Today we get our first glimpse at what the true cost of the Health Care Reform bill will actually cost America. This morning AT&T gave us the first Billion Dollar Red Flag.  According to their filing with the SEC, AT&T will take a $1 Billion dollar non-cash charge expense recorded against their first quarter 2010 earnings.  So much for the Obama administration's claim that health care reform would have no direct costs until 2014!  "AT&T Inc. ("AT&T") intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change.  As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company." http://www.sec.gov/Archives/edgar/data/732717/000073271710000017/filing8k.htm   Earlier, both Caterpillar, and John Deere Corp made similar moves, but they were ONLY $100 Million, and $150 Million respectively.

So just what does this mean?  Well, Stock price values come primarily from Earnings Per Share (EPS), and for AT&T this is approximately an 8% hit, Caterpillar 11%, and John Deere would be roughly 16%.  This tells us that major corporations will all need to be taking similar charges (SEC rules Require these charges be posted as soon as a company is aware of them) which means that all of their stock prices are now overvalued by whatever portion of their earnings these represent.  Guess which way stocks should be headed over the next few days/weeks?

So if this is happening now because of changes to RETIREE benefits, what do you suppose will happen when the corporations begin "evaluating prospective changes to the active" workers?  I'm sure glad this is going to be DEFICIT NEUTRAL to America! 

One more thing, 4th quarter GDP was revised lower today, and the latest economic forecasts project lower growth ahead which means less tax revenue.  These charges decrease profits further so we will get the double whammy of lower production, with lower profits resulting in Lower Tax Revenue to help fund our Increasing Deficit.

So what comes next for Interest Rates, and the housing industry?

This is the $64,000 question (actually given today's hyper spending maybe that should be $64 Million Question). The last couple days have seen a significant spike in interest rates, and there are a number of reasons, but they all eventually come back to the overspending by our government. Specific to this week is the health care bill, and with it comes some fairly stark world opinion of the passage of this plan. While the Obama administration, and the Democrat party are selling the American public on the idea that this will somehow lower the US deficit by several hundred Billion Dollars, the rest of the world is not buying.

The final Treasury auction of this week saw what is basically a 20% decline in participation that Wall Street Bond traders directly attribute to the passage of the Health care bill.  Investors paid about 10% less for every dollar of debt, and Indirect Bidders (mainly Foreign Central Banks) bought roughly 20% less than they have been over the last year.  http://www.marketwatch.com/story/treasurys-recover-after-rout-7-year-sale-on-tap-2010-03-25  Their take on the latest auction results is that investors believe private corporations are a better credit risk than the US Government!

Add to this with the knowledge that the Federal Reserve stops buying Mortgages (actually Mortgage Backed Securities - MBS) next Wednesday which means the private sector will have to step up to replace what amounts to nearly 80% of the mortgage market buying. That is the same private sector that is viewed by investors as being more responsible with their budget than the US government.

So what do you think they will expect for a return on their investment compared to the Fed? 

I sure wish I could claim this as an original material analogy, but it comes from an Economics Professor at the University of Georgia, and I only saw it as an outsider's comment so I could not Re-blog it in the author's name. 

I believe this is the best explanation available to bring true understanding of the United States Tax system, and its political manipulation for the majority of Americans.

Suppose that every day, ten plumbers go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four plumbers (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth plumber, Joe (the richest) would pay $59.

So, that's what they decided to do. The ten plumbers drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

'Since you are all such good customers, he said, I'm going to reduce the cost of your daily beer by $20.

Drinks for the ten now cost just $80.

The plumbers still wanted to pay their bill the way we pay our taxes so the first four plumbers were unaffected. They would still drink for free. But what about the other six plumbers - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth plumber and the sixth plumber would each end up being paid to drink his beer. So, the bar owner suggested

that it would be fair to reduce each plumber's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!

And so:

The fifth plumber, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

Joe, the tenth, now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the plumbers began to compare their savings.

'I only got a dollar out of the $20, 'declared the sixth plumber. He pointed to Joe, 'but he got $10!'

'Yeah, that's right,' exclaimed the fifth plumber. 'I only saved a dollar, too. It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh plumber. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'*

'Wait a minute,' yelled the first four plumbers in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine plumbers surrounded Joe and beat him up.

The next night Joe didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.

Professor of Economics, University of Georgia

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

Here is an interesting way to look at the long term success potential for the White House's Making Home Affordable Modification Program. 

I previously covered the problems associated with the actual number of permanent modifications, and the frustration faced by those hoping for such a modification due to the fact that over 1.3 Million have applied and fewer than 120,000 have been granted a permanent mod.  This in itself is not so bad because there are many more in a trial status of their modification, but I just cannot get past the fact that over 57% of the permanent modifications were granted primarily due to loss of Income.  These are people who are either unemployed, or underemployed.

Now let's take a look at the gains by those families who were granted a modification. 

According to the latest press release, the median monthly savings is $521.85 (Monthly Pmt before Modification= $1,431.30 - After Modification= $835.33) which is significant, and meaningful.  However, there are two other statistics in this same section that need examination. 

First, the "Front End Ratio" or percentage of GROSS INCOME for that new housing payment is 31% - the Target ratio these days. This means the family has a Total Gross Income of $2,694.61 ($835.33 is 31% of $2,694.61). 

Second, the "Back End Ratio" which is the total of debts shown on the credit report plus the housing payment above is at a median of 59.7%.  So this family has $773.35 in revolving monthly obligations to go with their new housing payment (59.7% of $2,694.61 = $1,608.68 - Hsg. pmt. $835.33 = $773.35).  Keep in mind, these monthly obligations are only the MINIMUM payment required for credit cards, lines of credit, etc. as well as the car payments, and so forth.

A $2694.61 income implies they pay $206.14 in Medicare & Social Security, and would typically result in roughly $175 to $200 a month deduction for Federal Income Tax.  So what we have is a household that has less than $700 of discretionary income that they must use to pay for all the expenses not covered in their credit report.  These would include Food, Clothing, Electricity, Insurance, Fuel (home, car, or both), Water, Sewer, Garbage, Cable, Internet, etc. etc.  In my opinion, not a picture that screams sustainability (and yet only 10.7% of the modifications were granted due to "excessive obligations).

Now, if that is the best case scenario (after all, they were the less than 10% who actually got a modification) how bad is the picture for those who are being turned away?

 Here's the link to the study for the statistics for those who doubt the math.

http://www.financialstability.gov/docs/press/January%20Report%20FINAL%2002%2016%2010.pdf

As a result of the Financial Crisis/Credit Meltdown/Real Estate Bubble etc., the Federal Government has spent approximately 10% of our countries total GDP annually for nearly 2 years now in an effort to "ease the crisis."  So what have we gotten for our investment?

Currently we are told unemployment is not as bad as it could be, and is possibly easing after last month's statistics.  Despite this reassurance, we have admitted unemployment of nearly 10% which does not count an individual who has been out of work more than the 26 week initial unemployment period nor does it count the roughly 150,000 persons who wish to enter the workforce each month as they come of age (they have never had a job to lose, therefore they cannot be unemployed).  The reality is we actually have one in five (20%) of our workforce either unemployed, or underemployed.

So what is government's answer? In the State of Washington, the legislature is now in "Special Session" figuring out ways to increase taxes for the citizens in order to close an almost $3 Billion shortfall.  To be fair they have "cut" spending by nearly that amount already (but the reality of these "cuts" is that they are "cutting" the previous budget's proposed increases rather than actually cut what is currently being spent).  The problem is that our leaders are out of touch, and while running around trying to find more ways to take hard earned dollars from us in the form of taxes, they have not come up with any kind of plan to increase jobs other than continue spending on programs that are already in place.

The problem with all of this is simple.  There is little, if any, difference between what our government is doing, and an individual who goes out after losing their job, and makes no change to their lifestyle, but just charges everything on their credit card.  After all, they will eventually get a job again, and they will just pay the money back then right?

I don't know about you, but this does not seem responsible for an individual, so why is it acceptable by our government?

I heard on the radio this morning that today is one of those anniversaries of something I would normally never think about. It turns out that March 15, 1985 is the date of the registration for the first Dot Com ever. It was launched by a computer manufacturer in Cambridge, MA (of course they have been out of business for a long, long time now) well before Bill Gates even approached IBM.

At any rate, I'm just not sure if this should make me feel better, or worse that "Dot Coms" are now a quarter century in existence? Just think, the vast majority of this year's College graduates were not even born before the first Dot Com was issued!

You decide; does this make you feel Young, or Old?

Friday we received the "good news" that foreclosures are improving. I would argue that we are still in a very fragile state, and the recovery that this implies is debatable at best. Actually, what we are seeing is that banks are holding back on foreclosures that are long overdue. We have had a couple of moratoriums on foreclosures of homes that are occupied by families, and this is making a mess of the true housing market.

Banks allow families to stay in these homes because it serves to preserve the quality of the home by keeping it in a "lived in" condition. In turn, this helps the home sell more easily when it comes up for auction at a later date. Banks understand that our market is one of weak demand which means they are better off to hold these homes rather than have them add to what is still a very high inventory.

The Real question becomes what will happen when this phantom inventory of homes awaiting foreclosure hits the market, especially when we consider the following two facts.

First, we are near the end of the Federal Reserve's commitment to buying mortgages, and soon after we will see the end of the $8,000 First Time Buyer Tax Credit.

Second, the Home Affordability mortgage modifications are only being granted at a rate of roughly 1 in 10 applications, and of those granted over half are to households with either unemployed, or underemployed borrowers.

I'm just glad "the worst is behind us."

I got this in an email today, and checked out the authenticity.  Turns out it is entirely legit as verified by Snopes http://www.snopes.com/politics/soapbox/itoldyouso.asp 

This is a good read when you consider the source is a Canadian author who is not in line with the US main Stream media.  Here are a few excerpts:

When Obama won the presidency with the help of the leftist media, Hollywood and entertainment liberals, ethnic socialists (ACORN), stupid non-business professionals and Bush haters, I wrote: It won't take six months until the people figure this guy out and realize how horrible a mistake they've made. And when they come to that realization, the damage to the United States of America will be so great it will take a generation or more to repair - IF EVER.

I don't believe the Democrats have nearly as much love for their country as they do for their own political fortunes. And with Obama, their fortunes are rapidly becoming toast.

Here is the link to the full article http://www.galganov.com/editorials.asp?ID=1147

So much for the idea that Obama's world tour had a positive effect on America's image.

In a Wall Street Journal article today Barney Frank "warns" of a non government backed future for Freddie, and Fannie.  "Rep. Barney Frank has unexpectedly called into question the safety of investing in Fannie Mae and Freddie Mac." 

Basically, Representative Frank is saying that bondholders of Fannie & Freddie can't expect the government to step in and make good on these bonds.  This is something that I have been complaining about since that day in September 2008 that I look at as the official end of Capitalism.  When the government actually bailed out the mortgage giants, investors got exactly what they had been betting on all along.  After all, as quasi government agencies their investment risk was considered nearly on par with T-bills, but the investors were reaping far greater rewards throughout the housing bubble. 

The article states "Frank said that when the firms are restructured, debt holders could take a haircut and shouldn't assume that any losses would be covered by the government."  Now, if Barney is being genuine (which I find highly suspect) then his statement regarding potential government actions "from paying nothing to a haircut to whatever," would actually be the right thing to do.  If you don't believe me take a look at what the front page of a FNMA Prospectus looks like -

Specifically, notice the "NOT GUARANTEED BY THE UNITED STATES, AND DO NOT CONSTITUTE A DEBT OR OBLIGATION OF THE UNITED STATES..."

So if Mr Frank is being "frank" what does this mean for the Federal Reserve, and their $1.25 TRILLION in MBS purchases?  Do you think Ben might just be calling Barney to explain where the money has come from to purchase these toxic assets?

I find it interesting that these views come from someone born outside of America when current political winds would lead to the belief that conservative American values are hated throughout the world?