CNBC – The Lame Duck Network: Shilling For Short Sellers and Hating Obama Are Not Enough Anymore

Daytime ratings for the financial news network CNBC have been in free fall since the summer, when they hit a rock-bottom 21-year low.  The CNBC response, of course, has been to shoot the messenger by firing Nielsen as its rating agency! In fairness, CNBC has a point: Nielsen only logs at-home viewership and the financial news networks all have considerable out-of-home audiences, in gyms, offices and trading floors for sure. CNBC will design its own ratings system using the market research firm Cogent to include its mobile viewers,  while its competitor, Fox Business, sticks with Nielsen, and Bloomberg continues to sidestep the ratings game. But is there something more behind the change in CNBC’s fortunes besides not counting the office and gym audiences? After all, the same audiences also watch Fox and Bloomberg as well.

Just a couple years ago, the beginnings of CNBC’s ratings fall was attributed by some commentators to the allegedly more “liberal” or at least “market promotional” bias of the network.  This despite its history of championing the views of its Chicago commentator Rick Santelli, who was the godfather of the Tea Party and actually coined that phrase during an on-air rant against the then-new Obama Administration’s initiatives to help homeowners with underwater mortgages.

Santelli now enjoys a privileged position in CNBC’s morning programming, including his own “Santelli Exchange” segment that features animated, if somewhat repetitive and predictable, rants against Obama, ObamaCare, federal spending, “quantitative easing,” Central Bankers in general and the US  Federal Reserve in particular, as well as its Chair Janet Yellen and European Central Bank President Mario Draghi. This steady stream of daily invective against Obama and the Fed is amplified by “interviews” Santelli conducts with various market participants and commentators who share (not to say ‘parrot’) Rick’s views.  Typically these “interviews” represent the  views of some Chicago-based  option, futures and bond traders who hate Obama ideologically and have similar sentiments about the Fed , which has taken a lot of juice out of their trading activity by maintaining interest rates next to zero to help the broader (i.e., non-trading) economy recover from the near-depression of 2007 to 2009.

Santelli’s daily stream of invective-laced advice has not generally been beneficial for CNBC’s viewers who may have taken it. Santelli, for example, consistently argued, over several years, that the Fed’s easy money policies regarding interest rates and quantitative easing would have by now produced rampant inflation and a crash in the value of the US dollar, and advised investors accordingly. But in his usual manner he simply screamed and interrupted when CNBC’s only true expert on Fed policy, Steve Leisman, called him out in a live discussion. While Rick apparently simply denied he had made such forecasts, it is clearly on the record that he did (hat-tip to Business Insider).

But Rick Santelli is not the only reason certain viewers may be turning off CNBC, at least those at home (i.e., the retail investor).  Just last Friday, prominent “Fast Money” CNBC regular Guy Adami flatly declared that the US “economy is lousy” despite the most recently reported 5% quarterly GDP growth rate, in order to support his generally anti-Obama and anti-Fed views. Expression of such views is now obviously encouraged on CNBC as led by its key executive editor Patti Domm, who regularly posts blogs such as the one posted early on Friday, January 9 predicting material downturns in the market on the basis of ideological views, generally in line with the Tea Party and short-oriented hedge fund traders’ views of the economic policies of Obama and the Fed.  Beyond Ms. Domm, other CNBC staff writers who regularly post pieces suggesting imminent “corrections” or even crashes in the market include Jeff Cox, whose views seem to coincide with short-selling hedge funds as in his disparagement of the 321,000 November job creation report, which no doubt surprised some short-the-market hedge funds.

CNBC has been tracking Tea Party positions on issues like ObamaCare since 2009. This is perhaps understandable given Santelli’s paternity, but even more, he has been correlating the balance of its market commentary to promote the views of some short hedge funds that bet against the market in 2014 (and were wrong) and who seem poised to double down on that negative view entering 2015,  according to the Wall Street Journal. Not to be outdone, CNBC’s Jeff Cox jumped in a few hours after the Journal to propose that the recent dramatic fall in oil prices would  necessarily lead to poor corporate profits in the coming earnings season. This view, of course, is certainly within the pale of possible outcomes – that’s what makes markets.  But the fact is that you won’t find a contrary view on CNBC, just the negative, which tends of course to send retail investors to the “sell” button: just as when the same Jeff Cox made a similar downbeat prediction just before the 2014 earnings season started in mid-April. It turned out to be a pretty good year for investors who did not sell off stocks despite his advice and for the short hedge funds who profited on the stock market’s way down, and then could buy them up cheap before the stellar earnings reported during the rest of 2014

In short, CNBC should be asking itself why on earth it continues to show such favoritism for the views of market pessimists and short sellers – indeed, even facilitating such traders profit strategies – at the expense of their retail TV audience. Maybe the hedge fund titans take the CNBC folks to some fancy lunches, or maybe they’re mostly just like Rick Santelli who are heavily invested in their Tea Party political views and determined to impose them on its coverage patterns. But at the end of the day, why should anyone watch CNBC for actual market “news” on finance and the economy when the network seems determined to turn off its audience with programming that just mimics the style Fox News and at best helps only the short hedge fund crowd by scaring off retail investors just when the hedgies want them to be scared? If viewers want pure unadulterated negativity, they can get that on the Fox channel.

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Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

The Business School Dean’s Quiz For 2015

Give yourself three points for each right answer until the last, which, if you guess correctly, is worth four points. The Dean’s guesses are shown at the end.  We’ll compare our guesses with reality at the end of 2015.

  1. The most successful IPO of 2015: (a) Palantir (b) Shake Shack (c) DropBox (d) Uber (e) Vine (f) Koch Industries (g) 0ther.
  2. The national leader who will not survive the year in office: (a) Vladimir Putin (b) David Cameron (c) Kim Jung-Un (d) Raul Castro (e) Bibi Netanyahu (f) none of the above.
  3. M&A deal of the year (a) Yahoo/CNN (b) IBM-Fortinet (c) News Corp-Twitter (d) Apple-PayPal (e) Google-GoPro (f) Pfizer/ISIS Pharmaceuticals (g) Netflix-Pandora.
  4. Leader facing the strongest challenge from within his or her own support base: (a) Barack Obama (b) Pope Francis I (c) John Boehner (d) Hillary Clinton (e) Roger Goodell.
  5. S&P 500 at year-end 2015 vs. 2014: (a) up double digits (b) up single digit (c) basically flat (d) down.
  6. Federal funds rate at year-end 2015 (a) 1.25% or higher (b) 1% (c) .75%: (d) .50% (e) .25% or lower.
  7. Car maker of the year: (a) General Motors (b) BMW (c) Ford (d) Tesla (e) Fiat Chrysler.
  8. Will go out of business in 2015: (a) Sears (b) RadioShack (c) Sandridge Energy (d) Uber (e) JC Penny (f) AirAsia.
  9. Will default on its debt in 2015: (a) Russia (b) Argentina (c) Greece (d) Venezuela (e) Ukraine (f) Illinois (g) none of the above (h) all of the above.
  10. Surprise political event of the year (a) Hillary Clinton chooses not to run for President (b) Elizabeth Warren chooses to run, beats Hillary in New Hampshire (c) Obama-Boehner do a deal on immigration backed by Silicon Valley, Chamber of Commerce and Catholic bishops (d) Supreme Court again saves ObamaCare subsidies by one vote (e) Democrats concede nomination in advance to Mrs. Clinton, hold primaries for VP choice only (f) Romney runs again (g) none of the above.
  11. GOP presidential candidate who makes the most progress in the polls in 2015: (a) Jeb Bush (b) Dr. Benjamin Carson (c) Ted Cruz (d) Carly Fiorina (e) Mike Pence (f) Rick Santorum (g) Rand Paul.
  12. Print edition goes dark: (a) The New Republic (b) Time (c) Playboy (d) The Village Voice (e) Variety (f) The Atlantic Monthly (g) none of the above.
  13. “Comeback of the Year”: (a) Tiger Woods (b) Twitter stock (c) President Obama (d) General Electric (e) McDonalds (f) Oil (g) other.
  14. First producer to curtail oil production in 2015: (a) United States (b) Saudi Arabia (c) Russia (d) Venezuela (e) Iraq (f) none of the above.
  15. Keystone XL pipeline gets final approval: (a) True (b) False.
  16. Congress and the President agree on a corporate tax reform plan: (a) True (b) False.
  17. Microsoft spins-off X-Box business (a) True (b) False.
  18. Pope Francis conditionally allows communion for divorced/remarried Catholics: (a) True (b) False.
  19. Obama’s immigration executive order effectively blocked by Congress or the courts: (a) True (b) False.
  20. The European Central Bank initiates government and/or bond purchases (“quantitative easing”) to prevent European recession: (a) True (b) False.
  21. Unemployment in the US ticks up above 6% again due to oil industry layoffs: (a) True (b) False.
  22. A top-100 American private college files for bankruptcy protection (a) True (b) False.
  23. China GDP growth slows below 7%: (a) True (b) False.
  24. A major Canadian bank requires a bailout due to soured oil loans (a) True (b) False.
  25. Oil bust dooms Rick Perry’s presidential campaign from the get-go: (a) True (b) False.
  26. The interest rate on the ten-year Treasury note ends the year above 3.25%: (a) True (b) False.
  27. Campus fraternity bans challenged in court as a form of sex discrimination: (a) True (b) False.
  28. President Obama has the opportunity to replace one or more Supreme Court Justice: (a) True (b) False.
  29. Political rioting significantly disrupt commercial activity in (a) United States (b) Australia (c) France (d) Denmark (d) Germany (e) Greece (f) Spain.
  30. Private Equity deal of the year: (a) Whole Foods (b) any mattress company (c) RiteAid (d) VeriPhone (e) Garmin (f) Under Armour (g) none of the above.
  31. Hottest growth stock of 2015: (a) GoPro (b) Twitter (c) ISIS Pharmaceuticals (d) NXP International (e) Apple (f) Hortonworks, Inc. (g) New Relic Inc. (h) other.
  32. First CEO to go: (a) Dick Costolo – Twitter (b) Marissa Mayer – Yahoo (c) Ginny Rometty – IBM (d) Michael Lyntton – Sony Entertainment (e) Mark Emmert – NCAA (f) Debbie Wasserman-Schultz – Democratic National Committee.
  33. ‘Product of the Year”: (a) Apple’s I-Watch (b) the GoPro drone (c) NASA-derived ‘meal-in-a capsule’ (d) 3-D printers for kids (e) all-electric motorcycles (with recorded engine sounds) (f) Vines.

Guesses from Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University: 1(a) 2(f) 3(b) 4(b) 5(a) 6(c) 7(e) 8(b) 9 (g) 10(c) 11(b) 12(a) 13(c) 14(a) 15(b) 16(b) 17(a) 18(a) 19(b) 20(a) 21(b) 22(b) 23(b) 24(a) 25(b) 26(b) 27(a) 28(a) 29(c) 30(a) 31(f) 32(f) 33(d).

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

The Fright Before Christmas

‘Twas the week before Christmas

And all through the Street

Not a hedge fund was buying:

Instead—in retreat!

They’d bet big on oil—

Now they weren’t in the black,

So they sold off their winners

To take up the slack.

The stock market tone?

Like taps on a bugle:

Down Apple, down Exxon;

Down Chevron and Google.

Through sixty, toward fifty,

The oil price descended;

Sayonara to fracking,

That party seemed ended.

The Saudi oil barons

Had put on a squeeze,

To force US frackers

To fall to their knees.

The banks how they quivered

To fund Bakken field;

And don’t even bother

To think of high yield!

It’s goodbye to boom times,

Dakota and Texas:

You’ll take a big hit,

Best trade in the Lexus.

The big city bankers

Knew they were hurt, too,

So they called in their chits

At the Washington Zoo.

Their minions in Congress

Played games with Dodd-Frank,

And gave Morgan and Citi

A deal that just stank!

A little old rider

So quietly drafted

That none knew the score

Until they were shafted.

The law had told bankers:

Hive off your swap stakes,

So taxpayers won’t have to

Bail out their mistakes.

But a twist of an arm,

And a wink of an eye,

Let Congress make sure that

This mandate would die.

A government shutdown

Was thereby curtailed,

But the process revealed

That we were blackmailed!

Banks swore they were acting

For the good of the nation

But the Journal said greed

Was their main motivation.

If swaps get to stay in

Insured institutions

The banks get best prices—

A perfect solution!

So to maintain big profits,

The banks pulled a fast one;

Pelosi and Warren

Said it won’t be the last one!

Next, Senator Cruz tried

A fresh point of order

To tie up the Senate

On the Mexican border.

He said he was willing

To shut D.C. down,

To make sure illegals

Would be run out of town.

But despite (and because of)

The Cruz machinations,

Harry Reid passed the Bill,

And won key nominations.

Obama’s executive

Order prevailed;

Merry Christmas, five million;

You’re not going to be jailed.

And then, just as wild market swings

Before the next Fed meeting flew,

Came a slew of predictions

Easy money was through.

GDP is up strong

And so is employment,

Why would a quick rate hike

Spoil the enjoyment?

But Europe is slowing,

And China is, too;

And on top of all that,

Greece defied the EU!

There’s Putin, there’s ISIS,

The Afghanistan War;

But the truth is we’ve all

Seen this movie before.

The trick of the hedge trade—

Get others to panic

That the Fed will cause stocks

To sink like Titanic

By hinting they plan to

Raise interest rates quickly

When, despite some good data,

The world is still sickly.

The prediction,

Whatever the reason or rhyme,

Was the Fed would no longer

Take “considerable time”

Before they decided

To press on the brakes—

That thought would give most of

Investors the shakes.

They’d part with their holdings

Before the Fed meeting,

Which then would give the hedge funds

A frenzy for feeding!

But the Fed’s Janet Yellen

Was steadfast and bold;

She surprised TV pundits

And kept rates on hold!

“Considerable time”

Remained on the table:

Even  “patience” was added—

(Just to stick it to Cable?

Joy reigned in the market

For stocks of all sorts,

As hedge funds moved quickly

To cover their shorts.

On the very same day

The lame duck Obama

Decided to normalize

Dealings with Cuba.

Marco and Jeb said,

We shouldn’t take chances;

But Obama had cover

From good old Pope Francis!

The Spirit of Christmas

Was abroad in the land,

If just for an evening;

Who knows what’s at hand?

2015

May bring new solutions:

New Congress, new leaders,

New Year’s resolutions.

Just be careful next year

Not to give too much cred

To rumors, and phonies,

And all that you’ve read.

When writing your e-mails,

Don’t be a buffoon;

Don’t get on the wrong side

Of young Kim Jong-Un.

Things are looking better—

California’s turned soggy;

And Europe’s still trusting

In Mario Draghi.

And there seems a consensus

What’s best for our nation

Would be increasing pay

And a bit more inflation!

The Court will decide

If ObamaCare stays;

One way or the other,

Somebody pays.

But we’ve kept out Ebola,

When too many panicked;

Let’s send more help soon

Across the Atlantic.

Trust nurses and nuns,

Give our kids renewed hope;

And pray CEOs

Get as wise as this Pope.

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Could The Oil Price Crash Kill Keystone XL?

In late November, the lame-duck Congress came within one vote in the Senate of sending a bill to the President mandating approval of the controversial Keystone XL pipeline. That project would bring oil produced in western Canada – primarily from tar sands but also from conventional drilling – down to Nebraska and then on to refineries in Texas and Louisiana for processing into petroleum products for export to Asian markets. Republicans planning their takeover of the Senate and enhanced majority in the House of Representatives quickly vowed to renew their effort to force Keystone construction  as a priority after the first of the year, with visions of a possible ‘veto-proof’ two-thirds majority, including Democrats pushed by their unionized supporters attracted to the job-creation benefit, however temporary, associated with the Pipeline’s construction.

Just a few days later, the Organization of Petroleum Exporting Countries (OPEC) decided not to reduce their oil production below the current target of 30 million barrels annually, even in the face of an already precipitous fall of that commodity’s price from over $100 per barrel to a low $70 range since early summer. This fall is due to an oil glut on world markets, partially as a result of tremendous growth in domestic American oil production from shale rock through the process known as ‘fracking.’ The day after OPEC chose not to cut, the price of West Texas Intermediate crude oil (a proxy for what is essentially oil produced in the U.S.) sustained a further, dramatic drop of 10%, down to $66 per barrel.

Oil market professionals and observers had been speculating that Saudi Arabia and a couple of its Arabian neighbor states were purposely playing a ‘long game’ in terms of being willing to tolerate much lower per-barrel prices for their oil (and lower current returns to their ‘petrodollar’ economies and social welfare benefits keeping their young, restless unemployed off the streets) with the security of hundreds of billions of dollar reserves. The object of that game, it was supposed, was to force the oil produced by marginally and precariously financed shale oil producers in the U.S. out of the market. That is, shifting the burden of reducing the global ‘oil glut’ and ultimately increasing demand and a return to higher prices, from OPEC to America’s upstart producers. If a goodly number of U.S. producers happen to go bankrupt and cease shale oil production permanently because they become unable to service their debt due to lower market prices, so be it: all the better to restore and enhance Arab market share once the dust settles.

All of which seems to beg the question: even though we have waited through over six years of environmental studies and political haggling to settle the question of whether to build the Keystone Pipeline to bring more oil to American refiners and more jobs to the American recovery scenario, what’s the hurry now with so much oil product floating around the world that prices have fallen nearly 40% in less than six months, and look to fall even further into the coming year? “On further review,” as they say in football, maybe we need to replay the Congressional debate on Keystone to see if the apparently ‘obvious call’ to move forward really ought to be reversed rather than ratified by the new Congress. Indeed, there seems to be a case to be made that the Saudi’s real objective is not just to crush wildcat shale oil firms in the U.S. but also, and more importantly, to put a spanner into the tar sands works up in Alberta, which produces the same type of oil as most of OPEC’s Gulf States. Here we get into the ‘sweet’ and ‘sour’ distinctions in the oil market, which has a certain charm given that the Arabs and the Canadians are really caught in market share war over the Chinese market!

The fundamental difference between ‘sweet’ and ‘sour’ oil (the former predominant in the U.S. fracking production and the latter in the Canadian tar sands and Arabia) is the amount of sulfurous impurities (primarily hydrogen sulfide) mixed in with the oil. Hydrogen sulfide smells like rotten eggs in low quantities but can be life-threatening in higher amounts.  Sour oil is generally defined as having more than .5% of such impurities and must be shorn of them in the refining process before products like gasoline, kerosene and diesel fuel can be safely refined, increasing the production costs. So-called sweet oil (which actually tastes that way, and smells nicer, too) has less than .5% impurities and thus can be more routinely and cheaply refined into those core fuel products.

Since both the Saudi sour oil and the Canadian tar sands sour oil are thus in direct competition for efficient production and marketing to Asian market, particularly China. It is apparent that the Keystone Pipeline project itself is intimately involved in the Saudis’ ‘long game’ calculations.  If OPEC can drive down the market price for oil to a level where the process of extracting tar sands oil in Canada, and then shipping it to costly refinement in the U.S., becomes uneconomic, then Keystone itself could become potentially uneconomic as well. Oil prices sustained below $85 per barrel could force deferral of new tar sands extraction project, but opinions differ on how low oil would have to go to cut ongoing production headed for Keystone. Some say as low as $65 would threaten such curtailment, while others point to long term contracts with Keystone customers that could tolerate prices even below $40. Interestingly enough, some market observers are lately predicting just such a fall to the $40 level — recalling that the Saudis previously engineered a crash to around $12 in 1999. The Financial Times reports that Saudi Arabia holds three-quarters of a trillion dollars in reserves to keep its economy and welfare state going, so it is prepared for a ‘long game’ indeed. Meanwhile, the Keystone XL could become a ‘pipeline (with nothing) to nowhere,’ a sensitive point for a Congress already famous for approving a bridge to nowhere.

On the other hand, however, if prices were to stabilize at higher levels more toward a floor of $65, the Keystone Pipeline – as a cheaper, less cumbersome and less costly distribution route for tar sand producers than rail or alternative pipelines to Canadian port refiners – could make the critical difference in whether tar sands production is sustained economically.  This could eventuality provide a stronger environmental objection than heretofore recognized by the U.S. State department in its previous reviews of the Pipeline’s likely environmental impact on greenhouse gas emissions.  This report presumed that at then-current oil pricing, the tar sands oil production would find its way to market in any event with or without Keystone. If Keystone makes the critical difference to whether tar sands production continues in a much lower oil price environment, as its opponent contend, then it would surely fail President Obama’s announced policy not to approve its construction if doing so would contribute to significant additional greenhouse gas emissions from tar sands oil and its production processes.

Why, indeed, would U.S. shale producers want to use public policy to subsidize Canadian oil producers in an extreme and sustained low oil price environment? Perhaps North Dakota and Texas entrepreneurs will turn out to be ‘for Keystone XL before they were against it?’ Time for a replay in Congress?

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Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Shhh….The American Economy Is On The Brink…Of A Boom!

For about a month through mid-October, the US stock market went down a certifiable “correction” amount of 10%, falling on one pivotal day as much as 460 points, based on multiple emerging fears of potential events that would undermine whatever progress the American economy was making after the terrible winter of 2014. And never mind the Great Recession, which many Americans think is still going on although it officially ended in 2009.

These fears included warnings that the US was about to have an epidemic Ebola outbreak, that corporate earnings and forward guidance would disappoint and foreshadow a fourth quarter economic retrenchment, that the Federal Reserve would mistakenly become more hawkish and announce a quicker move to higher interest rates, that the strengthening US dollar value would sink future earnings of American exporters, that Europe was going into recession while the European Central Bank was being held powerless by German bankers, that ISIS was about to overtake Baghdad, that Russia was about to invade the rest of Ukraine it was not already dominating and cut off the gas flow to Kiev and even the rest of Europe, that the Chinese economy, in the words of one trader on CNBC, was going “off the cliff;” that falling oil prices worldwide would threaten America’s oil and gas fracking investment boom and prove more harmful despite the obvious relief for consumers at the gas pump, and, finally, that Japan was going to commit economic suicide by going ahead with a second national sales tax increase after the first one had already tipped its economy toward recession.

Since mid-October, however, the only one of these fears that has materialized was the official announcement of a Japanese recession, but the sales tax increase has been put off. Baghdad did not fall and ISIS was stalled for a time in Syria. Russia sent tanks into the area it already controlled but did not march on Kiev and actually signed off on a gas deliver deal with Ukraine. China did not implode: its GDP dipped by only point-one in the most recent quarter. Corporate earnings in the US were broadly reported to exceed estimates for both bottom-and top-line growth with only a limited number of companies citing a stronger US dollar as cause for lower forward guidance. European Central Bank head Mario Draghi reiterated the prospect that the Bank would pursue government bond buying to support the economy notwithstanding German objections. No Americans caught Ebola here, a threat that seemed to miraculously disappear, even in Texas, very shortly after the fear-driven election of November 4.

Meanwhile, the US reported GDP growth of 3.5% for the third quarter of 2014 that ended September 30, significantly above estimates and continuing the superb growth of 4.6% in the second quarter. Not surprisingly, the stock market recaptured its 10% loss and then some, winding up a couple of percent above its early October levels and reaching several new all-time highs. But even with the good news, a renewed chorus of naysayers immediately began to question the quick snap-back as “too far, too fast” or words to that effect, even though the 10% so-called “correction” had been provoked by rumor-mongering and irrational fears that turned out – equally quickly – to have little basis in fact, and simply did not materialize as predicted. Some confidently predicted a market crash again just as those had done in mid-October.

But again the stubborn facts have intervened, even if not many seem to be paying attention as the markets have essentially traded sideways as we head deeper into November and get our first taste of the kind of harsh winter weather that put our economy into reverse in the first quarter of this year. But despite the snows leaving Buffalo literally six-feet under thanks to a big chill over Lake Erie initially produced by the freakish remains of a Pacific Ocean cyclone, the blizzard of good news on the US economy keeps coming.

The jobs report for October showed another 200,000+ gain in net employment, with the unemployment rate down to 5.8%, continuing a streak of similar numbers that put 2014 on the path for the best year-over-year gain in employment since the last truly “boom-time” year of 1999.  Weekly data for new claims for unemployment insurance have sent a similarly bullish message, with the number of those still receiving unemployment benefits after one week on the rolls (2.3 million) falling to the lowest level since December 2000. We are now clearly no longer in a lay-off pattern but rather in a consistent hiring pattern. Not good enough yet because many are still working part-time instead of full-time as they would prefer, and many have given up even looking for work.

Encouragingly, the Labor Department’s latest monthly “JOLTS” (Job Openings and Labor Turnover Summary) report showed strong growth in openings at the end of September with a climb to 4.7 million.  This indicates that there are plenty of opportunities to take off the labor-market slack. The Federal Reserve even noted directly that labor market slack seemed to be finally on the wane. The Feds also made clear in their meeting minutes that their main worry was not so much Europe or other areas of potential growth contraction internationally, but rather a persistent absence of “healthy” inflation toward their 2% goal. But the most recent Consumer Price Index data actually showed some signs of movement in the 2% direction despite the big drop in gasoline prices.

In addition, within the past few days, existing home sales have moved up 1.5% month-over-month, also showing the first-year-over-year increase since October 2013. Retail sales have come in above expectations as well, and consumer confidence has continued to surge over the past three months. Meanwhile, the Institute for Supply Manufacturing Index has shown a recent jump to a three-year high of 59 in October, up from 56.6 in September. Likewise, the Chicago Purchasing Managers Index, which has held well above the 50 level that indicates expansion, surged to 66.6 in October, well above the expected 60.0 level and up from 60.5 in September.

Most impressively, the Philadelphia Federal Reserve Bank Survey of Manufacturing Business Outlook Survey in the Middle Atlantic States (known as the “Philly Fed”) exploded to an October level of 40.8 not seen since 1993, up from an impressive 20.7 in September. Additionally, the Philly Fed shows a wide disparity between the 49% of firms reporting increased activity for the month as compared with merely 9% who saw decreased activity.

The Survey’s labor component also moved up a strong ten points, a three and one half year high. Dips in the Philly Fed have consistently been seen as a harbinger of downward pattern in the broader American economy, and vice versa. But the question remains whether the markets will perceive the extraordinarily positive results in this survey over the past two months as a true sign of a coming nationwide economic boom or will it succumb to another round of scare talk from the short-sellers of our economy who have the ready invitation of cable TV financial news? Sometimes they seem most interested in covering a potential train-wreck of a market crash rather than merely reporting that the economic train, at long last, is beginning to run with a full head of steam.

The real story is that “help is on the way” for America’s struggling middle class, the unemployed and the under-employed. The much maligned TARP stimulus and “extraordinary measures” of the Federal Reserve have finally and in fact – worked!

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Recently published on Huffington Post

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Obamacare Dominoes: If Federal Subsidies Fall At The Supreme Court, So Do The Individual And Employer Mandates — Game Over!

Everybody seems to be missing the real issue at stake in the recent decision by at least four Supreme Court Justices to hear an appeal of a Fourth Circuit Court of Appeals decision affirming the applicability of Federal insurance subsidies for qualified individuals who purchase “ObamaCare” insurance policies on Federal Exchanges set up for States whose governments chose not to establish one for their State.

This case, King v. Burwell, involves not a Constitutional question per se but rather a challenge to an IRS interpretation that allows subsidies for insurance purchased on Federal Exchanges despite statutory language that could be read to limit their availability only to those who purchase insurance only on an Exchange which a State has chosen under the law to “establish” itself directly rather than leaving it to the Federal government to set one up for it. The plaintiffs in the case (King et al) are Virginia residents who argued that the IRS decision allowing subsidies provided via the Federal Exchange set up when Virginia’s government refused to establish an ObamaCare Exchange on its own deprived them of an exemption from the Affordable Care Act’s “individual mandate” to purchase health insurance. They claim that absent such subsidies all policies available to them on the Federal Exchange would cost more than the 8% of their income that serves as a trigger for such exemptions.

While the legitimacy of the IRS determination to allow such subsidies would seem to simply involve a Federal  statutory question concerning  the scope of administrative flexibility in interpreting the ACA’s grant of subsidies, the plaintiff’s argument in King v.  Burwell opens the door to a much broader impact on ObamaCare than just the matter of subsidies. It would be huge if the Supreme Court determines the Court was wrong in affirming the IRS interpretation.  Estimates indicate that, for the poor and lower middle class, upwards of seven million would lose over $ 36 billion in subsidies. These losses would affect residents of Texas and Florida (the biggest losers) and 32 other states subject to the King v. Burwell Supreme Court decision.  These states are mostly in the hands of Republican governors and legislatures that oppose ObamaCare in principle and the potential “work-around” would depend on those  governors and legislators agreeing to “establish” State Exchanges possibly “outsourcing” their operations to the existing Federal Exchange, using their states’ own money instead of the Federal funds provided under the ACA  because eligibility for those funds just happens to have run out on November 14, 2015! No word as yet on whether the Centers for Medicare and Medicaid would consider extending that deadline in view of the pending Supreme Court decision.

With no “work around,” moreover, the dominoes at the heart of the ACA would, as noted above, begin to fall. If no subsidies are available in a particular state (or in the 34 states subject to a King v. Burwell reversal), then the premiums on the policies now on offer in the Federal Exchanges serving those states would exceed 8% of their income and therefore they would automatically become exempt from the individual mandate to purchase any health insurance at all. This result would not just affect the poorest families. Young, healthy college graduates – many burdened by tens of thousands of dollars in student loan debt – would be free to opt out of buying any insurance on a Federal Exchange or otherwise, and the economics of the Federal Exchange would be severely adversely affected without a balance of relatively healthy individuals to weigh against the insurance claims of more mature families and sub-Medicare elderly. Premiums would go up, enrollments would go down with a ruptured individual mandate.

But that’s not the end of the effects of a Supreme Court decision to invalidate Federal subsidies obtained through the Federal Exchange in two-thirds of our states. The employer mandate under the ACA  requires employers of more than 50 full-time workers (currently defined as all those working at least 30 hours per week) to either provide a Federally-approved health insurance package or pay an increasingly onerous per-worker tax penalty. For a variety of reasons, some clearly operational, some probably political, the Obama Administration gave employers extra time to comply, but the mandate will now begin in 2015 for employers with over 100 full-time workers, and for those with between 50 and 100 in 2016. But if the Supreme Court reverses King v. Burwell by overturning the IRS rule with respect to Federal subsidies, which are in fact delivered by means of tax credits which is why an IRS rule is at issue, the employer mandate is just as fatally wounded as the individual mandate, and the biggest ObamaCare domino of all falls.

The ruling by a Federal Court panel majority in another case brought against the IRS rule on ObamaCare tax credit subsidies, Halbig v. Burwell, points directly to this conclusion. The majority ruled against the IRS subsidy interpretation (the decision has since been appealed to the entire D.C. circuit Court of Appeals), and along the way to this conclusion, laid out its objections to the IRS interpretation precisely focusing on the effect on both the individual and the employer mandate:

“[B]y making tax credits available in the…states with Federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.”

The IRS Rule affects (sic) the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers – defined as those with at least 50 employees, see 26 U>S>C> section 4980H9c) (2) (A) – to provide their full-time employees with health insurance.  Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll…in a qualified health plan with respect to which an applicable tax credit… is allowed or paid with respect to the employee.’ Id. Section 4980(a)(2); see also id. Section 4980h (b) (linking another penalty on employers to employees’ receipt of tax credits).”

Lest there be any mistaking the view of this judicial panel majority as to the impact of their ultimate decision precluding tax credit subsidies to purchasers on the Federal Exchange, the judges went on to rub it in quite precisely:

“Thus, even more than with the individual mandate, the employer mandate penalties hinge on the availability of tax credits. If credits were unavailable in states with Federal Exchanges, employers there would face no penalties for failing to offer coverage.”

If a majority of the Unites States Supreme Court were to agree with the Halbig v. Burwell majority, the last ObamaCare domino would seem to fall, more or less automatically.

And yet the media and even the most ardent supporters of ObamaCare seem to ignore this potential effect. Assuredly, the “large employers” and their lobbyists who are funding the Halbig and King cases have not. Not to mix too many metaphors, but it is most important to understand that both the King and the Halbig cases are twin Trojan Horses: ostensibly about killing ObamaCare subsidies, but really all about indirectly but effectively destroying the individual and employer mandate. In the concluding words of the majority in the Halbig case, its ruling against Federal Exchange subsidies “will likely have significant consequences both for the millions of individuals receiving tax credits through federal r exchanges and for health insurance markets more broadly.” (Halbig v. Burwell at p 41.)

All the more so if the Supreme Court agrees.

Recently published by Huffington Post.

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Elections Have Consequences – And Truth: Here’s Some of Both

Here’s to the winners!  But who are they exactly, after the recent Republican sweep into power in the Senate and in a significant majority of governorships?

On the latter, the incumbent Chair of the Republican Governors Conference, Chris Christie of  New Jersey, took a modest “victory lap” for his efforts in support of major “Blue State” wins by the GOP candidates in Massachusetts, Maryland  and Illinois, not to mention important victories by Republican incumbents in Florida, Ohio  and Wisconsin. The New Jersey Governor certainly traveled widely and raised money handsomely for some of these winners, but that does not mean he moves to the front of the statehouse line for his party’s 2016 presidential nomination.

Surely Wisconsin Governor Scott Walker, who has now won three consecutive elections, including a recall attempt, against the Democrats in a “Purple” state, will not credit his win to Christie. Far from it. He was less than pleased that Christie cut back on funding from the GOP Governor’s Conference for his campaign. And Walker has also won the race to be the first to get an “exclusive” interview on “Meet the Press” (but does that program matter still?), presumably because Chuck Todd wanted him more than Christie or the other governors.

Among the other Republican governors, John Kasich of Ohio looks even more attractive now because he won again in the ultimate Electoral College “swing state.” He has adroitly positioned himself to take credit for most of the good things happening in that state other than LeBron James’ return (and maybe even that!), while managing to institute policies not unlike Walker’s without continuing to offend so many people. Why pick Christie and who could wind up losing even his home state of New Jersey in 2016 to Clinton, according to current opinion polls, when the GOP could pick up a possibly decisive electoral win in Ohio or Wisconsin?

Same goes for Rick Perry of Texas, who is sporting new “serious thinker” eyewear, but whose state did not cover itself in glory in terms of the Ebola “outbreak.”  He went on a European field trip while the problem peaked. Christie also messed this up a bit too, calling the momentarily famous Maine nurse “obviously” sick when she obviously wasn’t.  Perry suffers from the “safe state syndrome” that puts Texas safely in the GOP electoral count, with or without him. Plus he has Ted Cruz in the Senate who can deliver even more Tea Party bombast to the ticket.  Staying in the southwest, however, Governors Martinez of New Mexico and Sandoval of Nevada (no, not Pablo, but he has an even better Fall season) may have helped themselves in terms of vice-presidential consideration with easy wins with support from their Hispanic voter brethren who the GOP may need to court in 2016 depending on the outcome of coming immigration showdown with President Obama.

As to the rumored entry into the 2016 race of former Governor George Pataki of New York? As they say in Brooklyn – “fageddaboutit!”

Looking next at the GOP senators who gaze in the mirror and see a President, Kentucky’s Rand Paul seems to have won the most from the election results, even when candidates he campaigned for didn’t win (like Scott Brown in New Hampshire). The only Republican with  “metrosexual” appeal (the ‘30’s Hollywood shades, blazers and slacks, and unruly hair), Paul has reached out to single women and blacks as well as younger voters, who show signs of not being permanently enthralled with Democrats and whom some may think have run an economy, that for all the recent good data on jobs and GDP, has kept them living at Mom and Dad’s for far too long.  On the international relations front, too, Senator Paul’s view that ISIS should face mainly “local” boots on the ground obviously has appeal to younger voters that may prove to outweigh the venerable McCain/Graham war hawk wing of the GOP. At the least, Senator Paul actually has a foreign policy. Unless he wants to overly mend fences with Israel, expect Paul to be relatively quiet about an Obama nuclear deal with Iran while the rest of his Party’s likely candidates go ballistic about it, but are silently thankful that they won’t have to campaign in favor of an Iran war, too.

Speaking of ballistic, Ted Cruz will commandeer the nearest flamethrower in the Senate chambers, while new Majority Leader Mitch McConnell deftly mans the fire extinguisher. Yet frustrated Tea Party members may hand Cruz some surprising early primary victories — he’s running for sure. Cruz will side with Rush Limbaugh and the National Review in pushing the GOP precisely not to try proving they can “govern” over the next two years but rather just keep “obstructing” Obama and then urge voters to give them both the White House and Congress in 2016 as the only way to break DC gridlock. But even if they could get to 1600 PA Ave in ’16 with the right candidate, the GOP chances of holding the Senate in 2016 look as bad as the Democrats proved to be in 2014, because of the electoral map. Nonetheless, Dr. Ben Carson’s probably in this camp as well, since he’s in no position as an outsider to show he can “govern” anyway, but he will soon have his own video infomercial.

The guess here is that Senator Rob Portman of Ohio probably isn’t going to run despite his own solid credentials.  Kasich, his home state’s governor, is better positioned, and Portman would step back if Jeb Bush runs, anyway (and be in his Cabinet at a very high level). That leads us to the House and Congressman and former VP candidate Paul Ryan, who will be a central figure in the coming budget negotiations, perhaps too central given the GOP commitment to massive cuts in social welfare programs and entitlements. Like Portman, he too has a home state governor (Walker) who surely thinks he is now in line ahead of the mere Congressman, especially when one of the key GOP talking points for 2015-6 will be the need for “executive experience” in the White House, post-Obama.

Jeb Bush has that and more: a GOP home state governor who is not running for President, a foreign policy and fund-raising apparatus second to none, a Bush 43 with a reputation that has improved with absence, but also an immigration stance that is out of step with his Party’s. But the prevailing wisdom that the GOP won this round by being more “moderate” than before should encourage him. At the very least, he will have a lot of potential Vice Presidents to choose from in the above list of hopefuls and wannabes.

No so the Democrats. Quick, can you name the likely running mate candidates for Hillary? Can you name one? Biden? The Clintons and Obama have left the Democrats’ talent “bench” looking like a basketball team (the JV’s) facing off against a GOP hockey team ready to change on the fly. Three of their best up-and-coming politicians are women: Warren, Gillibrand and Klobuchar. But these Senators are all from safely Blue states that are already in Clinton’s electoral count, so she is unlikely to take any risk of a two-female ticket “first,” and keep the focus on her own “first” status. Moreover, the Constitution prohibits a Gillibrand VP candidacy so long as Clinton is also a New York resident. The same applies to Governor Cuomo.

As for the other “mentionable” men: Governor McNally of Maryland wants to shine, but left his state in the hands of a Republican. Governor Brashear of Tennessee comes to mind; he has been a reformer and knows health care, but not many know him. And then there are the two Senators from Virginia, a state Clinton will surely need to win. Senator Mark Warner, a smart centrist with a genuine world view worthy of a President, might have been first in line with a stronger victory, but Ed Gillespie darn near beat him (possibly with his last-minute “Hail to the Redskins” commercial.) The guess here is that Senator Tim Kaine, former DNC Chair, like Warner, an ex-Governor but also a Catholic who has taken a careful stance on the ISIS war, would be at the top of Hillary’s list.

And without Hillary as the presidential nominee, the Democratic bench sort of speaks for itself – and none too loudly.

Recently published on Huffington Post.

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.