Edwin Chambers

Are things getting better?

2010-07-14T08:25:00.009-04:00

The stock market has gotten out of its funk for several days in a row. Starting after the fourth of July weekend, the major indexes have been up every day. US Gov't bond yields have been up over the same period.

On July 2, 2010, the S&P 500 closed at 1,022.58. On July 13, 2010, it closed at 1,095.34. That's a close to close increase for the index of about 7.12%. The Dec. 31, 2009 close was 1,115.10 (a better starting point might be 1,126.42), so it's still down a bit for the year.

Bond yields have recently breached several psychological levels. The 10 year US Treasury Note has been as low as 2.88% in recent time. The July 2, 2010 close was 2.98%. The July 13 close was 3.11%. That is a close to close increase of about 4.36% in the 10 year yield. The yield at the end of last year was 3.84%.

The Bullish:

Earnings have been doing well against revised forecasts. Intel, in particular, had company best quarterly revenue and margins. Alcoa beat their much revised earnings projections, and CSX reported good results.

Overall, earnings appear to be heading in a good direction for Q2.

Low bullish sentiment and high bearish sentiment are often seen as a contrarian indicator as people are often at their most pessimistic during the worst periods. Bearish sentiment is up. As the article mentions, the bearish sentiment is as high as it's been since March 2009 (near the bottom), but this level was reached in November 2008 and continued its fall.

The yield curve is not inverted, nor is it close to getting there. It will be very difficult for short term rates to pass long term rates with the Fed holding its rates near 0%.

Wall Street is hiring.

The Bearish:

State budgets. See my last post about the GA state budget. There are state budget shortfalls all over the country. These shortfalls are resulting from weak tax revenues and withdrawal of federal funding sooner than anticipated.

We are not officially out of recession. The lack of an inverted yield curve generally leads one to believe that a new recession is not about to start. However, since we have not officially left this recession, that indicator may not be reliable.

Housing is bad. The rich are defaulting on mortgages (registration required) at a very high rate. The rest are defaulting on mortgages at a very high rate. Minority borrowers have been especially hard hit. Housing values are down. New home sales were at a record low in May.

Unemployment is even worse. The June rate fell to 9.5% from 9.7% only because the size of the labor force used in the calculation dropped by 652,000 people. Nearly half of the unemployed have been that way for more than 6 months. The longer a person has been unemployed, the lower his employment prospects should jobs become available. The long term unemployment during this recession is creating the "New Poor".

Financial reform doesn't appear to be strong enough. Since financial reform has been watered down, it leaves plenty of room for the next bubble to inflate.

Retail sales are down again for June. Since consumer spending makes up around 70% of the US economy, this is a bearish indicator.

The ECRI's weekly leading index is down. It hasn't reached the level of predicting a downturn yet, but it's getting close.

The United States public debt might surpass GDP in 2012.

Overall:

I'm bearish, but that doesn't mean I'm right. I don't really see a clean way out of the worldwide debt problems. I don't see how the US states are going to make the transition to significantly lower revenues without some serious pain. However, companies are making decent profits, and the stock market and bond rates seem to be heading in the right direction. Many people may recover, but the new poor may be that way for life.

Welcome to FY 2011

2010-07-01T08:41:00.002-04:00

Fiscal Year 2011 has started in most states.

Deficits abound. Congress has dropped the health stimulus from the Recovery Bill and reintroduced the Recovery bill without those provisions. However, Congress failed to reenact emergency unemployment compensation. It looks like they managed to get two Senate Republicans on board with the bill, but due to the death of Robert Byrd, the voting was still one short of the 60 required to bring cloture. Currently, there are over 1,000,000 people (1.2 or 1.3 million seem to be the numbers I have seen) who have already lost their extended unemployment compensation. Another 200,000 per week are expected to run out of benefits.

The Congress is taking a recess and will not resume consideration of the bill until the recess is over. They will be back in session starting July 12.

State budgets are projected to have deficits totaling around $89,000,000,000. The deficits in state budgets throughout the country are expected to lead to as many as 900,000 layoffs. In addition to the burden of employee loss, the state budgets would still be burdened by paying regular unemployment to the former employees for up to 26 weeks.

Georgia Budget Hole in FY 2011

2010-06-30T10:52:00.001-04:00

The state of Georgia seems to be facing serious budget shortfalls unless something is done.

Of course, the state is suffering from the Great Recession like many other states. We have had the most individual banks fail (39 since 2008, search of FDIC website performed on June 30, 2010). Our official unemployment rate is 10.2% (retrieved from GA DOL on June 30, 2010). The state budget, as is, already has a budget hole around $200,000,000 due to lower than anticipated tax receipts.

On June 26, 2010, the United States Senate voted against cloture on the "American Jobs and Closing Tax Loopholes Act of 2010" (H.R.4213). When that version of the bill went down to Republican filibuster, a huge new concern for the stability of the United States was created. Both Senators from the state of Georgia voted against cloture.

The version of the bill that was defeated included provisions for $19 Billion in state aid.

"(Sec. 229) Amends MIPPA to provide additional funding for FY2010 to the Centers for Medicare & Medicaid Services Program Management Account for state health insurance programs." --Senate Bill Summary.

The FY 2011 budget of the state of Georgia was depending on about $378.5 million in stimulus funding for Medicaid. There does not appear to be an alternative budget that omits the funding. Some states were more proactive and prepared alternative budgets or even omitted the stimulus funding.

"[T]he FY 2011 budget is heavily reliant on enhanced Medicaid funding originally included in the federal Recovery Act being; it assumes U.S. Congress will extend it for 6 additional months. Such an extension would make the enhanced federal funding available for all of FY 2011.

Currently, this enhanced funding is slated to expire in the middle of FY 2011 (December 31, 2010). While the U.S. Congress is currently working on legislation to extend this funding for an additional six months, as of the time of this publication, such an extension has not yet been passed. Without this extension, the DCH budget will be short approximately $378.5 million. In total, Georgia is using nearly $750 million in enhanced Medicaid funds from the Recovery Act in the FY 2011 budget." --Georgia Budget and Policy Institute Report (PDF)

In addition to the Medicaid budget shortfall, the filibuster of the bill ended extended unemployment benefits. Extended unemployment benefits became available when a person had been unemployed for more than 26 weeks. There is a modified unemployment bill back before Congress.

"After trying for weeks to extend jobless benefits as part of a broader economic package, Democrats said Tuesday that they would jettison all other provisions -- including $16 billion in aid to state governments -- and push solely for a six-month extension of jobless benefits and a small adjustment to a tax credit for home buyers." --Democrats seek to extend emergency jobless benefits

The extended unemployment benefits expired on June 2, 2010. No new applicants are eligible. Upwards of 2 million unemployed citizens will lose their benefits if nothing is done. The state of Georgia will have about 7000 unemployed persons lose their benefits per week that might otherwise have been able to receive additional unemployment compensation.

Between the thousands of people that will no longer have any income and the nearly $600,000,000 budget shortfall, I think that Georgia, along with the rest of the states affected by non-passage of this bill, is going to have a tough year.