Economy News, Share Economy

Earnings Disaster At GE; Profit Drops 45%; Revenues Lag

2009-12-20T07:22:00.000-08:00

Amidst all the excitement of companies beating 5 times watered down earnings estimates, GE managed to lay an egg. Please consider GE Profit Falls 45% as Revenue Trails Estimates.

General Electric Co.�s third-quarter profit declined 45 percent as the company scaled back real estate and consumer lending and sold fewer medical machines, leading to a steeper drop in sales than analysts projected.

Chief Executive Officer Jeffrey Immelt is shrinking the finance unit and weighing a reduced stake in NBC Universal as he builds energy, transportation and health-care businesses to help emerge from the recession. The GE Capital plan is ahead of schedule, Immelt said on a conference call after today�s earnings report.

Profit from continuing operations declined to $2.45 billion, or 22 cents a share, from $4.48 billion, or 45 cents, a year earlier, the company said in a statement. The average profit estimate of 13 analysts in a Bloomberg survey, excluding some items, was 20 cents a share. Results include 5 cents a share of restructuring costs, GE said.

Total orders declined 18 percent, and equipment and service contract cancellations remain �insignificant,� GE said. Large equipment orders in the so-called infrastructure divisions also fell 18 percent from a year earlier, a slower pace than the second quarter�s 44 percent drop.

The third quarter was likely the low point in orders, Immelt said on the conference call with analysts.

Health-care profit fell 20 percent as the U.S. market for orders �remains tough,� said GE Chief Financial Officer Keith Sherin said on the call.

GE spent $600 million on cost reductions in the quarter, knocking about 5 cents a share off profit. Total year-to-date expenses to cut jobs, shut offices and consolidate some plants have reached to $1.3 billion, GE said today.

GE Capital, helped by tax credits, had a $997 million loss before taxes, spokeswoman Anne Eisele said. The company�s revenue was hurt by a stronger U.S. dollar than in last year�s third quarter. The consolidated tax rate was a negative 25 percent, driven by the GE Capital credits.

Immelt, 53, has said he plans to reduce GE Capital�s assets to $400 billion to $450 billion, from about $557 billion in the second quarter, by concentrating on mostly commercial lending.

Selling NBC Universal

The company is preparing to cut its stake in NBC Universal in a deal with Comcast Corp. and may divest the media unit entirely in seven years, according to people familiar with the discussions.

�I don�t think NBC strategically fits with his view of GE going forward as sort of the green company,� Hardesty said of Immelt.

Not About Raising Cash

GE CEO Immelt says the spinoff of NBC Universal entertainment unit is Not About Raising Cash.

General Electric(GE Quote) Chairman and CEO Jeff Immelt reaffirmed Friday that a partial sale or spinoff of its NBC Universal entertainment unit is on the table, while saying the company has no need for cash.

Bearish observers of GE believe unrealized losses in GE Capital and expected tougher capital requirements from regulators will mean GE will need to raise a substantial amount of cash at some point, either by issuing equity or through unit sales, or a combination.

GE a Finance Company

The best way to think of GE is as a finance company masquerading as a manufacturing company. This was essentially the business model of GM as well, except GE is better at it.

In reference to the sale of NBC entertainment, Immelt said GE has no need for cash. Of course GE has a need for cash. GE has a total debt of over $500 billion.

Instead of buying back shares at totally ridiculous prices over the years, GE could have and should have been retiring debt. The panic low earlier this year below $6 was on concerns GE would not be able to refinance that debt.

The good news is GE has "90% completed its plans" to refinance its debt.

That relieves the short-term problem, but what about the long-term problem of getting rid of all that debt? Look for GE to continue to sell assets just as announced: Reducing GE capital and NBC universal.

As that happens, one can expect more layoffs and/or voluntary staff reductions by attrition. There is no driver for jobs anywhere as companies and individuals alike seek to reduce leverage and pay down debt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The John McCain �meltdown continues�

2009-12-19T23:20:00.000-08:00

California is a Complete Basket Case; Treasurer Requests Tarp Funds; LA Mayor Declares Emergency

2009-12-19T23:02:00.000-08:00

MarketWatch is reporting California formally asks Geithner for TARP assistance

California Treasurer Bill Lockyer asked U.S. Treasury Secretary Timothy Geithner on Wednesday to authorize assistance for his state from the federal Troubled Asset Relief Program, warning that depressed tax revenues may cut into basic services and halt the building of infrastructure.

In a letter, Lockyer asked Geithner for TARP assistance for California and "other financially strapped states and local governments which face a severe cash flow crunch."

"If we cannot obtain our usual short-term cash-flow borrowings, there could be devastating impacts on the ability of the State or other governments to provide essential services to their citizens," Lockyer wrote.

In addition, Lockyer warned in the letter that California"s cash flow problems may lead to trouble accessing the long-term bond market, which could "eventually even halt our infrastructure construction programs."

Lockyer estimated that California"s cash flow shortfall in fiscal 2009-2010 will be more than $13 billion.

A $13 Billion Deficit?

Who does Lockyer think he is fooling? California has not yet passed and should not pass $16 billion in Propositions 1A through 1F as noted in California, Please Send A Message!

Note that the proposed $16 billion in tax hikes was supposed to plug the budget but it is already another $8 billion in the hole. And judging from what Lockyer said, it appears the gap is up to $13 billion, assuming California passes those hikes.

I am betting California does not pas those propositions. Moreover I encourage California to not pass those propositions or they will be taxing themselves to death.

Assuming the hikes do not pass, California will be $29 billion in the hole, and counting, with the important phrase being "and counting".

California is going $2 billion more in the hole every month like clockwork and I see no reason for that to stop now.

LA Mayor To Declare Fiscal Emergency

Meanwhile, Villaraigosa calls on City Council to declare a fiscal emergency.

With Los Angeles facing a $529-million budget deficit, Mayor Antonio Villaraigosa on Tuesday urged the City Council to declare a fiscal emergency that would grant him the authority to lay off and furlough thousands of city workers.

The request signals a more hard-line tack by the mayor to win salary and benefit concessions from the city"s public employee unions, which had soured on Villaraigosa"s call for a salary freeze, furloughs and increased benefit costs to save $230 million and avert the need for layoffs.

Villaraigosa said the worsening economy and an expected $300-million drop in city tax revenue gave him "very few options." L.A."s budget gap is expected to grow to $1 billion in the 2010-2011 fiscal year because of investment losses in the city"s pension systems, which the city is required to keep solvent.

"The gravity of the fiscal emergency that we face is enormous," Villaraigosa said in his letter to the council. "Unless we act with urgency, the city will face a cash flow crisis, raising the prospect of running out of cash between November and February."

The city council is required to have a balanced budget by July 1. Good luck with that. My plan for LA is simple: declare bankruptcy just like Vallejo did and hope the unions get what they deserve in court, nothing.

Unions Hold California Hostage

Are unions out of their minds in this environment to object to a wage freeze? On the surface it would appear so. However, unions may be emboldened by the Obama Administration"s willingness to bend over backwards for union demands.

Please consider Demoting California.

One of the biggest stories in politics earlier this year was about California"s budget teetering on the edge of a $42-billion deficit abyss. It only staved off insolvency when its legislature ended three months of gridlock to pass a budget with steep tax hikes and spending cuts. Guess what the Obama Administration is doing? It is telling Governor Arnold Schwarzenegger that it will revoke nearly $7 billion in federal stimulus money unless the state restores legislated wage cuts for unionized health-care workers.

Governor Schwarzenegger has sent a letter asking the feds to reconsider, noting the cuts were taken in response to "an unprecedented fiscal crisis." Even now the state faces an estimated cash-flow problem of some $17 billion by July.

Restoring the union money will require a two-thirds vote of the Legislature, a task in California somewhat akin to moving the Sierra Nevadas. Still, it"s worth noting where the Obama team ranks the political authority of a legislative enactment by the state of California versus the political clout of a union.

Come to your senses California. If you are dumb enough to pass Propositions 1A through 1F, expect yet another round of tax hikes to follow.

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

Former unit of Cheney�s firm makes up �vast majority� of criminal audit cases in wake of Iraq war

2009-12-19T21:14:00.000-08:00

Ex-Cheney firm accused of massive criminal fraud, bribery

In shocking testimony made by the Pentagon�s top auditor on Monday, the Defense Department revealed that a former unit of the company where Vice President Cheney was CEO is under investigation for allegedly billing for unallowable costs, accepting bribes, falsifying time cards and overbilling.
The onetime unit of Halliburton, KBR, is now an independent company. Halliburton formally broke off ties with KBR in April 2007.
April Stephenson, head of the Pentagon�s contract audit agency, said she didn�t know of any contractor probed that had ever been cited for so many abuses. Of the 32 cases under criminal investigation, KBR constituted the �vast majority.�

�I don�t think we are aware of a program, a contract or a contractor that�s had this number,� Stephenson said.
The allegations of potential fraud began in February 2004, with the most recent one being in March of this year. Cheney was CEO of KBR�s then-parent company, Halliburton, from 1995-2000, in the years leading up to his election to the office of vice president.
In a statement to Bloomberg News, a KBR spokesman said the firm �in no way condones or tolerates illegal or unethical behavior� and that �when KBR has discovered wrongdoing of any sort by an employee, we have swiftly reported it to the government.�
KBR is purportedly the largest non-union construction contractor in the United States.
The Associated Press� writeup of the story follows.

Pentagon auditor cites heavy fraud by contractor
Top Pentagon auditor cites unprecedented number of reports of suspected contract fraud, waste

LinkHere

BLOOMBERG: Cadbury Rejects Kraft�s Unsolicited Takeover Offer as Too Low

2009-12-19T19:29:00.000-08:00

By Duane D. Stanford and Andrew Cleary

Nov. 9 (Bloomberg) -- Cadbury Plc, the maker of Dairy Milk chocolate, rejected Kraft Foods Inc.�s unsolicited takeover offer of 9.8 billion pounds ($16 billion) after Kraft stuck to the terms of its initial bid.

Kraft offered 300 pence in cash and 0.2589 new Kraft share per Cadbury share, the same as a bid made public Sept. 7, the Northfield, Illinois-based company said today in a statement. As of last week�s closing prices, the bid values Cadbury at 717 pence a share, below the current price. Cadbury recommended that investors reject the offer because Kraft�s stock drop has caused the value to decline from its initial 745-pence level.

The formal offer may be a starting point for talks with Cadbury, said Jane Coffey, who helps oversee $12 billion at Royal London Asset Management, which owns Cadbury shares. Cadbury has said it�s confident in its prospects as an independent entity, calling the original proposal from Kraft Chairman and Chief Executive Officer Irene Rosenfeld an �unappealing prospect� from a �low-growth� conglomerate.

�The question is does this bring Cadbury to the table to try and negotiate an offer closer to 8 pounds,� Coffey said. �It�s part of the normal strategy that Kraft would want an agreed bid.�

Cadbury shares fell as much as 2.4 percent after Kraft�s announcement, before erasing their decline. They advanced 1.5 pence to 759.5 pence at 3:45 p.m. London time.

Kraft declined 22 cents to $26.56 at 10:41 a.m. in New York Stock Exchange composite trading.

�Less Value�

�The repetition of a proposal which is now of less value and lower than the current Cadbury share price does not make it any more attractive,� Cadbury Chairman Roger Carr said in a statement today that recommended shareholders reject the bid.

Kraft reiterated the deal would produce at least $625 million in annual pretax cost savings by the end of the third year after closing. The company said it will use available resources for the cash portion of the deal, including a 5.5 billion pound senior unsecured term loan facility. The financing is being led by Citigroup Inc. and Deutsche Bank AG.

Kraft�s lead adviser is Lazard Ltd. Centerview Partners, Citigroup and Deutsche Bank and are also advising Kraft. Cadbury is being advised by Goldman Sachs Group Inc., UBS AG and Morgan Stanley.

A deal would push Kraft, the fourth-largest candy and chocolate maker by market share, past Mars Inc. as the world�s largest confectioner. The London-based maker of Creme Eggs would give Kraft greater ability to bolster its brands in the U.K. and to break into developing markets including India. It would be the biggest cross-border acquisition this year.

Global Expansion

�One of the biggest factors is getting at the global infrastructure that Cadbury�s built,� Christopher Growe, an analyst with Stifel Nicolaus & Co. in St. Louis, said in a Nov. 6 telephone interview. �It would give Kraft a real head start in some emerging markets.�

Growe, who recommends holding Kraft, expected the bid to be increased to 750 pence to 775 pence.

The bid values the confectioner at 26 percent more than on Sept. 4, the last trading day before the initial bid was made public. The combined company will have annual revenue of $50 billion, Kraft has said.

On Oct. 21, Cadbury increased its full-year profitability and revenue forecasts on higher sales of Trident gum and Wispa Gold chocolate.

Buffett�s Stake

Warren Buffett, the billionaire whose Berkshire Hathaway Inc. is Kraft�s largest shareholder, said in an interview with CNBC in September that the offer for Cadbury is �pretty full� as it stands, and that Kraft�s pursuit is a �tough game.�

�I�m not sure what kind of appetite Cadbury holders have to hold on while these two slug it out for the next six months,� said William Hobbs, who helps manage 134 billion pounds in assets, including Cadbury shares, at Barclays Wealth in London. �Anything under 800 pence is still a pretty chunky discount to what we could get.�

Investors including Hobbs and John Haynes, who helps manage 12 billion pounds including Cadbury shares at Rensburg Sheppards Plc in London, said Kraft is under no pressure to offer a significantly higher price unless competing bidders emerge.

Kraft has been �aided by the apparent absence of other interested parties,� Hobbs said. Analysts have speculated that white-knight bidders including Switzerland�s Nestle SA and Hershey Co. may make competing offers.

Melanie Kohli, a spokeswoman for Nestle, declined to comment. Kirk Saville, a Hershey spokesman, said the company doesn�t comment on merger and acquisition issues as a matter of policy.

Watch

Yacktman Interview on Kraft-Cadbury
Nov. 9 (Bloomberg) -- Donald Yacktman, chief investment officer at Yacktman Asset Management Co., talks with Bloomberg Carol Massar, Jon Erlichman and Adam Johnson about Kraft Foods Inc."s bid to acquire Cadbury Plc. Kraft stuck to its initial bid in an unsolicited offer to buy Cadbury for 9.8 billion pounds ($16 billion). Cadbury, the world�s second-largest candy and chocolate maker, rejected Kraft"s offer, saying the offer is now worth less and the initial proposal had already undervalued the company.

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Barack All Talk

2009-12-19T19:19:00.000-08:00

Barack
Was it all talk?
The message of change
Just a crock?

Its a crying shame
America"s in flames
You"re more of the same
A new face ... same game

Obama
Will you even provide us a comma?
In the serial campaigns to bomb a
Region that has what we want?

Guess he was bought
With the nomination locked ...
The peace act"s been dropped
(Brzezinski told him to stop?)

Bait and switch
By the very rich
They get everything on their wish-list
Guess who pays for it?

While liberty is dying
And the Founding Fathers sighing
You"re okay with spying?!
Then your act ain"t worth buying

You promised to fight for justice
But as usual, I guess its "just us"
No matter who"s sworn into office
Only the people can defend the U.S.

Both Jim Rogers and Marc Faber to Short Long-Term Treasuries

2009-12-19T17:52:00.000-08:00

Marc Faber says that investors should short long-term U.S. treasury bonds at the appropriate moment:

I think the big trade in 2009 will be to go short Treasurys massively -- I really mean massively -- because we may not have inflation for one, two, three years . . . .

Jim Rogers is saying the same thing. Rogers agrees that long-term treasuries are the last bubble, and is going to short them at the appropriate time.

Note: I am not an investment advisor and this should not be taken as investment advice.

Poll: Lieberman Would Lose 2012 Re-Election In Landslide

2009-12-19T17:32:00.000-08:00

Source: Talking Points Memo
If Joe Lieberman decides to run for a fifth term in 2012, a new Quinnipiac poll suggests that it may be a lost cause.
The new poll tests Lieberman as an independent against Democratic Attorney General Richard Blumenthal. The numbers: Blumenthal 58%, Lieberman 30%. Yikes.
Lieberman"s active campaigning against the Democratic Party last year hasn"t won him too many friends back home. Democrats go for Blumenthal by 83%-9%, and independents are for Blumenthal 55%-29%. Lieberman is the de facto Republican nominee in this match, and with GOP voters he scores 67%-23% over Blumenthal.
Lieberman"s job approval is also at only 45%, with 48% disapproving. Among Democrats that"s a 21%-70% rating, Republicans 75%-20%, while independents give him a narrow approval of 48%-46%.
LinkHere

Email From Canada In Support Of Unions

2009-12-19T15:12:00.000-08:00

I do not get many emails from union members that are "printable". Here is one from Canada that is. Tim McCallum, Millwright Local 1007, Canada writes:

Dear Mish,

I have read your blog for a couple of years now, I have a healthy respect for your opinions in general, but your continued outright union bashing now leaves me no choice but to come to the defense of my trade unions members.

I am a member of Millwright Local 1007 Niagara Falls(Ontario Canada) We are a part of The Carpenters and Joiners of America.

We are construction workers. The motto on our Local badge has only two words on it, Quality and Integrity. The men and women who work with me are all govt. certified ,qualified trades people, as per our own union rules.

They all have to pass an entrance exam to even qualify for an apprenticeship position. Then it takes 8000 hours of documented employment to be able to sit your journeyman"s/woman"s test. This test is administered by the provincial govt., just so you know that there is no funny business with the upper echelon in the union getting their brother or sister in the " back Door".

We as members of the union have no seniority, we have no guaranty of employment, we are hired out of a hiring hall that services a multi-employer group of companies that have signed an agreement to contract our services. The only rule is this, the person out of work the longest, gets to go to work first when the call comes.

We are employed in the construction and or maintenance of Auto plants, petrochemical refineries, coal fire and hydroelectric facilities, paper mills, the pharmaceutical industry, steel mills, airports,...well you get the picture. We are very diverse in out trade application. We are used by all these various industries for one overwhelming reason. We are cost efficient. We are cost efficient because we as a group basically live by two rules. One is the quality and Integrity I mentioned earlier, the second is worker health and safety. No job is more important than a person"s safety.

My union has a reputation. A reputation for the projects we build to be on time and on budget. We receive all of our training from the union, In fact most of the industry around here stopped their in house apprenticeship programs because they determined that six years and approx $500,000 ( per person) was too much cost to develop a tradesperson.

So, here in Ontario, we are not considered bloodsucking industry killers, rather we are considered industrial vacillators that form a mobile workforce that appears on demand, leaves when the job is done, and in the process of doing the job, constantly remind each other that the reason we have this job today, is because we did a good job yesterday. this concept is carried forward by apprentices learning from older success full trades people like myself, that you sometimes have to go that extra mile if you want to be called to work on your merit rather than because someone owes you a job. In our union, no one owes you anything, but you can earn respect and a good living.

We have not gone on strike in over fifty years.

One other thing that may well be obstructing clarity in this issue is the quid pro quo, We are the most expensive manpower available to do this work, Yet we are not out of work. Either the companies we work for just like to throw money away, or we do what I said, give value for the dollar. When the contract you are working on is worth hundreds of millions of dollars of capital investment, do you take a chance with the assets? Or do you let the experts( union millwrights) use their experience, education, and get er done attitude to help you along the path to success.

The future is uncertain at best in all of North America. But the people who work in my union, do their best on a daily basis to secure their future by doing a good job today. We can only hope about tomorrow. At least in our engineering, the numbers never lie. In the world of financial engineering, what the numbers relate to is up for discussion every other day.

Just thought I"d let you know that some of us do give a shit, and are tired of being lumped in with the status quo in your union concept.

Tim McCallum
Millwright Local 1007
Niagara Falls, On, Canada

Hello Tim.

Thanks for writing.

I do not think that every union person does a lousy job. Indeed I am quite sure most are dedicated, skilled, workers who take pride in their jobs. At the same time however, in case after case, I can see the problems.

In regards to public unions, many employees may be doing a "damn good job" but some of the pencil pushing jobs should not be done at all. That may not be the employees fault, but it certainly is not doing the average taxpayer any good.

Moreover, it"s easy to point out how many state and local governments made ridiculous promises on pension plans and benefits that cannot be met. Taxpayers are on the hook for those promises and cities and states are bankrupt.

These problems cannot and will not go away unless services are abolished and the pay and benefit scales match what is available in private industry. Unions have fought nearly every one of these realignments.

Unions (along with piss poor management) helped sink GM and that spurred another bailout. One of the reasons for an exodus of jobs is unions and union rules. I have heard amazing stories about work rules at GM and Caterpillar.

Finally, Obama"s support for unions risks a global trade war. I can assure you that a trade war will cost jobs across the board, including union jobs. Yet, ironically, unions are cheering for more protection.

These are things I am passionate about and unions are at the heart of it.

That does not make every union member a bad person. Nor does it mean the majority of union members are not dedicated workers. However, I cannot sit idle while ignoring public pension plans bankrupting states and trade wars started by Obama on behalf of unions, both of which threaten the country as a whole.

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

D.C. nonprofit aimed at women voters behind deceptive N.C. robo-calls

2009-12-19T14:50:00.000-08:00

By Chris KrommFacing SouthWho"s behind the mysterious "robo-calls" that have spread misleading voter information and sown confusion and frustration among North Carolina residents over the last week?Facing South has confirmed the source of the calls, and the mastermind is Women"s Voices Women Vote, a D.C.-based nonprofit which aims to boost voting among "unmarried women voters."What"s more, Facing South has learned that the firestorm Women"s Voices has ignited in North Carolina isn"t the group"s first brush with controversy. Women"s Voices" questionable tactics have spawned thousands of voter complaints in at least 11 states and brought harsh condemnation from some election officials for their secrecy, misleading nature and likely violations of election law.First, a quick recap: As we covered yesterday, N.C. residents have reported receiving peculiar automated calls from someone claiming to be "Lamont Williams." The caller says that a "voter registration packet" is coming in the mail, and the recipient can sign it and mail it back to be registered to vote. No other information is provided.The call is deceptive because the deadline has already passed for mail-in registrations for North Carolina"s May 6 primary. Also, many who have received the calls -- like Kevin Farmer in Durham, who made a tape of the call that is available here -- are already registered. The call"s suggestion that they"re not registered has caused widespread confusion and drawn hundreds of complaints, including many from African-American voters who received the calls.The calls are also probably illegal. Farmer and others have told Facing South the calls use a blocked phone number and provided no contact information -- a violation of North Carolina rules regulating "robo-calls" (N.C. General Statute 163-104(b)(1)c). N.C. Attorney General Roy Cooper further stated in a recent memo that the identifying information must be clear enough to allow the recipient to "complain or seek redress" -- something not included in the calls.It is also a Class I felony in North Carolina "to misrepresent the law to the public through mass mailing or any other means of communication where the intent and the effect is to intimidate or discourage potential voters from exercising their lawful right to vote."The calls have been denounced by the N.C. State Board of Elections, as well as by voter advocacy groups including Democracy North Carolina, which called them "another in a long line of deceptive practices used in North Carolina and elsewhere that particularly target African-American voters."Yesterday, I placed a call to the Virginia State Police, which had investigated similar suspicious robo-calls before that Virginia"s primaries last February. Their investigation concluded that the source of the calls was Women"s Voices Women Vote.Facing South then contacted Women"s Voices, and staffer Sarah Johnson confirmed they were doing similar robo-calls in North Carolina; they later admitted that they were the ones behind the deceptive "Lamont Williams" calls.So who is Women"s Voices Women Vote, and why are they making shadowy and legally-questionable calls that are causing North Carolina voters so many headaches?The D.C.-based nonprofit, led by well-connected Washington operatives, claims in a press release they sent to Facing South [PDF] that the North Carolina calls are part of a 24-state effort targeted at a list of 3 million voters, especially unmarried women. The robo-calls, which never mention Women"s Voices, are followed by mailings that include information on how to register to vote. They plan to mail some 276,000 packets in North Carolina alone.
LinkHere

Howard Dean Slams Senate Health Care Bill: "A Bill That George Bush Would Love"

2009-12-19T13:57:00.000-08:00

Dean please use your majority for the people not Pharma and the insurance companies.

Howard Dean panned the health care reform bill currently in the Senate Finance Committee as one that "George Bush would love" because "it"s a massive redistribution of government tax payers" money to the insurance industry":
Exactly the same thing that was going in the banking industry and other industries on Wall Street. It is a bad bill, the Finance Committee bill. It doesn"t insure people and it spends an awful lot of money and it gives it away to the insurance companies. So I do think ultimately the bill will have a public option because I don"t think the Democratic party is going to stand for this LinkHere

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The McCain Wander

2009-12-19T13:42:00.000-08:00

TO BAD, SO SAD

McCain Forced To Send Palin To Once-Red West Virginia

Economic Chicken vs. Mutually Assured Destruction

2009-12-19T13:00:00.000-08:00

While working in my garden this weekend I was thinking about a game of economic chicken. I was not the only one.

Economic Disconnect was writing about Superfund Strong Arm and a Game of Chicken.

Right now we are looking at a systemic banking crisis. The FED had to cut rates in a hurry, the discount window was open for business, Hank Paulson is running around on TV, in interviews, at any conference anywhere pushing the SIV Superfund. All these things are very rare and disquieting. The banks second front in their "War on Insolvency" is a game of chicken played against the FED, the US government, and the US taxpayer.

Let"s play chicken.

The game of Chicken models two drivers, both headed for a single lane bridge from opposite directions. The first to swerve away yields the bridge to the other. If neither player swerves, the result is a costly deadlock in the middle of the bridge, or a potentially fatal head-on collision.

It is presumed that the best thing for each driver is to stay straight while the other swerves (since the other is the "chicken" while a crash is avoided). Additionally, a crash is presumed to be the worst outcome for both players. This yields a situation where each player, in attempting to secure his best outcome, risks the worse.

Payoff Chart in Chicken

The chart at the left shows what happens if neither person swerves. The result if no one swerves is a head on collision where both parties both likely die. One person usually swerves.

In practice both typically swerve at the last possible moment. If either person misjudges the other (or the speed of their own reactions), then two people die unless the other swerves hard enough and fast enough to compensate.

Is the ongoing game Mutually Assured Destruction (MAD) or is it Chicken? I suggest economic MAD is more like the game being played. All of the world"s the central banks are involved as players. The current path is a massive economic failure at some point in the future. However, a peculiarity of the current game is that the first major player to "swerve" immediately causes his own demise as well as the demise of the other players.

For example, consider the threat by China to massively unload US treasuries. The threat is a hollow one. It is not in anyone"s best interest to start a global credit crisis, but that is what would happen if foreign central banks start dumping treasuries in mass.

The same logic applies to players stuck in SIVs. Those who are not familiar with the SIV story, can read Enron Accounting at Citigroup, a Special Edition Five Things You Need to Know, and Marked to Fantasy to catch up.

In economic MAD, the first player to dump assets in a SIV immediately puts its own economic life at risk. More problematic is that it puts the entire system at risk. And so a phony plan to disguise the real worth of those assets is being put in place. As a stopgap, should someone sell, the SIV bailout plan is prepared to buy its own assets. Because that sounds preposterous (and it is), additional buyers of last resort are being sought.

Arm Twisting by Paulson

Paulson is now twisting arms internationally hoping to scrounge up support for his plan. Headlines last Friday stipulated SIV support grows.

"Paulson has done a short briefing on the SIV fund," Bank of Italy Governor Mario Draghi told journalists. "PIMCO and Fidelity have joined."

PIMCO"s support comes as a surprise after Bill Gross, the chief investment officer of Pacific Investment Management Co. or PIMCO, criticized the effort as "a little lame" in a television interview.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.

Mario Draghi appears to be mistaken. MarketWatch is reporting "PIMCO is not participating" in the SIV bailout fund.

Player or not, Bill Gross" quip "a little lame" is an enormous understatement. The word "fraud" would be more appropriate.

It"s important to remember the game we are in today is the price we paid for Greenspan"s foolishness in slashing interest rates to 1% in the wake of the dotcom crash.

Greenspan did not make those rate cuts to prevent deflation. He made those cuts to bail out banks that made horrendously bad loans to dotcom companies and foreign banks. A side effect of the resultant credit bubble is that Greenspan has virtually guaranteed the deflation he claims to have prevented.

The problem with MAD is that we can pay a price today or a greater price in the future. At some point (perhaps it"s starting now) there is no longer a choice. The day of reckoning comes when consumers are unwilling to borrow or banks are unwilling (or unable) to lend.

Because of the entanglement of $300 trillion to $500 trillion in derivatives (credit default swaps, options, and leveraged mortgage backed securities), the first player to swerve in a major way risks collapsing the system.

As in Global Thermonuclear War, "The only winning move is not to play." But it"s far too late for that strategy now. Economic MAD has started, and there is no way to stop the game.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Blue Dogs Rolling In Health Industry Money

2009-12-19T10:15:00.000-08:00

WASHINGTON � As the Obama administration and Democrats wrangled over the timing, shape and cost of health care overhaul efforts during the first half of the year, more than half the $1.1 million in campaign contributions the Democratic Party"s Blue Dog Coalition received came from the pharmaceutical, health care and health insurance industries, according to watchdog organizations.
The amount outstrips contributions to other congressional political action committees during the same period, according to an analysis by the Center for Public Integrity, a nonprofit watchdog organization. The Blue Dogs, a group of fiscally conservative lawmakers, successfully delayed the vote on health care overhaul proposals until the fall.
"The business community realizes that (the Blue Dogs) are the linchpin and will become much more so as time goes on," former Mississippi congressman turned lobbyist Mike Parker told the organization"s researchers.
On average, Blue Dog Democrats net $62,650 more from the health sector than other Democrats, while hospitals and nursing homes also favor them, giving, respectively, $5,680 and $5,550 more, according to the Center for Responsive Politics, a nonprofit organization that tracks the influence of money in politics.
The contributions came at a time when health care and pharmaceutical companies were mounting a campaign against a government-run public health insurance option, fearing cost controls and an impact on business. The Blue Dogs" windfall also came at a time when the 52-member coalition flexed its muscle with both the White House and the Democratic leadership in the House of Representatives as an increasingly influential bloc in the health care overhaul debate.
At the same time, many Blue Dogs were also rubbing shoulders with health care and insurance industry executives and their lobbyists at fundraising breakfasts and cocktail receptions that cost upward of $1,000 a plate, according to public information compiled by the nonprofit Sunlight Foundation, which advocates greater government transparency. Since 2008, more than half the Blue Dogs have either attended health care industry fundraising receptions or similar functions co-sponsored by lobbyists representing the health care and insurance industries. LinkHere

Group Urges Americans to Speak Out Against Planned Bush Blanket Pardons

2009-12-19T09:09:00.000-08:00

Tim King Salem-News.com

The group says it is extremely important to block the pardons before they can happen.

(SALEM, Ore.) - A group called The People"s Email Network, is urging Americans to do what they can to stop the Bush Administration from issuing pardons that will absolve Vice-President Dick Cheney and others from future retribution over alleged crimes committed during the presidency. They say a recent round of pardons from President Bush are just a sign of things to come.

"Pay no attention to the handful of Christmas pardons granted by Bush. This is mere political window dressing to distract from the bumper crop of blanket absolutions, including one for himself, scheduled to be released just before midnight on Jan 19th," the group said. Cheney will be remembered for his implication that waterboarding is not torture, despite the fact that such practice can be prosecuted as a war crime in most civilized countries.

Critics point to a recent interview with the Washington Times, during which Mr. Cheney said "I felt very good about what we did. I think it was the right thing to do." The People"s Email Network said, "Cheney would not so arrogantly be bragging on TV about how he authorized torture if it were not so."

- snip -

The Action Page To Stop The Bush Pardons is located at this link: http://www.usalone.com/hres1531.php

LinkHere

Dark Clouds Over Detroit

2009-12-19T07:22:00.000-08:00

GM plunged today to a 10 year low when it finally confessed just how bad its operations really are. The world"s largest automaker said it now expects a loss of about $1.50 per share in the first quarter, well below its prior target calling for breakeven results or better. For 2005 as a whole, GM scaled back expectations and now anticipates earnings of $1 to $2 per share, not the $4 to $5 in expected previously. This is a company headed for bankruptcy but the Wall Street pimps will not admit it until the bitter end. According to the S&P, GM and their finance arm General Motors Acceptance Corp. had about $300 billion in outstanding debt at the end of 2004. That will be one heck of a lot of write offs when they happen.

The S&P affirmed its long-term "BBB-" ratings and its short-term "A-3" ratings on GM and GMAC, but the outlook was changed to "negative" from "stable." The change reflects S&P"s "heightened concerns regarding the profit potential of GM"s core North American automotive business in the wake of the company"s dramatically revised earnings and cash flow guidance," analyst Scott Sprinzen wrote in a research note. "Confidence that performance will be bolstered by the eventual introduction of new products is diminished because sales of major new products it has introduced recently have generally not met expectations," he said. Moody"s said it may cut ratings on GM and GMAC. The ratings agency currently rates GM"s long-term debt as "Baa2," two notches above junk.

The real story in today"s fiasco is NOT the GM implosion but the fact that Fitch, Moody"s and the S&P have not and will not cut GM"s rating to junk. I am openly calling for the SEC to crack down on the relationship with rating companies and their clients. No one wants to be the first to upset a relationship or to spook the equity markets with a downgrade on a company as large as GM. At the current pace they will put this off for as long as they can, just as they did with Worldcom and Enron. Ratings companies are now totally useless. The problem here is clear, ratings companies should NOT be allowed to have relationships with the companies they rate.

How many times do Moody"s, Fitch, and the S&P have to prove they can not police themselves. The only hope for accurate rating is if the companies are totally independent.

The New York Times commented on this in their February 2005 article
"Wanted: Credit Ratings. Objective Ones, Please"
"I think it"s fair to say that the oversight of the industry is insufficient," said Annette L. Nazareth, director of market regulation at the Securities and Exchange Commission. "We want the firms to commit to meet certain standards with respect to policies and procedures on conflicts of interest and solicitation of ratings. Right now we don"t have that at all."

In 1975, the S.E.C. ruled that the laws relating to debt carried by banks and financial institutions refer only to ratings provided by agencies that it recognizes. Right now, these are the big three and a much smaller fourth, Dominion Bond Rating Service of Canada. What you have, in other words, is an oligopoly.

Even more troubling, this oligopoly earns its keep from fees charged to the companies whose debt it rates. This conflicted business model means that the paying customers for these agencies are the corporations they analyze, not the investors who look to the ratings for help in assessing a company"s creditworthiness.

This is not the first time that Standard & Poor"s, MOODY"s and Fitch have been in the hot seat. When Enron and WORLDCOM failed, investors were stunned by how long it had taken the agencies to recognize the companies" declining fortunes. For example, all three agencies had rated Enron an investment-grade company until four days before it filed for bankruptcy. They had rated WORLDCOM similarly until a few months before it collapsed.

I am encouraging everyone to Email the SEC at:
SEC Center for Complaints and Enforcement Tips and complain about the obvious conflict of interest between ratings companies and their clients..

US bankruptcies are expected �to surge� amid JUNK bond deluge
Most Likely To Default
# Mitsubishi Motors Corp
# Holley Performance Products
# Motor Coach Industries
# Granite Broadcasting
# American Lawyer Media Holdings
# Interep National Radio Sales
# Sports Club Co
# Levi Strauss & Co
# Salton Inc

How long before GM and Ford are on that list?

The problem is that they should ALREADY be on that list. GM"s credit spreads prove it! GM"s debt trades at junk levels. Ok, So what"s the big deal then? The big deal is that everyone pretends that GM is not junk and GM bonds go into portfolios that are not suited for junk. Many funds have a requirement to NOT have junk bonds in their portfolios. Conservative investors purchasing such funds have tons of this stuff forced on them by bond fund managers speculating in issues that are clearly junk but is not rated as such. Investors buying those funds are treated to the risk of GM whether they want it or not.

The ratings companies do not want to downgrade GM because it might cause them future business and because it will flood the junk bond market. Although the corporate bond market is huge, the junk bond market is only a tiny piece of it. GM has an enormous amount of debt so no one wants to do the right thing and call a spade a spade (or junk junk). If GM was downgraded it would likely cause repercussions in the stock market as well as the junk bond market. So what? Non-junk Corporate bond holders deserve to hold non-junk. Why can"t we have some semblance of honesty? Well today any bond funds holding GM took a big hit. Let"s take a look:

NYSE Price % Losers 2005-03-16

12 of the top 16 losers today were GM related.
11 of them were GM bonds.
Will there be a lawsuit coming up by bondholders against Moody"s, Fitch, or the S&P?
Will there be a lawsuit coming up by bondholders against non-junk rated bond funds holding junk?

Somehow I do not think we have seen the end of this mess.
In the meantime this is what you need to do:
Email the SEC at:
SEC Center for Complaints and Enforcement Tips and complain about the obvious conflict of interest between ratings companies and their clients.

Mish

CHATTANOOGA TIMES: Shaw ups stake in Dixie

2009-12-19T05:50:00.000-08:00

Wednesday, May 6, 2009 , 12:00 a.m.

Audio

The founder and former chief executive of Shaw Industries has increased his ownership in Chattanooga-based floorcovering company Dixie Group to more than 12 percent.

Robert E. Shaw, who more than 40 years ago launched with his brother what would become the world�s largest flooring manufacturer, made two recent purchases of Dixie stock, bringing his shares to more than 1.4 million, according to documents filed with the Securities and Exchange Commission.

Records show Mr. Shaw purchased Dixie stock in February bringing his ownership in the flooring manufacturer to 6.23 percent. He later purchased an additional 690,000 shares of the stock to put his total ownership at 12.08 percent.

Kemp Harr, publisher of Floor Focus magazine, said only chief executive Dan Frierson owns more Dixie stock than Mr. Shaw.

�(Mr. Shaw) got out (of Shaw Industries) at the top of the market, and he�s one of those guys that can�t retire,� Mr. Harr said. �He�s just one of those guys that loves the business, and I feel he sees this as a good time to get back in.�

On Tuesday, Dixie Group�s stock closed at $3.07 a share, up more than 25 percent from Monday�s close.

That places Mr. Shaw�s total stock value at almost $4.4 million.

Mr. Shaw stepped down from Shaw Industries� top post in 2006.

According to Shaw, the company is wholly owned by Berkshire Hathaway, which is run by Warren Buffett.

Telephone calls to Mr. Shaw on Tuesday were not immediately returned.

Gary Harmon, chief financial officer at Dixie Group, said the company welcomes Mr. Shaw�s knowledge and expertise.

�Bob has been in the industry for years and is a pioneer in the business,� he said. �We are glad to have an expert as an owner. We think it is a real plus.�

Mr. Harmon said Mr. Shaw has owned Dixie stock for several years, but he has recently increased his stake in the company.

Mr. Harr believes Mr. Shaw has made a wise decision to increase his position at this time.

�I think Dixie is under-valued for where they are going to be when this market turns,� he said.

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CALGARY HERALD: Corporate News timed to the second

2009-12-19T04:45:00.000-08:00

Published: Wednesday, April 23, 2008, Calgary Herald

When satellite communication was still the rule, it wasn"t uncommon for urgent news releases to languish in a queue waiting to be sent.

Times have changed. Today, the companies that distribute corporate news and information are able to time the delivery of hundreds of press releases to the exact second.

"In the old days, when we relied on satellite communication, companies would give us their news and it would be queued up to move in a sequential order," explained Neil Hershberg, senior vice-president of Business Wire, a wholly owned subsidiary company of Berkshire Hathaway, which is controlled by Warren Buffett.

"With today"s technology, we have the capability of distributing hundreds of releases timed to the split-second on a global basis, so if you"re an investor interested in Nortel, you"re getting the news at the exact split-second in Sydney, Australia, as they"re getting it on Wall Street.

"The "old days," " Hershberg says dryly, "was prior to 2003, which is not exactly ancient history, but a long time ago where this technology is concerned. It"s a whole different ball game today."

It is a tidal wave of information in a constant flow around the world, all fodder for whomever has a need for it.

Business Wire operates in more than 100 different languages and posts in 17 languages on its website. It files to Associated Press, Bloomberg, Dow Jones, Reuters, Agence France-Presse and the British Press Association.

"You name the major news wire or financial information platform, and we"re on it," said Hershberg. "The purpose of many clients is to generate publicity and grab media attention. We"re one of the early links on the food chain."

There have been suggestions that there is an information overload, but while it may be getting crowded on the information highway, the demand for news and information shows no sign of abating.

Visit Share Investor Blog

Boomers" Future Went Down The Drain

2009-12-19T02:13:00.000-08:00

The attitudes and values of boomers heading into retirement are changing. They have to.

In the wake of a stock market and home price collapse, most boomers are not prepared for the future. Let"s explore that idea with a look at Is the Future Going Down the Drain? Baby Boomers Going Bust.

Millions of baby boomers born into the dawn of the most spectacular economic expansion in history are being forced to re-imagine their retirement futures. Few news outlets have failed to seize upon the low-hanging pun: the boomers have gone bust.

Among the adjustments forced by the new circumstances, perhaps the cruelest twist for many boomers is the need to join younger generations in the roommate queue. The housing crash has forced record numbers of late-middle age homeowners to take in boarders or risk becoming boarders themselves. From California to Vermont, home-share organizations founded to assist the elderly are scrambling to meet the demands of newly bust boomers.

�In the last few months we"ve experienced explosive growth in interest by homeowners age 50-plus to find rooms and roommates,� says Jacqueline Grossmann, Chicago coordinator for the National Shared Housing Resource Center. �The trend now is getting younger and younger. People in their 50s and 60s are losing their nest eggs and increasingly willing to give up their privacy in exchange for rents of $500, $600 a month.�

Boomers are maximizing room occupancy for the same reason that their kids in their 20s and 30s are still competing for the best group rentals on Craigslist: they"re broke.

The extent to which boomer wealth was based on home values is highlighted by a new report from the Center for Economic and Policy Research, entitled "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble."

The report details how the collapse has left the majority of those around retirement-age almost completely reliant on entitlements. The net worth of median households in the 45 to 54 age bracket has dropped by more than 45 percent since 2004, to just over $80,000. Households headed by those aged 55 to 64, meanwhile, have lost 38 percent of net wealth.

The result is that many baby boomers will only have entitlements to rely on in their retirement.�

Make that entitlements, roommates, and each other.

As more and more boomers scale down their retirement plans and consider alternative living arrangements, it"s worth asking: Is shared housing such a bad thing for aging boomers? Does a return to the Communal idea, borne of economic necessity, also have emotional, social, and environmental benefits? Why wait for the retirement home or hospice to live with other people? With the nation full of worthless, ridiculously large, and mostly empty houses, why not fill them with the newly penurious and like-minded boomers in need of housing?

Terry S., a 62-year-old self-employed divorced psychologist in Pittsburgh, is one boomer considering the cooperative housing route. Until the crisis hit last year, Terry planned to spend her retirement between Europe and New York City, living off her IRA and savings. But the crash saw her wealth plummet by 60 percent. �My friends and I feel betrayed because we are now in the same or worse position than those who never saved their money, but may have a pension,� she says. The crisis forced her to rethink retirement, and she now plans to buy a house with her friends. She explains the logic:

Some of my friends and I shared a communal house in the 70s. We first came up with this idea [of doing it again] when we were talking about the possibility of having to live in assisted living or nursing homes, and we decided it would be far better to all live together in a big house with friends we knew and loved and hire a nurse and a cook. One of my friends owns a construction firm and he says he can put an elevator in any home for less than $100,000. We have looked at several homes. One was a beautiful house that backed onto a huge city park and had a pool decks all around and could easily be converted into four private residences. It was $600,000, which would only be $150,000 per unit. Much less than the $4,000 a month to have half of a dingy room in a nursing home that smells like urine.

If the deepening economic crisis does lead the boomers back to Countercultural values, a generation will have come full circle. Whether they end up living in a group house, a shared apartment, or a full-on hippie-style commune, studies show that they will live longer and more fulfilling later lives. �The results here are truly amazing,� says Kirby Dunn, pointing to studies that gauge the effects of shared housing. �Across all programs and age-brackets, people say they feel safer, are less lonely, happier, and sleep better. They also call their family less often for help.�

Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble

Inquiring minds are reading Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble by the CEPR, Center for Economic and Policy Research.

This paper makes projections of wealth for 2009 for the baby boom cohorts (ages 45 to 54 and ages 55-64) using data from the 2004 Survey of Consumer Finance. It updates an earlier paper on this topic from June of 2008 using projections for housing and stock values that are more plausible given the sharp downturn in both markets over the last 8 months, and creates three possible scenarios from best to worst-case for baby boomers� wealth in 2009.

The projections show:

1) The median household with a person between the ages of 45 to 54 saw its net worth fall by more than 45 percent between 2004 and 2009, from $172,400 in 2004 to just $94,200 in 2009 (all amounts are in 2009 dollars). If the median late baby boomer household took all of the wealth they had accumulated during their lifetime, they would still owe approximately 45 percent of the price of a typical house and have no other assets whatsoever.

2) The situation for early baby boomers is somewhat worse. The median household with a person between the ages of 55 and 64 saw its wealth fall by almost 50 percent from $315,400 in 2004 to $159,800 in 2009. This net worth would be sufficient to allow these households, who are at the peak ages for wealth accumulation, to cover approximately 90 percent of the cost of the typical house, if they had no other assets.

3) As a result of the plunge in house prices, many baby boomers now have little or no equity in their home. According to our calculations, of those who own their primary residence, nearly 30 percent of households headed by someone between the ages of 45 to 54 will need to bring money to their closing (to cover their mortgage and transactions costs) if they were to sell their home. More than 15 percent of the early baby boomers, people between the ages of 55 and 64, will need to bring money
to a closing when they sell their home.

These calculations imply that, as a result of the collapse of the housing bubble, millions of middle class homeowners still have little or no equity even after they have been homeowners for several decades. These households will be in the same situation as first-time homebuyers, forced to struggle to find the money needed to put up a down payment for a new home. This will make it especially difficult for many baby boomers to leave their current homes and buy housing that might be more suitable for their retirement.

Finally, the projections show that for both age groups, the renters within each wealth quintile in 2004 will have more wealth in 2009 than homeowners in all three scenarios. In the second and third scenarios, renters will have dramatically more wealth in 2009 than homeowners who started in the same wealth quintile.

Homeownership is not everywhere and always an effective way to accumulate
wealth. For those who owned a home in the last few years, the collapse of the housing bubble led to the destruction of much or all of their wealth.

Three Scenarios

The "Three Scenarios" mentioned above relate to projections of the Case-Shiller housing index looking ahead.

Scenario 1: -21.1%
Scenario 2: -25.0%
Scenario 3: -32.9%

The first scenario assumes that nominal house prices decline no further from the level reported in the November 2008 Case-Shiller 20-city index to the 2009 average. The second projection assumes that nominal house prices in 2009 are on average five percent lower than they were in November 2008. The third scenario assumes that nominal house prices fall fifteen percent in 2009.

Already we know the first scenario is out. Moreover it is possible that even scenario 3 is optimistic. So much for the idea the way to accumulate wealth is through real estate.

Buying real estate may have helped one to accumulate wealth if one paid off the mortgage rather than continually borrowing against the equity to take vacations, buy cars, or to "put the money to work".

Nearly everyone attempting to put that money to work has gotten clobbered doing so.

Net Worth - Households Aged 45-54 in 2004 vs. 2009

click on chart for sharper image

Only those boomers in the top quintile have close to enough money for retirement. And that is the group hit hardest by the recent selloff. Think that group is going to be vacationing as much as they thought, eating out as much as they thought, golfing as much as they thought, etc.?

I don"t.

Moreover, those in the first through fourth quintiles are not prepared for retirement at all. The fourth quintile was arguably close in 2004. They are no longer prepared.

Note: There are 14 sets of figures in the CEPR article. It"s well worth taking a closer look.

Structural Demographics Poor

The structural demographics are very poor. Please see Demographics Of Jobless Claims for still more details. Here is a key clip.

Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families. In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.

A structural shift in consumption to savings or at least reduced consumption, is in store for boomers. Meanwhile job prospects are looking pretty grim for some time to come across the entire economic spectrum. This economic backdrop is deflationary.

Attitudes towards debt and consumption have changed.

Moreover, the above data suggests those attitudes, particularly among the key boomer group who now needs to draw down on accumulated wealth, are not changing back anytime soon. And it is attitudes, not Fed actions that will determine how long the deflationary period we are in lasts. I touched on the importance of attitudes many time, most recently in All Manias Leave Something Undervalued. Please take a look if you haven"t already.

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

Global Debt Bubble, Causes and Solutions

2009-12-19T01:59:00.000-08:00

Australian economist Steve Keen is one of the very few who have called this economic crisis correctly. What distinguishes Keen is that his economic forecasts are based on levels of debt and changes in levels of debt as opposed to money supply, output capacity and other things that led most economists astray.

The following video is about 19 minutes long but very much worth listening to in entirety, improving as it goes along. The video may take a while to load but it"s well worth it. Everything below in quotes, until the next bold title is a partial transcript from the video.

Steve Keen:

"If you have a sane economy, and by sane economy I mean one which is not addicted to debt, not a Ponzi economy, then the change in debt each year should contribute a minor amount to demand. Therefore, if you tried to correlate debt to the level of unemployment you would not find much of a correlation. Unfortunately that is not the economy we live in."

"The red line shows the percent contribution that debt contributes to demand and the blue line which is inverted is the unemployment rate."

"There should be no correlation if the economy is operating sensibly. Correlation is now at the level of 83%. Because we have a debt driven economy, the change in debt levels each year is the major determinant in the change in economic performance."

"Neoclassical economic theory is dangerous. Neoclassical economists completely missed this crisis. My favorite statement comes from the OECD in its June 2007 report"

" A recent survey trying to find economists who predicted this found 12. And there are 10,000-15,000 economists in the US alone which is why I don"t particularly accept their assurances that everything is OK from now on."

"Now why are economists so ignorant? Two major reasons. First of all the type of modeling they do is static where you ignore time, or if you have dynamics you assume they are converging to some nice stable situation in the future. And they ignore almost completely the role of credit and debt."

"I probably win the Dr. Doom award around the planet these days now that Nouriel Roubini is expecting the recession will end in about 6 months time. I think it"s got a lot longer to go than that."

"What we are going through is a deleveraging crisis and we haven"t experienced one of those since 1930. Last time it took 10 years and a world war to get rid of it, and this time we are staring up with 1.7 times the level of debt in America, not even mentioning the derivatives catastrophe that is also there."

"And deleveraging which is the attempt by the private sector to reduce its debt level can overwhelm the government"s stimulus. The whole problem was caused by irresponsible lending and the only way out of this ultimately is to eliminate that debt. The debt has to be written off"

Powerpoint Presentation

The above text is a partial transcript from his presentation and the slides are two of many slides from the accompanying Powerpoint presentation. You can download the presentation on Steve Keen�s Debtwatch Blog. You will need to listen to the video to understand some of the slides.

Australian readers will want to pay particular attention as Australia is certainly not out of the woods.

Keen"s Proposed Solutions

Steve Keen has some interesting proposals for solutions. He spoke of nationalizing banks which I have sided against. However, Keen also wanted to wipe out the shareholders and repudiate the bondholders by turning the assets over to the bondholders in a bankruptcy process. That is something I certainly do agree with. The problem here is probably the word "nationalization"

One thing is certain, US taxpayers got the worst of all worlds by nationalizing Fannie Mae and Freddie Mac, and taking over the liabilities (at taxpayer expense) while making the bondholders whole. To top off the madness, Fannie and Freddie increased lending limits, putting taxpayers at further risk. This is exactly the wrong "nationalization" approach and I am sure Keen would agree.

Keen has an interesting idea that mortgages on houses ought to be based on what rent they could fetch. Clearly the credit bubble never would have escalated to the point it did if lenders had the common sense to lend based on how much rent a house could fetch.

As it was, debt upon debt upon debt piled up until we had the Collapse Of The "Ownership Society".

Supposedly no one saw this coming. A chart in the preceding link proves otherwise.

Fed and Fractional Reserve Lending at Heart of the Issue

In regards to Keen"s solutions, I believe the free market should make these decisions, not government bureaucrats. And in that regard, Keen never touched on what I think are the two root causes of this mess:

1) Micro-mismanagement of interest rates by central bankers in general and the Fed in particular.
2) Fractional reserve lending gone mad.

Free Market Forces Should Decide

It was not lack of regulation that got us into this mess, but rather regulation, going back to 1913 and the creation of the Fed. Making matters worse, Congress authorized Fannie Mae and Freddie Mac and hundreds of "affordable housing" programs all designed to pressure people into buying houses.

Let"s not forget the misguided regulation that created FDIC.

Inquiring mind will want to consider As of Friday August 14, 2009, FDIC is Bankrupt and followup Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks.

If we eliminate FDIC, Fannie Mae, Freddie Mac, and all the housing subsidies authorized by Congress and the states, then the free market may very well decide that Keen"s model of pricing houses is the correct one.

As it sits, there are too many factors other than rent that affect home prices, such as federal income tax deductions, affordable housing programs, proposition 13 in California, Fannie and Freddie, etc . Attempting to control those forces with more regulation is the wrong way to go. However, there is no reason why banks could not and should not (on their own accord) start making lending decisions based on rental values.

When it comes to the writeoff of debt and the need to prevent another debt bubble, I certainly side with Keen vs. Krugman, Mankiw, and even Roubini who all prescribe variations of "Neoclassical Nonsense" hoping to spur more bank lending and consumer borrowing by throwing money at the problem.

My own theory on credit and debt is contained in Fiat World Mathematical Model. Thanks go to Steve Keen for helping me finalize that model.

I have some emails from Steve Keen regarding my model, Keynesian clowns, and other things. I will share some of those emails later this week.

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

Effect of Household Deleveraging on Housing, Consumption and the Stock Market

2009-12-19T00:18:00.000-08:00

Inquiring minds are investigating the Federal Reserve Bank of San Francisco report on Household Deleveraging and Future Consumption Growth.

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.

Notice the enormous gap between debt and income. This gap will be filled by deleveraging (increased savings), by default, or a combination of both. Either way, given consumer spending is close to 70% of the economy, it is irrational to expect the stock market to come roaring back anytime soon.

Can it get worse? Yes, unfortunately it can. Ponder the implications if wage growth deviates negatively from the long term trend for a sustained period of time.

Going forward, downward pressure on debt is likely to come from both lenders and households. On the supply side, tighter lending standards will require more income, collateral, and documentation for any given loan. Demand for mortgage debt could also wane as expectations of future house price appreciation are adjusted downward to reflect market conditions. Concerns about future job security and the risk of foreclosure or bankruptcy may spur consumers to boost their precautionary saving. Moreover, the need to rebuild nest eggs held for college education or retirement may prompt consumers to shift toward a more saving-oriented lifestyle.

Figure 2 shows that real consumption and real debt growth have been strongly correlated since 1960. Rapid debt growth allowed consumption to grow faster than income. Conversely, if households were to go through a sustained period of deleveraging (negative debt growth), then consumption growth would be expected to slow.

Figure 3 compares Japan"s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan"s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

Let"s now consider the effect of consumer and corporate deleveraging on the stock market.

Nikkei Stock Index 1980-Present

click on chart for sharper image

A look at the Nikkei shows that Japan has already lost two decades since the peak in 1990. It is likely the US follows the same general pattern.

Figure 4 shows that the U.S. personal saving rate has recently started to increase following a decades-long decline that bottomed out near zero in 2005. As described in Lansing (2005), the secular decline in the saving rate appears to have been driven, at least in part, by long-lived bull markets in stocks and housing. The recent price declines in these markets might therefore initiate a sustained rebound in the saving rate over time.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

Peak Credit and Peak Earnings

Not long ago, the US was once a nation of savers. Now that the housing bubble has crashed and the stock market along with it, the US is poised to become a nation of savers again.

Peak Credit and her twin sister Peak Earnings have arrived. Here is a snip from the former.

... That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

Think the US stock market is going to come roaring back if consumer deleveraging plays out as it must? Think again.

Expect another "Lost Decade" when it comes to housing and the stock market. It"s the deflationary payback for the greatest credit binge in world history.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Janet Tavakoli: Risk of deflationary collapse greater now than in 2007

2009-12-18T21:25:00.000-08:00

Janet Tavakoli is On The Edge With Max Keiser. Tavakoli says the Risk of deflationary collapse greater now than in 2007.

We�ve just interviewed Janet Tavakoli for our first episode of The Keiser Report. If you don�t know her, you should. She wrote a fantastic book, Dear Mr. Buffett. Max and I are on our second read of it. You really must get this book if you want to understand derivatives from one of the foremost experts on it who writes in plain English about how these financial tools became instruments for widespread fraud that then led to financial crisis. She also gives loads of positive advice and insight.

Here is a summary she provided for MaxKeiser.com on where she thinks we are today two years since the crisis began:

"Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I�ve been correct, and the government has been wrong. Here�s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we�ve seen history�s greatest fiscal and monetary expansion, but it hasn�t worked. Debt levels of consumers and business exceed the capacity to repay."

Travakoli makes six points about deflation. I concur with all of them. Here are three of them.

Our fundamental financial and economic problems, i.e. overleveraging, lack of transparency, have not been solved.
Since 2008, capacity utilization has plummeted; businesses have no pricing power; U.S. lost 6.7 million jobs but numbers are underreported; personal income tax receipts are down 21%; corporate tax receipts are down 58%; U.S. deficit will exceed $1.8 trillion; govt. spending is now 185% of tax receipts; 13% of mortgages are seriously delinquent and/or in foreclosure; huge decrease in personal net worth; 15 million mortgages exceed the home value. We�re on a massive debt spending spree.
Income on all levels is not sufficient to make debt payments.

Inquiring minds will certainly want to play the videos where she also addresses the role of derivatives.

Janet Tavakoli Part 1

Janet Tavakoli Part 2

By the way, the reason we are worse off than in 2007 is because of the Fed"s, response, the Treasury"s response, the Obama Administration"s response, and the Congressional response.

That"s quite a lethal combination.

None of the structural problems regarding consumer debt, excess capacity, or malinvestments have been addressed. Instead the government"s solution is to pile on more debt and bail out failed institutions at taxpayer expense.

One cannot cure a debt problem by going further in debt. It"s as simple as that.

Brett Steenbarger Book Review

Brett Steenbarger has a review in Featured Book Look: Dear Mr. Buffett by Janet Tavakoli

"At its core," Tavakoli observes, "the mortgage crisis is no more sophisticated than a schoolyard swindle, and the SEC is the principal." She effectively contrasts the imprudent use of leverage across investment banks, government sponsored enterprises, and hedge funds with the value investing philosophy of Warren Buffet, driving home the point that much of our recent economic activity has been destructive of wealth. "Price is what you pay," Buffett explained, "Value is what you get." Our recent financial system, Tavakoli asserts, has paid high prices for little value.

Her book is an excellent, readable overview and explanation of what"s gone wrong and also a warning about what may be to come. She explains:

"As long as Wall Street enhances revenues with leverage to prop up kingly bonuses, as long as there are few personal consequences for CEOs (and board members and other top executives) for shoddy risk management, as long as CEOs are allowed to walk away with millions, nothing will change. The fact that shareholders are wiped out is no deterrent, and moral hazard will live on (p. 206)."

I have not yet read the book but I respect the opinion of Brett Steenbarger greatly. I am going to order a copy of Dear Mr. Buffett and read it. Meanwhile, I am adding that book to my recommended reading list, the first on my list that I have not read before placing it there.

One final thought: If you are a trader or have plans to be a trader, do yourself a favor and bookmark Brett Steenbarger"s blog. He is a psychologist and discusses something no one else does, the Psychology of Trading. His book has been on my recommended reading list for some time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Job Cuts Increase Economic Stress

2009-12-18T19:56:00.000-08:00

Corporations are slashing jobs. States are in on the act too. Let"s take a look at a few headlines. All are from last weekend.

Citigroup (C) Slashing Investment Banking Jobs

Yahoo Finance is reporting Citigroup to slash investment-banking jobs

Citigroup is preparing fire thousands from its worldwide investment-banking division, The Wall Street Journal reported on Sunday. The Journal, citing people familiar with the matter, said the layoffs are part of a plan to cut about 10 percent of the staff of the 65,000-member investment-banking group.

Miami Teachers Protest Job Cuts

NBC is reporting Teachers Protest Job Cuts.

Teachers in Miami-Dade County are fighting back against the school board"s decision to slash jobs. Several teachers gathered outside the Intercontinental Hotel on Sunday to protest superintendent Rudy Crew"s decision to slash jobs while refusing to cut his own pay. The board approved additional job cuts last week, raising the total number of jobs lost to more than 2,000.

Continental Airlines Slashing Jobs

The Economic Times is reporting Continental Airlines to slash jobs.

Continental Airlines Inc, which is shedding 3,000 jobs in a cost-cutting move, is offering employees a year"s worth of health insurance and travel perks if they leave on their own.

"We are offering all of our work groups voluntary plans to reduce the number of involuntary furloughs and terminations that will be required due to capacity cuts," said Continental spokeswoman Mary Clark.

Continental has made an umbrella offer to all labor groups that includes the health benefits and free travel privileges for employees and their families until 2023. The offer was extended to employees who have worked at Continental for at least 10 years.

Janesville WI GM Closing To Cost 9,000 Jobs

The Chicago Tribune is reporting Janesville GM closing could result job loss of 9,000

A new analysis shows the closing of General Motors in Janesville could result in the loss of nearly 9,000 jobs and nearly half a billion dollars in labor income. Using software developed by the Minnesota Implan Group, Deller did the analysis assuming that nearly 2,200 of the plant"s 2,667 employees live in Rock County.

It gets to the nearly 9,000 mark -- about 10 percent of the county"s resident work force -- when jobs are lost through a ripple effect. Every modeling program uses a multiplier, a number that expands the effects.

In this case, the program attached different multipliers to the direct number of GM jobs lost (2,196) and the direct labor income of those GM employees ($188 million).

Pennsylvania Tax Collectors Automated Out Of Jobs

The Evening Sun is reporting Proposal looks to slash local tax collectors" jobs to streamline process.

Lawmakers are eyeing a bill to drastically change the way wage taxes are collected by slashing the number of tax collectors and creating countywide collection districts. Sen. Jane Earll, of Erie, sponsored the bill, which cleared the Finance Committee on Wednesday by a vote of 25-1 and now heads to the House.

California unemployment hits 6.8%

The Los Angeles Times is reporting California unemployment hits 6.8%.

California"s moribund construction and real estate industries helped push the state unemployment rate to 6.8% in May, its highest level in nearly five years. The state Employment Development Department reported Friday that joblessness in May rose six-tenths of a percentage point from the previous month and was a dramatic 1.5 percentage points higher than in May 2007.

"Although some forecasting groups continue to debate whether or not the economy is heading into a recession, these numbers should make it perfectly clear that the state is already in a recession," Beacon Economics, a Los Angeles-based research firm, said in an analysis of the jobless data. "The only question now is, how long and how bad will it be?"

Big California Unemployment Jump

click on chart for sharper image

Florida Unemployment Rate Highest Since 2003

NBC Is reporting Fla. Unemployment At Highest Rate Since Early "03.

State officials say Florida"s unemployment rate in May was at its highest in more than five years. The jobless rate was 5.5 percent, the same as the national number.

The Agency for Workforce Innovation reported Friday that another 56,000 workers lost jobs last month, bringing the total number of jobless in Florida to more than 500,000.

Dismal Job Reports

Those are dismal job reports. There are hundreds more you can find.

It"s question time.

Which way are foreclosures going to head? Bankruptcies? Credit Card Defaults? Home Equity Defaults? Commercial Real Estate Defaults? Corporate Loan Defaults? Corporate Profits?

The answers: Up, Up, Up, Up, Up, Up, Down.

Unemployment Is Lagging Indicator

Somehow the fact that unemployment is a lagging indicator, is being spun as a positive thing. Unemployment is indeed lagging, but it isn"t positive at all. We have not yet bottomed. When we bottom, unemployment will keep rising for as much as another year.

In normal economic times, with more household savings and less debt, consumers would be better prepared to weather the storm. That is what happened in 2002-2003.

Now, most consumers have virtually no savings to weather the storm. Worse yet, unemployment is likely to rise for at least two more years. I called for 6% in 2008 and 7% or more in 2009. California is nearly there. Michigan is over 8.5% already, perhaps on its way to 10%.

Should Congress act to stem rising unemployment with silly makeshift job programs, the dollar is likely to sink further which will put still more pressure on those with jobs.

Some suggest we are in the eye of a hurricane. However, as I said on Sunday, the reality is there are Many Hurricanes, Many Eyes. Most have not even reached shore yet. Very few people are prepared for the series of storms about to hit. And for those barely hanging on, each storm will be worse than the one before it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Free Fall In Munis, Worst Month Since 2003

2009-12-18T19:12:00.000-08:00

Bloomberg is reporting Munis Have Worst Month Since 2003.

U.S. municipal bonds are headed for their worst month in more than four years after collapsing demand for securities with rates set at periodic auctions sent debt costs for state taxpayers and hospitals as high as 20 percent.

The $330 billion auction-rate market froze after dealers stopped purchasing the bonds when buyers failed to bid. Their lack of support has spread to the broader tax-exempt market, sending yields soaring. Borrowers from California to New York City plan to convert the securities to longer-term debt, raising concern that a flood of bonds will overwhelm already sparse demand from banks and hedge funds.

"We"re going to get smashed with new-issue volume from all these auction-rate bonds" that are being converted, said Brian Battle, a trader and vice president at Performance Trust Capital Partners in Chicago.

"Every alternative we turn to is worse than it was a year ago," said Roger Anderson, executive director of the New Jersey Educational Facilities Financing Authority, which sells bonds for colleges in the state.

Professor Bennet Sedacca on Minyanville had this to say about Munis today.

My firm has avoided municipal bonds for years now. The above Bloomberg article, an excellent piece by Jeremy Cooke shows why.

This is not a back slapping exercise, it is an exercise in just how bad a "credit unwind" can get. I expect that many municipal bond portfolios will now get marked down in a big way. Net asset values of all sorts of municipal mutual funds, both closed end and open end will likely get smashed. How badly? It depends on the quality but I am guessing anywhere from 5-20%.

All sorts of "bid lists" are hitting Wall Street, but not much as trading as folks are appalled at the bids compared their values on their statements. But I will say this. My firm has been waiting on this and I am now getting interested in the municipal market as an opportunistic trade. I am not quite sure at what level as markets tend to overshoot on the upside and downside, so we will now monitor this market for signs of extreme fear and pessimism to enter the market for my firm"s investors and our fund.

Here is followup commentary from Sedacca a bit later in the day.

Muni Market in Disarray

As a follow up to the couple of pieces I wrote on munis, the Shoe has officially dropped... like an anvil.

Sources are telling me that the municipal bond market has all but seized up. Bid list after bid list surface, but nothing trades. The reality is that the bids are 10-15 points under statement values.

I have also heard of a few muni arb funds liquidating and shutting down (these funds mainly buy munis and short govies when the spread is wide). Well, it will get wider, and wider, and wider, until the margin clerk arrives.

If I owned a muni fund, I would not trust the nav, particularly in closed end levered funds. Be careful, folks. And don"t panic...

With that, let"s take a look at a list of closed end muni funds compiled by professor Kevin Depew. Click on any chart to see a sharper image.

Blackrock Long Term Municipal Advantage Trust

Blackrock Long Term Muni Yield Quality Fund II

Blackrock Strategic Muni

Eaton Vance Insured Municipal Bond Fund

Nuveen Prem Muni Fund

A forced unwind in leverage is now underway, with fingers pointed in the wrong direction (see Hedge Funds Blame Wall Street Instead Of Themselves). Anyone over-leveraged in anything right now should be scared half to death.

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

One on one with Obama

2009-12-18T18:09:00.000-08:00

Visit msnbc.com for Breaking News, World News, and News about the Economy

WATCH: Obama Discusses Gay Marriage, Paying For College With MTV News

2009-12-18T17:12:00.000-08:00

When an MTV viewer wanted to know what Democratic presidential nominee Barack Obama thought of Proposition 8, a state constitutional amendment on the 2008 California general-election ballot that would eliminate the right of same-sex couples to marry, MTV News brought the question straight to the man himself.
"I think it"s unnecessary," Obama told Sway, in response to a question sent in by Gangstagigz from San Leandro, California. "I believe marriage is between a man and a woman. I am not in favor of gay marriage. But when you start playing around with constitutions, just to prohibit somebody who cares about another person, it just seems to me that"s not what America"s about. Usually, our constitutions expand liberties, they don"t contract them."
Keep reading here.

MTV Shows

SFGATE: The business bookshelf

2009-12-18T15:01:00.000-08:00

Bernadette Tansey

Saturday, February 21, 2009

Brethren, are you bewildered by the fast-changing world and, frankly, searching for a guru to follow? New media tracker Jeff Jarvis suggests that we ask "What Would Google Do?" in his new book about the core precepts he divined from the Mountain View tech company"s way of doing things. Jarvis" title paraphrases a question that devout Christians ask about Jesus, but the author doesn"t quite equate Google with a godlike savior. He does preach that Googlethink principles such as trusting the masses can transform almost every kind of business. Jarvis doesn"t leave out Google"s signature dogma: "Don"t be evil."

Another sage"s example is mined for wisdom in "Warren Buffett and the Interpretation of Financial Statements" by Mary Buffett and David Clark, a former daughter-in-law and an ex-student of the investing wizard who have made a cottage industry of packaging his purported methods in such books as "Buffettology." Their latest examines Buffett"s rules for spotting trouble ahead by evaluating such entries as debt ratios and R&D expenses.

If you prefer to hear the word straight from the source, try "How to Castrate a Bull," the autobiographical business credo by NetApp founder Dave Hitz, who draws on his early experiences at a combined college and cattle ranch (yes, you read that right). His lesson from castrating angry bulls: "Risk can be managed."

Recommended Amazon Reading

What Would Google Do? by Jeff Jarvis
Buy new: $17.81 / Used from: $15.80
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Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett
Buy new: $16.47 / Used from: $12.00
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The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the World"s Most Famous Investor by Mary Buffett
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How to Castrate a Bull: Unexpected Lessons on Risk, Growth, and Success in Business by Dave Hitz
Buy new: $18.45 / Used from: $13.50
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March Auto Roundup And Retail Sales Forecast

2009-12-18T13:28:00.000-08:00

March Auto sales were a disaster across the board. Let"s take a look.

Ford Sales down 14%

Ford"s US sales down 14 percent in March

U.S. sales fell 14 percent
Truck and SUV sales fell 16 percent
Ford Expedition fell 34 percent
F-Series pickup fell 24 percent
Car sales were down 10 percent

Small cars fared best as consumers focused on fuel efficiency. The Ford Focus saw sales jump 24 percent for the month.

GM Sales Down 13%

GM March U.S. sales fall an adjusted 13 percent

General Motors Corp (GM) said on Tuesday that its U.S. sales fell an adjusted 13 percent in March to 282,732 vehicles and left intact its second-quarter production forecast.

GM Blames Consumer Confidence

"I think the main weakness is consumer confidence," said GM sales chief Mark LaNeve. "It"s (mortgages) resetting. It"s worry about the news. It"s presidential candidates telling you how bad it is. It"s Bear Stearns."

"The compact cars and the new crossovers are really what is carrying most manufacturers," said Jesse Toprak, executive director of industry analysis for Edmunds.com, adding that the industry-wide sales decline was in line with his expectations.

"Consumers want to buy cheaper, more gas efficient vehicles," Toprak said.

If only presidential candidates would stop telling everyone how bad things were, then everyone would be rushing out to buy a Camaro.

Then again perhaps consumers are broke, have no job, have no job prospects, and gas prices are through the roof.

GM says still expects second-half U.S. recovery

General Motors Corp still expects the U.S. economy to recover in the second half of 2008, pulling industry-wide auto sales higher, an executive said on Tuesday.
GM sales analyst Mike DiGiovanni, speaking to reporters and analysts on a conference call, said he saw "early signs" that the U.S. market was steadying.

My Comment: Is this some kind of April Fool"s Joke?

Separately, GM North American sales chief Mark LaNeve said GM"s inventory of full-size pickup trucks was "more than adequate" despite a five-week-old strike at supplier American Axle & Manufacturing Holdings Inc that has idled 30 GM plants.

My Comment: And it will be more than adequate if the strike lasts another 15 weeks. Who wants full sized pickups? GM ought to be thankful for that strike or they would be ramping up for a nonexistent second half recovery.

Toyota Sales Down 3.4%

Toyota says U.S. March sales down adjusted 3.4 percent

Toyota Motor Co on Tuesday posted a 3.4 percent decline in March sales after adjusting for two fewer sales days in the month compared with a year earlier.

The automaker, ranked No. 2 in the U.S. market by sales, said its Toyota-brand sales were down 2.9 percent. Sales for the Japanese automaker"s luxury Lexus brand were down 6.9 percent, it said.

Toyota said its car sales were up 1.5 percent in the month, while truck sales dropped by 8.8 percent in March.

Retails Sales Estimates Cut

Bloomberg is reporting U.S. Retailer Group Cuts Sales Estimate Second Time.

A U.S. retailer group cut its March sales estimate for a second time as shoppers concerned about job security and the worst housing slump in a quarter century cut apparel spending.

Retail sales probably fell or were little changed in the month, down from last week"s prediction of 1 percent growth, the International Council of Shopping Centers and UBS Securities LLC said today.

"We"ve been in a recession ever since October," said Britt Beemer, chairman of America"s Research Group in Charleston, South Carolina. "I"m predicting a very soft next 14 months in consumer spending until Memorial Day in May of 2009."

Tax Refunds

Seventy percent of consumers who have received their 2007 income tax refund are using it to pay off credit cards and bills, the first time in 20 years that figure has topped 50 percent, according to Beemer. People who may have never seen the inside of a Wal-Mart are now buying groceries there, he said.

"In my 29 years of research, consumers are doing exactly what they said they are going to do: they"re not spending," Beemer said in a telephone interview. He said his firm interviews 8,000 to 15,000 consumers a week.

This is a stunning announcement: "Seventy percent of consumers who have received their 2007 income tax refund are using it to pay off credit cards and bills, the first time in 20 years that figure has topped 50 percent."

Anyone who thinks Bush"s economic stimulus package will work is sadly mistaken.

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

The Raw Story | Rice admits officials approved "harsh interrogation techniques"

2009-12-18T11:17:00.000-08:00

Rice admits officials okayed "harsh interrogation techniques"

McCain is the selected pig.

2009-12-18T09:40:00.000-08:00

LinkHere

1980 Warren Buffett Letter to Berkshire Hathaway shareholders

2009-12-18T07:22:00.000-08:00



Visit the Share Investor Blog

 
To the Shareholders of Berkshire Hathaway Inc.:
    Operating earnings improved to $41.9 million in 1980 from
$36.0 million in 1979, but return on beginning equity capital
(with securities valued at cost) fell to 17.8% from 18.6%. We
believe the latter yardstick to be the most appropriate measure
of single-year managerial economic performance.  Informed use of
that yardstick, however, requires an understanding of many
factors, including accounting policies, historical carrying
values of assets, financial leverage, and industry conditions.

    In your evaluation of our economic performance, we suggest
that two factors should receive your special attention - one of a
positive nature peculiar, to a large extent, to our own
operation, and one of a negative nature applicable to corporate
performance generally.  Let?s look at the bright side first.

Non-Controlled Ownership Earnings

    When one company owns part of another company, appropriate
accounting procedures pertaining to that ownership interest must
be selected from one of three major categories.  The percentage
of voting stock that is owned, in large part, determines which
category of accounting principles should be utilized.

    Generally accepted accounting principles require (subject to
exceptions, naturally, as with our former bank subsidiary) full
consolidation of sales, expenses, taxes, and earnings of business
holdings more than 50% owned.  Blue Chip Stamps, 60% owned by
Berkshire Hathaway Inc., falls into this category.  Therefore,
all Blue Chip income and expense items are included in full in
Berkshire?s Consolidated Statement of Earnings, with the 40%
ownership interest of others in Blue Chip?s net earnings
reflected in the Statement as a deduction for ?minority
interest?.

    Full inclusion of underlying earnings from another class of
holdings, companies owned 20% to 50% (usually called
?investees?), also normally occurs.  Earnings from such companies
- for example, Wesco Financial, controlled by Berkshire but only
48% owned - are included via a one-line entry in the owner?s
Statement of Earnings.  Unlike the over-50% category, all items
of revenue and expense are omitted; just the proportional share
of net income is included.  Thus, if Corporation A owns one-third
of Corporation B, one-third of B?s earnings, whether or not
distributed by B, will end up in A?s earnings.  There are some
modifications, both in this and the over-50% category, for
intercorporate taxes and purchase price adjustments, the
explanation of which we will save for a later day. (We know you
can hardly wait.)

    Finally come holdings representing less than 20% ownership
of another corporation?s voting securities.  In these cases,
accounting rules dictate that the owning companies include in
their earnings only dividends received from such holdings. 
Undistributed earnings are ignored.  Thus, should we own 10% of
Corporation X with earnings of $10 million in 1980, we would
report in our earnings (ignoring relatively minor taxes on
intercorporate dividends) either (a) $1 million if X declared the
full $10 million in dividends; (b) $500,000 if X paid out 50%, or
$5 million, in dividends; or (c) zero if X reinvested all
earnings.

    We impose this short - and over-simplified - course in
accounting upon you because Berkshire?s concentration of
resources in the insurance field produces a corresponding
concentration of its assets in companies in that third (less than
20% owned) category.  Many of these companies pay out relatively
small proportions of their earnings in dividends.  This means
that only a small proportion of their current earning power is
recorded in our own current operating earnings.  But, while our
reported operating earnings reflect only the dividends received
from such companies, our economic well-being is determined by
their earnings, not their dividends.

    Our holdings in this third category of companies have
increased dramatically in recent years as our insurance business
has prospered and as securities markets have presented
particularly attractive opportunities in the common stock area. 
The large increase in such holdings, plus the growth of earnings
experienced by those partially-owned companies, has produced an
unusual result; the part of ?our? earnings that these companies
retained last year (the part not paid to us in dividends)
exceeded the total reported annual operating earnings of
Berkshire Hathaway.  Thus, conventional accounting only allows
less than half of our earnings ?iceberg? to appear above the
surface, in plain view.  Within the corporate world such a result
is quite rare; in our case it is likely to be recurring.

    Our own analysis of earnings reality differs somewhat from
generally accepted accounting principles, particularly when those
principles must be applied in a world of high and uncertain rates
of inflation. (But it?s much easier to criticize than to improve
such accounting rules.  The inherent problems are monumental.) We
have owned 100% of businesses whose reported earnings were not
worth close to 100 cents on the dollar to us even though, in an
accounting sense, we totally controlled their disposition. (The
?control? was theoretical.  Unless we reinvested all earnings,
massive deterioration in the value of assets already in place
would occur.  But those reinvested earnings had no prospect of
earning anything close to a market return on capital.) We have
also owned small fractions of businesses with extraordinary
reinvestment possibilities whose retained earnings had an
economic value to us far in excess of 100 cents on the dollar.

    The value to Berkshire Hathaway of retained earnings is not
determined by whether we own 100%, 50%, 20% or 1% of the
businesses in which they reside.  Rather, the value of those
retained earnings is determined by the use to which they are put
and the subsequent level of earnings produced by that usage. 
This is true whether we determine the usage, or whether managers
we did not hire - but did elect to join - determine that usage.
(It?s the act that counts, not the actors.) And the value is in
no way affected by the inclusion or non-inclusion of those
retained earnings in our own reported operating earnings.  If a
tree grows in a forest partially owned by us, but we don?t record
the growth in our financial statements, we still own part of the
tree.

    Our view, we warn you, is non-conventional.  But we would
rather have earnings for which we did not get accounting credit
put to good use in a 10%-owned company by a management we did not
personally hire, than have earnings for which we did get credit
put into projects of more dubious potential by another management
- even if we are that management.

    (We can?t resist pausing here for a short commercial.  One
usage of retained earnings we often greet with special enthusiasm
when practiced by companies in which we have an investment
interest is repurchase of their own shares.  The reasoning is
simple: if a fine business is selling in the market place for far
less than intrinsic value, what more certain or more profitable
utilization of capital can there be than significant enlargement
of the interests of all owners at that bargain price?  The
competitive nature of corporate acquisition activity almost
guarantees the payment of a full - frequently more than full
price when a company buys the entire ownership of another
enterprise.  But the auction nature of security markets often
allows finely-run companies the opportunity to purchase portions
of their own businesses at a price under 50% of that needed to
acquire the same earning power through the negotiated acquisition
of another enterprise.)

Long-Term Corporate Results

    As we have noted, we evaluate single-year corporate
performance by comparing operating earnings to shareholders?
equity with securities valued at cost.  Our long-term yardstick
of performance, however, includes all capital gains or losses,
realized or unrealized.  We continue to achieve a long-term
return on equity that considerably exceeds the average of our
yearly returns.  The major factor causing this pleasant result is
a simple one: the retained earnings of those non-controlled
holdings we discussed earlier have been translated into gains in
market value.

    Of course, this translation of retained earnings into market
price appreciation is highly uneven (it goes in reverse some
years), unpredictable as to timing, and unlikely to materialize
on a precise dollar-for-dollar basis.  And a silly purchase price
for a block of stock in a corporation can negate the effects of a
decade of earnings retention by that corporation.  But when
purchase prices are sensible, some long-term market recognition
of the accumulation of retained earnings almost certainly will
occur.  Periodically you even will receive some frosting on the
cake, with market appreciation far exceeding post-purchase
retained earnings.

    In the sixteen years since present management assumed
responsibility for Berkshire, book value per share with
insurance-held equities valued at market has increased from
$19.46 to $400.80, or 20.5% compounded annually. (You?ve done
better: the value of the mineral content in the human body
compounded at 22% annually during the past decade.) It is
encouraging, moreover, to realize that our record was achieved
despite many mistakes.  The list is too painful and lengthy to
detail here.  But it clearly shows that a reasonably competitive
corporate batting average can be achieved in spite of a lot of
managerial strikeouts.

    Our insurance companies will continue to make large
investments in well-run, favorably-situated, non-controlled
companies that very often will pay out in dividends only small
proportions of their earnings.  Following this policy, we would
expect our long-term returns to continue to exceed the returns
derived annually from reported operating earnings.  Our
confidence in this belief can easily be quantified: if we were to
sell the equities that we hold and replace them with long-term
tax-free bonds, our reported operating earnings would rise
immediately by over $30 million annually.  Such a shift tempts us
not at all. 

    So much for the good news.

Results for Owners

    Unfortunately, earnings reported in corporate financial
statements are no longer the dominant variable that determines
whether there are any real earnings for you, the owner.  For only
gains in purchasing power represent real earnings on investment. 
If you (a) forego ten hamburgers to purchase an investment; (b)
receive dividends which, after tax, buy two hamburgers; and (c)
receive, upon sale of your holdings, after-tax proceeds that will
buy eight hamburgers, then (d) you have had no real income from
your investment, no matter how much it appreciated in dollars. 
You may feel richer, but you won?t eat richer.

    High rates of inflation create a tax on capital that makes
much corporate investment unwise - at least if measured by the
criterion of a positive real investment return to owners.  This
?hurdle rate? the return on equity that must be achieved by a
corporation in order to produce any real return for its
individual owners - has increased dramatically in recent years. 
The average tax-paying investor is now running up a down
escalator whose pace has accelerated to the point where his
upward progress is nil.

    For example, in a world of 12% inflation a business earning
20% on equity (which very few manage consistently to do) and
distributing it all to individuals in the 50% bracket is chewing
up their real capital, not enhancing it. (Half of the 20% will go
for income tax; the remaining 10% leaves the owners of the
business with only 98% of the purchasing power they possessed at
the start of the year - even though they have not spent a penny
of their ?earnings?).  The investors in this bracket would
actually be better off with a combination of stable prices and
corporate earnings on equity capital of only a few per cent.

    Explicit income taxes alone, unaccompanied by any implicit
inflation tax, never can turn a positive corporate return into a
negative owner return. (Even if there were 90% personal income
tax rates on both dividends and capital gains, some real income
would be left for the owner at a zero inflation rate.) But the
inflation tax is not limited by reported income.  Inflation rates
not far from those recently experienced can turn the level of
positive returns achieved by a majority of corporations into
negative returns for all owners, including those not required to
pay explicit taxes. (For example, if inflation reached 16%,
owners of the 60% plus of corporate America earning less than
this rate of return would be realizing a negative real return -
even if income taxes on dividends and capital gains were
eliminated.)

    Of course, the two forms of taxation co-exist and interact
since explicit taxes are levied on nominal, not real, income. 
Thus you pay income taxes on what would be deficits if returns to
stockholders were measured in constant dollars.

    At present inflation rates, we believe individual owners in
medium or high tax brackets (as distinguished from tax-free
entities such as pension funds, eleemosynary institutions, etc.)
should expect no real long-term return from the average American
corporation, even though these individuals reinvest the entire
after-tax proceeds from all dividends they receive.  The average
return on equity of corporations is fully offset by the
combination of the implicit tax on capital levied by inflation
and the explicit taxes levied both on dividends and gains in
value produced by retained earnings.

    As we said last year, Berkshire has no corporate solution to
the problem. (We?ll say it again next year, too.) Inflation does
not improve our return on equity.

    Indexing is the insulation that all seek against inflation. 
But the great bulk (although there are important exceptions) of
corporate capital is not even partially indexed.  Of course,
earnings and dividends per share usually will rise if significant
earnings are ?saved? by a corporation; i.e., reinvested instead
of paid as dividends.  But that would be true without inflation. 
A thrifty wage earner, likewise, could achieve regular annual
increases in his total income without ever getting a pay increase
- if he were willing to take only half of his paycheck in cash
(his wage ?dividend?) and consistently add the other half (his
?retained earnings?) to a savings account.  Neither this high-
saving wage earner nor the stockholder in a high-saving
corporation whose annual dividend rate increases while its rate
of return on equity remains flat is truly indexed.

    For capital to be truly indexed, return on equity must rise,
i.e., business earnings consistently must increase in proportion
to the increase in the price level without any need for the
business to add to capital - including working capital -
employed.  (Increased earnings produced by increased investment
don?t count.) Only a few businesses come close to exhibiting this
ability.  And Berkshire Hathaway isn?t one of them.

    We, of course, have a corporate policy of reinvesting
earnings for growth, diversity and strength, which has the
incidental effect of minimizing the current imposition of
explicit taxes on our owners.  However, on a day-by-day basis,
you will be subjected to the implicit inflation tax, and when you
wish to transfer your investment in Berkshire into another form
of investment, or into consumption, you also will face explicit
taxes.

Sources of Earnings

    The table below shows the sources of Berkshire?s reported
earnings.  Berkshire owns about 60% of Blue Chip Stamps, which in
turn owns 80% of Wesco Financial Corporation.  The table shows
aggregate earnings of the various business entities, as well as
Berkshire?s share of those earnings.  All of the significant
capital gains and losses attributable to any of the business
entities are aggregated in the realized securities gains figure
at the bottom of the table, and are not included in operating
earnings.  Our calculation of operating earnings also excludes
the gain from sale of Mutual?s branch offices.  In this respect
it differs from the presentation in our audited financial
statements that includes this item in the calculation of
?Earnings Before Realized Investment Gain?.



                                                                        Net Earnings
                                  Earnings Before Income Taxes            After Tax
                             --------------------------------------  ------------------
                                   Total          Berkshire Share     Berkshire Share
                             ------------------  ------------------  ------------------
(in thousands of dollars)       1980      1979      1980      1979      1980      1979
                             --------  --------  --------  --------  --------  --------
Total Earnings - all entities $ 85,945  $ 68,632  $ 70,146  $ 56,427  $ 53,122  $ 42,817
                             ========  ========  ========  ========  ========  ========
Earnings from Operations:
 Insurance Group:
   Underwriting ............ $  6,738  $  3,742  $  6,737  $  3,741  $  3,637  $  2,214
   Net Investment Income ...   30,939    24,224    30,927    24,216    25,607    20,106
 Berkshire-Waumbec Textiles      (508)    1,723      (508)    1,723       202       848
 Associated Retail Stores ..    2,440     2,775     2,440     2,775     1,169     1,280
 See?s Candies .............   15,031    12,785     8,958     7,598     4,212     3,448
 Buffalo Evening News ......   (2,805)   (4,617)   (1,672)   (2,744)     (816)   (1,333)
 Blue Chip Stamps - Parent      7,699     2,397     4,588     1,425     3,060     1,624
 Illinois National Bank ....    5,324     5,747     5,200     5,614     4,731     5,027
 Wesco Financial - Parent ..    2,916     2,413     1,392     1,098     1,044       937
 Mutual Savings and Loan ...    5,814    10,447     2,775     4,751     1,974     3,261
 Precision Steel ...........    2,833     3,254     1,352     1,480       656       723
 Interest on Debt ..........  (12,230)   (8,248)   (9,390)   (5,860)   (4,809)   (2,900)
 Other .....................    2,170     1,342     1,590       996     1,255       753
                             --------  --------  --------  --------  --------  --------
   Total Earnings from
      Operations ........... $ 66,361  $ 57,984  $ 54,389  $ 46,813  $ 41,922  $ 35,988
 Mutual Savings and Loan -
    sale of branches .......    5,873      --       2,803      --       1,293      --
Realized Securities Gain ....   13,711    10,648    12,954     9,614     9,907     6,829
                             --------  --------  --------  --------  --------  --------
Total Earnings - all entities $ 85,945  $ 68,632  $ 70,146  $ 56,427  $ 53,122  $ 42,817
                             ========  ========  ========  ========  ========  ========

    Blue Chip Stamps and Wesco are public companies with
reporting requirements of their own.  On pages 40 to 53 of this
report we have reproduced the narrative reports of the principal
executives of both companies, in which they describe 1980
operations.  We recommend a careful reading, and suggest that you
particularly note the superb job done by Louie Vincenti and
Charlie Munger in repositioning Mutual Savings and Loan.  A copy
of the full annual report of either company will be mailed to any
Berkshire shareholder upon request to Mr. Robert H. Bird for Blue
Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California
90040, or to Mrs. Bette Deckard for Wesco Financial Corporation,
315 East Colorado Boulevard, Pasadena, California 91109.

    As indicated earlier, undistributed earnings in companies we
do not control are now fully as important as the reported
operating earnings detailed in the preceding table.  The
distributed portion, of course, finds its way into the table
primarily through the net investment income section of Insurance
Group earnings.

    We show below Berkshire?s proportional holdings in those
non-controlled businesses for which only distributed earnings
(dividends) are included in our own earnings.

No. of Shares                                            Cost       Market
-------------                                         ----------  ----------
                                                         (000s omitted)
 434,550 (a)  Affiliated Publications, Inc. ......... $  2,821    $ 12,222
 464,317 (a)  Aluminum Company of America ...........   25,577      27,685
 475,217 (b)  Cleveland-Cliffs Iron Company .........   12,942      15,894
1,983,812 (b)  General Foods, Inc. ...................   62,507      59,889
7,200,000 (a)  GEICO Corporation .....................   47,138     105,300
2,015,000 (a)  Handy & Harman ........................   21,825      58,435
 711,180 (a)  Interpublic Group of Companies, Inc. ..    4,531      22,135
1,211,834 (a)  Kaiser Aluminum & Chemical Corp. ......   20,629      27,569
 282,500 (a)  Media General .........................    4,545       8,334
 247,039 (b)  National Detroit Corporation ..........    5,930       6,299
 881,500 (a)  National Student Marketing ............    5,128       5,895
 391,400 (a)  Ogilvy & Mather Int?l. Inc. ...........    3,709       9,981
 370,088 (b)  Pinkerton?s, Inc. .....................   12,144      16,489
 245,700 (b)  R. J. Reynolds Industries .............    8,702      11,228
1,250,525 (b)  SAFECO Corporation ....................   32,062      45,177
 151,104 (b)  The Times Mirror Company ..............    4,447       6,271
1,868,600 (a)  The Washington Post Company ...........   10,628      42,277
 667,124 (b)  E W Woolworth Company .................   13,583      16,511
                                                     ----------  ----------
                                                      $298,848    $497,591
              All Other Common Stockholdings ........   26,313      32,096
                                                     ----------  ----------
              Total Common Stocks ................... $325,161    $529,687
                                                     ==========  ==========

(a) All owned by Berkshire or its insurance subsidiaries.
(b) Blue Chip and/or Wesco own shares of these companies.  All
   numbers represent Berkshire?s net interest in the larger
   gross holdings of the group.

    From this table, you can see that our sources of underlying
earning power are distributed far differently among industries
than would superficially seem the case.  For example, our
insurance subsidiaries own approximately 3% of Kaiser Aluminum,
and 1 1/4% of Alcoa.  Our share of the 1980 earnings of those
companies amounts to about $13 million. (If translated dollar for
dollar into a combination of eventual market value gain and
dividends, this figure would have to be reduced by a significant,
but not precisely determinable, amount of tax; perhaps 25% would
be a fair assumption.) Thus, we have a much larger economic
interest in the aluminum business than in practically any of the
operating businesses we control and on which we report in more
detail.  If we maintain our holdings, our long-term performance
will be more affected by the future economics of the aluminum
industry than it will by direct operating decisions we make
concerning most companies over which we exercise managerial
control.

GEICO Corp.

    Our largest non-controlled holding is 7.2 million shares of
GEICO Corp., equal to about a 33% equity interest.  Normally, an
interest of this magnitude (over 20%) would qualify as an
?investee? holding and would require us to reflect a
proportionate share of GEICO?s earnings in our own.  However, we
purchased our GEICO stock pursuant to special orders of the
District of Columbia and New York Insurance Departments, which
required that the right to vote the stock be placed with an
independent party.  Absent the vote, our 33% interest does not
qualify for investee treatment. (Pinkerton?s is a similar
situation.)

    Of course, whether or not the undistributed earnings of
GEICO are picked up annually in our operating earnings figure has
nothing to do with their economic value to us, or to you as
owners of Berkshire.  The value of these retained earnings will
be determined by the skill with which they are put to use by
GEICO management.

    On this score, we simply couldn?t feel better.  GEICO
represents the best of all investment worlds - the coupling of a
very important and very hard to duplicate business advantage with
an extraordinary management whose skills in operations are
matched by skills in capital allocation.

    As you can see, our holdings cost us $47 million, with about
half of this amount invested in 1976 and most of the remainder
invested in 1980.  At the present dividend rate, our reported
earnings from GEICO amount to a little over $3 million annually. 
But we estimate our share of its earning power is on the order of
$20 million annually.  Thus, undistributed earnings applicable to
this holding alone may amount to 40% of total reported operating
earnings of Berkshire.

    We should emphasize that we feel as comfortable with GEICO
management retaining an estimated $17 million of earnings
applicable to our ownership as we would if that sum were in our
own hands.  In just the last two years GEICO, through repurchases
of its own stock, has reduced the share equivalents it has
outstanding from 34.2 million to 21.6 million, dramatically
enhancing the interests of shareholders in a business that simply
can?t be replicated.  The owners could not have been better
served.

    We have written in past reports about the disappointments
that usually result from purchase and operation of ?turnaround?
businesses.  Literally hundreds of turnaround possibilities in
dozens of industries have been described to us over the years
and, either as participants or as observers, we have tracked
performance against expectations.  Our conclusion is that, with
few exceptions, when a management with a reputation for
brilliance tackles a business with a reputation for poor
fundamental economics, it is the reputation of the business that
remains intact.

    GEICO may appear to be an exception, having been turned
around from the very edge of bankruptcy in 1976.  It certainly is
true that managerial brilliance was needed for its resuscitation,
and that Jack Byrne, upon arrival in that year, supplied that
ingredient in abundance.

    But it also is true that the fundamental business advantage
that GEICO had enjoyed - an advantage that previously had
produced staggering success - was still intact within the
company, although submerged in a sea of financial and operating
troubles.

    GEICO was designed to be the low-cost operation in an
enormous marketplace (auto insurance) populated largely by
companies whose marketing structures restricted adaptation.  Run
as designed, it could offer unusual value to its customers while
earning unusual returns for itself.  For decades it had been run
in just this manner.  Its troubles in the mid-70s were not
produced by any diminution or disappearance of this essential
economic advantage.

    GEICO?s problems at that time put it in a position analogous
to that of American Express in 1964 following the salad oil
scandal.  Both were one-of-a-kind companies, temporarily reeling
from the effects of a fiscal blow that did not destroy their
exceptional underlying economics.  The GEICO and American Express
situations, extraordinary business franchises with a localized
excisable cancer (needing, to be sure, a skilled surgeon), should
be distinguished from the true ?turnaround? situation in which
the managers expect - and need - to pull off a corporate
Pygmalion.

    Whatever the appellation, we are delighted with our GEICO
holding which, as noted, cost us $47 million.  To buy a similar
$20 million of earning power in a business with first-class
economic characteristics and bright prospects would cost a
minimum of $200 million (much more in some industries) if it had
to be accomplished through negotiated purchase of an entire
company.  A 100% interest of that kind gives the owner the
options of leveraging the purchase, changing managements,
directing cash flow, and selling the business.  It may also
provide some excitement around corporate headquarters (less
frequently mentioned).

    We find it perfectly satisfying that the nature of our
insurance business dictates we buy many minority portions of
already well-run businesses (at prices far below our share of the
total value of the entire business) that do not need management
change, re-direction of cash flow, or sale.  There aren?t many
Jack Byrnes in the managerial world, or GEICOs in the business
world.  What could be better than buying into a partnership with
both of them?

Insurance Industry Conditions

    The insurance industry?s underwriting picture continues to
unfold about as we anticipated, with the combined ratio (see
definition on page 37) rising from 100.6 in 1979 to an estimated
103.5 in 1980.  It is virtually certain that this trend will
continue and that industry underwriting losses will mount,
significantly and progressively, in 1981 and 1982.  To understand
why, we recommend that you read the excellent analysis of
property-casualty competitive dynamics done by Barbara Stewart of
Chubb Corp. in an October 1980 paper. (Chubb?s annual report
consistently presents the most insightful, candid and well-
written discussion of industry conditions; you should get on the
company?s mailing list.) Mrs. Stewart?s analysis may not be
cheerful, but we think it is very likely to be accurate.

    And, unfortunately, a largely unreported but particularly
pernicious problem may well prolong and intensify the coming
industry agony.  It is not only likely to keep many insurers
scrambling for business when underwriting losses hit record
levels - it is likely to cause them at such a time to redouble
their efforts.

    This problem arises from the decline in bond prices and the
insurance accounting convention that allows companies to carry
bonds at amortized cost, regardless of market value.  Many
insurers own long-term bonds that, at amortized cost, amount to
two to three times net worth.  If the level is three times, of
course, a one-third shrink from cost in bond prices - if it were
to be recognized on the books - would wipe out net worth.  And
shrink they have.  Some of the largest and best known property-
casualty companies currently find themselves with nominal, or
even negative, net worth when bond holdings are valued at market. 
Of course their bonds could rise in price, thereby partially, or
conceivably even fully, restoring the integrity of stated net
worth.  Or they could fall further. (We believe that short-term
forecasts of stock or bond prices are useless.  The forecasts may
tell you a great deal about the forecaster; they tell you nothing
about the future.)

    It might strike some as strange that an insurance company?s
survival is threatened when its stock portfolio falls
sufficiently in price to reduce net worth significantly, but that
an even greater decline in bond prices produces no reaction at
all.  The industry would respond by pointing out that, no matter
what the current price, the bonds will be paid in full at
maturity, thereby eventually eliminating any interim price
decline.  It may take twenty, thirty, or even forty years, this
argument says, but, as long as the bonds don?t have to be sold,
in the end they?ll all be worth face value.  Of course, if they
are sold even if they are replaced with similar bonds offering
better relative value - the loss must be booked immediately. 
And, just as promptly, published net worth must be adjusted
downward by the amount of the loss.

    Under such circumstances, a great many investment options
disappear, perhaps for decades.  For example, when large
underwriting losses are in prospect, it may make excellent
business logic for some insurers to shift from tax-exempt bonds
into taxable bonds.  Unwillingness to recognize major bond losses
may be the sole factor that prevents such a sensible move.

    But the full implications flowing from massive unrealized
bond losses are far more serious than just the immobilization of
investment intellect.  For the source of funds to purchase and
hold those bonds is a pool of money derived from policyholders
and claimants (with changing faces) - money which, in effect, is
temporarily on deposit with the insurer.  As long as this pool
retains its size, no bonds must be sold.  If the pool of funds
shrinks - which it will if the volume of business declines
significantly - assets must be sold to pay off the liabilities. 
And if those assets consist of bonds with big unrealized losses,
such losses will rapidly become realized, decimating net worth in
the process.

    Thus, an insurance company with a bond market value
shrinkage approaching stated net worth (of which there are now
many) and also faced with inadequate rate levels that are sure to
deteriorate further has two options.  One option for management
is to tell the underwriters to keep pricing according to the
exposure involved - ?be sure to get a dollar of premium for every
dollar of expense cost plus expectable loss cost?.

    The consequences of this directive are predictable: (a) with
most business both price sensitive and renewable annually, many
policies presently on the books will be lost to competitors in
rather short order; (b) as premium volume shrinks significantly,
there will be a lagged but corresponding decrease in liabilities
(unearned premiums and claims payable); (c) assets (bonds) must
be sold to match the decrease in liabilities; and (d) the
formerly unrecognized disappearance of net worth will become
partially recognized (depending upon the extent of such sales) in
the insurer?s published financial statements.

    Variations of this depressing sequence involve a smaller
penalty to stated net worth.  The reaction of some companies at
(c) would be to sell either stocks that are already carried at
market values or recently purchased bonds involving less severe
losses.  This ostrich-like behavior - selling the better assets
and keeping the biggest losers - while less painful in the short
term, is unlikely to be a winner in the long term.

    The second option is much simpler: just keep writing
business regardless of rate levels and whopping prospective
underwriting losses, thereby maintaining the present levels of
premiums, assets and liabilities - and then pray for a better
day, either for underwriting or for bond prices.  There is much
criticism in the trade press of ?cash flow? underwriting; i.e.,
writing business regardless of prospective underwriting losses in
order to obtain funds to invest at current high interest rates. 
This second option might properly be termed ?asset maintenance?
underwriting - the acceptance of terrible business just to keep
the assets you now have.

    Of course you know which option will be selected.  And it
also is clear that as long as many large insurers feel compelled
to choose that second option, there will be no better day for
underwriting.  For if much of the industry feels it must maintain
premium volume levels regardless of price adequacy, all insurers
will have to come close to meeting those prices.  Right behind
having financial problems yourself, the next worst plight is to
have a large group of competitors with financial problems that
they can defer by a ?sell-at-any-price? policy.

    We mentioned earlier that companies that were unwilling -
for any of a number of reasons, including public reaction,
institutional pride, or protection of stated net worth - to sell
bonds at price levels forcing recognition of major losses might
find themselves frozen in investment posture for a decade or
longer.  But, as noted, that?s only half of the problem. 
Companies that have made extensive commitments to long-term bonds
may have lost, for a considerable period of time, not only many
of their investment options, but many of their underwriting
options as well.

    Our own position in this respect is satisfactory.  We
believe our net worth, valuing bonds of all insurers at amortized
cost, is the strongest relative to premium volume among all large
property-casualty stockholder-owned groups.  When bonds are
valued at market, our relative strength becomes far more
dramatic. (But lest we get too puffed up, we remind ourselves
that our asset and liability maturities still are far more
mismatched than we would wish and that we, too, lost important
sums in bonds because your Chairman was talking when he should
have been acting.)

    Our abundant capital and investment flexibility will enable
us to do whatever we think makes the most sense during the
prospective extended period of inadequate pricing.  But troubles
for the industry mean troubles for us.  Our financial strength
doesn?t remove us from the hostile pricing environment now
enveloping the entire property-casualty insurance industry.  It
just gives us more staying power and more options.

Insurance Operations

    The National Indemnity managers, led by Phil Liesche with
the usual able assistance of Roland Miller and Bill Lyons, outdid
themselves in 1980.  While volume was flat, underwriting margins
relative to the industry were at an all-time high.  We expect
decreased volume from this operation in 1981.  But its managers
will hear no complaints from corporate headquarters, nor will
employment or salaries suffer.  We enormously admire the National
Indemnity underwriting discipline - embedded from origin by the
founder, Jack Ringwalt - and know that this discipline, if
suspended, probably could not be fully regained.

    John Seward at Home and Auto continues to make good progress
in replacing a diminishing number of auto policies with volume
from less competitive lines, primarily small-premium general
liability.  Operations are being slowly expanded, both
geographically and by product line, as warranted by underwriting
results.

    The reinsurance business continues to reflect the excesses
and problems of the primary writers.  Worse yet, it has the
potential for magnifying such excesses.  Reinsurance is
characterized by extreme ease of entry, large premium payments in
advance, and much-delayed loss reports and loss payments. 
Initially, the morning mail brings lots of cash and few claims. 
This state of affairs can produce a blissful, almost euphoric,
feeling akin to that experienced by an innocent upon receipt of
his first credit card.

    The magnetic lure of such cash-generating characteristics,
currently enhanced by the presence of high interest rates, is
transforming the reinsurance market into ?amateur night?. 
Without a super catastrophe, industry underwriting will be poor
in the next few years.  If we experience such a catastrophe,
there could be a bloodbath with some companies not able to live
up to contractual commitments.  George Young continues to do a
first-class job for us in this business.  Results, with
investment income included, have been reasonably profitable.  We
will retain an active reinsurance presence but, for the
foreseeable future, we expect no premium growth from this
activity.

    We continue to have serious problems in the Homestate
operation.  Floyd Taylor in Kansas has done an outstanding job
but our underwriting record elsewhere is considerably below
average.  Our poorest performer has been Insurance Company of
Iowa, at which large losses have been sustained annually since
its founding in 1973.  Late in the fall we abandoned underwriting
in that state, and have merged the company into Cornhusker
Casualty.  There is potential in the homestate concept, but much
work needs to be done in order to realize it.

    Our Workers Compensation operation suffered a severe loss
when Frank DeNardo died last year at 37. Frank instinctively
thought like an underwriter.  He was a superb technician and a
fierce competitor; in short order he had straightened out major
problems at the California Workers Compensation Division of
National Indemnity.  Dan Grossman, who originally brought Frank
to us, stepped in immediately after Frank?s death to continue
that operation, which now utilizes Redwood Fire and Casualty,
another Berkshire subsidiary, as the insuring vehicle.

    Our major Workers Compensation operation, Cypress Insurance
Company, run by Milt Thornton, continues its outstanding record. 
Year after year Milt, like Phil Liesche, runs an underwriting
operation that far outpaces his competition.  In the industry he
is admired and copied, but not matched.

    Overall, we look for a significant decline in insurance
volume in 1981 along with a poorer underwriting result.  We
expect underwriting experience somewhat superior to that of the
industry but, of course, so does most of the industry.  There
will be some disappointments.

Textile and Retail Operations

    During the past year we have cut back the scope of our
textile business.  Operations at Waumbec Mills have been
terminated, reluctantly but necessarily.  Some equipment was
transferred to New Bedford but most has been sold, or will be,
along with real estate.  Your Chairman made a costly mistake in
not facing the realities of this situation sooner.

    At New Bedford we have reduced the number of looms operated
by about one-third, abandoning some high-volume lines in which
product differentiation was insignificant.  Even assuming
everything went right - which it seldom did - these lines could
not generate adequate returns related to investment.  And, over a
full industry cycle, losses were the most likely result.

    Our remaining textile operation, still sizable, has been
divided into a manufacturing and a sales division, each free to
do business independent of the other.  Thus, distribution
strengths and mill capabilities will not be wedded to each other. 
We have more than doubled capacity in our most profitable textile
segment through a recent purchase of used 130-inch Saurer looms. 
Current conditions indicate another tough year in textiles, but
with substantially less capital employed in the operation.

    Ben Rosner?s record at Associated Retail Stores continues to
amaze us.  In a poor retailing year, Associated?s earnings
continued excellent - and those earnings all were translated into
cash.  On March 7, 1981 Associated will celebrate its 50th
birthday.  Ben has run the business (along with Leo Simon, his
partner from 1931 to 1966) in each of those fifty years.

Disposition of Illinois National Bank and Trust of Rockford

    On December 31, 1980 we completed the exchange of 41,086
shares of Rockford Bancorp Inc. (which owns 97.7% of Illinois
National Bank) for a like number of shares of Berkshire Hathaway
Inc.

    Our method of exchange allowed all Berkshire shareholders to
maintain their proportional interest in the Bank (except for me;
I was permitted 80% of my proportional share).  They were thus
guaranteed an ownership position identical to that they would
have attained had we followed a more conventional spinoff
approach.  Twenty-four shareholders (of our approximate 1300)
chose this proportional exchange option.

    We also allowed overexchanges, and thirty-nine additional
shareholders accepted this option, thereby increasing their
ownership in the Bank and decreasing their proportional ownership
in Berkshire.  All got the full amount of Bancorp stock they
requested, since the total shares desired by these thirty-nine
holders was just slightly less than the number left available by
the remaining 1200-plus holders of Berkshire who elected not to
part with any Berkshire shares at all.  As the exchanger of last
resort, I took the small balance (3% of Bancorp?s stock).  These
shares, added to shares I received from my basic exchange
allotment (80% of normal), gave me a slightly reduced
proportional interest in the Bank and a slightly enlarged
proportional interest in Berkshire.

    Management of the Bank is pleased with the outcome.  Bancorp
will operate as an inexpensive and uncomplicated holding company
owned by 65 shareholders.  And all of those shareholders will
have become Bancorp owners through a conscious affirmative
decision.

Financing

    In August we sold $60 million of 12 3/4% notes due August 1,
2005, with a sinking fund to begin in 1991.

    The managing underwriters, Donaldson, Lufkin & Jenrette
Securities Corporation, represented by Bill Fisher, and Chiles,
Heider & Company, Inc., represented by Charlie Heider, did an
absolutely first-class job from start to finish of the financing.

    Unlike most businesses, Berkshire did not finance because of
any specific immediate needs.  Rather, we borrowed because we
think that, over a period far shorter than the life of the loan,
we will have many opportunities to put the money to good use. 
The most attractive opportunities may present themselves at a
time when credit is extremely expensive - or even unavailable. 
At such a time we want to have plenty of financial firepower.

    Our acquisition preferences run toward businesses that
generate cash, not those that consume it.  As inflation
intensifies, more and more companies find that they must spend
all funds they generate internally just to maintain their
existing physical volume of business.  There is a certain mirage-
like quality to such operations.  However attractive the earnings
numbers, we remain leery of businesses that never seem able to
convert such pretty numbers into no-strings-attached cash.

    Businesses meeting our standards are not easy to find. (Each
year we read of hundreds of corporate acquisitions; only a
handful would have been of interest to us.) And logical expansion
of our present operations is not easy to implement.  But we?ll
continue to utilize both avenues in our attempts to further
Berkshire?s growth.

    Under all circumstances we plan to operate with plenty of
liquidity, with debt that is moderate in size and properly
structured, and with an abundance of capital strength.  Our
return on equity is penalized somewhat by this conservative
approach, but it is the only one with which we feel comfortable.


              *  *  *  *  *  *  *  *  *  *  *  *               


    Gene Abegg, founder of our long-owned bank in Rockford, died
on July 2, 1980 at the age of 82.  As a friend, banker and
citizen, he was unsurpassed.

    You learn a great deal about a person when you purchase a
business from him and he then stays on to run it as an employee
rather than as an owner.  Before the purchase the seller knows
the business intimately, whereas you start from scratch.  The
seller has dozens of opportunities to mislead the buyer - through
omissions, ambiguities, and misdirection.  After the check has
changed hands, subtle (and not so subtle) changes of attitude can
occur and implicit understandings can evaporate.  As in the
courtship-marriage sequence, disappointments are not infrequent.

    From the time we first met, Gene shot straight 100% of the
time - the only behavior pattern he had within him.  At the
outset of negotiations, he laid all negative factors face up on
the table; on the other hand, for years after the transaction was
completed he would tell me periodically of some previously
undiscussed items of value that had come with our purchase.

    Though he was already 71 years of age when he sold us the
Bank, Gene subsequently worked harder for us than he had for
himself.  He never delayed reporting a problem for a minute, but
problems were few with Gene.  What else would you expect from a
man who, at the time of the bank holiday in 1933, had enough cash
on the premises to pay all depositors in full?  Gene never forgot
he was handling other people?s money.  Though this fiduciary
attitude was always dominant, his superb managerial skills
enabled the Bank to regularly achieve the top position nationally
in profitability.

    Gene was in charge of the Illinois National for close to
fifty years - almost one-quarter of the lifetime of our country. 
George Mead, a wealthy industrialist, brought him in from Chicago
to open a new bank after a number of other banks in Rockford had
failed.  Mr. Mead put up the money and Gene ran the show.  His
talent for leadership soon put its stamp on virtually every major
civic activity in Rockford.

    Dozens of Rockford citizens have told me over the years of
help Gene extended to them.  In some cases this help was
financial; in all cases it involved much wisdom, empathy and
friendship.  He always offered the same to me.  Because of our
respective ages and positions I was sometimes the junior partner,
sometimes the senior.  Whichever the relationship, it always was
a special one, and I miss it.


                                         Warren E. Buffett
February 27, 1981                         Chairman of the Board



  The Essays of Warren Buffett :
         Lessons for Corporate America by Warren E. Buffett

   Buy new: 
   $25.00
   / Used from: 
   $23.94


    Usually ships in 24 hours

Sen Graham To Sotomayor: Do You Have A Temperament Problem?

2009-12-18T05:27:00.000-08:00

"When you look at the evaluation of the judges on the second circuit you stand out like a sore thumb in terms of your temperament," said the South Carolina Republican, who went on to call Sotomayor a "bully."

As Ian Millhiser, a Legal Research Analyst with the liberal-leaning Center for American Progress Action Fund, points out, Graham didn"t publicly object to two other judges with reputations for being a bit brash: Chief Justice John Roberts and Justice Antonin Scalia. LinkHere

ADP Report Shows Contraction in Services and Small Business Jobs

2009-12-18T04:19:00.000-08:00

We will take a look at the US government jobs report in a separate post. First lets take a look at the ADP National Employment Report for October.

This month�s employment loss was driven by the goods-producing sector which declined 126,000 during October, its twenty-third consecutive monthly decline. The manufacturing sector marked its twenty-sixth consecutive monthly decline, losing 85,000 jobs. These losses were compounded by an employment decline in the service-providing sector of the economy which fell by 31,000, the first loss in the service-providing sector recorded by the ADP Report since November of 2002.

Large businesses, defined as those with 500 or more workers, saw employment decline 41,000, while medium-size companies with between 50 and 499 workers declined 91,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 25,000.

This is the first outright decline in small business employment reported by the ADP Report since November of 2002, and the largest percentage decline since the economy was emerging from recession in early 2002.

In October, construction employment dropped 45,000. This was its twenty-third consecutive monthly decline, and brings the total decline in construction jobs since the peak in August of 2006 to 455,000.

click on chart for sharper image

I circled in red the two key items in that chart. Small business and the service sector jobs are both contracting for the first time since 2002 . It"s an ominous sign but one everyone should have known was coming.

Here is another interesting chart from the report.

Chart 5. Monthly Changes of Employment in Construction

click on chart for sharper image.

Remarkably, the BLS has added construction jobs to its Birth/Death Model for 8 consecutive months (February through September). We will see if the absurdity continues for for a ninth later today.

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

Phone And Fax Numbers For All US Senators; More On What To Do

2009-12-18T03:41:00.000-08:00

Here is a list of phone, fax, and email address for all US senators: United States Senate 110th Congress Phone, Fax, Email Addresses

Here is a second List Of Senate Contacts. I am told this list is more current. It was used to formulate the fax contact table below.

Here is the Complete List of Email Addresses and Fax Numbers for US Congress and Governors.

Here is a comma separated list for those of you with access to to a program that allows block faxing. You may need to modify that list slightly for your application. The bulk of the work is done.

Formatted Fax List

12022243416,Sen. Richard Shelby
12022243149,Sen. Jeff Sessions
12022242354,Sen. Ted Stevens
12022245301,Sen. Lisa Murkowski
12022242207,Sen. Jon Kyl
12022282862,Sen. John McCain
12022281371,Sen. Blanch Lincoln
12022280908,Sen. Mark Pryor
12022282382,Sen. Barbara Boxer
12022283954,Sen. Dianne Feinstein
12022246471,Sen. Wayne Allard
12022285036,Sen. Ken Salazar
12022241083,Sen. Christopher Dodd
12022249750,Sen. Joeseph Lieberman
12022240139,Sen. Joseph Biden
12022282190,Sen. Thomas Carper
12022282183,Sen. Bill Nelson
12022285171,Sen. Mel Martinez
12022240103,Sen. Saxby Chambliss
12022280724,Sen. Johnny Isakson
12022242126,Sen. Daniel Akaka
12022246747,Sen. Daniel Inouye
12022281067,Sen. Larry Craig
12022281375,Sen. Michael Crapo
12022280400,Sen. Dick Durbin
12022285417,Sen. Barack Obama
12022281377,Sen. Evan Bayh
12022280360,Sen. Richard Lugar
12022246020,Sen. Charles Grassley
12022249369,Sen. Tom Harkin
12022281265,Sen. Sam Brownback
12022243514,Sen. Pat Roberts
12022281373,Sen. Jim Bunning
12022242499,Sen. Mitch McConnell
12022249735,Sen. Mary Landrieu
12022285061,Sen. David Vitter
12022242693,Sen. Susan Collins
12022241946,Sen. Olympia Snowe
12022248858,Sen. Barbara Mikulski
12022241651,Sen. Ben Cardin
12022242417,Sen. Edward Kennedy
12022248525,Sen. John Kerry
12022280325,Sen. Debbie Stabenow
12022241388,Sen. Carl Levin
12022241152,Sen. Norm Coleman
12022282186,Sen. Amy Klobuchar
12022249450,Sen. Thad Cochran
12022242262,Sen. Roger Wicker
12022248149,Sen. Christopher Bond
12022286326,Sen. Claire McCaskill
12022244700,Sen. Max Baucus
12022248594,Sen. John Tester
12022245213,Sen. Chuck Hagel
12022280012,Sen. Ben Nelson
12022282193,Sen. John Ensign
12022247327,Sen. Harry Reid
12022244952,Sen. Judd Gregg
12022284131,Sen. John Sununu
12022282197,Sen. Robert Menendez
12022284054,Sen. Frank Lautenberg
12022242852,Sen. Jeff Bingaman
12022283261,Sen. Pete Domenici
12022280282,Sen. Hillary Clinton
12022283027,Sen. Charles Schumer
12022241100,Sen. Elizabeth Dole
12022282981,Sen. Richard Burr
12022247776,Sen. Kent Conrad
12022241193,Sen. Byron Dorgan
12022280514,Sen. Maria Cantwell
12022255893,Sen. Patty Murray

Metro Fax

I have an existing email fax number but I opened up a second account just now for purpose of faxing every senator in the US. If a senator is missing from the list it because they did not have a listed fax number. I did not count them up.

I chose to go with MetroFax. There are others services, but 1000 pages a month for $12.95 was the best overall deal I could find. There is a $10 activation fee, but the second month is also free. If you elect to do the same, mention my name and I will get a free month.

First Name,Last Name,Company,Voice Number,Fax Number

Congress,B. Evan Bayh (S),Congress,2022281377,2022281377
Congress,Barack Obama (S),Congress,2022285417,2022285417
Congress,Barbara Boxer (S),Congress,2022240454,2022240454
Congress,Barbara Mikulski (S),Congress,2022248858,2022248858
Congress,Ben Nelson (S),Congress,2022280012,2022280012
Congress,Bill Nelson (S),Congress,2022282183,2022282183
Congress,Blanche Lincoln (S),Congress,2022281371,2022281371
Congress,Byron Dorgan (S),Congress,2022241193,2022241193
Congress,Carl Levin (S),Congress,2022241388,2022241388
Congress,Charles Grassley (S),Congress,2022246020,2022246020
Congress,Charles Schumer (S),Congress,2022283027,2022283027
Congress,Christopher Dodd (S),Congress,2022241083,2022241083
Congress,Chuck Hagel (S),Congress,2022245213,2022245213
Congress,Daniel Inouye (S),Congress,2022246747,2022246747
Congress,Daniel Akaka (S),Congress,2022242126,2022242126
Congress,Debbie Stabenow (S), Congress,2022280325,2022280325
Congress,Dianne Feinstein (S),Congress,2022283954,2022283954
Congress,Edward Kennedy (S),Congress,2022242417,2022242417
Congress,Elizabeth Dole (S),Congress,2022241100,2022241100
Congress,Frank Lautenberg (S),Congress,2022284054,2022284054
Congress,GeorgeVoinovich (S),Congress,6144697733,6144697733
Congress,Gordon H. Smith (S),Congress,2022283997,2022283997
Congress,Harry Reid (S),Congress,2022247327,2022247327
Congress,Herbert Kohl (S),Congress,2022249787,2022249787
Congress,Hillary Clinton (S),Congress,2022280282,2022280282
Congress,James Inhofe (S),Congress,2022280380,2022280380
Congress,Jeff Bingaman (S),Congress,2022242852,2022242852
Congress,Jeff Sessions (S),Congress,2022243149,2022243149
Congress,Jim Bunning (S),Congress,2022281373,2022281373
Congress,Jim Demint(S),Congress,2022285143,2022285143
Congress,John Cornyn (S),Congress,2022282856,2022282856
Congress,John E. Sununu (S),Congress,2022284131,2022284131
Congress,John Ensign (S),Congress,2022282193,2022282193
Congress,John F. Reed (S),Congress,2022244680,2022244680
Congress,John Forbes Kerry (S),Congress,2022248525,2022248525
Congress,John McCain (S),Congress,2022282862,2022282862
Congress,John R. Thune(S),Congress,2022285429,2022285429
Congress,John Warner (S),Congress,2022246295,2022246295
Congress,Johnny Isakson (S),Congress,2022280724,2022280724
Congress,Jon Kyl (S),Congress,2022242207,2022242207
Congress,Joseph Biden (S),Congress,2022240139,2022240139
Congress,Joseph Lieberman (S),Congress,2022249750,2022249750
Congress,Judd Gregg (S),Congress,2022244952,2022244952
Congress,Kay Hutchison (S),Congress,2022240776,2022240776
Congress,Ken Salazar (S),Congress,2022285036,2022285036
Congress,Kent Conrad (S),Congress,2022247776,2022247776
Congress,Lamar Alexander(S),Congress,2022283398,2022283398
Congress,Larry E. Craig (S),Congress,2022281067,2022281067
Congress,Lisa Murkowski (S),Congress,2022245301,2022245301
Congress,Maria Cantwell (S),Congress,2022280514,2022280514

Congress,Mark Pryor (S),Congress,2022280908,2022280908
Congress,Mary Landrieu (S),Congress,2022249735,2022249735
Congress,Mel Martinez (S),Congress,2022885171,2022885171
Congress,Michael D. Crapo (S),Congress,2022281375,2022281375
Congress,Michael Enzi (S),Congress,2022280359,2022280359
Congress,Mitch McConnell(S),Congress,2022242499,2022242499
Congress,Norm Coleman (S),Congress,2022241152,2022241152
Congress,Olympia Snowe (S),Congress,2022241946,2022241946
Congress,Orrin Hatch (S),Congress,2022246331,2022246331
Congress,Pat Roberts (S),Congress,2022243514,2022243514
Congress,Patrick Leahy (S),Congress,2022243479,2022243479
Congress,Patty Murray (S),Congress,2022240238,2022240238
Congress,Pete Domenici (S),Congress,2022280900,2022280900
Congress,Richard Durbin (S),Congress,2022280400,2022280400
Congress,Richard Lugar (S),Congress,2022280360,2022280360
Congress,Richard Shelby (S),Congress,2022243416,2022243416
Congress,Robert Bennett (S),Congress,2022241168,2022241168
Congress,Robert Byrd (S),Congress,2022280002,2022280002
Congress,Ron Wyden (S),Congress,2022282717,2022282717
Congress,Russ Feingold (S),Congress,2022242725,2022242725
Congress,Sam Brownback (S),Congress,2022281265,2022281265
Congress,Saxby Chambliss (S),Congress,2022240103,2022240103
Congress,Susan M. Collins (S),Congress,2022242693,2022242693
Congress,Ted Stevens (S),Congress,2022242354,2022242354
Congress,Thomas R. Carper (S),Congress,2022282190,2022282190
Congress,Tim P. Johnson(S),Congress,2022285765,2022285765
Congress,Tom Harkin (S),Congress,2022249369,2022249369
Congress,Wayne Allard (S),Congress,2022246471,2022246471
Congress,Debbie Stabenow (S), Congress,2022280325,2022280325
Congress,Dianne Feinstein (S),Congress,2022283954,2022283954
Congress,Edward Kennedy (S),Congress,2022242417,2022242417
Congress,Elizabeth Dole (S),Congress,2022241100,2022241100
Congress,Frank Lautenberg (S),Congress,2022284054,2022284054
Congress,GeorgeVoinovich (S),Congress,6144697733,6144697733
Congress,Gordon H. Smith (S),Congress,2022283997,2022283997
Congress,Harry Reid (S),Congress,2022247327,2022247327
Congress,Herbert Kohl (S),Congress,2022249787,2022249787
Congress,Hillary Clinton (S),Congress,2022280282,2022280282
Congress,James Inhofe (S),Congress,2022280380,2022280380
Congress,Jeff Bingaman (S),Congress,2022242852,2022242852
Congress,Jeff Sessions (S),Congress,2022243149,2022243149
Congress,Jim Bunning (S),Congress,2022281373,2022281373
Congress,Jim Demint(S),Congress,2022285143,2022285143
Congress,John Cornyn (S),Congress,2022282856,2022282856
Congress,John E. Sununu (S),Congress,2022284131,2022284131
Congress,John Ensign (S),Congress,2022282193,2022282193
Congress,John F. Reed (S),Congress,2022244680,2022244680
Congress,John Forbes Kerry (S),Congress,2022248525,2022248525
Congress,John McCain (S),Congress,2022282862,2022282862
Congress,John R. Thune(S),Congress,2022285429,2022285429
Congress,John Warner (S),Congress,2022246295,2022246295
Congress,Johnny Isakson (S),Congress,2022280724,2022280724
Congress,Jon Kyl (S),Congress,2022242207,2022242207
Congress,Joseph Biden (S),Congress,2022240139,2022240139
Congress,Joseph Lieberman (S),Congress,2022249750,2022249750
Congress,Judd Gregg (S),Congress,2022244952,2022244952
Congress,Kay Hutchison (S),Congress,2022240776,2022240776
Congress,Ken Salazar (S),Congress,2022285036,2022285036
Congress,Kent Conrad (S),Congress,2022247776,2022247776
Congress,Lamar Alexander(S),Congress,2022283398,2022283398
Congress,Larry E. Craig (S),Congress,2022281067,2022281067
Congress,Lisa Murkowski (S),Congress,2022245301,2022245301
Congress,Maria Cantwell (S),Congress,2022280514,2022280514
Congress,Mark Pryor (S),Congress,2022280908,2022280908
Congress,Mary Landrieu (S),Congress,2022249735,2022249735
Congress,Mel Martinez (S),Congress,2022885171,2022885171
Congress,Michael D. Crapo (S),Congress,2022281375,2022281375
Congress,Michael Enzi (S),Congress,2022280359,2022280359
Congress,Mitch McConnell(S),Congress,2022242499,2022242499
Congress,Norm Coleman (S),Congress,2022241152,2022241152
Congress,Olympia Snowe (S),Congress,2022241946,2022241946
Congress,Orrin Hatch (S),Congress,2022246331,2022246331
Congress,Pat Roberts (S),Congress,2022243514,2022243514
Congress,Patrick Leahy (S),Congress,2022243479,2022243479
Congress,Patty Murray (S),Congress,2022240238,2022240238
Congress,Pete Domenici (S),Congress,2022280900,2022280900
Congress,Richard Durbin (S),Congress,2022280400,2022280400
Congress,Richard Lugar (S),Congress,2022280360,2022280360
Congress,Richard Shelby (S),Congress,2022243416,2022243416
Congress,Robert Bennett (S),Congress,2022241168,2022241168
Congress,Robert Byrd (S),Congress,2022280002,2022280002
Congress,Ron Wyden (S),Congress,2022282717,2022282717
Congress,Russ Feingold (S),Congress,2022242725,2022242725
Congress,Sam Brownback (S),Congress,2022281265,2022281265
Congress,Saxby Chambliss (S),Congress,2022240103,2022240103
Congress,Susan M. Collins (S),Congress,2022242693,2022242693
Congress,Ted Stevens (S),Congress,2022242354,2022242354
Congress,Thomas R. Carper (S),Congress,2022282190,2022282190
Congress,Tim P. Johnson(S),Congress,2022285765,2022285765
Congress,Tom Harkin (S),Congress,2022249369,2022249369
Congress,Wayne Allard (S),Congress,2022246471,2022246471

To use the above list in MetroFax it must be copied and saved as a CSV file. (The extension must be CSV). One can use either notepad or Excel to create the CSV files. The maximum list in any one file is 50. So create Senators1.CSV and Senators2.CSV or whatever names you prefer.

What I Am Doing

I am emailing the plan I outlined in Open Letter To Congress On The $700 Billion Paulson Bailout Plan to every senator.

Please phone, fax, or email your Senators asking that Congress consider my alternative plan or the Hussman plan.

Anything is better than the plan Paulson put together.

Please phone and FAX your Senators.
Ask 10 people to do the same.
Send them this link

http://globaleconomicanalysis.blogspot.com/2008/09/phone-and-fax-numbers-for-all-us.html

Thanks

Adendum:

Please Act On This Now! It Is Easy

In at least one email please send your senators a brief message to consider the Mish Alternative (or whatever alternative you prefer).

Here is an easy way for those with outlook.

Please Click The Following Link To Email Them All Now: Email All Senators.

This is what I ask you to send. Please copy the following as the body of the email.

Dear Senator

Instead of rushing into a $700 billion Paulson bailout proposal, please consider the following alternatives:

Mish"s Open Letter To Congress On The $700 Billion Paulson Bailout Plan
http://globaleconomicanalysis.blogspot.com/2008/09/open-letter-to-congress-on-700-billion.html

Hussman"s Open Letter to the U.S. Congress Regarding the Current Financial Crisis
http://www.hussmanfunds.com/wmc/wmc080922.htm

Your Name
Your Address
Your Phone Number
Your Email Address

I updated Phone And Fax Numbers For All US Senators; More On What To Do with a MetroFax formatted list. Please blast away by fax as well.

Please forward this to 10 people you think agree and have them do the same.

Note: I am NOT asking you to spam your senators, I only ask you to do this if you agree with it.

Here is the raw list

senator@shelby.senate.gov;senator@sessions.senate.gov;senator@biden.senate.gov; senator@akaka.senate.gov;senator_lugar@lugar.senate.gov; olympia@snowe.senate.gov;senator@kennedy.senate.gov; senator@stabenow.senate.gov;senator@levin.senate.gov; senator@klobuchar.senate.gov;kit_bond@bond.senate.gov; mccaskilltransition@mccaskill.senate.gov;senator@bennelson.senate.gov; senator@ensign.senate.gov;mailbox@sununu.senate.gov; senator_bingaman@bingaman.senate.gov;senator@dorgan.senate.gov; arlen_specter@specter.senate.gov;tim@johnson.senate.gov;senator@hutchison.senate.gov; senator_leahy@leahy.senate.gov;senator@warner.senate.gov; senator_murray@murray.senate.gov;senator_byrd@byrd.senate.gov; senator@rockefeller.senate.gov;senator_kohl@kohl.senate.gov;

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

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

I hope he will be regretting it, even more today.

2009-12-18T01:49:00.000-08:00

WASHINGTON � The House Republican leader says he regrets that he and other members of his party spent time and money supporting the GOP nominee in a special House election in upstate New York.

The candidate picked by GOP officials in New York"s 23rd Congressional District, Dierdre Scozzafava, abruptly dropped out of the race Saturday. She then backed the Democratic candidate, Bill Owens, over Conservative Party candidate Doug Hoffman.

Support for Hoffman from prominent Republican conservatives helped to drive Scozzafava out of the race.

On Monday, House Republican leader John Boehner told reporters that he regretted supporting Scozzafava, saying she is clearly out there for herself and has an agenda different from that of most Republicans.
LinkHere

White House Set To Unleash Post-Rush Message Blitz

2009-12-18T00:19:00.000-08:00

Beginning Sunday, the White House will harness every part of the Democratic Party�s machinery to defend President Obama�s budget and portray Republicans as reflexively political, according to party strategists.
A participant in the planning meetings described the push as a successor to Democrats� message that Rush Limbaugh is the Republican Party leader. �We have exhausted the use of Rush as an attention-getter,� the official said.
David Plouffe, manager of Obama�s presidential race, helped design the strategy, which includes the most extensive activation since November of the campaign�s grassroots network. The database�which includes information for at least 10 million donors, supporters and volunteers�will now be used as a unique tool for governing, with former canvassers now being enlisted to mobilize support for the president�s legislative agenda.
Others involved in the planning included White House senior adviser David Axelrod; the DNC chairman, Virginia Gov. Tim Kaine; and DNC Executive Director Jennifer O"Malley Dillon.
The plan follows the private complaints of some Democrats that Obama let the GOP get the better of him during the debate over pork in the budget bill he just signed, and growing concerns among some Democrats that charges of big spending could stick to the president.

REPUBLICAN BUDGET PLAN - "CRICKETS"

LinkHere

Housing Weekly Potpourri

2009-12-17T22:19:00.000-08:00

Following are some stories from the last 7-9 days that I had been watching but never had time to write about or comment on. It seems to be an interesting medley of news.

Things are getting really desperate when proposals like these start flying.

San Mateo County Calls For Foreclosure Stoppage

San Mateo County supervisors Tuesday unanimously approved a non-binding resolution calling for subprime mortgage lenders to agree to suspend foreclosures in the county for three months.

Now exactly what is that supposed to do?

For starters it is not binding which means it is going to be ignored, so it"s just a waste of breath. But even if it was done, three months from now the houses would be worth less than they are now and the clowns calling for this will just be asking for another 3 month. A thinking person ought to realize the more foreclosures sooner rather than later, the better off everyone will be. Problems delayed are not problems solved and this economy is only going to get worse.

Condo Fee Defaults Surge in Manhattan

Much has been said about Manhattan"s perceived real estate invincibility in the aftermath of the subprime meltdown, but lawyers representing dozens of condominium boards in some of the city"s wealthiest neighborhoods say they are seeing these default cases increase as much as 25% this year.

"There has been a very substantial increase of cases involving condominiums," a lawyer who is the president of the Council of New York Cooperatives and Condominiums, Marc Luxemburg, said.

Shareholder Sues Citigroup Execs Over Subprime Mortgages Losses

Less than a month ago, Citigroup reported more than $1 billion is subprime-related losses. Last weekend, the bank admitted the losses could grow to more than $12 billion.

One shareholder has had enough.

Jeffrey Harris filed a lawsuit Wednesday, naming several Citigroup officials as defendants. The execs being sued include Sir Win Bischoff (acting chief executive) and Robert Rubin (the bank"s chairman). Charles Prince, who resigned as chief executive on Sunday, was also named as a defendant.

"Citigroup, under defendants" direction, recklessly spent billions of dollars purchasing subprime loans to be warehoused for future collateralized debt obligations," the lawsuit said. "These actions were reckless due to the impending subprime mortgage crisis and increasing delinquency rates among subprime borrowers."

Harris also alleges the defendants possessed "material nonpublic information" about Citigroup"s exposure, which prompted them to sell $36 million worth of their own shares in the company.

Citi"s Other Lawsuit

The suit mentioned above follows a separate lawsuit filed earlier this week in New York on behalf of a retirement plan participant. Alleging that the company"s stock was an "imprudent investment" for the plan, the suit names Citigroup and the administrators of its retirement program as defendants.

"Citigroup"s employees have their retirement plans in turmoil as Citigroup continued to acquire huge amounts of company stock for the plans even as it gambled with high-risk business practices," said Marian Rosner, who represents the plaintiff, in a statement.

To date, the plan has suffered over $1.3 billion in market losses.

HSBC Ends Sales of Mortgage-Backed Securities in U.S.

HSBC Holdings Plc, the biggest U.K. bank, said it stopped sales and trading of mortgage-backed securities in the U.S. after the collapse of the subprime market forced it to close down two lending units.

"They want to minimize the risk of earnings disappointment," said Samir Shah, a London-based analyst at Landsbanki Securities who has a "reduce" rating on the stock. "It is not meaningful in terms of profit contribution but it is in terms of brand damage."

Citigroup Credit Swaps Near Five-Year High on Subprime Concerns

Credit-default swaps on bonds of Citigroup Inc., Wachovia Corp. and Morgan Stanley are trading at the highest in at least five years on speculation the nation"s biggest banks may be forced to write down more subprime assets.

Analysts began revising predictions for writedowns at the banks after Citigroup this week said losses from the assets may rise to $11 billion. Credit-default swaps tied to Citigroup more than tripled in the past three weeks, indicating the risk of default is rising. Contracts on Morgan Stanley and Wachovia Corp. and Merrill Lynch & Co. are at or near six-year highs.

House committee passes mortgage reform bill

Members of the House Financial Services Committee voted to approve a bill imposing sweeping changes on the mortgage industry, including minimum standards for approving loans and some new liabilities on those who securitize risky mortgages. Committee members OK"d the bill by a vote of 45 to 19. The bill would mandate licensing for mortgage brokers and bank loan officers and set a minimum standard for all mortgages stating that borrowers must have a reasonable ability to repay.

This is obviously going to slow sales of houses further. With all the lawsuits now and especially the situation between Washington Mutual, Fannie Mae, and Cuomo (See Tanta On WaMu vs. Cuomo) lenders are going to be even more cautious.

Double Squeeze for Homes

Struggling homeowners seeking mortgage relief from their lenders say they are hearing a tough message: We can"t help you unless you first fall behind on payments.

That is putting borrowers in a bind, given that defaulting on a mortgage triggers all kinds of headaches.

Elizabeth Schomburg, senior vice president of the Family Credit Counseling Service in Chicago, says about 10% to 20% of some 1,000 families who sought help from the nonprofit agency last month were current on their mortgages and thus considered by lenders as "ineligible" for loan modification.

Consider Sharon Cooper of Lynn, Mass., who wants to sell her home. The problem: She now owes more than the house is worth, so she asked her lender to allow a "short sale" -- selling it for less than the amount due, and forgiving the rest -- to avoid foreclosure.

She says the lender, Countrywide Financial Corp., in August told her she would first need to fall two months behind on payments. So last month, she stopped paying. "I don"t have any option but to stop paying," she says.

I am not sure if that is sad of funny. But Countrywide is practically begging borrowers to stop payments.

Lennar Suspends Sales at Two Major Projects

Facing a market flooded with unsold homes and discount-hunting buyers, Lennar has decided to temporarily stop taking orders at one of its largest and highest-profile projects in southern California - Central Park West in Irvine. The Miami-based builder has also postponed construction of two high-rise projects in Anaheim, known as A-Town Metro and A-Town Stadium.

Emile Haddad, Lennar"s chief investment officer, who oversees both projects, also tells BUILDER that his company made its decision because the market in Orange County still has too much unsold inventory of new and existing homes, a condition that"s all but mandating significant price reductions to sell anything. "We don"t want to discount here," he says about Central Park West, whose home prices range from $500,000 to $2.9 million. The builder has refunded earnest money to buyers who had already purchased homes there.

Anyone got their money back on this should thank their lucky stars. And every month Lennar delays, the greater the holding costs of that land. Lennar is gambling that prices are going to come back. They won"t. But it"s better to be sitting on raw land than be sitting on dozens of houses that will never make it through closing. Lennar simply has no good options here. This is yet another version of an Economic Zugzwang.

AIG quarterly net falls 27% as subprime crisis bites

American International Group reported a 27% drop in third-quarter net income late Wednesday as the subprime mortgage crisis pushed the insurance giant"s results below Wall Street expectations.

AIG"s mortgage guaranty business reported an operating loss in the quarter amid continued deterioration in the U.S. housing market.

The company"s derivatives unit, AIG Financial Products, also reported an operating loss in the quarter due mainly to unrealized market valuation losses in its credit default swap portfolio. U.S. accounting rules require AIG to recognize such short-term changes in the value of these derivatives, but the insurer said it"s "highly unlikely" that it will have to pay out on the contracts.

Given we don"t know the exact nature of those swaps AIG is holding, it"s hard to say, but we will probably know a lot more next quarter. Expect another rough one.

Conservator takes over Cal State 9 credit union

The weight of defaults on real estate loans has forced the Bay Area-based Cal State 9 Credit Union into federal conservatorship.

The takeover signals yet another misfortune in the unfolding mortgage crisis in which homeowners are defaulting on their loans and losing their properties. The bulk of Cal State 9"s loans are for real estate transactions.

The state"s action "is related to the credit union"s defaults on mortgages," California Department of Financial Institutions spokeswoman Alana Golden said today.

This is the second banking failure in a week. Expect to see more of these.

Mogul"s advice to Realtors: Don"t keep your day job

Even Realtors can lose faith in the housing market.

Speaking to a gathering of industry professionals Friday, longtime California real estate titan Fred C. Sands called the housing market "pathetic" and said some agents needed to start looking for other work.

"If you"ve been in it for five or six years and are barely making a living, you might want to think about what you were doing before and get back into it -- you can come back in a couple of years," Sands told members of the California Assn. of Realtors meeting in Universal City.

In the short term, the local real estate market "is not going to get better," Sands said.

He added that he could speak with candor because he was no longer in the home-selling business.

It"s pretty sad when you cannot speak with candor. Especially when that job is selling something can make or break a person financially.

There are now 540,000 licensed real estate agents and brokers in California, up 50% from 2003, according to the state Department of Real Estate. But more than half of those agents haven"t been involved in a transaction in the last 12 months, a Realtors association board member said.

"We saw 25-year-old guys buying $3-million houses," he said of the questionable mortgage practices of recent years. "Someone who makes $100,000 a year can"t afford a $2-million house, but that"s what"s been going on," Sands said.

"The idea that everyone is supposed to own a home is baloney," he added.

Sands counseled agents that property prices must be cut drastically to "get in front of the crisis." Otherwise, agents will "follow it down like a dope" and get even less for the properties, if they can sell them at all, he said.

That"s good advice but what was he saying before he left residential for commercial?

U.S. builder Levitt files for bankruptcy protection

Levitt & Sons (LEV), the U.S. residential builder that created a template for the modern American suburb, said on Friday that it had filed for bankruptcy protection.

The company said the voluntary filing, made under Chapter 11 in U.S. Bankruptcy Court in the Southern District of Florida, was made "in response to unprecedented conditions in the homebuilding industry, which have severely impacted the company."

Levitt, which built "Levittown," a subdivision in Long Island, New York that is widely regarded as the first master-planned community, said the downturn was especially pronounced in Florida and the Southeastern United States -- the markets in which it now operates.

Many more homebuilder bankruptcies are coming. For a list of likely candidates as to who is next please see Homebuilder Credit Default Swaps November Update.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Five Most Recent Posts

California, Please Send A Message!

2009-12-17T22:08:00.000-08:00

California citizens have a chance to tell the spendthrifts to go to hell. All it takes is an appropriate NO vote on 5 of 6 California 2009 ballot propositions.

California Ballot Propositions

Seven statewide ballot propositions will be on a special May 19, 2009 election ballot in California.

click on chart for sharper image

Although the six ballot propositions (1A through 1F) are intended to close an approximately $42 billion budget gap, the California Legislative Analyst"s Office, an agency of the state government, said in early March that tax revenues flowing into the state treasury are "well below" the projections it used earlier in the year, and that California"s government now faces an additional $8 billion gap in addition to the earlier $42 billion gap.

Sentiment Is Changing

In Late February sentiment was in favor of passing these propositions now sentiment is against all but 1E which is pretty innocuous but deserves to go down, and 1F which deserves to pass.

click on chart for sharper image

Propositions Face Tough Road

The Public Policy Institute of California (PPIC) reports Special Election Ballot Propositions Face Tough Road.

California, March 25, 2009�California�s likely voters are divided on five of six propositions related to the state�s budget crisis that will appear on the May special election ballot, according to a survey released today by the Public Policy Institute of California (PPIC) with funding from The James Irvine Foundation. Levels of support for Propositions 1A through 1E vary widely, but none has the approval of a majority of likely voters. However, in a signal of the mood of the electorate this year, an overwhelming 81 percent favor Proposition 1F, which would limit salary increases for state elected officials when the state faces a budget deficit.

Eight weeks before the special election�called as part of the 2009�2010 budget agreement between the governor and legislature�those Californians most likely to go to the polls are feeling grim about the state of their state: The vast majority (77%) say it is headed in the wrong direction and see its fiscal situation as a big problem (85%). They give record low ratings to the legislature (11%) and to their own legislators (29%). Their approval rating for Governor Arnold Schwarzenegger (33%) has dropped to a new low among likely voters. For the first time, a majority of Republican likely voters (54%) disapprove of the job performance of the Republican governor.

Shell Games

The idea that one can borrow money from lottery proceedings to balance the budget is of course preposterous. And anyone voting for $16 billion in higher taxes either has holes in their head or is a direct recipient of the money.

In Move is up to California voters the LA Times reported "An average family of four with an annual income of $75,000 would pay about $963 more a year in taxes, according to a legislative analysis."

Bear in mind $16 billion is not even enough as California"s budget has deteriorated by $8 billion since the legislature worked out the compromise. To close the ever-growing gap solely with tax hikes, Californians ought to be prepared to pay $1800 more a year in taxes.

Moreover, the "rainy day" spending curbs in Proposition 1A can only be enacted if the tax hikes are extended from two to four years."

Propaganda Blasting

California voters should be prepared for a blast of propaganda from teachers unions, police unions, etc, all promising Armageddon if the measures do not pass. Indeed that has already started according to an email I recently received from "NJ" who writes:

"Today was the first day of advertising for the special, statewide May 19 ballot in California for the 2009-2010 fiscal year California state budget and tax increase agreement. The radio is blasting pro-Tax advertisements at us. My girlfriend, a teacher, had her email inbox full from endorsements by the California Teachers Association and coworkers."

Send A Message

It"s time to cut spending, not raise taxes. California, please send a message to the legislature for other states to follow. Tell the spendthrifts to go to hell. It"s easy to do. Just vote No on 1A through 1E and Yes on 1F. And I still want to see "Proposition Mish" to lower the pay of all government employees starting with the California legislature.

Enough Is Enough: Let The Tax Revolts Begin

Nationwide, we need to elect representatives who will cut spending, not raise taxes or play shell games to hide deficits.

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

Justice, What Justice?

2009-12-17T19:17:00.000-08:00

Spanish AG: No Torture Probe Of Bush Admin Officials

I Wonder Why?

MADRID � Spain"s attorney general has rejected opening an investigation into whether six Bush administration officials sanctioned torture against terror suspects at Guantanamo Bay, saying Thursday a U.S. courtroom would be the proper forum.
Candido Conde-Pumpido"s remarks severely dampen the chance of a case moving forward against the Americans, including former U.S. Attorney General Alberto Gonzales. Conde-Pumpido said such a trial would have turned Spain"s National Court "into a plaything" to be used for political ends.
"If there is a reason to file a complaint against these people, it should be done before local courts with jurisdiction, in other words in the United States," he said in a breakfast meeting with journalists.
Spanish law gives its courts jurisdiction beyond national borders in cases of torture, war crimes and other heinous offenses, based on a doctrine known as universal justice, but the government has made clear it wants to rein in the process. LinkHere

BLOOMBERG: GE�s AAA Ratings Stay Dry When They�re All Wet

2009-12-17T17:28:00.000-08:00

Dec. 11 (Bloomberg) -- The credit-rating companies say they�re cleaning up their act. That will be a tough sell as long as they keep saying General Electric Co. is AAA.

Almost two months ago, the heads of Moody�s Investors Service and Standard & Poor�s prostrated themselves before a congressional oversight committee and acknowledged that their companies had blown their reputations by giving top marks to countless mortgage-backed securities that were toxic.

The chief executive of Moody�s Corp., Raymond McDaniel, said �we know that there has been a loss of confidence in our industry,� and he pledged to do better. S&P�s president, Deven Sharma, said his company was �identifying and implementing steps to improve our processes and restore the market�s confidence in S&P�s rating opinions.�

One step would be to cut GE�s top-notch rating. Neither S&P nor Moody�s has. What I half-expected them to say during the last few weeks goes something like this excerpt from a Dec. 2 report by Egan-Jones Ratings Co., a competitor.

�With the tsunami sweeping over the financial sector, it is unrealistic to expect that GE will not get wet,� Egan-Jones said. �GE does not look, sound or act like a �AAA� and therefore is probably not a true �AAA.��

Egan-Jones isn�t predicting doom. Its rating on GE is A-, six levels below AAA. That�s hardly an insult, except to a company such as GE, which long has depended on its pristine rating to keep its borrowing costs low.

Unlike Moody�s and S&P, Egan-Jones gets paid by subscribers, rather than the companies it rates. It would be just a minor exaggeration to say the only people who still insist GE is AAA are all employed by S&P, Moody�s or GE itself.

Cash Drain

GE�s key industries -- financial services and capital equipment -- are under siege. The company needs to refinance more than $40 billion of debt by the end of 2009.

By GE�s estimates, all but about $2.6 billion of the $16 billion of excess cash it expects to generate next year will go toward paying dividends. As of Sept. 30, before its latest stock sales, GE had just $13.7 billion of tangible shareholder equity, excluding $98.7 billion of goodwill and other intangible assets.

At $189 billion, the company�s stock-market value is down about half this year, crimping GE�s ability to raise more capital cheaply. GE raised $12.2 billion selling common shares in October at $22.25 each. Its stock now trades for 19 percent less.

GE is paying a monstrous 10 percent annual dividend on $3 billion of preferred stock that Warren Buffett�s Berkshire Hathaway Inc. bought in October. And GE has resorted to government guarantees to issue new debt.

Cause for Wonder

In case none of that casts doubt, GE this quarter began including a new 323-word risk-factor disclosure in its securities filings, saying there can be no assurance efforts to strengthen its capital and liquidity will be enough to keep its AAA rating.

It�s no wonder then that recent prices for credit-default swaps on GE Capital Corp., the finance arm that relies on GE�s support for its own AAA rating, implied a 32 percent chance of default in the next five years, according to Bloomberg data. Even if that�s overly pessimistic, it shows investors buying protection in this market believe the risk of default is more than slight.

GE has made a big show of affirming its commitment to maintaining its AAA ratings. The company says it has always paid a large portion of its cash flow as dividends. It avoided many of the exotic financial instruments that have crippled large banks. As for relying on federal guarantees, it says it was just seeking to level the playing field with other financial companies.

�We are a triple-A company, but when the government recognizes a new class of financial-services companies with a guarantee program, that would put us at a disadvantage,� Russell Wilkerson, a GE spokesman, said.

Against the Weak

Mighty GE can�t compete against those weaklings without government help? And here I thought AAA-rated companies didn�t need federal assistance.

The raters at Moody�s and S&P say they�re looking beyond the unfolding credit crisis and believe the company will generate strong profits and cash flow over the long term. If conditions change for the worse, they say, so might GE�s ratings.

While a 10 percent dividend isn�t typical for a AAA credit, Moody�s analyst Richard Lane told me it�s a �short-term isolated incident in our view that was driven by the unique environment that we�re in temporarily.� As for the slim margin between projected cash flow and dividends for 2009, he says �our expectations are that the prospects for 2010 and beyond will be better than what they�re showing here.�

S&P analyst Robert Schulz in an e-mail said GE�s recent actions to raise cash, stop buying back stock, and keep its dividend unchanged are �indicative of a conservative financial policy and consistent with our rating expectations.�

What�s clear is that GE�s AAA ratings don�t reflect the company�s current financial position, as much as they do the hopes of a few analysts that the future will be brighter.

Just once it would be nice to see them ahead of the pack.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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Margin Calls Force Selling of Assets, Falling Prices

2009-12-17T15:42:00.000-08:00

Margin calls are picking up steam. Many are not being answered. The Telegraph is reporting Ex-Goldman stars liquidate Peloton funds.

The credit crunch has forced Peloton Partners, a $3bn (�1.5bn) hedge fund run by former Goldman Sachs star traders, to liquidate its two investment funds, leaving its founders millions of pounds out of pocket. Ron Beller and Geoff Grant decided to sell off the assets of Peloton ABS (asset-backed securities) and the Peloton Multi-Strategy Fund about 10 days ago when it became apparent that they could no longer meet margin calls from investment banks.

Peloton"s ABS fund was one of last year"s best performers, netting returns of 87pc after betting against the riskiest types of sub-prime debt, but it began to face difficulties after the market for even highly-rated asset-backed securities froze last year. The Multi-Strategy Fund had a 40pc stake in the ABS fund and could not continue to trade once it was closed.

Excessive Leverage Results In Fire Sales

What went wrong at Peleton was not asset quality, but rather excessive leverage in an illiquid market.

It was not that the fund was invested in weird or wonderful sub-prime, collateralised, etc; its problem was that it appears to have been leveraged to buy reasonable quality but now illiquid asset-backed securities.

With the credit crunch draining away cash, the company was unable to finance the exposure and was forced to find buyers at any price. With no buyers, it was forced into what appears to have been a fire sale.
The list of funds not permitting withdrawals is getting bigger and as it rises so the rate of redemption closedown may increase as those still with a departure route see heavy withdrawals at a time when they are unable to sell the assets (at a reasonable price), which have been bought on the back of the margins placed by their backers.
A bit of an Armageddon scenario I"m depicting and we are, of course, nowhere near this situation yet�but�.the vulture funds are circling.

Implosion Fears At Hedge Funds

Implosion fears are rising as Focus Capital slashes positions.

Focus Capital, an award-winning US-based hedge fund, has liquidated some of its biggest positions, raising fears of another implosion in the high-rolling sector.

The fund, which is run out of New York and Geneva, has caused turmoil as it dumped large positions in a raft of Swiss small cap stocks in recent days.

Unanswered Margin Calls at Bank of Montreal

After taking a series of significant writedowns over last couple of weeks, the Bank of Montreal is facing still another $500 million in writedowns after failing to meet margin calls on two of its trusts.

These moves guarantee more BMO writeoffs are coming and they threaten a proposed bailout of $33 billion in frozen Asset Backed Commercial Paper.

I wrote about this story at length over the weekend. Please see Bank of Montreal Misses Margin Calls for more details.

Thornburg Mortgage Hit With Margin Calls

More writeoffs at Thornburg are on the horizon. Thornburg"s $300 million margin-call is proof enough.

Thursday"s disclosure from Thornburg Mortgage (TMA) that it was forced to pay $300 million in new margin calls is the first warning bell of what might be another spiral of write downs -- and thus more dilution to come -- in the financial sector.

The Thornburg situation is significant for several reasons. During the "go-go" days of the subprime boom, Thornburg represented the gold standard of conservative underwriting standards for the whole sector. It kept only the highest-quality assets on the balance sheet, and thus when the whole subprime sector caught a fever last summer, TMA was widely believed to be a "thriving oasis" in the subprime desert.

But when the commercial paper market effectively shut down back in August, Thornburg"s share prices tumbled from the high $20s into the teens in a matter of days. Because of their heavy reliance on short-term financing in a form of commercial paper, Thornburg was forced to sell some of their best assets at a huge discount to meet margin calls, which triggered more write downs and thus more margin calls. Unfortunately, as the most recent announcement from TMA and UBS confirms, it looks like we might be in for another round of the same troubles.

Fingers Point In Wrong Direction

Hedge fund managers who herded into illiquid one way bets pushing risk premiums to all time lows, need to look into a mirror to see where the problem is. Instead, Hedge Funds Blame Wall Street Instead Of Themselves.

Hedge funds blaming Wall Street is a lot like banks blaming people for "walking away" instead of themselves for making $500,000 loans based on stated incomes everyone knew were lies. Now that risk is blowing sky high at banks and hedge funds, few are willing to look into the mirror to see their role in the mess.

Cash Is King

For years people have been telling me that there is no difference between money and credit. This action proves otherwise.

When things are liquid, money and credit "look" the same. It"s all an illusion. For starters, credit can (and is) is being withdrawn, even against hard assets. See Countrywide And Chase Shut Off The Cash Spigot for details on home equity lines of credit.

And unlike credit on bank balance sheets, cash in the bank may be "worth less" tomorrow but it is extremely unlikely to be "worthless" tomorrow.

As banks and brokerages are scrambling for more cash, hedge funds and others are getting migraines trying to produce that cash. By now it should be plain to see: Liquidity is a coward. It runs away at the first sign of trouble. Cash however, is hoarded in times of trouble. Cash, not credit, is king. It"s important to understand the difference.

Finally, Gold is the ultimate form of cash. It represents a true flight to quality. Gold is the only money that is not someone"s liability. It"s no wonder that gold has been soaring. However, to the extent that hedge funds may be over leveraged in gold (or commodities in general), a sharp pullback could easily be coming. One possible trigger might be an across the board margin hike on all commodity futures.

Excessive leverage everywhere needs to be unwound, and it will be. Those expecting more margin call migraines will not be disappointed.

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

Tavakoli: "We Should Impose a 95% Excess Profits Tax�Or Windfall Profits Tax�On Certain Financial Institutions... Enriching Themselves" at Our Expense

2009-12-17T13:29:00.000-08:00

The following is an advanced copy of an essay by Janet Tavakoli to be released tomorrow. Reprinted with permission of Tavakoli Structured Finance.

Warren Buffett�s Wall Street War

By Janet Tavakoli

October 20, 2009

In a January 2009 interview with NBC�s Tom Brokaw, Warren Buffett criticized leveraging �to the sky,� and creating �phony instruments [RMBSs, CDOs, et al.] that fool other people so you stick money in your pocket.� In 2002, he claimed over-the-counter derivatives are �financial weapons of mass destruction�¹and participants who account for them have �enormous incentives to cheat.� ²

Warren Buffett, the blogosphere�s �Oracle of Omaha,� often chastises the financial community. If you cost him money, he�s liable to write an expose. He posts annual shareholder letters on a low-tech website and seems to labor under the assumption that rational people eagerly read his blog. Congress and regulators are dismissive of Buffett�s hyperbolic rhetoric; it is fit only for a banana republic.

In 2003, Buffett wrote of the manufactured housing industry�s �business model centered on the ability�to unload terrible loans on na�ve lenders�The consequence has been huge numbers of repossessions and pitifully low recoverie[s].� ³ Buffett alleged that the manufactured housing industry�s consumer financing practices were �atrocious,�⁴ and securitizations provided the money to fuel the financing.

Berkshire Hathaway�s investment in the distressed junk debt of Oakwood Homes lost money after the designer and manufacturer of modular homes went bankrupt in 2002. Buffett claimed �Oakwood participated fully in the insanity.� ⁵

Warren Buffett�s diatribe suggested that most of the manufactured housing industry was involved along with several Wall Street firms that underwrote the securitizations. Using money from new investors to pay returns to old investors in unsupportable investments is called a Ponzi scheme.

Oakwood�s loans to purchasers of manufactured homes were made possible by a line of credit from Credit Suisse First Boston (Credit Suisse). The credit line was similar to a credit card except that Oakwood had to put up the home loans as collateral. Credit Suisse earned fees for the loans and further fees when it packaged (securitized) Oakwood�s loans. Credit Suisse (the old investor) bought the securitized loans and then sold them to new so-called sophisticated investors.

Sales of manufactured homes declined. Loan delinquencies (late payments) and repossessions rose. Oakwood Homes had crushing debt and falling income for at least three years before it filed for bankruptcy in November 2002. But securitizations had temporarily inflated the bubble for the collapsing enterprise. A June 2008 court opinion said Oakwood�s aggressive lending practices led to the high number of repossessions and a debt load that Oakwood could not support. Oakwood�s liquidator said the transactions it did with Credit Suisse were �value destroying.�⁶

Someone should have muzzled Warren Buffett back in 2003. The Slumbering Esquires� Club might have believed Buffett�s preposterous theory that after private securitizations became popular, the �industry�s conduct went from bad to worse.�⁷ Buffett�s wacky warnings could have jeopardized Wall Street�s subsequent mortgage lending securitization Ponzi scheme.

The SEC might have investigated Lehman Brothers� questionable shenanigans, especially after it was held liable in 2003 by a California jury for allegedly helping FAMCO cheat borrowers. The SEC might have looked into the unsavory practices at Goldman Sachs Alternative Mortgage Products, Bear Stearns, Merrill Lynch or the entire private securitization industry, and their mortgage lending subsidiaries.

While the SEC slept inside a collapsing debt bubble, the Omahaconspiracy theorist spooked Goldman Sachs into believing it needed his money. In the fall of 2008, Buffett closed a deal for $5 billion in Goldman Sachs�s preferred stock paying a 10% annual dividend. Goldman even gave Buffett warrants to buy $5 billion in common stock at a price of $115 anytime before October 1, 2013. [The Fed let Goldman buy back its warrants for chump change.⁹] Buffett�s warrants are now about $3 billion in-the-money and worth much more�a sweetener for his crispy calamari.

Hank Paulson, Ben Bernanke, and Tim Geithner¹⁰ ignored the historic ravings of the most successful living investor, and fueled some of the bombers piloted by Wall Street before finance�s Pearl Harbor. After they used taxpayer money to save the system and enriched the culpable with no strings attached, Buffett said �it could have turned out a lot differently,� and called each of them a four-letter word. The label was undeserved.

Four-letter words aside, Warren Buffett raised a good point. It could have�and should have�turned out a lot differently. But it�s not too late. Buffett called the crisis an economic Pearl Harbor and said that �Wall Street owes the American people one at this point.�⁸ During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax�or windfall profits tax�on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees.

Adapted from Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street (Wiley 2009) by Janet Tavakoli

Disclosure: Janet Tavakoli is an investor in Berkshire Hathaway Inc.

1 Berkshire Hathaway Inc. 2002 Annual Report, 15.

2 Ibid., 13.

3 Berkshire Hathaway Inc. 2003 Annual Report, 5.

4 Ibid.

5 Ibid.

6 OHC Liquidation Trust, et.al v. Credit Suisse First Boston et al., U.S. Bankruptcy Court, Delaware. Civil Action No. 07-799 JJF (Chapter 11 Case No. 02-13396) Memorandum Opinion June 9, 2008. (Partial Summary Judgment)

7 Ibid. [1]

8 Warren Buffett on ABC�s Good Morning America, July 9, 2009.

9 The Treasury got a paltry 23% return on its $10 billion investment in preferred shares and warrants in Goldman Sachs. The Fed accepted only $1.1 billion for warrants that had more than nine years to run during a quarter when Goldman Sachs was awash in cash and profits and would report record earnings made possible only by taxpayer intervention. The Fed gave up the right to buy 12.2 million shares of Goldman for $122.9 per share. [As of Oct 16, the warrants were in-the-money by around $750 million and would have been worth much more with just over nine years to the original October 26, 2018 expiration date.] This does not include ongoing near zero-cost funding, relaxation of accounting terms, temporary protected status as a bank holding company (guarding against a run on Goldman) before switching its status to a protected financial holding company on August 14, 2009 [The Treasury may designate it a Tier 1 Financial Holding Company], and issuance of $25.15 billion (as of June 2009) unsecured FDIC guaranteed debt [GS is allowed $35 billion outstanding prior to Oct. 31, 2009. Goldman�s first issuance was for $5 billion of 3.35% maturing in 2012 on November 25, 2008; at the time its stand-alone debt traded at 8.25% for a comparable maturity].

10 In the fall of 2008, Henry (�Hank�) Paulson was Treasury Secretary (Paulson was formerly CEO of Goldman Sachs), Ben Bernanke was (and currently is) the Chairman of the Federal Reserve, and current Treasury Secretary Timothy Geithner was the Chairman of the New York Fed. [Geithner was succeeded by Stephen Friedman as Chairman of the NY Fed. Friedman was a former Goldman Sachs co-chairman and owned shares of Goldman Sachs and was a member of Goldman�s board while he held his influential Fed position, a conflict of interest and a violation of Fed policy. Friedman resigned the Fed position in May 2009.]

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Euna Lee, Laura Ling Leave North Korea With Bill Clinton

2009-12-17T12:28:00.000-08:00

SEOUL, South Korea (AP) - His mission accomplished, former President Bill Clinton left Pyongyang early Wednesday accompanied by American journalists Euna Lee and Laura Ling after North Korean leader Kim Jong Il pardoned the women from their 12-year prison sentences.
Clinton and the two Californians were heading back to the U.S., his spokesman Matt McKenna said, less than 24 hours after the former U.S. leader landed in the North Korean capital on a private, humanitarian trip to secure their release. LinkHere

ISRAELI DIAMOND: Tiffany shuts down luxury Jeweller

2009-12-17T09:59:00.000-08:00

High-end jeweler Tiffany & Co (TIF.N) has stated that it plans to close its underperforming Iridesse pearl jewelry stores. The 16-store chain will be closed upon reaching agreement with landlords and sale of the inventory.

Head of investor relations at Tiffany, Mark Aaron, stated: "Iridesse has been recording an operating loss since it started a few years ago. That, combined with a difficult retail environment, led us to make this decision. In a better environment, the concept might have been viable."

The jewelry sector has sustained a serious blow due to reduced discretionary spending. In the past year, several fine jewelry chains have filed for bankruptcy and held liquidation sales.

Last month, Tiffany announced that Warren Buffett"s company, Berkshire Hathaway Inc, bought $250 million of debt from the luxury jewelry retailer.

Related Links

Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
Daily Forex Updates - Daily Forex data, commentary & tools to help make trading Forex easy
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Shareinvestorforum.com - Discuss this topic further

Recommended Amazon Reading

Of Permanent Value: The Story of Warren Buffett, Abridged Edition by Andrew Kilpatrick
Buy used from: $37.23

Kindle 2: Amazon"s New Wireless Reading Device (Latest Generation)

Website Allows Job Seekers To Bid On Low Pay

2009-12-17T07:45:00.000-08:00

Finding a job now is difficult. Competition is fierce. How low a pay will you accept? In Boston, college grads have create a new website where Job Seekers Bid On Low Pay.

In a sign of just how tough it is to find work in the struggling economy, a group of Boston college grads has created a Web site that allows job seekers to try for positions based on who will work for the lowest salary.

The three local college graduates have launched a site called www.jobaphiles.com where people can bid on jobs posted by employers.

The site was created with the vision to create a "student labor yellow pages,� said Thai Nguyen, CEO of Jobaphiles.com.

Similar to eBay�s bidding system, Jobaphiles.com visitors can bid on job positions by stating how much they are willing to be paid. They can also post why they are qualified and create a profile that includes a photo.

Employers can then select the most qualified and affordable bidder to hire for the job.

Signing up for Jobaphiles.com is free for both employers and students looking for jobs. Nguyen said the site has more than 1,300 job postings that range from HTML programming to baby-sitting.

Currently, the majority of job postings are for part-time positions in the Boston area. �We saw a shift in jobs, towards a higher demand for part-time work from small-scale businesses because of the economy,� said Nguyen.

Jobaphiles Beantown Beta

Inquiring minds are investigating Jobaphiles.Com.

How Jobaphiles Works

Jobaphiles is a free job-auction website. You can post a job and local college students and recent grads will then bid for it by indicating how much they"re willing to work for and why they should be hired.

1. Browse Job
2. Read the Details
3. Check the Ratings
4. Place a Bid
5. You will be contacted
6. Get Paid
7. Rate the Employer (Optional)
8. Get Re-Hired (Optional)

This is starting out as a part time thing for college students and college grads in Boston. I believe it has far bigger application. If so, someone like Craig"s List will soon be on this business model nationally. Either way, the downward pressure on wages salaries continues.

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

Schwarzenegger wants $500 billion to rebuild California

2009-12-17T07:22:00.000-08:00

Reuters is reporting California needs billions in bonds.

"I was at a meeting this morning where someone said, "Look, we need $150 billion just for infrastructure and transportation." It"s true," Schwarzenegger told Reuters in an interview in a state office in San Francisco.

"We need $500 billion to rebuild California the way it ought to be," he added. "But this is of course too big for people to digest, so you don"t talk about that."

Speaking about the total of $42.7 billion in general obligation bonds authorized by voters last year for public works spending, Schwarzenegger said: "This was only the foot in the door, to whet the appetite."

In the short term, Schwarzenegger acknowledged California could face lower tax revenues than projected in his January budget plan, but said he opposed new taxes.

"We have done tremendously with the revenue increases, but we do not want to do a tax increase."

He said he does not expect California to issue less debt if the economy slows. "I don"t think we have to do that," he said.

This is so staggering that all I can do is repeat the sound bytes.

Sound Bytes

$42.7 billion in general obligation bonds issued last year is "only the foot in the door, to whet the appetite."
It will take $500 billion to "rebuild California the way it ought to be".
$500 billion is "too big for people to digest, so you don"t talk about that" even though he is talking about it.
California needs $500 billion even though it has "done tremendously with the revenue increases".
California will not issue less debt even if the economy slows.
California "could face lower tax revenues" but he opposes tax hikes.

The US Census Bureau QuickFacts estimates the 2005 California population at 36,132,147 as the following table shows.

Let"s do the math. $500,000,000,000 / 36,132,147 is $13,838 dollars for every man woman and child in the state. That might not sound so bad but I do not think many 5 year olds have that much cash lying around. Let"s try the numbers again with the working age population (18-64). The working age population is 22,546,460 (calculated manually). That translates to a staggering $22,176 liability for every working age person. Married couples would need to pony up a mere $44,352 per couple to do it "the way it ought to be done", and remember those are after tax dollars.

But there are some other figures to look at, such as 13.8% of the California population is below the poverty level, and the median household income clocks in at $48,440. (QuickFacts shows those numbers are as of 2003).

This looks like fiscal insanity no matter how many years he wants to stretch this out over. The kicker is that Schwarzenegger thinks this can be paid for without increasing taxes, in the face of falling revenues, even if the economy heads into a recession. Mark my words California, your taxes are going to skyrocket if anything remotely close to this proposal passes.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Even BLS Admits Birth-Death Model Skews Unemployment Numbers During Recessions

2009-12-17T03:11:00.000-08:00

Barry Ritholtz and other writers have hammered the Bureau of Labor Statistics" (BLS) faulty birth-death model for years.

But as Ritholtz notes today, that ignorance about the inaccuracy of the birth-death model during recessions might finally might be lifting:

It is finally being recognized in the mainstream as the massive data distorter that it is. The latest BLS analysis and data revision shows that during 2008, the Birth Death adjustment caused NFP payrolls to be significantly under reported.
NYT�s Floyd Norris:

�It now appears that during the first half of 2008, when the recession was getting under way, job losses averaged 146,000 per month. That is nearly three times the average of 49,000 jobs shown in the initial estimates.

How did the government get it so wrong?

The official job numbers are based on a monthly survey of employers, augmented by something called the �birth-death model,� which factors in jobs assumed to have been created by employers who are too new to have been included in the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the latest survey.� (emphasis added)

Triple the job losses than reported, and right at a crucial part of the economic cycle! Is it any wonder policy response from central bankers and pols was so off? At the most crucial time, they failed to see the oncoming headlights, because they were lost in a fog of data so massaged as to have it completely and totally misrepresent reality.

About time this nonsense was recognized for the bullshit it is. We need to have BLS needs to toss out the 2003 modification to the B/D. We should get back to actually counting, rather than imagining, jobs.

Indeed, even BLS itself is now admitting the birth-death model has problems. As Bloomberg notes:

From April 2008 through December, the tax records showed the Labor Department�s figures overestimated payrolls by about 150,000, said Chris Manning, the national benchmark branch chief at the Bureau of Labor Statistics. That implies the estimates missed the mark by about 675,000 in the first quarter of this year...
�In this period of steep job losses, the birth/death model didn�t work as well as it usually does,� Manning said in an interview. �To the extent that there was an overstatement in the birth/death model, that is likely to still be there.�

The model added about 184,000 jobs to the payroll total last quarter compared with a 135,000 increase in the same period in 2008, before the financial crisis deepened with the collapse of Lehman Brothers Inc.

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The AP fact-checked the claim:

2009-12-17T02:45:00.000-08:00

Obama"s Planetarium Projector Earmark Explained

John McCain accused Barack Obama of a seemingly outlandish request for Chicago"s planetarium during the second presidential debate Tuesday, saying that the Democratic candidate backed a "$3 million [earmark] for an overhead projector at a planetarium in Chicago, Ill. My friends, do we need to spend that kind of money?"
The AP fact-checked the claim:
McCain"s phrase suggests Obama spent $3 million on an old-fashioned piece of office equipment that projects charts and text on a wall screen. In fact, the money was for an overhaul of the theater system that projects images of stars and planets for educational shows at Chicago"s Adler Planetarium. When he announced the $3 million earmark last year, Obama said the planetarium"s 40-year-old projection system "has begun to fail, leaving the theater dark and groups of school students and other interested museum-goers without this very valuable and exciting learning experience."
But McCain"s remark was enough to make Adler Planetarium officials issue a statement defending the scientific validity of the request:
To clarify, the Adler Planetarium requested federal support - which was not funded - to replace the projector in its historic Sky Theater, the first planetarium theater in the Western Hemisphere. The Adler"s Zeiss Mark VI projector - not an overhead projector - is the instrument that re-creates the night sky in a dome theater, the quintessential planetarium experience. The Adler"s projector is nearly 40 years old and is no longer supported with parts or service by the manufacturer. It is only the second planetarium projector in the Adler"s 78 years of operation.
Science literacy is an urgent issue in the United States. To remain competitive and ensure national security, it is vital that we educate and inspire the next generation of explorers to pursue careers in science, technology, engineering and math. Senator McCain"s statements about the Adler Planetarium"s request for federal support do not accurately reflect the museum"s legislative history or relationship with Senator Obama.
Sen. Dick Durbin and six Chicago-area Congressman, three of whom are Republicans, also agreed to sponsor the unsuccessful $3 million earmark.
Planetariums in New York and Los Angeles recently replaced their Zeiss projection systems with federal funding, the Tribune reports.

It is All Obama"s Fault: The Republican Twilight Zone

2009-12-17T00:39:00.000-08:00

Bequeathing to the American people the worst economic crisis in generations upon leaving office, President Bush continued to blame his predecessor for his failures as he was walking out the door. He blithely ignored the inconvenient fact that he was president for the past eight years. Bush said: "I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so" before he became president.

======

The lead fairy-tale on Fox News on January 26: "The Democrats" Economic Plan is to Blame Republicans for Everything." The truly bizarre implication is that somehow that blame is not warranted. After Bush blamed everything on Clinton for eight years, the audacity of that story is beyond description. Truly breathtaking.
The Republican attempt to blame Obama for Bush"s failures is a new historic low. That is like the Vatican blaming Galileo for abuses of the Inquisition. That is like being pushed off a cliff and then being blamed for not solving the problem of flight before hitting the ground. The idea is offensively absurd at every level.
The Republicans have lost their already tenuous grip on reality. They have lost the concept of shame. They have lost all pride, for nobody with any self respect could blame Obama for Bush"s eight years of mismanagement. No wonder Rush Limbaugh has become the voice of the Republican Party. The patients have taken control of the Republican Asylum. LinkHere

Deflation Round -Up

2009-12-16T22:08:00.000-08:00

As Absolute Return Partners wrote in its July newsletter:

The most important investment decision you will have to make this year and possibly for years to come is whether to structure your portfolio for deflation or inflation.

So which is it, inflation or deflation?

This is obviously a hot topic of debate, and experts weigh in on both sides. I�ve analyzed this issue in numerous previous posts (and try to make argue the case for inflation here), and every day there are new arguments one way or the other from some very smart people.

But deflation seems to be winning.

Who Says?

Nobel prize winning economist Joseph Stiglitz says:

Deflation is definitely a threat right now.

Alan Greenspan said on September 30th:

We are still, by any measure, in a disinflationary environment.

And the President of the Chicago Federal Reserve Bank, Charles Evans, said on September 9th:

Disinflationary winds are blowing with gale-force effect.

How Bad Could It Get?

The biggest deflation bears are rather pessimistic:

Former chief Merrill Lynch economist David Rosenberg says that deflationary periods can last years before inflation kicks in

Renowned economist Dr. Lacy Hunt says that we may have 15-20 years of deflation

PhD economist Steve Keen says that � unless we reduce our debt � we could have a �never-ending depression�

These are the most pessimistic views I have run across. Most deflationists think that a deflationary period would last for a shorter period of time.

The Best Recent Arguments for Deflation

Following are some of the best arguments for deflation.

Unemployment

Wall Street Journal�s Scott Patterson writes that we won�t get inflation until unemployment is down below 5%:

A rule of thumb is that inflation doesn�t become sticky until the unemployment rate dips below 5%�

�I see very little prospect of accelerating inflation� partly because of the employment outlook, said Mark Zandi, chief economist of Moody�s Economy.com. �I don�t think the risk shifts toward inflation until 2011, or even 2012.�

It could take a lot longer for unemployment to go back down to 5% (and for consumers to have more money to spend again).

Job losses are accelerating.

JPMorgan Chase�s Chief Economist Bruce Kasman told Bloomberg:

[We"ve had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

A new report from Advance Realty and Rutgers - America�s New Post-Recession Employment Arithmetic - argues that we will not have a full recovery in unemployment until until 2017, and that:

� The Great 2007�2009 recession is the worst employment setback in the United States since the Great Depression.

� In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs.

� The recession followed a very much-below-normal economic expansion (November 2001�December 2007) that was characterized by relatively weak private-sector employment growth of approximately 1 million jobs per year.

� This was less than one-half of the job-growth gains of the two preceding expansions (1982�1990 and 1991�2001), when average annual private-sector employment grew by 2.4 million jobs per year and 2.2 million jobs per year, respectively.

� In the preceding two expansions combined, private-sector employment growth per year was approximately 435,000 jobs higher than the annual growth in the number of people in the labor force.employment deficit.

� The weak economic expansion sandwiched between two recessions (2001, and 2007�2009) produced a lost employment decade.

� As of August 2009, the nation had 1.3 million (1,256,000) fewer private- sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

� From 1980-2000, the US gained a 35.5 million private-sector jobs. During the current decade, America has lost more than 1.7 million private-sector jobs.

� Total �employment deficit� could approach 9.4 million private-sector jobs by December 2009.

New jobs aren"t being created.

Even Larry Summers says unemployment will remain "unacceptably high" for years.

The New York Times points out that U.S. job seekers exceed openings by record ratio.

2 out of 5 Californians out of work.

Almost half of 16-24 year olds are unemployed.

(Note: hyperinflation is obviously an entirely different animal. For example, there was rampant unemployment in the Weimar Republic during its bout with hyperinflation ).

Debt Overhang and Deleveraging

Steve Keen argues that the government�s attempts to increase lending won�t work, consumers will keep on deleveraging from their debt, and that � unless debt is slashed � the massive debt overhang will keep us in a deflationary environment for a long time.

Edward Harrison notes:

Nomura�s Chief Economist Richard Koo wrote a book last year called "The Holy Grail of Macroeconomics" which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade. He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts. And the three D�s come into play: a downturn leads to debt deflation, deleveraging, and ultimately depression. The D-Process is what truly separates depression from recession ...

See a presentation by Koo here.

Leading investment advisor Ray Dalio says the same thing.

So does Albert Edwards, who argues that - even as the government tries to inflate its way out of all its problems and printing trillion in new treasuries - it is unable to catch up with the non-governmental balance sheet collapse:

The US Federal Reserve recently published their comprehensive flow of funds data for the US. This showed that the household sector continued to pay down debt for the fourth consecutive quarter. Corporates also started to pay down debt sharply in Q2 at a similar $200bn pace. The non-financial private sector paid down debt at a $435bn pace in Q2. This compares to a $2,116bn pace of expansion in 2007 (see chart below). Add to that the financial sector unwind and the total private sector is unwinding debt faster than the government is able to pile it up (hence the red line is still negative)! The lesson from the balance sheet recession in Japan is that the massive private sector headwind to growth has a long, long way to run.

If that is the case, we can expect, just like Japan, frequent relapses back into recession. The market now understands how an end of inventory de-stocking can boost GDP, i.e. it is the change in the change that matters. Similarly as Dylan Grice points out - link, it is the change in the fiscal deficit that is a net stimulus or drag to GDP. A massive 6pp stimulus last year is likely to turn into a 2pp drag on growth next year (see chart below). With continued private sector de-leveraging likely next year and beyond, how can one seriously not expect the global economy to relapse back into recession next year taking nominal GDP deep into an abyss?

Mish writes:

An over-leveraged economy is one prone to deflation and stagnant growth. This is evident in the path the Japanese took after their stock and real estate bubbles began to implode in 1989.

Leverage is increasing again, according to an article in Bloomberg:

Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007�

�I am surprised by how quickly the market has become receptive to leverage again,� said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse�

Indeed, as I have repeatedly pointed out, Bernanke, Geithner, Summers and the chorus of mainstream economists have all acted as enablers for increasing leverage.

Mish continues:

Creative destruction in conjunction with global wage arbitrage, changing demographics, downsizing boomers fearing retirement, changing social attitudes towards debt in every economic age group, and massive debt leverage is an extremely powerful set of forces.

Bear in mind, that set of forces will not play out over days, weeks, or months. A Schumpeterian Depression will take years, perhaps even decades to play out.

Thus, deflation is an ongoing process, not a point in time event that can be staved off by massive interventions and Orwellian Proclamations �We Saved The World�.

Bernanke and the Fed do not understand these concepts, nor does anyone else chanting that pending hyperinflation or massive inflation is coming right around the corner, nor do those who think new stock market is off to new highs. In other words, almost everyone is oblivious to the true state of affairs.

Flattening Yield Curve Points Toward Deflation

PIMCO"s Bill Gross said:

There has been significant flattening on the long end of the curve,� Gross said in an interview from Newport Beach, California, with Bloomberg Radio. �This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.

David Rosenberg, Tyler Durden and Mish also believe that a flattening yield curve indicates deflation.

Bloomberg notes:

The difference in yield between nominal and inflation-protected Treasury securities maturing in one year is negative 0.4 percent, suggesting investors expect deflation during the next 12 months.

Pension Crisis

Pension expert Leo Kolivakis writes:

The global pension crisis is highly deflationary and yet very few commentators are discussing this.

Collapse of the Shadow Banking System

Hoisington�s Second Quarter 2009 Outlook states:

One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed�s balance sheet will automatically lead to a quick and substantial rise in inflation. [However] An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called �shadow banks�. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline. The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The �shadow banks� are in even worse shape. Over 300 mortgage entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re-trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent.

Ellen Brown argues that the break down in the securitized loan markets (especially CDOs) within the shadow banking system dwarfed other types of lending, and argues that the collapse of the securitized loan market means that deflation will � with certainty � continue to trump inflation unless conditions radically change.

Support for Brown�s argument comes from several sources.

As the Washington Times notes:

�Congress� demand that banks fill in for collapsed securities markets poses a dilemma for the banks, not only because most do not have the capacity to ramp up to such large-scale lending quickly. The securitized loan markets provided an essential part of the machinery that enabled banks to lend in the first place. By selling most of their portfolios of mortgages, business and consumer loans to investors, banks in the past freed up money to make new loans. . . .�The market for pooled subprime loans, known as collateralized debt obligations (CDOs), collapsed at the end of 2007 and, by most accounts, will never come back. Because of the surging defaults on subprime and other exotic mortgages, investors have shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses.�

Senior economic adviser for UBS Investment Bank, George Magnus, confirms:

The restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit, and until banks have created the capacity to resume lending to creditworthy borrowers. This is still about capital adequacy, where better signs of organic capital creation are welcome. More importantly now though, it is about poor asset quality, especially as defaults and loan losses rise into 2010 from already elevated levels.

And McClatchy writes:

The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven�t kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.

Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like.

�The basis of revival of the system along the line of what previously existed doesn�t exist. The foundation that was supposed to be there for the revival (of the economy) . . . got washed away,� [economist James K.] Galbraith said.

Unless and until securitization rebounds, it will be hard for banks to resume robust lending because they�re stuck with loans on their books.

Credit Still Constrained

US credit has shrunk at Great Depression rate prompting fears of double-dip recession:

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."
The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc...

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

The Independent notes:

A second credit squeeze and a �200bn national "funding gap" threatens to sabotage the recovery in the British economy, the IMF warned yesterday.

In its latest Global Financial Stability Report, the fund said that a combination of a soaring government deficit and the borrowing needs of British companies and consumers � coupled with a still broken banking system � would leave the UK with a national "funding gap" of 15 per cent of GDP, or around �200bn next year, much higher than in either the US or the euro area.

Housing

Moody"s forecasts that housing won"t return to pre-bust levels until 2020, "Florida and California will only regain their pre-bust peak in the early 2030s"

Treasury says millions more foreclosures are coming.

Fannie Mae"s serious delinquency rate is skyrocketing.

Half of all borrower who are getting help with loan modifications end up redefaulting.

And apartment rental prices are falling world-wide.

Business

The creation of small businesses is way down.

Experts are projecting unprecedented corporate defaults.

Ghost fleets of unused ships lie rusting in port.

States

State tax revenues have plunged 17%.

More Signs of Deflation

Bloomberg writes:

The U.S. faces the possibility of deflation for the first time since the Eisenhower administration...

Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year- earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department...

While the economy contracted 2.7 percent during the 1953 recession, it shrank 3.8 percent in the current recession, the most since the 1930s. Economists at New York-based JPMorgan Chase & Co. and Goldman Sachs Group Inc., the second- and fifth- biggest U.S. banks by assets, say there�s so much deflationary excess labor and plant capacity in the economy that the Fed won�t raise interest rates until at least 2011.

Paul Krugman writes:

A new report from the International Monetary Fund shows that the kind of recession we�ve had, a recession caused by a financial crisis, often leads to long-term damage to a country�s growth prospects. �The path of output tends to be depressed substantially and persistently following banking crises.�

The U.S. Census Bureau reports that 40 million Americans are living in poverty.

AP writes:

As in the 1980s, much of that shift will be driven by baby boomers. For the 78 million people born from 1946 through 1964, the Great Recession hit at a particularly inopportune time � during peak years of earning and saving before retirement. Boomers range from 44 to 63 today � the youngest is nearly 10 years older than the oldest was in 1982. They are running out of time and are most likely to remain cautious spenders and become aggressive savers even as the economy improves.

The housing bubble mistakenly led boomers and millions of others to believe their home was their retirement nest egg. If they left their home equity alone during the boom, they"ve taken a hit the last couple years but are still ahead. But many treated their home like a personal bank and spent the gains by tapping a home equity line of credit.

Alix Partners finds:

While American industry is struggling to get through what could become the worst recession since the Great Depression, Americans say that even after the recession ends, their spending will return to just 86% of pre-recession levels, which would take a trillion dollars per year out of the U.S. economy for years to come. According to this in-depth survey of more than 5,000 people, Americans plan to save (and therefore not spend) an astounding 14% of their total earnings post-recession, with the replenishment of their 401(k) and other retirement savings leading the way among their biggest long-term concern.

As Huffington Post notes:

"There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally," says Matt Murray, an economist at the University of Tennessee. "And that is not something that took place in the 1980s."

Fed Paying Interest on Reserves

And Naufal Sanaullah writes:

So if all of this printed money is being used by the Fed to purchase toxic assets, where is it going?

Excess reserves, of course. Counting for $833 billion of the Fed�s liabilities, the reserve balance with the fed has skyrocketed almost 9000% YoY. Excess reserves, balances not used to satisfy reserve requirements, total $733 billion, up over 38,000%!

The Fed pays interest on these reserves, and with an interest rate (return on capital) comes opportunity cost. Banks hoard the capital in their reserves, collecting a risk-free rate of return, instead of lending it out into the economy. But what happens as more loan losses occur and consumer spending grinds to a halt? The Fed will lower (or get rid of) this interest on reserves.

And that is when the excess liquidity synthesized by the Fed, the printed money, comes rushing in and inflates goods prices.

Of course, most people who are arguing we will have deflation for a while believe that we might eventually get inflation at some point in the future.

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Wild Ride In Lehman, Financials

2009-12-16T21:55:00.000-08:00

Note: I will be doing Market WrapUp on Financial Sense every 2nd, 4th, and if applicable 5th Thursday of the month. This was my first one.

Concerns continue to mount at Lehman, with several top executives on the hot seat. Today Lehman Dropped their CFO and President.

Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory after the firm failed to quell speculation about mounting losses and stem a 60 percent plunge in the stock this year.

Chief Executive Officer Richard Fuld has seen Lehman"s ability to remain independent called into question this week after the company posted the first quarterly loss since it went public in 1994 and turned to outside investors for a $6 billion cash infusion.

While Lehman may consider selling a stake to a strategic partner, Fuld is unlikely to sell the whole firm, UBS AG analyst Glenn Schorr said in an interview last week. Many of Lehman"s bigger rivals have also been weakened by the subprime crisis, making it unlikely they could buy the firm, Schorr said.

Credibility Issues

On Monday I stated that Credibility Issues Haunt Lehman. And I continue to wonder what Lehman is hiding on its balance sheet, what its real leverage is, and how much its $29 billion portfolio of commercial real estate is really worth.

Lehman wrote down $3.5 billion and called it "substantial". I call it "peanuts". Earlier this week, in a capital raising effort, Lehman sold 145,000,000 shares at 28. Anyone who bought shares at 28 now has to regret it.

Test of Reaction Low

click on chart for sharper image

That reaction low in March was formed on rumors that Lehman was going to follow Bear Stearns (BSC) into the grave. Lehman more than doubled from that low amidst denials by Lehman that it was in any kind of trouble.

Was there ever any doubt that a retest of that reaction low was coming? Well here it is.

Wild Ride On 5 Minute Chart

click on chart for sharper image

After opening at $21.35 today, the stock quickly rebounded back into positive territory made a successful intraday bottom test, rebounded to positive territory a second time, then collapsed into the close. What a ride!

Those that bought at 28 are now $6 and 21% in the red.

Dividends Cut Most In Five Years

Cash strapped banks have had no choice but to raise capital, and on increasingly worse terms. Yet many banks and brokers are still paying dividends they cannot afford. It makes no sense to pay dividends while increasing shareholder dilution in capital raising efforts.

Bloomberg was talking about dividend cuts today in U.S. Financial Firms Cut Dividends Most in Five Years. Here are a few highlights:

KeyCorp (KEY), Ohio"s third- largest bank, chopped its payout in half today -- the first decrease in 43 years -- and said it must raise $1.5 billion after losing a tax case.
Goldman (GS), the world"s biggest securities firm, may reduce its dividend by 26 cents to 9 cents, while Bank of America (BAC), the second-largest U.S. bank by assets, may cut its payout by the same amount, to 38 cents, Deutsche Bank AG strategists wrote in a June 10 report.
Citigroup (C), the biggest U.S. bank, may lower its dividend by 23 cents, the same amount it did in January, to 9 cents, according to the report.
Washington Mutual and National City each slashed their dividends to close to the bare minimum -- a penny.
Wachovia (WB) dropped 23 percent after the bank cut its dividend in April.

Some banks, especially Citigroup have been way too slow in cutting dividends. Citigroup does not need to reduce its dividend, it needs to eliminate it. It will eventually be forced to.

More Problems Surface In Alt-A

Today the S&P Lowered Ratings on 65 classes of Alt-A Securities. Far more downgrades of Alt-A mortgages are coming. Inquiring minds might be asking "What banks have the biggest exposure to Alt-A?" The answer is Washington Mutual (WM) and Wachovia (WB).

One quick look at the the chart of Washington Mutual shows the bank is on life support.

Washington Mutual Weekly Chart

click on chart for sharper image

WaMu The Killer Bank

WaMu, the killer bank, is back in the news today stating Three Proxy Firms Support Capital Plan.

Washington Mutual Inc., the biggest U.S. savings and loan by assets, said three proxy advisory firms support its plan to raise $7 billion in capital.

Institutional Shareholder Services Inc., Glass, Lewis & Co. and Proxy Governance Inc. recommend shareholders vote for proposals tied to the plan at a June 24 meeting, the Seattle- based lender said today in a statement on Business Wire.

The technicals suggest the company may not survive. I am inclined to believe the technicals.

Unusual Treasury Action Continues

US treasuries were under pressure again today, and in the same unusual pattern as the following chart courtesy of Bloomberg shows.

click on chart for sharper image

While there is nothing unusual about treasury spreads widening, it is unusual for yields on the two year to soar in relation to yields on the 30 year long bond. A four standard deviation event occurred on Monday (see Treasury Curve Steepening Bet Blows Sky High) and there was a continuation on Tuesday. So this makes the third occurrence this week of the yield curve flattening at a higher level.

Such action is not good for financial companies that tend to borrow short and lend long. In fact, it"s not good for the stock market on the whole.

There was interesting commentary today about yields on Minyanville between Todd Harrison (Toddo) and Mr. Practical.

Oh that smell. Can"t you smell that smell?

I was just pinging with Mr. Practical and we had the following exchange. We share it with ye faithful in the spirit of community.

Mr. Practical: Yields are upticking. Fed Fund Futures are implying a rate hike in September.

Toddo: Yeesh, talk about a death knell. That has "foreign influence" written all over it.

Mr. Practical: Central banks may have given notice to Ben that if he doesn"t raise rates, the dollar is toast. We should remind Minyans to read The Pin Prick. It"s as relevant today as it was then. Instead of foreign central banks abandoning the auction, they"re giving him fair warning.

There is no breathing room for the box Bernanke is in. Several Fed governors are in open revolt calling for higher rates, and others are openly questioning the Term Auction Facility (TAF), and Primary Dealer Credit Facility (PDCF). US consumers are getting smoked by rising prices, banks are getting smoked by falling margins, rising defaults, and the need to raise capital. Housing will be further smoked if Bernanke is forced to raise rates and the dollar may be further smoked if he does not.

Economic Checkmate!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Talks Football, Troop Withdrawal, Malia And Sasha"s School, And Jessica Simpson

2009-12-16T21:39:00.000-08:00

Visit msnbc.com for Breaking News, World News, and News about the Economy

LinkHere

Busted Bonds & Financial Illusions

2009-12-16T20:19:00.000-08:00

MarketWatch is reporting $43 billion in loan deals pulled in past two weeks.

In the past two weeks, another 13 corporate loan or bond deals have been postponed or reduced, representing slightly less than $43 billion, according to new research released Thursday by Baring Asset Management.

That lifts the total number of deals pulled since June 22nd to 46, analysts at the firm said. They valued those at more than $60 billion. Last year, no pulled deals were counted by the firm"s research staff.

The amount of incomplete cash-financed leveraged buyouts and management-led buyouts sitting on bank balance sheets remains substantial, wrote Toby Nangle, a fixed-income manager at Barings, in a note. "Given their inability to pass this credit risk on to the market, their short-term acquisition finance is increasingly looking like a series of long-term loans," Nangle added.

46 busted deals since June 22 is a lot of busted deals. Instead of being able to pass the trash, companies like Citigroup have already committed to funds the IPOs are stuck with it. Merrill Lynch,Lehman, Bear Stearns, etc all made fortunes passing the CDO trash to pension plans, life insurance companies, and foreign governments.

Flashback June 1 2007

Banks Sell "Toxic Waste" CDOs to Calpers, Texas Teachers Fund

June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.

At a sales presentation of the bank"s CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.

"It has a very high cash yield to it," Fleischhacker says at the March convention. "I think a lot of people are confused about what this product is and how it works."

Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.

"It"s grossly inappropriate to take this level of risk," he says. "Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig."

If they were confused before they should not be now. It"s as simple as this:

Bear Stearns has lost all credibility.
Bear Stearns Cos. co-president and co-chief operating officer Warren Spector was fired.
The firing of top level management is seldom a sign that the problems have been taken care of.
Anyone buying toxic garbage from Bear Stearns on the promise of 20% returns now regrets it.
Anyone buying anything Wall Street is pumping is likely to regret it.

Greatest Bait and Switch Ever

Tollowing are excerpts from Hayman Capital Partners on The Greatest �Bait and Switch� of ALL TIME

I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world.

This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the �real money� (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to �mark up� these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt.

Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the �excess� pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt�until now. They have had orders on the various desks of Wall St. to buy any US debt rated �AAA� by the rating agencies in the US.

How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches � thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF�you magically have 80% of the structure rated �AAA� by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets... This will go down as one of the biggest financial illusions the world has EVER seen.

...
Sincerely,
J. Kyle Bass
Managing Partner

Misconstrued Views

A couple of people have posted comments that I have misconstrued the views of Bill Fleckenstein in Fleckenstein (and others) State the Deflation Case . If so, it was not intended. The point is that whether Fleckenstein believes in deflation or not, he sure presented a strong case for it. Furthermore, not knowing whether or his views on deflation in the US had changed or not I posted "Like it or not (and I suspect he might not because he did not use the D-Word itself) Fleckenstein described how and why a Japanese style deflation is headed for the US." That is a statement of fact. Fleckenstein described deflation as did others in the article. He simply chooses not to believe his own arguments, I suspect on grounds that the Fed has an ability and willingness to hyperinflate and that it will work. On that latter point, I do not share his view for reasons I have stated many times.

A Saturday Song

To the tune of Me & Bobby McGee

Busted bonds in Wall Street, waitin" for a pump
This market�s near as faded as my jeans
Goldman thumbed Bernanke down just before the dump
Said act or stocks are only good as beans

Feelin" good was easy, Lord, when Greenspan cut the rates
And feelin" good was good enough for me
Good enough for me and you Ben B

If anyone cares to add verses to this song and/or to completely rewrite the above, please send the lyrics my way. If there are enough submissions I will combine the best of them and post the result.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

REUTERS: USG note conversion approved-Berkshire Hathaway

2009-12-16T19:45:00.000-08:00

LOS ANGELES, Feb 11 (Reuters) - Berkshire Hathaway Inc (BRKa.N) on Wednesday said USG Corp (USG.N) shareholders had approved the conversion into stock of the $300 million of notes held by the Warren Buffett-controlled company.

Upon conversion, Berkshire will own 34.6 percent of USG, or 43.39 million shares, Berkshire said in a filing with the U.S. Securities and Exchange Commission. (Reporting by Nichola Groom; editing by Carol Bishopric)

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Panetta Acknowledged CIA Misled On Interrogation Policy: Dem Lawmakers

2009-12-16T18:19:00.000-08:00

CIA Director Leon Panetta told lawmakers in a recent briefing that the intelligence agency he heads misled Congress on "significant actions" for a "number of years," a group of Democrats revealed on Wednesday.
In a letter written to Panetta on June 26 by seven Democratic members of the House Intelligence Committee, the CIA chief is urged to "publicly correct" an earlier statement he made in which he insisted that it was not agency policy to mislead Congress.
As the letter details, Panetta apparently acknowledged in an earlier briefing that this statement was not, in fact, true.
"Recently you testified that you have determined that top CIA officials have concealed significant actions from all Members of Congress, and misled Members for a number of years from 2001 to this week," the Democratic lawmakers write. "This is similar to other deceptions of which we are aware from other recent periods."
The letter does not explain what those "significant actions" were. But a source with knowledge of the dispute says it concerns Bush administration interrogation policies. Panetta briefed the Intelligence Committee about these and other matters two days before the letter was written, as well as other dates.
Early reports on the matter said that the letter was signed by six Democratic lawmakers: Anna Eshoo, D-Calif., John Tierney, D-Mass., Rush Holt, D-N.J., Mike Thompson, D-Calif., Alcee Hastings, D-Fla. and Jan Schakowsky, D-Ill. (These are the members who signed the above document). A source with direct knowledge of the letter"s content says that Rep. Adam Smith D-Wash., has also added his name to the letter.
The note was made public just hours after Congressional Quarterly reported that the chairman of the House Intelligence committee, Rep. Silvestre Reyes, D-Texas, also stated that the CIA had "affirmatively lied" to his committee. LinkHere

NIGHTLY BUSINESS REVIEW: Susie Gharib Interveiw with Charlie Munger

2009-12-16T16:44:00.000-08:00

Friday, May 01, 2009

SUZANNE PRATT: Warren Buffett says he wants tough questions from shareholders at Berkshire Hathaway"s annual meeting tomorrow. Investors will certainly ask about the company"s stock. It has tumbled more than 30 percent in the past year. Also answering questions, Charlie Munger, Buffett"s business partner for half a century and Berkshire"s vice chairman. Munger keeps a low profile, but today in Omaha, he sat down for an interview with Susie Gharib. She began by asking him what he"ll say to shareholders tomorrow to restore confidence in Berkshire.

CHARLES MUNGER, VICE CHAIRMAN, BERKSHIRE HATHAWAY: I think the reality is that if you hold a stock for a long long term even though it"s screamingly successful as an investment, you will have huge declines in the value of that stock two or three times in half a century. And I don"t think that should bother long term holders all that much.

GHARIB: Mr. Munger, shareholders will certainly have questions tomorrow on why Berkshire took such large positions in derivatives especially since you and Mr. Buffett have warned for years that derivatives are dangerous investments. What are you going to tell them?

MUNGER: We think the bets we made were intelligent bets. That"s why we took the positions. It"s just that simple. We also think that the system which allowed derivative bets to be so widely available was bad public policy. There"s nothing inconsistent in those two actions.

GHARIB: We hear more and more people saying that the economy"s improving, that the worst is over. From what you"re seeing at Berkshire, what kind of shape is the economy in?

MUNGER: Well of course there are glimmers of hope and of course not all the news is bad. But averaged out it"s deadly serious and the threats and problems are far from over. We have a very unpleasant stretch to go through at best.

GHARIB: When do you see the recovery coming?

MUNGER: We don"t have any special ability to make that kind of macro economic prediction.

GHARIB: How are Berkshire"s businesses doing so far this year?

MUNGER: Mixed. But the two biggest businesses, which are insurance and utilities, are flourishing. So I would say that even with all of the bad effects we"ve had, we"re not catching our full share of the horror.

GHARIB: You delayed the release of Berkshire"s quarterly results and some people are speculating that maybe things aren"t going so well for Berkshire. What"s your response to that?

MUNGER: I guarantee you that Berkshire is not delaying reporting based on whether things are going well or ill. There are delays because there are glitches of getting the job done right as fast as they would like to have it done.

GHARIB: So what"s your business strategy for 2009? Are you running Berkshire differently to deal with this economic downturn?

MUNGER: Our fundamental way of operating we"re not changing. Are we a little more cautious based on the extreme disruptive effects that are conceivable, I think the answer is yes.

GHARIB: How are you being more cautious?

MUNGER: We"re a little less willing to borrow and a little less willing to spend. And that is happening all over America.

GHARIB: Some of Berkshire"s investments are in financial stocks like American Express and Wells Fargo. Does it make sense to continue to hold on to these stocks? What"s your outlook for the financials?

MUNGER: Well, I think the companies which we are invested have very respectable futures from this point forward. The financial world should be restructured so that these people who are too big to fail are not allowed to behave in such a gamey fashion. I"m pessimistic with the regulatory changes that come down. I"m afraid they won"t be as severe as we need.

GHARIB: As an investment, investors should stay away from financials for now?

MUNGER: I didn"t say that. We need the financials. We can"t have a modern civilization without strong financial companies. But we don"t need them as swashbuckling and as crazy and as venal as they"ve been.

GHARIB: This has certainly been an unusual time. What have you learned about Warren Buffett and how he handled this financial crisis that you didn"t know after working with him for 50 years?

MUNGER: I don"t think Warren Buffett has changed at all in terms of the way he handles this sort of thing. He handled it well 35 years ago and he"s handling it well now.

GHARIB: Now I understand there are three candidates who are being considered to take over from Warren Buffett when the time comes. I know you"re not going to tell me who they are. But what do you think is the most important characteristic for this job?

MUNGER: I don"t think there"s any one way that"s the right way to run a corporation. Different people have different styles. Different people have different strengths. I am quite confident that Berkshire will be governed very well long after Warren and I are gone.

GHARIB: Mr. Munger, it"s been a pleasure talking to you. Thank you so much for your time.

MUNGER: You bet.

PRATT: On Monday, we hear from the Oracle of Omaha. Susie brings us her interview with Warren Buffett and gets his outlook for Berkshire and the economy.

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ASU Alumni Pull Donations Over Obama Snub

2009-12-16T14:05:00.000-08:00

ASU Says "We Blew It," Alumni Rescind Donations

The Arizona State University community is expressing anger and embarrassment in response to ASU"s decision not to award President Barack Obama an honorary degreewhen he gives the commencement speech there next month. An ASU spokesperson now confesses, "we blew it," and concedes that the university likely would have conferred the honorary degree, but once it became a controversy, ASU administrators were too worried about appearing insincere.
When the news hit last week that ASU would not honor Obama with a customary honorary degree when he addresses the graduating class, the Huffington Post asked for people with ties to ASU to email their reactions. A couple hundred members of the university"s community (students, alumni, staff, and faculty) submitted their personal thoughts.
Nearly every email expressed shame over the decision made by their alma mater. One alumnus, Dr. Neil Francis, wrote from Thailand to say he will no longer wear his Arizona State University ball cap -- even halfway around the world. Several said that they did not believe the story when they first heard it: they thought the story was a satirical news piece or a holdover from April Fool"s Day.
Many Huffington Post readers wrote in to say that they would be withholding donations. Some said they would even remove endowments from their wills. The detrimental effect that this debacle will almost certainly have on fundraising could not come at a worse time, since the state legislature has recently enacted major funding cuts. LinkHere