Signs of Economic Stress

There are unmistakable signs of economic stress everywhere.

We already talked about threats of trade wars in The Nonsense on "Free Trade" Continues. We also talked about the implications of the bankruptcy reform act in The Deflation Guarantee Act of 2005.

Let's take a look at some new ones...

Just today the State of Utah told the Bush administration to take a hike On unfunded federal mandates. In a stinging rebuke of President Bush's signature education law, the Republican-dominated Utah Legislature on Tuesday passed a bill that orders state officials to ignore provisions of the federal law that conflict with Utah's education goals or that require state financing. The bill is the most explicit legislative challenge to the federal law by a state, and its passage marked the collapse of a 15-month lobbying effort against it by the Bush administration.

Federal officials fear Utah's action could embolden other states to resist what many states consider intrusive or unfunded provisions of the federal law, known as No Child Left Behind. The attorney general of Connecticut has announced that he will sue the Department of Education over the law's finances, Texas is in open defiance of a federal ruling on testing disabled children and many state legislatures have protested various provisions of the federal law, which has required a sweeping expansion of standardized testing.

Utah is interesting because it has a republican state congress as well as a republican governor who said he will sign the bill. The problem is that US congress is passing national bills, without funding them, forcing states to pay for services they do not want with money they do not have. If times were better one would not see republican states being openly defiant of President Bush. This is clearly a sign that this "recovery" is clearly under duress.

More signs of stress....
Today the Labor Department said average real weekly earnings fell 0.3% in March and 0.5% in the past 12 months. Increases in average hourly pay for 80% of U.S. workers have not matched the increase in prices. In March, energy prices jumped 4%, the highest increase since October. Gasoline prices rose 7.9%. Bear in mind those are AVERAGE wages, and that includes fat raises paid to CEOs to outsource work to India and China in the name of corporate profits. Let's see.... wages keep going down, prices keep going up, and consumers going further into debt. Does anyone think that is not causing stress?

Still more signs of stress...
Today GM announced that it is considering screwing its employees as much as possible before it ultimately goes bankrupt by withdrawing $6 billion from the retiree health care fund. Once it takes money out of the fund, it is not required to replace it. And the money could be used for general business expenses, GM Chief Financial Officer John Devine said. "It is a source of liquidity if we need it," he said. "We can extract it pretty aggressively, if we have to." That's nice. Attempt to hold stock prices up by screwing your employees. The sad thing is it will not work. Meanwhile GM insists it will keep paying billions in dividends with money it does not have.

Too bad GM did not choose to fund their retirement plan with leap PUTs rather than GM stock which has now fallen in half since they did that. What were GM's pension plan estimates again? 9% or so. Anyone think they will make those targets?

Here's still another one....
Shares of bond insurer Ambac Financial Group Inc. (NYSE:ABK) fell more than 14 percent after the company said it will no longer provide earnings estimates because markets are too unpredictable. That is just too much. I was rolling on the floor laughing.

Still more signs of stress...
Credit spreads are widening, bond offerings have been delayed or canceled, and financial and tech stocks are taking a beating. These are signs that this "grand reflation scheme" is falling apart at the seams.

Following is a chart of the XLF Financial Services Sector.Notice the breakdown on extremely high volume. This is a strong economic warning signal.


Following is a chart of the QQQQ Nasdaq 100 Index. Once again notice the high volume selloff. Is the flight from tech a sign of liquidity stress? I think so. Perhaps it is just a sign that earnings have peaked for this recovery. Most likely both of the above.


Let's recap some of the signs of stress we are seeing.
1) Trade War Threats
2) States ignoring federal laws over monetary concerns
3) Real wages falling
4) Job growth stalling
5) GM funding problems
6) Earnings estimates postponed because "the markets are too unpredictable"
7) Credit spreads are widening
8) Bond offerings have been shelved
9) High volume breakdown in the financial sector stocks
10) High volume breakdown in liquidity driven momo stocks

I did not see it but I am told that the CEO from Annaly Mortgage Mangement Inc (NLY) was on CNBC today. This is what he said: "We are witnessing a slow motion car wreck in credit....GM was just the first to go through the windshield."

Is there any reason to be long this market other than perhaps energy or gold? I think not. Get out now if you haven't already.

http://globaleconomicanalysis.blogspot.com/
Mish