Aug 3, 2011

Longing for the Days of Jimmy Carter

August 3, 2011

"Ethanol economics are questionable. The grain required to fill a 25-gallon gas tank with ethanol will feed one person for a year."-Lester Brown, environmentalist

The market has been down eight straight days, the first time since the fall of 2008 we’ve experienced that much futility. If the Dow were to close down today, it would be the first time since Jimmy Carter was President (1978) the index has experienced nine consecutive days of declines. The recent decline has wiped out all the gains for the year for the major indices. In the past, whenever the market has moved back to zero late in the year, I’ve always commented that it seems like a lot of work to not make any progress.

In an echo of last summer, the economic data continues to deteriorate and the recession calls are beginning to dominate the business news. The Challenger Job Cuts report increased by almost 60% year over year on the back of announced layoffs by Merck, Cisco, and Lockheed. The ISM Services Composite for June came in at 52.7 vs. expectations of 53.5 and 53.3 for May. The employment sub-index and orders activity was lower than expected, the business activity slightly better. Factory orders were down 0.8% vs. an expected decline of 0.8% in June, and an increase of 0.8% in May.

In spite of the hullabaloo in Washington, treasuries have been rallying on concerns about the economy, with the two-year yield touching 0.32% and the ten year 2.60%. While the 2-10 curve is still steep at 230bps, the low absolute yields are signaling a much higher probability of recession.

Gold has also continued its rally, closing yesterday at $1644 an ounce. In a related trade, the Swiss franc hit a new record against the dollar and euro, although both battered currencies are stronger this morning.

Auto parts retailer The Pep Boys-Manny, Moe & Jack, which was founded in the 1920’s, is memorable for its three founders and namesakes. It turns out that the firm was actually run by Manny, Moe and Izzy. Jack left the firm a couple years after it started and was replaced by Moe’s brother Izzy. In what probably turned out to be a smart marketing decision, the brothers decided to keep Jack’s name on the door and the rest is auto-parts retailing history.

Yesterday the Senate approved and the President signed the debt ceiling increase package. The next step for the DC crowd is to cut $1.2-$1.5 trillion from future spending. The structure of the deal will force Congress to accept a tax increase beyond the repeal of the Bush tax cuts or face additional cuts to the defense budget, which was hit pretty hard in the initial stage of the deal. President Obama spoke yesterday and called for new jobs through patent reform, a middle-class tax cut, trade deals with worker retraining guarantees, and to “give opportunities” to construction workers by creating infrastructure projects through an infrastructure bank and airport rebuilding programs.

Everyone seems to be reeling, surprised that House Republicans were willing to default on the debt. I’m guessing that this was a lot of posturing and a great negotiating stance. In a negotiation, if the other side believes your bluff and it is a worst case scenario than they are willing to accept, you have a serious leg up in the discussions. We’ll never know how far they would have gone.

One thing is for sure, the Obama bluff of not signing a bill under $3 trillion and making sure "revenues", i.e. tax increases, were included, went right out the window. Is anyone else pained when they listen to Obama talk about job creation, revenues, etc, and it is blatantly obvious he has zero idea what he is talking about? I estimate that Obama Care, his moratorium on domestic drilling, an over-reaching EPA, and some portions of Dodd-Frank have cost the US easily over 1 million jobs. How's that for change you can believe in?

Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retailer is worried. “We’re seeing core consumers under a lot of pressure,” CEO Mike Duke said Wednesday at an event in New York. “There’s no doubt that rising fuel prices are having an impact.” Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in. Lately, they’re “running out of money” at a faster clip, he said. “Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.”

Asian markets were whipped last night after the late route in the US market yesterday. The Nikkei fell 2.1%, ASX 200 2.3%, Kospi 2.6%, and Hang Seng 1.9%. The Shanghai Composite was flat.

There have been a number of comparisons bandied about over the past couple of years comparing the cost of the economic stimulus since 2008 to other financial crisis’s. The chart below, courtesy of the Washington Blog, estimates the total cost at $8.1 trillion, a total that equals the combined, inflation adjusted cost of all the wars ever fought by this country, the S&L crisis, the Marshall Plan, the initial cost of the New Deal, and NASA’s all time budget.

Have a great day


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