Oil Heads for Biggest Weekly Decline Since May, Wiping Out Gains for Year
Oil fell in New York, heading for the biggest weekly decline in three months, as investors bet that signs of a slowing economy in the U.S. indicate fuel demand will falter in the world’s biggest crude-consuming nation.
Futures slid as much as 0.6 percent after slumping 5.8 percent yesterday. Oil erased this year’s gains as reports showed a rise in jobless claims last week and a drop in consumer confidence to the lowest in more than two months. A Labor Department report today may show that the U.S. failed to create enough jobs in July to reduce unemployment, according to a Bloomberg News survey.
“What you’re looking at here is concerns about what demand is going to be doing because of the economy,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The result of all this could be slower growth and the result of slower growth is less oil demand.”
Crude for September delivery dropped as much as 50 cents to $86.13 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.35 at 9:11 a.m. Sydney time. The contract yesterday tumbled $5.30 to $86.63, the lowest settlement since Feb. 18. Prices are down 9.8 percent for the week and 5.5 percent in 2011.
Brent oil for September settlement fell $5.98, or 5.3 percent, to $107.25 on the London-based ICE Futures Europe exchange yesterday. The European benchmark contract settled at a $20.62 premium to U.S. futures, compared with a record $22.67 close on Aug. 2.
U.S. Economy
U.S. stocks plunged, driving the Standard & Poor’s 500 Index to the biggest decline since February 2009. The S&P 500 decreased 4.8 percent to an eight-month low of 1,200.07 at the 4 p.m. close in New York.
Applications for jobless benefits decreased 1,000 in the week ended July 30 to 400,000, the Labor Department said yesterday in Washington. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey.
A Labor Department report today may show that U.S. payrolls rose by 85,000 workers after an 18,000 increase in June that was the smallest this year, according to the median forecast of 88 economists surveyed by Bloomberg News. The jobless rate probably held at 9.2 percent after rising in each of the previous three months.
The Bloomberg Consumer Comfort Index was minus 47.6 in the week to July 31, the lowest since May, compared with minus 46.8 the prior period. Confidence among women fell to the lowest level since October 2009, while Americans making more than $100,000 a year were the most pessimistic since November 2009.
U.S. crude oil stockpiles climbed for a second week in the seven days to July 29, according to an Energy Department report on Aug. 3. Inventories increased 950,000 barrels to 354.9 million, the report shows.
Treasury Yields Evoke Eisenhower Era
Treasury Yields Evoke Eisenhower Era on Concern Global Economy Is Stalling
The Dow Jones industrial average plunged more than 300 points and erased its gains for the year as investors grew more concerned about economic weakness in the U.S. and Europe. Photographer: Jin Lee/AP
A trader stands outside the New York Stock Exchange during afternoon trading on August 4, 201. Photographer: Mario Tama/Getty Images
Treasury bond yields are plunging to levels seen in the 1950s on concern the two-year recovery in the world’s largest economy is stalling.
Yields on benchmark 10-year U.S. notes are about 4.3 percentage points below the average over the past 49 years and almost where they were when President Dwight D. Eisenhower began his administration in 1953. The yield, which dropped to 2.40 percent today in New York, reached a record low of 2.04 percent in December 2008 during the global financial crisis.
Investors are piling into Treasuries after the European Central Bank resumed bond purchases and made more cash available to banks to keep the region’s debt crisis from spreading and the Japanese and Swiss central banks sought to protect their economies against declines in the dollar and euro. The Standard & Poor’s 500 Index had its biggest drop since 2009 and markets worldwide have tumbled since a July 29 report showing gross domestic product climbed less than an earlier estimate in the second quarter renewed speculation the Federal Reserve will have to resort to more stimulus measures to avert another recession.
“It’s a clear cut panic,” said Colin Robertson, the managing director of fixed-income in Chicago at Northern Trust Corp., which oversees $300 billion. “Along with European debt concerns, market participants are focusing on the perceived much higher likelihood of a double-dip recession in the U.S.”
Bill Auction
Yields on 10-year notes dropped 21 basis points, or 0.21 percentage point, to 2.41 percent at 4:38 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 1 28/32, or $18.75 per $1,000 face amount, to 106 6/32.
Two-year note yields fell eight basis points to a record low of 0.25 percent. The yields on 10-year notes fell to within 2.16 percentage points of two-year securities, the narrowest since November.
“There’s this fear of stall speed,” said Mohamed El- Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in an interview on Bloomberg Television yesterday. “If a plane’s not going fast enough, it ends up by coming down.”
Rates on one-month bills traded at negative 0.005 percent and the Treasury sold $20 billion of 10-day cash management bills at zero percent as investors were willing to lend the government money for free in exchange for the promise of getting back their principal.
Stocks Stumble
“It’s signaling a flight to safety,” said Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch in New York, on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “Even with the Treasury market as a weakened safe-haven market, it still gets the safe haven money.”
The S&P 500 fell 4.8 percent, dropping more than 10 percent drop from its April 29 peak. The MSCI All-Country World Index slid 4.3 percent. Oil plunged 6.2 percent to $86.27 a barrel as all 24 commodities tracked by the S&P GSCI Index declined. Gold futures retreated from a record.
“It’s a general fear environment,” George Strickland, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management Inc., which oversees about $84 billion, said in a phone interview.
The U.S. faces a 50 percent chance of a return to recession, said Martin Feldstein, a Harvard University professor and a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said Aug. 2 on Bloomberg Television.
Eisenhower Era
The 10-year yield remained below 3 percent from the third quarter of 1953 through the second quarter of 1956, and dipped below that level again in 1958 as Eisenhower grappled with an economy that fell into a 10-month recession in 1953, an eight- month contraction in 1957 and another 10-month slowdown in 1960.
Bond yields began a 20-year climb after the end of the last Eisenhower recession in 1961, reaching a peak at 15.8 percent in 1981 as Fed Chairman Paul Volcker raised the central bank’s target rate for overnight loans between banks to 20 percent to contain surging inflation.
Signs of an economic slowdown have emerged as the federal government begins moving to rein in deficits. President Barack Obama signed legislation on Aug. 2 that threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The compromise defers decisions on the nation’s finances to a bipartisan panel of lawmakers and may reduce government deficits only modestly while slowing economic growth.
Payroll Report
“If there’s a 50-50 chance of recession risk, then you have to think there’s a 50-50 risk of deflation, then yields should be even lower than today,” said Chris Low, chief economist at FTN Financial in New York.
Payrolls climbed by 85,000 workers after an 18,000 increase in June that was the smallest this year, according to the median forecast of 86 economists surveyed by Bloomberg News before a Labor Department report Aug. 5. The jobless rate held at 9.2 percent after rising in each of the previous three months.
The unraveling economy and unemployment higher than 9 percent may spur Fed officials to consider steps to shore up the recovery when they meet at Jackson Hole, Wyoming in August. Fed Chairman Ben S. Bernanke first signaled the central bank may undertake additional bond purchases, known as quantitative easing, or QE2, at the Economic Policy Symposium a year ago.
QE3 Speculation
“The Fed’s hurdle for QE3 is lower at this point than it was at the end of June at their last meeting,” Tom Higgins, global macro strategist in Boston at Standish Mellon Asset Management Co., which oversees about $85 billion in fixed-income assets, said in a telephone interview. “That we can go into a recession and come out into a recovery in normal business cycle fashion is less likely, and the reason is that the Fed has fewer tools to address the downturn and Congress is currently tightening fiscal policy.”
Interest-rate futures signal traders are pushing back expectations for when the Fed raises its target for overnight loans between banks to 2013. The Federal Open Market Committee has kept its target rate for overnight loans in a range of zero to 0.25 percent since December 2008.
ECB purchases of Irish and Portuguese bonds haven’t stamped out investor concern on the 21-month crisis spreading to Italy and Spain, whose yields soared to euro-era highs this week. European officials are trying to put a firewall around Europe’s third and fourth-largest economies to avoid them being forced into seeking external aid.
‘Inkling of Growth’
The yen dropped by the most since October 2008 against the dollar after Japan sold its currency to stem gains that threaten the nation’s economic recovery. The Swiss central bank unexpectedly cut interest rates yesterday and said it will increase the supply of francs to money markets to curb the “massively overvalued” currency.
Investors have snapped up the yen and the franc as signs emerge that the global economy is slowing, said Boris Schlossberg, director of research at online currency trader GFT Forex in New York.
“To a great extent this is all a function of weak dollar policy and also a function of slowing U.S. fundamentals,” Schlossberg said in a telephone interview. “The market needs to perceive that the U.S. has an inkling of growth.”
World Market Rout Is a Loud No-Confidence Vote in Global Leadership
World Market Rout Is a Loud No-Confidence Vote in Global Leadership: View
Photographs by: Scott Eells, Prashanth Vishwanathan, Tim Boyle; Illustration by Bloomberg View
Global markets have issued a vote of no confidence in the management of the world’s two largest economies, the U.S. and the euro area. To regain credibility, leaders on both sides of the Atlantic need to recognize the magnitude of the crisis they face.
The outlook reflected by the market rout is not encouraging, coming as it does after European and U.S. officials thought they were doing enough to fix their similar -- and overlapping -- fiscal problems. The U.S. is growing at a rate too slow to withstand a serious shock, and that shock could easily come from Europe’s resurgent financial crisis. So far, politicians’ efforts have been far too timid to convince the world that they have the situation under control.
This week’s deal to raise the U.S. debt ceiling is a case in point. Given the exceedingly weak recovery, the U.S. government should stand ready to provide more stimulus. To prevent larger deficits from harming its credit standing, the U.S. must also convince investors that it is capable of putting its long-term finances on a sustainable path.
Instead, partisan brinkmanship has undermined confidence. The deal that Congress and the White House ultimately struck doesn’t come close to solving the government’s long-term problems, but threatens spending cuts that could weigh heavily on economic growth in the short term.
Lacking Urgency
Europe’s leaders have also lacked urgency. Markets need to see that German Chancellor Angela Merkel, French President Nicolas Sarkozy and other officials can rise above national politics to fix the euro area’s glaring flaws, which include the lack of a unified fiscal authority. Instead, a series of half- measures has mainly served to exacerbate the crisis, allowing its spread to the large economies of Spain and Italy and to banks that hold Europe’s sovereign debt.
Thursday’s moves in the markets gave a taste of how costly politicians’ dithering can be. The drop in world stock markets represents hundreds of billions of dollars in lost value. Italy’s cost of borrowing, as measured by the yield on its 10- year government bond, rose to a new euro-era high of 6.18 percent.
What needs to be done? Europe’s leaders should demonstrate that they stand together, ready to do what it takes to restore confidence. This would involve issuing jointly backed euro bonds to replace most or all of the debts of struggling governments, and simultaneously recapitalizing banks that would suffer losses from debt restructurings. It also would include setting up a finance ministry with enough taxation power to service the euro bonds and provide stimulus to weaker economies.
Consumer Demand
In the U.S., the government must be prepared to boost consumer demand, and that means putting people back to work. Ideally, a comprehensive plan to fix the country’s long-term finances could be combined with a shorter-term stimulus. President Barack Obama is already promising to pivot from debt talks to a national jobs program. But having just completed punishing negotiations over spending cuts, he has very little hope of finding new money -- and little time to waste.
Barring a major new stimulus program, some steps can be taken. Obama could ask Congress to quickly adopt a jobs tax credit, renew clean energy tax breaks and temporarily waive federal environmental, labor and other requirements that delay public works programs, all moves that would put workers back on private payrolls.
Job Sharing
The president could ask Congress to allow states to channel some of their federal unemployment compensation into job-sharing programs, which have worked well in Germany and a few American states. He could encourage Fannie Mae and Freddie Mac to allow homeowners who are current on their mortgages, but who owe more than their houses are worth, to refinance into lower-rate loans, thus freeing up more cash to spend.
When the Federal Reserve meets on Aug. 9, it should signal that it’s ready to do its part, too. Among the stimulative tools at its disposal: Pledging to hold onto the U.S. Treasury bonds it has accumulated in its quantitative-easing programs, and to reinvest the proceeds from any maturing securities in government debt. It could announce that it plans to keep its key interest rate near zero for a longer, more defined period. It could lower the 0.25 percent interest rate it pays banks that park excess reserves at the central bank, to prompt more lending and investing. And it could replace the shorter-term securities it holds on its $2.9 trillion balance sheet with longer-term ones, to push down those rates as well.
Ultimately, markets may force politicians and policy makers to implement all these measures and more. The world will be much better off if they find the will to get ahead of the curve.
Japan Stocks Plunge
Japan Stocks Plunge Most Since March Amid Global Equities Rout
Pedestrians walk past an electronic stock board outside a securities firm in Tokyo on Aug. 2, 2011. Photographer: Kiyoshi Ota/Bloomberg
Japanese stocks plunged the most in more than four months as concern the economy is faltering sparked a global equities rout that drove the Standard & Poor’s 500 Index to its worst slump since February 2009.
Sony Corp., which makes half of its sales in the U.S. and Europe, tumbled 5.1 percent. Toyota Motor Corp., the world’s largest carmaker, retreated 4 percent. Mitsubishi Corp., Japan’s No. 1 trading company, sank 4.7 percent as commodity prices dropped.
The Nikkei 225 Stock Average fell 4.1 percent to 9,266.50 as of 9:07 a.m. in Tokyo, dropping the most since March 15. All 225 members of the Nikkei declined. The broader Topix index plunged 3.8 percent to 794.71.
“It’s a panic attack,” said Prasad Patkar, who helps manage the equivalent of $1.7 billion at Sydney-based Platypus Asset Management Ltd. “There was an expectation that resolution of the U.S. debt-ceiling issue would trigger a relief rally. It looks like everyone forgot about the weakness in the underlying economy.”
Tax Reform's Moment?
Tax Reform's Moment?
Where else is the growth going to come from?
STEPHEN MOORE'Let's go with the radical approach." That's what then-Senate Finance Committee Chairman Bob Packwood exclaimed to his top tax aide during a legendary two-pitchers-of-beer lunch at Washington's Irish Times in the spring of 1986. They were trying to figure out how to save Ronald Reagan's dream of a sweeping tax overhaul that appeared dead in the Senate. That lunch changed history.
By going "radical," Mr. Packwood meant a wholesale restructuring of the tax system. His plan was to slash the 50% top tax rate to 28%—which was far lower than even the 35% rate Reagan had proposed—terminate all but the most sacred deductions, and go to war with the high-powered corporate lobbyists on K Street. And miracle of miracles, "radical" carried the day in one of the most improbable legislative victories in a generation. A majority of Republicans and Democrats in both houses voted for imposing the lowest tax rates since the 1920s. This was Congress at its very best.
Is it time for another 1986 moment? When I asked that question to the people who could make it happen, they were hardly encouraging. "No way. It won't happen," says Wisconsin Republican and House Budget Committee Chairman Paul Ryan. "There's not enough time and the debt rules would make us raise taxes," he points out. Other naysayers complained that the war between the two parties has made the atmosphere in Washington too poisonous.
But don't be so sure. What everyone inside and outside the Beltway wants to know, given the recent economic funk, is: Where will the growth come from? Certainly not from another round of failed Keynesian spending blowouts. The White House's lame call for an infrastructure bank this week is merely a stimulus redux, and Republicans have seen enough "shovel ready projects" to last two lifetimes. Nor will Republicans, in an era of $1.5 trillion deficits, get very far pitching pro-growth tax rate cuts, a la Reagan 1981, without major offsetting loophole closings. This omelet is going to require cracking some eggs.
Rep. Dan Rostenkowski (left) with Sen. Bob Packwood, June 1, 1986.
There are other reasons to think the stars might finally be aligning for another 1986 triumph. Last year the White House tax-reform commission headed by former Fed Chairman Paul Volcker denounced the corporate income tax structure and warned that the "growing gap between the U.S. corporate tax rate [39%, a combination of state average and federal rates] and the corporate tax rates of most other countries [25%] generates incentives for U.S. corporations to shift their income and operations to foreign locations." Treasury Secretary Tim Geithner was even more succinct when he said earlier this year: "Everybody who looks at the current system says we can do better than this." Amen.
Meanwhile, everyone seemed to miss the political breakthrough by the much-maligned bipartisan Gang of Six, which proposed to end tax loopholes and lower the top income tax rate to between 23% and 29%. For the first time since 1986 we have Democrats—even liberals like Dick Durbin of Illinois—endorsing lower tax rates and finally acknowledging that soaking the rich with confiscatory taxes is an economic loser. "We understand getting these rates down is an important economic goal," says Democrat Mark Warner of Virginia, another one of the six.
Mr. Warner is right on the economics. In the early 1990s, Dale Jorgenson, then-chair of Harvard's economics department, calculated $1 trillion of economy-wide efficiency gains from the 1986 tax reforms—and that was when a trillion was still a lot of money.
There's an old saying that when dollar bills are lying on the sidewalk, someone picks them up. The big question is whether Barack Obama has the good sense to do that on tax reform. It may save his presidency.
Junking the tax code is one of his last chances to pour growth hormones into a sickly economy and get jobs back before November 2012. For their part, Republicans could use a tax restructuring to tap the Laffer Curve growth effects of lower rates. There's no reason for the GOP to defend special-interest favors in the tax code doled out to the housing industry, nonprofits, the municipal bond sellers, and the green-energy lobby. The value of trading in all those undeserved favors for a 25% tax rate would be enormously positive, and by growing the economy, would lower the deficit.
I asked Jeffrey Birnbaum, the co-author of the indispensable book on the 1986 Tax Reform Act, "Showdown at Gucci Gulch," how good policy managed to triumph over the legions of special interests. "Tax reform was like a Phoenix," he explained. "Every time it seemed dead, someone pulled it out of the ashes." Could it happen again? "Well back then," he replied, "people in both parties understood the income tax was broken and unfair." How is that different from today?
Mr. Moore is a member of the Journal's editorial board.
Stocks Nose-Dive
Stocks Nose-Dive Amid Global Fears
Weak Outlook, Government Debt Worries Drive Dow's Biggest Point Drop Since '08
TOM LAURICELLAStocks spiraled downward Thursday as investors buckled under the strain of the global economic slowdown and the failure of policy makers to stabilize financial markets.
The selling began in Europe and continued in the U.S., where stocks plunged from the opening bell. The Dow Jones Industrial Average posted its worst point drop since the financial crisis in December 2008, falling 512.76 points, or 4.31%, to 11383.68. Oil and other commodities were also hammered. Even gold was a safe haven no more as prices fell. Tokyo's market slid on Friday morning, falling more than 4% in early trading.
Stocks plunged, driving the Dow Jones Industrial Average down more than 500 points, as investors worried about the global economy and Europe's debt crisis. Paul Vigna has details.
"It was an absolute bloodbath," said John Richards, head of strategy at RBS Global Banking & Markets.
There was no one single catalyst for the downdraft, traders said. Rather it reflected multiple concerns that have mounted over the past month and came to a head this week. Worries about a U.S. default, settled by a last-minute fix to lift the country's debt limit on Tuesday, have given way to broader fears about the failing health of the domestic economy. That will lead to close scrutiny of Friday's jobs report.
Investors are also questioning how much longer the recent run of strong corporate earnings can continue. Amid other troubles, corporate profits have been a rare bright spot.
In Europe, leaders are grappling with a widening debt crisis, which started in Greece and spread to Italy and Spain. An earlier bailout of Greece now appears insufficient. There are growing concerns about European banks and their heavy investments in the debt of countries with big fiscal problems.
The nervousness among investors is being reflected in the extraordinary rally in U.S. Treasury bonds, regarded as a safe haven for investors in times of turmoil. The yield on the 10-year Treasury note, which falls as prices rise, tumbled to just 2.46% at 3 p.m. Thursday, the lowest since October of last year.
The carnage in stocks was the Dow's ninth down session in the past 10. With losses totaling 11.1% from its 2011 high hit in April, the index has entered official "correction" territory.
The Dow's decline was its biggest point drop since the market was plunging amid a crisis of confidence in banks in late 2008. On Thursday, the focus has shifted to world governments, which are laboring under mountains of debt and have diminished ability to prop up the financial system.
"I'm just sorry to see my retirement going to hell," said Robert Slocomb, an 82-year old retired Kodak optical engineer in Rochester, N.Y. Mr. Slocomb blamed the government's handling of the economy for the stock market's woes.
In the first half hour of trading Thursday the Dow lost 1.3% and by noon the widely followed benchmark was down more than 2.7%. Most of the selling appeared to be from longer-term stock investors, rather than hedge funds, which have mostly been in a defensive mode for the last several months.
For a time during the afternoon stocks stabilized with traders wondering if bargain hunters had come on the scene. But the selloff soon resumed.
Wall Street firms had little appetite for holding stocks and other riskier investments on their books, and their traders dumped stocks into the closing bell. The Dow lost more than 155 points in the last hour of trading.
Some traders said the plunge put the market more in sync with the state of the U.S. economy. "The market sold off 500 points, it's not a crash, it's a small correction," said Stephen Holden, a floor trader at the new York Stock Exchange. "It's overdue…I think there's more to go."
"In this environment, no one wants to catch a falling knife," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.
Volume on stock exchanges has spiked in recent days, a sign that more investors are piling into selling. For much of the year, volume had been weak as many investors stood on the sidelines. Some 7.5 billion shares changed hands in NYSE composite trading, the highest since May of last year, when investors were also fretting about European debt and the U.S. economy.
The Chicago Board Options Exchange Volatility Index, known as the "fear gauge," broke above 30 for the first time since March 16, rising 35% to 31.66. A higher reading suggests increased volatility in markets, and nervousness among investors. Still, that's a far cry from the depths of the 2008 crisis, when the so-called VIX almost reached 100.
Investors have grown frustrated with efforts by policy makers to deal with the challenges posed by big overhangs of corporate and consumer debt. "Their solutions are too late and no one is taking a longer-term, more-considered approach to problems," said Benjamin Segal, head of global equities at asset manager Neuberger Berman.
In the U.S., investors fear the economy could be heading for a double-dip recession. The Federal Reserve is seen as limited in its ability to provide yet another shot in the arm. Interest rates are already essentially at zero and two rounds of quantitative easing, in which the Fed pumped $2.3 trillion into the financial markets, failed to get the U.S. economy strong enough to stand on its own. Meanwhile, given the push to trim deficits, significant economic stimulus from the U.S. government is seen as unlikely. "You look at monetary and fiscal policy and it's very hard to find a powerful lever that somebody can pull," said Mr. Richards of RBS.
Investors have been equally underwhelmed by the official response to the European debt crisis. That was the case on Thursday when the European Central Bank outlined steps to shore up confidence in European banks in the face of deteriorating conditions in the bond market.
The ECB also conducted purchases of bonds, traders said, but that may have backfired. Traders said the ECB bought Irish and Portuguese bonds, but didn't appear to buy bonds from Italy or Spain, countries which are seen as most at risk from the spreading crisis.
The ECB's efforts came on the heels of the steps by the Swiss National Bank and Bank of Japan to halt the rise of the Swiss franc and Japanese yen, respectively. Investors weren't convinced that either moves will have much long-term success. "There's the idea that they are pushing against a string," says Robert Lynch, head of currency strategy for the Americas at HSBC.
Debt Deal is a Blank Check
Debt Deal is a Blank Check
By supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians. But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, "Don't Be Fooled by Political Posturing" from July 9th).
Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.
More importantly, none of these "cuts" are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?
The Congressional Budget Office currently projects that $9.5 trillion in new debt will have to be issued over the next 10 years. Even if all of the reductions proposed in the deal were to come to pass, which is highly unlikely, that would still leave $7.1 trillion in new debt accumulation by 2021. Our problems have not been solved by a long shot.
Essentially, the structure announced today allows both political parties to talk about reform without actually changing anything. To underscore that point, the deal involves less than $25 billion in immediate cuts! This is less than a rounding error in a $3.8 trillion dollar budget. This is politics as usual.
Even these estimates are based on rosy economic assumptions that have no chance coming to fruition. For example, for the current fiscal year, Washington estimates GDP growth at 4%. But actual growth for the first half of 2011 is below 1%! If our government is over-estimating our current year's growth by a factor of 4, how accurate could their forecasts be ten years into the future? A more honest assessment of likely economic performance would reveal future budget deficits spiraling out of control.
Some might say that the primary goal of this deal was to avoid the dreaded credit rating downgrade. Unfortunately, the deal addresses none of the ratings agencies' stated grievances. If they fail to follow through on their downgrade warnings, the rating agencies will lose whatever credibility they have left. For political reasons, the downgrades may not come right away, but they are inevitable. But as has happened so often in the past, by the time the tardy downgrades arrive, the market will have likely already rendered its verdict.
The debt ceiling itself merely represents a self-imposed limit on US borrowing. Since Congress can vote to raise the limit, its existence has been more of a political nuisance than an actual barrier. The operative factor is not how much we allow ourselves to borrow, but how much our creditors are willing to lend. That type of ceiling can't be raised by an Act of Congress. Once our creditors come to the conclusion that they have lent beyond our capacity to repay, they will be very reluctant to lend more. As trillions in short-term Treasuries mature, the dwindling pool of buyers will demand higher rates of return to compensate them for the risk. But our government is in no condition to afford those higher rates without gutting the rest of the budget.
Last week, it was revealed that despite Obama's warnings that a default would immediately occur if the debt ceiling were not raised, the administration had already agreed to prioritize interest payments to avoid default. Such preferential treatment is only possible because current interest rates are so low and debt service represents only about 10% of total revenue. When the pool of willing lenders evaporates, net interest payments could quickly consume more than 50% of federal revenue. This is particularly true since rising rates will also plunge the economy into a recession that will substantially reduce revenues - even as debt payments surge.
At that point, prioritizing interest payments would mean deep sacrifices in the rest of the federal budget - including Social Security, Medicare, and the Armed Forces. The question then becomes: will US politicians really be willing to take the political heat that would emerge from prioritizing interest payments to foreign creditors over payments to American voters?
I expect that as soon as our creditors decide that they are no longer willing to lend to us at ultra-low rates of interest, we will refuse to repay what they have already lent.
Besides default or major cuts to domestic spending, inflation provides the only other means for the government to deal with this intractable crisis. Because of its political palatability, inflation is, in fact, the most likely outcome. Once we go down that path, we risk high inflation turning into hyperinflation, which would decimate the remainder of our economy. So, as our leaders congratulate themselves for saving the nation, the reality is that they may have just sold it down the river.
Get Rich, Pay Lower Taxes, Boost Federal Revenue
Get Rich, Pay Lower Taxes, Boost Federal Revenue: Amity Shlaes
To clean out and start over right.
That’s the great impulse that Americans act on each spring. We tell ourselves there’s nothing wrong with this process repeating annually. In religion, the cycle is always there: sin, repent, purge. These days the impulse gets its most vivid individual expression in the realm of personal health: “sin, repent, spinning class.” Or “sin, repent, detox drink.” The worse the year, the greater the repentance required.
Spring also brings a collective impulse to reform. That usually gets expressed in a resolve to make the tax code more progressive. Some of the demand for more progressivity is revenue-related. The government needs the money, or thinks it does.
But some of progressive reform is just the annual expression of that spring impulse to make life clean, fair and right. To “maintain or increase the progressivity of the tax code” is, for example, one of the recommendations being quoted right now from the report by President Barack Obama’s bipartisan National Commission on Fiscal Responsibility and Reform.
Ritual isn’t always logical, however. It can be destructive, precisely because it repeats. Too much sin-and- repentance, and even we don’t believe ourselves any more. Too many detoxes, and you’re poisoning yourself.
Nowhere is this clearer than in the case of tax progressivity.
Graduated Rates
The first modern expression of the progressive impulse came in the springs of the early part of the last century, when the Treasury Department fashioned the Form 1040. The tax formula was progressive, with a graduated rate structure going from 1 percent to 7 percent. Since only a few people paid federal income tax, that rate structure was a model of progressivity.
But of course it wasn’t. Making the code progressive felt good to lawmakers, just the way the detox does. World War I and its costs strengthened the general mood of sacrifice. So they made the code even more progressive, taking the top rate up all the way into the 70s.
The results taught lawmakers a quick lesson. Raise the rates too high, and you get a perverse result: less money from the rich than you expect. Lower the rates, and the rich pay a greater share of the taxes. Treasury Secretary Andrew Mellon found that when he cut rates down to 25 percent, he got the most revenue of all.
But logic couldn’t always suppress instinct. Each year, lawmakers felt that need to demonstrate they were increasing progressivity even more than they felt the need to get an optimal result. Each year that need had to find expression. Within a generation the top rate was back in the 70s, reaching 91 percent in the 1950s. This proved inefficient. Taxpayers found ways around the statutory rates. Again, the reform didn’t work.
Progressive Outcomes
In more recent springs, both Democrats and Republicans have developed a compromise repentance to accommodate some reality. The lawmakers discovered, as Mellon had, that by talking about helping the poor, but keeping the actual top rates lower, they got an outcome that was splendidly progressive.
In 1980, the top 1 percent of earners paid 19 percent of income taxes, and the bottom half of earners paid 7.1 percent. A decade later, with a lower maximum rate, the top 1 percent paid 25 percent of taxes, while the bottom earners paid just 5.8 percent. By 2008, top earners paid 38 percent of taxes, the bottom half 2.7 percent.
What about today? It might make sense to cut taxes even more, down to, say, a top rate of 20 percent. Then the rich would pay all the taxes. And there would be more revenue, as foreigners came in.
Burden of Rich
But here tax sanctimony gets in the way of tax reform. In a progressive rate structure, the rich almost always get bigger tax cuts, because their rates are higher to begin with. So their cuts sound unfair. The more progressive a tax structure, the more unfair its dismantlement appears.
The reality is that this year in tax terms, the U.S. isn’t a sinner. The country is already clean. The very rich shoulder far more of the collective burden than their share in the population warrants.
Yet in his recent debt speech, Obama clearly wanted to make the point that the rich don’t pay their share of the collective costs of government, whatever the data showed. So he retreated to another datum: the share of individual income that a taxpayer gives up in taxes.
“At a time when the tax burden on the wealthy is at its lowest level in half a century,” the president said, “the most fortunate among us can afford to pay a little more.”
World of Problems
That ratio is indeed lower than at some other points. You can find a way to make America look like a sinner even if it isn’t sinning. Tax increases may be appropriate as a last, worst resort. But we are not at the last, worst moment this spring.
Why then did Obama ignore the record of lower rates bringing more revenue? Because there’s a lot wrong in the world, starting with the federal debt, and continuing on to joblessness, war in Libya, and Japan’s nuclear crisis. So the general urge to purge is greater, and it’s being channeled into tax sanctimony. But that doesn’t mean this particular ritual is worth honoring.
(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of “The Forgotten Man: A New History of the Great Depression,” is a Bloomberg News columnist. The opinions expressed are her own.)
Balanced-Budget Bill Fails Fiscal Test
Balanced-Budget Bill Fails Fiscal Test: Stephen L. Carter
At a Washington event in the early 1990s, I happened to find myself seated beside an official fairly high in the White House of George H.W. Bush. We got to chatting, and he waxed poetic about a constitutional amendment requiring the federal government to balance its annual budget.
He even had a new draft in his pocket, words he had scribbled on a cocktail napkin. I don’t recall the precise language, but his version was short, and began something like this: “Except in time of war, the federal government shall not ..."
A free and frank exchange of views ensued.
Fast-forward to today: Republican lawmakers want a quick vote on a balanced-budget amendment (or BBA, as the cognoscenti, I am sad to report, are now calling it). This is an understandable demand given Congressional Budget Office estimates of near trillion-dollar deficits into the near future.
Yet, while I remain skeptical of objections that the amendment would lead to fiscal disaster, I do think its opponents are right on the merits. The amendment is a poorly designed cure for a disease of complex causes.
The American tradition of deficit spending goes back to the Revolutionary War, when the colonies financed their rebellion with borrowed money. Shortly after the constitutional system replaced the Articles of Confederation, the federal government took on the debts incurred by the states, an act that sent the new nation’s debt soaring, by most estimates, to a third or more of GDP.
Founding Fiscal Hawks
That era had its own fiscal hawks, and providing a way to pay down the debt was hotly debated at the constitutional convention. In 1798, Thomas Jefferson wished the Constitution had “an additional article taking from the federal government the power of borrowing.”
The founders’ bills were paid off just in time to start the whole merry-go-round again when the Civil War broke out. Although some historians attribute the Union victory to its superior creditworthiness -- the South faced far higher borrowing costs -- the accumulated debt nearly bankrupted the winning side, and took another half century to retire.
Abraham Lincoln himself wondered how the U.S. would ever pay back the money borrowed to finance the Civil War, fretting that the conflict “has produced a national debt and taxation unprecedented, at least in this country.”
And in the late years of the 19th century, a worried Congress adopted laws restricting the purposes for which the self-governing territories of the West could take on debt, limiting their borrowing to no more than 1 percent of the value of taxable property within their borders.
It was inevitable that the worries would eventually lead to efforts to amend the Constitution. The first came in 1936, when Representative Harold Knutson, a Minnesota Republican, introduced an amendment to limit federal borrowing. It and its successors have all failed, although several proposals in the 1980s and 1990s passed in one chamber of Congress.
Beyond political support, however, the real problem with a balanced-budget amendment is that it would fail to do what its supporters claim: Keep the nation’s fiscal house in order.
Consider Section 1 of a current bill: “Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a rollcall vote.”
Sounds impressive, until one parses it. We all think we know what a fiscal year is, but legislatures have redefined the term constantly for budgeting purposes. To take the most obvious example, the federal fiscal year begins on Oct. 1. But until 1976, the federal fiscal year began on July 1, and Congress has often extended the fiscal year through a continuing resolution. Businesses are allowed in some circumstances to use a 53-week fiscal year.
Subject to Manipulation
Some experts argue that the fiscal year should be 18 months to allow for smoother budgeting. In short, the amendment is built on a concept both ill-defined and subject to manipulation.
Likewise, consider the rule that outlays must not exceed receipts. Another section defines “total receipts” as “all receipts of the United States Government except those derived from borrowing” -- in essence, taxes, tariffs and fees. “Total outlays” are “all outlays of the United States Government except for those for repayment of debt principal.”
Here’s a quick and easy way for a future Congress to game those definitions: Set up an independent, nonprofit, nongovernmental corporation that issues bonds, for the avowed purpose not of raising revenue but of giving Americans a place to invest their money safely. We might call our new agency the Federal National Bond Association, or Fannie Bae.
Fannie Bae’s bonds would not be quite as cheap as Treasuries, but as Treasuries would no longer exist, these would presumably be the next best thing, because of their implicit federal guarantee. Most of the money Fannie Bae raised in the market would then be turned over to the Treasury, which would place it in a trust fund. (A small part would be kept to run Fannie Bae.) The funds are now just like Social Security -- a “receipt” within the meaning of the amendment -- and “outlays” may therefore rise by that amount.
Now, you might protest that the establishment of Fannie Bae would seem to vitiate the purpose of the amendment. But the federal government gets around constitutional provisions all the time. (Remember the congressional power to declare war?)
Maybe the courts would strike down Fannie Bae, but to imagine them doing so is to accept the likelihood that federal judges would have final say over fiscal policy. As Walter Dellinger, a solicitor general in the Bill Clinton administration, warned recently in the New York Times, “the process of enforcing” such an amendment “would be uncertain and perilous.”
Counting the Receipts
Although one is tempted to respond that this quality, alas, does not differentiate the proposed amendment from any other provision of the Constitution, the more provisions we add, the greater the possibilities for, let us say, unpredictable interpretations.
Furthermore, for the amendment to operate, someone -- presumably the Congressional Budget Office -- would have to figure out each year what the total receipts and total outlays probably will be. Every corporation has to do the same thing, but the prospect of such review proved too much for even the fiscal watchdogs of the Wall Street Journal editorial board: “We doubt the historic 1981 Reagan tax cuts within the Kemp- Roth bill, once subjected to Congress’s revenue-neutrality accountants, could have survived the balanced budget mandate.”
This objection hints at the biggest problem with the proposed amendment: It seeks to enshrine as fundamental law a single theory about the relation of fiscal policy to the operation of the U.S. economy. And this would be a grave mistake.
In microeconomics, the theory of supply and demand is rigorously worked out and often tested. Despite soft spots, it remains the heart of every introductory economics class, precisely because it is concise, understood and essentially correct.
Macroeconomics is of a very different character. It is a field rich with theories difficult to test. One difficulty is trying to model the entire economy, and no matter how many variables are held constant, there is always something important unaccounted for. This helps to explain why economists are all over the map. Keynesians and supply-siders alike can all present data favoring their theories. That is why politicians and the economists whose work they rely on should approach the subject, as Harvard economist N. Gregory Mankiw has put it, with humility.
So the balanced-budget amendment, whatever its political popularity, possesses the following difficulties: It is poorly written and easy to circumvent; it invites judicial control of the appropriations process; and it pretends to know more than we can confidently say we do about how the economy works. For an amendment to the Constitution, those are just too many deficits.
Spanish-Language El Clasificado
Spanish-Language El Clasificado Balances Print Growth With Online Push
Martha de la Torre and Joe Badame run El Clasificado, the largest free, weekly Spanish- language classified print publication in the U.S., reaching more than 1.5 million people. Photographer: Pablo Scarpellini/El Classificado via Bloomberg
Growing up in East Los Angeles, Martha de la Torre spoke South American-influenced Spanish, which often elicited playground taunts from her classmates, mostly Mexican- Americans. Midway through elementary school, she swore she’d never speak Spanish again, except to her Ecuadorean grandmother.
Today she runs El Clasificado, the largest free, weekly Spanish- language classified print publication in the U.S., reaching more than 1.5 million people. It’s the flagship title of the thriving 130-employee publishing company de la Torre and her husband, Joe Badame, started 23 years ago for Southern California’s Latino population.
In June, the couple rebranded, changing their company’s name from El Clasificado to EC Hispanic Media to reflect the growth of their five online editions as well as their geographic expansion into the agricultural heart of Central California. With 2010 revenue of $16.3 million, the business is on track to hit $19 million this year, de la Torre says.
“El Clasificado is a marvelous niche product,” says Peter M. Zollman, founding principal of marketing firm Advanced Interactive Group in Altamonte Springs, Fla., which publishes Classified Intelligence Report. “It takes a long time to win [the Hispanic market’s] trust and loyalty, but once you have it, you keep it.” While online sales for classifieds in the U.S. have more than doubled to about $6 billion since 2006, Zollman says, the overall industry has shrunk to about $15 billion, half its 2006 total, due to the economic downturn and the collapse in classified revenue at most daily newspapers.
Bloomberg contributor Karen E. Klein spoke recently to de la Torre and Badame, an Italian-American who speaks even less Spanish than his wife, about their strategy for future expansion. Edited excerpts of their conversation follow.
Karen E. Klein: So many print publications have seen their readership and distribution decline over the past decade. Is that happening to El Clasificado?
Martha de la Torre: For years, we’ve been in fear of print disappearing just like everyone else. We ended 2010 principally a print company. Print ads account for 98 percent of our revenues. But we’ve also moved into digital, which accounted for about 1 percent of our revenue in 2010. Year-to-date, digital ads have grown to about 5 percent of our total revenue.
Joe Badame: We’re not going away from print. Our print revenues increased close to 16 percent last year and our print circulation is up 10 percent from 2010 to 2011. The demographics are working in our favor.
Q: The latest immigration data have shown that fewer Mexicans are emigrating due to improved opportunities in Mexico and the economic downturn in the U.S. How will that affect your success as a Spanish-language company?
Badame: It will have a long-term effect on us, maybe five to 10 years out. But we have such a big market of Hispanics here already; there are about 35 million in California and we’re still at 455,000 circulation so we haven’t come close to saturating the market. And the birth rates are much higher, so we don’t expect it to have a huge impact immediately.
De la Torre: When we started out, I always thought El Clasificado would stop existing around 2005. I was wrong.
Q: Have you found that your readers are migrating online?
De la Torre: Digital is attractive to a lot of Latinos who have a little more education and income and are outside of densely Hispanic markets.
Digital allows us to find additional niches, like the insurance company or lawyer who will advertise online. The problem is that our print reps are not interested in selling digital ads because they can still sell print and it’s more lucrative. An average digital sale might be $100 a week, where a print account will average $500 to $1,000 a week. Online is also harder to explain to our clients, who are very focused on print and not as advanced technologically.
Badame: A lot of our clients don’t believe that our readers are online. But our online traffic results for El Clasificado are showing that we have 6 million page views a month, from 400,000 unique visitors, with 20 percent of them coming through mobile devices.
De la Torre: I was at one of our biggest clients a year ago and they said, “Our customers are not online.” But I started doing keyword searches and I showed them that they are getting online now. So we gave them a free online classified so they could try it out. We’re putting all our efforts forward. We operate from fear and always look to the future, continually trying to recognize where our weaknesses could be.
Q: Both of you have financial backgrounds. How did you become entrepreneurs?
De la Torre: We were both CPAs, we met at Arthur Young & Co. in 1983 and started dating in 1985. I specialized in banking and the oil and gas industry and then I started getting requests to do due diligence on Hispanic media companies. I was alarmed at how much money was being spent on these companies that weren’t very impressive.
So I started thinking about doing something like the PennySaver [a free weekly classified publication] but for Latinos. I made a business plan but I didn’t want to be an entrepreneur. I hoped someone would come along to run the thing so I could do what I do best, which was be a financial person.
But we started the company in 1988 after Joe raised money from our friends and family. We got married in 1991. Joe kept his day job to keep us afloat for all the years we didn’t take salaries. He joined us full-time in 2000.
Badame: We hit bottom in 1992 due to the recession, and ever since we’ve grown every year from 8 percent to 35 percent. Even during this last recession, we were growing by 16 to 17 percent.
Q: What changes did you make?
De la Torre: One major thing is that we changed our distribution model. My business plan was based on a bulk-mail, home-delivery model. We stuck to that for three or four years -- until we almost went bankrupt.
Q: Why did you stay with something that wasn’t working?
De la Torre: It took us a long time to finally get it. It was the early ‘90s, we were in recession and it seemed like nothing worked. It was hard to figure out what was going wrong.
My mother and father were distributing our magazines in local Hispanic stores. So we tried putting distribution racks in about 150 small business locations, and we finally realized we were getting better results that way because Latino shoppers go to the market every day for fresh food. Today we have close to 22,000 locations where we drop 15 to 400 magazines each.
Badame: We started dropping magazines at a location and then we’d sit in our car and watch what happened for a couple of hours. We realized that with home delivery, we were giving the magazine to people who might not want it. They might just throw it away. When it’s sitting in a rack, only the people who want to read it actually pick it up.
Q: What’s next for EC Hispanic Media?
De la Torre: For 2011, we’re going to do more geographical expansion and focus on more training and hiring. We’re also adding some new products and hope to have new online revenue to add to the 5 percent we’re currently getting from online.
Badame: We have a short-term goal to ramp up revenues to $50 million within five years and a long-term plan to hit $100 million in the next 10 years. We can get to $50 million by 2016 if we maintain our historical [average annual] growth rate of 20.8 percent. The more experience we have, the smaller the numbers seem to look to us. Those numbers would have been huge, and unobtainable, to us years ago.
Oil Erases 2011’s Gains on Economy Concern
Oil Erases 2011’s Gains on Economy Concern
Crude oil wiped out all of its gains for 2011 and natural gas traded below $4 for the first time since April in New York as concern the global economy is weakening sent raw materials prices tumbling around the world. Photographer: Andrew Harrer/Bloomberg
Crude oil wiped out all of its gains for 2011 and natural gas traded below $4 for the first time since April in New York as concern the global economy is weakening sent raw materials prices tumbling around the world.
All 24 commodities on the Standard & Poor’s GSCI Index declined slipped, as a rout in equities drove the Standard & Poor’s 500 Index to its worst nine-day slump since March 2009. Silver dropped 6 percent, gold retreated from a record and wheat slumped the most since June.
“There’s a lot of pessimistic news on the macro-economic front and that’s hitting commodities,” said Michael Wittner, the head of oil-market research at Societe Generale SA in New York and the fourth-most-accurate forecaster for West Texas Intermediate oil among 26 analysts ranked by Bloomberg in the past eight quarters. “If the economy continues to slow, demand for oil will take a hit.”
U.S. consumer confidence dropped last week to the lowest level in more than two months, paced by growing dissatisfaction among women and high earners, a report today showed. The Bloomberg Consumer Comfort Index was minus 47.6 in the period to July 31, the lowest level since May, compared with minus 46.8 the prior week.
Consumer spending dropped in June for the first time in almost two years as savings climbed, Commerce Department figures showed earlier this week. The U.S. economy grew less than forecast in the second quarter after almost stalling at the start of the year, another report from the agency showed.
Commodity Slump
The S&P’s GSCI Index of 24 raw materials fell 3.7 percent to 647.1, the lowest level since June 27. The index is up 2.4 percent this year after being as much as 20 percent higher on April 11.
Crude oil for September delivery declined $5.15, or 5.6 percent, to $86.78 a barrel at 2:24 p.m. on the New York Mercantile Exchange. Futures touched $86.04, the lowest level since Feb. 18 on an intraday basis. Brent for September settlement dropped $5.59, or 4.9 percent, to $107.64 a barrel on the London-based ICE Futures Europe exchange.
“There’s a growing realization that we may be facing a double dip or at least very anemic growth,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “Until the economy shows signs of life, there’s nothing to turn this around.”
Stocks Fall
The Standard & Poor’s 500 Index fell 3.7 percent to 1,213.58 and the Dow Jones Industrial Average declined 3.4 percent to 11,490.81.
The dollar rose 1.4 percent to $1.412 against the euro, from $1.4323 yesterday. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.
“Fear and panic are good words to describe what we’re seeing today,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Anytime markets move this hard there’s been a change in sentiment.”
Copper fell $182, or 1.9 percent, to $9,353 a metric ton on the London Metal Exchange, bringing the drop this year to 2.6 percent. Aluminum fell for 1.7 percent to $2,482 a ton, the seventh consecutive decline and the longest losing streak since January 2009.
“Sentiment has taken its turn for the worse at the moment,” said Gayle Berry, an analyst at Barclays Capital in London. “The markets are very worried about what the implications of fiscal austerity mean for the trajectory of economic growth, and therefore for metals demand.”
Silver Slides
Silver for immediate delivery dropped 5.1 percent to $39.5675 an ounce, the biggest decline since May 11. Platinum fell 3.1 percent to $1,726 an ounce and palladium dropped 5 percent to $756 an ounce, erasing gains for the year. Both metals are used in catalysts to remove exhausts in automobiles, and are more dependent on economic growth than gold.
Gold was little changed at $1,661.43 an ounce after climbing to a record $1,681.72 an ounce earlier today. Prices are up 17 percent this year.
Agriculture was the second-worst sector today after energy. Wheat fell 3.4 percent to $7.245 a bushel on the Chicago Board of Trade. Soybeans declined 1.8 percent to $13.4875 a bushel and corn dropped 1.9 percent to $6.9925 a bushel.
“The world economy is struggling, and that is slowing demand,” Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa, said in a telephone interview.
U.S. Stocks Plunge in Biggest Retreat Since 2009
U.S. Stocks Plunge in Biggest Retreat Since 2009
Traders work on the floor of the New York Stock Exchange on Aug. 4, 2011. Photographer: Jin Lee/AP
Aug. 4 (Bloomberg) -- Barton Biggs, managing partner and co-founder of Traxis Partners LP, talks about today's decline in the U.S. stock market. He speaks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Aug. 4 (Bloomberg) -- Barry Knapp, head of U.S. equity strategy at Barclays Capital, talks about the equity and Treasury markets. Knapp, speaking on Bloomberg Television's "InBusiness With Margaret Brennan," also discusses the outlook for the U.S. economy. (Source: Bloomberg)
Aug. 4 (Bloomberg) -- Dan Ammann, chief financial officer of General Motors Co., talks about the company's second-quarter profit reported today and business strategy. The largest U.S. automaker said net income almost doubled to $2.52 billion, or $1.54 a share, on rising U.S. sales. Ammann speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
U.S. stocks plunged, driving the Standard & Poor’s 500 Index to the biggest decline since February 2009, as concern the global economy is weakening prompted a global rout.
Only three out of 500 stocks in the benchmark measure of American equities rose. Losses exceeded 10 percent for 13 of the companies including Alpha Natural Resources Inc. (ANR) and Gap Inc. (GPS), which fell after the retailer’s sales missed estimates. All 10 S&P 500 groups slumped, led by losses topping 5.3 percent for material, energy and industrial shares. Chevron Corp. (CVX) and Alcoa Inc. (AA) fell more than 5.7 percent as Japan sold its currency, driving down commodities priced in the dollar.
The S&P 500 dropped 4.8 percent to an eight-month low of 1,200.08 at 4 p.m. in New York. It has retreated 11 percent since July 22, the biggest loss over the same amount of time since March 9, 2009, when the bull market began. The Dow Jones Industrial Average retreated 512.61 points, or 4.3 percent, to 11,383.83 today, erasing its 2011 gain.
“It’s unbelievable,” David Joy, Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $693 billion in assets. “The emotional aspect of this is ticking higher. It’s left everybody with this mindset that things are not good. The situation in Europe is getting everyone concerned. We had the impact of the Japan intervention in the currency market. The flight-to-quality trade is going to pick up.”
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
U.S. Department of Defense Contract Awards
U.S. Department of Defense Contract Awards for Aug 01, 2011
Here’s Today’s Department of Defense Contract Awards
ARMY
Oshkosh Corp., Oshkosh, Wis., was awarded a $904,184,088 firm-fixed-price contract. The award will provide for the modification of an existing contract to procure 6,963 Family of Medium Tactical Vehicles. Work will be performed in Oshkosh, Wis., with an estimated completion date of June 30, 2013. The bid was solicited through the Internet, with three bids received. The U.S. Army Contracting Command, Warren, Mich., is the contracting activity (W56HZV-09-D-0159).
Hellfire Systems, L.L.C., Orlando, Fla., was awarded a $159,018,990 firm-fixed-price contract. The award will provide for the procurement of 3,097 Hellfire missiles in containers; 16 Hellfire II guidance test articles; and engineering, equipment, and production services. Work will be performed in Orlando, Fla., with an estimated completion date of Sept. 30, 2014. One sole-source bid was solicited, with one bid received. The U.S. Army Contracting Command, Redstone Arsenal, Ala., is the contracting activity (W31P4Q-11-C-0242).
Wilhelm Commercial Builders, Inc., Annapolis Junction, Md., was awarded a $49,999,999 firm-fixed-price indefinite-delivery/indefinite-quantity task-order contract. The award will provide for the construction services for the Baltimore-Washington corridor with availability to be utilized throughout the continental United States. Work location will be determined with each task order, with an estimated completion date of July 29, 2016. The bid was solicited through the Internet, with nine bids received. The U.S. Army Corps of Engineers, Baltimore, Md., is the contracting activity (W912DR-11-D-0017).
Olin Corp., East Alton, Ill., was awarded a $29,372,473 firm-fixed-price with economic price adjustment contract. The award will provide for the procurement of 5.56mm, 7.62mm, and .50 small caliber ammunition. Work will be performed in East Alton, Ill., with an estimated completion date of March 31, 2017. The bid was solicited through the Internet, with two bids received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (W52P1J-11-C-0038).
Okland Construction, Inc., Salt Lake City, Utah, was awarded a $22,282,136 firm-fixed-price contract. The award will provide for the design and construction of the Aerospace Maintenance and Regeneration Group hangar at Davis-Monthan Air Force Base, Tucson, Ariz. Work will be performed in Davis-Monthan Air Force Base, with an estimated completion date of July 18, 2013. The bid was solicited through the Internet, with 15 bids received. The U.S. Army Corps of Engineers, Los Angeles, Calif., is the contracting activity (W912PL-11-C-0007).
Delfasco, L.L.C., Afton, Tenn. (W15QKN-11-D-0198), and Conco, Inc., Louisville, Ky. (W15QKN-11-C-0192), were awarded a $19,859,690 firm-fixed-price indefinite-delivery/indefinite-quantity multiple-award-task-order contract between two contractors. The award will provide for the facilities, personnel and equipment for the manufacture of the PA 117 container. Work location will be determined with each task order, with an estimated completion date of July 11, 2020. Four bids were solicited, with four bids received. The U.S. Army Contracting Command, Picatinny Arsenal, N.J., is the contracting activity.
AAI Corp., Hunt Valley, Md., was awarded an $18,682,819 cost-plus-fixed-fee contract. The award will provide for the engineering services in support of the Shadow 200 unmanned aircraft system. Work will be performed in Hunt Valley, Md., with an estimated completion date of May 31, 2013. One bid was solicited, with one bid received. The U.S. Army Contracting Command, Redstone Arsenal, Ala., is the contracting activity (W58RGZ-11-C-0103).
Alliant Lake City Small Caliber Ammunition Co., L.L.C., Independence, Mo., was awarded a $7,968,389 firm-fixed-price contract. The award will provide for the production base support projects at Lake City Army Ammunition Plant. Work will be performed in Independence, Mo., with an estimated completion date of Sept. 30, 2012. One bid was solicited, with one bid received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (DAAA09-99-E-0002).
BWAY Corp., Atlanta, Ga., was awarded a $7,366,564 firm-fixed-price with economic price adjustment contract. The award will provide for the procurement of 797,986 M2A1 ammunition containers in support of various contracts for small caliber ammunition production. Work will be performed in Atlanta, Ga., with an estimated completion date of April 26, 2013. The bid was solicited through the Internet, with two bids received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (W52P1J-09-C-0030).
AIR FORCE
Lockheed Martin Corp., Archbold, Pa. (FA8213-11-D-0008), and Raytheon Missile Systems of Tucson, Ariz. (FA8213-11-D-0007), are being awarded a $475,000,000 firm-fixed-price contract for Paveway II laser-guided bomb computer control groups (seekers) and GBU-12 air foil groups (tail kits). The Ogden Air Logistics Center/GHGKA, Hill Air Force Base, Utah, is the contracting activity.
The University of Dayton Research Institution, Dayton, Ohio, is being awarded a $24,510,000 cost-plus-fixed-fee, firm-fixed-price, cost reimbursement contract to provide testing, evaluation, and the incidental research and development of advanced polymer materials, equipment and processes, and to provide for the operation and maintenance of the Coatings Technology Integration Office, Special Test and Research facilities, and Erosion facilities at Wright-Patterson Air Force Base, Ohio, where work will be performed. The Air Force Research Laboratories/PK, Wright-Patterson Air Force Base, Ohio, is the contracting activity (FA8650-11-D-5602).
ITT Industries, Inc., Systems Division, Cape Canaveral, Fla., is being awarded a $13,465,960 cost-plus-award-fee contract modification for Spacelift Range System contract support for increased depot level software maintenance for the operationally accepted Range Standard Architecture System, to include the transition and ongoing sustainment of range standard architecture for both the Eastern and Western ranges. Work will be performed at Patrick Air Force Base, Fla., and Vandenberg Air Force Base, Calif. The Space and Missile Systems Center Space Logistics Group/PK, Peterson Air Force Base, Colo., is the contracting activity (F04701-01-C-0001, P00693).
Planning Professional, Ltd., Allen, Texas, is being awarded a $12,418,640 firm-fixed-price, indefinite-delivery/indefinite-quantity contract for event planning services in support of the Air Force Reserve Command Yellow Ribbon Program. Work will be performed at Allen, Texas; Summerfield, N.C.; and Twinsburg, Ohio. The Headquarters Air Force Reserve Command/A7KA, Robins Air Force Base, Ga., is the contracting activity (FA6643-11-D-0004).
BAE Systems, Nashua, N.H., is being awarded a $9,000,000 firm-fixed-price contract for one Autonomous Real-Time Ground Ubiquitous Surveillance-Imaging System with options for two additional systems. The Air Force Materiel Command, Aeronautical Systems Center, 645th Aeronautical Systems Group/WIJK, Wright-Patterson Air Force Base, Ohio, is the contracting activity (FA8620-11-G-4029 0008).
Chugach Management Services, J.V., Anchorage, Alaska, is being awarded an $8,811,927 firm-fixed-price contract for civil engineering management services. Work will be performed at Kirtland Air Force Base, N.M. The Air Force Nuclear Weapons Center/PKOC, Kirtland Air Force Base, N.M., is the contracting activity (FA9401-11-C-0010).
NAVY
General Electric Aircraft Engines, Lynn, Mass., is being awarded a $71,484,930 modification to a previously awarded firm-fixed-price contract (N00019-06-C-0088) to exercise an option for the supplemental engine requirement to procure (18) F414-GE-400 engines and (18) F414-GE-400 engine device kits. The F414-GE-400 engine powers the F/A-18E/F Super Hornet aircraft. Work will be performed in Lynn, Mass. (44.8 percent); Madisonville, Ky. (18.1 percent); Evandale, Ohio (14.1 percent); Hooksett, N.H. (10.4 percent); Rutland, Vt. (3.9 percent); Dayton, Ohio (2.2 percent); Jacksonville, Fla. (1.5 percent); Muskegon, Mich. (1.4 percent); Terre Haute, Ind. (1.4 percent); Bromont, Canada (1.2 percent); and Asheville, N.C. (1 percent). Work is expected to be completed in July 2013. Contract funds will not expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.
Raytheon Co., Network Centric Solutions, Marlborough, Mass., is being awarded a $67,030,102 indefinite-delivery/indefinite-quantity, cost-plus fixed-fee/cost-plus incentive-fee/firm-fixed-price hybridcontract for the procurement of highly specialized engineering services to meet the Navy’s Satellite Communications Program requirements to include, but not limited to, the following systems produced by Raytheon: Extremely High Frequency (EHF); Super High Frequency (SHF) WSC-6 (v)5/7; Global Broadcast Service (GBS); Submarine High Date Rate (SUB HDR); and Navy Multiband Terminal (NMT). Work will be performed in Marlborough, Mass. (84.49 percent), Chula Vista, Calif. (13.51 percent), and Sterling, Va. (2 percent). Work is expected to be completed by August 2016. Contract funds will not expire at the end of the current fiscal year. This contract was not competitively procured because Raytheon Co., Network Centric Solutions, is the sole manufacturer and current maintainer of the EHF, SHF (AN/WSC-6 (v)5/7), GBS, SUB HDR, and NMT systems and is the only source that possesses the detailed knowledge and unique expertise necessary to provide the required engineering services without substantial duplication of cost to the government that is not expected to be recovered through competition. The Space and Naval Warfare Systems Command, San Diego, Calif., is the contracting activity (N00039-11-D-0045).
Oceaneering International, Inc., Chesapeake, Va., is being awarded a $47,429,395 modification to previously awarded contract (N65540-05-D-0012) to provide continuing Subsafe engineering and technical services to support submarine, Subsafe, and Level I material work onboard Seawolf (SSN 21) class, Los Angeles (SSN 688) class, Ohio class (SSBN), and Virginia class submarines. Work will be performed in Puget Sound, Wash. (60 percent), Norfolk, Va. (30 percent), and Pearl Harbor, Hawaii (10 percent), and is expected to be completed by May 2014. Contract funds in the amount of $15,000,000 dollars will expire at the end of the current fiscal year. The Naval Surface Warfare Center, Carderock Division, Ship Systems Engineering Station, Philadelphia, Pa., is the contracting activity.
Toyon Research Corp.*, Goleta, Calif., is being awarded a $12,109,000 indefinite- quantity/indefinite-delivery contract for the procurement of various antennas and ancillary parts, which are integrated into communication jamming pods and electronic warfare laboratories, spares, and the incidental engineering required to fabricate, modify and/or maintain the antenna and feed assemblies. Work will be performed in Goleta, Calif., and is expected to be completed in August 2014. Contract funds will not expire at the end of the current fiscal year. This contract was not competitively procured pursuant to FAR 6.302-1. The Naval Air Warfare Center Weapons Center, China Lake, Calif., is the contracting activity (N68936-11-D-0027).
Lockheed Martin Maritime Systems and Sensors, Moorestown, N.J., is being awarded a $8,657,273 cost-plus-fixed-fee modification to previously awarded contract (N00024-10-C-5124) to exercise options for fiscal 2011 technical and engineering support and related operation and maintenance of the Navy’s Combat Systems Engineering Development Site and technical engineering support of the SPY-1A test lab and Naval Systems Computing Center. Work will be performed in Moorestown, N.J., and is expected to be completed by October 2011. Contract funds will not expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington Navy Yard, D.C., is the contracting activity.
SoBran, Inc.*, Dayton, Ohio, is being awarded an $8,453,652 modification to a previously awarded time-and-material, indefinite-delivery/indefinite-quantity contract (N68936-05-D-0042) to provide 308,072 hours of logistics production support for the Fleet Readiness Center Southeast, Jacksonville. Work will be performed in Jacksonville, Fla. (95 percent), Oceana, Va. (3 percent), and Beaufort, S.C. (2 percent). Work is expected to be completed in May 2012. Contract funds will not expire at the end of the current fiscal year. The Naval Air Warfare Center Training Systems Division, Orlando, Fla., is the contracting activity.
Raytheon Co., Tucson, Ariz., is being awarded a $7,351,328 modification to previously awarded contract (N00024-11-C-5448) for three refurbished and upgraded rolling airframe missile MK 49 Mod 3 Guided Missile Launch Systems with associated hardware for LHA 7 and LCS 5. Work will be performed in Tucson, Ariz., and is expected to be completed by March 2013. Contract funds will not expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington, D.C., is the contracting activity.
Pathfinder Systems, Inc.*, Arvada, Colo., is being awarded a $6,717,214 cost-plus-fixed-fee contract for a Phase III Small Business Innovation Research (SBIR) project under Topic N03-190 forthe Phase III operational prototype Marine Common Aircrew Trainer (MCAT) prototype two. This SBIR Phase III project will implement a baseline configuration upgrade based on the previously delivered MCAT prototype one and will build upon previously demonstrated and delivered Phase II simulation technologies. Work will be performed in Arvada, Colo. (95 percent), and the Naval Air Station Miramar, Miramar, Calif. (5 percent), and is expected to be completed in August 2013. Contract funds will not expire at the end of the current fiscal year. This Phase III contract was not competitively procured pursuant to FAR 6.302-5. The Naval Air Warfare Center Training Systems Division, Orlando, Fla., is the contracting activity (N61340-11-C-0021).
Raytheon Co., Tucson, Ariz., is being awarded a $6,693,470 modification to previously awarded contract (N00024-07-C-5437) for engineering and technical services in support of the MK15 Phalanx Close-In-Weapon System. The Phalanx Close-In Weapon System is a fast reaction terminal defense against low- and high-flying, high-speed maneuvering anti-ship missile threats that have penetrated all other ships’ defenses. The Phalanx Close-In Weapon System is an integral element of the fleet defense in-depth concept and the Ship Self-Defense Program. Operating either autonomously or integrated with a combat system, it is an automatic terminal defense weapon system designed to detect, track, engage, and destroy anti-ship missile threats penetrating other defense envelopes. Phalanx Close-In Weapon System is currently installed on approximately 187 Navy ships and is in use in more than 20 foreign militaries. This effort includes the governments of Japan and Saudi Arabia (1 percent) under the Foreign Military Sales Program. Work will be performed in Tucson, Ariz., and is expected to be completed by April 2012. Contract funds in the amount of $200,000 will expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington, D.C., is the contracting activity.
DEFENSE LOGISTICS AGENCY
Meggitt Polymers, Rockmart, Ga., was awarded a firm-fixed-price, indefinite-delivery/indefinite-quantity, requirements type contract with a maximum $9,500,706 for aircraft fuel tanks. There are no other locations of performance. Using service is Air Force. The date of performance completion is July 2017. The Defense Logistics Agency Procurement Operations, Warner Robins, Robins Air Force Base, Ga., is the contracting activity (SPRWA1-11-D-0016).
General Petroleum*, Rancho Dominquez, Calif., was issued a line item modification on the current contract SP0600-11-D-0360/P00002. Award is a fixed-price with economic price adjustment contract with a maximum $6,920,760 for marine gas oil. Other location of performance is San Francisco, Calif. Using services are Army, Navy, Air Force, Marine Corps and federal civilian agencies. The date of performance completion is April 30, 2015. The Defense Logistics Agency Energy, Fort Belvoir, Va., is the contracting activity.
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