Fin/Inv

A crisis over police and fire benefits in Baltimore, has reached boiling temperature.

Please consider Baltimore police, fire pension costs could double next year.

An unusual pension benefit for police and firefighters could cost Baltimore $164.9 million next year, nearly double what the city is now paying and a figure that the city's finance director says taxpayers cannot afford.

After years of calls for pension reform, board members who oversee the nearly $2 billion system said their Tuesday vote that passes the whopping bill on to City Hall is a message that the fund is close to a breaking point and needs attention.

Edward J. Gallagher, the city's finance director, said the city "certainly cannot afford" to pay the full commitment due in July. "It seems that our concern has really come home to roost."

The new retiree funding request is twice as large as the $81.9 million the city paid to the fire and police pension fund last year.

If the pension system is not altered before the bill comes due, needed cash could come from raising the city property tax rate 11 percent, or "significant reductions across all agencies, including public safety," Gallagher said. Mayor Sheila Dixon, who has long sought reductions in the city's tax rate of $2.27 per $100 in assessed value, has said both options are unacceptable.

The extra cash is needed largely to shore up a part of the pension program called a variable annuity. The benefit is similar to a cost-of-living increase, but is tied to positive stock market returns. When the market goes up, some of the extra money is given to retirees in the form of a permanent pay increase, an uncommon benefit that has made Baltimore's costs grow. In most pension plans, extra money is plowed back into the asset funds to make up for the bad investment years.

The Dixon administration in March recommended replacing that part of the retirement benefit with a straight cost-of-living increase - a change that would have likely headed off Tuesday's vote. However, the unions objected, saying the proposed COLA was too low.

The administration withdrew that plan and offered a new proposal to suspend the variable benefit, with the idea that some type of COLA would be reinstated later as part of a larger pension reform effort.

Unions object to that plan too, and there has been no action on it.

The market value of the fund's assets has fallen to 50.2 percent of what is needed to pay out all benefits. Last year, it was 89.4 percent funded.

Baltimore's Pension Plan Bankrupt

It's time for Baltimore to face the facts. The pension plan is essentially bankrupt. It is grossly unfair to taxpayers to raise taxes one cent to pay for this monstrosity.

My recommendation for Baltimore is to
1) declare bankruptcy
2) privatize the fire department

The greed of the unions is simply unconscionable. It's time for Baltimore to "Pull a Vallejo". Please see Judge Rules Vallejo Can Void Union Contracts for a synopsis of the situation in Vallejo, California.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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With the Dow up more than 50% since its lows in March, it is no surprise that sentiment among newsletter writers has improved dramatically. As shown below, the percentage of bullish newsletter writers has increased from a low of 22.4% in October 2008 to 47.2% today. While sentiment has improved, we would note that some investors are still uneasy. With...

This is a bull market that's lifting all boats. With today's run above 10,000 in the DJIA, and another new high in the S&P 500, the number of stocks in the S&P 500 hitting 52-week highs rose to 22% (110 stocks). As long as this figure can expand as the market rises, the ball is in the bulls' court. Subscribe...

Submitted by Edward Harrison of Credit Writedowns.

Earlier today I wrote a post featuring comments by Marc Faber as I like to do from time to time.  In this particular case Dr. Faber was waxing prosaically about an eventual bankruptcy of the U.S. government.  His money quote was:

“Next station is when the U.S. government goes bust.”

I love this guy. Quite frankly, the man is a quote machine.  He makes a lot of outrageous statements that get him noticed.  Here are a few that I have featured in the past:

• Oct 2009 – “Monetary policy in the United States will stay expansionary”
• Sep 2009 – “The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society.”
• May 2009 – “I am 100% sure that the U.S. will go into hyperinflation”
• Mar 2009 – “The feds poured the gasoline and lit the match. Now they’ve joined the fire department”
• Nov 2008 – “I advise every American to hold his gold outside of the United States“
• Mar 2009 – “Don’t underestimate the power of printing money.”

The last one is my all-time favorite.  And there are many more available at Credit Writedowns and elsewhere.  Dr. Doom is very entertaining indeed – which is why I quote him so often.  But, is he right?

That’s a good question – one I will take up indirectly by introducing the latest piece by Martin Wolf, another author I have featured at Credit Writedowns from time to time. You may have seen me tweet this earlier today. I had intended to add it to the links for tomorrow, but Niels Jensen, who I also feature often, convinced me to write it up as an ‘antidote’ to Faber.

Here’s how Wolf begins his article:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

This is exactly what the Chinese are doing. They are preparing themselves for a non-dollar future. This is why the Chinese are buying gold. This is why the Chinese are settling trade in Yuan. And this also why the Chinese are getting a bunch of other countries onside.  But they are not looking for a dollar crash as I indicated last week.

Then, there is the part about Dollar weakness being a sign of inflation. Here’s what Wolf has to say about this idea:

The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that “huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk”.* Even those who are sceptical of this agree that the US needs export-led growth.

I hope this argument sounds familiar because it is one I made when I asked is the Fed just jawboning? The U.S. wants – it needs a lower dollar to avoid deflation. Quantitative easing is not solving the deflation question. The U.S. government wants a strong dollar? Well, policymakers say one thing and wish for another. The U.S. insistence on focusing on global imbalances at the G-20 should tell you what policy makers really want. This is why the dollar is falling.

The problem of course is that the dollar’s recent rout is not necessarily helping the U.S. because the dollar is overvalued vis-a-vis a host of pegged currencies. And while those currencies are under pressure to drop the peg, they are resisting because they do not want to move toward a more re-balanced global growth paradigm unless forced to do so.  Unless these countries (read China) do something on the currency front, expect more of this, this and this – protectionism.

Then, the question arises, if everyone hates the dollar, what are they moving to? Wolf says:

Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.

This view may be too complacent. The danger of a collapse of the dollar is small and of its replacement by another currency still smaller. But a global monetary system that rests on the currency of a single country is problematic, for both issuer and users. The risks are also growing, particularly since the emergence of “Bretton Woods II” – the practice of managing exchange rates against the dollar.

I liken this argument to George Soros’ comments on dollar weakness: “The dollar is a very weak currency except all the others.” Right now, there is no alternative to the dollar.  Some people are fleeing U.S. assets if they can. But the alternatives are limited and this limits how far the dollar will fall. And this is unfortunate because the monetary system now in place is in need of change.  Without it, we are likely to see nationalistic policy responses to economic weakness, which will induce conflict.

Wolf says:

I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar’s role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.

Apropos alternative monetary systems, we might start with Paul Davidson’s ideas, which I first highlighted in November.  So there is no hyperinflation, no U.S. national bankruptcy, and  no dollar crash coming. But, the financial crisis demonstrates we are living on borrowed time and need a new monetary system. The time is now.

Source

The rumours of the dollar’s death are much exaggerated – Martin Wolf

With everyone cheering the US economy finally completing its first lost decade, and likely the first of many, it is worthwhile to compare the top ten Dow Jones stocks by market cap today and ten years ago. What is notable is the rotation out of pharma companies, with both Merck and Pfizer dropping out of the ranking, and their replacement with taxpayer capital proxies, in the face of JP Morgan (#4) and Bank of America (#9). As both of these companies have achieved phenomenal profitability (and a resulting stock price appreciation) almost exclusively courtesy of the inverted yield curve and numerous other boons from the Fed, their market cap contribution should be carefully considered for whether it is sustainable or is one-time item (assuming the QE 1.0-xxxx.0 liquidity pump ever runs out). Also notable is CNBC parent GE's fall from grace, and its over $200 billion loss in market capitalization.

Lastly, over half a trillion in market cap (21%) has been lost by the top 10 companies, even with the Dow at the same level.

source: capiq

Some afternoon reads:

• Martin Wolf:  The rumours of the dollar’s death are much exaggerated (FT)

• History Shows Dow Gets Tired at 10,000, Other Round Numbers (CNBC)

• Why Investors Hate Making Money (heh heh)

• Geithner Aides Reaped Millions Working for Banks, Hedge Funds (Bloomberg)

• Medal of Honor: Banking Analyst Chris Whalen is the Best at Breaking Down Banks (Wall St Cheat Sheet)

• Don’t trust Dow 10,000 (CNN/Money)

• The radiant beauty of cosmic collisions (Discover)

What are you reading ?

Anna here gang

The Dow first hit 10,000 on March 29, 1999, ten-and-a-half years ago!!! So if you bought and held back then you would have made nothing. The Dow is now nearly 55 percent higher than the 12-year-low of 6469.95 hit on March 6, but remains more than 12 percent from its pre-Lehman Brothers bankruptcy close on September 12, 2008. LOL Crazy stuff. That’s why you have to be versatile in your trading and willing to be on either side of a trade to bank that coin.

Glad to have that silly 10,000 over with, so we can move on, I would caution anyone wanting to go short to gbe careful as Google, GS, C report tomorrow and we could melt even higher.

Mole emailed everyone that are subs of Geronimo that  his servers got blown out in L.A., so he got his backup running, but remember it is slow.

So now Ben Bernanke  has printed us to oblivion

Here is Zero and the way it gave you signals quite clearly.

Geronimo 2 trades + 5.00

From March 29, 1999: A CNBC Promo ...



Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Developing story per WSJ. LAZ halted. And yet again, questions for the SEC on companies reporting potentially misleading health information on key individuals.

The latest perspectives from Prechter's Elliott Wave International

You've heard the rumor that Middle Eastern oil producers, plus China, Japan and France have all agreed to start trading oil using a basket of currencies - instead of the dollar - starting in 9 years (see this explanation for why the governments are denying the rumor).

But - whether or not the rumor is true - the world has actually been moving away from the dollar as the preferred method for settling trades for years.

The Wall Street Journal reported yesterday:

China and Russia are working on ways to eventually settle their trade with the Chinese yuan and Russian ruble, senior government officials from the two countries said Tuesday.

In January, it was reported that China had reached a similar arrangement with Brazil:

The Brazilian Central Bank announced it had reached an initial understanding with China for the gradual elimination of the US dollar in bilateral trade operations which in 2009 are estimated to reach 40 billion US dollars.

Indeed, as I pointed out in March 2007, many countries started moving out of the dollars as the basis for international trade settlements, including:

• Japan

• Syria

• Iran

• Libya

• Russia

• Argentina

• Brazil

• Venezuela and 12 other Latin American countries as well as Cuba
  

• Many other countries
  

As I and many others have argued for years, everyone wants to get out of the dollar, but not all at once. Foreign central banks want to move out of dollars gradually so they are not left holding worthless paper.

But the process actually started a while back.

I once spent a couple of weeks asking myself, "How can a nation, or even just a city, cheaply deal with a scarcity of food for the poor, together with a plenitude of cheapbad food (whether fast or home-made) which harms ones health?" I came up with the Streetfood Initiative (still in planning, I am sorry to say.)

Up here in the great white north we have plenty of poorly fed, obese, and diabetic people. We're good -- but not perfect. Our local food bank alone fed about 36,000 people four years ago when I last looked up the data, and the numbers have risen since then.

I proposed that a network of carts and tiny kiosks be set up to give away Streetfood to anyone who asks.

It would not infringe on the fast food industry because it would not be the sort of addictive mix of fat-sugar-salt-starch that they specialize in. All offerings would be vegetarian, though spicy and nutritionally balanced. Rice, lentils, curry, stews, and stir-fry type recipes, each serving handed over in an edible container, like a hollowed breadroll or a unsweetened ice cream cone type cup, using a minimum of wrapping. Recipes would be public, on the net, and available at the cart for the asking.

The carts and kiosks would be funded through general revenue, with the understanding that savings and benefits would show up elsewhere: less diabetes, better performance in the schools, fewer malnourished drunks taking up hospital beds, fewer proud starving seniors, and so on.

How much rice, lentils and beans can you buy for what it costs to care for one blind, amputee diabetic? Lots and lots, I bet.

Another effect I hoped for (perhaps the core effect) would be to alter people's ideas of what "food" is.

We generally consider the food we grew up with to be real food, and stuff encountered later as foreign, peculiar or even non-food. Diet is partly choice, true -- but much of what we consider choice comes down to imprinting.

Jared Diamon, in his book "Collapse: How Societies Choose to Fail or Succeed": wrote about why the Norse settlements on Greenland failed. He said

"Looking back on these settlements from our vantage point today, we can observe that the Norse were imperceptibly following practices which weren’t sustainable in their environment in Greenland. These practices were as follows:
•Chopped down forests to use wood for fuel, furniture and houses
•Used cleared land for grazing cows
•Built houses out of 6-foot slabs of turf which meant a home consumed about 10 acres of grassland
These practices weren’t sustainable... Looking back the Norse Greenlanders should have learned from the Inuit to hunt seals as the most reliable food source in winter. But they preferred beef and didn’t like seal. The Norse also should have eaten fish. If they had, they may have survived."

I consider canned mushroom soup to be a staple, along with bananas, potato chips, and frozen pizza. My grandmother, born in the late 1800s, most likely would never have seen these when she was growing up.

But what if a generation of children grew up eating delicious street food? Presented correctly, it could become the circus and state-fair finger food for a whole population of youngsters, and help introduce people to a diet that doesn't subvert their health.

As for the free rider problem -- bring 'em on. In an inversion of the old saw, we could be a culture where "the wealthy, as well as the poor, are permitted to eat Streetfood all they wish."

Up here, a person generally has to be below 37% of our poverty line before they will go to a food bank. People who need the food still won't go until truly desperate. I think the potential for free riders is less than one might imagine, and meanwhile -- they will learn different tastes.

Here is a Market Delta footprint chart filtering out trades of 50 contracts or more in the ES futures (click for detail). As you can see from the blue arrows, large trades executed at the offer price were a nice indication of an upside breakout move in the making. Unable for selling to take us below the day's VWAP, we made a run for the overnight highs and took them out.
.

Ever more investors are fleeing from not just the 30 year Treasury but the 10 year as well. Money is rapidly congregating in the whatever yields the sub 10 year space is providing. The fact that the upcoming QE 2.0 liquidity and housing stimulus does not contemplate UST purchases is definitely not helping.

By George Washington of Washington’s Blog.

According to Bloomberg, the original draft of Barney Frank’s derivatives legislation:

would have given the Securities and Exchange Commission and Commodity Futures Trading Commission joint authority to “prohibit transactions in any swap” that they determine “would be detrimental to the stability of a financial market or of participants in a financial market.”

Frank has now stripped that provision because it would be “unsettling”:

“There was concern that a broad grant to ban abusive swaps would be unsettling,” Frank, chairman of the House Financial Services Committee, said today as the panel began action on his measure.

Unsettling to the economy?

No.

Unsettling to the 5 banks which comprise the lion’s share of the derivatives business.

Frank’s revised bill fails to address the many concerns raised by the head of the CFTC (see this and this), and really does nothing to fundamentally reign in the credit derivatives which were largely responsible for crashing the economy.

Change?

Nope, nothing but hot air.

Rumors of buyouts fly around all the time, but its interesting to see that the one involving Riverbed Technology (RVBD) has been so persistent. Now seeing reports that an offer for $34-35 in now on the table from both Hewlett Packard (HPQ) and Juniper Networks (JNPR). RVBD has been one of the best performing companies during this recession having actually grown revenue YOY. That list is very

In today's release of the full September 22-23 FOMC minutes (which happened to bring the market down soundly when just the statement was released 3 weeks ago), the Fed acknowledges that several Fed members have been actively pushing for QE 2.0 already:

In their discussion of monetary policy for the period ahead, Committee members agreed that no significant changes to its policy target rate or large-scale asset purchase programs were warranted at this meeting. Although the economic outlook had improved further in recent weeks and the risks to the forecast had become more balanced, the level of economic activity was likely to be quite weak and resource utilization low. With substantial resource slack likely to persist and longer-term inflation expectations stable, the Committee anticipated that inflation would remain subdued for some time. Under these circumstances, the Committee judged that the costs of growth turning out to be weaker than anticipated could be relatively high. Accordingly, the Committee agreed that it was appropriate to maintain its target range for the federal funds rate at 0 to 1/4 percent and to reiterate its view that economic conditions were likely to warrant an exceptionally low level of the federal funds rate for an extended period. With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook. Another member believed that the recent improvement in the economic outlook could warrant a reduction in the Committee's maximum purchases. However, all members were able to support an indication by the Committee of its intention at this time to purchase the full $1.25 trillion of agency MBS that it had previously established as the maximum for this program. With respect to agency debt, the Committee agreed to reiterate its intention to purchase up to $200 billion of these securities. To promote a smooth transition in markets as these programs are concluded, members decided to gradually slow the pace of both its agency MBS and agency debt purchases and to extend their completion through the end of the first quarter of 2010. The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.

As economic deterioration is merely a question of time and of stimulus exhaustion, the Stardust betting desk on if QE 2.0 will become an official policy is no longer taking bets.

The minutes from the FOMC Sept meeting didn’t reveal much in terms of gaining any clues of when they might raise interest rates in light of their more optimistic view of the economy in terms of expecting 2nd half improvement that they expect to continue into ‘10. Based on their still sanguine view of inflation due to weak labor markets and the “significant under utilization of resources,” they showed no inclination to change monetary policy anytime soon. They went over all the tools they have to unwind their massive monetary accommodation when the time comes but they clearly have no idea when that might be. IMO, yes the unemployment rate remains high and many do not think rates should be hiked under those circumstances but we are currently living under emergency interest rate levels that were reached when we were worried about the collapse of the entire financial system. While things are still tough I agree, is the fire still raging?

>
Has to be those Dow 10,000 hats that CNBC had their anchors first wear in 1999. They got to reuse them so many time!

I wonder if they will break them out again this time . . .

According to Bloomberg, the original draft of Barney Frank's derivatives legislation:

would have given the Securities and Exchange Commission and Commodity Futures Trading Commission joint authority to “prohibit transactions in any swap” that they determine “would be detrimental to the stability of a financial market or of participants in a financial market.”

Frank has now stripped that provision because it would be "unsettling":

“There was concern that a broad grant to ban abusive swaps would be unsettling,” Frank, chairman of the House Financial Services Committee, said today as the panel began action on his measure.

Unsettling to the economy?

No.

Unsettling to the 5 banks which comprise the lion's share of the derivatives business.

Frank's revised bill fails to address the many concerns raised by the head of the CFTC (see this and this), and really does nothing to fundamentally reign in the credit derivatives which were largely responsible for crashing the economy.

Change?

Nope, nothing but hot air.

Oil is bumping up against multi-month resistance (bottom chart; USO), as the Oil VIX ($OVX) has been closing in on multi-month lows. It wasn't so long ago that gold was in a similar situation. With continued U.S. dollar weakness, these are levels I'll be watching.
.

Another great representation of the amazing loss of purchasing power by the US public are today's oblivious statements about the Dow at 10,000. While in absolute terms the Dow may cross whatever the Fed thinks is a necessary and sufficient mark before QE begins to taper off (Dow crosses 10k just as Treasury purchases expire), the truth is that over the past 10 years (the first time the DJIA was at 10,000) the dollar has lost 25% of its value. Therefore, we present the Dow over the last decade indexed for the DXY, which has dropped from 100 to about 75. On a real basis (not nominal) the Dow at 10,000 ten years ago is equivalent to 7,537 today! In other words, not only have we had a lost decade for all those who focus on the absolute flatness of the DJIA, but it is also a decade where the US Consumer has lost 25% of purchasing power from the perspective of stocks! You won't hear this fact on the MSM.

And if you want to be really scared, here is the comparable representation for the DJIA in ounces of gold. It cost about 30 ounces to buy the 10,000 Dow last time. Now it costs less than 10.

Today we introduced our new Morning Earnings Report over at Bespoke Premium. Along with a summary of key statistics throughout earnings season, each morning the report will provide all of the US earnings reports that were released after the prior trading day's close and so far that morning. For each company, we provide both actual and estimated EPS and revenue...

There are several key points here:

The pace of economic growth in 2009 and 2010 "was unlikely to reduce the unemployment rate appreciably".

There are different views on future asset purchases, although they agreed to remain "flexible" and will expand the asset purchase programs "should the economic outlook deteriorate".

There is "considerable uncertainty" about economic growth once government "supports were withdrawn or their effects waned".

Here are the September FOMC minutes. Committee Policy Action:

With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook. Another member believed that the recent improvement in the economic outlook could warrant a reduction in the Committee's maximum purchases. ... Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.
emphasis added

Economic outlook:

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic activity had picked up following its severe downturn; most thought an economic recovery was under way. Many participants noted that since August, they had revised up their projections for the second half of 2009 and for subsequent years. A number of factors were expected to support growth over the next few quarters: Activity in the housing sector was evidently rising, and house prices had apparently stabilized or even increased; ; reports from business contacts and regional surveys were consumer spending seemed to be in the process of leveling outconsistent with firms making progress in bringing inventories into better alignment with sales and with production stabilizing or beginning to rise in many sectors; the outlook for growth abroad had also improved, auguring well for U.S. exports; and financial market conditions had continued to improve over the past several months. Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained. Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually. In light of recent experience, consumers were likely to be cautious in spending, and business contacts indicated that their firms would also be cautious in hiring and investing even as demand for their products picked up. Some of the recent gains in activity probably reflected government policy support, and participants expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned. Overall, the economy was projected to expand over the remainder of 2009 and during 2010, but at a pace that was unlikely to reduce the unemployment rate appreciably. Subsequently, as the housing market picked up further and financial conditions improved, economic growth was expected to strengthen, leading to more-substantial increases in resource utilization over time.