But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.

Retail spending in China is said to be up 15%.

Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.

Hmmm… Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable.

As to the first point, no one would quibble. As to the second, only a fool wouldn’t.

The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts.

The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe…that there is no brink waiting for the United States?

Even more curious…what do the Chinese believe?

“It’s all very strange,” said a new friend who came into our Buenos Aires office today. “Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price…”

On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February – down 6.5%.

Charles Hugh Smith argues that not only are house prices still going down – they’ll never recover. He gives five reasons, which we’ve paraphrased below:

1. Bubbles never re-inflate; instead, they go to a new sector
2. Even if nominal prices go up, they will be undercut by inflation
3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the ’50s.)
4. The low-interest rate, low-inflation world that permitted high property prices is finished
5. There is no demographic pressure on housing prices; the current stock is sufficient for years.

Low housing prices force Americans to cut their spending.

“But if Americans don’t buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?”

Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States?

“Well,” our friend continued, “I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can…leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse…so would the US economy…completely. “

Now, we turn to Addison, who points out some telling trends now underway:

“The credit crisis has stymied a unique feature of American society,” writes Addison in today’s issue of The 5 Min. Forecast.

“According to the Census bureau, 35.2 million people changed their residence from March 2008 to March 2009 – the lowest number since 1962. And back then, there were 120 million fewer Americans.”

“The New York Times does a rather unremarkable job analyzing the trend underway, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up…old people move less often than the young do.

But probably the most telling trend underway: two-income families have become more common and increasingly necessary to maintain a middleclass lifestyle. “Finding employment for both spouses in a new location can be challenging,” says the NY Times.

“And in this environment, it’s getting more challenging all the time. The line of American’s seeking jobless benefits grew even longer last week, the Labor Department says today. Their gauge of continuing claims – that’s people seeking unemployment benefits for more than a week – rose to a new record 6.13 million. New claims inched up 27,000 to 640,000 last week – not a record, but close.

“While these numbers look awful – and they are – they’ll be a non-event in trading today… this latest report was right in line with Wall Street expectations.”

Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

We’re continuing our report on our trip to the ranch. This has no particular financial implication; we just want to tell you what happened.

Compuel is what we’d call the ‘back 40’ in America. Except it’s about 10,000 acres…and it’s a 4-hour trip on horseback. Still, the cattle have to be rounded up from Compuel annually. Then, they are driven down to the main part of the ranch …where they are vaccinated against brucellosis and other diseases and parasites…culled…castrated…and generally treated roughly. It takes about 7 hours to drive the herd up over the pass and down to the corrals near the ranch house.

The following day, we got up before dawn…by the time we got to the corral, the sky in the East was pink. It was still cold, but warming up fast.

Jorge gave the orders.

“Javier…you and Cosimir separate out the ‘terneros’ (young animals)… Pedro and Gustavo, get on the sluices… Senior Bonner, would you like to operate the gate?”

Javier is a young man who looks a little like Robert Mitchum, if you can imagine Robert Mitchum as an Incan with a huge wad of coca leaves in his jaw. Javier wore leather chaps and a flat, broad-brimmed Peruvian cowboy hat. He and Cosimir worked fast. They yelled. They whipped. A huge cloud of dust swirled up as they got the whole herd moving in a circle…and then forced the young animals into a second pen…generally by waving their hats at them. Occasionally, the cattle would panic and the two would run for cover. And occasionally, a cow…or a bull…would get annoyed and charge. Javier, particularly, was amazingly fast on his feet. He jumped onto the stone walls of the corral a couple of times.

The last calves were lassoed…and dragged them away from their mothers, into the holding pen. Then, they were pushed through a maze of stone walls, where the passage became narrower and narrower, until they finally came to the wooden sluice. It is tight turnstile with a gate on one end and a “sepa” on the other (we couldn’t find the word in the dictionary). This sepa is rather ingenious. It is two large pieces of solid wood that open up into a V-shaped passage and then come together – suddenly – like the jaws of a clamp. The cows come through the sluice one at a time. As they come through, the rear gate closes behind them. Then, the sepa at the other end begins to close. As it closes, the cow makes a dash for freedom. But Pedro was working the sepa lever and he rarely missed. As the cow started through the sepa opening, he leaned down hard on the lever and grabbed it by the neck.

Then, the hatches on each side of the sluice opened…and the needles came toward the struggling beast.

“Mr. Bonner…you’re going to have to operate that gate a little faster,” said Jorge. “We only want one cow at a time.”

More tomorrow…we’re out of time for today.

Source: What’s China’s Gameplan?

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

“The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery,” Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. “Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise.”

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers’ sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

“This was not a pretty report as demand for just about everything fell,” Naroff said. “There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing.”

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn’t much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be “subdued” in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can’t be absorbed by record low interest rates.

Source: Retail Sales and Inflation Slip in March

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

“The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery,” Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. “Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise.”

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers’ sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

“This was not a pretty report as demand for just about everything fell,” Naroff said. “There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing.”

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn’t much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be “subdued” in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can’t be absorbed by record low interest rates.

Source: Retail Sales and Inflation Slip in March

This from Taipan Daily:

Jim O’Neill is the Goldman Sachs economist who invented the BRIC acronym – shorthand for “Brazil, Russia, India, China.”

Now O’Neill thinks the BRIC countries – or rather, the shoppers in these countries – will save the global economy in its great hour of need.

“The BRIC consumer is going to rescue the world,” O’Neill says. There are 2.8 billion of them… and they are “poised to spend more.”

2.8 billion is a pretty big number. (As the old saying goes, anything times a billion is big number.) It’s also important to note that these consumers are quite different from those in the West. Unlike us, they come from very thrifty beginnings. Many of them are preparing to open their wallets for the first time – as opposed to draining the last bit of juice from a close to maxed-out credit card.

“The best hope to keep the global economy growing may be people like Wei Yufang,” Bloomberg reports. “A peasant who farms a small plot beside the mud-brown Huaihe River in central China, Wei has a modest dream: to buy an air conditioner to give her family relief from the dusty heat that each summer envelops Xiaogang (Little Hill) village in Anhui province.”

The Chinese government would like to see many more Wei Yufangs.

It’s slow going getting Chinese consumers to open up, though, because the tendency towards thrift is so strong.

The Urge to Save

Many Chinese routinely save as much as half or even two-thirds of annual income. Fittingly, consumer spending only makes up about 35% of Chinese GDP – roughly half of the total pie share in the United States. This is down from a 50% share in the 1980s.

Part of the reason the Chinese save so much is because there is no social safety net. The prospect of getting sick is especially frightening in China.

Wang Tao, a Beijing-based USB Securities analyst, says that “America’s healthcare problems can’t even compare… Healthcare is so expensive and distorted [in China] that no matter how much you save, if you get sick you’re going to end up poor.”

The Chinese also save mightily to pay for their kids’ educations. As in the United States, college is a big-ticket item there.

A New Generation

Is O’Neill’s BRIC optimism misplaced, then, at least as far as China is concerned? Maybe not.

As it turns out, the one-child rule has created a generation of pampered kids. Doting mothers and fathers bend over backwards for their sons and daughters. Accustomed to being the center of attention – and confident in their odds for long-run success – Chinese kids are thus far more likely to splurge than their parents.

While the parents and grandparents save, in other words, the new generation spends.

China is also working hard to change attitudes towards healthcare and retirement. The gradual construction of a social safety net will have a lubricating effect on willingness to spend, much how FDIC insurance lubricated the long-term expansion of the banking system in the United States.

So as fear of personal disaster loosens its grip, the BRIC purse strings will loosen more too. While the paradigm shift entails U.S. consumers spending less and saving more, the trend for O’Neill’s 2.8 billion is the opposite.

A Painful Transition – But a Necessary One

So what will the world look like when the American consumer hangs up his spurs?

An inability to imagine such a transition is in part what has Wall Street so afraid. Joe and Jane Sixpack have financed the global economy with their buying of “stuff” for so long… with their wallets snapping shut now, how can the world as we know it not end?

Well. The world as we know it is coming to an end. But that doesn’t mean armageddon. It just means we’re on our way to a new place… a new paradigm.

To understand why things will be okay in the long run (and certainly far better than they look now), it’s useful to recall a few things.

• When the system is functioning properly, saving is just spending in another form. (That is to say, higher savings rates are not automatic doom.)
• It’s not impossible to imagine a world where America embraces thrift. It’s just hard to picture after 25 years in the other direction.
• Investors, being utterly lousy at seeing around corners, have a tendency to panic on the cusp of major sea change.

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Saving versus Spending

To address the first point: As Henry Hazlitt pointed out in his excellent text “Economics in One Lesson,” saving is really just spending in another form.

If you put your money in a bank, Hazlitt notes, that capital becomes available for a worthy enterprise to borrow and put to good use. If you put your money in the market – savings as long-term investment – the capital again goes to companies that can make worthy use of it. So there is no reason saved money has to be dead money.

This is how it’s supposed to work – and it generally does work this way in normal times.

As of late 2008 the system has been wrecked by reckless leverage… due to a jamming up of the works banks no longer want to lend, and companies no longer have the financing they need to expand.

But when the system is finally healed – when the leverage toxins are fully flushed – saving will again be as good as spending as far as the health of the economy is concerned. Mortgage payments and bank balances will be recirculated back into the economy, markets will resume their normal function of channeling capital to companies that deserve it, and so on.

In a world where the system functions properly – without the idiotic Greenspan-inspired leverage excesses of recent years – it won’t be so bad if U.S. consumer spending drops dramatically as a percentage of GDP… Especially if consumer spending in the BRIC countries rises up, as O’Neill and others expect it will.

After all, doesn’t it make natural sense? As we who have far more “stuff” than we need cut back on our buying, and those who have not yet bought their first air conditioner step up their buying, the global mix simply changes.

The West’s increased savings can then be put to productive use – perhaps by the multinationals selling consumer goods to the emerging market world, or the companies tasked with repairing and upgrading the West’s tattered infrastructure.

Doom for Some

So picture a world in which BRIC consumer spending (the 2.8 billion again) rises to 50% of GDP on average, while U.S. consumer spending falls below that.

This would not be a disaster. If anything, it would be a far more healthy (and logical) balance of things.

Such a shift would, though, prove a disaster for many consumer-centric industries focused on American appetites. As my colleague Adam Lass likes to point out, binge retail is on its way to becoming a wasteland.

So if a business model is invalidated by the new market landscape, then guess what – that business model is toast, no matter how fervently the participants in that industry wish it not so.

But that’s the whole point of creative destruction.

A free market economy is either dynamic or it is dead. The creative destruction process is vital because it allows resources and capital to shift from one area of the economy to another… not as determined by central planning or government fiat, but in flexible real-time response to how the world is changing.

Economic systems that resist this sort of flexible change – that rely too much on intervention and central planning and resistance to change – wind up stagnated and brittle. Blessed are the flexible, for they shall not be bent out of shape.

The Market Doesn’t See It – Yet

Here and now, in December 2008, the market has no sense of what the world will look like the day after tomorrow.

The market has no true sense of anything now, for that matter, because so many of the normal functions have been broken. The markets now are like a plumbing system in which half the pipes have exploded from the duress of water pressure 10 times normal levels.

When the system gets pushed far enough out of whack by global margin calls and liquidity panic, the valuations stop making sense. Logic takes a time out. The academics who forget this (or foolishly deny it) remain blind to the fact that all their precise theories are grounded in a messy world of buyers and sellers.

So for now we’re still watching the Talking Heads movie (Stop Making Sense). But when the market needle starts swinging back in the “rational” direction – when logic gets a toehold again – I think cooler heads will prevail and a sense of the transition’s aftermath will sink in.

It’s hard, but not impossible, to see a world in which Americans spend a good deal less while others spend a good deal more.

It is also hard, but again not impossible, to see a world in which U.S. consumer savings play a useful role in a properly functioning market system – getting recycled as capital for banks to lend and companies to make wise use of. For now, it’s just a matter of getting from here to there.

Source: Saving and Spending in the 21st Century

This from Investor’s Daily Edge:

Consumers drive the American economy. Give them confidence in their jobs and they work hard, create value, make money and exchange it gladly.

Take away their jobs, and it all stops.  The flow even stops when people who still have jobs become worried by the trouble they see around them. And that is exactly what is happening today.

This week, the Institute for Supply Management released numbers that should frighten consumers and freeze the economy even more. The ISM’s monthly index of manufacturing activity fell to 36.2 for November. Any reading below 50 means the economy is shriveling, and these numbers are extreme. It gets worse. The new orders index fell to the lowest level in 28 years.

And jobs… The ISM employment index fell to 34.2. It has fallen four months in a row, without a sign of improvement anywhere in sight.

Meanwhile, financial pundits and columnists who should know that two-thirds of the U.S. economy is rooted in consumer spending applaud every layoff and plot for more… they think this creates shareholder value.

Worse, they invent plans to save the world by inflicting more pain and job loss.

I’m not sure where they think consumer dollars come from, but it’s a crazy idea to kill the golden geese if you expect them to spend their nest eggs. And they promote this nutty notion by repeating crazy or outright false facts…

For instance, they think they could save Detroit if it weren’t for those $70 an hour autoworkers.

Aww, gee… The problem with their plan is that union autoworkers don’t make $70 an hour. Not even close. Do you want to know the real numbers?

In 2007, the United Auto Workers union renegotiated the base union wage to $14 an hour for new “second tier” hires. That was a full 50% cut from what pre-2007 (first tier) workers got.

This is old, old news—the pundits with the plans should know this. I’m not sure whether they missed the news or they just prefer to overlook it because it doesn’t fit their philosophy that labor is always the problem.  In the military, spreading stuff like this is called disinformation. In politics, it’s called propaganda. Out here where I live, it’s called stubborn.

But you still think that $70 an hour number must have some truth if everybody is spouting it? Well, it must be those fabulous benefits, then, huh? Sure… but if you think a blue-collar $28 an hour bolt tightener is really making $70 an hour, let me show you how to prove a $7 an hour burger flipper really makes $18.

You start with your actual base pay of $7.25 an hour at Hamburger McHeaven. Then you add the national average for benefit expenses such as health insurance, retirement and vacations. That would be 29% of his base pay (U.S. Department of Labor, Small Business Administration data). Now you’re up to $9.35 an hour in wage costs (not all pay!).

We still have a long way to go… but we can use the “evil autoworker” ploy—we’ll include the pensions for four ancestors in the burger flipper’s salary.

That’s how you get a $70 an hour autoworker. You take his salary, plus his benefits like Social Security, FICA, workers comp, and health. And then you add full benefits and pension costs for four retired workers to the total.

That’s the germ of the “truth” in the $70 number, even though UAW workers don’t personally make anything close to that figure.

True, pensions are a big overhead. In 1962, GM (NYSE:GM) employed 460,000 American workers, and provided retirement benefits to about 40,000 former employees. But by 2005, GM had about 140,000 employees and 450,000 retirees.  Their past success and size led to this upside-down mess.

But the current worker’s pay? Truth: the actual average for manufacturing workers in Big Three auto plants is $67,480 a year. Turnover is very low. Half of these workers are over 45 and have been on the job more than 20 years. So they’re up to $32.44 an hour, just a 16% raise from what a new worker hired in 2006 would get. (Source: Center for Automotive Research data, 2008.)

And what does a retiree get? The average is $31,000.

These numbers, by the way, include both skilled and production workers… the designers, engineers, programmers and mechanics as well as the bolt-tighteners.

Detroit and other auto towns may lose hundreds to thousands of jobs. We may not be able to avoid it. But don’t imagine for a minute it’s good.

Fire ‘em, furlough them, poison them or ship them to the moon and you are still not going to save $145,000 every time you get rid of a GM, Ford (NYSE:F) or Chrysler worker.

But you will lose a consumer, who might lose a house, who will pay less in taxes at state, local and federal levels.  You will gain a family that doesn’t buy a new car, take a Disney vacation or eat steak and go out to Red Lobster once in a while. Why the media propose that creating massive sudden unemployment is going to fix Detroit’s mess—or ours—is a mystery to me.  Maybe they don’t like blue-collar workers who make more than they do.

That’s just the obvious example of the day. Ditto the same in a dozen other industries and states.

Job losses eventually harm us all indirectly. Maybe even your own city’s budget—even if you live in Maine or California instead of Detroit. The New York Times reports that in October alone, 20,000 employees of auto dealerships lost their jobs nationwide. The auto dealers association estimates that new-car dealers produce a $54 billion annual payroll for 1.1 million workers. These dealers bring in nearly 20% of the retail sales and sales taxes in small and large communities alike, according to the Times.

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And there’s something else you should know about those autoworkers if you think the middle class matters. They’re college grads, too

That’s right, as of 2007, over 74,000 of the Big Three’s 129,000 manufacturing workers in Michigan had college degrees. The ratio is continually rising. Unskilled positions are becoming very hard to find in the industry.

Even among skilled workers with no college degrees, attaining their skilled job status required 8,000 hours of on the job training, plus 700-800 hours of classroom time. If you were applying for a US government job, that would constitute the “equivalent” of a bachelor’s degree at the very least.

“They” are us. Different part of the country, different industry, different work, but real, true middle class people. That was Henry Ford’s plan. And Henry Ford was a heck of a capitalist.

Ford paid his autoworkers $5 a day back when a machinist’s pay was 22 cents an hour and less skilled workers made 15 cents to 20 cents an hour. Ford wanted his workers to reach middle class and buy cars.

We’ve lost his vision. He understood that good jobs led to widespread prosperity. Trying to hire U.S. workers at mythical pay scales of Third-World countries that sell third-rate cars within their own borders, or even their Japanese counterparts over here is not the solution.

In fact, non-union autoworkers at the foreign carmakers in the U.S. now make just about the same as the Big Three’s union workers.

Of course they do. Supply and demand, baby. If they didn’t, every Toyota (NYSE:TM) plant in the country would vote to go union tomorrow. Why don’t the media know this? Are they eating the magical mushrooms?

But the disinformation campaign rages, and you should ignore it. These people got their theories from books, and think they are better than average working people, because as long as the AC is working they don’t sweat while sitting at those desks.

It’s simple. The economy will not turn around while unemployment is rising. We may have to lose jobs, but it’s like losing a leg to prevent the spread of gangrene. It’s a deterrent; it’s not a blessing.

So, let’s not be so quick to applaud every time we read about layoffs.

And let’s not be too high-minded about preferring desk-bound white-collar jobs to production-line jobs. Only some of those white-collar jobs are truly skilled, and most are learned on the job just like in factories—except the training period is shorter in the white-collar world.

These days, companies hire college grads to be customer service order takers, salesmen and marketing assistants—none of which truly requires 16 years of education. College grads are a dime a dozen. The average machinist is far more explicitly job-skilled and has much greater direct job training than the average new bank teller or loan officer.

And just look where all those loan officers got us, anyway.

We may not bring back the housing bubble that sent the economy into overdrive, and we don’t want to. But we do need to put most of the people who lose jobs in this recession back to work as quickly as possible. Only then can we get the momentum to create real, new jobs once spending unlocks again.

My only hope is that if state or federal governments do create jobs with infrastructure spending to get things going the money will be tightly managed. I’d suggest two criteria:

• Funding only projects that are “shovel-ready,” not in planning.
• Earmarking for projects that serve security needs, high-density areas, major shipping routes or critically worn infrastructure such as old water and sewer systems.  We don’t need more outer-outer beltways, airport parking lots, stadiums, or highways through nowhere.

And by the way, give those autoworkers some credit for a lot of good things the rest of us enjoy. If you are going to screw them, at least snap off a respectful salute first.

Because you owe a lot of benefits to organized labor–paid vacations, 40-hour standard weeks… and your health insurance. Almost nobody had it till unions fought for employee health insurance when President Harry Truman’s plan for national healthcare failed in the 1940s.

Source: A Consumer Economy Can’t Run Without Consumer Income

• The world’s biggest nuclear utility company, Electricité de France SA will offer as much as $6.5 billion for assets of Constellation Energy Group, Inc (CEG), source familiar with the matter told The Wall Street Journal. A previous offer by EDF was turned down, with Constellation opting for a $4.7 billion bid from Warren Buffett’s MidAmerican unit of Berkshire Hathaway Inc. (BRK.A,BRK.B).

• Research In Motion Ltd.’s (RIMM) third-quarter subscriptions and profit fell short of forecasts, as it simultaneously faces increased competition and recession in its largest market. Profit for the Blackberry maker rose no more than 83 cents a share in the quarter ended Nov. 29, well short of its goal of 97 cents, Bloomberg reported.

• Legg Mason fund manager Bill Miller said yesterday (Wednesday) that the “bottom has been made” in U.S. equities and that the Federal Reserve should purchase stocks and junk bonds to pull the United States out of the financial crisis Reuters reported. Miller said that all long-term investors believe that stocks today are cheap after acknowledging that his funds “performed far worse than I would’ve predicted we would” this year.

• Online retail spending rose 15% on “Cyber Monday,” the Monday immediately after Thanksgiving, from a year earlier, according to tracking firm comScore Inc. Consumers spent $846 million shopping online Monday, comScore said.

• Declining imports led to a surprise drop in U.S. crude oil stocks last week, the Energy Information Administration (EIA) said yesterday (Wednesday). Supplies of crude oil fell by 400,000 barrels to 320.4 million barrels in the week to November 28. Crude imports fell 1.46 million barrels per day (bpd), the IEA said.

• New Zealand’s central bank yesterday (Wednesday) cut its key interest rate by 1.5 percentage points to 5%, hoping to break the worst recession its faced in nearly two decades, Bloomberg reported. “Today’s decision takes monetary policy to an expansionary position,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today. “Policy is working together with the depreciation of the New Zealand dollar and fiscal stimulus to create the conditions for some rebound in growth.”

Source: Global Investing Roundups Thursday, December 4th, 2008

This from Money Morning:

Apple Inc. (Nasdaq: AAPL) used to rule its niche world and will continue to do so, with lots of room to grow.

As Coldplay’s “I used to rule the world…” played softly on the outside stereo speakers of my sailboat “Southern Cross” as my family and I pleasantly glided by Execution Rock on a gorgeous Sunday afternoon in the Long Island Sound, I could not stop myself from thinking how the song got there.  It was coming out of my daughters’ Apple iPod, interfacing with the boat’s new iPod-ready stereo system.  And I was wondering whether it was time to get into Apple’s stock.  Yes … even on a weekend sail.

Strong Results

A few days after my family’s sailboat outing, I saw that Apple had posted its strongest results ever. The Cupertino, Calif.-based company said that it’s launching its next generation of Apple computers at higher prices – justified, as usual, by the uniqueness and hard-earned “coolness” factor that’s inherent in Apple machines.

Additionally, Apple just got Best Buy Co. Inc. (NYSE: BBY) to start selling its popular Apple iPhone in its chain of Best Buy electronics stores. And with Apple currently sitting on a $25 billion cash hoard, and having no debt, the speculation now is that Apple will launch a huge stock buyback.  After all, given Apple’s uniqueness and innovation excellence, there is little out there that could complement the company and it has a history of eschewing acquisitions.

At Friday’s closing price of $98.24, Apple shares are down about 52% from their 12-month high of $202.96. The stock is trading at 20 times earnings, but with its consistent high earnings growth, the company’s Price/Earnings/Growth Rate (PEG) ratio is less than 1.0, meaning the shares are right now priced at bargain levels.

If those consistent, predictable earnings continue, this stock is an absolute steal. But that raises the question: Will those predictable earnings continue?

For now, at least, the company seems to have all its “ducks in a row.”

While Dell Inc. (Nasdaq: DELL) and other PC makers are suffering, Apple is on a roll.  The iPod continues to rule the MP3 player market and has given birth to an entirely new, higher-end, higher-margin product, the iPhone.  The iPhone – and to a lesser, but still-important extent, Apple computers – have each been a tremendous success.

In the last quarter, Apple sold nearly 7 million units, more than five times the number of phones than in the same quarter last year.  This points to major market share gains from the estimates as recent as May. For a look at these market-share estimates, let’s take a look at Chart I:

Chart I: Wireless Phone Market Shares (By Brand)

56% Symbian (primarily Nokia)
13% Windows Mobile
12% RIMM Blackberry
9% LINUX
7% MAC (iPhone)
2% Palm
1% other
Source: Industry statistics, Money Morning Staff Research.

More importantly, Apple has recently been selling more units than the king of the enterprise-mobile phone segment, Research in Motion Ltd. (Nasdaq: RIMM) lately.  The mobile phone market is huge and has been almost doubling in size year after year.  And although growth is expected to slow a bit in the future, the profit possibilities remain huge.  Could these market growth numbers and Apple’s share gains be maintained?

To get a better idea, I started by studying the worldwide market-share sales projections for the “smartphone” market. Admittedly, these statistics harken back from before the current financial crisis really took hold in the past month or so. Still, it’s a good starting point. Let’s take a look at Chart II:

Chart II: Projected Global “Smartphone” Sales

The year-by-year and projected annual breakdown of global smartphone sales between both the high-end consumer and conventional corporate users (in millions of units).

Year Corporate          High End Consumer
2006 :                     12            +              39
2007                       21            +              77
2008                       40            +            134
2009                       74            +            219
2010                     111            +            300
Sources: Industry Statistics, Money Morning staff research.

The Competitive Landscape

To make some sense of the competitive landscape the Apple iPhone is facing, I called my friend Brenda Lewis, principal in Transactions Marketing, Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.  I wanted to validate the industry forecasts for growth in “smartphones” – both for high-end consumers and for enterprise users.  I shared my forecasts and what I heard from Brenda was eye opening. “These forecasts for the high-end consumer are far too high now, especially given the lack of personal discretionary income in most markets,” she told me.

Of course, she is right.  Personal discretionary income has likely gone negative in the U.S. market because of high household debt and the need to replace lost retirement savings. But it’s also severely reduced in Europe and Japan, because of lower trade flows and job losses due to the global downturn.

Even so, there are roughly $5 trillion worth of stimulus packages that have been committed to the overall global economy by various governments around the world.  And we can expect to start seeing the benefits of those liquidity infusions very soon.

So the picture and slowdown we are feeling right now will “surprisingly” improve in about six months. In the meantime, economic numbers will be very tough, since the financial freeze brought the economy to an abrupt stop and unemployment is likely to spike – even from the already-increased levels we’re seeing right now.

Economic inertia is hard to shift quickly.

So until the economy turns around, it’s wise to consider other possible catalysts. For instance, what about the possibility that corporate users could adopt the Apple iPhone?  My hopes for being the discoverer of that as-yet-unknown-by-Wall Street catalyst were likely dimmed by Brenda, who said that corporate chief information officers (CIOs) “will likely use the downturn as a reason to reduce the number of devices permitted for enterprise use and to consolidate central CIO control of current business unit devices, a continuation of a trend of the past five years.”

Again, the enterprise-market segment, which she knows intimately, has two main concerns:

• Total cost of ownership, which includes the initial price for the phone, as well as the service and, very importantly the maintenance.

• Data security.

The latter one is a killer for the iPhone in the enterprise market, since corporate IT departments cannot remotely shut down iPhones that are lost or are stolen as they are able to do with Research in Motion-made Blackberries. In addition, the locked nature of the iPhone makes it very difficult for IT departments to customize solutions for company use.

So, while the iPhone is superb from the consumer standpoint for its “coolness” factor and functionality, and for the fashion statement they make for those who wear them in visible locations, Blackberries actually accomplishes many more business-critical functions for corporations, and at a lower cost. This means that Apple’s traditional consumer focus – a niche that it dominates – is shrewdly placed.

Competitive Threats for the iPhone

What about risks to the Apple iPhone’s success in its own turf – the high-end consumer?

Well, for starters, Apple faces many brewing challenges: For instance, Wal-Mart Stores Inc. (NYSE: WMT) is starting its own online music-download service, and will undercut the Apple iTunes prices by about 25%.

Wireless phone heavyweight Nokia Corp. (ADR: NOK) is operating a similar story overseas, and it is unclear how long it will take them to come to the U.S. market. More ominous is the ultra-secret plans of Internet-search behemoth Google Inc. (Nasdaq: GOOG), which has launched its own branded Google Phone, which will be sold by Walmart at a discounted price of  $148 (compared with a price of $199.99 for the Apple iPhone at Best Buy, for example).

The Google Phone is revolutionary and appeals to the spirit of the U.S. “techie” crowd: freedom.  It is designed with an operating system, called Android, that’s been tagged with the marketing slogan – “apps (applications) without walls.” The whole goal of the device is to speed up users’ ability to access and surf the Web via a mobile phone – all too often a very slow process, right now.

The Google phone also emphasizes the hottest trend in phones today, with the ability to provide “location services,” such as customized weather forecasts, directions and listings of nearby businesses and attractions.  Finally, the operating system is, unlike Apple’s, is “open source.” This means that it will be extremely easy for anyone to develop new applications for the phone and for corporate IT departments to create customized applications for their employees to use on the phones. There’s even an alliance of software developers – called the “Open Handset Alliance” – whose chief goal is to encourage such custom developments.

As if this new threat were not enough, Nokia, the king of the mobile consumer market, announced its Nokia Tube (5800). Research in Motion is adding to its Blackberry lineup with a newly launched iPhone competitor called Bold. And Samsung Electronics Ltd. is coming out with its entrant, Instinct, a touch-screen phone with some features that are not available in the iPhone, like streaming TV.

And even Garmin Ltd. (Nasdaq: GRMN), the ruler of the GPS device world – and the topic of a recent, well-read “Buy, Sell or Hold” feature here in Money Morning, has launched its nüvifone, that, unlike the iPhone, gives you turn-by-turn directions.

My conclusion is that Apple’s iPhone business will continue its strong growth, but that the growth won’t be as strong as Wall Street recently projected. There will be market growth concerns in the near future, and with rivals ganging up on the successful iPhone, some of the market-share-gain momentum that we’ve recently seen will be blunted a bit in the future, although Apple will keep gaining absolute market share.

What about their computers?  Enjoying the synergistic “halo effect” from its iPod, iPhone and iTunes strategy, Apple keeps gaining market share in the computer market. Another Apple hit was its adoption of Intel chips that can run the Mac OS X, Leopard, and Windows Vista operating systems in the same machine, even simultaneously, with virtualization software.

I am encouraged by these machines, but not exuberantly so. Apple now faces very serious price competition from Windows-only systems.  But on the other hand, the segmentation of the market is critical and the ease of use, maintenance, fast recovery from hibernation, advantage in graphic-intensive tasks, intuitive use and virus-free environment make a Mac irresistible for its traditional constituents, provided they will keep paying the very steep Mac premium pricing.

The conclusion is that, moving forward, with 41% of sales coming from abroad and very small absolute market shares in its key iPhone and Mac businesses, Apple is very likely to be able to continue to gain market share, albeit at lesser pace. Also, given its consumer-centric focus, as the consumer gets hit in developed countries, sales growth will wither, while growth in emerging markets actually can accelerate.

Apple is not a pure computer company any longer, but is instead a consumer products company – and one that possesses a very cohesive strategy. That’s what will allow it to continue to survive and thrive.

The stock – with a PEG ratio of less than 1.0, is a bargain right here. But in the highly volatile environment, wait for weakness to start accumulating it, and take your time.  Apple’s results are much less dependent on the iPod today, and thus the soon-to-be revealed disappointing Christmas season is nowhere as important as it used to be.  So I would buy two-thirds of my position prior to year-end and the remaining third over the subsequent three months in the first quarter, as the bad news over the economy keep trickling in.

ACTION TO TAKE: BUY Apple Inc. (Nasdaq: AAPL), but do so with some care. Purchase two-thirds of your position between now and year-end, and the final third during the first quarter of the New Year.

Source: Buy, Sell or Hold: Apple Inc.

The trouble with following the financial news is that there is so much of it. Everyday brings news information, new facts, new theories – dozens of them. The financial news becomes like a dense Russian novel, with so many characters coming and going that we forget the plot.

Of course, if you’re reading Dostoevsky this summer, you can always stop, flip back and figure out what is going on. In the financial markets you can never stop. The news just keeps coming…the absurd character keep popping up…the intrigues and sub-plots get denser and more confused.

And yet, it’s in the financial markets that the plot really matters.

A serious investor is probably better off with neither television nor newspapers to distract him. In fact, he would probably be better off never reading The Daily Reckoning either. It would force him to pay attention to only what he actually knows or can find out. He might study a local bank, for example…meet its management, explore its ledgers, and parse its financial statements. He might find that it is a good investment – or a bad one. In so doing, he is much more likely to be right than the fellow who reads Barron’s and decides that it is a good time to get back into the bank shares.

But here at The Daily Reckoning, we are not investors. Our job is to keep an eye on the financial news and try to make sense of it. It is a vast and confusing story; our mission is to try to keep track of the main plot.

Yesterday brought more complicating details. The Dow sold off another 109 points. Oil rose $3.44. The dollar was up slightly…still at $1.49 per euro. And the price of gold leaped up $16.90. The 10-year T-note rose to yield 3.94%.

We suggested a possible plot outline yesterday:

Boy meets girl. Boy and girl go on spending spree. Wall Street and Washington collude to cause them to spend more than they could afford and to go much further into debt than they should. Boy and girl can’t pay their debts; they’re losing their houses. The moneybags who lent to them are going bust.

Subplot: Meanwhile, on the other side of the planet, the foreigners who kept selling them gadgets and gizmos are running into trouble. So, they’re buying less stuff to make gadgets and gizmos with. And, wouldn’t you know it, the people who sell them stuff – oil, copper, coal and so forth – are also running low on cash, because the price of their stuff is falling.

As the curtain went down last week, it looked as though the whole world economy were sinking into a soft, slow, Japan-like mud.

The storyline seems solid enough. The facts seem to fit more or less. But we have a strong feeling that there are more twists and turns in this plot…and that, when the show is over, the story will turn out be very different.

In the first place, the boys and girls may be in bigger trouble than we’ve seen so far – and there may be more of them.

“Skies Darken for Retailing as Spree Fades,” says a headline in the Wall Street Journal. U.S. retail sales fell in July for the first time in five months. Rising sales were misleading anyway; they were more a reflection of higher prices and rebate checks than of an actual increase in either the consumers’ willingness or ability to spend more.

Meredith Whitney, one of the few professional analysts who foresaw the subprime crisis, says that the downturn will be more severe than people yet realize. One in ten households overextended itself in the bubble period, she points out. Bankruptcy, default, and foreclosure rates will inevitably worsen as these Jacks and Jills roll down the hill.

Toll Bros., one of the country’s biggest builders, announced that revenues were still going down.

Anyone waiting for the financial industry to return to the glory days of 2006 may have a long wait. As a credit-fueled boom turns into a bubble, it takes more and more lending to produce an additional increment of GDP growth. In the real boom years after WWII, it took about $1.40 worth of credit to produce $1 worth of GDP growth. The ratio rose sharply after the Reagan Revolution…and now stands at about $6 of credit to every extra dollar of GDP. Of course, that is why Wall Street made so much money – it was selling credit. But it’s also why that story is history; that show is over. As the cost of growth – in terms of credit – rises, so does the cost in terms of debt service. Even at 5%, the cost of $6 of credit is 30 cents per year. If it produces $1 of GDP growth, that extra output would need a 30% profit margin to break even. Not very likely.

And the good news just continues to pour in from the housing sector. RealtyTrac reported this morning that bank seizures of U.S. homes have risen 184% since the group began tracking this data in 2005. Banks have repossessed close to 3 times the amount of homes in the United States, when compared to last year’s stats.

One in four houses sold in America today is sold at a loss, says a report on CNNMoney. That totes up to a lot of losses for the whole financial chain…the homeowner, the mortgage company, the builder, the real estate agent, and the investor who bought a mortgage-backed security.

This epic rise in foreclosures is depressing home values throughout the country. The S&P/Case-Shiller index shows that home prices fell 15.8% in May.

Real estate website Zillow.com reports that in the year leading up to June 30, almost 25% of all homes sold in the United States pulled in less than the seller originally paid.

CNN.com reports: “In Merced, Calif., 63% of homes sold during the past 12 months brought in less than what the owner paid. Prices there have fallen 40% over the past 12 months and 56% from their 2006 peak.

“About 63% of sellers in Stockton, Calif., lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

“And the trend has worsened in recent months. In Merced, 74.9% of sellers took a loss when they sold during the three months ended June 30 compared with just 28.7% during the same period in 2007.”

The bottom is still not in view – Zillow.com says, “With $3.9 million unsold homes on the market, prices will have to come down even more before the market stabilizes.”

We can all agree that many things need to occur to stabilize the U.S. economy as a whole – and there may be more of these ’supershocks’ to the system on the way. There’s no reason, however, for you to not make a little money in the meantime. Our friends at Strategic Investment have put together a Financial Survival Library – and it’s a must-read for anyone who wants to stay afloat in the current market climate. Click here for all seven of the financial survival steps.

*** While the United States may be in greater trouble than the markets realize, China may be in less. In other words, the slump in the West may not be so soft. In the East, it may not be in a slump at all.

Retail sales in the United States are falling, but sales in China are going up at 23% per year. Even after inflation, they’re going up at 15% – the fastest pace in 9 years. Sales of gasoline are increasing at a 55% annual rate.

Incomes are rising too – real, after inflation incomes are going up at an 8% annual rate.

In other words, maybe China is not slowing down very much, after all.

Remember, if these big, emerging economies can continue to grow, it will keep the pressure on prices for raw materials. This then makes the situation worse for Americans; they pay more for food and fuel…even as their incomes and assets fall in price.

*** “Oh yes, we met a couple of years ago,” said a new friend at a party last night. “You said to buy gold. At the time I thought it was a little flakey…buying gold, that is. But then the price went up…and I thought of you.”

“Well, it isn’t going up now,” we replied. “But we wouldn’t give up on it. Not yet. Most analysts think the crisis in the financial sector is pretty much over. They think we’ve seen the worst. They don’t expect any more major banking failures. They think the dollar is coming back. And they expect the rate of inflation to moderate. They’re looking for a huge soft landing for the entire world economy.

“But financial analysis, at least on this kind of macro level, is mostly fraud. It’s impossible to keep track of all the various inputs – many of them purely psychological or emotional – and make a logical judgment about what will happen. You can form an opinion. But your opinion is usually driven by some kind of philosophical prejudice. Say, for example, you just don’t like to see all those Wall Street hotshots making huge bonuses for doing something that you know is mostly a kind of razz-ma-tazz designed to wow the little guys in the market. Then, you’re sure that they’re going to get their comeuppance, one way or another. So you look around and try to find justifications for your point of view. And there are so many facts and theories around, you can always find whatever you’re looking for.

“You know, things in the financial markets have been going very well for a very long time. Major stock market indices are down only about 15% from record highs. No major economy is even – for now – in a recession. Unemployment in the U.S. still hasn’t risen to 6%. Gold is no higher than it was 28 years ago – in nominal terms. People still lend money to the world’s biggest debtor – the U.S. government – at only 3.94% for 10 years. And the dollar is still taken as a ’store of value,’ even though there are trillions of them in central bank vaults…and a whole rickety tower of dollar-based credits reaching up to the sun.

“But investors talk as though it were the end of the world. It’s not. It’s only the beginning of a major correction…and probably, only the beginning of the beginning.

“And when it is over, people will want more than 10% yield before they will lend to the feds. The world’s monetary system will probably have collapsed and been replaced with something new. Stocks will probably sell for less than 8 times earnings. Ten percent of the U.S. population will probably have gone bust – that’s 30 million people. And gold will probably sell for more than $2,000 an ounce.

“Of course,” we had to admit, “between here and there, anything could happen.”

[Ed. Note: But we know that our long-time DR sufferers have been paying close attention, and preparing for the long correction ahead. In fact, some very savvy investors have taken it upon themselves to secure an extra paycheck - without the hassle of extra work. If you haven't secured your extra income yet, don't wait any longer. The next payday is tomorrow, August 15…learn more here.]

*** “Won’t these string beans ever stop?” our cook wanted to know. She’s already filled the freezer with them…and already stuffed every jar we own with canned green beans. And she’s served them up at every meal in every possible way. Fried. Steamed. Grilled. Boiled. Braised. In soufflés. In casseroles. In soups. In stews. In salads. She’s probably slipped them into some desserts too, but we didn’t detect them.

Damien had just come up to the kitchen with another 5-gallon bucket full of them.

“Oh no…not more green beans,” said Edward. “We eat green beans all the time. I’ll never want to see another green bean as long as I live.”

“Then don’t look in the pantry,” said the cook.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Source: The Plot Thickens…