Thursday, August 2, 2012

Today's links

1--Obama authorizes secret support for Syrian rebels, Reuters

President Barack Obama has signed a secret order authorizing U.S. support for rebels seeking to depose Syrian President Bashar al-Assad and his government, sources familiar with the matter said.

Obama's order, approved earlier this year and known as an intelligence "finding," broadly permits the CIA and other U.S. agencies to provide support that could help the rebels oust Assad.

This and other developments signal a shift toward growing, albeit still circumscribed, support for Assad's armed opponents - a shift that intensified following last month's failure of the U.N. Security Council to agree on tougher sanctions against the Damascus government.

The White House is for now apparently stopping short of giving the rebels lethal weapons, even as some U.S. allies do just that.

2--US Housing Inventory Requiring Deleveraging: 30 Million Units, The Big Picture
3--Diminishing returns; The slide in corporate profits, The Big Picture (graph)

4--The economy is running out of gas, Rex Nutting, WSJ (video)

5--Strategists Most Bearish on Equities since 1985, The Big Picture (eye popping chart)

6--China prepares vast stimulus as slump threatens Asia, Telegraph

China has ditched its reform strategy and prepared a vast stimulus package as the country’s soft-landing turns uncomfortably hard, with recession warnings flashing across East Asia.   7--Oh Mr Draghi, what have you done, IFR   So now we know. After a week of frenzied speculation, the market finally got to find out just how big a bazooka Mario Draghi and co pulled out of their pockets to try to alleviate the stress on the second tier of the periphery. The ECB kept rates on hold, leaving the refi rate at 0.75% and the depo rate at zero. Some thought that both rates may well be cut for a second month in a row but that was nothing compared to the disappointment that followed.

At the usual press conference following the rate decision, Draghi once again put the onus squarely on individual governments in stating that national governments should stand ready to activate the EFSF with strict conditionality.

On the subject of the much vaunted peripheral bond purchase, Draghi said that the ECB “may” undertake open market operations and that the size of those operations would be adequate. He also said that over the next few weeks the ECB will design models for such matters. He added that concerns regarding seniority issues on EFSF/ESM will be addressed.

And that was pretty much that.

To say that the market’s disappointment was palpable was an understatement. It was quite nicely summed up by a trader friend who said that “the market has bought a ticket to the Las Vegas magic show by David Copperfield, but when they turn up they find he’s been replaced by Tommy Cooper”.

8--Markets are betting on US housing recovery, Sober Look (Chart)

Both the equity and the credit markets are betting on the US housing recovery

9--Artificial Butter Flavoring Ingredient Linked to Key Alzheimer's Disease Process, science daily

10--Europe's very ugly PMIs, macrobusiness

Overnight we had another round of PMI data and once again the results were woeful. From Markit Economic’s chief economist:

“The Eurozone manufacturing sector’s woes intensified again in July. Output fell at the fastest rate since mid-2009, consistent with the official measure of production falling at a quarterly rate in excess of 1%. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter, as the Eurozone faces a deepening slide back into recession.

“The July survey is characterised by faster rates of decline in output and new orders, leading manufacturers to cut back on headcounts and inventory holdings and suggesting a fear among companies towards ongoing weakness in the coming months.

“Rates of decline hit the fastest for three years or more in Germany and France, but Spain and Greece continue to stand out in seeing particularly disappointing performances.

“The only country to show any sign of emerging from the downturn so far this year is Ireland, where output is beginning to increase again due to rising exports. The brighter picture from Ireland perhaps sends a message that other countries do not necessarily face the inevitability of deepening downturns if competitiveness can be improved, though the current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home. ”

11--Manufacturing Update, Tim Duy, Fed Watch

This morning's ISM manufacturing report was a disappointment with the sector posting a second consecutive modest contraction: chart...

Bottom Line: The global manufacturing slowdown is increasingly washing up on US shores, but obviously not enough to prompt the Fed into action. Unfortunately, the risks still seems to remain clearly on the downside, which means that when and if the Fed moves, they will certainly be behind the curve.

12--Payroll Tax Cut on Track to Quietly Expire, WSJ

White House Isn't Pushing for an Extension and Both Parties Suggest They Would Go Along as Part of Bigger Tax Deal.

Amid a high-decibel fight over the nation's budget, there is one emerging area of agreement: Both parties appear willing to quietly let a major tax cut expire—a payroll tax break enjoyed by about 122 million people.

Congress, aiming to give wage-earners a few extra dollars in each paycheck, first cut the payroll tax, which funds Social Security, to 4.2% from 6.2%, for the 2011 calendar year.

A Democratic proposal to extend the tax cut for 2012 was the subject of a pitched battle last year before it narrowly passed in December.

This time, the White House isn't pushing for another extension. "That was always intended to be a temporary measure to support job creation and economic growth," Jason Furman, a top White House economic adviser, said recently. "It's not something that we have at this stage called for extending into next year."...

The payroll tax cut lowered the taxes paid by working families by an average of $934 per year, according to the independent Tax Policy Center. It also has cost the federal government about $120 billion a year.

13--What's the Election Really About?, Mohamed El-Erian, economist's view

America’s Constrained Choice, by Mohamed A. El-Erian, Commentary, Project Syndicate: The conventional wisdom about the November presidential election in the United States is only partly correct. Yes, economic issues will play a large role in determining the outcome. But ... whether President Barack Obama or Mitt Romney prevails in November, the next president will be constrained by the twin need for urgent economic stabilization and longer-term reforms. And, with headwinds from Europe and a synchronized global slowdown, the candidates will have no choice but to pursue, at least initially, similar economic policies to restore dynamic job creation and financial stability. ...

But this does not mean that there is no scope for differences..., each economic decision will be accompanied by the need for social judgment – whether explicit or, more likely, implicit – regarding its distributional impact. ...

This is not really an election about such hotly-debated issues as outsourcing, tax increases versus entitlement reforms, government control of production versus unfettered private sector activity, or job creators versus free riders. It is much more about the accompanying concepts of social fairness, entitlement, equality and, yes, standards of behavior for a rich and civilized society.

This is an election about social responsibility – a society’s obligation to support those who are struggling, through no fault of their own, to find jobs and make ends meet. It is about protecting the most vulnerable segments of society, including by providing them access to proper health coverage. It is about reforming an education system that fails America’s young people (and about providing appropriate retraining to those who need it). Among the numerous issues of fairness and equality, it is about the rich giving back to a system that has brought them unimaginable wealth.

It is here where the differences between Obama and Romney are important. The sooner the campaign debate pivots to this, the greater the probability that Americans will make a more informed choice

14--Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area, The Wilder View

In stark contrast to the trend in household mortgages relative to the ECB refi rate, non-financial corporate lending rates in Portugal, Spain, and Italy diverged from the other country trends.

If the ECB means business on improving the monetary transmission channel, they’ll need to attack the price of corporate loans in the Periphery markets.

15--Falling Demand Spreads World-Wide Factory Flu, WSJ

Across the world, production lines are shutting down and factory workers’ hours are being cut. A dearth of demand has fallen back on goods producers, suggesting the global slowdown won’t turn around soon.

Wednesday brought news that factory activity either downshifted significantly or outright contracted in July. The euro-zone factory recession worsened last month. China posted its weakest official manufacturing reading since November. Readings from Australia and the U.K. were the lowest in at least three years. The Institute for Supply Management said the U.S. factory sector contracted for a second straight month.

The culprit for manufacturers is falling demand

16--Consumer Attitudes Remain Muted, WSJ

U.S. consumer economic confidence weakened in August, as households worry more about higher food and gasoline prices, according to a survey released Thursday.

The Royal Bank of Canada said its consumer outlook index dropped to 46.4 this month from 47.0 in July. The index has hovered between 45 and 47 for all of 2012, indicating little change in how consumers feel about the economy.

“The overall confidence trend since January 2012 has been one of stasis as Americans wait for unambiguous signals that the economy is improving,” the report said.

The RBC current conditions index rose to 37.3 from 37.1. The expectations index fell to 56.1 in August from 57.0 in July.

The views on jobs and prices both worsened this month. The RBC jobs index fell to 52.7, its lowest reading since February, from 54.5 in July. The inflation index jumped a record 7.5 points to 77.8 in August.

The jump was driven by concerns about food and gasoline price increases. “This month, perhaps because of the drought coverage, we see a significant spike (up 20 points) in the number of people expecting major increases [in food prices] from last month,” the report said. In addition, a growing share of consumers think gas prices will rise over the next six months.

In a series of special questions, RBC found two pieces of good news for the economic outlook. “Americans are more hopeful about the housing market than they were five months ago,” the report said. About 32% of respondents said the housing market has gotten better, a five-point gain from when the questions were last asked in March.

In addition, the results found, more parents are planning to spend more this year on back-to-school shopping. “This year 18% plan to spend more than last year, up from 9% in 2011,” the report said.

17--Europe: Running out of Time, sober look

18--Draghi does nothing; stands pat, pragmatic capitalism

The ECB has disappointed the market who expected some action after Draghi’s strong comments last week. In anticipation the euro was briefly taken through the $1.24 level only to be sold down to new lows for the week, below $1.22.

Draghi did not break new ground. He reiterated what was already known. Countries need to formally request EFSF support to activate it. The ECB cannot and replace government action. Spain is understandably reluctant to ask due to potential conditionality and stigma associated. Draghi did suggest the subordination/seniority issue will be addressed.

Draghi tried to deliver a fait accompli to the ECB board, seeming to promise action, which he was not authorized to do. It appears he simply did not have his ducks lined up.

19--Ex-TARP overseer denounces US government cover-up of Wall Street crimes, WSWS
20--Afghan war crimes report suppressed, WSWS

21--The jobs crisis and the 2012 elections, WSWS

22--Behind the mounting conflicts in the EU, WSWS
23--Rex 84: Government Silently Positions for Martial Law as Financial Collapse Arrives in America, global research

24--Do the benefits of shadow inventory outweigh the costs?, OC Housing News
Shadow inventory is composed of delinquent mortgage holders who still occupy the houses they are not paying for. Many in shadow inventory have been living payment free for years, and many will continue living for free for several more. So why did banks do this? Ordinarily, banks would foreclose quickly to get their capital back to loan it profitably to someone else. What was their benefit in allowing so many to squat for so long?

In mid 2008, house prices were crashing hard, particularly in subprime dominated markets which were the first to implode when their toxic mortgages required higher payments. Lenders quickly realized prices were crashing because they were flooding the MLS with inventory, and the available buyer pool couldn’t absorb it at bubble-era prices. A certain amount of price correction was inevitable because prices were too high, but many markets began to overshoot to the downside under the weight of so many foreclosures.

For the banks, continuing to flood the MLS with foreclosures was reducing the value of the collateral backing their loans and increasing their losses. It was in their best interest to stop and maintain as much bubble-era pricing as they could. New England witnessed the extreme of delinquent mortgage squatting as the legions of delinquent loan owners were not foreclosed on. As a result, their prices are still artificially inflated, and many copycats defaulted on their mortgages to obtain the same free housing benefit.

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