Keep the Change

Initial Claims Come At 451K On Expectations Of 470K, Trade Deficit Declines From $47 Billion To $42.8 Billion

admin — Thu, 09 Sep 2010 13:03:17 +0000

Futures surge as the US economy continues to hemorrhage jobs: a 451K print in initial jobless claims merely means that ever more people are being shifted over to extended benefits, which increased by 64.7K. One can be sure that at least 20K of this number is those hitting the 6 month ceiling on claim applicability. Also, continuing claims increased by 22K, and came in 28K worse than expected, at 4,478K compared to expectations of 4,450. And yes, anything over 400K means no job creation (private or census), contrary to whatever the DOL may want everyone to believe.

Elsewhere, the US trade deficit for July came out at “only” $42.8 billion on expectations of $47 billion, with the previous print slightly revised to $49.8 billion. We are looking forward to the Chinese release over the weekend of their version of the story, which will show more updated August data, and allow to read into how the China-US trade balance is developing.

Goods and Services

Exports increased to $153.3 billion in July from $150.6
billion in June. Goods were $107.7 billion in July, up from $104.9
billion in June, and services were $45.6 billion in July, virtually
unchanged from June.
Imports decreased to $196.1 billion in July from $200.3
billion in June. Goods were $162.9 billion in July, down from $167.1
billion in June, and services were $33.2 billion in July, virtually
unchanged from June.
For goods, the deficit was $55.2 billion in July, down from
$62.2 billion in June. For services, the surplus was $12.5 billion in
July, virtually unchanged from June.

Goods by Category (Census basis)

The June to July increase in exports of goods reflected
increases in capital goods ($2.3 billion); other goods ($0.5 billion);
and industrial supplies and materials ($0.5 billion). A decrease
occurred in automotive vehicles, parts, and engines ($0.4 billion).
Foods, feeds, and beverages and consumer goods were virtually
unchanged.
The June to July decrease in imports of goods reflected
decreases in consumer goods ($1.9 billion); automotive vehicles, parts,
and engines ($0.7 billion); capital goods ($0.6 billion); industrial
supplies and materials ($0.4 billion); other goods ($0.3 billion); and
foods, feeds, and beverages ($0.1 billion).

Services by Category

Exports of services were virtually unchanged from June to
July. Decreases in other private services ($0.2 billion), which
includes items such as business, professional, and technical services,
insurance services, and financial services, and in other transportation
($0.1 billion), which includes freight and port services, were partly
offset by an increase in travel ($0.1 billion). Changes in the other
categories of services exports were small.
Imports of services were virtually unchanged from June to
July. A decrease in royalties and license fees ($0.1 billion), which
were boosted in June by payments for rights related to the 2010 soccer
World Cup, were partly offset by an increase in travel ($0.1 billion).
Changes in the other categories of services imports were small.

Goods by Geographic Area (Not Seasonally Adjusted)

The goods deficit with Canada decreased from $2.5 billion in
June to $1.4 billion in July. Exports decreased $2.6 billion
(primarily automobiles, parts, and accessories) to $19.7 billion, while
imports decreased $3.7 billion (primarily passenger cars and crude oil)
to $21.1 billion.
The goods deficit with China decreased from $26.2 billion in
June to $25.9 billion in July. Exports increased $0.6 billion
(primarily civilian aircraft, engines, equipment, and parts) to $7.3
billion, while imports increased $0.4 billion (primarily toys, games,
and sporting goods and apparel) to $33.3 billion.
The goods deficit with the European Union increased from
$7.8 billion in June to $9.9 billion in July. Exports decreased $1.6
billion (primarily pharmaceutical preparations and civilian aircraft,
engines, equipment, and parts) to $18.8 billion, while imports increased
$0.5 billion (primarily petroleum products) to $28.7 billion.

This and more information is provided in the Bureau
of the Census and Bureau of Economic
Analysis press release:

U.S.International Trade in Goods and Services:

July 2010

.

For further information on goods, contact Maria
Iseman, Foreign Trade Division, U.S. Census Bureau, on (301) 763-2311;
on services, contact Edward Dozier, U.S. Bureau of Economic Analysis, on
(202) 606-9559.

NOTE: Total goods data are reported on a Balance of Payments basis;
commodity and country detail data for goods are on a Census basis.
For information on data sources and definitions, see the information
section on page A-1 of the FT-900 release, or at www.census.gov/ft900
or http://www.bea.gov/bea/di/home/trade.htm.

Frontrunning: September 9

admin — Thu, 09 Sep 2010 13:03:13 +0000

Norway Buys Greek Debt as Sovereign Wealth Fund Sees No Default (Bloomberg), and in two years those responsible for the decision will be sued for criminal negligence; In other news ECB funding to Greek banks stays within €0.3 billion of all time high at €95.9 billion. Perhaps Norway meant buying ECB bonds?
Funniest self-serving statement of the year: Greece Says Bonds Now an ‘Opportunity’ as Budget Deficit Falls (Bloomberg)… as opposed to yesterday when they were a catastrophic investment. Also not mentioned was the austerity is really working as Greek industrial production plunges far below expectations
And guess what – more QE coming to a broke Europe near you: BOE Mulls ‘Second Wave’ of Bond Buying as Rebound Ebbs (Bloomberg)
Base metals overnight flash crash in China (Reuters)
OECD Says Slowdown `More Pronounced’ Than Anticipated (Bloomberg)
European Crisis Flares Up in Ireland (WSJ)
A recent uptick in insider buying is normally considered a positive for the stock market, but it may be misleading for investors (Reuters)
Japan Plans to Seek Discussions With China on Bond Purchases (Bloomberg)
Economists cut U.S. growth forecast again (Reuters), yet corporate earnings mysteriously stay flat to very flat
UK watchdog fines Goldman Sachs $27 million (Reuters)
Mr. Bubble Bounces Back: Greg Lippmann Leaves Joke T-Shirts, Daily Sushi and the Glorious Bust Behind Him (NY Observer)
NYT Editorial: Debating the Economy (NYT)
Searching for Yield: At Any Cost? (Merk Investments)
Senate, House eye action on China currency (Reuters)
Drunken, Rowdy Bond Market Is About to Be Ill: Mark Gilbert (Bloomberg)
Speculation swirls as Rahm Emanuel mulls mayoral run (Reuters)

Economic data:

Germany Consumer Price Index for August 0.00% m/m 1.0%y/y – in line with expectations.Consensus 0.00% m/m 1.0%y/y. Previous 0.00% m/m 1.00% y/y.
Germany CPI – EU Harmonised for August 0.01% m/m 1.0%y/y –higher than expected. Consensus 0.00% m/m 0.90% y/y. Previous 0.00% m/m 0.90% y/y.
France Non-Farm Payrolls for Q2 0.20% – in line with expectations. Consensus 0.20%. Previous 0.20%.
Sweden CPI Level for August 302.06–lower than expected. Consensus 302.36. Previous 302.04.
Sweden CPI – Headline Rate for August 0.0% m/m 0.9% y/y –lower than expected. Consensus 0.1% m/m 1.0% y/y. Previous -0.3% m/m 1.10% y/y.
Sweden CPI – CPIF for August 0.0% m/m 1.4% y/y –lower than expected. Consensus 0.0% m/m 1.5% y/y. Previous -0.3% m/m 1.7% y/y.
UK Visible Trade Balance GBP/Mn for July -£8667 – lower than expected. Consensus -£7500. Previous -£7532.
UK Trade Balance Non EU GBP/Mn for July -£4800 – lower than expected. Consensus -£4300. Previous -£4313.
Australia Employment Change 30.9K – higher than expected. Consensus 25K. Previous 23.5K.
Australia Unemployment Change 5.10% – lower than expected.Consensus 5.20%. Previous 5.30%.
Australia Full Time Employment Change 53.1K.Previous -4.2K.
Australia Part Time Employment Change -22.1K.Previous 27.7K.
Australia Participation Rate 65.40% – lower than expected.Consensus 65.5%. Previous 65.5%.
Japan BOJ September Monthly Report
Japan BSI Large All Industry 7.1 q/q. Previous 4 q/q.
Japan BSI All Industry 13.3 q/q.Previous 10 q/q.
Japan Buying Foreign Bonds¥731.7B.Previous ¥70.8B.
Japan Buying Foreign Stocks¥215.3B.Previous ¥141.0B.

· Foreign Buying Japan Bonds¥100.5B.Previous ¥77.4B.

· Foreign Buying Japan Stocks¥40.1B.Previous -¥150.0B.

· Japan Tokyo Average Office Vacancies 9.17%.Previous 9.10%.

Oracle Declares War with HP By Hiring Hurd

admin — Thu, 09 Sep 2010 13:03:10 +0000

By Dian L. Chu, Economic Forecasts & Opinions

In response to HP’s suit against its former CEO Mark Hurd to block him from working at Oracle, Larry Ellison stated that

“Oracle has long viewed HP as an important partner…By filing this vindictive lawsuit against Oracle and Mark Hurd, the HP board is acting with utter disregard for that partnership, our joint customers, and their own shareholders and employees….The HP Board is making it virtually impossible for Oracle and HP to continue to cooperate and work together in the IT marketplace.”

However, when you add in Larry Ellison`s commentary blasting HP for the decision to let Mark Hurd go, one could make an argument that Larry Ellison has crossed the line with regard to appropriate conduct for a CEO, especially one who claims to hold the HP-Oracle partnership so dear.

Once the decision has been made by HP, and this is an internal decision for what HP feels is right for their company going forward, and HP has more information regarding the actions that Mark Hurd took that led up to his removal. The public negative statements by Ellison serve no purpose other than to weaken the partnership going forward.

This is HP`s business, they made a decision, Larry Ellison`s vitriolic statements were not going to change HP`s decision, it was final, so who is damaging the partnership relationship here? It is obvious that Larry Ellison doesn`t care about HP`s partnership, or joint customers. This is pure propaganda on behalf of Larry Ellison. The only reason he can get away with these type of over the top statements is because he owns his company and not accountable the way most CEO`s are with regard to professional conduct, and public statements.

In fact, Larry Ellison, if truly cared about the HP relationship, could have asked HP if they had any issues with him hiring Mark Hurd. Larry Ellison knew there would be considerable fallout from hiring Mark Hurd so soon after his leaving HP.

If anything he was trying to instigate a fued with HP, it’s like he was going out of his way to rile HP. This behavior is not exactly consistent with someone interested in maintaining a future cooperating partnership. Rather it is reminiscent of a direct competitor with a strategic move and an aim at taking market share in key categories and causing as much damage to HP in the process.

Ultimately, Oracle wants HP`s top talent, key customers, and even their shareholders as their predatory history suggests. So Oracle and Larry Ellison is no Saint in all of this, and their overt, explicit actions have formally declared war with HP.

But this is just the beginning of the major war within the big players in technology landscape, as there are not enough high margin areas for all to survive. So not only are the large firms going to gobble up the smaller firms, but the competition for top talent, key market segments, and future viability also means we will see further consolidation of the big players.

It is evident that there are now at least two major players too many to peacefully coexist in the technology space–too little high margin to go around. In the end, some large player will have to take over another large player. So the current firestorm is really just a smokescreen. The real question is who is going to buy who in regards to the inevitable Mega Mergers that need to occur in the technology sector.

Dian L. Chu, Sep. 07, 2010

John Taylor Comments On The End Of Bismarkism, Says Greece Is Doomed, And The Euro Will Not Replace Dollar

admin — Thu, 09 Sep 2010 13:03:07 +0000

On one hand you have the Greek finance minister uttering the most self-serving statement of the year, saying Greek bonds are no longer something to fear (even as Greek industrial production falls 8.6% on expectations of -5.7%), on the other you have John Taylor saying that “unless a miracle takes place, the Greek situation will deteriorate and other countries will follow in the next few years.” That’s fine: G-Pap is currently taking advanced transmogrification lessons as the local alchemy university – even miracle workers have to start somewhere.

Bismarck’s Strategy Has Reached Its Limit

September 9, 2010
By John R. Taylor, Jr.
Chief Investment Officer, F/X Concepts

In the 1880’s, Otto von Bismarck, Chancellor of Germany, instituted a series of revolutionary and very generous social reforms in a successful attempt to weaken the growing political appeal of the Social Democrats. His strategy was such a success that it not only allowed him to maintain control of the volatile German political landscape for a few more years, but also became the social welfare model for the rapidly democratizing Europe. By giving the rapidly growing working classes a far better deal that allowed them to receive a decent wage with retirement benefits and health care, Bismarck neutralized the powerful Socialist and Communist threat that looked as though it might force him from power.

Looking back at the development of the European democratic system, it is clear that Bismarck’s tactic, designed to take the wind out of the Social Democrats’ sails almost 130 years ago, laid the groundwork for several different more-or-less successful political systems that continue to operate throughout the continent today. What makes these systems different than that of the United States is the entrenched power of the European economic and social elite and the generous social benefits offered to those who (in US terms) have no economic or political power. The US system is its opposite: more open to economic and social outsiders, allowing for more dynamism within the power structure, but lacking a decent social safety net. Although the differences between the two democratic systems have blurred in the last few decades and can be overblown, the US still offers many fewer entitlements and more mobility while Europe offers substantial entitlements and much less social mobility.

From a long-term point of view, Europe’s system is threatened by two intertwined problems: many countries are unable to pay the future level of entitlements that the Bismarck strategy demands, and the pan-European structure created by the political and economic elite can only be maintained if the high level of entitlements and economic security promised by Bismarck is continued. The debt load of almost all member states and the expansion of the European Union to countries with lower standards of living are issues today, but the problems are much deeper and will continue to expand. Although statistics can be confusing and lead to incorrect conclusions, in this case the projections of future population growth and the current economic positions of the vast majority of the EU countries have such negative implications that it is hard to draw any positive scenarios for the Continent. If all Europe could take the lead of modern Germany as an export powerhouse, selling very high value-added products to the rest of the world and building up a tremendous global net-asset position, there might be a way to pay the entitlements when the dependency ratio closes in on 1.0 about 40 years from now. Or if Europe discovered a Saudi Arabian sized pool of oil under the Mediterranean, or, more likely, a rare earth play that allowed it to hold the dominant position that China does today, then these would work. The nationwide strikes in France yesterday, protesting the increase in the retirement age from 60 to 62, and the targeted ones in Greece this week, are symptoms of Europe’s more likely course – a rolling cut back in entitlements. As a 67 year-old American writing this evening (in overtime), I find it easy to say “just do it,” raise the retirement age and cut social benefits, but my knowledge of politics and societies tells me that the process will be very difficult and fraught with political struggle and turmoil. Unless a miracle takes place, the Greek situation will deteriorate and other countries will follow in the next few years. Although it is hard to forecast currency movements years into the future, one thing is obvious: the euro, as it is structured today, is not the currency to replace the dollar.

h/t Teddy KGB

Daily Highlights: 9.9.2010

admin — Thu, 09 Sep 2010 13:03:03 +0000

Afghan president’s brother made $800K in Dubai using loan tied to Kabul Bank.
Asia stocks up, SKorea unexpectedly leaves key rate at 2.25% as recovery slows.
Australian employers’ hiring for August exceeds estimates; Currency gains.
BOE mulls ‘second wave’ of bond buying as rebound ebbs.
China trade surplus may top $20B, stoking tension over yuan policy.
China’s stocks decline most in 2 weeks on concern about new property curbs.
Euro slides to $1.2693.
Norway buys Greek debt as sovereign wealth fund sees no default.
Oil inventories fall 7.3 million barrels API says.
Oil hovers near $75 in Asia after US crude supplies drop.
Space available for lease at US local retail centers to decline next year for the first time since 2005 as consumer spending rises: CB Richard Ellis Group.
Treasuries rise as Japan stocks pare gains, Fed prepares to buy debt today.
US falls to 4th place in competitiveness ranking behind Switzerland, Sweden and Singapore.
7-Eleven Inc. has offered $40/sh (~$2B) to buy Casey’s General Stores Inc.
Apple eats into Nintendo, Sony’s console sales as iPhone plays to gamers.
BP report pins most of blame for the Deepwater Horizon fiasco on others.
Goldman hit with a $31M UK fine as part of the investigation by the regulator.
HP issues $3B of bonds in three-part debt offering.
Indian court dismisses Vodafone Group’s challenge of $2B tax claim.
Men’s Wearhouse’s Q2 profit rises 7.6% to $42.5M on 2% rise in revs at $537M.
National Australia Bank’s Axa bid is blocked by regulator for second time.
Santos Ltd. sells 15% of a proposed LNG JV to Total S.A. for $596M.
Shanda Games to acquire Eyedentity Games; deal est. at $95M in cash.
Talbots swings to Q2 profit of $0.9M, but sales disappoints. Revs down 1.3%.
TNS Inc. to buy pvt owned Cequint for $112.5M; to buy back up to $50M of its stock.

Economic Calendar: Data on Initial & Continuing Claims, Trade Balance to be released.

Earnings Calendar: CHP, GAME, KFY, NOBH, NSM, PNY, STEI, SWHC.

RECENT RATING ACTIONS
HUNTINGTON BANCSHARES (HBAN)
MGM RESORTS INTERNATIONAL (MGM)
ABBOTT LABORATORIES (ABT)
NAVISTAR INTERNATIONAL CORP (NAV)
NASH FINCH CO (NAFC)
WESTERN UNION CO/THE (WU)
NEW YORK TIMES CO/THE (NYT)
DR PEPPER SNAPPLE GROUP INC (DPS)
BECKMAN COULTER INC (BEC)
SOUTHWEST AIRLINES CO (LUV)
DELL INC (DELL)
ENTERPRISE PRODUCTS (EPD)

Data provided by Egan Jones

To The President: URGENT

admin — Thu, 09 Sep 2010 12:03:15 +0000

From The Daily Capitalist

TO THE PRESIDENT: URGENT

The President
White House
Washington, D.C. 20500

Dear President Obama:

I observed with some concern a photo of you and your glum economic team in the White House Rose Garden during your September 3 address on the jobs report.

I am aware that you are gravely concerned about the economy and the employment situation. Understandably so since your policies of fiscal and monetary stimulus have failed to create economic growth or employment. Yet despite such failures you advocate more of the same remedies in the face of their failure.

On Labor Day you announced new spending of $50 billion on infrastructure construction to create “jobs”. This is in addition to the American Recovery and Reinvestment Act commitment of $499 billion for similar projects. According to your web site, Recovery.gov, only $296 billion of that amount has been spent so why do we need more?

Yet the economy is stagnant, if not declining, unemployment is high and going higher, and credit is still largely unavailable to most American businesses even if they were willing to borrow. Home buyer credits have failed to stop the decline in home prices and Cash for Clunkers has had no lasting effect on the auto or appliance industries.

I suggest that since existing policies have failed to revive the economy, your Administration should try something different. I offer you several innovative policies that would actually speed a recovery and lead to higher employment.

The problems that we need to quickly solve are:

High unemployment.
Declining output.
Credit freeze.
Surplus of housing and commercial real estate.
High private debt load.
High federal debt.

Until the economy starts growing again, these problems will persist.

Unless we understand the causes of our problems, solutions are not easy. Because you place great emphasis on “what works” rather than economic theory, I will get to the specific issues straightaway.

Here are some guiding principles for “what works”:

Economies can repair themselves without a lot of government help. History has proven this time and again.
Government interference in the repair process can hinder recovery or even make things worse.
Government spending is very inefficient.
Individuals can make better choices about what to do with their money than the government.
Economic growth only comes from private enterprise. The corollary of this is that government can only spend money, not make money.
Since government produces nothing, then real growth and real jobs can only come from private enterprise.
If government spending is inefficient and if economic growth comes only from the private sector, then taking vast amounts of money out of private hands and putting it into government hands will hinder growth.
Government spending to revive an economy has failed wherever and whenever it has been tried.
More legislation increases uncertainty for businesses, making them reluctant to expand (called “regime uncertainty” in economic terms).

With these time-tested guiding principles in mind, here are some specific policies that you should immediately implement to allow the economy to quickly recover. They will “work.”

Fix the Banks

Cure the credit freeze by eliminating policies that cover up the fact that many of our banks are financially unsound. These policies generally relate to how banks value the assets that secure real estate loans, primarily commercial real estate (CRE) loans. These policies allow banks to overvalue their loan assets. These policies include “mark-to-make-believe” (rather than “mark to market”) and “extend and pretend” each of which allow banks to maintain a fiction. If the actual values of these loans were realized, banks would be required to foreclose on these bad assets. By getting these loans off their books, they would be able to recapitalize and become financial sound.

Why is this important? It is the only way to restore credit to small- and medium-sized businesses and resolve the oversupply of CRE. Big businesses have plenty of credit from the big money center banks. It’s the regional and local banks which finance the rest of us that are in trouble.

We have just gone through the world’s biggest financial bubble. During this bubble, projects that made no sense but for the cheap Fed money and the false appearance of paper prosperity, were hugely over-produced. Now that the bubble has burst, we are in the mopping up stage of recovery. Banks are reluctant to extend credit because they are unsure of their financial future. The longer banks hold on to these malinvestments, their balance sheets will remain clogged up, and credit will remain restricted. Yes, more banks will go out of business; the process is never pretty but it is necessary. It is important to keep in mind that until this done, millions of unemployed Americans will stay jobless longer.

Bring Back the RTC

If you allow banks to fail as did President Bush I (mostly S&Ls actually), then there will be many foreclosed CRE projects that will need to be liquidated by the FDIC. Alan Greenspan, then Fed chairman, for all his faults did the right thing by urging the creation of the Resolution Trust Corporation, a separate entity whose function was to liquidate S&Ls and sell off the foreclosed assets from failed institutions. It actually worked pretty well and a huge slug of bad real estate, mostly apartments, were sold off to investors. The investors got great deals, but, more importantly, the economy recovered sooner.

The RTC dealt with 747 S&Ls with total assets of $394 billion (according to the Wikipedia article). According to the latest FDIC report there are 829 “problem” banks with $403 billion in assets as of Q2 2010. It is conceivable that this idea would work again.

Stop Passing Laws

Surveys reveal that the number one problem for business is uncertainty created by the government. They have been hit with an onslaught of complex legislation the consequences of which they don’t understand. This is called “regime uncertainty” in economic terms. The truth is, according to the surveys, that even if credit was available, businesses aren’t borrowing because they don’t know what the government will do to them next. Consider that three major pieces of legislation have been passed during your administration: the American Recovery and Reinvestment Act, the health care bill, and the Dodd-Frank financial overhaul bill. Further, they are uncertain if taxes on them will be raised.

No new laws are required to allow the economy to recover. I urge you to speak to business and tell them that we Americans trust their ability to drive our economy, and that your Administration will enact no new laws that will create greater burdens on their ability to expand, borrow, hire, and reap profits.

Stop Useless Spending

While your Administration has gamely tried to convince us that you have created jobs, we know that is fiction. The CBO report and claims by prominent economists have no credible evidence that any real jobs were created. If it were the case that government could create jobs then there would be no need for the private sector. Of course you know well that history has proven that policy to be a disaster.

Only private enterprise can create a real job. Having the government pay people to work is not a “job” in the same sense as a job in the private sector. When a business hires an employee, it is because somewhere down the line consumers want the end product of his or her productivity. The job created by the business is generated by economic activity until consumers decide otherwise.

If the government pays someone to do something, it isn’t generated by economic activity. When the money stops, the job stops. That has been the case of all of fiscal stimulus spending. While someone is earning money from the government, the money to pay him or her comes from taxes, which ultimately can only be generated from private enterprise.

If the government takes money out of the economy to pay people to do things it wants done rather than let the economic forces of private enterprise work, then businesses who create real jobs will have less money with which to expand their businesses. You should consider what the person from whom the money was taxed was going to do with the money. It would aid recovery to let private enterprise keep their money.

Encourage Saving Rather Than Spending

With historically high debt loads, job uncertainty, a lack of retirement funds, and declining home values, is it not reasonable for people to increase savings? Urging people to spend at this time runs counter to people’s innate sense to take care of themselves. While people are trying to repair their financial condition after the housing and credit bubble, urging more spending is reckless advice. People are rightly using their common sense.

There are two substantial benefits to saving. It allows families to reduce their debt burdens. Once they pay down their debts, they will be more willing to spend without the fear that they will end up homeless. Saving also creates the new capital that will be required for businesses when they decide to expand. It is not as if the Fed can just print dollars to create wealth and capital; wealth can only come from savings.

Policies that encourage spending such as Cash for Clunkers or home buyer credits or various tax credits for government-favored projects only encourage spending and thus reduce savings. Furthermore, they appear to have no lasting economic impact.

Don’t Raise Taxes

In light of the detriment to the economy of giving the government more of our earnings right now, an increase in taxes would be harmful to a recovery. While we face a serious deficit in the federal budget, the only way to pay down national debt is to have a vigorous growing economy and a reduction of government spending. With the right policies put in place, lower taxes would help create economic growth.

Raise Interest Rates

Fed policies to expand the money supply to create inflation will eventually succeed. Thus they are planting the seeds for perpetual stagnation and inflation. To prevent this new disaster, the Fed should immediately raise the Fed Funds rate and stop new attempts at quantitative easing. This will have an immediate positive impact. First, it will encourage saving as people seek higher, safer returns on their capital. Second, it will unmask malinvested projects, clear away the burden of their related debt load, and allow capital to be redirected to profitable ventures. Third, it will prevent the rise of inflation which robs savers of their wealth. Fourth, it will prevent the creation of a new destructive stagflationary cycle. Fifth, as in the Volcker era, greater savings and low inflation will eventually lead to new economic growth and higher employment.

I strongly urge you to adopt these innovative solutions to solve our nation’s desperate economic problems.

Sincerely,

Dr. Jeffrey Harding

Guest Post: Retailers – Reality Check Time

admin — Thu, 09 Sep 2010 12:03:05 +0000

Submitted by Jim Quinn of The Burning Platform

Retailers – Reality Check Time

Having worked for a big box retailer for 14 years, I understand the
dynamics of a high growth rollout of stores as a key to increasing
market share and profits. Some of the best retail names in the US have
practiced the identical strategy of concentrating many stores in each
market to drive the small competitors out of business. This strategy
worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early
part of this decade. The combination of solid same store sales and
opening new stores is a fantastic combination during good times. The
results actually make the CEOs of these companies think they are
brilliant. Their store expansion models based on rosy assumptions are
followed like they can’t go wrong.

What these CEOs didn’t realize was that their expansion plans were
based on lies and frauds. If they had advisors who could give them a
reality check, they could have avoided the massive downsizing that
awaits them. Their hubris didn’t leave room for a reality check. The
population of the US has grown from 281 million in 2000 to approximately
308 million today. We’ve had a 10% population increase in 10
years. Consumer expenditures have grown from $6.7 trillion in 2000 to
$10.3 trillion today. This is a 54% increase over the course of the
decade. Amazingly, real average weekly earnings have only gone up by 6%
in the last decade.

The chart below tells the story that retail CEOs have been ignoring
for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to
$2.4 trillion today. This 60% increase in consumer debt has allowed
workers who have barely increased their earnings to spend like they made
a lot more money. This debt fueled consumption binge led major
retailers to expand in order to keep up with the delusional consumers.

Retail America has run directly into a brick wall. Below are charts
detailing the expansion history of four of the most admired retailers in
America. Lowes grew their store count from 600 to 1,700 over the course
of the decade, a 183% increase. Wal-Mart grew their store count from
4,000 to 8,500, a 113% increase. Target grew their store count from
1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300
to 1,050, a 250% increase. Same store sales are the true measure of a
retailer’s health. When comp store sales are +5% or better, retailers
make substantial profits and confidently build new stores. As the charts
below clearly show, comp store sales have been in a substantial
downtrend since 2006. The new stores that have been built in existing
markets are over cannibalizing their existing stores.

Lowes has 500 more stores today than it had in 2005, $4 billion more
sales, and $1 billion less profits. Target has 340 more stores today
than it had in 2005, $12 billion more sales, and the same profit. Kohl’s
has 240 more stores than it had in 2006, $1.6 billion more sales, and
$100 million less profit. Only Wal-Mart has kept the profits flowing,
mostly due to its international expansion. The tough times have only
just begun for these retailers.

The American consumer is still heavily indebted. Much of the retail
spending in the last decade came from mortgage equity withdrawals. Using
your home as an ATM is history. Home equity is at an all-time low and
25% of homeowners are underwater. Home prices are destined to fall
another 20%. There are 15 million people unemployed. Consumer
expenditures still account for 70% of GDP. In order for the US economy
to achieve equilibrium, consumer spending will need to regress back to
65% of GDP. This will require an annual reduction in consumer spending
of $800 billion. The CEOs of these retailers have not grasped the
implications of this coming adjustment in our consumer society.

There are three major errors that have been committed by every
retailer in America. They failed to recognize that the spending per
household was 30% over inflated due to debt financed demand. They then
extrapolated the spending per household using a 5% to 10% growth rate.
Lastly, they ignored the fact that
their competitors had the same strategy. There are 1.5 million retail
establishments in the US. Thousands of these stores are going out of
business every year.

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their
predicament. They are still blinded by their hubris. The point of
recognition will occur within the next year. Each of these retailers
will be closing hundreds of underperforming stores in the next two
years. Time for a reality check.

E-minis

admin — Thu, 09 Sep 2010 10:03:05 +0000

No related posts.

65% Fear Double-Dip, 71% Say US is Fundamentally Broken, Net 32% Expect to Reduce Spending

admin — Thu, 09 Sep 2010 08:03:12 +0000

It is quite clear the US economy is sliding back towards recession, if not still in it. The average consumer understands that, yet the average economist doesn’t.

How is it that the average consumer has a better grip on the economy that the average economist? Regardless of the answer, here are some interesting survey results from Americans Fear “Double Dip” Recession & European Financial Problems.

92% say the US is still in recession
65% fear a ‘double dip’ recession
57% are fearful about running out of money in the next year
44% could easily see their family slipping into bankruptcy if things get worse
42% say they will spend less money than they did over the last 3 months, while just 10% will spend more. 48% report their personal spending will likely stay even
09% say the US is in a 1930s style economic depression
72% say Europe’s financial problems likely to hurt US
42% say that they or their spouse has had wages or salary reduced
34% say they or their spouse lost their job or has been laid off
33% have taken on more hours or another job to try and make ends meet
28% dipped into a planned retirement account like an IRA or 401K because they needed the money
09% have had their house foreclosed on
08% had their child delay college (or graduate school) or drop out to save money
20% expect their personal finances will recover by the end of 2011, 27% say after the end of 2011, 24% say their personal finances won’t ever fully recover

“Attitudes towards the current economic climate should be very concerning for those who sell consumers goods and services. The perception that the economy is likely slowing down again is leading consumers to tighten their belts and keep their wallets and purses closed. Consumer marketers will need to figure out how to best dial up the perceived value of what they are selling in order to stay on track”, said Bradley Honan of StrategyOne.

For a discussion of whether or not the recession has ended, please see NBER Likely to say “Recession Ended” July 2009; Assessing the Real Time Probability US Back in Recession

At this juncture, the debate as to whether the recession has ended or not is actually moot. The pertinent factor is: If there was a recovery, it now seems over.

Looking ahead, attitudes rule. With consumer spending weak and weakening, and now that the stimulus has run its course, the odds the 3rd and/or 4th quarter GDP numbers will be negative are quite high, as are the odds of double digit unemployment numbers by the end of the year.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Counterparties

admin — Thu, 09 Sep 2010 06:03:16 +0000

Scarborough and Kinsley to write for Politico — NYT

Find out what is “the greatest diva moment of all time” — Awl

Mandelman’s a fan of American Homeowner Preservation — ML-implode

WSJ vs NYT, Taiwan-style — YouTube

Some vegetable oils have a bigger footprint than animal fats, and vegan farming means the large-scale killing of animals — Guardian

Tad Friend’s quintessentially New York walk from the Empire State Building to Central Park — TNY