Mish's Global Economic Trend Analysis

Good but Expected News for Republicans: House Democrats Re-Elect Pelosi as Their Leader
Full Year of Muni Gains Wiped Out in 2 Weeks; California in Shambles, Philadelphia Downgraded; Issuance Soars; Horrid Muni Risk-Reward Setup
Why It's Hard to Get a Business Off the Ground
6 Million Benefit-Paying Jobs Vanish in One Year!

Good but Expected News for Republicans: House Democrats Re-Elect Pelosi as Their Leader

Posted: 17 Nov 2010 05:25 PM PST

In good, yet expected news for Republicans House Democrats Re-Elect Pelosi as Their Leader

The House speaker, Nancy Pelosi of California, was re-elected on Wednesday to lead the Democrats in the next Congress, despite her party's loss of more than 60 seats and its majority control of the House in the midterm elections.

Officials said that Ms. Pelosi defeated Representative Heath Shuler of North Carolina in an internal party vote, 150 to 43. Mr. Shuler acknowledged before the vote that he had no chance of winning, but he wanted to give disgruntled Democrats a chance to register their opposition to Ms. Pelosi's leadership anyway.

In the midterm election campaign, Ms. Pelosi became something of a lightning rod for public anger over some of the sweeping and costly legislation passed during the past two years. Republican candidates frequently singled her out for attack in their campaigns. Many of the House Democrats who went down to defeat this month were moderates with ties to the speaker.

But it was precisely because of the sweeping defeat the Democrats suffered in the elections that Ms. Pelosi said she wanted to stay on as the caucus's leader.

"Our consensus is that we go out there listening to the American people," Ms. Pelosi told reporters Wednesday afternoon after the vote. "It's about jobs, it's about reducing the deficit and it's about fighting for the middle class. I look forward to doing that with this great leadership team."

Arrogant Nonsense

The American people have spoken. The idea that Democrats are "out there listening to the American people" is absurd and the election proves it. Voters have had enough of Obamanamics already (and certainly not a moment too soon).

Only an arrogant buffoon could not understand that. The implication of course, is that Nancy Pelosi is an arrogant buffoon.

If Pelosi wants to reduce the budget deficit then "Where the hell is the plan?"

Proving that I am an equal party basher, I ask the same of the Republicans "Where the hell is the plan?" The difference is Republicans have a huge advantage for two big reasons.

1. Nancy Pelosi's big mouth
2. A devastating election for the Democrats

However, it is important to point out that because BOTH Democrats and Republicans resort to tit-for-tat worst of both worlds compromises, we are in this mess.

For example, politics at present consists of this idiotic compromise: you grant a bigger budget for the military, I will give you an increase in entitlements.

Thus, both parties are guilty.

However, at the moment, Republicans have the upper hand because Nancy Pelosi looks like a arrogant, disingenuous fool. The simple reason is that Nancy Pelosi is an arrogant disingenuous fool.

That may sound harsh, but it is the truth. Moreover, I point out once again: I am not a Republican. I am an independent. I vote for policies not parties. I am in favor of a balanced budget amendment, and I ask both parties to back that idea.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Full Year of Muni Gains Wiped Out in 2 Weeks; California in Shambles, Philadelphia Downgraded; Issuance Soars; Horrid Muni Risk-Reward Setup

Posted: 17 Nov 2010 11:30 AM PST

A full year of municipal bond gains went up in smoke in the past two weeks. Worse yet, it's highly likely more blood is coming as issuance soars amid decreased demand from investors. A Moody's downgrade of Philadelphia, a complete mess in California, and a looming city bankruptcy in Michigan all weigh on the sector.

MUB iShares National Muni Bond Fund

click on chart for sharper image

Moody's Cuts Philadelphia Bond Rating

Bloomberg reports Philadelphia Bond Rating Cut to A2 by Moody's on Fiscal Weakness

Philadelphia's credit rating was reduced to A2 from A1 by Moody's Investors Service, which said the sixth most-populous U.S. city is financially weak and has limited budget options.

The downgrade, to the firm's sixth-highest investment grade, affects $3.8 billion of general obligation bonds and similar debt. The outlook for the city of 1.5 million is stable, according to Moody's.

Philadelphia is rated BBB by Standard & Poor's, two steps above noninvestment grade, and A- by Fitch, four steps above noninvestment grade, according to data compiled by Bloomberg.

"The city has little budgetary margin over its five-year plan which includes significant repayment of deferred pension contributions in 2013 and 2014," the Moody's report says.

Realistically, Philadelphia is Bankrupt

Philadelphia is in the same big mess for the same reasons as Los Angeles, Miami, Houston, and Oakland: pension promises and public union benefits that cannot possibly be met.

It is unfair and immoral to keep raising taxes on city residents to support benefit promises that should not have been made, and cannot possibly be kept no matter how high taxes go.

Philadelphia should declare bankruptcy.

Swaps on Property and Casualty Insurers Jump on Muni Selloff

Please consider Swaps on Property and Casualty Insurers Jump on Muni Selloff

The selloff in municipal bonds is helping push the cost to protect the debt of property and casualty insurers to the highest in more than a month.

Credit-default swaps on New York-based Travelers Cos. and Chubb Corp. climbed to the highest since October. Municipal securities account for 26 percent of the financial assets of property and casualty insurers, Hans Mikkelsen, credit analyst at Bank of America Corp., wrote in a report yesterday.

"Some investors view P&C insurer CDS as hedges against muni risk," Mikkelsen wrote. The swaps gain value as investor confidence in the companies' ability to repay debt deteriorates.

Municipal bond prices are dropping amid a surge in issuance. Pacific Investment Management Co.'s Municipal Income Fund has dropped 12.3 percent since Nov. 3, when the Federal Reserve said it would undertake a round of quantitative easing, known as QE2, by buying $600 billion in U.S. debt.

Yields on top-rated tax-exempt bonds due in 10 years climbed to a four-month high as the market absorbed the highest weekly issuance of municipal debt in at least seven years. California led states and local governments issuing $16.3 billion this week.

Credit-default swaps on Sprint Nextel Corp. jumped to the highest in more than two months after Moody's Investors Service said yesterday it's reviewing whether to cut its rating on the third-largest U.S. mobile phone carrier. They rose 9.2 basis points to 398.5, according to CMA.

"The question becomes will the federal government help," Buffett, 80, said at the U.S. Financial Crisis Inquiry Commission in New York on June 2. "I don't know how I would rate them myself. It's a bet on how the federal government will act over time."

Flood of Issuance Amidst Head Winds

A flood of issuance from California and other states comes amidst downgrades of Philadelphia, problems in California, and renewed fears of sovereign default in Europe.

Please consider the Wall Street Journal article Head Winds Facing Muni Issuers.

The tumble in long-term municipal bonds last week comes as a flood of states and municipalities are seeking money in the debt markets, raising the prospect some will have to pay higher yields to lure investors.

California leads the list of planned borrowers. The state alone is planning $14 billion of sales before Thanksgiving.

Investors have been keeping a close eye on the municipal debt markets in recent months, amid reports—albeit rare—of some municipal borrowers struggling with or walking away from debts. Investors also have begun to worry about the future of Build America Bond program and the effects of the Federal Reserve's bond-buying efforts.

That came to a head last week when yields on consulting firm Municipal Market Advisors' index of AAA-rated 30-year municipals jumped up 15 basis points—or 0.15 percentage point— from the prior week. That is the biggest move in 18 months, said Matt Fabian, managing director at the firm.

Difficulties have been felt by even high-quality borrowers. Last week Harvard University was forced to pay an interest rate above a key benchmark rate and reduce the amount of debt it sold to close a $600 million bond deal. That got investors' attention, said Mr. Fabian, and helped trigger the price correction in the broader market.

Another concern: the future of the Build America Bond program. The program was designed as part of the Obama administration's effort to help states, cities and other local government entities borrow in the bond markets and lower financing costs by offering a federal subsidy.

The gains for Republicans in this month's midterm elections, market participants say, makes reauthorization of the program less likely. "The threat is if that [the BABs program is] not authorized than all that volume comes back to the tax-exempt side," Mr. Friedlander said.

There much more in the article. Those interested in Munis should give it a look.

Bad Timing in California

It is quite typical of California to run into problems at exactly the worst possible time. Le Los Angeles Times reports Bad timing: California seeks bond buyers amid rout in muni market

Yet another way the California Legislature has stuck it to taxpayers: The long delay on a budget agreement this year also delayed the state's plans to raise cash in the municipal bond market.

Now, Treasurer Bill Lockyer is trying to get investors to buy $14 billion in debt amid a broad sell-off in the bond market overall, and the worst sell-off in many tax-free muni bonds since the financial crash of late-2008.

That will mean higher interest rates on the debt than the state would have paid two months ago.

California Bond Sale Pricing Delayed

CNBC reports Institutional Pricing on California's $10 Billion Notes Delayed

Institutional pricing of California's $10 billion of revenue anticipation notes, which had been scheduled for Wednesday, has been delayed until Thursday due to litigation over a state building sale, the state treasurer's office said on Wednesday.

"The state is required to disclose the lawsuit to investors, and did so this morning. Retail investors on Monday and Tuesday ordered $5.89 billion of the RANs. Those orders now have to be reconfirmed in light of the new disclosure," a statement from Tom Dresslar, spokesman for California Treasurer Bill Lockyer said.

The building sale and lease-back plan was approved by the governor and legislature to help eliminate California's budget deficit.

Earlier on Wednesday, Lockyer issued a notice for the deal's preliminary official statement that said a taxpayer lawsuit was filed in state court on Tuesday seeking to block the sale of 11 state office properties.

Build America Bond Program About to Expire

Build America Bonds, a brainchild of the Obama Administration, was supposed to be a "temporary emergency" program. The debate now is whether to kill it.

David Reilly writing for the Wall Street Journal says Build America Bonds Need Tearing Down

Started in early 2009, the program offered state and local governments a subsidy to help issue debt when credit markets were largely frozen. The idea was that government borrowers, who largely sell tax-exempt debt to individual investors, needed help tapping the wider institutional market.

To this end, the U.S. government decided to rebate to state and local governments 35% of the interest paid on a taxable bond issue. That allowed them to sell debt with yields comparable to, say, corporate issues, and so garner wider investor attention, yet ultimately pay less interest. The program has proven popular — more than $150 billion of Build America Bonds have been issued as of October, according to the Treasury Department.

Whether that flies will depend on the lame-duck session of Congress that begins on Monday. The best course would be for legislators to end what is essentially just another bailout.

Why? State and local governments need incentives to get their financial houses in order, as painful as that might be. By subsidizing the cost of borrowing with this program, the federal government reduces the incentive to do so.

I concur with David Reilly. States need to get their fiscal budgets in order. Going into more debt does not work.

Muni Risk-Reward Setup is Horrid

Regardless of whether the Congressional lame duck session approves a permanent extension to the temporary Build America Bond Program, munis are very richly priced in this backdrop of increasing global uncertainty and likelihood of additional bond downgrades and even defaults.

I see no point in investing in munis at all. The sector crashed in October 2008 and there is no reason it can't (or even that it shouldn't) crash again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Why It's Hard to Get a Business Off the Ground

Posted: 17 Nov 2010 09:04 AM PST

Why it's hard to get a business off the ground in various cities around the USA including Milwaukee, Los Angeles, Houston, D.C., Chicago, and Philadelphia.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

6 Million Benefit-Paying Jobs Vanish in One Year!

Posted: 17 Nov 2010 02:05 AM PST

Analysis of weekly unemployment data and covered employees shows that 5,977,844 benefit-paying jobs have been lost in the last year.

click on chart for sharper image

The above chart is from reader Tim Wallace. I added the date and numeric annotations. Thanks Tim!

Covered Employment Stats of Merit

Covered employment is back to 2004 levels.
Close to 6 million benefits paying jobs have vanished in a year.
Over 8 million benefits paying jobs have vanished since the 2008 peak.

What is a Covered Employee?

The exact meaning of "covered employee" varies slightly state to state, but not by much. In simple terms it means one is eligible for unemployment insurance benefits.

Most states exclude the self-employed, commission based employment such as real estate agents, those in student training programs, academic and hospital internships, employment by churches or religious organizations, and rehabilitation programs.

Self-employed individuals must pay into unemployment insurance programs, however, the self-employed are not eligible for benefits anywhere.

Nearly 6 Million Jobs Vanish

By the above intrepretation, it is safe to conclude that 5,977,844 jobs totally vanished (not just benefit paying jobs).

The only way that cannot be true is if there was a sudden shocking increase in the number of real estate agents, church hiring, or close to 6 million people all of a sudden decided to go into business for themselves.

All of those possibilities are highly unlikely to say the least.

Tim Wallace writes ....

The ANNUAL ADDITIVE TREND from 2004 to 2008 of 1.9 million is now a net loss of 8 million the past two years

Year....Covered...........Number added from previous year
2004....126,276,670....Data from hard copy sheets
2005....127,622,590....1,345,920
2006....130,605,286....2,982,696
2007....132,623,886....2,018,600
2008....133,902,387....1,278,501 average added per yr = 1,906,429
2009....131,823,421....-2,078,966
2010....125,845,577....-5,977,844

Did the stimulus SAVE or CREATE any jobs, or did we lose over 8 million jobs in two years in spite of record amounts of stimulus?

Download data including the covered column is found on the US Department of Labor website, Weekly Claims Data.

Was there a Massive Surge in Retirees?

click on chart for sharper image

There was no massive surge in retirees so that cannot account for the loss of benefits-paying jobs.

Retiree Data

In October of 2006 there were 30,908,097 retirees.
In October of 2007 there were 31,467,071 retirees, an increase of 558,974.
In October of 2008 there were 32,222,895 retirees, an increase of 755,824.
In October of 2009 there were 33,366,881 retirees, an increase of 1,143,986.
In October of 2010 there were 34,463,650 retirees, an increase of 1,096,769.

Information on retirees is from the Social Security Administration. It undercounts retirees not in the system so actual numbers would be somewhat higher.

The number of retirees is certainly increasing which suggests the number of jobs needed to keep the unemployment rate steady is dropping. It also helps explain a falling participation rate (although not at the rate that it is falling).

That aside, the growth in the number of retirees cannot begin to explain the massive loss of benefits-paying jobs.

The increase in retirees from 2008 to 2010 is only 2,240,755 total. Civilian population growth was rose by 1,980,000 just last year.

Population Changes

I recently discussed population changes in my post In Search of 1.1 Million Jobs Claimed by Obama; Where the Hell are They?

Let's take another look at the BLS October Jobs Report.

Scroll down to page 5: HOUSEHOLD DATA Summary table A. Household data, seasonally adjusted.

click on chart for sharper image

The first item of interest is the Civilian Noninstitutional Population (i.e the population aged 16 and up not in school, prison, or other institutions).

In the last year, the table shows Civilian Noninstitutional Population rose by 1,980,000 an average gain of 165,000 potential workers a month.

Expected Increase In Workforce

In the last year the Civilian Noninstitutional Population rose by 1,980,000. There were 1,096,769 retirees. That mean the labor force should have increased by 883,231 workers. Instead the BLS reports the labor force increased by 50,000 workers (second line in table A above).

The rest supposedly dropped out of the workforce.

Hard Facts

Please remember the numbers in Table A are from phone surveys, seasonally adjusted, and arguably quite error prone.

On the other hand, the covered employees chart was produced from actual jobs data from the states.

Hard data says the US lost 5,977,844 benefits-paying jobs in a year, and 8,056,810 benefits-paying jobs in 2 years when we should have gained close to a million jobs a year or so based on population growth, even factoring in the number of retirees.

6 Million Benefits-Paying Jobs Vanish and Unemployment Rate Drops!

In spite of losing nearly 6 million benefits-paying jobs in the last year (and not gaining another 800,00 to a million more based on population growth minus retirees), the unemployment rate in October of 2009 was 10.1% and it is now supposedly a half-point lower at 9.6%.

Is this a crock or what?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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