All Eyes Down for a UK Credit Debt Default

Another small social pleasure done to death by the socialists...

WHAT BETTER WAY to mark New Labour's last budget in power than by granting a tax cut on bingo...?

Muddled and messy beyond all hope of purpose, Alistair Darling cut the duty on bingo from 22% to 20% on Wednesday. But that undid less than a third of his own bingo-tax hike from just two years before. And of course, Britain's own "Crisis Chancellor" (as Institutional Investor's front-page calls him this week, not spotting the joke) did nothing to rescind New Labour's smoking ban.

(The Fabians thought working-types only smoked when they drank, not when they gambled. Who'd have guessed it...?)

No.1 operator Rank now says UK bingo-hall revenues are shrinking by one-fifth per year. So along with having a pint in your local, whatever small pleasure bingo afforded the plebs is just another social vice regulated by socialists into history's fortnightly bin collection.

Noblesse oblige this week; presumption of innocence two weeks from now. Please dump running your neighbours' children to school on the first Friday of each month; dispose of saving for the future the third.

"It is the Tontine Act [of 1693] which should be taken to mark the origin of the national debt," reports a late historian.

Deriving its name from the Italian inventor, who first took it to France, "The tontine is an interesting mixture of group annuity, group life insurance, and lottery," says a paper at the NBER.

Scourge of Lehman Brothers, 2009 gold bug and now Tokyo bond bear David Einhorn recently said Japan might consider reviving the system. But whoever squeaks home in next year's UK election, the tontine route to raising funds will appeal most to London's government. Because gambling and cheap finance are just what we need. Preferably at home, so we can keep smoking too.

A way of raising money without having to pay it all back, the tontine as applied by the English state in the late 17th century offered lottery prizes of between £10 and £1,000 per year to the lucky holders of 2,500 tickets out of 100,000 sold. These annuities ended with the life of the holder, which back then made a fair bet for the state.

Gilt holders beware. Already paying less than inflation, today's tontine successors might soon become an out-and-out lottery. The Bank of England has monetized the entire fiscal deficit for 2009 to date. That sound you can hear, with money creation (like the deficit) running at 14% of GDP, is foreign creditors and the City grumbling about the UK state's credit rating.

Eyes down for an empty bingo hall – and vanished tax duty!

By Adrian Ash

U.S. Dollar Index Bottom?

It's Monday, and there is no better place to start the week with the only asset that has mattered for the past 8 months - the Dollar. Although Friday's job report brought a spike in the Dollar Index, the down trend remains intact. However, the likelihood of the downtrend ending leading to a counter trend rally or consolidation is now as high as it has been in months.

Figure 1 is a weekly chart of the Dollar Index. This is the same chart I have been showing since June, 2009 - prior to the Dollar Index unraveling. Positive divergence bars are marked with pink markers inside the gray ovals. A weekly close over 75.94, which is the high of the most recent positive divergence bar, would suggest that the downtrend in the Dollar Index is ending.

Figure 1. Dollar Index/ weekly

Figure 2 is a weekly chart of the PowerShares DB US Dollar Bear (symbol: UDN). This is the inverse of the Dollar Index. The indicator in the bottom panel searches for negative divergence bars, and we have had a cluster of these over the past 13 weeks. As discussed recently, this can be an ominous topping pattern or a spring board to higher prices - i.e., a blow off market top where prices really accelerate higher. A weekly close greater than 28.70 would suggest higher prices for UDN, which means a much lower Dollar Index. A weekly close below 28.25 and the down trend in the Dollar is over for now.

Figure 2. UDN/ weekly

My take is this: in all likelihood, this is the end of the down trend for the Dollar Index.

By Guy Lerner

U.S. Unemployment Rate Edges Lower to 10%, But Jobs Keep Contracting

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

The unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000), the U.S. Bureau of Labor Statistics reported today. In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

Establishment Data

Highlights

• 11,000 jobs were lost in total vs. 190,000 jobs last month.
• 27,000 construction jobs were lost vs. 62,000 last month.
• 41,000 manufacturing jobs were lost vs. 61,000 last month.
• 58,000 service providing jobs were added vs. 61,000 lost last month.
• 15,000 retail trade jobs were lost vs. 40,000 last month.
• 86,000 professional and business services jobs were added vs. 18,000 added last month.
• 40,000 education and health services jobs were added vs. 45,000 added last month.
• 11,000 leisure and hospitality jobs were lost vs. 37,000 last month.
• 07,000 government jobs were added vs. 0 added last month.

A total of 69,000 goods producing jobs were lost (higher paying jobs). Retail and professional services contributed massively to to the plus side.

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 were +.2 to 33.2. Short work weeks contribute to household problems. Moreover, before hiring begins at many places, work weeks will increase.

Birth Death Model Revisions 2008

Birth Death Model Revisions 2009

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 in a complete display of incompetence.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

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

In November, both the number of unemployed persons, at 15.4 million, and the unemployment rate, at 10.0 percent, edged down. At the start of the recession in December 2007, the number of unemployed persons was 7.5 million, and the jobless rate was 4.9 percent.

Among the major worker groups, unemployment rates for adult men (10.5 percent), adult women (7.9 percent), teenagers (26.7 percent), whites (9.3 percent), blacks (15.6 percent), and Hispanics (12.7 percent) showed little change in November. The unemployment rate for Asians was 7.3 percent, not seasonally adjusted.

The civilian labor force participation rate was little changed over the month at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent.

The number of people working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in November at 9.2 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Persons Not in the Labor Force

About 2.3 million persons were marginally attached to the labor force in November, an increase of 376,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 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 808,000 discouraged workers in October, up from 484,000 a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.6 million persons marginally attached to the labor force in October had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Gordon Brown's Ten Worst Financial Gaffes

In 2006, an eloquent Gordon Brown, then Chancellor of the Exchequer said that he was "ready to make the decisions for people and to work with other people to make this country the great country it is at all times." A year later he became Prime Minister, and the rest is history. Here is a list of Gordon's worst financial blunders, the screw-ups which have cost us all dearly and left economists, accountants and the rest of us scratching our heads in disbelief. Vote for Gordon's worst gaffe in the e-Poll below or make your own suggestions in the comment box.
1. Taxing dividend payments
Before 1997, dividends issued by UK companies and paid to pension funds were tax-free - that is, the tax could be claimed back via a system of tax credits. Not any more, decided Brown. Tax relief was scrapped, reducing the amount collected by pension funds by around £5 billion a year. Pension funds holding the cash that you, me and almost everyone else in the country plan to use for our retirement have lost around £100 billion over the last 12 years. That's one hell of a stealth tax.
2. Selling our gold
In May 1999 Gordon Brown had a plan to sell some gold. There were two problems with this, which concerned his economic advisers deeply. The price of gold had slumped after a decade of stagnation, but was likely to increase in the proceeding years. Added to this, the announcement of a major sell-off would drive the price down further. Little of this worried Gordon. Experts believe that the poorly timed decision to flog our national treasure has cost us all around £3 billion. Granted, that doesn't seem much nowadays, but more of that later.
3. Tripartite financial regulation
The system of financial regulation dividing powers between the Treasury, the Bank of England and the Financial Services Authority, established by Brown as Chancellor in 2000, missed what amounted to the biggest financial crisis of our lifetime. Whoops. This has led some glass-half-empty commentators to conclude that the system set up by Brown failed and should be replaced. The Commons Treasury Select Committee’s report on the collapse of Northern Rock said that the Financial Services Authority had “systematically failed in its duty” to oversee the troubled bank’s activities. Little did it realise at the time that Northern Rock was the over-leveraged tip of the securitised iceberg.
4. Tax credits
“Gordon Brown claims the tax credits system lifts children out of poverty,” says Simon Blackmore, 38, who was pursued for £6,057 in over-paid tax credits. “Maybe it does, but only to plunge them and their families into debt two years later.” Millions of low-income families have had to pay back the Treasury after receiving too much money in tax credits, putting them under huge financial and emotional strain. Meanwhile, 40 per cent of workers and families who deserved tax credits left billions of pounds unclaimed in the 2008-09 tax year for fear of being chased for the cash later on. Introduced in 1999, reformed in 2000, tax credits have been "a complete disaster zone", according to tax experts.
5. The £10,000 corporation tax threshold
In 2002, Gordon Brown introduced a new tax regime to help small businesses. He announced a new zero per cent rate of corporation tax on profits below £10,000. It was designed to boost the ability of small businesses to grow and prosper. It didn't quite work out this way. It became advantageous for sole traders such as taxi drivers or plumbers to turn themselves into limited companies to take advantage of the new rules. A Treasury Minister later commented that "the Government did not realise how many people would engage in abusive tax avoidance", despite the fact that it was "blindingly obvious" to tax experts "within 5 seconds" of the budget announcement that this would happen. Gordon scrapped the rules a few years later, raising the rate from 0 per cent to 19 per cent when he released how much money was being lost.
6. Abolition of the 10p tax rate
Mr Brown rarely apologises. In fact, he never apologises. But occasionally he acknowledges "mistakes", albeit begrudgingly. Over the abolition of the 10p tax rate in 2007, Mr Brown told Radio 4's Today programme that "we made two mistakes. We didn't cover as well as we should that group of low-paid workers who don't get the working tax credits and we weren't able to help the 60 to 64-year-olds who didn't get the pensioner's tax allowance." Experts use stronger language to describe the Budget of 2007, which was designed to produce positive headlines for the 2p cut in income tax. Accountants calculated that the scrapping of the 10 per cent tax rate, coupled with the increase in the proportion of tax credits withdrawn from higher earners, would leave 1.8 million workers earning between £6,500 and £15,000 paying an effective tax rate of up to 70 per cent.

7. Failing to spot the housing bubble
Gordon Brown said he ended boom and bust, and in those innocent days before the collapse of the global finance system we believed him. In 1997, he outlined his plans. "Stability is necessary for our future economic success", he wisely informed an audience at the CBI. "The British economy of the future must be built not on the shifting sands of boom and bust, but on the bedrock of prudent and wise economic management." The other components of that bedrock including a trillion-pound debt mountain and a decade of unchecked and unparalleled house price inflation presumably slipped his mind. In 2003 a mild-mannered Liberal Democrat MP by the name of Vince Cable dared to question the mantra of "the end of boom and bust". He asked Gordon Brown: "Is it not true that...the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?" Gordon replied: "The Honourable Gentleman has been writing articles in the newspapers, as reflected in his contribution, that spread alarm, without substance, about the state of the economy..." We all know what happened next.

8. 50 per cent tax rate
Robert Chote, director of the Institute for Fiscal Studies, has said the tax hike which heralded the end the new Labour may actually end up losing the Government money. "If you look at what happened when higher rates were last changed in the 1980s, that might lead you to suggest that such a move might actually lose you revenue, rather than gain it, as people actually declare less income for tax," he said.

9. Cutting VAT
"It would be funny if it wasn’t so serious," said a tax accountant when asked about the Brown-Darling brainwave to cut VAT by 2.5 percentage points. As a nation of shoppers, rather than shopkeepers, a chopped down sales tax sounds like a good idea, providing a vital boost to hard-pressed families at a time of financial hardship. There were two problems. It costs £12.5 billion a year and it has made little discernable difference to those hard-pressed families because it is shopkeepers, rather than shoppers, who have pocketed much of the benefit.

10. Public-sector borrowing
If Gordon had only saved a little more in the good times, we might have had a little more to fall back on in the bad, economists sigh. Last month saw public-sector net borrowing hit £19.9 billion, the highest on record, according to the Office for National Statistics. The chancellor of the exchequer, Alistair Darling, has forecast that Government borrowing will reach £175 billion this year. It is forecast that total government debt will double to 79 per cent of GDP by 2013, the highest level since World War 2. Mr Chote recently warned that "the scale of the underlying problem that the Treasury’s detailed forecasts identify will require two full parliaments of mounting austerity to repair.”
Even after he leaves office in 2010, as is almost certain, it seems that we will all be paying for Gordon's gaffes for many years to come.

Oil hovers near $76 amid weak US crude demand

SINGAPORE: Oil prices hovered near $76 a barrel Wednesday in Asia as investors mulled whether signs of a sluggish U.S. economy and weak crude demand justified a further sell-off this week.

Benchmark crude for January delivery was up 24 cents to $76.27 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell $1.54 to settle at $76.02 on Tuesday.

Crude has fallen about 7 percent since reaching its high this year of $82 a barrel last month amid evidence economic recovery in the U.S. will be tepid.

The Commerce Department on Tuesday revised down third quarter gross domestic product growth to 2.8 percent from 3.5 percent, a disappointing result since economies emerging from recessions often see larger expansions.

U.S. crude demand also appears to be stagnant as oil supplies keep growing.

Crude inventories jumped more than expected last week, the American Petroleum Institute said late Tuesday. Crude stocks rose 3.3 million barrels while analysts had expected a rise of 1.4 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The Energy Information Administration plans to announce its inventory report later Wednesday.

Crude is testing the bottom of a month-long trading range of between $76 a barrel and $82 and some energy analysts, such as Ritterbusch and Associates in Galena, Illinois, say prices could fall to $70 a barrel during the next month.

Other analysts, however, expect prices to rebound as investors seek an inflation hedge amid a weakening U.S. dollar. Bank of America Merrill Lynch forecast an average price of $85 a barrel next year.

"Loose monetary policy and a weaker dollar should put upward pressure on crude oil prices next year," the bank said in a report. "In addition to the monetary factors, a stronger than expected cyclical rebound in the global economy should lead to tighter physical oil supply and demand fundamentals next year."

The euro rose to $1.4989 in Asian trading from $1.4958 on Tuesday while the dollar fell to 88.25 yen from 88.53.

In other Nymex trading, heating oil was up 0.5 cents $1.955 a gallon. Gasoline for December delivery fell 0.4 cent to $1.935 a gallon.

In London, Brent crude for January delivery rose 32 cents to $76.78 on the ICE Futures exchange.

America's Stealth Stimulus Plan To Allowing Homeowners to become Deadbeats

I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth. I thought to myself, well part of this are all the programs where the American government is subsidizing consumption. In fact we're at the point one of every six dollars of consumption are from goverment, meaning you only need to "earn" 5/6ths of your spending power. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]

But something else hit me... I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society. While it is hard to keep track of all the stimuli, try to think back to the Bush spring 2008 stimulus. (that was about 37 stimuli ago) That goosed GDP quite well for two quarters. But we now have a quasi permanent stimulus plan that goes on quarter, after quarter, year after year.... and its equivalent to have a permanent Bush level stimulus (using VERY conservative figures).

Let's look at this from a more analytical eye.

1) The number of households in America is approximately 111,000,000 (111 million)

The home ownership rate, after peaking near 70% (the long term trend was 65%ish but we've tried every trick in the book the past decade to get another 5% into the "ownership society), currently it sits under 68%. I will use 67.5%

That means 111M x 67.5% = 75M households in America "own" a home.

2) We saw just last week that more homes in the US were in deliquency or foreclosure, than there are for sale - about 9.6% in delinquency and 4.5% in foreclosure. So 14.1% of home "owners" are living "rent free" - i.e. freeing them from a home payment. Of course some of these people are in dire circumstances so let's not be too flippant about it, but others have chosen to make a calculated decision to walk away from underwater homes and until the banks show up to take the house back they have no housing payment.

So of the 75M households in America owning a home, about 14% are not making a payment.

That means 10.5M households in America are living in a shelter where they either can not, or choose not to make a mortgage payment.

3) Now comes the tricky part, trying to figure out the average note payment. I truly have no idea so let's make an educated guess. The median value of a home in America is roughly $170K, and the average loan to value is about 70%.

About 1/3rd of American homes are owned free and clear of a mortgage meaning the other 2/3rds have notes to pay. Obviously those who are not making payments fall into the 2/3rds category. Hence if we exclude the 1/3rd of Americans who owe nothing on their mortgage, the remaining 2/3rds have a much higher loan to value than 70%. Is it 80%? 90%? No idea... it really makes little difference in our analysis.*

On a $170K home owing 90% means a $153K mortgage, whereas owing 80% means a $136K mortgage. Reasonable people would agree the average owed by the 2/3rds who have not paid off their note would be somewhere in that range.

Next we have to back into some sort of monthly mortgage payment; just looking through some ammortization tables, and realizing some people have bad credit, some average, some good on a $145Kish type of median US mortgage the monthly payment is probably somewhere near $1200-$1300. I am excluding property taxes from this analysis which is another cost that people are avoiding - which is why my numbers are going to be conservative.

So excluding property taxes let's say the average person's mortgage payment is $1250.

Going back to point 2, 10.5M Americans are skipping out on their payments. At a monthly payment of $1250 that is a monthly "stimulus" to the economy due to "not paying a mortgage" of $13.1 Billion.

Annualized that is just under $160 Billion a year of "stimulus" to the US economy via deadbeats; i.e. the Bush 2008 rebate happening quarter after quarter, year after year. Again, I contened the real number is higher than that as property taxes are not included. If I increase the monthly payment "avoided" by $250 (to account for property taxes) we get very close to $200B of extra money flowing through the US economy that should be going to pay for a roof over one's head.

*note: if you disagree with my conclusion on the average LTV level, or average mortgage payment that is fine. Simply plug in whatever you think the average mortgage payment is in America and multiply it by 10.5 million households for the monthly figure. I don't think a $1250 mortgage payment is atypical in America, in fact I might be understating it.

**************************

Now obviously in a 6-24 month period it is not the same people who enjoy this stimulus. Some finally are kicked out of their homes, while other new 30+, 90+, 120+ day late borrowers take their place. So it's a "rolling" stimulus if you will, relatively stable in terms of absolute dollars but rolling from 1 household to another as they go through the stages of default.

With the changes in accounting rules earlier in 2009 that allow "mark to myth" rather than mark to market, there is little incentive for banks to foreclose quickly, so instead of the pre2007 timeline to kick people out of foreclosed homes there are many anecdotal stories of people living "rent free" for 14, 16 months (if not longer). Plus of course all the mortgage modifications, many of which fall right back into default 6-12 months later... further kicking the can, and extending how long this stimulus can last (perhaps into 2012 if we really do "things right")

So on top of the "sacrifice our grandchildren's standard of living stimulus" (spent $1T+ of money to manipulate interest rates downward so people can refiannce at lower rates) we have a stimulus no one is talking about.... the Deadbeat Stimulus. So as we smugly cheer how American seem to yet again be able to spend more than they earn, let's clap for our neighbors who once again have "figured out the system". Those of out there paying their mortgage (like I do)... well, we're the suckers in the system.

Now if we could only figure out a similar scheme for the renters of America (the other 37.5% of households) we could really get this economy screaming upward into a rampant recovery.

By Trader Mark

The Fed Fears New Mortgage Crisis Could Derail Economic Recovery

Although the number was just revised downward, the U.S. economy still expanded by 2.8 percent during the third quarter. So it definitely looks like the recession is history.

What’s more, last Thursday the Conference Board published its Leading Economic Indicator (LEI) for October. This indicator has a strong predictive history, having predicted each recession since the early 1960s as well as the one we’ve just gone through.

Right now the LEI is not forecasting a return of the recession. Quite to the contrary … the October reading was again very strong. Year over year the LEI was up by 4.2 percent, the seventh consecutive increase. And the LEI’s historical record strongly supports a continuation of economic growth during the coming quarter.

With so much good news, I have to ask …

What Does the Fed Fear, Then?

Why are Fed members continually reiterating the current zero percent interest rate policy?

Why are they assuring us that this policy will continue “for an extended period?”

What are they afraid of?

Do they see or know something we don’t?

Why are Fed members sticking to their zero percent interest rate policy?

The past few years have clearly demonstrated that the Fed members didn’t have a clue about the consequences of the real estate bubble, which they themselves inflated. And after the crisis hit, they kept underestimating it at each step along the way.

Moreover, if you had listened to Bernanke and his pals in regards to your personal finances, your losses would be huge!

This sad showing obviously did nothing to shake their self-efficacy or arrogance. They still want us to believe that they are the puppet masters behind the economy — at least in boom times. And during a bust they want us to believe that they alone are in possession of a remedy.

It seems as though they totally lack trust in the free market forces. Instead they desperately want to fix things by decree and money printing.

So why do they keep advertising an ultra lax monetary policy even now, after the economy is starting to recover?

Because They Know Another Mortgage Mess Is in the Offing

The Fed is well aware of the mortgage reset schedule for the coming years. And they’re probably well aware of a major problem out there, too … a problem at least as severe as the subprime mess.

I’m talking about mortgages like Alt-A and Option-ARMs. A huge wave of resets is due to commence soon.

From the second quarter of 2010 until the fourth quarter of 2011, hundreds of billions of dollars in these mortgages will reset to much higher rates! And many of them will end up becoming delinquent.

Here’s why …

Mortgage resets are bound to increase the number of foreclosures.

Aggravating the situation is the fact that most of these mortgages were taken out when the housing bubble was at its height. So now, the loan-to-value ratios for many homes will be obscenely high.

This means a tsunami of write-downs for the banking sector, probably as huge as the subprime write-downs. And it means a huge wave of foreclosures on borrowers who can’t afford the new, higher monthly payments.

The ability to service a debt does not depend on rising GDP figures. It depends strongly on current income. That’s why high (and rising) unemployment rates are very bad news for the housing market and for the banks — again.

It’s still too early for this unavoidable, mortgage reset problem to derail the banking system and stop the economic rebound in its tracks. We can still be bullish on stocks for some time, as well.

Nevertheless, this looming problem goes a long way in possibly explaining the Fed’s reluctance to return to a more normal monetary policy. And it’s something you should keep in mind.

Best wishes,

Claus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting.

Barry Ritholtz, Bad Economy Could Spell Good News For Wall Street for Years

It has been a very typical Thanksgiving week thus far; remember the winning percentage on Wed & Fri around Thanksgiving Thursday is over 80% since 1950. So the indexes have been up each day this week, and speculative fervor has hit pockets of the small cap, speculative universe. It's textbook action. All the computers are waiting on for now, is that break over S&P 1112-1113 so we can all pile in like lemmings for the next leg up.

Two nice videos below with Barry Ritholtz, who I always call the "grandfather of financial blogging". Barry had been very bullish for much of this rally but the breakdown we saw in late October, including the 5-6 intraday reversals we noted had him reconsidering. But he appears back in full bull mode. As I keep saying, things that in the past you used as historical guides as warning signs (such as the market behavior in 2nd half October) have been tossed aside as if they don't exist. So as of November 1st, all our yellow lights were blown to pieces and its effectively been back to (bullish) normal on the major indexes and big caps at least. Not quite so wonderful in the small/mid cap space as a whole as many stocks are simply treading water or down a bit.

For those of you new(er) to the stock market, and who cannot reconcile what is happening in the market to what you might see in your everyday life (Main Street economy) I think this first video is very important to watch. At this current moment we have the perfect Goldilocks stock market... good news means good things, and bad news means easy money forever. Hence there is no bad news. Yesterday's Fed statement minutes, which parallels this line of thinking, had me laughing out loud. They offer "good news" for the future but conclude they still must offer drugs at an epic rate. Another "have your cake and eat it too" analysis. They conclude that the economy will grow almost at trend growth (2.5%) as we go forward. Which sounds great! But then why do we need record levels of interest rates, purchase programs, and stimulus? I mean if we are going to almost be "at normal" growth rates why all the morphine? The other thing that made me laugh is anyone believing in a forecast from these folks who completely missed the bubble, who thought unemployment would peak below 7% as of 20+ months ago, and who generally are as wrong as the typical CNBC pundit. I guess past performance means nothing.

But getting back to Barry's video - we are now reaching the point where the market will not want "too much" good news. Because the more good news we get the end data (in theory) for all the easy money in the economy. That's how it USED to work anyhow. I have stated for well over a year now that the easy money will be us for a very long time, and interest rates will not be increased in the entire year of 2010. A year ago that was laughed at but now its becoming the consensus... even 3 months ago summer 2010 was assumed to be the first series of rate increases. So there is even a chance that "good news" won't push the Fed into increasing rates ... talk about a perfect world for Wall Street.

As for the second video, Barry agrees with much of what my views have been as well. Until any form of reality returns to mortgage rates, and the government begins to finally step away from subsidizing every step of the housing process we will not have a true bottom. That said, many "temporary" government programs never cease to go away, so our new normal might be a permanently subsidized housing market. Speaking of, as of this week, the Fed has successfully pushed mortgage rates back to their all time lows. Rejoice. When I see mortgage rates back over 6.25% or so, and then see the effect on housing prices - I'll be more inclined to start talking bottoms. At this rate that may be 2013. But from here I expect a less dramatic housing market, that begins to become more regional in nature (i.e. back to normal) and the drops in pricing less so than we saw in 07-09.

On to the videos:

1) A Bad Economy Could Spell Good News for Wall Street for Years to Come

The economic recovery isn't as strong as first thought. Revised GDP figures released this morning show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in-line with expectations but shows the economy didn't have as much momentum heading into the fourth quarter as previously believed.

Unlike Wall Street traders, consumers seem to know the recovery is "anemic," as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board's latest confident survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows. (Thanks to Dan Greenhaus of Miller Tabak for pointing this out this last fact.

Yet, stocks are still near their highs of the year.

What's driving the disconnect between Wall Street and Main Street.

Ritholtz says it's a classic example of bad news being good news on Wall Street. "We're in a cycle that's not based on profitability, not based on expanding economy but based on all sorts of government supports," he says. "Bad news is going to be good news for the next couple of quarters probably."

That's because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. "Cash is trash," says Rithotlz, who remains bullish on stocks.

Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the "extraordinary" stimuli can be removed.

But predicting the timing is anyone's guess. "You could have this disconnect that goes on for not days, weeks or months but years and years," he says.

So, in the meantime, Ritholtz – who correctly predicted the 2008 crash and told Tech Ticker's audience "the mother of all bear market rallies," was upon us in March - is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.

2) Housing Bottom? "Not Even Close" Says Ritholtz

A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday's stronger-than-expected existing home sales report is giving renewed hope to the housing bulls.

"Disregard them," says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.

We are "not even close" to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.

"Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that's how you know the bottom is in," says the blogger and Bailout Nation author.

The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.

"And that's if we're lucky," Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic's analysis that 23% of all U.S. mortgage holders are under water, as reported in The WSJ. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is "not nearly done," he warns.

In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall -- unless the "real" economy shows dramatic improvement, which Ritholtz doesn't see anytime soon

Weak demand means oil price could fall

The recent oil price rise has not been driven by a recovery in demand, said Royal Dutch Shell's chief financial officer after the group reported a sharp drop in profit and warned the outlook for 2010 remains opaque.

'It’s difficult to say what the cause of the rise is but it is not fundamental. Demand has not picked up,' said Simon Hendry.

The price of oil has risen from lows of $34 in February to above $78.

Shell said while the oil price has been increasing, the prices Shell got from customers were broadly the same as in the second quarter 'due to contractual time lag effects.'

Hendry said business sales such as transportation are a key part of Shell's business and these are showing little sign of recovering demand.

He said signs of recovery in the US are also limited and while the economic environment in Asia is improving that hasn't yet translated into a pick up in demand for the oil and gas.

He said the massive global stockpiles also justify Shell's cautious approach to the future direction of the price of oil.

Earlier chief executive Peter Voser said he is 'not expecting a quick recovery' in prices despite some indications that energy demand and pricing are improving.

Shell's fortunes are more acutely linked to the price of oil than for many of its peers and low prices mean the group has to add to its debts to pay its dividend as low oil prices knock cash flow.

A $1 dollar move in the US oil price can build or knock Shell's profits by $90 million dollars per quarter, Hendry said.

A report from business analysts Ernst & Young also pointed to an uncertain outlook for oil.

'To a large extent, oil prices continue to be higher than market fundamentals justify,' said Marcela Donadio, Americas oil and gas sector leader at the firm.

‘General optimism and a weakening US dollar are creating strong commodity prices, despite sluggish short-term demand and high inventories,' she agreed.

'The key question in the months ahead is, once government-delivered stimulus efforts run dry, will private and corporate dollars step in to carry on the economic recovery and create growth in energy demand?' said Donadio.

Paul Krugman: Free to Lose

What should we do about "the terrible employment situation"?:

Free to Lose, by Paul Krugman, Commentary, NY Times: Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result — but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.

Don’t you think Country A might have something to learn from Country B?

This story isn’t hypothetical. Country A is the United States, where stocks are up, G.D.P. is rising, but the terrible employment situation just keeps getting worse. Country B is Germany, which took a hit to its G.D.P. when world trade collapsed, but has been remarkably successful at avoiding mass job losses. Germany’s jobs miracle ... raises serious questions about whether the U.S. government is doing the right things to fight unemployment.

Here in America,... we don’t really have a jobs policy: we have a G.D.P. policy. The theory is that by stimulating overall spending we can make G.D.P. grow faster, and this will induce companies to stop firing and resume hiring.

The alternative would be policies that address the job issue more directly. We could, for example, have New-Deal-style employment programs. Perhaps such a thing is politically impossible now ... but we should note, for the record, that at their peak, the W.P.A. and the Civilian Conservation Corps employed millions of Americans, at relatively low cost to the budget.

Alternatively, or in addition, we could have policies that support private-sector employment. Such policies could range from labor rules that discourage firing to financial incentives for companies that either add workers or reduce hours to avoid layoffs.

And that’s what the Germans have done. Germany came into the Great Recession with strong employment protection legislation. This has been supplemented with a “short-time work scheme,” which provides subsidies to employers who reduce workers’ hours rather than laying them off. These measures didn’t prevent a nasty recession, but Germany got through the recession with remarkably few job losses.

Should America be trying anything along these lines..., if only as a stopgap?

Now, the usual objection to European-style employment policies is that they’re bad for long-run growth... And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

But these aren’t normal times. Right now, workers who lose their jobs aren’t moving to the jobs of the future; they’re entering the ranks of the unemployed and staying there. Long-term unemployment is already at its highest levels since the 1930s, and it’s still on the rise.

And long-term unemployment inflicts long-term damage. Workers who have been out of a job for too long often find it hard to get back into the labor market even when conditions improve. And there are hidden costs, too — not least for children, who suffer physically and emotionally when their parents spend months or years unemployed.

So it’s time to try something different. ... Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.

Is Mexico the “New” China?

Keith Fitz-Gerald writes: When it comes to global manufacturing, Mexico is quickly emerging as the “new” China.

According to corporate consultant AlixPartners, Mexico has leapfrogged China to be ranked as the cheapest country in the world for companies looking to manufacture products for the U.S. market. India is now No. 2, followed by China and then Brazil.

In fact, Mexico’s cost advantages and has become so cheap that even Chinese companies are moving there to capitalize on the trade advantages that come from geographic proximity.

The influx of Chinese manufacturers began early in the decade, as China-based firms in the cellular telephone, television, textile and automobile sectors began to establish maquiladora operations in Mexico. By 2005, there were 20-25 Chinese manufacturers operating in such Mexican states Chihuahua, Tamaulipas and Baja.

The investments were generally small, but the operations had managed to create nearly 4,000 jobs, Enrique Castro Septien, president of the Consejo Nacional de la Industria Maquiladora de Exportacion (CNIME), told the SourcMex news portal in a 2005 interview.

China’s push into Mexico became more concentrated, with China-based automakers Zhongxing Automobile Co., First Automotive Works (in partnership with Mexican retail/media heavyweight Grupo Salinas), Geely Automobile Holdings (PINK: GELYF) and ChangAn Automobile Group Co. Ltd. (the Chinese partner of Ford Motor Co. (NYSE: F) and Suzuki Motor Corp.), all announced plans to place automaking factories in Mexico.

Not all the plans would come to fruition. But Geely’s plan called for a three-phase project that would ultimately involve a $270 million investment and have a total annual capacity of 300,000 vehicles. ChangAn wants to churn out 50,000 vehicles a year. Both companies are taking these steps with the ultimate goal of selling cars to U.S. consumers.

Mexico’s allure as a production site that can serve the U.S. market isn’t limited to China-based suitors. U.S. companies are increasingly realizing that Mexico is a better option than China. Analysts are calling it “nearshoring” or “reverse globalization.” But the reality is this: With wages on the rise in China, ongoing worries about whipsaw energy and commodity prices, and a dollar-yuan relationship that’s destined to get much uglier before it has a chance of improving, manufacturers with an eye on the American market are increasingly realizing that Mexico trumps China in virtually every equation the producers run.

“China was like a recent graduate, hitting the job market for the first time and willing to work for next to nothing," Mexico-manufacturing consultant German Dominguez told the Christian Science Monitor in an interview last year. But now China is experiencing “the perfect storm … it’s making Mexico – a country that had been the ugly duckling when it came to costs – look a lot better."

The real eye opener was a 2008 speculative frenzy that sent crude oil prices up to a record level in excess of $147 a barrel – an escalation that caused shipping prices to soar. Suddenly, the labor cost advantage China enjoyed wasn’t enough to overcome the costs of shipping finished goods thousands of miles from Asia to North America. And that reality kick-started the concept of “nearshoring,” concluded an investment research report by Canadian investment bank CIBC World Markets Inc. (NYSE: CM)

“In a world of triple-digit oil prices, distance costs money," the CIBC research analysts wrote. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder."

Indeed, four factors are at work here.

Mexico’s “Fab Four”

• The U.S.-Mexico Connection: There’s no question that China’s role in the post-financial-crisis world economy will continue to grow in importance. But contrary to the conventional wisdom, U.S. firms still export three times as much to Mexico as they do to China. Mexico gets 75% of its foreign direct investment from the United States, and sends 85% of its exports back across U.S. borders. As China’s cost and currency advantages dissipate, the fact that the United States and Mexico are right next to one another makes it logical to keep the factories in this hemisphere – if for no other reason that to shorten the supply chain and to hold down shipping costs. This is particularly important for companies like Johnson & Johnson (NYSE: JNJ), Whirlpool Corp. (NYSE: WHR) and even the beleaguered auto parts maker Delphi Corp. (PINK: DPHIQ) which are involved in just-in-time manufacturing that requires parts be delivered only as fast as they are needed.
• The Lost Cost Advantage: A decade or more ago, in any discussion of manufactured product costs, Asia was hands-down the low-cost producer. That’s a given no more. Recent reports – including the analysis by AlixPartners – show that Asia’s production costs are 15% or 20% higher than they were just four years ago. A U.S. Bureau of Labor Statistics report from March reaches the same conclusion. Compensation costs in East Asia – a region that includes China but excludes Japan – rose from 32% of U.S. wages in 2002 to 43% in 2007, the most recent statistics available. And since wages are advancing at a rate of 8% to 9% a year, and many types of taxes are escalating, too, East Asia’s overall costs have no doubt escalated even more in the two years since the BLS figures were reported.
• The Creeping Currency Crisis: For the past few years, U.S. elected officials and corporate executives alike have groused that China keeps its currency artificially low to boost its exports, while also reducing U.S. imports. The U.S. trade deficit with China has soared, growing by $20.2 billion in August alone to reach $143 billion so far this year. The currency debate will be part of the discussion when U.S. President Barack Obama visits China starting Monday. Because China’s yuan has strengthened so much, goods made in China may not be the bargain they once were. Those currency crosscurrents aren’t a problem with the U.S. and Mexico, however. As of Monday, the dollar was down about 15% from its March 2009 high. At the same time, however, the Mexican peso had dropped 20% versus the dollar. So while the yuan was getting stronger as the dollar got cheaper, the peso was getting even cheaper versus the dollar.
• Trade Alliance Central: Everyone’s familiar with the North American Free Trade Agreement (NAFTA). But not everyone understands the impact that NAFTA has had. It isn’t just window-dressing: Mexico’s trade with the United States and Canada has tripled since NAFTA was enacted in 1994. What’s more, Mexico has 12 free-trade agreements that involve more than 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade. Its goods can be exported – duty-free – to the United States, Canada, the European Union, most of Central and Latin America, and to Japan.

In the global scheme of things, what I am telling you here probably won’t be a game-changer when it comes to China. That country is an economic juggernaut and is a market that U.S. investors cannot afford to ignore. Given China’s emerging strength and its increasingly dominant financial position, it’s going to have its own consumer markets to service for decades to come.

Two Profit Play Candidates

From a regional standpoint, these developments all show that we’re in the earliest stages of what could be an even-closer Mexican/American relationship – enhancing the existing trade partnership in ways that benefit companies on both sides of the border (even companies that hail from other parts of the world).

In the meantime, we’ll be watching for signs of a resurgent Mexican manufacturing industry that’s ultimately driven by Chinese companies – because we know the American companies doing business with them will enjoy the fruits of their labor.

Since this is an early stage opportunity best for investors capable of stomaching some serious volatility, we’ll be watching for those Mexican companies likely to benefit from the capital that’s being newly deployed in their backyard.

Two of my favorite choices include:

• Wal Mart de Mexico SAB de CV (OTC ADR: WMMVY): Also known as “Walmex,” this retailer has all the advantages of investing in its U.S. counterpart – albeit with a couple of twists. Walmex’s third-quarter profits were up 18% and the company just started accepting bank deposits, a service that should boost store traffic. And while the U.S. retail market is highly saturated – which limits growth opportunities – there are still plenty of places to build Walmex stores south of the border. After all, somebody has to sell products to all those thousands of workers likely to be involved in the growing maquiladora sector.
• Coca-Cola FEMSA SAB de CV (NYSE ADR: KOF): Things truly do go better with Coke – especially higher wages and an improved lifestyle. According to Reuters, Mexicans now consume more Coca-Cola beverages per capita than any other nation in the world. The company just posted a 25% jump in its third-quarter net earnings, aided by a strong 21% jump in revenue. Coca-Cola FEMSA continues to experience strong growth from its Oxxo convenience stores, and strong beer sales, too. And all three product groups are logical beneficiaries of strong maquiladora development and the growing incomes and rising family wealth that will translate into higher consumer spending in the immediately surrounding areas.

U.S. Dollar Drifts Ahead of U.S. Unemployment Rate

The Unemployment Rate is a measure of the percentage of the total labor force that is unemployed but actively seeking employment and willing to work in the US. A high percentage indicates weakness in the labor market. A low percentage is a positive indicator for the labor market in the US and should be taken as positive for the USD.

Analysts forecast a 9.90% unemployment rate, up from 9.80%.

Euro Dollar

The Euro broke short-term resistance and reached both suggested targets 1.4846 and 1.4897 successfully. Yesterday's climb stopped 10 pips above Fibonacci level, then went back to settle below it. That is why this resistance will keep its importance. Breaking it would send the Euro above 1.50, or at least close to the dollar and a half mark. The Euro continued its shine since reaching the bottom of the hourly channel that we talked about yesterday, and is currently rising inside an upward rising channel on the intraday charts, with its top at 1.4972, a level we consider as a first target to a break of 1.4897, and after that we could see 1.5014.

The bottom of the same channel is currently at 1.4839, and as long as price holds above it (at the moment its only pips above this level) the potential for more short-term upside works stays alive. On the other hand a break of the bottom of the channel indicates that the direction for the short-term has turned down, which will target 1.4769 first, and may be 1.4701 later. We remind you of the rate decision of the ECB that will be announced today, and the news conference for president Trichet that will follow, which usually moves the Euro violently.

Support:
• 1.4839: the bottom of the rising channel on the intraday charts.
• 1.4769: Fibonacci 50% for the last rising move.
• 1.4701: previous important support/resistance area.
Resistance:
• 1.4897: Fibonacci 61.8% for the drop 1.5061.
• 1.4972: the top of the rising channel on the intraday charts.
• 1.5014: previous resistance.

USD/JPY

Dollar-Yen broke Fibonacci resistance 90.68 and reached 91.28 as we accepted, with accuracy (yesterday's high 91.30), before retreating fast. This behavior redefined the rising channel on the hourly chart to make its bottom at 90.18. And when calculating Fibonacci 61.8% resistance for the short-term (for the drop from yesterday's high), we find that it is at the resistance level of 90.90.

In case of a break of either of those levels, we believe price will move in the direction of the break. If the bottom of the channel at 90.18 is broken, the price will move down and target 89.61 first, and may be 89.07 as well. While if we break Fibonacci resistance at 90.90 we expect a rise to surpass yesterday's high, targeting the important 91.63 first, and only if it is broken we can expect 92 to appear on the price screens when the price targets the obvious resistance on the hurly chart 92.17.

Support:

• 90.18: the bottom of the rising channel on the hourly chart.
• 89.61: previous support & Oct 12th low.
• 89.07: previous intraday support.
Resistance:

• 90.90: Fibonacci 61.8% for the short-term.
• 91.63: a well known support area that contained a number of daily tops and bottoms, the last of which was Oct 29th high.
• 92.17: obvious resistance on the hourly chart.

Analysis by: http://www.Forexpros.com - Written by Munther T. Marji

"A Modern World System?"

Globalization from a different perspective:

A modern world-system?, by Daniel Little: Immanuel Wallerstein created a huge stir in the 1970s with the publication of The Modern World-System: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century (1974). The book is an intellectual masterpiece, synthesizing a vast range of fundamental literature on the economic history of Europe and the world. You could look at the book as the first serious and extended effort to theorize globalization -- a term that barely existed at the time of publication. Or you could look at it as a general theory of colonialism -- an account of the pathways and influences through which the metropole dominated and exploited the periphery. It is worth looking back at this work today to tease out some of the guiding assumptions about history, sociology, and globalization it reflected.

The concept of "world system" is itself a key component of our current understanding of globalization, in that it captures the idea of causal interconnectedness across the globe among major organizations, firms, populations, and states. Wallerstein observes that earlier social scientists had usually centered their analysis at the level of the political unit -- the nation-state; whereas his own approach is different:

This book makes a radically different assumption. It assumes that the unit of analysis is an economic entity, the one that is measured by the existence of an effective division of labor, and that the relationship of such economic boundaries to political and cultural boundaries is variable, and therefore must be determined by empirical research for each historical case. Once we assume that the unit of analysis is such a "world-system" and not the "state" or the "nation" or the "people", then much changes in the outcome of the analysis. (xi)

But what, more exactly, did he mean by a system?