2010 Full of Uncertainty But Economic Knowledge Can Help

January 2 2010

Rewards for incompetence again, few writers bearish anymore, unprecedented borrowing, conditions for business not improving, Wall Street backed up for next time, duties on steel entering China, Blackwater trial whitewashed, back to Glass-Steagall to bring order to the markets

US Markets

The move to give Fannie, Freddie and GMAC unlimited funds and outrageous salaries and bonuses as rewards for incompetence is disgusting, but to be expected from our government. This was the brainchild of our esteemed leader Mr. Obama.

The Hulbert sentiment tracking system shows bond sentiment has collapsed from 23.35 to minus 33%.

Stock pessimism among newsletter writers fell to its lowest level since April 1987, six-months before the equity crash known as Black Monday on October 19, 1987. Those bearish fell to 15.6%, which is a very strong contrarian indicator.

The seven-year note auction had a bid to cover of 2.52 to 1 versus an average price of 2.76 to 1. Indirect, foreign central bank participation was 44.7% versus 62.5%.

The White House is borrowing unprecedented amounts for spending programs. Debt has increased to a record $7.17 trillion in November from $5.80 trillion at the end of 2008.

For the past decade general equities were the worst investment. Gold and silver mining equities were the best performers. The Dow will finish the decade flat, but the dollar has lost 30% of its value rendering stock and bond investments as big losers. The dollar lost 75% of its value versus gold.

As of September 30, 2009, Goldman Sachs posted $42 billion in derivatives and had $115 million in assets. JPMorgan had $79 billion versus $1.7 billion in assets. Both are accidents ready to happen.

The federal government said Wednesday it will take majority control of the troubled auto lender GMAC, providing another $3.8 billion in aid to the company, which has been unable to raise from private investors the money it needs to staunch its losses. GMAC, which already has taken $12.5 billion in direct federal aid along with other forms of government support, is the largest lender to General Motors and Chrysler dealerships and to their auto-buying customers.

Supply Management

Order backlogs in the U.S. economy rose in December for the first time in over a year, according to a closely-watched survey of economic activity published Wednesday.

The Institute for Supply Management-Chicago said Wednesday that its headline business barometer climbed to 60.0 from 56.1 in November, topping the 55.1 market consensus and nearing a four-year high.

The survey, formerly known as the Chicago purchasing managers index, is viewed as a leading indicator, though even lagging components such as employment ticked higher in December.

The barometer is compiled by the Institute for Supply Management-Chicago. Readings above 50 indicate economic expansion.

After falling to a low of 31.4 in March, the barometer has climbed in all months except September, though the latest results highlight continued caution among purchasing managers. Order backlogs expanded for the first time in 16 months, rising to 53.0 in December from 46.5 in November.

December Chicago PMI rises to 60 from 56.1.

Foreign Exchange Reserves

Data released by the International Monetary Fund on Wednesday showed global official foreign exchange reserves rose to $7.52 trillion at the end of the third quarter from $7.18 trillion at the end of the second quarter.

Allocated reserves stood at $4.43 trillion, up from $4.27 trillion in the previous quarter. The amount of allocated reserves held in U.S. dollars stood at $2.73 trillion, an increase from $2.68 trillion in the second quarter but below the $2.81 trillion recorded in the third quarter of 2008.

The data showed U.S. dollar reserves account for 61.65% of allocated reserve holdings, a decline from 62.82% in the previous quarter.

Euro holdings edged up to 27.75% from 27.42%, while sterling holdings rose to 4.34% from 4.30% and yen holdings climbed to 3.23% from 3.12%.

Employment Outlook

Initial jobless claims fell by 22,000 to 432,000 in the week ended Dec. 26, the lowest level since July 2008, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance fell in the prior week to 4.98 million, and those receiving extended benefits jumped.

Economists forecast claims would rise to 460,000 from a previously reported 452,000, according to the median of 29 projections in a Bloomberg News survey. Estimates ranged from 430,000 to 490,000.

The four-week moving average of initial claims, a less volatile measure, dropped to 460,250 last week from 465,750 the prior one. Claims are down from a 26-year high of 674,000 in the week ended March 27.

Continuing claims decreased by 57,000 in the week ended Dec. 19, reaching the lowest level since February. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.

Today's report showed the number of people who've use up their traditional benefits and are now collecting extended payments climbed by about 199,000 to 4.82 million in the week ended Dec. 12. Twenty-nine of the states and territories where workers are eligible to receive government extension have begun to report that data, a Labor Department spokesman said. Two states have started reporting data on the latest emergency extension, he said.

Twenty-seven states and territories reported a decrease in claims, while 26 reported an increase. These data are reported with a one-week lag.

The government is scheduled to release its December payrolls report on Jan. 8. In November, the economy lost the fewest jobs since the recession began two years ago and the unemployment rate receded to 10 percent from a 26-year high of 10.2 percent the prior month.

The Institute for Supply Management-New York reported its Current Business Conditions index fell to 59.7 in December, from 62.9 in November. But a reading above 50 indicates a faster pace of activity, and this was the fifth consecutive month that the index was in expansion territory, the report said. The Six-Month Outlook index jumped to 80.2 from 74.4 in November. It was the first time since 2006 that the index broke above 80.

IMF

The dollar’s share of global currency reserves fell in the third quarter to the lowest level in a decade while the euro’s share rose to a record, according to the International Monetary Fund.

The U.S. currency’s portion dropped to 61.6 percent in the period ended Sept. 30, from 62.8 percent in the prior quarter and 64.5 percent a year earlier. The euro’s share rose to a record 27.7 percent from 27.4 percent while the yen gained and the pound was unchanged.

US stocks added to losses in late morning trade Thursday, after the Chicago Institute for Supply Management revised lower its December business activity index to take into account seasonal factors, only a day after issuing its initial assessment. The December index was revised to 58.7 from Wednesday's reported 60.0. Readings from September to November were also revised lower. [This is a perfect example of government market manipulation. It is in your face and arrogant, that is what these people think of you. Bob]

Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue.

The third quarter was the fourth consecutive quarter in which tax collections were below year-ago levels. Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%.

Read the legislation

To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.

Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives…It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more- bailoutsâ€