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    Daily Digest – May 14

    by Davos

    Thursday, May 14, 2009, 3:14 PM

  • Financials: Is the Tailwind Becoming a Headwind?
  • Truth Tellers Seeing Brown Shoots…
  • Total Private Payrolls (Charts, Historic look back also)
  • Monthly Changes in Private Payrolls (Charts, Historic look back also)
  • Bernanke’s Speach at Jekyll Island, Georgia
  • Credit Crisis Visualized (H/T Ivo, Repost)
  • Krugman: Rapid Recovery ‘Extremely Unlikely’
  • Banks CDS, if you blinked…
  • Never one to mince words, Jim Rogers – Bail on the dollar and equities (Video)
  • The Horror Scenario
  • On American Sustainability – Anatomy of Societal Collapse (H/T Suzie)
  • Despite Stimulus Funds, States to Cut More Jobs
  • GM CEO: Bankruptcy Likely; Firm May Leave Detroit
  • It Pays to Lobby (Chart)
  • 1 Minute Battery Station for EV’s
  • Bloomberg: Swine Flu May Be Human Error; WHO Investigates Claim (Update1)
  • A few A(H1N1) Links Dr. Henry Niman’s Map 4,434 U.S. Cases as of this wrtitng, A(H1N1) Current Timeline, CDC Cases

Economy

Financials: Is the Tailwind Becoming a Headwind? 

Good Evening: After taking the weekend to reconsider last week’s celebrations over seeing less awful than expected economic data and the relief in feeling less angst than expected in the wake of the stress test results, investors decided to take profits on Monday. Financial companies led the downdraft in part due to the recent levitation in bank shares, since the banks themselves have decided to respond to the rising demand for their equity with a fresh dose of supply. Negative comments about the banks by Meredith Whitney only reinforced this directional wind shift, as did some proposed tax hikes by the Obama administration. Because it is too soon to tell if today’s reversal will last more than a session or two, perhaps it will be instructive to look at some economic data that lies outside the spin zones found in New York and Washington, D.C.

Friday’s upside surprise in terms of the April jobs figures (-539K vs. expectations for -630K) looked less flattering the more analysts pulled apart the data. Not only were there downward revisions to prior months, but also the weakness in manufacturing, construction and other, higher-paying pursuits was met with strength in either temporary jobs (by the U.S. government for the upcoming census) or fictional jobs (the infamous “birth-death model” somehow estimated new job creation by small businesses of more than 200K). Maybe I should be more open-minded, but I don’t think a new business has been created when former investment bankers hang out the “consultant” shingle while in outplacement, nor would I count all the out of work traders goosing their P.A.s from home. And even if one is moved to take Friday’s unemployment report at face value, losing more than half a million jobs in a month falls a wee bit shy of the 100-150K job additions normally associated with a minimally growing economy.

As the market participants who are actually employed filed back to work this morning, they had little in the way of either economic data or earnings results to guide them. It made the headlines you see below all the harder to miss. A group of stalwart banks, especially those receiving a “good housekeeping” seal of approval from Treasury stress regulators late last week, decided today was the day to cash in the recent rally in their shares by offering a good deal more of them. The new share issuance by Key, USB, Capital One, BB&T, and PNC was marketed as the sort that would enable these fine institutions to repay their TARP loans. To me it looked more like an attempt by this group to avoid having to some day take TARP II funds rather than funding a way to pay back those received in TARP I. Time will tell, but Meredith Whitney’s comments late in the day on CNBC imply my interpretation might not be far off the mark (see below). Saying she wouldn’t touch bank stocks here, Ms. Whitney also pointed out that the business models for financial firms have changed because the government is now involved. “For investors, you invest on what you know to be the rules of the game,” said Whitney. “But with the government involved, no rules apply.” (source: CNBC.com)

If investors needed a further reminder that Uncle Sam is making profits more difficult to come by for corporate America, the Obama administration announced some targeted tax hikes in its proposed budget today (see below). Broker dealers, traders, certain types of insurance, large estates, and “carried interest” all had bull’s-eyes placed on them for prospective tax increases. Rather than comment on the politics of this move, I will stay in the policy realm instead by simply noting that Uncle Sam has some rather large bills to pay. That wealthy individuals, partnerships, and corporations will all be targeted to pony up is exactly the type of change our new President promised while on the campaign trail, and it should come as no surprise to investors. What may start to bother them as they re-price forward earnings at higher effective tax rates is that less of what companies earn will be falling to the bottom line. This announcement is just one of many recently that suggest that even when GDP some day returns to 2007 levels, corporate profits are likely to make a much slower journey back to their highs.

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Truth Tellers Seeing Brown Shoots…

Five Economic Storms Raging NOW!

Any economist fixated on so-called “signs of a recovery” needs to have his head examined.

As I’ll prove to you in a moment, the hard-nosed reality is that five major economic cyclones are in progress at this very moment.

The storms are not abating. Nor are they changing direction. Quite the contrary, what you see today is, at best, merely a deceptive calm before the next, even larger tempests.
For investors who follow Wall Street, it could be fatal.

For contrarian investors, however, this insanity opens up some of the greatest opportunities in many years: Precisely when we see plunging barometers all around us, we also have a new surge of hype on Wall Street, driving stock prices higher.

Result: The rally has lowered the cost of contrary investments precisely when their prospects are best. Consider the five storms, and you’ll see exactly what I mean…

Storm #1.
Plunging Jobs

On Friday, the Bureau of Labor Statistics announced that job losses were running at a slightly slower pace than in the first quarter. So Wall Street cheered.

But it’s a joke, and the 539,000 additional Americans out of work aren’t laughing.

Nor are the 23 million people — 15.8 percent of the work force — who are officially unemployed… are struggling with lower paying part-time jobs… or have given up looking for work entirely.

Look. In December 2007, there were 138.1 million jobs in America. Now, there are only 132.4 million.

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Total Private Payrolls (Charts, Historic look back also)

Monthly Changes in Provate Payrolls (Charts, Historic look back also)

Bernanke’s Speach at Jekyll Island, Georgia

Whether the objectives of the assessment program were achieved will only be known over time. We hope that in two or three years we will be able to reflect on the banking system’s return to health with a sharply diminished reliance on government capital. More immediately, we hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion; and that they will, as a consequence, be required to have a capital buffer adequate to weather future losses and to supply needed credit to our economy–even if the economic downturn is more severe than is currently anticipated.

Credit Crisis Visualized (H/T Ivo, Repost)

 Krugman: Rapid Recovery ‘Extremely Unlikely’

Princeton University’s Nobel Prize-winning economist, said global economic prospects don’t justify the two-month rally that has restored $8.9 trillion to stock markets around the world.

Speculation government spending packages and interest-rate cuts worldwide will reinvigorate the global economy has helped the MSCI World Index rally 37 percent since falling to its lowest since 1995 on March 9. The U.S. Standard & Poor’s 500 Index surged 34 percent in that time.

“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman, 56, said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

Banks CDS, if you blinked…

Now that we are a few days removed from the release of the stress test results, let’s look at the markets view of the credit quality of the bigger institutions today versus where they were on Feb 10th, the day Geithner introduced the stress test. Interestingly, the CDS of each, except Citi, are near the same level as of yesterdays close as they were on Feb 10th. Of course much happened in between. As of yesterday’s close, the 5 yr CDS for JPM was 123 bps vs 110 bps on Feb 10th and off its high of 237 bps. WFC is at 141 vs 128 on Feb 10th and off its high of 317. BAC is at 190 vs 173 on Feb 10th and off its high of 407. Citi is at 368 vs 282 on Feb 10th and off its high of 675. MS is at 269 vs 273 on Feb 10th and off its high of 470 and GS is at 177 vs 180 on Feb 10th and off its high of 364. The question further out is if the stressed scenarios weren’t stressed enough, will bondholders at some point have to share in the stockholders pain.

Never one to mince words, Jim Rogers – Bail on the dollar and equities (Video)

The Horror Scenario

This morning you may have read Gideon Rachman’s positive view on Hungary. He said the panic is all but over and it looks like Hungry is going to get through this debt crisis.

The horror scenario envisaged a Hungarian banking collapse that would ripple back into the rest of Europe and then around the world. Many EU banks have lent heavily in central Europe. Austrian banks are thought to have lent the equivalent of more than 70 per cent of their country’s gross domestic product to the region. This idea – perhaps combined with a folk memory that the Great Depression had something to do with the collapse of an Austrian bank – helped heighten the panic about Hungary.

But, having just visited Budapest, I can return with good news. The immediate crisis is over. There was a moment when there was a real fear of a bank run. One Hungarian financier is quite precise about the date: Friday, March 13. However, confidence just about held up, the moment passed and so has the threat of imminent collapse.

The unfolding of the Hungarian crisis now looks like a microcosm of the world crisis. Fear of financial collapse is gradually giving way to worries about an unprecedented contraction in the economy – with all the social and political consequences that could imply.

The Hungarian government has predicted that the country’s economy will shrink by 6 per cent this year. It has not performed that badly since 1945. Unemployment is rising and so is inflation, because of the fall in the Hungarian currency.

Hungary has no room for the kind of counter-cyclical Keynesianism that is being tried in the US and the UK. Nobody thinks the markets would tolerate huge fiscal deficits, so instead the government is cutting spending and raising taxes. State pensions were sliced by about 8 per cent last week. Sales tax has just been increased. And this is just the start of an austerity drive.

So, to recap what Rachman is saying, Hungary is looking pretty awful, but it could be worse. But, is that really true? I’ll come at this question via Latvia and the troubles now ongoing there. Yesterday, we learned that Latvia’s economy shrank 18% in the period from Q1 last year to Q1 2009. This is a Great Depression scenario for Latvia. But, the other Baltics, Estonia and Lithuania, are imploding as well. For example, at the end of April, Lithuania reported a 12.6% drop in year-on-year GDP – not as bad as Latvia, but a Depression with a Capital ‘D” nonetheless. I had asked in July if the Baltics were the next Argentina. The answer is obviously, yes.

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On American Sustainability – Anatomy of Societal Collapse (H/T Suzie)

On American Sustainability—Anatomy of a Societal Collapse (Summary)

The Real “Inconvenient Truth”

Most Americans believe that we are “exceptional”—both as a society and as a species. We believe that America was ordained through divine providence to be the societal role model for the world. And we believe that through our superior intellect, we can harness and even conquer Nature in our continuous quest to improve the material living standards associated with our ever-increasing population.

The truth is that our pioneering predecessors drifted, quite by accident, upon a veritable treasure trove of natural resources and natural habitats, which they wrested by force from the native inhabitants, and which we have persistently overexploited in order to create and perpetuate our American way of life. The truth is that through our “divine ordination” and “superior intellect”, we have been persistently and systematically eliminating the very resources upon which our way of life and our existence depend.

We now find ourselves in a “predicament”. We are irreparably overextended—living hopelessly beyond our means ecologically and economically—at a time when the supplies of many critical resources upon which we depend will soon be insufficient to enable our American way of life. We are about to discover that we are simply another unsustainable society subject to the inescapable consequence of our unsustainable resource utilization behavior—societal collapse. 

Despite Stimulus Funds, States to Cut More Jobs

Eleven weeks after Congress settled on a stimulus package that provided $135 billion to limit layoffs in state governments, many states are finding that the funds are not enough and are moving to lay off thousands of public employees.

The state of Washington settled on a budget two weeks ago that will mean 1,000 layoffs at public colleges and several times that many in elementary and high schools.

The governor of Massachusetts, who cut 1,000 positions late last year, just announced 250 layoffs, with more likely to come soon.

Arizona has already laid off 800 social service workers this year and is facing the likelihood of deeper cuts over the next two. The state no longer investigates all complaints of child or elder abuse.

"Don’t be a child or a vulnerable adult in Arizona," said Tim Schmaltz of the Protecting Arizona’s Family Coalition.

The layoffs are one early indication of how the stimulus funding could be coming up short against the economic downturn. As the stimulus plan was being drawn up, there was agreement among the White House, congressional Democrats and many economists that a key goal was to keep states from making big layoffs at a time when 700,000 Americans were losing their jobs every month.

The House passed a stimulus bill with $87 billion in extra Medicaid funding for states, as well as $79 billion in "stabilization" money to plug gaps in states’ budgets for education and other areas.

But in the Senate, the stabilization funding was cut by $40 billion to secure the support of the three Republicans who were needed for a filibuster-proof 60 votes — Sens. Susan Collins and Olympia J. Snowe of Maine and Sen. Arlen Specter of Pennsylvania — as well as to gain the support of conservative Democrats such as Sen. Ben Nelson of Nebraska. The senators wanted to reduce the package to less than $800 billion, and several wanted to make room for a $70 billion patch of the alternative minimum tax.

Supporters of the final $787 billion bill, which included $25 billion less in state aid than the House plan, said it would help states avoid severe cuts. But tax revenue is coming in even lower than feared.

Ray Scheppach, executive director of the National Governors Association, told a Senate committee last month that states are facing a $200 billion deficit over the next two years. At least a dozen states, including California, Georgia and New Jersey, have ordered furloughs of workers, and increasingly, layoffs loom as the next step.

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GM CEO: Bankruptcy Likely; Firm May Leave Detroit

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday.

It Pays to Lobby (Chart)

An FDL review of lobbying reports for the first quarter of 2009 reveals that banks receiving federal bailout funds spent over $13 million lobbying against consumer interests and for the financial benefit of their executives.

In the first quarter of 2009, banks such as Bank of America, JP Morgan and Wells Fargo that received billions in taxpayer assistance focused their lobbying efforts on defeating attempts to regulate credit card practices, specifically caps on interest rates. They also lobbied extensively to prevent legislation that would have allowed bankruptcy judges to write down mortgage principle ("cramdown"), which FDL examined yesterday. At the same time, they lobbied on behalf of their executives to be paid without limit.
Below is a chart of bailout funds received as a multiple of that $13mm spent on lobbying in the quarter.

1 Minute Battery Station for EV’s (Video at bottom of page)

Better Place unveiled its battery swap system today and said the $500,000 gadget can replace a dead battery and get you back on the road in less time than it takes to fill your gas tank.

The prototype revealed in Japan is the first of what the Silicon Valley startup promises will be countless automated battery exchange stations that will one day dot our cities. The technology will make it possible to travel long distances in an EV without the hassle of stopping to recharge your battery, company founder and CEO Shai Agassi said.

“Today marks a major milestone for the automotive industry as well as Better Place,” Agassi said during the demonstration in Yokohama, which was shown live via webcast. “For nearly a century, the automotive industry has been inextricably tied to oil. Today we are demonstrating a new path forward.”

The demonstration came six months after Better Place opened 17 EV charging stations in Tel Aviv, the first step in its plan to have 150,000 places to plug in throughout Israel by 2011. The company, which is working with Renault on an EV, also plans to have 100 battery swap stations in Israel by then. It’s a model the startup hopes to replicate in Denmark, Australia, California, Hawaii and other locations where it has forged alliances with governments and utilities to hasten the adoption of cars with cords.

Taken together, the two developments show just how far Better Place has come in the 19 months since Agassi announced his audacious plan to bring EVs to the masses.

Bloomberg: Swine Flu May Be Human Error; WHO Investigates Claim (Update1) 

May 13 (Bloomberg) — The World Health Organization is investigating a claim by an Australian researcher that the swine flu virus circling the globe may have been created as a result of human error.

Adrian Gibbs, 75, who collaborated on research that led to the development of Roche Holding AG’s Tamiflu drug, said in an interview that he intends to publish a report suggesting the new strain may have accidentally evolved in eggs scientists use to grow viruses and drugmakers use to make vaccines. Gibbs said he came to his conclusion as part of an effort to trace the virus’s origins by analyzing its genetic blueprint.

“One of the simplest explanations is that it’s a laboratory escape,” Gibbs said in an interview with Bloomberg Television today. “But there are lots of others.”

A few A(H1N1) Links Dr. Henry Niman’s Map 4,434 U.S. Cases as of this wrtitng, A(H1N1) Current TimelineCDC Cases 

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