Wall St. Makes Fierce Return, as Main St. Remains Sluggish

Top 5 banks make a come-back with record returns expected according to published year-to-date earnings. Morgan Stanley, Goldman Sachs, Citigroup, JP Morgan Chase, and Bank of America, are all expected to end 2010 with hefty revenues. The first half of the year was dampened by market and investor uncertainly, but by the third quarter the market was able to find solid ground, and began building a fierce momentum.

Year-to-Date Record Returns:

- Bank of America: $83.8 billion
- JP Morgan Chase: $74.1 billion
- Citibank: $67.8 billion
- Goldman Sachs: $30 billion
- Morgan Stanley: $23.8 billion

Consumer spending is up this holiday season, as retailers saw pre-recession shopping levels. The preliminary holiday sales revenues are reported to be $451.5 billion, an increase of 5.5% over 2009. Online holiday sales were reported to be approximately $36 billion, a 15% increase over 2009. This should serve as a sign of what’s to come, yet we may still find ourselves waiting longer than we’d like.

Although the bank revenues and retail sales data is encouraging, you may be thinking that it is somewhat detached from the rest of the economy. I would be inclined to agree with you, as the housing market remains on life support, and national unemployment rate is still above 9 percent.

I am sure that millions of Americans who are currently unemployed (or underemployed) fail to see the silver lining - but we are beginning to see an increase in job growth. In fact, this year did actually produce net job growth amounting to 500,000 new jobs, but with over 10 million people unemployed, half a million jobs is simply not enough. With all the hope of better things to come, and the promise of "The American Dream" a faint recollection, 2011 could not come soon enough.

K. Reilly
Cohn-Reilly Report

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________________Comment
Robert Ortega said......
Its great that the banks were able to bounce back to make record profits. The TARP money has apparently been paid back with lots of interest, so the government also made good money on the Bailouts. What I don't understand is how the Tea Party clowns manage to construe this as a bad thing. We made money on the bailouts, the banks are profitable again, and the economy is clawing out of the recession and gaining momentum. Makes you wonder what the issue really is for republicans? - January 9, 2011
________________Comment
K. Reilly said......
Rob, I happen to agree with you on some level. There are many positive economic factors that depict that the recovery is progressing. There are hidden agendas and racial overtones that seem to be the underbelly of the tea party movement, but it is hard to pin-point the real objective other than to "take back" America (whatever that means). Let's face it, Politics, as we have come to know it, is never about Truth, Transparency or Honesty, it is about money and power - Period.
With respect to your comment about how the Tea party “construed” the economic progress. The white house and the Democrats failed to effectively get the Positive message out to the public along the way. Although there was not much to cling to in the first 12 months of the Obama Administration, they did little to counter the negative, and aggressive propaganda coming from right wing politicians. Admittedly it would have been difficult to challenge the FOX News media monster, but certainly better than ducking criticism. Nevertheless, the Democrats and the Obama Administration were asleep at the wheel for the midterm elections, thus the republicans and the Tea party, who were on a serious mission (though separate agendas) have successfully lobbied and rallied themselves into back into power on Capital Hill. To be honest with you I think it is generally much better with the mixed majority than all Republican or all Democrat for house and senate. The law makers are forced to reason, discuss and compromise than when they are gloating and flaunting their power around. Thanks Rob, your comment is much appreciated- - January 9, 2011

EU Financial Crisis: Exotic Financial Maneuvers Likely Cause

Debt deals eyed as foundation of the problems emerging from Europe. For too long, investors took the “don’t ask don’t tell” position with the European governments hard line bookkeeping and accounting, which was aimed at meeting their fiscal ceiling regulations. To circumvent the regs, many Countries across the Continent have used complex financial transactions. These "transactions" were not fully disclosed as to the size of their debts or deficits.

The members of the EU are required to comply with rules concerning debt levels, capped at 60% of their gross domestic product. The members are also required to abide by the strict mandate concerning their annual budget deficits, which should be no more than 3%. According to the Wall Street Journal, these restrictions explain why the Continent has the rich history of exotic financial maneuvers practiced by the EU members. The complex financial transactions were essentially used to camouflage borrowing over the past decade. Making matters worse is the fact that governments were not required to report their Country's military spending, which is not be included in debt-to-GDP ratio calculations. For example: in ‘2000 Greece reported that they spent the equivalent of $1.13 billion on their military, but later admitted that it was closer to 4 billion. Under pressure, Greece disclosed that they under-reported military spending between 1997 and 2003 by €8.7 billion (that's $11.4 billion USD). The European leaders deemed these practices acceptable during the time they were planning the currency union, but of course hindsight is 20/20. Thus the proliferation of Euro-zone countries in crisis is staggering.

Although the United States' financial troubles are not completely behind us, and our economic forecast is still a question mark, the worst appears to be over. I cannot say the same for the European Union, as it is difficult to determine were the bottom actually is.


K. Reilly
Cohn-Reilly Report

Recommended reading: Article by Geoffrey R D Underhill provides an Interesting perspective on Europes Financial Crisis

___________Comments

C. Nireth said...

Yeah, this Eurozone crisis is pretty gloomy, but it puts our troubles in perspective. Wow...I get it! This is a global crisis which seems to escape most people in the US - especially the republicans and the misguided teaparty, who are using the economy as a platform to discredit the democrats and Obama.

Katherine said...

You are exactly right. One of the reasons I think it's important to write about the financial concerns overseas is to broaden our perspective on what's going on domestically. There is certainly enough blame to go around, but for some reason the Obama administration and the democrats are unfairly targeted. We have had over a decade of out-of-control hedge funds, insider trading, portfolios with over-the-limit derivative/high risk securities, sub-prime loans, and ponzo schemes, rancid mortgage-back securities, Hide-and-seek accounting practices ....I could go on and on
Thanks for your coment




K. Reilly
Cohn-Reilly Report

Spain: To Big to Bailout?

This year has been a rude awakening for the European Union, with emergency bailouts for Greece, Ireland, as Belgium and Portugal await a similar fate. The debate is now focused on Spain; to bailout or not to bailout, that is the question. Ted Scott, Director of UK Strategies at F&C Investments, was reported as saying “Spain is too big to bailout”(CityWire, 2010). Now that’s a switch - in this country we’ve heard the phrase “Too big to fail” more often than we wanted to. So what are the factors that render Spain too far gone, or is it? Well for starters, Spain’s economy is the fourth largest in the Union, larger than Greece, Portugal and Ireland put together, representing 11.5 percent of the European Union’s GDP. It has the third largest deficit in the Union, estimated at over 400 billion Euros. which is significant. Increasing fears of instability is reflected in the upward spiraling interest rates investors have imposed on Spain's bonds. Unlike Ireland’s debt crisis, 50% of Spain’s debt is held by international investors, so although the impact of defaulting will send trimmers across the globe, the domestic investors will be more forgiving, and continue to purchase Spain’s bonds.

Surprisingly, the government of Spain believes that there will be no need for external assistance. Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, warns international investors that they will lose money betting against his nation’s debt. To his credit, the Prime Minister has implemented aggressive austerity measures in an effort to avoid the need for a bailout, through tax hikes and spending cuts for this year and 2011. Unfortunately analysts are not as confident as the Jose Luis Rodriguez Zapatero, that these measures will be sufficient to ward off IMF intervention.

To stay afloat the government of Spain and its banks have to raise upwards of 300 billion euros. Given the recent Moody’s rating downgrade, prompting steep interest rate increases on Spain's bonds, many analyst believe it’s simply too late for Spain to successfully climb out of the hole. Defiant and independent, Spain is conducting a series of bond auctions, while counting on budget cuts and the continued domestic appetite for its bonds as a firewall against external intervention from the IMF. That sounds good, all tied up into a neat little financial bow, but is it realistic? Given Cohn-Reilly Report's "EU Financial Crisis" article addressing the European Union members' exotic accounting maneuvers to hide borrowing, it is hard to keep a positive outlook on Spain’s ability to emerge from this crisis without external financial help. I wont bet against Spain, but I'm not looking to purchase their bonds either. Nevertheless, I do hope the Prime Minster achieves his objective - against all odds

K. Reilly
Cohn-Reilly Report

___________Comments

sinaj norrab said...

It seem that the eurpoean union have their work cut out them. This is like waht we have been going through for the past two years. One thing after another, with the Bank and auto makers bailouts, followed by housing crisis and foreclosure fallout. it did not help that the finance fraud and scams seemed to be the icing on the cake. Gloabally, we are all in trouble. Is there any hope that 5 years from now everything will be okay?

The State of Unemployment and the Economy

This past week we found that the published unemployment rate rose to 9.8%, while continuous unemployment benefit claims rose 53,000. Especially hard hit were the goods producing areas, manufacturing and the battered construction industry. Overall, there was a jump in unemployment of 276,000 for the month – a significant and substantial number.

How did the market react to this on Friday? It actually ended up for the day. What does this tell you? It is obvious that the Fed is propping up the markets no matter what happens. By pouring money into the economy and purchasing treasuries, and I believe securities - although not publicized, we have a highly manipulated environment. In reality the Dow should be at least 1,000 points lower at this point in time. Bernanke’s risk is to create wealth by increasing share prices, hoping that this will psychologically make people feel better and spend more money on consumer goods. Also, he hopes that employers, feeling good about their company’s stock rising, will hire more people. Well obviously that is not case if the unemployment rate rose to 9.8; probably the real rate is more like 1 ½ to 2 times higher than the reported rate.

Also, as I have said before, the printing presses of the Fed are destroying the dollar. This week it dropped to a three-week low versus the yen and fell against all of its other most-traded counterparts, except the Mexican peso and Canadian dollar. Could inflation be far behind as the Fed pumps more money into the economy?

Another important event to mention was the expiration of unemployment benefits for nearly 2 million people on November 30. It seems likely that the political parties will work out an agreement, as of this writing, to temporarily extend the benefits. But what about the chronically unemployed who have been out of work for two years or more, since the crisis began? The over 50 category, commercial construction and teachers come to mind, as groups who will have a tough time getting jobs in the future. After all, there will be a time when the unemployment benefits will cease and with little hope for jobs, it will become a nightmare for some people.

C. Cohn
Cohn-Reilly Report

___________Comments

Melisa Connelly said...
yes, there does seem to be a disconnect where the market is concerned. The market is ranging on, while jobs are still not coming. The Bush taxes were extended and so were the unemployment benefits -that's good I guess. Enthusiastic holiday shopping showed that consumers were feeling more confident, therefore the feds did manage to manipulate public perception of economic stability to a small degree.

Charlie said...
Although some hiring has occurred in different sectors,unemployment is still high - we may never get back to the pre-crisis numbers; companies are operating under a different model, taking a lean/mean approach. Resource productivity is up because staff is putting in more hours than ever to compensate for lack of personnel. I think there is definitely a disconnect here. We ended the year with the Dow overbought at levels not seen since the summer of 2008; up almost 80% since the March 2009 low. Will we have a correction early this year, as technical analysis indicates, or will the Fed override that and continue to prop up the markets? We should know very soon.

January 2, 2011 1:34 PM

Ireland Beats Spain to the Bailout Line

Ireland is the latest to lose its financial bearings in the European Union. This comes with distinction, as the government adamantly denied that they had any difficulty this past Summer. With their tail between their legs, the Irish Government is forced to accept the largest international bailout to date. Last Thursday was the first time the finance minister acknowledged needing help. It is widely believed that the sour loans lead to the huge financial losses that nearly toppled the Island.
Much needed help is on the way, amid fierce concerns for the impact it will have on the EU, and Spain in particular. The IMF is prepared to package over €110 billion Euros as bailout for Ireland. Where does that leave Spain? Spain has a greater need for the financial bailout than Ireland or Greece. Here is the dilemma, once the IMF bails out Ireland, the €350 billion Euros needed to salvage Spain’s debt and deficits will exceed what is available. There must be some way to avoid this train wreck. Perhaps the IMF could come up with an alternative; for instance; The bailout could be done on a drawdown schedule. The IMF could provide Ireland with bailout installments over time. This might give them a chance to help Spain, and work toward soliciting additional funds to meet Ireland's bailout installments that are due later in the payment schedule. Just a thought.

In the meantime, in anticipation of the Ireland bailout, Portugal and Spain’s bond yields have increased nearly 12 basis points. That is only the beginning. The list below serves as a reminder as to just how steep these bailouts are for the EU.

-Greece bailout: €110 billion Euro Greece bailout
-Ireland’s bailout: €113 billion Euros
-Spain Needs: €350-billion Euros

Portugal is reportedly the next in line for a bailout, while the IMF is looking at Belgium as another EU member in financial distress. Although, an official from one of the leading EU countries pointed out that Belgium’s debt is largely internal, so it's not at all in the same boat as Ireland or Spain. Belgium’s financial problems will not have as much of an impact on international investors.

The Euro has declined to a two-month low against the dollar, as crisis continues to unfold. I will be closely watching to see what solutions are put forth from the authorities at IMF, and how the EU will wiggles out of this one. America's economic stability is still at large, while economies around globe also struggle to climb out of the valley of a deep recession.

K. Reilly
Cohn-Reilly Report

Greece Recovery: 6-Months After Bailout

Greece’s recovery is likely going to be a long time coming. Last August the jobless rate jumped to 12.2% up 2% from July. With all the Prime Minister’s efforts to reduce the deficit, the government data illustrates slow progress. Reuters reportedly anticipates a contraction of Greece’s GDP by at least 5% over last year. As Greece is expected to report their 3rd quarter GDP on Friday, the Greek Finance Ministry warns that the Country's unemployment could reach 14.5% by next year.

Though a cloud still looms over Greece’s deficit, the Finance Ministry stated that their deficit has declined 30% since last year, which represents $23.8 billion in U.S. dollars, or €17 billion in Euros. This was achieved through drastic spending cuts. Admittedly, 30% off their debt is a substantial chunk off Greece’s deficit, but unfortunately it still came in below the 36.9% target. To compound the disappointment, the Finance Ministry's revenue projections were also thwarted as a result of rebellious tax evaders and weakening demand. As part of this Spring’s €110 billion bailout, agreement the government of Greece pledged to reduce the deficit by 5.5 of the GDP, which would bring the deficit down to 9.5% of the GDP, as opposed to the estimated 15% in 2009. Nevertheless the Prime Minister, George Papandreou confidently expressed that the deficit will be 5.5% lower by year’s end

At the moment the Greece’s quarterly economic hiccups have minimal impact on the European Union in the short-term, since their borrowing needs have been met by the bailout. The European Union will now have to shift it attention to financial problems mounting in Spain.

K. Reilly
The Cohn-Reilly Report

___________Comments


Erin Thak said...
From what I'm reading, there are so many more members of the European Union that are in need of Financial help that Spain may not be the next country to get the attention of the IMF. like the article

The Elections Are Over – What’s Next For The Economy?

The American people have spoken and have clearly shown how unhappy they are with the Administration and the Democrats, formerly in control of both houses - result - the House is now in Republican hands. It is the nature of our political landscape to seek new blood when results are unsatisfactory. No surprise, considering unemployment is still high, with the actual rate somewhere in the teens, not the published 9.5% - 10% range. Many are not being counted because they are no longer eligible for unemployment benefits or they never had any to begin with. The housing sector is still weak and the commercial construction industry is a disaster. The Democrats are lucky to have held onto the Senate.

More Reasons for Political Unrest:

Mr. Obama claims that he cut small business taxes 16 times to fend off public perception that he is not a friend to small business. However, half of the “tax cuts” are actually incentives that reward businesses for taking actions they might not otherwise take - in other words, you have to spend money to get the tax benefit. For example, only businesses that already provide health insurance to their employees now would consider the health-care credit a tax cut. The main beneficiaries are businesses making big investments (and perhaps those caught investing in tax-shelter scams). Encouraging such investments may be a worthwhile public policy goal, but in this economic climate, the number of companies that will participate is likely to be very limited. Those inclined to be suspicious of Mr.Obama probably won’t take much comfort in this offering.

Today the Fed announced another round of asset purchases to the tune of $600 billion, adding to the $2 trillion already spent from 2008 to present. This second round of quantitative easing comes with many risks. The idea behind asset purchases is to flood the economy with money (the Fed printing press), which would lower interest rates and spur more lending and spending. But new asset bubbles could form if the Fed doesn't start backing away from its policy of easy money, often thought to be the source of the housing bubble which caused the recession in the first place.

Kansas City Fed President Thomas Hoenig has been warning of asset bubbles since early this year, and consistently voted against additional asset purchases and low interest rates. There are already troubling signs of possible new bubbles, like increases in the values of various assets from Treasuries to gold to other commodities.

The dollar is at risk: at the last Fed meeting policymakers said prices were too low, and signaled they were ready to take action if necessary. That caused a drop in the value of the dollar, as investors fear the currency will lose value in the future. That day, the dollar fell about 1% against the euro, and almost 4% more since then. If more confidence is lost, a downward spiral for the greenback could raise prices by making the cost of various commodities and imports, such as food and oil, more expensive for Americans. That could also drive up interest rates, as overseas investors financing U.S. government debt would demand higher rates to compensate for expected declines in the dollar. Higher rates could lead to a host of problems, like making business and consumer loans more expensive. It would also hurt the value of the Fed's huge asset holdings.

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C. Cohn
Cohn-Reilly Report

Game Changer: Housing Market Forces Feds to Reassess

The Housing Market is pulling the economy down. Clearly the recent unveiling of the foreclosure debacle is a game changer in the Fed’s strategy to bring the economy back around. Any plan set for the last quarter of this year is null and void. The cost of unraveling the legal web is likely in the billions when it is all said and done. Ben Bernanke is no doubt under intense pressure to take action toward healing the economy. Although he has been suspiciously silent in the days leading up to the Foreclosure Freeze outbreak, he was quoted in the Wall Street Journal as saying he will take the measures necessary.

What about the rumors and speculation about Quantitative Easing? This is a monetary policy strategy that infuses money into the economy by purchasing securities. If the Federal Reserve buys bonds, banks will then have money from the sale of the bonds, which can then increase their ability/desire to lend to businesses and individuals. The domino effect will serve to speed up the economy. Unfortunately last year’s attempts to speed up the economy had little impact, so specialists are debating about whether or not quantitative easing will be enough at this point.

Nevertheless, the stock market is dancing to its own beat, seemingly not connected to the sluggish economy. In the meantime a lot will hinge on the two-day meeting held next week, , beginning November 3rd. Investors are not expecting the quantitative easing measures to have the traction needed to spur the economy. It will undoubtedly take more than throwing money at the problem, which is why next weeks Fed meeting is highly anticipated.

(See Interesting Article about the Currency War at Reuters)

K. Reilly
The Cohn-Reilly Report

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Ives said....
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Cohn-Reilly Report said...
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Goldman: Polishing Off the Tarnish

After over 140 years in business, the prestigious investment bank that has long been the envy of many companies that have come and gone. Goldman continues to make all kinds of money irrespective of the scandal launched by the SEC investigation this past Spring, which precipitated a hearing on Capital Hill. This was to be only the beginning of a bad year for the gold plated maverick, at least where their reputation is concerned.

Not long after the SEC investigation ended in a $500 million settlement, a German bank; Landesbank Baden-Wurttemberg (LBBW), filed a suit claiming the firm knowingly sold $660 million of subprime mortgage-backed securities to a subsidiary of LBBW.
As to be expected, Goldman began to take action to buff off the tarnish derived from the unbecoming headlines of greed and deception. To this end the company formed a Business Standards committee, which is headed by Goldman’s chairman and vice chairman, Jerry Corrigan and Michael Evans, respectively. The Business Standards committee will review strategies to rebuild its once stellar reputation.

A series of surveys conducted by Goldman’s Business Standards Committee revealed that their clients believe that Goldman will make them money, but do not feel that they are trustworthy. If the Goldman committee approaches this “perception” issue the way it aggressively approaches its other business strategies, this will soon be a vague memory.

K. Reilly
The Cohn-Reilly Report


___________Comments

Kirsten said...

Goldman has been able to escape criticism for a century. I saw a documentary about GS that talked about how many of the good old boys from the firm went on to work for presidents, so they have been essentially "untouchable" until now. It makes you wonder if they have been doing transactions like this all along
OCTOBER 28, 2010 7:03 AM

Home Sweet Home?: Foreclosure Freeze Incites Serious Concern

In New York , three of the largest banks implemented a freeze on foreclosures amid concerns of illegitimate filings and erroneous documents. According to the Mortgage Bankers Association, NY has upwards of 80,000 mortgage loans in foreclosure. When JP Morgan Chase, Bank of America and GMAC prompted the freeze, it certainly brought much needed attention to the problem. Last week, it was made public, although not officially announced. Shortly thereafter many other banks followed suit. Apparently Attorney Generals from forty states are calling for a freeze, including New York Attorney General Andrew Cuomo. It is widely reported that Cuomo stipulated that the biggest mortgage lenders immediately halt all foreclosures.

Just as the foreclosure crisis began a new wave of court proceedings, a more pressing crisis unfolds. Not only does Cuomo plan to extend the freeze beyond the BofA, JPM Chase and GMAC, but he wants the halt to include evictions, and foreclosure sales.

This is probably good news to hundreds of thousands of home owners across the country who are struggling to stay in their homes, with little or no alternatives. The freeze is anticipated to pause the process for at least one year - enabling homeowners to go without the pressure of making mortgage payments. At least for a few homeowners, this may be just the extra time they need to get their finances back on track, or at the very least prepare an alternative living situation for their families.

Why the Drastic Freeze?
Apparently what is described as “faulty” paperwork, ranges from affidavits that do not stipulate who originated or owns the loan, to forged documents. This could mean that countless foreclosures may be overturned, which puts the many recent buyers of foreclosed properties on shaky grounds at the very least. Oh What tangled web we weave, to quote Sir Walter Scott. This essentially puts the last two years of foreclosed property sales in uncertain territory. Meanwhile, Back on Wall Street, this spells deep trouble for the big three, and many other mortgage underwriters. Although Wells Fargo and CitiGroup maintain that their documents are straight, that remains to be seen. It is hard to phathom the entire mortgage industry is pausing to resolve a nationwide scandal involving erroneous foreclosure documents, yet Wells Fargo and CitiBank mortgage documents are 100% clear of any errors.

Massive Costly Clean Up Ahead: As courts from state-to-state take on the daunting task of sifting through thousands of documents to verify the true mortgage holders, banks will have to expend costly legal support to prove their position. The costs on both sides of the fence will ultimately translate to higher interest rates for borrowers, and yet another nightmare for tax payers. It is difficult to determine how deep this crisis really is, but I imagine that this is just the tip of the iceberg.

K. Reilly
Cohn-Reilly Report

The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by ColorofChange.org, Credo Action, MoveOn.org, Free Press and the Progressive Change Campaign Committee. SavetheInternet.com summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.

Are we truly net neutral today and if so,
How long can it be sustained?
There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number
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C. Cohn
The Cohn-Reilly Report

Small Businesses: Good things come to those who Wait.

The small business community was left out of the Bail Out, as I pointed out in a previous article “Too small To Succeed”, small banks and businesses were left to sink or swim. Sadly many small banks and businesses have met an untimely end. It’s too bad that help is on the way nearly 2 years later. You may be thinking it’s too little too late, but I say, better late than never.

Last Month Timothy Geithner paid a visit to New York to convey his message to the financial industry, bankers in particular that the new Regs are good for business. His objective was to communicate to Wall street that finance reform would ultimately be the “foundation of a stronger economy”. His NYU audience was told that the Obama administration seeks to strike a balance with safeguarding Businesses, while protecting consumers. Geithner likely new that the Administration had a plans to unveil a kind of incentive package for banks to make loans to small company to spur business.

This week the U.S. Senate passed the bill valued at $30 billion to be utilized to encourage lending, and approximately $12 billion earmarked to provide much needed tax breaks for small businesses. Still to be approved by the Senate, the law is expected to create 500,000 jobs according to estimates by the Democrats. Amid a firestorm of criticism, with midterm elections threatening to curtail the democratic reign on Capital Hill, the administration is refocusing its efforts to try and make a dent in the unwavering unemployment rate, and spur economic development.

K. Reilly
Cohn-Reilly Report

Range Bound Markets Await Direction

Over the last six sessions the Dow traded in a narrow 200 point range and the S&P followed suit, trading within a 25 point spread; not surprising due to the number of people on vacation this time of year resulting in low daily volume and a lack of direction.

The economic news did not help this week, which was mixed and lackluster. On Monday there was a bright spot as consumer personal income in July posted a 0.2 percent gain, following no change at all in June. More importantly, the wages and salaries component rebounded 0.3 percent after slipping 0.1 percent in June. The Fed is depending on the consumer to counter a faltering housing sector - Bernanke and Company got its wish at least for July. Overall personal consumption increased 0.4 percent, following a flat number in June. How did the market react? The Dow sold off by over 140 points anyway; obviously traders didn’t think the numbers were good enough. Since the PCE (Personal Consumption Price Index) rose by .02, which is slightly inflationary, that should have been looked at as a good thing, since there has been so much worry about deflation. But no – it had no affect.

Today was a roller coaster, affected by reports showing an increase in home prices for June, a weak consumer confidence index and a mixed picture from the Fed minutes released at 2:00 PM. The result was a close with little change in the markets.

Interestingly, the Fed minutes pointed to the widespread differences between the Fed governors on what should be done to affect the state of the economy. Some feel we are doing just fine, while others are ready to take more stimulus action and still others are sounding the alarm for disinflation – a slow deflationary decline in prices. No wonder the public is confused. They can’t decide amongst themselves what the next course of action should be.

Anyway, let’s see if the ADP employment report, jobless claims and the national unemployment report on Friday will have better luck in moving the markets.

C. Cohn

Cohn-Reilly Report

America to Obama:Time Is a Luxury We do Not have

The country couldn’t be more divided on the key issues like finance reform, and healthcare. Could it be the media, or the tea party rallies, or could it be the voters, who overwhelmingly voted President Obama into the White House on the platform of Healthcare and finance reform, are having a change of heart? Something just does not add up, there has got to me more to this crusade than meets the eye. There is one camp that feels that Obama can do no wrong (with ever declining members) and another camp that feels that Obama can do nothing right. Either side of the fence seems a bit extreme. The fiscal policy, bailouts and stimulus measures implemented by the previous and current administrations have had some impact on stabilizing the economy and avoiding catastrophic collapse of the markets, but we are now faced with slow growth and high unemployment some 18 months later. Patience is what is needed, given the breadth of the problems the President had sitting on his desk on his first day in office. Nevertheless, time is not on his side, with midterm elections around the corner, it seems almost destined to be an upset. The Democratic majority is in serious jeopardy of swinging back to the Republicans.

From my perspective, the fullness of time is required before evidence of the wise and unwise movements of the administration is ultimately revealed. In the meantime, we are hearing from the "so called" experts Obama’s popularity is swiftly eroding, and his administration, though productive in many respects, not in the areas of concern. The wars, new jobs, and now the BP oil disaster. It will take a high profile republican scandal to damper the outcome of the upcoming elections.

K. Reilly
Cohn-Reilly Report

SEC: Keeping the Bond Market Churning

To beat the potential stand-still in bond offerings, the SEC opted to temporarily allow bonds sales to proceed without providing credit ratings in Official Statements, which are deal documents distributed to brokers, and investors that provide full disclosure of issuers' financials - particularly, balance sheet, cash flow, total debt outstanding, credit rating, use of funds and debt service.
It appears that the SEC is intent on keeping the flow of deals moving to help financial “supply chain” generate money including, investment banks, issuers of debt, lawyers and financial advisors. Perhaps their mindset is that this will trickle down to impact the economy as a whole. And so it goes....the SEC is bending the rules to indirectly help keep the Economy moving in the right direction, by way of the Bond sales.

On the heels of the securitized mortgage and subprime housing debacle, the last thing we need are credit raters that are gun shy about rating bond offerings. Okay, let's break this down.... credit rating agencies, are in fear of rating?. You're thinking, "Isn’t that like a Chef being afraid of cooking?" Nevertheless, this comes as an unintended backlash from the Financial Reform Bill. It was reported in the Wall Street Journal that raters’ want to avoid exposure to liability, therefore the top three rating agencies; Moody, S&P and Fitch, won’t allow their ratings to be included in the public disclosure documents (Official Statement) that would normally accompany bond sales. To be clear, they will continue to rate bonds, but apparently do not want their rating to be the basis of any investors’ decision to purchase the bonds - thereby eliminating liability in the event of default.

Well I know many of us market watchers, analyst and economists were all prepared for backlash from the tightened regulations handed down by lawmakers. As the smoke clears, and the dust settles on the Reform Bill, more and more instances of backlash will emerge. Capital Hill will be compelled to press the “reset” button, and then it’s back to the drawing board with revisions and addendums until they get it right.

K. Reilly
Cohn-Reilly Report

___________Comments

John T. said......
I am very very concerned that the bond market is the next bubble. We have basically been in a 25+ year bond bull market, and rates are darn close to zero. Every scared person out there is jumping at bonds and bond fund managers are holding their noses and scooping up everything they can......with the exception of Bill Gross who knows this is coming and is probably already clearing out his offices.......

As soon as we get a couple of good jobs numbers and confirmation that yes, we are in recovery.......and the Fed says "ok, let's raise 1/4 pt".....it's over....and everyone who has bond funds is going to watch the NAV deteriorate, perhaps for many years to come. And those who bought long term bonds for yield will find the prices will erode and they will be forced to hold to maturity........and maybe even watch a 1 year 5% CD float by as they can't do a darn thing about it.

I feel bad for the elderly. They're going to get hit from this when it comes.

Katherine said...
You make a very good point John T. It seems that investors now have the responsibility (self preservation)to project into the future and decipher whether or not the worst case scenario is something they can bare. In today's market there is no such thing as a secure investment. Bonds were always a good bet for long term, but there are so may unusual factors playing into the market that it's next to impossible to anticipate. Veteran analysts and fund managers may have the benefit of experience to navigate through these times, but what about the fund managers who have only 3-5 years experience.

Where is the Economy Headed?

Two of my favorite financial commentators are Jim Rogers, currency trader extraordinaire, hedge fund pioneer and former partner with George Soros, and Dr. Mark Faber – creator of the GloomBoomDoom report, a former managing director of Drexel Burnham Lambert and an international investor with the uncanny ability to predict market direction. I thought it would be interesting to take a look at what their current thinking is about the economy and the markets.

Mr. Rogers cautioned that when another downturn takes hold "the world is going to be in worse shape because the world has shot all its bullets"; meaning that due to the extraordinary measures already adopted by central banks and governments around the world, the arsenal of available tools to combat the next recession is somewhat lacking. Speaking in an interview with business television channel CNBC, the septuagenarian investor said that "since the beginning of time" there has been a recession every four-to-six years, and that means another one is due around 2012.

Rogers has long been a proponent of abolishing the Fed. His point is that America survived and prospered without a central bank for long periods and can do so again. "We don't need the Fed. The Fed is making our lives miserable," the famed financier says. "The Fed is printing huge amounts of money, which we'll have to pay for sometime. The Fed has borrowed gigantic amounts of money on their balance sheet...the numbers are so staggering that this is going to have ramifications before too much longer." "Is Mr. Bernanke going to print more money than he already has? No, the world would run out of trees" Rogers says.

Mr. Faber comments “The Fed doesn't pay any attention to asset bubbles when they grow. That's their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It's a very asymmetric response and it has many unintended consequences. In a credit-addicted economy, you don't need credit to actually fall for there to be problems. All you need is a slowdown in the growth rate, and you get big problems. Now, the government and the Fed are aware of this, so they are creating debt through fiscal deficits and monetization. That creates a hugely volatile environment. “

In 2008, government credit creation was inferior to private credit contraction, and asset markets tanked. In 2009, government credit creation was higher than private contraction, and asset markets went ballistic. Lately, government credit creation has slowed, and asset markets have gone down. Now, the Fed is aware of this, and it's only a matter of time before it throws more money into the system. I guarantee this.
I'm a believer that the stock market lows of March 2009 will not be revisited. You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging. Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms. And if the Dow does go to 700, you'll have more to worry about than your investments. All the banks will be bust. The government will be bust. You don't want cash if massive deflation happens. On the contrary: It will be worthless. You have to think very carefully about hardcore deflation.”
Both Mr. Rogers and Dr. Faber share a good degree of the same pessimism. Both sound the alarm for the real threat of a deflationary spiral, due to the zero rates and the printing press actions of the Fed. Deflation is correlated with recessions including the Great Depression, as banks defaulted on depositors. Additionally, deflation may cause the economy to enter the liquidity trap, a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. Deflation discourages investment and spending, because there is no reason to risk on future profits when the expectation of profits may be negative and the expectation of future prices is lower. Consequently deflation generally leads to, or is associated with a collapse in demand. Without the "hidden risk of inflation", it may become more prudent just to hold on to money, and not to spend or invest it.

Sobering thoughts on a hot summer July afternoon, as the market sputters back and forth from gains and losses trying to figure out what will happen next.

C. Cohn
Cohn-Reilly Report

______________Comments

Erin Thak said...
This is very scary stuff. I can't imagine what was going through the minds of the the general public during the great depression, but I can certainly say that I know this past three years on the economic and financial market front will be a significant part of our history. One that will be analyzed for decades.

August 20, 2010 7:54 AM

Katherine said...

I will have to agree with you on that Erin. I feel I am living in fascinating times. Don't get me wrong, it is definitely extremely difficult times for the majority of the the population, including myself, but I can't help but recognize the importance of what is taking shape.....for better or worse.

Reform Bill Signed ..and the Sky is Not Falling

The Bill was finally signed by President Obama on Wednesday July 21st, marking the most extensive financial reform legislation since the great depression. In addition to tougher regulations and fees for large banks, the bill outlines new processes and steps to be taken to address troubled companies, which would break down the business units and sell them off, rather than bail them out. The bill is being heavily criticized for what appears to be the government’s increased role of power and control. Further, despite what we’ve heard from the President and democrats on Capital Hill, the bill does contain language that suggests that the Federal Government still retains the authority to bailout troubled companies. Bloggers are going bonkers over this issue. I, on the other hand, feel otherwise. In all likelihood, the government’s authority is restricted to last resort options, or special circumstances. Let’s face it, no one could have predicted the turn of events in ’08 and ’09. Therefore, to close the door to any alternate options that may save the country from another “never before seen” economic turn of events, would not be wise.

As anticipated, the large financial institutions will be subject to increased oversight. Unfortunately, my understanding is that the Securities and Exchange Commission is going to be the watchdog. Are you kidding me? Now this is a real concern! The SEC, in all due respect, is the very same group that ignored countless warnings about Madoff, slept as the high risk sub-prime were securitized with “A” ratings, while spending thousands of office hours porn surfing. I am not encouraged by this at all.

I'm sure you've heard the "sky is falling!" type reports surrounding the passing of this bill, where market journalists, analysts and self proclaimed finance geniuses speculate that the bill will have a harsh impact on banks, which will stall or reverse the economic recovery. Sure there will be some initial impact, but banks have always found ways and means of navigating around the Regs and pulling out their multi-billion dollar profits. Time will tell, my friend times well tell. In the meantime, I shall remain open minded until I get more information about this historic bill might impact the economic recovery.

K. Reilly
Cohn-Reilly Report

___________Comments

Charlie said......
I agree with you about the SEC. The problem is that companies are concerned about how the financial regulations will affect their businesses going forward, along with the impact of health care reforms. As a result, firms are sitting on trillions of dollars in cash, reluctant to commit to hiring the still 9.5% of the population that is unemployed.

I speak to recruiters frequently and they confirm that employees are still working long hours to make up for the lack of staff in their departments. Hiring managers have numerous open requirements for employee spots to be filled, but until senior management can get over this uncertainty, we still will have major hurdles in putting America back to work.
JULY 23, 2010 6:25 AM

Katherine said......
You're right, Charlie. We don't disagree. Except from my standpoint, the Reform Bill is a key contributor, but there are other factors that come into play with respect to companies sitting on cash, and still reluctant to hire. Overall, the concerns are valid: How stable is the market?, How tight will the banks be with distributing credit? , and Will there be liquidity?, These are significant issues where the corporations are concerned, particularly the small companies, who depend on credit to purchase inventory, and make payroll. I definitely get it. Nevertheless, reform was absolutely necessary. We all know the financial industry was out of control, and now we all have to suffer for it. My old boss used to say "This too shall pass". Corporate America will adjust, survive, and eventually thrive again. Yes the economy may stagnate, but it will prevail.

No doubt there will need to be some changes in the Reform Bill – a few nips and tucks before we can strike a balance between consumer protection and keeping the banks motivated.
JULY 23, 2010 7:35 PM


Anonymous said......
Hey....nothing like a healthy debate, right? You both make solid arguments, but I’m more of the wait and see type. These are scary times, but I hear they don’t compare to the great depression – we have it easy. Look. - it’s not going to be the same no matter what we do, so why whine about it. Let’s just man-up and wait it out. Banks are never going to satisfied, and the Wall Street high rollers are moaning because we're raining on their parade. Wall Street and Main Street will never see eye-to-eye. So how do you write legislature that reflects the concerns of both sides. You Don't!

Federal Tax Increases Could Affect Lower and Middle Income Families

Tax cuts that were put into place by the Bush Administration are scheduled to expire at the end of this year. There could be some significant changes that will take people by surprise. The public has been led to believe that only tax payers in the top two brackets will face higher federal income taxes when the Bush cuts are gone. This may not be the case if Congress and the President fail to act. There are currently six rate brackets - 10%, 15%, 25%, 28%, 33% and 35%. They will be replaced by five new ones: 15%, 28%, 31%, 36% and 39.6%. A few months back it was thought that Congress would keep the old brackets to protect lower and middle-income families. It is now uncertain if this will happen.

There will be higher capital gains and dividends taxes.Right now, the maximum federal rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains will increase to 20%. The maximum rate on dividends will skyrocket to 39.6% unless action is taken to limit the rate to 20%, as the President has repeatedly promised. For people in the lowest two rate brackets of 10% and 15%, the current rate is 0% for long-term gains and dividends. Starting next year, those people will pay 10% on long-term gains and 15% and 28% on dividends (compared with 0% now) unless a change is made. Otherwise, taxes on long-term gains and dividends will go up for everyone.

Currently, the standard deduction for married joint-filing couples is double the amount for singles, easing the so-called marriage penalty (see this link for more information http://en.wikipedia.org/wiki/Marriage_penalty) that can force a married couple to pay more in taxes than when they were single. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles unless Congress takes action and the President approves. If that doesn’t happen many lower and middle-income couples will face higher tax bills. In the current system, the bottom two tax brackets for married joint-filing couples are exactly twice as wide as those for singles. That ratio helps keep the marriage penalty from biting lower and middle-income couples. Starting next year, the joint-filer tax brackets will contract, causing higher tax bills, unless a change is made.

The tax cuts in place now offer tax relief to most Americans who pay federal income taxes. The scheduled demise next year will raise the tax bill of nearly every taxpayer, unless Congress makes changes and the President jumps on board.

C. Cohn
Cohn-Reilly Report

___________Comments

Erin Thak said.....
In the short-term some of the Obama Administration‘s policies and regulations may appear to be more toxic than they really are. Like anything else, time may prove otherwise. I remember thinking that NAFTA was a good, progressive idea, which after 15 years, has proven to have a horrific impact the US. NAFTA commenced an huge increase in outsourcing resulting in the loss of 1.7 million jobs, as well as suppressed wages, due to the extremely low cost of doing business in Mexico. As brilliant as Bill Clinton is, he was unable to see the long-term ramifications of NAFTA, nor was any of the geniuses in his administration. So I remain guarded but hopeful that in the long run, the best interest of the country is being protected. This administration can’t do any worse than the previous one.
JULY 15, 2010 11:27 PM


Charlie said.....
I agree about NAFTA and the prior administration. However, I hope the new regulation laws do not have adverse affects on the many good companies that are not guilty of unethical practices and actually employ most of us. Also, as I mentioned above, I hope the President and Congress are aware of the impact that the reversal of the current tax cuts will have; not only on the wealthier citizens, but on the lower and middle-income tax payers as well.
JULY 16, 2010 10:55 AM

Katherine said.....
I agree 100% with Erin, as you well know Charlie, given our recent debate. However, Your point is well taken regarding the reversal of Bush's tax cuts. I cannot imagine that (with the dozens of economic and financial advisors on the Obama Administration's advisory board) no one is emphasizing this critical issue to the President. Although the Republicans are normally not cheerleaders for the middle class, this is one time that I hope the Republicans make this point loud and clear.
JULY 17, 2010 7:10 AM

Charlie said.....
I agree that the Administration has an ample supply of advisory personnel. However, the year is slipping away and with all the current distractions including a war, regulation, health care, etc., will there be enough time to mount sufficient effort to tackle this issue? Also, it is not just The Administration that must act - Congress has to move too. We all know that nothing gets done overnight in Washington and December 31 is closer than you think.
July 19, 2010 6:03 AM

Independence Day for the Feds: Lawmakers to Let the Federal Reserve Retain Their Independence

Wall Street reform, begins to take shape as the House of Representatives and the Senate attempt to hammer out the details of the much anticipated plan.
The Federal Reserve has been the subject of much sustained criticism for its role in the financial crisis. Eventually the Feds admitted to being complacent and not responding to mitigate mounting housing troubles due to risky lending practices back in ‘2007. Accordingly, there was a not-so-subtle push to make the head of the Federal Reserve Bank a political appointment. This idea was, thankfully, abandoned according to a Reuters report. Nevertheless, the Federal Reserve did not get off completely, as Lawmakers allegedly signed off on a one-time review of its emergency lending during the Crisis, and has ordered them to disclose the Discount Window and Open Market operations on an on-going basis. Even though the information requested is at a 3-year lag, this may come as huge adjustment for the Feds. Hey Feds...you win some, you loose some.
I am guarded but excited about the prospect of Wall Street reform, but I anticipate a difficult road ahead for the lawmakers as they chisel out the historical bill. It will certainly be interesting to see how they revise and attempt to blend the separate(and very different) bills that previously emerged from the House and the Senate. This July 4th weekend, which was the White House dead line, should quickly reveal just how bumpy the road might have been. As of week before last, the key issues were as follows:
1. "Yes" or "No" to a provision that would open the Fed’s interest-rate policy to congressional audits. If not perhaps they would look at examining other less sensitive areas.
2. Establish tighter regulations that would essentially crimp financial firms' profits, but serve to avert a repeat of the financial crisis of 2009.
3. Establish improved consumer protections. This would protect consumers from predatory and unsavory loan rates and fees.
4. Set up a process for dismantling troubled firms, in lieu of costly bail outs
5. Limit the range of high-risk, but profitable trading activities, which played a key role in the financial collapse of banking firms.

Although the Lawmakers differ in the details, both the Senate and the House would like to see funds set aside for dismantling troubled companies, rather than save them because they're “too big to fail. Regulators have also been directed to find ways to eliminate the conflict of interest that may have lead to credit-rating agencies. I wonder why they're ignoring the conflict of interest concerning research analysts who issued “strong buy” reports to stocks and companies that were troubled? Will they be included? You may or may not recall that one of the research analysts of a major investment bank was fired after pressure from Enron, because he did not give them a "strong buy" rating. Once the analyst was fired, Enron rewarded the Investment bank with a $50 million transaction. I can only imagine the numerous stories that have not been made public? At some point this week the details will be made public on this widely anticipated bill.


K Reilly
Cohn-Reilly Report

Post Script

Geithner and Michelle Obama at The U.S. Treasury

The two talk about the hard work of the treadury department employees, and the finance reform programs that are designed to mitigate another financial crisis from happenign again. Mrs. Obama talks about her child obesity initialtive.