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Today S&P downgraded Goldman Sachs and 11 other banks.  We can call them the “TARP 12″ for short and it’s very interesting that this particular ratings agency has finally gotten around to doing what it’s been completely delinquent on doing for far too long.  Too little too late at this point from my perspective, not to mention what appears to be an awful lot of unnecessary piling on after the fact.  After all, it was S&P, Moody’s and Fitch that pretty much created the “big lie” on the front-end of this problem with investment grade AAA golden plated ratings on virtually every toxic security and derivative out there (SIVs, CDOs, MBSs, etc.) and have ultimately been way, way behind the proverbial eight ball on the back-end now. 

I’ll save the ratings agencies venting for another time, but you should know that I think that they should be completely eliminated or completely restructured as they have limited to no value add to both institutional and retail investors alike.  Same goes for the SEC, but again, that’s for another day and it appears that there’s likely to be a new sheriff in town at the commission very, very soon based on yesterday’s announcement from President Elect Obama on Mary Schapiro. 

The only thing that is becoming more obvious now, especially in light of yesterday’s announcement that none other than GE was being put on credit watch by S&P and given a negative outlook, is that there appears to be a new attitude prevalent from the ilks of S&P that they must get out whatever bad information and ratings adjustments that they are considering as quickly as possible so that everything is out there, somewhere, and that they can no longer be accused of not having released their negative ratings and opinions.  Again, too little too late, not better late than never, and as stated previously, piling on now to drive the cycle down even worse when it wasn’t originally done when it was supposed to be done just makes a challenging (bad) situation worse.  I don’t think that it’s needed right now for anyone’s sake at all from my perspective and it’s probably about as productive as the FAS 157 mark to market accounting rules are in addressing these problems and being able to move forward more appropriately to recovery.  Ahh, yet another topic for yet another day.

Now back to Goldman Sachs.  One announcement that has likely been lost in the noise, and is a great follow up to a recent entry I wrote on US corporations up-rooting or relocating to foreign countries from the US, is the announcement that none other than Goldman Sachs has moved its corporate profits offshore.  That’s right.  Through some corporate restructuing, aggressive accounting and creative financial engineering, Goldman Sachs has managed to cut its corporate taxes in the US to a paltry 1%.  First companies were voting with their feet, but now they are also voting with their wallets.

Goldman Sachs effectively took down more than $10 billion in loans from Warren Buffett via Berkshire Hathaway and the US government via TARP this year, raked in another $2.3 billion in operating profits and then paid out almost $11 billion to its employees in compensation and bonuses … and still managed to reduce its taxes from $6 billion last year to $14 *million* this year.  You heard that right, only $14 million in total tax exposure to the US Treasury and fully 99% less than what they paid only 1 year ago. 

Goldman Sachs attributed its lower tax rate to “more tax credits as a percentage of earnings” and “changes in geographic earnings mix” while tax accounting advisor Robert Willens told Bloomberg News that the rate drop seemed “a little extreme”.  Excuse me, but ya’ think?

This is yet another striking example of what happens when you treat great American corporations as villains and also what happens when you maintain ridiculous tax codes here in the US that incent those with the time, capability and resources to invest in corporate structures, geographic structures and creative financial engineering to ensure that they become as “tax efficient” as possible.  It is why tax cuts for individuals and corporations in the US ultimately result in higher revenues for the US Treasury rather than when taxes are actually raised.  It may be counterintuitive, but history proves this out to be true.  Namely, the lower the effective tax rate, then the less likely that smart individuals and companies will try to “avoid” paying them by outsmarting “the system” and thus the US Treasury gets more revenues because more taxes are paid rather than creatively avoided through loopholes, financial engineering and offshoring.  When will we ever learn?

Another day and another vast expansion of the bubble in US Treasuries.  The TLT, or iShares Lehman 20+ Year Treaury Bond ETF, has broken $120 per share and the yield on 30 Year Treasuries has dropped to a tiny 2.64%.  Look at this chart!  

When you see such hyperbolic (or vertical) moves in a stock or ETF, you pretty much know that it’s only a matter of time before the laws of gravity kick in.  It may not be next week, next month or next quarter, but it is very, very likely that when the Treasury bubble pops, it will be swift, severe and extreme and as the prices plummet, the paltry yield will spike straight up.  I also think that it’s a matter of when and not if and because I don’t know exactly when this is likely to occur, I play it by buying LEAP puts on the TLT for no earlier than 2010 expiration dates.

More ominously, China today announced that lending to the United States will not go on forever and we had better take advantage of this brief time allowed to clean up our house.  Separate from the link provided for the article, the quotes that jumped out at me the most were:

“China’s increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis.”  

“Given the global economic crisis , the consequences would be serious if China and other nations stopped channelling money into the US economy.”

“The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds.  Instead, it [the United States] should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon.”

All I can say is uh oh.

Meanwhile, the US dollar continues to fall and gold continues to rise.  UDN is the bearish play on the dollar and DGP is the bullish play on gold.  With the Fed cutting rates to effectively 0% and $8 trillion in new money being printed, there is very little choice but for the US dollar to fall against other currencies and gold and other commodities to rise in parallel.

Today we see more evidence of the stresses in “the system”.  It’s not so much that the markets are up or down in a big way.  In fact, today they don’t seem to be doing very much of anything, as the Dow is down a little more than 100 and the Nasdaq is off about 40 as of this writing.

The data continues to be bleak, whether it’s unemployment numbers, manufacturing numbers or pretty much anything else that we want to cite.  However, with that said, everyone continues speculating about our having hit “the bottom” back in October/November when we successfully retested the lows and held.  Even better though is the view that the market has already “priced everything in” except for “new surprises” or macro events.  Yeah, OK, sure it has.

Clearly Mr. Market is expecting the Fed to drop the Fed funds rate by at least 75 basis points to 0.25% at the end of its FOMC meetings today and tomorrow. But, while most of the world is focused on the Fed and “quadruple witching” options expiration this Friday, today I want to focus on the oil and gas patch and the latest announcement from Weatherford International that they too are leaving the United States for the greener pastures of Switzerland. 

Someone in Washington DC needs to start paying attention to how many large US corporations in the energy complex are simply throwing in their operational white towels and literally bailing out of the US in droves (at least in terms of their corporate structure, HQ leadership and investment).  At last count this puts Transocean, Foster Wheeler and Tyco in Switzerland and Haliburton in Dubai, in addition to many, many others that are probably less known by “the masses”. 

This is absolutely great, just great (insert frustrated sarcasm here for effect).  Perhaps as a next step our illustrious leaders can see if they can effectively drive Cisco Systems, Google, Microsoft, Apple and the entire core technology complex out of the country as well (again, insert frustrated sarcasm here for effect).  I’m sure that such grand political efforts would breed the basis for further improvement in the US economy and much stronger future prospects for the continued global leadership of our great nation.  Please, please, WAKE UP!!

Oil Companies Voting With Their Feet—Investor’s Business Daily

Source: 15 December 2008 (c) 2008 Investor’s Business Daily

Energy: Another day, another oil company fleeing the country. No, this isn’t Ecuador, the banana republic that just defaulted on its debt after chasing out investors. It’s the United States, and what we’re seeing is self-defense.

Much political hay has been made in Congress about “unpatriotic” corporations that move operations abroad. Weatherford International is the latest, taking its headquarters from Houston to Switzerland. The oil services company said that it wants to be closer to its markets. But what it really meant was that it no longer saw the future in the U.S.

In a political atmosphere of blaming corporations, it’s no wonder. Halliburton fled to Dubai in 2007. Tyco International, Foster Wheeler and Transocean International all went to Switzerland. As a pattern emerges, America’s global standing diminishes, in part because it’s based on the willingness of companies to invest. It’s an especially bad sign when domestic companies flee.

“The U.S.is an important market,” Weatherford CEO Bernard J. Duroc-Danner told the Houston Chronicle Thursday. But, “it’s just a market. It’s not the primary market.”

How does that sound for a loss of global leadership? If that’s not clear enough, try this: “In the hierarchical pecking order, (Houston’s) not going to be Rome anymore.”

What accounts for this vote of no confidence in the U.S.?

Start with the demonization of oil companies. Executives have been hauled before Congressional star chambers, held up to abuse and ridicule, and then blamed for high oil prices as if they wanted to kill their markets. Rising global demand, nationalizations and Congress’ failure to open the country to drilling go ignored.

Huge companies such as Exxon Mobil, whose market cap exceeds the GDP of most countries, create $100 billion in earnings in quarters when oil prices soar. It looks high, but over the years, the industry’s average returns, at 9%, are less than other industries.

Nevertheless, Exxon’s profits are evidence of its success at extracting oil from miles below the earth’s surface, even underwater, and from unbelievably hostile environments, such as the Arctic. Instead of being objects of national pride for their productivity and efficiency, and subjects of heroic Hollywood movies, their success is considered to be dishonest.

Congressional hostility affects oil companies’ operations abroad, too: Exxon, remember, noted that Congress’ animus toward oil profits directly encouraged Hugo Chavez’s uncompensated expropriations of $1 billion of Exxon’s assets in Venezuela, which drove oil prices higher.

With an expanded Democratic Congress and an incoming Democratic president determined to create “patriot corporations,” it’s no surprise to see companies try to get out while they can. Make no mistake — it’s investment fleeing the country. As this goes, foreign capital could flee next.

Congress’ abuse sets the political tone for the worst to come.

First, oil companies, like all corporations, endure the second-highest taxation in the developed world (39.25% of their income), which dampens their competitiveness. The 2007 OECD average is 27.6% and falling. Worse still, U.S. firms are taxed on operations around the world, unlike the global standard, making a move of headquarters a defensive move.

Meanwhile, politicians openly say they want to hike taxes on oil firms. President-elect Obama seems to have backed off, but questions remain as to whether he can stand up to a rapacious and economically ignorant Congress that hasn’t.

Second, Big Labor is feeling its oats, swaggering confidently with newfound political power. United Steelworkers approved a “national oil bargaining policy” for higher wages and beefed up its “strike defense fund,” both of which point 15 plans to squeeze oil companies, if not launch strikes.

“You have to prepare your membership for 2009,” according to USW International Vice President Gary Beevers on a union Web site. “The oil companies are ready for us; we have to be ready for them.” With Congress at their back, oil companies are unlikely to lose.

None of this portends well for the U.S.business environment. That’s why top-performing firms, such as Weatherford, are exiting. Until Congress learns to appreciate and value oil firms, this will continue, leading to less U.S. investment and influence as more competitive climes beckon.

Well folks, the bad data just keeps coming.  This morning the Labor Department shared numbers not seen in the United States in decades.  Unemployment rises to 6.7%.  Job losses exceed 533,000.  Average work week drops to 33.5 hours per week.  Yuk.  Yuk.  And Yuk!

Estimates for job losses had a consensus around 340,000 jobs, with a 500,000 loss as the magic “whisper number”.  Unfortunately even the most pessimistic views on the number understated just how bad it was out there.  I think that these numbers are so bad that the U.S. government will start working aggressively on the next economic stimulus package so that President Elect Obama can sign something in to law as soon as he completes his oath of office in mid January. 

As stated over and over and over again, focus on the data and ignore the media noise.  Hope is not a plan and we can no longer wish our way out of this mess.  I’ve been clicking my heels together for 3 months and despite saying “there’s no place like irrational exubberance, there’s no place like irrational exubberance”, I’m still looking at the same problems and unfortunately the data has only gotten worse.  Toto is not only not in Kansas anymore, but Dorothy also can’t even seem to find him to even start their road trip back home.  With that said, please make sure that you’re “following the yellow brick road” and adding to your gold position as 2009 is likely to result in either hyperinflation or stagflation (both of which will make gold move much higher).

With futures only off by 120 points this morning pre market, it is growing more and more apparent that the market is desperately trying to have all of this bad news priced in to the markets so that we can try moving forward again.  Retesting the lows of 7350-7500 appear very much in the cards, so expect that and also expect a battle between “holding that line” on the bull side versus “get real” on the bear side.  Downside in to the low 6000s is now very much on the table if the rate of decline in the data continues to accelerate rather than stabilize.  We’ll keep following this and let the numbers be our guide. 

Other than commercial real estate, the next major bubble appears to be 10 and 30 year Treasuries.  Start watching this closely rolling forward as yields are now hitting lows that haven’t been seen since the 1950s.  Yikes!

Well hello everyone.  More bad data out there again today and the market is responding as you might expect.  Namely, the U.S. private sector shed 250,000 jobs in November, the biggest job loss in 7 years, according to the ADP national employment index released Wednesday.  The loss was in line with estimates of analysts surveyed by MarketWatch.  Job losses rose to 158,000 in the goods-producing sector and to 92,000 in the services sector. 

More importantly, this report comes two days before the government releases its report on the labor market for November, with analysts expecting the worst losses in more than *25* years.

Keep your seat belts on and again, remain focused on the data and not the headlines or spin.  The data will be your guide and so far all of it is either horrible at best or horrible and accelerating to the downside at worst.

Be careful out there!