Silvio Berlusconi supporters threatened to resign form Italy's parliament en masse today, even though a week ago Berlusconi himself said he would not end the coalition. To someone in the US, such a ploy makes little sense, because as soon as you resign, you lose your vote.
Parliamentary rules described below suggest there may be some merit in the idea, but I still think a coalition collapse by ordinary means (withdrawing support) is more likely. Regardless, one way or another, the threat of a coalition collapse is back in the picture.
In response to the threat of a government collapse Standard & Poor’s warned of a further downgrade “by one notch or more” if Italy could not demonstrate “institutional and governance effectiveness”. Italian sovereign debt is just two notches above junk.
The Financial Times reports Italy PM Letta returns to resignation threat from centre-right
Fresh from assuring potential Wall Street investors that Italy was “young, virtuous and credible”, prime minister Enrico Letta was heading back to Rome late on Thursday to save his coalition government from collapse after Silvio Berlusconi’s supporters threatened a mass resignation from parliament.
The 76-year-old former prime minister – convicted last month for tax fraud and also appealing against a separate conviction for paying for sex with an underage prostitute – threw the government into chaos on Wednesday night when his centre-right Forza Italia party warned it would quit parliament if a senate committee voted to expel its leader from the upper house next month.
As Mr Letta has repeatedly warned, Italy can ill afford higher costs in servicing its €2tn of public debt, with its budget deficit for 2013 currently forecast to overshoot the 3 per cent limit agreed with the EU.
A mass resignation from parliament would cause legislative chaos just when the government must seek approval for its 2014 state budget. Parliamentary procedures dictate that each resignation must be voted on individually, a process that would have to be repeated if deputies nominated to replace them also resigned.
Renato Brunetta, lower house leader for Forza Italia, told the Financial Times he was already collecting resignation signatures from the party’s 188 MPs. He declined to say how many he had received so far.
With the head of state adamantly opposed to dissolving parliament, politicians are scrutinising whether Mr Letta could find the 30 or so votes he would need in the senate to form an alternative majority. Opinion polls show that elections would lead to a repeat of February’s hung parliament, with the anti-establishment Five Star Movement once again holding the balance of power.
Time Running Out For Letta Coalition
Even though Berlusconi is prone to change his mind frequently, and his supporters make threats they do not carry out, it appears this time, one way or another, the Letta coalition is nearly finished.
Italy's president, Mr. Napolitano, said he would not succumb to pressure to dissolve parliament and call new elections, but what other choice can he make, unless Letta picks up votes from Beppe Grillos's 5-Star Movement?
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/#ujEZrF4Lya1sPsiy.99
Danaher Corp. (DHR, $69.77) announced Thursday afternoon that its subsidiary, Beckman Coulter, has received FDA clearance of its new Access AccuTnI+3 troponin I assay for use on the UniCel DxI series of immunoassay systems.Beckman, with expertise in cardiac disease management, was acquired by Danaher in 2011, after problems with its cardiac test,Troponin, led to a recall and financial problems.The FDA approval is a minor positive for Danaher stock, and closes the door on a difficult period in Beckman’s history.
Danaher is a science and technology company that manufactures diversified products, with locations in more than 50 countries. Its revenues are expected to grow 8 and 9% in 2013 and ’14 through internal growth via new and enhanced products, and through acquisitions.
Earnings are expected to grow 7-12% per year over the next three years, from expense control, and margin enhancement via the consolidation of recent acquisitions. The PE is 20.5, in a steady five-year range of 12-23.
The company has a solid balance sheet and strong cash flow, with intentions to repurchase 10 million shares, invest in R&D, and continue acquiring companies.
Danaher’s stock price is on a steady, long-term uptrend and appears immediately capable of continuing to climb.The valuation seems pricey, and I would instead concentrate new purchases on stocks with faster earnings growth.If I were enamored with Danaher and intent on owning shares, I’d wait, and hope for a pullback below $66.
The one state arguably more screwed up than California is Illinois.
Unions, union sympathizers, socialists, and tax-hike proponents are strongly in control of both states. Is it any wonder that perpetual economic difficulties and insurmountable pension underfundings face both states?
Via email, Ted Dabrowski at the Illinois Policy Institute writes ...
Six months ago, Illinois overtook California to become the state with the second-highest unemployment rate in the nation, behind only Nevada. It hasn’t budged since.
Last week’s release from the Bureau of Labor Statistics detailed yet another month of stalled unemployment numbers for Illinois. The state’s August unemployment rate remained at 9.2% — 1.9 percentage points above the national average, which fell to 7.3% in August.
Compared to its neighbors, Illinois fared even worse. The state’s unemployment rate is now a full 2 percentage points above its neighbors’ average, which fell to 7.2% from 7.3% one month earlier.
Illinois’ unemployment rate has remained above 9% since December of last year.
Illinois Unemployment Gap
The number of unemployed Illinoisans also remains high, at 602,000. This is the third month in a row the number of unemployed has remained above 600,000.
Illinois’ most recent U-6 unemployment rate is 16.1%, meaning more than 1 million Illinoisans are unemployed or underemployed.
Five years after the end of the Great Recession, Illinois still has an unemployment rate nearly 5 percentage points higher than its pre-recession average and there are 147,000 fewer Illinoisans in the labor force compared to August 2007.
The state is still missing 177,000 nonfarm payroll jobs compared to August 2007.
Six months of the second-highest unemployment rate is no anniversary to be proud of.
Inquiring minds should also take a look at Fiscal Crisis in Chicago: Pensions 31% Funded, Moody's Downgrades Debt 3 Notches, Pension Liability is $61,000 Per Household; Mish's Proposed Solutions
Mike "Mish" Shedlock
As I go through the unemployment claims numbers from this week, I'm a bit mollified that the computer glitch that prevented two states from reporting complete claims the last few weeks has finally been fixed.
Claims came in at 305,000 this week, which is a six year low. On September 12th claims came in at 292,000 or 294,000 for the week of September 7- depending on if you believe Bloomberg or the Dept. of Labor's numbers. But in any event either number excluded some claims that got lost due to that computer glitch.
But then, on second thought, I wonder if the glitch really has been fixed and complete numbers reported.
Just last week California, one of the states implicated in the glitch, admitted that the problem was getting worse, according to the Sacramento Bee :
A computer problem delaying unemployment benefits for thousands of Californians has grown far wider in recent days, with an increasing number of people left unpaid and the state backing off its claim the issue might be resolved by week’s end.
The problem is significant enough it affected weekly reporting of initial jobless claims by the U.S. Department of Labor. In data released Thursday, the federal government said initial claims in California decreased by 25,412 in the week ending Sept. 7, an unusually steep decline.
Higher interest rates are a fact of life. Regardless of what happens with quantitative easing we will not see the 1.5% rates that we saw in May on the benchmark ten-year Treasury.
And is hardly just an inconvenience either. Interest rates affect the bottom line of every corporation every household and even our government. The cost of money has just gotten a lot more expensive than last few months. Although interest rates of moderated over the last week or so, over long-term that's likely just a temporary occurrence.
Citigroup, Bank of America, and Wells Fargo have each announced layoffs because of higher interest rates.
From The Star Telegram:
Citigroup, the fifth-biggest U.S. mortgage originator last year, is cutting about 1,000 jobs in its home-lending business, including about 100 in Irving.
Most workers affected by the layoffs “will be reassigned to other work at the site,” said Mark Rodgers, a Citigroup spokesman. “While difficult, these actions reflect our ongoing efforts to increase operational efficiency, adapt to changes in the marketplace and position the business for the future.”
Each of these companies has helped lead the rally in stocks since last year. And the fact that they're laying off mortgage staff is worrisome for housing in general. Not coincidentally housing also helped lead the market higher.
Mortgages? Housing? Mortgages? Housing?
See the connection?
Look at the flatline for Bank of America since about the middle of July.
Now compare the chart with the PIMCO 7-15 Year Treasury ETF.
The stock market was way out in front of this move and interest rates. And quantitative easing is not gonna be able to do much about it. It's not about the supply of money, It's about the supply of creditworthy borrowers.
It looks like we out.
At least until some jobs are created.
Certainly banks and the mortgage business will be the first to be hit by higher interest rates. But they won't be the last.
With September out of the way, most economists now expect a December tapering event. Steen Jakobsen, chief economist at Saxo Bank in Denmark is not one of them.
Via email, Steen writes ...
More QE, Less growth, Less Inflation and Less Upside
I have mentioned a few times how I see the fourth quarter having a dramatic slow-down effect, mainly due to unemployment rising, but also due to a serious drop in US housing activities. Please see the chart below. It clearly shows not only why housing will fall (correlation with a lag of mortgage rates) but also why we will see more quantitative easing (QE) rather than less.
With Months' Supply and Mortgage Rates Increasing, Sales and Prices Will Collapse in Q4 2013
Tapering will not happen in October or in 2013 for that matter. Not a single economic vector in our model is pointing up. All indicate less growth, less inflation and less upside. The problem? The market is still talking recovery, despite the US this year being barely able to muster 1.5 percent growth after 2.5 percent last year. If this is recovery, I don't want to experience recession.
Non-Tapering Changed Fixed Income's Relative Value Over Equities
Again, we are increasingly confident about our 2.25 percent 10-year US bond rate call by the end of Q4-2013 versus 2.65 percent now. The Federal Open Market Committee's fixed income put issued by the Fed's recent non-tapering act has changed the relative value of fixed income over equities. This story has only just begun.
Alpha-wise, increasingly my Gold calls still see 1525/75 before falling again, and finally I continue to play the US dollar short as the path of least resistance will be a lower US dollar to help refuel emerging market currencies.
Housing Bulls Increasingly Optimistic
Curiously, housing bulls in the US are increasingly optimistic.
For example Bloomberg reports Blackstone Said to Gather $2 Billion for Real Estate. It's important to note that Blackstone is raising money for European real estate (but it also has huge US commitment as well).
More to the point, I find the following Seeking Alpha headline rather amusing: It's Not Too Late To Capitalize On The Real Estate Recovery.
That title reminds me of my 2005 post "It's Too Late"
When you start seeing advertisements saying "It's not too late", or "Act now before it's too late", invariable the bulk of the gains have already been had, and the top is extremely close at hand, if not already gone.
One and Done Tapering?
That was a reasonably bold call by Steen. Another possibility is a "one and done" trivial amount of tapering in December. That is along the lines of what I expected in September.
For further discussion, please see ...
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Read more at http://globaleconomicanalysis.blogspot.com/#G5BGVpMRfMwfLDsf.99
Bloomberg is reporting that Wal-Mart Stores, Inc. (WMT, $74.65) is cutting orders with suppliers through the fiscal year-end in January, in order to remedy a recent problem with rising inventories. The inventory problem stems from tighter consumer spending, and a lack of manpower to keep shelves stocked.Wal-Mart has increased its number of stores by 13% over the last five years, while cutting its workers by 1.4%.S&P comments, “While we do think consumer spending remains choppy, we do not believe this report signals a negative inflection in trends.”
Wal-Mart missed analysts’ earnings projections in each of the last five quarters, as payroll taxes and poor global economies wreak havoc with customers’ spending patterns.To offset economic woes, Wal-Mart aims to double its sales of beer and liquor by 2016.Earnings per share growth projections have been falling all year, from 10% expected growth back in February to 4% today.The price-earnings ratio (PE) is 14.3, in a four-year range of 11-15.The dividend yield is 2.52%.
Wal-Mart’s share price peaked in May and has since trended slowly downward.Since there’s no catalyst on the horizon to cause the share price to rise, we think shareholders would likely achieve growth of capital more quickly by selling their Wal-Mart shares and purchasing stock in a company with double-digit earnings growth.It would also be wise to use stop-loss orders, in case the stock price falls below recent support around $72.Stock chart:
Second quarter earnings at Red Hat Inc. (RHT, $46.73) came in better than expected today, but the market is concerned with decelerating revenues, and the stock fell $6.20 in Tuesday trading.The core Linux business continues to slow down, while margins have bottomed and are improving.
Bookings growth has fallen from 30%+ in recent years, to 17% in fiscal 2013 (ended Feb. 28), and 11% expected in 2014.Reuters reported six Wall Street firms cutting target prices and ratings for Red Hat on Tuesday.
Red Hat provides commercial support for open source infrastructure software.Earnings per share (EPS) are expected to grow 10%, 17% and 16% in the next three years, although these numbers could be subject to revision after today’s future revenue disappointment.
The price-earnings ratio (PE) is 35.The stock is trading at a premium to its peers, which is unwarranted by the slowing revenue growth.As a general rule of thumb – which varies by industry – the fair value PE should be in-line with earnings growth.For example, if Red Hat had a PE of 18, the share price would be $24.
The stock peaked in April 2012 at $62.75, and the trading range has been ratcheting downward ever since, most recently trading between $45 - $56.While it’s somewhat unlikely that the stock will fall through support, it’s tremendously overvalued, and shareholders are gambling by holding on.
Shareholders should devise an exit strategy -- maybe selling now, maybe selling on a bounce to $49 – and reinvest their capital in a growth stock with a much lower PE, thereby minimizing overall risk.
ADT Inc., made news today when it was revealed that they were borrowing $1 billion in cash to support acquisitions, increased dividends, and repurchase shares. We've talked in the past on Ransom Notes Radio about the effects of quantitative easing, how QE has the deformed financial markets.
The case of ADT puts a new twist on an old example. We previously cited Disney, Microsoft and Apple as companies that had run out of good ideas for cash and were pledging substantial amounts of cash for both dividends and share repurchase programs. They can't hire folks for so what the hey.
Why not put the cash to work that has been amply supplied by the Federal Reserve Bank through QE doing other things?
In the previous examples, however, those companies had substantial amounts of cash in the bank. With ADT, however, the cash is coming through low interest loans made possible by quantitative easing.
Like with the other companies ADT has run out of good ideas in terms of reinvesting cash. They have the ability to borrow money, however. And at these favorable low interest rates it would make sense for the companies to do something with that money.
Buying up stock in the open market and passing cash along to current shareholders is just another way of companies Trying to unlock the value of the equity to shareholders. It perhaps is not the smartest way, or the most favorable way, but with low interest rates that we will likely never see again in our lifetime, who can blame them?
Because it certainly remains true that the business conditions for the country are going to remain uncertain for sometime. Even today we discovered a brand-new "glitch" to Obamacare.
Congress in their haste to pass a bill that they didn't even bother reading, made sure that the subsidies offered to individuals who's companies did not provide health plans don't necessarily translate to family coverage.
Congress defined "affordable" as 9.5% or less of an employee's household income, mostly to make sure people did not leave their workplace plans for subsidized coverage through the exchanges. But the "error" was that it only applies to the employee — and not his or her family. So, if an employer offers a woman affordable insurance, but doesn't provide it for her family, they cannot get subsidized help through the state health exchanges.
That can make a huge difference; the Kaiser Family Foundation said an average plan for an individual is about $5,600, but it goes up to $15,700 for families. Most employers help out with those costs, but not all.
"We saw this two-and-a-half years ago and thought, 'Has anyone else noticed this?'" said Kosali Simon, a professor of public affairs at Indiana University who specializes in health economics. "Everyone said, 'No, no. You must be wrong.' But we weren't, and that's going to leave a lot of people out."
The issue has recently received attention, especially after former president Bill Clinton highlighted it in a recent speech.
"The family glitch is definitely a drafting error that Congress made that needs to be fixed," said Joan Alker, executive director of the Georgetown University Center for Children and Families. "But that seems unlikely."
Congress made a lot of drafting errors when it comes to Obamacare. 2,900 pages of them.
Warren Buffett may not have said that we should scrap Obamacare and start over. But if he didn't, he should've. Just goes to show you that while he may be a whiz when it comes to stock investments, he knows nothing about practicing medicine.
Why is it that Americans believe that people who are accomplished in one area of life, are Gnostics about areas they seem to know nothing about? Warren Buffett is not a political genius, nor is Will Ferrell, nor is Jon Stewart, nor was Albert Einstein. Or Jane Fonda, or Barbra Streisand. Frankly my next-door neighbor, "Al", who is a computer technician, knows more about politics than anyone of them.
Yet if I saw the headline Albert So-And-So Thinks Obamacare is Just Nifty! I'd break out and hysterical laughter.
J.C. Penney Co., Inc. (JCP, $12.36) is rumored to be in talks with Goldman Sachs (GS, $165.25) to raise more money to finance operations, possibly borrowing against real estate, or issuing new equity and/or debt.Goldman previously arranged a $2.25 billion loan for J.C. Penney this past spring, to help with falling inventories and rising accounts payable.
J.C. Penney has not been able to get on its feet after turning its back on loyal discount-oriented shoppers, and attempting to transform itself into a trendy shopping destination.The strategy failed, sales dropped precipitously, and a large fiscal ‘13 (year-end January) net loss is turning into large annual losses through at least 2016.21,000 employees have lost their jobs in the last 18 months.
After a loss of $3.49 per share in 2013 (before additional non-recurring charges), Wall Street expects Penney to lose $5.99 per share in 2014, with continued losses thereafter.
The share price is reaching13-year lows, and could easily fall further.“Worthless” is a conceivable scenario.
We told Ransom Notes Radio listeners to sell J.C. Penney shares repeatedly since February.Logically, an investor will make more money by selling today, and reinvesting in a profitable company with a bullish stock chart, than they will by holding J.C. Penney shares and praying for a miracle.
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