To Infinity and Beyond
Research for Online Investors

by John Dalt

8/16/11

Industrial Production numbers came out this morning just before the market opened.  The number was stronger than expected at a 0.9% increase compared to expectations of 0.5%.  One caveat…the number includes electrical production.  How hot has it been?  Over most of the U.S.?  Beware of numbers that can be misleading.  Market futures were off early this morning over GDP numbers coming out of the Eurozone.

Japan released their GDP numbers yesterday which showed shrinkage of 0.3%.  This was better than expected.  Analysts expected a bigger drop because of the earthquake and tsunami.  Germany is the eurozone’s largest economy, but reported growth of only 0.1% in the second quarter. This was down from 1.3% in the first quarter. Eurozone wide GDP growth was only 0.2%.

Fitch reaffirmed the U.S.A.’s triple-A credit rating, with a stable outlook this morning.  According to Reuters, the rating agency warned that the U.S. was falling behind other AAA rated nations on fiscal matters and should show “tangible results” in efforts to reduce the federal budget deficit.

Fitch said an increase in the medium to long-term public debt would likely result in a change in their outlook.  “The rating action would most likely be a revision of the rating Outlook to Negative, which would indicate a greater than 50 percent chance of a downgrade over a two-year horizon.  Less likely would be a one-notch downgrade.”

The congressional “super-committee” of twelve has been appointed by House and Senate leadership.  They are to report a bill to congress by November 23rd cutting $1.2 trillion in cuts to reduce the deficit.  Congress then has until Christmas to vote up or down on the bill, without amendments.  If the committee’s work is not passed by congress and signed by the President, $1.5 trillion in cuts to defense and medicare would automatically kick-in.

The super-committee was created by the Budget Control Act of 2011 that raised the debt ceiling in exchange for $917 billion in cuts.  All cuts in the bill and for the super-committee are scored over the next ten years.  This is done because the Congressional Budget Office projects budgets for ten-years.  It also serves to impress the public with how much money they are cutting, but which can be changed later by congress.

The super-committee is officially known as the Joint Select Committee on Deficit Reduction.  After the Continuing Resolution passed on April 8, 2011, spending for 2011 fiscal year was cut to $3.817 trillion.  The Federal Budget grows by approximately 8% per year under baseline budget rules established in the 1974 Congressional Budget Act.  How large will our Federal Budget be in the future, even with the cuts of $917 billion?

These numbers are compiled from the Congressional Budget Office (CBO) April Budget Outlook, Wikipedia and the CBO August Baseline Adjustment Report (Table 3).

We have used the actual Cuts specified in the Budget Control Act, but they only apply to descretionary spending.  The budget numbers are the total budget, including Social Security, Medicare and Medicaid.

We can also see that “cutting” the budget in Washington is a sham.  Every “cut” is applied to the growth under baseline budgeting.  It is simply slowing the growth of the monster on the Potomac.  Even with the cuts outlined so far, the Federal Budget will almost double in the next ten years.  Cutting another $1.2 trillion is a good goal, but unless the cuts are done in the early years the baseline growth of 8% adds more each year.

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Paris this morning to discuss actions necessary to avert the credit crisis in some eurozone countries from spreading to other countries.  They proposed a eurozone “economic government” with balanced budget amendments required for all members.  They also proposed a financial transaction tax.  They voiced support for defending the euro and a proposal for France and Germany to coordinate their tax structures.  The market was not impressed.  Immediately after their press conference the S&P dropped 23 points.

Headline risk is still alive and well.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top