Economic Potpourri December 9, 2008

News is flying out of every corner at record speed now. It is very difficult to keep up with. I had been collecting headlines to post for weekend potpourri for several weeks now.

It's only Monday evening and I already have a basket of mostly grim news collected. I will now do Economic Potpourri as often as required to keep everyone informed as best as possible.

Here are a few headline news reports of interest from the past few days.

Japan’s Economy Shrinks 1.8%, More Than Expected

Japan’s economy shrank in the third quarter faster than the government initially estimated, after businesses cut spending and slashed inventories in anticipation of a prolonged recession.

Gross domestic product contracted at an annual 1.8 percent pace in the three months ended Sept. 30, the Cabinet Office said today in Tokyo, more than the 0.4 percent reported last month. Economists surveyed by Bloomberg predicted a 0.9 percent decline. Japan’s first recession since 2001 is deepening as companies including Canon Inc. and Toyota Motor Corp. cut production, jobs and spending.

“Big Japanese companies are panicking about the global export market,” said Graham Davis, director of the Economist Intelligence Unit in Tokyo. “There’s almost no good news out there.”

Sony to Cut 8,000 Jobs, Shut Plants, Reduce Spending

Sony Corp. plans to eliminate 8,000 jobs in the largest reduction announced by a Japanese company since the credit crunch drove the world into a recession.

Sony will curb investments, outsource production and move away from unprofitable businesses as part of plans to save more than 100 billion yen ($1.1 billion) by the year ending March 2010, the Tokyo-based company said today. The job cuts represent about 5 percent of the electronics division’s workforce, it said.

Japan Gloom Deepens

Japan sank deeper into recession than previously thought in the third quarter and is reportedly considering $216 billion in new stimulus spending to fend off the global financial crisis, while the United States worked toward a rescue package for its battered auto makers.

The economy shrank 0.5 percent in the third quarter, deeper that a preliminary reading of a 0.1 percent contraction. To combat the downturn, the government of Prime Minister Taro Aso was considering a new economic package that includes spending of up to 20 trillion yen ($216 billion), the Yomiuri newspaper reported, without citing sources.

Samsung Says It’s Struggling to Make Profit From Chips, LCDs

Samsung Electronics Co., the world’s largest maker of memory chips, liquid-crystal displays and televisions, said the global recession is wiping out profits at those businesses this quarter.

The glut in the memory-chip market has worsened, making it “difficult” for Samsung to earn a profit from the product, Executive Vice President Chu Woo Sik, head of investor relations, said yesterday in San Francisco. The company is “struggling very hard” to make money from LCDs and falling prices have evaporated profitability from TVs, he said.

A failure to generate profit from semiconductors, screens and TVs would leave Suwon, South Korea-based Samsung relying on mobile phones as its only means of avoiding the company’s first quarterly loss on record. Samsung’s struggles may signal bigger shortfalls at Toshiba Corp. and LG Display Co. because Samsung produces memory chips and LCDs more cheaply than any rival.

Hynix Semiconductor Inc., the world’s second-largest computer-memory chipmaker, will probably post a record operating loss in the fourth quarter, according to a separate survey of analysts. Infineon Technologies AG, Europe’s second-biggest maker of chips, reported a seventh straight quarterly loss last week.

Samsung’s telecommunications division will probably post a 15 percent profit decline, hurt by slowing demand for mobile phones, according to the Bloomberg survey. This month, Nokia predicted that mobile-phone industry sales will decline 5 percent or more in 2009, the first contraction since 2001.

Hello chip makers, phone makers. Welcome to deflation.

California Headed for Fiscal ’Disaster,’ Budget Director Says

California will suffer a “financial disaster” if lawmakers remain deadlocked over how to address a widening budget deficit and a looming cash shortage, Director of Finance Mike Genest said.

Genest, budget chief for Governor Arnold Schwarzenegger, said that without immediate spending cuts and revenue increases, the state will run out of cash to pay monthly bills in March and will experience a $7 billion cash shortfall by July.

California’s deficit has widened to $11.2 billion this fiscal year and is projected to swell to $28 billion in the next 19 months as the state’s revenue diminishes amid the worst financial crisis on Wall Street since the Great Depression.

U.K. November Housing Sales Fall to 30-Year Low, RICS Says

U.K. home sales declined to the lowest level since at least 1978 as Britain plunged deeper into a recession, the Royal Institution of Chartered Surveyors said.

Real-estate agents and surveyors sold an average of 10.6 homes in the quarter through November, the least since the series began three decades ago, RICS said today. A separate report showed retail sales fell in two consecutive months for the first time since at least 1995.

Britain’s inflation rate fell the most in at least 11 years in October to 4.5 percent after oil prices dropped and the economy contracted 0.5 percent in the third quarter. Producer prices declined for a fourth month in November, the statistics office said yesterday.

GM's Bust Turns Detroit Into Urban Prairie of Vacant-Lot Farms

With enough abandoned lots to fill the city of San Francisco, Motown is 138 square miles divided between expanses of decay and emptiness and tracts of still-functioning communities and commercial areas. Close to six barren acres of an estimated 17,000 have already been turned into 500 ``mini- farms,'' demonstrating the lengths to which planners will go to make land productive.

``People are moving out of the city, trying to find work,'' said David Martin of Wayne State University's Urban Safety Program. Those who stay ``can't afford to move out.''

That exodus has left Detroit with the highest poverty and foreclosure rates in the U.S. and, at 10.1 percent in October in the area including Livonia and Dearborn, one of the steepest measures of unemployment in the nation as well.

Bernanke Invocation of ‘War Powers’ Undermines Fed Bank Chiefs

The Federal Reserve’s interest-rate target is getting close to zero, and so is the power of the Fed’s regional bank presidents. “The Board has usurped authority,” said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. “This dramatic change in policy direction has not been announced or even acknowledged.”

“If I am a regional Fed bank president, I have had my power diminished a lot,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, who used to work at the New York Fed. “I think of it as war powers for the Board of Governors.”

“The Board’s importance has grown at the expense of the FOMC,” said Dino Kos, former markets director at the New York Fed and now managing director of research firm Portales Partners LLC. “The FOMC meeting itself is going to become a very uncomfortable place if people don’t know what they are there for. Institutional issues are at stake.”

Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles

The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.

“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.

“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

This is a case of Keynesian clowns vs. Monetarist clowns. They are both wrong.

CIBC faces $600M class-action lawsuit hearing Monday

The Canadian Imperial Bank of Commerce squares off in a Toronto courtroom Monday with bank teller Dara Fresco, in a $600-million class-action fight about overtime.

It's the first major national class-action lawsuit for unpaid overtime to be contested at the certification stage and the case could spill over into workrooms across the nation if Justice Joan Lax accepts arguments from Ms. Fresco's legal team - led by renowned class-action lawyer Douglas Elliott of Roy, Elliott, O'Connor - that the bank violated overtime laws involving its frontline workers, including tellers, personal bankers and assistant branch managers.

Robert Bayne, a management-side labour lawyer at Filion Wakely Thorup Angeletti in Toronto, added the case is a warning to businesses. "Employers think that because an employee is paid by salary they are overtime-exempt. That is not true."

Illinois Threat to Bank of America Is Dangerous, Critics Say

Illinois Governor Rod Blagojevich’s threat to halt the state’s dealings with Bank of America Corp. over a shut-down factory in Chicago extends a “dangerous” trend of politicians meddling with commerce, a former general counsel of the Federal Deposit Insurance Corp. said.

Blagojevich, a Democrat, yesterday said the biggest U.S. retail bank won’t get any more state business unless it restores credit to Republic Windows & Doors, whose workers are staging a sit-in.

“They’re absolutely right,” Obama, who gave up his U.S. Senate seat from Illinois last month, said over the weekend. “These workers, if they have earned these benefits and their pay, then these companies need to follow through on those commitments.”

Cook County Commissioner Mike Quigley said he’ll introduce an ordinance to block the state’s biggest county from doing business with Bank of America. “I’m usually cautious, but this is an extraordinary example at an extraordinary time,” Quigley said in an interview.

Robert Topel, a labor and economics professor at the University of Chicago, said it’s “just silly” that a governor or member of Congress would seek to “micro-manage” a business.

“What does Chris Dodd know about running an auto company?” Topel asked. “Is Bank of America supposed to pick and choose which line of credit they want to keep open based on political pressure? It’s not Bank of America’s obligation to make sure the employer has funds to pay its employees.”

This is clear cut. I side with Topel, against Obama. Bank of America should not be forced to lend money to a company that is going to go bankrupt. This is pure idiocy. But it get worse. Please consider .....

New Jersey Governor Calls for Sweeping Foreclosure Moratorium

New Jersey Gov. Jon Corzine on Monday called for a three-to-six-month forclosure moratorium — a temporary pause during which severely delinquent loans cannot enter the foreclosure process — while government officials implement mass loan modification systems. “We need a bottom up approach to modifying mortgages one home at a time,” Corzine said. “It’s going to be be messy, but you got to get on the ground level.”

The governor’s statements mean New Jersey has joined other states like Florida, Connecticut and California with their governors either looking at or urging action on a foreclosure moratorium. Massachusetts implemented such a 90-day stay on the foreclosure process earlier this year with telling effects. The number of foreclosures shrank for a few months until the stays began to expire; the state saw a more than 400 percent increase in foreclosure volume months after the moratorium went into effect, suggestion little action was taken on severely delinquent loans during the pause.

Corzine cannot recognize failure when it bites him in the nose. His remedy is to take a 400% failure in Massachusetts and try it 50 times bigger (nationally) as if the results of mass stupidity will somehow produce a different result than individual stupidity. Instead of displacing people gradually over time, the Corzine plan will displace 600% of one month's total after six months.

Corzine Says Allowing Auto Industry Shutdown Would Be ‘Crazy’

New Jersey Governor Jon Corzine, the former chairman of Goldman, Sachs & Co., said allowing the U.S. automakers to shut down is “crazy” and that outside leadership is needed to turn the companies around.

“We don’t need another Lehman Brothers unintended consequence explosion of this,” Corzine said in an interview today on MSNBC. Markets have been roiled and investors have fled all but the safest securities since Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15.

Corzine, not content with proving himself to be a complete fool once, he had to do it twice. Wait a second, make that three times if you count what I said in State of New Jersey Is Insolvent.

Majority of Modified Loans Fail Again, Regulator Says

Most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months, the chief regulator of national banks said.

Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said today at a housing conference in Washington.

“The results, I confess, were somewhat surprising, and I say that not in a good way,” Dugan said, citing a third-quarter survey his agency plans to release next week.

Inquiring minds just might be wondering what Corzine thinks about this. Here is the answer. ....

Corzine Urges U.S. Government to Buy, Hold Mortgages

Governor Jon Corzine talks with Bloomberg's Kathleen Hays about the need for the federal government to buy and hold mortgages to help stem foreclosures.

Corzine, speaking in Washington, also discusses his support for either conservatorship or pre-packaged bankruptcy for U.S. automakers.

Has this guy every done or said anything that makes any sense?

Santa Baby

This is all grim stuff, but be careful of which way you are looking.

Please consider Jeff Saut: The Sound of the Santa Rally?

Speaking to the equity markets, last week I said on CNBC, while standing on the floor of the NYSE:

“First, until proven wrong, I continue to think October 10, 2008 represented the ‘capitulation low’ when of the 3,130 stocks that traded on the NYSE, a shocking 2,901 (or 93%) of them made new yearly lows. Subsequently, even though all of the indices we follow have registered lower prices since October 10th, none of those lower lows have been accompanied with anything close to the new yearly low ratio that occurred on October 10th!

"Second, while the S&P 500 (SPX) traveled below its 2002 ‘low,’ the DJIA did not, and that’s a huge downside non-confirmation. Third, I can find nowhere in history were the major averages have declined by 50% and there has not been a major ‘throwback rally’ even if the averages eventually went lower. And fourth, I’ve learned the hard way that it is extremely difficult to put stocks away to the downside during the ebullient month of December.”

Saut goes on to say that "stocks, in the aggregate, are cheap.” I disagree, but there are many who don't. Stocks are cheaper than they were, but that does not make them "cheap".

Earnings are low and headed lower still. It is a mistake to ignore what hugely rising unemployment is going to do to both demand and profits in 2009 and 2010. And it is an additional mistake to not factor in something for boomers scared half out of their minds headed into retirement.

However, Saut gave 4 very good reasons for either going long, or lightening up on shorts. I discussed a 5th reason today in Bullish Looking Charts: S&P 500, Nasdaq, BKX, Gold

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