What is wrong with the US economy? Part 2

[turbo]

Merck stock is down and Schering-Plough is up on news of this acquisition. 16,000 jobs getting the axe? Consolidations in major industries seem to the the norm these days, but is the trend leading us to more "too big to fail" scenarios?

Merck & Co. is buying Schering-Plough Corp. for $41.1 billion in a deal that gives Merck key new businesses, access to a promising pipeline of new products and the chance to further cut costs, including eliminating about 16,000 jobs.

http://news.yahoo.com/s/ap/20090309/ap_on_bi_ge/merck_schering_plough;_ylt=AmxNC0OC3aD.MV3AV6FyPX6s0NUE;_ylu=X3oDMTI4cGtiODNkBGFzc2V0A2FwLzIwMDkwMzA5L21lcmNrX3NjaGVyaW5nX3Bsb3VnaARwb3MDNgRzZWMDeW5fdG9wX3N0b3J5BHNsawNtZXJjaw--

 

[edward]

It appears to me that the big banks may be double dipping with the bailout money?? Many who were in trouble due to AIG received a benefit from the AIG bailout. Yet they also received separate bail out money.

This reflects back on post 1361 ,my AIG counterparties post.

http://money.cnn.com/2009/03/07/news/companies/aig.fortune/index.htm

 

[Astronuc]

Top 10 headlines that could signal a market bottom

NEW YORK (MarketWatch) -- With few technical or fundamental road signs left, two equity strategists have devised a top 10 list for investors searching for signs of a bottom -- not to be confused with a bear-market rally.

. . . .
The Dow Jones Industrial Average changes more than two names at the same time, and/or adds names to increase the overall number of stocks in the index. "There are some 'zombie stocks' in the index . . . .
. . . .

I wonder how many people on Wall Street play violin.

 

[Astronuc]

Geography of a Recession (back in December)

http://www.nytimes.com/interactive/2009/03/03/us/20090303_LEONHARDT.html

related article:

Job Losses Show Breadth of Recession
http://www.nytimes.com/2009/03/04/business/04leonhardt.html

 

[Astronuc]

Freddie Mac seeks $30.8B in US aid after 4Q loss
http://news.yahoo.com/s/ap/20090311/ap_on_bi_ge/earns_freddie_mac

WASHINGTON – Freddie Mac, facing mounting damage from the U.S. housing crisis, said Wednesday it will ask the government for nearly $31 billion in additional aid after posting a gargantuan loss of more than $50 billion last year.

The report comes just weeks after Fannie Mae said it would need more than $15 billion in government assistance after losing almost $60 billion last year.
. . . .
Freddie's request for $30.8 billion in federal aid comes on top of $13.8 billion the McLean, Va.-based company received last year. Freddie Mac was forced to go back, hat-in-hand, because its net worth — the value of its assets minus the value of its liabilities — fell below zero.

The recent loss was driven by $13.2 billion in hedged trades, $7.2 billion in credit losses from the declining housing market conditions and $7.5 billion in writedowns of the value of its mortgage-backed securities. The company also took a charge of $8.3 billion for now-worthless tax credits.

The faltering economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread. Nearly 12 percent of all Americans with a mortgage — a record 5.4 million homeowners — were at least one month late or in foreclosure at the end of last year, according to the Mortgage Bankers Association.

. . . .

Obama, Geithner: recession requires global action
http://news.yahoo.com/s/ap/20090311/ap_on_bi_ge/obama_geithner

But the countries that would take action have contracting economies as well.

China exports slump, IMF warns on toxic banks
http://news.yahoo.com/s/nm/20090311/ts_nm/us_financial_20

Number of U.S. millionaires falls by a quarter
http://news.yahoo.com/s/nm/20090311/us_nm/us_usa_economy_millionaires

US trade numbers for Jan '09 are due Friday.

 

[turbo]

Back to what's wrong with the economy. The largest industrial employer in the area is SAPPI fine papers, and they recently announced the layoff of an undisclosed number of salaried employees, both here and at other plants. They have closed their Muskegon, MI, plant for "at least the next 6 months" according to the news report. They have slashed the production of bleached Kraft pulp at this plant due to lack of demand, and employees on the 3 high-speed paper machines are facing the possibility of curtailments in the form of long shutdowns to help reduce inventory.

These reductions come on top of the outright closures of several other pulp and paper mills and the closures of all but one of the state's largest sawmills during the collapse of the housing sector. Predictably, people who live in the most rural areas of the state are getting hit hard with job-losses in related fields, such as logging, trucking, heavy-equipment maintenance, etc. Apart from some business in the southern part of the state that are dependent on defense contracts, the only businesses that seem to be holding steady employment levels are in the health-care sector, and even so, a hospital serving the Blue Hill area is considering closing its obstetrics department to cut costs.

It will take a very long time to reverse these losses, and many jobs will never come back.

 

[Ivan Seeking]

The DOW is having a very good day so far. Right now it is up about 240 points.

 

[Astronuc]

A number of newspapers have closed, so demand for newsprint is down, and probably won't come back. News is becoming more likely to be delievered electronically.

The US stock markets are rallying for a third day (although I don't consider yesterday to much of a rally).
http://news.yahoo.com/s/ap/20090312/ap_on_bi_st_ma_re/wall_street

However - U.S. household wealth falls $11.2 trillion in 2008
http://news.yahoo.com/s/nm/20090312/us_nm/us_usa_fed_wealth

WASHINGTON (Reuters) – U.S. households suffered a record 9 percent drop in wealth and pared debt in the fourth quarter as a deepening recession battered confidence and finances, Federal Reserve data showed on Thursday.

Household net worth dropped by $5.1 trillion from the prior quarter to $51.5 trillion. For the full year, net worth dropped by $11.2 trillion, reflecting steep declines in the housing and stock markets.

The declines in household net worth were the largest since quarterly and annual records began in 1951 and 1946, respectively, said the Fed -- the U.S. central bank.

Since a second-quarter 2007 peak of $64.4 trillion, household wealth has dropped by about 20 percent, effectively wiping out four years of gains. That has put a chill on consumer spending and added to Americans' anxiety about their economic well-being.

Michael Feroli, an economist with JPMorgan in New York, called the $5.1 trillion quarterly drop a "showstopper."

"Given where the S&P 500 (stock index) is now and recent house price data, we estimate consumers have lost about another $2.5 trillion in the first quarter of the year," he said.

. . . .

Certainly some of that will return as the equities markets recover. On the other hand, a lot of future buying power simply evaporated. Property values may recover slowly with time, but in some areas, they may not recover (e.g. where there is extensive loss of manufacturing/industrial and higher paying service jobs).

Locally, I've noticed a sudden decrease in activity on the local main street. Indeed several companies have laid off people, and now it's quite noticeable. There are empty parking spaces on the street. As early as last year, it used to be rare to find an open parking space between 8 am and 5 pm during the week, and empty parking spots are noticeable.

 

[Astronuc]

Great rally on the equities (stock) markets this week.

The Dow up 600 pts - the week since Nov. 2008. But WAIT!

Dollar's rally means weaker earnings

NEW YORK (MarketWatch) -- With the dollar surging more than 20% over the past year and seemingly on track for further gains, year-on-year earnings comparisons for the first quarter are getting bleaker, a potential blow for the nascent rally seen in U.S. stocks this week.

The dollar index , which measures the greenback against a basket of six major currencies, has gained more than 22% since March 2008, and it's up more than 7% since the start of this year.

"The dollar has done quite well and that makes earnings comparisons difficult for multinationals in the U.S.," said Ken Tower, market strategist at Quantitative Analysis Service.

Companies that make sales overseas in other currencies lose out when they have to translate those into a stronger dollar in quarterly reports.

At least 45% of the sales of S&P 500-component companies come from overseas, and possibly a lot more, as only two-thirds of companies disclose where their sales come from, according to Standard & Poor's.

"That translates into a low single-digit percentage headwind to sales," said Alec Young, market strategist at S&P.

For U.S. firms' earnings, the problem isn't only that sales are weaker when they get translated, it's also that U.S.-made products have become more expensive, and therefore less competitive on markets around the world, just as overall sales have shrunk amid the global recession.

"The stronger dollar and its negative impact on the export business are pretty painful when the global economy is already so weak and companies are looking for any strength they can find," said Don Straszheim, president of Straszheim Global Advisors.

. . . .

The US needs to export more than it imports, otherwise foreigners need to start buying realestate in the US (which apparently they are doing are bargain prices) in order to stop the hemorrhaging of cash from the US economy. A stronger dollar means that US exports are less attractive.

Latest trade data - http://www.census.gov/indicator/www/ustrade.html

 

[mgb_phys]

The US needs to export more than it imports, otherwise foreigners need to start buying realestate in the US (which apparently they are doing are bargain prices) in order to stop the hemorrhaging of cash from the US economy. A stronger dollar means that US exports are less attractive.

Simple solution - subsidise gas.

Get gas down to > $1/gallon
People will buy more SUVs - bailing out Detroit.
Huge rise in gasoline consumption will boost oil prices back up > $100/barrel
That will boost exploration, jobs and profits for US owned oil companies.
The rest of the world will have to buy dollars to buy the oil.
The US can just print $ to buy foreign oil.

 

[Proton Soup]

Simple solution - subsidise gas.

Get gas down to > $1/gallon
People will buy more SUVs - bailing out Detroit.
Huge rise in gasoline consumption will boost oil prices back up > $100/barrel
That will boost exploration, jobs and profits for US owned oil companies.
The rest of the world will have to buy dollars to buy the oil.
The US can just print $ to buy foreign oil.

i seriously doubt that. there was really no incentive at all to boost production during the last oil peak. keeping supply limited keeps the price up, so why bother? certainly didn't hear oil companies clamoring to get at offshore oil here in the US as http://abcnews.go.com/gma/story?id=1841989"

 

[Astronuc]

Stocks Soar, But Dismal Signs Remain
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/12/AR2009031201668.html

. . . .
Falling stock and home prices have wiped out four years of gains in Americans' net worth since the start of 2008, according to new data from the Federal Reserve. Nearly half of those losses occurred over the last three months of the year, the biggest quarterly decline since recordkeeping began in 1952.

The new data underlined just how quickly wealth created during the biggest credit bubble in history has vanished, leaving Americans without the college funds, nest eggs and other reserves they had set aside.
. . . .
Some experts said yesterday's news about foreclosure filings, which can range from default notices to bank repossessions, did not bode well.

"Our expectation was that nationally we would see a decline. So the fact that we saw an increase fell between a shock and surprise," said Rick Sharga, senior vice president of RealtyTrac, . . . .
. . . .
As the recession has deepened, consumers are also having a harder time paying off credit cards and auto loans. Commercial developers and businesses are also struggling to pay their debts. More defaults, combined with the credit crunch, are hurting corporate balance sheets.

One of the latest casualties is GE. The manufacturing and services conglomerate lost its top-notch, triple-A credit rating yesterday for the first time since 1956, largely because of troubles at its financial arm. GE Capital, which once accounted for half of GE's profits, is involved in credit card, business, real estate lending and has been hurt by rising defaults in the United States and overseas.
. . . .
Last night, Warren Buffett's Berkshire Hathaway also had its AAA credit rating cut one notch. Fitch Ratings cited problems and uncertainties facing all financial companies in its decision to cut the rating. Berkshire retains the highest rating from S&P and Moody's.

Retail sales (excluding autos) were up, but manufacturers still have more inventory to dump.

 

[rootX]

After The Crisis: A Parody of 15 Corporate Logos

http://www.businesspundit.com/after-the-crisis-a-parody-of-15-corporate-logos/

 

[Astronuc]

Analysis: White House, Dems backpedaling on AIG
http://news.yahoo.com/s/ap/bonus_stakes_analysis

WASHINGTON – For the first time since last fall's election, Democrats and the Obama administration are backpedaling furiously on an issue easily understood by financially strapped taxpayers: $165 million in bonuses paid out at bailed-out AIG.

Republicans, struggling to regain their political footing, are content to let Democrats try to dig their way out of this mess on their own.

Professing shock at the bonus payments, Democrats have embarked on a hurry-up effort to impose what amounts to confiscatory taxes on the bonuses, a maneuver that almost surely will be tested in the courts.

Treasury Secretary Timothy Geithner won a strong vote of confidence Wednesday from President Barack Obama, whose administration has been struggling with the controversy since the weekend.

But the mood is less charitable among congressional Democrats. And Republicans have made Geithner their top target, not surprising given Obama's continued high approval ratings.

"It's shocking that they would — the administration would come to us now and act surprised about these contracts," said Sen. Mitch McConnell, R-Ky., the Senate GOP leader. "This administration could have and should have ... prevented this from happening. They had a lot of leverage two weeks ago."

That would be when the Treasury Department decided to make an additional $30 billion available to American International Group Inc., the huge insurance conglomerate deemed too big to fail by two administrations.

. . . .

Geitner should have been on top of this from the get go. Of course, the restrictions on the funds and provisions for accountability should have been established last October.

AIG's Larceny
http://www.forbes.com/2009/03/17/geithner-obama-republicans-bonuses-opinions-columnists-aig.html
Dan Gerstein

As we try to put the grand lunacy of AIG's grand larceny in some rational perspective, it might help to think of this latest bonus brouhaha as a reverse stress test--of the Obama administration's leadership, the political-financial complex as a whole and, ultimately, our very conceptions of capitalism. Is this really the economy that our leaders promised and the American people paid for? And are the elites who have been running and corrupting this system actually capable of changing it?

So far we are flunking on all counts. And, fitting for this most surreal of situations, this is the blessing in disgust. We now know what "the bottom" looks like. It looks like a company that perpetrated the biggest business loss in the history of the world handing out half a billion dollars in retention bonuses to the unit that almost singlehandedly destabilized the global economy--and a government that could not see this madness for what it was until millions of average Americans who could not tell a derivative from a Derringer called them out on it.

. . . .

 

[mheslep]

Analysis: White House, Dems backpedaling on AIG
http://news.yahoo.com/s/ap/bonus_stakes_analysis
Geitner should have been on top of this from the get go. Of course, the restrictions on the funds and provisions for accountability should have been established last October.

AIG's Larceny
http://www.forbes.com/2009/03/17/geithner-obama-republicans-bonuses-opinions-columnists-aig.html
Dan Gerstein

AIG and more AIG. Do we here anything about Freddie and Fannie in the news? Everything must be ok there.

Fannie Mae is due to pay retention bonuses of as much $470,000 to $611,000 this year to some executives despite enormous losses at the government-backed mortgage company. Fannie's main rival, Freddie Mac, also plans to pay such bonuses but hasn't yet provided details...

James Lockhart, director of the Federal Housing Finance Agency, of FHFA, which regulates Fannie and Freddie, said the bonuses they are paying are "critical" to retain people needed to support the mortgage market and work on foreclosure-prevention efforts. After the companies' chief executives were ousted in September, "it would have been catastrophic to lose the next layers down and other highly experienced employees," he said. Mr. Lockhart added that compensation has declined for many employees because other types of bonuses weren't paid last year and "past stock grants are virtually worthless."

That is their chief government regulator saying it would be 'catastrophic' to lose these people if they don't bag $1M this year. Yes, yes its 'critical' if you have political support. I imagine that a fair number of Americans could cite the $180B figure that AIG has received in federal deposits since it is on every headline. How many can cite the figure that Fannie and Freddie are gulping down? Anyone? Must not be important.

Spoiler

$200B, each.

 

[Astronuc]

Something I missed posting in September.

Behind Insurer’s Crisis, Blind Eye to a Web of Risk
By GRETCHEN MORGENSON
“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007


Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.
. . . .
“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”
. . . .
Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.
. . . .
These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.
. . . .

The rest is history - in the making.

 

[Jimmy Snyder]

Obama 's Great Depression II is in full swing. The S & P rose 22 percent in the past 10 trading days, the fastest two week advance since 1938 in the depths of Roosevelt's Great Depression I.

 

[Astronuc]

I heard about this today. There is an ongoing investigation, and it will be interesting to see if Goldman Sach's trading are manipulated the price of oil last summer.

Did Goldman Goose Oil?
http://www.forbes.com/forbes/2009/0413/096-sachs-semgroup-goldman-goose-oil.html
Christopher Helman and Liz Moyer, 03.25.09, 06:00 PM EDT
Forbes Magazine dated April 13, 2009

How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.

When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation's crude oil inventories. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup filed for bankruptcy on July 22.

But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup's collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup's accounts.

. . . Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.
. . . .

So Aron owed $430 million, but did not pay Semgroup which put Semgroup in default? Somehow, that just doesn't seem right.

And how many people were pushed over the edge as the cost of energy and other products surged last summer?

 

[OmCheeto]

http://www.nytimes.com/2009/04/02/business/global/02electric.html?_r=2&hp"
By KEITH BRADSHER
Published: April 1, 2009
China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.

Being outproduced 6 to 1 in an industry we were once proud to be a leader in?

Oh! Never mind. It looks as though Japan passed us up 3 years ago, and China put us in third place just last year.

http://www.emsnow.com/npps/story.cfm?id=39167"
Mar 27, 2009
...
In 2003, U.S. car production surpassed that of China by nearly a factor of 3:1. In 2008, China's production exceeded that of the United States by nearly 7 percent.
...
Meanwhile, U.S. automakers have outsourced a major portion of their manufacturing of cars destined for the domestic market to Canada and Mexico. Japanese and European auto manufacturers also have auto production facilities in Canada and/or Mexico.
...