Massive Jobs Contraction In Small and Medium Sized Businesses

2008 is poised to become of the worst years ever for jobs. So far it is 11 out of 11 months for job losses. December will make it a perfect 12 of 12.

Furthermore, it is now looking likely that December will exceed November's grim total of 533,00 jobs lost. See Jobs Contract 11th Straight Month; Unemployment Rate Hits 6.7% for more details.

ADP National Employment Report

Inquiring minds are pondering the grim statistics in the December 2008 ADP National Employment Report. Here are some highlights.

• Nonfarm private employment decreased 693,000 from November to December 2008 on a seasonally adjusted basis.

• Nonfarm private employment in the service-providing sector fell by 473,000

• Employment in the goods-producing sector declined 220,000, the twenty-third consecutive monthly decline.

• Employment in the manufacturing sector declined 120,000, marking its twenty seventh decline over the last twenty eight months.

• Construction employment dropped 102,000. This was its twenty-first consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 809,000.

Private Employment July - December 2008



click on chart for sharper image

Small Business Outlook

Small businesses have been driving most of the employment gains for the last couple of years. In July of 2008 that statistic started to wobble as noted in Downward Spiral In Jobs.

In November of 2008 the ADP Report Shows Contraction in Services and Small Business Jobs.

Floodgates Open On Small Businesses

The small business weakness that started in July has now become a floodgate of job losses. Please consider the December 2008 ADP Small Business Report.

Nonfarm Private Employment Highlights

• Total employment: -693,000
• Small businesses: -281,000
• Medium businesses: -321,000
• Large businesses: -91,000
• Goods-producing sector: -220,000
• Service-providing sector: -473,000
• Manufacturing industry: -120,000

Small businesses represent payrolls with 1-49 employees
Medium businesses represent payrolls with 50-499 employees
Large businesses represent payrolls with more than 499 employees

Nonfarm private payrolls by selected industry sector and size



click on chart for sharper image

Nonfarm Private Employment - Monthly Job Growth by Company Size

Who is ADP?

Here is some information About ADP.

Automatic Data Processing, Inc. (ADP), with nearly $9 billion in revenues and over 585,000 clients, is one of the world's largest providers of business outsourcing solutions.

The ADP National Employment Report® is a measure of nonfarm private employment, based on a subset of aggregated and anonymous payroll data that represents approximately 400,000 of ADP's 500,000 U.S. business clients and roughly 24 million employees working in all 19 of the major North American Industrial Classification (NAICS) private industrial sectors.

Because ADP pays 1-in-6 private sector employees in the United States every pay period across a broad range of industries, firm sizes, and geographies, it has a unique and significant perspective on the U.S. labor market.

I tip my hat to ADP for making this data available.

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

Larry Flynt Seeks Porn Industry Bailout

Even though online sales are up, and the industry is not in financial danger Larry Flynt Seeks Porn Industry Bailout.

Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.

“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion.

Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."

Industry leaders said the issue is a nation in need. "People are too depressed to be sexually active," Flynt said in the statement. "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."

"With all this economic misery and people losing all that money, sex is the farthest thing from their mind. It's time for congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."

It was only a matter of time before this happened, and that time has arrived. It's safe to say that nearly every industry group in the country is now asking for a bailout.

This is what happens when you start handing out free money. Everyone wants their "fair share". The fair share for every request is of course zero, but once you cross the line and start picking favorites, it is hard to stop. Lines for free money will always be endless.

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

As Pink Slips Mount, So Do Concerns

Increasing numbers of "Pink Slips" are weighing on the minds of consumers. Every industry, every service is affected, not just in the US, but globally. Please consider Alcoa to cut 13 pct of global work force

Alcoa Inc., the world's third-largest aluminum maker, said Tuesday it will cut 13,500 jobs, or 13 percent of its work force, and slash spending and output to cope with the global economic slowdown.

The reductions expand on cost-cutting measures announced in October, when Alcoa reported a 52-percent decline in third quarter profit, due to sharply lower aluminum prices, weaker demand and a charge from curtailing a smelter in Texas.

Production of alumina, a material used to make aluminum, will be reduced to 1.5 million metric tons per year in response to market conditions, the company said. The production cuts are expected to be completed by the end of March.

Broader production cuts are needed by Alcoa competitors, such as Rio Tinto Group and aluminum producers in China, Bradford said, and prices are unlikely to stabilize unless more drastic steps are taken.

"The problem is a lack of demand," he said. "With the lower price, Alcoa has got to try to bring its costs down. There is no way they can make money at 65-cent aluminum."

Alcoa said it will seek to lower costs for energy and raw materials, such as coke, caustic soda and aluminum fluoride.

Pink Slips Mount In China

China's uninterrupted growth for nearly three decades is coming to an end. Evidence can be found in China's mounting pink slips

After 30 years of nearly continuous, even momentous, economic growth - which has lifted millions out of poverty and bolstered the ruling Chinese Communist Party - the economy's manufacturing base is slipping. Last month, exports dipped for the first time in seven years.

Mounting factory layoffs this year - around 2 million have been sent packing near the factory city of Dongguan alone - have prompted a string of noisy but isolated protests across the country's southern industrial region.

Fretful Chinese workers have yet to channel discontent into unified campaigns, or demands for representation in the political sphere. But whether Beijing can so easily mollify the growing apprehension among the country's middle class could be another story entirely.

Cutbacks In Health Care

Health care was one of the bright spots over the past couple of years as everything else started to falter. Inquiring minds are now noting that Health insurer Cigna Cutting About 1,100 Jobs

In actions described as a response to the economic downturn, health insurer Cigna Corp. said late Monday it would be laying off 1,100 employees, roughly 4 percent of its work force, as well as consolidating unspecified real estate locations.

“Given the unprecedented economic situation we and our customers are facing, these actions are essential to ensure we can meet their needs for high value, cost effective products and services,” Cigna Chairman and Chief Executive Officer H. Edward Hanway said in a statement. “Decisions like these are difficult and never made lightly, but they are necessary given the current environment.”

Obama To Create Government Jobs

Change.Gov, the office of president-elect, is highlighting Obama's plan to create jobs called the "American Recovery and Reinvestment Plan"

“We need an American Recovery and Reinvestment Plan that not only creates jobs in the short-term but spurs economic growth and competitiveness in the long-term,” he says. “And this plan must be designed in a new way—we can’t just fall into the old Washington habit of throwing money at the problem. We must make strategic investments that will serve as a down payment on our long-term economic future. We must demand vigorous oversight and strict accountability for achieving results. And we must restore fiscal responsibility and make the tough choices so that as the economy recovers, the deficit starts to come down. That is how we will achieve the number one goal of my plan—which is to create three million new jobs, more than eighty percent of them in the private sector.”

To build a 21st century economy, we must engage contractors across the nation to create jobs rebuilding our crumbling roads, bridges, and schools. To save not only jobs, but money and lives, we will update and computerize our health care system to cut red tape, prevent medical mistakes, and help reduce health care costs by billions of dollars each year. To make America, and our children, a success in this new global economy, we will build 21st century classrooms, labs, and libraries. And to put more money into the pockets of hardworking families, we will provide direct tax relief to 95 percent of American workers.

Obama said "more than eighty percent of them in the private sector". Assuming it is exactly 80%, that would mean there will be 600,000 new government employees, the last thing the US needs.

Filling potholes and repairing bridges will not create any lasting jobs. Nor will building libraries or enhancing classrooms. The best library is the internet and save the cost of an internet connection and computer, the information is free. Compare to the cost of maintaining a brick and mortar library.

More importantly, for the work that needs to be done, inquiring minds are asking "At What Cost?"

The answer is the highest possible cost on account of the Davis-Bacon Act, a remnant of the Great Depression that prolonged the depression then and is still backfiring today. Davis-Bacon created a nightmarish "prevailing wage" concept that insured government would pay the highest possible wage for services rendered. I recommend Congress abolish Davis-Bacon but the odds Obama supports the scrapping of Davis-Bacon are pretty slim.

Bear in mind that government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs creation (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes), but once the potholes are filled, one has to ask the question, "What will we do for an encore?"

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

Chrysler Wants Money, Asks To Become "Independent Lending Corporation"

The requests for handouts keep right on coming: Chrysler seeks to tap relief funding.

Chrysler’s financing unit is in talks with the US government to change its status in a way that will allow it to tap into the troubled assets relief programme and other sources of credit.

The Detroit carmaker, which received $4bn in government aid on Friday, said on Monday that Chrysler Financial first applied three years ago to be classified as an “independent lending corporation” and that the talks have recently intensified.

Unlike GMAC, General Motors’ financing arm, Chrysler Financial is not seeking a bank charter. Even so, Ron Kolka, chief financial officer, said the proposed new status would “give us multiple sources of funding and cheaper sources of funding for the finance company”. He did not elaborate.

With their first federal loan cheques in hand, GM and Chrysler are entering complex talks with creditors, unions and others on restructuring measures aimed at convincing Washington they can become more competitive and financially viable companies.

They will be seeking deep concessions from bondholders, dealers, suppliers and the United Auto Workers’ union to satisfy conditions of $17.4bn of emergency bridge loans approved by Congress last month.

GM said it was talking to unions and its talks on debt would pick up pace over the month. Chrysler has already been talking to suppliers, dealers and the UAW for the past month.

GM took the first $4bn installment of its loan on Wednesday and was due to receive another $9.4bn by mid-February.

The carmakers need to present detailed restructuring plans by February 17 and demonstrate they can achieve a positive net worth by the end of March to secure additional taxpayer funds aimed at securing their survival.

According to GM's 10-Q it has assets of $110 billion (some of which are highly questionable, notably the stated value of inventory and property), and liabilities of $169 billion.

Stockholders deficit after factoring in a few extra items is -60 billion. And that was as of September 30th.

GM has been bleeding cash badly since then. When you lose money on every car you make, and you are starting $60-$70 billion in the hole, the odds of coming up with a plan to become profitable any time soon are extremely unlikely to say the least.

Nonetheless General Motors Claims It May Not Require Further U.S. Loans to Survive.

General Motors Corp. has enough government loans to cover the worst-case scenario it described last month and says it won’t need more if the economy holds up.

[Now there's an escape clause if I ever saw one. The odds of the economy "holding up" are essentially zero. - Mish]

“The U.S. Treasury’s $13.4 billion bridge loan to GM, coupled with the separate transaction for GMAC, meets our liquidity needs under the scenarios outlined in our December plan to Congress,” GM spokesman Greg Martin said yesterday.

GM is trying to win concessions from its biggest union, cut its debt level in half, and trim brands and dealerships as part of a restructuring plan to show it will be able to repay the money. A progress report is due Feb. 17 to the Treasury Department, and a final report is due March 31. If the plan doesn’t pass government scrutiny, GM has to repay the loans.

GM received the first $4 billion Dec. 31 from the Troubled Asset Relief Program administered by Treasury. GM is spending that money to pay bills, mostly to its 3,000 suppliers, said spokeswoman Renee Rashid-Merem.

The automaker is due to receive an additional $5.4 billion this month. Should Congress agree to release a second $350 billion in TARP funds, GM will get $4 billion more in February.

The Treasury Department also gave Chrysler LLC $4 billion Jan. 2 to help it stay in business and said Dec. 31 it has drafted broad guidelines for aid to the auto industry that would let officials provide funds to any company they deem important to making or financing cars.

GM’s losses have amounted to almost $73 billion since 2004. Chrysler says its first-half loss, the most recent information available, totaled $1.08 billion.

Chrysler is 80.1 percent owned by Cerberus Capital Management LP, which also owns 51 percent of GMAC.

Because it’s closely held, Chrysler isn’t required to release financial results and Chrysler said yesterday it still doesn’t plan to release financial information to the public after getting $4 billion in U.S. loans last month. The terms of the loans require it to release that information to the Treasury department.

If GM or Chrysler is unable to develop a viable business plan, the U.S. loan terms also allow the funds to be used as so-called debtor in possession funding to keep operating in bankruptcy. Both automakers have said bankruptcy would result in their liquidation because they wouldn’t be able to get such loans from private banks.

Notice how Chrysler is not releasing is financial statements even though taxpayers are already on the hook for $4 billion. To top it off, Chrysler Financial wants still more handouts after it becomes an “independent lending corporation”.

The government desperately wants more lending and I have just the solution. Let's all apply for aid as “independent lending corporations". If approved, lending is sure to pick up. Then we can sit back and bail out the economy while getting rich lending each other money. Wait a second, didn't we just try that with subprime and Alt-A loans?

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

Families Start Saving; Does This Aggravate The Nation's Woes?

Inquiring minds are reading Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes.

Here are some snips from the article, followed by a rebuttal.

Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.

This same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decades long buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

Paradox Of Thrift Yet Again

Kelley Evans at the Wall Street Journal is perpetuating the myth of the "Paradox of Thrift". There is no paradox.

I rebutted the Paradox of Thrift thesis on October 21, 2008 in Keynesian Claptrap From PIMCO and again in Something For Nothing vs. Paradox of Deleveraging.

Here are a few snips from both.

Keynesian Claptrap From PIMCO

Simple Logic vs. Paradox of Thrift

Simple logic would dictate that excessive spending and loose lending standards caused this crash so excessive spending and loose lending standards cannot possibly cure it. Indeed it is axiomatic that the problem cannot be the solution. The concept is so simple that Keynesian demagogues cannot see it.

Is there a Keynesian on the planet who can think more than one second ahead?

Paulson and the Keynesian fools want banks to lend. For what? What is it we need more of? Houses? Condos? Pizza Huts? Home Depots? Lowes? Nail salons? Strip Malls? Walmarts? And if by some miracle banks did lend that money and new stores were built, who is there to buy? What would happen then? Is the amount of money that can be thrown at problem unlimited? What about the problems that will create? Can problems be postponed forever? Is there a Keynesian on the planet who can think more than one second ahead?

Something For Nothing vs. Paradox of Deleveraging

Attempts to prop up the stock market, housing prices, and to stimulate lending, etc., are all doomed to fail.

The simple truth is that Keynesian economic theory is based on the same failed something for nothing theory of perpetual motion. Attempts to get something for nothing are a complete waste of both time and resources and thus can only make matters worse.

Let's look at this still another way. In Austrian economics terms, saving is what is left over (not consumed) from production.

Keynesian theory suggests you can have something today and tomorrow which is of course as preposterous as having your cake and eating it too. In simple terms one cannot consume what one does not produce, at least not forever.

Spending now will only borrow from future production. The United States has been doing that for decades and all we have to show for it is an exodus of manufacturing jobs from the United States to China, and a housing bubble of epic proportion.

There is no paradox. The United States has borrowed itself into oblivion. Consumers have finally seen the light and are attempting to save in spite of horrible economic policy encouraging them to do otherwise.

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

Factory Orders Tumble, Retail Sales Fall, Foreclosure Sales Triple

The string of bad news continues as factory orders plunge, retail sales fall, home prices sink and foreclosure sales soar. Bloomberg is reporting Factory Orders in the U.S. Tumble More Than Forecast.

Orders placed with U.S. factories in November fell twice as much as forecast, signaling businesses are cutting back on investments as the recession deepens.

Demand fell 4.6 percent after a revised 6 percent decrease in October that was larger than previously estimated, the Commerce Department said today in Washington. The back-to-back decline was the biggest since records began in 1992.

“Consumer-durable spending is way down as credit is more difficult to get,” said Douglas Smith, chief economist for the Americas at Standard Chartered Bank in New York, said in an interview with Bloomberg Television. “With weakness overseas, you’re also seeing fewer orders for U.S. manufactured goods.”

Factory orders were forecast to fall 2.3 percent, after a previously reported 5.1 percent drop the prior month, according to the median estimate of 60 economists surveyed by Bloomberg News. Projections ranged from declines of 0.4 percent to 6.5 percent.

Factory sales plunged 5.3 percent in November, the biggest drop on record.

The U.S. economy contracted at a 0.5 percent annual rate in the third quarter, the Commerce Department said Dec. 23. The economy probably shrank at a 4.3 percent annual rate in the last three months of 2008, the biggest contraction since 1982, according to the median estimate of 51 economists surveyed last month by Bloomberg.

Factory inventories decreased 0.3 percent, and manufacturers had enough goods on hand to last 1.41 months at the current sales pace, up from 1.33 months in October.

The jump in the inventory-to-sales ratio “indicates excess inventories that will need to be worked off,” Steven Wood, president of Insight Economics LLC in Danville, California, wrote in a note to clients. “The manufacturing sector is mired in a deep recession that is unlikely to be quickly resolved.”

U.S. Retail Sales Fell 0.8% in Week After Christmas

The string of bad news on the retail front continues with a report U.S. Retail Sales Fell 0.8% in Week After Christmas.

Purchases at U.S. retailers declined last week as post-Christmas markdowns failed to overcome what may have been the worst holiday shopping season in four decades.

Sales at stores open at least a year dropped 0.8 percent in the seven days through Jan. 3, the International Council of Shopping Centers and Goldman Sachs Group Inc. said today in a statement. ICSC Chief Economist Michael Niemira said November- December sales declined as much as 2 percent.

Macy’s Inc., Talbots Inc., Aeropostale Inc. and other retailers offered discounts of 65 percent or more on some sweaters, jewelry and pants to clear out merchandise after Christmas. Higher markdowns may put more pressure on earnings.

“December was relatively chaotic in price, with more discounts than retailers planned, especially in department stores,” Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport Beach, California, said in a telephone interview. “Consumers have discovered that the industry is responding with lower and lower and lower prices.”

The stores think this is grim news but actually it is a very good thing. Consumers need to spend less and save more. It is spending that got us in trouble, spending will not get us out of trouble. Look for the savings rate to soar in 2009.

Foreclosure Sales Triple

Motivated sellers are driving the market. With banks dumping properties Metro-Area Foreclosure Sales Tripled in First 10 Months of 2008.

Foreclosure sales in the 25 largest U.S. metropolitan areas almost tripled in the first 10 months of last year as rising unemployment and falling home values made it tougher for homeowners to sell or refinance their mortgages.

Motivated sales, which include foreclosure auctions and banks selling homes taken over for non-payment, increased 193 percent from January to October 2008 from a year earlier, New York-based real estate data company Radar Logic Inc. said today in a report. Conventional sales rose 6 percent in that period.

“Lenders are motivated to sell foreclosed houses as quickly as possible to get as much of the loan recovered as possible,” Radar Logic Chief Executive Officer Michael Feder said in an interview. “They have a tendency to accept deeper discounts relative to other sales, to the point where motivated sales are driving the market.”

Home prices fell in 24 of 25 U.S. metropolitan areas in October, Radar Logic said, as unemployment hit a 15-year high in November. Almost half the homeowners who bought in 2006 now owe more on their mortgages than their houses are worth, making it difficult for them to refinance without bringing cash to the closing, according to Seattle-based real estate data company Zillow.com.

Forty-one percent of October home sales in Los Angeles and Phoenix were foreclosure auctions or financial firms trying to recoup lost loan value, Radar Logic said.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record, according to RealtyTrac Inc., a Irvine, California-based provider of default data.

There is no reason to proclaim an end to the trend of rising foreclosures and falling home prices. Rising unemployment will seal the fate in 2009. The bottom is not in.

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

Reflections On 2008, Themes For 2009

2008 may best be remembered as the year most would like to forget.

Sure there were some highlights that nearly everyone will remember fondly such as the opening ceremony of the Olympics in China, and for Democrats the election of Barrack Obama, the first black president in history, but otherwise there were slim pickings, especially on the economic side.

2008 brought a continuation of the housing crash, massive foreclosures, rising unemployment, the collapse of Bear Stearns, the bankruptcy of Lehman, a $700 billion bailout that most citizens were against, fear mongering by Bush and Paulson to get the bailout bill passed, a ponzi scheme right under the nose of the SEC by Madoff that wiped out as much as $50 billion, hundreds of mortgage lenders imploding, and a stock market crash that was down as much as 51% finishing the year at -38.5%.

We also witnessed a credit crunch, soaring corporate bond yields, a commodities boom and crash with oil soaring to $140 then falling to $36, record low yields in treasuries, the nationalization of Fannie Mae and Freddie Mac, and a bailout of AIG that has already cost taxpayers over $100 billion. Sadly, socialism was embraced while free market principles were shot and left for dead. Worldwide, the Fiscal Insanity Virus Spread Rampantly.

Finally, 2008 was a year of the biggest ever declines in the CPI, auto sales, consumer sentiment, home sales, home prices, and treasury yields which actually went negative on a couple of occasions. The only comparable period in US history to this sequence of events was the Great Depression.

Investmentwise (on the long side), treasuries were the big winner, followed by cash. Nearly everything else lost. I can sum all of the above paragraphs up in a single word.

DEFLATION

2008 is the year the impossible happened, the impossible being deflation. Deflation was called on this blog and a few other places but the idea was essentially mocked as impossible by the masses.

Of course this will start the inevitable argument about what deflation is or isn't, but what's described above is most assuredly an economic deflationary depression that only those clinging to impractical definitions can possibly disagree with.

For further discussion and a chart of conditions one would expect to see during periods of deflation, inflation, disinflation, and stagflation please see Humpty Dumpty On Inflation.

Themes For 2009

Looking ahead in 2009 here are some things I see as likely.

Obama will pass a stimulus package of $850+- billion but $300 billion will be "tax relief" amounting to $19 a week at most. $19 a week per household is not going to stimulate much of anything but it will add to the budget deficit. People will use that money to pay down bills, which is exactly what they should be doing with it.

The first 3-5 months are going to be extremely weak on the jobs front with 400,000 or more jobs lost each month. Obama is going to need to create 2-3 million jobs just to counteract job losses in first half of the year. There is no way he is going to create jobs that fast given implosions in state budgets and retailers.

In 2009 consumers will continue to retrench, housing will continue to decline, and as many as 100 small or regional banks will implode over falling commercial real estate prices. The Fed may arrange shotgun marriages with these banks instead of letting them go under.

I am sticking with a thesis that says we are currently in a sucker rally in the stock market that will end soon after inauguration or moments after Obama signs a new stimulus package. My target is 600 on the S&P but 450 is not out of the question. However, it is better to think of this in ranges and that range would roughly be 450-700.

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

Should treasuries be shorted? No, it is too early. Yields can easily make lower lows. Just because something is not a good long, does not make it a good short. Look at how long yields stayed low in Japan. I doubt we see a print of 4 on the 10-year treasury for a long time. If one wants to bet on yields rising in a for a reflation trade, there are better plays such as going long energy stocks that yield a nice dividend as well.

What About Gold, The Dollar, Inflation?

Let's work backwards. One thing that is virtually guaranteed not to happen in 2009 is hyperinflation. So toss that silly hyperinflation ideas out of your head before they poison your mind. Credit marked to market is going to continue to plunge, and plunge at a faster rate than any stimulus from Obama or any swap-o-rama tactics by the Fed. In my book that is deflation. You might not be able to see it as the Fed will allow banks to hide the destruction of credit in level 3 assets or off the books in SIVs, but pretending something is worth more than it is does not make it so.

The Fed at some point will resort to out and out monetization, and that will have the inflationists screaming at the top of their lungs. However, banks will still be reluctant to lend, and consumers and businesses will be reluctant to borrow. In addition, I expect the velocity of money printed to be close to zero and for the savings rate to rise. In aggregate, these are not hyperinflationay things. Heck, they are not even inflationary things.

US Dollar Trading Range

Where the dollar goes will depend greatly on what foreign central banks do. Additional cuts by the ECB, BOE, and China will be dollar friendly. I expect those to happen. I am sticking with a thesis that has the dollar index in a trading range of 75-90 for most of the year. If Obama proves to be more fiscally prudent than the market participants think (this is quite possible because no prudence at all is expected), then the dollar can easily bust the top of that range. If the ECB refuses to cut in the face of an expanding recession, the dollar can fall to the bottom of that range.

It is highly unlikely the dollar crashes in 2009. The dollar already crashed. There is no other word for a plunge from 120 to 70 on the US dollar index. Furthermore, seignior currencies tend to strengthen in deflation and there is no reason to believe deflation will come to an abrupt end.

Wildcards

China is a wildcard, as is war in Mideast between Israel and Iran, as is protectionist legislation coming from Congress. On the positive side, pulling troops out of Iraq is likely dollar friendly. The rationale is spending money in the US where we at least get something out of it on the asset side of the balance sheet is better than wasting money dropping bombs. And finally it is possible that Obama makes peaceful overtures towards Iran, defusing a messy situation. This too would likely be dollar friendly.

Where's Gold Headed?

So where is gold headed in 2009? The answer is I do not know nor does anyone else. It is far easier to post solid reasons why S&P earnings will continue to fall, unemployment will continue to rise, and various stimuli will fail to stimulate than it is to predict the likelihood of various wildcards, actions by foreign central banks, etc., that may affect sentiment towards gold.

You may wish to consider buying some gold (not coins as the markup is ridiculous) and simply holding on to it for the long haul. Physical gold, stored outside the country, at GoldMoney is one of the best options. In the interest of full disclosure I have a relationship with GoldMoney and will benefit if you open up an account using the above link. It will not affect the price you pay when you buy or receive when you sell.

It is not possible to predict what timeframe it takes for market participants to realize it's not just the US dollar that is trash, but rather every fiat currency on the planet. That realization is a process, not an event that can be timed. So don't bet so much on it (or anything else for that matter) that you will lose sleep over it if price declines for a while longer.

Here's one final thought on equities: Expect the first half of 2009 to be a traders market, most likely biased to the downside, perhaps all the way through September. At that point (especially if downside S&P targets are reached), the final three months may provide a substantial 4th quarter rally. Whatever you do, don't marry this scenario or any other scenario. Be nimble, take the setups you see, and be happy with them.

Wishing you a happy and prosperous new year.

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

Media Blamed For Making Economic Crisis Worse

A new poll is out showing 77% of Americans blame media for making economic crisis worse.

Seventy-seven percent of Americans believe that the U.S. media is making the economic situation worse by projecting fear into people's minds.

The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse. The poll was conducted via telephone, December 4 - 7.

Household Incomes:
$25k - $35k -- 79% answered YES
$35k - $50k -- 88% answered YES
$50k - $75k -- 76% answered YES
$75k - more -- 78% answered YES

Demographics:
85% of young adults (18-24 yrs old) answered YES
77% of males and females alike answered YES
65% of blacks answered YES

Richard Scheff, a national expert on corporate liability and white collar crime issues, warns media that they could potentially be exposed to liability despite apparent constitutional protections:

"Although statements by the media are protected by the First Amendment, the survey results demonstrate that the public believes that the press bears some responsibility for the lack of confidence in the economy. One would hope that the media would act less out of self-interest in these times of national crisis," said Mr. Scheff, vice chairman and partner with Philadelphia-based law firm Montgomery McCracken Walker & Rhoads.

Scheff seems to think bad news should be suppressed in the national interest. This is constitutionally dangerous thinking. Who gets to say what is or isn't in the anyone's self interest? From where I sit, it is always desirable to hear the truth from media and the Government.

Sadly, if one wants a positive spin on things, all one has to do is turn on CNBC to get a parade of experts proclaiming the bottom is in and housing will recover in the second half. And if one needs a laugh it's an easy matter to turn on Cramer. Actually it's quite hard to not get a bullish spin on things from the media.

Don't blame the media for fear mongering. The most fear mongering in history was done by politicians, administration hacks like Treasury Secretary Paulson, and GM executives all promising Armageddon if various bailouts were not passed.

There's Emotional Contagion Going On

The San Francisco Chronicle is reporting the Economy takes a toll on mental health.

In a typical week, Berkeley psychotherapist Don McKillop sees clients with a range of emotional issues. But these days, all of his patients have one thing in common: financial stress.

"In the last week," McKillop said, "every one of my clients mentioned anxiety over the economy."

McKillop is not alone. In an economic climate that grows more precarious every day, Bay Area residents are experiencing an epidemic of anger, anxiety and emotional stress, according to local psychotherapists and academics. "There's emotional contagion going on," says Corte Madera psychotherapist Ruth Kalb. "Panic begets panic."

In October, an American Psychological Association survey showed that 83 percent of American women and 78 percent of American men were experiencing heightened stress about money.

Women, the study said, are today more concerned with money issues than personal health. Women over 63 are especially distressed: Worries about the economy rose from 74 percent in April to 92 percent in September.

Inevitably, financial anxieties spill into family relations. "People are struggling with how to talk about this with their kids," Kalb said. "Adult children are needing to move back home, upsetting everyone's rhythm."

Economic anxieties are passed on to children, said Berkeley psychotherapist Susan Regan. "I was with this family in a family session and one of the kids turned to the parent and said, 'Mom, how's your job going? Are you OK?' "

Economic Masochism

While some blame the media for reporting bad news, hoping it will go away, others are fixated on it. Please consider Catching the economic anxiety bug.

Hymie Anisman, a neuroscientist at Carleton University in Ottawa, has diagnosed a new and highly contagious ailment for the recession era: economic masochism.

It was a pal who first exhibited the symptoms many people are experiencing these days -- although this man's case is extreme.

"I have a friend who sits all day going through various journals online and various blogs as if he wants to find more bad news. He's read it all 20 times, he's knows what's there. It's almost like he's addicted by it. But every once in a while he'll get some little glimmer that will reinforce some little glimmer of hope," Dr. Anisman, who studies the effects of stress, said in a recent interview.

Consumer Confidence At Record Low

Growing anxiety over jobs has Consumer Confidence At All Time Low.

Confidence among U.S. consumers unexpectedly dropped in December to a record on growing anxiety over the lack of jobs, raising the risk that spending will keep weakening into the new year.

The Conference Board’s index of consumer confidence fell to 38, the lowest level since records began in 1967, from 44.7 in November, the New York-based private research group said today. Another report showed declines in property values accelerated.

Rising unemployment, mounting foreclosures and declining household wealth have dimmed the outlook for consumer spending, which accounts for 70 percent of the economy. This year’s holiday season, the most important for retailers, was probably the worst in at least four decades.

“The deterioration going on right now in the labor market made people feel much worse,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “If people are worried about their jobs, they are not going to spend. That is extremely negative.”

The 60 percent plunge in gasoline prices from July’s record had prompted economists to project confidence would climb, mimicking the improvement in other measures. The median estimate in a Bloomberg News survey of 52 analysts called for the Conference Board’s gauge to rise to 45.5 from previously reported 44.9 for November.

Those ever optimistic economists are forever predicting stock market recoveries, housing recoveries, job recoveries and consumer confidence recoveries, all of which set unrealistically high expectations and glimmers of hope that won't pan out.

No wonder everyone's miserable.

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

Auto Sales Collapse, GM At 49 Year Low

It was a grim December across the board for Automakers as GM’s 2008 U.S. Sales Plummet to 49-Year Low; Toyota, Honda Fall.

General Motors Corp.’s 2008 U.S. sales plunged to a 49-year low, dragged down by a 31 percent plunge in December as demand was ravaged by the recession and concern that the biggest domestic automaker might collapse.

Toyota Motor Corp.’s U.S. deliveries plummeted 37 percent last month, while Honda Motor Co. slipped 35 percent, Ford Motor Co. fell 32 percent and Nissan Motor Co. was down 31 percent, pointing toward the industry’s worst annual volume since 1992.

The federal rescue of GM and Chrysler LLC couldn’t overcome the weight of consumer pessimism and tight credit in the world’s biggest auto market. Ford’s annual U.S. sales sagged to a 47-year low, while GM’s total of 2.98 million was the least since 1959, according to trade publication Automotive News.

“If consumer confidence doesn’t snap back soon, it’s going to be difficult for the automakers,” said John Wolkonowicz, an analyst with IHS Global Insight Inc. in Lexington, Massachusetts. “It isn’t just GM, Ford, Chrysler that are suffering from this. It is the entire auto industry globally.”

Ford, Honda Sales Tumbled More Than 30%

Bloomberg is reporting Ford, Honda December Auto Sales Tumbled More Than 30%

Ford Motor Co. said U.S. sales fell 32 percent in December, while Honda Motor Co. posted a 35 percent decline as the recession curbed demand in the world’s biggest auto market.

Sales at Ford, the second-biggest U.S. automaker, dwindled to 139,067 cars and trucks, from 195,105 a year earlier, the Dearborn, Michigan-based company said today in a PR Newswire statement. Honda, No. 2 in Japan, was down to 86,085 vehicles from 131,792, said Chris Martin, a spokesman.

Honda’s December slide dragged the company to its first annual U.S. sales decline since 1993, while the industry’s 2008 total may have been the lowest in 16 years. Last month’s federal rescue of General Motors Corp. and Chrysler LLC failed to stem consumer pessimism and tight credit.

Sales globally have begun to crumble as well. Auto sales in Japan dropped 5 percent in December and finished the year at a 28-year low as a recession there sapped demand for Toyota and Nissan vehicles. French auto sales fell 16 percent in December.

Honda U.S. December Sales Declined 35%

Make it a clean sweep of the major automakers reporting today as Honda Says U.S. December Sales Declined 35%.

Honda Motor Co., Japan’s second- largest automaker, said U.S. sales fell 35 percent in December, dragging the company to its first annual decline in the market since 1993.

Sales dwindled to 86,085 cars and trucks, from 131,792 a year earlier, a spokesman, Chris Martin, said today in an interview.

Honda led off the industry’s monthly reports that may close the worst year for U.S. sales since 1992. The federal rescue of General Motors Corp. and Chrysler LLC in December failed to stem consumer pessimism and tight credit that eroded demand for every automaker selling cars worldwide.

Attempts to revive auto sales will be futile. There is no pent up demand for autos and promotional sales will do nothing more than bring a bit of future demand forward.

Consumers are retrenching because they need to retrench. Why is it the Fed, the Treasury, and Congress cannot understand this simple economic construct?

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

Survival Of The Weakest

There was a very interesting pair of articles over the weekend on the New York Times by Michael Lewis and David Einhorn called How to Repair a Broken Financial World. I agree with much of what they have to say.

Here are a few snips from the article describing some of the things the Fed, Treasury, and SEC have done wrong.

The Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money?

But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

I agree with Einhorn and Lewis on the above points and have talked about the rating game scam on many occasions, most notably on September 28, 2007 in Time To Break Up The Credit Rating Cartel. But instead of getting rid of the big three rating agencies or breaking them up, the SEC is talking about adding more bureaucratic oversight and rules that will solve nothing.

Moody's, Fitch, and the S&P could not possibly survive without government support. That's how bad their ratings were and still are. But interestingly enough, no one in authority wanted them to downgrade Ambac (ABK) or MBIA (MBI) for fear of repercussion in the bond market.

This is the epitome of the anemic protecting the weak.

And rather than let GM and GMAC go under, the Treasury Now Makes Subprime Auto Loans and the Fed opened up the TALF program to all borrowers including auto dealerships. I surmise that as a result of these programs, the Fed Destined Is To Become World's Largest Auto Dealership.

Everywhere you look the weak are being propped up for one reason or another. Take a good look at AIG. There is no reason for the government to be pouring over a hundred billion dollars to prop up this sick puppy. I suspect but cannot prove the reason this was done was that Goldman Sachs (GS) and or JPMorgan (JPM) were on the other end of AIG's credit default swaps gone bad. Whatever the reason, taxpayers are footing the bill.

Perhaps we find out eventually but the Fed and the Treasury are refusing to disclose what they are doing in spite of assuring Congress there would be transparency. Sadly, there is no transparency and no accounting of what either department is doing.

In response, Bloomberg Sues Fed to Force Disclosure of Collateral and Fox News Business Network Sues the Treasury Department for Failure to Respond to Freedom of Information Act.

Fed's Yellen supports "experimental approaches"

On Sunday the Fed's Yellen announced support for "experimental approaches" to prevent deflation. Here is my summary of Yellen's proposal.

1)Yellen wants to "pull out all the stops to ensure an extended period of stagnation does not occur"

2)Yellen wants to do this even though the "approaches are experimental, and there is a great deal of uncertainty concerning their likely effects."

3)To top it off, Yellen admits that an extended period of stagnation will occur anyway: "Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely."

Everywhere you look, the actions and statements by the Fed, the Treasury, and the SEC are tantamount to a policy of "Survival of the Weakest". Such policies cannot possibly work in nature, or the economy. Recessions and depressions need to clear the weak, the incompetent, and the superfluous. Attempts to keep them alive will only zombify the economy and push off the recovery.

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

Fed's Yellen supports "experimental approaches" to prevent deflation

Nearly everyone is hopping on the Keynesian bandwagon as the urge to try something, anything, to halt this economic slide is simply overpowering.

Please consider Fed’s Yellen Supports ‘Substantial’ Economic Stimulus.

The U.S. economy faces a “serious risk” of stagnating for an extended period of time and “it’s worth pulling out all the stops” on fiscal stimulus, said Federal Reserve Bank of San Francisco President Janet Yellen.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Yellen said in the text of a speech today in San Francisco. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”

Yellen’s remarks indicate that support for new stimulus to revive the economy is gaining momentum within the central bank. Chicago Fed Bank President Charles Evans endorsed such policy yesterday, following Fed Chairman Ben S. Bernanke’s lead in October.

“Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation,” which may intensify financial-market conditions, Yellen, 62, said during the annual meetings of the Allied Social Science Associations and the American Economic Association.

“It’s worth pulling out all the stops to ensure those outcomes don’t occur,” she said.

“I am sanguine that the Fed’s new programs will be helpful in restoring credit flows,” Yellen said. “But many of the new approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

“Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely,” she said.

Summary of Yellen's Proposal

1)Yellen wants to "pull out all the stops to ensure an extended period of stagnation does not occur"

2)Yellen wants to do this even though the "approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

3)To top it off, Yellen admits that an extended period of stagnation will occur anyway: “Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely.”


One Sentence Summary

Yellen wants to pull out all the stops using experimental approaches to the fiscal crisis that she admits will not solve the crisis and might even be detrimental.

Interestingly, Yellen says the Fed Must Have ‘Exit Strategy’ for Loan Programs.

Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. central bank must have a “timely” plan for ending lending programs created since the start of the global financial crisis.

“Many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness,” Yellen said in remarks prepared for a speech today in San Francisco. “The Fed must ensure that it has an exit strategy to wind down the facilities in a timely and effective way when they are no longer needed.”

To further recap, Yellen proposes "novel interventions" of dubious merit, admitting they will not work, and wants a "timely" plan to end them.

How about right now, before they do any more damage?

Writing the Rules for a New World

Does "experimental" economic policy make any sense? Fareed Zakaria writing for Newsweek thinks it does. Please consider Writing the Rules for a New World

As bad as it looks, the current financial crisis will end. I don't know when or how, but the combination of government interventions will eventually work. Why do I say this? Because governments are more powerful than markets. They can close markets down, nationalize firms and write new rules. And Washington has one other, unique power: it can print money.

I cringe when I read such monumental stupidity.

Every nation on the planet has the ability to print money. There is nothing unique about Washington's ability. And if you print and spend enough of it you look like Zimbabwe. Yes the US will survive, but it will be in spite of such stupidity not because of it.

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

44 States Face Huge Budget Shortfalls

The Center on Budget and Policy Priorities is reporting States Face A Great Fiscal Crisis.

At least 44 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.

States are currently at the mid-point of fiscal year 2009 — which started July 1 in most states — and are in the process of preparing their budgets for the next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps of 42 billion (9% of state budgets) have opened up in the budgets of at least 41 states plus the District of Columbia. These budget gaps are in addition to the $48 billion shortfalls that these and other states faced as they adopted their budgets for the current fiscal year, bringing total gaps for the year to nearly 14 percent of budgets.



click on chart for sharper image



click on chart for sharper image

STATE FISCAL STRESS DEEPENS

• Some 44 states are facing fiscal stress in their FY2009 and/or FY2010 budgets.
• New mid-year fiscal year 2009 shortfalls of $42 billion have opened up in the budgets of at least 41 states and the District of Columbia.
• Budget deficits are already projected in 38 states for the upcoming fiscal year. Initial estimates of these shortfalls total almost $80 billion.
  
• As the full extent of 2010 deficits become known, shortfalls are likely to equal $145 billion.
• Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total $350 billion to $370 billion.

Numbers Are Overly Optimistic

As bad as those numbers look, I suggest the numbers are overly optimistic. California alone has raised its budget deficit projection several times from $4 billion, to $8 billion, to $14 billion, and that is just for fiscal year 2009. The California 2010 deficit is now projected to be $25 billion, a whopping 24.8% of the Fiscal Year 2009 General Budget. However, how can anyone have any confidence in the numbers when the projected deficit is revised higher every month?

Remember that economists are expecting housing to bottom in 2009 and the recession is also expected to end soon followed by a weak recovery. Of course those same economists predicting a housing recovery have predicted a second half housing recovery for the last 3 years and most of them did not think the US would slide into a recession.

I do not think housing prices bottom until 2012 given massive inventory and soaring unemployment. Furthermore, I expect any recovery will be exceptionally weak, assuming there even is a recovery.

The key point is the trend is for worsening state budget projections, and there is no reason to expect that trend to reverse.

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

State Workers Fight Over Cutbacks as States Want More From Obama

As the budget crisis deepens, state employees are fighting each other for survival. Potshots are thrown between management vs. non-management, union vs. non-union, teachers vs. everyone else. In addition, governors want $1 trillion out of a total package of $850 billion Congress is likely to send to Obama to sign. The math does not add up.

There is other noteworthy economic news of interest. Here are a few headline news reports of interest from the past couple days.

California Employees fight each other as budget crisis deepens

State workers donned their rhetorical boxing gloves in 2008 and slugged it out – with each other.

Online, state workers defended themselves from attacks by private-sector workers and jabbed the governor (not so affectionately referred to as GAS) for wanting to furlough or lay off workers. And they attacked each other. ....

You'd think that state workers would pull together in tough times. Strength in numbers and all that.

But the opposite almost always happens when members of a large bureaucracy, be it public or private, feel threatened, said Todd Dewett, a group behavior expert at Wright State University in Dayton, Ohio.

"The notion of what constitutes productive behavior gets shaken," Dewett said. "So as California's financial pie shrinks, rivalries among state workers become more fierce."

Weakened leadership widens those divisions. Disenchanted members will freelance to protect their interests, Dewett said. And many public employees feel as if their team is losing right now.

Legislators and the governor agree that state education funding will have to be cut as part of any budget fix, something the teachers' lobby would have blocked in years past. The once-feared correctional officers union has gone two years without a negotiated contract. Negotiators haven't made much progress in labor talks covering another 170,000 unionized state workers. Most contracts expired last June.

And true to human nature, state workers fought with each other. Sound the bell for another round in 2009.

Click on the link to see the amount of bickering. It's quite interesting.

Treasury Defends Its Actions to an Oversight Panel

Responding to a congressional panel's attack, the Treasury Dept. says it's responded effectively to the financial crisis. That won't be the last word.

Early on the afternoon of Dec. 31, just as many Americans were beginning to tune out and focus on New Year's Eve celebrations, the Treasury Dept. issued its response to a blistering Dec. 10 report from the congressional panel established to oversee the agency's actions.

The 13-page Treasury report broke no new ground, strongly echoing recent comments and testimony from Treasury Secretary Henry Paulson and Neel Kashkari, his deputy managing the crisis response. At the same time, it sidestepped some of the most pointed questions and observations raised by the Congressional Oversight Panel in its initial report. In that report, the COP criticized the Treasury for failing to monitor what the banks and others actually did with billions of dollars in federal funds they had received, and questioned whether the Treasury had an overarching strategy or could show concrete results.

In its response, the Treasury effectively responded that it knows what it's doing, things could have been a lot worse, its efforts should improve matters in time, and the programs are working even if results are difficult to measure. ...

Central to many of the agency's answers in the report—and echoing Paulson and Kashkari in recent weeks—is the argument that, without Treasury's actions, worse could have happened: "The most important evidence that our strategy is working is that Treasury's actions, in combination with other actions, stemmed a series of financial institution failures," the report says. In other words, Treasury seems to be saying, Citigroup (C) teetered on the brink even after receiving an initial $25 billion capital infusion from the Treasury; but after a second bailout, it survived.

Government aid could save U.S. newspapers

Connecticut lawmaker Frank Nicastro sees saving the local newspaper as his duty. But others think he and his colleagues are setting a worrisome precedent for government involvement in the U.S. press.

Nicastro represents Connecticut's 79th assembly district, which includes Bristol, a city of about 61,000 people outside Hartford, the state capital. Its paper, The Bristol Press, may fold within days, along with The Herald in nearby New Britain.

That is because publisher Journal Register, in danger of being crushed under hundreds of millions of dollars of debt, says it cannot afford to keep them open anymore.

Nicastro and fellow legislators want the papers to survive, and petitioned the state government to do something about it. "The media is a vitally important part of America," he said, particularly local papers that cover news ignored by big papers and television and radio stations.

To some experts, that sounds like a bailout, a word that resurfaced this year after the U.S. government agreed to give hundreds of billions of dollars to the automobile and financial sectors.

Many media experts predict that 2009 will be the year that newspapers of all sizes will falter and die, a threat long predicted but rarely taken seriously until the credit crunch blossomed into a full-fledged financial meltdown.

Some papers no longer print daily, and some not at all.

"The whole idea of the First Amendment and separating media and giving them freedom of control from the government is sacrosanct," said Digby Solomon, publisher of Tribune Co's Daily Press in Newport News, Virginia.

Note the insanity. Government sponsorship of papers is supposed to keep a free press.

SEC Said to Examine More Ponzi Schemes After Madoff

U.S. regulators working to untangle Bernard Madoff’s alleged $50 billion Ponzi scheme are probing other money managers suspected of using similar tactics, two people with knowledge of the inquiries said.

The U.S. Securities and Exchange Commission is pursuing at least one case in which investors may have been cheated out of as much as $1 billion, according to a person, who declined to name the manager and asked not to be identified because the probe isn’t public.

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators as recently as last month sought more investors.

The new cases “signal it’s become an enforcement priority,” said University of Rochester President Joel Seligman, who wrote a history book on the SEC. After Madoff’s alleged fraud “you’ve got to check hard and see if there is more like it in the marketplace.”

The House Financial Services Committee at a Jan. 5 meeting will examine regulatory efforts to catch investment scams and scrutinize how Madoff’s alleged conduct avoided detection for years. SEC Chairman Christopher Cox said Dec. 16 that the agency failed to act on “credible, specific” allegations about Madoff dating back at least to 1999.

Obama Moves to Counter China in Space With Pentagon-NASA Link

President-elect Barack Obama will probably tear down long-standing barriers between the U.S.’s civilian and military space programs to speed up a mission to the moon amid the prospect of a new space race with China.

Obama’s transition team is considering a collaboration between the Defense Department and the National Aeronautics and Space Administration because military rockets may be cheaper and ready sooner than the space agency’s planned launch vehicle, which isn’t slated to fly until 2015, according to people who’ve discussed the idea with the Obama team.

The potential change comes as Pentagon concerns are rising over China’s space ambitions because of what is perceived as an eventual threat to U.S. defense satellites, the lofty battlefield eyes of the military.

China, which destroyed one of its aging satellites in a surprise missile test in 2007, is making strides in its spaceflight program. The military-run effort carried out a first spacewalk in September and aims to land a robotic rover on the moon in 2012, with a human mission several years later.

Obama has said the Pentagon’s space program -- which spent about $22 billion in fiscal year 2008, almost a third more than NASA’s budget -- could be tapped to speed the civilian agency toward its goals as the recession pressures federal spending.

NASA faces a five-year gap between the retirement of the space shuttle in 2010 and the first launch of Orion, the six-person craft that will carry astronauts to the International Space Station and eventually the moon. Obama has said he would like to narrow that gap, during which the U.S. will pay Russia to ferry astronauts to the station.

We went from no program to a man on the moon in 7 years. Now with a complete program in place and having been to the moon already, it is going to take another 7 years to get back there. How much did it cost to put a man on the moon the first time? How much will it cost this time?

Chrysler gets $4bn emergency loan

The huge American carmaker Chrysler has received a $4bn (£2.75bn) emergency loan from the US government in a deal to help it stave off collapse.

It is part of a $13.4bn rescue package approved last month by Washington for Chrysler and its rival General Motors. Both companies said they needed the money to pay suppliers at a time of plunging sales and credit concerns.

They were promised bail-out funds on condition that they restructure and prove their viability by 31 March. "This initial loan will allow the company to continue an orderly restructuring," Chrysler Chief Executive Bob Nardelli said in a statement.

Fannie says IndyMac has $1 bln in mortgage obligations

Fannie Mae, the largest U.S. home funding company, believes that failed mortgage lender IndyMac has obligations to repurchase around $1 billion of home mortgages that failed to meet Fannie's standards, the Wall Street Journal said, citing people familiar with the situation.

Banks that sell loans to Fannie or its smaller rival, Freddie Mac, must make "representations and warranties" that those loans meet certain quality standards, the paper said. If not, the lenders can be forced to buy the loans back, the paper reported on its website late on Thursday.

A spokesman for Fannie told the paper the company is working with the Federal Deposit Insurance Corp (FDIC) to resolve the issue.

Once Burned, Twice Shy: Pension Funds

After suffering through 2008, some big pension funds are having second thoughts about their exposure to private-equity firms, hedge funds and other nontraditional investments.

Across the U.S., pension-fund managers and investment officers have been scrutinizing their asset allocations, especially toward alternative investments. In addition to wilted returns, pension funds are leery because some hedge funds have made it hard to cash out, including by postponing redemption requests from investors.

Other pension funds that barreled into private equity have been crunched by capital calls, or demands to deliver cash that are often conditions of investment with private-equity firms. While those obligations aren't a surprise, many pension funds expected to offset the payments with returns from other private-equity investments. Such gains have been rare.

"What we saw as an asset before, we now see as a liability," says Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, the country's second-largest public pension fund by assets.

About 14% of Calstrs's roughly $129 billion in assets are in private equity. The pension fund will review those holdings as part of a broader asset-allocation review in February.

It is doubtful that retirement behemoths with billions in assets will retreat completely from alternative investments, partly because returns should improve once the economy pulls out of the recession. Still, some pension funds are likely to reduce their positions or put the brakes on plans to invest more. Other funds feel compelled to hoard cash to compensate for the lack of liquidity.

Group Unlocks Apple's New iPhone

A band of independent programmers says it has "unlocked" the latest generation of Apple Inc.'s iPhones so the devices can be used on unauthorized wireless networks, in a move that could threaten Apple's carrier partners.

Since the original iPhone was launched in June 2007, Apple has struck partnerships with wireless carriers world-wide, such as AT&T Inc. in the U.S. and France Telecom SA's Orange unit. Under the agreements, the iPhone can generally be used only by subscribers to those carriers.

But on Wednesday, a group called the iPhone Dev Team released a free piece of software called "yellowsn0w" that unlocks the iPhone 3G. The software lets users reprogram the phones so they can work on any wireless network based on the same technical standard.

Several users said they successfully installed the software on their iPhone 3Gs and were able to make calls on non-authorized networks.

The development could lead to a loss in revenue for Apple's wireless partners. International travelers would be able to buy airtime for their iPhones on local wireless networks when they travel abroad, so they don't have to incur steep roaming charges.

U.S. governors seek $1 trillion federal assistance

Governors of five U.S. states urged the federal government to provide $1 trillion in aid to the country's 50 states to help pay for education, welfare and infrastructure as states struggle with steep budget deficits amid a deepening recession.

The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin -- all Democrats -- said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues.

Gov. David Paterson of New York said 43 states now have budget deficits totaling some $100 billion as tax revenues plunge.

"It's clear that the federal government needs to step in and jump-start the economy," said Gov. Deval Patrick of Massachusetts.

The latest package calls for $350 billion to create jobs by building or repairing roads, bridges and other public works; $250 billion to maintain education; and another $250 billion in "counter-cyclical" spending such as extending unemployment benefits and food stamps, which are typically a responsibility of the states.

The remainder would be used to fund middle-class tax cuts, stimulate the embattled housing market, and stem the tide of home foreclosures through a loan-modification program.

Gov. Jon Corzine of New Jersey said he hoped some of the $700 billion authorized by Congress in the Troubled Asset Relief Program would be available to help the housing market.

Obama: Country needs economic stimulus plan

President-elect Barack Obama urged congressional leaders Saturday to move quickly on an economic recovery plan, even as some Republicans are saying they want more time to review the details.

Obama said Congress should pass an American Recovery and Reinvestment Plan designed to create 3 million jobs. The Democratic president-elect hasn't announced a final price tag on it, but aides said the cost could be as high as $775 billion.

"For too many families, this new year brings new unease and uncertainty as bills pile up, debts continue to mount and parents worry that their children won't have the same opportunities they had," Obama said in an address taped Friday and distributed on radio and posted on YouTube Saturday morning.

The nation's economy remains the top challenge facing Obama when he takes office on Jan. 20. The Federal Reserve estimated that lenders were on track to initiate 2.25 million foreclosures this year, more than doubling the annual pace before the crisis set in. One in 10 U.S. homeowners is delinquent on mortgage payments or in foreclosure.

Obama aides had hoped to have an economic plan approved by the House and Senate before Obama takes office. That timeline, though, appears unlikely as time is running out and Republicans have urged a delay to review the plans. Sen. Mitch McConnell, the Republicans' top official, said the plan needs time so that "every dollar needs to be spent wisely and not wasted in the rush to get it spent."

Congressional aides briefed on the measure say it's likely to blend tax cuts of $500 to $1,000 for middle-class individuals and couples with about $200 billion to help revenue-starved states with their Medicaid programs and other operating costs.

A large portion of the measure will go toward infrastructure projects, blending old-fashioned brick and mortar programs such as road and bridge repairs and water projects with new programs such as research and development on energy efficiency and an expensive rebuilding of the information technology system for health care.

"Economists from across the political spectrum agree that if we don't act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment and the American dream slipping further and further out of reach," Obama said.

Obama needs a lesson in economics. Everyone in his administration needs a lesson in economics. Everyone in the Bush administration needed a lesson in economics, as does and did every member in Congress.

American dreams are not founded on unsound spending. And as far as states go, it appears they are going to get only $200 billion of the $1 trillion they want. That is not going to be enough to stop massive layoffs. As a side note, reflect on the fact that the word only is in front of $200 billion. That number at one time would have been shocking. Now $200 billion does not raise an eyebrow.

However, we still need to put that $850 billion package in perspective.

Close to $8 trillion in wealth has been wiped out by this bear market and more is coming. Credit balances on the books of banks and corporations is extremely suspect, at best. Unemployment is likely headed to 9% if not 11% by the time the economy bottoms, and housing is unlikely to bottom for several more years.

Consumers are retrenching and will stay retrenched. Boomers headed into retirement need to draw on savings as opposed to accumulate them. No matter how one slices this, it is damn hard to get hyperinflation or even a significant amount of inflation out of this mess. Credit is being destroyed faster than any proposed stimulus.

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

Treasury Announces Targeted Investment Program of "Citi-Style" Rescues

The treasury has announced a fresh new wave of insanity called the Targeted Investment Program (TIP) in which the Treasury will mull Citi-style rescues on case-by-case basis.

The Treasury Department opened the door Friday to using a Citigroup-style rescue package to help other troubled financial institutions.

The financial lifeline thrown to Citigroup Inc. in late November involved backing billions in risky assets and providing the banking giant with a fresh capital infusion.

Treasury said participation by other companies in such a program would be weighed on a case-by-case basis. Treasury said it would consider, among other things, whether the "destabilization" of a financial institution could threaten the viability of creditors and others. It also would weigh the extent to which the institution faced a loss of confidence because of the troubled assets it held.

The information was contained in guidelines for the initiative, dubbed the Targeted Investment Program, unveiled on Friday.

"This program will be applied with extreme discretion in order to improve market confidence in the systemically significant institution and in financial markets broadly," the department said. "It is not anticipated that the program will be made widely available."

Expect No Discretion

• The treasury has thrown thrown $350 billion around with no accounting.
• The Treasury and Fed are facing class action suits under the freedom of information act for refusing to say how the money already allocated has been spent. See Bloomberg Sues Fed to Force Disclosure of Collateral. Also see FOX Business Network Sues the Treasury Department
• The Treasury has committed billions more in funding than congress has allocated. See Paulson's $6 Billion Foot In The Door Play.
• The Treasury Makes Subprime Auto Loans.

When the treasury says it will use "extreme discretion in order to improve market confidence" it really means there will absolutely no discretion; that it will do what it damn well wants, anytime it wants, whether it has the money to do so or not.

Guidelines And Justification

The Treasury offers these Guidelines and Justification for TIP.

Guidelines for Targeted Investment Program

The United States Department of the Treasury will determine eligibility of participants and allocation of resources under the Emergency Economic Stabilization Act (EESA) pursuant to the Targeted Investment Program. Financial Institutions (as defined in EESA) will be considered for participation in the Targeted Investment Program on a case-by-case basis. There is no deadline for participation in this program.

Justification

The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security. In an environment of high volatility and severe financial market strains, the loss of confidence in a financial institution could result in significant market disruptions that threaten the financial strength of similarly situated financial institutions and thus impair broader financial markets and pose a threat to the overall economy. The resulting financial strains could threaten the viability of otherwise financially sound businesses, institutions, and municipalities, resulting in adverse spillovers on employment, output, and incomes. ....

For more on what "Citi-Style" might mean please see Citigroup Bailout Terms of Agreement.

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

Wave 4 Theory Intact as Market Shrugs Off Bad News

The "wave 4 theory" is alive and fine. Here is the chart from December 8th Bullish Looking Charts: S&P 500, Nasdaq, BKX describing possible targets for Wave 4.

$SPX - S&P 500 Daily Chart



click on chart for sharper image

In Elliott Wave terms we are looking for a "wave [4]" bounce. The short term implications are bullish with possible retrace targets of 1008 for a 38.2% retrace or 1090 for a 50% retrace of "wave [3]". The long term implications are rather nasty. Our "Wave [5]" target back down is approximately 600.

Please see S&P 500 Crash Count for more details.

The S&P 500 closed today at 931, shrugging off a lot of bad news in its wake. There is no point to redraw the chart, just make a mental note we are one step closer to the Fibonacci target of 1008.

Market Shrugs Off Another Wave Of Bad News

Here are a few headlines.

US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month

Manufacturing is contracting in the US, Eurozone, Russia and China. The Institute for Supply Management’s factory index [Manufacturing ISM] fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949.

Visteon plans pay cut, shorter work week

Visteon Corp. will cut pay by 20 percent for about 2,000 salaried employees as the employees transition into a four-day work week beginning Monday.

Two thousand employees at Visteon's Van Buren Township offices and 50 workers at its testing center in Plymouth will be affected by the move, spokesman Jim Fisher said Friday. The action comes as Visteon is in the process of eliminating 800 salaried jobs globally.

"This is a way to reduce our operating costs while eliminating layoffs," Fisher said. "We realize this is a hardship for our workforce," Fisher said. "We have told our employees all along that we are committed to working through these tough economic times."

The auto supplier's three core products are electronics, interiors and climate control devices, Fisher said. "We have increasingly diversified our customer base," he said. Visteon only counts 40 percent of its revenue from Ford, GM and Chrysler, Fisher said.

Semiconductor sales fall 9.8% in November

Jan. 2, 2009
Worldwide sales of semiconductors fell 9.8% to $20.8 billion in November, compared with $23.1 billion in the year-earlier period, the Semiconductor Industry Association said Friday.

Workers Ordered to Give Up City-Owned Cars

Economic hard times are about to hit New York City’s employees where it hurts: in their driveways. As the Bloomberg administration scrambles to cut spending, it is ordering city agencies like the police, parks and health departments to give up nearly 700 city-owned cars, a cherished perk for their workers.

The move would save $20 million over the next two years, according to a copy of the memorandum sent to city agencies.

The decision to sell off scores of Toyota Prius cars and Ford Escape sport utility vehicles is very likely to irritate many city workers, who use the them to travel around the city inspecting sites or rushing to meetings.

Bear Market Rallies Frequently End On Good News

On December 19th in Catch A Wave I wrote ....

The market may rally in a sloppy choppy fashion until Obama is inaugurated and signs the bill Nancy Pelosi has waiting, with an overshoot of 1-3 days, culminating in a big gap and crap event.

This thesis is based on the idea that major bear market rallies frequently end on good news, not bad news. Likewise, bull market corrections often end on bad news. With that in mind, the market may be rallying now in expectation of a huge economic stimulus package, something that the news media and most economic pundits thinks is "good news" even if the reality is otherwise.

Under this scenario, the rally lasts until Obama signs that economic stimulus bill plus a 1 to 3 day euphoric blowoff or gap and crap when the world realizes that a true recovery was actually postponed by the recovery package.

This theory may or may not happen, but the key now is that regardless of "why", and until proven otherwise, we are still in a choppy overlapping wave 4 up. Either catch the wave or stand aside. Swimming against the tide is simply no fun.

MarketWatch is reporting First session of 2009 locks in a weekly advance.

U.S. stocks rallied Friday to lock in solid weekly gains, with the Dow Jones Industrial Average ending above the 9,000 mark for the first time since Nov. 5, as investors shelved one of the most bruising years on record to ponder moves by the new administration.

"Expectations for another big stimulus package once Barack Obama is sworn into the presidency in about three weeks' time is helping lift stocks," said analysts at Action Economics.

Whether or not a big "sell the news" event is coming, the fact remains this market is not cheap. Bennet Sedacca noted on Minyanville today that the S&P is on track to report $42 in earnings this year.

At 1008 and $42 in earnings, the S&P would have a PE of 24, assuming those earnings stick smack in the midst of rising unemployment, consumer retrenchment, and massive deleveraging by consumers and corporations alike. Good luck on that.

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