Gordon T Long

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PRESERVE & PROTECT: Mapping the Tipping Points

The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price.  As a sailor it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared?

 

What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors the financial markets do not have the forecasting technology to protect it from such a possibility. Good sailors before today’s technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today’s financial community.

 

Looking through the misty haze though, I can see the following clearly looming on the horizon.

Since President Nixon took the US off the Gold standard in 1971 the increase in global fiat currency has been nothing short of breath taking. It has grown unchecked and inevitably became unhinged from world industrial production and the historical creators of real tangible wealth.  READ MORE

 

Do you believe trees grow to the sky?

Or, is it you believe you are smart enough to get out before this graph crashes?

   

 

INNOVATION: What Made America Great is now Killing Her!

What made America great was her unsurpassed ability to innovate.  Equally important was also her ability to rapidly adapt to the change that this innovation fostered. For decades the combination has been a self reinforcing growth dynamic with innovation offering a continuously improving standard of living and higher corporate productivity levels, which the US quickly embraced and adapted to.

 

This in turn financed further innovation. No country in the world could match the American culture that flourished on technology advancements in all areas of human endeavor. However, something serious and major has changed across America.  Daily, more and more are becoming acutely aware of this, but few grasp exactly what it is.  It is called Creative Destruction. 

 

It turns out that what made America great is now killing her!

 

Our political leaders are presently addressing what they perceive as an intractable cyclical recovery problem when in fact it is a structural problem that is secular in nature. Like generals fighting the last war with outdated perceptions, we face a new and daunting challenge. A challenge that needs to be addressed with the urgency and scope of a Marshall plan that saved Europe from the ravages of a different type of destruction. We need a modern US centric Marshall plan focused on growth, but orders of magnitude larger than the one in the 1940’s. A plan even more brash than Kennedy’s plan in the 60’s to put a man of the moon by the end of the decade. America needs to again think and act boldly. First however, we need to see the enemy. As the great philosopher Pogo said: “I saw the enemy and it was I”.

READ MORE

 


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

POSTS:  THURSDAY 08-26-10

Last Update: 08/27/2010 05:17 AM

SCHEDULE: 1st Pass: 5:30AM EST, 2nd Pass: 8:00 AM, 3rd Pass 10:30

ARTICLE SOURCE 1 2 3 4 5 6 7 8 9 10
                       
Spain uses social security fund to prop up the bond market Prichard X                  
Euro Relies on Germany Tightening Purse Strings Bloomberg X                  
Merkel Is in Europe's Driving Seat WSJ X                  
What About Germany? Krugman X                  
France, Germany against EU budget boost - minister Reuters X                  
Civil servants in plea over jobs cull FT X                  
Ireland's Rating Cut by S&P Bloomberg X                  
Irish debt downgrade raises fears of international deflation spiral Independent X                  
Ireland downgraded on concern about bank bailouts MarketWatch X                  
It pays to riot in Europe Prichard X                  
Ireland attacks ‘flawed’ S&P move FT                    
The Scariest Economy - Japan, not Greece, is the real worry Newsweek X                  
China fund bond sale faces criticism FT X                  
Pretoria defends China’s Africa policy FT X                  
U.S. Has `Realistic Possibility' of Stagnation--S& Bloomberg X                  
CBO Estimates Stimulus Boosted Q2 GDP By 4.5%, Standalone Number Is Likely Under Around -3.5% Zero Hedge X                  
Depression-Era Manufacturers' Association Slashes U.S. Growth Forecasts -- And 350,000 Jobs Disappear BI  X                  
U.S. Durable Goods Order Weakness Portends Easing Of Factory Sector Growth Haver Analytics X                  
FSA seeks to avoid financial ‘froth’ FT   X                
Hard-nosed Fed sends global markets reeling Prichard     X              
100-year Treasuries could be tough sell Reuters     X              
Asian markets continue retreat from risk FT             X      
Commercial Property Owners Default WSJ               X    
U.S. New Home Sales' Depressed Level Pulls Prices To 2003 Level Haver Analytics                 X  
The Homebuyer Tax Credit Created A Huge Distortion BI                 X  
CDS On Home Builders Spike After Terrible Housing Data BI                 X  
Existing Homes: Months of Supply and House Prices July 2010 Calculated Risk                 X  
                       
ARTICLE SOURCE 11 12 13 14 15 16 17 18 19 20
                       
Retiree Ponzi Scheme Is $16 Trillion Short Bloomberg X                  
PPF to unveil long-term pension funding plans  FT X                  
Activist pension funds to target boards FT X                  
Are Pensions the Next AIG Zero Hedge X                  
Illinois Teachers' Retirement System Enters The Death Spiral- AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations Zero Hedge X                  
Rosenberg- Prepare For Another 4-5 Million Job Cuts BI   X                
Another Atlas Shrugs-Small Bus. Owners Chime In Mish   X                
Jobs, Foreclosures May Keep Housing  Depressed Bloomberg   X                
Private Equity Losing Commitments From Pensions as Tony James Woos Oregon Bloomberg       X            
                       
REMAINING                      
Diageo Profit Growth to Trail Pernod as U.S. Consumers Shun Premium Liquor                     24
What's the Beef- Food-Inflation Fears WSJ                   31
The Dangers of Agricultural Speculation der Spiegel 31
US chains beef up meals to lift profits FT                   31
                       
                       
BP OIL                      
Transocean accused over maintenance FT                    
On Doomed Rig's Last Day, a Change of Plan WSJ                    
                       
GENERAL INTEREST                      
The Fed Can Create Money, Not Confidence WSJ                    
Bonds Aren't The Only Asset Class Sucking In Investor Money These Days BInsider                    
Argentina Moves to Seize Newsprint Firm WSJ                    
                       
FLASH CRASH                      
Market insiders blame 'fat finger failure' for unusual stock swings Independent                    
                       
MARKET WARNINGS
Head-and-Shoulders Portends Double-Dip Barrons                    
Market Looks Ready to Break to New Lows Nasdaq                    
                       

Complete Legend to the Right, Top Items below.
Articles with highlights, graphics and any pertinent analysis found below.
(Note:  Latest re-rankings reflecting "Mapping the Tipping Points" will be reflected tomorrow)

 

1

         

1-SOVEREIGN DEBT

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY

TODAY'S TIPPING POINTS UPDATE

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge





08-25-10

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

 

IRAN

IRAN NUCLEAR THREAT

 

 

 

1- SOVEREIGN DEBT & CREDIT CRISIS

 

SOVEREIGNS

 

 

SPAIN

Spain uses social security fund to prop up the bond market  Prichard

 

GERMANY

Euro Relies on Germany Tightening Purse Strings BL
Capital-market rates for Greece stand more than 8 percentage points higher than interest rates on German government bonds.

Merkel Is in Europe's Driving Seat WSJ
When Chancellor Angela Merkel opted in 2009 for a significant post-crisis German stimulus she did so in the knowledge that her country could afford it.

What About Germany? Krugman

FRANCE

France, Germany against EU budget boost - minister Reuters

 

UK

Civil servants in plea over jobs cull  FT

 

IRELAND

Ireland's Rating Cut by S&P on Concern Support for Banks to Increase Debt  BL

Irish debt downgrade raises fears of international deflation spiral Inde I-Times
The Irish authorities reacted angrily -- "It's a bit like waking up the patient in the middle of an operation to tell him he's not feeling well.”

Ireland downgraded on concern about bank bailouts MW
Banking sector support may cost government 90 billion euros, S&P estimates

It pays to riot in Europe Pritchard
Ireland must now pay more than Greece to borrow...To add insult to injury Ireland is having SUBSIDIZE Greece to meet its share of the rescue fund.

Ireland attacks ‘flawed’ S&P move  FT


JAPAN

The Scariest Economy - Japan, not Greece, is the real worry Newsweek

 

CHINA
China fund bond sale faces criticism
  FT
Circular nature of bank recapitalisation raises concerns
Pretoria defends China’s Africa policy  FT
Trade minister rejects neo-colonial expansion claims

 

USA

 

 

U.S. Has `Realistic Possibility' of Stagnation, S&P's Wyss Says BL
“I think there is still a realistic possibility in the U.S. that it’s slipping into this pattern like Japan has -- 10, 20 years of stagnation”

 

GDP REVISIONS - ANTICIPATION

 

CBO Estimates Stimulus Boosted Q2 GDP By 4.5%, Standalone Number Is Likely Under Around -3.5%  ZH

Depression-Era Manufacturers' Association Slashes U.S. Growth Forecasts -- And 350,000 Jobs Disappear  BInsider

The Manufacturers Alliance (MAPI), whose roots date back to the U.S. depression period when it was formed in order to help stabilize the manufacturing economy, has just slashed their U.S. GDP forecasts in their latest economic outlook. Previously expecting 3.3% GDP growth this year, they now see just 2.9%. 2011's forecast has also been trimmed to 2.6% from 2.9%.

MAPI:

“There is a somewhat bleaker outlook amid weaker economic data and it clearly indicates a slow growth mode,” said Daniel J. Meckstroth, Manufacturers Alliance/MAPI Chief Economist. “For instance, the numbers for June retail trade, inventories, and foreign trade have all come in weaker than the Bureau of Economic Analysis had estimated in the preliminary estimate of second quarter GDP growth. The homeowners’ tax credit has expired. Consumers are not spending as much. They are saving more and repaying debt, which is good for the long run but not the near term. The inventory swing is over and the benefits of the stimulus have basically run their course.”

There remain, however, positive economic signs, and the manufacturing sector should continue to hold its own. “Expenditures are rapidly growing for business equipment, as are exports,” Meckstroth added. “Manufacturing will grow faster than the general economy as it relies less on consumer spending while disproportionately benefiting from strong demand for business equipment, exports, and basic materials.”

Yet manufacturing output will grow faster than the U.S. economy thanks to high-tech.

Interestingly, they nevertheless expect the U.S. manufacturing sector to expand at a faster rate than the greater U.S. economy, forecasting manufacturing production growth of 5.7% in 2010 and 4.7% in 2011. Digging a bit deeper, it's a substantially different economy environment for high tech vs. 'non-high tech' companies. While non-high tech output is only expect to grow by 5.1% and 4.3% in 2010 and 2011 respectively, high-tech production is forecast to surge by 14.5% and 13%. It's a completely different economy for those in the high-tech space.

Nevertheless, there's one final piece of news, which isn't too pretty for those in need of a job:

MAPI forecasts overall unemployment to remain high, averaging 9.6 percent in 2010 and 9.4 percent in 2011. Manufacturing is expected to see a hiring increase, albeit less than previously anticipated. The sector is forecast to add 277,000 jobs in 2010 and 373,000 jobs in 2011, although the numbers are down from 400,000 and 500,000, respectively, in MAPI’s May report.

While the association expects 650,000 manufacturing jobs to be created through 2011, this is a sharp drop of about 350,000 from the 900,000 new jobs previously expected for the period, back in May. Hiring will likely be skewed towards the high tech industries where there's double-digit production growth, so high tech is the place to be.

 

U.S. Durable Goods Order Weakness Portends Easing Of Factory Sector Growth  Haver Analytics

By itself, a 0.3% gain in July durable goods orders might be an encouraging sign from the Commerce Department for factory sector growth. But several aspects of the report paint a dimmer picture of the U.S. manufacturing sector.

  1. 1) The increase followed two months of slim gain which together left the three-month change down 2.1% after double-digit growth this spring.
  2. 2) Excluding bookings in the highly volatile transportation sector, orders fell by 3.8% and pulled three-month growth to -8.7%.
  3. 3) Orders weakness has been widespread amongst industry groups.

Leading last month's orders' weakness was:

  1. 1) a 15.0% decline in the (+14.1% y/y) machinery sector and
  2. 2) a large 12.7% drop (+7.8% y/y) in orders for computers & related products. 3) Electrical equipment orders dropped 5.9% (+5.4% y/y), for the third decline in the last four months, and
  3. 4) fabricated metals orders fell 1.0% (+8.2% y/y).
  4. 5) Partially offsetting these declines were a 5.3% increase (19.9% y/y) in motor vehicles and a 3.9% gain (-17.3% y/y) in orders for communications equipment.

Durable Goods

 

BLOOMBERG: The Commerce Department report showed bookings in July for goods made to last at least three years rose 0.3 percent, compared with the 3 percent median gain forecast in a Bloomberg survey. Excluding transportation equipment, demand fell by the most in more than a year. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, dropped 8 percent after climbing 3.6 percent in June. Over the past three months, these orders climbed at a 20 percent annual pace, down from a 31 percent gain in the three months to June, signaling companies will rein in investment.

Equipment Shipments

Shipments of those items, used in calculating gross domestic product, decreased 1.5 percent after rising 1 percent in June. A report from the Commerce Department tomorrow may show the economy expanded at a 1.4 percent rate in the second quarter, down from the 2.4 percent pace previously estimated. “The manufacturing sector that has played a leading role in the economic recovery to date is beginning to ebb,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York, who also put the odds of another economic slump at about one-in-three, twice as high as earlier this year. “That warns of a softening in economic growth in the months ahead.”

 

 

 

2- EU BANKING CRISIS

   

FSA seeks to avoid financial ‘froth’  FT

Call for action on banks’ capital requirements

 

3- BOND BUBBLE

 

Hard-nosed Fed sends global markets reeling Pritchard

 

100-year Treasuries could be tough sell Hutchinson

 

4- STATE & LOCAL GOVERNMENT

 


5- CENTRAL & EASTERN EUROPE

 


6-BANKING CRISIS II

 

 

7- RISK REVERSAL

 

Asian markets continue retreat from risk  FT

 

8- COMMERCIAL REAL ESTATE

 

Commercial Property Owners Default  WSJ
STRATEGIC DEFAULTS & JINGLE MAIL:
Like homeowners walking away from mortgaged houses, some large commercial property owners are defaulting on debts and surrendering to lenders buildings worth less than their loans. Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC.Owners of commercial property have an easier time walking away than homeowners because commercial mortgages are typically nonrecourse.

CDOs
Whether landlords walk away from properties often depends on the lender. In recent years, most projects were financed by the use of commercial-mortgage-backed securities, or CMBS, which are effectively bundles of mortgages sold as bonds to thousands of investors. Restructuring debt with scores of bondholders is more difficult than with banks. If borrowers do walk from bond-financed properties, the real estate is often foreclosed and sold for less than the loan balance. Investors holding those loans take another hit by paying fees to loan servicers that handle the liquidations.

 

 

9-RESIDENTIAL REAL ESTATE - PHASE II

 

NEW HOME SALES


U.S. New Home Sales' Depressed Level Pulls Prices To 2003 Level  Haver Analytics
Estmates: 339,000   Actual 276,000   18.6% Miss
Haver Analytics

What the Federal government gives, it can take away. And the removal of the $8,000 home-buyer tax credit wreaked more havoc on home sales last month. The Census Department indicated that July new home sales fell 12.4% to 276,000, another record low, from a downwardly-revised June. Expectations were for sales of 333,000. Two months ago it was  reported that May sales had reached a record low. The decline in home sales was sharp across the country's regions but most pronounced in the Southern and Western states where sales were bottom-scrapping. These tallies began in 1963.

The decline in sales last month caused median home prices to again fall. The 4.8% y/y decline to $204,000 was to the lowest level since December 2003. The average price of a new home also fell sharply to $235,300 (-13.2% y/y), also the lowest since 2003.

At the current sales rate, the months' supply of unsold homes rose back to 9.1, nearly the highest in a year, from an upwardly revised 8.0 in June. The latest remained well below the early-2009 high of 12.1 months. The inventory of unsold homes was down 22.2% from last year and down nearly two-thirds from the 2006 peak.



EXISTING HOME SALES


In Case It Wasn't Obvious That The Homebuyer Tax Credit Created A Huge Distortion  BInsider

Check out this chart from Waverly Advisors which shades in the period of the tax credit.  Home sales started rising immediately, and have fallen off immediately with the tax credit's expiry.  Quick Congress, time for another! (Kidding!)




CDS On Home Builders Spike After Terrible Housing Data   BInsider

CDS prices on home builders spiked as a result of this morning's poor existing homes sales data. Sales plunged 27.2% in July, far worse than estimates.  Now key homebuilders are seeing the cost of insuring their debt rise dramatically as the housing market comes under renewed pressure. Tomorrow, new home sales data is released.  The industry ETF, however, is up 0.28%.

From Markit:

Existing Homes: Months of Supply and House Prices July 2010  Calculated Risk
The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.


 
Click on graph for larger image in new window.


Although inventory increased from June 2010 to July 2010, inventory decreased 1.9% YoY in July. The slight year-over-year decline is probably because some sellers put their homes on the market in the Spring hoping to take advantage of the home buyer tax credit.   Note: Usually July is the peak month for inventory.

This level of inventory is especially bad news because the reported inventory is already historically very high, and the 12.5 months of supply in July is far above normal.  The months-of-supply will probably decline in August as sales rebound slightly and some sellers take their homes off the market, but I expect double digit months-of-supply for some time - and that will be a really bad sign for house prices ... A normal housing market usually has under 6 months of supply. The following graph shows the relationship between supply and house prices (using Case-Shiller).


This graph show months of supply (through July 2010) and the annualized change in the Case-Shiller Composite 20 house price index (through May 2010). Below 6 months of supply (blue line) house prices are typically rising (black line).  Above 6 or 7 months of supply, house prices are usually falling. This isn't perfect - it is just a guideline. Over the last year, there have been many programs aimed at supporting house prices, and house prices increased slightly even with higher than normal supply. However those programs have mostly ended.  This is a key reason why I expect house prices to fall further later this year as measured by the Case-Shiller and CoreLogic repeat sales house price indexes, although I don't expect huge declines like in 2008. My expectation is further price declines of 5% to 10% on the repeat sales indexes.

Notes: The Case-Shiller house price index for June will be reported next week (really a 3 month average of April, May and June). We really want to see prices for July - and those will not be reported until the end of September. And once again the July numbers will be a 3 month average. So it might take until the end of October to see the price declines that are already happening in the housing market.

 

10- EXPIRATION FINANCIAL CRISIS PROGRAM

 

11- PENSION & ENTITLEMENTS CRISIS


Retiree Ponzi Scheme Is $16 Trillion Short BL (Kotlikoff)
This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap...

Unfortunately, the Trustees’ cash-flow accounting, like all such accounting, is arbitrary and misleading. In fact, Social Security is broke. Its fiscal gap, which the Trustees measure correctly, is $16 trillion. This gap is small compared with the U.S.’s overall $202 trillion shortfall, not because the Trustees treat Social Security’s $2.5 trillion trust fund as an asset (a questionable choice), but because they credit one-third of federal revenue to the program. But dollars are dollars. If we re-label Social Security “payroll” taxes as “general revenue wage taxes,” Social Security’s fiscal gap increases by $60 trillion, and the fiscal gap of all other government activities falls by $60 trillion, leaving the overall $202 trillion gap unchanged. Even by the Trustees’ measure, there’s a massive problem. Coming up with $16 trillion requires permanently raising revenue or cutting benefits by 26 percent, starting now. In other words, the program is 26 percent underfunded.


PPF to unveil long-term pension funding plans  FT
UK’s body plans to have enough cash to pay all future benefits by 2030

Activist pension funds to target boards  FT
New proxy access rules set to shake up underperforming US companies

Are Pensions the Next AIG  ZH
If forced liquidation becomes a pattern among US (and global) pension funds, watch out, the pension tsunami will have far reaching effects which will make the whole AIG fiasco look like a walk in the park...

Illinois Teachers' Retirement System Enters The Death Spiral- AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations  ZH
Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default." In other words, TRS was selling substantial amounts of derivatives, which held the fund's other assets as hostage in case the collateral calls started coming in, as should the market broadly decline, the value of the downside derivatives would "increase" and the seller (in this case TRS) would need to pledge ever more collateral against these wrong way bets. Not only that, but the Fund is currently getting annihilated on its curve exposure: "TRS appears to be betting that long-term Treasury yields will greatly increase" we wrote back then. So as a result of i) its massive underfunded fundamentals and ii) a bet that the market would turn bullish, i.e., spreads would drop (they are rising), and treasuries would plunge (we all know where they are today), which was supposed to happen by now but isn't as the economy is now officially double dipping, the fund has basically thrown in the towel and is proceeding with liquidations. The problem there is that due to its derivative exposure, liquidations now become self-reinforcing, as more cash needs to be pledged as collateral in a declining market, and the AIG death spiral we all know and love, follows. The only thing missing is for Goldman to raise its overnight variation margin requirements and it's game over, as we get a brand new AIG on our hands. And since Goldman is among the 60 or so asset managers that actually decide how the fund invests its meager assets, it is fully aware of its precarious position, and it is a sure bet that Goldman is currently deciding when to pull the plug on the TRS life support.

12- CHRONIC UNEMPLOYMENT


David Rosenberg- Prepare For Another 4-5 Million Job Cuts  BInsiders

In his morning note, David Rosenberg warns of more economic bloodletting ahead.

The article in yesterday’s WSJ titled Specter of Layoffs Stalks Wall Street really resonated with us. As we said in yesterday’s note, the size of the securitized loan market has shrunk 60% in the past two years. Balance sheets, production, order books and staffing requirements are all rightsizing to this new semi- permanent landscape of reduced credit availability.

In fact, we could see a situation where another 4 to 5 million jobs could be shed in the United States — and in the three sectors that were, and remain, the most affected by the housing crisis and financial collapse.

For example, historically, the construction industry employed three workers for every housing start. Today, that ratio is closer to 10. This could easily mean that we see 3 to 4 million construction jobs being lost going forward, barring a major revival in the housing market, which isn’t happening.
The ratio of employees in the financial sector to outstanding private sector credit is at a new and lower level that would warrant around a workforce 500,000 lower than is the case today — just to get to productivity ratios that prevailed in the pre-bubble era. And the third sector, which is the fiscally-challenged state and local government segment, for payrolls there to mean revert to the level commensurate with the ever-declining level of public spending would also mean roughly 500,000 employment cutbacks. No doubt there are other sectors that will provide some offset in health and education and even manufacturing, but it took 25 years for these areas combined to rise five million and something tells us that the downsizing that is left in the housing, financial and state/local government sectors will occur in a much shorter period (and the latter too, if what happened recently in New Jersey is any indication, the social contract with public sector unions will soon go the way of the dodo bird)."

Note that the year-on-year trend in layoff announcements, after a brief period of declines, is now re-accelerating in the three above-mentioned affected sectors. For the first time since late 2007, the financial sector posted no hiring announcements in each of the last two months and this has also been the case in three of the past four months in the real estate sector. Government sector hiring announcements, as an aside, have plunged 75% from year-ago levels. The signs are already there — get ready for another downleg in employment as the jobless claims are now suggesting — especially as it pertains to this 33 million or 25% chunk of the total workforce.


Another Atlas Shrugs - Small Business Owners Chime In  Mish
The CEO of a healthcare consulting company writes ....
You ran a series of articles on small businesses, hiring and expansions. I thought I would add to it.

I run a small firm, with about 45 employees and 40 contractors. We have been growing pretty well, close to 80% topline numbers for the past 3 years. Our average salary is over $100,000. We have some innovative software we sell to the industry. We also offer operational improvement strategies and IT consulting.

We provide great healthcare insurance coverage to our employees. It is necessary in order to attract talent and I am in the talent business. Our healthcare costs went up 90% this year – and that is on a 6-figure number to begin with. We found only one insurer willing to provide us coverage, United Healthcare.

Every other provider pulled out of our segment of the small business market. Cigna, our prior carrier, refused to renew at the last minute on a technicality despite being our carrier for the past 3 years.

Our management team’s focus for two weeks was seriously diverted as we dealt with the consequences of this. Had we lost coverage altogether, we would have been out of business as our employees would go elsewhere.

Our staff is young and healthy, by and large. Average age is early 30s, in the healthcare consulting, software and technology industry. Only in a severely government distorted marketplace can a firm with a young and healthy staff that has had coverage for years face insurers pulling out or demanding a 90% hike.

We had plans to add one person to our R&D staff, a low 6-figure salary. That was shelved because of healthcare costs. Our software development cycle is slowed as a result.

How has the healthcare bill helped the economy? In this case, not one bit. And everyone of my employees has been hurt, because we switched mid-year, those who were part way into their deductible have to start all over again. That is a few 1000s for a number of employees. Because of a bill that passed that cost us money, and most of our employees money. No one is happy with this.

I have additional areas I would like to invest in. Areas that involve productivity gains, not just taking share from someone else, and not just for us. Many of the things I would like to do would reduce costs for my customers and build efficiencies in the healthcare industry as well.

One of our software products reduces the cost of clinical trials, and has saved millions of dollars in better planning. Another model we have developed reduces the cost of carrying inventory for bio/agritech firms. I believe it is the best in the world, developed by a Ph.D. out of Carnegie Mellon. It saves millions a year for large companies (Monsanto, Bayer Crop Science, etc. type of companies).

Productivity is the wealth of a nation.

However, thanks to Obama administration policies, we are pissing our edge away on dumb stuff which makes us hesitate to invest more. Thanks a lot, Congress.

The state government, California, (surprise, surprise, surprise) has intimated our customers. Several large companies are withholding taxes from our payments in case we need to pay sales tax on our services. We don’t. It is our responsibility to pay sales taxes under our contract anyway.

What can I do? Sue my customer?

How in the heck in this environment can a business owner feel good, create jobs, and expand?

It's no wonder small businesses are in a sour mood. I have so many other stories from other small business owners that I know. The theme is the same. We are all up against overseas competition, against taxes, against the government, against societal acrimony.

Many of my business executive associates are looking to cash out if they could find a buyer at a decent price. As my friend, a former mid-size credit union COO and small business owner, says whenever one of the “good guys” – people who understand how to start businesses that are productive - throws in the towel and cashes in … “Another Atlas shrugs.”

The business climate is freaking insane. I don’t blame the insurers too much. It takes a government to make a market this screwed up.

Thanks to you and others, I pay more attention to Washington, D.C. and state legislatures. I also call to protest and give money to fiscal conservative candidates.

Unfortunately this takes time away from my business. But do I have a choice?

Unions get to pay people full-time to lobby on their behalf. Me? I work long weeks. I feel bad for my family if I don’t spend more time with them, but I cheat my son if I don’t fight for a better world for him.

As always, your coverage of all topics, including public sector unions, is wonderful, a great service, and greatly appreciated. You have an impact on us who don’t have time to do this on our own, but care about our society and want to contribute. I have given to so many individual campaigns and efforts around the country this year, more than the rest of my years combined. You are making a difference, thanks.

"Healthcare CEO"

Lack of Jobs, Foreclosures May Keep Housing in U.S. Depressed BL


13- GOVERNMENT BACKSTOP INSURANCE

 

 

14- CORPORATE BANKRUPTCIES

 

Private Equity Losing Commitments From Pensions as Tony James Woos Oregon  BL

A year after the financial crisis subsided, the $2.5 trillion private-equity industry is finding the easy money may be gone.

Managers saddled with $1.6 trillion in buyouts made during a three-year boom have marked at least 6 of the era’s 10 biggest deals at or below cost, according to data compiled by Bloomberg. About $470 billion sits idle, according to London-based researcher Preqin Ltd. Announced purchases so far this year total less than a fifth of their volume at the peak in 2007.

Pensions, endowments and mutual funds cut new commitments to buyout funds by more than 50 percent, according to Preqin, questioning whether firms led by Blackstone Group LP have grown too large to generate the returns that made their founders billionaires. Blackstone, the world’s biggest private-equity company, has dropped 67 percent in New York trading since a 2007 offering, and Fortress Investment Group LLC lost 82 percent. KKR & Co. this month canceled a $500 million stock sale.

“There is a rightsizing of the industry right now,” said Joncarlo Mark, senior portfolio manager at the California Public Employees’ Retirement System, the largest state-run U.S. public pension. “A lot of investors have limited ability to commit new capital, and it’s going to stay that way for years unless public markets come back in a meaningful way.”

Calpers slashed its commitments to 2009 funds by 90 percent from those made to 2008 funds -- to $1.27 billion from $12.7 billion -- according to data compiled from the pension’s website. It committed a record $15.1 billion to 2007 funds.

Overall, private-equity funds raised $281 billion last year, a 57 percent drop from the record $646 billion collected in 2007, according to Preqin.

Rates of Return

Private-equity firms, which have their roots in the leveraged buyouts of the 1980s, pool money from investors to take over companies, usually with a mix of cash and debt, with the intention of selling them later for a profit.

The firms grew into multibillion-dollar asset managers, helped by returns that dwarfed what investors could earn in traditional assets such as stocks and bonds. Funds with more than $2 billion in commitments that were completed in 2001 and 2002 generated median rates of return of 34 percent and 33 percent, according to Preqin.

Institutional investors including endowments and pensions poured money into the funds as limited partners, committing more than $200 billion in a single quarter at the height of the buyout boom. The fund managers, or general partners, collected management fees of 2 percent of the capital committed and 20 percent of profits, making buyout pioneers including Blackstone’s Stephen A. Schwarzman and KKR’s Henry Kravis and George Roberts billionaires.

‘Pumped Out Profits’

“From 2005 to 2008, firms pumped out profits in 24 hours, buying on Monday and selling on Tuesday,” said Antoine Drean, head of Triago SA in Paris, which helps firms raise money. “That made for fundraising that was like a lottery, in which every ticket was a winner. That was too good to be true.”

The “lazy” days of easy fundraising are over, Tony James, president of New York-based Blackstone, said in an interview. Last month the 59-year-old Wall Street veteran flew across the country to win a commitment from the Oregon Investment Council to invest in a new $13.5 billion buyout fund. Instead of jumping at the opportunity, the council’s members grilled James for almost an hour about the performance of Blackstone’s 2007 fund, its fifth buyout pool.

The Oregon pension committed $1.6 billion to private-equity funds last year, down from $2.7 billion in 2008, according to the state treasury.

Blackstone Fund V

“That all sounds really great, and you probably raised money at the right time so you could go out and get deals,” Katherine Durant, who helps oversee $52 billion for state employees as a member of the council, said during James’s presentation in the Portland suburb of Tigard, which was open to the public. “That said, why does Fund V look so bad?”

Blackstone Capital Partners V was valued at a loss of 2 percent including fees, compared with a 7 percent drop in the Standard & Poor’s 500 Index during the same period, James told council members seated around him in a semicircle. He said it would return investors twice their money eventually.

The firm’s 1994 fund delivered 2.2 times investors’ money and average annual returns of 37 percent, according to Calpers, one of the investors.

Below Cost

Blackstone’s Fund V isn’t the only pool started in the boom years that’s struggling. As of the end of the second quarter, New York-based Fortress had $4.9 billion in unrealized, or paper, losses from private-equity funds started since 2005.

That’s because at least six of the 10 largest buyouts announced between 2005 and 2007 are marked at or below cost, according to public disclosures and communications with investors obtained by Bloomberg. KKR and TPG Capital’s Energy Future Holdings Corp.; Blackstone’s Hilton Worldwide; and Apollo Global Management LLC and TPG’s Harrah’s Entertainment Inc. have all sought to restructure their debt through methods such as debt exchanges or additional equity infusions.

Energy Future Holdings, the Dallas-based power producer formerly known as TXU, was the largest leveraged buyout in history when it was announced in 2007, with a value of $43.2 billion. At the end of the second quarter, KKR valued the company at 30 cents on the dollar.

Harrah’s, NXP

Harrah’s, the world’s largest casino company, was taken private in a $30.7 billion deal completed in January 2008. The Las Vegas-based firm’s owners have trimmed about $4.2 billion in debt through discount deals with banks and exchanges with creditors. Apollo valued the investment at 63 cents on the dollar as of June 30, according to an investor presentation obtained by Bloomberg.

Firms that were able to sell holdings had to cut the price or sell below cost. KKR and Boston-based Bain Capital LLC this month raised $476 million in an initial public offering of NXP Semiconductors NV after reducing the price to $14 a share from as much as $21. They bought the Dutch chipmaker in 2006 in a deal valuing the company at about $9.4 billion including debt. NXP has reported combined losses of $5.5 billion since then, and its current market value is $2.7 billion. KKR said this month that its stake in NXP was worth 50 cents on the dollar.

“Too much capital in any strategy, sector, time or place renders a market efficient, or hyper-efficient, and dilutes returns,” said Peter Yu, managing partner of Cartesian Capital, a New York-based private-equity firm.



 


OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

 

24-RETAIL SALES

Diageo Profit Growth to Trail Pernod as U.S. Consumers Shun Premium Liquor  BL

 

 

31-FOOD PRICE PRESSURES

What's the Beef- Food-Inflation Fears  WSJ
Cattle prices are soaring toward records, pushing up beef prices in stores, with gains fueled by rising appetites globally and a dwindling U.S. herd.

The Dangers of Agricultural Speculation Spiegel

'Price Increases Are Costing Millions of People their Health'
US chains beef up meals to lift profits  FT

Move comes as inflation returns to food prices




BP - British Petroleum

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

------------

 

Transocean accused over maintenance  FT

‘Recertification’ deadlines failed for blowout preventer

On Doomed Rig's Last Day, a Change of Plan  WSJ
The Deepwater Horizon blowout has become one of the most scrutinized maritime disasters ever. But a central uncertainty remains: Why didn't the crew recognize the warning signs in the final hours before the lethal eruption? Many workers on the rig didn't find out until the morning of April 20 about the change in a pressure test that would help determine the well's safety. BP wanted to remove an unusually large amount of the thick drilling fluid called mud from the well and then run the test. It was unorthodox and left crew members confused.

Transocean said that BP was responsible for directing and interpreting tests of the well.  "The final interpretation of the test results is the responsibility of the operator's personnel on the rig and on shore—the only personnel with complete information about the properties of the well and reservoir," said a statement from the company.


BP Oil

 

GENERAL INTEREST

 

The Fed Can Create Money, Not Confidence WSJ

 

Bonds Aren't The Only Asset Class Sucking In Investor Money These Days...BInsider

As U.S. treasury yields sink further, the 10-year even broke below 2.5% today, U.S. stocks are taking it on the chin. Fund flows continue to massively favor bonds over U.S. stocks.  Yet as U.S. stocks struggle to hang on, it's peculiar how some stock markets are on fire these days.

For example, Indonesia's stock market hit a new high just a few days back. Other Southeast Asian stock markets are approaching multi-year highs as well. In South America, Brazil's Bovespa Index is close to re-taking its pre-crisis high, and Argentina's Burcap Index has already broken above pre-crisis levels.

Here's a clue as to what's going on -- According to EPFR, emerging markets funds attracted $2.2 billion of investor inflows during last week alone, which means that $34.5 billion has flowed into emerging market funds year-to-date, shown in light blue below. Note these emerging market stock inflows have come as U.S. stock funds have seen outflows.  The current global malaise is sending investors into bonds and nations like Indonesia or Brazil, which makes for a peculiar combination of safe-havens since these far flung nations were considered higher-risk economies not too long ago.

 

 

Argentina Moves to Seize Newsprint Firm  WSJ
Argentina's government pushed forward in a campaign to wrest control of the country's largest newsprint-paper provider in a move top local newspapers called a brazen attack on press freedom.

 

FLASH CRASH - HFT - DARK POOLS

Market insiders blame 'fat finger failure' for unusual stock swings Inde

 

MARKET WARNINGS

Head-and-Shoulders Portends Double-Dip Barron’s
Market Looks Ready to Break to New Lows Nasdaq

 

GOLD MANIPULATION

 

 

VIDEO TO WATCH

 

 

QUOTE OF THE WEEK

 

To paraphrase Oscar Wilde

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.ont>

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

TODAY'S NEWS

THURSDAY

08-26-10

AUGUST
S M T W T F S
1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28
29 30 31        

ARCHIVAL


TIPPING POINTS

1-SOVEREIGN DEBT & CREDIT CRISIS

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY
 

15-CREDIT CONTRACTION II

16-US FISCAL IMBALANCES
17-CHINA BUBBLE
18-INTEREST PAYMENTS
19-US PUBLIC POLICY MISCUES
20-JAPAN DEBT DEFLATION SPIRAL
21-US RESERVE CURRENCY.
22-SHRINKING REVENUE GROWTH RATE
23-FINANCE & INSURANCE WRITE-DOWNS
24-RETAIL SALES
25-US DOLLAR WEAKNESS
26-GLOBAL OUTPUT GAP
27-CONFIDENCE - SOCIAL UNREST
28-ENTITLEMENT CRISIS
29-IRAN NUCLEAR THREAT
30-OIL PRICE PRESSURES
31-FOOD PRICE PRESSURES
32-US STOCK MARKET VALUATIONS
33-PANDEMIC
34-S$ RESERVE CURRENCY
35-TERRORIST EVENT
36-NATURAL DISASTER

 

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Book Review- Five Thumbs Up for Steve Greenhut's Plunder!  Mish

 

 

   

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.