It’s official: Our government ran a record $180.7 billion over budget in July, the Treasury Department said today. That’s just a bit over Wall Street expectations and just under the Congressional Budget Office estimate we reported Monday. Thus the government tab so far this fiscal year is a record $1.27 trillion, not the record $1.3 trillion the CBO guessed earlier this week. Phew… what a relief.

A few more scary details:

• The budget deficit is still on track to exceed $1.8 trillion by October, the end of the fiscal year. That would be four times last year’s record budget
• July spending rose to over $332.2 billion, an all-time high
• Government revenues fell 5.6% from last June, to $151 billion
• Those revenues have been lower than the same month the year before for 15 straight months.

And we doubt Uncle Sam will get much help from tax revenues anytime soon… even “cash for clunkers” couldn’t save American retail sales in July. The Commerce Department’s July retail sales number shocked the Street this morning, down 0.1%, despite expectations of a 0.8% rise.

The government’s cleverly acronymed Car Allowance Rebate System (CARS) program did help — without auto sales, the retail gauge would have fallen 0.6%. But the lowly consumer has made his point: Even with free money deals from Uncle Sam, retail is not ready to “get back on track,” as the Obama administration likes to say. In fact, even if the Street’s wish came true, we’d still be a long way from the old status quo.

In a similar vein, Wal-Mart’s latest sales numbers missed expectations this morning. While still profitable, the world’s biggest retailer saw same-store sales fall 1.2% in the second quarter — well below the Street’s forecast of a 1% rise.

Interestingly, Wal-Mart enjoyed 13 straight months of better same-store sales from April 2008-April 2009. Then they suddenly stopped reporting monthly sales and switched to quarterly. Now, in their first quarterly report, sales are down. Hmm… must be a coincidence.
We don’t blame Joe Consumer for resisting retail, even “everyday low prices.” After all, another 558,000 Americans filed for unemployment for the first time last week. Initial claims rose by 4,000, says the Labor Department today. 6.2 million people are now receiving unemployment benefits.
U.S. foreclosures rose to another record high in June,says RealtyTrac today. One in 355 households, or about 360,000 homes, were in some form of foreclosure during the month. As we mentioned yesterday, roughly one quarter of all mortgages are worth more than the present value of the homes they cover.

That’s not good for the average home price, down 15% last quarter to $174,100 (existing single-family home).

Well, at least troubled homeowners can count on the Fed to keeping pinning down refi rates… Uh-oh:
Mark your calendars… the Fed has promised to stop manipulating the bond market by October.

That’s the meat of the news from yesterday’s Federal Open Market Committee meeting. They will “gradually slow” the pace of its official Treasury purchases, but the $300 billion program will now run through October instead of ending in September, as the Fed had previously scheduled.

(Of course, as our friend Chuck Butler often points out, that’s just the official word. The Fed has other ways to skin this cat. For example, they’re rumored to be striking deals with primary dealers for post-auction purchases. Instead of making official bond purchases at the auction, the Fed will have a primary dealer buy the bonds and then sell them to the Fed… same debt monetization, but without that pesky “transparency” and media attention.)

Outside of the Treasury bond announcement, the FOMC statement was about what you’d expect: Interest rates were left at 0% and will remain “exceptionally low” for an “extended period.” While “economic activity is leveling out,” it will “likely remain weak for some time.” And, of course, “inflation will remain subdued for some time.”
“The Fed doesn’t exist to help you,” says our currency man Bill Jenkins.

“Central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to an end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

“For us, we will trade with all this in mind as each bank assesses its role in the global finance arena… knowing that they will begin raising rates as soon as possible, and sometimes even before. When they do, it will give us huge opportunities to profit. Rising rates almost always guarantee soaring currencies.

“Particularly I would look for the U.S. dollar, Europe, Aussie and United Kingdom. Australia will provide the real runaway as long as China can get some exports up and running. If this recovery gets some legs (which is still problematic in my mind), they already have the upper hand with an interest rate multiple times higher than the others.”

Will you profit from this trend? Have Bill help you reap the benefits by checking out Master FX options Trader.
The Fed’s announcement hit just about every market…bonds, stocks, currencies and commodities.
No surprise that the Fed’s announcement hurt bond prices. Not only did they forecast the end of their official purchases, but that “leveling out” talk also hints of higher interest rates, and thus lower bond prices. The yield on a 10-year jumped as much as 10 basis points, to 3.7%, on the news. But this morning it’s already given it back on the heels of the latest retail and jobless numbers.
Stocks rallied in advance of the FOMC meeting in expectation of some kind of good news. Up 1.3% before the announcement, the S&P 500 seemed content with the Fed’s lilywhite forecast and finished up 1.2%.
The dollar was perhaps yesterday’s biggest loser. That brief “good for the economy, good for the dollar” trade from last Friday is dead in the water. Traders took no comfort in the Fed’s soothing announcement and bid the dollar index down a full point, to 78.2 as we write.
Thus commodities are on the up and up. Gold’s up about $10, to $957 an ounce. Oil gained a buck and is now just below $71 a barrel.
“I had the unique opportunity,” writes Byron King, “to tour two different oil sands operations near Fort McMurray, in northern Alberta. I saw a massive open-pit oil sands mine, and the associated reclamation effort, operated by Syncrude Canada Ltd. I also visited an in situ oil sands recovery project called Surmont, operated by ConocoPhillips.

“When we think about the concept of ’Peak Oil’ today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the light, sweet, easy-flowing oil that is getting harder and harder to find, certainly in significant quantity.

“But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be ’heavy,’ with lots of carbon atoms and not so many hydrogen atoms.

“Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

“Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the ’other’ issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

“Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the United States wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.”

There are stocks to own no matter who wins the battle over Canada’s oil sands… find them here, in the Outstanding Investments portfolio.
One surprise batch of data today: France and Germany are technically out of recession. Both nations reported 0.3% GDP growth for the second quarter today. Given that the two are now Europe’s biggest economies, that’s surprisingly good news.

Should make for some fireworks from the PIIGS (Portugal, Ireland, Greece, Spain and an extra I for Italy) when the two start pestering the ECB to raise rates.
“You mention that the short interest on stocks fell 12% in two weeks,” a reader writes. “No surprise there. With the SEC issuing its rule prohibiting ’naked short selling,’ risking personal insolvency to predict falling prices is now illegal. And just as there is now no ’downtick rule’ or mark-to-market accounting (not to mention the federal government’s interdiction against accurate financial reporting — a.k.a. ‘stress testing’ — and its outright ownership of significant areas of the economy, subsidized by the taxpayers), there is now no investment whistle to blow to sound the alarm for the unsuspecting public.

“Of course, much of the unsuspecting public is now so caught up in the economic game of musical chairs known as the Obama administration that they are too busy (and broke) to pay attention. This does not bode well for the futures of our children or our children’s children … you know, the ones to whom we are passing the buck!”
“I served in the U.S. Navy for 8 years and did my share of ’spending like a drunken sailor,’” another reader writes. “I take offense at the notion that drunken sailors spend like power-mad politicians. Drunken sailors only spend what is in their pocket or what they won playing poker on the ship, but nonetheless once they’re broke, drunken sailors quit spending (and usually pass out).

“Please have your readers try to find a more appropriate analogy to wasteful spending by crooked politicians because those of us who were, and the ones who still are, drunken sailors spend within our means on things that are important to us (booze and babes). Thank you for your attention.”

The 5: Point taken… no sense in giving drunken sailors such a bad name.

Source: Budget Insanity, FOMC Down-Low, Oil Sands Investing and More!

The Dow fell another 107 points yesterday. Oil held steady at $70. The dollar fell to $1.38. And gold rose $4 to 932.

What if the rally is over? Could be… It began on 9 March. That makes it more than 3 months old. Most likely, it will continue through the summer. But who knows?

The important thing to remember is this: there can be no major, sustained bull market without one of two things happening.

Either… the mistakes of the Bubble Epoque must be cleared away… allowing for a new era of genuine growth and real prosperity. At best, this would take a few years to achieve. Just imagine how long it will take to restructure GM into a profit-making business again. Just imagine how long it will take consumers to pay down their debts so they can begin to spend again. Just imagine how long it will take to save enough money to build new factories… and convert shopping malls to warehouses and apartment complexes…

And just imagine how long it will take with the feds fighting it tooth and nail. At least a decade!

Or… people must be willing to go even further into debt… thus increasing the errors of the debt-soaked boom. Anything is possible. But here at the Daily Reckoning we think the economy is already saturated with debt. It can’t absorb more. Besides, the financial industry is no longer capable of pushing debt on the public. That machine is broken. The bubble in finance exploded when Lehman Bros. went down. Once a bubble blows up, it can’t be reflated.

And so far, the feds’ efforts to reflate the bubble in consumer finance have caused a return of speculation in oil, commodities, and emerging markets. There is no sign of consumer price inflation or expanding consumer credit. Instead, consumer credit is contracting.

So don’t expect a real bull market.

Instead, let’s move on… this just in…

The Financial Times reports that a vending machine company is soon to install machines in Germany where you’ll be able to buy gold as easily as buying a chocolate bar. There’s one machine already in the Frankfurt Airport, where for 30 euros you can buy a 1-gram wafer of gold.

Already, in Switzerland, you can buy gold in the Post Office.

What do these yodelers and sausage eaters know that we don’t? Germany was required to pay reparations after WWI. The amount was about $1.121 trillion in today’s money. In gold. She had no choice. She had to turn over her real money – gold – to the victorious French and English. Thus, she had no real money left in the domestic economy. What could she do? Germany printed up marks… not backed by gold and experienced hyper-inflation, up close, in the ‘20s.

Coming not long after the debacle of WWI and the Treaty of Versailles, it not only destroyed the economy… it also wiped out savers and destroyed Germans’ residual faith in their own sausages. Soon after, there were armed gangs of communists and national socialists fighting for control of the streets. And we all know how that turned out…

So, back to the USA… The US has entered the third and final stage in the life and death of a great country.

America’s history can be divided into three broad stages. The first stage was industrialization. This is what took the US from a marginal nation of settlers, explorers, farmers, entrepreneurs and religious refugees to become the world’s richest and most powerful country. The source of its wealth and power was its factories… and its people. The factories were the best in the world. And the people how labored in them were accustomed to hard work, saving, and self-discipline. There were no free lunches in America during this period. The fastest growing cities of the time were manufacturing centers – Chicago, Gary, Detroit, Pittsburg, and Birmingham.

Thanks to its smokestacks and assembly lines, the US could make things better, cheaper and faster than any other country, with the possible exception of Germany before WWI and Japan after WWII. That is how the US became the world’s largest creditor – by selling US-made goods to foreigners. And it’s how the US won WWI and WWII too. American factories could turn out more tanks, more planes, more guns and more butter than any other nation. And the US had an abundant source of fuel too; “Texas Tea” they called it.

After WWII America enjoyed its glory days. It was on top of the world… in practically every sense. The US was #1.

Nothing fails like success. The New Deal had fundamentally changed Americans’ relationship to the state. Federal meddlers began playing a larger and larger role in the economic life of the country. Soon, American attitudes evolved to fit the circumstances. With the world’s reserve currency… a huge lead over its competitors… and a government that promised to take care of its wants and needs, the US workforce relaxed. Gradually, it shifted from making things to buying them… while industry turned its focus from production to sales… and then, financing. Then, the US entered the second stage: financialisation.

In this second stage, the center of gravity shifted from the wealth-producing factories to the financial centers – mainly Manhattan. Prices of real estate in New York soared. Wall Street came to be seen not merely as a place to invest the proceeds of honest toil… but a way to create wealth. The most ambitious college graduates turned from engineering and manufacturing first to sales and marketing and later to finance; because that’s where the money was. At the peak, in the Bubble Epoch, 2003-2007, Wall Street was drawing in the world’s leading scholars in mathematics and statistics… These people were the biggest debt bombs in history… exotic, complicated financial concoctions… that eventually blew up in their faces.

Detroit went into a decline as early as the late ‘60s… GM continued to make cars, but it looked to financing as a way of making money. GMAC became the major source of GM’s profits. Still mills along the Monongahela River began to rust in the ‘70s. Ships began to come to the US laden with goods in the ‘80s and ‘90s… and to go back empty. The US Fed tried to stimulate the US economy on several occasions, but it had a strange effect. It put more credit in the hands of US consumers – who used the money to buy goods from overseas. In effect, the US Fed was stimulating manufacturing in China!

But in 2007-2008 the bubble in consumer debt blew up. GM went broke in May of ’09. The financialization stage ended. In its place comes a new stage: politicization, the third and fatal phase of a great nation.

Where is the money now? It took the train from Grand Central Station in Manhattan down to Union Station in Washington, DC. Want money? Ask Washington. It’s pledged an amount equal to 3 times what it spent in WWII to the fight against deflation.

Where is the power now? Just ask Chrysler bondholders; in the end it didn’t matter what their contracts said… when the US government turned against them, their goose was cooked. The Obama Administration, owner of GM, now sets top salaries and determines what kind of cars the company will make. Washington also determines which businesses will be kept alive – AIG – and which will die – Lehman Bros. Now it’s the politicians, not Wall Street, nor investors, who decide the allocation of big capital…

And when ambitious young people buy a ticket to begin their careers, are they going to Milwaukee… to Manhattan… or to the lobbyists’ mecca in Northern Virginia?

Reuters reports: “U.S. college grads shun Wall Street for Washington

WASHINGTON, June 11 (Reuters) – Wall Street may be losing its luster for new U.S. college graduates who are increasingly looking to the government for jobs that enrich their social conscience, if not their wallet.

In the boom years, New York’s financial center lured many of the brightest young stars with the promise of high salaries and bonuses. But the financial crisis has tainted the image of big banks, and with fewer financial jobs available, Uncle Sam may be reaping the benefit.

“Some grads might have seen two of their older siblings go through the dot-com crash and the emptiness of that, and now the Wall Street crash, just chasing after the big bucks,” said John Challenger, chief executive of job placement company Challenger, Gray & Christmas.

“… A report from the National Association of Colleges and Employers projected a 21.6 percent decrease in new hires among college graduates. Almost every sector was hit, with banking taking the biggest blow, dropping 70.9 percent.

“Students don’t see the private sector as being as viable this year,” said Edwin Koc, director of strategic and foundation research for the Pennsylvania-based NACE.

Of the the roughly 1.6 million students who recently graduated from college, only 19.7 percent had secured jobs upon graduation in May, according to NACE’s 2009 student survey.

But Labour Department data shows employment in the Washington area has increased since early 2008, even as other regions have lost jobs.

“D.C. is the only place where we can point to that is actually adding jobs right now, and we also know that the government is hiring thousands of people to oversee both the (economic) stimulus package and all the associated projects,” said Marisa Di Natale, Senior Economist for Moody’s Economy.com.”

How does the politicization stage end? We don’t know… but we bet it won’t be pretty.

Source: Nothing Fails Like Success

Yesterday was beautiful in London. We wandered along the banks of the Thames and crossed Waterloo Bridge over to Covent Garden. Everywhere, people were sitting out on the grass… standing outside pubs… walking hand in hand. Everyone had the same idea – to take advantage of the nice weather before it goes away.

Last year, London had a beautiful summer too. But we were gone that week and missed it.

Alas, many of the best things in life are fleeting. And thankfully, so are the worst things.

What put us in such a reflective mood were yesterday’s news reports. The Dow rose again – up 19 points this time. Gold edged closer to the $1,000 mark – at $984. Oil traded at $68. And the dollar fell to only $1.43 against the euro.

These trends – not to mention the broad rise in commodities and stocks worldwide – lead many investors to think that the fair weather is back, permanently. Asset prices are rising. Investors are less afraid of risk. Hallelujah – a dove with a sprig of green in its beak!

Of course, it may be true. But our advice, dear reader, is to take an umbrella with you anyway. As far as we can tell, nothing has happened to disturb the major weather pattern that began developing two years ago. Anyone could see it coming years in advance. ‘You gotta expect trouble when the average house is more expensive than the average person can afford,’ we kept saying.

But it was only when high winds hit the housing market that the newspapers took notice. Then, for 40 days and 40 nights the rain came down.

First, the house flippers were caught off guard. They were in the middle of flipping condos when all of a sudden the wind shifted and sent their contracts aloft. Mortgage rates were rising and buyers disappeared. The flippers lost their deposits and walked away from empty buildings.

Then, resets and higher rates blew the roof off the sub-prime market.

Then, the whole housing sector was getting knocked down – builders, suppliers, and financers.

Next came the credit crunch… when major lenders and investment banks realized that they were in heavy seas. Their ships were swamped with mortgage-backed debt and derivatives… and their captains were morons. Lehman went down. Wall Street abandoned ship. And the feds sent out rescue planes.

By late in 2008, everyone was taking shelter. Businesses were cutting payrolls. Banks were squeezing their reserves. Consumers were staying at home. And GM was hiring bankruptcy lawyers.

Everything was falling in price – houses, office buildings, stocks, commodities… practically everything except the US dollar, US bonds, and gold. These three were seen as the only safe refuges for storm-tossed investors.

But on March 9, 2009, came a lull. Reluctantly, investors came out of their storm shelters. The skies lightened…the sun shined. Oil has gone up 53% since then. Stocks worldwide are up about 30%.

And now…people say “the worst is behind us.”

We meteorologists here at the Daily Reckoning watch the skies like everyone else. But we also read reports from big storms of the past. And what we notice is that this doesn’t look like the passing storms of the ‘80s or ‘90s. It looks to us like a major change in weather patterns. To be more precise, it looks to us like the Great Storm of the ‘30s. Do you remember that one, dear reader? No? Well, we don’t either, but we’ve read the histories. It was a doozy. And it began… well… just like this one.

In 1930, six months after the initial storm front passed world output was down about 15%. Today, it is down about 15% too. Stock markets were only down about 20% in mid-1930. Today, they’re down about 35%. And world trade slipped about 15% in the six months following the onset of the Great Crash of ’29. Today, it is down 25%.

One thing you notice is that like the Great Depression, this downturn is global. A collapse in world trade followed the Crash of ’29. It is usually blamed on two protectionist bumblers in Congress – Smoot and Hawley. But in a real depression trade falls anyway. World commerce needs to readjust to new realities… whatever they are. That’s happening again now.

The other thing you notice is that this adjustment takes time… and takes the losses much further… much deeper… than anyone expects. The actual bottom in the ‘30s didn’t come until 2 to 3 years after the crash. And it took stocks down all over the planet to about 65% below their peaks. World output eventually fell to only about 2/3rds of what it had been in the late ‘20s.

It took two decades and a major world war before the world was back on its feet.

More news from Manraaj Singh on emerging markets….

“Over the last four weeks $12 billion in new money has flowed into the emerging markets. That has triggered the biggest rally in the benchmark MSCI Emerging Markets Index since it was set-up in 1987. It’s up by 61% since February. That brings us right back to where markets were before they tanked.

“No one in their right mind honestly believes that the global economy is going to return to the pace of growth that we saw before the crash anytime soon. Not even Alastair Darling. But it’s all a matter of timing. I believe that the emerging markets offer the best value over the long-term. That’s why I am now looking at India and China for our next investment plays. But investors who pile-in right now risk getting badly burnt.

“You see, analysts are viewing the short-term outlook for the emerging markets right now through rose-tinted specs. They have hugely over-estimated how much emerging markets companies will earn this year. Figures for the first three months of this year show that analysts’ estimates were 41% above what the companies actually earned.

“There may still be one more surge in the emerging markets before the correction. We seem to be reaching the point when every money manager without a clear idea of what’s going on jumps on the bandwagon. You can bet that many of them are going to be in tears before the leaves turn gold.

“An extreme fund flow like this is a contradictory indicator. It points to a coming market drop rather than a sustainable rise. The crash in emerging stock markets is on its way. I’ll let you know when it is time to get in.”

Publisher’s note: Manraaj Singh is chief investment strategist of Profit Hunter, which looks to profit from special situations around the world. To learn more about his service and discover his latest investment recommendation, click here.

And more thoughts…

*** “Treasuries Tumble,” announced a cover of Barron’s recently. Oh my. Long bonds are down 20% since January.

Pity the poor Chinese. They’ve got $768 billion worth of them.

And pity poor Tim Geithner. He’s over there right now on a fool’s errand, lying to the Chinese:

“Geithner Tells Chinese its Holdings Are Safe,” says the Washington Post.

Reuters went on to report:

“His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.”

More about this later in the week… *** “Those people did not become French in the last five months,” says Mitch Daniels, Republican governor of Indiana.

He was referring to the people who re-elected him. His point was that Americans are not necessarily in favour of socialism. They may be fed up with what they see as the failures of capitalism. But they’re not ready to vote for Nicholas Sarkozy.

But the country has clearly moved towards more government intervention in the economy. In 1986, 40% of Americans thought government regulated the economy too much. Now, 40% think it doesn’t regulate enough. And get this. The Economist reports the results of a worldwide poll. Asked “are people better off under free markets,” 75% of Indians say ‘yes’ and so did about 72% of Chinese. But put the question to Americans and only about 69% think so.

Even Italians are more in favour of free enterprise than Americans. Go figure.

The Economist passes along the thoughts of an American lawyer to explain it: “The disaster in the housing and mortgage markets shows that free markets don’t always get incentives right or generate the information people need to make wise decisions. There may be times, he adds, when government is better suited to giving people the information they need.”

Ha. Ha.

Information? What information was it that people didn’t have? All the information was not only available – it was free. We reported it here at the Daily Reckoning – for free. Day after day… we read the headlines and passed along the statistics. What was hidden from view? What was unknown?

This information was available to the government too. Its thousands of regulators, representatives, researchers, and consumer advocates had computer terminals and newspaper subscriptions. They even had thousands of Ph.Ds in economics whose JOB IS TO STUDY THE ECONOMY!

If government were really able to give “people the information they need,” you’d think that one of these earnest meddlers would have whispered to Secretary of the Treasury… or maybe to the head of the Fed: ‘Hey… better tell the voters to watch out… this thing is getting out of control.’

But do you remember a word from the Secretary of the Treasury… from the Fed… from the SEC… from the other busybody parasites who live on the public payroll? We don’t. All we remember is how they told us to “buy an SUV” and how derivatives “spread the risk to those who are able to bear it” and how “sub-prime mortgages help increase home ownership.”

The government does a better job of running the economy? Ha. Ha.

Source: A Storm on the Horizon

• The housing market showed further signs of bottoming in April, as pending sales of previously owned U.S. homes saw their biggest monthly gain in seven and a half years, the National Association of Realtors reported. The number of Americans signing contracts to buy previously owned homes climbed 6.7% in April, more than forecast and the fourth increase in five months. The report supports the case for a housing bottom made in Money Morning on Monday, where it was noted that housing prices are starting to move upward in western U.S. markets and should soon slowly begin to rise in hard-hit east coast markets.  “Based on what we just heard, we are now formally calling for the end of the housing depression and that we increasingly think that the housing market is beginning to turn up. All signs are pointing to a bottoming out now of the housing market” Bernard Baumohl, Chief Global Economist at the Princeton-New Jersey based Economic Outlook Group, told Reuters.

• Detroit’s ailing Big Three automakers, all reported that May sales in the U.S. fell less than analysts’ estimates while Toyota Motor Corp. (ADR NYSE: TM) and Honda Motor Co. (ADR NYSE: HMC) did worse than expected. Sales at General Motors Corp. (NYSE: GM) dropped 30% from last year, Ford Motor Co.’s (NYSE: F) sales fell only 24% and Chrysler LLC plummeted 47%, better than estimates, as shoppers returned to showrooms.  Deliveries at Toyota plunged 41% and Honda plunged 42%. Among Japanese carmakers, only Nissan Corp sales exceeded estimates, falling only 33%, Bloomberg reported.

• Microsoft Corp (Nasdaq: MSFT) said on Tuesday its new Windows 7 operating system, which will replace the unpopular Vista, will be available on October 22, well ahead of its original schedule and in time for the holiday shopping season, Reuters reported.  Windows 7 was originally scheduled to launch at the start of next year, but Microsoft confirmed last month that it would push up the schedule to allow sales during the year’s busiest buying period.

• The U.S. Federal Reserve Bank has successfully pulled the economy back from the brink, Dallas Federal Reserve Bank President Richard Fisher said yesterday (Tuesday).  The Fed official also said that conditions are “getting less worse” over time and the Fed needs to unwind its new, expansive credit programs as soon as it can, Reuters reported.  Furthermore, the U.S. central bank needs to make it clear it will not “monetize” the rapid expansion of U.S. debt, Fisher told a gathering of community leaders at a Dallas Fed event.

• Unemployment in Europe rose to 8.6% in April, up from 8.4% in March and 6.8% during the same period last year. Although the economic downturn in Europe is showing signs of slowing, the employment rate typically lags behind economic health.

• Pepsi Bottling Group Inc. (NYSE: PBG) Chairman and Chief Executive Officer Eric Foss is being promised a minimum $16.5 million in severance pay and stock benefits if PepsiCo Inc.’s (NYSE: PEP) takeover succeeds. He earned $6.1 million in total compensation last year. Pepsi Bottling, along with PepsiAmericas Inc. (NYSE: PAS) rejected a $6 billion acquisition attempt by PepsiCo, calling it “grossly inadequate” and “not acceptable.” Pepsi Bottling and PepsiCo are now locked up in a lawsuit, with PepsiCo accusing Pepsi Bottling of adopting a “poison pill” takeover defense that restricts its rights as a shareholder.

Source: Investment News Briefs Wednesday, June 3, 2009

Let’s give credit for the rally to good news… and also to bad news, because that’s also good news. In fact, let’s just give credit to news in general.

Topping yesterday’s headlines was the “news” that General Motors (NYSE:GM) had formerly declared bankruptcy. The automaker’s de facto bankruptcy of the last several years finally yielded to the de jure variety. That’s good news, because now we taxpayers get the chance to increase our charitable giving. We get the opportunity to write a $50 billion check to one of America’s largest and most beloved nonprofit organizations.

But wait, GM’s bankruptcy wasn’t the only good news to cross the wires yesterday. Stock market investors celebrated the following stories as well:

1) Treasury bond prices plummeted, exacerbating the bond market’s worst January-through-May performance in 32 years.

2) The Dollar Index slipped to a fresh seven-month low.

3) Activity in the nation’s factories fell for the 15th straight month.

Curiously, there were also a few news items yesterday that the stock market blithely ignored…like the news that our largest foreign creditor is becoming increasingly nervous about supplying fresh credit. On the eve of Treasury Secretary Timothy Geithner’s goodwill mission to China (OUR goodwill, not theirs), Yu Yongding, a former central bank adviser, remarked, “I hope Geithner’s visit can soothe our nerves. The Chinese public is worried about the safety of its foreign-exchange reserves.”

China is the largest foreign holder of U.S. Treasuries – with almost $800 billion worth in its national piggy bank. Understandably, therefore, the Chinese are not thrilled to see Treasury prices plummeting, while America’s budget deficit is soaring. Seventeen of twenty-three Chinese economists polled in connection with Geithner’s visit said holdings of Treasuries were a “great risk” for their nation’s economy.

“It will be helpful if Geithner can show us some arithmetic,” said Yu. Regrettably, basic arithmetic would produce more consternation than comfort. No matter how you line up the numbers, the sum will always be an enormous, gigantic, colossal NEGATIVE number.

No, Geithner does not need arithmetic; he needs a miracle…or a printing press. Without some sort of miracle that converts liabilities into assets, America’s debt is already larger than national cash flow would support. We would be broke already, were it not for two convenient facts: 1) Our creditors keep lending us money; 2) Even if they didn’t, we can print for ourselves the money with which we must re-pay our debts.

So it’s probably safe to say that America will not default on its debt. But it’s also probably safe to say that the dollars our creditors receive in the future will be worth much less than the dollars they loaned us in the first place.

“We are committed to bringing our fiscal deficits down over the medium term to a sustainable place, to a sustainable level,” says Geithner. “We believe in a strong dollar. A strong dollar is in the U.S. interest.”

China’s Yu Yongding does not seem to believe him.

Says Yu: “I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds.’ The euro is an alternative. And there are lots of raw materials we can still buy.’’ To sharpen the point, Yu continued, “Some people say the euro is very weak. Okay, weak is good, we’ll buy very cheap.’’

Geithner promises that America will keep its spending under control. But the promise rings hollow from a leading member of an economic team that will produce a $2 tillion deficit in its very first effort to “control spending.” The Obama Administration did not invent deficit spending, but it has quickly mastered the art.

“The borrower should keep their promises,” China’s Yu insists. “The U.S. should be a responsible country.”

It should be, but it’s not. The nearby chart, based on data provided by Shadow Stats, tracks the explosive growth of America’s national indebtedness over the last few years. This chart presents America’s indebtedness in terms of both cash-based accounting and GAAP-based accrual accounting. The latter of these two methods is the one that every corporation in America must use. As such, GAAP is real-world accounting, which would include things like the present value of the Social Security liability and the Medicare liability. At $12 trillion for year-end 2009, the cash-based deficit is bad enough; but at $74 trillion, the GAAP-based numbers are a catastrophe.

$74 trillion is about five times GDP, which is a ratio that would put America well within emerging market parameters. The only problem is; we aren’t emerging. We are submerging…at least from the standpoint of national indebtedness.

These data points should frighten any student of financial history. Therefore, these data points should terrify every holder of dollar- denominated assets. The good news – and remember, it’s all good news right now – is that Rome wasn’t destroyed in a day.

There may be a way out of this mess – we certainly hope so – but America’s current fiscal plight reminds us of General Motors. For many, many years, General Motors survived on its reputation. Despite the company’s obvious financial distress and obvious inability to book a profit selling cars, investors continued to buy the company’s bonds and to bid its shares higher. Thus, GM racked up liabilities far in excess of what it could ever hope to repay.

Sound familiar?

Sound: This Market Just Likes News

“You ain’t seen nothin’ yet!”

Actually, we’ve seen so much already that it’s hard to believe there’s more coming. But there’s sure to be more… and we have a feeling it will be worth the wait.

Yesterday, for example, GM filed for Chapter 11 bankruptcy protection. It couldn’t pay its bills. GM was once the strongest corporation on the planet. But it has been around for nearly 100 years. Heck, everything wears out eventually… even a ’55 Chevy.

“Obama Nationalizes GM,” says a triumphant headline in France’s “La Tribune.”

Triumphant?

Yes. According to the papers, Obama may have been handed the keys to GM… but the old jalopy is worn out. The French say the whole US economic model is ready for the junkyard. More on the French – and the French model, below…

First, let’s stick with the USA. The Dow rose 221 points yesterday – to 8,821. Investors think the worst is over.

Everything is going up. Copper is up 65% so far this year. Oil is up 53%. Soybeans are up 22%. Stock markets are up about 30% worldwide. And gold is up 12%. In this company, gold is a laggard!

Copper has risen so much, say the papers, because China is buying all it can get. What it is doing with the stuff we don’t know; maybe it is stocking up at what it believes are low prices.

Maybe it is hedging its bets. China has the biggest pile of Treasury bonds in the world – $768 billion of them. That’s 768 billion reasons to worry. That’s because each T-bond is denominated in dollars… and while everything else is going up, the dollars is going down. Yesterday, the dollar touched a new low against the euro for this year – at $1.42.

T-bonds are down too – minus 5% for the year. It would not be at all surprising for the Chinese to be stockpiling oil, gold, copper and all the other inflation hedges they can get. Their dollar-denominated bonds may go down… but their commodities and gold would go up. Overall, they’d come out even.

This week, Mr. Tim Geithner – the big banks’ main man in Washington – is in China trying to reassure the Chinese that America takes its financial obligations seriously. That’s something we never expected to see either. America may have the strongest economy on earth. But if the commies stop financing it, we’re out of business.

So Geithner is in China, hat in hand, like a major debtor called into the banker president’s office. Geithner, of course, has no choice. He has to go and say what he has to say. He will use all the right words. He will show the appropriate seriousness… he will smile when it is called for… and put on a grave face when he needs to.

The trouble is, there’s little he can do to help the Chinese. They want him to protect the dollar and the bond market. That’s something he can’t do.

“It will be helpful if Mr. Geithner can show us some arithmetic,” said Yu Yongding, a former advisor to the Chinese central bank.

Yes, we’d like to see that arithmetic too. How do you add $1.75 trillion in deficits, pay for it with funny money from the Fed… and still come out even on the value of the dollar? There’s no arithmetic we know of that works in the Chinese favour.

Right now, the numbers and the logic of the situation are telling us that feds aim to create inflation. Instead of trying to keep prices under control… they’re trying to get them to go up. That’s yet another thing we didn’t expect to see!

The US government is less concerned with protecting foreign lenders than it is with getting the US economy back to its old E-Z money ways. Cheap money is what people want. Cheap money is what the feds are trying to give them.

Today – will wonders never cease! – the US is pushing its phony money all over the world. The Chinese, meanwhile, are champions of financial integrity. Just wait until they give up on US bonds… then, we’ll really seen something we ain’t seen yet!

And more thoughts…

*** The French think they were right about everything. Iraq, for example. The French have deep ties to the Arab world. They knew Iraq would be a tar baby for the US – just like Algeria had been for them. You pick it up… you can’t put it down.

But Congress and the administration not only ignored the French (as they had when Charles DeGaulle advised against intervention in Vietnam in the early ‘60s calling it a “rotten country”) they accused France of cowardice, dumped good bottles of Bordeaux down the drain and renamed French fries ‘freedom fries.’

Remember the jokes? When a bomb blew up a Spanish train, France raised its colour-coded Terror Alert system… from mauve for “Collaborate” to chartreuse for “Run and Hide.”

And remember what Anglo-Saxon economists said about the French economy? It was ‘sclerotic’… it was a ‘museum’… first, it was tied up by labor unions and then the socialist politicians did kinky things to it.

But every dog has his day, and now the French are enjoying a delicious moment of schadenfreude.

The frogs stayed out of Iraq… avoided a housing bubble… and side-stepped a credit crisis.

And now, the “French model” for managing an economy is the envy of the world. At least, that’s what you might think if you read ‘The Economist.’ A recent issue has Sarkozy on the cover… looking confident and pleased with himself. By contrast, Britain’s Gordon Brown and Germany’s Angela Merkel look as though they needed a drink.

What’s the ‘French model?’ It’s a system where the state meddles heavily in the economy. Health care, education and public transport are all government enterprises. And political cronies, rather than entrepreneurs, run key businesses. Heck the French don’t even have a word for “entrepreneur” as George W. Bush pointed out.

It seems to work fairly well. The health care system functions fairly well – while taking a smaller percentage of GDP than in the US. The trains run on time (except when there is a strike). Grammar and secondary schools are probably better than in the US; the universities are probably worse. And many of France’s private businesses are world leaders – Air Liquide, Danone, LVMH, to name just a few that come to mind.

And so far, France has suffered less from the worldwide financial meltdown than any of its rivals. The last time we were in Paris, the restaurants seemed as full as ever; taxi cabs were as hard to get as ever; and Paris property had barely come down at all – at least, officially.

“I’m not so sure… ” said a colleague in Paris. “I’ve been looking for an apartment for the last year. A year ago, there was almost nothing available in my price range. Now, I’m seeing lots of places. I looked at one last week. It is listed at $340,000 – about what it would have been a year ago. But the agent told me that the seller would probably take $275,000. If they’re telling me that right off-the-bat, I figure it might go for $250,000”.

Source: The US is Pushing its Phony Money All Over the World

We’re not so sure. It seems too early to us.

But we’re not even going to think about it. Today, we’ve got to make tracks. We’re traveling.

In light of our voyage we’re turning today’s essay over to guest host Ian Mathias, of Agora Financial’s 5 Min. Forecast. He’ll take over from here…

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every US household – thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total US tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.

Unless the US becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed – US Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in US paper are “very safe.”

“I doubt the Chinese believed him,” says friend and currency expert Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former US Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would be business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

“It all comes down to the fact that the US needs China more than the other way around.”

General Motors, once the backbone of US manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in US history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the US government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing and Tokyo.

Sign of the times… GM and Citigroup (NYSE:C) are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citigroup is the former owner of Travelers, which it spun off in 2002.

The market had baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.

“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebächer Society.

“As we have documented in recent weeks, the list of US macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

Just like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze: China’s manufacturing sector expanded for the third month in a row in May, its government reports. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.

Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number. On the other had, the dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.

Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says energy and oil expert Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the US dollar. Break out the black crepe and armbands of mourning for the US dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is – believe it or not – leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?

So again, we thank Ian for his contribution today as guest host and his insightful above look at the news.

Our regular commentary, such as it is…tomorrow.

Bill Bonner

Source: Your Share of the US Debt

The largest of the U.S. Big Three automakers yesterday (Wednesday) announced that it failed to persuade the required 90% of its bondholders to swap $27 billion in debt for stock, pushing the venerable GM several steps closer to a bankruptcy filing.

The rejection by bondholders is the latest chapter in the ongoing saga of GM’s desperate attempts to reorganize as it faces a government-imposed Monday (June 1) deadline to restructure or file for bankruptcy.

In recent days, the company struck a deal with its United Auto Workers (UAW) union on payment terms for $20 billion of debt in a retiree healthcare trust, and it successfully convinced the union to take a reduced stake of common stock in the new company.

GM also is still in negotiations to sell its European Opel and Vauxhall units to a consortium of bidders. Those talks were scheduled to continue in Berlin last night, as German and U.S. government officials met with representatives from three prospective new owners.

Still, the odds now favor what would be one of the biggest Chapter 11 cases in history, as the global auto giant that has been an icon of American culture since the early 1900s will likely follow Chrysler LLC into bankruptcy court.

Last Hope Bond Offer Fails

In what was seen as GM’s last best hope to cut debt outside of a government-financed bankruptcy, bondholders rejected the company’s offer of 225 shares in a restructured GM for each $1,000 of principal – the equivalent of 10% of the new company for their $27 billion in debt.

The principal amount of notes tendered was “substantially less than the amount required by GM” and, as a result, “the exchange offers will not be consummated,” the company said in a statement.

The news was no surprise to many analysts.

Bankruptcy is “imminent,” Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg News.

“It’s no surprise at all that a deal that was as unattractive as this one would be soundly rejected,” said Hastings, who had recommended that his clients refuse the exchange offer.

Some analysts blamed the offer’s failure on the unyielding stance of U.S. President Barack Obama’s auto task force, which had a hand in deciding the terms of any deal made with the debt holders.

“I think the task force made that hurdle so high, they wanted them to go into bankruptcy, they see that as the solution,” independent auto industry analyst Erich Merkle told Reuters.

Others saw GM’s long history of mismanagement and failure to respond to market conditions as the primary culprits.

“I think the exchange offer was really a transparent attempt to blame bondholders for the bankruptcy rather than to accept responsibility for years of mismanagement and failure to anticipate things that should have been understood,” Richard N. Tilton, a restructuring analyst at Covenant Review LLC, told Reuters.

The New “Good” and “Bad” GM

A GM bankruptcy is likely to involve so-called “debtor-in-possession” financing so it can continue daily operations as it is divided into a “good” and “bad” company by the bankruptcy court.

The “good” GM would include the company’s most successful operations, including the Chevrolet and Cadillac brands, and within months would exit bankruptcy in sound financial health. The “bad” GM would be left with such laggard brands as Pontiac, Hummer and Saturn, and other liabilities that would be divested in a lengthier court-supervised reorganization.

The U.S. government is expected to increase its ownership stake in GM from its current 50% to as much as 70% in order to slash debt and will lend the new company almost $30 billion, The Washington Post reported last week, citing sources familiar with the matter. That’s in addition to the $19.4 billion the United States has already invested. Canada is expected to lend GM an additional $9 billion for a smaller ownership stake in the company, sources familiar with the talks told The Post.

When all these financial packages are included, the GM bailout will have a sticker price of about $60 billion, making it one of the largest – and most costly – rescue and reorganizations in corporate history. When it’s finalized, the United States and Canada would own almost three-fourths of GM, the newspaper said.
Despite the vote, bondholders would be left with a 10% equity stake in the reorganized company and current shareholders would own about 1%. As much as 20% could go to the health-care trust fund for union retirees.

Chrysler Bankruptcy Paves the Way

Ironically, Chrysler’s swift journey through the bankruptcy process may be a major factor in inducing GM to steer its way into Chapter 11.

Chrysler appears to have made great strides towards a successful restructuring and may be ready to emerge from bankruptcy as early as next week, Bloomberg reported, citing an anonymous source.  That would be well in advance of the 60-day upper limit announced at the time of the filing on April 30.

Chrysler has asked a bankruptcy judge to let it sell most of its assets to Italy’s Fiat SpA (ADR OTC: FIATY) in order to avoid liquidation.  Up until now, the judge in the Chrysler case has signed off on all elements of the company’s simplified bankruptcy process that calls for Fiat to take a major equity stake. The deal is still opposed, however, by some of the automaker’s dealers, bondholders, and former employees.

But consumers apparently are buying into President Obama’s pledge to keep Chrysler alive, as the automaker’s sales in May were about even with those from April. That could mean shoppers remain optimistic about the viability of factory warranties and dealer services if GM enters the same process.

“The government has showed that it’s going to put its muscle behind this,” George Magliano, director of automotive research for IHS Global Insight Inc. (NYSE: IHS) in New York, said in a Bloomberg Television interview. “They don’t want a long bankruptcy. They want to get it in, get it out to minimize the impact of a long bankruptcy.”

Jeremy Anwyl, chief executive of automotive research firm Edmunds.com, told Reuters that “a few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening.”

GM Bankruptcy More Complex and Risky Than Chrysler’s

A GM filing would be far bigger and more complex than what Chrysler is attempting.

For one thing, GM’s bankruptcy would take longer than Chrysler’s, simply because it is a larger company. GM employees 244,500 people, compared with 54,000 at Chrysler. It also boasts a network of dealers that outnumbers Chrysler by almost two-to-one, with about twice as many brands.

And even though the automaker put 1,100 of its 6,000 dealers on notice that they will have their contracts terminated next year, they are shielded by a labyrinth of state franchise laws.

GM also has publicly traded equity and debt, complimented by international operations in Europe, Asia and Latin America.

Those factors contribute to a large web of complications that could hinder the bankruptcy process and present other, more serious risks, David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told MSNBC.

“If you look at the complexity of the company infrastructure and the number of players involved here – the union, the creditors, the dealers, the suppliers and the government – it’s an unholy cast of characters,” said Cole. “Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity.”

Cole also said if a “quick-rinse” GM bankruptcy predicted by the administration fails, it could present more far-reaching and serious implications for the overall U.S. economy.

If the planned bankruptcy process “blows up,” he says, it could lead to a “cascading failure,” shoving auto suppliers into insolvency and forcing other automakers into bankruptcy, according to MSNBC.

“We are talking about the potential for a rapid collapse – it could trigger a national depression,” he said. “The automotive supply structure is in pretty serious trouble now… so if we were to see a cascading failure it could quickly spread to the rest of the economy. That’s the scale of this industry.”

Source: Collapse of Bond Deal Steers GM Toward ‘Imminent’ Bankruptcy Filing and Majority Government Ownership

• The Conference Board’s index of consumer confidence jumped to 54.9 in May, up from a revised 40.8 in April. The leap marks the biggest one-month gain since April 2003, and was set in motion by tighter credit and oversupply of homes pushing down prices, Reuters reported.

• Hong Kong’s government will inject another HK$16.8 billion ($2.2 billion) into the economy via tax cuts, fee waivers and spending, Bloomberg reported. Added to previous stimulus measures, Hong Kong’s government has pumped HK$87.6 billion, or 5.2% of the country’s gross domestic product, into the economy.

• Virgin Atlantic said its annual profits nearly doubled, but gave a grim assessment the current fiscal year. “We have not seen conditions as tough as this, and we do not see any signs of recovery … for airlines to make a profit this year is almost impossible,” Chief Executive Steve Ridgeway told Reuters. “The key now is to slow down capital expenditure and preserve cash.”

• South Africa has slipped into its first recession in 17 years, as its gross domestic product fell an annualized 6.4% in the first quarter. Manufactures and miners have been scaling back output and letting workers go, as a result of tightening global demand, Bloomberg reported.

• Sonia Sotomayor, President Barack Obama’s nominee for the U.S. Supreme Court, does not appear to be either particularly liberal or conservative on business issues, but four of her rulings have been overturned by the high court, according to legal experts interviewed by Reuters. Sotomayor has a lengthy record of rulings in business cases as a federal judge in New York, but her rulings appear to present a patchwork of decisions based more on the merits and facts of the cases than an ideological approach to the law, the experts said.

• Hedge funds are making big bets that commodity prices will rise as the global economy rebounds from its steepest slump since World War II, according to Bloomberg. An index of the net long positions in U.S. commodity futures held by hedge funds and other large speculators rose to a nine-month high. The index consists of 20 raw materials and is monitored by the U.S. Commodity Futures Trading Commission.

• General Motors Corp. (NYSE: GM) received approval from its Canadian Auto Workers union to freeze pension payments until 2015 and cut new hires’ pay to protect jobs, as it works on labor agreements to help speed its exit from a probable bankruptcy, Bloomberg reported. The union, representing about 9,000 hourly employees, ratified the accord yesterday (Tuesday) with 86% of the vote. The United Auto Workers (UAW) presented a tentative U.S. contract to plant-level leaders in Detroit yesterday as well.

• A Russian Internet investment firm has invested $200 million in Facebook, as the social networking site builds a cash buffer.  The investment by Digital Sky Technologies, which has invested in leading Russian web properties like Mail.ru and Vkontakte.ru, values the social networking site at $10 billion.  The Russian company took a 1.96% stake in Facebook in preferred stock in exchange for its investment, Reuters reported.

Source: Investment News Briefs Wednesday May 27, 2009