Labor Perspective

The number of workers that were members of unions totaled 16.098 million — slightly greater than the 15.670 million in 2007. As a percent of all employed workers, union membership was 12.4% last year — not too far from the 12.1% in 2007, which was the lowest level in over 60 years. The peak was registered in the early 1950s, with as many as 35% of all workers carrying a union card. It is clear that the change in the composition of the workforce from an industrial powerhouse to a service-dominant economy is taking quite a toll on organized labor. In the early 1950s, the U.S. was more of a smokestack economy — with about 40% of the workforce engaged in manufacturing activity. Today, a mere 10% of all workers are employed in the manufacturing sector, and over 80% are employed in services-type positions.

Source: Argus Research, Market Watch 1-30-2009

Historical Perspective on Gold Pricing and Inflation/Deflation

There is little threat of deflation, according to the recent trends in the price of gold. Last week, gold traded at close to $900 per ounce, down from the $1,000 price in early 2008 but up from the low $700s last fall. The last major spike in the yellow metal occurred during the oil crisis in the late 1970s-early 1980s, when gold surpassed $600 per ounce. After the crisis subsided, and the economy entered a recession in the early 1980s, gold prices declined back toward $300, and dipped toward $200 in the late 1990s as the U.S. enjoyed a long period of economic prosperity. The last time the markets faced the threat of deflation, gold was trading at around $400. When oil prices took off in 2002-2003, threatening a bout of global inflation, oil prices began their surge that has brought them to current levels. On a weekly basis, the trend in gold suggests that the peak was reached at $1,000 in early 2008. But the recent surge over the past few months suggests that investors remain quite concerned about the potential for pricing pressure, or inflation – not deflation.

Source: Argus Research, Market Watch 1-29-2009

Is gold the next bubble???

Quote of the Day

Try not to become a person of success, but rather try to become a person of value.

Albert Einstein

IPO's Poised to Return??????

The IPO market shut down last fall, and has yet to reopen. According to data from Renaissance Capital, the number of deals completed in the United States in 2008 dropped to 43 from 272 in 2007 — this as the credit crunch increased its grip on the economy. Proceeds for the year totaled $28 billion, down 54% from $59.7 billion a year earlier. The amount of capital raised would have been far less if the $18 billion Visa deal didn’t occur last year. The returns to investors were miserable; more than half of the IPOs traded down on Day One, and the average aftermarket return was - 29% versus the average 24% increase over the previous five years. In 2009, there have not yet been any IPOs. However, in recent days, two companies (Changing World Technologies and the security firm O’Gara Group) have announced plans to raise approximately $200 million. If successful, and firms follow on, the return of the IPO market could signal that the capital markets may be on the road to recovery.

Source: Argus Research

Headline Financial News

New prez, new banking plan. President Obama's economic team is rushing to complete a bank-rescue plan that can be twinned with the $825B stimulus package working its way through Congress. Details are still sketchy, but the plan will likely include $50B+ to stem foreclosures, new capital injections for banks and efforts to deal with toxic assets, possibly through the combination of a 'bad bank' and government guarantees. In his inaugural speech, Obama called for 'bold and swift' action to resolve the crisis that cost the U.S. nearly 2.6M jobs last year. Shares of U.S. banks fell around 20% as some investors feared the government might ultimately need to nationalize the hardest hit financial institutions.

Geithner grill. Tim Geithner, Obama's pick for Treasury, will be grilled in Congress today on issues ranging from his past tax troubles to his solutions for fixing ailing financial markets. Still, despite Geithner's late payment of almost $50,000 in federal taxes and penalties, even critics concede his experience and ability. In prepared remarks, Geithner calls for 'reform' of TARP to help small businesses and families that are losing their homes and jobs, and says "the ultimate costs of this crisis will be greater if we do not act with sufficient strength now. In a crisis of this magnitude, the most prudent course is the most forceful course." The Finance Committee will vote on his nomination tomorrow.

Housing Started This Crisis and Must Be Corrected to End It.

Nouriel Roubini of NYU published an interesting article on the titled subject. The following link is to the article - http://www.rgemonitor.com/economonitor-monitor/255103/us_housing_sector_far_from_bottoming_out_needs_greater_government_intervention

Once we stop the housing price "free fall", banks will start to lend again. Housing is the key to this problem. Why can't the government and Wall Street get this right?

In their third attempt to ignite the economy on November the 25th, they (Feds) got it right. That's when Bernanke purchased MBS. But for some reason they stopped. WHY?????

Stabilize housing - which in turn will stabilize banks and get the credit market rolling. I am not saying go back to the forced Congressional Housing Programs. Simply let's stop the social experiment and go back to "common sense" lending.

The Fight Over TARP 2: No More Money For Nothing

Jan14: Barney Frank release of remaining TARP funds to rescue package to help stem foreclosures, including cutting interest payments and forgiving a portion of the mortgage principal. He also wants to use TARP funds for muni bond issuers. Moreover, banks will be required to commit to lend money before they receive it

The Congressional Oversight Panel Report raises questions about the handling of TARP1 (how was the money spent by receiver banks? we still don't know how to value toxic assets? If the underlying problems are foreclosures why aren't we addressing them? What's the strategy? Are capital injections for sick or healthy banks?)

Jan 14 Moody's: The U.S. junk-rated default rate is seen jumping to 15.3% by end 2009, compared with 12% on a global basis.The European rate is expected to fare even worse, surging to 18.3%. The U.S. rate ended 2008 at 4.4%, compared with 1% at the end of 2007--> historical high over past decades was 12% in 1991 and 2002. Compare with 15.4% in 1933

Source: RGE Monitor

Bullish Bond Markets

The picture for global growth isn’t as gloomy as many suggest, this according to
analysis of the yield gaps in key nations. The yield gap is defined as the 10-year yield minus the three-month yield; if the difference is positive, the yield curve is sloped upward — which correlates to an outlook of economic growth in 12-18 months. The
yield gaps in most industrialized nations are positive, though the depth in some also
reflects heavy demand among investors – and central banks – for Treasury securities.
In global equity markets, of course, investors are fearing much worse. Over the past
year, global stock markets are down 42%. The so-called BRIC nations (Brazil, China,
Russia & India) are off on average 58%. We think the aggressive sell-offs have reopened opportunities, particularly in the regions in which bond investors are
anticipating economic growth.



Source: Argus Research

INVESTORS PREP FOR 4QEPS

Alcoa is due to kick off the fourth-quarter EPS reporting season on Monday. Forecasts for the Basic Materials bellwether call for a loss of $0.20, versus a profit of $0.44 in the comparable period a year ago. This is likely to be a microcosm of the earnings results for the market as a whole. Our Director of Market Strategy David Ritter is calling for a 20% decline in profits for the quarter, which would mark the sixth quarter in a row of EPS declines. Our full-year estimate for S&P 500 earnings in 2008 is $65, implying a 14% year-over-year decline. We look for further weakness in 2009, to $56. In addition to challenges on top-line growth, we expect margins to fall as companies work feverishly to bring costs in line with revenue. We reckon that after-tax profits as a percent of GDP may fall all the way to 5.8%, matching the 1965-70 drop, versus 9.3% at the peak in 2007. Later in 2009, though – and after months of heavy job cuts – the outlook for margins and profits may brighten. We think stocks will anticipate this so we are bullish on equities, despite the near-term fundamental challenges.


source: Argus Research Market Watch, Thursday January 8, 2009

Obama, Madoff and More...

Obama forecasts bleak future without stimulus. Obama painted a grim picture of the country's economic future sans immediate stimulus action, saying he doesn't "believe it's too late to change course but it will be if we don't take dramatic action as soon as possible." Without a rapid fiscal stimulus package, he warned, the economy will become 'dramatically worse,' unemployment could reach double-digits and the recession 'could linger for years.' The speech marked the launch of what is expected to be an aggressive campaign to raise public support for the stimulus plan.

How much will Madoff investors see? Based on the value of Madoff's brokerage, and assets including real estate, boats and jewelry, scammed investors may have access to as little as $1B of Madoff's money to satisfy as much as $50B in claims. The bulk of any refunds would likely come from other clients who withdrew money from Madoff recently, and government payouts (SIPC, tax refunds). According to one calculation, average Madoff victims might eventually get back $0.20 on the dollar. Small, direct Madoff clients could get back much more thanks to SIPC payouts of up to $500,000 per account. Large, indirect Madoff clients might not get much of anything at all. Meanwhile, insurers who cover financial institutions may be on the hook for over $1B to cover the legal costs for investment managers who gave client money to Madoff.

Swiss secrets revealed. UBS (UBS) will close 19,000 secret offshore accounts of wealthy U.S. clients under pressure from federal authorities who suspect the IRS is getting ripped off (no!). Balances will be transferred to other banks or UBS divisions, or else checks will be sent directly to clients - creating a damning paper trail. Here's how one UBS client puts it: "You can either take that check and throw it in the woods, or deposit it somewhere and get busted." Prosecutors suspect U.S. citizens have about $18B buried in UBS accounts (that's all?).

Unemployment came in down 524,000, better than the consensus of 525,000 and much better than the whisper of 600+. The unemployment rate reached 7.2%. Including "underemployment" the rate is around 13+%. Biggest concern with the date was the average work week of 33+hours. This points to an accelerating downturn in hours worked/week and potential for an increase in additional accelerating layoffs.

Will U.S. Treasuries Be the Next Asset Bubble to Burst?

In 2008, the Treasury market had its best annual rally in more than 25 years on fears of global credit crisis, recession, deflation. 10yr and 30yr Treasury yields fell to all-time lows and T-bill yields even dipped into negative territory for the first time since the Great Depression. The total return of the 30-year bond was c. 45%, its best year since 1982. Treasuries in general returned 14%, outperforming S&P 500 by 53 percentage points

In 2009, any signs of a less than dire economic outcome may burst the bubble in Treasuries. With the U.S. government expected to issue between $1.5 trillion to $2 trillion of debt into the $5 trillion Treasury market to finance its rescues of the financial system, the risk of a sudden drop in prices is growing. 10yr and 30yr Treasuries are still yielding between 2-3%, 2yr notes less than 1%, T-bills near zero. The TIPS market is anticipating less than 0.5% annual inflation for the next 10 years.

Breaking Through Resistance

Stock prices seem to have stabilized somewhat since the Fed lowered its target for the Fed Funds rate to 0.25%-0.00%, the Obama Administration began to detail plans for a fiscal stimulus package and Detroit automakers convinced Congress to give them at least three more months. After the rally on January 2, the S&P 500 actually moved above the resistance established by the 50-day moving average. From a technical standpoint, the next major test will be the 100-day moving average, which is currently 1028. Before stocks can hit that threshold, though, the fundamentals will need to show improvement. While we think much of the bad news regarding 4Q results has been priced into the market, investors may not yet be anticipating the challenges that the first quarter will bring, despite government intervention. We look for the S&P 500 to trade in a range of 800-1000 for much of the first half, until it becomes clear that the economy is – or isn’t – gaining traction.

Argus Research Market Watch, January 5, 2009

2009 A Look Ahead

2009: Hoping for a turnaround, bracing for a thud. 2008 was a tumultuous, messy year, shaking investors' belief in basic market premises, including the value of the buy-and-hold strategy and the idea that stocks will outgain other assets over time. Volatility was startling, the stock market had its third worst year in over a century and the government spent billions of dollars frantically trying to plug holes in the economy. Some analysts believe a dismal '08 at least provided a bottom to this market, citing November's multiyear lows and the upswing that followed, though others expect another sag in 2009. Forecasters for 2009 have covered the full range of outlooks, from continued heavy losses to healthy recovery. Investors, meanwhile, are hoping 2009 brings a turnaround, but aren't counting on one.

FDIC goes back to the future. With at least 171 banks on the FDIC's 'problem list,' the agency is turning to a tool last used during the savings and loan crisis. Called 'loss sharing,' the mechanism provides an incentive for healthy banks to take on the troubled assets of a failed institution, with the government agreeing to cover the majority of future losses. The FDIC tried out the model several times in 2008, including in its initial rescue effort for Wachovia (WB) and as part of an aid package to Citigroup (C), and is feeling out industry interest in the approach.

Quotables. Warren Buffett's Berkshire Hathaway (BRK.A) fell 32% in 2008, marking its worst performance in over thirty years. Buffett, however, appears unfazed. "It's happened to me three other times. It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50 percent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times."