8/1/11…a failure to lead

This week’s economic calendar is full of important indicators. The highlight of the week will be the July Employment Situation Report (Friday). We will also get the July ISM Manufacturing Survey and June Construction Spending (Monday), June Personal Income and July Motor Vehicle Sales (Tuesday), the July ADP National Employment Report, June Factory Orders, and the July ISM Non-Manufacturing Survey (Wednesday), and June Consumer Credit (Friday). Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA

 

Bloomberg Top Stories:

 

*Obama Debt Limit With Congress to Avoid Default Faces Vote Today

(Have low expectations for passage and you will be more cheerful! TB)

*U.S. Futures, Stocks, Commodities Rally on Debt Accord as Treasuries Drop

*HSBC Will Eliminate 30,000 Jobs Worldwide as Costs Outpace Bank’s Target

*Worst European Earnings Hitting Industrial Stocks as Stoxx 600 Falls 8.9%

*Spanish, Italian Ratings Drive Markets to ‘Negative Spiral’

*Downgrade of U.S. Debt Amounts to Only Few Basis Points in Ratings History

*Commodities Beat Stocks, Bonds to End Two-Month Decline on China Expansion

*Gold Coins Selling Out in Downtown Lisbon as Biggest Wager Sees 11% Gain

*Banks in BRICs Signaling Credit Crisis With Loans Showing Increasing Risks

*Obama’s Deficit Bargain Lost out to 2012 Politics with Shifting Priorities

*Industrial Policy is Just a Nicer Name for Corporate Welfare (read subsidies)

 

On Friday TB wrote: “it is hard to conceive an uglier day than yesterday’s on the prospects of failure to pass the debt ceiling.” That was easily trumped in Friday’s session as volume was just shy of Thursday’s 4.6B shares BUT Big Board volume surged from 1.1 billion to 1.2 billion shares highest since March 15, and trading was take no prisoners. The S&P VIX exploded to 25.94,highest since March 17th, and closed at 25.25 vs 22.98. Fear has overtaken complacency in the equity markets. Bonds meanwhile, despite the debt ceiling, posted a huge gain with the long end closing at the lowest yields of the year!

The declines were stunning and marked a fourth decline, the worst for the week in more than a year. The Dow fell 0.8% vs -1.6% vs -0.7% and is now up just 4.9% ytd, Transports -0.8% vs -2.6%!!! vs -1.3%, and the S&P 500 fell 0.7% vs -2% vs -0.4%. The two Nasdaq indices fell 0.4% after plunging 2.6%, while the Russell 2000 which tanked a whopping 3% Thursday declined another 0.3%, vs -0.8% vs -1.1%. New 52 week highs were were steady at 49, while new lows rose slightly to 212 from 210 from 102 from 77 from 50. This is only the second time in months that the ratio has been negative and the first time on THREE straight sessions! Advance/Declines continue weak: look at the NYSE: -2:1 vs -11:1 vs -1.9:1 vs -4:1, and -1.4:1 vs -6.5:1 vs -1.8:1 vs -3.3:1 on Nasdaq, while Breadth was -2.5x vs -17x!!! vs -1.4x vs -3.5x on NYSE and -2x vs -11x!!! vs -1.1x vs -2.5x on Nasdaq.

Overnight global equities are rallying on a debt deal (sic) and China growht: UK’s FTSE +1.4% vs -0.3% vs -0.5% vs +0.1%; French CAC 40 +0.5% vs -1% vs -1% vs -0.5%; German DAX +0.05% vs -1.2% vs -0.6% vs flat for two days; Nikkei +1.3% vs -1.5% vs -0.5% vs +0.5%%; Hang Seng +1% vs +0.1% vs -0.1% vs +1.3%; Korean Kospi +1.8% vs -0.9% vs +0.3% vs +0.9%; Indian SENSEX +0.6% vs -1.2% vs -0.5% vs -1.9%. U.S. Futures are strong for the same reasons…will the optimism hold? DOW +159; SPX +12.90; NDQ +28. Gold is $1619.90 -$11.30 after hitting another record high of $1637.50 Friday, while Crude is $96.81 +$1.11 – and struggling with the 40/50 day  after bouncing off the 200 day Friday: $94.94.U.S. treasuries are off slightly EXCEPT the 30 year which is off 7/16 but yielding just 4.15% after Friday’s 2-3/8 point rally. The 10 year is 2.80% -1/16 after rallying 1-1/8 Friday.

…not only is there a failure to lead there is a failure to properly report by the press. For a second straight week the panels on the Sunday talk shows merely talked over one another…an incredible reenactment of how Congress is acting.

Only one man had it right: Fareed Zakaria, one of the wise men of America, even though he wasn’t born here. Is that what it takes to have common sense in this country? First, he pointed out that there is only one country with a debt ceiling: Denmark. But it is set so high that they never have to raise it. As for the U.S., it was set up during WWII…for the exact opposite reason it is being used today: to keep Congress from having to appropriate more spending during the war. As it now stands it is an anathema to that purpose and has now been misused to the detriment of the nation, it’s stature in the world, and now has pushed both sides so far apart that any budget reconciliation…which is what should have been done instead of extorting the government…is out of the question. The tea party mantra of: no new revenues (even elminating wasted subsidies or rescinding ‘temporary’ tax cuts as the mantra of their constituents is a disgrace…why are the hurting those who have suffered without attaching any costs on those who have benefitted the most?).

Zakaria, like TB, and economists (even Kudlow joining Reich on this), is appalled at the behavior of our Congress on something that shouldn’t be a topic of debate – rather it should be eliminated. The ‘crisis’ they see was created BY THEM, rather than work out a plan to cut costs over the next five years, reform entitlements and the tax code, and in general act like educated adults instead of children.

On Friday, the point was made that Apple has $74 billion in cash…$2 billion more than the U.S. government. Zakaria interviewed the CEO of GM which has $35-40 billion in cash or nearly half what the government has and WE the people, bailed them out!

What are these companies doing with the money? Paying their employees more…well yes, in a way…top management that is!

Remember when we bailed out GM and Chrysler? We did NOTHING for their suppliers who weren’t paid, and many of which went out of business creating more unemployment. A friend at a top defense contractor received a company email saying to prepare for a work stoppage if the debt ceiling isn’t approved. It is a sure thing that suppliers to the government will not be paid…but will they pay their subcontractors?

Paul Krugman made a point that it is absurd to believe that with 9% unemployment we are going to reduce the size of government yet create jobs…as if the private sector will then do it??? Worse, the REAL unemployment rate is at least 12% and perhaps as high as 16%. He also was appalled at Friday’s Q2 GDP number of +1.4% even as Q1 was reduced to just 0.4%. The economy is growing less and both he and Jim Cramer are now talking risk of another recession. Think about it!

Last week, TB pointed out that the poverty level for a family of four in the U.S. is $22,500. This is grossly understated because if a family has health insurance that would require another $500 to $1,000 a month. MEDIAN income in the U.S. for all races is just $49,665 up from $40,000 in 1965!!! …and that is NOT adjusted for inflation. Now take off an average $8,000 for health insurance and what do you have? A poor nation that can no longer to consume…after all that consumption was based on just one thing: CREDIT! We can no longer do that. Furthermore, we have borrowed well into the future and cannot get out of car leases and more than half are upside down on their homes. There is a shortage of rental…in Minneapolis the average rental is now $1,200 a month! Hmmm, that is $14,400 a year!

The markets today are fired up on an agreement but this has played out too many times as Lucy picking up the football so Charlie Brown lands on his butt again. That is what TB thinks will happen again and even if not the damage is done. The left wing of the Dems is sounding like the opposite of the tea baggers: no cuts to social security or medicare…period. How do you strike a balance with that?

By the way the tea party was born on CNBC when bond geek, Rick Santelli in an emotional market yelled out: who here wants to pay for someone else’s mortgage. He then invited everyone to dump tea in Lake Michigan with him. Brilliant. Then as it gained momentum, the Koch brothers, two of the wealthiest Americans, funded it. That is how, TB believes, they got no revenue increases into the equation.

Would the tea party have prevailed or would we have the leaders we have without the shameful gerrymandering which was accomplished by both sides to preserve the incumbents? In one southern state (Virginia, TB believes) there is a 25 mile strip connecting two areas that are heavily one party. This is a travesty and one reason we are becoming so segmented.

Yesterday, on This Week, Grover Norquist, the head of Americans for Tax Reform, and also both a domestic and foreign lobbyist (a conflict of interest don’t you think?), spouted all kinds of wrong facts and said that all people should pay the same tax rate…as if the tax code isn’t regressive enough as it is. Beware of special interest groups distorting the truth and facts. Meanwhile, YOU decide.

. .  – – –  . . .    . . .  – – –  . . .

A doctor wrote in the Minneapolis Star Tribune that this is the 45th anniversary of Medicare and how much it has done for Americans. This, despite, cries of socialized medicine. Think where we would be without it. The doctor wrote a good article on how cost effective it is versus the private health care system. Of course, every time the topic comes up cries of ‘socialism’ come up but the same right wing also says: they will have death squads to pull the plug on Grandma. Let’s face it the only thing we know is that we are all going to die. The doctor ignored this fact by not saying that we need to evaluate treatment as to whether it will meaningfully prolong life, improve quality of life, and take it out of the hands of family members who are pressured into approving treatment, and totally uninformed. THAT is the problem with medicare, not the program itself. Other countries allocate treatment…and here, if you have the money, fine…then you can pay for it, not allow it to be siphoned from doing good elsewhere. This may sound cold but it is the only practical solution to a mounting problem and would have been solved had politics been removed from the equation.

By the way, what caused medicare costs to escalate so much over the past five years? Medicare Part D – prescription drugs. Pushed through by Goerge W. Bush and passed by the GOP and dems. Not only that but they insisted that medicare NOT buy drugs direct…which would have saved billions and allowed control of costs (they should also have banned ads for prescription drugs on TV). Obama followed suit by doing the same in his flawed plan. Will someone do the right thing?

 

Think about it and how you want this country to look ten years from now.

TB

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