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Monthly Archives: July 2012

S&P Study: Despite Record Cash on the the Books Corporate Pension Under Funding Continues

“The public pension and retirement ‘schemes’ are in considerable trouble (as we noted here and here) and now, according to a recent S&P study,private companies are at record levels of pension under-funding. Fiscal 2011 shows that the under-funded level for S&P 500 companies’ defined pensions reached an epic $354.7 billion – an increase of over $100 billion from 2010 and surpassing the 2008 record of $308.4 billion – and OPEB under-funding reached $223.4 billion.”

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The Bulls Play Bounce With the Markets

After back and forth action this morning the bulls took charge and bounced the market up into positive territory. Finishing off the highs of the day the bulls sent equities to higher ground after the clam gave his testimony to congress.

 The markets most certainly believe QE3 is coming despite no clear indications from the clam.

Gold and silver sold off a bit while  healthcare, energy, services, and utilities lead the rally.



S&P UP 10

WTI up $0.54

[youtube://http://www.youtube.com/watch?v=Cw6pQUa0yS8 450 300]

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Homebuilders Most Confident in More Than 5 Years

“Homebuilders today are feeling more confident than they have in more than five years. Recent earnings reports from the big public builders have shown spikes in new orders for single family homes, and competition from foreclosures has eased as banks try to modify more troubled loans.”

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The State Budget Crisis Task Force Predicts a Lack of Services Due to State Financial Woes

Financial problems for many states may bring a gradual erosion of services. A tough economy, aging population, medicaid and pension strains will curtail even the most basic services many come to expect after paying their taxes.

Full article

[youtube://http://www.youtube.com/watch?v=Ykeh0EkEXnc 450 300]

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Irony: Tobacco Settlement Bonds Will Default If Smoking Continues To Decline

New York, July 12, 2012 — Nearly three-quarters of senior tranches of the tobacco settlement bonds will default should cigarette consumption in the US continue on its current rate of annual decline, says Moody’s Investors Service in a new report. Specifically, the rating agency finds that if the decline in consumption continues at a 3% – 4% pace, as Moody’s projects, bonds constituting 74% of the aggregate outstanding balance of all the tobacco settlement bonds will default.

The finding is consistent with current ratings on the tobacco settlement bonds, 79% of which are rated at B1 or below, says Moody’s in the new report “Sustained Decline in Cigarette Consumption Rates Will Cause Many Tobacco Settlement Bonds to Default.”

“Characteristics that lead bonds to be vulnerable to a lower rate of decline include high leverage, long bond maturity, and low cash reserves,” says Irina Faynzilberg, a Moody’s Vice President-Senior Credit Officer and Manager.

In the report Moody’s presents consumption break-even decline rates for the bonds, which estimate the rate of decline that would lead a particular bond to default.

Moody’s finds that 15 tranches representing 33% of the rated bond balance have an annual consumption decline break-even in the 2%-3% range, while 27 tranches representing 41% of the aggregate rated outstanding balance for all tobacco bonds, have an annual consumption decline break-even in the 3% – 4% range. The analysis assumes a constant rate of decline for the duration of the bonds’ life.

Moody’s calculates the break-evens for cigarette consumption decline rates by conducting iterative cash flow analyses to determine the default threshold for each rated bond, holding all other inputs constant. The default threshold is the highest constant annual decline rate for cigarette consumption at which each bond fully amortizes by its final maturity date without a payment default.

Moody’s notes that although it does not assign ratings based on consumption breakevens, they do closely correlate with ratings.

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Bernanke’s Full Remarks

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Chairman Johnson, Ranking Member Shelby, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy.

The Economic Outlook
The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2-1/2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter.

Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent.

Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low.

We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater–that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction.

After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand–such as surveys of business conditions and capital spending plans–suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports.

At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013.1 These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data.2 In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which–as I already noted–are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and–as I will discuss in more detail shortly–the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014.

The Committee made comparatively small changes in June to its projections for inflation. Over the first three months of 2012, the price index for personal consumption expenditures (PCE) rose about 3-1/2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 1-1/2 percent over the first five months of this year, compared with a 2-1/2 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014.

Risks to the Outlook
Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.

Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of three-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.

The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.

The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect–a scenario widely referred to as the fiscal cliff–a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.3 These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.

The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.

Monetary Policy
In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative.

Economic growth is also being supported by the exceptionally low level of the target range for the federal funds rate of 0 to 1/4 percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Thank you. I would be pleased to take your questions.

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Market Update

The markets circle jerked from positive to negative into the clam testimony, but as the clam spoke markets decide to go positive hitting the highs of the day just after today’s testimony ended.

Materials seem to be leading the market higher.

Market update 

The story

[youtube://http://www.youtube.com/watch?v=mzJj5-lubeM 450 300]

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Bernanke Predicts Slow Progress in Unemployment; Prepared to Give Additional Support

Bernanke did not give the markets the all clear sign of QE policy. Reading between the lines Bernanke stated that the FOMC is prepared to take action. We can see from his testimony that the FOMC may be close to to doing something given the economy and improvement on employment will be ‘frustratingly slow.’

He would prefer congress to act on the fiscal cliff.

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Bernanke Gives Nothing To QE3 Beggars

(AP) WASHINGTON – The U.S. economy has weakened and the Federal Reserve is ready to take further action to bolster growth if conditions don’t improve, Chairman Ben Bernanke told a congressional panel Tuesday. But Bernanke provided no clues about what steps the Fed might take or whether any action was imminent.

Investors were hoping Bernanke would signal that the Fed was ready to launch another round of bond purchases, which aim to drive down long-term interest rates and encourage more borrowing and spending.

Bernanke is delivering his mid-year report on the economy to the Senate Banking Committee. He’ll testify Wednesday before the House Financial Services Committee.

His report comes as job growth has slumped, manufacturing has weakened and consumers have grown more cautious about spending.

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Al Lewis: U.S. in a Invisible Depression (video)

“According to Al Lewis on The News Hub, we’re actually in a depression right now, but most people don’t see it. One out of seven Americans are on food stamps – if they weren’t getting cards in the mail every month, you’d see them in soup lines.”

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Roubini: US Growth May Not Even Break 1% in Third Quarter

“U.S. economic growth might not even break 1 percent in the third quarter of this year, which would put the country at stall speed and in danger of petering out, says New York University economist Nouriel Roubini.”

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