Back to the Future

Posted by Shyam Moondra

The political and business landscape is changing fast here in the United States and around the world. At home, Republicans won big in the recent mid-term elections and President Obama's second-term is no longer a shoe-in. In Europe, the era of socialism and welfare state is crumbling in the face of economic reality. The peace in the Middle East is as elusive as ever with no light at the end of tunnel. A snippet of what's happening in the U.S. and elsewhere follows.

What lies ahead for Obama?
In the mid-term elections held earlier this month, the Democratic Party lost the control of the House and lost several seats in the Senate while still barely keeping control of that body. Below are the reasons for the Democrat's resounding defeat at the polls:
· President Obama's stimulus efforts failed to create new jobs in time for the elections. The people often cast their votes based on how secured they feel about their finances at the time of the election. With the unemployment rate hovering around 10%, the voters were in no mood to give the Democrats a second chance. The people were also unhappy about their tax dollars being used to bailout the banks that caused the financial crisis in the first place. Even though the bailout was orchestrated by the Republican President Bush and his Treasury Secretary Paulson, the voters nevertheless directed their anger at the Party in control.
· Obama's leftist liberal tendencies cost him the votes of the Independents and conservative Democrats. As an example, Obama's health care initiative was initially predicated on reducing the costs but he gave in to the liberal wing of the Democratic Party that turned the initiative into providing subsidized health care for those who couldn't afford it with a huge price tag of $1 trillion over ten years.
· Obama lost focus. At a time of high unemployment, Obama should have taken a page from President Clinton's strategy ("it's economy, stupid") and focused exclusively on economy. However, he unnecessarily raised the temperature by getting involved in divisive issues such as gays in the military and climate change that could have been deferred to his second-term.
· Obama failed to communicate effectively. While he demonstrated that he is very intellectual, he lacked the political deftness of President Clinton. In spite of his victories on the health care bill and financial reform bill, he didn't quite achieve his original visions on both of those issues. He utterly failed to reign in the liberal wing of the Democratic Party that led to the expensive health care bill and strong consumer advocacy policies that made Obama look like anti-business. Obama could have done a better job in communicating what he wanted and then showing steely resolve in dealing with the liberals in his Party.
· The candidate Obama promised bi-partisanship in Washington, D.C., if elected, but he got almost zero Republican votes in the Congress for most of his initiatives. During the presidential campaign, the people bought Obama's assertion that he could change the culture of the capital and work across the isle to solve people's problems. The voters were genuinely disappointed that Obama's slogan "yes, we can" turned out to be just that, a political sound bite.

Now that the Republicans control the House and the Democrats barely control the Senate, it would be much more difficult for Obama to get things done. However, if he showed some leadership and political skill, he could forge a coalition of moderate and conservative Democrats, Independents, and moderate Republicans to pursue an agenda that is slightly on the right of the center, just as Clinton did. Obama must stop chasing liberal Democrats, if he wants to have a shot at being re-elected in 2012. We have had divided government in the past and yet Presidents were able to forge workable arrangements with the opposition parties and move the country forward. President Reagan worked very effectively with his nemesis, the late Tip O'Neill, then the Democratic Speaker of the House. They achieved big things in the area of reducing the size of the government and reducing taxes. President Clinton was able to work with Republican Trent Lott, the Republican Senate Majority Leader, and achieved welfare reforms and turned budget deficit into surplus. The real question now is if Obama has the necessary political and social skills, in the mode of Reagan and Clinton, to create jobs and reduce budget deficit.

What lies ahead for Republicans – the Party of "No"?
The Congressional Republicans should, by no means, consider their victories in the mid-term elections as a mandate by the voters to change the direction of the country. Many people voted for Republicans not because they liked Republicans any better but they just needed to punish Democrats for the slow economic recovery and high unemployment. If things do not improve in the next two years, the voters would throw the Republican "bums" out just as readily in 2012. As a victor, the Republicans now have the responsibility to deliver and, therefore, they can no longer rely on their strategy of "just say no." The people expect the Republicans to work hard in finding common ground with Obama. It's no longer possible to pursue policies strictly based on ideologies; the people expect the Republicans and Democrats to find pragmatic solutions to move the country forward. The following is a laundry list of what they could accomplish by working together and compromising on key issues:
· Extend the Bush income tax cuts for everyone for one year and then let those cuts expire for the rich. Even billionaire Warren Buffet feels that the rich people pay too little in taxes. It's an inconvenient fact – with the budget deficit running so high, the nation simply cannot afford to give tax cuts to the rich.
· Reform the corporate tax laws – when a rich company like Google pays only 2% in taxes or Goldman Sachs pays only 10% in taxes, clearly, there is something very wrong. We need to close the corporate tax loop-holes and make all corporations pay their fair share of taxes, commensurate with the benefits these companies are getting from the government in the form of defense and security, law and order, global trade, etc.
· Allow temporary accelerated depreciation on new capital investments, provide payroll tax holiday for new hires, and offer special incentives for expansion of manufacturing within the U.S.
· Ban Congressional wasteful spending in the form of earmarks.
· Revisit the health care bill to put on hold certain provisions that would increase the costs for the employers; there is absolutely no support for repealing the law as some Republicans are arguing. As a long-term goal, the Congress needs to take out "greed" and "profit" from the equation, if we are serious about bringing down the health care cost.
· Revisit the financial reform bill and put on hold some of its provisions so as not to precipitously increase the costs for some of the financial institutions.
· The Deficit Reduction Commission has come up with many interesting recommendations that should be debated, in a pragmatic and non-ideological manner, to put our financial house in order. If we fail to bring down the deficit and debt, we will see higher interest rates, slower growth, high unemployment, and loss of competitive edge by the American companies in global trade.
· The U.S. needs to upgrade the crumbling infrastructure for future growth and to remain competitive on the world stage. Many Americans would be open to paying a special gasoline tax for a specified period to fund this endeavor.

FED, the Bubble Maker
In the early 2000's, low interest rates and expansive monetary policy of the Federal Reserve Board created the dot-com bubble that propelled the NASDAQ index to a record high of 5,132. Today, it stands at half that level. During the mid-2000's, continued easy money under FED Chairman Alan Greenspan caused the housing bubble that led to the soaring real estate prices and new innovative financial products such as mortgage-securities that we know now were disastrous. In 2008, when that bubble bursted, the stock market crashed by more than 50%, real estate prices tumbled by more than 30%, and big name institutions such as Lehman Brothers, Bear-Stearns, and Merrill-Lynch, and scores of large banks got in deep financial trouble. The government was forced to spend $780 billion of taxpayers' money to bailout the financial sector. Now, Ben Bernanke, the current FED Chairman, is creating yet another commodity bubble by keeping interest rates close to zero and printing money at an unprecedented rate as part of his QE-2 program. He says the biggest threat right now is deflation, which could lead us into a long period of sluggish growth with unacceptably high levels of unemployment, just as what happened in Japan during the 1990's. So Bernanke is printing new money, and lots of it, to buy government securities in the open market with the hope that investors will use that money to create inflation. A daring and inherently risky strategy! What if inflation gets out of control? The FED will then be forced to apply sudden brakes that will bring about a recession. The FED may end up with high inflation and high unemployment, defying the so-called Phillips Curve (historic inverse relationship between inflation and unemployment). It seems as if the FED is pre-disposed to perpetually creating bubbles and dealing with the aftermath by throwing taxpayers' good money after the bad.

Insider Trading and Market Manipulation
The SEC and FBI are aggressively going after several hedge funds (and investment banks that own hedge funds) and mutual funds for insider trading and market manipulation involving the so-called expert-networks and collusion between traders and research analysts. It's a well-known fact that in the last ten years, with the advent of computerized trading algorithms, the big players are resorting to gambling as opposed to investing based on the fundamentals. Many small investors feel that the markets are rigged and big players make money at their expense. As a result, small investors are staying away from the stock market and putting their money in the safe treasury securities or less risky bonds (thereby creating a "bond bubble"). Big investors rely on computers to make trading decisions by combining short selling, options trading, and high-frequency/high-volume trading that often lead to inexplicable price movements and flash crashes like the one that happened in May of this year. Unless, new regulations are adopted, it would be impossible to go back to the way trading was done, say, ten years ago when long-term fundamentals were paramount in stock selections. In recent years, investors seem to have redefined what are insider trading and market manipulation and their argument is that everybody is doing it. One simple way to reduce speculative trading is to require that investors hold the securities they buy for at least three business days. In addition, imposing a high income tax rate, of the order of 50%, on the short-term capital gains will induce investors to start thinking about the long-term fundamentals. We also need tougher penalties for those who engage in market manipulation and insider trading, including mandatory jail terms for the CEOs of the companies whose traders and research analysts engage in unlawful activities.

End of Socialism in Europe
The industrial revolution made Europe the most advanced and affluent continent on the face of this earth. The success bred complacency that led to 35-hour work weeks, early retirements at the age of 60, liberal vacations not for weeks but months, free health care, subsidized education, generous retirement benefits, etc. When economy stopped keeping pace with the increasing costs of benefits, the European life, as we knew it, started to crumble under the pressures brought about by one of the worst financial crises ever. Severe budget cuts in Greece, the U.K., and France led to riots on the streets. The process of belt tightening has just begun and it will be years of cuts and adjustments before the European economic house is put in order. The era of socialism is over and a period of renewed focus on smaller governments, lower taxes, and pro-business policies is afoot. For the next decade, it is the Asia-Pacific region (not Europe) that would drive the world's economic and geo-political agenda.

Hasta la vista to Two-state Solution
Israel continues to build Jewish settlements in the occupied territories, making peace in the Middle East as elusive as ever. If Israel is able to grab more land and then be showered with billions of dollars in financial and military aid by the United States, not to forget new fighter planes, why should Israel make peace with the Palestinians? By building Jewish settlements over the Palestinian land, however, they are unwittingly mixing up the two populations in a way that will eventually make a two-state solution unviable. By then, they will be left with an impossible choice between granting Palestinians the right to vote in Israeli elections or instituting apartheid thereby losing moral standing in the eyes of the world. Once, at a Congressional hearing, exasperated James Baker, then the Secretary of State under President George H. W. Bush, read aloud the WH telephone number at which Israelis could call if they ever wanted to have a peace agreement with Palestinians. Since then, the occupants of the WH have changed but the telephone number remains the same and the WH is still waiting for that call to arrive.

"Namaste"
President Barrack Obama and First Lady Michelle Obama recently visited India on a 3-day state visit that was full of pageantry and substantive policy discussions including trade deals worth $20 billion that would save or create 50,000 jobs here in the United States. The visit was a huge success, considering the overwhelmingly positive reaction of the population and the press there. Both United States and India are the largest full-fledged democracies with individual rights, free press, and independent judiciary. They both represent secular societies where all the people enjoy the same rights regardless of their religion. India, with a rapidly growing economy and a huge middle class population, represent an important market for the American goods and services. Given increasing military power and aggressive posturing of China with regard to the border disputes with most of its neighbors, including India, a close economic and military relationship between India and the United States has become strategically important to both the countries. Obama's visit cemented the deepening relationship between the two countries that actually began during the Clinton presidency and moved up a notch by President George W. Bush. The Indo-American relationship could prove to be the defining alliance in the modern history with far reaching economic and military implications for the Asia-Pacific region. Obama was correct to publicly announce that the United States would work towards making India, the largest democracy in the world, as a permanent member of the United Nations Security Council. During the visit, Michelle Obama's dance moves with the children at a school in Mumbai won the hearts of the Indians. She always seems to find a way to be one of the best American goodwill ambassadors of recent times.

Need targeted tax incentives to give a boost to the fragile economic recovery

Posted by Shyam Moondra

There are clear indications that the U.S. economic recovery is stalling. There is no danger of a double-dip recession, but the economy could use a boost from the government. Any new stimulus would have to be in the form of targeted tax incentives and not major spending programs that tend to be inefficient when it comes to creating jobs.

Given the present high budget deficit, a large-scale spending program is politically infeasible. Instead, what the Obama administration could do is to let the Bush income tax reductions for rich people (making more than $250,000 a year) expire on January 1, 2011 and use the increased tax revenues to provide targeted tax inducements to the businesses and consumers with the twin objectives of increasing employment and consumer spending. Here are a few examples of tax incentives:

· Offer temporary one-year holiday from payroll taxes to employers as an inducement to hire more people.
· Temporarily increase tax credit for new capital investments by businesses.
· Put on hold certain parts of recent financial and health care reforms that would increase the costs to the businesses, contingent upon their hiring more workers.
· Re-offer tax incentives for buying new homes and cars and making homes more energy efficient. These programs were successful the first time, so they are worth repeating again for one more year.
· Work with states to have a holiday on sales taxes for, say, six months to induce consumers to spend more, with the federal government partially reimbursing the states for the lost sales tax revenues.
· Rather than extending unemployment benefits, offer temporary jobs to the unemployed people who could work on various public projects.

Market manipulation scaring small investors away - need trading reforms

Posted by Shyam Moondra

New York Times reported that small individual investors pulled out staggering $33 billion from the mutual funds in the first seven months of this year and invested that money in bonds that are considered relatively safe. It is estimated that individuals have over $8 trillion parked in bonds, gold, and Treasury securities. This unprecedented abandonment of stocks is motivated by many factors:

• The wounds from 40-50% losses caused by the market crash of 2007-2008 are still fresh. At the slightest sign of market weakness, these risk-phobic investors look for an exit.

• Recent slowdown in the economy has raised doubts in the minds of many investors about the sustainability of the recovery. Some are convinced that we are headed to a double-dip recession, as happened during the depression of the 1930’s.

• In recent years, the stock market has become very volatile; the stocks move up and down without any significant reason. It is a widespread belief that the markets are manipulated by institutional investors through their frantic computerized trading.

The investment banks and hedge funds short sell a stock to push it down (often spread false rumors about the targeted company to aid the process of bringing it down) while also trading in options. Then just before the monthly options are to expire, they start covering their short positions and push the stock up. In the process, they may lose some money in trading stocks but they make proportionately more money in options and thus come out ahead. Sometimes they move a particular stock up or down to make the options they wrote worthless and thus pocket the premium the buyers paid. They repeat this process every month in many targeted high-beta stocks and make money at the expense of small investors. Some of these big players also use what is known as "pump-and-dump" strategy in which they take substantial long position in a company, usually a lesser-known small-cap company, and then publish inflated views or research reports about those companies that help move the stock price up ("pumping"), enabling them to sell their holding (“dumping”) at a profit. Some times these big players also use their research departments to make money in their trades. As an example, research departments of some investment banks were touting that oil was headed to $200 per barrel while at the same time they reportedly held long positions in oil through their energy hedge funds. The investment banks and hedge funds call the above trading practices as "investment strategies" and deny that they are engaged in unlawful manipulation. The fact is that if a market player can make a stock or commodity move in a certain direction at will, then that's manipulation.

More recent form of market manipulation is called "quote stuffing." The SEC is reportedly investigating the practice of day traders in which very large numbers of buy or sell orders are placed and canceled almost immediately. It is also reviewing another practice known as "sub-penny pricing," where orders are priced in increments smaller than a penny, but are far from the price at which the stock is trading. Yet another manipulative practice is to initiate buy or sell orders for 100 shares at a time at successive higher or lower prices at a rapid pace to make it look like a trend is emerging, which, in turn, induces other investors to place their bets. These trading practices are very easy to execute with the advent of high-speed computers. Some of these practices may have played a role in the May 6th "flash crash," a panicked disruption in trading that saw the DJIA drop hundreds of points in minutes.

The stock markets were created to help companies raise capital so that they could build new factories and hire more workers and the stock prices moved up or down based on the company fundamentals. Now the markets move up and down in a yo-yo fashion without much change in the underlying fundamentals. The increased volatility caused by market manipulation has turned the markets into gambling casinos that has made small investors desert the equity markets altogether.

We urgently need new regulations to stop market manipulation by the investment banks and hedge funds. The government has already taken some steps in the financial regulations bill such as close oversight of hedge funds, restrictions on proprietary trading by banks, higher capital ratios required for banks, and a total ban on naked short selling that should help reduce the market volatility. However, to lure small investors back to the equity markets, more needs to be done:

• Ban "quote stuffing," "sub-penny pricing," and other computerized trading schemes designed to manipulate the markets.

• Investment banks and hedge funds must be required to hold stocks they buy for a certain minimum period (e.g., for three business days until the trades have been settled) before they can sell those stocks. This will reduce computerized day-trading and induce investors to invest rather than speculate.

• Impose higher taxes (as high as 50%) on profits realized from short-term trading.

• The investment banks must not be allowed to own research business. Currently, they have arm's length relationship between their trading and research departments but that is not enough.

• Pass tough laws to discourage "pumping-and-dumping" so that big players can't make money at the expense of unsuspecting small investors. Strengthen SEC resources to investigate and enforce the laws vigorously to stop market manipulation. The CEOs of the companies that are found to violate any of the new regulations must be given mandatory jail terms and their companies must be fined heavily to discourage them from manipulating the markets.

• Change the tax laws to stop investment banks and hedge funds from escaping from paying their fair share of income taxes. In a recent quarter, a major investment bank paid only 10% in taxes because it reportedly executed its trades through a complex web of off-shore subsidiaries and hedge funds that made it possible for it to reduce the tax levies. It's time we close all these tax loopholes.

Extend the Bush tax cuts for one more year and then gradually eliminate them for the super rich

Posted by Shyam Moondra

In 2001, at the height of relative economic prosperity, President George W. Bush pushed for and got enacted unprecedented income tax cuts since the trickle-down theory pursued by President Ronald Reagan. The Economic Growth and Tax Relief Reconciliation Act of 2001 was especially generous to the rich who benefited the most. This Act, however, had a unique sunset provision which required that the enacted tax cuts expire on January 1, 2011 unless the Congress passed a new legislation making those tax cuts permanent. So here we are with this raging debate between the Republican tax cutters and Democrat spenders at a time when our budget deficit is running at record levels. Treasury Secretary Tim Geithner has said that making the Bush tax cuts for the super rich permanent would be a perpetual $600 billion-a-year mistake.

First, the timing of the original tax cuts and now making those cuts permanent seem very odd. The Bush tax cuts were enacted when economy was doing well. When economy is doing well, one would expect to increase taxes to thwart inflationary pressures and to raise tax revenues to reduce budget deficit and national debt. This is what common men would do - when they feel financially secured, they pay off their debt. Now, at the present time, when economy is not doing so well, one would expect that taxes be kept low to induce consumers to spend and keep the economic recovery alive. At the same time, given the record budget deficit and mounting national debt, one would argue that at some point taxes would have to be raised or else we would put our national credit rating at risk, in the mode of Greece-like crisis. If the deficit and debt problems are not addressed in a credible manner, the government will be forced to take stern cost cutting measures in the future that would trigger civil unrest and interest rates will go through the roof creating economic malaise for years to come.

It’s clear that the Bush tax cuts were ill-timed. It’s also clear that canceling those tax cuts right now will most likely push us into a double dip recession. Therefore, it seems sensible to extend the Bush tax cuts for everyone for just one more year and as the economy recovers, those tax cuts should then be gradually eliminated, first for those who are making more than $250,000 individually ($500,000 for family) and then in subsequent years for those who are making between $100,000 and $250,000 individually ($200,000 - $500,000 for family), while making tax cuts permanent for the rest of the taxpayers. This gradual approach will keep the current economic recovery going, increase tax revenues to reduce federal budget deficit and national debt, and bring fairness to our tax code which was heavily tilted in favor of the rich under the Bush presidency. Republicans’ desire to make the Bush tax cuts permanent will only add to the already record high budget deficit. While the Obama administration and Congress should also look for ways to cut government expenditures, the humongous deficit will undoubtedly require a combination of both reduced spending as well as tax increases. President Obama needs to show leadership and hammer out a compromise on gradually canceling Bush tax cuts for the rich and reducing expenditures. It’s important to note that President Bill Clinton’s efforts to achieve a balanced budget was instrumental in our sustained prosperity that eventually led the stock markets to record levels. At this critical juncture, we need to replicate the Clinton strategy to ensure our prosperity for the next generation.

To breakup the economic logjam, the FED should start raising interest rates now

Posted by Shyam Moondra

The stock market is in a downward spiral, again. However, the trading volume is low, indicating lack of conviction. The market is going down not because investors decided to dump the stocks they own but it's more because of lack of liquidity caused by investors' unwillingness to take risk. They are choosing to keep their cash in bank accounts or in Treasury securities earning a meager rate of return. Some are rushing to buy precious metals. On a valuation basis, stocks are very cheap with a forward PE ratio of less than 10.

The U.S. economy is in a logjam with conflicting crosscurrents. The unprecedented financial crisis of 2007-2008, which witnessed the demise or near demise of well-known financial institutions, forced the Obama administration and Federal Reserve Board to take stern actions to provide immense liquidity in the form of a stimulus program, near-zero federal funds rate, and other federal credit facilities. The aggressive moves by the government were effective in stabilizing the financial system. However, the financial institutions became risk-phobic that led them to become overly cautious in lending, especially to small businesses that create many jobs. In fact, the banks acquire funds at very low interest rates and earn a tiny return by investing those funds in the Treasury securities. The banks are content with a small return rather than lend and potentially earn much more but at much higher risk. Lending lubricates the economic engine; however, the current liberal FED rates and credit facilities are in fact inducing the banks to not lend.

Corporations have a record $1.8 trillion cash on their books but they are reluctant to spend on capital projects because they are not sure how the new regulations that the Obama administration pushed through the Congress would affect their profitability. There is always a chance that some of these complex regulations may lead to unintended consequences in an unpredictable way. The uncertainty created by upheaval in the regulatory regime is making them very cautious in making risky bets on adding capacity or hiring more people, beyond what's needed to replenish the depleted inventories.

Consumers are stunned by the rapid decline in their home prices and in the values of their investments. So they have parked their $8 trillion in bank accounts and Treasury securities that provide close to zero return. Also, they have cut down their discretionary spending to save more. The government tax credits to replace old cars or to buy new homes or to make their homes more energy efficient did provide a temporary burst of consumer activity but all these programs have now ended or are coming to an end. The slow pace of improvement in the job outlook is also discouraging the consumers, making them cautious when it comes to making the big-item purchases. Consumers are also not sure how the health care and financial reforms would affect them. They hope these reforms would reduce their costs, but they are not convinced that they would.

The government is in a fix without any good options. With the rampant budget deficit and national debt, the federal government is not in a position to undertake another large stimulus program that could significantly add to the deficit. Also, many analysts are not convinced that huge government expenditures are the most efficient way to create jobs. On the monetary side, the FED has already reduced the interest rates to almost zero and there is not much they can do on that front. They could buy government securities on the open market or troubled assets from banks to increase money supply but that could spark inflation.

After the crash of financial markets in 1979 and 2001, various publications declared investment in equities as dead, forever. But we know that both times markets came back roaring and they set new record highs. This time would be no exception. Here is what the government can do to speed up the economic recovery:
· The FED should start raising interest rates immediately and lift the fed funds rate to at least 2.5% over the next twelve months and wind down all credit facilities they created to deal with the financial meltdown two years ago. Easy money usually fires up the financial markets, home buying, and business and consumer spending, but this time it's not working out that way. The people are fearful of easy money (that's bound to form a bubble), government regulations, and mounting deficit. So the FED might start raising the interest rates now to induce banks to actively lend again rather than park their funds in risk-free Treasury securities.
· The Obama administration should refrain from starting any new major stimulus program. It's not needed; the U.S. economy is resilient and it will bounce back on its own without any external stimulus. The perceived benefits of any new stimulus program are outweighed by the risks posed by higher deficits and national debt.
· The Obama administration should come up with a credible plan to reduce budget deficit and national debt soon. Any delay in proposing this plan would be negative for the financial markets and would push the long-term interest rates higher that would undermine the economic recovery.
. President Obama needs to do a better job in convincing the people that the recent financial and health care reforms would indeed reduce costs and revitalize the economy.

The stock market decline is driven by fear and misconceptions

Posted by Shyam Moondra

The stock market is in a downward spiral. Since April 26, 2010, when the market set the 52-week high, DJIA has declined over 12%. After having risen 74% from the crash bottom set on March 6, 2009, it was expected that the market would have a correction. However, the intensity of decline (as much as 25-30%) in the prices of shares of some of the companies in the financial and technology sectors is baffling. The market decline lacks conviction given the relatively light trading volume. The market sentiment has become overly negative, which may be a sign of the market bottom. Every little bad news gets overblown and good news gets discounted. In the last couple of quarters, the economy has been recovering steadily as is evident by the statistics on corporate profits, industrial production, leading indicators, consumer confidence, retail sales, and housing. The numbers on inflation have been very positive. When did stock market decline in an environment characterized by increasing corporate profits, low interest rates, and low inflation?

At the present time, the investors have lost confidence in the strength of the economic recovery, largely based on fear and misconceptions. Here are some observations:

· When an economy comes out of recession, it does not recover in a straight line. Initially, it's always a slow process consisting of two steps forward followed by one step backward. That's quite normal as the economy goes through the phases of structural adjustments during the post recovery period.
· The Europe debt problem is being blown out of proportion. The U.S. banks have no more than $60 billions worth of exposure to Europe, which is like a drop in a bucket, considering the size of the total assets of these banks. It's doubtful that there will be any defaults on sovereign debt, so long as the countries are prepared to tighten their belts and IMF is ready to help them out. Yes, in the near-term, reduced government expenditures would slow down the European economy a little, but the budget cutbacks will have very healthy long-term impact in terms of keeping the interest rates low and in keeping the economic recovery going on a sustained basis. So what is going on in Europe is not as bad as some fear-mongers would like us to believe. In fact, today, Germany announced that manufacturing orders in the month of April unexpectedly rose 2.8% compared to the previous month; this was a good news but it apparently got lost amidst the panic driven market decline.
· In the last two months, the economy has actually created new jobs. The unemployment rate is a lagging economic indicator, so obviously this is the last category of improvement we would see as the economy recovers. The data for the current year has nothing in it that would suggest that the economic recovery is getting off track. The employment numbers reported in the coming months would prove that. While it is true that it may take a few years before we again see the unemployment rate closer to 4.5%, let us not forget that 90% of the workers are currently employed and they have done an extraordinary job in controlling their spending and saving more during this recession than any other prior recessions.
· The corporations have $1.5 trillions cash on their balance sheets, which is a record. Some of this cash will end up in capital investments that will create new jobs. The corporations did a very good job in controlling their costs throughout this recession (via low inventories and painful work force reductions); as a result, the productivity gains would contribute to their higher profit margins as the economic recovery gains momentum.
· The pace of innovation picked up even during the recession, as is evident from the new products being offered by technology and other companies. There were hundreds of people waiting in lines for hours in London and Paris to get their hands on Apple's iPad. Doesn't that say loudly that one should never underestimate America? The U.S. has always been on the forefront of innovation and we will continue to dominate the world and create high-paying jobs. One has to have faith in what we can do.

Given the American entrepreneurial spirit and genius, one can never doubt where we are headed. The current pessimism and fear are misplaced. The beaten down stock prices are in fact an excellent opportunity to invest for the long-term. The market correction has run its course and it seems ready for a big up move.

Today's abnormal stock market behavior should be investigated

Posted by Shyam Moondra

Today, the stock market started out on the defensive because of the continuing saga of the debt problem of Greece and other EU countries. By 2:30 pm, the DJIA was down by about 250 points. However, at around that time, the market literally fell like a rock and within minutes it was down by more than 1,000 points. But then, by 3 pm, almost like a miracle, DJIA shot up by almost 700 points and finally ended the day with a loss of about 350 points.

Early reports indicated that Proctor Gamble stock (ticker symbol PG), which is one of the 30 components of DJIA, traded at some other exchange at about 37% lower price than its last price on New York Stock Exchange. That dramatic decline in PG triggered computerized sell orders by big players that are linked to the movements of DJIA's 30-component stocks. It's not clear who placed that particular PG order. One other story appeared in the media saying that one trader erroneously placed an order to sell $15 billions worth of stock when he/she actually meant to sell only $15 millions worth.

Some analysts compared today's market movement to the crash of October, 1987. However, this time what is starkly different is that the market didn't just crash but it quickly rebounded and that raises some troubling questions.

One theory is that the above mentioned erroneous trades were in fact intended to engineer a crash so some big financial institution or hedge fund could cover their short positions or close options at a huge profit. The sharp turnabout in the market after the crash was caused by short covering by this culprit financial institution. If this theory is proven right then we can safely say that smart people on the Wall Street (who designed synthetic derivatives) outsmarted the regulators one more time.

The U.S. Department of Justice and the SEC should investigate to determine if today's sudden fall of the market was manufactured by someone to profit from the decline. The regulators also need to design a protection mechanism to prevent this kind of stock manipulation in the future. The cost of the abnormal behavior of the stock market is staggering; many individual investors got panicked and they started dumping their holdings in stocks and commodities and moved to safer investment vehicles such as gold and treasuries. The dramatic decline wiped out $1 trillion worth of equity within minutes. NASDAQ just announced that the trades in stocks that moved yesterday by more than 60% after 2:40 pm would be canceled. This may seem like the right decision, but the downside is how could investors be ever sure which of their future trades would be honored.

The overall market, having gone up from 9,800 to 11,300, was due for a correction. That correction is now largely behind us. Given excellent corporate earnings, low interest rates, and low inflation, we are in a long-term bull market which would last for several years. Today's overreaction in fact affords an excellent opportunity to buy for the long-term. We are headed to 12,000 during the summer and to 13,000 by early next year. By the end of Obama's first term in office, I wouldn't be surprised to see DJIA at a record high of 15,000.

A modern version of TV commercial: "Goldman Sachs. They make money the easy way. They stick it to the investors"

Posted by Shyam Moondra

In 1986, the late actor John Houseman made a TV commercial for the investment bank, Smith Barney, which instantly became a classic. In that commercial, Houseman delivered the famous lines: "Smith Barney. They make money the old-fashioned way. They EARN it." The modern version of that commercial would be "Goldman Sachs. They make money the easy way. They stick it to the investors."

In the last ten years, the financial sector, and for that matter the entire U.S. economy, has increasingly become more speculative in nature than at any other time in history. The days are gone when stocks, bonds, commodities, and currencies would be the primary vehicles for investment. Now, the companies and individual investors can bet on all sorts of derivatives, sports events, political elections, movie box-office receipts, etc. Not only that, they can also buy the so-called credit default swaps as an insurance to protect against losses on their bets. Even individual investors are now more apt to trade in options, sell short, and engage in day trading based on short-term speculation rather than invest based on sound long-term fundamentals.

America, as a society, is increasingly becoming greedy and turning more and more to gambling. The investor's greed made it possible for Bernard Madoff to pull-off his Ponzi scheme that cost billions of dollars to the investors. Greed made corporate CEOs to fake short-term profits by sacrificing the long-term interests of their companies and walked away with millions of dollars in stock options. Gambling has made it possible for many financial giants with assets of hundreds of billions of dollars, such as Goldman Sachs, to make lots of money quickly by manipulating markets and deceiving investors, thanks to the SEC staff that were too busy watching porno websites on their office computers. But, as we all know, gambling is never a sure thing. So it has also produced dramatic falls such as Enron, Lehman Brothers, Bear Sterns, and General Motors. Excessive risk taking culminated into the crisis that brought financial ruins to millions of families and state governments, and it led to the unprecedented high levels of federal budget deficit and national debt.

Now that we have seen the catastrophe caused by the financial meltdown, the key question is could it happen again. Alan Greenspan, the former Fed Reserve chairman, said that unless a way can be found to change human nature about greed, another crisis is inevitable. As is evident from the SEC suit brought against Goldman Sachs, there is a pervasive mindset in the corporate world that they can do what they please to make money with very little regard to ethics and playing by the rule. The financial reforms proposed by President Barack Obama are a necessary first step but we also need aggressive enforcement by the SEC, CFTC, and FDIC, to minimize the chances of another financial crisis. When criminals sense that the police is not cruising the streets, they would tend to commit crimes. If the enforcement agencies were doing their jobs and the companies were fearful that they would be caught doing the wrong things and there would be consequences, may be we could have avoided some of the wrongdoings that have become so widespread in the financial sector.

Another problem in the financial markets is manipulation by the big players. Companies like Goldman Sachs with assets close to a trillion dollars have enormous financial resources that they can marshal to make the markets move in a certain way. When some stocks move sharply or are pinned down at a certain price level near the options expiry date, it's quite obvious that they are being manipulated. The big players often combine short selling, options trading, and the issuance of research reports at strategic moments to move stocks in the desired direction. They call it strategizing but it fits the definition of manipulation. The SEC knows what is happening, but so far they have been too lax in enforcing the laws.

Reforming the derivative market is critical to controlling excessive risk taking, as are the reforms in how compensation is structured for the executives and professionals. We need to go back to a reward system that encourages long-term accomplishments rather than artificially manufactured short-term profits.

It's clear that we need to strengthen regulations and enforcement of the financial sector. However, we need to do it in such a way so that we do not stifle legitimate innovations. In parallel, the corporate world must also show increased sense of responsibility and accountability for the greater good. They must go back to the culture of ethics and integrity that served us so well for generations.

Republican opposition to financial reforms is a major blunder

Posted by Shyam Moondra

Republicans are being urged by the Senate Minority Leader Mitch McConnell to oppose the financial industry regulations as proposed by the Obama administration, just as they opposed the health care bill. McConnell says he wants the new regulations to prevent any future financial crisis but his tactics suggest that he is out to kill any new regulations of the Wall Street. His motive is suspicious given that he and other Republicans have been showered with handsome campaign contributions by the banks and hedge funds. He believes that by playing this double game, Republicans will be well positioned in the upcoming mid-term elections in November. He is dead wrong, just as he was on the health care legislation. The people have nothing but contempt for banks because of their greed and any-thing-goes attitude. Recent polls show that as many as 90% of the people view the financial sector negatively. They vehemently opposed the $700 billion government bailout funded with taxpayer's money at a time when individual citizens were losing their homes and jobs. It's a political mistake to take the side of the Wall Street against the Main Street in an environment where the hate for the banks is so deep rooted in the minds of the people.

McConnell wants a blanket statement put in the new financial reform bill saying that the government would never again bailout the financial sector. When it comes to governing, you never say never and limit your options in case of national emergency. In 1971, bailout was instrumental in saving Lockheed, which is a thriving defense contractor today. In 1975, the federal government bailed out New York City that saved jobs and saved the city from chaos that would have ensued if the city were allowed to go bankrupt. Last year, if the federal government hadn't bailed out the large banks, we would have had depression with unemployment running as high as 25%. Therefore, rather than saying that bailout should never be an option, we should focus more on preventing the circumstances that could lead to the need for bailouts.

The essential elements of any reform for the financial sector must include:
· De-linking the risk taking and excessive compensation.
· Higher capital ratio requirements for the banks and close monitoring of these ratios. No more 20:1 leverage that some banks have had immediately prior to the collapse of the credit markets.
· Restrictions on proprietary trading by banks, as proposed by Paul Volcker. Banks should not be allowed to own or finance hedge funds.
· Close monitoring of trading in innovative derivative products that today is normally done off exchanges without any regulations.
· Increased enforcement of the laws against market manipulation by banks and hedge funds. More powers should be granted to SEC, FDIC, and CFTC.
· A strong mechanism to protect the consumers from predatory practices of the banks.

The financial crisis, which led to the economic meltdown throughout the world, is a global phenomenon. Unless financial reforms are implemented worldwide, a repeat of the financial calamity is inevitable, given the interconnectedness and interdependence of the financial institutions around the world. If the U.S. implements the proposed reforms but other industrialized countries do not, then the U.S. banks will be put at a disadvantage vis-à-vis major banks of other countries in a fiercely competitive global arena. President Obama needs to provide more leadership in making sure that financial reforms are implemented universally and not just in the U.S.

The Republican election strategy of frustrating any financial reforms is unlikely to sit well with the voters, given their intense dislike for the financial institutions. The people in fact want serious reforms and restrictions on how the banks make money and treat their customers. McConnell made a mistake on the health care bill and now he is about to make the same mistake on financial reforms. The best strategy for the Republicans would be to replace their current leaders in the Congress and at the RNC.

Pessimists continue to misjudge the stock market - next stop 12,000

Posted by Shyam Moondra

I predicted five months ago that DJIA was headed to 11,000 (The Moondra Post, October 31, 2009) and last Friday it did just that. Last month, I predicted that DJIA would hit 12,000 this summer (The Moondra Post, March 17, 2010) and, in spite of the dire predictions of many pessimists, I think we are headed to that level soon and even to 13,000 by early next year. The pessimism of many bears is based on miscalculations. Their arguments and my rebuttal are as follows:
· The market has gone up over 69% since March of 2009 when the market bottomed out at 6,500. While 69% appreciation may seem excessive, it should be pointed out that the market sunk to 6,500 because of the fear that financial crisis might force some big commercial banks to declare bankruptcy which never happened. In that sense, the market now is simply correcting the miscalculation that many made. At least half of the appreciation, say 35%, shouldn't even be called appreciation; it was just a reversal of the fear driven decline that in retrospect was unjustified. Even at 11,000, the stocks are hardly overpriced, given that the forward PE of 15 is quite modest. The market analysts are predicting that corporate profits this year would grow 50% compared to last year.
· The unemployment continues to be very high and thus consumers would be reluctant to spend freely in the foreseeable future. Since consumers drive the two-third of the U.S. economy, the pessimists argue that the market is running ahead of itself. While it's true that unemployment will improve only gradually, the consumers have done a remarkable job in managing their finances during this recession. They have saved more than usual and reduced their debt. That means they are not going to wait until employment has fully recovered before they start spending again. The increasing auto sales in recent months are a testament to the renewed confidence of the consumers in the sustainability of the economic recovery that appears to be gaining strength.

The pessimists neglect to take into account some very powerful forces that could unleash the growth in the coming months.
· Corporations have done a remarkable job in managing their cost-structure by staying lean-and-mean. They not only reduced the payroll aggressively, but also cut the inventory levels to the lowest level not seen for decades. Even a small pick up in demand could significantly increase their profit margins. Also, corporations have $1.5 trillion cash on their balance sheets, which is unprecedented. This cash could fuel capital investments in the coming months and years.
· The inflation expectation continues to be low because the capacity utilization is very low. The Federal Reserve Board has indicated that they would keep interest rates low for an extended period. These trends would fuel the economic growth.

Higher corporate earnings, low inflation, and low interest rates have always put the stocks on fire and this time it wouldn't be any different. The market has the potential to surpass 12,000 on the DJIA this summer and set the stage for a move to 13,000 by early next year. When market goes over 11,400 or so, which could happen as early as this week, some profit taking would be inevitable (given the market would then be up by 1,600 points from the last bottom of 9,800). But that small correction, of the order of 500-600 points, should be considered as a buying opportunity for the long-term. I wouldn't be surprised if the market set a new record high by the end of President Obama's first term in office.

Republicans should fear Obama's luck and accomplishments

Posted by Shyam Moondra

Republicans are in complete disarray. They have followed a policy of "No" on cooperating with Democrats on major issues such as health care and financial regulations, but their negative policy approach has backfired. Rather than gaining popular support, the Republicans have actually lost ground. The scandalous behavior of the staff at RNC, where they went partying at strip joints and charged their RNC expense accounts, has made things worse for the party. Republicans, who take pride in family values, look like hypocrites. Campaign donors feel betrayed and that has negatively affected the in-flow of campaign contributions. Republicans also have no front-runner, who could challenge President Obama in 2012. The lack of leadership and focus within the Republican Party has splintered the party and driven many Republicans to join the ranks of the Tea Party. This division will siphon off the votes and further weaken the Republican Party. All of these Republican problems are mainly due to the absence of strong leaders in the Congress and at the RNC. It's time they replace Senate Minority Leader McConnell, House Minority Leader Boehner, and RNC Chairman Steele. Republicans also need to adopt a policy of constructive engagement and focus on solving people's problems rather than be seen as obstructionist.

Republicans have been counting on Obama's failure on major issues, but so far luck has not favored them. Obama is in fact on a roll. He got health care reform done, something that many presidents before him tried and failed to do. Obama also got TARP approved (a program initiated by President Bush), which did stabilize the banking system, in spite of the fact that American people were not in favor of using tax-payer's money to save the rouge banks. Obama got $700 bi stimulus program passed by Congress in spite of the strong Republican opposition. By most accounts, the stimulus program has worked in stopping the economic slide (cover story of Business Week, April 19, 2010). Obama successfully concluded a new SALT treaty with Russia. Some of Obama's other accomplishments include:
· Reformed the student loan program.
· Financial reforms are on their way to becoming a law.
· His aggressive Afghanistan policy is working with the Taliban and Al Qaeda on the run.
· Iraq exit strategy seems to be on track following the recent successful elections there.
· Got the first Hispanic Supreme Court justice, Sandra Sotomayor, confirmed by the Congress. Now that Justice Stevens is retiring, Obama has an opportunity to appoint another woman on the Supreme Court.
· Proposed a plan for offshore drilling, strongly favored by the Republicans. He has also provided billions of dollars in research grants for the development of alternative energy technologies.
· Initiated the work on completely reshaping the tax code by eliminating the loopholes that many rich individuals and corporations use to escape from paying their fair share of taxes. The Board led by Paul Volcker will issue recommendations by the end of the year.
· Reversed Bush's ban on stem cell research.
· Made it easier for women to sue for job discrimination.
· Extended health care to millions of children.
· Extended the National Service program.
· Set aside huge tracts of wilderness for federal protection.
· Proposed a nationwide super-speed train system.
· Provided strong leadership at the U.N. climate change conference in formulating a consensus.
· He took a small step towards Cuba by allowing family visits and remittances of money from the U.S. to Cuba. Cuba is a small and impoverished country and it is no threat to the U.S. Obama must take further steps such as dropping the trade embargo leading up to establishing full diplomatic relationship with Cuba.
· Obama gave the orders to shoot the Somali pirates and free the American hostage, dispelling many Republicans' fear that Obama is weak and he lacks resolve to deal with the evil people in the world.
· He seems to be succeeding in getting a consensus on imposing a new round of sanctions on Iran on the nuclear weapon issue. As a result of Obama's tough stance, North Korea is inching towards resuming the six-party talks on nuclear disarmament.
· Obama is showing strong leadership on the issue of eradication of nuclear weapons throughout the world by organizing a conference in Washington, DC which is expected to be attended by the heads of state of 46 countries.
· Obama has been successful in improving the image of the United States around the world, especially in the Islamic countries.

President Obama, who was initially aloof from the bill writing process, has begun to show leadership and has racked up an impressive long list of accomplishments in spite of Republican's total lack of support in a short period of just one year. The American people reward hard work and accomplishments. Even though some people may have reservations about his approach to health care reforms, but they are also mindful that we needed to take the first step on the health care issue. Republicans are miscalculating that their non-cooperation will somehow win them votes. At the end of the day, the people would want their problems solved, so it's very unlikely that they would reward those who are doing nothing. It's time Republicans stop praying for Obama's bad luck and start contributing constructively to solve nation's problems.

Obama's historic victory on health care

Posted by Shyam Moondra

The health care bill just passed by the House of Representatives is a stunning victory for President Barack Obama, who steadfastly pursued this biggest health care reform since Medicare was created in 1965. Regardless of political persuasion, this has to be considered as a major personal triumph for Obama. The health care success will now breed more success on many other issues such as financial regulations, immigration, and campaign reform. Had this health care effort failed, Obama's presidency would have been crippled making it harder to accomplish anything else in the remaining three years. Obama's success at home will also strengthen his hands on the world scene in dealing with issues related to the Middle East, Iran, and North Korea.

While the Speaker of the House, Nancy Pelosi, continues to be a polarizing figure, she sure came out as a big winner. She presented herself as a strong leader who could get things done. The biggest losers in this endeavor are the Republican leaders in the Congress, who performed very poorly and, therefore, should be replaced. While they may have been right in opposing the massive cost of the bill, the American people did not particularly appreciate their tactics of non-cooperation and partisanship.

The voters like the winners, even if they don't agree with the legislation in its entirety. Republicans' calculation that by voting "no" on health care, they would gain a political advantage in the mid-term elections in November would prove to be dumb-founded. I believe Obama's stature as a strong leader has been vastly improved; he will be perceived as a problem solver while Republicans will be viewed as merely playing politics for their own self-interest with almost no desire to solve people's problems. The November elections are not likely to yield any tangible benefits for the Republicans.

On the merit of the health care bill, I am not entirely happy with the cost of the reform. However, I am glad that this first step was taken. We can always fine-tune the reforms in the future by adding, subtracting, or modifying, as needed, to make them more effective. We just needed to start somewhere. I think we need to do more to bring down the health care cost:
· We need to regulate the rates and profits of health care providers through some kind of public commission, just as we regulate the telephone, gas, electric, and water companies today.
· We need to do more on malpractice suits and out-of-control awards with the objective to have the service providers pass on the reductions in malpractice insurance premiums and awards to the patients in the form of lower rates.
· We should allow re-importation of drugs from abroad and facilitate the introduction of generic drugs sooner.

Obama proved that he can think big and still deliver. This bodes well for his other initiatives such improving infrastructure, building high-speed railways, exploring alternative energy technologies, remaking our educational system, finalizing financial reforms, implementing campaign reforms, etc. The victory on health care can pave the way for Obama to have a remarkably successful presidency and thus become a shoe-in for a second term.

Stock market is ready to explode - DJIA headed to 12,000

Posted by Shyam Moondra

Yesterday, the Federal Reserve Board announced that they expect to hold interest rates low for an extended period of time to let the economic recovery take firm hold. Today, the Labor Department announced that Producer Price Index declined by 0.6% in February. Low interest rates and low inflation are like music to the ears of the stock market and yet the market has moved up only slightly with a very low volume. It's possible that investors are holding back because of the recent mixed consumer confidence and housing data that prompted some to entertain the thought of second dip in the economy. However, those unfavorable economic indicators may have been distorted because of one of the most severe snowstorms in the North East region in the last fifty years.

It's hard to ignore the following encouraging signs that suggest that economic recovery would accelerate in the coming weeks and months:

· The corporations with low inventories are lean and mean; any up-tick in the demand for goods and services would significantly increase their profits and employment levels.
. Manufacturing has a lot of unused capacity which means that economy can recover without rekindling inflation.
· The corporate world has very strong balance sheets, hoarding over $1.4 trillion cash that could fuel the capital investments over the next couple of years.
· Consumers are being cautious because of lingering high unemployment level; however, they have also shown their willingness to make big purchases as is evident by a strong pick-up in the automobile sales. They will start spending more freely, once they are convinced that economic recovery is taking hold.

The present cautious stock market is in fact a prelude to a stronger and sustained up move with heavy volume in the coming days and weeks. Based on the forecasted 50% increase in corporate profits this year, the Dow Jones Industrial Average could head to 12,000 by the end of third quarter and even hit 13,000 by early next year.

As the paper profits pile up, investors would be tempted to take profits and thus DJIA's move to 13,000 would not be without wild swings. At any sign that the market has temporarily peaked, there will be a floodgate of profit taking which will push the market down but then bargain hunters will move in and the market will move up again on a short order. The key to maximizing the returns would then be to have a good sense of timing in terms when to take profits and when to move back in.

This year and the next are the golden opportunities for investors to make good money, but only if they could master the art of market timing.

Chief Justice John Roberts is not above the People

Posted by Shyam Moondra

John Roberts, the Chief Justice of the U.S. Supreme Court, made a critical comment about President Barack Obama's recent State of the Union address given at the joint session of Congress. I thought that was out of line and offensive. Roberts seemed to suggest that the Supreme Court is somehow immune from criticism by the elected officials or the American people. Justices also occasionally make mistakes like all other humans, so there is nothing wrong if President or anyone else for that matter criticizes them for their wrongheaded decisions or poor performance.

Roberts said that Obama's criticism of the court's decision to allow unlimited corporate campaign contributions during elections was an attempt to politicize the independent court. Hello! When Justices Scalia, Thomas, Roberts, and Alito always vote as a block, representing the views of conservatives, isn't the Supreme Court already politicized by the very same people who now complain about politicizing the Court? Justices are supposed to decide cases without bias or personal prejudices. How is it then that the court watchers often can predict beforehand how these conservatives (or liberal justices for that matter) would vote on any given controversial issue? When conservative justices banded together to elect Republican George W. Bush as the President vs. Democrat Albert Gore, wasn't that a political decision?

Today, we have a gridlock on the Supreme Court between the conservative and liberal justices. Most cases are decided by a single justice, Justice Kennedy. So why don't we just fire everybody else and let Kennedy decide all the cases that come in front of the Supreme Court. Today's Supreme Court is a sham.

Roberts' criticism of Obama reflects abuse of power bestowed upon the justices by virtue of the fact that they are appointed for life by the President and confirmed by Congress. With lifetime appointments also come a certain sense of arrogance and misconceived belief that the justices are above everybody else, when in fact they are not. In a democratic country, it's the People that are the supreme and not the justices who sit on the Supreme Court.

In recent years, my respect for the Supreme Court has declined largely because of how it functions. The Court increasingly shows lack of objectivity in deciding divisive issues such as abortion, campaign contributions, school prayer, etc. Their decisions are often wrapped in medieval age thought processes that are no longer valid. As time changes, so do customs, views, and temperament. As such, legal decisions should be based on contemporary interpretation of the constitution and not as if it is a standstill constant.

I like to propose a few reforms of this declining institution:
· Lifetime appointments should be abolished. The idea behind lifetime appointments was that they wouldn't have to worry about the politics of re-appointments. However, the fact is that the court is already politicized by the justices themselves, so by appointing them for four-year terms at a time wouldn't take away their independence. On the contrary, it would take away their arrogance and make them more accountable.

· There must be a way to remove justices, who consistently interpret constitution based on their own personal philosophy and make unfair and biased decisions (and that's why we need a term limit for justices).

· The Congress should explore if we could do away with the Supreme Court and replace it with a new more fluid mechanism in which judges are tapped from the federal bench on a case-by-case basis depending on the nature of the case and the expertise required. That way we have constantly changing faces on the high court bench and not have this Scalia-Thomas-Roberts-Alito axis of bias who frequently vote as a block based on their ideology rather than the merit of the case.

For now, Roberts should apologize to President Obama and the American people for his outburst. He may be above the law but he is not above the People.

Today's stock market decline may be an overreaction - it's time to buy

Posted by Shyam Moondra

Today's stock market decline may be an overreaction to the disappointing report on new jobless claims. However, the broader indicators continue to be positive, and, therefore, today's market sell-off may turn out to be a buying opportunity.

Recent market reports have generally been good:
· The corporate earnings in the fourth quarter of 2009 exceeded consensus estimates of the analysts. The average PE ratio for S&P 500 stocks now stands at 19, with the projection for 2010 at around 15. This, by no means, makes the stocks as too expensive.
· Sharp productivity gain of 6.2% in the fourth quarter of 2009, the largest gain since 2003, means the corporations have brought down their cost-structure considerably by staying lean-and-mean through the 2008-9 recession. That means, even a slight pick up in demand could significantly boost the corporate profit margins.
· In recent months, industrial production, orders for durable goods, and service industry index have all increased.
· The housing market has stabilized, with increasing home sales and a slight up-tick in the home prices.
· The consumer sentiment and personal savings continue to be positive.
· The market decline may bring an unintended benefit of taming the inflationary expectations that will make it easier for the Federal Reserve Board to phase-in higher interest rates in the second-half of this year.
· The technology sector took a hit in recent weeks, which is actually good for the market. This sector was running ahead of the overall market, making it difficult to sustain the market's upward momentum. However, with the healthy correction in the technology sector, the market is now poised for a sharp up move, led by these same stocks that caused the recent decline in the market.

While the job market has proven to be stubbornly sluggish, as is evident from today's report on new jobless claims, this is nevertheless a lagging indicator. The Senate is considering the new job creation bill that will give a boost to the job market soon. The consumers are not necessarily going to wait for actual job growth before they start aggressively spending again; all they are looking for is an indication that the job market has stabilized and it may soon start growing again.

In this environment, consumer-oriented stocks (such as banks, casinos, hotels, airlines and consumer staples) and technology stocks look attractive.
(Disclosure: The blogger owns stocks in most of these sectors)

Obama's first year in office - he traveled so far and yet all he did was come back to where he started

Posted by Shyam Moondra

President Barack Obama just finished one full year in office. He seems to have traveled so far and yet it feels like all he did was come back to where he started. I give him a C for his efforts and personal qualities, which is far less than a B+ he gave himself during an interview on CBS. If anything, he certainly gained valuable experience from which he could learn and grow, and hopefully accomplish big things in the next twelve months.

Obama's election as president of the United States was transformative and it raised hopes for change among the American people. Right after his election, Obama enjoyed tremendous popularity and many expected that he would capitalize on that popularity and accomplish big things on a short order. The people were almost euphoric about the possibilities. They thought Obama will bring more bi-partisanship in national political discourse, stop job losses and home foreclosures, sign a health care reform legislation, implement new regulations for the financial sector, reach agreements with North Korea and Iran on non-proliferation of nuclear weapons, achieve an international consensus on climate change, and reach agreements with Russia on new arms treaty. He succeeded on none, making the voters angry and disillusioned that led to the unexpected victory of Scott Brown, a Republican, in the most liberal state of Massachusetts, filling the seat of the late Sen. Ted Kennedy. Now that the Democrats have lost their super majority in the Senate, it would become even more harder to get things done.

What went wrong?
· Obama failed to provide leadership. Obama proposed things but then he uncharacteristically became aloof from the process, leaving the members of Congress with diverse opinions to sort things out. Ultimately, the process became so polarizing, thanks to intense lobbying by the various interest groups, that it became almost impossible to realize Obama's original vision.

· Obama, a man with excellent communications skills, couldn't persuade a single Republican to vote with him. His failure to work effectively with the opposition was one of the biggest disappointments, especially to the independents.

· Lackluster leaders in the Congress from both parties sealed the fate of many initiatives that Obama proposed. The Senate Majority Leader is utterly ineffective, the House Speaker is one of the most disliked politicians in the history, and Republican leaders in the Senate and House have zero leadership skills. The Democrats have a majority in both houses and yet the party is doomed because of lack of discipline among the rank-and-file and Obama has not paid sufficient attention to the inner workings of the party.

· Obama's tendency to throw money at problems has turned off many independents and conservative Democrats. He needs to offer more imaginative solutions that require less new spending.

· Obama also suffered from bad luck. If his $700 bi stimulus spending had created the promised two million jobs, the mood of the people would have been very different than it is today. This recession has proven to be very stubborn and more stimulus may be needed down the road.

So where does Obama go from here?
· Obama needs to make some staff changes. Secretary of State Hillary Clinton and Secretary of Defense William Gates should be kept, but everyone else should be re-evaluated. Chief of Staff and Secretary of Department of Homeland Security should be replaced.

· Obama needs to move to the center and abandon his socialist tendencies, or else he will permanently lose the support of the independents. When all Republicans in the Congress vote against him, that is a big political problem. Obama needs to change his governing style and peel away pragmatic Republican lawmakers to achieve his agenda. He needs to forge and maintain special relationships with the centrist Democrats, non-ideologue Republicans, and independents to get big things done.

· Bring about changes in the Democratic leadership in the House and Senate. We need new leaders in the mode of the late Speaker Tip O'Neil or the late Senate Majority Leader L. B. Johnson who can bring discipline among the rank-and-file Democrats and also work effectively with the opposition.

· Provide more leadership. Obama tends to give broad outlines of his proposal but then he just walks away and let the members of Congress fight it out with disastrous results. Obama needs to roll up his sleeves and hammer out detailed compromises with the Democratic and Republican leaders in the Congress. Obama's recent meeting with the Republicans in Baltimore was a good start. He needs to follow-up with regular meetings with the Congressional leaders from both parties at the White House, as he said he would.

· Stop throwing money at problems at a time when our national debt and budget deficit are running so high. The case in point, health care reforms. Obama said all the right things during the election campaign, but once in office, the Democrats turned the main objective of cutting health care costs into developing new subsidies and entitlement programs. After the experience of escalating costs of Medicare and Social Security, the American people have almost no appetite for starting any new entitlement programs. Obama needs to go back and prune the health care bill to focus on insurance reforms and cost cutting. If costs are brought down, many of the uninsureds would be able to afford to buy health insurance, and thus the number of uninsureds would go down over time. The Democrats need to cut-down on the proposed subsidies and new entitlement programs.

· The first stimulus has not worked as expected, in terms of job creation. It seems inevitable that a second stimulus would be required, or else we could see the recurrence of recession in the second-half of 2010. This time, Obama needs to focus more on tax incentives rather than new spending. The government spending is never efficient and it involves a lot of waste. On the other hand, tax incentives put more money in the hands of non-government bureaucrats that tends to have immediate positive effect on economy. Besides, taxes can be raised again in the future when we have our prosperity back, but the government spending is never recovered.

· While we are still providing stimulus to the economy, simultaneously, Obama needs to aggressively propose a credible plan to reduce budget deficit and national debt. Unless the budget deficit is brought down to a more reasonable level, we are headed to a tough interest rate environment which will choke-off economic growth. Obama should eliminate wasteful spending in all different parts of the government, including the Defense Department. The federal budget gap, however, cannot be eliminated just by reducing wasteful spending; at some point, we will have to increase income taxes for those earning more than $250,00 a year ($500,000 for a couple) and close-down the corporate tax loop-holes (it's unfair when companies like Goldman Sachs pays only 10% in taxes because of creative off-shore trading schemes).

President Obama has many fine personal qualities, he is a very likable and honest man, he is very intelligent and well versed with public policy issues, and, most importantly, he has extraordinary communications skills. There is no reason why he can't use all of that and lead friends and foes into forging partnerships that would deliver for the American people. Obama just needs to show more leadership and get more involved in crafting legislation, collaborating with both Democrats and Republicans in the Congress. Even though, he didn't do as well as expected (true, he suffered from very high expectations), but he has the necessary skill set to achieve big things in the remaining three years of his presidency. Yes, he can!