Audit the Fed Blocked by Senate Procedural Move

In the House, Mr. Sunshine, Ron Paul Wins Support to Audit Fed Reserve.

The feisty congressman from Texas, whose insurgent "Ron Paul Revolution" presidential campaign rankled Republican leaders last year, now has the GOP House leadership on his side -- backing a measure that generated paltry support when he first introduced it 26 years ago.

Paul, as of Tuesday, has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.

The bill would call for the comptroller general in the Government Accountability Office to audit the Fed and report those findings to Congress. The GAO's ability to conduct such audits now is severely restricted.

A slew of top Republicans are backing the bill, as are many Democrats.

"Ron Paul has the right idea on this," said Sen. Jim DeMint, R-S.C., who supports similar legislation in the Senate. "I'm just hoping we can get a clear audit. ... We need to know what they're up to."

Unfortunately for Paul, the bill appears to be idling in the House Financial Services Committee, which is chaired by Barney Frank, D-Mass. The bill has been sitting there, gathering co-sponsors, since Paul introduced it in late February.

Calls to Frank's office were not returned.

Paul acknowledged that his bill hasn't advanced but said Frank has "promised" him he will deal with his bill and is willing to give it a hearing. Paul said it's easily got the "momentum" to pass the full House.

A representative with the Federal Reserve could not be reached for comment. DeMint told FOX News last week that the measure would have a good chance of passing the Senate if supporters can push Paul's to a vote, which he said would be successful, in the House.

"The whole process is unconstitutional. There is no legal authority to operate such a monetary system," Paul said in February, in a statement calling for Washington to "end the Fed."

DeMint amendment to audit the Federal Reserve blocked by Senate Leadership



Senator Jim DeMint (R-SC) is blocked by Senate Democrat Leadership from having a vote on his amendment to audit the Federal Reserve, based on a bill authored by Congressman Ron Paul (R-Texas) in the House, H.R. 1207, and Senator Bernie Sanders (D-Vermont) in the Senate, S. 604.

Speak Out - Audit the Fed, Then End It!

If you have not done so yet, please contact your legislative representatives and tell them you support a Fed audit. If you have already done so, then please do so again. Details how in Speak Out - Audit the Fed, Then End It!

Mike "Mish" Shedlock
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Tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to Go to Hell

As banks and credit unions stop accepting California IOUs, a market for the securities has sprung up on eBay and Craigslist.

Not so fast... California Sets Terms on IOUs as Questions Arise.

As California continues to issue "IOUs", more controversy is brewing over their use.

On one side, IOU recipients are beginning to trade them like currency, forcing the California state treasurer's office to issue guidelines if they are sold through eBay (EBAY), Craigslist or other means.

California's treasurer is telling recipients of the IOUs that if they sell them to third parties, they will be redeemed by the state treasurer's office only if accompanied by a notarized bill of sale signed by their listed payee.

"We are in the process of contacting officials of eBay and Craigslist to post a notice of the policy on their sites," the statement said.

Speculation is rising over whether California's tax-exempt IOUs, technically registered warrants, can be bought, sold and traded.

The Securities and Exchange Commission must first determine if the IOUs are securities to regulate them, said Ernesto Lanza, general counsel to the Municipal Securities Rulemaking Board, adding that the board was not working directly with the commis—sion on that decision.

"It looks like it has all the hallmarks of a security," Lanza told Reuters. "If they are securities, I think they're pretty clearly municipal securities."

At least one website aims to offer a platform for selling the registered warrants. Obed Dorceus, owner of ioumarket.com, said he sees a potential secondary market for the IOUs — and potentially other government promises to pay.

The Wall Street Journal is reporting Big Banks Don't Want California's IOUs

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

The group of banks included Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and J.P. Morgan Chase & Co. (JPM), among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

Ms. Mills of the CBA said some banks were concerned that there aren't processes in place to accept IOUs, and also worried about fraud issues. She noted that not all banks have set a July 10 deadline, and that dozens of credit unions in the state will keep accepting IOUs.

Wells Fargo's head of community banking, Lisa Stevens, said: "We're very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of payments to some businesses and individuals."

State officials said they were disappointed by the banks' decision. Garin Casaleggio, a spokesman for Mr. Chiang, said: "We don't want anybody to suffer who can't redeem them when they need cash."

Big Banks Cutting Own Throats

Big banks are cutting their throats by not accepting IOUs, unless of course they have an inside information that the IOUs will go worthless, something I highly doubt Obama would let happen.

Recipients of IOUs will be looking for some place to deposit the securities and small savings and loans or credit unions that will cash them will get the business.

Every one of those blood sucking banks was bailed out by taxpayers (California taxpayers too) and now will not take an IOU from the State of California for the citizens of California. This is disgusting.

If you have an IOU that the big banks will not cash, I recommend closing your accounts and putting them someplace that will. Please tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to go to hell.

Addendum

Bear in mind I am not supporting California's Issuance of these IOUs. California needs to balance its budget so it can pay its bills. I have talked about that a dozen times at least. The two actions are separate and distinct.

However, I am willing to put myself in the shoes of a contractor with employees who needs to cash to pay his employees and subcontractors. There is going to be one massive domino effect of defaults and business closures if people are not paid.

Bear in mind there is no mechanism for states to declare bankruptcy. They must balance the budget somehow and therefore they will. This means the banks will get paid for the IOUs.

It is the California legislature, primarily Democrats, who simply refuse to balance the budget. Contractors and state employees are legitimately owed that money for services rendered. I am all in favor of axing jobs, whatever it takes to balance the budget. I am not in favor of holding businesses and consumers hostage for services already rendered while it is done.

To the extent that banks' refusal to cash IOUs pressures the legislature to act, the refusal may appear to be a good thing. However, two wrongs do not make a right, and if I had a bank account at any of those places and they refused to honor IOUs from the state I would move my account to someplace who would. So should any thinking person.

Addendum II

Aaron Krowne at ML-Implode writes:

It is very interesting that the big banks have reversed. This confirms my suspicion that, despite the bailouts, the banks are intensely in pain for cash to meet their obligations, and cannot make themselves further illiquid by accepting IOUs.

As far as secondary markets, this whole situation reminds me a lot of Continentals.

However you feel about this situation, one thing is for sure. This is a gigantic mess that is getting worse by the day.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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156 Killed in China as Violence Erupts Over Ethnic Grievances and Jobs

One reason China stepped on the fiscal stimulus pedal was to help quiet millions of displaced migrant workers now out of a job. China's concern over migrant workers was well founded as Violence Kills 156 in China, Hundreds More Detained.

China’s government said more than 700 people were detained after ethnic rioting in the capital of Xinjiang province killed 156 people. Overseas Uighur groups were responsible for the violence, the government said.

A curfew and traffic blockade remained in effect in Urumqi, capital of China’s westernmost province, until 8 a.m., a government press officer, Yang Guoqiang, said in an interview. Three armed guards checked every visitor and bag with metal detectors at the Sheraton Urumqi hotel.

China Central Television yesterday aired images of smoke billowing from vehicles, crowds overturning police cars and bloodied people slumped on sidewalks in Urumqi. More than 825 people were also injured after rioting broke out in the city late on July 5, and the toll is likely to rise, Xinhua cited Liu Yaohua, the region’s police chief, as saying.

As many as 30 million migrant workers have lost their jobs during the global financial crisis, as demand from the U.S. and Europe vanishes, exacerbating already simmering social tensions.

“It’s like Mao Zedong used to say, a spark can spread the fire into the prairie, and that’s the situation in Xinjiang,” said Jean-Philippe Beja, a senior researcher at the French Centre for Studies on Contemporary China in Hong Kong.

Fifty-seven bodies were retrieved from the streets, while the remainder were confirmed dead at hospitals, said Liu, the police chief. Rioters burned 261 vehicles and destroyed 203 shops, authorities said.

Nur Bekri, chairman of the Xinjiang regional government, said in a televised speech yesterday that the riot was triggered by the death of two Uighur workers in a factory brawl in Guangdong province in June, Xinhua reported. That incident also had ethnic overtones, with the Uighur workers fighting ethnic-Han workers, according to the news agency.

Mobs Take to Streets

Another day of violence is underway and China Tries to Calm Urumqi as Mobs Take to Streets.

Hundreds of Chinese from rival ethnic groups fought each other with machetes, metal pipes and bricks in the northwestern city of Urumqi, overcoming police attempts to quell the deadliest clashes in decades.

Police fired tear gas to prevent a mob of Han Chinese from avenging rioting by ethnic Uighurs that left at least 156 dead. The fighting came after thousands of Chinese armed with knives and steel bars clashed with police in Urumqi, capital of the westernmost province of Xinjiang.

The violence illustrates China’s failure to address simmering grievances among its minorities, who complain of restrictions on religious and cultural practices. Beijing’s policy of investing billions of dollars to placate the restive territories of Tibet and Xinjiang has also led to migration by the Han, who make up more than 90 percent of the country’s population, exacerbating tensions.

Muslim Uighurs, who make up less than half Xinjiang’s 20 million population after years of Han migration, complain of discrimination and unfair division of the region’s resources. The landlocked region, about three times the size of France, has China’s second-highest oil and natural gas reserves and was the biggest cotton producer.

“Uighurs feel they are not getting enough of the goodies,” said Colin Mackerras, a China researcher at Griffith University in Queensland, Australia. “The balance has shifted quite heavily in favor of the Han and the Uighurs think they are being taken over.”

The official death toll makes the violence the most deadly in decades, possibly since the Cultural Revolution.

Simmering social tensions and a lack of jobs are a deadly mix. Expect the problems to get worse.

Mike "Mish" Shedlock
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Home-Equity Loan and Credit Card Delinquencies Reach Record Since 1974

As unemployment rises so too will credit card and home-equity delinquencies. This it is not surprising to see this headline: Delinquencies on U.S. Home-Equity Loans Reach Record.

Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.

Delinquencies on home-equity loans climbed to 3.52 percent of all accounts from 3.03 percent in the fourth quarter, and late payments on home-equity lines of credit climbed to a record 1.89 percent, the group reported today. An index of eight types of loans rose for a fourth straight quarter, to 3.23 percent from 3.22 percent in October through December, the group said.

“The number one driver of delinquencies is job losses, which we’ve seen build and build,” James Chessen, the group’s chief economist, said in a telephone interview. “Delinquencies won’t come down without a dramatic improvement in the economy and businesses will have to start hiring again.”

Delinquent bank-card accounts jumped to a record 6.60 percent of outstanding card debt in the first quarter from 5.52 percent in the previous period, a signal unemployed borrowers are relying on cards as falling prices erode the equity in their homes. More borrowers are using cards to meet daily expenses after losing their jobs, the ABA said.

“There is less equity to draw on and certainly financial institutions have been scaling back the available lines of credit,” Chessen said. Banks boosted reserves for losses on delinquent loans and have adopted more cautious underwriting policies, he said.

The composite index rose to the highest level since the group began collecting data in October 1974. Loans are considered delinquent when a late payment is 30 days or more overdue.

Of the closed-end accounts, delinquencies rose on five: home-equity loans, direct auto loans, recreational vehicle, mobile home and personal loans, the group said. Auto loans are 45 percent of all consumer closed-end loans, the ABA said.

Rates for indirect auto loans, made through third parties such as a dealer, fell to 3.42 percent from 3.53 percent in the fourth quarter. Property improvement and marine loan rates also declined.

No relief is in sight for jobs. Expect unemployment to rise for another year. By the way, January and July are revision months for the Birth Death Model.

From Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5%

Birth Death Model Revisions 2008



click on chart for sharper image

Birth Death Model Revisions 2009



Take a look at January 2009 and July 2008.

At some point the BLS is going to have to get its hugely flawed model corrected and there will be a massive backward revision in jobs. I suspect this July is not that revision. However, I am looking for another bad month.

Regardless, there is no driver for jobs, and that is what counts, not the make-believe as well as unbelievable unemployment number put out by the BLS monthly.

Mike "Mish" Shedlock
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Office Vacancies Near 4-Year High; 24% Vacancies in Suburbs; Rents Fall

Lease asking prices are falling on office space and actual prices even faster as U.S. Office Vacancies Near 4-Year High on Job Losses.

U.S. office vacancies rose to the highest in four years in the second quarter as job losses mounted and demand for space declined, Reis Inc. said.

The vacancy rate increased to 15.9 percent from 13.2 percent a year earlier, the New York-based research firm said today in a statement. Vacancies hit 16 percent in the first quarter of 2005 and were at 15.2 percent in the first quarter of this year, according to Reis.

Landlords’ asking rents fell 1.4 percent to an average $28.43 per square foot. Actual rents paid by tenants dropped 2.7 percent, a sign that landlords are continuing to offer concessions such as one or more months of free rent, Reis said.

Actual rents, also known as effective rents, were down 6.7 percent from a year earlier, according to Reis.

Distress in Suburban Office Market

Crains Chicago Business is discussing Rising vacancies, distress in suburban office market.

Suburban office vacancies climbed for a 10th straight quarter, nearing the highest level this decade as companies continue to cut jobs and reduce their space.

Almost one-fourth of the 96 million square feet of office space in the suburbs is now vacant, including space that’s available for sublease, according to real estate services firm Jones Lang LaSalle Inc.

The rising vacancy rate, which has soared to 24.3% from 19.8% two years ago, has caused a handful of suburban office landlords to default on their loans, leading to at least two big foreclosure lawsuits.

Downtown, the overall office vacancy rate now stands at 13.7%, while the direct vacancy rate is just 11.5%.

Deals for tenants are plentiful, with aggressive rents and concession packages becoming the norm. That’s particularly true in the northwest suburbs around Schaumburg, where the overall vacancy rate is more than 26%.

While rents overall haven’t dropped dramatically, down just 2% for the year, landlords are upping tenant improvement allowances and offering lots of free rent.

D.C. Vacancies Soar, Driving Down Rent

The Washington Post is reporting Office Vacancies Soar, Driving Down Rent.

The office vacancy rates in the District, Northern Virginia and suburban Maryland rose substantially in the second quarter, forcing building owners to push down rents to fill empty space, according to an analysis released yesterday.

The District, which benefited for years from a building boom, hit a double-digit vacancy rate for the first time since 1997, according to the study by CB Richard Ellis.

Numerous Washington-area firms have been cutting staff and putting off expansions to save money, postponing or canceling plans to lease bigger quarters. Excess space is rising with some companies contracting and others closing offices and going out of business.

The result is that the vacancy rate rose to 10.2 percent in the second quarter from 8.5 percent in the first quarter in the District, to 13.9 percent from 12.9 percent in Northern Virginia; and to 13.9 percent from 13.1 percent in suburban Maryland.

"We're working as advocates for our clients to reduce rates," said Mary Lynch, vice president for property management at Akridge, which manages 35 commercial properties in the region. "At our Homer Building, we've reduced energy costs by 34 percent," a savings that is passed on to tenants.

Manhattan office vacancies at 15-year high.

Reuters is reporting Manhattan office vacancy hits 15-year high.

The vacancy rate for top quality Midtown Manhattan office buildings reached its highest level in 15 years and asking rents fell nearly 11 percent in the second quarter, a Jones Lang LaSalle (JLL) report said.

Midtown Class A office space, which commands the highest rents and whose demand is driven by the financial industry, saw vacancy rates reach 15 percent at midyear 2009, up from 13.5 percent at the end of the first quarter, Jones Lang LaSalle said in a report released on Wednesday.

Vacancies have more than doubled from a low of 7.2 percent in December 2007, the report said.

The average asking rent for Class A Midtown space fell by a record 10.8 percent to $73.10 per square foot at the end of the quarter.

Every day I see stories like this. And every day I wonder what the heck the hyperinflationists are thinking. These are not hyperinflationary conditions; these are not even inflationary conditions.

Mike "Mish" Shedlock
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Facebook Revenue to be "Billions" in 5 Years; Twitter Vital for National Security

Tonight I see Twitter is such a vital communications channel that the state department asked the start-up to postpone maintenance during recent events in Iran.

Facebook is in the same news story but the reason is massive expected revenue growth. Please consider Facebook revenue to be "billions" in 5 years.

Facebook will likely be posting billions of dollars in revenue in five years, up from about $500 million this year, according to Silicon Valley entrepreneur Mark Andreessen who sits on Facebook's board.

Andreessen told Reuters that the world's most popular online social network could pile up $1 billion in revenue this year if it pushed harder on selling advertising. "This calendar year they'll do over $500 million," Andreessen said in an interview, noting that Facebook has more than 225 million users, so revenue per user is still small.

Andreessen said it will be difficult, but not impossible, for MySpace to rebound now that Facebook has such a big following. Both he and Horowitz say they do not expect Twitter to make the same kinds of mistakes that MySpace did.

Twitter was a high profile Web start-up even before it shot into the headlines during the Iran election crisis, when the U.S. State Department called on it to reschedule planned maintenance because it considered Twitter a vital communications channel for protesters.

The state department is now probably analyzing hundreds of billions of "tweets" attempting to figure out what tweeters know that the CIA doesn't.

Mike "Mish" Shedlock
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500,000 Canadians 90 Days Behind on Credit Payments, Delinquency Rate Hits 1.52%; US Delinquency Rate is 1.32%

Those who think Canada is immune from credit problems need to think again. Over 500,000 Canadians are at least 90 days behind on credit payments. Please consider how Debt is tripping up Canadians.

More than half a million Canadians have fallen behind on their various credit payments, fuelling a 19 per cent rise in the average national delinquency rate in the one-year period ending May 31, 2009, says a new report from Equifax Canada.

The credit bureau called the double-digit jump "alarming," noting the average delinquency rate for Canada hit 1.52 per cent at the end of May.

Much of the trouble stemmed from missed payments on credit card bills and for sales finance purchases of items such as furniture and electronics.

Equifax defines delinquent bills as those that are at least 90 days overdue.

Nadim Abdo, an Equifax vice-president, stressed the "sharpest increase" in delinquencies resulted from credit card and sales finance purchases, which have risen by 38 per cent and 58 per cent, respectively, since May 2008.

Rising delinquencies in those areas are troubling because consumers tend to miss payments on those unsecured credit products before they fail to pay back collateral-backed loans such as mortgages, bank loans and lines of credit, Abdo said.

US Credit Card Delinquency Rate Jumps 11 Percent

Inquiring minds might be asking for a comparison between Canada and the US. For the answer, please consider 1Q credit card delinquency rate jumps 11 percent.

Credit card holders who in ordinary years might have used their tax refunds to pay down their balances apparently spent the money elsewhere as the recession deepened in the first quarter.

That's one of the conclusions that may be drawn from data showing the delinquency rate for bank-issued credit cards rose 11 percent in the first three months of the year, according to credit reporting agency TransUnion.

The delinquency rate jumped to 1.32 percent this year, from 1.19 percent in the first three months of 2008, TransUnion said. The statistic measures the percentage of card holders who are three months or more past due on their payments for cards bearing MasterCard and Visa logos, along with American Express and Discover cards.

The average total debt on bank cards also rose, jumping to $5,776 from $5,548 last year.

TransUnion measures credit card delinquencies at 90 days, but tracks mortgage delinquencies at 60 days. Becker said that is because card payments are typically much smaller than mortgage payments, and it's easier to catch up on past due cards. For people in financial distress, it's much harder to produce two mortgage payments once they fall behind, he explained.

Not surprisingly, bank card delinquency rates remained the highest in the states hardest hit by the mortgage meltdown: Nevada, Florida, Arizona and California.

North and South Dakota and Alaska, the states with the lowest rate of mortgage delinquencies, are also the states with the lowest credit card delinquencies, TransUnion data showed.

TransUnion, which samples 27 million consumer records to produce its data, expects the rate of credit card delinquencies to rise for the rest of the year, ultimately reaching about 1.7 percent.

Note that the US rate was a comparison of March 2009 to March 2008 while the rate for Canada was a comparison of May 2009 to May 2008. Thus Canada and the US are following a similar path.

Dynamic Maps

The Federal Reserve Bank of New York has Dynamic Maps of Bank Card and Mortgage Delinquencies in the United States that some may wish to consider.

In regards to mortgages, Canada has some "catching down" to do, and it will. All the bubble areas such as Vancouver, Calgary, Toronto, etc are going to get hit hard.

Mike "Mish" Shedlock
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No Amount of Stimulus Will Work

Economist Paul Krugman is back at it, whining for more stimulus. If you can stomach it, please consider What didn’t the vice president know?

But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.

The above is not much more that an "I told you so" referback to Stimulus arithmetic (wonkish but important).

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.” Let’s hope I’ve got this wrong.

Krugman Wrong Again

Well Krugman did get it wrong. On many counts. For starters, the unemployment rate is headed to something like 11%, not 9%. At the time, I called for 9.8% by August. We are at 9.5% as of June. Please note that "no one could possibly have foreseen that" even though all I did was project the then current situation forward by 6 months.

Krugman says "Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond."

It seems to me that if fiscal stimulus takes time, it cannot do much good now no matter how big the stimulus is. More importantly, if fiscal stimulus takes time (assuming one believes it accomplishes anything at all), then what is the case for more stimulus now? Perhaps it just hasn't worked yet.

Krugman falls back on his wonkish formulas about multipliers and how fast they work. The truth is the real world does not give a damn about what economists think multipliers should be, or for that matter how any economic formulas are supposed to work in theory.

Stimulus Plans Raise National Debt For Dubious Benefits Now

In the real world, artificial stimulus may not accomplish anything at all other than driving up national debt. That pretty much sums up what transpired in Japan.

Oh sure, if the government gives away enough money, government could easily cause hyperinflation, in theory. However, that would not create any economic activity that anyone wants. Nor will it be tried because it would destroy banks.

Moreover, all this talk of multipliers is nonsense. If government spends money in a manner that private industry would not, the multiplier is far less than 1, and perhaps even negative.

Case in point: There are numerous road construction and repaving operations where I live. The thing is, most of the roads did not even need repair. Money came in for roads, Obama said use it or lose it, so the roads were "fixed". Now what?

They can "fix" every road in the country that does not need fixing and as soon as the roads are fixed, we will be back at square one, in need of still more stimulus, with Krugman whining for still more.

There is an economic benefit for fixing roads that genuinely need fixing, however, all that does is push up the curve a bit. Then what?

Ludwig von Mises on the Endgame

Flashback February 2, 2006: Inflation: What the heck is it?

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

The FED should have been listening to Mises all along. Instead they have put their faith in "productivity miracles", "new paradigms", and their own hubris. Those actions have accomplished nothing other than delay the eventual day of reckoning.

No Amount of Stimulus Will Work

The problem with Keynesian clowns is they never look ahead to when the stimulus stops. By definition "stimulus must end" and as soon as it does, unless the stimulus created lasting new jobs, there will be nothing to show for it other than debt.

And interest must be paid on that debt. And that interest has to come to come from somewhere, either more taxes, or printing money and cheapening the dollar. That means there is a price to pay down the road for stimulus today. Keynesian clowns act as if there is no price down the road.

Since you cannot spend what you don't have (without long-term negative consequences), the key to a solid recovery comes from a buildup in savings, lower taxes, and letting consumers keep more of their money (as opposed to government deciding how and when it should be spent).

In short, no amount of artificial stimulus can possibly work because government cannot allocate capital in an efficient manner (repairing roads that do not need to be repaired is proof enough). This is something that academic wonks trapped in their ivory towers apparently will never understand.

Creating a better business climate, with less government waste, will work. However, the right plan will take time and patience, traits that Government bureaucrats and academic wonks both lack. Unfortunately, but not unexpectedly, we are moving in exactly the wrong direction as noted in Obama's "Cap and Trade" Energy Plan Will Cost Jobs.

There is a price to be paid for reckless expansion of credit and we are paying the price now. All artificial stimulus does is prolong the agony. The greater the stimulus, the greater the period of future agony, just as happened in Japan. Ironically Keynesian and Monetarist clowns shouted for more stimulus all the way, and they are doing so again now.

Mike "Mish" Shedlock
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Services ISM Contracts at Slower Rate

Bloomberg is reporting U.S. ISM Service Industries Index Increased to 47.

U.S. service industries from retailers to homebuilders contracted last month at the slowest pace in nine months, as measures of new orders and employment improved.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 47 -- higher than forecast -- from 44 in May, according to data from the Tempe, Arizona-based group. Readings less than 50 signal contraction.

The index’s third straight monthly improvement reflects signs of stabilization in housing and consumer spending. That combined with leaner inventories means companies may start expanding output again in coming months. Still, mounting job losses and stagnant wages are likely to restrain some purchases, limiting the impact of any recovery.

“The gradual improvement is very good news,” Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said today in a Bloomberg Television interview. The services index “should continue to track improvement in the broader economy,” she said.

ISM Report On Business®

Inquiring minds are investigating the June 2009 Non-Manufacturing ISM Report On Business®.

"The NMI (Non-Manufacturing Index) registered 47 percent in June, 3 percentage points higher than the 44 percent registered in May, indicating contraction in the non-manufacturing sector for the ninth consecutive month, but at a slower rate. The Non-Manufacturing Business Activity Index increased 7.4 percentage points to 49.8 percent. The New Orders Index increased 4.2 percentage points to 48.6 percent, and the Employment Index increased 4.4 percentage points to 43.4 percent. The Prices Index increased 6.8 percentage points to 53.7 percent in June, indicating an increase in prices paid from May. This is the first time the index has registered above 50 percent since October 2008."

Comparison of ISM Non-Manufacturing and Manufacturing

The chart shows that business activity in manufacturing is in positive territory (expansion) and non-manufacturing is close. The prices paid index is positive but with the recent pullback in commodity prices I do not expect to see it stay there. Employment in manufacturing and non-manufacturing remains at depressed levels.

The numbers are consistent with slowly stabilizing activity at low levels but with employment acting as a huge drag.

Mike "Mish" Shedlock
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Hotels Feel the Pain of a Glut of Empty Rooms and Lower Room Rates

Hotels are slashing rates to attract customers. However, it's not working and Resorts are Suffering From Financial Strains.

From Arizona Central ...

A glut of empty rooms and panic pricing are taking a serious toll on hotel and resort owners in the Phoenix area.

Foreclosure proceedings were initiated against seven financially squeezed properties, two of them brand new, in the first half of the year. That's just one less than in all of 2008 and more than double the number in 2007, according to Ion Data, a Mesa real-estate research firm.

There are other signs of financial stress, too, including major liens filed against resorts that recently expanded or renovated, and big projects being put on hold, some midstream.

The worst part: Many experts say the foreclosure woes are likely in the early stages given the volume of big-ticket deals during the boom years, the severity of the hotel downturn in Greater Phoenix and few signs business will solidly rebound anytime soon.

"This is probably still the tip of the iceberg," said Robert Hayward, principal with the Phoenix hospitality consulting and research firm Warnick & Co.

Metro Phoenix, usually a magnet for vacationers and big meetings, continues to post some of the industry's biggest declines in occupancy, average daily rate and other measures, with many at the lowest levels on record, according to Smith Travel Research.

Preliminary figures show June occupancy was about 45 percent, nearly 10 percentage points, or 17 percent, below June 2008, when occupancy was already hurting. Most are calling it an industry depression, rather than recession.

Richard Warnick of Warnick & Co. said he'd be surprised if nearly all hotels and resorts, here and across the country, weren't in technical default on their loans, falling below required minimums on debt service coverage, for example, given the sad state of travel. That is often a precursor to more serious financial problems that prompt lenders to foreclose.

Nationally, the number of delinquent hotel loans has been climbing sharply since the recession deepened last fall. The delinquency rate jumped from 0.3 percent of so-called hotel commercial mortgage-backed securities loans in September to 2.8 percent in May, according to Realpoint data provided by real-estate services firm Jones Lang Lasalle.

The big questions are who is going to buy the troubled properties, when and for how much. The market for hotel deals is anemic. Nationally, there were just 19 transactions in the first half of the year, vs. 103 in the same period last year, according to Jones Lang Lasalle.

"From our standpoint, transactions have really just stopped," said Jeremy Allen, vice president in the Phoenix office of hotel brokerage firm Molinaro Koger.

He said the only activity is for smaller deals, those for $5 million and under.

For bigger deals, such as the $120 million the Montelucia's German bank is reportedly seeking for the resort, there are a couple obstacles: financing and agreeing on a price in this volatile market.

Tip of the Iceberg

This is indeed the tip of the iceberg. Moreover, places like Phoenix where no one in their right mind would want to go in the Summer, Spring, Winter, or Fall are going to be especially hard hit.

Yes, I am biased against Phoenix. I am not fond of dust storms, blazing hot treeless conditions, flat barren desert, or any other Phoenix attractions except when there are Spring rains every 5th year or so and the desert blooms.

When there are Spring rains, I highly recommend camping in places like Picacho Peak State Park.

Note: the pictures in that link are god awful. Then again, that is how the place looks most of the time. I have some tremendous images of the park in full bloom. Unfortunately they are slides and my slide scanner does not work with a recent Microsoft Vista upgrade so you have to take my word for it.

Others might feel Chicago is god awful, especially in the Winter. The important point is, no matter where you pick, travel is down, and travelers are making do with less. Camping is in, hotel rooms are out. Traveling far is out. Traveling close by is in. Eating out is out. Backyard barbecues are in. By the way, inquiring minds might be interested in the origin of the word barbecue.

Barbecue is from the French barbe à queue when goats were roasted on a spit from the beard (barbe) to to the tail (queue). Some disagree as to the origin, but that works for me.

At any rate my advice for the rest of the summer is skip the hotel and go camping. I am back from a weekend of camping, posting at night from a closed bagel shop on the hood of my car with lights from the Little Caesars Pizza place next door. The bagel shop left its WiFi going all night and I took advantage.

Those who see hyperinflation coming, need to ponder the implication of multiple aspects of this post and think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Railfax Rail Carloading Report June 27, 2009

Every week I watch the Weekly Railfax Report of North American Rail Freight Traffic for signs of stabilization. Year over year, there is nothing to cheer at as the following charts show.

Total US Rail Traffic



Total Industry Charts (US, Canada and Mexico)
Year over Year Percent Change - 13 Week Rolling Averages



Autos cargoes remain at depression levels and the only bright spots (on a relative basis) are coal and food. More charts in the report.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mish Weekly Mailbag 2009-07-04

I often receive many interesting emails from readers. Bear in mind that unless I specifically comment, I may or may not agree with the Emails. Here are a few from this last week.

Aircraft Repair Jobs Revisited

In response to Aircraft repair jobs sold to foreign workers, resumes not important GR writes:

Hi Mish,

Very interesting story.

I used to be a Boeing Pilot for South African Airways 40 years ago. We used to train crews from India. None of us would ever get on an Indian flight.

Very sadly, over the last 30 years, the US has allowed its FAA to degenerate badly. They are now totally minimalist to save expenses.

Aircraft mechanics are making hundreds of small decisions every day. Usually it is a no-brainer. However, one or two decisions a day are pivotal. As you know, very often a mechanic's decision can take 10-20 years to cause a disaster.

I really fear for the US because it is making only expedient short term decisions about everything. This is not like the US of my generation.

Regards GR

Radio Advertising Sign of the Time

RT writes:

As a frequent reader of both your blogs, I thought you might enjoy (if that is the right word) this little tidbit. Last night I heard on Q104.3 (a tri-state area radio station) the radio host making an announcement that in these trying economic times, finding a job can be harder than ever. That's why you can now PAY the radio station to have your RESUME read on the air.

If that doesn't tell you the true state of affairs, I don't know what will.

This is one consequence that I wouldn't have ever guessed. It's not surprising to me, but I just wouldn't have ever thought of it.

RT

Thanks RT

Your story is telling for a couple of reasons. Radio advertising has to be way down for the station to do that. Unemployed individuals cannot be paying much to have their resumes read. So the station is as hard up for cash as those unemployed individuals whose resumes it reads on the air.

True Unemployment Rate

TMK from Utah has this interesting perspective on the unemployment rate:

Mish

I am a Mormon in Utah, and last Sunday evening I was at a Priesthood Meeting (basically, all the men hold the Priesthood) with our Stake President, who presides over a Stake (equivalent to a diocese) of 5,000 members. A good statistical study group, in other words. (FYI, if you weren't already aware, the Latter-Day Saints (Mormons) keep EXCELLENT tabs on their members and are fastidious record keepers.)

I went up to him after the meeting and asked, "Are you keeping track of the number of heads of households out of work in our Stake?" "Oh, yes," he said, and then he threw out a number of the unemployed heads of households. "How does that translate into percent?" I asked. "Sixteen percent", he told me.

We talked about how this is significantly higher than what the national media is reporting.

This is in Utah County, where economic difficulties are rising, but I wouldn't consider depression-like, yet.

Nonetheless, I was amazed to read your informative blog today indicating that the more accurate count is, indeed, 16 percent.

TMK

Spanish Economy

Bran from Spain writes:

It is always hard to be objective as circumstance and sentiment is ever changing, but I will give you my feelings as to the temper in Spain.

Personally I have the sense of present/forthcoming serious economic disintegration, of social confusion and retribution. There seems no outlet to the bullishness more present in Spanish society than others, and that it may end up being almost vindictive, if not destructive in its expression.

As Spain relies so heavily on foreign participation to augment its productivity, it is not going to be a primary target for future global investment, as it is a secondary economy, and the northern economies may take several years to restock. The boom here has leveled prices with the north which due to Eurozone can't be diminished easily to invite investment.

We now have a very terrible cocktail of large immigrant populations, wealth exodus, high unemployment, end of anti-cyclic bank provisions, high public deficit, inter-regional disagreements, corruption, pre-democratic divides in power and politics, a dysfunctional legal system, large differences in expectations between young and old, past and future, poor economic education amongst the population, etc.

Maybe the only things that will maintain the fabric are family, religion, and the underground economy - not exactly inviting in business terms.

When I see such I dread to think what will be made of this country, even at the best of times they didn't quite have their act together. Remains to be seen.

All the best, Bran.

I cannot comment on Bran's take on the Spanish economy other than to say I trust his judgment. I can comment on his command of the English language and it is clearly superb. Thanks Bran.

Independent Contractors and the Unemployment Rate

DAL Writes:

The day after I retired (in 1993) I went back to work as an independent contractor or consultant. I've since retired for good, but here's a question...

During the 1990s and up until 2008 there were a huge number of ICs employed. The IC pays his/her own Social Security and Medicare taxes, files tax returns as self-employed. There hae been literally millions of ICs.

During layoffs a company will simply let ICs go. No fuss, no muss, just tell them to stop showing up for work. No problems with unlawful discharge suits, no severance pay. Nothing. And, by the way, since they are self-employed they do not qualify for unemployment compensation, so they do not show up on the government books.

If from 5 million to 7million people have been let go - "officially" - since the beginning of the downturn, how many people on IC status are simply out of a job and out of luck? Is there any way of finding out? My guess is that unemployed independents may at least equal the number of people counted on the roles.

Something to think about.

DAL

Thank's DAL, you are correct. I have commented on this many times but I do not know how to total it up. It is far worse this go around because of all the mortgage broker and Realtors who are still officially working but who have not had a paycheck for months.

This is another reason the reported Birth/Death job numbers are absolutely bogus. Many small independent business are no longer in existence yet the Birth/Death model showed net job expansion through the entire recession. The BLS model is a total fabrication of reality.

From Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5% :

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



The BLS should be embarrassed to report such nonsense.

Mish

Obama's "Cap and Trade" Energy Plan Will Cost Jobs

A quick look at the details of the Energy Plan working its way through Congress shows that Obama's energy plan will cost jobs. Please consider Energy job losers could get windfall.

Workers who lose their jobs if the pending climate change legislation becomes law could get a weekly paycheck for up to three years, subsidies to find new work and other generous benefits -- all courtesy of Uncle Sam -- under a little-noticed provision of the bill.

Touted by its House Democratic authors as a jobs engine, the bill offers extraordinary compensation for those who would lose their paycheck as a consequence of its passage.

Adversely affected employees in oil, coal and other fossil-fuel sector jobs would qualify for a weekly check worth 70 percent of their current salary for up to three years. In addition, they would get $1,500 for job-search assistance and $1,500 for moving expenses from the bill's "climate change worker adjustment assistance" program, which is expected to cost $4.2 billion from 2011 to 2019.

The bill passed the House a week ago in a hotly contested 219-212 vote, with supporters arguing that a principal reason to support the bill is that it would create millions of new jobs. But analyses from the political left and right argue that potentially millions of jobs in industries tied to traditional fossil fuels would be lost and, at least initially, not enough "green" jobs would be created to replace them.

"Can you name another jobs-creation bill that was so concerned about its potential impact that it preemptively included a benefits' program for the millions of workers it expected to displace?" asked Chris Tucker, a spokesman for the Institute for Energy Research, a pro-oil industry independent think tank.

While the analyses assume displaced workers will eventually find jobs, the liberal-leaning Brookings Institution predicts a net job loss of 0.5 percent over the first 10 years that carbon reduction legislation, called "cap-and-trade," is in effect. The conservative Heritage Foundation found that by 2030 net job losses would top 1.1 million, while the Coalition for Affordable American Energy, an industry group, estimates that more than 3 million jobs would be lost by 2030 as a result of the cap-and-trade system.

All Pain, No Gain

Government interference like this always costs jobs. The plan is a complete boondoggle. The provision to give displaced workers 70% of their salaries is downright disgusting. Who else gets guarantees like that?

Moreover, the plan is ripe for graft. Anyone who loses a job for any reason will be blaming the "cap-and-trade" legislation. At 70% pay, many will be hoping they lose their jobs.

Inquiring minds will want to investigate an excellent writeup on the subject called Cap and Trade and the Illusion of the New Green Economy on Prison Planet.

Contact Your Senators

"Cap-And-Trade" legislation has already passed the House. The only hope at this point is the Senate. There is a Senate Contact List in Speak Out - Audit the Fed, Then End It! You can also get Phone, Fax, and Email numbers from the Online Directory for the 111th Congress.

Please contact your senators today and stop this boondoggle. Tell them you do not support this bill outright, and you especially do not support 70% pay for those who lose their jobs. If the bill is supposed to gain jobs such provisions are not needed and will be ripe for graft.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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We The People

Here is a thought provoking video about the stimulus package, Congress, the Constitution and many other topics.



I disagree with some of it, especially mandatory service. If the founders wanted mandatory service or English as the national language, they would have put it in the Constitution. Require a bunch of 18 year olds to join the military and you are begging for another war or more police actions. The US simply cannot afford to be the world's policeman.

The video also left out a discussion of money and gold that would have been interesting. However, most of what was said about Congress and spending rings a big bell.

Millions of people have played this video, and it is a good topic for discussion this 4th of July weekend.

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

More Idiocy From the SEC: Reinstatement of Short-Selling Restrictions

Inquiring minds are reading S.E.C. May Reinstate Rules for Short-Selling Stocks.

They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it.

Now short-sellers, the market skeptics who correctly called last year’s downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult.

Many banks, whose stocks came under attack last autumn, maintain that unfettered short-selling is dangerous. The shorts, their argument goes, helped bring down Bear Stearns and Lehman Brothers last year.

Mary L. Schapiro, chairwoman of the S.E.C., has said that considering new rules restricting short-selling is a priority.

For the moment, the most likely outcome may be for the S.E.C. to reinstate a rule that the commission itself abolished with a unanimous vote in 2007, under its previous chairman, Christopher S. Cox. Known as the uptick rule, it would bar investors from shorting a stock until its price ticks at least a penny above its previous trading price.

To some, the issue is clear-cut. The American Bankers Association, a trade group representing the vast majority of American banks — whose equity values have been especially battered in the last 18 months — recently submitted an opinion in favor of reinstating the short-sale restrictions.

Sally Miller, a spokesman for the A.B.A., said the member banks thought there was a clear link between the market turmoil and the rule change.

The American Bankers Association Group of Idiots

What brought down the banks was excessive leverage (40-1 or greater at Bear Stearns and Lehman), excessive dependence on real estate investments (both residential mortgages and commercial real estate), lax lending standards, off balance sheet investments ($1 Trillion at Citigroup alone), and a host of other piss poor discretions.

If the American Bankers Association wants to place the blame on who is responsible for this mess they ought to look straight in the mirror and blame themselves.

Moreover, Sally Miller is obviously a complete dunce as to how stock markets work. sally says there is a "clear link between the market turmoil and the rule change". Hello Sally, correlation does not imply causation.

The rooster crows at the crack of dawn every day and the sun comes up. The sun does not comes up because the rooster crows, no matter what the ABA says.

Citigroup's Ridiculous Short Selling Claim

Flashback November 20, 2008: Citigroup Blames Short Sellers For Collapse.

Inquiring minds are looking at Citigroup Statistics as of October 28, 2008.




Citigroup is blaming shorts when the short interest is under 3%. That's ridiculous. If Citigroup does not understand this, it is a sign of incompetence. If Citigroup does understand how ridiculous their claim looks (and is), that is additional support for the desperation thesis.

Note the dividend. Citigroup is paying a dividend when it is clearly in need of capital . Is that a sign of arrogance or incompetence? That Citigroup is in this mess in the first place is clearly sign of incompetence somewhere, at some point in time. Current management will attempt to place that blame on Chuck Price, but the culture of greed, arrogance, and excessive risk taking, permeated the entire financial industry.

Looking ahead, foreclosures, credit card defaults, and bankruptcies are going to soar along with a soaring unemployment rate. Banks in general, and citigroup specifically, are woefully undercapitalized and unprepared for what is about to happen. One look at a chart of Citigroup should be proof enough.

The market seems to believe Citigroup is insolvent and so do I.

Citigroup The Bank That Gets Nothing Right

While on the subject of Citigroup, and Citigroup whiners, I offer Listen to Citigroup Analysts at Your Own Peril.

Who Are The Short Sellers?

Inquiring minds are asking, who is doing the bulk of short selling?

It's a good question, too. And I have an answer: The market makers like Goldman Sachs, Citigroup, and Merrill Lynch.

Yes, the whiners complaining about short selling are doing the bulk of it! For every buyer there is a seller, and when markets are screaming higher, the market makers are frequently shorting as a pure function of what they do. Moreover, when people buy PUTs, the market makers selling those options short stock as a hedge.

Not only are the market makers shorting, but these actions are where the bulk of naked shorting comes from.

By the way, the SEC initiated a huge short squeeze once before by restricting shorts on financials. Guess what happened when the short squeeze ended and Goldman Sachs, Citigroup, and the other market makers were the ones left holding the shorts? The market plunged is what.

Finally, there is no uptick rule for market makers. There never was. This is how ridiculous this nonsense about shorting is.

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

Sweden Cuts Deposit Rate to NEGATIVE .25%

There has been a lot of ludicrous recommendations recently to combat deflation by making deposit rates negative. I did not think any central bank would be dumb enough to try it. I thought wrong.

Today, Riksbank, Sweeden's central bank cut the deposit rate to -0.25% effectively charging savers interest on deposited money.

DATE 2/07/2009
The weak development of the economy requires a somewhat more expansionary monetary policy. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.25 of a percentage point to 0.25 per cent.

Deep economic downturn

Economic activity abroad is very weak and this hits Sweden hard. Exports have fallen substantially and the situation on the labour market is continuing to deteriorate rapidly. The information received in recent months points to the economic downturn in 2009 being somewhat deeper than the Riksbank forecast in April.

Deposit Rate

The decision on the repo rate will apply with effect from Wednesday, 8 July. The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.

Sweden Attempts To Boost Lending

Please consider Sweden cuts rates to new low, offers banks loans.

Sweden's Riksbank cut interest rates to a fresh record low on Thursday and offered banks 100 billion crowns ($13.2 billion) to boost lending as it strives to reverse the country's worst recession since the 1940s.

The central bank lowered its key interest rate by 25 basis points to 0.25 percent in a surprise move, putting official rates at their lowest since records began in 1907, and said it expected rates to remain at that level until late 2010.

"It's a double whammy, or even a triple whammy," said Roger Josefsson at Danske Markets.

"The deposit rates are actually negative now. In some sense they are creating a money machine for banks. You can lend all you want, but don't put that back into the central bank."

Sweden was plunged into recession late last year as the global financial crisis pulled the plug on market demand, leaving firms such as world number two truck firm Volvo scrambling to cut costs and shed jobs.

The central bank forecast the economy will contract 5.4 percent this year and return to tepid growth of 1.4 percent next year.

Broadening its arsenal of policy measures, the Riksbank said it would offer banks loans at a fixed rate as was done recently by the European Central Bank, although it offered unlimited amounts.

The Riksbank will offer 100 billion crowns of fixed interest loans with a maturity of 12 months. It said supplementary measures would ensure monetary policy had the intended effect.

"This should contribute to lower funding costs for the banks and lower interest rates for companies and households," it said.

Deputy Central Bank Governor Barbro Wickman-Parak told a news conference that offering loans at fixed rates to the banks was judged more suitable than purchasing government or mortgage-backed bonds, at least for now.

"Sweden has a very bank-based system," she said.

"Company borrowing, in contrast to the United States, is carried out through the banks and in light of that it is reasonable for us to look first to moving through the banking system when we want to ease credits."

The ECB ended up pouring 442 billion euros ($622 billion) of funds into money markets in its first such operation with a term as long as one year, pushing some bank-to-bank borrowing costs to new record lows.

Punishing Savers

The global economy is in a mess because of the lack of savings not because of an excess of it. People spent money they did not have, pushing asset prices to ridiculous levels. Banks, in belief that asset prices would keep rising exponentially, increased leverage. Now consumers everywhere are retrenching in the wake of the collapse, a much needed phenomenon.

In light of the above, punishing savers with negative deposit rates is the height of stupidity.

It would be fitting if there was an immediate run on deposits. And if that happens what will Sweden do? Halt deposits? Sweden risks (and deserves) a currency collapse and bank runs for this insane effort. Look for capital flight in Sweden.

We should all be rooting for the demise of Sweden lest Bernanke or some other Central Bank clowns try the same thing. The risk is that Sweden does not immediately suffer for this stupidity and that Bernanke tries to do the same thing.

One thing is certain. This is eventually going to blow sky high. Let's hope it does before Bernanke gets the same brilliant idea.

By the way, in case you missed it, here is Bernanke's Deflation Preventing Scorecard.

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

Listen to Citigroup Analysts at Your Own Peril

Citigroup analysts appear to be a hopeless lot. Please consider this July 1, analyst recommendation: Citi tells clients to buy Bank of America.

The analysts added Bank of America (BAC) to their "Ten+ Aggressive Growth List," telling clients that the Charlotte, N.C.-based company is a good long-term investment and that it should return to normalized annual earnings of $3 a share in a few years.

"We believe the firm stands to benefit long term from market-share gains across a variety of businesses, including traditional banking, mortgage origination, retail brokerage, and investment banking," Citi analysts said in a research note.

They also highlighted Bank of America's record of making acquisitions and argued that two controversial recent takeovers -- namely, Countrywide Financial and Merrill Lynch -- offer good growth opportunities for Bank of America when the mortgage and capital markets stabilize and resume their expansion.

Citi rates Bank of America's shares as a buy with an $18 price target, implying 36% potential upside from their closing price Tuesday.

Flashback March 31, 2009

Inquiring minds are taking another look at a post of mine from April 2, 2009 called Citibank to Investors: We Suggest You Bet Against Us.

In a statement that ought to scare the hell out of the bears Citigroup Says Buy Bank Puts Because Rally Will Fade.

March 31 (Bloomberg)

Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.

“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.

He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

Citigroup is essentially telling investors to bet against JPMorgan, Citigroup, Bank of America, and a whole slew of financial stocks that have been smashed to smithereens.

Pardon me for asking, but where was this advice a year ago, or six months ago, or even three months ago?

I am not particularly bullish on financials right now, but perhaps I ought to be on the grounds that Citigroup has not gotten anything right during this economic decline and is now recommending a bet against itself.

Indeed, Citigroup's recommendation could be a nice contrary indicator especially as More Ugly Details Emerge On "Geithner's Heist America Plan".

XLF 15 Minute Chart



Those $8.00 strike May PUTs are likely to expire worthless. If so, I have to ask the question: Can anyone at Citigroup get anything right?

Can Citigroup Strike Out Again?

Those strike $8 May XLF PUTs did expire worthless. Indeed someone could have had a 300% profit by betting on $8 May XLF CALLs.

At the time of Citigroup's inspirational XLF PUT recommendation this is what the weighting of the XLF sector looked like. Note that Bank of America had the second largest weighting. Click on link for current weightings.



XLF Daily Chart



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Bank of America Daily Chart



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Excuse me for asking but exactly where was the Citigroup recommendation to buy Bank of America at $3? $4? $5? $6?

The answers are nowhere, nowhere, nowhere, and at $6 a recommendation to bet against financials via PUTs, a recommendation that went to $0.

Now, after a 300%+ rally from the lows, Citigroup analysts advise buying Bank of America stock.

This is not a recommendation, but it just may be time to buy some XLF PUTs. My big caution on the PUT trade is whether or not Geithner's Heist America Plan gets off the ground.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5%

This morning, the Bureau of Labor Statistics (BLS) released the June Employment Report.

Nonfarm payroll employment continued to decline in June (-467,000), and the unemployment rate was little changed at 9.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job losses were widespread across the major industry sectors, with large declines occurring in manufacturing, professional and business services, and construction..




Establishment Data



click on chart for sharper image

Highlights

• 467,000 jobs were lost in total vs. 345,000 jobs last month.
  
• 79,000 construction jobs were lost vs. 59,000 last month.
  
• 136,000 manufacturing jobs were lost vs. 156,000 last month.
  
• 244,000 service providing jobs were lost vs. 120,000 last month.
  
• 21,000 retail trade jobs were lost vs. 18,000 last month.
  
• 118,000 professional and business services jobs were lost vs. 51,000 last month.
  
• 34,000 education and health services jobs were added vs. 44,000 added last month.
  
• 18,000 leisure and hospitality jobs were gained vs. 3,000 added last month.
  
• 52,000 government jobs were lost vs. 7,000 last month.
  

A total of 223,000 goods producing jobs were lost (higher paying jobs), and in contrast to last month, the service sector was hit hard again. Indeed most of the improvement in May was a 149,000 relative improvement in the service sector as compared to April.

It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Work hours are now down to 33.0 in aggregate. This is contributing to household problems. The expectation was for work hours to rise.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers remain in deep outer space.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession.

The Birth/Death numbers are a complete joke and has been for at least two years now.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

The number of unemployed persons (14.7 million) and the unemployment rate (9.5 percent) were little changed in June. Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 4.6 percentage points.

The number of long-term unemployed (those jobless for 27 weeks or more) increased by 433,000 over the month to 4.4 million. In June, 3 in 10 unemployed persons were jobless for 27 weeks or more.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in June at 9.0 million. Since the start of the recession, the number of such workers has increased by 4.4 million.

Persons Not in the Labor Force

About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in June, 618,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the past 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 793,000 discouraged workers in June, up by 373,000 from a year earlier.

Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.4 million persons marginally attached to the labor force in June had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status



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The chart shows there are 9 million people are working part time but want a full time job. A year ago the number was 5.5 million.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 9.5% and rising. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.5%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.

Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Regardless of whether you think these are depression level statistics, unemployment is high and rising. Moreover, the "adverse scenario" in the Fed's stress test was unemployment at 10.3% at the end of 2010.

If you want something to think about after reading that jobs report, please consider Aircraft repair jobs sold to foreign workers, resumes not important.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Aircraft repair jobs sold to foreign workers, resumes not important

Here's something to think about when the unemployment numbers come out Thursday Morning: Aircraft repair jobs sold to foreign workers, resumes not important.

A News 8 investigation found that hundreds of aircraft mechanics have been brought into the United States to work at aircraft repair facilities.

Insiders say the companies that are importing the mechanics are so eager to save money, they’re overstating their qualifications. The result may be a threat to safety, abetted by lax enforcement of immigration law.

At daybreak any morning at San Antonio Aerospace, hundreds of workers amble through the gates for the day shift. They repair big jets like Airbuses, Boeing 757s and MD-11s.

Jada Williams used to work for one of the contracting companies, Aircraft Workers Worldwide (AWW), based in Daphne, Alabama. AWW supplied workers for two facilities, Mobile Aerospace Engineering (MAE) in Mobile, Alabama and San Antonio Aerospace, which are both controlled by ST Aerospace. San Antonio Aerospace is a division of ST Aerospace, the largest aircraft repair company in world.

"They’ve employed over 200 since I left,” said Williams, who said she was unfairly fired by the contractor last fall. "And I know we had over a hundred when I was in there, just in Mobile.”

San Antonio Aerospace uses several contracting companies to supply it with workers. It can be a high-profit business for the contractors. They can make $3 to $12 an hour for every worker hired by SAA, contractors say.

The drive for profits is so big, Williams and other insiders said, that the contractors often falsify the qualifications of the imports.

"We had two,” she said. “One of them was a female. She was about 16. It was a brother and a sister. One guy was a grocery bagger, one was a security guard in Puerto Rico. Their ages were between 18 and 22.”

Their ages are important because it takes years of experience or schooling to learn how to repair a big jet, experience they couldn’t have had.

One former SAA mechanic, who spent years learning his trade before being laid off, said foreign workers got their training on the job from the Americans they worked with.

"The more experienced mechanics, we would get paired up with either one or two of these guys,” he says. “And they would watch us for a month or so. And that’s how they would get their training.”

Williams is suing her former boss, Daniel Harding, for unlawful termination and racial discrimination. She has a computer full of company documents that were acquired accidentally when AWW got new computers for its office and gave her an old one. Spreadsheets, resumes and payrolls revealed many company practices, from interviews, to trips to the U.S. Embassy in Mexico City for visas, charts marked the progress of Mexican workers to the United States. Documents also showed workers were charged $3,500 each by AWW to get into the United States.

Williams also has an e-mail trail from AWW president Harding to Moh Loong Loh, the President of San Antonio Aerospace. He described one candidate as having “ 25 percent English skills.”

Williams said in Mobile the numbers were even bigger. She said she picked up a group of 60 people from Puerto Rico at Mobile Regional Airport last February. Since Puerto Rico is a U.S. territory, its residents are U.S citizens. For the contractors, this is a bonus because they can pay the Puerto Ricans low wages without having to deal with foreign immigration requirements.

There is an interesting video in the above link that inquiring minds may wish to consider.

Putting profit over the safety of aircraft and passengers is unconscionable. If anyone at AWW or San Antonio Aerospace is in violation of immigration laws or falsifying documents, I hope they join Madoff for a nice stay in prison.

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