International Forecaster Weekly

Profits and Moves Behind the Downturn

Unemployment will stay high for a long time, fears of further downturns, IMF report out, Profit taking and de risking, crunchtime for mutual funds has arrived.

Bob Chapman | July 3, 2010

The Fed says US unemployment is likely to stay high for a long time, and that justifies zero interest rates indefinitely.

The June Chicago Purchasing Managers Index was 59.1 vs. 59.7 in May. The employment component rose to 54.2 from 49.2 in May. New orders fell to 59.1 from 62.7.

Homebuilder Lennar is cutting new home prices 15% as new orders fell 10%. KB Builders said new orders fell 23%, as new home sales fell 32%.

The MBA Purchasing Applications Index fell another 3.8% week-on-week and was 36% lower year-on-year.

The housing market is in serious freefall with builders scheduled to increase units by 535,000 this year. As sales fall so will big bank balance sheets. That means we are facing another credit collapse.

The US stock market seems to have a case on indigestion. The Dow continues to struggle just above 10,000 and is getting ready for another test of recent lows, which we believe could very well be broken. Markets worldwide share the downward pressure. We predicted a lower Chinese market in September and it has since fallen 23%, as China prepares for the bursting of their recent real estate bubble caused by the injection of $1.8 trillion into the economy. It could be that debt restructuring could be needed by the five PIIGS of the euro zone. The elitists are talking in terms of five years when that problem may have to be faced over the next six months to a year. There is the call for great fiscal centralization and the final death of sovereignty. Europe did not do well for ten years; they just hid their problems, much as other nations have. The euro has proven to be another unnatural creation engineered to bring about a world currency.

As sovereign debt problems rage across the world financial scene, the prices of stocks and commodities are fading and bonds could be topping out. Who would be willing to accept a yield of slightly under 3% for a US Treasury note? In addition, commodity currencies are under pressure. The dollar remains relatively firm after having fallen to 85.42 on the USDX from a recent high of 89. In that process the dollar cold be completing a head and shoulders, which could in time portend a much lower dollar. There are certainly lots of uncertainties out there, as volume increases each time the market falls, a sign that the natural direction is downward. AAA companies have done well in the recent past in part due to plenty of cheap money. In the second half of the year their earnings should begin to fade as GDP falls into the minus column. That fall can be stopped if more stimulus is added or if the Fed injects $2 trillion more into the economy.

The unemployed won’t get extended benefits, but the bankers and Wall Street got most of what they wanted in the financial reform package. That includes making the Fed, which is privately owned, into a tyrannical, financial monopoly. The unemployed don’t contribute to campaigns, Wall Street and banking does. The reality is special interest money controls our House and Senate, and that is why incumbents have to be kicked out of office in November.

The $8,000 real estate stimulus is gone and sales are falling in spite of 30-year fixed rate loans at 4.69%. Inventory and shadow inventory grows with each passing day. It should be noted that Fannie, Freddie, Ginnie and FHA are buying and guaranteeing 95% of mortgages, a good part of which are subprime. The $860 billion stimulus looked good and sounded good, but in part it was neutralized by cutbacks in state spending. It simply wasn’t strong enough to overcome underlying negative factors. That left the Fed with the job of keeping the recovery going. Even spending more than $2 trillion couldn’t ignite a permanent stage of growth. Worse yet, the refusal of the Senate to extend unemployment benefits will put 1.3 million Americans in a dire situation. It’s food stamps and nothing else. Americans for years have been just weeks from being broke. Now many of then are broke. Finding a place under a bridge is going to become more difficult.

GDP for the first quarter was 2.7%. That is half of the 5.6% posted in the 4th quarter and 1.7% of that 2.7% gain was due to stimulus. Final sales were 0.8% of that 1%. YOY real final sales grew only 1.2%, making this the weakest recovery in 100 years. The foundations of the economy are trembling. The 2nd quarter’s official GDP growth should be ½% to 1-1/2%, the 3rd quarter could be even and the 4th quarter zero to minus 2%. The Congress and Senate probably won’t approve more stimuli, so the Fed now has the entire job of keeping the economy in 2011 from collapsing. If the G-20 meeting told us anything it’s that it is now every man for himself. Europe is at least for now not cooperating with the US. In Europe it’s austerity and bailouts along with higher taxes. That will bring on depression and bankruptcy. In the US it’s the Fed injecting money and credit and higher taxes that will bring on higher inflation and then collapse and that won’t work either. The US should cut taxes and have government cut costs 30%. Yes, we know unemployment will rise, but it is going to rise anyway. This would cause a much slower slide into depression, which would be far more manageable. That may be small consolation, but it beats plunging. Under classical economics the system has to be purged and so it will be. The trick is to make it as palatable and less damaging as possible. We have to laugh watching the “experts waving their magic wands and blaming the austere Europeans for the wavering in the US economy. Most of these pundits are legends only in their own minds. What is absent is dissenting opinion and that is the way it will always be until GE goes under and with it CNBC. Then we can return to the framework of FNN and get objective reporting instead of an elitist controlled cheering section. Some of the players are now doing ads for the Council on Foreign relations. The experts and CNBC are all well aware of what the message is and that is propaganda. All are nothing but word merchants. This attempt at recovery was vastly different than a normal manufacturing recovery. It is a financial recovery. Incidentally, if you didn’t notice we have hardly any manufacturing left. That became the victim of free trade, globalization, offshoring and outsourcing. That has caused us the loss of 8 million jobs and has allowed transnational conglomerates to hide $1.4 trillion in profits offshore depriving America of taxing those slave labor profits, which aggregate about $500 billion. Remember readers that this exercise is to enrich these companies and the financial sector and to keep Illuminist companies solvent. The economy is rolling over and even the public realizes it. Consumer confidence figures just fell from 62 to 52, so that should tell you something. The FOMC is running in circles not knowing what new trick to pull out of the hat. We have just experienced almost three years of de-leveraging and the problem is yet to be solved. All the Fed has done is give companies money to keep them solvent. The problem is still there and the economy is more fragile than before. CNBC parades their guru’s across the stage telling us how everything will be all right. Last Wednesday they had on Jon Corzine, former CEO of Goldman Sachs, who as governor of New Jersey left the state in a shambles, after being ejected from office due to his involvement with unions and disgusting personal affairs. These are the kind of people the elitists want us to listen to and follow. The stock market is finally figuring out what is going on and is heading down with giant justification. The corporate earnings will fall and economic activity will slow dramatically. Socialists in the House will unsuccessfully try to extend unemployment benefits, and in lieu of that, the administration will extend the $8,000 housing credit into the fall for those who didn’t make the cutoff, so the real estate sector and the economy won’t fall off a cliff. Fascist nostrums don’t work, but rich socialists do not get it, they never get it. Look at Wall Street and banking as an example. Politically they love to give money away, but not their own money, only the general public’s money.

It wasn’t long ago we saw the US 10-year T-note at 4%. It was then apparent to professionals that the market was in trouble and that funds would be escaping into bonds and gold. That is what has happened. We do not find this a reason to buy dollar denominated bonds. We expect the dollar to fall in value against other currencies and gold. For those who follow technical patterns the dollar USDX chart is in a massive head and shoulders, which will prevail to the downside in the intermediate future.

May saw $1 trillion in the value of stocks wiped out in minutes. The market action has been so volatile over the last 1-1/2 years that once the market rallied back the public began to leave. Millions began an exodus that has since been filled by black box trading and government’s blatant intervention. As we write the S&P and Dow are in the process of breakdown, which should soon carry them lower. During May we saw the largest outflow in 18 months. Who can blame them shares have lost 55% of their value in 22 months despite the bear market rally of the past year. We are sure the game that was being played by Wall Street and banking, which on May 8th, plunged the market almost 1,000 Dow points in a half hour, had to have terrified investors. $1 trillion was lost in 30 minutes and regulators are still “investigating.” We spent 28 years on Wall Street; they knew within 5 minutes what was going on.

Another factor pulling the market lower is not only lower GDP and earnings, but also the specter of higher taxes in 2011, particularly an increase of 5% in long term capital gains taxes from 15% to 20%. It is insanity the Democrats want to go ahead with the increases.

Weakness is becoming more apparent in the US economy. Retail sales fell 1.2% in May. Business conditions in NYC from ISM fell to 69.3 from 89.9 in May, the largest one-month decline on record. The six-month outlook fell to 69.6 from 84.2. NYC debt and deficit are very high as are those of many cities and states.

As the market falls the opportunities for capital gains disappear and with them the chance for business investment. Business is in fear and are not hiring. Why should they as productivity increases 3% to 6%. Besides getting money from banks is very difficult if not impossible. The lenders and financial institutions have been bailed out, but the citizen hasn’t been. If Main Street doesn’t prosper neither can Wall Street.

On the exterior we see the BP false flag operation and all the negativity it engenders. Hundreds of thousands have lost their jobs and businesses. State, County and cities are broke. After doing little or nothing about the BP episode the President pushes hard for carbon taxes and Cap & Trade. We have the pending passage of financial reform, which makes the Federal Reserve a financial dictatorship. A planned unnecessary war that will engulf the whole world is about to begin in the Middle East. Unless the Fed soon re-liquefies the economy it will collapse into deflationary depression.

Thirty minutes after the NYSE open the Confidence Board reported that US consumer confidence plunged to 52.9 in June from May’s 62.7; 62.5 was expected. But that’s not the entire story. May consumer confidence was revised lower, to 62.7 from 63.3. So the June decline is dramatic.

The magnitude of the confidence decline shocked investors and traders on Tuesday. Hopefully the Confidence Board didn’t miscalculate previous US consumer confidence like they did with China.

Consumers’ short-term outlook, which had improved significantly last month, turned more pessimistic in June. Those anticipating an improvement in business conditions over the next six months decreased to 17.2 percent from 22.8 percent, while those expecting conditions will worsen rose to 14.9 percent from 11.9 percent.

Today’s ADP Report does not include the effects of federal hiring for the 2010 Census. Hiring for the census may have peaked in May. For this reason,

Friday’s figure for the change in nonfarm total employment reported by the BLS might be weaker than today’s estimate for nonfarm private employment in the ADP Report.

If final demand is lacking, the inventory buildup that accounted for 69% of Q1 GDP will drag the economy lower in Q2 and perhaps Q3.

U.S. private-sector firms created 13,000 more jobs in June, according to the ADP employment report released Wednesday. Job growth was "disappointingly weak," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. Private-sector job growth was revised higher in May to 57,000 from 55,000 earlier. Economists are expecting nonfarm payrolls to fall by 130,000 when the government reports its estimates on Friday, including the loss of some 250,000 temporary workers at the Census Bureau. Private-sector employment has increased five months in a row.

Homebuyers would get an extra three months to complete their purchases and qualify for a generous tax credit under a bill overwhelmingly passed by the House yesterday.

Under current law, buyers who signed purchase agreements by April 30 have until today to close on the sale to qualify for tax credits of up to $8,000. The bill would give buyers until Sept. 30 to complete their purchases.

The extended deadline only applies to people who signed purchase agreements by April 30. The National Association of Realtors estimates that about 180,000 home buyers who already signed purchase agreements are likely to miss today’s deadline.

“We owe this to the people who have essentially followed the rules who are caught by a closing date,’’ said Representative Sander Levin, Democrat of Michigan and chairman of the House Ways and Means Committee.

The bill passed 409 to 5. It now goes to the Senate, where majority leader Harry Reid, Democrat of Nevada, has sponsored a similar measure.

The popular tax credit has helped to stabilize the nation’s slumping housing market.

The latest IMF Currency Composition of Official Foreign Exchange Reserves report was just released. In the quarter ending March 31, the biggest relative drop occurred in central bank holdings of Dollars, declining as a percentage of total reserves from 62.2% in Q4 2009 to 61.5% in Q1 2010. This is the lowest ever relative holding of US Dollars by foreign banks. Oddly enough, the euro was not the biggest beneficiary of this loss of confidence in the dollar (it also declined on a relative basis by 0.1% as a % of total holdings to 72.2% in Q1), but the "Other" currency category. We assume that the Chinese Yuan is the dominant currency in this particular basket. Other reserves increased from 3.1% of total to 3.7% in just one quarter. Central banks are starting to rotate holdings out of Dollars (and after this quarter, certainly out of euros) and into non-traditional, non-developed currencies. Are China and Russia slowly becoming reserves?

Crunchtime for mutual funds has arrived. On one hand they are getting slammed with the S&P now almost -8% YTD causing a collapse in the funds' own equity values. On the other hand, investors have now withdrawn $30 billion in cash, forcing a feedback loop where selling begets selling, and even more redemptions. Ah, the beauty of a Keynesian system falling apart. And let's not forget that fund cash levels are at all near record lows to begin with. If the market slide can not be contained, and if consumers who already have zero faith in the market retrench even more, it could be the beginning of the end for the fund industry. More relevantly, ICI has just reported $1,248 million in outflows from domestic equity mutual funds: this is the eighth sequential week of outflows since the Flash Crash, and a period during which $32 billion has been redeemed.

Stephen Friedman, a former Goldman chairman who was then head of the audit committee of its board of directors. Goldman’s stock was down 65 percent from its 52-week high during an accelerating global financial breakdown.Friedman, 72, who is still a Goldman director, bought 37,300 shares at an average of $80.78 each on Dec. 17. Five weeks later, he picked up 15,300 more at an average of $66.61. By yesterday, the stock had doubled to $133.76, giving Friedman a paper profit of $3 million.

Now, the U.S. House Oversight and Government Reform Committee is investigating Friedman’s stock purchases. It wants to know why he was permitted to buy stock in a bank he was regulating as chairman of the New York Fed.

Friedman held both that post and his Goldman board seat when the firm became a bank holding company in September 2008. The Federal Reserve Act forbids an official at the New York Fed in his position from also being a director of a bank or buying its stock.

The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston costing taxpayers $100 million are getting even more money to fix what they broke.

UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals.

The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings.

“There was really no mention of any downside of these swaps,” said Christy Mihos, a turnpike board member from 1999 to 2004 who voted for the UBS agreement. “It was portrayed as a no-brainer that we could not lose.”

Refinancing drove total U.S. mortgage applications to an eight-month peak, as loan rates fell to or near record lows, but demand to buy homes sank toward 13-year lows last week, the Mortgage Bankers Association said on Wednesday.

The U.S. housing market continued to deflate after a spring sales spree, fueled by now-expired federal tax credits of up to $8,000, robbed from summer home buying.

The upside is now limited by unemployment stuck near 10 percent, heavy foreclosure supply and pent-up selling from owners just waiting for the right time to put their homes back on the market.

Mortgage refinancing requests jumped 12.6 percent in the week ended June 25 to the highest level since May 2009, as average 30-year mortgage rates slid 0.08 percentage point to 4.67 percent, the industry group said.

In its just released Long-Term Budget Outlook, the CBO has come out with the most dire warnings on the US projected debt to date. In summary, the healthcare spending and the Social Security will consume an increasing portion of the budget and will push the national debt up sharply unless lawmakers act, CBO Director Douglas Elmendorf warned. "CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed." While this does not sound too dramatic, the way it is attained is with the following ludicrous assumptions (which Paul Krugman would certainly call perfectly normal): "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." Good luck with that. In the more realistic, alternative fiscal scenario, the CBO observes that "with significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and non-interest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." The CBO's conclusion is a nightmare to each and every hard-core Keynesian fundamentalist (you know who you are): "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them."

A month ago, Sarkozy was disturbed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional de-risking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.
Some interesting action was also seen on the re-risking end, where Italy saw a whopping $1 billion+ in bearish positions get unwound. This is probably the single biggest weekly sovereign re-risking we have seen in months. Nonetheless, without any concrete news out of the boot, we assume this is merely profit taking after numerous week of consistent de-risking. Greece, which nobody cares about, continues to see re-risking, which however in light of this week's new record widened in 5 Year CDS, was somewhat unexpected.

Not shown on the table, but certainly in need of noting, was our very own state of California, which with 377 million in net de-risking, was the 3rd most shorted entity of all. Is the last bastion of "all is well" propaganda about to fall?