Mish's Global Economic Trend Analysis

---

• Election Predictions - How Big the Blowout?
• Gallup Surveys Shows Anemic October Consumer Spending, No Pickup in Christmas Spending Plans
• Extreme Readings in Bullish Investor Sentiment as Insiders Bail at Highest Rate Ever Tracked
• Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions

Election Predictions - How Big the Blowout? Posted: 01 Nov 2010 09:41 PM PDT A few months ago when some thought it was possible the Republicans might take the house, I thought the odds were about 75%. In early July I had it at 60%. Today there is little question the Republicans will win the House. The only question now is "How big will the blowout be?" Battle for the House Real Clear Politics shows the Battle for the House like this. Note that Republicans will control the house even if they lose all 44 tossup seats, provided they win 56 of the 61 Republican leaners and likely seats. To be sure, the Republicans are unlikely to win every seat they are leaning or likely, but the same holds true for the Democrats. Moreover, surprises are far more likely to go to the Republicans. For example, I think Doug Cloud has a better than even shot at winning Washington District 6 even though RCP has that race marked as "Likely Democrat". To make a final prediction, I went through all 44 tossup elections giving the Democrats the benefit of the doubt anytime they were consistently ahead, regardless of how little (as long as it was consistent). I treated Republicans the same. That methodology awards 15 seats to the Democrats and 9 Republicans. That leaves has 20 genuine tossups where there were no polls, the polling data extremely old, or polls were inconsistent or with huge swings. Assuming the incumbent will win about 2/3 of those seats I will award 14 to the Democrats and 6 to the Republicans. House Prediction 224 + 15 of 44 tossups would be 239. That is a pickup of 61 seats. To go out on a limb and factor in complete surprises that I believe will go Republican, I will add 3 more to the total. My final prediction then is 242 Republican seats, a pickup of 64. Battle for the Senate Real Clear Politics shows the Battle for the Senate like this. Once again I am willing to give the leaners to each party. With only 7 Tossups remaining I will call each one. The Incumbent is listed first. CA: Barbara Boxer (D) Wins over Carly Fiorina (R) CO: Michael Bennet (D) Loses to Ken Buck (R) IL: Alexi Giannoulias (Open D) Loses to Mark Kirk (R) NV: Harry Reid (D) Loses to Sharron Angle (R) PA: Joe Sestak (Open D) Loses to Pat Toomey (R) WA: Patty Murray (D) Loses to Dino Rossi (R) WV: Manchin (Open D) Wins over John Raese (R) If correct, that is a pickup of another 5 seats. I will go with that as my final call. Senate Prediction - 50 Republicans 50 Democrats The polls show a very slight lead for Murray, but I believe Rossi will pull it out. It is possible but I do not think likely, that Republicans will win one of the other two races. Battle for Governors Real Clear Politics shows the Battle for Governor like this. CO: John Hickenlooper (Open D) Wins over Dan Maes (R) and Tom Tancredo (I) CT: Tom Foley (Open R) Wins over Dan Malloy (D) FL: Rick Scott (Open R) Wins over Alex Sink (D) HI: Duke Aiona (Open R) Loses to Neil Abercrombie (D) IL: Pat Quinn (D) Loses to Bill Brady (R) MA: Deval Patrick (D) Wins over Charles Baker (R) MN: Tom Emmer (Open R) Loses to Mark Dayton (D) OH: Ted Strickland (D) Loses to John Kasich (R) OR: John Kitzhaber (Open D) Loses to Chris Dudley (R) RI: John Robitaille (Open R) Loses to Lincoln Chafee (I) VT: Brian Dubie (Open R) Loses to Peter Shumlin (D) I am going with two lagging in the polls: Florida and Oregon, on hopes of a huge Republican turnout. Vermont is a wildcard. My prediction then is 32 Republican, 17 Democrat, 1 Independent That is a big pickup from the current 26-24 edge to the Democrats. Because this is a census year, the Gubernatorial races take on extra importance. It is quite advantageous to control the governorship in redistricting years. These pickups will certainly help Republicans. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Gallup Surveys Shows Anemic October Consumer Spending, No Pickup in Christmas Spending Plans Posted: 01 Nov 2010 03:36 PM PDT In a trend that likely portends another poor shopping season for retailers, Gallup reports U.S. Consumers' Spending Anemic in October Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $62 per day during the first four weeks of October. That figure is up from $59 in September and is about the same as the $63 figure from August. From a broader perspective, spending remains in the 2009-2010 new normal monthly average range of $59 to $72 and is far below the 2008 recessionary spending range of $81 to $114. Weak Christmas Spending Plans Please consider Consumers Issue a Cautious Christmas Spending Forecast Gallup's initial measure of Americans' 2010 Christmas spending intentions finds consumers planning to spend an average of $715 on gifts, roughly on par with the $740 recorded in October 2009. Americans' average prediction of the total amount they will spend on Christmas gifts this year is not highly encouraging for retailers, who may be hoping for a return to pre-recessionary buying habits. The good news, however, is that the $25 decline in this year's October forecast is far less than what Gallup found in each of the prior two years at this stage in the season and, according to Gallup modeling, would point to a fairly flat year in holiday retail sales if it holds at this level through December. Christmas Bust States in dire need of increased sales tax revenues will not consider flat sales a welcome event, nor will retail stores in light of store hiring plans and rising inventories. Moreover, I rather doubt weak outcomes are priced into the stock market. Perhaps there is some small nominal rise in Christmas spending, but a collapse cannot be ruled out yet either, especially if unemployment benefits are not extended once again. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Extreme Readings in Bullish Investor Sentiment as Insiders Bail at Highest Rate Ever Tracked Posted: 01 Nov 2010 10:13 AM PDT Hallelujah! In a few days the Fed will announce what nearly everyone thinks is the "sure thing" that will propel stocks higher. Supposedly it will be buy the rumor, buy the news, and then keep buying. Trader's Narrative highlights the picture in Sentiment Overview: Week Of October 29th, 2010 Sentiment Surveys Contrarian investors should sit up and take notice as we are finally getting a definitive extreme reading from the weekly AAII sentiment survey. According to the survey, the majority of retail US investors believe that the stock market will be higher 6 months from now: 51.2% were bullish and only 21.6% were bearish. As I mentioned yesterday, this is the first time we are seeing such a larger bullish camp since May 2008 (53%) - this was one of the intermediate peak retracements during the recent bear market. The S&P 500 topped out at 1426 and fell 15% by mid-July 2008. As well, the bull ratio is now slightly above 70% - something we hadn't seen for almost 3 years. That is to say, relative to bears, the AAII didn't have such a large portion of bulls since February 22nd, 2007. This was just before the S&P 500 corrected 6%, falling from 1459 to 1374. This week's survey result is the lowest number of bears since mid-January 2006 (19%). In response the S&P 500 was able to trundle along for a few months basically moving sideways but it peaked in May 2006 about 2% above the January bullish extreme date. From there it declined for the rest of the summer. The result was that basically the first 8 months of 2006 were a wash. Of course, during strong bull markets it can go much higher but in recent years we've seen a range for the bull ratio between 30-70% so this is definitely pushing the upper boundaries. As the examples above illustrate, historically when the AAII survey has been this lopsided towards the bullish camp the equity markets have had a tough time. According to Bespoke, from 1990 onwards, when the bullish levels has been between 50-60% as it is now, the S&P 500 index has returned an average of -0.19% in the following month (49.61% were positive). Trader's Narrative also tracks ABC News CCI, conference board sentiment, consumer confidence, fund flows, investors intelligence, ISE sentiment, Michigan consumer sentiment, NAAIM, OEX options, and put call ratios. Inquiring minds may wish to give the site a closer look. Insider Selling Volume at Highest Level Ever Tracked Investor sentiment is one thing, insider sentiment is another. Behind The Money reports Insider Selling Volume at Highest Level Ever Tracked . The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data. The strategist looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple (AAPL), Google (GOOG), and Amazon (AMZN). Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap (GPS), Target (TGT), Costco (COST), as well as the top insiders in the semiconductor industry at companies such as Altera (ALTR), Broadcom )BRCM), and Sandisk (SNDK). The largest companies in three of the most important leading sectors of the market have seen their executives classified as insiders sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one. The grand total for the three sectors are "as awful as we have ever seen since we began doing this exercise years ago," said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the 'Flash Crash'. "Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally." "At the risk of sounding like a broken record, we expect a significant correction," said the newsletter editor. To be sure, neither excessive nor unwarranted optimism matters until it does. In the meantime, everyone can take comfort in the fact that the high frequency trading robots that dominate trading don't care about sentiment measures of any kind, earnings, unemployment, the implosion in housing, foreclosure fraud, double-dip recessions, the will for political stimulus drying up, trade imbalances, currency wars, or for that matter anything at all. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions Posted: 01 Nov 2010 12:54 AM PDT Reader Jack is interested in corporate cash levels, average hiring costs, and how many jobs corporations might create if they used 1/3 of their corporate cash to hire employees. Jack writes ... Hello Mish Corporate America has somewhere between $1 Trillion and $1.8 Trillion in cash judging from sources I consider "reliable," such as The Wall Street Journal, Bloomberg, etc. That it is a heck of a lot of cash. I hope you might be able to help me in some research I have been trying to do but I have hit brick walls left and right. What I am wondering is how much does it cost a private sector employer, in either the manufacturing or service industry sectors of this nation today, to bring on one full time equivalent employee for one full year? The cost needs to include everything, not just the obvious, such as wages, compensations, benefits, and government taxes. Hiring and training. I know that the employer must have a building to work in or out of, property, plant and equipment. Thus, the employer must meet all of the pre-paid expenses and the overhead that is directly or indirectly associated with bringing on one new full time equivalent employee for one full year. I already placed calls to the National Association of Manufactures and the U.S. Chamber of Commerce with no results. If corporate America (not small and mid-size companies) is sitting on a wad of cash between $1 and $1 trillion, I have to believe they could use 33% of this to fully invest and hire American workers at American facilities making and selling American products or services, either domestically or to our trading partners. To my mind's way of thinking, the entire U.S. "economy" is a function of the number of Americans employed, the average wages they are paid, and their disposable income. thanks much, Jack Corporate Cash Once Again The first problem is that Corporate America is not sitting on that amount of cash that Jack and others think. Please consider Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company. I posted a clarification to the above article in Cash Cow: "Who has the Cash?" Followup. Of the top 50 companies in the S&P 500, net corporate cash (cash minus debt) is negative $749.6 billion. That number was as of data from Yahoo!Finance, some of it from second quarter. I believe the situation is worse now. Premise Flawed Even assuming one could come up with some sort of "average" cost of hire, the number would be useless. What good does it do to figure out the cost to hire the "average worker" if a mining company needs a geologist, Amazon needs a corporate lawyer, or Google needs cloud computing specialists? Companies hire if and only if they need workers, position by position, not by averages. It only makes sense to hire someone if they produce a positive rate of return. Hiring for hiring sake would needlessly burn up corporate cash. Startups are Life-blood of Job Creation Interestingly, Jack focused on large corporations although small businesses and startups are the life-blood of job creation. A study by Tim Kane at the Kaugffman Foundation shows that excluding startups, from 1977 on, there would be no net job growth in the U.S. economy! For more details please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It. The sad fact of the matter is small businesses have no reason to hire, and given the economic uncertainties, starting a business now does not seem to be the wisest thing to do (at least in a general sense). Hiring During Schumpeterian Depressions Inquiring minds will want to consider Anemic Job Creation During The "Schumpeterian Depression" (written over a year ago, well ahead of the curve). Thoughts on the Schumpeterian Depression My friend "BC" writes: During Schumpeterian Depressions, large, cash-rich firms dominate and push increasing scale and standardization, whereas small firms suffer from a lack of capital and a reluctance by banks to lend. This trend should persist well into the next decade, as deflationary depressions and the associated demographic cycle reduces business start-up activities, and this time around Venture Capital activity. Also, younger workers of a peak demographic cohort lack the capital and longevity in the occupational structure to have made sufficient contacts and gotten access to capital and equipment in order to reach the necessary critical mass of experience, reputation, and problem solving one demonstrates sometime in their mid- to late 20s to early to mid-30s. Thus, we are not likely to see a new wave of incremental innovation and new capital formation and business start ups until no earlier than the mid-to-late '10s to early '20s. In the meantime, mass cross-industry consolidation, R&D moving inside large firms, spin-offs, firings, wealth consumption, and shifting composition of household spending led by Boomers in late life will combine to slow growth for years to come. Moreover it is questionable as to whether China and India can buck the larger demographic and Schumpeterian-curve trends, as they have come to rely so heavily upon US supranational firms' Foreign Direct Investment in plants, equipment, trade credits, and intellectual property. The growth of US and Japanese firms' FDI will likely continue to decelerate with "trade" for years to come. For more on Schumpeterian Depressions, please see Creative Destruction. Tax Laws and Other Factors There are still many other factors at play. Corporations do not exist to create jobs, they exist to create profits. When it comes to hiring, if companies can get a higher rate of return by expanding overseas, that is exactly what they will do, and in fact exactly what they should do. Unfortunately, tax law is such that it practically begs companies to move both jobs and profits overseas. Those tax laws benefit huge corporations that can take advantage of monstrous loopholes, to the detriment of everyone else. How $60 Billion is Lost to Tax Loopholes The US Corporate tax rate is 35%. Care to guess what tax rate Google paid? Bloomberg reports Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google's income shifting -- involving strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich" -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. "It's remarkable that Google's effective rate is that low," said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. "We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent." Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay "arm's length" prices for the rights -- or the amount an unrelated company would. Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary's expenses effectively shifts profits overseas. After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission. The IRS gave its consent in a secret pact known as an advanced pricing agreement. Google's $1 Billion-a-Year Loophole For an interactive graphic that shows how the strategy works, please see Inside Google's $1 Billion-a-Year Tax Cutting Strategy. Google Inc. has cut roughly $3 billion from its income tax bill since 2007. It relies on techniques known to tax planners as the "Double Irish" and the "Dutch Sandwich" Microsoft uses a "Double Irish" structure as well. Apple, IBM, and Oracle also use tax schemes, but Google is best at it. Tax Deference Note that these schemes are actually tax deference schemes, not tax avoidance schemes. The tax has to be paid, eventually, at least in theory. What happens in practice is corporations defer taxes perpetually, until there is some sort of tax holiday given to repatriate taxes. Technology Cash Cows Interestingly, a quick check of that first Cash Cow link shows Apple has $46 Billion in net cash, Google $30.1 Billion, Microsoft $30.6 Billion, Cisco $24.6 Billion, and Intel $18.4 billion. That is a combined $149.7 billion in net cash from those 5 corporations. Yet, returning to the original premise, just how likely is it for those companies to use 1/3 of their cash to go on US hiring sprees? Moreover, what does their average hiring costs have to do with average hiring costs in general? It is simply impossible to equate cash on the sidelines (most of it nonexistent except for technology companies), with potential hiring. In Defense of Google Before everyone gets all up in arms about Google, let me point out that Google has more than 20,000 employees, many of them very highly paid. Is that the kind of business you want to punish? I think not. Small Businesses Crucified Small businesses cannot afford the legal teams of Google or Microsoft. Thus, the real tragedy is small businesses and startups (the very foundation for job creation) get hit with 35% Federal tax rates, and states take another 1%-10% (varies by state), on top of that. Yikes! Who wants to start a company in the US, with these disadvantages, with this healthcare mess, with overcapacity nearly everywhere you look, with the likelihood that cities and states will be hiking taxes? I wouldn't. Nor do banks want to lend in this environment. The risks are simply too high. Level the Playing Field The ideal corporate tax rate is 0% but that would not fly in this environment with our deficits. Rather than overtly punish successful businesses like Google and Apple with higher taxes, I propose slashing corporate income taxes across the board to some extremely low level while penalizing profits held overseas, in a revenue neutral fashion. This would level the playing field between big and small businesses, encourage small business creation right here in the US, and encourage repatriation of profits earned or held outside the US. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are subscribed to email updates from Mish's Global Economic Trend Analysis To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610