“When and if we recover from this recession, we are going to have to worry about government debt and deficits. Spending cuts and tax increases will become the priorities of politics. President Obama just gave us a good example of how not to do it.

The president has endorsed a tax on banks by size to collect a projected $90 billion over the next 10 years. The president argues that the tax will help repay taxpayer losses in the TARP bailout program for banks.

It’s a crummy argument. Most of the TARP losses will be racked up not at banks, but at the AIG insurance company and the rescued automakers, GM and Chrysler. No tax for them.

Meanwhile, banks that received not a dime from TARP will be taxed.

I get it that people want to punish banks. Banks lobbied to change laws to allow them to undertake riskier activities. Then when the risks went bad, they begged for public money to rescue themselves. They got it too, and now they are paying their top people huge bonuses to thank them for profits really owed to public generosity.

So the desire to punish is understandable. But punishment is a bad basis for taxation.

The new tax won’t be applied to bonus pools. It will be applied to banks by asset size, meaning based on the amount of lending they do. But of course the big problem of the moment is that banks are not lending nearly enough.

How does it make sense to punish banks for doing more of what we should want them to do? It’s true that the huge expansion of government undertaken by President Obama will have to be financed to the extent it cannot be rolled back.

That financing ought to be done as rationally as possible. It should preserve incentives to work, save, and invest. It should avoid favoring or disfavoring specific industries. It should be cheap to collect. And it should be enacted jointly with reductions in government spending.

President Obama’s bank tax flunks on every count.”

From Marketplace on American Public Media

BLS has released state & local unemployment stats for October, 27 states & DC had higher rates than they did in September, 15 were lower, and 8 were unchanged.

Here is the full list, by unemployment rate:

Here is the full list, by change in unemployment rate:

22 states realized a decrease in their unemployment rate in September, 7 were unchanged, 21 states and the District of Columbia had a higher rate in September compared to August.  The following list shows the range of employment situations, with color coding to make it easier to get an overall picture.  The Dakotas and Nebraska are holding on as the only 5% and under states, again there are 14 states and DC over 10%, and Michigan edged even higher to 15.3%.  Illinois realized the largest increase, with their rate climbing from 10% to 10.5%.  Three states had rates declining by 0.7%, Ohio, Minnesota, and Oregon.

Sorted by amount of change, August to September

S&P downgraded Pfizer late last week due to their recent increase in debt.  In order to finance their acquisition of Wyeth, Pfizer increased their long term debt from $7.1B to $31.8B over the past year, an increase of nearly 350%.  This increases their debt/equity ratio (book value debt and market value equity) to 34%, which is too high for a AAA rating.  PFE had a D/E ratio of 8% prior to the Wyeth deal.

The 4 remaining companies are:

• Automatic Data Processing (NYSE:ADP)
• Johnson & Johnson (NYSE:JNJ)
• Microsoft (NASDAQ:MSFT)
• ExxonMobil (NYSE:XOM)

Now that PFE is rated AA there are just four companies still holding AAA ratings.  They are MSFT, JNJ, ADP, and XOM.  Let’s check up on their balance sheets to see if they are at risk of losing their ratings.

We can see that all these companies appear safe with their ratings, and all except XOM increased their debt load since April.  Given the current economic conditions this makes a lot of sense, stock prices are depressed and interest rates are low, so it is financially beneficial to issue bonds rather than stock.  MSFT issued almost $4B of long term debt during the second quarter, breaking a streak that goes back at least 10 years.  Of course, this is not necessarily a bad thing, AAA rated companies can issue debt at the lowest interest rates, so debt is cheaper than equity from the company’s perspective.  Debt also created a tax shield since interest payments are tax deductible while dividends are not.

A quick side note–Moody’s signaled today that the US government could lose their AAA rating due to the $1.4 trillion budget deficit.  Based on our national debt of almost $12 trillion and AAA rating, our national equity is implied to be about $150 trillion, or 0.15 quadrillion!  I’m being a bit silly in saying our “national equity,” government credit ratings are determined differently from corporate ratings since their financial structure is entirely different.

New England, DC area, and the Midwest are Fairing Better than Average.

15 states had double digit employment in August.  Michigan still tops the list, coming in at 15.2% last month (a full 2% higher than the next on the list, which is Nevada).  Only the Dakotas had sub-5% unemployment, and Nebraska was the only other state under 6%.

Here is the full list (Red=Increase, Blue=Decrease, Green=Unchanged):

I was just reading an article on Bloomberg.com about a Chinese investor who lost over half a million dollars due to the collapse of Lehman.

Says the article: “Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments. ’There is no way a person like me could understand any of this,’ Yu said”

Yu persuaded her children to invest just under a half a million dollars in an investment that there was no way she could understand, according to her.  I’m not saying that I don’t feel bad for this woman because she lost all her and her family’s money.  I certainly do.  I have lost money on investments before, never this much, but I blame myself for not doing enough research prior to making the investment.

The article goes on to say: “Yu said she didn’t read the fine print, trusting Chow [her banker]  when he told her she couldn’t lose her principal. Had she looked at the prospectus and understood it she would have discovered that she had essentially bought three call options — contracts that would capture gains if the shares of the three companies rose by a certain amount — coupled with the equivalent of a Lehman corporate bond. If Lehman defaulted, her money would be gone.”

One must always read the prospectus, and if you do not understand it, do not invest.  If you do not understand where the money is coming from, ask the company, and if they don’t have a clear and concise answer, do not invest.  If it seems too good to be true (Chow said his bank could return 20% per year with no risk of loss of principle) it probably is, do not invest.

The best thing to do, if you do not understand complex investments like Lehman Minibonds (which probably would require a lot of reading and investment knowledge), is to invest in a savings account, long term Treasury bonds (TIPS are good if you are concerned with inflation) and low cost index funds, such as those provided by Vanguard.  Had Yu invested in these assets over the past five to ten years, she would have had less growth during the good times, but would not have lost a great deal when the market tanked a year ago.

Bloomberg Article

29 of 30 Dow Jones Industrial Average components notched their current 52-week highs more than 333 days ago.  28 reached their recent high point in September of 2008, JP Morgan hit it in early October, and Exxon Mobil hit its high point on December 16th of last year.  8 have their 1 year anniversary of their high point tomorrow, meaning their 52-week high will change just because their previous high was more than 52 weeks ago.  These stocks are Merck, Cisco, Microsoft, Intel, Verizon, AT&T, Boeing, and Alcoa.  They are, respectively, 12, 13, 13, 15, 19, 28, 37, and 164% from reaching a new 52-week high.  If Merck traded flat for the next couple weeks it would mark a new high on 9/16.

There are just 3 components within 10% of their 52-week high, they are 3M, IBM, and HP.  All three of these highs were reached on 9/19 of last year.  If 3M traded flat it would reach a new high on 9/23, IBM on 9/29, and HP on 10/3.

Seven companies reached their 52-week low on October 10th of 2008, 1 in November, 3 in February, and the other 19 sank to their low point between March 2nd and 10th of this year (the Dow itself bottomed on 3/6/09).  Not surprisingly, financials have rallied the most with BofA up 600% from its low, AmEx up 246% and JP Morgan up 190%.  Alcoa, GE, Caterpillar, and DuPont are also up more than 100%.  Although they have risen a great deal, GE, BofA, and Alcoa would still need to gain over 100% to reach a new 52-week high.  Talk about volatility.  Surprisingly, WalMart is up the least from its low, gaining just 11% since 2/2/09.  In dollar terms, 21 companies are now closer to their 52-week highs, while 9 are closer to their 52-week lows.

This chart illustrates the components’ prices in relation to their 52-week highs and lows.

So, which Dow component will be the first to notch a new 52-week high?  3M is a good candidate because it is just 3.8% away from doing so, however Merck has a good chance since it could either gain 11.7% or trade flat for a couple weeks and mark a 52-week high.  And then there are fundamentals.  Which of these is poised to gain in the short term?  Personally I am bearish on the short term, so I would not bet that any of them will reach a new high in September.  I think 3M or Merck could, as could McDonalds (which would require a 16.6% gain), IBM (4.9%), HP (9.4%), and Cisco (12.8%).  I am a big fan of MCD, but I wouldn’t count on a 16% gain in the short term, it is a long term holding.  If you like tech IBM, Cisco, and HP look good.     Please, cast your vote and I will write a follow up post when it happens.

The BLS came out with their July state unemployment data today, and the data is mixed.  While 18 areas had unemployment rate decreases, 26 were higher in July than they were in June, and 7 were unchanged.  Just 3 states have unemployment under 5% currently, up from just 1 in June.  Again, 15 states and DC had unemployment over 10%.

The best five job markets are:

1. North Dakota (4.2%)
2. Nebraska (4.9%)
3. South Dakota (4.9%)
4. Utah (6%)
5. Wyoming (6.5%)

The worst five are:

1. Michigan (15%)
2. Rhode Island (12.7%)
3. Nevada (12.5%)
4. California (11.9%)
5. Oregon (11.9%)

The states with the biggest downward change were:

1. Vermont (-0.5%)
2. South Carolina (-0.3%)
3. District of Columbia (-0.3%)
4. Minnesota (-0.3%)
5. Hawaii (-0.3%)

The biggest increases came in:

1. Wyoming (0.6%)
2. Louisiana (0.6%)
3. Mississippi (0.6%)
4. Nevada (0.6%)
5. Arizona (0.5%)

The map at the top shows the unemployment rate in each state, you can see there are certain geographic areas that have been doing much better, and some that have been hit harder.  For example, the midwest and northeast have been doing much better than the west and southeast.  This map shows the change in unemployment rate:

Here are the full lists, starting with July unemployment rate:

And sorted by amount of change:

This last chart shows the relationship between unemployment rate and the change in the unemployment rate.  For the last few months there has been a clear pattern that the states with higher unempl0yment rates had the most significant increase in rates.  I have been referring to this as the poor getting poorer.  The trend reversed itself in July, with Michigan, the state with the highest rate, showing a lower rate in July compared to June.  So, in summary, there was a positive correlation between rate and change with some significance, but now there is indication of a slightly negative correlation with nearly no significance (R-squared), so there is effectively no correlation between rate and change.

I take all of this to mean that there are signs of recovery, but with unemployment so high this rally in the equity markets has been overdone.  Unemployment will stay high for a while, and that means consumers won’t be spending and their earnings will suffer.  The stimulus has provided relief for that, but if it does not bring down the unemployment rate it will not be able to compensate for decreased consumer spending.

The latest figures are out for state and regional unemployment, and there was a shift this month.  The past couple of months have shown a pattern that states with higher unemployment rates had larger increases in their rates that states with lower rates.  This month there is nearly no correlation:

The Top 5 states held their positions in June, but Nevada replaced California in the Bottom 5 list.  The Top 5 are as follows:

And the Bottom 5:

Full list, sorted alphabetically:

Full list, sorted by unemployment rate:

Finally, full list sorted by change in unemployment rate, May to June 2009

The BLS came out with state & local unemployment data for May, and there seems to be a pattern.  States with higher unemployment saw their rates increase by more than those with lower rates. The only state with a declining rate from April to May was Nebraska, which dropped from 4.5% to 4.4%.

The states with the lowest rates are:

• 1. Nebraska – 4.4%
• 1. North Dakota – 4.4%
• 3. South Dakota – 5%
• 3. Wyoming – 5%
• 5. Utah – 5.4%

Utah replaced Iowa in the #5 spot in May.

The states with the highest rates are:

• 1. Michigan – 14.1%
• 2. Oregon – 12.4%
• 3. Rhode Island – 12.1%
• 3. South Carolina – 12.1%
• 5. California – 11.5%

These are the same five states that were in the bottom five in April.

Full List:

You might have noticed that those states with the higher rates saw their rates increase more than those with lower rates.  This graph shows the correlation between the unemployment rate and the amount of change from April to May.