| Hardball in Wisconsin; Massive Defeat for Unions in Lame-Duck Session Posted: 16 Dec 2010 10:06 PM PST In Wisconsin, governor-elect Scott Walker is in a showdown with state employee unions. "Anything from the decertify all the way through modifications of the current laws in place," Walker said at a luncheon sponsored by the Milwaukee Press Club at the Newsroom Pub.
"The bottom line is that we are going to look at every legal means we have to try to put that balance more on the side of taxpayers and the people who care about services." Union supporters did not like the idea one bit and sought legislation in the lame-duck session that would tie Walker's hands. It was a done deal. The votes were there in the house. In the Senate it was 18-14 in favor. Or so everyone thought. Amazingly, at the last moment, two democrats including Senate Majority Leader Russ Decker switched votes sending the bills up in flames. Please consider Dems end lame duck session after failure to pass union contractsDemocratic Gov. Jim Doyle's administration announced last week it had completed negotiations on 17 contracts covering 39,000 state workers ranging from teachers to janitors. The deals included no pay increases, factored in 16 furlough days Doyle ordered state employees to take in the current state budget and called for 5 percent increases in health care contributions.
The contracts have been a hot issue for Walker. He demanded Doyle's staff stop work on the agreements last month, saying they could hamstring him as he grapples with a $150 million deficit in the current fiscal year and a $3.3 billion shortfall in the next two-year budget.
He wants state workers to make deeper concessions and even suggested he would consider abolishing state employee unions after he takes office.
Democrats pushed on despite Walker's demands, saying he's not the governor yet. But no one realized that former Senate Majority Leader Russ Decker, D-Weston, wasn't on board.
Assembly Democrats convened first Wednesday evening and barely got the contracts through, approving 16 of them by one vote and the last by three votes. The swing voter was Rep. Jeff Wood, who convinced a judge to release him from jail long enough to travel to Madison and vote. Wood, a Chippewa Falls independent who often sides with Democrats, is serving 60 days for impaired driving in Marathon County.
The Senate convened moments later, with Republicans complaining that Democrats were so desperate to tie Walker's hands that they pulled a lawmaker out of jail.
Then, moments before the vote on the first contract, Decker got up and said he couldn't support any of the deals. He said Doyle should have had the contracts ready months ago and the next Legislature should deal with them.
He and Sen. Jeff Plale, D-Milwaukee, voted against the contract, creating a 16-16 tie with Republicans. A tie vote meant the contract failed.
Enraged Democrats immediately recessed to a closed door meeting, stomping angrily out of the chamber. Decker seemed in good spirits on his way into the meeting, laughing when a trailing reporter joked he was getting more media attention than Wood.
When Democrats remerged they had stripped Decker of his leadership post and handed it to Hansen. They returned to the floor and voted on the remaining 16 contracts, but Decker and Plale didn't change their minds and every one of the agreements failed, 16-16. Decker, a 20-year Senate veteran, sat in his chair as the votes went on, looking unaffected. He had nothing to lose; he lost his re-election bid in November and will be out of the Legislature in three weeks anyway. I am not sure exactly what happened but I would not be surprised to see either Russ Decker or Jeff Plale, both who lost reelection bids, find jobs with the new administration. Regardless of what did happen, I definitely look forward to some hardball from governor Jim Doyle. Specifically, I want to see him decertify public unions. If he can get that done, I would support him for president. Nationally, we need to kill collective bargaining for all public unions, scrap Davis-Bacon and all prevailing wage laws, mandate Right-to-Work laws, and do something to cleanup untenable public union pension promises, not just going forward, but existing benefits as well. To do the latter, I propose taxing public union pension benefits above $120,000 at 90%, returning the excess to the pension plans until the plans are fully funded using a reasonable rate of return estimate of the long-term T-Bill rate. That rate is currently 4.25%. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Dear Santa Letters Ask For Clothes, Shoes, Not Toys Posted: 16 Dec 2010 02:25 PM PST Looking for the reason behind soaring apparel sales and weak sales at Best Buy? You can find an explanation in Sad Santa Letters that the United States Post Office opens a reads as part of "Operation Santa". With just nine days to go until Santa shimmies down those chimneys, letters to the big, jolly guy are coming in fast and furious. "The common theme this year seems to be a single mom with young kids, the parent has left -- they don't know who the father is, or the father left -- and they can't pay the bills," said Pete Fontana, head of the United States Postal Service Operation Santa in New York.
"We had one little girl write in and say all she wants is a winter coat for her mom. Nothing for herself," he said. "We had another letter for grandparents and they wanted to put a turkey with the trimmings for the holiday dinner ... but they couldn't even get their medicine."
Other letters are similarly heartbreaking.
Eight-year-old Skayla told Santa that her mother doesn't have a job and her father lives in the Dominican Republic, leaving it up to her grandmother to buy everything. She asked for clothes and shoes for herself, her 7-year-old sister and their infant brother, even including their sizes.
"Thanks Santa," she wrote," I LOVE YOU."
How You Can Help
If you want to help make a Christmas wish come true, the best way is to Contact a local post office participating in Operation Santa. Industrywide Demand for Electronics is SoftPlease consider Best Buy cuts outlook as results disappoint. Dec. 14, 2010, 12:55 p.m. EST
The No. 1 U.S. electronics retailer's profit fell as lower demand for televisions, notebook computers and videogames led to a sales shortfall in the U.S. While margin widened slightly, analysts said they were concerned that it came at the expense of sales.
Best Buy Co. shares tumbled more than 15% Tuesday, their biggest decline in more than eight years, after the retailer reported an unexpected decline in fiscal third-quarter profit and cut its outlook.
"There's interest there from consumers on the latest and greatest, but really they are making trade-offs in their discretionary spending, not only across CE [consumer electronics], but within CE categories, where there are periods of time we may have historically seen them buy multiple large products in a year, they are being more choosey at this point in time," said Muehlbauer [Best Buy's CFO] on a conference call with analysts. Ample WarningThere was ample warning for that huge miss at Best Buy. On December 3, a report from SpendingPulse showed Retail Sales Led by Apparel, Consumer Electronics and Appliances Down.Retail sales are way up year-over-year and apparel is leading the way. I have this email from SpendingPulse to share: ....
Year-over-year Total Apparel sales in November saw another sharp monthly increase. At 9.6% this was the largest year-over-year growth in 2010 for that sector following the previous record in October. Total apparel has enjoyed 8 out of 11 months of year-over-year gains so far in 2010. In November, all of the sub-sectors posted year-over-year growth.
For the second consecutive month, the Consumer Electronics and Appliances segment posted a year-over-year decline, although at -1.1%, it was not as severe as October's decline. The Consumer Electronics sub-category was down by 1% while the Appliance sub-sector fell by 1.6% year-over-year.
Pent Up Demand For Clothes
The SpendingPulse report shows a pent-up demand, not for junk, electronics, or appliances, but for specifically clothes. Repeating my ending comment from the above article: It's nice to see shoppers focus on real needs instead of electronic garbage. However, pent-up demand for apparel cannot last forever, nor can apparel sales form the foundation for a lasting recovery. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Plowing Into Junk While Insiders Bail Posted: 16 Dec 2010 10:06 AM PST After an enormous rally in junk bonds in 2009 and 2010, Goldman Sachs, JPMorgan, Neuberger Berman, Guggenheim Partners, and Schroders Investment Management all recommend increased risk. Meanwhile investor sentiment on US treasuries is at a record low and the bull-bear spread on equities has widened out to 36.3. According to Dave Rosenberg, that bull-bear spread is within striking distance of the 42.4 all-time high posted in October 2007. Please consider Junk Spreads Narrow to 2007 Level on Fed's QE2The extra yield investors demand to own high-risk debt rather than government bonds has dropped 82 basis points this month to 540 basis points, or 5.4 percentage points, the lowest since Nov. 16, 2007, according to Bank of America Merrill Lynch's U.S. High-Yield Master II index.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising clients to buy speculative-grade debt in 2011, even after gains of 14 percent this year and a record 57.5 percent in 2009.
"We're going to start taking more risk as we go into next year because the economic fundamentals are better," said Thomas O'Reilly, a managing director in Chicago at Neuberger Berman Fixed Income LLC, which oversees $11 billion in junk bonds.
Spreads on high-yield debt have tightened 187 basis points from this year's high on June 11, according to Bank of America Merrill Lynch index data. The riskiest tier has narrowed the most this month, falling 122 basis points to 906, according to the bank's US High Yield, CCC and Lower Rated index. Investment- grade bonds have dropped 13 basis points to 169.
"The sweet spot is high yield," said Alberto Gallo, a credit strategist at Goldman Sachs in New York, which favors bonds with B ratings. "You want to gain as much spread exposure as possible, and you want to decrease your rate exposure, which is what you achieve with high yield."
JPMorgan says investors should be "overweight" CCC ranked securities as the economy grows faster than expected, the New York-based bank's Peter Acciavatti wrote Dec. 8 in a report. Overall, high-yield bonds will return 9.8 percent, he wrote.
"Certainly in my mind, QE2 is working," said Scott Minerd, chief investment officer at Guggenheim Partners LLC in Santa Monica, California, where he oversees more than $100 billion. "As the availability of credit continues to increase as a result of monetary expansion, the prices of high yield relative to other assets should continue rising. And that makes high yield a safer place to be."
Junk bonds should help shield investors from losses stemming from rising interest rates and inflation, said Lucette Yvernault, who helps oversee the equivalent of about 7 billion euros ($9.3 billion) as a money manager at Schroders Investment Management Ltd. in London.
Total return money managers, hedge funds and proprietary trading desks are all "eagerly" boosting their exposure to credit risk across asset classes, Ken Hackel, head of securitized product strategy at CRT Capital Group LLC in Stamford, Connecticut, wrote in a Dec. 15 note.
The U.S. default rate for junk-rated debt is expected to drop to 2.2 percent by this time next year, from 3.6 percent in October, Moody's said in a report.
High-yield bonds will return about 7 percent to 12 percent in 2011 as defaults are "near zero" for the next few years, said O'Reilly of Neuberger, which in the past 13 years has owned one security that defaulted.
Guggenheim's Minerd is adding junk bonds, focusing on those with B ratings in the 7- to 10-year range that yield more than 10 percent, and shorter-term notes that pay at least 6 percent.
"The forward momentum in the economy is very strong," Minerd said. "We expect that next year will be one of the best for the economy that we've seen over the past 10 years." That is about as lopsided sentiment ever gets. The time to buy asset classes is when everyone hates them, not when everyone loves them. Nonetheless, extreme sentiment is only an indicator of extreme risk (or opportunity), not a timing mechanism. The Inside BetMeanwhile corporate insiders (those most likely to actually know something), are bailing stock at a near record pace as Mark Hulbert explains in The Inside Bet. Vickers Weekly Insider Report is a service that analyzes the insider data, calculating each week a ratio of the number of shares that insiders have sold that week to the number that they have bought. Over the last four decades, according to Vickers, this ratio has averaged between 2 and 2.5 to 1. As a result, the firm considers any reading above 2.5-to-1 to be bearish, since it indicates an above-average pace of selling on the part of insiders.
You better be sitting down before reading what this sell-to-buy ratio was this past week: 7.07-to-1. In other words, corporate insiders on balance are selling more than seven shares for every one that they are buying.
The last time this ratio was this high was the week ending Feb. 14, 2007, almost four years ago.
Does this mean the market will immediately tank? Of course not.
In fact, Jonathan Moreland, editor of the Insider Insights advisory service, advises clients to not prematurely give up on the rally, despite the worrisome recent trend of insider behavior: "Experience has taught us that it is usually best to stay the course until the indices themselves begin to show a change in trend. There is still good money to be made staying long in the late stages of a rally."
Therefore, Moreland concludes, even as he remains on "high alert for a trend change," for the moment he will continue to be fully invested.
David Coleman, editor of the Vickers Weekly Insider Report, is not willing to give the rally the benefit of the doubt that Moreland is willing to do. His two model portfolios currently have an average of about 60% allocated to cash, and in addition, one is hedged with a put option on the S&P 500 index Insider sales, together with extremely bullish equity and junk bond sentiment, and extremely bearish treasury sentiment, along with numerous technical divergences in the stock market, sounds one of the biggest warning bells in history. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| EU Agrees to Agree in 2013, Bickers Like Mad Now; Smoldering Greece, Smoldering Politics Posted: 16 Dec 2010 01:37 AM PST Pretty speeches regarding solidarity will not solve the European debt crisis. Yet, as Greece smolders in riots and firebombs over various austerity measures, pretty speeches, untenable pledges regarding haircuts, and continual bickering remain the only action items of note coming from Europe. Smoldering PoliticsGreece is not the only thing smoldering right now. Eurozone politics is on the front burner, with the heat on high. Please consider Europe Staggers as Critical Summit LoomsEurope's smoldering financial crisis flared up on Wednesday, with riots over austerity spending in Greece, new signs of troubles in Spain and little indication that European leaders were moving any closer to agreement on a systemic approach to long-term stability.
In remarks to the German Parliament on Wednesday, Germany's chancellor, Angela Merkel, tried to reassure the markets and answer some of her own critics by allaying fears about the future of the 16-nation monetary union.
"No one in Europe will be left alone, no one in Europe will be abandoned," Mrs. Merkel said, offering an olive branch to her European partners, some of whom have questioned her commitment to the union. "Europe succeeds when it acts together and, I would add, Europe succeeds only when it acts together."
Mrs. Merkel's soothing words were undercut, for example, by her adamant rejection of euro bonds, European-wide bonds that would provide a way for the euro zone to pool its debt and risk, allowing weaker members to borrow at lower rates.
With Irish elections scheduled for early next year, investors worried that the opposition's threatened move could soon become reality.
"Those who think we can unilaterally renege on senior bondholders against the wishes of the E.C.B. are living in fantasy land," said Ireland's finance minister, Brian Lenihan, referring to the European Central Bank.
In Greece, in a reminder of the social and political costs of extended austerity programs, Athens was hit with its seventh general strike this year, grounding flights, keeping ferries in ports, halting trains and closing government offices and schools.
Opposition to the measures, and to the pressure being applied by international creditors, was clear in the streets on Wednesday. Angry protesters wielded placards reading "I.M.F. out!" and "Let us not live as slaves!" while others chanted "Thieves, thieves!" and "Shame on you!" to unseen deputies in Parliament.
Recently, Merkel has been criticized for opposing an increase in the size of the nearly $1 trillion bailout fund operated by the European Union and the International Monetary Fund and for dismissing the euro-bond plan.
"Germany's thinking was a bit simplistic on this," said Jean-Claude Juncker, prime minister of Luxembourg and chairman of the group of euro-zone finance ministers, in a blistering attack last week in the German newspaper Die Zeit. "They are rejecting an idea before studying it.
In her remarks to Parliament on Wednesday, Mrs. Merkel tried to redefine the narrative of events shaking the union: "It is undeniable," she said, "that some euro-zone countries face difficult challenges. But it is also undeniable that the euro has shown itself to be crisis-proof."
Untenable Pledges Regarding Haircuts and a "Crisis-Proof" EuroDoes that look like a good backdrop for heading into a summit? I think not, and given that the Euro is in the midst of a crisis, Merkel's statements about crisis-proof certainly look absurd. Moreover, once Ireland's finance minister is thrown out on his ass, we will see just who is in fantasy land regarding haircuts on bonds. My position is that the sooner Ireland tells the IMF and EU where to go, the better off Ireland will be. For more on this angle, please see To Ireland With Love. Agreement to Agree in 2013The summit is about to start but there is so much bickering going on that the current discussion pertains to what the agreement will look like post 2013. Bloomberg reports EU Faces 'Gridlock' on Debt Crisis, Nears Deal on Post-2013 ToolEuropean Union divisions widened over how to contain the debt contagion that threatens the euro, limiting a summit starting today to agreeing on a crisis- management mechanism that takes effect in 2013.
Strife among Merkel, the European Central Bank, Luxembourg Prime Minister Jean-Claude Juncker, and the German domestic opposition intensified on the eve of the Brussels summit, marring confidence in Europe's handling of the fiscal woes that forced Greece and Ireland to fall back on financial handouts.
EU governments are close to agreeing on a two-sentence amendment to the bloc's Lisbon Treaty foreseeing a "mechanism to safeguard the stability of the euro area as a whole" with financial aid for distressed governments "subject to strict conditionality," EU officials told reporters in Brussels yesterday.
Germany has failed to get a reference to possible costs for bondholders enshrined in the treaty and is virtually alone in pushing for the amendment to say that any financial assistance will only be offered as a "last resort," the officials said.
Merkel continued to hold out against calls by ECB President Jean-Claude Trichet to put more money into the aid fund. The ECB has bought 72 billion euros of weaker countries' debt since May under a policy without unanimous support on the bank's council.
Driven by a German public outcry against aiding fiscally reckless countries, Merkel also ruled out retooling the support facility to buy troubled governments' bonds and opposed further entwining Europe's economies by consenting to joint borrowing.
Luxembourg's Juncker, the promoter of the joint bond-sale proposal, said it won't go anywhere at the summit. Juncker told Luxemburger Wort newspaper that Germany is "allergic" to the idea, fearing it would push up German borrowing costs. Crisis Won't WaitOne thing I am sure of is the crisis won't wait until 2013. Frank-Walter Steinmeier and Peer Steinbrück, former German foreign minister and former German minister of finance respectively, came up with a multi-point proposal that could conceivably work. Please see PIGS Exposure Table, Explaining the Panic by Numbers; Credit Warning in Spain, Belguim; Piecemeal Proposals Doomed for details. That's the good news. The bad news is the Steinmeier-Steinbrück plan would require agreements on haircuts, debt guarantees, E-bonds, fiscal policies, and debt rescues. Good luck with that. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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