From the Washington Post:

The House ethics committee ruled Friday that seven lawmakers who steered hundreds of millions of dollars in largely no-bid contracts to clients of a lobbying firm had not violated any rules or laws by also collecting large campaign donations from those contractors.

In a 305-page report, the ethics committee declared that lawmakers are free to raise campaign money from the very companies they are benefiting so long as the deciding factors in granting those “earmarks” are “criteria independent” of the contributions. The report served as a blunt rejection of ethics watchdogs and a different group of congressional investigators, who have contended that in some instances the connection between donations and earmarks was so close that it had to be inappropriate.

“Simply because a member sponsors an earmark for an entity that also happens to be a campaign contributor does not, on these two facts alone, support a claim that a member’s actions are being influenced by campaign contributions,” the House Committee on Standards of Official Conduct said in a unanimous statement.

From another Washington Post article:

A team of congressional investigators believed they had probable cause that Rep. Pete Visclosky sought campaign contributions in exchange for steering federal contracts to corporate donors, but a House ethics panel decided not to inquire further into the matter.

A report from the House ethics committee, released Friday, shows that a preliminary investigation found e-mail evidence suggesting that Visclosky’s staff arranged campaign fundraisers for corporate clients seeking earmarks, and the donors believed their donations were linked to whether they would win earmarks from the Indiana Democrat. The Office of Congressional Ethics recommended that the more powerful House ethics committee use its subpoena power to require Visclosky and his staff to answer questions under oath about his earmarking practice.

But the committee said they found no evidence of wrongdoing, and opted not to subpoena Visclosky or any other records to answer the questions the OCE had raised.

From the New York Times:

WASHINGTON— A Congressional inquiry that cleared five House Democrats and lightly admonished Representative Charles B. Rangel for accepting free trips to the Caribbean drew harsh criticism on Friday from some ethics lawyers who said it showed that Congress was still loath to police itself.

The House Committee on Standards of Official Conduct, which spent eight months on the investigation, concluded Thursdaythat apparently none of the lawmakers who attended the conferences in St. Maarten and Antigua in 2007 and 2008 knew that corporations like AT&T, I.B.M., Pfizer and Verizon had indirectly footed the bill.

The case was regarded as a test, the first thorough examination of travel practices by members of Congress since new rules were adopted in 2007 to respond to the scandal involving the lobbyist Jack Abramoff. Mr. Abramoff arranged for junkets, including foreign golfing destinations, for the members of Congress he was trying to influence.

In the case closed Thursday, only Mr. Rangel, the powerful New York Democrat, was admonished, with the committee concluding that his staff had known that big corporations were financing the trips, rather than CaribNews, a newspaper based in New York.

But nearly 2,500 pages of documentsreleased Friday about the inquiry only seemed to intensify questions. Members of Congress, including Representative Carolyn Cheeks Kilpatrick of Michigan, significantly underreported what the sponsors had paid for airfare or hotels, the documents show.

Like other members, Ms. Kilpatrick told investigators she did not know that corporations had paid the travel bills. But she is quoted in the report as having thanked the corporate sponsors at the 2008 conference.

The report includes photographs taken at the conferences of the House members in front of the sponsors’ corporate logos.

I don’t know about you but I’ve had about all the ethical lapses I can take from the politicians who claim to represent the people of this country. Before all my Democratic readers get up in arms, let me just add that the only bipartisan success in Washington, D.C. over the years has been in the corruption department. Before the current crop of scandals – and the above just scratches the surface by the way – the Republicans managed to disgust the electorate every bit as much as the current crop of Democrats and were turned out of office in 2006 primarily for that reason. For all of you memory impaired Republicans, do the names Jack Abramoff, Tom Foley and Duke Cunningham ring any bells?

President Obama said at the health care summit a few weeks ago that if Republicans couldn’t find a way to agree with Democrats on a compromise and pass health care reform that he would press to pass some form of health care reform without them and “that’s what elections are for.” One can only assume that he believes Republicans will be punished by voters for not compromising and that Democrats will gain as a result. I believe this to be a complete misreading of the mood of the public. 

The anger of the American electorate is not about health care reform or any other single issue. It is about the arrogance of the politicians of both parties who seem to believe they can do whatever the hell they want and get away with it. It isn’t the mere passage of health care reform that turns normally mild mannered independent voters into Tea Party activists. It is the political deal making that explicitly favors some Americans over others. It is the bribes disguised as campaign contributions that allows large corporations to shape legislation to their liking. It is the sales pitch from President Obama and other politicians that sounds a lot like the hard sell we’ve come to expect from salesmen with inferior products. Most people cannot tell you what they don’t like about the President’s health care plan, but they can smell desperation a mile away and President Obama’s increasingly shrill pleas for passage reek.

What American voters want – or at least this independent American voter – is for politicians to stop dividing us into groups and pitting one group against another. The United States – emphasis on the United part – needs leaders who can inspire the public to common purpose. We need politicians willing to tell us the truth about how we got in this mess and how we will get out. We need politicians who will represent all the people rather than just the ones with the most money. We know there is hard work ahead to pay off our debts and create jobs, but we also know America has faced larger challenges in the past. We know we are a productive and creative people who are strengthened by our differences and diversity. We know we can recover from this and just want to get started. What we don’t need right now are politicians constructing obstacles and making it more difficult to do the job we know needs doing.

And most of the policies being offered by policymakers at this point are exactly that – obstacles to recovery. Our current health care “system” no doubt needs reform but if reform means raising the cost of hiring right now for the alleged benefit of more coverage and lower costs somewhere in the mists of the distant future, that is not a deal we should make in the middle of a recession, if ever. It should also not escape anyone’s attention that the “system” we currently enjoy is primarily the product of government. Does anyone really believe that just a little more tinkering – okay a lot more tinkering – by politicians will solve the problems created by their predecessors? You’ll excuse me if I am a little skeptical.

The US economy is recovering from this recession despite the best efforts of Congress. I’ll admit there are some policies which have had a marginally positive effect on the US economy – the tax rebates in the stimulus package probably had a positive effect on disposable income for instance – but the negatives in my opinion have vastly outweighed the positives. The uncertainty alone surrounding future policy has been enough to stymie hiring. What company wants to hire someone today when the future cost of that employee is a large unknown variable? 

The cause of this recession, to put it in simple terms, was too much debt. We have spent most of the last 18 months transferring that debt from the private sector to the public sector but we have yet to even begin paying it down. I do not believe it is necessary to go through some period of extreme austerity to solve our problems but make no mistake, there is a price to pay for our past profligacy and the sooner we start paying it, the better. Ethically challenged politicians – from either party – who enact policies for the benefit of large campaign contributors will only make the bill larger and should – will – not be tolerated.

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Weekly Economic Review 

The economic data released last week continues the pattern we’ve seen for months. Manufacturing is leading the recovery while consumption continues to lag. This pattern is actually quite normal for recovery from recession and is consistent with economic theory. The mainstream view that the economy can’t recover without a rise in consumption is exactly backwards. This recession – and almost every other recession for that matter – was not caused by a lack of consumption. The recession was caused by a drop in investment, specifically a drop in residential investment. During the housing boom, practically the only investments we were making were in real estate so when it fell, the entire economy, unsurprisingly, did a header.

 

Recessions are generally caused by a large drop in investment.

Recessions are generally caused by a large drop in investment.

 

This recession was caused particularly by a drop in residential investment.

This recession was caused particularly by a drop in residential investment.

 

Notice that consumption tends to drop well after the beginning of the recession. That's because the drop in consumption is a reaction to the recession, not a cause. Consumption will only rise again after a rise in investment results in a recovery in employment. That will give individuals the ability to consume out of cash earnings. In other words, you must first produce so that you can consume.

Notice that consumption tends to drop well after the beginning of the recession. That’s because the drop in consumption is a reaction to the recession, not a cause. Consumption will only rise again after a rise in investment results in a recovery in employment. That will give individuals the ability to consume out of cash earnings. In other words, you must first produce so that you can consume.

 
The incoming economic data support this view that it is investment that is leading us out of recession. Last week’s data started with personal income and outlays which showed a small rise in income and spending. Personal income rose 0.1% month over month and 1.1% year over year. Wages and salaries were up nicely (0.4%) but that was offset by a reversal of the strong increase in farm income last month (what the heck was that about?). Spending was up 0.5% but most of that was due to a rise in gasoline prices. Durable goods spending was only up 0.1%. Real disposable income fell slightly on the month, possibly due to the expiration of extended unemployment benefits. The savings rate fell slightly to 3.3%. Income and spending will only really pick up when employment recovers but as bad as this recession has been, income and spending have held up surprisingly well throughout.

By contrast, the ISM manufacturing survey, also released Monday, showed continued expansion in the manufacturing sector, although it did ease a bit from last month to 56.5. The employment component was strong for the second month rising to 56.1 (Friday’s employment report showed a rise of 1000 jobs in manufacturing; not much but a start). New orders and backlogs were also strong at 59.5 and 61.0. Further confirmation of the strong ISM report came Friday when factory orders were reported up 1.7%. The backlog reading looks like future jobs to me. Manufacturers have squeezed about as much productivity out of the current work force as they can and hiring will have to pick up soon if new orders keep coming in at this pace.

Construction spending fell 0.6% in January, but that was a bit less than expected and maybe a bit surprising considering the snowstorms. Most surprising was a 1.3% rise in residential construction. The overall drop was due to a drop in non residential and public construction.

The ISM non Manufacturing report was released Wednesday and rose to 53.0 it’s highest reading since April of 2008. The employment component rose strongly but is still below 50 at 48.6. New orders rose to 55 the highest since August 2007. It makes sense that the non manufacturing survey lags the manufacturing survey coming out of recession so I expect the non manufacturing report to continue to surprise to the upside in coming months.

 

Chain stores reported quite good same store sales on Thursday. Overall same store sales rose 4% with Macy’s, Dillard’s, Aeropostale, Gap, Abercrombie and Fitch, Banana Republic, Old Navy and Limited Brands, to name just a few, all reporting better than expected numbers. This is six straight months of rising same store sales so this isn’t a fluke. The death of the American consumer has been greatly exaggerated.

 

Jobless claims fell on the week to 469,000, slightly less than expected but still much higher than I’d like to see. I think we can see some job growth at this level but in a healthy economy claims would be at least under 400,000 and preferably even lower. On a brighter note, productivity and unit labor costs were both better than expected. The drop in unit labor costs (-5.9%) is particularly important since a reduction in labor costs will have a direct impact on hiring. One of the hesitations about hiring is that the future cost of an employee right now is a giant unknown due to the ongoing debate over health care reform and other policy measures. Those things will ultimately be resolved though and when they are, labor costs will have fallen in the meantime.

 

Pending home sales, reported on Thursday, confirmed the ongoing weakness in the housing market. Contracts signed were down 7.6% in January which the NAR blamed on the weather but this is one more in a string of weak reports so I don’t think that is the whole explanation. We had a burst of activity as we approached the end of the first time home buyers tax credit in November that sucked sales forward. We might see a similar effect as we approach the extended expiration in April, but unless the subsidy is extended once again we’ll have to wait for further confirmation of economic recovery before sales pick up again.

 

Friday brought the employment report which showed a loss of 36,000 jobs on the month, a bit less than expected. Of course, the administration had prepared everyone for this by blaming a weak report on the weather well in advance, but the truth is that the snowstorms probably had a minimal effect on this report. The big loser – again – was construction with a loss of 64,000 jobs but this is just a continuation of what we’ve been seeing for many months now. And it should be pointed out that these reports are seasonally adjusted and last I checked winter happens every year. Okay, the snow was worse than normal but construction won’t come back for some time regardless of the weather.

 

The glimmers of hope in these employment reports are getting brighter and this one was no different. Temporary help was up again, rising by 48,000 jobs. Service jobs were up 42,000 and government jobs, despite census hiring, fell by 18,000 (yes, I put that in the positive category). The labor force and the participation rate were both up and the number of employed expanded by 308,000 while unemployed rose 34,000 (this is from the household survey). There were some bad stats too though; those working part time due to economic conditions rose 475,000 reversing some of last month’s positive change. There are still significant problems with the labor market. Long term unemployment is a major problem and there are a lot of people who have dropped out of the workforce. As the economy recovers these people will re-enter the workforce so even when the economy starts producing jobs again, the unemployment rate will likely stay high for a while. But things are improving and I expect next month’s report to start showing overall growth.

 

The economic recovery is, as I said last week, on a pretty normal path with manufacturing leading. Consumer activity will pick up when employment picks up and with new orders and backlogs rising and retail sales surprisingly strong, we might be on the verge of exatly that. Jobless claims are the key metric over the next few weeks; if they start falling again I think we can expect a very strong employment report next month.

 

Selected Charts

 

Stocks had a good week, but the S&P is still below its recent high. The next few weeks will be all health care debate, all the time so new highs may have to wait, but if the current health care legislation fails, as I expect it to, the removal of the uncertainty should do the trick.

Stocks had a good week, but the S&P is still below its recent high. The next few weeks will be all health care debate, all the time so new highs may have to wait, but if the current health care legislation fails, as I expect it to, the removal of the uncertainty should do the trick.

 

Mid caps have already made new highs though so maybe the large caps will play catch up.

Mid caps have already made new highs though so maybe the large caps will play catch up.

 
 
 
 
 
 
 
 
 

 

 

Small caps are leading too as one would expect coming out of recession.

Small caps are leading too as one would expect coming out of recession.

The earthquake in Chile had only a minimal and short term effect on the market. We still hold ECH in our Select Country portfolio.

The earthquake in Chile had only a minimal and short term effect on the market. We still hold ECH in our Select Country portfolio.

Another stellar performer from the Select Country portfolio has been Israel which continues to outperform.

Another stellar performer from the Select Country portfolio has been Israel which continues to outperform.

Colombia is a country whose economy and market are beneath most investor's radar but both have performed well.

Colombia is a country whose economy and market are beneath most investor's radar but both have performed well.

REITs have continued to defy all the experts opinions. There is a commercial real estate problem but REITs seem likely to be beneficiaries of the turmoil. They've raised lots of new equity, paid down debt and should be able to acquire bargains from the overleveraged players.

REITs have continued to defy all the experts opinions. There is a commercial real estate problem but REITs seem likely to be beneficiaries of the turmoil. They've raised lots of new equity, paid down debt and should be able to acquire bargains from the overleveraged players.

 

Another surprising sector which I've highlighted before are the homebuilders. Most of them aren't very profitable yet - if at all - but they've stopped the bleeding and are starting to acquire land again in preparation for the next up cycle.

Another surprising sector which I've highlighted before are the homebuilders. Most of them aren't very profitable yet - if at all - but they've stopped the bleeding and are starting to acquire land again in preparation for the next up cycle.