010 through yesterday, compared with $208.1 billion for all of last year... Junk-rated companies are accelerating issuance amid rating upgrades and average borrowing costs that have plummeted from a high of 21.6% in 2009 to 8.4% as of yesterday..."
September 8 - Bloomberg (Joe Brennan and Louisa Fahy): "Anglo Irish Bank Corp. will be broken in two as Ireland's government seeks 'finality' on the bailout of the nationalized bank and tries to calm investor concern that the cost will continue to mount. Anglo Irish will be split into a so-called good bank, which will retain the lender's deposits, and an asset recovery bank which will run down its loans over time..."
September 10 - Bloomberg (Andrea Catherwood and Joe Brennan): "Anglo Irish Bank Corp. Chief Executive Officer Mike Aynsley said 25 billion euros ($32bn) is a 'pretty good estimate' of the total bailout cost for the bank. 'There will be some adjustments to that,' he said... 'It's not possible to entirely predict the exact numbers. But we feel that we're really coming to the end of the process now and we're not very far away.'"
September 10 - Bloomberg (Sonja Cheung and Kate Haywood): "Banks in Europe boosted bond sales to the most in two months as borrowers took advantage of falling borrowing costs and investor demand to refinance debt. BNP Paribas SA and UniCredit SpA lead issuers raising 18 billion euros ($23 billion) this week..."
September 8 - Bloomberg (Alan Katz and Elisa Martinuzzi): "Four months after the 110 billion- euro ($140bn) bailout for Greece, the nation still hasn't disclosed the full details of secret financial transactions it used to conceal debt. 'We have not seen the real documents,' Walter Radermacher, head of the European Union's statistics agency Eurostat, said... Eurostat first requested the contracts in February. Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a 'solid estimate' of the total value of debt hidden by the opaque contracts. 'This is a new era,' he said."
August 25 - Bloomberg (Patricia Kuo): "BHP Billiton Ltd.'s loan to buy Potash Corp. of Saskatchewan Inc. has pushed lending to commodity firms to $128 billion this year, the most since 2007, as rising prices for raw materials draws European bank demand... In 2007, banks committed a record $220 billion to natural resources deals in Europe, according to data compiled by Bloomberg."
September 8 - Bloomberg (Paul Armstrong): "The global default rate on... junk, debt will fall to 2.7% by the end of this year before dropping to 2% a year from now, according to Moody's... Defaults worldwide declined to 5% in August from 5.5% in the previous month... A year ago, the rate was at 12.3%."
September 8 - Bloomberg (Maria Levitov and Paul Abelsky): "Russia will be 'technically ready' to sell its first ruble-denominated Eurobond in November as it borrows less than planned on the domestic market, Deputy Finance Minister Dmitry Pankin said. Western banks have suggested raising the equivalent of $1 billion to $3 billion in a sale of bonds with a maturity of as much as five years..."
Global Government Finance Bubble Watch:
August 23 - Bloomberg (John Glover and John Detrixhe): "The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall. Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000..."
August 23 - Bloomberg (Charles Stein): "Retail investors in the U.S., burned by two market crashes in a decade, have shunned stocks for the longest stretch in more than 23 years, upsetting the balance of power in the $10.5 trillion mutual-fund industry. Bond funds attracted more money than their equity counterparts in 30 straight months through June... Preliminary data show the trend continued in July, matching the streak posted by bonds from 1984 through 1987."
September 8 - Bloomberg (Yalman Onaran, Jana Randow and Karin Matussek): "Global regulators reached a compromise on capital ratios for banks that will introduce higher capital requirements over a five- to 10-year period starting in 2013, a German central bank official said. The Basel Committee on Banking Supervision drafted key points of the so-called Basel III reforms... The proposal will be the basis for the Sept. 12 meeting of the Group of Governors of Central Banks and Heads of Banking Supervision Authorities who will decide on the reform framework."
September 9 - Bloomberg (Scott Hamilton): "Bank of England Governor Mervyn King may have to embark on a new round of bond purchases as Britain's rebound from the worst recession since World War II fades. Manufacturing, services and construction all faltered in August and the housing market weakened... That suggests 200 billion pounds ($309 billion) in bond purchases by the central bank since March 2009 and record-low interest rates may not be enough..."
September 9 - Bloomberg (Josiane Kremer): "Norway, which has amassed the world's second-biggest sovereign wealth fund, says Greece won't default on its debts. The Nordic nation's $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy... '...The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default.' Norway says its long-term perspective will protect it from losses. 'One could say we are investing for infinity,' Johnsen said..."
Currency Watch:
The dollar index rallied 1.0% to 82.87 (up 6.4% y-t-d). For the week on the upside, the Australian dollar increased 1.1%, the New Zealand dollar 1.1%, the South Korean won 0.8%, the Brazilian real 0.6%, the Canadian dollar 0.3%, the Singapore dollar 0.3%, the Taiwanese dollar 0.2%, the Japanese yen 0.2%, and the Mexican peso 0.1%. For the week on the downside, the the Danish krone declined 1.5%, the euro 1.5%, the Norwegian krone 1.3%, the British pound 0.6%, the Swiss franc 0.3%, and the Swedish krona 0.1%.
Commodities Watch:
September 10 - Bloomberg (Jeff Wilson): "Corn futures rose to 23-month high on speculation the U.S. crop will be smaller than the government forecast after hot, dry weather reduced yields."
September 9 - Bloomberg (Cecilia Yap and Luzi Ann Javier): "Rice prices are becoming 'worrisome' as global supplies tighten because of crop losses in some of the largest exporters, according to an official in the Philippines, the world's biggest buyer. The global supply-and-demand balance is 'not at the 2008 level yet, but it's pretty worrisome because of the prices,' Lito Banayo, head of the National Food Authority... said..."
The CRB index increased 0.9% (down 2.9% y-t-d). The Goldman Sachs Commodities Index (GSCI) gained 2.1% (up 0.3% y-t-d). Spot Gold was little changed at $1,246 (up 13.5% y-t-d). Silver gave back 0.3% to $19.89 (up 18% y-t-d). October Crude rallied $1.87 to $76.47 (down 4% y-t-d). October Gasoline rose 2.8% (down 4% y-t-d), while October Natural Gas declined 1.6% (down 31% y-t-d). December Copper dropped 2.5% (up 2% y-t-d). December Wheat slipped 0.6% (up 36% y-t-d), while December Corn jumped 3.0% (up 14% y-t-d).
China Watch:
September 8 - Bloomberg (Yoshiaki Nohara): "China bought more Japanese bonds than it sold for a seventh month in July, heading for a record annual increase, as a weakening dollar encouraged it to diversify debt holdings. China purchased a net 583.1 billion yen ($6.97bn) of Japanese debt in July... 'It's part of China's ongoing efforts to diversify its currency holdings, and they are increasing yen-denominated assets,' said Koji Ochiai, chief market economist... at Mizuho Investors Securities... 'Dollar weakness is continuing, which will weigh on China if they do nothing.'"
September 10 - Bloomberg: "China posted a third straight trade surplus of more than $20 billion in August even as imports leaped, highlighting friction with the U.S. over claims that the nation's currency is undervalued. Exports rose 34.4% and inbound shipments climbed a more-than-forecast 35.2%, leaving a $20.03 billion excess..."
September 8 - Bloomberg: "China's attempts to cool the real-estate market may be faltering as sales surge, prompting speculation the government may issue more tightening measures. Housing transactions in cities including Shanghai jumped in August from July... China Vanke Co., the nation's biggest developer, said sales increased 149% from a year earlier."
August 26 - Bloomberg: "Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50% pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20% in the past year. Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. 'The workers suffer,' he says. 'Everybody is crying.' Officially, China's consumer price inflation topped out at 3.3% in July..."
September 9 - Bloomberg (Cecilia Yap and Luzi Ann Javier): "China's passenger-car sales to dealerships grew at a faster pace in August as dealers offered discounts to clear rising inventories. Wholesale deliveries of passenger cars rose 18.7% to 1.02 million units in August, compared with 13.6% growth in July..."
September 6 - Bloomberg:: "China's retail sales may outstrip those of the U.S. by reaching 34 trillion yuan ($5 trillion) in 2016, Huang Hai, a former Chinese assistant commerce minister, said... The forecast is based on annual growth so far this century of 14.5% in China and 4.6% in the U.S...."
September 6 - Bloomberg (Katrina Nicholas and Henry Sanderson): "Bonds issued by China developers are rebounding from their worst first half in two years as a record $6.8 billion in offshore debt sales spurs confidence the borrowers have the resources to weather a slowing economy."
September 9 - Bloomberg (Kelvin Wong): "A 26-year-old government-built apartment near one of Hong Kong's busiest shopping areas sold for a record price per square foot, underscoring concerns that home prices in the city are becoming unaffordable. The 420-square-foot (39-square-meter) home in the Sham Shui Po area of the Kowloon district was bought for HK$1.98 million ($255,000)..."
Japan Watch:
September 10 - Bloomberg (Keiko Ujikane): "Japan's economy slowed less than initially estimated in the second quarter as companies boosted capital spending, indicating the nation's recovery was intact before a surge in the yen threatened to stunt export gains. Gross domestic product grew an annualized 1.5%, faster than the 0.4% reported last month..."
India Watch:
September 6 - Bloomberg (Abhishek Shanker): "India's steel ministry raised its forecast for steel consumption on increased demand from carmakers and construction companies in Asia's second-fastest growing major economy. Steel consumption may increase 10% in the year..."
Asia Bubble Watch:
September 8 - Bloomberg (Chan Sue Ling): "Cathay Pacific Airways Ltd., Qantas Airways Ltd. and Emirates Airline are awaiting deliveries of about 400 planes to capitalize on Asia's rising prosperity. Finding pilots is the next job. Boeing Co. expects the region's carriers to be the biggest buyers of twin-aisle planes as travel grows in China and India, home to a combined 1.1 billion middle-class people. Asia-Pacific airlines will buy about 8,000 planes worth $1.2 trillion over the next 20 years, Airbus SAS said."
September 8 - Bloomberg: "Vietnam's bank lending rose 16.3% in the first eight months of 2010 from the end of last year... The Southeast Asian nation has pressed commercial banks to cut interest rates and boost lending in an attempt to meet its target for a 25% increase in credit and 6.5% growth in gross domestic product this year."
Latin America Watch:
September 6 - Bloomberg (Telma Marotto): "Analysts covering Brazil's economy raised their forecast for gross domestic product growth this year to 7.34%, according to a central bank survey."
September 8 - Bloomberg (Thomas Black and Carlos Manuel Rodriguez): "When Cessna Aircraft Co. sought a low-wage country in 2006 where it could manufacture airplane parts, its first instinct was to go to China. After struggling to find a way to ship supplies to the Asian country in less than a month, the... producer of light airplanes discovered a better solution just across the U.S. border: Mexico."
Unbalanced Global Economy Watch:
September 8 - Bloomberg (Peter Laca): "Czech economy grew at the fastest pace in two years in the second quarter... Gross domestic product rose an annual 2.4%, compared 1.1% in the first quarter..."
U.S. Bubble Economy Watch:
September 10 - Bloomberg (Sarah Mulholland): "Monthly losses on commercial property debt bundled into bonds have doubled since April as loan specialists gave up trying to restructure smaller mortgages, Deutsche Bank AG data show. Average losses on loans packaged into U.S. commercial mortgage-backed securities totaled $501 million in August compared with $245 million in April.... In August 2009, the number was $41 million."
Central Bank Watch:
September 8 - Bloomberg (Theophilos Argitis and Alexandre Deslongchamps): "The Bank of Canada raised its benchmark interest rate... for a third time this year, and said it expects households and businesses to spend even as the outlook for the U.S. economy weakens. The bank raised its target rate for overnight loans between commercial banks to 1% from 0.75%..."
September 6 - Bloomberg (Christian Vits): "European Central Bank Governing Council member Ewald Nowotny said policy makers will wait until December before discussing how to withdraw emergency measures to give the economy time to gather strength. 'We certainly won't discuss the first quarter before December of this year' Nowotny told Bloomberg News... 'We're still facing an economic development with a very high uncertainty in many respects. It's certainly too early to take a clear position.'"
September 10 - Bloomberg (Gabi Thesing): "European Central Bank President Jean-Claude Trichet said it will take time to wean banks off its emergency lending measures, which policy makers extended last week into 2011. 'We are accompanying the market as it progressively gets back to normal,' Trichet said... The ECB confirmed Trichet's comments. "It's a process that takes time.'"
Muni Watch:
September 9 - New York Times (Ken Belson): "It's the gift that keeps on taking. The old Giants Stadium, demolished to make way for New Meadowlands Stadium, still carries about $110 million in debt... The financial hole was dug over decades by politicians who passed along the cost of building and fixing the stadium, and it is getting deeper... New Jerseyans are hardly alone in paying for stadiums that no longer exist. Residents of Seattle's King County owe more than $80 million for the Kingdome, which was razed in 2000. The story has been similar in Indianapolis and Philadelphia. In Houston, Kansas City, Mo., Memphis and Pittsburgh, residents are paying for stadiums and arenas that were abandoned by the teams they were built for."
California Watch:
September 8 - Bloomberg (Christopher Palmeri): "California property values fell 1.8% for the current fiscal year, only the second drop since the most-populous U.S. state began collecting the data in 1933. Declines in 48 of the state's 58 counties brought the total value to $4.37 trillion... 'This is historic,' Larry Stone, the assessor for Silicon Valley's Santa Clara County, said... 'This is not your normal downturn.'"
Speculator Watch:
September 8 - Bloomberg (Saijel Kishan): "John Paulson, who became a billionaire by betting against U.S. mortgage markets, lost 11% this year in his... firm's biggest hedge fund... The company's Advantage Plus Fund, which uses investment strategies designed to profit from corporate events such as mergers or bankruptcies, fell 4.3% in August, said the person, who asked not to be named..."
September 4 - Bloomberg (Christine Harper and Saijel Kishan): "Goldman Sachs Group Inc. is disbanding its principal-strategies business, one of the groups that makes bets with the firm's own money, to comply with new U.S. rules aimed at curbing risk, two people with knowledge of the decision said."
Bubble Thesis Update
My thesis coming into the year was that 2010 was a "Bubble year." The unprecedented global fiscal and monetary policy response to the 2008 bursting of the Mortgage/Wall Street finance Bubble had unleashed the Global Government Finance Bubble. The "Bubble year" analysis implies bipolar outcome possibilities: if the Bubble is accommodated by ongoing loose financial conditions, it would demonstrate a propensity to broaden and strengthen. Fragile underpinnings, however, leave this emerging Bubble susceptible to bursting and the rapid reemergence of financial and economic crises.
Throw into the mix that acute systemic fragilities ensure that policymakers will attack any potential crisis quickly and with overwhelming force. Such a backdrop would seem to ensure uncertainty and heightened market volatility, and that's what has transpired thus far in 2010.
I have also posited the thesis that the Greece debt crisis was an important inflection point for the Government Finance Bubble, with similarities to the eruption of subprime debt issues in the spring of 2007. Global markets have certainly awakened to structural debt issues. Even so, outside of the European periphery sovereign yields have tanked.
It was more than a year before the subprime crisis evolved to the point of fomenting systemic crisis. There are reasons an even longer gestation period may be in the offing this time around. In contrast to mortgage-related fragilities, global policymakers will not be caught complacent and unprepared. Indeed, the markets' perception that authorities will act forcefully to support debt markets - and marketplace liquidity more generally - is a key reason why the Government Finance Bubble is potentially so dangerous.
The ECB's forceful response contained the debt crisis in the short-run - and certainly boosted marketplace liquidity. Here at home, post-Greece market and economic weakness forced an abrupt u-turn at the Fed. Planning for the so-called "exit strategy" was put on hold - or perhaps forever abandoned. In a too typical Pavlovian response to the market's clamoring for additional monetization, the Fed announced it would buy Treasurys to ensure its bloated balance sheet did not become less so. Comments from Chairman Bernanke, President Bullard and others assured the markets that the Federal Reserve's commitment to purchase Treasury's was open-ended. Talk of (recommendations for) a massive government-induced refi program threw gas on the fire.
The markets now perceive (are convinced) that global central bankers are irreversibly committed to providing government debt markets a (an inexhaustible) "backstop bid." This is fundamental to a Bubble's "terminal phase" expansion and reminiscent of the fateful mortgage finance "backstop bid" provided by Fannie, Freddie, the FHLB, and the Federal Reserve.
Fixed income markets have enjoyed a historic rally. After touching 4.0% in April, 10-year Treasury yields ended August at 2.47%. Benchmark MBS yields sank from an April high of 4.67% down to a low of 3.29%. After slowing sharply during the Greek crisis period, corporate debt issuance bounced back strongly. Junk bond issuance already equals last year's record for the entire year ($162bn).
After jumping to a seven month high of 695 bps in June, junk bond spreads (IBOX) ended the week at 554 bps. Investment grade spreads (IBOX) have declined back to 103 bps after reaching 132 bps in June. For perspective, junk and investment grade spreads reached respective highs of 1,890 bps and 279 bps at the height of the 2008 Credit crisis. The collapse of market yields has been across the board. The Bond Buyer index of municipal bond yields dropped from an April high of 4.45% to this week's 3.92%.
Global Financial Conditions have loosened markedly over the past month or so. After jumping above 5.5% in May, Brazilian dollar bond yields dropped to a record low 3.63% in August. Mexican bond yields dropped to a low of 3.72%, with emerging debt spreads (EMBI) to Treasurys declining to below 300 bps (from a 2008 high above 901). From a May low of 247, the CRB Commodities index has rallied back to 275. Most global equities markets have significantly reduced 2010 declines or moved back into positive territory.
After trading to 88.71 on June 7th, the dollar index has settled back down to 82.87. Renewed dollar weakness has played an instrumental role in the loosening of Financial Conditions. The Greek crisis caught many on the wrong side of fast-moving markets. Shorting the (structurally unsound) dollar to go long global risk markets had, again, become too crowded. European debt problems, the sinking euro and rallying dollar pounded those participating in the "global reflation trade." De-risking and de-leveraging fueled a squeeze on the dollar bears that further fed an unwind in commodities, equities, and risk asset markets more generally.
While European problems are anything but resolved, the market has become much more focused on dollar vulnerability. Talk of QE2, additional fiscal stimulus in the face of massive deficits, and June's nearly $50bn trade shortfall worked to reenergize the dollar bears. And renewed dollar weakness - and seemingly endless outflows of dollar liquidity - coincided with a big increase in foreign reserves held in custody at the NY Fed (foreign central banks lapping up excess dollar liquidity). These holdings increased a remarkable $145bn in only 13 weeks to a record $3.221 Trillion. It is worth noting that International Reserve Assets (as reported by Bloomberg) are up an incredible $940bn year-to-date to $8.572 Trillion.
I still believe the Greek debt crisis will be viewed as an important infection point with regard to market perceptions of structural debt issues. At the same time, it is also clear that the backdrop has been extraordinarily supportive of Bubble Dynamics.
Of course, skyrocketing bond prices have given rise to fundamental justification. Interminable deflation risk is at the top of the list of why bond returns will indefinitely outperform cash. I am reminded of how technology stocks and home prices were only to go higher. My analytical framework downplays deflation and focuses instead on a debt Bubble fueled by the Federal Reserve, The People's Bank of China, the ECB, BOJ, and the approaching one Trillion y-t-d increase in global central bank reserves. Throw in hedge fund/speculator leveraging and the billions flowing weekly (in search of any yield) into global fixed income and one sees all the necessary financing for a historic Bubble.
Developments and dynamics over the past couple of months have provided important confirmation for the Global Government Bond Bubble thesis. At the same time, there are numerous fault lines. Stress has reemerged in European debt markets, with yields rising notably in Greece, Portugal and Ireland. Here at home, stress continues to build in municipal finance. To what extent - and for how long - Global Government Finance Bubble Dynamics and attendant liquidity/speculative excesses mitigate some of these crisis points is an open question.
http://www.safehaven.com/article/18139/bubble-thesis-update
“And a partridge in a ‘pair’ tree”
by Jeffrey Saut
September 13, 2010
I recalled the lyrics “and a partridge in a pear tree” when an institutional account asked me for some “pair trade” ideas. Recall that “pair trading” is considered a market neutral strategy whereby you match a long position in one stock while selling short an equal dollar amount of another stock that is strongly correlated with the long stock position. Then, if the correlation weakens, hopefully your long position rises while your short position falls. For example, from our research universe a pair trade might consist of buying Regal Cinemas (RGC/$12.25/Strong Buy) and selling short an equal dollar amount of Speedway Motorsports (TRK/$14.97/ Underperform). For guidance, I called one of the smartest pair traders I know. His response was, “Don’t do it!” “Why?” I asked. “Because correlations are as high as they have been since 1987,” he replied. Further research reveals that he’s right, for arguably the best pair trading hedge fund in the business is down 11% year to date. Here’s why.
The chart on page 3 shows the correlation of S&P 500 stocks to the S&P 500 Index. Studying the chart one finds that the correlation from September 2009 through early May 2010 ranged between 55 – 65. However, following the May 6th “flash crash” the correlation leaps to ~78 and eventually ~82, which is indeed the highest correlation since the 1987 crash. So what caused this fairly rare event? In my opinion it is because the retail investor – disgusted with high-frequency trading, dark pools, trading huddles, inter-market sweep orders, etc. – simply left the game, leaving the “pros” to trade among themselves. Obviously, when the alleged “dumb money” left the party correlation had to rise. Adding to the situation has been Exchange-Traded Funds (ETFs). To wit, when volume increases in say the Powershares Consumer Discretionary ETF (PEZ/$21.08), that ETF automatically goes in and buys ALL 60 of the mid-cap stocks within the fund. Plainly, that causes correlation to rise.
The conclusion from my brief study is that pair trades are not working. Consequently, to make money you must take only one side of a position, either long or short. A potential insight is that as correlation recedes it might imply retail investors are returning to the equity markets. Currently, however, this is not the case, for as repeatedly stated, “I have not seen retail investors so unwilling to discuss stocks since the fourth quarter of 1974.” That gleaning is reflected by the sentiment figures and the money flows out of equity mutual funds. With such a dour mindset, I think “Something’s Gotta Give.” That belief is driven by the fact that corporate profits continue to explode. Indeed, with 99% of the S&P 500 (SPX/1109.55) companies reporting, operating earnings for 2Q10 have increased roughly 52% year-over-year to $21. Ladies and gentlemen, the peak in quarterly earnings tagged $24.06 a few years ago. Hence, we are roughly $3 away from bettering all-time peak earnings! Currently, this year’s earnings estimates for the SPX are hovering around $83, while next year’s are sticky around $95. The question then becomes, “What price-to-earnings multiple will Mr. Market put on said earnings if those estimates prove accurate?”
Alas, that is always a difficult question because the stock market is truly “fear, hope and greed only loosely connected to the business cycle.” Some negative nabobs suggest that the P/E multiple should be in the single digits. Other, more optimistic types argue that with interest rates and inflation exceptionally low the P/E multiple should be 20x. The right answer probably lies somewhere in the middle. Using a median P/E multiple of 15x yields a price objective of 1425 for the SPX based on a $95 estimate. Using a 12x P/E multiple renders an 1140 price target. Yet one inquisitive portfolio manager asked me, “Jeff, how do you arrive at that $95 number?” I responded that I don’t engage in such exercises, preferring to try and get things directionally correct. I then proceeded to relate to him what one of Wall Street’s best and brightest stated on a recent conference call. The speaker was Dr. David Kelley, strategist for J.P Morgan Funds, and he had this to say (as paraphrased by me):
I arrive at my $95 earnings estimate for the S&P 500 in 2011 by assuming interest rates stay below 4%, nominal GDP grows at 5.8%, a 2% hop in productivity, and with unit labor costs falling by -0.3%. Considering that unit labor costs have fallen by -2.1% for the second year in a row, this is not an unreasonable assumption. If correct, at least in real terms, the value of output per laborer is increasing faster than workers’ wages. Inasmuch, the gains in productivity are accruing to corporations. Add in low depreciation expense and the result is a profits explosion.
Obviously, that forecast foots with my belief that we remain in a “profits recovery” whereby profits soar, leading to an inventory rebuild that drives a capital expenditure cycle. Then, and only then, companies begin hiring, which fosters a pickup in consumption. Ergo, with surging profits bringing the SPX’s earning’s yield to 8.5% ($95 ÷1110), I keep chanting, “I think it is a mistake to get too bearish here.” Verily, if we were on the verge of a big decline it seems rather odd that many of the world’s stock markets are strengthening with some of them actually trading to new recovery highs. If past is prelude, such action suggests the weaker markets should soon follow. And, that’s what our stock market has done over the last two weeks, causing the SPX to break above its recent reaction high of 1105. My sense is we’ll see more near-term upside with the SPX then stalling around 1115 – 1120, attempting to pull back without much traction, and then re-rallying. Eventually, I think we will break out above the August recovery high (1130).
If correct, my preferred strategy is to buy Putnam’s Diversified Income Fund (PDINX/$8.07) and buy an equal dollar amount of some equity income fund populated with blue chip, dividend-paying stocks. Raymond James Asset Management Services has numerous Separately Managed Accounts (SMA), as well as a Unified Managed Account (UMA), that accomplish this. However, if you want to stay within the Putnam family of funds you might consider Putnam’s Equity Income Fund (PEYAX/$13.43). While it may not yield as much as others, Bart Geer has been the portfolio manager for over a decade and for the past three-, five-, and 10-year periods has handily beaten his benchmark (Russell 1000 Value Index). It’s worth noting that such a 50/50 asset allocation (fixed income/stocks) has never produced a five-year negative return in the last 60 years. Additionally, in an attempt to add alpha to the aforementioned portfolio, I like the strategy of layering in some individual stocks. Since the equity income fund covers the blue chip sectors, I would use prudently selected special situations.
Because I continue to favor technology, in past missives I have mentioned numerous tech names. To be sure, technology stocks are cheap, trading at their lowest levels relative to the SPX in almost two decades (1.0x the S&P 500). This has happened despite cashed-up balance sheets and good returns on invested capital. Moreover, there could be a paradigm shift afoot. Take Intel’s (INTC/$17.97/Outperform) recent agreement to buy Infineon’s Wireless Solutions Business (WLS), a leading provider of cellular platforms. Obviously, with the smartphone markets growing five times faster than the PC market Intel is hedging its “bets.” Two names from our universe benefitting from this smartphone surge are American Tower (AMT/$49.07/Strong Buy) and Crown Castle (CCI/$42.40/Strong Buy). Or, consider the recent bidding war for cloud computing company 3Par (PAR/$32.92). Cloud computing threatens to shake the hardware and software businesses to their very roots. While there are many stocks in our universe that play to cloud computing, this morning I offer CA Technologies (CA/$19.78/Strong Buy) for your consideration (see our analyst’s update).
The call for this week: I think we’ve gone from double-dip to double-drip as while the economy is slowing, a slide back into recession is unlikely. I also think the deflation theme has been deflated. Meanwhile, last week the Labor Day Indicator sounded the “all clear” signal when the SPX closed higher over the four days following the holiday. That rally took the SPX above its recent reaction high of 1105 and left it in position to challenge its 200-day moving average (DMA) at 1115. My sense is it will stall around that level and try to sell down. However, I don’t think the selling will gain much traction, leading to a re-rally that will eventually allow the SPX to break out above its early August highs of 1130. Thus, unless the SPX violates its 50-DMA of 1085, followed by a break of 1060, I think the path of least resistance for stocks remains up. Still, investors continue to shun stocks, which has left the Equity Risk Premium (ERP) exceptionally large, as can be seen in the attendant chart. Indeed, “Something’s Gotta Give!”
“Long-term duration asset prices are supposed to tell us something about long-term expectations. Recently, long-term government interest rates have reached new historical lows, and equity earnings yields have remained close to the very high end of their historical range. As a result, the equity risk premium (ERP), at nearly 10% has retested its extremely high level of early 2009. We thus face a striking paradox: investors prefer lending money to heavily indebted governments rather than to the prosperous, resilient and well-managed listed corporate sector. But the corporate sector is on a prosperous streak, with a constrained cost base and decent margins, and thus producing good earnings yields. Is this because equity markets are perceived as more dangerous than ever because of their super low risk/reward profile of the last decade?”
...GaveKal
http://www.raymondjames.com/inv_strat.htm
The Fed Outlook: No Good Choices
by Dr. Scott Brown
September 13 – September 17, 2010
In his semiannual monetary policy testimony to Congress in July, Federal Reserve Chairman Ben Bernanke said that the Fed “remains prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability.” In his Jackson Hole speech (August 27), he outlined possible steps the Fed could take, including expanding its holdings of longer-term securities, but cautioned that “the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs.” The Fed recognizes that recent economic data have been disappointing. However, according to Bernanke, “the preconditions for a pickup in growth in 2011 appear to remain in place.”
The Fed sees economic support from “very accommodative” monetary policy and improved financial conditions. Banks have improved their balance sheets and are more willing to lend. Consumers have reduced debt and built up savings, returning wealth-to-income rations near to their historical norms. Strong corporate balance sheets and low costs of financing should continue to support business spending on equipment and software. On the negative side, residential and commercial real estate are likely to remain weak, state and local government budgets remain under significant pressure, and federal fiscal stimulus is set to fade. On balance, economic growth is expected to be subpar in the near term, but still positive.
Core inflation has trended lower through the first half of the year, but may be stabilizing at a low level. An economy operating with considerable excess capacity will tend to see downward pressure on inflation, but well-anchored inflation expectations should prevent inflation from falling a lot more (say, into negative territory). Inflation expectations have begun to edge down and they should continue to fall as long as inflation remains lower than expected. However, unless the economy stumbles more substantially in the near term (not likely) or fails to pick up as anticipated in 2011, then the prospects for outright deflation (a sustained rate of decline in the overall price level) are relatively remote.
Back in 2002, then-Governor Bernanke recommended preventative action against the possibility of deflation. The Fed should act swiftly and forcefully to prevent deflation. So why isn’t it doing more now? The main reason is that the Fed has already done a lot in terms of credit easing and there are perceived risks in doing more. Purchases of long-term securities made sense when the economy and financial conditions were under severe duress, but may be much less effective when conditions are more normal. Moreover, a further increase in the size of the Fed’s balance sheet could undermine public confidence in the Fed’s ability to exit such a policy later on.
There is also an important side debate about how much the economy can improve over the near term. Some economists have argued that the increase in unemployment is structural, the result of a mismatch between the skills of those laid off and the skills that are needed in the “new” economy. Other economists argue that the rise in unemployment is cyclical, a consequence of a weak economy in general. Why not both? There is some evidence supporting both views.
The Beveridge curve relates job vacancies and the unemployment rate. The recent trend has broken above the expected pattern, consistent with at least some skill mismatching. The Fed’s recent Beige Book noted upward wage pressures “in a narrow set of sectors experiencing a mismatch between job requirements and applicant skills.” In addition, the housing debacle has likely led to a decrease in labor mobility.
Even if the labor market weakness is mostly cyclical, there’s a view that the chief factor in the economic recovery is time. That may explain the Fed’s complacency in the face of what is expected to be a prolonged period of elevated employment.
http://www.raymondjames.com/monit1.htm