US Markets

January 20, 2003
Bob Chapman

Just because some companies are sitting on lots of cash doesn’t mean they’ll pay a dividend or increase their dividend to enhance the Bush tax cut on dividends. Generally, shareholders are not interested in dividends and with debt to cash flow at 15.4%, we don’t see companies rushing to the dividend window. Non-financial corporations’ debt loads were 57.2% of net worth in the third quarter, the highest in modern history. Do you really think they’ll initiate a dividend program? Tax-free dividends are a non-starter. That may have been helpful 30-40 years ago, but in today’s financial environment it will be little help to the economy or the stock market. The prospect of rising government spending means more Treasury issuance, concentrated in the 5 to 10 year areas, which means the net supply of Treasuries would increase about $300 billion this year, which means the Fed will have to supply $1.3 trillion to the economy not $1 trillion, otherwise the government will crowd business out of the bond markets, forcing interest rates higher. This is short-term deflation neutralizing or inflationary. We can’t tell which, because we can’t gauge the anticipatory deflation drag. Fifty percent of a $600 billion tax package will be longer term supply side Keynesian reform that will somewhat reduce pressure on the bond market. On the other hand it will blunt a good part of its effectiveness on the economy.

The ten-year tax package now goes to Congress. The $674 billion plan the first year would cost $102 billion. Thirty four million lower income taxpayers with a $39,000 income would receive $1,083 checks, dividend taxes would be eliminated and the rich would receive accelerated deductions. The child tax credit will be $1,000 up from $400. The result is the average taxpayer making $44,000 a year would save $27.00. Someone making $147,001 to $356,000 would save over $1,300. The states, which tie their tax codes to the federal code, would have a staggering shortfall and Mr. Bush has no plan for them in his legislation. We believe the plan is one to revive the stock market. Once the market falls again all the pension plans go under and the elderly can’t afford to live. As before, 80% of that $1,083 will go to eliminate debt. He is trying to defuse the debt bomb and get money into the economy. It’s just another delaying action and inflationary as well. If dividends become tax-exempt, municipal bonds will not be as attractive to investors and states will pay more and have a harder time raising capital. If this section of the legislation looks like it will be passed, sell munis. Who will pay for the budget deficits? The plan guarantees higher real interest rates. The plan entails very serious long-term costs, which will further denigrate the dollar and truly compound the existing problem on a long-term basis. As the dollar falls, the flight to quality exacerbates the rise in interest rates. By year-end, if the legislation is passed in current form, 1/2% will be added to interest rates by the bill, putting them 1% higher. The result will be economic gridlock. We found the President’s reasoning ludicrous. He only sees a slight problem with the economy but he is using a sledgehammer to fix it. The economy is in deep trouble and he is lying about it. The $26 billion saved by investors in tax-free dividends will mean $26 billion more debt for the government. The package without question is a naked blatant effort to manipulate the stock market higher or to keep it from plunging, particularly during the up and coming pre-planned Iraqi war. We predict only a skeleton of the plan will be passed. The main reason is the purging of Trent Lott. Southern legislators are furious at what was done to Lott to get him out of the way. They won’t talk about it, but watch their votes. The main reason the Reagan tax package was passed was 93 Democratic Southerners in the House and Senate voted for the bill. That surely won’t happen this time.

The SEC is moving toward a new regulation that turns attorneys into whistle-blowers. If the lawyer sees evidence of a client company committing a material securities-law violation and is unable to get the company’s board to stop it, he is to quit and inform the SEC. This is a dramatic breach of confidentiality and turns the attorney into a regulator or a snitch for the regulator.

Good news, consumers cut their debt obligations for the first time in five years in November by $2.2 billion from October to $1.722 trillion, the first drop since January 1998 and the largest drop since 1991. It’s believed that the drop is the result of mortgage refinancing.

It is evident that the Bush administration wants to operate without any fiscal restraints. That’s what the economic package is all about. Reflate no matter what. We now know that the Fed’s annual infusion of $1.5 trillion has not been enough, nor has Fannie and Freddie’s $300 billion been enough to keep the economy growing. We are also now seeing, as we predicted, the beginnings of competitive devaluations brought about by loose fiscal and monetary policy and lower interest rates throughout the world. As these countries’ currencies become less valuable, people will buy gold in a flight to quality. These moves will cause a dramatic slowdown in world trade and ultimately to further deflation and depression. Later this year or early next year a debt crisis will begin, when it is recognized that expansionary fiscal and monetary policy is not working and debt defaults rise. Of course, again we are one of the few lone voices in the darkness attempting to warn of the coming catastrophe and few want to listen. The devaluations bring higher interest rates and prices in a slower economy and a further flight from the dollar by foreigners. That flight will also pressure real interest rates higher due to the relative unattractiveness of the dollar. Sir Greenspan has told us he would go to any end to kill deflation and we believe him, thus we believe he could take us into a hyper-inflation such as experienced in Weimar, Germany in 1922-23, that would be short lived and the result would be a colossal crash. Consumption has begun its fall and the Fed’s mismanagement of the economy becomes more evident. We recently said if you are going to throw money at the problem you had best put it to good use by taking the unemployed, which we are paying to sit idle, and let them restore America’s infrastructure. It’s not a solution but it’s a good allocation of funds. We see interest rates 1% higher by year-end as a result of excessive stimulus and a flight from dollar denominated, paper. Inversely, we see gold $500 to $840 an ounce. This is not what Wall Street, CNBC or our government is telling us, but then again they have been totally wrong for 34 months.

There is a wrinkle in the looming deal between the administration and the government of Mexico, which would make hundreds of thousands of Mexican citizens eligible for US Social Security benefits. The centerpiece of the agreement would be a so-called totalization, which would mean that even if a Mexican citizen did not work in the US long enough to qualify for social security, the number of years worked in Mexico would be added to bring up the total and thus make the Mexican worker eligible for cash transfers from the US. That’s even if he worked here illegally. This is an insult to the millions of Americans who pay their entire working lives into the system and now face the possibility that there may be nothing left when it is their turn to retire. This rewards felons. What an incentive for illegal immigration. If you break into America you get a paycheck for life. They’ll stream over by the millions. That’s foreign aid for individuals rather than to states or countries. That will cost us $1 billion a year. This is a giveaway that could end up costing $5 to $10 billion a year. Mr. Bush may not seek congressional approval, but he will probably lay this monstrosity on us by executive order. Get a hold of your legislators now and demand they stop this giveaway.

The People’s Republic of California is now officially a third world country. Their budget shortfall of $35 billion is full qualification. That is $1,000 for each inhabitant. These numbers are much higher than many third world countries. The hundreds of billions of dollars in taxes taken from taxpayers in the booming late 1990’s has been totally squandered and then some. Then again, what can one expect from a socialist/Marxist government? You get the government you deserve. Recently S&P lowered the state’s bond rating to the lowest level of any state. When we left California in 1989 we wrote that it would take 10-15 years and the state would be totally bankrupt. The reason would be loss of their tax base. Over a 13-year period, 25% of the middle and upper level taxpayers left the state, a massive irreplaceable loss. Not only did they leave due to onerous taxes, but because the state had become a third world country due to unchecked illegal immigration. The miracle of stock options and a rigged stock market is over. The 44,000 taxpayers with incomes over $1 billion, who paid a collective $15 billion in taxes or 24% of general fund revenue, are history. Market related revenue in two years has dropped 72%. It is difficult when half the population makes under $42,358 a year and they don’t pay state taxes, never mind the millions of illegal aliens who don’t file at all and are bankrupting the social service system. 72% of live births in L.A. County are born to illegal aliens. The illegal population is expanding in leaps and bounds at over 100,000 a year. That is what jus soli has brought us. All we can say is if you live there leave as quickly as possible. There’ll come a time when you won’t be able to leave.

Behind the scenes the FDIC has been told not to sell Treasury paper into the market. Due to growing bank failures and the prospect of higher interest rates, at some point falling revenue, the FDIC wanted to become more liquid. The FDIC hasn’t had to do this since 1971. The decision points up the vulnerability of the Treasury market and where Washington thinks interest rates are headed in the future.

Due mainly to free trade and dumping by foreign companies, 30 US steel companies have filed for Chapter 11 over the past five years. The result is we taxpayers through the Pension Guarantee Corp have stepped in to assume retirement liabilities. Thus, free trade and pension obligations put these companies out of business. The industry’s 500,000 retirees and their dependents represent $12 billion in so called legacy costs, which are made up of health care costs, pensions, insurance and other benefits. There is now considerable consolidation in the industry, allowed by a protective tariff structure implemented by President Bush. This allowed time and profits to be straightened out in order to plan for survival. This is one of the few intelligent things the administration has done over the past two years. The answer to these problems is the end of free trade and management ability to set reasonable goals for retirement. The pension problem throughout all industries is a bomb waiting to explode and once the market moves lower again many companies will go under because they can’t compete with foreign slave labor and they can’t make their pension payments.

This is the most protracted slump since the depression of the 1930’s and it will get worse over the next two years. The manufacturing sector has eliminated jobs for 29 months in a row mainly due to the results of free trade. Unemployment is over 12%, because government simply doesn’t count anyone who no longer collects unemployment. The only reason last month’s figure of 6% didn’t move up was because 191,000 workers supposedly left the workforce last month. It’s like they didn’t exist and of course, they are still looking for work, but can’t find any because their jobs has been spirited to China and Mexico. Again the experts were wrong. There has been no job increase and there is no recovery, and there won’t be recovery, not just yet. Six hundred and seventy-four billion dollar tax cuts won’t solve anything. It will just prolong the agony. It is a gift of fiat money to a failing economy. People who were making $70,000 a year, who were laid off, are now making $8.50 an hour so transnational corporations can continue to rake in profits by using third world workers. There is no job security left in America. If we do not abolish free trade and impose protective tariffs there will be no America left. It will have become a satellite of China. Wake up America, can’t you see what’s happening to you and your country? Everything we have built for over 225 years is being destroyed and you are allowing it to happen.

Now that the top brokerage houses have bought themselves out of jail with the complicity of government, they now are bracing for the private-litigation barrage. One law firm has filed about 100 lawsuits against Citigroup’s Salomon Smith Barney and analyst and master deceiver Jack Grubman. Another law firm has 2,000 arbitration claims against Salomon and Merrill Lynch.

Governor Gray Davis of California will raise cigarette taxes by $1.10 a pack, creating a black market; impose a tax on Indian casinos and raise the sales tax from 7.25% to 8.25% to service the state’s $35 billion deficit and to pay for welfare for illegal aliens. The highest marginal tax rate would move up from 9.3% to 10% for incomes over $136,000 and 11% for incomes of $272,000. We wonder why he doesn’t fire the 13.6% increase in state employees accumulated since 1997. There will be many more upper income families leaving the state.

Business investment fell 3.2% in 2002 and is expected to rise only 0.7% this year. We see it flat. The $500 billion current account deficit requires $1.9 billion in foreign investment daily to fund. Dollar holdings by foreigners rose in 2002 by $122.2 billion, of which about $100 billion was bought by Asian central banks to prevent their currencies from rising against the dollar. This will likely continue in 2003.

Normally a weaker dollar would bring a lower current account deficit due to goods becoming more expensive to import, but as long as oil prices stay over $25.00 a barrel that won’t be the case. Downward pressure on the dollar will continue to build. Now that gold has begun phase two of its bull market, as a result of a falling dollar and other factors, the move to $500.00 gold means that huge gains will be made in gold shares, particularly in the junior and exploration companies.

The nationwide apartment vacancy rate rose to 6.2% in the fourth quarter of 2002, the highest level since the early 1990’s, from 4.8% a year earlier. New rentals fell to 3,341 in the fourth quarter from 20,612 in the third quarter. For the year the absorption was negative, with 10,349 fewer units occupied. There was negative absorption of 15,865 units in 2001. The National Multi Housing Council expects a vacancy rate of 6.7% for 2003, up from a previous forecast of 6.5%. US rents fell 1.1% to an average $857 a month at the end of 2002 down, from $866 in 2001.

We are against affirmative action, particularly in education. If the Supreme Court chooses to strike it down they should also strike down the legacy preference, which almost totally favors white students entering colleges and universities. Only the best students with the best grades should be admitted. That includes students with sports scholarships. Institutions of learning are for learning and only those who have attained the best academic standings should be admitted regardless of color or background. What’s good for the goose is good for the gander. In Ivy League schools 35 to 50% of applicants are legacy oriented and that allows elitists to perpetuate control over our society. Not by achievement but by conspiratorial connection.

It looks like former Treasury Secretary Paul O’Neill wasn’t very happy during his stay in Washington. He now tells us the President’s plan to eliminate taxes on corporate dividends will do little or nothing to improve the nation’s economy. He said he wouldn’t have done that. That’s probably one of the reasons he is no longer there. He was stifled in Washington. He said, "it’s all about sound bites, deluding the people, pandering to the lowest common denominator. The notion that government can actually do something about unemployment in the short term is ridiculous." Mr. O’Neill is a very brave man. We can promise you he’ll be done away with within a year.

Sun Life Financial petitioned the state of Massachusetts to reduce the guaranteed rate on fixed annuities to 1.5% from 4%. In the 1950’s it was rumored around Boston that Sun was mob connected via Meyer Lansky. If you thought your annuity was safe, think again. The state does have the power to legally reduce rates. The fixed annuity money is commingled with the insurance companies’ monies and if the insurance company goes under you become a creditor and you have to go to court to collect. If you have a variable annuity it is kept in a separate account with the stock and bond investments and is not affected by bankruptcy. With all that is going on it is wise not only to have gold and silver coins at home but also small denomination bills.

Mortgage lenders, in order to keep the two-year buying orgy intact, are cutting into profits by reducing the spread they add to the key interest rate. The result is 6% loans. The MBA is forecasting that loan volume will fall by as much as 28% this year, from a record $2.5 trillion last year. Twenty percent of the growth in the US economy last year came from refinancing. Late this year housing prices will begin to plunge, finally. It could also mean the laying off of 100,000 mortgage related workers.

The US Treasury Department doubled the amount of time that investors must hang on to their savings bonds to 12 months from six months. The move is designed to keep professional investors from piling into savings bonds instead of short-term Treasury bills that throw off much less interest. It will also stop bond flippers, who buy bonds with credit cards to earn frequent flier miles or cash refunds, sell them six months later, and then buy them again to earn more rewards. Series EE bonds currently yield 3.25% annual interest, while I bonds or TIPS earn 4.08%. The Treasury now allows individuals to buy only $15,000 in E bonds during a calendar year and $30,000 I bonds.

JP Morgan Chase may have settled with insurers over Enron but the grief could only be beginning. Morgan officials are not being called before a New York grand jury as prosecutors continue to probe for criminal acts by employees. The bank has been named in a civil case bought by Enron investors in federal court in Houston, which could potentially incur a large damage award or settlement for the firm. The Manhattan D.A.’s office is also reviewing a series of similar transactions set up between Citigroup and Enron.

The SEC adopted a rule to require companies to state when their earnings reports don’t follow national accounting standards and to certify that reports aren’t untrue or misleading. Another new regulation restricts stock trading by senior executives during periods when rank and file workers are prohibited from trading. Pro-forma results are now going to be labeled as such and spelled out. Pro-forma is deception and lies. The new rules require companies to clearly show differences between pro-forma earnings and formal results that comply with GAAP. Finally the investing public is getting the truth.

Fannie Mae’s net fourth quarter income fell 52% due to losses in derivatives. This is the greatest decline in net for years. Fannie’s book of business grew 16.4% in 2002 to $1.82 trillion. Credit-related losses doubled to $34.3 million in the 4th quarter up from $13.9 million in the 3rd quarter. That’s all those bad loans beginning to come home to roost. The number of properties acquired through foreclosure rose 35% in 2002 from 2001. We put a short on Fannie at $79.00 with a $48.13 cover. We are removing the cover and designating it open to the downside.

The elitists at Halliburton, Schlumberger, Exxon Mobil, Chevron Texaco, Conoco Philips, Bechtel, Baker Hughes, etc. are already telling us how they are going to carve up Iraqi oil production. They can’t wait to start the murder and slaughter.

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