Good News, Bad News with SEC

Bad news - still no letter back with comments on the application.

Good news (when you are stretching for good news) - just found out the SEC is required to respond to the mutual fund filing by the 6 month mark.  Rather than being launched in April as I assumed, we are (sadly) approaching the 4 month mark.  But at least there is a worse case scenario date that cannot be breached.

Off to bang my head against a wall for another week...

Nearly 1 in 20 Working Age Americans are on Disability, a Doubling versus 1990

While I've spent a lot of time talking about the massive increase in food stamp usage (when I started the blog it was 1 in 11 Americans, it is now 1 in 7 Americans ... including 1 in 4 children), I have rarely touched the somewhat contentious issue of disability benefits.  This is not even one of the key anti poverty programs that have exploded in use [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare] in the "Dependence Economy" .[Apr 4, 2011: Economix - The Dependence Economy; Only Half of Average Americans Income Comes via Wages]

So aside from these numbing statistics,in a country of just over 300M....

50 million Americans on Medicaid  (keep in mind this excludes the substantial fraction of Americans with no health insurance)
10 million on unemployment benefits (peaked at 12m, but some people are exhausting their 2 years of eligibility)
40 million Americans on food stamps
4.4 million on welfare

....this NYT story indicates 1 in 21 working age Americans (age 21 to 64) is on disability insurance.  That was pretty shocking to me - it is not an area I have studied much.  At just under 5% of all working Americans, that is a doubling from the levels seen just 2 decades ago.  In 2010 alone, the number of people enrolled jumped by half a million which can help us explain part of the huge drop in workforce labor participation in the U.S. (some 2M Americans have simply dropped off the map)  If a somewhat similar number was seen in 2009 (which looking at the 45 degree angle of growth in the chart below would appear very likely) that would explain away half of the 2M Americans who have disappeared from the workforce.

 Without getting into the typical arguments about "someone is scamming the system" it does make one scratch your head when you consider much more work in the US is "service oriented" (and in theory should take less of a toll on the body) than the manufacturing type of work that used to be more common in the 60s, 70s, and even 80s.  The article says this is due to a sharp increase in mental illness and muscular-skeletal/back ailments than in previous generations.

Of course as the % enrolled has doubled, the cost has actually tripled since 1990 - from $40B a year to $120B annually.   That would place the cost above food stamps + welfare combined.... again, I had no idea about this until reading these stories.  I also did not know after 2 years in the disability program, you qualify for Medicare regardless of age.

Without getting all "GOP", one wonders if we are reaching a tipping point where so many Americans are dependent on government, that it will be impossible to ever truly cut back on these programs as so much of the population now has a stake in receiving monies from one or multiple programs. 

• ....at a time when employers are struggling to create spots for the 13.5 million people actively looking for jobs, helping people like Mr. Howard find employment — or keeping them working in the first place — is becoming increasingly important to the nation’s fiscal health.
• For the last five years, Social Security has paid out more in benefits to disabled workers than it has taken in from payroll taxes. Government actuaries forecast that the disability trust fund will run out of money by 2018.
• About 8.2 million people collected disabled worker benefits totaling $115 billion last year, up from 5 million a decade earlier. About one in 21 Americans from age 25 to 64 receive the benefit, according to an analysis of Social Security data, compared with one in 30 a little over a decade ago.
• Along with monthly checks that are based on the worker’s earnings history, beneficiaries generally qualify for Medicare — otherwise reserved for those over 65 — two years after being admitted to the disability rolls.
• There are several reasons for the increase in beneficiaries. Baby boomers are hitting the age when health starts to deteriorate, and more people are claiming back and other muscular-skeletal ailments and mental illnesses than claimed those as disabilities a generation ago. 
• Lawyers who solicit clients on television and on the Internet probably play a role. And administrative law judges say pressure to process cases sometimes leads to more disability claims being accepted.
• But given the difficult job market, some economists say they believe that an increasing number of people rely on disability benefits as a kind of shadow safety net.

• The program was designed to help workers who are “permanently and totally disabled,” and administration officials say that it is an important lifeline for many people who simply cannot work at all. But Social Security officials can take into consideration a claimant’s age, skills and ability to retrain when determining eligibility. So one question is: How many of these beneficiaries could work, given the right services and workplace accommodations? 
• Nicole Maestas, an economist at the Rand Corporation, has examined Social Security data with fellow economist Kathleen J. Mullen, and concluded that in the absence of benefits, about 18 percent of recipients could work and earn at least $12,000 a year, the threshold at which benefits are suspended.  Other economists say that even among those denied benefits, a majority fail to go back to work, in part because of medical problems and a lack of marketable skills. 

Once you are "in", it appears you never leave.

• Even if claimants have more ambiguous medical cases, once they are granted disability benefits, they generally continue to collect. Of the 567,395 medical reviews conducted on beneficiaries in 2009, Social Security expects less than 1 percent to leave because of improved health.  The benefits have no expiration date, like the current 99-week limit for collecting unemployment. 
• And because many people spend years appealing denials and building their medical case before being granted benefits, their skills often atrophy and gaps open on their résumés, making it more difficult for them to get back to work.
• Out of 12.5 million disabled workers and those who receive benefits for the disabled poor, only 13,656 returned to work over the last two and a half years, with less than a third of them earning enough to drop the benefits. 

------------------------


In a very related story, the WSJ says insolvency looms as states drain the U.S. disability fund.  According to this article, we have yet another future bailout (along with the state and local pension plans) coming down the road.

Strange fact - Puerto Rico has the highest % of people who get their application approved, at 63%, 4% higher than any of the traditional U.S. states.

[click to enlarge]

• The SSDI is set to soon become the first big federal benefit program to run out of cash—and one of the main reasons is U.S. states and territories have a large say in who qualifies for the federally funded program. Without changes, the Social Security retirement fund can survive intact through about 2040 and Medicare through 2029. The disability fund, however, will run dry in four to seven years without federal intervention, government auditors say.
• In addition to the uneven selection process, SSDI has been pushed to the brink of insolvency by the sour economy. A huge wave of applicants joined the program over the past decade, boosting it from 6.6 million beneficiaries in 2000 to 10.2 million in 2010. New recipients have come from across the country, with an 85% increase in Texas over 10 years and a 69% increase in New Hampshire. 
• Unlike Medicare or the Social Security retirement fund, which provide benefits mostly based on age, SSDI decisions are based in large part on medical opinions, which can vary from doctor to doctor, state to state.  Because someone else pays the bills, local officials have little incentive to keep the numbers low. The feds have tried to enforce consistency, but the process relies heavily on the judgment of doctors and administrative law judges who hear appeals.  
• In 2009, benefits averaged $1,064 a month. But the program opens up access for recipients to other government programs, multiplying the ultimate cost to taxpayers.  Anyone who spends two years on SSDI qualifies for the Medicare health program, which usually is available only for those 65 years old and older. SSDI recipients tend to remain tethered to the program for years, and the government's lifetime financial commitment averages $300,000 per person, estimates David Autor, an SSDI expert who teaches at the Massachusetts Institute of Technology. "The system has profound problems," Mr. Autor said.
• Supporters say SSDI serves a vital need for millions of people who have paid into the system, qualify for the benefits and depend on the income. Some contend its problems can be fixed by raising taxes or by diverting money from the Social Security fund for retirees.
• Critics have raised concerns about the solvency of the program, backed by a report last year from the nonpartisan Government Accountability Office alleging that the government was paying benefits to some people who didn't deserve them.  
• The disability insurance trust fund was created in 1957 to provide a backstop to people who worked several years before suffering a debilitating illness or injury. Disability beneficiaries can now include those with cancer, chronic back pain, persistent anxiety and schizophrenia. Applicants should no longer be able to work in a substantial, gainful way, and must provide medical records affirming the likelihood the applicant won't be able to work for at least another year, or that their health problems would eventually result in death. 
• In 2005, SSDI began spending more money than it brought in through tax receipts. In 2010, the number of beneficiaries grew by 489,488, the largest one-year increase ever. It is projected to spend $153 billion on benefits and other costs in 2015, $22 billion more than it brings in through tax revenue and other income. Its surplus funds built up over the years are expected to be extinguished in four to seven years.
• Doctors in the area say applicants are still pouring into the system. Several said the SSDI program has become so large, and in some cases so dependent on medical opinions, that patients have worked out which doctors and government officials are less stringent, a phenomenon that lawyers in the U.S. said is also occurring in different parts of the country. They say this explains the high concentrations of beneficiaries in certain areas.

10 Day Moving Average Rule Hits as S&P 500 Goes through 6th Day of Consolidation

The market continues to show tremendous resiliency and an inability to pull back.  This is the 6th day of a tight trading range, and that has allowed the 10 day (exponential) moving average to catch up to the freight train that has been the market.  Outside of exogenous global events, the S&P 500 has essentially held the 10 to 13 day moving average range the entire rally.

Speaking of exogenous events, it is remarkable how global bailouts are now taken in stride.  Nearly a year ago the Greece sovereign crisis led to a worldwide selloff - some of the heaviest selling since the rally began in March 2009.  Then in November 2010, we had a more modest selloff of about 6-7% due to the Irish sovereign debt crisis.

The current Portugal sovereign debt crisis, in which a formal request to be bailed out was announced in the past 24 hours?  Who cares!  Business as usual in the bailout nation globe.   Of course part of this has to do with the ESFS (a sort of TARP for European countries), but the market has become numb to things that would be unthinkable just 3 years ago.

Josepth Stiglitz: Of the 1%, By the 1%, For the 1%

A pretty interesting commentary by economist Joseph Stiglitz in Vanity Fair on the concentration of wealth and inequality in the United States.  For those not familiar with Stiglitz he would definitely be considered "left" ala Paul Krugman.  That said, some fair points in this piece as the U.S. continues to take on more characteristics of a lot of other countries (that we don't want to be like).   Certainly 'equality of all' is not the goal in terms of economics - no one wants to be the old USSR - and economic incentives are very important for productivity, but the gaping (and expanding) chasm between top and bottom has many potential societal issues. [Sep 7, 2009: Citigroup 2006 - America, a Modern Day Plutonomy]

Aside from concentration of wealth one big worry is that what was once America's strength was economic mobility.  It was relatively easy to advance from the economic 'class' you were born, to a significantly higher one.  While still possible today, from a few surveys I've read the past year the U.S. now has less economic mobility than many of the "socialist" countries we deride in Europe.  I think that would come to a shock to many since we still have the "Facebook effect" - i.e. the 1 in 10 million chance you can go from nothing to billionaire.  Anyhow, with the political class captured I expect nothing to change and indeed this path we've been on the past few decades to continue.  Bread and circuses for the rest.

It is a lengthy piece so follow the link below for the entire thing.

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

Via Vanity Fair:

• It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. 
• One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. 
• All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran.  
• Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. 
• The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin. 
• Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.
• ....many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy. 
• The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. 
• In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general. 
• As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

[Jan 16, 2011: The Atlantic - The Rise of the New Global Elite]
[Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]

AP: Rising Costs, Higher Wages Drive Low Cost Manufacturing Out of Southern China

Even in a country of over a billion the relentless push to find cheaper and cheaper labor has limits.  First the relatively prosperous coastal east became pricey in terms of labor, and now it appears it has spread to the south.   [Jan 27, 2011: China Raises Minimum Wage... Again] [Feb 27, 2008: China Raising Minimum Wage] [Jun 2, 2010: Cheap Labor Fighting Back in China]   The far more remote western and central regions appear to be the last bastions... then?  If the supply chain is not going to move wholesale to Indonesia or Vietnam (which would be doubtful) the multi decade push down in exported product prices that the Chinese manufacturer has produced, could reverse.  Then again, automation could prosper for Chinese manufacturers to lower costs... but then what to do with all the excess labor?

Via AP:

• When millions of workers didn't return to their southern China factory jobs after Lunar New Year holidays, a turning point was reached for foreign manufacturers scraping by with slim profit margins.  Companies were already under pressure from rising raw material costs, restive workers and lower payments for exports because of a stronger Chinese currency. Despite hiking wages, labor shortages kept getting worse as workers increasingly spurned the often repetitive and unskilled jobs that helped earn China its reputation as the world's low-cost factory floor.
• "I don't know of any factory in China that can absorb both the raw material prices we have, the labor issues we've been looking at and the renminbi," China's strengthening currency, said Hubbs. The currency is also known as the yuan.  He's joining a wave of export manufacturers, big and small, that are moving from China's coastal manufacturing regions to cheaper inland provinces or out of the country altogether, in a clear sign that southern China's days as a low-cost manufacturing powerhouse are numbered.
• Foxconn Technology Group -- the world's biggest contract electronics manufacturer with customers including Apple Inc., Sony Corp. and Hewlett-Packard Co. -- is planning to gradually cut its workforce of 400,000 in the southern Chinese city of Shenzhen by a quarter and move the bulk of manufacturing inland. 
• China watchers at Credit Suisse, an investment bank, call the shift an "historical turning point" for China's economy and perhaps the world as the country's role in keeping global inflation low by supplying cheap goods is set to end.
• "It may take a decade for China to see its export competitiveness erode, but we have seen the beginning of this happening," the Credit Suisse report said, predicting that salaries for China's estimated 150 million migrant workers would rise 20 to 30 percent a year for the next three to five years.
• That's partly because China's traditional advantage -- its vast, cheap pool of workers -- is drying up. Economists say it's the result of a rapidly aging population after 40 years of the one-child policy.
• The ripple effects of rising costs in China are already being felt around the globe. U.S. clothing retailers are raising prices for shirts and other garments by 10% on average after a decade of price falls, partly due to higher labor costs in China.
• China's blistering growth has also lifted incomes and created more opportunities in poorer inland provinces, which means fewer people leaving for jobs in the richer coastal cities.  Some 30 to 40% of migrant workers didn't return to their factory jobs in Guangdong province's Pearl River Delta manufacturing heartland after the annual Lunar New Year holiday in February, said Stanley Lau, deputy chairman of the Hong Kong Federation of Industries. Typically the proportion is 10 to 15%.  That was despite Guangdong authorities raising minimum wages by up to 20% in March.
• Many factories already pay more to retain workers but are still having a hard time finding manpower.  Hubbs employs about 500 workers earning 1,800 to 2,000 yuan ($275 to $306) a month, a lot higher than Guangzhou's 1,300 yuan minimum wage, which came into effect March 1. But he's still short about 100 people, resulting in a 90-day turnaround time for orders, twice as long as he'd like. 
• He wants to move 30 to 40% of production to a new factory in Cambodia, Laos or even Myanmar in six to eight months.  Hubbs has looked at moving elsewhere in China but doesn't think the cost savings would last beyond two or three years as wages and prices even out across the country.
• Greater use of automation is also becoming more economic.  CBL Group, a contract manufacturer, has five welding robots used to assemble brackets for hospital beds and seat frames for new carriages on the New York subway. Chairman Gideon Milstein said he bought them in 2007 and 2008 for $600,000 because they could track welds by computer to ensure they were up to standard.  At the time, it was cheaper to weld by hand but that's changing because wages for skilled human welders are going up.  "It will soon be cheaper to weld by robot than it is by human in China," Milstein said.

[Apr 7, 2010: Vietnam Begins to Lure Business Away from China]
[Rising Factory Costs Erode China's Edge]
[China's Inflation Hits American Price Tags]

[Chart] As S&P 500 Surges, Volume Plunges - Old Rules Continue to be Useless

I often bemoan how so many of the rules those of us in the market pre 2009 had learned, have become useless in the new paradigm Fed supported era.  One of the most flagrant is the concept that healthy moves up should be supported by volume expansion - frankly that is a bedrock concept in the technical analysis community.  This rule has been obliterated during the past few years.  Ritholtz over at the Big Picture flagged this amazing graph via Bloomberg that cross references the advance in the S&P 500 with volume.  As they say a picture says a thousand words.... volumes have fallen by some 40% in stair step fashion since the market bottom in spring 2009, yet the markets go up almost non stop.  Remarkable.

If current trends persist I assume when the S&P hits 2500, there will be 100 shares trading a day?

[click to enlarge]

• The CHART OF THE DAY compares the Standard & Poor’s 500 Index with daily share trading in exchange-listed companies, as compiled by Bloomberg, during the past two years. The latter is represented by a 200-day moving average, which smoothes out day- to-day swings in buying and selling.

[Video] Yahoo Breakout: Eric Sprott Says Silver Doubles from Here

Before the body of the piece, for those wondering whatever happened to Jeff Macke after his infamous CNBC meltdown, he has resurfaced on Yahoo's expanded Finance section, sharing a platform with ex-CNBCer Matt Nesto.

Yesterday 'the boyz' had a video session with a man much more famous in Canadian financial markets, than American - Eric Sprott.  [Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme Ever]  Keep in mind, like most managers, Sprott is talking his book as he has a multitude of commodity based products under his wing... but he reaffirmed an extremely positive view on silver.  Indeed despite the 22% gain in Q1 2011 alone, he sees it doubling again to $80.

With all the major currencies headed by central bankers happy to devalue it, the case against precious metals is difficult to make.  One can assume when the next recession happens (cyclically it should be here within 3 years), the only game plan in town nowadays is another global round of quantitative easing and fiscal deficit spending to the moon.  Rinse. Wash. Repeat.

(lost in the Fed speak the past few weeks, I read yesterday the Bank of Japan has put in $275 BILLION USD worth of yen into the system since the earthquake - relative to their economy size, that would be akin to the Fed doing $1 TRILLION - in a few weeks!)

In the nearer term, as the Fed works on creating the 3rd bubble in 12 years, it looks like commodities are going to be the "winners" this time around.   As we saw with NASDAQ stocks and U.S. real estate, the last stages of the bubble will be parabolic moves upward - and then the crash.  But until then, speculators will want to play the Fed's mandate to create bubbles.  And unlike the appreciation in housing and stocks during the last 2 Fed bubbles, the move UPWARD in commodities is causing all sort of pain for citizens globally.  Got corn?

------------------------------

6 minute video

• Sprott, the chief investment officer and CEO of Sprott Asset Management, doesn't see a bubble in gold, calling it wildly under-owned when viewed in historical terms. But if you want to get the genial Sprott really worked up, ask him about silver. Even at three-decade highs near $40 an ounce, Sprott says silver will more than double from here.
• What would change his mind? Global stability and rational central bank behavior. Nothing, in other words.
• When pushed, Sprott says $2,000 gold and $50 silver are possible in 2011. But he's got the kind of macro bullishness that leads to buying any and all dips, as he believes higher levels for precious metals are inevitable.
• "I've owned gold for 11 years, and I've never sold any of it," Sprott says with conviction. And gold is only his second favorite metal. As befitting a hedge fund manager, Sprott is betting on other assets declining in price as his precious metals soar. He's bearish on base metals -- those used in production -- and he's shorting financial and consumer-related companies.

No position

Gap Up Open Right on Schedule

Yesterday I wrote

While the small and mid caps have already moved forward to new highs everyone is simply waiting for the S&P 500 to break through the old February highs in the mid 1340s so we can continue the song and dance.  I would not be surprised to see this happen via a gap up open, sooner rather than later.

And this morning, we have a large move up in futures for no apparent reason other than it's been a few sessions since we've had one.  Sorry to be cynical about it, but anyone watching this market the past few years can see anytime we struggle with a technical level, the "urgent buyer" (someone who apparently does not care what price 'he' pays, but is happy to drive the entire market up in the overnight session usually for no good reason) comes in, and off to the races we go.

Looking back at the February highs, the intraday high was 1344 on the 18th, with the closing high at 1343 so I'd expect the premarket surge to take us right near those levels.  After most of the dirty work is done in the overnight session, we often see either flat or downward moves during the actual regular hours, so we'll see how today goes.  This is definitely the pivot point of the week as I outlined Monday - and with little in the way of economic news, we'll continue to trade on technicals until earning season comes upon us.

Marc Faber Expose on CNBC.com

I know a lot of readers here are fans of Marc Faber, but even if one is not, there are very few who can entertain like this man while offering his market views.  While tagged as "doom and gloom" I generally find much of what he says very realistic - especially in the near and intermediate term.  In the long run, we're all dead.   If you are a fan, there is a quite lengthy expose on the man's career on CNBC.com which I found to be an interesting read.  Unfortunately there is no video specific to the piece- much like Hugh Hendry, a story on this guy without an accompanying video is just a shame.

Click here for full story.  Some snippets:

• The thing about predictions is that if you make enough of them, eventually they’ll start to come true. Being a good enough prognosticator to hold the investor community’s attention most of the time is an entirely different matter.  That’s what economist and market forecaster Marc Faber has clearly become. But even he isn’t perfect. His best prediction of all time, he says, was also the worst investment call he’s ever made. “That was the prediction that the tech bubble would burst,” which he made in 1998. “But it came two years too early.”
• Identifying market lows is much easier than calling market highs, Faber believes. Bubbles always seem to blow up further than expected. “I have always underestimated the madness of the investment community,” he says.
• In terms of timing, his best bet was to recommend selling stocks a week before the 1987 crash. But even that had more than an element of luck. “It was a coincidence that it happened a week later,” he admits.
• Still, it’s those kinds of calls that have made Faber a favorite board member, panelist and prognosticator. Subscriptions to his monthly “Gloom, Boom & Doom Report” run as high as $1,500 per year, or $300 for an abbreviated market commentary.
• “He sometimes gets it wrong,” Hong Kong-based writer Nury Vittachi notes, “but one doesn’t mind someone getting it wrong as long as they have taken a stance. It’s the people that don’t take a risk who don’t get any respect.” 
• His outspoken nature, and deep knowledge of the history of financial markets, have made him a popular speaker. TV anchor Bernie Lo, who has interviewed him since the early 1990s, says he is one of the most anticipated guests, generating a flood of emails and inquiries ahead of any appearance.
• Faber is one of the few Asia-based experts who command worldwide attention. He ranks along with investment gurus Mark Mobius and Jim Rogers in terms of the attention his predictions get, Lo says, noting it’s standing-room-only to hear his addresses at investment conferences. “People love him,” Lo says. “He is entertainment and historical perspective, all in one package.”
• Given a hectic travel schedule, Faber spends only a week out of every month at home, and three weeks on the road.

This is a hilarious outtake from the article:

• The same kind of logic applied to his run on Wall Street, which began in 1970 at the firm White Weld & Co. with a role summarizing economic research to send to overseas offices, in the pre-Internet days. He got to know future U.S. Federal Reserve Chairman Alan Greenspan, who gave a briefing to the firm every two weeks.  “At the end I was the only person attending because all he did was summarize the Wall Street Journal of the previous day,” Faber says.

Latest views:

• Faber predicts now that the financial system will ultimately break down, and even forecasts that the current fad of printing money in the West will lead to World War III. In the meantime, own stocks, real estate and commodities, not bonds and cash, he recommends.
• Among his favorite current calls: invest in natural gas, now very cheap, and Japanese stocks. Beware the U.S. stock market, particularly small- and mid-cap stocks. Gradually buy gold. Real estate is a bargain, though not in China and Hong Kong. Emerging markets are likely to continue to correct, and the U.S. dollar should gain.

Market is Working Off Overbought Condition via Time not Price

Much as we've seen since August 2010 (excluding the 2 quick and dirty selloff of three weeks each in November 10 and March 11), there is no pulling back in this market.  Big moves up can be consolidated by price (a pullback) or time (sideways action).  The latter has been the case consistently since QE2 was promised and then delivered to this market.  The last 4 days the S&P 500 has been in a very tight range, on piddling volume, consolidating a huge 2 week move. This action bodes well for bulls and poorly for bears - especially since all bad economic news has been ignored.  Rally, consolidate sideways, and rally some more has been the pattern of this market and until that pattern changes, traders will continue to assume it continues and act accordingly. Until we see the behavior change, it is quite useless to fight it.

I've placed the 10 day moving average on the chart below because the move up has been so relentless since August 2010 that (excluding those 2 quick corrections) we don't fall farther than level during the rallies.  In fact during the move from early December to mid February only one day (the day massive Egyptian violence broke out) was this level seriously punctured.

While this move up has again come on pathetic volume, that is nothing new to the new paradigm action - where you once looked for confirmation of moves upward by expanding volume, now we can move up constantly on a trickle of volume.   While the small and mid caps have already moved forward to new highs everyone is simply waiting for the S&P 500 to break through the old February highs in the mid 1340s so we can continue the song and dance.  I would not be surprised to see this happen via a gap up open, sooner rather than later.

As an aside, copper continues to be lost at sea and not confirming the glee in equities. Since so many old rules of the market seem to have been tossed aside, I assume (for now) this one also doesn't matter. 

[Video] CNBC - Hedge Fund Legend Michael Steinhardt Takes Dramatic Jab at Warren Buffet in Between a Series of Macro Views

One of the pioneers of the hedge fund world, Michael Steinhardt, is not that well known by much of the current trading community because if anything most of his era was pre "Wall Street" (Charlie Sheen version) - late 60s through early 90s.  If interested there is a short write up here but the numbers tell the tale.

Steinhardt Partners achieved a performance track record that still stands out on Wall Street: 24% compound average annual returns – more than double the S&P 500 – over a 28-year period. 

That said it was a different time, with far less competition, and pre HAL9000 - the landscape is so much different know... and so many hedge fund managers are essentially running the same models or techniques.  Far less opportunity to find situations to exploit and profit from.

This morning CNBC had a 16 minute interview with the man, mostly on his macro views (which correspond to mine in many ways).  Strangely, about half way through he went on a rant against Warren Buffet.  The commentary is not so strange because if anyone does PR good it's Buffet - one of the most savvy and hard driving investors of our era, but cloaked in "aww shucks" - but it's the public undressing of the man is what catches one off guard.  Reading between the lines it seems like one of Steinhardt's friends was let go by Buffet during his one wayward attempt at investing in a Wall Street financial firm (excluding the Goldman investment a few years back), and Steinhardt has not forgotten.  Then again he may have been taking a poke at Becky Quick who is the personal PR machine for Buffet on CNBC.  Who knows.  Based on how blunt he is, one wonders if once you get past a certain age, your guard comes down and you are willing to actually speak your mind publicly.

Either way, the rest of the interview focuses on mostly macro views, and his comments on what is happening in America will be very familiar to the FMMF audience. 

16 minute video, email readers will need to come to site to view






[Jun 6, 2009: Michael Steinhardt: "A Lot More Pain"]

ISM Services Slows Much More than Expected at 57.3

Head scratcher today on the economic news front as the ISM Services figure slowed down substantially; a 2.4 point drop month over month.  This was also a large miss versus expectations - actually it came in lower than the prediction of any of the 69 economists surveyed.  While still fully in expansion mode this report is far more important than last week's ISM Manufacturing report since services make up a lion's share of economic output in the U.S.  Some of the underlying data was also quite weak as well.

The equity market currently could care less about data, as we are firmly in a "it only matters when it matters" moment again - and after a 2 minute selloff, we're back in the green on the S&P 500 - but this is one to keep an eye on next month to see if there is a rebound.  One might also find it curious that $105 oil was a reason to selloff a month ago, but now once more... no one cares.

Via Bloomberg:

• U.S. grew less than forecast in March, a sign the biggest part of the economy is trailing the gains in manufacturing. The Institute for Supply Management’s index of non- manufacturing businesses decreased to 57.3 from 59.7 in February. Economists forecast the gauge would fall to 59.5, according to the median estimate in a Bloomberg News survey. A reading above 50 signals growth for about 90 percent of the economy.
• Estimates in the Bloomberg survey of 69 economists ranged from 57.7 to 61. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began. It’s averaged 52.9 since the current recovery started in June 2009 through February, trailing the 56 reading on the group’s factory measure during the same period.
• The measure of new orders decreased to 64.1 from 64.4 in February, while the gauge of business activity fell to 59.7 from 66.9. The group’s employment gauge dropped to 53.7 from 55.6 a month earlier. The index of prices paid declined to 72.1 from 73.3.
• The ISM services survey covers industries that range from utilities and retailing to health care, finance and transportation.

NASDAQ to Rebalance Nasdaq-100 to Rely Less on Apple (AAPL)

Important news out if you trade one of the most popular ETFs in the market - QQQ (Powershares QQQ).  This ETF is essentially the high beta equivalent of the SPY, but for tech stocks.  Apple's (AAPL) incredible ascent over the past few years has put it in a dominant position in the NASDAQ 100 - this one stock had taken a weighting of 20.5% of the ETF, leaving the rest for the other 99 companies.  NASDAQ is going to move this weighting down by 8.2% (along with 81 other stocks).  Meanwhile 19 will see an increase with the most prominent below:

Google (GOOG) +1.6%
Intel (INTC) +2.4%
Microsoft (MSFT) +4.9%
Oracle (ORCL) +3.4%

While better for diversification reasons, I don't think the trading community will like this because aside from Oracle, the other names have been non performers for quite a while.  I do wonder if this news was leaked as discussions took place the past few weeks, as Apple (AAPL) has been down 5 of the past 6 sessions; sharply so the past two.

Via WSJ:

• In a move likely to ripple across the stock market, Nasdaq OMX plans to announce Tuesday a rare rebalancing of its Nasdaq-100 index, which will reduce the big weighting of Apple Inc. The company currently makes up more than 20% of the index.
• The rebalancing was driven in part by the seemingly unstoppable rise in Apple shares, which are up more than fourfold in the past two years. The tech company's big weighting means that a change in fortune for the maker of iPhones, iPods and iPads has a huge impact on one of the most heavily traded indexes in the market. After the rebalancing, which takes effect May 2, Apple will make up 12% of the Nasdaq-100.
• The Nasdaq-100 consists of the 100 largest nonfinancial stocks that trade on the Nasdaq and is the index tracked by the heavily traded QQQ exchange-traded fund and many other securities. The move matters to investors because more than $330 billion worth of assets track the index via exchange-traded funds, mutual funds, options and futures. 
• The move could mean significant selling pressure on Apple shares by money managers tracking the index. Because of the way the index has been calculated, Apple was given more than twice the weight in the index than it should have had based on its number of shares. Under the new plan, it will be reduced to the weight it should have given its size.
• Apple's market capitalization is roughly $300 billion, twice that of Google. But its weighting in the index was five times that of Google. After the rebalancing, Google's share of the index will be 5.8% compared to Apple's 12.3%.
• In addition to Apple, 81 other stocks will see their share of the index reduced. The remaining 18 stocks will get a boost in the index. Among the biggest beneficiaries will be Microsoft Corp., whose weighting in the index was reduced in the only other special rebalancing of the index 13 years ago. Microsoft will see its weighting boosted to 8.3% from 3.4%.
• There are more than 2,900 financial products tracking the Nasdaq-100 in 27 countries, Nasdaq says. That includes the $24.4 billion PowerShares QQQ exchange-traded fund, which over the past year has been the sixth most actively traded stock on U.S. exchanges.

No positions

[Chart] Economix - The Dependence Economy, Only Half of the Average American's Income Comes via Wages

I've often written how dependent the average American has become on transfer payments as nearly 20% of income now comes via this route.   [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]   But this graph via NYT Economix shocked me, because it cross references the growth in transfer payments with the shrinkage in wages in terms of the average American's % of income.  From nearly 70% sixty years ago, we are fast approaching the point where wages only make up half of a typical person's income. Startling, especially when you consider this is not a chart for the bottom 1/3rd, or bottom half of Americans, but everyone.  One can only imagine how much more heavily it would skew for the lower socio-economic classes.

I would assume a large proportion of this growth has to do with the outsized gains in healthcare costs, especially in the past 25-30 years, but it still is an eye opener.

As an aside, I wish I had the inputs for this chart so I could figure out where the other "30%" of income is coming from if 50%ish is from wages and 20%ish from transfer payments.   Whatever the case, and for whatever reasons (some of which are very clear), the average humanoid is becoming increasingly dependent on the government ...   Of course "the government" is nothing more than taxes on other citizens + exponential growth in borrowing.  Smells like a Ponzi... sounds like a Ponzi....

Via NYT Economix

• Over the weekend I attended a talk by Credit Suisse’s chief economist, Neal Soss, on the structural and cyclical challenges facing the economy. The cheekily titled chart  — showing how much more dependent Americans have become on government money— is taken from his presentation.
• The red line shows what share of personal income comes from wages — that is, what Americans earn from working. The blue line shows what share comes from  transfer payments, which are made to individuals, usually by the federal government, through social benefit programs like unemployment insurance, disability insurance and Social Security. (Note that the two lines use different scales, shown on the vertical axes, and that the scale for wages does not start at zero.)
• ............the lousy job market accounts only for the spike at the end of the blue line (and likewise the steep slide at the end of the red line), where the numbers correspond with the Great Recession and its aftermath. The chart shows that the overall trends long predate the financial crisis.
• These underlying trends are partly because of demographic changes; an aging populace means that an ever-smaller share of Americans are working, and so a larger share are receiving Social Security benefits and Medicare, which is also getting more expensive. 
• Policy changes, more Americans’ going on disability and growing inequality, which in some cases may be leaving more Americans on the dole, are also likely contributing to the growing Dependence Economy.
• Whatever the causes, these  trends are not infinitely sustainable. The money for transfer payments has to be transferred from somewhere, after all — and if not from other people’s wages, then from China and other foreign creditors.

[Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]

WSJ: Fed's Low Interest Rates Crack Retirees' Next Eggs

This front page story in the Wall Street Journal could have been ripped from the virtual pages of FMMF over the past few years. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]   Essentially we have had a huge wealth transfer from the savers of America to the bankers and debtors - hence once again prudence is punished in this country.  I never had a way to quantify it but bank analyst Chris Whalen estimates the price tag at $750 billion annually.  That's a massive implicit theft of the saving class.

Bigger picture, the incentive system our central command has built for the worker rats in America is quite amazing... First, don't save... go spend (or the terrorists have won).   If you do save, we will punish you with nearly invisible interest rates.  Hence, use that money to go speculate - get in the stock market, immediately.  Last but not least... if you don't pay your mortgage we have government programs to reward you - of course we cannot help until you've not paid your note for at least 6 months.  If you are sacrificing to make the payment and ask for help, we can't help you - sorry.  Or even better just don't pay and live for a few years rent free... and to go full circle, use the money you saved to either (a) speculate or (b) spend [see points 1 and 2]  Understood?  Did I mention no cost of living adjustment for those on fixed income because there is no inflation? 


Via WSJ

• .....with short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
• "It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."  Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.
• A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
• Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
• In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.

• A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
• As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959.  
• Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February. 
• "Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."
• Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts. 
• Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out. 
• By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.
• .....more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele.  "The fear is palpable at this point in their lives," he says. "Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or 10-year CDs." 

[Apr 20, 2009: How Banks will "Outearn" their Losses]

Consider Taking Some Profits in Sina (SINA)

If you are an active trader, and came into Sina (SINA) sometime during my 'pounding the table' phase on the name, I'd consider taking some off the table to lock in profits (and try to buy back later) as the name is beginning to go parabolic.  I tend to get antsy when stocks start to break away from their 10 day moving average like this, but I am relatively conservative in my trading style. I am not implying the run is over, as we are officially in "lemming mode" now as people pile in with no regard to price or value.

Since the first mention publicly in December, the stock is up over 65%.  In just the past 2.5 weeks, it is up 35%!

Even Sohu.com (SOHU) which is a similar type of company but without Weibo ("Chinese Twitter") inside is seeing a breakout as speculators are trying to find something similar to Sina to play.   When the speculator class begins to look for lower quality merchandise as a parallel plaything, it's usually another warning sign.

No positions

McDonald's (MCD) Set to Hire 50,000 on April 19th

Good news, bad news on this one.  As store traffic picks up and more stores go to 24/7 hours, McDonald's is set to hire 50,000 Americans, or roughly 3-4 per store.  Obviously the quality of these jobs is not the highest, but it should help to bump up the employment figures in April as it appears everyone will be hired on the 19th.  Once more we are seeing some quantity of jobs return, but the quality leaves much to be desired in the American 'service economy'.  [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]  Average pay $8.30 an hour which comes to about $17K a year (and that includes the managers set to be hired at far higher pay)... but Wall Street will surely surge on the 'better than expected' jobs figures about a month from now.

Via CNNMoney:

• McDonald's said Monday that it is planning a one-day hiring spree of 50,000 new workers on April 19 for its U.S. restaurants.   McDonald's  said that these new "Mcjobs" will include crew and management positions, part-time and full-time.  
• McDonald's, which has 14,000 restaurants in the United States, said the hires will occur nationwide. "We're excited to offer 50,000 new jobs, all across America, all in one day," said Jan Fields, president of McDonald's U.S.A.
• .....said the 50,000 new hires will increase the U.S. workforce to 700,000 from its current level of 650,000.
• She said the average pay for the jobs is $8.30 an hour. That's compared to the federal minimum wage of $7.25 an hour, though in some states the minimum wage is higher. She said that restaurant managers can make $50,000 a year.

No position

Sandwich Week

Looking at the docket of economic news it is a quiet week aside from ISM Non Manufacturing on Tuesday.  Over in Europe the ECB is expected to raise rates to combat inflation for the first time in a few years, but that is well telegraphed to markets so not really news.  Meanwhile the ultra easy US money policies have no end in sight, causing pressure on the dollar and lifting every asset priced in dollars ever higher.  You should be noticing the nearly $4 gas near you quite soon.

Earnings season kicks off in the latter half of next week so I would consider this a sandwich week in between some heavier economic data last week and earnings driven action next.  Hence technicals should dominate... everyone waits for the breakout to new highs in the SP500 to pile on more exposure as appanently marging pressures and $4ish gas are only things to worry about for the little people....

t

Walmart (WMT) CEO: "Inflation is Going to be Serious"

While our friendly government statisticians continue to substitute and hedonically (is that even a word?) adjust away nearly all forms of inflation in their propaganda figures [Dec 16, 2010: Shadowstats.com - Inflation as Measured in the 1980s Would be 8%+, as Measured in 1990: 4%] the head of a the company that churns through 1 of every 10 U.S. retail dollars peeks not the future supply chain and says otherwise.

As in 2008, it will only matter to the market when it matters.  And not a moment sooner.

• U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday.   The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.
• Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said. "We're seeing cost increases starting to come through at a pretty rapid rate."
• Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.
• "We're in a position to use scale to hold prices lower longer ... even in an inflationary environment," Simon says. "We will have the lowest prices in the market."
• Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have "access to any factory in any country around the globe" to mitigate the effect of inflation in the U.S., Long says.  Still, "it's certainly going to have an impact," Long says. "No retailer is going to be able to wish this new cost reality away. They're not going to be able to insulate the consumer 100%."

[May 13, 2008: News of the Day - Inflation]
[May 22, 2008: Bill Gross - Inflation Underplayed]
[Jan 5, 2011: [Video] ABC News - Consumer Reports Showing People are Paying for Less]

[Video] CBS Sunday - 50+ Crowd Finds Job Market Even More Difficult than Younger Peers

An interesting story this morning on the plight of the 50+ year old crowd in America's job market.

Despite improving job data, older unemployed workers are having more trouble finding work, as companies favor less-experienced, cheaper candidates. Tracy Smith looks into what it takes to find a job for an unemployed baby boomer.

8 minute video



"People over 50 are in a very tough spot these days, because employers are cautious about taking on not only the salaries but the benefits they expect," said Jordan Goodman, an author and personal finance expert. "Many cases, people 50+ can't replace the job they had before, even though they have lots of experience," Goodman said. "Experience is less valuable to employers these days than being cheap."

Market No Longer Has a Middle Ground

Looking back at the market since August 2008 when The Bernank explicitly added "pushing up asset prices" as the Fed's 3rd mandate there has been no middle ground in the market.  We are either in a V shaped non stop rally mode OR a very short term, but swift 6-7% type of correction that only comes about due to an exogenous event - Ireland in Nov 2010, and Japan/Libya a few weeks ago.  If there is no exogenous event, there is no stopping the V shape rally.  There is no longer the typical "rally for 2 months, then consolidate the move" action that used to be the norm. Until the pattern changes, traders will continue to play it... it will work until it no longer works.

The S&P 500 has smashed through any form of resistance the past few weeks (much of it in the overnight session of course), and the only thing that stands in its way now is yearly highs in the mid 1340s.   Once that double top is cleared, off to the races we go again as technicians will pounce on that pattern. 

Today is yet another example of how the market has done little during the day, but the entire gain was in the overnight session (with 50 minutes to go in the session).   Therefore, to capture much of the gains you no longer can avoid overnight risk but embrace it or see your returns lag.  In this 12 session rally, 7 days have been led with gap up opens - many of substantial manner.  And many where the market did nothing (or fell) during normal market hours.  I am still scratching my head to see a market bottom on a gap up open (two weeks ago Thursday) -  another atypical event we need to file under "new paradigm market action".

---------------------------

Speaking of April Fool's, it appears the SEC has pulled one on me.  It's now been over three weeks since they verbally committed sending our review letter 'next week'.  Three 'next weeks' have passed and still we twist in the wind.  I must have been filed in the 'purgatory' basket on someone's desk.

NYT: Many Low Wage Jobs Seen as Failing to Meet Basic Needs

With government defined poverty surging the past few years, the pressure on wages has created a new class of "working poor" - employed, but living in a high cost of living country. [Jan 6, 2011: Census Estimates 1 in 6 Americans Live in Poverty, 65+ Crowd Expanding Rapidly]  [Sep 19, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated]  For example, adjusted for (government reported) inflation, many American men now make the same wages they made in the 1970s.  

During this recession and 'recovery', a huge surge in transfer payments has helped to allay part of this issue [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]  [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High] , but if things don't dramatically improve economically and the U.S. goes back to a typical budget deficit of say 3% of GDP rather than 10% GDP anytime in the future (which is obviously not going to happen), the reality under the surface will be exposed.   Looking at food stamps alone, when I started this website 1 in 11 Americans were on the program... now it is 1 in 7. 

Recall, if you make $23,000 for a family of 4 - you are not in poverty per government measure.  If you are single and make $14,000 you are not in poverty.  Most people living in the real world who actually have to pay rent, and eat, or own a vehicle, and pay insurance probably would differ with the government cut offs.

The New York Times has an in depth look at the plight of these workers as a new study was released today showing what is a more realistic level of income to be just above poor and on the lower end of middle class.  Clearly the bifurcated economy continues to create some winners, but it appears a seemingly larger lot of losers.

• Hard as it can be to land a job these days, getting one may not be nearly enough for basic economic security.  Many of the jobs being added in retail, hospitality and home health care, to name a few categories, are unlikely to pay enough for workers to cover the cost of fundamentals like housing, utilities, food, health care, transportation and, in the case of working parents, child care.
• A separate report being released Friday tries to go beyond traditional measurements like the poverty line and minimum wage to show what people need to earn to achieve a basic standard of living. The study, commissioned by Wider Opportunities for Women, a nonprofit group, builds on an analysis the group and some state and local partners have been conducting since 1995 on how much income it takes to meet basic needs without relying on public subsidies. The new study aims to set thresholds for economic stability rather than mere survival, and takes into account saving for retirement and emergencies.
• According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, (that seems a lot more reasonable than the government's sub $11K threshold)  and nearly twice the federal minimum wage of $7.25 an hour.
• A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.  That compares with the national poverty level of $22,050 for a family of four.  (while one can quibble with the $68K for 2 children, let's take that down by 25% and make it $51K - that is still more than double what the government says is poverty - I mean seriously, $22K for a family of 4?)
• Wider Opportunities and its consulting partners saw a need for an index that would indicate how much families need to earn if, for example, they want to save for their children’s college education or for a down payment on a home.  “It’s an index that asks how can a family have a little grasp at the middle class,” said Michael Sherraden, director of the Center for Social Development at Washington University in St. Louis
• To develop its income assessments, the report’s authors examined government and other publicly available data to determine basic costs of living. For housing, which along with utilities is usually a family’s largest expense, the authors came up with “a decent standard of shelter which is accessible to those with limited income” by averaging data from the Department of Housing and Urban Development that identified a monthly cost equivalent for rent at the fortieth percentile among all rents paid in each metropolitan area across the country.
• They chose a “low cost” food plan from the nutritional guidelines of the Department of Agriculture, and calculated commuting costs “assuming the ownership of a small sedan.” For health care, they calculated expenses for workers both with and without employer-based benefits. Ms. Kuriansky said that the income projections do not take into account frills like gifts or meals out. “It’s a very bare-bones budget,” she said.
• Obviously, the income needs change drastically depending on where a family lives. Ms. Kuriansky said the group was working on developing data for states and metropolitan areas. 
• The report compares its standards against national median incomes derived from the census, and finds that both single parents and workers who have only a high school diploma or only some college earn median wages that fall well below the amount needed to ensure economic security.  
• Workers who only finished high school have fared badly in the recession and the nascent recovery. According to an analysis of Labor Department data by Cliff Waldman, the economist at the Manufacturers Alliance, a trade group, the gap in unemployment rates more than doubled between those with just a high school diploma and those with at least a four-year college degree from the start of 2008 through February.
• For some of the least educated, Mr. Waldman fears that even low wages are out of reach. “Given the needs of a more cognitive and more versatile labor force,” he said, “I’m afraid that those that don’t have the education are going to be part of a structural unemployment story.”
• Even for those who do get jobs, it may be hard to live without public services, say nonprofit groups that assist low-income workers. “Politicians are so worried about fraud and abuse,” said Carol Goertzel, president of PathWays PA, a nonprofit that serves families in the Philadelphia region. “But they are not seeing the picture of families who are working but simply not making enough money to support their families, and need public support.”
• In New York, Áine Duggan, vice president for research, policy and education at the Food Bank for New York City, estimates that about a third of the group’s clients are working but not earning enough to cover basic needs, much less saving for retirement or an emergency. She said that among households with children and annual incomes of less than $25,000, 83 percent of them would not be able to afford food within three months of losing the family income. That is up from 68 percent in 2008 at the height of the recession.

[Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]
[Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy] 
[Oct 22, 2010: Reuters - The Haves, the Have Nots, and the Dreamless Dead]
[Sep 3, 2010: FT.com - The Crisis in Middle America]
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]

Consumers Continue Trend of Paying Credit Cards Before Mortgages

This was a topic we explored quite a bit in 2008 and 2009 but I have not touched on it in a long time.  (it's been so long I cannot find the old posts in the archives)  In a complete change of ethos from how defaulting used to be done in the 'good ole days', the practice of paying credit cards ahead of mortgages not only has continued, but has increased from 2008-2009 levels.  This should come to no surprise as we brought an army of "home owners" into the country who put nothing down into "their" house with these new fangled 'innovative' mortgages, hence had no skin to lose by not paying the mortgage.  Effectively we were giving away homes under terms even cheaper (out of pocket) that renting... which requires a security deposit at least.  (keep in mind many of our 'innovative' mortgages in the bubble years rolled closing costs into the mortgage balance)

Of course that was the situation in the earlier days of the crisis - now as we have moved in 2010 and 2011, we have armies of strategic defaultors plus those who simply cannot pay due to loss of jobs or taking new jobs with substantially lower pay levels.  Therefore, paying for the item that provides immediate cash flow (credit card) versus the sunk cost, illiquid asset has become a no brainer when choosing between the two.   This is a world of difference versus the pre "innovative mortgage" era, when the fact people actually had to put a substantial amount of money down on their home, would create a focus on saving it above all else during financial hardship.  Just another unintended consequence of a system gone dysfunctional.

The last point is one never cited in these stories - when you don't pay your mortgage, it's easy to pay down/off the credit card balance each month with the extra money ....

Via AP:

• It's not just mortgages that are upside down. People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.  Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.
• Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. 
• That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.
• In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.
• "As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.
• Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country -- in the third quarter of 2007.
• The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

If the latest data (Q4 2010) is any indication, this trend is not changing anytime soon - indeed I could see this continuing for many more years into the future, as housing enters the 2nd leg of a double dip. 

• Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.