This is Just Not Right!

You probably have one of their gasoline gas cans in your garage, because it has 70 to 75% (or did have) of the portable gas cans sold in the United States.  However, Blitz will close its operations today, July 31, which will put 300 employees out of work.  Why?  What happen?  The reason is that the company has spent $30 million defending product-liability suits and owes $3.5 million in lawyer fees.  So, the company must have been producing defective cans that split open and spilled gasoline where it could catch fire.  No, that would definitely be the logical response.  “The lawsuits have involved adult individuals who have used gasoline to start a fire or accelerate a fire.”  Even though Blitz's gas cans are imprinted with safety guidelines approved by the American Society for Testing and Materials that clearly state gasoline should never be used to start a fire.  However, in this day and age, it does not prevent consumers from ignoring the guidelines and taking the manufacturers of gas cans to court.  

So, there you have a company that has been in business for nearly 50 years and because of our present tort system of litigation will now cease to exist.  Oh, where do you think those gas cans will now be produced?  Can anyone say "CHINA."

Ford Looks Like a $1 Stock, Again!

Swipe Fees for Using Plastic

Every time you use your credit card a retailer pays up to 3% of your total purchase to the credit card company.  It’s called a “swipe fee,” and now retailers are getting ready to pass this cost on to you, in the form of a surcharge.  Why?  It’s all because Visa-MasterCard and several major banks settled a long running lawsuit alleging they conspired to fix “swipe fees.”  As part of the settlement, retailers are now allowed to charge customers a surcharge if they pay with plastic.  What does this mean for you?  Well, if you make purchases on your credit card, say $1,200/month, or $14,400/year, those purchases will now cost you an additional $432 per year.  What next, you maybe asking?  Paying sales tax on all your internet purchases.  It is definitely coming to a computer close to you!

Gold ($GLD): Deflation Forces Forecast Further Weakness

Silver ($SLV): Minimum Downside of $19

Government Motors (GM) Ramps Up Risky Subprime Auto Loans To Drive Sales

President Obama has touted GM as a successful example of his administration's policies. Yet, GM's recovery is built, at least in part, on the increasing use of subprime loans.  (Remember that GM counts a vehicle sold when it leaves the production line.  However, all those GM vehicles are not good for the financial health of its dealers.  Therefore, in order to move vehicles off those dealer lots, GM has lowered the FICO scores of those eligible to buy those cars.)

Now, in regard to those FICO scores, potential borrowers of car loans are rated on scores that range from 300 to 850.  Anything under "660" is generally deemed subprime.  So, now you can guess how GM is helping to move all that inventory off dealers' lots.  GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.  And, believe it or not, the worse the FICO score, the bigger the increase.   From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores (below 540) shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion. 

According to Investor's Daily News, by spring of 2010 GM's new management, led by North American executive Mark Reuss, wanted to move back into subprime car loans, fearing that GM couldn't compete without granting such loans to the very worst credit worthy customers. 

GM still owes about $26.4 billion in direct aid to the federal government.  The Treasury owns 26.5% of the automaker, or 500 million shares.  The stock price would need to be $53 to recoup those taxpayer costs.  GM shares closed Friday at $19.67. 

The America That I No Longer Recognize

So sad but so very true is the fact that June 2012 saw 46.5 million Americans on "food stamps," which is a 222,157 increase in the month, or nearly three times the number of people who found jobs according to the BLS.  To make matters worse, the total number of Americans on disability is at 8.7 million, which is an all-time high.  If you can not find a job and your extended benefits have run out, individuals are going on disability.  (Have you noticed all those TV commercials by attorneys offering their services to get you on disability?)

Government Motors (GM) Stock Slides To Fresh Post-Bankruptcy Lows

Wow! Look at the very close correlation between GM's stock price and dealers' inventories, which is on an inverted scale.  GM books revenues when the vehicles leave the factory and on the way to the dealer (dealer stuffing).  However, dealers have yet to sell those cars, which is a good way to cook those financial books at GM but lousy for all those loyal GM dealers.  What the chart is telling us is that Wall Street has finally caught on to all those "phantom" sales at GM.  Of course, nobody (lemmings, that is) could have possibly predicted the reaction to GM's stock price by increasing inventories at dealers. 

You are Screwed!

The current federal deficit (spending > revenues) as a percentage of GDP is slightly more than 10%.  Now, what was the growth rate of GDP last year, 2011?  Answer: ≈ 2%.  Therefore, without that deficit spending, the economy grew at a negative 8%.  Why is no one with the exception Karl Denninger at “Market-Ticker” discussing the negative impact of federal deficits on the GDP in the long run?  These federal deficits are not sustainable going forward.  Deficits have to be financed by issuing more debt.  There is almost no historical precedent where debt paid by the addition of more and more debt has been a successful operation. When this fact is recognized for what it is, the economy will tank into that infamous “Great Depression” abyss.  I know some of you are probably thinking that the government will never allow that to happen, because the Federal Reserve System is “omnipotence and omniscience.” Well, if you continue to believe that Pollyannaism, I do question your economic sanity.  And, when the managed economic chaos occurs, I hope you remember that someone did forewarn you. 

 

Who Really Invented the Internet?

 Recently, President Obama made the following statement: "The internet didn't get invented on its own. Government research created the Internet so that all companies could make money off the Internet."  Oh, how one has a tendency to embellish something that is not really true.  Remember, Senator Al Gore's claim that he developed the internet.  And no, the Pentagon did not create the internet.  Then again, bureaucrats like to elevate their own self-importance over entrepreneurs any day of the week.

If the government nor Senator Gore nor the Pentagon didn't invent the internet, who did?  According to Gordon Crovitz in today's Wall Street Journal, full credit goes to "Xerox PARC" labs in Silicon Valley in the 1970s where the Ethernet was developed to link different computer networks.

"According to a book about Xerox PARC, "Dealers of Lightning" (by Michael Hiltzik), its top researchers realized they couldn't wait for the government to connect different networks, so would have to do it themselves."  So having created the internet, why didn't Xerox become the biggest company in the world?  It was too focused on selling copiers.  From their standpoint, the Ethernet was important only so that people in an office could link computers to share a copier.  Then, in 1979, Steve Jobs negotiated an agreement whereby Xerox's venture-capital division invested $1 million in Apple, with the requirement that Jobs get a full briefing on all the Xerox PARC innovations.  They just had no idea what they had, Jobs later said, after launching hugely profitable Apple computers using concepts developed by Xerox."

Why is this diatribe about the internet important?  I would say to set the record straight, because it's too often wrongly cited to justify the existence of big government.  

State Budget Crisis: Worse to Worse

"States around the country face a fiscal crisis that will only worsen without action, according to a report released this week by the State Budget Crisis Task Force, co-chaired by Richard Ravitch and Paul A. Volcker.  Threats to fiscal sustainability include rising health care spending, federal budget cuts, unfunded pension promises, eroding tax bases, budget laws and local governments' financial woes, according to the report.  Its conclusions are based on an examination of six heavily populated states: California, Illinois, New Jersey, New York, Texas and Virginia."

Now, you know why I just included "Eschaton" in the title of my blog, Financial Insights for Eschaton. 

Facts about U.S. Manufacturing

Who leads the world in manufacturing?  Answer: United States!  Yes, you read that correctly.  I had to do some checking, but the U.S. does lead the world in manufacturing.  We produce 21% of global manufactured products, while China comes second at 15%.  Japan is third at 12%.  According to the National Association of Manufacturers, manufacturing supports an estimated 17 million jobs in the U.S., which is about one in six private sector jobs.

We have heard a lot of talk recently by both political parties about "outsourcing" jobs.  But, what about "insourced" jobs?  "Insourced" jobs, which are jobs brought to America by foreign-based companies, account for nearly 5% of private-sector employment.  And, according to the Organization for International Investment, these businesses buy more than $1.8 trillion in goods and services from local suppliers and small businesses. 

Therefore, the next time you hear all this talk about "outsourcing," please remember that the other side of the coin is "insourcing" of jobs to the United States.

Canadians Now Richer than Americans

For the first time in recent history, the average Canadian is richer than the average American; and not just by a little.  Currently, the average Canadian household is more than $40,000 richer than the average American household.  To add insult to injury, not only are Canadians comparatively better-off than Americans, they're also more likely to be employed.  The unemployment rate is 7.2 percent in Canada, while the U.S. is stuck with a stubbornly high rate of 8.2 percent. 

Chevy Volt 60-Day Return Policy is Worth a $7,500 Tax Credit

General Motors has announced a "60 day money back guarantee policy for all new Chevy models, including the Chevy Volt." The move sets up a scenario where purchasers can buy a Volt, claim the $7,500 federal tax credit (and most likely state credits) and return the vehicle for a refund within 60 days and still get the tax credit.  Did GM really not consider this glitch, or is this just another way for Government Motors to prop up politically important Volt sales leading up to November elections?  Also, sales tax on a returned item is refundable, so it's even better.  Title and registration fees would not be, but those are relatively minor compared to the $7,500 tax credit. The tax form for the credit is IRS 8936. 

So, if you see me driving around a Chevy Volt, you will know it is for the tax credit; and I am probably on my way back to the dealer to return it. Thank you, American taxpayer.  You are so very generous. 

Taxes Do Matter

The one underlying agreement by both Austrian and Keynesian economists is that you don’t raise taxes in a recession or slow-growth environment.  The United States faces a massive tax increases coming on January 1, 2013 along with continued deficit spending for years on end, which will lead to a massive economic collapse. 

Small businesses have been the catalyst of job growth here in the United States, but that catalyst is now in great jeopardy because of the pending tax increases.  Let me give an illustration that hopefully will drive home my point.  “You have a small business that is incorporated.  Currently, this business pays a corporate rate at the margin of 35%.  You company makes a profit before taxes of $100.  Given the marginal rate of 35%, your company pays Uncle Sam $35.   This leaves the company, you, with an after tax profit of $65.  Since you own the business, you give yourself a dividend of $65.  However, this amount is currently taxed at 15%.  So, at the end of the day, you have $55.75 to keep for yourself after paying out to Uncle Sam $44.75, or an effective tax rate of 44.75%, which does not include any state income taxes by the way.  For 2013, the administration is proposing that the corporate tax be reduced to 28%, which is at least in the right direction, and increase the dividend tax rate to 43.4%, which is definitely not good news to small businesses.  The consequences of these pending rate changes will be for you to keep $40.75 and pay out to Uncle Sam $59.25, or an effective tax rate of 59.25%.”  Ouch, that will definitely hurt!

Bottom line is that for the small business owner his/her tax rate will effectively go from 44.75% to 59.25%.  In other words, you take all the risk as the business owner and get to keep only $40.75 from every $100 that you, not the government, generate.

U.S. Corporate Tax Rate: Highest in the World

Japan, which had the highest corporate tax rate in the world at 39.8% rate on business income between national and local taxes, cut its rate to 36.8% this past April 2012. The U.S. corporate tax now stands at 39.2% when both federal and state rates are included, which puts us with dubious distinction of having the highest tax rate in the world!  (At least we are #1 at something!) Taxes do matter, and they are about to collapse our already fragile economy.  Please refer to the following graph.

Silver: Bear Market!

Gold: Trend is Down!

Gold Miners: Back to $22?

The beauty of "Point & Figure Charts" is its ability to identify "Stages."  In this chart of GDX, one can clearly see the "Distribution Phase (Stage 3) and the current Selling Phase." 

Silver's Downside Projection

A Short History of Congress's Power to Tax

Paul Moreno in this week's Wall Street Journal's Opinion piece provides a very succinct overview of the taxing power of the U.S. Congress. (You may read his complete opinion by clicking here.)  For those of you that do not want to read his entire opinion, the following excerpts are taking directly from Mr. Moreno:

"In 1935, Secretary of Labor Frances Perkins was fretting about finding a constitutional basis for the Social Security Act.  Supreme Court Justice Harlan Fiske Stone advised her, 'The taxing power, my dear, the taxing power. You can do anything under the taxing power.'  Last week, in his ObamaCare opinion, NFIB v. Sebelius, Chief Justice John Roberts gave Congress the same advice—just enact regulatory legislation and tack on a financial penalty, as in failure to comply with the individual insurance mandate.  So how did the power to tax under the Constitution become unbounded?

The first enumerated power that the Constitution grants to Congress is the "power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States."

Congress enacted very few taxes up to the end of the Civil War, and none that was a pretext for regulating things that the Constitution gave it no power to regulate. 

The first unabashed use of the taxing power for regulatory purposes came when Congress enacted a tax on "oleomargarine" in 1886. Dairy farmers tried to drive this cheaper butter substitute from the market but could only get Congress to adopt a mild tax, based on the claim that margarine was often artificially colored and fraudulently sold as butter.

Then, in 1914, Congress imposed taxes on druggists' sales of opiates as a way to regulate their use. Five years later, in U.S. v. Doremus , the Supreme Court upheld the levy under Congress's express power to impose excise taxes.

Then, in 1922, the court rejected Congress's attempt to prohibit child labor by imposing a tax on companies that employed children.

Things came to a head in the New Deal, when Congress imposed a tax on food and fiber processors and used those tax dollars to provide benefits to farmers. Though in U.S. v. Butler (1936) the court adopted a more expansive view of the taxing power—allowing Congress to tax and spend for the "general welfare" beyond the powers specifically enumerated in the Constitution—it still held the ends had to be "general" and not transfer payments from one group to another.

And now, in 2012, Justice Roberts has confirmed that there are no limits to regulatory taxation as long as the revenue is deposited in the U.S. Treasury."

Therefore, as long as Congress calls it a tax and the proceeds are deposited in the U.S. Treasury, it is constitutional.  How long do you think that it will take our Congress to abuse this "renewed" power?  That is why we need the Fair Tax, which would abolish the income tax completely, and get rid of the Internal Revenue Service.  In addition it would repeal the 16th Amendment so income cannot be taxed. It would replace the income tax revenue with an equal amount using a national sales tax. Same tax dollars but a different point of collection.  And, it would take away the ability of Congress to pass legislation and fund it with a so-called tax. 

 

 

June's Non-Farm Payrolls: A Big Dud

June's "Non-farm Payroll" number of 80,000 comes below expectations of 100,000.  The infamous "Birth/Death" adjustment added 124,000 jobs.  (Keep-in-mind that the Birth/Death adjustment is a statistical measure and not does not mean REAL job creation.  In other words, it is a statistical adjustment and does not indicate real job creation.)  Therefore, if we subtract off the "Birth/Death" statistical measure of phantom job creation, we actual lost 44,000 jobs in June.  Wow!  With the statistical Birth/Death adjustment taken out, we actually lost jobs in June, not the statistical gain of 80,000, which is abysmal in its own right. 

Goldbugs Worse Nightmare

Picture Guide to Financial Markets Since 1800

A collection of almost 100 charts on asset price returns, correlations, volatility, valuations and many other market and macro factors for the US, UK, Europe, Japan, and Emerging Markets.  A must read/view for the technical analyst. Click here to view all the charts.

Patient Protection and Affordable Care Act (PPACA)

Karl Denninger, Market-Ticker, had a great post today about the infamous "Patient Protection and Affordable Care Act," or simply ObamaCare.  I have re-posted with some minor editing and comments from yours truly.

"Patient Protection and Affordable Care Act (PPACA) sets forth a tax of $2,000 per employee for a business that has 50 or more and does not provide "at least" the minimum "insurance" to all. Ok, there is no health care plan I'm aware of that a business can buy today that costs less than $2,000 per employee per year and which also meets the requirements in the law.  None. Therefore, the incentive is for all businesses to drop health care and pay the tax. Period!

Now, your choices are to either buy health insurance or pay a tax of 1% of income (increasing to 2.5% of Adjusted Gross Income in 2016.)  The minimum "fine" is $95 starting in 2013, rising to $695 in 2016.  The average family income is about $50,000/year, which means that the tax will be $1,250 in 2016. You cannot buy health insurance at their "minimum level" for anything approaching $1,250 a year no matter how healthy you are at any age. Therefore, like businesses, you will pay the tax. Why? The question always comes up that I cannot be without health insurance. Well, that was under the old “normal.” The new “normal is completely different. Why? The law prohibits insurance companies from charging you more if you're sick, or refusing to cover you at all.  They must accept everyone on equal terms.

What are the potential consequences? First, businesses will drop coverage; it's cheaper (by far) for them to pay the fine and, for those under 133% of the federal poverty level, those employees can go onto Medicaid.  This is a "family of four" income of $31,900 (as of today; it will go up of course.)  Second, individuals will drop coverage and pay the fine, since it's far cheaper than to buy the insurance."

Now, what is going to happen to insurance costs when everyone only buys it when they need it, since they cannot be denied?  This question, of course, is rhetorical, which does not need a rhetorical response. Just ponder what health care will be like in five or ten years from now.  Pretty scary, isn't it?