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

But there’s now another problem looming – one that could ultimately weigh down the global financial system.

The problem: Europe’s banks.

As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.

Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.

Bank executives “[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1,” Chief Executive Officer Stephen Hester told Reuters.

In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.

In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.

That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.

Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide “considerable comfort about the health of the banking system.”

But in the five months since that Institute of International Finance report was issued, it’s  likely that European banks have experienced a major decline in their fortunes.

Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.

Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?

Market Matters

Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM).  Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance.  On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.

A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years.  Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.

The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year.  Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight.  Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis.  With stress tests out of the way, where will the next leaks come from?

Economically Speaking

U.S. retailers released same-store sales data for April and the results were actually quite promising.  As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations.  A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.

On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy.  Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.

Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy.  The contraction represented the smallest in six months and was below most analysts’ expectations.  Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.

Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best.  In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain.  Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.

Weekly Economic Calendar

Source: Are Europe’s Banks Next to be Stressed?

Goldman Sachs Group Inc. (GS) reports tomorrow (Tuesday), while JPMorgan Chase & Co. (JPM) reports Thursday, and Citigroup Inc (C) reports on Friday.

While the chief executives of several of the largest U.S. banks were quick to announce favorable showings for the first two months of the year, analysts are concerned that the strong showings may not have carried over into March, and that the performances of some of these money-centered banks may disappoint.

Contradictions hit the financials last week as diverse reports about Morgan Stanley (MS) and Wells Fargo brought even more confusion to a sector that cannot seem to stay out of the daily headlines. On one hand, analysts expect Morgan Stanley to write down an additional $1.2 billion worth of bonds; subsequently, the firm may suffer its second straight quarterly loss.

On the other hand, Wells Fargo expects earnings to far surpass Wall Street’s projections as its Wachovia Corp. acquisition has enhanced its mortgage-lending capabilities at a time when rates are at historic lows and when the U.S. housing market is showing some signs – be they ever so slight – of rebounding [Indeed, a Money Morning report from just last week made this same point].

Bear in mind that since the financials have led the charge in equities during the past five weeks, investors may be looking for any excuse to take some recent profits.  Intel Corp. (INTC), which reports tomorrow, Google Inc (GOOG), which reports Thursday and General Electric Corp. (GE), which reports Friday, figure to be crucial announcements.

The March inflation gauges highlight the economic calendar, and economists hope that price pressures remain far off of their radar screens.  The retail sales data should lend a bit more insight into the current plight of the consumer.

Market Matters

Alcoa Corp. (AA) kicked off earnings season with more of whimper than a bang.  While the aluminum producing giant lost about $500 million during the quarter, the company expects to benefit from the infrastructure programs promoted in the economic stimulus package – key areas that could enhance demand for its products.  Bed Bath and Beyond Inc. (BBBY) reported better-than-expected quarterly results and even received a favorable analyst upgrade.

With the season set to kick off in a big way in the weeks to come, Thomson Reuters has called for a 37% drop in profits at Standard & Poor’s 500 Index companies, the eighth consecutive quarterly decline (though that prediction came before the Wells announcement).

Economically Speaking

A light week on the calendar still provided plenty of headlines on the economic home front last week.  Corporate executives painted a rather bleak picture of the short-term future for U.S. industry as the Business Roundtable issued a quarterly outlook that turned negative for the first time in its survey’s history.  The majority of those participating expect their companies to experience layoffs and reductions in business spending during the coming six months.

However, Roundtable Chairman Harold McGraw III, who is also the CEO of The McGraw-Hill Cos. Inc. (MHP), expressed confidence in the Obama administration’s ability to generate renewed business activity. McGraw said he also believes the economy may be close to a bottom.

On the other hand, minutes from the latest U.S. Federal Open Market Committee policymaking meeting that U.S. Federal Reserve Chairman Ben S. Bernanke and friends revised their expectations (to the downside) for the economic recovery. While they anticipate that gross domestic product (GDP) will flatten (from its current contraction state) by the end of the year, unemployment is expected to continue its downward spiral well into 2010.

Though initial claims for unemployment benefits surprisingly fell last week, they remain at very high levels, and total claims (those looking for jobs over extended periods) jumped to a record high. While the trade deficit narrowed to its lowest level since November 1999, the improvement is more indicative of the sluggish economy and the reduced global demand for any and all goods and services.

Retailers posted their results of March sales and the numbers were mixed at best.  While Wal-Mart Stores Inc (WMT) had long been the one “steady Eddie” during this economic downturn, the world’s largest retailer reported March sales that missed expectations (though the company does expect its quarterly results to be strong, thanks to a stellar February).  Stores that target teens like Abercrombie & Fitch Co. (ANF), Aeropostale Inc. (ARO) and American Eagle Outfitters (AEO) each posted disappointing numbers, though analysts point out that Easter (and many spring breaks) fall later in the 2009 calendar (April 12 this year versus March 23 a year ago) and most holiday shoppers are waiting until the last minute these days.

Still, more than 50% of those retailers reporting beat Wall Street expectations, and some even issued favorable guidance for the quarter as a whole.  Of note, The TJX Cos. Inc. (TJX) (TJ Maxx and Marshalls) and Penney Co. Inc. (JCP) both posted better-than-expected sales results and increased their outlooks for the three-month period.

Weekly Economic Calendar

Source:  As Earnings Season Heats Up, U.S. Banks Will Make or Break the Stock-Market Rally

This from Smart Profits Report:

‘Tis the season to… well, spend. And in a credit-oriented nation, Americans again proved that they do that better than the rest. The National Retail Federation (NRF) says 172 million consumers hit the malls or logged on to buy goods over the extended Thanksgiving weekend – a 17% jump from the same period in 2007. And ShopperTrak says “Black Friday” sales rose 3% to $10.6 billion over “B.F. 2007,” with the average consumer spending $372 – up 7.2% from a year ago.

Granted, a 3% sales rise isn’t spectacular, but it’s not terrible for a nation with a pathetic savings rate, a 3.7% year-over-year inflation rate in October, and 1.2 million job losses. I’m sure America’s battered banks are wondering exactly where these guys are getting their money from – and whether they can pay it back.

Retailers are doing their best to help – and potentially at their own expense…

The Retail Sector’s Vicious Cycle

Many still predict a rough time for retailers, with the NRF predicting a measly 2.2% rise in holiday shopping sales – the lowest since 2002. Retailers are compelled to offer eye-popping deals to cash-strapped consumers, but they can’t sustain the bargains forever, for risk of eroding their profit margins too much.

That could result in flat sales and profit growth, with some analysts suggesting that it could also lead to more bankruptcies, following electronics giant Circuit City, Linens n’ Things, and The Sharper Image. In turn, that could drive unemployment even higher.

Already, a major online trend is providing some clues…

When High Traffic Meets Falling Sales

The good news: Online traffic on “Cyber Monday” (the Monday following Thanksgiving, which traditionally kicks off the online shopping season) climbed by 10% over the same day in 2007, according to Pricegrabber.com. Other firms have also reported heavy activity, with Target (NYSE: TGT) expecting its web traffic to jump 40% this season.

The bad news: Online research firm comScore says web sales are down 4% so far this season and will remain the same as last year throughout the November-December compared at $29.2 billion. That’s prime evidence that deep discounts could squash profit margins. But essentially, retailers have little choice.

But what choices do investors have?

“It’s Wal-Mart Time”

A few weeks ago, my colleague Marc Lichtenfeld gave you three companies that could be set to buck the gloomy retail trend this season.

One of them was sector bellwether Wal-Mart (NYSE: WMT), whose CEO Lee Scott proudly proclaims, “It’s Wal-Mart time. This is the kind of environment that Sam Walton built this company for.”

He’s right. As consumers go all-out to dig up value, Wal-Mart is among those discount-oriented firms set up to not only weather this season’s storm, but to profit from it. Check out Marc’s article for more details, plus his thoughts on Kohl’s (NYSE:KSS) and Dollar Tree (Nasdaq: DLTR).

I’m going to throw another one into the mix – The TJX Companies (NYSE: TJX) – a company I actually highlighted here a year ago…

The Outlook For TJX

At the time, the stock traded around $28.50 and bounced to $32 by early February 2008, followed by a 52-week high of $37.52 in August.

Since then, however, shares have sunk back to the $20 area, as a combination of high oil prices at the time stifled consumer spending, while the U.S. dollar (the company also operates overseas, including Britain and Ireland), economy and stock market slumped.

Despite this, though, the firm reported a 4% and 3% sales rise in August and September respectively, compared with August-September 2007. That’s a testament to its business model – the company offers fashionable, quality goods (some of which it buys from other higher-end retailers’ excess inventory) at attractive prices.

However, total third quarter profit came in at $235.8 million ($0.54 per share), compared with $249.5 million ($0.54 per share) in Q3 2007 – a 5.5% drop, due to the negative economic climate and an exchange rate hit. Over the first nine months of 2008, though, TJX earned $629.9 million ($1.42 per share) over the $470.6 million ($1.00 per share) from January-September 2007.

TJX pegs fourth quarter EPS between $0.58 and $0.62 – lower than the $0.67 in Q4 2007 and the $0.72 estimates, but $2.07 to $2.11 per share in fiscal 2009, compared with $1.68 for this year.

Also, the company’s T.J. Maxx and Marshall’s stores could be prominent destinations for bargain-hunting shoppers this season. The fact that The Gap (NYSE:GPS) posted better than expected third quarter results could bode well for TJX. Other positive factors include the U.S. dollar strengthening a little and Card Activation Technologies settling its litigation against TJX.

Ultimately, fourth-quarter retail earnings will tell the full story of this holiday period

And while the overall gloom shrouding the retail sector could drag successful, bargain-oriented companies down with the pack in the short-term, provided their business models lure in discount-hungry consumers this season, they could end up having the final word.

Source: Tune Out The Retail Doomsayers… These Firms Could Bust This Season’s Trend

• The Organization of Petroleum Exporting Countries, which produces 40% of the world’s oil, is “very likely” to cut its crude production at its next meeting on Nov. 18, according to the group’s President Chakib Khelil. “The Organization is concerned about the deteriorating economic conditions with contagion risks,” OPEC members said today in a statement. The official production quota for 11 of OPEC’s members is 28.8 million barrels a day. The group exceeded that target by 390,000 barrels a day in September, according to Bloomberg estimates.

• Iceland yesterday (Thursday) took control of Kaupthing, the country’s leading bank, and suspended trading on its stock exchange for two days, as it the island country struggled to overcome a financial crisis that could ultimately result in bankruptcy. Iceland’s Financial Services Authority now has control of all three of the country’s major banks.

• New applications for unemployment benefits dropped from a seven-year high last week, according to the Department of Labor. Initial claims for jobless benefits dropped 20,000 to a seasonally adjusted 478,000. However, the four-week average, a more stable indicator, rose to 482,500 – the highest since October 2001.

• Micron Technology Inc. (MU), the largest domestic producer of memory chips, yesterday (Thursday) announced it would reduce its staff by 15% and scale back production levels. Over-production has flooded the market, pushing memory-chip prices below the cost to produce them, Bloomberg News reported. Micron has racked up $1.9 billion in losses over the past two years.

• National City Corp. (NCC) could be the next bank to get bought out by a larger rival as financial firms look to stabilize their capital positions by buying deposit assets at discount prices. PNC Financial Services (PNC) and Toronto-based Bank of Nova Scotia (BNS) are two of the potential buyers for the regional bank, Forbes reported.

• Abercrombie & Fitch Co. (ANF) and The TJX Cos. Inc. (TJX), parent company of T.J. Maxx and Marshall’s, both lowered their profit outlook as retail sector sales continue to worsen. “Consumers are bracing for recession,” Ken Perkins, president of Retail Metrics, wrote yesterday (Thursday) in a report, Bloomberg News reported. “Credit will continue to be very difficult to come by through the holiday-shopping season, and the jobs market is likely to further deteriorate.”

Source: Global Investing Roundups Friday, October 10th, 2008