Jobless Claims: On the Right Track?

The number of new jobless claims dropped by 21,000 in the weekly report released yesterday, providing some hope that the employment figures may finally be turning the corner. The number of people filing new unemployment claims - 434,000 - was the lowest it's been since July. The four-week moving average, which is supposed to smooth out any hiccups in the figures, is also at the lowest rate it's been since July.

Except for that blip in July, new jobless claims were at their lowest since August 2008, or just a few months into the recession. The number of people who are continuing to receive unemployment benefits is at 4.36 million; that's the lowest that figure has been since November 2008. Of course, some of the drop in that figure is the result of people using up all their unemployment benefits.

The Labor Department's official unemployment report for the month of October will be out next Friday. At that point, we'll have a better idea of whether this was just a blip, or a genuine cause for optimism.

Cutting Down on Risky Trading

With last May's "flash crash" still heavy on their minds, the SEC is on the verge of banning a process called "naked access," in which brokerages permit their customers to trade on their computer codes without oversight. While brokers use risk controls and algorithms to prevent automated trades from spinning out of control, their clients are under no such obligations.

It's important to realize who the brokerage's customers are, the ones the SEC are concerned about. It's not some guy making trades out of his basement; more likely, it's what's known as quantitative trading firms. These are firms who buy and sell stocks based solely on what their computer algorithms are telling them to buy, which means they have a tremendous advantage if they're not limited by the broker's customary controls.

This is a huge business. By one estimate from earlier this year, naked access accounts make up nearly 40 percent of all stock trades. While eliminating this type of trading would reduce the possibility of enormous, instantaneous drops in the market, it's anyone's guess what other effects it might have.

Foreclosure-Gate Reaches New Jersey

The foreclosure mess is really hitting home here in New Jersey, with the announcement that seven plaintiffs have filed a class-action suit in Newark against Bank of America and two of its subsidiaries. According to the suit, BofA has been foreclosing on homes in New Jersey when it had no right to begin the proceedings.

Among the specific claims brought in the suit:

* A homeowner took steps to get his mortgage modified and began making his reduced payments, but he was foreclosed on anyway.

* Another homeowner took the bank to binding arbitration and won his case - only to have the bank ignore the arbitrator's decision and foreclose anyway.

The end result of all this won't be an end to foreclosures in New Jersey, of course; it will only slow them down. The vast majority of foreclosures are on homes that legitimately should be foreclosed upon, even if it's not clear who has the authority to begin the proceedings. One positive aspect of all this, other than forcing the banks to get their own houses in order, might be to stretch out the pace of foreclosures, resulting in a more orderly number of homes going up for sale. That could have a small but positive effect on our overall housing market.

Wages Dropping

The Social Security Administration has released its figures regarding wages and salaries for 2009, and they shed some light on the effects the recession has had on our national income. Overall, 150.9 million Americans reported earned income in 2009, down 4.5 million from the number in 2008. Not surprisingly, the average earner saw his income drop by $384, down to $39,269, in 2009.

Toward the upper end of the scale, a total of 78,149 Americans earned a million dollars or more in wages and salaries (not counting capital gains) in 2009. That number was down from 101,200 people making a million dollars in 2008. The number of Americans who made more than $10 million dropped from 2,539 to 1,620. And at the very top end of the scale, the number of Americans making $50 million or more dropped from 131 in 2008 to just 74 in 2009.

No matter where you fell on the wage scale, 2009 was not a good time to be in the workforce.

Forecasting the GDP

We're due to get the official third-quarter GDP report from the Commerce Department on Friday of this week. In the meantime, Bloomberg News has asked a group of economists for their forecasts, and they're expecting the growth number to come in at a quarterly increase of 2 percent. That would be up slightly from the second quarter GDP growth of 1.7 percent.

The primary cause of the upswing: the rise in consumer spending. Considered to constitute roughly 70 percent of the American economy, consumer spending is thought to be up an annual rate of 2.4 percent for the June-to-September quarter. The National Retail Federation projects holiday spending to up 2.3 percent over last year.

So that's the good news. If the economists' forecast is correct, it probably means that the recovery is strong enough to sustain itself for a while, making a double-dip recession even more unlikely. The bad news is that even 2.0 percent GDP growth probably won't be enough to make a dent in the unemployment rate.

Bad Cop

It's getting so you can't even trust the police anymore. Remember the TV show CHiPs, about two Callifornia highway patrol cops, which was on the air from 1977 to 1983? If you do, then you remember Officer Jon Baker, played by Larry Wilcox (pictured at right), who was the partner of Ponch Poncherello, played by Erik Estrada.

Well, Wilcox appears to be working on the other side of the law these days. After CHiPs ended, Wilcox moved into business, running a software company called MediaCore and a pharmaceutical firm called Team Elite. Lately, he's been running a firm called the UC Hub Group, which has been pushing penny stocks on stockbrokers and pension-fund managers - including, if you believe the SEC charges against him, offering kickbacks to the fund managers if they'd buy Wilcox's stocks.

Wilcox's problems began when he and his associates tried to sell some of the stocks to undercover FBI agents. He offered to set up phony consulting companies for the purchasers, paying them money to do nothing - except buy his penny stocks for their clientele. This is, of course, highly illegal. It's an embarrassing fall for a man who was once one of America's favorite policemen.

The Latest From the Beige Book

The Fed's Beige Book, reporting on economic conditions around the country, was released yesterday (and if you're thinking that this comes out somewhat irregularly, you're right - it comes out eight times a year). As always, the news on New Jersey is divided between the New York office, covering the northern half of the state, and the Philadelphia office, covering south Jersey.

Many of the reports from those two offices were in sync this time around. For instance, the commercial real estate market showed "practically no change in market conditions" in Philadelphia, while the New York office reports that commercial real estate has "generally been steady."Manufacturing appears to be picking up slightly in both regions. Overall, the northern half of the state reports that the economy "continues to expand at a modest pace," while the southern half says the business outlook is "positive, but not robust."

One interesting note: The Beige Book reported that although consumer spending was up slightly, it was mostly limited to necessities and non-discriminatory items, and consumers remained very price-sensitive. Separately, it noted that wholesale prices had been rising, but those costs had not been passed along to the consumer. One reason that inflation has been kept in check, perhaps, is that the consumer just won't stand for it.

To read more of the latest Beige Book report, click here.

Foreclosure-Gate

As you've probably heard, the latest iteration of the housing crisis is what's being called foreclosure-gate, in which many of the nation's largest banks have been foreclosing on properties that they may not even own. With thousands of homes in foreclosure around the country, and the ownership of many of them unclear, banks have been rubber-stamping foreclosure documents without, in some cases, ensuring that they hold the title to the property. In one case, Bank of America foreclosed on the house of a man in Fort Lauderdale, Florida - even though he had paid cash for it and didn't have a mortgage.

You'll recall that the housing crisis was driven by the practice of securitizing and selling off mortgages, often chopping them up into little bitty pieces. One of the results of this is that it's not clear, at this point, who owns many of the houses that have been foreclosed on. In many instances, the foreclosures have been initiated by a little-known company called MERS, which maintains an electronic registry of mortgage records. MERS doesn't actually hold any mortgages, just the records of them, but it has begun thousands of foreclosure proceedings anyway. Whether or not it's legal for it to do so remains very much an open question.

What we do know is that the attorneys general from all 50 states have signed on to an investigation of the foreclosure process, which shows how expansive, both geographically and politically, this problem has become. What all of this will do to a still-fragile housing market is anyone's guess.

Back and Forth

In keeping with the one-step-up, one-step-back nature of this economy, we had two contradictory economic figures released yesterday. The National Association of Home Builders found that confidence among homebuilders was at its highest level in October than it had been since early summer. The confidence level also exceeded the expectation of the economists surveyed by Bloomberg. That measure bottomed out in January of 2009, but it may finally be headed for positive territory.

So that's the good news. On the other side, overall production in the U.S. fell by 0.2 percent in September, which also came as a surprise to economists. That's a drop in the output of all American factories, utilities and mines. Now, 0.2 percent is a very small number, but still, it should be moving in the opposite direction.

The differences might be explained by the anticipation of the Fed's moves, in which they're expected to purchase a significant amount of Treasury bonds in early November. It could be that that's what causing the backwards-looking numbers to be more sluggish than the forward-looking ones.

The State of the Estate Tax

As we head into the home stretch of this election season, one issue that hangs in the balance for a new Congress to tackle is the estate tax. As you probably know, there is no estate tax for 2010, but it is scheduled to return in 2011, at a rate of 55 percent on estates valued at more than $1 million. But neither party seems comfortable with letting this situation stand. There are several proposals that may come into play, depending on who wins control of Congress in November:

* The most visible Democratic proposal, from Senate Finance Committee chairman Max Baucus of Montana, would set the new estate tax to its 2009 levels: a rate of 45 percent, with an exemption of $3.5 million.

* On the Republican side, Senate Minority Leader Mitch McConnell of Kentucky has suggested raising the exemption level to estates worth more than $5 million, and lower the tax to 35 percent.

* More than 250 congressional candidates, primarily Republicans, have pledged to permanently repeal the estate tax.

So that's three possibilities that are out there. We've got a new article on the Echelon Wealth Strategies Web site discussing how the estate tax got to this point, where it's headed, and what it means to you. To read the article, just click here.

Not Even the IRS Would Sink So Low

There's an email going around, purportedly from the IRS, claiming that there's something wrong with the recipient's electronic payment. It's October, and IRS payment are due in April, but bureaucracy moves at the sort of pace, right? The email offers the recipient an easy way to refile the payment online.

Of course, it's a scam, designed to get you to enter a credit-card number to make up for the missing payment. For one thing, if the IRS has any issues with your taxes, they will get in touch with you via the good old U.S. mail. If your electronic payment is ever rejected, you'll get a detailed letter in the mail explaining the situation. They're also very careful about giving you multiple points of access to them, including a phone number and information available at www.IRS.gov.

For its part, here's how the IRS responds to such "phishing": The IRS does not initiate taxpayer communications through e-mail. In addition, the IRS does not request detailed personal information through e-mail or ask taxpayers for the PIN numbers, passwords, or similar secret access information for their credit card, bank or other financial accounts.

The Worst Credit Cards in America

Consumer Reports recently announced its choices for the two worst credit cards in America. While it's unlikely that you've got either one in your wallet, their more horrific aspects can provide lessons in what to look for - or not look for - in a credit card.

The First Premier Bank Mastercard advertises that it charges a one-time $75 "first-year annual fee." What it doesn't advertise as boldly is that it also charges a subsequent-year annual fee of $75 as well. There's also a processing fee, ranging from $25 to $95, and a fee just for raising your credit limit.

That card is aimed specifically at people with poor credit, so you're not very likely to end up with one. But you might stumble into something like the Platinum Zero Visa from Applied Bank, which claims it has zero interest, zero application fees, and zero annual fees. But after six months, the card starts charging $9.95 per month - which means you end up paying over a hundred bucks a year for something with "zero" fees.

For more, see the latest issue of Consumer Reports.

The Presidential Effect

We talked recently about the effects of a deadlocked Congress on the stock market, but the presidential elections, of course, have a profound impact on the economy as well. And of course, as with every other possible effect on the market, someone has studied this too. It turns out that the period just after the midterm elections have been historically pretty solid.

There have been 17 elections in the middle of a presidential term since 1942. Each time, the following 200 days produced a gain in the S&P 500 of at least 18 percent. We'll be starting the next such period less than a month from now.

And there's another potentially positive indicator. The breakdown for the Dow Jones' return in the various years of a presidential term (from 1900 to 2009) are as follows:

Year 1: 5.5 percent

Year 2: 3.7 percent

Year 3: 12.6 percent

Year 4: 7.5 percent

Obama's Year 3 starts in January 2011. Does this mean anything? Is it all just a fluke? Who knows, but at this point, we'll take all the good news we can get.

Driving Down the Dollar

The economy may be getting a boost from a trend that sounds a little bit counterintuitive: the weakness of the dollar. In the past quarter, the value of the dollar fell by 8.5 percent in the Dollar Index, which tracks it against the yen, euro, British pound, Canadian dollar, Swiss franc and Swedish krona. That's the biggest quarterly drop since June 2002.

In a sense, that is also what the Fed would also be doing early next month if it buys up Treasurys, as Fed chair Ben Bernanke has signaled recently. If the Fed buys up a significant amount of these bonds - one estimate holds that it will purchase $600 billion worth - that will have the effect of injecting that amount of money into the economy. Basically, that's $600 billion in the pocket of whoever the Fed buys those bonds from.

And one of the effects of that is to put more dollars into the economy, thereby lowering the value of all of them. Just the speculation that the Fed would take this move drove the dollar last week to its lowest level versus the yen in 15 years. With a weaker dollar, our exports will cost comparatively less for foreign buyers, and they'll be able to snap up more of our goods and services. That's the plan, anyway; we'll see how well it works.

The Bad News on Jobs

So last week's unemployment figures were disappointing yet again. Although the overall unemployment rate was unchanged at 9.6 percent, the economy lost 95,000 jobs in September.

The worse news is that the broadest measure of unemployment, commonly called U-6, dropped again to 17.1 percent, the highest it's been since April. That includes people who have stopped looking for work and people who would like to find full-time jobs but have had to settle for less than that. Temp jobs are up 23 percent since September 2009.

If there's a silver lining in all of this, it's that the private sector did add new jobs for the month, with 64,000 workers hired. The reason overall job loss was so high was that the government shed 159,000 jobs. But even that is problematic. It's one thing when these are census workers losing their jobs, since we expected those jobs to be temporary in the first place. But in September, state and local governments lost more workers (83,000) than did the Census Office (76,000).

The Facebook Stock Fraud

You knew it was going to happen: The Manhattan U.S. attorney's office is investigating a stock-fraud case in which alleged criminals used social media Web sites - including Facebook and Twitter - to pump up stocks. Shareholders who fell for the fraudulent stock touting ended up losing over $7 million. There were 22 people involved here - mostly longshoremen, of all people - who posted "false and misleading statements," according to the complaint filed against them, then made "coordinated purchases and trades... in order to sell the cheaply purchased stocks at higher prices."

The fact that there were so many fraudsters involved here probably was instrumental in duping so many people. If you see 10 or 12 of your "friends" on Facebook all getting excited - and seeming to have insider knowledge - about a particular company's stock, it's easy to fall for the ruse. The wisdom of the crowds is a very real phenomenon.

But this is one more reason to stick with prudent, long-term investing. Once you hear about a hot stock tip, that should be the beginning of the research process, not the end. If all those people had looked into the longshoremen's tips and discovered for themselves whether the stocks were really worth buying, they'd be $7 million richer today.

Raises on the Rise

If you got a bigger raise this year than last year, you're not alone. According to the human-resources consulting firm Aon Hewitt, the average raise received by salaried American workers this year is 2.4 percent. In 2009, by contrast, that same worker got an average raise of just 1.8 percent. According to another survey, the average raise is expected to rise modestly again, to 2.7 percent, in 2010.

The 2009 figure was the lowest in the history of the survey. So in a way, there was nowhere to go but up.

Aon Hewitt also reports that it is getting hired significantly more often to give compensation advice in 2010, which it calls a good signal for the recovery. Put together, if people are getting bigger raises and companies are hiring more top-salaried employees, that's a sign that we may be seeing the first rumblings of a solid increase in employment.

Predictions on Financial Reform

Do you think that the financial reform legislation that was passed over the summer will help our financial sector be more competitive? For most people, that depends on where you live. In the United States, 48 percent of all executives surveyed by McKinsey expect the bill to be either somewhat or very negative with respect to the competitiveness of the U.S. financial-services industry. Only 29 percent expected the effects to be somewhat or very positive.

But in the rest of the world, it's a very different story. In areas outside the U.S., only 25 percent of the executives surveyed said the new law would make the U.S. less competitive. More than half thought it would make the financial sector more competitive.

Overall, 41 percent of the executives worldwide thought the financial reform was good for American banks. Just 38 percent thought it would be negative; only 3 percent saw it as very negative.

Behind the Flash Crash

Remember back in May, when the Dow plunged almost 1000 points within the space of an hour? The official report as to the cause of that little episode came out last week. Here's what happened in a nutshell: A trader put out an order to sell more than $4 billion worth of S&P futures, without specifying a price at which to sell those futures, which would have smoothed the sale out over time. That put 75,000 E-Mini S&P futures on the market all at once. With all those shares coming quickly onto the market, to be sold at whatever price they could fetch, their price came down very rapidly.

That trade was made by an actual trader, but several automated trading programs picked up on the big sale and the price drop, and automatically followed suit. Those S&P futures are considered bellwethers for the stocks in the S&P 500, so when traders saw the futures plunging, many of them began selling off the underlying stocks as well.

Eventually, cooler heads prevailed, and the market quickly made back all those losses when people realized the drop had been caused by, essentially, nothing. The SEC hasn't yet decided if it needs to implement additional regulations to keep such plunges from happening in the future, although it has put circuit breakers on the market to halt or slow trades of any stock that moves more than 10 percent in a five-minute period.

The End of TARP

Last week, the Treasury Department announced that it was in the process of unwinding the billions of dollars it had loaned AIG, the insurance giant at the center of the financial meltdown, and that the government might actually turn a profit on that aspect of the TARP program. TARP is in many ways officially over, so the New York Times yesterday provided a bit of a postmortem on the program. Some highlights:

* Although the bailout fund was initially funded with $700 billion, and is often described that way, it was actually reduced to $475 billion by the financial reform act passed last summer.

* Banks received $250 billion, of which $158 billion has been paid back. The government projects that this aspect of the program will eventually result in a profit of $5 billion to $20 billion for the Feds.

* The Big Three automakers got $82 billion, including money for lenders like Chrysler Financial and GMAC. Of that, about $15 billion has been paid back. For this part of the program, the government expects to eventually lose from $15 billion to $34 billion.

* A fund of $46 billion was created to help troubled homeowners modify their mortgages, but this has been a failure. Only 15 percent of eligible loans have been modified, and all the money is expected to be lost.

Double Dose of Strength

We had good news from two disparate sectors of the economy on Thursday, which may be a positive signal for this recovery. First of all, the manufacturing sector posted surprisingly strong figures in September, with the Institute for Supply Management's business barometer soaring to 60.4. Anything over 50 is considered to indicate expansion. The economists surveyed had expected the number to come in around 55.

Meanwhile, retail stocks posted their biggest quarterly gain since 2003 for the quarter that ended yesterday. The S&P Retail Index was up 19 percent, with the biggest gainers being Liz Claiborne (up 44 percent for the quarter) and the Warnaco Group (up 41 percent).

Those factors probably fueled the mild drop in workers filing new unemployment claims, which dropped by 16 percent last week. None of these figures on its own is the sign of a rip-roaring recovery, but the fact that they're so broad-based gives us reason for cautious optimism.