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Tuesday 07.29.2014

Dodd-Frank: Helping lawyers and foreign cities, hurting US competitiveness
Four years on, one effect of 2010’s Dodd-Frank Act is to incentivize US banks to push much of their swaps trading (often credit default swaps, or CDS) offshore. While the intention — always a dangerous word in Washington — of the regulation was to increase transparency and accountability in these markets, let’s look at who is actually winning and losing as a result of Dodd-Frank’s Title 7, “Wall Street Transparency and Accountability.” As the Wall Street Journal put it this past April, the banks’ response “could shift more of the $700 trillion swaps market to London, Europe’s financial hub.” This means that these trades have now been pushed outside the purview of US regulators, exactly the opposite intention (there’s that word again) of Senator Dodd, Congressman Frank and President Obama. The new rules hurt: The USA, and New York City in particular: Our competitiveness and importance as a financial center are slightly diminished with each trade and each employee pushed offshore.

Here’s What Wall Street Bulls Were Saying In December 2007: Read And Take Cover!
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears. Indeed, with the S&P 500 at 1460 and just off its all-time high in October, the dozen top Wall Street prognosticators surveyed by Barron’s anticipated still more index gains during 2008: ….. the dozen seers we’ve surveyed all have penciled in higher stock prices in 2008, although their estimated gains vary widely, from 3% to 18%.

Bankrupt solar manufacturer wins $27M judgment
The Flagbeg Solar U.S. Corp. $30 million plant, opened in 2009 and laid off its employees in March 2013. A federal bankruptcy court has imposed a $27 million judgment against a Chinese company, siding with attorneys who argued that a broken deal over an industrial glass oven ultimately led to millions in losses for creditors. As Judge Carlota M. Bohm sees it, Zhejiang Daming Glass Co. Ltd. owes $22 million in consequential damages and $5 million in punitive damages over the deal with bankrupt Flabeg US Solar Corp. in Findlay. Flabeg attorneys had asked for an overall award of $55 million. They argued that because Daming Glass reneged on the agreement to buy the oven, Flabeg couldn’t pay its lease and wound up having to liquidate instead of reorganizing and resuming business. According to U.S. Bankruptcy Court for the Western District of Pennsylvania filings, Daming agreed in August 2013 to buy the oven – it was unused and crated, a component of a future expansion.

Gerald Celente: We’re Building Up to World War III

Will Janet Yellen Turn The Right Knobs & Flip The Right Switches?
Mohamed A. El-Erian, a recent addition to the gaggle of central planning defenders at BloombergView, is anxious about what the future holds for the Land of Oz. Will the Great Wizard, Janet Yellen, turn the right knobs and switches? Let's go through El-Erian's concerns one-by-one, and apply some clear thinking to them: To what extent is the central bank's policy approach increasing the risk of financial instability down the road? This question is preoccupying a growing number of regional Fed presidents. Well, since the Fed has distorted the marketplace with piles of malinvestments and debt, while at the same time twisting the capital structure into an Aunt Annie's pretzel, the "risk" of economic reality intervening (i.e, what central planners call "financial instability") is weighing in at a cool 100%. The planners think they can turn the economy into a kaleidoscope and avoid the ramifications. Not gonna happen. Next question..How much damage has the recession inflicted on the economy’s growth potential...

Is The U.S. Near Economic, Jobs Speed Limit Already?
Five years into an economic expansion that's often felt like anything but, jobs are coming back. Employers have added an average of 272,000 jobs each month in 2014, undoubtedly good news. But the new phase of the cycle brings fresh questions about the definition of "full employment." In textbook economics, full employment refers to the lowest jobless rate that can be sustained before demand for workers grows so high that wages are bid up and inflation grows out of control. It may sound obscure, but how full employment is defined, and targeted, has implications for policy, economic growth and even how businesses operate. Determining that level precisely is a bit like the Supreme Court's informal definition of pornography: you know it when you see it. In the stagflation of the 1970s, many economists thought full employment was reached when the jobless rate fell to 6.5%. But in the 1980s and 1990s, unemployment steadily fell, reaching a long-time low of 3.8% in 2000.

Smith & Wesson Fined $2M Over Foreign Bribery Charges
Smith & Wesson on Monday agreed to pay a $2 million fine to settle charges that employees and company representatives paid foreign officials to win supplier contracts, according to the Securities and Exchange Commission. The SEC said Smith & Wesson logged about $100,000 in profits from the one contract that was completed before the Foreign Corrupt Practices Act violations, which occurred between 2007 and 2010, were identified. Under the settlement, the gun maker must report to the SEC on its compliance efforts for two years. Smith & Wesson, which agreed to the settlement without admitting or denying the SEC’s findings, said the SEC inquiry stemmed from a Department of Justice investigation that was later dropped. The settlement expense was accrued in the fourth quarter ended April 30. “We are pleased to have concluded this matter with the SEC and believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders,...

GDP, Nonfarm & FOMC To Send ‘Mixed Signals’ To Gold: Holmes

Report: Pentagon Employees with Top Secret Access Have $730M in Back Taxes
Some 83,000 Pentagon employees and contractors who handle classified intelligence were found to have unpaid federal taxes totaling $730 million, which makes them more likely to “compromise classified information,” according to a report by the Government Accountability Office (GAO). At least 83,000 Defense Department tax delinquents “were determined eligible for secret, top secret, or sensitive compartmented information (SCI) clearances, or related interim clearances” despite their outstanding debts, according to the report. Some of those with back taxes are likely security-cleared employees of the executive branch, legislative branch, and the intelligence community, due to the large scope of the GAO’s analysis. Pentagon officials warned that “individuals having access to classified information pose a greater risk because they have more opportunity to actually compromise classified information than a person who is only eligible to access classified information,” according to the GAO.

Investment Bank: the “Redistributive Effects” of QE and ZIRP
A new study found that the inflation-adjusted wealth of America’s median household – half of households are above and half are below – plunged 36% from 2003 to 2013. These years include the phenomenal stock and bond market rallies and price surges in other asset classes, propelled by the greatest credit bubble in history, ingeniously engineered by the Fed via QE and ZIRP. But the median household wasn’t the only one to get shafted. The wealth of the lower 25th percentile, those folks who don’t have much to begin with, plunged 68%. And the bottom 5th percentile? Well, these hapless souls fell even deeper into the bottomless pit of owing more than they have in assets. Three times deeper. Even at the upper end, it was tough. The 75th percentile couldn’t beat inflation and lost on wealth, according to research by the Russell Sage Foundation. Only the top 95th percentile came out ahead and saw their wealth rise 14%. Which still isn’t much, over ten years.

Could Ebola sneak across U.S. border?
The Ebola virus presents a particularly nasty way to die. “Early symptoms of the disease include … sudden fever, chills and muscle aches,” the U.S. Centers for Disease Control and Prevention, or CDC, explains. “Around the fifth day after onset of symptoms, a skin rash can occur. Nausea, vomiting, chest pain, a sore throat, abdominal pain and diarrhea may follow. Symptoms become increasingly severe and may include jaundice, severe weight loss, mental confusion, shock and multi-organ failure.” There is no known cure or vaccine for the virus, and as many as 90 percent of those who contract the disease die from it. But what are the odds of it infecting the U.S.? And could the porous southern border provide an avenue for Ebola to enter the country? Though no case of the disease has ever been reported in the U.S., the World Health Organization admits the current outbreak in Western Africa – which has infected at least two Americans working in relief efforts there – is the worst on record.

Why We Spend So Many of Our Dollars at Dollar Stores
And why the $8.5 billion Dollar Tree–Family Dollar deal is probably a sign that the dollar store's heyday is coming to an end. The dollar store has been one of the great success stories of the recession era, with chains such as Dollar Tree, Family Dollar, and Dollar General posting record sales figures, broad expansions, and soaring stock prices over the past half-dozen or so years. Now that Dollar Tree is purchasing Family Dollar for $8.5 billion, it appears as if the era of rampant dollar store growth is plateauing, even while many household finances remain pinched and dollar store shopping continues to be popular. How did we get to the point where such a colossal merger would make sense? Here’s a look back at the recent evolution of the dollar store, with a particular focus on why many shoppers have come to view them as handy neighborhood general stores—and not just for cheap stuff. The Great Recession destroyed shopper budgets.

CNN Reporter: VA Reform Bill 'A Little Misleading', Money Was Never the Problem

US Tax Code Causes Businesses to Flee Overseas
Free-market advocates say Treasury Secretary Jack Lew wants to treat the symptoms rather than the cause of U.S. businesses seeking lower taxes overseas. Lew is the latest Obama official to make the case for restricting the ability of U.S. companies to merge with foreign companies in order to relocate to lower-tax countries. The controversial process is known as corporate inversion. Lew acknowledged in the Washington Post Sunday that “there is nothing wrong with cross-border merger activity,” provided it be “based on economic efficiency, not tax savings.” However, he wrote the trend toward inversion has accelerated in recent months, and many of the companies that have sought tax savings through this strategy “are for all intents and purposes still based in the United States.” In the long term, Lew argued, “enacting comprehensive business tax reform is clearly the best way to address the problems in our tax code that trigger inversions.”...

Happy Workers, Richer Companies?
There is a free lunch in economics, after all. Companies with perks like complimentary meals clearly outperform competitors in the stock market. You can hear it in the game rooms of Google's Chelsea office, smell it from the ice cream shops on Facebook's Menlo Park campus, and see it with yoga mats aligned on the rooftop of OpenDNS: We are living in an Age of Peak Perk. (Some of us, anyway). While it's reasonable to consider benefits like free rental cars and dry-cleaning somewhat extreme, there might be a method to perk-madness. In a 2012 paper, Wharton's Alex Edmans showed that, controlling for factors like industry, firms listed in “100 Best Companies to Work For in America” have outperformed their peers in annual stock market growth by up to 3.8% since 1984. To make sure causality wasn't running the wrong way —i.e.: great stock performance making workers happy—Edmans restricted his study to future returns (e.g.: "by relating satisfaction in December 2001 to stock returns in 2002").

We Don’t Need to End “Too Big to Fail”
The Dodd-Frank Act celebrated its fourth birthday last week, but the House GOP did not come to the party. On July 21, the Republican staff of the House Committee on Financial Services issued a report—called “Failing to End ‘Too Big to Fail’ ”—thundering that the act has sowed the seeds for another round of bailouts by encouraging banks to grow too big to fail. The zillion-page statute has spawned 208 regulations, with at least 190 more to come. Not even liberals have shown much enthusiasm for it. Everyone seems to agree that the law has failed to ensure no bailouts will ever take place again and that the blizzard of regulations is questionable. But the act, while imperfect, was a significant achievement, and the House report’s criticisms are seriously muddled. The report denies that deregulation of the financial industry caused the financial crisis but then blames regulators for weakening rules that limited what risks banks could take.

Sneaky ways food companies make you eat price increases
With food prices rising, food manufacturers are making sure consumers stomach the extra costs. Almost all perishable foods - dairy, meats, fruits and vegetables - have seen price increases because of the drought out West, continued high oil and gas prices and diseases affecting crops or livestock. The Bureau of Labor Statistics says the price of a pound of ground beef increased 16.5 percent to $3.85 in May compared with a year earlier. In the same period, a pound of Navel oranges increased 28.1 percent to $1.34, while a pound of American cheese increased 11.1 percent to $4.51. Food manufacturers rarely want to eat price increases because they don’t want to gamble on whether and when prices will return to normal previous levels. “It might make sense in the short run if one anticipates the cost increase will be temporary, but it’s more difficult to accept in the long run as it will reduce the profits of the company,” said John Gourville, professor of business administration at Harvard Business School.

Obama Talks "Economic Patriotism" and "Corporate Deserters"
President Obama returned to his theme of "economic patriotism" last week, invoking the phrase "corporate deserters" to describe multinational companies that use mergers with overseas firms to reduce their tax liability in the United States. "It's legal, but it's not right," Obama said Thursday in an outdoor speech at the Los Angeles Trade-Technical College. The appearance came at the end of a California campaign trip in which the president spoke at fundraisers for this year's Democratic candidates in congressional elections. "They're technically renouncing their U.S. citizenship," he said of the companies. "They're declaring they are based someplace else even though most of their operations are here. You know, some people are calling these companies corporate deserters." Obama is calling for congressional action against a process called "inversion" by which an overseas subsidiary legally becomes the parent company.

If minimum wages, why not maximum wages?
I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another. So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists? The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. Although the share of income going to the top 1% in the UK fell sharply in 2010, the more up to date evidence from the US suggests this may be a temporary blip caused by the recession. I find the attempts of some economists and journalists to divert attention away from this problem very revealing.

David Beckworth on QE effects & Yanis Varoufakis talks the future of Greece

Southwest Airlines faces $12-million FAA fine over jet maintenance
Southwest Airlines is facing a $12-million fine after air safety regulators said the airline didn't comply with maintenance regulations on its Boeing 737 jetliner fleet. The Federal Aviation Administration is proposing the civil penalty against Southwest. It would be the second-largest fine in FAA history. Since 2006, the agency said in a statement, the airline and its contractor, Aviation Technical Services based in Everett, Wash., have broken rules related to maintenance work while conducting an “extreme makeover” on the aluminum skins of some planes. Two of the planes with known maintenance problems were used for more than 20 passenger flights before the issues were fixed, the agency said. The agency says that Southwest and its contractor were doing the work on the fuselage skins of 44 airplanes to prevent them from cracking. The FAA said the violations were that: Workers applied sealant underneath new skin panels, but then didn’t install all of its fasteners in time for the sealant to be effective,..

Zillow to acquire Trulia for $3.5 billion
For much of the last nine years, Zillow and Trulia have competed in the online real estate listings market they helped create. But after a speedy, six-week courtship, the two are set to combine forces. Zillow agreed Monday to buy Trulia for about $3.5 billion in stock, creating a giant online repository of real estate listings and home values. Under the terms of the deal, Zillow will pay 0.444 of one of its shares for each share of Trulia. Based on Friday’s closing prices, the takeover bid is worth $70.53 a Trulia share, a premium of roughly 25 percent. Together, the two will dominate the traffic for online home listings. Last month, Zillow reported 83 million users, while Trulia reported 54 million — a combined 61 percent of total Internet users for the category, according to the research firm ComScore. “The companies know each other very well,” Spencer Rascoff, Zillow’s chief executive, said. “We’ve been competitors and rivals for nine years, but I’ve always had respect for them.”

Shift to pipe tobacco, large Cigars Saves Tobacco Firms Billions
A 2009 law that raised federal taxes on tobacco products to discourage smoking triggered a market shift to pipe tobacco and large cigars, costing the U.S. Treasury billions in lost revenue, according to a GAO report obtained by NBC News. In some instances, it took little more than a label change to qualify for the lower tax rate, it said. The Government Accountability Office study, which will be the focus of a congressional hearing on Tuesday, found that Children's Health Insurance Program Reauthorization Act (CHIPRA) drove manufacturers and price-conscious consumers to gravitate to pipe tobacco and so-called large cigars because it taxed them at lower rates than cigarettes, small cigars and roll-your-own tobacco. Among what the report labeled "tax avoidance" measures were reclassifying roll-your-own tobacco as pipe tobacco, "with minimal differences in the packaging and the appearance of the tobacco itself," and slightly increasing the weight of so-called small cigars to qualify...

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