Good day… And a Happy Friday to one and all! Yesterday, I welcomed you to October. I had been prepared to tell you about a famous radio station here in St. Louis, that has long called October… Rocktober… But forgot, as usual! But anyway… It’s the first Fantastico Friday of Rocktober!

Today is a Jobs Jamboree Friday too! And… I’m not getting a good feeling about today’s labor report at the Jobs Jamboree. The forecast is for jobs losses to fall from -216,000 to -175,000, but the unemployment rate to tick up to 9.8% from 9.7%… I got the feeling, baby, baby, I got the feeling… Oops, a little James Brown on Fantastico Friday never hurts! But what I was saying was I’m getting the feeling that there are risks to this forecast… And that the job losses could come in higher, which would really be a BAD thing for the recovery flag wavers and risk takers, I’m sorry to say…

You see, the recovery flag wavers and risk takers are wishing, and hoping, and thinking and praying that the data in the U.S. continues to show some sign of life. Any signs that the U.S. economy could be slipping backwards, would deep six stocks for sure, and if last year’s trading tells us anything, it would have an adverse affect on Commodities and Currencies too!

So… This is a BIGGIE, today, folks… So strap yourself in, and make sure you keep your arms and legs inside at all times during the ride!

Yesterday’s currency trading left a lot to be desired… There was little movement from the overnight sessions which tomahawked the non-dollar currencies. That’s a good thing… But the downside risk today is just too much for me right now… Maybe after 7:30 CT I’ll be able to breathe again, for that’s when the Jobs Jamboree prints… Again, Japanese yen enjoys the sun from both sides of their house… When the dollar is weak, yen rallies with the other non-dollar currencies… When the dollar is strong, yen rallies alongside the dollar! It’s good to be the yen! (that is before the Ministry of Finance in Japan begins to intervene!)

Hey! Remember when I bashed the Cars for Clunkers scheme, I mean program, and exposed it for what it was, and what it would do to future sales of automobiles? Well, as they say… The proof is in the pudding!

Yesterday, it was reported that General Motors (NYSE:GRM) had posted a 45% drop in September U.S. light-vehicle sales, while Chrysler’s sales fell 42%. Ford saw a much more modest drop of 5.1%. Among Japanese auto makers, Toyota said its September U.S. sales declined 16% from a year earlier, while Nissan saw its results fall 7% and Honda said its sales slid 23%. The auto industry was hurt by the expiration of the U.S. government’s “cash-for-clunkers” rebate program.

Yes… I told you this would happen… I also think that any Gov’t program to prop up the economy is just falling into the ghost of Japan’s hands… I’ve explained this before, about how when Japan experienced a HUGE market correction after their go-go 80’s, they panicked and began throwing money at the problem, instead of just letting the markets run their course… The Japanese introduced stimulus package after stimulus package, and Gov’t program after Gov’t program, like Quantitative Easing… And look how well that’s worked out for them!

So the ghost of Japanese recoveries that never panned out, is haunting the U.S. Gov’t now!

Today is also the start of a G-7 meeting in Istanbul… Istanbul was once Constantinople! Or so the song goes… Any way… The rumors coming out of the pre-meeting stuff is that G-7 will no longer make a statement or issue a communiqué’ regarding currencies, as they now feel that the only group that should have that responsibility is the G-20, which last week took the world economies watchdog title from G-8…

Currency traders have long used these G-7 communiqué statements as a tool that indicates direction for currencies… And while that has actually come to fruition a handful of times over the years, for the most part, G-7 was nothing but a boondoggle!

One thing that’s out there that you won’t see a lot of people talking about is the vote going on in Ireland today, on the Lisbon Treaty, which the Irish people voted down last year… This Lisbon Treaty changes the way the European Union works, and would amend the Maastricht Treaty… It was intended that all member European Union states would ratify this before now… So, this vote is like the Sword of Damocles hanging over the euro for Monday morning…

You see, the vote will be taken today, counted tomorrow, and announced Sunday, which will cause a knee-jerk reaction to the euro trading on Monday… Right now, the polls show the Treaty will be accepted this time by the Irish. If passed, it goes to Poland and the Czech Republic, and if they vote yes then it would lead to ratification, which would be a good thing for the euro… A no vote would be bad thing, just like it was in June of 2008, when Ireland voted no the first time around.

Yesterday, the IMF issued a report on Currency Composition of Global FX Reserves… And this is quite telling I believe, for the report showed a continued diversification away from the dollar, in the 2nd QTR of this year… I had to laugh last year, when I was on the FXU Currency Tours, and one of the guys there said that the fall of currency reserves allocation of dollars from over 80% to 64%, was nothing but currency appreciation by the euro… I would point to the these IMF reports, when I talked so that I didn’t make a big thing out of it…

Did you see the story in the Wall Street Journal (WSJ) regarding Lehman Brothers? This story has conspiracy stamped all over it, so you know me, I was all over this story like a cheap suit! Here’s the gist of the story from the WSJ… “An examiner is looking into how the Federal Reserve was promptly repaid billions of dollars in cash and securities it lent to Lehman Brothers before the bank filed for bankruptcy, while other creditors are still owed money. The court appointed Anton Valukas, chairman of Jenner & Block and a former U.S. attorney, to explore whether the Fed received improper preferential treatment.”

Chuck again… Now, you, me and the lamppost all know what went on here, just by that description in the WSJ… But, we’ll wait for the report, I guess…

The U.S. stocks really got taken to the woodshed at the close yesterday, and the futures in the overnight markets are weak… So… Guess where the money goes when they sell stocks? That’s right, U.S. Treasuries… So, just about the time you think that the mom and pop’s of the world that went to Treasuries last year in the so-called Flight to Safety, had taken on enough losses, and were going to get out… Here comes the stock correction that I’ve been talking about… Or maybe not… Maybe this is just a couple of days of selling… Or maybe it is the correction…

So, if dollars are flowing into Treasuries, the yields of those Treasuries are going down once again… UGH! This just doesn’t make any sense to me! Didn’t these people that went to the so-called Safety of Treasuries last year, but lost money, learn anything? Or did enough time pass and they’ve “forgotten the pain”?

Oh Heck! This just feeds more air into the Treasury Bubble… Which means that it grows larger and larger, and also means that when it does POP, the losses will be severe and all across the board… I mean, isn’t that what we’ve learned about what happens when a bubble POPS in the past?

Yesterday, the data cupboard was busy… We had the Weekly Initial Jobless Claims post a higher number than was expected, coming at 551,000, VS last week’s 534,000… I always love it when the Jobs Jamboree follows a Weekly Initial Jobless Claims repot… Because… The Weekly report shows that, in this case, that 551,000 jobs were potentially lost last week, and today’s monthly report by the BLS will show something far less…

We also saw that the U.S. Consumer continues to spend more than they make, as Personal Spending was up 1.3%, while Personal Income was only up .2%…

And then finally we saw the U.S. ISM Index (manufacturing) come in weaker than expected, but remain above 50, at 52.6… That’s a weaker number than the August figure which was 52.9… And I would think that someone would have noticed this… But we had the TV on all day, and I had it one when I got home, and never saw mention of this anywhere!

And then there was this… Colleague, Aaron Stevenson, called me yesterday morning, trying to beat the deadline for stuff to add to the Pfennig… He missed… So I have it for today… Remember yesterday morning, when I announced that BOA CEO Ken Lewis was retiring, and that I thought that to be strange?

Well, Aaron was all over this, telling me that he worked for BOA for a number of years, and sat in on meetings with Ken Lewis, and that Ken Lewis was not the kind of person to take “early retirement”… In fact, Aaron says, “that 4 months ago, I heard an interview with Ken Lewis, and he said I’m 62, I’m not ready to retire.” Aaron said that he was a “no surrender, no quit, kind of guy.” Hmmm… I wonder what changed in 4 months? Well, Aaron thinks, and I agree, that he was forced out by the Feds, for speaking his mind on the BOA / Merrill Lynch deal that was brokered by the Fed and Treasury…

OK… To recap… Today is a Jobs Jamboree Friday, and I’m getting the feeling that it will be disappointing VS the forecast of 175,000 job losses. G-7 meets this weekend, and there might be a change in the what they say after each meeting. The ghost of Japanese recoveries, is at work in the U.S. Ireland votes on the Lisbon Treaty today, and the dollar remains well bid VS the non-dollar currencies… Except yen!

And this… On Monday next week, I will be doing an educational presentation for the folks at DTI… You can find out more here: http://www.dtitrader.com/trading_education_MMM_everbank.htm

Currencies today 10/2/09: .8630, kiwi .7130, C$ .9175, euro 1.4550, sterling 1.5850, Swiss .9620, rand 7.72, krone 5.8250, SEK 7.0420, forint 186.20, zloty 2.9185, koruna 17.4750, RUB 30.20, yen 89.30, sing 1.4170, HKD 7.75, INR 47.75, China 6.8265, pesos 13.77, BRL 1.7860, dollar index 77.20, Oil $69.69, 10-year 3.15%, Silver $16.25, and Gold… $996.75

That’s it for today…Time to get working on making this Friday, Fantastico!

Chuck Butler

Source: A Jobs Jamboree Friday!

Now, JPMorgan Chase & Co.  (NYSE: JPM) has issued a report suggesting that investment-banking returns on capital will be sharply down over the next few years. Perhaps this will be only a moderate downturn.

However, there’s also a good chance that labor-cost pressures – combined with tightening margins – will take the likes of JPMorgan and Goldman Sachs Group Inc. (NYSE: GS) down a path similar to that of General Motors Corp. (NYSE: GRM) and Chrysler Group LLP, both of which earlier this year declared bankruptcy.

Challenging Headwinds

JPMorgan anticipates that the regulatory changes that are likely to take place over the next year or so will reduce investment banks’ return on equity (ROE) to around 11% – down from its previous forecast of 15%.

More capital will be needed for trading activity, which naturally reduces the return on capital from that activity. However, there will also be effects from new transparency requirements on derivatives. (Most – if not all – derivatives will have to be traded and cleared across central exchanges.) And tighter limits on commodities positions will prevent firms from cornering less-active markets.

This effect will be concentrated on investment banks themselves – firms such as Goldman Sachs and Morgan Stanley (NYSE: MS) – as well as on the investment banking activities of such firms as Credit Suisse Group AG (NYSE: CS), Deutsche Bank AG (NYSE: DB), Citigroup Inc. (NYSE: C), and JPMorgan Chase.

Old-fashioned commercial banking, on the other hand, will likely become somewhat more profitable. That’s because the sharp reduction in securitization activity has reduced the excessive competition for much of the lending business. It’s also improved the lending business profitability.

Investment banks will have to reduce their headcount by another 3% from present levels and cut their overall cost per employee by another 15%, to around $543,000 in 2011, according to the JPMorgan study.

What agony! (Actually, that joke is not quite fair – the cost per employee includes the building, the equipment and all the fancy information services, so the take-home is much less. Even so, these guys – at least those who keep their jobs – won’t starve.)

The New Reality

We are so used to investment banking growing and becoming increasingly more profitable – on virtually an uninterrupted basis – that we have never even considered what might happen if that trend were to reverse.

Even after last year’s crash, Goldman Sachs reported record second quarter profits in 2009. Spreads in all kinds of trading widened dramatically and Goldman found its market share dramatically increased after the demise of Lehman Brothers Holdings Inc. (OTC: LEHMQ).

But here’s the thing: The trillions of dollars poured into the markets by the U.S. Treasury Department and the U.S. Federal Reserve were the driving force behind those profits. Investment banks like Goldman weren’t just given a level playing field – they were given one that was essentially (and artificially) cleared of obstacles. Even the few “competitors” that remained were hobbled by their past mismanagement.

Investment banking is not particularly difficult or intellectually challenging. And the proliferation of new and complex products that turbocharged the profit growth of investment banks during the past few decades won’t continue. Any new financial product will be forced to run a gauntlet of regulatory bureaucrats before being allowed to emerge.

Had the credit-default swap (CDS) been invented today, can anyone doubt that it would have been fenced in by restrictions so onerous that the damaging derivative would have never made it to market? The painful memories of last year’s near-unraveling of the global financial markets are still fresh. So it’s unlikely that investment banks would be able to get the regulatory nod for a big-risk strategy that is likely to result in a taxpayer bailout.

The bottom line is clear: The reduction in U.S. investment banking profitability is likely to be permanent, with various rent-seeking scams blocked. In this post-crisis era, investment pools from China, the Middle East and other parts of Asia – backed by increasingly sophisticated financial players in those markets – will acquire the necessary capabilities to enter the market and further reduce the returns of domestic investment banks.

We have seen this before: An industry, previously very profitable, finds itself hemmed in by government restrictions and its most-profitable products get regulated out of existence. Foreign competition enters the market and grinds away at the domestic market share.

The natural reduction of competitors doesn’t happen, as one or more are bailed out by taxpayers and survive to continue competing for the business.  Legacy costs of remuneration promises made when things were better place an ever-increasing burden on the industry’s returns. Reducing the work force pay becomes very difficult, as the workers have great power over production and resist the necessary downsizing of their excessive pay.

Sound familiar? Last time, it was the U.S. auto industry, and the eventual result was the bankruptcy of GM and Chrysler. Reducing pay to a work force when market conditions become harsh is extremely difficult, if now downright impossible.

Of course, investment bankers have no United Automobile Workers (UAW) representing them. But shareholders will know from past experience that the investment-banking work force’s ability to suck up available profits is huge, whereas losses suddenly devolve back on shareholders.

Don’t forget, militant autoworkers could only beat up “scabs” when their livelihood was threatened. Militant traders could re-jig the computer systems so that the trading algorithms worked backwards, producing losses instead of profits. In an era of credit default swaps and millisecond trading, this could wipe out shareholders in half an hour of frantic activity before anyone realized what had gone wrong in an era of credit default swaps and millisecond trading.

It may take a couple of decades for the investment banking business to decline, as it did for the much larger U.S. auto industry. But by 2030, collapse could loom.

The comparison isn’t a stretch. In fact, it wasn’t just a ticker-symbol letter – “G” – that  the two companies shared: GS for Goldman Sachs, and GM when General Motors was still a public company. It turns out that their underlying business models also shared similar strategic flaws. And those flaws put the two on a similar path to ruin at the hands of forces that grew out of the crises in their particular industries – crises that they each helped create.

Source: Could Goldman Sachs Share GM’s Fate?

Whether the action can be accredited to the greatly debated Cash for Clunkers program or if it is merely the effect of natural economic forces, there is good news out of the auto industry these days… finally.

First, there is word from General Motors (NYSE:GRM) that it plans to expand production at three of its manufacturing facilities. For the nearly 2,400 workers that will be invited to work on the third-shift line, the news is the best they have heard in a while.

It is a similar story at cross-town rival, Ford (NYSE:F), except few American workers will be clocking in for the new shifts. The company is widely expected to announce its plans for a third major production facility in China later this week.

Ford’s news is strong evidence of Asia’s long-term growth potential, especially for American car manufacturers dealing with a weak currency back home.

A bit further down the supply chain, Dana Holding Corp. (NYSE:DAN), a major automotive industry supplier,  is adding to its spectacular six-month run today as its shares surge by nearly 30%.

The stellar gains come as the company kicks off a public offering of 27 million shares. The sale, which is likely to bring in close to $200 million, will be used to repay the company’s massive debt.

While $200 million won’t pull the company out of debt, it will help. The heavy load created by over a billion dollars in debt was one of the driving forces that took share price as low as $0.19 over the last year.

With shares of the company trading for close to $7.30 today, investors who got in at the bottom are sitting on gains of more than 3,700%. Not a bad profit for six months.

Room for more gains?

Over on the retail side of things, the situation is nearly as optimistic.

CarMax (NYSE:KMX) shareholders are smiling today as their company’s value has surged by double-digit proportions on news that the company’s second-quarter sales were better than expected.

Thanks to the crowds awakened by the Cash for Clunkers incentive program, the massive car retailer raked in a record-breaking profit of $103 million over the past three months.

Now the big question on everybody’s mind is will the profitability and growth be sustainable?

Already, there are signs the industry is beginning to slow. Some reports have new-car showrooms even emptier than before the massive incentive program. If that is the case, those recalled workers may be back in the unemployment line all too soon.

If you are a long-term investor, you can afford to keep your shares in the game. Eventually, today’s prices will look cheap.

But if you can’t stand some short-term volatility or are sitting on a hefty pile of profits, now would be a good time to pull some chips from the table.

Detroit has found safety in a calm meadow, but it is not out of the woods yet.
Source: Detroit Update: Finally Some Good News?

McLean, Virginia-based Paice LLC has filed a complaint with the U.S. International Trade Commission (ITC) that claims the Toyota Camry infringes on its patents, Bloomberg News reported. An investigation into the claim could be completed within 15 months and result in a ban of some Toyota imports.

Paice, a developer of hybrid electric power train technology, in 2005 won a similar case against Toyota involving the Japanese carmaker’s Prius, Highlander and Lexus RX400h hybrid models. Paice claimed those vehicles used its drivetrain technologies, and a jury agreed, awarding the company $4.3 million in damages.

U.S. District Judge David Folsom rejected Paice’s request for a court order to halt the sales of Toyota vehicles in the United States, but he did force Toyota to pay royalties based on the cars’ wholesale prices.

Toyota appealed the claim but lost.

A similar ruling in this instance could be a huge blow to Toyota, whose hybrid vehicles were the main beneficiary of a shift in U.S. auto sales toward more fuel-efficient vehicles. The Camry was the best-selling vehicle in the nation last month, benefiting greatly from the U.S. Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers.”

New Toyotas accounted for 19% of the cars bought through the Clunkers program, and the company reported a year-over-year sales increase of 6.4%.

The company has sold more than 2 million hybrid vehicles worldwide since their launch in 1997. Those sales were led by the Prius model.

Source: Toyota Faces Possible Import Ban Over Paice’s Patent Suit

New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. (NYSE: PHM) has more than doubled from its low. Toll Brothers Inc. (NYSE: TOL) is up around 70% from its bottom. D.R. Horton Enterprises (NYSE: DHI) is up almost four times from its bottom. Lennar Corp. (NYSE: LEN) is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. (NYSE: HOV) is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recently released earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years. Yet January 2000 was not the bottom of a housing depression – far from it, in fact. That was actually close to the top of the dot-com bubble, when valuations of all assets were at all-time highs. So an average price over the whole country that – even now – remains 42% above the average price recorded at the very top of a huge economic boom does not seem like a market bottom to me.

You also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.

And that’s not all.

The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.

In individual cities, the picture is somewhat brighter. Phoenix and Las Vegas prices are less than 10% above their 2000 levels, having been halved from their respective peaks. In those markets, house prices may truly be reaching a bottom, although the overhang of foreclosures after such a huge drop may make recovery slow. At the other extreme, Detroit housing is 30% cheaper than in 2000, a testimony to the awful economic environment there, with the bankruptcies of General Motors Corp. (NYSE:GRM) and Chrysler Group LLC.

Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.

Probably the best prospects, however, are in Denver and Dallas, where prices are about 20% above their 2000 level, roughly in line with the increase in consumer prices during that same period. However, the local economies are strongly based on natural resources, particularly oil, whose price is triple its 2000 level. With prices in Dallas and Denver down only about 10% from their 2000 peaks, a true recovery in those cities may be near.

At the opposite extreme are the metropolitan “Big Three” of Los Angeles, New York and Washington, where prices are 61%, 71% and 74% above their 2000 levels, respectively.

Washington will be fine, of course: The Obama administration’s spending-and-legislation plans have attracted yet another huge influx of bureaucrats, lobbyists and lawyers, all of which will boost the housing market to new highs. With New York you have to worry about all the financial-services jobs being lost as a result of the worst financial crisis since the Great Depression.

From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. Housing is likely destined to once again become a highly regional market, as it always was prior to the 2001-2006 market boom, with the cycles in each market being very different.

As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.

Source: The U.S. Housing Market’s False Dawn

In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.

But that new hope is destined to be short-lived.

It’s true that – in terms of value delivered for the money invested – “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.

Financial Crisis Fallout Reshapes Sector

Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.

But regional differences are already emerging.

In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.

(Prior to the global financial crisis and accompanying recession – which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles – the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)

It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.

Granted, India’s auto market – around 2.5 million cars and light trucks a year – is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.

Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.

That’s why Asia will become the new Detroit – the future center of the automaking world.

Gone For Good?

In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.

For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.

General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM (NYSE:GRM) will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.

The United States’ One “Better Idea”

Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from “Cash for Clunkers,” and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market – as the most-effective manufacturer of the large automobiles that Americans continue to prefer – no matter what the government tells Ford to do.

Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.

Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious – particularly in the emerging economies of Asia – that upscale portion of the auto market should continue to be strong.

Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.

But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.

The New Leaders

For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano” car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.

Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.

Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.

The bottom line: Tata and its India-based competitors – Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) – as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.

By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.

Source: Why Asia Will Supplant Detroit as the Global Center of the Auto Industry

The stock is still a far cry from its record-high level of $83.56, but is only 0% below its 52-week high of $53.46.  Much has changed since then, as the U.S. auto industry is no longer producing the 16 million cars it produced in 2007, nor the 13 million it managed to sell last year.  This year we are looking at some 10 million units sold, according to J.D. Power and Associates, the leading forecaster in the industry.

But there is encouraging news:  The very quick restructuring of both General Motors Corp. (NYSE: GRM) and Chrysler Group LLC, the U.S. Federal Reserve’s efforts to stabilize the financial markets, and the U.S. government’s fiscal stimulus plans have helped keep the economy from falling into a depression.  The Fed’s support for the auto industry included buying auto receivables under the Term Asset-Backed Securities Loan Facility (TALF) program, in order to restart this type of securitization.

Therefore, the paralysis of sales that we saw late last year, when the financial system froze and there was no financing available, has subsided and sales are increasing.  In fact, J.D. Power expects U.S. vehicle sales to increase to 11.5 million units next year, a full 15% pickup from projected 2009 levels.

In fact, we are already seeing an increase in auto sales already, thanks in no small part to the government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers.” So far, CARS has spent some $1.29 billion and Congress has expanded the original $1 billion authorization by another $2 billion.

Total light vehicle sales for July were just shy of 1 million units, a milestone the industry hasn’t topped since August 2008, mostly due to the program’s success.

This shot in the arm on the back of the general cost restructuring that Ford Motor Co. (NYSE: F) is carrying out under Allan Mulally has already prompted Ford to increase production of its Focus model.

Similarly, Chrysler has reported that it is running two plants in overtime and a third shift at another plant just to keep up with demand.  And GM, which is seeing a huge rebound in sales, will add to this by increasing advertising spending and selling new cars on eBay Inc.’s (Nasdaq: EBAY) popular online auction Web site. Most of Wall Street is in “wait-and-see” mode, which gives us more of an incentive to jump in.  But the steel story is not just about cars.

Nucor will not only profit from the remaining $1.75 billion to be deployed through the government’s cash for clunkers program and the general improvement in market conditions, but on the pick-up in government construction in the United States that will result from U.S. President Barack Obama’s massive fiscal stimulus.

Additionally, the company will benefit from the already massive stimuli being deployed in China, Brazil, India and Russia.  And let us not forget Europe, where the European Central Bank will soon consider raising its benchmark lending rate to 1.25% from its current record low of 1% in order to prevent inflationary expectations from building up.

China will achieve more than 8% growth this year, driven by public spending, especially in construction and a strong pickup in auto sales  (up 63.6% in July from a year earlier) and domestic appliances.  All of these have a very high content of steel.

Similarly, India’s gross domestic product (GDP) will grow by more than 6%, barely down from last year’s 6.7% expansion. Auto sales in India jumped 18% last month.  Remember that India’s Tata Motors Ltd. (NYSE ADR: TTM) launched the cheapest car in the world last January and this is likely to work wonders in today’s budget-conscious market.

So what about Nucor itself?

The company reported a second quarter loss of $133 million, which improved over the first quarter’s $189 million loss.  But the key is that volumes are already turning around.

Volumes increased 11% in the second quarter, which allowed the company to increase its capacity utilization from 45% to a still very low 46%.

And this is where the upside lies.

In capital-intensive industries like steel, the very high fixed costs induce very large swings in profits, depending on volumes.  And not only did Nucor see its volumes pick up in the second quarter, the trend should continue accelerating in the third quarter and beyond, thanks to the recent burst in car sales and increased government infrastructure spending.

In addition, prior to the cash for clunkers program, Nucor announced it already expected to see an improvement in its third-quarter results. The company said that many of its customers had run their inventories too low and would need to replenish them just to meet demand.

So, at reporting time, investors could be very positively surprised by Nucor and many other companies in the sector, which will provoke many analysts to increase their stock targets.

And to make the whole story even better, we are counting on increasing inflationary expectations and a weaker dollar, which will continue to drive portfolio managers to hedge this risk in commodity stocks.

That means Nucor, which has been bumping into strong resistance levels since the beginning of January, but making higher lows in every subsequent correction, is likely to break out of its current range with an explosive rally before it even reports third-quarter earnings.

Nucor stock closed down 92 cents, or 1.93%, Friday at $46.79 a share.

Source: Nucor Corporation Will Get Is Due for a Boost from Government Spending

Competition can be so mean. In a country where the government is doing its best to make sure we  all have equal incomes and resources, you would think companies like Redbox, Netflix (NASDAQ:NFLX) and TiVo (NASDAQ:TIVO) would take it easy on Blockbuster (NYSE:BBI) for a few quarters.

After all, isn’t it “un-American” to force your fellow citizens into bankruptcy?

Banks can’t force homeowners delinquent on their mortgages out of their houses. General Motors (NYSE:GRM) and Chrysler were saved. How in the world can we stand by and watch Blockbuster go under? Where will I rent my Saved by the Bell Reunion video?

While it is not surprising to see a company that has done the absolute bare minimum to update its business model over the last, oh say, two decades is about to be rewound for the last time, it is time the markets seriously begin to discount the notion.

After yesterday’s horrific earnings report, it is safe to say there are plenty of folks taking bets on just how many days Blockbuster has left on this planet.

Be kind, DON’T rewind

Once yesterday’s closing bell was done vibrating, the company snuck onto the news wire and told investors it managed to lose $0.21 per share ($39.7 million total) last quarter, far worse than even the lowest analyst expectations.

On average, the company’s followers were looking for a per share loss of $0.11. The spread was enough to drive shares down by close to 20% in today’s notably rough session.

Although the quarter’s loss was less than last year’s corresponding period when the company spent $41.9 million more than it made, a same-store sales figure that is 17.8% lower proves that operating cuts and short-term margin boosters will not be able to prop up the company’s losses for much longer.

Unless consumers suddenly start flocking to Blockbuster instead of the growing list of competitors, Blockbuster’s bottom line is only going to sink deeper and deeper.

Just when the company thought the threat from Netflix in the mail-rental business was leveling off, Redbox shows up and slams its in-store business.

Why drive to the nearest Blockbuster and shell out five bucks when you can pay a buck a night from one of the kiosks that seemingly appear on every corner these days?

Blockbuster missed its shot at a first-entry position once again. It is proving it is not necessarily the company’s business model that is lacking, but its management team.

Unless these guys can offer something innovative and appealing to its customers real quick Blockbuster’s dwindling pile of cash is going to become a serious problem.

Shares are already trading well under a buck each. It won’t be long until they are trading back down at 52-week low territory, just above the single-digit range.

If you are holding shares of Blockbuster, you had better return them now. You are not going to like the late fees.

Source: Blockbuster: Where is the Rewind Button When You Need?

Don’t look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard – wherever!

So maybe now you’re asking yourself, “Aren’t the unemployment numbers getting better?”

Well, let’s see…

Verizon (NYSE:VZ) – 8,000 jobs cut
Motorola (NYSE:MOT) – 7,000
Microsoft (NASDAQ:MSFT) – 5,000
Untied Technologies (NYSE:UTX) – 8,000
HSBC (NYSE:HBC) – 6,100
Anglo American (LON:AAL) – 19,000
Avon (LON:AVON) – 2,500
Goodyear Tire (NYSE:GT) – 5,000
GM (NYSE:GRM) – 10,000
Nissan Motors – 20,000
Panasonic (NYSE:PC) – 15,000
PNC Bank (NYSE:PNC) – 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven’t heard from yet. Frankly, I couldn’t list the thousands of companies and millions of jobs lost in this write-up. That’s just a sampling. But let’s get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years’ end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don’t spend money. They don’t buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there’s plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession – and I’m reasonably sure we are in for a “multi-dip.” It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a “recovery,” it isn’t going to be one without the consumer. If he’s exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, “We have turned the corner… things are going to get better – if they don’t get worse!”

Regards,

Bill Jenkins

Source: Illogical Optimisim