Investors and readers are no doubt aware of the benefits of the free enterprise system as practiced in the United States: entrepreneurship, innovation, ingenuity, dynamism, risk taking, wealth building, and commerce are chief among these benefits.
But readers also know that corporate capitalism has its drawbacks, including (but not exclusively) financial crises that have resulted in devastating economic and social upheavals. 1893, 1929, 1987, 20??
Moreover, despite technological change, productivity increases, and massive increases in wealth, it's remarkable how similar both the crises and the public policy responses have been over the hundred-plus year period: excesses occur, bad debts mount, some regulatory changes are implemented by the U.S. Government (and sometimes by state governments), and then corporate capitalism resumes.
Further, whether it's due to America's culture, its vast natural resources, something innate in Americans, human nature in general, or some other factor, or a combination, every time a crisis occurs, the American people, by and large, reach the same conclusion regarding what caused the crisis or problem: bad decisions or incorrect decisions. Basically, that people, mainly executives and other business leaders (sometimes federal/state regulators), made mistakes or bad decisions.
"A billion here, a billion there, and pretty soon you're talking about real money."
To paraphrase the late Senator Everett Dirksen (R-Illinois), if a couple billion is real money, what's $400 billion amount to? Fiscal trouble for the United States, says an economist.
The U.S. federal budget deficit will double this year, to $407 billion, from $161 billion last year, the Congressional Budget Office announced Tuesday, in its revised baseline projection report (pdf).
The CBO said a weakening economy, spending for the Iraq and Afghanistan Wars and the War on Terror, higher entitlement spending, and a slowing growth rate in federal receipts are among the factors that will push the deficit to 3% of GDP this fiscal year, which ends September 30.
The deficit will rise to $438 billion next year, fiscal 2009, remain roughly at that level, $431 billion, in fiscal 2010, before tapering to $325 billion in fiscal 2011.
The CBO also expects U.S. GDP to grow just 1.5% in 2008 and slow to 1.1% in 2009.
Economist Glen Langan said the multiple $400 billion deficits are bad enough, but they could rise considerably, if the U.S. Treasury's bailout of Fannie Mae and Freddie Mac does not go well. "If the housing market does not stabilize in the year ahead, Treasury could end up spending tens of billions more per year," Langan said. "Nearly all of that cost would be born by the taxpayer, which means the deficit will increase."
The U.S. Government 'adds' $5 trillion in debt, but the dollar doesn't fall. How is this possible?
"Because the currency markets months ago had already factored-in or priced into the dollar some form of U.S. Government takeover of both Fannie Mae and Freddie Mac," Andrew Resnick, currency trader, told BloggingStocks Monday.
The U.S. Treasury will buy as much as $200 billion in new, senior, preferred stock in Fannie (NYSE: FNM) and Freddie (NYSE: FRE) as part of its takeover of the government service giants, whose business models ran into trouble as the housing boom ended and mortgage defaults soared. The large, potential increase in government spending/borrowing would appear to be unquestionably dollar-bearish. Not so, says Resnick.
"The bailout is going to cost the U.S. Government and taxpayers more money, there's no doubt about that. But if it represents the first step toward reaching a bottom in the housing mess and at the same time stabilizes credit markets, that would be dollar bullish," Resnick said. "And that's the currency market's view at the present time."
Indeed, the dollar showed little signs of a collapse Monday. After dipping early Monday morning in Asia, the dollar firmed and was up about one-half cent to $1.4430 versus the euro, and added three-tenths of a cent versus the British pound. The dollar was rose about 1 yen to 108.52 versus Japan's yen and rose 1 cent to $1.1290 versus the Swiss Franc.
Could the U.S. economy tolerate, and, equally significant, will the American people push the nation's chief executive, the president, in the direction of more government intervention?
The view from here is: probably not. Everything in the American ethos and culture speaks against it.
Unlike in France, where the French Government is simply, "France," Americans, for the most part, view their government -- save defense spending -- usually as part of the problem, not the solution. 'Government is best which governs least' is a longstanding Americanism. And most investors/readers know about candidates who say they want to "get the Washington bureaucrats off the backs of the American people" and "clean up the mess in Washington!"
Americans are anti-central government, and they are anti-state (they generally dislike the limited federal government that exists). In the United States, it is always private first, public second.
Few would deny that the new U.S. president, Democrat or Republican, will face a plethora of concerns and problems after reciting the oath of office in January 2009.
One issue that sort of presents the 'problems panorama' in a snapshot has, curiously, received light news coverage lately -- is the U.S. budget deficit.
Time was, just a short decade ago, the federal budget was in surplus. However, in 2001 a federal tax cut occurred. That fact, combined with required spending for the war on terror / Iraq War, and the absence of a tax increase to pay for that increased spending, has primarily led to a projected $553 billion deficit for fiscal 2008, which ends September 30, 2008, and a $403 billion deficit for fiscal 2009, which begins October 1, 2008, according to Congressional Budget Office research (pdf).
Three factors that could balloon the deficit
In the view of many, the existing deficit is large -- but still manageable -- in the context of a $2.9-3.0 trillion federal budget. However, three factors could markedly increase the budget deficit in the immediate years ahead, and in doing so add to the new president's woes, economist Richard Felson told BloggingStocks.
First, there's the U.S. economy. If it falls into a recession (if it hasn't already), federal receipts (such as corporate and individual income taxes) will decline from current projected levels, and social program costs will increase, "adding $20-$50 billion to the deficit," Felson said.
At first glance, word that the number of so-called primary government securities dealers decreased to 19 from 20 last month, may seem like a fairly esoteric concern that's removed from the typical investor and taxpayer.
But, in practice, it isn't that removed because fewer dealers means fewer firms bidding for U.S. bonds - - a circumstance likely to increase government (read: taxpayer) borrowing costs, Mark MacQueen, money manager of Sage Advisory Services told Bloomberg News Monday.
The number of authorized bond traders who make markets in U.S. Government debt decreased to 19 when the Bank of America (NYSE: BAC) acquired Countrywide Financial Corp., Bloomberg News reported. It will drop again, to 18, after J. P. Morgan Chase (NYSE: JPM) completes its takeover of Bear Stearns.
Economist David H. Wang agreed Monday that the bidder math is not running in the U.S. Government's favor at this juncture. "We know from basic economics that, historically, if the number of market makers declines, auctions will not be as efficient, and this will lead to higher financing costs for the U.S. Government," Wang said.
Another factor likely to drive up U.S. Government borrowing costs: the size of the U.S. Government's budget deficit, Wang said. The Congressional Budget Office projects that the Fiscal 2009 deficit will total $500 billion, up from $470 billion in Fiscal 2008, the current fiscal year, which ends September 30, 2008. (pdf)
Oil's four-year bull run to +$140 per barrel has increased the wealth of 'petrodollar' nations, and is about set to propel another shift, this time in the bond market.
Petroleum-exporting nations, such as Saudi Arabia and Russia are set to become the biggest creditor nations to the U.S. Government, Bloomberg News reported Monday.
Holdings of petrodollar nations increased 44% to $510 billion through April, Bloomberg News reported Monday -- an increase pace that's set to displace Japan, which holds the largest amount of U.S. Treasuries, at $592.2 billion.
Oil rose about 20 cents to $145.28 per barrel in late Monday afternoon trading.
Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. But every once in while an exception is made, and with the above in mind, L-3 Communications (NYSE: LLL) is worth a review.
L-3 makes secure and specialized systems for satellite, avionics, and marine communications, with a healthy percentage of its business coming from the U.S. Government.
Analysts like LLL's diversified revenue streams: specialized products (34%) intelligence/communications (22%) government services (25%), and aircraft modernization and maintenance (19%).
The secular growth trends in oil and gas services and infrastructure continue, and a company well-positioned in these two promising sectors, and by extension, worth a review, is Jacobs Engineering Group.
Jacobs Engineering Group (NYSE: JEC) is a diversified engineering/professional technical services company providing services to the chemical, petroleum, pharmaceutical and biotech sectors. The company also has aerospace and defense contracts with the U.S. government.
Analysts expect 14-20% revenue growth for F2008 on strong upstream oil/gas and downstream petroleum refining work. Public transportation infrastructure work also remains solid.
Analysts also like JEC's growth opportunities for chemical projects in the Middle East and Europe. Further, overall margins are expected to improve. The Reuters F2008/F2009 EPS consensus estimates for JEC are: $2.99/$3.59.
China, which has kept its currency, the yuan, artificially low in order to keep the cost of its exports low and promote a domestic economic boom as its nation develops, is finding that the strategy has a negative effect: domestic inflation.
Unlike market-based currencies characteristic of the foreign exchange, China's government sets the yuan's value -- allowing it to trade in a tight band, currently at about or near 7.2730 yuan to the U.S. dollar. China argues that the yuan/dollar peg is necessary to promote economic growth and protect young, developing businesses and sectors.
And the strategy is working: China has registered +10% GDP growth for more than four years; has the world's third-largest economy, in purchasing power parity terms, behind the European Union and the United States; and has generated massive trade surpluses, particularly against the U.S.
Still, the U.S. counters that the peg keeps China's goods at artificially low prices and hence gives China's companies an artificial competitive advantage in trade. China has turned aside those and other U.S. concerns, particularly the trade deficit, arguing that if the U.S. wishes to lower its trade deficit, its citizens should save more and consume less, and the U.S. government should eliminate its budget deficit.
If technology sector operations combined with stable government contact work sounds like an appealing play, you're not the only one to reach that conclusion.
Harris Corporation (NYSE: HRS) develops communications products/solutions for government and commercial customers.
Harris' manufactures satellite, microwave, and wireless network transmission equipment, air traffic control systems, mobile radio systems, and digital network broadcasting and management systems. The U.S. Government is Harris' largest customer.
Every once in a while there's a compelling research report issued in the Concrete Canyon that goes virtually unnoticed. Wall Street, so often caught up in the mood of the market 'right now,' sometimes drifts past data and fails to fully-publicize information that reveals fertile ground and investment opportunities.
The report, entitled "Infrastructure: A Global Opportunity for Investors" notes that $41 trillion will be needed to modernize urban water, electricity, and transportation systems globally, during the 2005-2030 period, according to an estimate by Booz Allen Hamilton. In the United States, the figure is $1.6 trillion, according to research by the American Society of Civil Engineers. There are two distinct but massive infrastructure tasks: in emerging markets, a massive build-out to support growth; in the United States and the developed world, a focus on repair and replacement, according to U.S. Global Investors.
For L-3 Communications, the defense never rests. L-3 Communications Holdings, Inc. (NYSE: LLL) makes secure and specialized systems for satellite, avionics, and marine communications, with a healthy percentage of its business coming from the U.S. Government.
Analysts like LLL's diversified revenue stream: specialized products (34%), intelligence/communications (22%), government services (25%), and aircraft modernization and maintenance (19%).
Analysts expect 8%-9% organic revenue growth in 2007 and 7%-8% in 2008, including solid growth in government service and specialized products. The Reuters F2007/F2008 EPS consensus estimates for LLL are $5.95 to $6.51.
The risks? Analysts are keeping their eye on LLL's profit margins, high financial leverage, and ability to increase its low dividend. A substantial decline in U.S. government/defense spending would also hurt L-3's results.
The First Call mean rating for LLL is: Hold [15 firms]. Mean 2008 target: $116.20 [high: $129, low: $108].
Stock Analysis: L-3 Communications is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from LLL's shares. Sell/Stop Loss if you were to purchase shares in this company: $78.
Investors and readers are no doubt aware of the benefits of the free enterprise system as practiced in the United States: entrepreneurship, innovation, ingenuity, dynamism, risk taking, wealth building, and commerce are chief among these benefits.
"A billion here, a billion there, and pretty soon you're talking about real money." 
The secular growth trends in oil and gas services and infrastructure continue, and a company well-positioned in these two promising sectors, and by extension, worth a review, is Jacobs Engineering Group.
China, which has kept its currency, the 
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