Boomerang Economics:the darkside of Globalization

In the past the effects a poor economy in one area, would impact other nearby regions or tri-state area in the case of the U.S.. Globalization, as a result of technological advancements, is a powerhouse game changer. We are no longer autonomous in our successes or failures as a nation. The U.S. financial fallout in of 2008 and 2009, sent trimmers across the Atlantic, as our economies are now more connected that ever. The financial Tsunami that followed the near collapse was powerful enough to shake the fiscal foundation of many other nations. Europe’s financial crisis began to surface in the Fall of 2010, but is now beginning show familiar signs of a near fiscal collapse for a number of its EU members. Our troubles certainly had an impact on the overseas markets, but we are not entirely to blame for the financial crisis which is quickly unraveling before us.

In a boomerang-like cycle, it is possible that the financial discord in Europe, will have a negative impact on the U.S. So much so, it is feared that this Boomerang effect may spur another recession. This was the concern of the IMF yesterday, as they discussed the importance of the EU tackling the debt crisis. If Europe fails to lasso the problem soon, there is a strong possibility that both regions will fall into a recession.

Who would have thought that boomerang economic would become one of the harsh side effects globalization.

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K. Reilly
The Cohn-Reilly Report

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U.S. Economy Stalls as Europe's Fiscal Crisis Worsens

It’s almost certain that the U.S. economy will continue to stagger through the 4th quarter. Budget and economic analysis provided to congress by the CBO (a bipartisan federal agency) supports the theory of continuing slow growth, and an unyielding jobless rate through 2012. I contend that the jury is still out were 2012 is concerned, as there are so many pending elements to the economy that leave room for reasonable doubt. For example, Obama’s jobs creation program, which offers tax cuts and other incentives to corporations has the potential to positively impact the economic picture for 2012. According to a WSJ article by Stacy Curtin, the results of austerity measures implemented in Greece are questionable and may prove to be in large part overated. Nevertheless, the fate of the EU’s financial crisis, has the potential to an impact on the US economy, negatively or positively. Being a generally optimistic person, I’m reluctant to say the idea of the U.S. slipping back into a recession is not out of the question. Meanwhile, Europe is not out of the woods either. In fact, the continent seems to be experiencing a deepening crisis.

The EU crisis has reached a new level, as the alarms are set off concerning the likelihood of Greece defaulting on their debt. Thankfully, for some inexplicable reason, the U.S. financial markets don't appear to be fluctuating as drastically in reaction to bad news from Europe. Nevertheless, the European Union's Fiscal discord is the primary focus of a meeting scheduled for this Friday, as EU Prime Ministers prepare to gather in Poland. Resolving Greece's financial crisis is undoubtedly at the top of the agenda, but the larger economies are also under heavy financial pressure. Angela Merkel, the Chancellor of Germany, took her message to the media in an attempt to diffuse the rising fears of Greece defaulting on its debt. In one radio interview, Merkel emphatically proclaimed that the EU was doing everything in its power to avoid a Greek default.

Echoing my opinion in previous articles concerning the financial crisis, Chancellor Merkel, also stated "We face a completely new challenge - one that has no historic precedent". Speaking of historical precedence, U.S. Treasury Secretary, Timothy Geithner is expected to attend the meeting with the EU Finance Ministers on Friday. This should prove very interesting, and serve to enhance our battered image.

Also, see Article citing Soros' views of the EU crisis in the Huffington Post.


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K. Reilly
The Cohn-Reilly Report

Facebook: Untouchable, & in a League of Their Own

It is clear that Zuckerberg is Superman, and his Facebook is untouchable. In the midst of a downgraded, underrated, crawling economy, Facebook managed to double its revenues in the first half of this year with a staggering $1.6 billion, according to the Wall St. Journal. There was much talk about Facebook feeling the pressure from competitors, which was obviously completly unfounded. Although, at somepoint, Facebook may have to face external threats to its marketshare, but at the moment, they're in a league of their own. As market leader, having overtaken Myspace, leaving them in struggling to retain name recognition, Zuckerberg has successfully carved a permanent mark on the pop culture around the world.

In a Superman-esque feat, Zuckerberg’s Facebook platform saved the internet advertising industry. Although, it's safe to say social networking has revolutionized the online advertising, Facebook alone accounted for nearly 1/3rd of the internet display advertising impressions in June, which is more than Yahoo, Google, MicroSoft Corp and AOL combined. This illustrates the tremendous power of Facebook, and more importantly, the power of social networking as a whole. You don't have to be a marketing guru, or economist to see the impact social networking will have on allocation of advertising dollars in the not-so-distant future. But for now, it’s all about Facebook and the hundreds of millions of people, spending millions of minutes just "hanging out" on their page, or checking out their friend's pages.

The growing obsession has created global opportunities for advertisers, and businesses looking to market directly to their target in a personal environment - which (in the case of social network sites), is a captive audience.

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K Reilly
Cohn-Reilly Report

Corporations Hoard Cash, Await Signs of Stability

There was reported 1.9 trillion in corporate profits by the end of 2010, and hoarding of cash at record levels. This tells a story of corporate fear and uncertainly when you consider the back drop of a flat job creation report for the month of August, and a S&P downgrade of US debt. I strongly believe that the catalyst for the low hiring rate last month is the S&P downgrade. The S&P downgrade shifted the climate dramatically from hopeful to not sure. Employers seem to have been shaken by the uncertainty and elected to curb their enthusiasm about the Country’s economic future. This sentiment is echoed by Jeffrey Kleintop of LPL Financial, who was quotes in the Associated Press as saying the new job figures are likely skewed by the unusual events that may have made employers reluctant to add jobs in August.

Let’s clarify; there were definitely new jobs created in the month of August (I happen to know of two in particular), but unfortunately there were just as many jobs lost, yielding a net zero for the month. In about 4-6 weeks there will likely be an adjustment made on the August numbers for better or worse. Being of a a glass-half-full mindset myself, I believe the adjustment may prove to be slightly better than the net-zero reported on Friday before the Labor day weekend. Nevertheless, fear of the country dipping back into a recession is having a dramatic impact on the market.

Friday’s New jobs report was disappointing, leaving Investors and economists alike surprised. The expectation was that there would be approximately 93,000 new jobs added, but there was no indication that jobs growth would be completely and utterly flat.. The months of June and July were revised lower, so the overall jobs growth picture for the summer is looking more and more bleak as the U.S. economic drama unfolds.


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K Reilly
Cohn-Reilly Report

Where Do Investors Turn for Safety?

As the market appeared to gradually recover from the S&P downgrade of US Debt, there was still a sense that institutions and investors were pausing for a sign that the economy is on solid footing. There were those sitting on the sidelines like sharks waiting for a discount buying opportunity, but for the most part, fear had taken hold on investors. This is clearly reflected in the trading shifts that can be seen just by looking at rising gold prices.

The financial crisis which has had a death grip on US economy, has not been kind to Europe either. This is extremely unusual time where financial markets are concerned. Historically investors and institutions would diversify their portfolios by spreading the risk between stocks, bonds and European securities or foreign currency.

The wisdom of this strategy is simply this: when stocks are not doing so well, the bond yields and overseas securities and currency trades, would mitigate the overall portfolio losses. This is precisely why the mantra for investing has been to diversify. Remember the devastated employees of Enron, and WorldCom who had enjoyed fat portfolios values in the millions. These unsuspecting employee/shareholders swiftly went from being millionaires to being completely broke. Why, because they had only one stock in their portfolio -no other stocks, government bonds, or foreign investments to offset the plunging Enron stock - which ultimately became worthless. Traditionally portfolio managers would use government treasuries and bonds, along with foreign investments as safe havens.

Given the sluggish U.S. economy and S&P downgrade, the overseas market would normally serve as safe havens. However, the coninuing rash of bailouts overseas eliminates the prospects of a safe place to invest, while awaiting economic stability in the U.S.

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Horror on Wall St.- Rated PG:

Another Finance Industry Horror Begins to Unfolds

Like a bad horror film, relentless slashing is imminent, and likely resulting in a blood bath of Wall Street employees, running for cover(unemployment line). Thousands of innocent victims scattered on the street as a result of massive Wall St. cuts....you get the idea. In all seriousness though, this will be a living nightmare for those hard working employees who will lose their jobs in the coming months.

As trading remains lackluster, the impact on returns have forced Banks to consider another merciless round of trimming. Certainly many perceived that the Market's continuous climb past DOW 12,000 meant it was going to be safe from a repeat of the economic trauma that plagued 2008. Well, from my standpoint, Wall St. may not revisit the lows and panic of 2008, but the Market is far from being “safe”.

Although the economy has managed to gain traction over the past 18 months, and bring the unemployment rate below 10%, it has not stabilized substantially enough - at least not in the way we had hoped. The monetary and fiscal policies of the Obama Administration and Federal Reserve have not had the impact on the economy that they anticipated either. This comes at a bad time for the President and the Democrats as they gear up for next year’s elections.

In the last 3 years, businesses have been sleeping with one eye open, if they're sleeping at all. Let’s face it, the economy is just not recovering fast enough. If you combine bank losses from the first 6-months of last year, and the first 6-months of 2011, it is estimated at $20 billion globally. That number only represents the lost revenues of 9 of the top banks. The Wall St. Journal Article “Wielding the Ax” quoted Michael Karp of Options Groups as saying “banks are cutting a lot of deadwood and live wood”. Based upon the word on the Street, this apears to be a statement of truth.

Banks have taken just about all they can stand from the Wall Street slump, and report plans to take steps toward trimming down the staff. A few of the tops Banks are ready to make severe cuts in annual expenses, as early as this week. Austerity is not limited to the borders of Europe, J.P. Morgan, alone, is preparing to trim nearly a billion in annual expenses. Credit Suisse Group laid off investment banking employees, as part of the planned layoff of 400-600 jobs, while Barlcays is expected to cut additional jobs - on top of the 600 jobs eliminated in January. Goldman Sachs' annual Survival-of-the-fittest program ( 5% annual reductions) wont be enough this year, therefore deeper cuts can be expected. Surprisingly though, Goldman still plans to add jobs in Brazil, India and Singapore.

There's a saying; When Wall St. sneezes, the rest of us catch a cold. That said, prepare for the worst, and hope forthe best.

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Justice is Served: Hedge Fund Titan is Slammed

Like a woman scorned, Lady Justice took the ultimate revenge; A Guilty Verdict. The Manhattan U.S. Attorney, Preet Bharara, made good on his promise to crack down on illegal trading on Wall Street. After a week of deliberations, the verdict is in and Galleon Group Founder, Rajaratnam, was found guilty on 14 counts of securities fraud and conspiracy. The co-founder and former head of the Galleon Group is officially a convicted Felon, facing 15-19 years in prison. Three cheers for Justice and the fight against unbridled greed in corporate America.

During the trial the Jurors listened hours of testimony and dozens of secretly recorded calls that clearly revealed that Rajaratnam was trafficking in illicit information. An interview of the jurors revealed their efforts not to rush to judgment. Ms. Gorman, one of the jurors, explained that they painstakingly comb through the stock charts, trading records and witness photos. Adding that they went through the evidence deal by deal. When questioned, jurors admitted to being very impressed by the Sri Lankan defendant and referred to him as a “smart man”. Nevertheless, the prosecutor provided hard evidence that was very persuasive in the end.

In my view, insider trading is a directly related to greed, and the prevalence of it in the finance industry is rampant. These hedge fund managers and traders feel privileged, above the law, and think that they’re so much smarter than the rest of us. They’re so blinded by their own narcissism and conceit, that they are convinced no one will ever see through their scheme. Rajaratnam was ever so clever, but obviously not clever enough. This case is a tragedy on many levels, particularly that which concerns humanity. I think of how this brilliant Sri Lankan could have been a celebrated hero to poor, young men and women in his country and to struggling immigrants here in America, but instead he opted to worship money and disgrace his family and his country.

This is not the last we will hear about this vast insider trading case, there are aparently 12 more traders that have been lassoed into this case, so I am sure they are beginning to realize the severity of their predicament.

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