8/8/11…totally disgusted

This week’s economic calendar is much lighter than this week’s was, particularly of important indicators. The highlight of the week will be July Retail Sales (Friday). We will also get Q2 Productivity & Costs (Tuesday), June Wholesale Trade and the July Treasury Budget (Wednesday), June International Trade (Thursday), and mid-August Consumer Sentiment and June Business Inventories (Friday). Perhaps most important, however, will be the FOMC Meeting (Tuesday). Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA

 

Bloomberg Top Stories:

 

*Oil Futures Fall to $83.18, Lowest Since November 2011, broke Support at $84.80

*Treasuries Gain as Stocks, Futures Fall After Rating Cut; Italy Bonds Jump

*ECB Bond Buying May Reach $1.2 Trillion in Creeping Union Germany Opposes

*Muni Market Prepares for Loss of AAA Ratings as S&P Downgrades U.S. Credit

*Global Banks Poised to Slash 101,000 Jobs in Fastest Reductions Since 2008

*Volatility Increases From Asia to Europe After S&P’s U.S. Rating Downgrade

*Central Bankers Confront Decision on which Risk Scares Them Most

*Record Cash Showing S&P 500 Finances Beat U.S. as America Loses AAA Rating

*Commodity Currencies Only Refuge Left After Intervention Eliminates Havens

*Bond Sales Skid to Slowest Pace of 2011 as Economy Weakens

*Puerto Rico Plans $225 Million Bond Offering After U.S. Cut – watch closely!

*Hospital Debt Risk Climbs to 12-Month High on Deficit Deal

*Standard & Poor’s Seen Surrendering to Tea Party at U.S. Taxpayer Expense

*Geithner Decision to Stay on Gives Obama ‘Continuity’ Amid Market Turmoil

 

 

Friday’s NYSE volume rose sharply again to 8.6B shares, highest in 30 months as stocks self-destructed ahead of the July payrolls report. Big Board volume also surged to 2.25 billion a 12-month high at least. The S&P VIX slipped slightly to 32.00 but still at highest since July 1, 2010! Despite initial euphoria on a puny jobs report that slightly exceeded expectations, it was overstated then plunged. After the close S&P cut U.S. credit rating to AA+ while the other two agencies held it steady.

We have had one puny up day in 11 sessions, with yet another big, fat explanation point placed on yesterday’s rout. TB is not even going to bother with how the other indices fared yesterday as they were off from 4.6% on the NDQ 100 to 6% on the Russell 2000. New 52 week highs tumbled to an infinitesimal 14 from 25 – they had been running in the hundreds, while new lows nearly doubled to 1303 from 781!!! That puts the ratio at -93:1 which is unbelievable vs -31:1!!!,and it has now been NEGATIVE for EIGHT straight sessions! Advance/Declines were negative: NYSE: -2.6:1 vs -21:1!!! and -2.2:1 vs -12:1 on Nasdaq, while Breadth was -1.8x on Nasdaq and -3.2x on Nasdaq vs an incredible NEGATIVE 87x on BOTH NYSE and Nasdaq!!!

Overnight global equities are really tanking: UK’s FTSE -2.2% vs -1.9%; French CAC 40 -2.5% vs +0.4%; German DAX -3% vs -1.5%; Nikkei -2.2% vs -3.7%!!!; Hang Seng -2.2% vs -4.3%!!!; Korean Kospi -3.8% vs -3.7%!!!; Indian SENSEX -1.8% vs -2.2%. Remember a month ago when we were told to sell U.S. stocks and buy emerging markets? U.S. Futures sharply lower again: DOW -259; SPX -28.50; NDQ -52!!! Gold is $1699.70 +$47.90 after a new record high of $1718.20 overnight while Crude is accelerating to the downside, $83.73 -$3.15. U.S. treasuries are rallying at the expense of all other asset classes. 30 year 3.81% +5/8, following Friday’s selloff! the 10 year 2.47% +3/4.

…we are watching a very bad movie, one where the outcome is almost a given. Here are the players:

S&P and the other rating agencies: these guys who rated nearly every subprime mortgage in the U.S. AAA, now cut the rating of the U.S. treasury to AA+, a two notch cut. Not that TB disagrees (in fact it is still too high aside from the fact that we are the main reserve currency to the world), but the impact on securities spread to it will be much worse. In fact, overnight the 30 year bond is UP ½ point. This is not what anyone expected, especially since the long bond is up 10% since June 30th. What is less evident is that it represents a flight from spread product to the bond that will be least impacted.

Obama: he showed his biggest failure to lead in the statement the Administration issued on the downgrade. First, they scoffed at S&P on a $2 trillion error…or was it? Take a hard look at government accounting and try to decipher which numbers are correct…remember that the bill just signed actually increases spending but by a trillion less than it ‘would have been.’ Here is what TB would have said,

“while the accuracy of S&P’s ratings, as was evidenced during the recent credit crisis, is suspect, this should be viewed as a warning shot to government’s everywhere that changes will have to be made. Unfortunately this comes at a time when at a minimum the unemployment rate is 9.1% and actually higher, where government, instead of creating jobs, has been cutting more than 20,000 jobs each and every month while the private sector does minimal hiring and largely with temporary jobs with no benefits of guarantee of stability.

We should not be demonizing S&P but rather putting aside ideology to find a solution to this problem…regardless of what it does for our individual re-election prospects. If nothing is done and the rancor continues who would want to be in power after 2012? Certainly not former elected officials who are disgusted, as are the American people with our failure to work to a solution for the common good.

The ink is barely dry on the debt ceiling yet the special committee that was established is already being given of mandate of no new revenues…it must be done by cuts alone. The tax increases we proposed were for the top 1% of taxpayers who in 2009 paid an effective 21% tax rate, about the same as a person earning $50,000 a year, near the median worker. Some argue that raising taxes will not produce revenues but it is hard to believe that at 21% an increase, no restoration of the old rates would cause these people to not invest. Worse yet, a high percentage of these people do nothing to help the economy but are merely getting tax breaks that were designed to grow the economy.”

I have been repeatedly blamed for the explosion of debt and I cannot deny that I contributed to it. Whether you agree with the stimulus spending however, would it have been wise to do nothing? Also, remember that the deficits under George W. Bush were double and due to the tax cuts which added nothing to economic growth but dramatically increased the wealth gap as Main Street suffered at Wall Street’s expense.

It is time to put aside our differences and act as Americans, rather than as special interest groups to rectify the problems we have created, both Republicans and Democrats as well as the Tea Party. Failure to do this will be tragic to the noble experiment that began more than 200 years ago.”

That is leadership…that is taking responsibility. Because Obama is in charge he got top billing but here are some others:

House Speaker Boehner: in a totally partisan slam, blamed it all on the Democrats and Obama. He and the other GOP leaders (sic) know that they were the root cause of the problem, yet refuse to take responsibility, and worse to try to repair the damage they did.

Sen. John Kerry: called it pretty much as TB would and made sense but was countered by…

Sen. John McCain: now sounding like a total tea partier…totally partisan and offered nothing towards a solution. While Obama has been a disappointment what would he and Palin have been? A pretty sad commentary.

Sen. Sessions: as ranking GOP member on the Senate Appropriations Committee he refuses to even consider any revenue increases, meaning that the special committee will be one-sided in approach and drive the two parties even farther apart.

Alan Greenspan: on a panel yesterday, he said that IMF studies show that raising tax rates does not help the deficit, only spending cuts. This is in contrast to what he said as Fed Chairman over the proposed tax cuts when he said they must be met with spending cuts. The exact opposite happened, yet now his solution is that despite a sharp decline in revenues as was predicted and large numbers of unemployed allowing the top 1% to pay 21% taxes is the right thing to do? How Ayn Randian.

Corporations: say they aren’t hiring due to uncertainty yet if they employed some of those cash hoards they could allow the economy to grow. Employees have little confidence in the safety of their jobs.

TB could go on and on, and surely you can add your own players to the list, but the point is we are in for a long period of weak growth…in fact it could be worse. We are on the brink of a double dip and deflation, not inflation is a problem.

Note that since May 2nd the price of the front crude contract has plunged from $114.83 to $83.50, half of that drop since June 30th. Think what that implies and keep in mind that crude, like gold is speculatively priced, not demand driven. Overnight Gols surged to a new record high of $1718.20, despite the pros saying sell it on Friday. Meanwhile Crude plunged. What do these two things tell you? Think fear!

TB is thoroughly disgusted and disillusioned. Can we save ourselves especially with the motley crew we have sent to Washington? You decide.

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

A friend gave TB a heads up to the Bank of New York Mellon which due to an enormous increase in deposits is now going to charge a fee on deposits. Think of the billions of corporate funds that will go from earning 0.1% to losing 0.3%. Will the other banks follow suit? Seems likely.

TB read an article lately that talked about how the economy will be hurt by low interest rates…this will be especially true when the fallout from the downgrades causes spreads to widen. You will earn less and pay proportionately more. A terrible situation.

All the best,

TB

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