The Diabolical Deadline of the Rating Agencies

Panic artists drummed up fear as September ended and the government shut down. It closed, but the sun rose the next day and stocks stayed put. Then people like me started warning of the debt ceiling deadline, suggesting that it was the true point of no return. But one deadline is at least as potent as that drawn by the U.S. Treasury for October 17th, but more dangerous because of its stealth nature. It is very likely the reason why Congressional leaders convened last Thursday to work towards a short-term solution. It is the deadline vaguely drawn, gray and opaque, the one set down by the credit rating agencies.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

You see, with one fell swoop, Standard & Poor’s, of McGraw-Hill (Nasdaq: MHFI), or Moody’s (NYSE: MCO) or Fitch could easily shock the market. If two of the above were to downgrade the sovereign rating of the United States, the effect could be as bad as a default on payments to our creditors, if not worse. The impact would be global too and I expect quite apocalyptic. So I curiously wonder here if that biblical demon of old referred to as the Anti-Christ in the Book of Revelations might in fact be Standard & Poor’s and its fellow rating agencies. Unfortunately, such impossible word play seems to gain disturbing credence when we recall the fact that on March 6, 2009, the market index by the same name stopped at an intraday bottom value of precisely $666. It was the low point of the financial crisis, but was it also meaningful for “the one who has understanding?”

You’ll recall the uproar when S&P downgraded America’s credit rating last year; it was for the very reason I speak of here. Yet, there was no catastrophic impact to our nation’s borrowing capacity or to interest rates. Why is that? Because unless two or more rating agencies cut America’s AAA credit rating, all the mutual funds and other funds bound by charter to own triple-A credits would not have to sell their core holdings of U.S. treasuries; nor those of municipalities which would be overcome by the fall of the parent nation’s rating; nor those of the corporations which run out of the land of the free. Neither would our nation need to offer a more appealing yield to sell debt, and so raise all interest rates and cut the dollar at its knees. But if two rating agencies do act in concert this time around, then we may be done for.

I was not surprised Tuesday to hear Senator Reid warn that the rating agencies were very likely already at work on a plan of action. The Democratic Leader indicated that a downgrade could come as early as Tuesday evening. Indeed, Fitch later warned that it might cut our AAA rating. My friends, if this scenario is about to play out, we as a people should be taking it as seriously as we would nuclear missiles in the air. Actually, I believe we should be taking it even more seriously than we would that nightmarish plot. I would go so far as to call it treasonous to allow this situation to reach the midnight hour, and I would place those at fault into custody for such an inexcusable underestimation of risk. Ignorance is no excuse here; an appropriate anomaly might be a clumsy government representative accidentally hitting the red button. How would he pay for that mistake? Wouldn’t it be too late anyway? If we can stop the failure before it occurs, we should. The President must intervene in this case, and ensure the government does not ruin our nation.

The impact to our economy and to the global economy of an undermining of the reserve currency and of the risk-free rate, the basis of all security value, is worse than a nuke touching down. Interest rates would rise for everyone in America, and for all those people living across the world in nations holding U.S. debt and the dollar as their reserve currency. This covers every developed nation in the world and everyone else as well. Only those nations rich in alternative currencies like gold and silver would benefit from such a global disaster, because as the buying power of the dollar is destroyed, the value of those precious metals, mankind’s natural reserve currency, would rise. This is why today, as the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) fell, the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV) gained ground.

The words read, “This calls for wisdom: let the one who has understanding calculate the number of the beast, for it is the number of a man, and his number is 666.” These times call for patience and tolerance from the leaders of this nation and also from the rating agencies. However, from the people, the times call for activity not passivity. I advise every person living in this nation and every global leader to contact those American Congressmen holding up the simple raising of the debt ceiling for the sake of other partisan interests; or better yet, to stand at their doorsteps so that they understand that the levity with which they are handling this matter is intolerable. I am not the only voice who believes the consequences of a failure here may be irreparable for America; nor am I alone in my view that it could also be devastating for civilization. But the time for chatter and debate has passed, and the time for action has come. If no resolution occurs immediately, the President must intervene for the sake of reason.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

PEG Ratio - Kaminis Yield Adjustment (PEG-KYA)

Markos Kaminis earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Price-to-EPS-to-Growth Ratio (PEG) seeks to value a stock relative to growth expectations and is useful for investors seeking Growth at a Reasonable Price (GARP). The measure is used to value growth stocks. In the case of a growing company that also pays dividends (a sort of hybrid), the measure fails to incorporate the portion of capital return from the dividend yield.

The paying out of dividends weighs on growth for companies that can readily find it. It is also a substitute capital use (return to shareholders) for a firm that is considered better off not investing toward growth that may be beyond its reach or better suited for other firms. Investors can make the capital investment decision for themselves. For instance, it makes no sense for a company like McDonald’s (NYSE: MCD) to engage in the development of a new electronics product, especially since I can buy Apple (Nasdaq: AAPL), a top notch producer of novel electronics, myself.

Analysts’ earnings models incorporate the drag of the dividend in that growth is tempered (or saved for some) by that other use of cash versus investment in (or destruction of) the business. Still, dividend payouts affect the price of a stock as well, especially when value is largely in current equity, since a fractional portion of its total value is being paid out; and that would lower the P/E ratio to meet the lower growth outlook.

Still, assuming a company can maintain a dividend yield level and P/E ratio level as it grows means a certain return results to the investor. This is what matters, and why my adjustment makes sense. Perhaps this is most pure when the PEG ratio is 1.0 and assumed to stay that way. So, why not add back the dividend yield to the capital growth return expectation or the analysts’ five-year average annual growth forecast, since it contributes to total return just the same? That is exactly what I seek to do in my Kaminis Yield Adjustment to the PEG ratio. Let’s call this the Kaminis Yield Adjusted PEG Ratio or PEG-KYA©™ - this is hereby copyrighted and trademarked, along with all variations and uses including for forecasting target prices for stocks.

Perhaps this argument cannot hold forever as companies age, but what argument can? If it can hold for five years, the length of the growth forecast, then the valuation metric should be valid and useful.

Incorporating the Kaminis Yield Adjustment (KYA) to the PEG Ratio The process is rather simple. All you need to do is to first consider the five-year average annual EPS growth forecast as a capital appreciation or return estimate. Since the dividend yield also contributes to total return, simply add the dividend yield to the five-year growth forecast or the denominator of the PE/G ratio. This gives us a total return estimate, which we can then compare to the P/E ratio value. It’s going to give credit to a company for its dividend payout, and more accurately reflect value, especially in the case of hybrid growth/dividend payers. This measure can also be used to estimate future value and to forecast target prices. I’ll produce a second article to help investors to do that. Look for additions and corrections within the comments of this blog post.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The 4th of July – My American Heritage

We want to take this moment to wish our dear friends, readers and fellow Americans a happy Independence Day. A little known fact about “The Greek” is that he is a patriotic American citizen, born in the United States with a childhood dream to become President of the United States, among seven other things. Yes, I have been a limitless dreamer since the start of it all.

What some of you may not know about me is that I am a patriot, and that I believe fully in my heart in what the Declaration of Independence and the Constitution assert for our nation. I would defend those God given rights with passion if need be. Before our government ever offered it, my father offered the U.S. government (a sheriff in Houston Texas to be specific) to serve our armed forces in Korea in exchange for American citizenship. Unfortunately, or fortunately, he was turned down and did not become a citizen until decades later.

Two of my uncles have served in the armed forces, with my Uncle John having been a Ranger (paratrooper) in Korea, who thankfully was returned home safely to us just before that infamous battle known to you as “Hamburger Hill.” He does not speak of his time in service, and we do not ask him about it, but we are so very proud of him.

My Uncle Tom served as a marine, and boy is he the epitome of the American marine. He’s the toughest mother I’ve ever known, and I’ve known some tough guys. You know, I delivered pizza as a kid, and in some bad neighborhoods where I needed to carry a blackjack to ensure my safety. Well, once when threatened by some thugs who were eating on my car, after I got them off it, I knew exactly who to call. I told my uncle they threatened to “get me” after work, and he showed up in the parking lot with a gun and a bat. He was an expert marksman and a Master Sergeant, having served in Japan.

Our American heritage extends back to my grandfathers on both sides of the family, with my Grandfather Markos having ventured to America before World War II. It was both fortunate and unfortunate, as he ended up stuck here while the rest of the family had to endure Nazi occupation of our island. My father, in his childhood, with his starving siblings and mother left the island via a miraculous journey in the middle of the night on an overfilled boat at constant risk of sinking due to its excessive weight (one inch separated the sea and the ship’s rim). They endured the final year of the war in Egypt as refugees, where my father’s Grandfather Antonis died and remains buried. My grandfather on my mother’s side was a foreman at Bethlehem steel in Pittsburgh, PA. He led a group of Greek American painters and was the boss in every aspect of his life. Somewhere, I have a classic photo of him and his men around his Baby Overland Ford (NYSE: F); I’ll be sure to share that someday. For now, I’ll share my best wishes to my fellow Americans on this day marking our independence.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Fed Talk is Cheap

By The Greek:

Stocks were higher Wednesday despite a sharp downward revision to Q1 GDP and another report of decreased mortgage activity on spiking interest rates. The catalyst for stocks was some soft comments from Minneapolis Federal Reserve Bank President Kocherlakota and others. Well, talk is cheap; the action of the Federal Reserve to pull away its asset purchase programs prematurely speaks louder than words. As a result, I do not expect this latest support to hold unless it is followed by a change in policy.

Security	June 26 Change
SPDR S&P 500 (NYSE: SPY)	+1.0%
SPDR Dow Jones (NYSE: DIA)	+1.0%
PowerShares QQQ (Nasdaq: QQQ)	+0.9%
Bank of America (NYSE: BAC)	+0.7%
iShares Dow Jones US Real Estate (NYSE: IYR)	+1.5%

How desperate must traders be to be bidding up stocks on some contradictory comments from a regional Federal Reserve Bank representative when the truth about the economy shows it’s not as secure as the FOMC believes it to be?

The Truth

First quarter GDP was revised significantly lower this morning in its third revision, which usually does not bring with it major change. I’ll leave it to the reader to run the regression analysis to prove this, and trust in my own observations over the last lifetime on this one. GDP is revised several times, and so by the third revision not much change is typical. Yet, Q1 GDP was cut to 1.8% growth from its recent reporting at 2.4% (that is a big difference for the mathematically challenged). The revised growth rate is consistent with the expectations of the World Bank and Conference Board for the U.S. economy this year, but less perfectly matched with the latest Fed view for 2.3% to 2.6% growth. Furthermore, judging by the trend over the last three Fed prints on this, the Fed’s economic forecast will be cut to 2.0% to 2.6% at next printing, in my view. Eventually, it might even make sense.

In its economic report the government stated: ”The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 2.4 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined.”

Add to that sour news the fact that mortgage rates spiked even higher last week, as reported by the Mortgage Bankers Association (MBA) today. For the week ending June 21, the MBA indicated that its Market Composite Index for mortgage activity fell by 3.0% to its lowest level since November 2011. Mortgage rates spiked last week after the Federal Reserve’s press conference announcing the tapering plan for the asset purchase programs. Here’s what happened to rates in the latest week:

Mortgage Loan	Rate	Change
30-Yr. Fixed Conventional	4.46%	+29 Basis Points
30-Yr. Fixed Jumbo	4.52%	+29 BPS
30-Yr. Fixed FHA Sponsored	4.20%	+35 BPS
15-Year Mortgage	3.55%	+25 BPS
5/1 ARMS	3.06%	+25 BPS

Perhaps not so surprisingly, Purchase Activity actually increased in the latest reported period, as some buyers on the fence rushed to lock in as low a rate as they could. Some believe rising rates will increase mortgage activity, and while I agree this could be a short-term phenomenon, it will not be a long-lasting sustainable economic positive or a catalyst for growth in the housing market.

So why then are stocks rising counter to intuition?

Fed Speak

Minneapolis Federal Reserve Bank President Narayana Kocherlakota wanted to clarify what he thought was a misinterpretation of the market since the FOMC Monetary Policy release and press conference. So on June 24, he published this clarifying statement and held a conference call to discuss the issue. He also appeared on CNBC this morning to discuss the issue, where I believe he caught the market’s attention.

President Kocherlakota’s statements were meaningful, mostly because they seem to give the Fed an out of this horrible trajectory it has decided on. The fact that this event occurred showed that there is some pressure on the Fed today about how markets have digested the message. Therefore, it may eventually react to stop the trend in mortgage and interest rates, hopefully in time to stop serious economic damage. But until it does, none of this matters.

The market believes the Fed is acting prematurely and taking away a critical support from the real estate recovery and from the still vulnerable economy. Interest rates will continue to rise as a result and the Fed thus destroys its own economic work. Talk is cheap, and actions speak louder than words. So the Fed should accept that the efficient market has spoken and that it was a mistake to taper asset purchase programs over the near-term, period.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Fed's Funny Math

I know our math skills are poor in this nation, but the Fed would not try to blatantly pull the rug over our eyes while testing our elementary math skills would they? Let me get out my calculator and try this again, because my math skills must be failing me. So the Fed is saying then that 3.0% – 1.5% = 2.8%? Did they really just say that? Let’s move on to the lower end of the GDP growth forecast range for 2013. So then the money men are saying that 2.3% – 1.5% = 2.3%? What is this phantom math or quantum physics? Are there assumptions here that are beyond human comprehension? Is it just me, or do the numbers not add up? Fed Chairman Bernanke just reconfirmed in his press conference that there was a 1.5% drag to economic growth this year. So why didn’t that drag show up in the latest Fed forecasts? Did the Fed just lie to me?!?!

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

They say, “Fool me once, shame on you; fool me twice, shame on me.” I stopped getting fooled by Fed economic forecasts when they said the financial crisis would be contained within the real estate sector at the end of the last decade. Then some time passed and Ben started to grow on me I suppose. I even grew a beard like his. Before I knew it, I guess I can say in the words of Nicki Minaj, my new favorite American Idol judge, “I beez in the trap!” (Warning – the linked to video contains profanity) Actually, so does my ego right now. I mean, we just took the Fed for its word and authored this article, Fed Warning – Expect a Sharp Cut to the Economic Forecast. I suppose I should have continued, “but based on the new math…”

What bothered me most was that during his press conference, Bernanke reiterated that there would be a 1.5% drag to Real GDP growth this year. Okay then, so where did the 1.3% offsetting and quite suddenly arriving factor come from and what is it exactly? Because otherwise, this math just does not add up. I’m sitting here with a calculator, a sundial and the spirit of Nostradamus losing my mind over this thing. I may have to send Nosti to dig up Einstein or Steven Hawking, because this math may have dimensional aspects to it or fall under string theory. Unfortunately, I hear the genius mathematicians are busy battling. I would like to see an Epic Rap Battle between Bernanke and Greenspan.



Here’s the actual Fed forecast. The simplicity of the PDF should have tipped me off I suppose. The math is reminiscent of something actually. It reminds me of the adjustments some of my superiors used to make to their tear sheet stock reports without earnings models to support them. Is the room spinning for you too? This is phantastic. I just can’t make sense of it, so it really deserves nothing more than a cynical editorial really. What really peeves me about it is that real money is moving on this news, and nobody (I mean nobody!) is questioning it. The market gained on the day and rose into the close. On what?!

Security	Blind Direction
SPDR S&P 500 (NYSE: SPY)	+0.7%
SPDR Dow Jones (NYSE: DIA)	+0.4%
PowerShares QQQ (Nasdaq: QQQ)	+0.7%
iShares Russel 2000 (NYSE: IWM)	+0.9%
iShares Dow US Real Estate (NYSE: IYR)	+0.6%
Financial Select Sector SPDR (NYSE: XLF)	+0.7%
SPDR Gold Trust (NYSE: GLD)	-0.5%

All those reporters got up and asked questions and not one of them said, “Um, Mr. Bernanke, could you help me get the math here?” I think the Fed has some explaining to do. What say you?

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only. This article interests Bank of America (NYSE: BAC), J.P. Morgan (NYSE: JPM), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), Exxon Mobil (NYSE: XOM), Apple (Nasdaq: AAPL), Facebook (NYSE: FB), Google (Nasdaq: GOOG), GE (NYSE: GE), Microsoft (Nasdaq: MSFT), Cisco (Nasdaq: CSCO) and Ford (NYSE: F).

5 Economic Issues that Need Reconciling

There are times when the stock market and the economy diverge. In March 2009, for instance, when stocks started higher, the economy was still far from reflecting a turn. Today, the market is pricing in better days, but the economy is still flashing red. Only time will tell if the market has forecast correctly or not. For now, 5 economic issues still need reconciling.

1. There’s a glaring issue with the most important data point measuring economic health. Real Gross Domestic Product (GDP) was just revised higher, but to just above zero. At 0.1%, the expansion in the fourth quarter could not have been any closer to recessionary territory. Furthermore, we know the sequester cuts will cost the economy approximately 0.6% GDP points this year, part of a 1.5% weight that the Federal Reserve says fiscal policy is adding prematurely to our backs in 2013. 
2. Corporate earnings estimates are being revised lower, and that is a bad economic signal that is especially hard for stock investors to ignore, and yet they are. Factset (NYSE: FDS) reports that all 10 sectors reported downward revisions to Q1 2013 EPS estimates. There were 82 companies warning on first quarter earnings, while just 25 pre-reported positive surprises. 
3. The improvement reported by the government in the Employment Situation Report is questionable. My review of the report indicates that an employment participation rate closer to that of 2006 would have unemployment at 11.8% and underemployment at 18%, and neither improved over the prior month’s data, as was reported by the government. 
4. Small businessmen, who drive the American economy and employ a great number of Americans, are so pessimistic in this period of economic growth that the National Federation of Independent Business’ (NFIB) Small Business Optimism Index is lower now than it was at the trough of two previous recessions. 
5. The well-being of the European economy is in serious question, with the European Central Bank (ECB) recently revising its expectations lower. Germany is facing recession and people are so fed up across Europe that the Italians almost brought back Silvio Berlusconi. The Greeks, who fought so valiantly in World War II that Winston Churchill said heroes fight like Greeks, have a faction raising flags in protest that makes me so angry I want to go knock a few ignorant brethren out. My father almost starved to death in the war and lost an Uncle as a refugee in Egypt, escaping only through that famed friend of Greece, Turkey on a boat so full of desperate people that it had just an inch left between it and the sea before it would fill with water in the middle of the night. A Nazi pig put the bottom of his boot onto my uncle’s preteen forehead, after he traded them wood for bread, and pushed him down a cement staircase without the bread. That was when they decided they had better leave. I just hope that the world realizes that the ignorance of a handful of Greeks does not represent nor even hold a candle to the love of many more God fearing Greek people who fought against fascism at great cost.

Chart by Yahoo Finance

I suspect I could dig up a few more economic issues than this, and I welcome readers to add their own pet peeves within the comments hereunder. We have not even broached the schizophrenic state of affairs in Washington D.C., and yet on Tuesday, as the Dow was flirting with ending its streak of higher highs, the SPDR Dow Jones Industrials (NYSE: DIA) and the Dow itself broke into green ground just before the close (marking 8 straight days of gains). Still, the SPDR S&P 500 (NYSE: SPY) and the PowerShares QQQ (Nasdaq: QQQ) ran out of trading time to get there, and closed down 0.2% and 0.4%, respectively.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Seriousness of the Sequester

There’s a debate at play in the market this week as to whether the “Sequester” is serious enough of an issue to worry about or if it’s just an overblown political ploy. I for one do not see the Sequester as anywhere near as serious an issue for investors to consider or stocks to discount as the debt ceiling or the fiscal cliff, and I believe the market agrees. Still, there are some specific points about this Sequester issue that are still highly concerning, all of which focus attention on the silly way our politicians are going about our business and still failing at it.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Sequester

The Sequester is a set of self-inflicted wounds pending implementation on March 1st unless other offsetting action is taken by the government to redirect and control budget cuts. Dreamt up in 2011, the set of sequester cuts have been designed to be so undesirable to both political parties as to lead our politicians to a better compromise. However, even this self-destructive and politically preposterous consequence has so far been unable to get our bifurcated government to budge.

Federal Reserve Bank Chairman Bernanke opposes Sequestration, indicating that it adds an unnecessary burden to a not so hot economy. The impact of Sequestration is estimated by the Budget Office to be 0.6% against Real GDP growth this year. That contributes to a 1.5 percentage point drag to Real GDP caused by spending cuts this year, according to Bernanke’s prepared testimony to Congress this week. Chairman Bernanke adds that a slower recovery would actually lead to less deficit reduction due to its stifling of economic growth. Bernanke suggests replacing Sequestration with policies that reduce spending less dramatically in the near-term, though more substantially over the long-term.

Still, take note that the Sequester does not threaten to drive the economy into recession. We realize that our budget deficit is a serious long-term issue, especially if entitlement programs are not addressed. So bearing some cost now may be beneficial to us later. You might consider it like bearing fever while your body fights off a virus; it’s necessary though painful. And like the debt ceiling issue, controlling the budget should help to support the full faith in credit of the United States and so keep our borrowing rates manageable, but it does so in a very meaningful way. Raising the debt ceiling just sort of passes the buck. Unlike the fiscal cliff, the Sequester does not put as much direct pressure on the economy as a whole, but on sectors of it. Only certain consumers will be burdened instead of all of them or the most in need. Where the fiscal cliff threatened to drive the economy into recession, the sequester cuts (or cuts of some sort to replace them) represent a lesser drag but reflect important medicine.

Stocks have been moving lower off early year highs on fear, with the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) all volatile lately. However, today, as we near the implementation of the $85 billion in spending cuts scheduled for March 1st, the SPY, DIA and QQQ are actually gaining ground. Positive economic data is proving more powerful than the sequester threat.

While it’s unfortunate that the forced spending cuts aren’t leading the government to work together for better solutions, it’s worse that the defense sector gets held hostage for it. After feigns and fake outs too many other times though, the stocks in the sector have not flinched until recently. There’s a sort expectation that things will be worked out as always, but I’m not sure they will be this time. As you can see by the table below there’s no relative underperformance visible in the sector or the specific stocks listed against the performance of the SPY. Still, if the cuts go into effect stocks operating in the specific areas of cuts will likely see impact. Obviously, a heightening likelihood of the confrontation of Iran is working in the group’s favor and helping to support shares nonetheless.

Security	February Through 2/26
SPDR S&P 500 (SPY)	+0.2%
PowerShares AeroSpace & Defense (NYSE: PPA)	+1.1%
General Dynamics (NYSE: GD)	+0.9%
Honeywell (NYSE: HON)	+1.9%
Northrop Grumman (NYSE: NOC)	Unchanged
Rockwell Collins (NYSE: COL)	-0.1%

But what bothers me most about sequestration is the fact that the government had to resort to ploys to force itself into action, and what’s worse is that those ploys have not even worked as yet. All the government has done is shined the spotlight on itself and its weaknesses, and that only serves to further destabilize it and bring radical powers and parties into greater favor, like we are seeing now in Europe. Our representatives had better wake up and lead before they are replaced because of their ineptness, and by their own doing. As we stand today, I am not sure if Washington has done more to help stocks or to hold them up, but I am certain that it could do more for the investment sector.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

We Must Address American Labor Force Attrition & Atrophy

By The Greek:

The latest Weekly Initial Jobless Claims Report looks harmless enough to the casual reader, but upon closer inspection, it continues to reveal great attrition in the American workforce. It’s the reason why I recently suggested the real unemployment rate was closer to 11.8% than the government’s reported 7.9% rate.

Weekly unemployment insurance filings increased by 20,000 in the period ending February 16, but only rose to 362K. That’s mild enough for a market used to rates running nearer to 400K for what seems like the last decade now. Indeed, the claims count was just a few thousand higher than the economists’ consensus expectation for 359K this week, as compiled by Bloomberg. The four-week moving average for jobless claims reveals a less dynamic environment, with an 8,000 increase in the latest period, to 360,750.

However, what is bothering me today is the ongoing trend in American labor that is hiding the true state of affairs. A tragic number of Americans have been unemployed for far too long, with some 4.7 million Americans or 38% of the total unemployed count out of work for at least 27 weeks. The way the system works is that these people are counted for as long as they are letting the government know about their situation. They have incentive to do so when collecting unemployment insurance, either through the regular program or the extensions program. But if they are to continue to be counted post the expiration of their 99 weeks of extended benefits, then they must file for welfare or some sort of other government support and report their ongoing unemployment. I’m not even certain the government has its act together well enough to count people who remain in the system in this way.

So, as a result, what we have seen is a shrinking labor force count that a lot of economists want to attribute to demographics and the retiring of baby boomers (some 10K a day estimated). However, the employment participation rate has dropped too substantially too quickly, and I think it’s because of the factor I’m laying out for you here today.

In this weekly report, the Department of Labor offers information on the total number of Americans receiving benefits of some sort through all programs. Now, extended benefits are no longer being offered in any state to those Americans just now filing for their regular benefits. In the period reported, for the week ending February 2nd, the total number of unemployed Americans receiving a benefit of some sort was 5.6 million.

Please take a seat now as I report to you something very important. In the just reported February 2nd period, this number dropped by 307,848. Some will say it’s due to an improving American economy and retiring baby boomers, but it is surely also due to American laborers simply falling off the radar screen. It’s unfortunate and it angers me. We must get a good count of these people, so that the government can focus on helping them in some way, either through training programs or some sort of support if they are not receiving any currently. I have a great concern that many jobs lost as a result of the financial crisis may never be recovered, and that certainly will be the case if we do not go the extra mile here.

Now, there is a worker shortage in construction, as I heard from Toll Brothers (NYSE: TOL) during a recent investor conference I attended in Philadelphia. So, many of the long-term unemployed and some of the forgotten described herein will start to hear about new opportunities at homebuilders now. Though, builders recently backed off a bit in terms of their enthusiasm about prospective buyer traffic.

Also, there are small mortgage lenders hiring like mad now in order to fill the mortgage lender shortage that has arisen. It’s due to the destruction of so many firms through the real estate collapse, and the burden major mortgage lenders still bear today, especially Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS). Many of the day’s biggest lenders, including Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM) are applying tighter standards today as well. But BofA and the others are also shy to lend more due to the size of their outstanding mortgage loan bases and lingering questions about MBS liability. Plus, the returns have not been very attractive, thanks to Federal Reserve created synthetic demand for MBS.

We need to get a good count of the real unemployment rate so that we may target those struggling Americans for training and other forms of support. It’s time for Americans to go the extra mile and to give our struggling brothers a leg up before they fall down for good. I believe if this situation were better understood, the SPDR S&P 500 (NYSE: SPY) and the SPDR Dow Jones Industrials (NYSE: DIA) would not be quite as hot as they have been this year. But the truth always comes to the surface, so we have an opportunity to preserve the situation if we act on long-term unemployment rather than stand by waiting for it to heal or go away.

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