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Tuesday 08.09.2016

Fannie, Freddie Could Need $126 Billion in Crisis, Test Shows

Fannie Mae and Freddie Mac could need as much as $125.8 billion in bailout money from taxpayers in a severe economic downturn, according to stress test results released Monday by their regulator.

The Federal Housing Finance Agency said that the government-controlled companies, which back nearly half of new mortgages, would need at least $49.2 billion. The annual test, required by the Dodd-Frank Act, is likely to be used both by proponents of allowing Fannie Mae and Freddie Mac to build capital and by those who think there’s not an urgent need for the government to take that move.

Under the terms of the companies’ bailout agreements, Fannie Mae and Freddie Mac must send nearly all of their profits to the U.S. Treasury and wind down their capital buffers until they reach zero dollars in 2018. After that point, any loss at either company would require a draw from taxpayers.

Monday’s stress test results showed that the funds that the U.S. Treasury Department is authorized to use in a bailout are more than enough to cover the billions that Fannie Mae and Freddie Mac would likely lose in a crisis. The companies would have between $132.2 billion and $208.9 billion in available bailout money from the Treasury after the period of financial duress passed, according to FHFA.

Billionaire Investor’s Dire Warning: Sell Everything!

With the S&P 500 hitting record highs, one of the world’s most renowned investors has hit the panic button with a sledgehammer… Jeffrey Gundlach, also known as the “Bond King,” is one of the most accomplished fund managers on the planet.

Just six years after launching his own firm, DoubleLine Capital, he’s at the top of the bond world, with more than $100 billion under management. When Gundlach speaks, the press genuflects. And not surprisingly, many of Wall Street’s brightest lemmings are freaked out by his recent market warnings…

In a recent Reuters interview, Gundlach told investors to head for the hills. Here’s his apocalyptic advice:

Sell everything! Nothing here looks good… The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Why is Gundlach headed to the bomb shelters? Economic growth is in the toilet… corporate earnings are accounting games… corporate debt is soaring… and the Fed is out of control in an effort to make everyone a winner.

A License to Print Money

Can you believe the fix that the West is in? Interest rates lowered artificially to near-zero or negative to forestall deflation? Clinton lauded as the President under which the economy showed a surplus, though he and Bernanke birthed the Dot.com Nasdaq Bubble, which birthed the housing Bubble and asset-backed securities Bubbles and because no one is allowed to really go bust—Freddy & Fanny get bailed out, GM gets bailed out, most of the world’s senior banks get bailed out, we have QE1, QE2, QE3 and Operation Twist and STILL the world can’t kick it back into high gear. Just think of all the loot that got consumed in the Afghanistan, Iraq and Syria wars! Not even to consider the costs of Homeland Security! Shouldn’t $40 oil kickstart everything?

So what’s coming, folks? Well, it’s an idea just about as lunatic as making tree leaves currency—more and more you are hearing the term “helicopter money”. Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

Hey, hey, everyone loves free money, right? Well it has to be got from somewhere, and yes you guessed it—Central Banks would just conjure it out of thin air. This is not trickle-down Reaganomics, this is a straight in-your-wallet Keynesian-inspired throwing of money to the populace to drive consumption and (hence in theory) the economy. Call it what you will, a tax break or Universal Basic Income (as was recently defeated in a plebiscite in Switzerland) but it is increasingly being seriously considered in this current age of nuttiness.

Can the Government Run the Economy?

Fed Set to Unload Explosive Student Loan Rule That Will Dump Billions on Taxpayers

Regulations are flying out the door in in Washington, where an already hyper-aggressive Obama administration is looking at its last chance to move its agenda forward while sidestepping Congress. Many of the expensive rules in areas like energy, health care, and finance have drawn widespread public and media scrutiny – which makes it all the more curious that what is likely to be the single most expensive proposed regulation of the year, a Department of Education rule that would discharge billions in student loans, has gone almost completely unnoticed.

The proposed rule, titled the “Borrower Defense to Repayment Regulations,” would create a stampede to file claims for loan forgiveness based on a newly broadened, vague standard requiring only that a plaintiff allege a school made a “substantial misrepresentation.” This phrase is defined broadly as any “statement” or “omission” with a “likelihood or tendency to mislead under the circumstances.”

For decades students have been able to apply for loan forgiveness when they were victims of intentional fraud or another violation of state law. The proposed rule ditches the requirement that there be any actual legal violation, substituting in a new standard so vague that complaints will proliferate based on innocent errors and alleged misunderstandings – with the costs shifted either onto schools or, ultimately, to federal taxpayers.

Schools will have little recourse to defend against the allegations. Determination of whether an institution has made a “substantial misrepresentation” to a student or group of students is made unilaterally by a hearing examiner at the Department of Education. The examiners, facing sympathetic tales of woe from people who racked up big debt totals, will likely be inclined to approve most of them.

Boston Paying $8 Million For 100 Teachers To Not Teach

Boston’s public school system has over 100 teachers on payroll who have no classroom assignment for the coming fall, hitting the city with an $8 million bill to pay teachers who are doing very little.

The Boston Public Schools (BPS) school year is scheduled to start Sept. 8. With classes just a month away, about 100 teachers have no classroom assignment, making them effectively dead weight for the district.

According to The Boston Globe, the teachers who have been “displaced” are victims of downsizing, along with a Boston program that allows school principals to hire from out of district even if there are sidelined teachers looking for positions. Officially “unassigned,” a more accurate term for the teachers would be “unnecessary,” but they can’t be let go because all of them have permanent contracts under the current union deal.

BPS has about 4,200 teachers, so the 100 sidelined teachers represent over 2 percent of its teaching workforce. The teachers won’t be completely idle. Rather than staying home or being exiled to a “rubber room,” the city plans to use the teachers for tutoring or other support roles. Still, it’s a less than ideal use for full-time teachers.

A Round Of Layoffs Is Coming To Dollar Tree

It looks like job cuts are coming to Dollar Tree, and 370 positions are going by the wayside as the firm restructures after its acquisition of Family Dollar. Those cuts will sweep up 100 vacant Family Dollar positions – so no layoffs there – and come as the chain is hoping to make its shared services model worth through integration of the two firms.

“This announcement represents another step in the process of integrating our two large organizations,” said Bob Sasser, CEO Dollar Tree. “Since completing our acquisition a year ago, we have communicated our plans to utilize a shared services model, leveraging our back office functions to support both the Dollar Tree and Family Dollar business segments.

Our focus continues to be on maximizing our operational efficiencies to drive tremendous value for our customers, while creating long-term value for our shareholders.” Sasser further noted the goal is to bring growth to both firms.

“At Dollar Tree, everything is $1 while Family Dollar serves as your neighborhood discount store,” he said. “To insure that we deliver value and the brand standard, we plan to keep our customer-facing organizations separate and focused on the individual banners. Specifically, store operations and merchandising functions will remain largely unchanged.

VA has spent over $408 million on solar panels

The Department of Veterans Affairs has spent more than $408 million to install solar panels on its medical facilities in recent years, despite many of the projects experiencing significant delays and some of the systems not becoming operational at all.

The VA has failed to effectively plan and manage these solar panel projects, resulting in significant delays and additional costs, according to a report released by the agency’s inspector general last week.

The watchdog conducted an audit of 11 of the 15 solar projects awarded between fiscal years 2010 and 2013 that were still in progress as of May last year. The investigation, which was completed in March, found that only two of the 11 solar panel projects were fully completed.

“This occurred because of planning errors, design changes, a lengthy interconnection process, and contractor delays,” the inspector general concluded. “As a result, VA did not increase renewable energy for those solar projects in the time frame planned and incurred additional costs through needed contract modifications.” The VA subsequently told the inspector general in July that five of the 11 projects had been fully completed and eight were generating solar power. Three of the planned systems, including one in Little Rock, Arkansas, that precipitated the investigation, still are not generating solar power at all.

The Phony Job Recovery - Ron Paul

Last Friday saw the release of a bombshell jobs report, with headlines exclaiming that the US economy added over 250,000 jobs in July, far in excess of any forecasts. The reality was far more grim. Those “jobs” weren't actually created by businesses — they were created by the statisticians who compiled the numbers, through the process of “seasonal adjustment.” That's a bit of statistical magic that the government likes to pull out of its hat when the real data isn't very flattering. It's done with GDP, it's done with job numbers, and similar manipulation is done with government inflation figures to keep them lower than actual price increases. In reality there are a million fewer people with jobs this month than last month, but the magic of seasonal adjustment turns that into a gain of 255,000.

Delving further into the jobs report, we see that many of the jobs that were supposedly created were jobs in government and health care. Government jobs, of course, are paid for by siphoning money away from taxpayers. And health care jobs are increasingly created solely because of the ever-growing mandates of Obamacare. Other major sources of job growth were temp jobs and leisure & hospitality (i.e. waiters and bartenders). These aren't long-lasting jobs that will contribute to economic growth, they are mostly just jobs that cater to the tastes of the well-to-do who continue to benefit from the Federal Reserve's easy monetary policy.

As New York, San Francisco, Washington, DC, and other political and financial hubs continue to benefit from trillions of dollars of debt-financed government spending and the trillions more dollars the Federal Reserve has created from nothing, the politicians, lobbyists, and bankers who receive that money demand ever more exotic food, drink, and entertainment. The jobs that arise to satisfy that demand, we are supposed to believe, are the backbone of the job market “recovery.” Yeah, right.

Eight years after the worst part of the last financial crisis, the US economy still has not fully recovered. The number of people employed may have finally begun to grow past its pre-crisis peak but the quality of jobs has deteriorated, and the number of people who are still looking for jobs or who have even given up looking for jobs and dropped out of the labor force still numbers in the millions and shows no signs of shrinking. Quantitative easing, zero or negative interest rates, and other inflationary central bank policies cannot lead to lasting job creation or economic growth. Try telling that to the central bankers, though. They only care about aggregate numbers, not what is actually behind those aggregates. A castle built of sand is the same to them as a castle built of stone.

Gap Shares Drop as Dismal Store Traffic Drags Down July Sales

Gap Inc., the biggest U.S. apparel-focused retailer, fell in late trading after posting July comparable sales that missed analysts’ estimates and indicated that foot traffic at its stores might not improve as much as expected later in the year.

Same-store sales -- a key benchmark -- dropped 4 percent in July, the San Francisco-based retailer said in a statement Monday. Analysts had predicted a decline of 1 percent, according to Retail Metrics. Preliminary earnings ranged from 58 cents to 59 cents a share in the second quarter, excluding the impact of store closures and initiatives to streamline the business. That topped the 48 cents estimated by analysts.

“While adjusted earnings results for the quarter showed improvements from the first-quarter trend, it is important to acknowledge that performance was uneven within the quarter, with challenging traffic in May and July,” Jack Calandra, senior vice president of investor relations, said on a recorded sales call. “As such, we’re maintaining a cautious view of the retail environment in the second half.”

The results stoked investor concerns that sales won’t get a needed boost from the back-to-school and holiday shopping seasons. Chief Executive Officer Art Peck, who took over the job last year, has said results would begin to improve at the Gap and Banana Republic brands this spring, but the recovery has been short-lived. While sales and traffic trends improved in June, they worsened in July, when many shoppers should be stocking up on clothes for the new school year.

Obama's Historically Bad Economy

The recent release of anemic quarterly economic-growth numbers for 2016 has revived the debate over the Obama economy. Some say it has been okay; some say it has been lousy. In truth, the economy under President Barack Obama has been historically bad. How bad? Adjusted for inflation, average yearly GDP growth under President Obama has been less than half of what it was under President Jimmy Carter, 1.5 percent to 3.3 percent.

According to figures from the U.S. Commerce Department's Bureau of Economic Analysis (BEA), the source for all of the figures provided herein, average annual GDP growth in the post-World War II era has been 2.9 percent.

By far the worst year in that stretch was the first, when in the immediate aftermath of the war, GDP declined more than four times as much (-11.6 percent) as it has in any year since. From 1947-onward, average annual GDP growth has been 3.2 percent.

But average annual GDP growth has varied greatly by president, ranging from a high of 5.3 percent under President Lyndon Johnson to a low of 1.5 percent under President Obama. Obama's last-place tally of 1.5 percent doesn't even include the BEA's numbers for 2016, since the year isn't yet complete. Thus far, growth in 2016 has been 0.8 percent in the first quarter and an estimated 1.2 percent in the second quarter. So Obama will be lucky to finish his presidency at even half the postwar average of 2.9 percent growth.

Robots are taking over the roads!

Chicago Public Schools lays off more than 500 teachers, another 500 school-based workers

Chicago Public Schools is laying off more than 500 teachers and another 500 school-based staff members, the district said Friday. The teachers being laid off will be eligible to apply for jobs in the district, which has about 1,000 teaching vacancies, officials said. The majority of affected personnel are expected to be hired into open positions at other schools, CPS said.

In past years, about 60 percent of teachers who have been laid off have been rehired in full-time positions in the district, CPS said. The layoffs and rehirings occur regularly at CPS as principals respond to changes in enrollment. The district said 273 of the 500-plus district-run schools will have no teacher or staff impacts in the coming year.

The layoffs broke down this way: 314 elementary school teachers and 194 high school teachers for a total of 508, and 378 elementary personnel and 143 high school support staff, for a total of 521.

Many of the staff reductions are related to enrollment, according to numbers distributed by CPS late Friday, especially at high schools that are projected to lose large numbers of students. However, some schools projected to see higher enrollment and more funding still lost staff. The Chicago Teachers Union criticized the layoffs, saying in a statement that "the gutting of experienced educators and other school employees only weakens schools and puts children at a disadvantage."

Social Security faces a $32 trillion shortfall

You can look at the financial health of Social Security in many ways. The official version, found in the Social Security and Medicare Boards of Trustees' annual report, is this: Social Security's total income is projected to exceed its total cost through 2019, as it has since 1982. After 2019, interest income and money taken out of reserves will provide the resources needed to offset Social Security's annual deficits until 2034.

By then, if Congress does nothing, the federal government will collect enough in payroll taxes to pay about 75 percent of scheduled retirement benefits until 2090. The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That's up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall.

Despite the huge numbers, there's even a less generous way of looking at the fiscal shortfall. A projection, known as the "infinite horizon," takes into account all the program's future liabilities, even those beyond the 75-year period that Social Security actuaries typically use in their calculations.

Under the infinite horizon, Social Security will have $32.1 trillion in unfunded liabilities by 2090, $6.3 trillion more than last year's projection. The infinite horizon calculation is the most important part of the trustees' annual report, said Laurence Kotlikoff, a Boston University economics professor and co-author of "Get What's Yours," a best-seller about how to maximize claiming Social Security retirement benefits. "We're not broke in 20 years to 30 years. We're broke now," Kotlikoff said. "All the bills have been kept off the books by Congress and presidential administrations for six decades."

Clinton promised 200,000 jobs in Upstate New York. Her efforts fell flat.

In her presidential bid, Hillary Clinton has made job creation a centerpiece of her platform, casting herself as a pragmatist who would inspire “the biggest investment in new, good-paying jobs since World War II.’’

Her argument that she would put more Americans to work has focused on her time in the Senate, when she took on the mission of creating jobs in chronically depressed Upstate New York. As her husband, former president Bill Clinton, put it recently, she became the region’s “de facto economic development officer.”

But nearly eight years after Clinton’s Senate exit, there is little evidence that her economic development programs had a substantial impact on upstate employment. Despite Clinton’s efforts, upstate job growth stagnated overall during her tenure, with manufacturing jobs plunging nearly 25 percent, according to jobs data.

The former first lady was unable to pass the big-ticket legislation she introduced to benefit the upstate economy. She turned to smaller-scale projects, but some of those fell flat after initial glowing headlines, a Washington Post review shows. Many promised jobs never materialized and others migrated to other states as she turned to her first presidential run, said former officials who worked with her in New York.

US Oil, Gas Industry Sees 26% Decline in Employment

US oil and gas producers have cut 142,000 jobs as of May 2016 since its peak employment levels in October 2014 of 538,000, according to a US Energy Information Administration press release on Friday—a 26% drop over that period.

The 26% decline in oil and gas employment seems to mirror—although not as drastically—the oil and gas rig count, which stood at 404 rigs in May 2016—down a staggering 77% from the 1800 rigs in action in fall 2014.

To put the employment figures into perspective, the average decrease in employment over the 20-month span from October 2014 to May 2016 is 7,100 per month—a figure that dwarfs the jobs cuts in the oil and gas sector during the 2008-2009 recession, which was 51,000 for a 13-month period, according to the press release, or an average of 3,923 per month.

Whereas US oil rig count and jobs are seemingly tied together and followed similarly bleak paths, crude oil production has not followed the same sharp downward trajectory, mainly due to advances in drilling technology. This would seem to suggest that neither the rigs nor the jobs are needed to sustain current production levels, which are not too far off from 2014 levels.

S&P Revises Outlook On UPS Ratings To Negative On Worry About Pension Deficit

Standard & Poor's Global Ratings said Monday it is maintaining its A-plus rating on debt issued by United Parcel Service Inc. UPS, +0.19% but revising the outlook to negative from stable, on concerns about the company's pension deficit, which S&P views as debt.

"Although we expect the company's earnings and cash flow to improve from the growth of its e-commerce business and management's cost-reduction initiatives, we don't anticipate that UPS' pension deficit will decline materially through 2017 because we expect that interest rates will remain low over this period," the rating agency said in a statement.

S&P is expecting UPS' funds-from- operations-to-debt ratio to remain in the high 30% area through 2017, compared with its previous expectation of a rate of 40% to 55%.

If it should fall below 30%, "we could downgrade the company," said the statement. UPS shares were slightly higher in afternoon trade, and are up 13% in the year to date, while the S&P 500 SPX, -0.18% has gained 6.6%.

Are Low-Skill Workers America's Next Great Economic Resource?

Few workers have suffered as much in the new post-outsourcing, post-automation, post-recession economy as workers without a college degree or high-school diploma. Unemployment, underemployment, and wage stagnation have plagued this class of workers since the start of the most recent economic downturn. But, ahead of an impending shift in the makeup of the labor pool, there’s some reason to believe that conditions may soon improve for these workers, who once comprised the backbone of the American economy.

Perhaps the greatest shift in the labor market over the past several decades has been the portion of Americans entering the workforce with a college degree or higher—a group that is often referred to as highly-skilled workers. This segment of the workforce has more than doubled since 1989, according to a report from Georgetown University’s Center on Education and the Workforce. And in 2016, workers with a college degree made up 36 percent of the labor market, making them the largest group of American workers. That’s a first, the report says.

So isn’t an economy where more and more workers have gone to and completed college technically a good thing?

The answer is a little complicated. Right now, the labor-force participation rate in general has been a cause for concern. According to the Bureau of Labor Statistics, about 62.8 percent of the adult population is currently working. Prior to the recession, that figure was 66 percent. And the most significant declines have been among workers who haven’t been to college. While a larger population of highly-educated workers has meant greater productivity and quicker growth for the U.S. economy, it’s also resulted in the displacement of workers whose qualifications don’t include a college degree. Accordingly, the workforce has stratified, producing rifts in employment rates, wages, income, and quality of life.

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