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C&L Opening Bell, 11-30-10

I hope you all had a nice, relaxing Thanksgiving weekend. While you were digesting turkey and buying discounted iPads for friends and family, the world continued to fall apart. Aren't I just a cheery way to wake up in the morning? Let's get

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I hope you all had a nice, relaxing Thanksgiving weekend. While you were digesting turkey and buying discounted iPads for friends and family, the world continued to fall apart. Aren't I just a cheery way to wake up in the morning? Let's get started with today's Opening Bell...

  • First, some chipper news: Black Friday was a relative hit this year, which could bode well for the rest of the holiday shopping season:

    The number of people who shopped at stores and online between Thursday and Sunday jumped 8.7% to 212 million shoppers, according to a National Retail Federation survey of 4,306 shoppers conducted by BIGresearch. The total amount spent during the four-day weekend reached an estimated $45 billion, with the average spending rising 6.4% to $365.34, the survey showed.

    A flood of doorbuster deals from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) to Best Buy Co. (BBY) and Macy's Inc. (M), coupled with earlier-than-ever store openings and offers of free shipping put shoppers in a mood to spend. The number of those who began their Black Friday shopping at midnight tripled this year to 9.5% while those who shopped on Thanksgiving day itself also have doubled over the past five years to 22.3 million, the survey showed.

    Hooray non-sucky sales data! Ain't no Austerity Grinch can hold down the American Christmas Spirit, baby!

  • OK, now that we've got the good news out of the way, let's turn to Ireland.

    You may be wondering why I'm concentrating on Ireland so much. Well, I think Ireland's situation demonstrates in very clear terms the ways in which corporatism is undermining democracy. Right now you have a soon-to-be-out-on-its-arse government readying an austerity plan that will dip into the country's pension fund to bail out its banks' European creditors. And to make things worse, the EU's Commissioner for Economic Affairs is warning any incoming government against even thinking of revising the terms of this spectacularly awesome deal:

    The EU Commissioner for Economic Affairs, Olli Rehn, has said that it would not be advisable for any new government in Ireland to attempt to renegotiate either the interest rate on the EU/IMF loan or the use of the National Pension Reserve Fund in repairing the banking sector.

    In an interview with RTÉ News, Commissioner Rehn said it did not want to involve himself in democratic politics in Ireland, but he said: 'They are key parts of the programme so I would not advise re-opening these'.

    He said he 'fully understood' the frustration and anger of the Irish people about the banking sector, which he said had made big mistakes in the past. 'However we have to move on and the essential thing is to complete the repair, implying both the restructuring and downsizing of the banking system,' he said.

    This is delightful! "Oh sure, your banking system has totally busted your country and is now stealing from your pension fund, but really, I think it's time to look forward and not backward, don't you?" 50,000 Irishfolk protested the austerity measures in Dublin, but it sadly probably won't do much good. The least bad option for Ireland right now is default on its debt -- yes, it means that credit to the country will freeze, but even that beats becoming a permanent vassal state of the EU and the IMF.

  • But hey, all of those wonderful austerity measures should do wonders for Ireland's economic growth, right?

    Ireland's economy may only expand by 0.9 per cent in 2011, the European Commission said today, only half of what the Government predicted in its four-year plan.

    In the four-year plan, which was published last week, the Government said real gross domestic product will grow by an average of 2.75 per cent in the years between 2011 and 2014. It said real GDP is expected to grow by 1.75 per cent next year, after falling 2 per cent this year.

    The commission's figures were part of a report on the wider EU. It said GDP in Europe may weaken to 1.5 per cent in 2011 as budget cuts to stem a mounting debt crisis hurt consumer demand and faltering global expansion curbs exports.

    Oh.

    But hey, at least the austerity plan will reassure the markets and will stop the spread of the debt contagion to other Eurozone countries, right?

    European governments’ 85 billion- euro ($113 billion) bailout package for Ireland failed to quell the market turmoil menacing the euro as stocks, bonds and the currency declined.

    Irish 10-year bonds slid after an early advance, Spanish bonds slid by the most since the euro’s launch and European shares sank 1.4 percent. The euro slid against 15 of its 16 major counterparts and the cost of insuring the debt of Spain and Portugal against default soared to records.

    “The notion that a rescue package for Ireland would create a firewall and stop the fear of contagion is clearly discredited,” said Preston Keat, director of research at Eurasia Group, a political consultancy, in London. “Portugal and Spain are already facing pressures in the markets.”

    Oh.

    I guess the good news is that America is not alone in having thoroughly incompetent economic and political leadership. This way we can all go down in flames together!

  • Speaking of incompetent American economic leadership, President Obama has once again deployed his patented "offer free concessions in the hope that the GOP stop comparing me to Pol Pot" negotiating strategy:

    President Barack Obama on Monday called for freezing the pay of 2 million federal employees, saying the move is the first of many difficult decisions that must be made to slash the nation's mounting deficits.

    "The hard truth is that getting this deficit under control is going to require some broad sacrifice, and that sacrifice must be shared by the employees of the federal government," Obama said.

    The two-year freeze would apply to all civilian federal employees, including those working at the Department of Defense, but would not affect military personnel. The freeze is expected to save more than $5 billion in savings over two years, $28 billion over five years and more than $60 billion over 10 years, White House officials said.

    Joe Lieberman apparently thinks this is a great idea. Joe Lieberman also wants to keep tax cuts for the richest 2% of Americans in place. In other words, Joe Lieberman supports denying pay increases to VA nurses taking care of wounded vets just so Paris Hilton can keep her precious, precious tax cut.

    In case you haven't noticed, our political ruling class is deeply, deeply evil.

  • And finally, Heidi Moore has a good piece on how banks plan to skirt capital requirements using (GULP) synthetic collateralized debt obligations:

    Here’s the new development: Banks are increasingly planning to use these synthetic C.D.O.’s to reduce the amount of capital they use to back up derivatives deals for clients. Derivatives are inherently riskier. Basel regulations call for banks to keep at least 7 percent of regulatory capital on hand to offset their risky businesses.

    [...]

    Here is an example of the way these synthetic C.D.O.’s usually work: A bank may lend up to $2 billion to, say, a group of 100 companies. The bank would usually have to commit about 7 percent to 8 percent of the face value, or up to $150 million, to protect against the default of those loans.

    The synthetic balance sheet C.D.O.’s bundle that risk away. The C.D.O. bundle is full of contracts that protect the bank if the derivatives trades fail. The protection means that the bank has to hold less money in regulatory capital. As a result, after using synthetic C.D.O.’s, the bank has to commit only a fraction of its own capital — around $10 million or less in this case.

    The whole idea behind capital requirements is that banks should have enough liquidity to handle significant withdrawals during a financial panic. If the banks are instead outsourcing this requirement to firms like A.I.G. in the hopes that they'll be able to cash in on insurance policies during a full-blown economic crisis... uh, eep?

  • Today's Doom Index: Gold futures rose by $3.20 to settle at $1,367.50 yesterday. Yields on 10-year t-bills dropped by 0.35% and closed at 2.82%. Thank God Obama is instituting a federal pay freeze -- otherwise who knows how the bond vigilantes might have responded!
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