Sunday, July 31, 2011

And we have a deal!

Surprise, surprise, Washington managed to eke out a deal just in time to satisfy the "markets". As a side note - it's hard to govern when you make every policy decision based on the daily gyrations of the USDJPY.

It's hard to imagine this being more convoluted but in Washington anything is possible. The debt ceiling goes up by $900 billion (which basically only lasts until Christmas b/c we've already spent about $300 bil beyond our ceiling since May -- Boehner says this will last until Feb, we'll see). The deal guarantees $917 billion in cuts over the next decade but for perspective that is less than 10 mths of debt at our current rate of spending.

Also if the previous plans are any guide much of these cuts will be back-end loaded. As I understand it we'll get $45 billion in "cuts" before we have to hike the ceiling again. As I expected, the debt ceiling goes up, there are no new revenues and spending cuts are mostly Washington's version of vaporware - Yeah! Let's all run home and start those re-election campaigns!!

This is where the real comedy (or tragedy depending upon your viewpoint) kicks in --- " an additional $1.5 trillion in cuts to be worked out on a bipartisan basis as the price for another increase in the debt ceiling next year."

So between now and January Congress is going to learn how to compromise and come up with $1.5 trillion in cuts so we can extend the debt ceiling again? I think it will have a better chance of happening if I just write a letter to Santa.


As a side note, both Moody's and S&P have slipped back into the role of issuing toothless ratings. S&P had said all along any cuts in spending that didn't total $4 trillion would lead to a downgrade. Now, they seem to be backing away from that and saying $917 billion in cuts ten years from now will be just peachy. Watch for news on China's rating agency making waves later this week.


Stocks are rocketing over in Japan on this news, but everyone expects this to fade because the reality is that our economy is showing severe cracks despite all of the stimulus programs. However, as I've said before when everyone expects the market to zig it usually zags and everyone thinks this rally is fake so it might actually have some legs.


So, what's next for our staggering economy? Will the Fed step in with Qe3? Maybe. Another stimulus? Unlikely. Stay tuned for the next episode of As Washington Turns.


Cheers!


P.S. - Do we have any rainy day money left over for a quick little war with Syria? It seems while we've been chasing shadows around the MENA region (Egypt, Tunisia, Libya) Syria is actually using their military on their own people. Scary stuff.



Wednesday, July 27, 2011

Some debt/deficit facts

Okay, this has really gone on long enough. The leadership in Washington has to come to some sort of agreement so we can get back to worrying about Greece, Iran, and faulty bullet trains.

So while all of the politicians are battling over $20 billion here or there (Boehner's latest plan allegedly cuts just $22 billion in spending next year) there will soon be a real impact on our nation's fiscal status.

1) The current thinking is that there is about a 60% chance that the US debt rating is cut from AAA to AA (or lower) even if we get some sort of deal. Why? The main reason is that it appears as though the US has no ability to manage it's finances. Well, you might be saying to yourself - big deal what's 1 little letter?

2) Well, the only other time we "defaulted" (we missed some payments in 1979 due to a clerical error and a dispute with some debt holders) our interest costs rose by 60 basis points. Most believe that a debt downgrade will add roughly 1% to our average interest cost. Well, that doesn't sound too bad, right?

3) WRONG! 1% equates to roughly an extra $100 billion in interest cost for me, you and our kids every year for the forseeable future. So, maybe Boehner is able to magically cut $30 billion in spending or Reid finds $28 billion in cuts, but in the end it won't matter. This comedy of errors in Washington is going to cost us an extra $100 billion in interest costs (maybe a Trillion dollars over the next decade!!) more than wiping out any "savings" from spending cuts.

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People are struggling to explain why the market sold off today. Was it durable goods? The debt debate? Well, yes they both played a role, but the reality is that the computer traders are all using the same methodologies and that can lead to scary moves. No one complains when the computers churn out buy orders for market leaders like LULU (yoga apparel), GMCR (coffee makers) or SODA (at home soda fountains) - seriously these are some of the hottest names in the market - but the computers are also all working with the same sets of technical data and when the market stayed below certain technical thresholds after 2:30, the sellers hit every bid with a vengance.

Any rumor of a debt deal is going to cause an explosive short-term rally, but be very careful in this market because there is a lack of fear in the market today.

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I think the Red states should be careful what they wish for.

It's clear that the biggest calls for reducing Federal spending continue to come from the Red states (principally in the South). However, it's really the blue states that seem to be getting a raw deal.

I'm looking for updated tax data to reflect currect collections, but in 2004 here were the states that took more from the Federal Gov't than they paid in (in paranthesis is the amount of money rec'd for every dollar paid in Federal taxes)....

1. D.C. ($6.17)
2. North Dakota ($2.03)
3. New Mexico ($1.89)
4. Mississippi ($1.84)
5. Alaska ($1.82)
6. West Virginia ($1.74)
7. Montana ($1.64)
8. Alabama ($1.61)
9. South Dakota ($1.59)
10. Arkansas ($1.53)

Indeed, 17 of the 20 (85%) states receiving the most federal spending per dollar of federal taxes paid are Red States.

By contrast the states receiving the least amount of Federal aid for every dollar paid in are principally blue states.

1. New Jersey ($0.62)
2. Connecticut ($0.64)
3. New Hampshire ($0.68)
4. Nevada ($0.73)
5. Illinois ($0.77)
6. Minnesota ($0.77)
7. Colorado ($0.79)
8. Massachusetts ($0.79)
9. California ($0.81)
10. New York ($0.81)

Source: Tax Prof Blog.

Cheers!

Monday, July 25, 2011

Ah, I think I'll pass on the Kobe beef this weekend

via bloomberg

Aeon Says Suspected Radioactive Beef Sold in 174 Supermarkets Across Japan

Aeon Co., Japan’s biggest supermarket chain, said beef suspected to be contaminated with radioactive cesium was put on sale at a total of 174 of its stores across Japan.

Aeon found 4,108 kilograms (9,056 pounds) of the beef was put on shelves in stores in Tokyo and 28 other prefectures, according to a faxed statement from the company today. The figure includes locations previously announced by the company.

Supermarkets throughout Japan have been testing beef sold in their stores after the Tokyo Metropolitan Government found cesium levels in slaughtered cattle. Some of the beef had already been sold before testing began. The government banned sales of beef from Fukushima on July 19.

Borders update

The good people at dealnews.com have gone through the effort of comparing Borders book prices before the "Liquidation Event" and after the clearance began.


Borders Liquidation Price Check

1st Week Price 2nd Week Price Lowest Price Available
The Girl Who Kicked
The Hornet's Nest $19.57 $25.16 $11.87 at Walmart

The Help $11.20 $14.40 $8.57 at Amazon

Water for Elephants $10.47 $13.46 $7.77 at Walmart

Too Big To Fail $12.60 $16.20 $10.55 at Walmart

(Sorry about the format)

Of 25 books they looked at in Borders 19 (!!!) INCREASED in price this week and none of the books listed were the lowest available price. Steer clear for the foreseeable future :)

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As someone said yesterday - Washington couldn't solve a Rubik's Cube if it had only one color.

The President made a rational, if boring, presentation of the facts tonight. Rep. Boehner quoted almost every populist bumper sticker in rural Texas in a passionate speech and rallied his troops. I don't see this ending tonight :(

Cheers!

Skip the Borders Liquidation sales

This is really hard for many people to do but there are reasons why you should avoid the Borders liquidation sales.

Liquidation sales are run by companies other than the bankrupt company so two things happen:

1) The liquidator takes inventory back to MSRP and then discounts the price. So, a book had an MSRP of $19.99 and Border price of $12.99. The liquidator moves the price back $20 and offers you "20% off" so the new CLEARANCE price is $16. A 23% increase in price for the customer!!!

2) Liquidators often have "other" merchandise that they bring into the store to move during these sales. This merchandise was never in Borders but now it will be on their shelves and unsuspecting buyers might end up buying it because it feels like a deal.

If you have to shop these store closings, the experienced shoppers say the best deals are usually found 6-8 weeks after the liquidations start. In Borders' case this would mean late September.

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From the files of "Only in Florida" comes a report that the State of Florida's DMV made $63 million last year selling driver data.

The state has been selling names, addresses, vehicles people drive (a particularly telling piece of data) for marketers in Florida. Add this to the snakes and humidity as reasons not to move to Florida.

Cheers.

Aluminum cans to file class action lawsuit vs. Washington for unrelenting kicking down the road

So another deadline has come and gone in Washington. The lack of leadership in Washington is stunning. Republicans, Democrats, lobbyists, etc all share equally in the blame.

About a month ago I suggested that we would get a "deal" with "huge cuts" that were back-end loaded, no new revenues and a lifting of the debt ceiling past the 2012 election. Well, we're about 2/3rds of the way there as the latest proposal from the Democrats has back-end loaded cuts and no new taxes. However, the reality is the Republicans want to make the debt ceiling a debate every 6 months until the 2012 election so we don't have a deal. The President needs to be careful with his requested debt ceiling hike. If the economy continues to sputter $2-$2.5 trillion might not be enough to get him to the 2012 election (as amazing as that sounds).

One of the major ironies of the markets today is that given the influence of computers in today's trading, we're seeing just a minor dip in the equities while gold rallies and the dollar dips. This lack of panic is not going to force the politicians to make any hard choices and we'll remain in limbo for the foreseeable future. However, we need to be wary of what happens when the computers all head for the exits at the same time (remember the Flash Crash?).

What concerns me is that politicians tend to talk in black and white terms - you're with us or against us, etc. This issue is VERY, VERY difficult to pin down and there are many moving parts.

Let's consider some issues:

1) If we default (or even if we don't) the rating agencies have signaled that they may cut our rating. This is the equivalent of a falling credit score. So now instead of paying 2% on our debt the rest of the world says "We think we'd like 3% or 4% or 5%" on the money we lend you. Higher interest costs wipeout any theoretical "savings" the Federal government might achieve.

2) Austerity measures have consequences. The current forecasts for 2012-2015 US GDP are for 3-4% growth over the next 4 years. However, I saw one forecast this weekend that cut those growth rates to 1%-1.5% for 2012-2015 if certain austerity measures were passed. Again, this is probably a more accurate representation of the non-government growth of the economy but this has ramifications for tax collections (which will fall) and budget deficits (which could grow despite falling expenditures).

3) We can not continue the level of deficit spending that we've enjoyed over the past 30 years. Yes, our deficits have gone parabolic in the past 10 years, but to be honest this began in 80's and we borrowed our way to prosperity. Where do we cut? Well, the easiest items to target those that have seen the greatest increases in the past 10 years. Namely, defense, entitlements, and federal salaries. Again, this would have a huge impact on our economy but deficit spending has artificially boosted our growth rates for 30 years (side note: remember how WE won the cold war? Russia's Debt to GDP - about 7%. US Debt to GDP - closing in on 100%.)

I'll be honest, I never expected this dramedy to go on this long. The global capital markets need to put this issue behind us ASAP. We don't know what will happen if we fail to reach an agreement but I can't picture a scenario that ends well for the US.

Cheers!

Tuesday, July 19, 2011

Does the Apple fall far from the US economic tree?

Well, unless you're living under a rock you're going to hear plenty about Apple's monster earnings today.

Over 9 million iPads sold

Over 20 million iPhones sold

Over 7 million iPods sold

Two days ago the stock market was breaking down because it looked like we were falling back into a recession and the government seemed headed for either default or a weak extension of the debt ceiling.

Now because Apple had a great quarter is all well. As a reminder, Apple designs most of it's products in the US, but they are almost all manufactured in China and now 62% of their sales come from overseas. It's amazing that some will draw broad conclusions about the US economy based on a "toy" company that makes devices designed to distract.

Cheers!

Monday, July 18, 2011

Charts and Debt/Deficit update

Well, as I mentioned last week it seems like the status quo is winning in Washington and the most likely deal will be "Let's just kick the can until after the 2012 election." I'll predict some agreement will be reached that will look like the McConnell plan - some minor spending cuts (heavily back end loaded) and an agreement to move the debt ceiling up (most likely giving the President sole authority so Congress can vote against it knowing that their vote will be meaningless).

We will get some more showboating from Congress but in the end, I think all reasonable people understand that this debt debate is like causing a self-inflected wound on our economy.

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Almost, everyone in NNY has benefited directly or indirectly from the defense spending boom that has occurred over the past 10 years.

However, as we get ready to wind down wars on two fronts I think we're going to have to get ready for a period in which defense spending begins to revert to the mean which over the past 65 years has been about $400 billion annually (inflation adjusted dollars). Well, if spending is curtailed from its current level (near $750 billion) that means leaner times in communities that are very reliant on military bases - like NNY.




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This is the debate that should really be at the heart of any discussion about spending.......






Our healthcare expenditures per citizen are WAY above average and yet our life expectancy is well below countries like Japan or Italy. A blended healthcare model that uses the best aspects of the Japanese, Australian, and Swedish models would be worth testing in the US.

Cheers!




















Monday, July 11, 2011

The Debt and Deficit Debate

So, the powers that be in Washington had a gruelling 75 minute meeting to discuss the future of our nation's finances and came away empty handed. Well, we didn't expect our leaders to actually govern did you?

The problem is the Democrats and Republicans are fighting over numbers that really make little difference over the long-run. Four trillion? Three trillion? These numbers are just (unfortunately) a drop in the bucket.

Here's the scariest bit of data you'll read today: All of the current debt/deficit projections are being made assuming an average 2.5% Fed Funds rate (basically the interest cost of the government's debt). However, the problem is that over the last 30 years the average Fed Funds rate has been about 5.7%. If we just return to an average interest rate the total interest costs would skyrocket by $4 trillion over the next 9 years. This would more than wipe out any "savings" produced by these gruelling 75 minute meetings in Washington.

Here's what I expect will happen: There will be some form of compromise later this week (which will undoubtedly send the computers into full blown buy mode) "cutting $2 to $3 trillion from the projected deficits over the next 10-20 years. The biggest problem I expect with this "deal" is that it will probably be back-end loaded. Both parties will celebrate this austerity and they will quietly raise the debt ceiling by $2 trillion.

Why is that number important?

Well, surprise, surprise guess how long that $2 trillion will last us? Just long enough to get through the next election (sometime in early 2013 we'll be having this discussion again).

While, I'm on the subject of the politics infecting our national fiscal situation, I thought I should note that hypocrisy comes from both parties.

1) "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally."

Sen. Barack Obama - 2006

2) Ah, but the flip flopping goes both ways.

Rep. Boehner, Rep. Cantor, Sen. McConnel and Sen. Kyl (all Republican leaders) voted to raise the debt ceiling 5 times from 2002- 2007 hiking the limit by almost $4 trillion. Hmm, I wonder who was President when they were for it before they were against it?

Both parties are in the wrong here. Republicans have become low-tax addicts that can't grasp the fact that we have a REVENUE problem (not enough taxes). Democrats have lost sight of the fact that SPENDING is truly out of control.

We've flirted with third parties in the past - Ross Perot, The Tea Party - but these have never been serious operations. I'm hopeful that this latest debt debate will draw some true centrists out of the wood work and maybe we will get a Bloomberg style third party to run nationally in 2012.

Friday, July 08, 2011

Ugly (but probably accurate) jobs picture

Well, the ADP number that goosed the stock market for 2 days again proves to be about as accurate as a Dallas sports reporters forecasting how many Superbowls the Cowboys will win in the next decade.

The good:

At least we didn't lose any jobs :)

The bad:

Just about everything in this report.

* Unemployment rate up to 9.2%
* Only 18,000 jobs created vs. official expectations of 105-125k.
* Labor force participation slipped back to 64.1% - the lowest level in 25 years.
* Employment to population ratio fell to 58.2%.
* Average work week fell.
* Average hourly earnings fell.
* Average duration of unemployment is now 39.9 weeks another new high.
* The number of birth/death jobs was 131k (more than half in leisure and hospitality). Who knows how much this added to the final total but it's clear that without this number we probably would have lost jobs in June.
* April and May were revised down.

As a reminder, the US economy needs to add about 150k jobs per month just to keep up with population growth. We need to be adding 250-300k jobs per month to get the unemployment rate to budge.

Typically, I look for holes in the BLS data that show where the headline number might not be as good as promised. This month the entire report is a disaster.

This report will do two things:

1) Increase the chatter about QE3 (the banks are practically picketing in front of the fed begging for it now).

2) Weaken the hand of any Congressman that wanted to force a showdown over the debt ceiling. This report shows how weak our economy is right now and any hint at default could push us over the edge, so I think this will hasten the negotiations to get a deal done.

Cheers!

Wednesday, July 06, 2011

Do we really spend $20 Billion a year on Air Conditioning in Iraq and Afghanistan?

This claim has gone mainstream in recent days after a report mentioned that we spend $20 billion/year on providing Air Conditioning for soldiers. The story was clearly written to grab attention and the details are much more complicated than the headline would lead you to believe.

To get to the $20 billion number the study includes the cost of building and securing roads in Afghanistan which is a service we'd still pay for even if there was no air conditioning so that's a bit misleading, but this story at least makes us discuss how we should spend our increasingly limited resources.

Why Does It Cost So Much?

To power an air conditioner at a remote outpost in landlocked Afghanistan, a gallon of fuel has to be shipped into Karachi, Pakistan, then driven 800 miles over 18 days to Afghanistan on roads that are sometimes little more than "improved goat trails," Anderson says. "And you've got risks that are associated with moving the fuel almost every mile of the way."

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The fun never seems to end for eurozone. Greece seems to be bailed out for the time being, but now Portugal gets downgraded and Ireland's interest rates are soaring. Oh, and just in case you wanted to fly to Europe this weekend:

"Experts say one of Iceland's most feared volcanoes looks ready to erupt, with measurements indicating magma movement, raising fears of a new ash cloud halting flights over Europe. The Iceland Civil Protection Authority says it is closely monitoring the situation. "The movements around Hekla have been unusual in the last two to three days," University of Iceland geophysicist Pall Einarsson said."

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I have a well known desire to score a deal whenever possible - my kids would call me cheap, but that's another story. I wanted to confirm this deal before passing it along but we tried it out yesterday and it worked great, so here you are ---

Regal Cinemas (including the new Salmon Run Mall location) is offering $1 movies on Tuesday and Wednesday mornings!

This is only for select G and PG movies (usually older movies - yesterday it was Despicable Me and The Chronicles of Narnia) and only for the 10am shows on Tuesdays and Wednesdays through the summer. The theater is not promoting this offer with anything other than a small sign and a few postcards on their counters.

However, taking a family of four to the movies for $4 is definitely a must do if you have kids complaining about being bored this summer.

You can see a list of participating theaters here and if you click on the Salmon Run Mall you'll see the entire summer schedule.

Friday, July 01, 2011

This circular logic will make your head spin

So, stocks are up again (this week has been an amazing rally on next to no news - I have some theories that I'll share later) and here's the basic narrative from the press:

"Stocks rise after June manufacturing shows a rebound."

Well, yes the headline was up a little but the composition of the data was relatively weak and actually shows that the economy is sliding backward. Huh, so shouldn't stocks be down?

Not in today's market where bad news = hope for more free crac.... I mean money, from the Fed = higher asset prices = higher stock prices.

No go out and celebrate the Fourth by flying your G6 to Nantucket while the 44.65 million Americans that are on Food Stamps fight over the scraps at Walmart.

Cheers!