President Barack Obama said he is looking for compromise in the coming months to end a two-year fight with Congress over how to reduce the deficit, promising Americans in his weekly radio address that he will try to find common ground with lawmakers.

Turning away from the sharp rhetoric he has used in recent weeks to blame Republicans for $85 billion in government spending cuts that took effect March 1, Obama this week highlighted how he is working with lawmakers in Congress.

"The fact is, America is a nation of different beliefs and different points of view. That’s what makes us strong, and frankly, makes our democratic debates messy and often frustrating," Obama said.

"But ultimately what makes us special is when we summon the ability to see past those differences."

The warm and fuzzy message contrasted sharply with Obama’s radio addresses from the past two weeks, when he blasted Republicans for protecting the rich and hurting the middle class and accused them of "partisan recklessness."

"We just need Republicans in Congress to catch up with their own party and the rest of the country," he said last week.

But this week, Obama turned on a charm offensive, having lunch with Paul Ryan, the Republican chairman of the House Budget Committee and the party’s 2012 vice presidential nominee, and dinner with a dozen Republican senators.

Obama described the meeting with senators as "an open and honest conversation" that he plans to continue next week, when he plans to visit Capitol Hill four times.

Obama said he will talk about immigration reform and new gun control proposals in the meetings, as well as the deficit.

His visits come during a week when both chambers are slated to unveil their budget plans for 2014, and the Senate also considers ways to adjust spending for the rest of 2013 to try to ease the impact of the March 1 "sequester" cuts.

Obama said Friday’s news that the jobless rate fell to 7.7 percent last month – lower than when he first took office in 2009 – showed "momentum" in the economy that risks being stalled by Washington’s political gridlock.

"In the months ahead, there will be more contentious debate and honest disagreement between principled people who want what’s best for this country," Obama said, adding he believed compromise is possible.

"And I know there are leaders on the other side who share that belief."

 

People need to start naming their kids Frank, and Bob again.

 

By James Saft

March 8 (Reuters) – Now that it is official that the U.S. Justice Department pulls its punches when it comes to prosecuting the largest banks, it is time for investors to understand why they, too, are the losers.

Attorney General Eric Holder came right out this week and told the Senate Judiciary Committee what many observers have long suspected – that his department has refrained from more aggressive criminal prosecutions of the so-called too-big-to-fail banks, exactly because of their special status.

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that … if we do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," Holder said on Tuesday. "I think that is a function of the fact that some of these institutions have become too large."

Lawmakers have expressed surprise that no corporate or personal criminal prosecutions emerged from the HSBC Holdings Plc case, in which the bank was fined $1.9 billion over money laundering, including money from Mexican and Colombian drug cartels.

Justice Department officials also cited economic stability concerns in December when announcing a $1.5 billion fine, but no criminal charges, against UBS AG, in a multiyear scheme to manipulate Libor and other benchmark interest rates.

In short, we have the top law enforcement official in the United States admitting that if a bank is big enough and systematically important enough, it will not be subject to the same laws as the rest of us.

First of all, it is Holder’s job to enforce all laws – not just the ones that he thinks are consistent with financial stability.

Secondly, he is almost certainly dead wrong that slamming a too-big-to-fail bank with a criminal prosecution would hurt the global economy. Indeed, it is quite the reverse.

OTHERS PUNISHED

The too-big-to-fail (TBTF) and too-big-to-jail status serves as a tax on the rest of us – everyone who uses a bank, invests in a bank, or invests in a company that uses banks, suffers.

Many investors commit funds to the too-big-to-fail banks because they figure their investments will benefit from the special status they enjoy. What, they reason, is not to like about a bank with implicit government backing and which, if it is caught with its hand in the cookie jar, won’t pay the full price?

A look at the funding costs of the biggest banks, estimated in an IMF paper at 0.8 percent lower annually than the rest of the market, reveals that investors are indeed putting their money behind TBTF banks.

For investors, there is no getting on the right side of this kind of wrongdoing as the very poor share performance of the TBTF banks over the past decade amply demonstrates.

Lots of people were getting rich off of Citigroup, for example, but they weren’t the widows and orphans with Citi shares in their mutual funds; they were employees who took big risks, took home big rewards and didn’t have to stand good for the mess they made.

The strength of the rule of law has to be one of the biggest protections for shareholders, and whatever weakens it threatens them. A country with lawless and entitled large banks is a country which will have lower structural growth and worse investment returns. Sound familiar?

Money will be badly allocated, both because TBTF banks will have an incentive to make financial products as complex as possible, and because bank employees will game the system to their own advantage. Heard this story before?

Imagine for a moment that a certain class of large hospital got a big subsidy, like the banks in funding, but couldn’t be sued for malpractice. What do you imagine the impact on healthcare would be?

Looked at from ground level, this is going to sting investors even if they try to take advantage of TBTF banks’ special status.

TBTF bank employees will have even more incentive than before the crisis to take on too much risk and to flout the law. After all, they will continue to pocket huge sums and the most they can lose is their job rather than their liberty.

Senior managers, whatever they say, have less reason to control their subordinates, and given the short shelf life of so many banking careers, that much more incentive to make coin while times are good. Money will flow into and out of the largest banks, but very little of it will be captured by those actually footing the bill.

While Holder was right in calling for better measures to end too-big-to-fail, he was dead wrong in his calculations of the costs of the matter. We are all paying, every day.

 

Private sector hiring expanded by 246K, whereas government payrolls declined by 10K – This is what American progress should look like.

 

After a two-month delay, the time for sequestration has finally come. Equity markets took the news in stride, hav­ing already anticipated that Congress would not bridge the gap before today. At the time of writing, President Obama was scheduled to meet with top members of the House and Senate to discuss how best to proceed on both revenue and expenditure related issues. At this point, the chances of an­other last minute deal to come out of this meeting are slim to none. If the past is any indicator of the future, President Obama will most likely make another push for a delay or reduction in spending cuts combined with a closing of loop holes and other deductions. Republicans will undoubtedly dismiss any such proposals, remaining steadfast on their position to further increases in revenue. The end result, continued stalemate in Washington.

Although sequestration officially kicks in today, the effect is already being felt. Fourth quarter GDP revisions which were released yesterday morning showed that the U.S. economy grew by a paltry 0.1% (annualized) in the final quarter of 2012, as opposed to the initially reported -0.1% (annualized) contraction. The revision disappointed relative to market expectations for growth of 0.5% (annualized), with government spending being one of the main culprits – subtracting a sizeable 1.4 percentage points from the tally.

The question now is: how much more of a drag can we expect? Sequestration will result in $85 billion dollars of cuts to the budget authority over the remaining 2013 fiscal year, and a total of $1.2 trillion over the next ten years. However, not all of the $85 billion in reduced spending authority will result in actual spending cuts this year. Because outlays can carry over from previous years, departments will be able to offset some of these cuts. In fact, the Congressional Budget Office (CBO) estimates that outlays, due to sequester, will fall by only $44 billion in the 2013 fiscal year. This equates to a 4.6% reduction in outlays over the remaining fiscal year that will be split evenly between discretionary defense and non-defense spending.

Unlike the fiscal cliff, the effects of the sequestration will not be felt immediately. Rather, the $44 billion in cuts to outlays will slowly be introduced over the course of the next seven months. Barring any further negotiations from Washington, the drag on real GDP during 2013 could be as large as 0.6 percentage points. While the impact of the sequester alone is not catastrophic, it is coming atop of a depressed economy that has struggled to find traction since the recent tax increases – a by-product of the American Tax Payer Relief Act of 2012.

At this point, changes to our GDP forecast will be mod­est (-0.1 percentage points), as we had already assumed considerable fiscal consolidation following the January tax-deal. While there is a possibility that sequestration is here to stay, there is also a chance that the House and Sen­ate could succumb to mounting public pressures over the coming months to reduce or eliminate it. Ideally, a deal to reduce sequestration would consist of a credible long term plan to shrink the deficit through a combination of revenue increases and more carefully directed cuts to discretionary spending.

Equities could not be more over bought right now. I guess QE3 worked.

Shares halted for DELL

 

U.S. non-manufacturing continues to expand albeit at a slower pace

 The U.S. Non-Manufacturing indexed slipped modestly in January to 55.2, down from a revised 55.7 the

prior month. This was slightly better than what the market had expected which was 55.0.

 The employment sub-index increased to 57.5 which is the highest level since March 2012. New orders

fell for the month of a January, to 54.4.

 Business activity retreated to 56.4 on the month. The price index on the other hand, edged up indicating

an increase in inflation for the month of January.

Key Implications

 While the gains in the manufacturing numbers released last Friday surprised us all, the same cannot be

said for this morning’s release of the U.S. ISM non-manufacturing index. The service sector continues to

expand and sustained improvements in employment levels will keep driving it forward.

 Total non-farm payroll numbers released last Friday reaffirm the ongoing recovery to the labor market.

Probably more important than the January release were the upward revisions to 2012Q4′s job numbers,

which added an additional 150k jobs in the final three months of the year. Moving forward, we expect

that the ongoing strength in the labor market will continue to provide a boost to the service index.

 The negative GDP print last week, although disappointing, was more of statistical anomaly than

anything else – attributed to sharp drops in transitory factors such as defense spending and net trade.

There is no question that the expiration of the payroll tax-breaks and looming spending cuts pose

considerable headwinds in the near term. Although corporate balance sheets remain strong, businesses

will most likely remain on the sidelines for the first half of 2013, and wait for this fiscal storm to pass.

Once it does, we believe the stage is set for stronger growth in the US.

ISM manufacturing index jumps up in January

 The U.S. ISM manufacturing index rose to 53.1 in January from 50.2 in December, which was well above

market expectations of 50.7.

 The details of the report were mainly positive across the board. Production is up to 53.6 (from 52.6), while

new orders were up 53.3 (from 49.7). The employment sub-index also faired well – up to 54.0, which is the

highest level since last June. Inventories increased to a whopping 51.0 on the month, up from 43.0 in

December.

 New import and export orders both fell on the month to 50.0 and 50.5, respectively. However, both remain

in expansionary territory.

Key Implications

 This month’s release of the ISM manufacturing index shocked everyone, coming in well above what the

market had expected. Don’t think this month’s release was a fluke either – with new-orders still coming in

above inventories, expect production activity to continue to expand in the coming months.

 Net trade ended the final quarter of 2012 on a weak note, with imports and exports declining by 3.2% and

5.7%, respectively – singlehandedly the largest decline in both since the recession. This morning’s data

release showed that new manufacturing orders in January for both imports and exports had weakened, but

still expanding nonetheless. Over the coming months, we expect new orders to pick-up as there have been

signs of stronger than expected growth coming out of the emerging markets – China in particular.

 The non-farm payroll release that came out earlier this morning showed 4k jobs were added to

manufacturing in January. The string of gains in manufacturing jobs is consistent with the increase shown

in the ISM employment sub-index. Job creation will continue at a modest pace over the next several

months, but will be restrained by the ongoing uncertainty surrounding how Congress will proceed on

handling both the debt-ceiling and the large-scale automatic spending cuts (set to kick in March 1st, 2013).

Once Washington can provide some clarity on these issues, we believe that it will instill more confidence in

businesses and provide an extra kick to job growth.

Auto sales kick off the year on a strong note

 U.S. auto sales kicked off the year pretty much where they left off in 2012. According to

Ward’s data, January’s seasonally adjusted annualized rate came in at 15.2 million units.

This is slightly below December’s 15.3 million unit tally, but still a 14% increase over

January 2011 levels.

 Nearly all automakers recorded an increase in sales relative to year-ago levels. Of the

top eight leading brands, Toyota (+27%) led the way, followed by the Detroit Three –

Ford (+22%), Chrysler (+17%) and GM (+16%) – and Honda (13%), who all had double

digit gains. Sales increases were a marginal 2% at Hyundai, Kia and Nissan.

Key Implications

 Although we’re only one month in, 2013 is shaping up to be another great year for auto

sales. January is typically a weak month for auto sales. So the fact that they maintained

the strong pace set at the end of 2012, and did so with lower incentives – Truecar

estimates that incentive spending was down 12% from December and 8% from year-ago

levels – suggests that momentum is running strong.

 While it is possible that January’s tally is inflated by Hurricane Sandy, several auto

market-specific factors– including pent-up demand, aging vehicles, and a number of new

models for the 2013 model year hitting the market – remain in place and will continue to

prop up sales this year. An easing in credit conditions will also play a key role, as lenders

are offering a number of attractive, low cost options. For details on trends in the auto

credit market, see a recent report entitled “Auto Finance a Bright Spot for Auto Lenders“,

available on our website.

 In addition, there are other factors in the broader economy that will help sustain a sales

pace of over 15 million units this year. The housing market recovery appears to be

gaining more traction, stock markets have been rallying and the economy has been

consistently creating jobs. All these factors will help to boost consumer confidence, and

in turn allow consumers to feel more comfortable making big-ticket purchases. That said,

there is still a risk that the failure of American politicians to agree on spending cuts and

another lift in the debt ceiling could derail confidence and the recovery. However, this is

not our base case scenario.

U.S. economy keeps turning the crank on jobs

 January produced 157K new jobs, which was not far off from consensus of 165K. All the job creation

was in private payrolls (+166K) and was broadly based.

 Today’s report incorporates the combination of annual benchmark revisions, updated seasonal

adjustment factors and updated population estimates. The net effect was an upward revision of +422K

jobs (+424K NSA) between April 2011 and March 2012, which was greater than the preliminary

estimate that was reported of 386K.

 The unemployment rate edged up to 7.9% from 7.8%.

 With the housing market on the comeback, construction jobs are finally responding. January produced

28K new jobs, and the 3 month average is now 27K.

 The other sectors with the strongest gains were retail (+33K), education/health (+25K), leisure (+23K),

professional/business services (+25). Gains in the latter three industries does not come as a surprise,

they were the first to return to pre-recession levels.

 The government sector continues to shed jobs, particularly at the local level. However, revisions

tempered some of the negative news on this front. Prior to the revisions, local governments had

slashed an outsized 71K jobs in educational services between Sept-Dec. Those losses are now more

muted at -28K. January saw a further deceleration in education job losses of -4.7K, and the hope is that

the worst of the cuts in this sector is behind us.

Key Implications

 We expect the U.S. economy will chalk up roughly 2 million jobs by the end of 2013. This would be

similar to 2012, but this time we expect strengthening momentum to be back-loaded in the year. This

corresponds with an unemployment rate hovering at a still-elevated 7.5% at the end of this year, and we

don’t foresee it returning to the Federal Reserve’s 6.5% guidance until 2015.

 If Congress is able to quickly resolve the battle over spending cuts, the debt ceiling and the budget, it

would remove a major weight to growth in the first half of this year. However, a forecast based on this

outcome in the current political environment is a Hail Mary pass. So, we believe hiring will remain on

the tentative side until greater policy certainty is apparent. The cautious behavior of businesses has

been well documented by the subdued pace of equipment investment growth, even with the rebound

that occurred in the fourth quarter. Investment has a tight leading relationship with private payrolls. You

don’t get a sustained pick-up in the second without the first.

U.S. economy keeps turning the crank on jobs

 January produced 157K new jobs, which was not far off from consensus of 165K. All the job creation

was in private payrolls (+166K) and was broadly based.

 Today’s report incorporates the combination of annual benchmark revisions, updated seasonal

adjustment factors and updated population estimates. The net effect was an upward revision of +422K

jobs (+424K NSA) between April 2011 and March 2012, which was greater than the preliminary

estimate that was reported of 386K.

 The unemployment rate edged up to 7.9% from 7.8%.

 With the housing market on the comeback, construction jobs are finally responding. January produced

28K new jobs, and the 3 month average is now 27K.

 The other sectors with the strongest gains were retail (+33K), education/health (+25K), leisure (+23K),

professional/business services (+25). Gains in the latter three industries does not come as a surprise,

they were the first to return to pre-recession levels.

 The government sector continues to shed jobs, particularly at the local level. However, revisions

tempered some of the negative news on this front. Prior to the revisions, local governments had

slashed an outsized 71K jobs in educational services between Sept-Dec. Those losses are now more

muted at -28K. January saw a further deceleration in education job losses of -4.7K, and the hope is that

the worst of the cuts in this sector is behind us.

Key Implications

 We expect the U.S. economy will chalk up roughly 2 million jobs by the end of 2013. This would be

similar to 2012, but this time we expect strengthening momentum to be back-loaded in the year. This

corresponds with an unemployment rate hovering at a still-elevated 7.5% at the end of this year, and we

don’t foresee it returning to the Federal Reserve’s 6.5% guidance until 2015.

 If Congress is able to quickly resolve the battle over spending cuts, the debt ceiling and the budget, it

would remove a major weight to growth in the first half of this year. However, a forecast based on this

outcome in the current political environment is a Hail Mary pass. So, we believe hiring will remain on

the tentative side until greater policy certainty is apparent. The cautious behavior of businesses has

been well documented by the subdued pace of equipment investment growth, even with the rebound

that occurred in the fourth quarter. Investment has a tight leading relationship with private payrolls. You

don’t get a sustained pick-up in the second without the first.