Archive for March, 2011
By Dawn Kopecki
Mar 30, 2011 2:24 PM PT
JPMorgan Chase & Co. (JPM) Chairman and Chief Executive Officer Jamie Dimon said some municipalities will need to renegotiate debt and a hundred may not “make it.”
“I wouldn’t panic about what I’m about to say,” Dimon, 55, said today at a U.S. Chamber of Commerce event in Washington. “You’re going to see some municipalities not make it. I don’t think it’s going to shatter America, I just think it’s a part of the credit cycle.”
Speculation about widespread municipal-bond defaults intensified in December when bank analyst Meredith Whitney predicted that “hundreds of billions” of dollars of municipal bonds may default in 2011 amid pressure to balance budgets.
JPMorgan, the second-biggest U.S. bank by assets, said in February its commercial bank’s municipal-debt holdings are diversified enough to handle a likely increase in defaults. The number of issuers that can’t manage debts may be about a hundred, Dimon said today.
“It’s not going to be thousands,” he said. “It’s going to be maybe a hundred. It’s going to be a small number” out of roughly 14,000 municipalities.
The commercial bank’s $9.7 billion municipal portfolio has about 26 percent of its holdings concentrated in local government bonds, 22 percent in primary and secondary education, 14 percent in state governments and the rest among higher education, utilities, airports and other investments, Todd Maclin, chief executive officer of the unit, said in the presentation last month.
Standard & Poor’s said this month that municipal-bond defaults in the first two months of 2011 are down 50 percent from the same period last year. The research followed a report by the consulting firm of Nouriel Roubini, the New York University economist who in 2006 predicted the credit-market collapse, that said about $100 billion of U.S. municipal debt will default in the next five years.
Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said comments that fuel fear in the municipal-bond markets only hurt debt holders and taxpayers.
“Despite the devastation wrought by the captains of our economy, municipalities remain fundamentally strong as credits and pose only the tiniest default risk,” he said.
Dimon also said excessive U.S. regulation may “hamstring” the financial industry and push business overseas where costs are lower and regulations less stringent. Congress passed hundreds of new rules in the Dodd-Frank Act last year, and bank regulators are working on new capital requirements for U.S. banks.
“We’re starting to add up a whole bunch of things which are negative for America,” he said. New rules on derivatives may hurt U.S. competitiveness, and “if we have higher capital limits than the rest of the world, now you’re just starting to put nails in the coffin.”
He called derivatives laws in Dodd-Frank some of the most “irrational” legislation he’s ever seen. The Durbin amendment, which limits debit-card fees, is “basic price-fixing at its worst,” he said.
“It’s very important that the regulators and our government, the secretary of the U.S. Treasury, the chairman of the Federal Reserve, that they make sure that when we’re done with all of this stuff, American banks can compete with the rest of the world,” Dimon said. “You don’t want to kill one of the golden gooses of healthy capital markets.”
Read the entire article HERE.
By Olga Belogolova
Wednesday, March 30, 2011 | 9:10 a.m.
The Organization of the Petroleum Exporting Countries (OPEC) is set to make a record-breaking $1 trillion in export revenues this year if crude oil prices remain above $100 a barrel, an the International Energy Agency official told the Financial Times.
“It would be the first time in the history of OPEC that oil revenues have reached a trillion dollars,” Chief IAEA Economist Fatih Birol told the Financial Times. “It’s mainly because of higher prices and higher production.”
The possibility of a record-breaking year comes as continued unrest in the Middle East and North Africa, engagement in Libya, and signs of an economic recovery renew debate among policymakers over how to deal with rising global oil prices and their ties to national security.
President Obama will weigh in on the issue today when he speaks about his new four-part “Plan for America’s Energy Security” at Georgetown University. And Republicans and oil state Democrats have argued for expanded offshore oil and gas drilling in light of rising prices and foreign oil dependence.
On Tuesday, House Natural Resources Committee Chairman Doc Hastings, R-Wash., introduced legislation that expands drilling and the Interior Department said in a report this month that the oil industry isn’t using a large portion of their drilling leases.
The report, along with other energy security concerns, will likely be discussed at Hastings’ Natural Resources Committee hearing this morning, where Bureau of Energy Management, Regulation and Enforcement (BOEMRE) director Michael Bromwich is scheduled to testify on his FY 2012 budget.
Read the entire article HERE.
By Stephanie Clifford
Published: Monday, 28 Mar 2011
New York Times
Chips are disappearing from bags, candy from boxes and vegetables from cans.As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.
With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.
For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.
“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”
Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.
Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”
In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).
Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.
“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”
Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.
Most companies reduce products quietly, hoping consumers are not reading labels too closely.
But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.
Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.
Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.
And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.
“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at Focus.com, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.
Or marketers design a new shape and size altogether, complicating any effort to comparison shop. The unwrapped Reese’s Minis, which were introduced in February, are smaller than the foil-wrapped Miniatures. They are also more expensive — $0.57 an ounce at FreshDirect, versus $0.37 an ounce for the individually wrapped.
At H. J. Heinz, prices on ketchup, condiments, sauces and Ore-Ida products have already gone up, and the company is selling smaller-than-usual versions of condiments, like 5-ounce bottles of items like Heinz 57 Sauce sold at places like Dollar General.
“I have never regretted raising prices in the face of significant cost pressures, since we can always course-correct if the outcome is not as we expected,” Heinz’s chairman and chief executive, William R. Johnson, said last month.
While companies have long adjusted package sizes to appeal to changing tastes, from supersizes to 100-calorie packs, the recession drove a lot of corporations to think small. The standard size for Edy’s ice cream went from 2 liters to 1.5 in 2008. And Tropicana shifted to a 59-ounce carton rather than a 64-ounce one last year, after the cost of oranges rose.
With prices for energy and for raw materials like corn, cotton and sugar creeping up and expected to surge later this year, companies are barely bothering to cover up the shrinking packs.
“Typically, the product manufacturers are doing this slightly ahead of the perceived inflationary issues,” Ms. Rosenblum said. “Lately, it hasn’t been subtle — I mean, they’ve been shrinking by noticeable amounts.”
Read the entire article HERE.
March 28, 2011 (Bloomberg) — Treasuries fell, pushing 10-year yields to the highest in more than two weeks, on speculation the Federal Reserve may end its debt-purchase program early as the world’s biggest economy shows signs of a sustained recovery.
Five-year U.S. notes fell for an eighth day, the longest streak since before the collapse of Lehman Brothers Holdings Inc. St. Louis Federal Reserve Bank President James Bullard said on March 26 policy makers should review whether to complete $600 billion of Treasury purchases, a policy known as quantitative easing. Reports this week will show consumer spending rose in February, while the economy added more jobs last month, according to surveys of economists by Bloomberg.
“The market is concerned about how soon QE2 will be terminated, or whether they will even stop short of implementing the full package,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “It’s going to be difficult for yields to go much lower when the longer-term perspective is that the U.S. economy is recovering, inflation is rising and there’s talk of an early exit for QE2.”
Benchmark 10-year yields rose four basis points to 3.48 percent as of 11 a.m. in London, according to Bloomberg Bond Trader data. The 3.625 percent note maturing in February 2021 fell 10/32, or $3.13 per $1,000 face amount, to 101 6/32. The note yielded as much as 3.48 percent, the most since March 9. The five-year yield was at a 2 1/2-week high of 2.22 percent.
The decline in five-year is the longest streak since April 2008, as investors awaited a $35 billion sale of two-year debt today in the first of three auctions this week. The 2.125 percent note due February 2016 fell 8/32, or $2.50, to 99 18/32.
Fed Chairman Ben S. Bernanke has given no indication that the central bank will deviate from its plan to buy bonds through June to spur economic growth and reduce the 8.9 percent unemployment rate. Bullard, who in July became the first policy maker to call for Fed purchases of Treasuries, has said the Federal Open Market Committee should review the plan at every meeting and, if necessary, continue it indefinitely.
“The economy is looking pretty good,” Bullard told reporters in Marseille, France. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short.”
The Fed is scheduled to purchase between $5.5 billion and $7.5 billion of government debt today.
Treasuries have handed investors a 0.1 percent loss this quarter even after accounting for reinvested interest, based on Bank of America Merrill Lynch data.
The Thomson Reuters/Jefferies CRB Index of 19 commodities gained 8 percent so far this year, while the MSCI All Country World Index of stocks returned 2.8 percent, including reinvested dividends.
The 10-year yield will advance to 3.91 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
The two-year notes being sold today yielded 0.78 percent in pre-auction trading, compared with 0.745 percent at the prior sale on Feb. 22. Indirect bidders, the category of investors that includes foreign central banks, bought 31.3 percent of the notes last month. Direct bidders, non-primary dealers buying for their own accounts, purchased 6.8 percent, the least since November 2009.
The Treasury is scheduled to follow today’s two-year sale with a $35 billion five-year auction tomorrow and a $29 billion seven-year offering on March 30.
Consumer spending, which accounts for about 70 percent of the U.S. economy, rose 0.5 percent in February after a 0.2 percent gain the prior month, according to the median forecast in a Bloomberg News survey. Personal income rose 0.4 percent, a separate survey showed.
Payrolls climbed by 195,000 this month, the most since May, after a 192,000 gain in February, the surveys show.
The worldwide recovery is continuing, especially in Asia and the U.S., and remains vulnerable, Federal Reserve Bank of St. Louis President James Bullard said March 26.
The first coordinated intervention in foreign-exchange markets by the Group of Seven nations in more than a decade will combine with rising oil prices to support Treasuries, some investors said.
Oil at more than $100 a barrel may temper economic growth at the same time developed nations from Germany to Japan sell yen and buy U.S. debt with the proceeds. Every $10 per barrel increase in crude cuts U.S. growth as much as 0.3 percentage point, UBS AG estimates. Japan will need to reinvest the estimated $25 billion acquired as it drove the yen lower on March 18 after the nation’s worst earthquake on record.
“I don’t think the Treasury market has had the death spike put into it,” said Mark MacQueen, a partner at Austin, Texas- based Sage Advisory Services Ltd., which oversees $9.5 billion. “The market’s extremely sensitive to perceptions of future economic growth. Any time that comes into question, the Treasury market’s the place to be.”
Warren Buffett, the billionaire investor, said investors should avoid long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will decline.
“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., said March 25 in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”
An index of investor sentiment toward Treasuries fell last week, based on a survey by Ried Thunberg ICAP Inc. The end-of- June gauge slipped to 46 from 47 for the week ended March 25, according to a survey of 19 money managers. A figure less than 50 indicates investors expect prices to decline.
–With assistance from Susanne Walker, Daniel Kruger and Andrew Frye in New York, Pooja Thakur in Mumbai and Unni Krishnan in New Delhi, Scott Hamilton in London. Editors: Keith Campbell, Daniel Tilles.
Read the entire article HERE.
By Garry White, and Rowena Mason
6:02PM BST 27 Mar 2011
Certainly, the fundamentals are sound. Declining mine production has resulted in a tight supply as demand continues to rise.
Investors are still keen on silver because of currency and geopolitical concerns. Holdings in the iShares Silver Trust, the largest silver exchange-traded fund (ETF) in the world, increased by 179 tonnes to 11,140 tonnes in the week to March 24. Gold holdings in ETFs fell over the same time period.
“The psychologically important mark of $40 a troy ounce is meanwhile within a reachable proximity,” Commerzbank said on examining the ETF figures.
The fact that investors are keen on silver means that ETFs take supply out of the market, which can mean price rises become a self-fulfilling prophecy.
Silver is also an industrial metal, so demand for it is rising as the global economy recovers. Although it is no longer used much in photography, as the industry switches to digital applications, its use in electronics sectors, especially in semiconductor production, is increasing. There are also new applications for the metal emerging, such as silver oxide batteries.
Hochschild remains a hold for exploration success
20 Jan 2011
Commodities in 2010: Gold glittered but silver was shinier
30 Dec 2010
Investors see silver lining in economic gloom
03 Oct 2010
Buyers spurn gold for silver
17 Dec 2009
Both gold and silver hit significant highs on Thursday last week. Gold futures jumped to an all-time high of $1,448.60 following the turmoil in Libya and further protests around the Middle East. Silver prices reached $38.18 on the same day, the highest in 31 years. Silver prices jumped almost 6pc last week after more than doubling over the last year.
The main argument that silver bulls use relates to the gold/silver ratio, which is simply the price of gold divided by the price of silver in the spot market.
When gold and silver were used as currency, it was decided that 16 ounces of silver had the same degree of purchasing power as one ounce of gold. The silver/gold ratio therefore stood at 16:1.The last time that the ratio reached 16:1 was in the 1980 precious metals spike following the energy crisis.
At the start of October last year, when this column last talked about silver, the gold/silver ratio stood at just under 60. Today the ratio stands at 38.3, having fallen sharply over the last month. At the start of February the ratio was at 49.5. There is definitely a trend that silver is increasing in value relative to gold.
The fact the ratio is below 40 is itself a reason for caution. The long-term average is about 40, so today’s ratio could be about right. Most analysts did not expect the price to rise so sharply this year, so the price could be ahead of itself – especially if there is a quick resolution to the current turmoil in the Arab world.
There are other downside risks, too. Any strengthening of the dollar is likely to cause a dip in commodity prices, as they are priced in the US currency. There has been some brighter economic data from across the Atlantic of late causing some to ask the Federal Reserve to stop its second bout of quantitative easing early.
“The economy is looking pretty good,” James Bullard, president of the Federal Reserve Bank of St Louis said on Saturday. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the programme or to stop a little bit short.”
Printing money is expected to weaken the dollar over the long term, so any early cessation could cause the US currency to rise. As commodities are priced in dollars, any strengthening makes them more expensive in other currencies causing a weakening of demand.
After such a bull run, any correction in silver prices could come hard and fast, so it may be wise to wait and see if it appears, especially since silver equities now appear to be very richly rated.
However, the US debt is enormous and, at some point, policy makers may decide that inflating away the debt is their only option, prompting the dollar to devalue. This means silver will remain attractive over the long term. But now does not look like a good time to buy.
Read the entire article HERE.
by Robert Lenzner
Mar. 27 2011 – 1:20 pm
It’s a sign of the times, when gold and silver are making new highs in precious metals markets and investors everywhere are worried about the value of their paper money.
Those old coins in the bottom of your attic trunk just got marvelously valuable, if two full-page ads in the NY Times today is any proof. You are asked to bring your old Buffalo nickels. I used to have some, but they are long gone.
Try to find those old silver quarters and dimes or pre-1966 paper money in “Brand New Condition” and you could collect a small fortune–a very small fortune. Up to $300 for a $100 bill.
You’re also being invited to bring in wrist watches (up to $70,000 for a Patek Philippe, $20,000 for a Rolex), sterling pitchers, flatware and candlesticks, gold wedding bands ($100), diamonds (1 carat, $4,000), even costume jewelry, or wheat pennies (whatever they are) at 20% over face value.
Five days at eight hotels in NYC area sponsored by Anderson, Carter, Bascom & Assoc., who warn “You should not clean your coins! You may hurt their value!
Under the heading “Important Economic Information” there is the suggestion that high prices for your gold and silver may not last forever. “We have studied the investment and collectibles markets for decades, and in the past during times of economic uncertainty (which is happening now), there have been dramatic price declines in many areas of the jewelry, coin, and collectible markets.”
Hmmm! I’d like to know when this economic certainty is coming. Doesn’t seem too likely to me, what with global markets, spiking food and fuel prices, political instability, sovereign debt issues, radioactive nuclear plants, and the need to get the U.S. budget into balance.
Read the entire article HERE.
Charles Hugh Smith
March 26, 2011
When the consensus is confidently weighted on one side of a trade or view, reality has a nasty habit of introducing blowback and/or unintended consequences.
In a followup to yesterday’s entry A Contrarian Take on the Dollar’s Demise , here are some other contrarian views culled from readers and recent news items. When does a contrarian view or bet become mainstream? Sometimes the answer is ambiguous. When do you look around and realize (usually with some dismay) that “everyone” now agrees with your once-lonely point of view?
Consider gold as an example. I am a fan of gold for the simple reason that it won’t go to zero–something that cannot be said of purely financial assets. But as a technical observer, I can’t help but notice just how lopsided the trade in gold has become.
According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts. That is a remarkably one-sided trade, and one that is technically ripe for a major reversal. When everyone agrees you can’t miss on a trade, and punters are betting 50-to-1 that the trade can only go one way, then that’s when it reverses and crashes.
As a technical observation, this is completely disconnected from all the fundamental reasoning behind owning gold. In other words, if you are one of the many readers who own gold long-term for peace of mind and insurance, then a 20% decline in gold is merely a “buy the dip” opportunity. For traders, it may offer an opportunity to gain on the downturn and then again on the inevitable upturn.
Correspondent Martyn T. recently made what I consider an important and contrarian point about the financial consequences of Japan’s devastating earthaquake and tsunami.
So far you have not noted the way in which the Japanese insurers will affect stock markets. The Japanese government has long insisted that insurers prepare for a major event. This was expected to be an earthquake hitting Tokyo.
Obviously, they would need to have massive reserves, and these should be abroad, so that secure cash can be found.
In their rush to bring in some cash they have sold some and bought yen. This has resulted in other central banks helping to reduce the value of the yen.
But this is only the first tranche of selling. So far they won’t know what liquidity they need, but as it rises so will selling, all across the developed world.
In other words, if the rebuilding and insurance claims will end up costing $300 billion, a significant chunk of that will come from insurers and re-insurers who will have to liquidate globally distributed assets such as stocks and bonds to raise the cash.
Let’s assume the Japanese government will cover half of the costs of rebuilding and insurers will have to cover the other $150 billion. What will the liquidation of $150 billion in financial assets do to a vulnerable market? I hesitate to offer a prediction, but it is unlikely to be bullish.
Frequent contributor Dr. Ishabaka offered up this menu of other consensus views that “everyone knows to be true”:
– the U.S. dollar will continue to decrease in value indefinitely
– U.S. real estate will continue to decrease in value indefinitely
– the standard of living in the U.S. will decrease
– the U.S. stock market is in a bubble
– commodities will continue to rise
– China will overtake the U.S. as the next great power
– U.S. manufacturing is dead
– U.S. debt will increase indefinitely
– emerging markets will provide the economic growth of the future (along with China)
– everyone in poor countries wants to eat more meat, and own a car
– energy will increase in price indefinitely
– wars and revolutions will continue to increase, perhaps leading to another world war
– Social Security and Medicare will go bankrupt
– defined benefit pension plans are dead
– health care costs will continue to increase at a rate that outstrips inflation indefinitely
– unemployment will be serious in the U.S. for the foreseeable future
– Fenders beat Gibsons hands down (pre CBS Fenders, I mean)
– the gap between the wealthy and the rest of us will continue to increase
– government in the U.S. is controlled by lobbyists, unions, and other big money interest groups (banks)
What if all these things “everybody knows” are wrong?
I am not at all sure that “everyone” knows Fenders beat Gibsons, but the list is certainly food for thought. As someone who has played both Stratocasters and my Gibson Les Paul Deluxe, I would say it’s more like the difference between a cabernet and a zinfandel wine: sometimes you’re in the mood for one or the other, but arguing about which is “best” is pointless, as both are superb but in slightly different ways.
Mark Twain commented on the dangers of consensus thusly: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
As I concluded yesterday:
When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It’s ironic, isn’t it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.
There is always someone on the other side of a trade, of course: someone originated the option or futures, and someone sold the shares that someone else bought. The problem arises when a “can’t lose” trade rolls over, then there are no longer enough buyers to offset the panicky, underwater sellers who are overleveraged via margin or other forms of debt.
This is in effect what still plagues the U.S. housing market: there are still plenty of sellers in the wings, hoping to unload properties, and a dearth of buyers willing to gamble that “the bottom is in.” Even worse, there is a dearth of buyers qualified to buy properties at today’s prices. That will become even more of an issue as interest rates rise.
As a reminder of how things can play out at real bottoms: in the depths of the 1930s Depression, a Manhattan skyscraper was sold for the original cost of its elevators. In other words, the rest of the building was “free.”
People talk about replacement cost as a metric of value in homes and buildings. In other words, this house can’t drop much below $200,000 because it would cost that much to buy the lot and construct a replacement house.
That is another thing “everyone knows to be true” that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding.
We might conclude that being contrarian is simply considering very few possibilities as being “impossible,” especially when it comes to herd behavior and investments.
Read the entire article HERE.
By DAVID KOCIENIEWSKI
New York Times
Published: March 24, 2011
General Electric, the nation’s largest corporation, had a very good year in 2010. The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.
Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.
Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.
In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.
Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.
Yet many companies say the current level is so high it hobbles them in competing with foreign rivals. Even as the government faces a mounting budget deficit, the talk in Washington is about lower rates. President Obama has said he is considering an overhaul of the corporate tax system, with an eye to lowering the top rate, ending some tax subsidies and loopholes and generating the same amount of revenue. He has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.
“He understands what it takes for America to compete in the global economy,” Mr. Obama said of Mr. Immelt, on his appointment in January, after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world.
A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.
Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas.
Company officials say that these measures are necessary for G.E. to compete against global rivals and that they are acting as responsible citizens. “G.E. is committed to acting with integrity in relation to our tax obligations,” said Anne Eisele, a spokeswoman. “We are committed to complying with tax rules and paying all legally obliged taxes. At the same time, we have a responsibility to our shareholders to legally minimize our costs.”
The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion.
But critics say the use of so many shelters amounts to corporate welfare, allowing G.E. not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States.
“In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,” said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center. “But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.”
The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.
The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended — a flourish made in jest, he said through a spokeswoman.
That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.
The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district. Joel I. Klein, then the schools chancellor, and Mayor Michael R. Bloomberg, who presided, said it was the largest gift ever to the city’s schools.
G.E. officials say the donation was granted solely on the merit of the project. “The foundation goes to great lengths to ensure grant decisions are not influenced by company government relations or lobbying priorities,” Ms. Eisele said.
Mr. Rangel, who was censured by Congress last year for soliciting donations from corporations and executives with business before his committee, said this month that the donation was unrelated to his official actions.
Defying Reagan’s Legacy
General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. Industrial, commercial and medical equipment like power plant turbines and jet engines account for about 50 percent. Its industrial work includes everything from wind farms to nuclear energy projects like the troubled plant in Japan, built in the 1970s.
Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.
As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.
“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.
That pendulum began to swing back in the late 1990s. G.E. and other financial services firms won a change in tax law that would allow multinationals to avoid taxes on some kinds of banking and insurance income. The change meant that if G.E. financed the sale of a jet engine or generator in Ireland, for example, the company would no longer have to pay American tax on the interest income as long as the profits remained offshore.
Known as active financing, the tax break proved to be beneficial for investment banks, brokerage firms, auto and farm equipment companies, and lenders like GE Capital. This tax break allowed G.E. to avoid taxes on lending income from abroad, and permitted the company to amass tax credits, write-offs and depreciation. Those benefits are then used to offset taxes on its American manufacturing profits.
G.E. subsequently ramped up its lending business.
As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.
Read the entire article HERE.
The Economic Collapse
March 25, 2011
50,000 Manufacturing Jobs Have Been Lost Every Month Since 2001. Any economy that constantly consumes far more wealth than it produces is eventually going to be in for a very hard fall. Many point to relatively stable GDP numbers as evidence that the U.S. economy is doing okay, but the truth is that we have had to borrow increasingly massive amounts of money to keep GDP numbers up at that level. The U.S. government is going to run an all-time record deficit of about 1.65 trillion dollars this year and average household debt in the United States has now reached a level of 136% of average household income. But borrowing endless amounts of money and consuming massive amounts of wealth with that borrowed money is a road that leads to economic oblivion. The only way to have a healthy economy in the long run is to create wealth. But how can America create wealth if our industrial base is being absolutely destroyed? According to Forbes, the United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001. Hundreds of formerly thriving industries in the United States are being totally wiped out. China uses every trick in the book to win trade battles. They deeply subsidize their domestic industries, they openly steal technology, they blatantly manipulate currency rates and they allow their citizens to be paid slave labor wages. So yes, the products coming from China are cheaper, but in the process tens of thousands of factories in the U.S. are shutting down, millions of jobs are being lost and the ability of America to create wealth is being compromised.
In 2010, the U.S. trade deficit was just a whisker under $500 billion. Much of that trade deficit was with China.
During 2010, we spent $365 billion on goods from China while they only spent $92 billion on goods from us.
Does a 4 to 1 ratio sound like a “fair and balanced” trade relationship to anyone out there?
Our trade deficit with China in 2010 was the largest trade deficit that one country has ever had with another country in the history of the world.
In fact, the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.
Needless to say, that is not a good trend.
Our industrial base and our ability to create wealth is being wiped out so rapidly that it has now become a very serious threat to our national security.
According to Forbes, there is only one steel plant inside the United States that is still capable of producing steel of high enough quality to meet the needs of the U.S. military, and even that plant has been bought by a European company.
Meanwhile, China produced 11 times as much steel as America did last year.
Not only that, China is now the number one supplier of components that are critical to the operation of U.S. defense systems.
How in the world did we let that happen?
So what happens if we have a conflict with China someday?
But of more immediate concern is the loss of jobs that the destruction of our industrial base is causing.
For example, the Ivex Packaging Paper plant in Joliet, Illinois just announced that it is shutting down for good after 97 years in business. 79 good jobs will be lost. Meanwhile, China has become the number one producer of paper products in the entire world.
But China is not just wiping the floor with us when it comes to things like steel and paper.
The truth is that China has now become the world’s largest exporter of high technology products. Back in 1998, the United States had 25 percent of the world’s high tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.
So how is China doing it? Well, as noted above, they are pulling every trick that they can think of.
Most Americans think that we have “free trade” with nations such as China. That is a complete and total lie and anyone that believes that we have “free trade” with China does not know what they are talking about.
China subsidizes their domestic industries to such an extreme extent that many global industries no longer even come close to resembling “free markets” as a recent story in Forbes noted….
According to a story in the January 20, 2009 New York Times, government subsidies so thoroughly disrupted pricing in the global market for antibiotics that many western producers had to either move facilities to Asia or exit the business entirely. The reason this might matter to intelligence analysts is that the last U.S. source of key ingredients for antibiotics — a Bristol-Myers Squibb plant in East Syracuse, New York — has now closed, leaving the U.S. dependent on foreign sources in a future conflict.
Our politicians and our business leaders have pursued economic policies that are so self-destructive that it defies explanation.
How in the world could anyone be so stupid?
Since 2001, over 42,000 U.S. factories have closed down for good. Millions of jobs have been lost. The ability of the once great American economic machine to create wealth has been neutered.
The business environment in America is completely and totally pathetic at this point. The number of small businesses that are being created is also way, way down.
According to the U.S. Census Bureau, only 403,765 small businesses were created in the 12 months that ended in March 2009. That was down 17.3% from the previous year, and it was the smallest number of small businesses created since records began being kept in 1977.
The truth is that the U.S. economy is dying.
We continue to consume about the same amount of wealth that we always have, but our net worth is declining.
According to the Federal Reserve, more than two-thirds of Americans have seen their net worth decline during this economic downturn. In fact, the Fed says that between 2007 and 2009, the wealth of the average American family declined by 23%.
So if it seems like your family and everyone around you is getting poorer, that is because it really is happening.
We really are becoming poorer as a nation.
We can see evidence of this all around us. Just consider a few of the examples that have been in the news in recent days….
*One school district in the Chicago area is laying off 363 teachers.
*The U.S. Postal Service is offering $20,000 buyouts to thousands of workers as they attempt to slash 7,500 good paying jobs.
*The city of Detroit, once a shining example of middle class America, is now a rotting cesspool of economic decline and it saw its population decline by 25 percent over the decade that recently ended.
Americans are not feeling the full impact of America’s industrial decline yet because we have been filling the gap in wealth creation with massive amounts of debt.
In the years since 1975, the United States had run a total trade deficit of 7.5 trillion dollars with the rest of the world. That 7.5 trillion dollars could have gone to support U.S. businesses and U.S. workers, but instead it left the country and went into the hands of foreigners that do not pay taxes.
Read the entire article HERE.
Thursday, March 24, 2011
So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.
They basically printed money out of thin air—about $1.25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.
In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.
Time passes, we move on.
Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase $600 billion worth of Treasury bonds over the next eight months.
The rationale was so as to stimulate lending. But really, it was so that the Federal government wouldn’t go broke. The Federal government deficit for fiscal year 2011 is $1.6 trillion—the national debt is beyond 100% of GDP, at about $14 trillion. The Federal government issues Treasury bonds in order to fund this deficit. Ergo, by way of QE-2, the Federal Reserve bought roughly 40% of the Federal government deficit for FY 2011. Add on other Treasury bond purchases by the Fed via QE-lite (the reinvestment of the excedents of the toxic assets on the Fed’s books), and the Federal Reserve is buying up half the deficit of the Federal government, as I discussed here in some detail.
In other words, the Fed saved Washington by printing up money, and then giving it to them in exchange for—well, not bad paper, but at least questionable paper.
So! . . . let’s see now . . . Fed money printing—check! Saving someone’s bacon (even though they shoulda known better)—check! Taking on dodgy paper—check!
Did it in 2008 for Wall Street, then did it again in 2010 for Washington.
But the key difference between these two events is, the banks didn’t have any more toxic assets, once they sold them all to the Fed.
But the Federal government will still have more Treasury bonds it will have to sell, once the Federal Reserve ends QE-2 this coming June.
The fiscal year 2012 deficit will be on an order of 10% of GDP—roughly $1.5 trillion. And 2013 and 2014? Around the same range.
Over at Zero Hedge, they are past masters at timing the funding needs of the Federal government. But we don’t need to go into the monthly figures of POMO purchases and Treasury auctions and all the rest of it. All due respect to Tyler and his wonderful team at ZH, all that is merely the mechanics of Federal Reserve monetization.
What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between $75 and $100 billion worth of Treasury bonds at yields of 3.5% for the 10-year?
Is there someone?
The answer is, No one will take up the slack.
Who, Japan? They’ve got some well-known troubles of their own—they’re all about selling Treasuries and buying up yens, both now and for the foreseeable future.
The Chinese? They’ve been quietly exiting Treasuries for a couple of years now, and going into every commodity known to man.
Europe? Are you serious—Europe? Please don’t make me laugh that hard—it hurts.
The fact is, there is no one outside the United States that I can think of who would willingly buy Treasury bonds—not to the tune of +$75 billion a month.
Therefore, if no one outside the United States would willingly give money to Washington to fund the deficit, then someone inside the U.S. will have to step up.
The obvious-obvious-obvious solution to this mess is for the Federal government to stop spending its way to oblivion—but does anyone realistically see this happening?
Therefore, as Spock always sez, if you eliminate the impossible, whatever remains, however improbable, must be the truth.
If foreign sources of funding will not cover the Federal government’s deficit after June 2011, and Washington will definitely not cut spending in any sort of realistic sense, then there really are only two—and only two—possibilities:
• The indefinite continuation of QE by the Federal Reserve.
• Or the requisitioning of private retirement accounts and pension funds.
Don’t dismiss the second possibility out of hand—think it over.
What pool of money is just sitting there, not doing much, while being legally barred from its owners? What pool of money is easily accessed, yet is large enough to fund the deficit?
The retirement accounts of the American people: Both individual private accounts, and pension funds.
After all, the total for all pension monies is roughly 100% of GDP (this includes Social Security). And the Federal government has already raided the “Social Security lock box”—that box is stuffed with Treasury IOU’s.
So the Federal government might well turn to the private sector for cash. The Federal government might conceivably claim that ongoing funding needs require that every single 401(k) and IRA divest from its portfolio of stocks and bonds, and be fully invested in Treasuries.
This could be accomplished very easily, from a practical standpoint—just inform banks, and have them turn over to the Federal government all your mutual funds and stocks you agonized over, and get long-term Treasury bonds of nominal equal value in exchange.
401(k)’s and IRA’s would be the first ones the Federal government would go after—for the obvious reason that union pension funds have the union’s political muscle. But individuals? They have no political machine. So they’re screwed.
Anyway, the language used for this maneuver by the Treasury department would make it difficult for a lot of (unaffected) people to get upset over the situation: The Treasury department wouldn’t call this process “retirement account confiscation”. They’d call it something innocuous, like “retirement asset swap”—or better yet, throw in some patriotic bullshit (indeed, the last refuge of the scoundrel) and call it “Americ-Aide Asset Swap”—or even better: Call it “Help America Retirement Treasury Bond Program”—otherwise known as HART-bonds. (Awww!!! Probably maudlin enough to get Geithner an appearance on fucking Oprah.)
There might be short-term political damage, but like losing your virginity or carrying out state-sponsored torture programs, it would be the necessary start for a slide that will never end. After this first “retirement asset swap” carried out on the 401(k)’s and IRA’s, the Treasury department would start doing more of this to ever-bigger pension funds, until eventually all retirement assets would be converted into Treasury bonds.
Hey, they did it in Argentina. And as Yves Smith always sez, America has become Argentina, but with nukes.
Now, this is one possibility, of the only two which I can see.
The other possibility, of course, is that the Federal Reserve will not end Quantitative Easing-2 come June. The Fed will extend the deficit monetization indefinitely. The Fed will be under the mistaken impression that this will somehow save the U.S. economy. (The best metaphor I’ve been able to come up with for this situation is, the Federal government is like a junkie who’s already OD’ed—and the Federal Reserve is trying to “save” him by shooting him up with even more heroin.)
So between these two possibilities—confiscating retirement accounts and forcing some sort of Treasury bond asset swap, or an endless continuation of QE—which is easier?
Therefore, that’s what I think is going to happen: QE money-printing as far as the eye can see.
Well, look on the bright side: At least you’ll get to keep your ever-shrinking retirement nest egg. Bully for you!
Read the original blog post HERE.