Replies to post #4463 on Your Economy (No Politics) (YE1)

[FinancialAdvisor]

Adios, have a good time, don't let Vegas take too much of your hard-earned money, and I'm sure I speak for many when I say that we patiently await your next Market Trend Update!

Peace!

[odiemutt]

A good article. But I'd like to see articles on suggestions to turn this trend around. No one seems to have a clue...

http://www.counterpunch.org/roberts05192005.html

The Politics and Economics of Outsourcing

By PAUL CRAIG ROBERTS

Offshore outsourcing is misunderstood by economists and policymakers. The phenomenon is misperceived as an extension of the mutual benefits of comparative advantage-based trade.

Comparative advantage has two necessary conditions, neither of which is met today. One condition is that capital is immobile internationally relative to traded goods. The other is that the trading countries have different opportunity costs of producing the traded goods. (The economic concept of opportunity cost is an in-kind measure; for example, the quantity of wine that is not produced in order to make a yard of cloth.)

The condition of capital immobility is required to insure that a country's capital seeks comparative advantage at home instead of absolute advantage abroad. Different internal cost ratios of producing one good in terms of another are necessary if low- and high-cost countries are to experience mutual gains from specializing and trading.

David Ricardo discovered comparative advantage when he investigated the question of why a country that could most cheaply produce all tradable goods would trade with a higher cost country.

Ricardo's answer is that the opportunity cost of producing one good in terms of the other was different in the two countries. He was able to show that total output would increase if each country specialized in the product in which it had relative advantage. He then showed that the increased output would be shared by the terms on which the countries would trade one product for the other.

In Ricardo's example, the different opportunity cost ratios of producing wine and cloth in the two countries are due to inherent differences in geography, climate and soil.

Modern production functions, however, are based on acquired knowledge. They operate the same in all countries. These production functions do not reflect country-specific inherent differences that result in different opportunity cost ratios on which comparative advantage depends.

When I point out that the conditions on which the case for free trade is based are no longer met in today's world, economists either evade the issue or drag red herrings across the path. They talk about shifts in the terms of trade, about productivity gains abroad, and about the pervasiveness of factor mobility even in Ricardo's time. They equate the rise of the high speed Internet and collapse of world socialism, which made vast quantities of cheap labor available to first world capital, with innovations such as lower transport costs that turned previously non-traded goods into traded goods.

None of these arguments engages the issue. Ricardo imposed the condition of relative capital immobility internationally in order that specialization according to comparative advantage could occur. Otherwise, a country's capital would flow to absolute advantage abroad. When US firms substitute foreign labor for domestic labor in their production for domestic markets, capital is flowing to absolute advantage.

Factor mobility from Ricardo's time to the recent advent of offshore outsourcing was qualitatively different. Foreign investment was a way to evade tariffs, quotas, and high transport costs. Foreign investment was not geared toward offshore production for home markets. Ford and GM produced cars in Europe to sell to Europeans, not to export to America.

Economists assume that offshore production for home markets is trade because the goods count as imports when they enter the US. But what is being traded when a US firm closes its American factory, lays off its American work force, moves its capital and technology offshore and uses foreign labor to produce the identical product for the same US markets? This is not trade in the traditional sense with one country specializing in cloth, the other in wine, and sharing the gains.

The old free trade argument that US labor has nothing to fear from cheap foreign labor, because US labor works with more capital and better technology no longer holds when US firms provide the same capital and technology to foreign labor. The international mobility of capital and technology and the advent of production functions that operate the same regardless of location mean first world labor will be displaced in tradable goods and services until there is a global equalization of wages and living standards.

Indeed, one reason the facts of offshore outsourcing are evaded by so many economists is that they look with favor on the international redistribution of income and wealth that is occurring.

As the BLS payroll jobs statistics make clear,
the US has ceased to create jobs in tradable goods and services. The higher productivity, higher value-added jobs that provide upward mobility are missing from the data. Our most prestigious engineering schools report a marked decline in enrollments in computer and electrical engineering. Business Week magazine reports that US firms are now outsourcing R&D, design and innovation.

As I report each month following the BLS release, so far in the 21st century the US economy has been able to create jobs only in domestic nontradable services. Independent studies by economists at Northeastern University (reported in The Boston Globe by Charles Stein, Feb. 20, 2005) and by Edwin S. Rubenstein conclude that most of the new jobs in domestic services have gone to new legal and illegal immigrants. If these studies are correct, employment growth of native-born Americans has ceased in the 21st century.

In the 21st century, the US labor force has been acquiring the complexion of a third world country, with new jobs available only in domestic services. In contrast, China and India are acquiring high tech manufacturing and professional service jobs, the mark of first world countries.

How does the US gain from inability to create jobs in export and import-competitive goods and services?

How do Americans gain from the loss of the jobs, careers, and incomes associated with the production of the goods and services that they consume?

How do US firms gain, beyond the short-run advantage of CEO bonuses and share prices based on quarterly performance, from becoming brand names with a sales force marketing foreign made goods?

How does America as a whole gain when the US pays for the cheap foreign labor contained in the offshored goods and services (a major component of the rising trade deficit) a second time by handing over to foreigners more of its existing stock of assets? The "cheap Wal-Mart goods" are not cheap when properly measured.

How do US universities gain when there are no payoffs to a university degree? The BLS estimates that the vast majority of the new jobs that the economy is expected to create during the next ten years require no university education.

Where is patriotism when politicians turn a blind eye to the decimation of opportunity for native-born citizens.

What is the state of economic education in the US when economists cannot comprehend the reality that confronts them?

Economists are not even aware of the latest and most important work in international trade. In 2000 M.I.T. Press published Global Trade and Conflicting National Interests by Ralph E. Gomory and William J. Baumol. This important work, which does not directly address the offshore outsourcing issue, shows that the comparative advantage case for free trade is too unsophisticated to be correct even if its required conditions are met.

It will take economists a decade or longer to absorb this work. In the meantime, they are operating with a defective trade model that leads them to incorrect conclusions and disastrous policy advice.

Paul Craig Roberts has held a number of academic appointments and has contributed to numerous scholarly publications. He served as Assistant Secretary of the Treasury in the Reagan administration. His graduate economics education was at the University of Virginia, the University of California at Berkeley, and Oxford University. He is coauthor of The Tyranny of Good Intentions.He can be reached at: [e-mail]

[Bullwinkle]

~:~:~Market Trend Update for the Week Ahead~:~:~



Overview:
Last week I was off on a Vegas vacation and did not have the time to give an objective view of the markets, but I am back and ready to get back to business. As mentioned in the update prior to my departure I mentioned the following; This last week has been strange to say the least, possibly a last ditch effort to avoid the inevitable with the COMP being the only area of strength, but I do not expect this to last when considering overhead resistance. Some heavy lifting will be required to get back to 2000 and nothing short of a break above 2024 would really get my attention. That was 2-weeks back, but Mr. Market did get my attention and as seen we surpassed 2024 and the ranges I had outlined with the top side having been DJIA 10460, SPX 1080 and COMP 1980 (including +/- 10pts fudge factor). With that being said, we sit today at DJIA 10545, SPX 1198 and COMP 2075. Basically we are retesting the area from which we broke down and out of back in April. The move started with what appeared to be short covering during Ops Exp week, followed by some decent Econ news (such as better than expected PPI, GDP, etc) and external news events (such as Zarqawi on deathbed and the like) and finally snowballing into month/quarter end. Good news no matter how insignificant has been warmly greeted while bad news and numbers have been shrugged off. Internals have improved although very low volume and low open interest are suspect in my opinion. On the other hand, fund inflows improved greatly with $3 Bln coming into the market of which 2/3rds found its way into domestic funds. On another note, the CRB has moved back to 300, Oil back to $52bbl, Gold holding steady at $419 and the U$D at 86.41. This in itself its very interesting and I will touch on it more a little later…

Economic #’s:
For the most part Econ #’s were pretty good again this week, then again these particular numbers when last reported were rather poor (except for housing) so any improvement should not be all that surprising…

Existing Home Sales rose 4.5% to 7.18 Mln beating expectations of 6.90 Mln and the previously reported 6.89 Mln. Single-family home sales rose 4.5% in April to a 6.28 Mln unit rate from a 6.01 Mln unit rate in March. Condo sales climbed 4.8% to a 899K unit rate from an 858K unit pace in March. The national median home price rose 15.1% to $206,000 from the same month a year ago, that price increase was the biggest since November 1980 when prices rose 15.6% according to NAR.
New Home Sales rose 0.2% to 1.316 Mln, just shy of expectations of 1.328 Mln while slightly beating the previously reported 1.313 Mln. The median sales price for new homes rose to $230,800 from $217,500 in March, but that was still short of February's $235,800 level. Unlike the sales prices of existing homes, which saw median prices up 15% from year-earlier levels, the typical April new home sales price is up a bit less than 4% from April 2004.
MBA Mortgage Applications rose 4.3% on a seasonally adjusted basis in the week ended May 20 compared to the prior week. Refi applications rose 6.4% on a week-to-week basis, while applications to purchase homes increased 2.8%. Refi’s accounted for 40.3% of total applications last week, up from 39.3% a week earlier, while adjustable-rate mortgages reached 34.8% from 33.9%. Last week's average contract interest rates for 30- and 15-year fixed-rate mortgages stood at 5.63% and 5.24%, respectively, down from 5.73% and 5.28% in the prior week. The rate on one-year ARMs averaged 4.21%, up from 4.11%.
Durable Orders rose 1.9% to $200.3 Bln and beating expectations of a 1.3% increase and the dismal previously reported of –1.6%, which was revised up from an originally reported –2.3%. Orders for transportation goods jumped 8.2%, accounting for all of the increase in total orders. Excluding transportation goods, orders fell 0.2% in April.
Initial Jobless Claims rose 1K to 323K with expectations having been for a 3K decrease to 325K. The 4-week moving average of new claims rose by .5K to 330.5K from 330K in the week. The number of former workers receiving state unemployment checks fell 22K to 2.574 Mln in the week ending May 14. The 4-week average of continuing claims rose by about 6K to 2.59 Mln. The insured unemployment rate - the percentage of covered workers who are receiving benefits - stayed at 2%
Help Wanted Index advertising volumes were flat in major U.S. newspapers and unchanged at 39 in April. Ad volumes have fallen in 7 of 9 regions over the past 3-months.
GDP rose to an annualized rate of 3.5% and just shy of expectations for 3.6% growth, but above the previously reported 3.1%. This report still represents a slight deceleration from the 3.8% rate in the 4th Qtr and the 4.4% rate for the full year of 2004. A key inflation measure linked to GDP, the core personal consumption expenditure price index rose 2.2% in the 1st Qtr and unchanged from the initial estimate. Another figure closely watched, final demand -- which represents economic activity excluding inventories -- was up 2.7% in an upward revision from a 1.9%. Consumer spending was revised slightly higher to a 3.6% increase, compared with the initial estimate of a 3.5% gain. Another section of the GDP report showed US corporations' before-tax profits from current production rose a record 23.6% to an annualized pace of 1.307 Tln in the 1st Qtr.
Personal Income/Spending incomes rose by 0.7% last month from 0.5% previously reported and in line with expectations while spending rose by a lower-than-expected 0.6% in April and below expectations of a 0.8% increase with previously reported 0.6% revised upwardly to 0.9% for March.
Oil Inventories as reported by the DoE (Dept of Energy) and API (American Petroleum Institute). Crude according to DoE fell by 1.6 Mln bbls, but according to API rose by 2.3 Mln bbls. Gasoline according to DoE rose by 600K bbls, but according to API fell by 416K bbls. Distillates according to DoE rose 1.9 Mln bbls, but according to API rose 2.5 Mln bbls.
Michigan Sentiment fell to 86.9 from 87.7 in May although the final reading for May was higher than the preliminary reading of 85.3 reported two weeks ago. The survey's expectations component slipped to 75.3 in May from 77.0 in April, while sentiment on current conditions rose slightly to 104.9 in May from 104.4 in April.

Next week will be a busy one for sure with Chicago PMI, Consumer Confidence, Auto/Truck Sales, Construction Spending, ISM Index/Services, Initial Claims, Productivity, Factory Orders, Average Workweek, Hourly Wages, Nonfarm Payrolls and unemployment Rate…


Freedom of Speech, Religion and Press are equally as important as the other and here today we have our first amendment rights falling by the wayside. While I will leave religion for another discussion, I would like to touch on freedom of speech and press. I was just watching C-SPAN where media coverage and freedom of the press were being discussed within a forum setting. Democrat, Republican and Independent journalists and media heads were invited to attend. As it turned out and was no surprise (at least to me) that no Republicans showed up. This would include the likes of Limbaugh, O’Reilly, Hannity, Carlson, Sapphire, Novak, etc (you get the picture). The discussion began about the many problems of getting a topically relevant and truthful report with verified facts via our media outlets and how journalists of all kinds can perform their jobs without fear of reprisal. Some other things discussed were the corporate ownership of all if not most media outlets, the scripted and one-sided guests cast, paid for solicitations to advance an ideology, the planting of advocates within press conferences, infotainment, the lies being told as truths and a whole litany of issues that paint a picture that is not representative of what is really taking place here on planet earth. In that 60-minutes I got more news that pertained to things I care about than 8 hours of regular news media information. Did you know that the USA ranked 29th in freedom of the press, 29th! Think about that for a minute... We are what freedom is, aren’t we?

At press conferences (the very few we do see) follow up questions are not allowed and if they are not soft ball questions then you are banished to the back of the room and never called upon again. A new culture exists, where you and I are not supposed to question authority. This does not happen in any other free nation, as a matter of fact it is expected in England for instance. If they did not approach leaders with suspicion, they would not be doing their job. Only those under the kind of rule that you and I are not accustom to does this type of activity exist where “trust me because I say so” is the last word. If you do not fall into line then life becomes very unpleasant for you courtesy of our administration. The Newsweek story, which told of abuses where the Koran was being defaced is just one instance where freedom of the press came under fire. Newsweek told the truth and were called “murderers” by the administration because of the aftermath that followed. Forget that pictures exist of Rumsfeld shaking hands with Saddam or that we armed Iraq with chemical weapons, forget that we traded arms for hostages with Iran, forget about abuses at Abu Ghraib or the fact that the Iraq war was based on lies and that 1600 Americans have paid the ultimate price for their country. Is this the kind of society you want to live in? A society under a cloud of secrecy and censorship where the Bill of Rights is used by the GOP to wipe their feet? This does not just apply to world news, events or politics, it also affects economic reports, economic numbers and many of the articles that you and I read about the state of the economy and the markets we follow…

There is nothing I dislike more than a liar and/or a hypocrite and we have allowed ourselves to be surrounded by them and are expected to believe their words as gospel. An example of this is the highly massaged economic numbers we see when out here in the real world we know inflation exists, prices are rising and that the middle class is under assault. Politically speaking, how about where we tell the world that terrorism will not be tolerated and that anyone that helps or supports terrorists is a terrorist and an enemy of the USA. Then our government turns around and harbors a known and admitted terrorist http://www.workers.org/2005/world/posada-0428/ Our government and media goes too far in massaging our brains into believing what they say has no need to be questioned while they suppress the truth and keep the public in the dark about any issue that matters to American’s and our way of life. Secrecy is a top priority and it has nothing to do with security, it’s about pursuing an agenda that is distasteful to the average American. When is the last time you saw a coffin of a dead soldier returning home for burial? Is this anyway to honor those who have fought for our way of life? To be forgotten and not even receive the recognition they deserve? How about the way we are told that education (i.e. head-start) is being funded and a priority only to find out that it has been undercut by bills we never hear anything about that undermine its effort? Or that alternative fuels is a top priority, yet we are off to drill in ANWR? Say one thing and do the opposite is business as usual and these are just a couple of the many instances of the abuse of power that happens every day.

Michael Jackson, Terry Schiavo and gay marriage are not top priorities, at least not to me, yet they are shoved down our throats ad-infinitum while 10Lbs pork laden bills are pushed through Congress in record time, while soldiers are dieing, while the economy is on the brink, while the administration changes the constitution to fit its needs, while whistleblowers are punished and liars are rewarded. Is nothing sacred anymore? I don’t think I have to tell you how disgusted I am with Neocon elitists who sell out our nation, outsource our jobs and our intellectual property and security. These people are as fake as a $3 bill. Call me what you want; a bleeding heart liberal, unpatriotic or whatever, but it could not be further from the truth. I care too much about my country and sitting idly by while it is being dismantled before our very eyes is something that I do not take lightly and neither should you… WAKE UP AMERICA!

What can we expect now?:
While we have traveled a little further than anticipated on the indices, nothing has changed including my outlook. We are overbought and testing major resistance and all on pathetic volume. The DJIA and SPX may go a little further, but I do not believe the COMP gets passed 2080-2100. To get to new highs we will need much more than 1.3 Bln shares traded. I will go out on a limb here and state that this is nothing more than the exhaustion phase of a sucker rally like we saw in April’04 and then again in July’04. On the positive side, this run also resembles the post election run and if volume improves, then this may have some legs. Also if you were able to identify the bottom, I am sure you have done very well. I am not a day trader, so this current move does not mean too much to me. We are still in an overall downtrend and even if we were to make new highs they are not far from here and will most likely be short lived. If we do move onto new highs, I believe they will be the last we see for some time to come. With that said, this current move could have very well been a 2nd Qtr earnings ramp, end of month jockeying or a combination of the two. It is not out of the question, but on what premise would these highs be built? Earnings are most likely going to show slowing growth, fund managers are at 3% cash and quite frankly too many still expect it. All in all, I do not see the conviction. The only thing this market has going for it is the anticipation and the Fed who should never be under estimated in their ability to coerce the market. As for Oil, it appears to have bounced off the $46-$47bbl area where I had mentioned the 200DMA and 38.2% Fib reside although a break above $53bbl will be required to initiate another run to $55bbl before possibly testing new highs. The U$D has held above 86, but Gold has also held the $419 area. As a matter of fact, gold stocks are now moving up and if I remember correctly it is the Gold shares that lead the price of Gold. If this is true and holds up, then we might see the May rally I was looking for materialize in June. The U$D may be exhausted too, but to gain another point from here would most likely not do too much damage to the price of Gold. I believe 87.5 is it for the U$D and that’s if we get there. Also Commercials are getting long Gold and possible accumulation of the Euro, not a good sign for the U$D. While at this point in time it is still too early to tell, I get the feeling we are setting up for some serious summer doldrums…

On a technical note, Bullish Advisors are at 46.7% with Bearish Advisors at 26.1%. The VIX/VXN trends have moved out of their bullish flag like chart patterns. CBOE Equity P/C Ratio is at .574 with a 21DMA of .632 and the ever-tightening range has moved from an upward bias to a downward one. The RSI 5-Days are Overbought on the COMP and SPX, but Neutral on the DJIA with RSI 5-Wks Overbought on the COMP, but Neutral on the SPX and DJIA. The $NASI Daily (Summation), The $NAMO Daily (McClellan), The $NAHL Daily (Highs/Lows), The $NAAD Daily (Advance/Decline) and BP%'s are all in downward trends where the 50DMA has clearly crossed under the 200DMA.

Charts for all of the indicators mentioned are posted below for your viewing pleasure…


























NOTE:
I continue to hold a USPIX position, which I will flip to UOPIX when appropriate.

CORE:
Funds; HSGFX, PCRDX, PRPFX, QRAAX, RSNRX ,TAVIX. Individual Stocks; ANO, BHP, SWWC

SWING: BGO, GSS, NXG

Disclaimer:
This disclosure is not a recommendation to buy or sell or to do as I do. It is only to give my thoughts on current market conditions and share the positions that I am holding for tracking purposes only. I am not a day trader and only attempt to identify up/down trends and play the swings.