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Monthly Archives: May 2013

NY Fed Survey: End of Payroll Tax Cut Prompting Consumers to Scale Back Spending

“The end of the payroll tax holiday is prompting consumers to cut spending, according to a new survey from Federal Reserve Bank of New York.

Of the 370 individuals surveyed, 79 percent said they plan to cut spending in response to the end of the tax cut, while nearly 20 percent said they will cut savings and 2 percent will increase debt (borrowing).

The payroll tax cut reduced Social Security and Medicare taxes withheld from paychecks by 2 percent in 2011 and 2012, impacting 155 million workers. It gave an extra $1,000 a year to the average household earning $50,000.

The economists compared how people had used the extra money with what they say they’re doing in response to the end of the tax.

“We see a disproportionate shift toward primarily reducing spending,” New York Fed economists Basit Zafar, Max Livingston and Wilbert van der Kaauw write in their report. “Regardless of what consumers reported doing with the increase in take-home pay over the last two years, a majority report that they will cut back on spending.”

For example, 86.2 percent of those who mostly spent the extra money said they now plan to mostly cut spending, and 80 percent of those who used the extra funds mostly to pay off debt also plan to mostly reduce spending. ….”

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IMF Report Shows Spain is Officially Insolvent According to the Telegraph

“Spain is officially insolvent. Just look at the International Monetary Fund (IMF)’s latest Fiscal Monitor, says U.K. Daily Telegraph columnist Jeremy Warner.

His advice: Get your money out now.

“I don’t advise getting your money out lightly. Indeed, such advice is generally thought grossly irresponsible, for it risks inducing a self-reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.”

The IMF’s report, he says, comes as close to declaring Spain as being insolvent as you’ll ever see in an official analysis.

“The IMF is far too diplomatic for such language. But that’s the plain meaning of its latest forecasts, which at last have an air of realism about them, rather than being the usual dose of wishful thinking,” Warner writes.

Spain’s budget deficit is projected to decline this year to 6.6 percent of gross domestic product (GDP), Warner notes. That steep drop is mostly due to the cost of bailing out the banking sector from last year. Other than that, the deficit didn’t really fall much. And the IMF doesn’t predict it to fall any time soon.

The structural deficit, or permanent debt remaining even after economic growth returns, is even worse.

“By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the U.K. and the U.S.,” Warner explains…..”

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IMF: Central Banks Face Steep Losses as They Pull Back

“Central banks got it right when they saved the world economy, but their unprecedented actions risk disruptive cross-border spillovers and potentially heavy losses when the time comes to reverse course, the IMF said on Thursday.

In its most detailed survey so far of the dramatic measures taken to counter the damage from the 2007-09 financial crisis, International Monetary Fund staff repeated earlier assessments that the steps had worked but face diminishing returns.

However, in new research, they also said central banks could face severe losses when they begin to withdraw the extraordinary sums of money they have pumped into financial systems around the world.

Massive market bets are riding on whether the U.S. Federal Reserve and its peers can execute a graceful withdrawal from more than four years of ultra-easy monetary policy, which helped restore confidence in global growth.

Central banks have pumped trillions of dollars, euro and yen into the global economy through bond-buying campaigns after interest rates were slashed close to zero.

The ultra-easy monetary policies have prompted critics to warn of the risk of inflation and asset price bubbles, while some developing nations have argued their richer counterparts were seeking to gain an export edge by lowering the value of their currencies.

Jaime Caruana, head of the Bank for International Settlements, warned on Thursday that big central banks should not delay in winding down their economic support programs. The BIS advises global central banks.

But the IMF found the benefits of unconventional measures still outweighed the potential costs in the United States and Japan, and it reserved its toughest language for politicians who fail to undertake long-overdue economic reforms.

“A key concern is that monetary policy is called on to do too much, and that the breathing space it offers is not used to engage in needed fiscal, structural, and financial sector reforms,” the IMF said in the report.

“These reforms are essential to ensuring macroeconomic stability and entrenching the recovery, eventually allowing for the unwinding of unconventional monetary policies,” it said.


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Disconnect the Dots

“A so-so first-quarter earnings season hasn’t dented investors’ enthusiasm for stocks.

Profit at large U.S. companies modestly exceeded Wall Street analysts’ expectations, while revenue was weak and many companies ratcheted down growth projections.

But stock prices have been rising, with the Dow Jones Industrial Average up 16% for the year and 4.2% since earnings season began April 8 with a mixed report from aluminum company Alcoa Inc. AA 0.00%

The developments have added up to a rise in stock-market valuations. The price/earnings ratio on the Standard & Poor’s 500-stock index now stands at 14.5, its highest level since 2010.

Stock-rally skeptics said that spells trouble. They contend soft U.S. economic growth and expanding P/E multiples can’t coexist forever. Economists predict U.S. gross domestic product will expand at a slower rate in the second quarter than the first, when it increased at a 2.5% annual rate. Government spending cuts known as the sequester came into effect March 1. The Labor Department said Thursday that initial jobless claims increased by 32,000 to a seasonally adjusted 360,000 in the week ended May 11, the largest one-week gain since November.

But many market watchers emphasize there are few other options available for investors. With the Federal Reserve committed to buying $85 billion a month in bonds for the foreseeable future, pushing down interest rates and reducing the income investors can make on assets perceived as safe like Treasurys, many will likely continue pushing into stocks, betting that the economy will continue to improve. “Revenue is not good,” said Adam Parker, chief U.S. equity strategist with Morgan Stanley MS -1.14% . “But people are giving companies a hall pass for that, because most believe that companies will do better in the second half of the year.”

Longtime bulls have been waiting for years for investor confidence in the rally to pick up. Even as shares soared off their March 2009 financial-crisis lows, investors sent only a trickle of cash into stocks despite a recovery in corporate profits. But that has changed this year with the pickup in the stock market and the rise of other riskier asset classes such as “junk” bonds, those issued by below-investment-grade companies.

The increased flows come as the corporate-earnings recovery has plateaued…..”

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The Greenback Stays STRONG

“The Dollar Index rose to the highest level since July 2010 while South African and Australian currencies fell on speculation the Federal Reserve will scale back stimulus measures. U.S. stock-index futures gained while gold dropped.

The gauge of the U.S. currency against six trade partners added 0.7 percent to 84.173 at 8:49 a.m. in New York. The rand sank to its weakest level since April 2009 and the Aussie slid to the lowest in almost a year. Spain’s 10-year bond yield fell eight basis points. Standard & Poor’s 500 Index futures climbed 0.4 percent. The Stoxx Europe 600 Index added 0.1 percent. Gold fell for a seventh day, the longest slump in four years…..”

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Bloomberg Poll: U.S. Recovery Will Continue Slowly Into 2015 Without Recession

“The U.S. economy will continue to recover until at least 2015 without tumbling into a recession, achieving the sustained growth that has eluded it since the last slump ended four years ago, according to a Bloomberg poll.

With the economy creating an average of 208,000 jobs a month since November, 69 percent of those surveyed call the recovery “sustainable” while 27 percent anticipate a new recession within two years, according to the global poll of investors, analysts and traders who are Bloomberg subscribers.

“I expect growth to accelerate,” says respondent Brandon Fitzpatrick, 35, a portfolio manager for D.B. Fitzpatrick in Boise,Idaho. “Consumers’ balance sheets are improving, and consumption is set to pick up.”

The prospect of increasing energy independence, a rise in home values after years of decline and a pause in the partisan budgetary battles in Washington are driving investor sentiment.

Real estate, the epicenter of the 2008 financial crisis, is a big part of the optimism. Even after yesterday’s reported drop in April’s housing starts, homebuilders began work on 853,000 new homes, up 78 percent from the April 2009 low. After watching the housing crash erase more than $7 trillion worth ofwealth, homeowners have recovered about $2 trillion in real estate holdings, according to Federal Reserve data.

In the poll, 71 percent of Bloomberg customers say the recent home-price increase in major U.S. markets is evidence of a genuine recovery in values; 21 percent say it’s a sign that a new bubble is inflating.

Above Average….”

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$JCP Disappoints on Earnings

“Struggling department-store retailer JC Penney on Thursday reported operating margins plunged in the first quarter on weak sales and heavy clearance deals, as its new chief executive promised more promotions and a return to basics to win back shoppers.

Penney, struggling with mass customer defections after a failed strategic shift by former Chief Executive Ron Johnson, said gross margins came in at 30.8 percent, nearly 7 percentage points lower than a year earlier. Total sales and same-store sales both posted double-digit declines, in line with the company’s warning last week…..”

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The U.K. Fires Up the BBQ on $GOOG, $AMZN, and Other Multinationals Avoiding Taxes

“LONDON (Reuters) – Internet retailer Amazon.com Inc. will be called back to the British parliament to clarify how its activities in the UK justify its low corporate income tax bill, two lawmakers told Reuters.

Amazon will follow search giant Google, which attended another grilling by parliament’s Public Affairs Committee (PAC) over its tax affairs on Thursday. A Reuters report earlier this month raised questions over Google’s earlier assertions that its UK-based staff don’t sell to customers.

Over the past six years, Amazon has paid around $9 million in income tax on over $23 billion of sales to British clients, because it says it operates a single European business out of Luxembourg, rather than a multinational structure of independent subsidiaries in different countries, and should therefore pay tax in Luxembourg.

However, Reuters has uncovered evidence from the company’s own statements, job advertisements, statements from three suppliers and five former employees, as well as the profiles of over 140 staff on networking website LinkedIn, which suggests the UK unit has a high degree of autonomy, with local managers deciding on many aspects of its business.

The information, collected during a three-month investigation, suggests that while Amazon depicts itself as a virtual business, its structure may not be so different from its bricks-and-mortar rivals.

“The basic business model wasn’t very different to a mail order company in the 1970s or 80s,” said Mark Riley, a Business Development Manager at Amazon.co.uk between 2005 and 2008.

Bryan Roberts, Retail Insights Director for consultants Kantar Retail, said apart from the fact buyers seal deals over the Internet, Amazon’s UK unit Amazon.co.uk Ltd, which is based in an office block in Slough, near London, was essentially a UK retailer.

“Amazon.co.uk is a British business in that 99 percent of the people who are responsible for merchandising, buying, the online activity, fulfillment, are based in Slough,” said Roberts, an expert who advises many Amazon suppliers.

Amazon declined to answer any questions about its UK business.

On Thursday, the Guardian newspaper reported that it had found “extensive UK activities” for Amazon that suggested the UK tax authority could be tougher on taxing its British operations.

Companies, especially those which sell over the Internet, increasingly designate their British subsidiary as a supplier of support services to an affiliate in a low-tax jurisdiction, through which sales are then booked….”

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Credit Suisse: Au Will Melt Down

“Bearish sentiment toward gold has prices for the yellow metal tumbling again.

On Wednesday, George Soros revealed through a regulatory filing that he cut his gold exposure during the first quarter.

In a new note to clients, Credit Suisse‘s Ric Deverall forecasted that gold would plunge to $1,100 this year and eventually to $1,000 within five years.  This according to Bloomberg’s Maria Kolesnikova.

More from Kolesnikova…”

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Old Man Buffett’s Favorite Indicator Is Still Weak

“This week’s rail traffic reading showed modest improvement over recent weeks, but the longer-term trend remains negative.  Intermodal traffic was up 3.9% this week which was an improvement over last week’s reading of 2.8%.  The data, however, continues to soften on a rolling 3 month basis with the latest reading coming in at 3%.  That’s the lowest level since January.  The good news is we’re not seeing the type of consistently negative readings that tend to precede a recession.  The bad news is that the growth is tapering.

Here’s more via AAR….”

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Josh Brown: 2013 is Nothing Like 1999

“The market is seemingly in can’t-lose mode.

When there’s good news, stocks spike. When there’s bad news, stocks go nowhere. Lots of people say this is all the doing of the Fed, and that it’s a bubble that will end in tears.

In a great, thorough post, Josh Brown destroys the comparisons between 2013 and 1999 in utterly convincing manner.

It’s a very thorough post which attacks this comparison in multiple ways.

The simplest debunking is on valuation. Right now, he notes, the S&P 500 is earning twice what is was in 1999. And the dividends are twice as big as well:

What kind of premium, pray tell, are we paying for double the earnings and twice the dividend yield versus 1999’s market? I’m so glad you asked – turns out we’re not paying any premium at all. We’re paying a discount. 50% off. The current S&P 500 trades for a PE of 14 versus 33 for 1999. So double the fundamentals for half the price.

And he destroys the idea that there’s speculation everywhere by reminding readers what the scene was really like in 1999, for those who have forgotten:

In 1999, the S&P 500 rose by 19.5% – a good gain but you should know that the gains were extremely concentrated, more than half of the companies in the S&P were actually negative on the year! The Nasdaq 100 was up an astounding 85% in 1999, a mania for the ages, but an extremely sector-specific one. This contrasts with today, where almost every sector is now participating in the advance in a rolling, rotating, sexually undulating manner not unlike the midriff of a belly dancer….”

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$JPM: S&P 1715

“JPMorgan’s bullish analyst Tom Lee just cranked up his S&P forecast:

This has been a better bull market than we expected, particularly in 2013. But this is conforming to history—the average gain in the fifth year of a bull market is 19% (implies 1,719)….”

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Abenomics Swings the Samurai Sword Once Again

“Japan’s new approach to reflating its economy – termed “Abenomics,” after Japanese Prime Minister Shinzo Abe – involves three components: unprecedented monetary stimulus, a big boost to government spending, and structural reforms designed to make Japanese industry and institutions more competitive.

These are referred to as the “Three Arrows” of Abenomics.

The Japanese government has already announced plans for the first two “arrows” on the fiscal and monetary fronts. Structural reforms, on the other hand, had not yet really come to the fore of the discussion until today.

Overnight, Abe announced some plans. Reuters has the details:

The latest tranche of Japan’s growth strategy will aim to triple infrastructure exports and double farm exports by 2020, as well as boost private investment, Prime Minister Shinzo Abe said on Friday.

The government will set a target for domestic private-sector investment of 70 trillion yen ($687 billion) annually, Abe said in a speech to business executives and academics, the level before the 2008 financial crisis and up about 10 percent from the current figure.

The details, of course, aren’t fully fleshed out…”

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What Can We Learn From the Super Wealthy ?

“F. Scott Fitzgerald wasn’t entirely right. The very rich are different from you and me—but not by much.

new study offers a comprehensive look at the portfolios and investment decisions of several hundred of the wealthiest families in the U.S. Every investor, rich or otherwise, can learn from how these people make the most of their advantages—and from how they mess up.

These households, with an average net worth of roughly $90 million, invest intelligently, for the most part, spreading their bets widely, seldom trading and keeping their investing taxes to a minimum.

But the superrich also commit rookie mistakes. Their approach to diversification might not always be ideal. They chase investment fads like dogs chasing parked cars. They freeze with fear just when bravery is most likely to be rewarded. Maybe the “smart money” isn’t so different from the middle-class “dumb money” that Wall Street likes to mock.

Three economists—Enrichetta Ravina of Columbia Business School, Luis Viceira of Harvard Business School and Ingo Walter of New York University’s Stern School of Business—analyzed the holdings and trades of more than 260 ultrawealthy families between 2000 and 2009. The data came from an unnamed private company that consolidates account information for the wealthy.

What have these rich investors gotten right?…”

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Wall Street Holds True to Their Motto; ” I WIN A LOT BIATCH “

“The U.S. regulator overseeing the derivatives market is set to retreat from an ambitious proposal that would have increased competition in the swaps market, handing victory to large banks including JPMorgan Chase and Goldman Sachs.

The Commodity Futures Trading Commission will vote Thursday on final rules that will govern a large portion of transactions in the $633 trillion swaps market. Some derivatives are known as swaps because they “swap” risk from one party to another.

The impending regulations will determine how many prices buyers of swaps must solicit when trying to enter into a derivatives contract, the minimum size of large transactions that can be traded outside transparent trading platforms, and how trades can occur on derivatives marketplaces known as “swap execution facilities,” according to officials and agency documents.

Roughly five years after previously unregulated derivatives helped fuel the downfall of large financial institutions and led to a global financial crisis, the rules to be voted on by the five-member commission, led by Gary Gensler, Democratic chairman, represent a big portion of the government’s response to rein in risky activities under the Dodd-Frank overhaul of U.S. financial regulation, while also helping to determine the profitability of swaps trading for dealers such as Citigroup and Bank of America.

After failing to persuade a majority of his commission, Gensler conceded on the price solicitation proposal, known as “requests for quote,” or RFQ, officials said. Gensler had originally proposed that buyers of swaps such as institutional investors solicit a minimum of five quotes before entering into a swap.

But the largest global banks, including Deutsche Bank, Barclays and Morgan Stanley, fiercely objected to the five-quote minimum, according to comment letters filed with the agency. The proposal was intended to increase price transparency and encourage wider participation beyond the small number of dominant dealers in a bid to diffuse risk and lower prices for institutional investors and companies that purchase swaps to offset risk…..”

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$TSLA Announces a Secondary Offering


“Tesla (NASDAQ:TSLA) just won’t (can’t) stop, apparently. Shares were up as much as 11 percent in pre-market trading on Thursday after the electric-vehicle maker announced an offering of more stock and convertible senior notes aimed at raising as much as $830 million. CEO Elon Musk put his personal brand behind the offering, stating that he intends to purchase about $100 million worth of stock directly from Tesla.”

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Bloomberg Poll: Janet Yellen Estimated to Be Next Fed Chairperson

“Federal Reserve Vice Chairman Janet Yellen is seen by a third of international investors as the most likely to take the helm of the central bank when Ben S. Bernanke’s term ends in January.

The second-most probable choice is Bernanke himself, according to a quarterly poll of investors, analysts and traders who are Bloomberg subscribers — even though the Fed chairman has said he feels no personal responsibility to remain for another term.

Speculation about the succession at the central bank intensified after the Fed said April 21 that Bernanke would skip an annual symposium in Jackson Hole, Wyoming, because of a personal scheduling conflict. Yellen, a 66-year-old former professor at the University of California-Berkeley, has been identified by Fed watchers as a favorite, with former governor Laurence Meyer saying she has “right of first refusal.”

Yellen “has a strong record of monetary policy experience, to state the obvious, but she is also perhaps too dovish,” or overly concerned by unemployment, said David Schimizzi, senior economist at Ally Financial Inc. in Charlotte, North Carolina. “While turning off the spigots of monetary policy support immediately may not be a good idea, Yellen may push the Federal Reserve to undertake policies that could increase the risk that inflation could accelerate too quickly in the intermediate term.”

The Bloomberg poll showed 34 percent expect President Barack Obama to choose Yellen, while 27 percent predicted Bernanke and 17 percent named another candidate from a list of four other names.

Familiarity Lacking…”

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