Washington - Do This Next - Jobs & Expectations.

Its been 6 months since the bottom in the market and many of the actions by government have helped move the public's feelings that we were on the brink back to a more normal state. The question now should be focused on what to do next and this is where we're floundering as a nation.

The answer resides in a success which they've already accomplished - restoring confidence in the general public that tomorrow wasn't going to be the end of the world. Fortunately the recipe for doing this is a tried and true skill of government - spend as much as is necessary and then add $500 billion more under the guise its "necessary" in order to get the votes necessary to make it happen. In any event, it worked - the world isn't going to end, our 401Ks are not going to zero and life it seems will drag on.

But, what kind of life will it be? That is the next question that everyone is asking themselves and its now supplanted the prior question as the new most important piece of information before the economy will move from capital preservation and cash flow maximization to betting on the future being at least mostly as bright as its been over the past 20 years.

So, if we can sleep at night not worrying about tomorrow, but are still worried about next week, month, year and 5 years, how much have we really gained? I'd submit nothing - we're still in a wait and see mode albeit with a little more calmness. What we really need is a new believable long term model for growth upon which we can make all our hopes, dreams, and government expenditures possible. Its this long term model that is now holding us in suspense; nobody knows what it is because it is 100% in the hands of the congress and all the signs point to "not good" for growth by the Democrats.

Here are some things that could settle the long term fears (1-5yrs) which is where all the eyeglasses are focused now:

1.) The "rich" pretty much know 2010 means bad news for taxes which hurts the economy, but what really scares them is the fact that there is little to no word on their long term tax obligations stoked by constant chortling about how they need to pay for all the new programs congress is piling on daily. The rich are planning day by day - if you don't think its true, look at Businessweek last week - they're the only group who has curtailed their spending dramatically in the past year.

2.) Cap & Trade - another potential liability with the possibility to impact heavily everyone in this country. A noble effort yes, but a classical curse of the commons - that being everyone on the Earth. If China doesn't get on board, all we'll be doing is taxing local growth and giving a competitive advantage to importers who don't have to pay the cap and trade taxes. Try to tariff Chinese goods and you create and even larger uncertainty and liability that further tanks the future expectations of growth between China and U.S. and the rest of the world.

3.) Future debt obligations - the quantity of future debt obligations we're setting ourselves up with and the rhetoric we're using to calm our creditors leads to a growing desire for our creditors to de-couple themselves from their reliance on buying our debt. Pile this on top of our "talk out of both sides of our mouth" policy regarding whether we are going to back the dollar or let it slowly fall creates uncertainty which creates immobility in terms of investment in the U.S. as a whole. The effects right now are murky, but when they become clear they'll prove devastating. Think of this as the asshole boss you'd like to quit on because he doesn't appreciate your necessity and contribution. You're working to free yourself from him daily and when you finally tell him to "shove it" and quit - he'll be up a creek. That's the U.S. if they don't create credibility in their dollar possibility - they're basically pissing on all the worlds current and future holdings of our debt.

4.) Financial Regulation - like any regulation is creates a freeze until certainty arrives. If this is truly a priority, get it done quickly so investment can resume in this sector and speculation over the actual outcome will give way to actual long term investment.

5.) Tax Cuts & Incentives - Here is where a long term promise on lowered taxes and incentives to invest would relieve the gridlock of fear in the economy. Short term stimuli are just that - they boost a quarter and they get people to trade in older cars, but they don't lead to hiring. With the unemployment officially at 10% (those who say 9.9% need to get off the media's obsession - round it up, its already unofficially much worse - how's 16% sound?) the only thing that is going to get jobs created is long term commitments to spur people to start and grow new businesses and the most broad way to do this is through lower taxes. Those who don't start new businesses will consume more as they can build new rates into a 3-5yr plan which any sensible person does when evaluating their financial budget regarding cash flow and credit. Think this is stupid? Ask yourself if you'd start a business where the profit margin is 5% and you can make $1m next year netting you $50k / year. If it cost you $100k to start your payoff is 2years. Now ask yourself if you'd start that business if you thought your taxes on sales of $1m could increase by 3-4%? Your payoff goes from 2 to 8-10 years - not exactly a call to action.

6.) Government Spending - we've all had enough of it. I read everyday about the cost of Obama's dinner dates with Michelle, and the program to give cell phones to poor people (how did poor people survive before cell phones?) - I'm not trying to be mean, but this type of spending is not going to grow a thing - if you want to spend tax dollars - make tax breaks to job creators with promises for long term investment (we're letting the Special Master set bonuses based on 3-5yr stock price) in jobs and growth, not a bunch of crappy little projects that will whither away when the spending does leaving with just the debt of that waste to repay.

If there is a common thread in all of these its the notion that with an economy out of panic mode, they're now sitting in neutral waiting to see what happens next. Get the next steps right or capital will flow elsewhere. I heard today Brazil is limiting foreign investment to keep their dollar from appreciating vs. ours (which is sinking) - it sounds like the growth story is where is investment is - lets make the growth story and American one again.

Republican Makeover...At an undisclosed Pizzeria in Arlington

So I heard the other day that the Republicans spent some time at a pizza place in my home town of Arlington this past week discussing the future of the Republican party. I'm so happy the Mitt Romney, Jeb Bush, and Eric Cantor decided to eat somewhere other than Mortons, but really who are these guys to give a hope of a makeover to the party. Bush the third - sorry you're not going to convince anyone that your kindler and gentler. Romney - I think the Republicans decided you wouldn't be there leader last year when they voted for McCain after you couldn't take a stand on any issue for months during your campaign. Eric - I guess that makes you "the last guys standing" which is not a basis for a re-make of my much maligned Republican party.

So, I'm glad no Republican actually hoping for change knew where to share a slice with you, because if I walked in for a pie and saw you three there as the face of change I'd have puked.

Here are a few pointers for expanding the tent, but I doubt you can do it without losing the die-hard social conservatives that refuse to let go of their old ways and insistent on losing again and again because of it.

If you're looking for those Republicans that aren't currently voting for you - people like me, here is a start:

1.) Be the party of tax reform. Make concessions on marginal rates (which you'll probably have to anyway), but insist on eliminating phase-outs on things like ROTH IRAs, Education Debt Interest Deduction, Marriage penalty for dual income earners that punish the next generation of Republicans, not catering to the aged who will soon become Democrats again when they retire.

2.)Pay people for working not for lazing - Raise Military Salary and Benefits - these guys and gals risk their life for us, make it worth the risk and the while and solve the recruitment issue. Bring 50k soldiers home and they'll buy houses too.

3.) Don't tell people they can't get married - anyone. It's not your business and you have no right and you'll lose the debate, so give it up.

4.) Get control of healthcare. If you can't corral the businesses to get them working to make it sustainable to remain private, it will be nationalized. If you want to be the party of business this means not constantly bending over for them.

5.) Drop the illegal alien issue. Most want to work, most would pay taxes and buy up homes and create a bottom to housing. Don't scare away the highly educated foreigners either - these are the future, we've been welcoming them for 100 years and its served us well - its not taking jobs from Americans, its limiting job growth though.

A lot of these things run backward to the current Republican mantra, but right now you're backpeddling anyway - it is a sign that you went to far. Start with these, admit you were wrong (people like that) and ask them to trust you to make it right.

Gotta start somewhere.

The Fiscal Stimulus Debauchery

The fiscal stimulus bill coming out of Congress is the biggest fiscal debauchery of our country's history. It is 407 pages long, but I intend to read every page and question every financial outlay that seems to run counter to the President's statements of directly creating jobs.

Since this will take a while to read, I'll likely encapsulate each section of the bill and the ridiculousness of each in seperate posts, so stay tuned.

You too can read it and weep here:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf

Alright. It doesn't take very long to find our first contradiction - on page 2.

Title I - AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND RELATED AGENCIES

We pay some money to renovate buildings - 24million to be exact. Sounds like its creating jobs right away, I'm fine. However, then the office of the inspector general -$22.5million "to remain available until September 30, 2013" for ovesight and audit programs and grants and activities funded by this act!

Ok- so translation - we're outlaying $24m to renovate some buildings, then another $22.5m to report how the building is being renovated which won't be spent for 3 years?

On page 3 we spend $145m to purchase some land for flood plain easements. Though I'm sure this might be a good idea were we in a fiscal boom period, but wouldn't this $145m go a long way toward helping troubled homeowners. What is our return on flood plain purchases going to be long term?

In case you're getting infuriated already, the next paragraph helps calm you down with a cool $11billion to help out rural homeowners with their mortgages. Don't ask me how buying flood plain land easements fits in with this portion - and $145m compared to $11billion sure seems like an earmark to me (I thought we weren't having any of those in this bill Obama?).

Later on page 4 we spend on some sewage treatment facilities which I suppose generates some jobs, an infrastructure which seems fine. We all need clean water, right?

Page 5 we get some school lunch programs for needy children and food assistance to women, infants and children. Thought we had these programs already, but who can be against food for the hungry.

While we're on the topic of food - page 6 enacts "TEMPORARY INCREASE IN BENEFITS UNDER THE
SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM. (a) MAXIMUM BENEFIT INCREASE." Sounds good, right. Well it increases to 113% the benefit for the good folks in Puerto Rico and American Samoa and American Indians living on the reservation - you know - the ones not subject to taxes? It then goes on to spend hundreds of millions for the administration of this and has about 7-8 pages of rules and exceptions for this.

I'll pick up on page 13 in the next post - where find out whether the Census gets $500m or $1billion for more polling.

Stay tuned!

What Happened in Retail in January

Real quick here - the January bump in sales was the effect of a simple over-conservation through the Christmas season. With the bad news in, many people overly tightened their wallets. The January bounce was a head fake and cannot be trusted.

Make Savings Account Interest Tax Free

In times of great economic distress, when banks are starving for capital and politicians are clamoring about banks taking TARP money and not loaning it out, I've got a very simple component solution.

Make savings account interest tax free. With public confidence in the equities and bond market shot, most people are scurrying to find places to stash their money where they know it won't disappear. While savvy investors may find good places, most people just stuff them into the Treasury market which means many will get hit a second time when this crowded trade clears out or its in a matress which is just as bad.

However, if instead we told those with cash that their savings yields would be tax free - it would allow banks to attract new savings (the actual money they use to make loans) and give them a "government sponsored" boost in competitiveness through tax exemptions boosting their stated yields. If the economy recovers, this exemption could be revoked at varying levels to force capital into more risky assets.

The combination of a tax-free yield and an FDIC guarantee on the deposit would provide a boosted and safe place for everyone with savings ranging from $1 to the FDIC limit and beyond. Secondarily - it would steer fear capital to the banks and allow them to lend at a leveraged rate. Since every dollar of savings could make ten dollars of loans - this private capital infusions could be huge. Doing this would effectively short circuit the current pattern whereby the government issues treasuries at low yields at oversubscribed auctions and then uses these funds to give to the banks or spend in some other economic stimulus. Why don't we just cut out the government middle-man?

Instead of this whole process - the banks could get the deposits they need to make new loans immediately through cash infusions of savings! The savings rate which is too low right now would be bolstered through additional incentive to save and greater compounding, the government would be removed from the normal tax portion of savings and therefore the possibility of pork spending eliminated. The general public might then experience tax adjusted yields of up to 5% or the banks would be able to attract cheaper capital or both.

Moreover - the fact that savings accounts are not tax free currently is ludicrous. 401K retirement savings are, mortgage interest is deductible, so why not general savings?? I don't know the tax liability for the government, but if its potentially huge, just set limits on tax exemption on savings like the FDIC does with insurance.

The main goals should be to direct scared capital to solve the problem of teetering banks. Insure the banks deposits, direct the free cash flow toward them as a safe and smart investment vehicle in a time of crisis and you'll ensure that banks get the most money to stimulate the economy precisely when they need it most. Lastly - to solve the politicians heartburn - new savings, unless used by banks to lend is only a burden on them as they'll need to pay out interest on it - a natural solution to promote new lending as the cash rolls in for them to utilize or sit on and squander.

Why Immelt Should Pick Preserving the Dividend

Recent news over GE potentially having to cut its dividend in order to save capital to retain its AAA bond rating haven't raised an important issue. The main reason the bond rating is important is because it facilitates lower borrowing costs. Lower its rating and it has to pay more to borrow. However, cut the dividend and the general confidence of what was always a very stable long term investment following is thrown in the trash.

So, weighing these differences would seem to be prudent. The problem is the stock and its credit default insurance costs are already acting as though it lost its rating. So, why try to preserve it? Also - the rating is something that will be in question continually, dampening the stock continuously for the next 12-24 months. Since S&P is destined to become more strict now that they realize their is perception of their proximity to the cause of the current situation - GE is being held hostage by the very institution that created the problem in the first place.

So I say - let the rating slide - everybody expects it. Then phrase it in a way that makes it look like you chose to remain committed to the dividend for the shareholders and couldn't care what an agency rates GE. The fallout from this will certainly be lower than the cost of eliminating the dividend. The stock will again be bought up by mutual funds and the "blue chip" will remain.

If GE is intent on growing its infrastructure business and shrinking its capital business, then debt financing should become a smaller part - so making this financing more expensive will help speed the adjustment. Orders from customers will need to be financed by others, but that is more healthy for GE anyway.

As the economic crisis matures, the borrowing costs which have been so much higher will have been lowered through global interest rate cuts. Credit default insurance will subside meaning that the debt market is about as bad as it will get. Therefore - being one level below AAA in a matter of 12 months will probably be the same as being AAA right now. However, if you cut the dividend, investor confidence will be shot for years.

S&P and Moodys - Death of Bond Rating Agencies

In all the carnage of 2008 - the bankrupted companies, the government bailouts, the mortgage foreclosures, the ratings agencies have been consistently behind the ball regarding reacting to the changing financial landscape. Moreover - the analyses of the companies these bond rating agencies conducted will likely show that they too were asleep at the switch as this crisis emerged. Current credit watches are just prime examples.

Today's headline from Bloomberg details the fewer than a dozen companies left worldwide who still hold the coveted Aaa rating. GE has been in the spotlight lately because it has desperately tried to hold on to its Aaa rating - a grade it has held since the 1950's - amid worry about its huge financial services arm. The implication being that the borrowing costs of their future debt issuances will escalate if they are downgraded even one level costing them about 1.1% more than if the were to keep the Aaa rating.

The crazy thing about the Aaa rating or lack thereof - is that it should be largely irrelevent at this point. The stock market has put its own downgrade on many of these Aaa companies far sooner than S&P or Moody's - making the sudden wash of downgrades and negative credit watches seem tongue and cheek.

Furthermore, the notion that a company could issue some debt today while it still had a Aaa rating and save 1% in interest over the same debt issued the day after a downgrade is ridiculous. There is too much being put on the difference in borrowing costs, but it shouldn't have anything to do with the rubber stamp of S&P, so much as the health of the overall credit market. Case in point - GE's borrowing costs have been rising all year, so what did the Aaa have to do with it?

The fact is - nothing. Bond ratings are dinosaurs of a by-gone era where access to financial information was not easy to come by and markets less fluid in pricing in information. All the ratings agencies now are is trumped up analysts and cheerleaders of companies cheering or booing after the play has already happened. In this way, their ratings changes are like Monday-morning quarterbacking companies financial position. Their stamps of approval have probably led to unfortunate ill-guided and researched investment positions which are now being brought to light not by the ratings agencies, but by the rest of the information available all year long.

Though ratings are needed in some form because they allow companies to be evaluated generally, their ratings serve more for eye-pleasing cursory ratings - and their changes are too static. What would be of better value would be daily updated composite indicators which compare companies on a variety of factors - this is in fact what the open market for debt issuance does - it would be more helpful to see the results of this in a consolidated form and would likely treat every company more fairly than the discreet bond ratings levels currently being used.