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Daily News Briefing: Monday, July 30, 2012

Published by: Clark Barrow

Clark Barrow

DAILY BRIEFING - SUMMARY

  • GENERAL MOTORS - General Motors is relying increasingly on subprime loans. GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.
  • CONGRESS - The U.S. House is set to vote this week on a GOP proposal that would keep the existing tax breaks across all income levels, including the wealthy, for another year.
  • WHITE HOUSE - Obama used his Saturday radio and Internet address to finger GOP lawmakers for a stalemate that could increase taxes on Americans next year. The Democratic-controlled U.S. Senate narrowly passed such a measure this past week; the U.S. House is not expected to follow suit.
  • SEQUESTRATION - Increasingly concerned that time is running out for the U.S. Congress to avoid $500 billion in automatic defense cuts, the Pentagon is assessing all options, including the possible implications of a one-year, $100 billion government-wide, “mini-sequester” deficit-reduction deal, Defense Department and industry sources said.
  • TARP - The U.S. Treasury Department sold shares in a dozen banks for about 14% less than its original investment, highlighting challenges for its planned sales of more bank shares in the coming months.
  • SYRIA - Syria has expanded its chemical weapons arsenal in recent years with help from Iran and by using front organizations to buy sophisticated equipment it claimed was for civilian programs.
  • IRAQ - The U.S. Defense Department has promised a swift and "unrelenting" response to the resurgence of al Qaeda in Iraq as the terror faction fights to regain ground lost to U.S. and coalition forces during the war.

WHAT WE KNOW

ECONOMIC NEWS

  • GOVERNMENT IMPEDIMENT - Falling military spending and the end of federal stimulus programs are further slowing the already weak U.S. economic recovery.
    • Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.
    • Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.
    • The budget cuts come at a tough time for the U.S. economy, which has lost steam after appearing to accelerate earlier this year. Recession in much of Europe and slowing growth in China have cut into demand for U.S. exports, hurting manufacturing, which had been a key source of strength earlier in the recovery. Weak job growth and shaky financial markets have hit consumer spending, which some economists had hoped would drive economic growth this year. The overall economy grew at an annual rate of 1.5% in the second quarter, down from 2% in the first quarter, and most economists expect continued weak growth for the rest of the year.
  • GENERAL MOTORS - General Motors is relying increasingly on subprime loans.
    • GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012. The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion. Prime loans, those above 660, dropped 42% to $676 million.
    • Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime.
    • GM Financial provides just over 8% of GM's financing. Prior to 2006, GM's captive lending arm was GMAC, but GM sold a controlling stake in 2006. GMAC later renamed itself Ally Financial and continues to provide the bulk of GM's financing. Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM's growth.
    • GM still owes about $26.4 billion in direct aid to the federal government. The Treasury owns 26.5% of the automaker, or 500 million shares. The stock price would need to be 53 to recoup those taxpayer costs. GM shares closed Friday at 19.67 after hitting a post-IPO low on Wednesday.
  • Monday morning futures on the Dow Jones Industrial Average lost 18 points, or 0.1%, to 13,015.
  • Monday morning futures on the S&P 500 declined 3.2 points to 1,379.30.
  • Monday morning futures on the Nasdaq 100 gained 0.25 point to 2,642.25.

COMMODITIES

  • The U.S. national average for a gallon of regular gasoline is $3.48.
    • When President Obama was inaugurated, in January 2009, the U.S. national average for a gallon of regular gasoline was $1.85. Average gasoline prices are currently 88 percent higher than they were when Mr. Obama became president.
  • Crude oil for September delivery decreased 16 cents to $89.96 a barrel on the New York Mercantile Exchange.
  • Gold for August delivery decreased $1.00 to settle at $1,622 an ounce on the Comex division of the New York Mercantile Exchange.

NEWS TO WATCH

  • PROTESTORS – The Occupy Wall Street protests continue around the world, now in their 313th day.
  • CONGRESS - U.S. Congressional Republicans reacted swiftly to the latest report on the nation's sluggish economic growth, saying the outlook amplifies their position that now is not the time to raise tax rates on the wealthy, as President Obama has proposed.
    • The U.S. House is set to vote this week on a GOP proposal that would keep the existing tax breaks across all income levels, including the wealthy, for another year. Various income tax breaks from the George W. Bush era are set to expire in December. Obama wants to let those expire for the top earners: singles earning more than $200,000 a year, or $250,000 for married couples.
    • Under the White House plan, the top tax bracket would go from 35% to 39.6%, reverting to the levels that had been in place during the Clinton administration. Estate taxes would also rise, as would the tax rate on capital gains and dividends. The White House proposal was approved last week by Democrats in the U.S. Senate.
  • WHITE HOUSE - Obama used his Saturday radio and Internet address to finger GOP lawmakers for a stalemate that could increase taxes on Americans next year.
    • Obama pressed the Republican-controlled House to extend Bush-era tax cuts for households making $250,000 or less while letting lower rates on wealthier taxpayers expire and go up. The Democratic-controlled U.S. Senate narrowly passed such a measure this past week; the U.S. House is not expected to follow suit.
    • Responding on behalf of the congressional GOP, Utah Sen. Orrin Hatch, the top Republican on the Senate Finance Committee, said Obama's plan would do more harm to the economy and criticized him with almost identical language. He called for extending current tax rates for all taxpayers and spending 2013 overhauling and simplifying the tax code.


PRESIDENT’S SCHEDULE

  • In the morning, President Obama will receive the Presidential Daily Briefing at the White House.
  • In the afternoon, the president will participate in an Ambassador Credentialing Ceremony at the White House.
  • Later in the afternoon, the president will depart Washington, D.C. and travel to New York City, New York.
  • In the evening, the president will deliver remarks at a fundraiser at the NoMad Hotel in New York City, New York.
  • Later in the evening, the president will depart New York City, New York and return to Washington, D.C.


HAPPENING IN THE U.S. CONGRESS

U.S. SENATE

  • The U.S. Senate is in session today.

U.S. HOUSE OF REPRESENTATIVES

  • The U.S. House is in session today.

TOPICS OF INTEREST

NATIONAL SECURITY

  • SEQUESTRATION - Increasingly concerned that time is running out for the U.S. Congress to avoid $500 billion in automatic defense cuts, the Pentagon is assessing all options, including the possible implications of a one-year, $100 billion government-wide, “mini-sequester” deficit-reduction deal, Defense Department and industry sources said.
    • Obama administration officials are adamant they are not planning for sequestration and continue to urge lawmakers to pass a long-term debt-reduction deal that would avoid automatic cuts entirely, but worries are mounting that lawmakers will be unable to strike a deal to cut revenues while increasing taxes before the November elections.
    • Panetta and top executives discussed how sequestration could result in massive job cuts and how other Cabinet agencies should pressure Congress to modify the Budget Control Act of 2011 — the law that mandates sequestration to lower the U.S. deficit — should lawmakers not be able to agree on alternate ways to reduce the country’s debt.
    • The four scenarios DOD officials are considering:
      • Congress does not act and sequestration happens.
      • During the lame-duck session of Congress after the November elections, a plan is constructed to thwart sequestration.
      • Members of Congress come up with a $1.2 trillion cut to avert sequestration before the election.
      • Congress inserts language into a continuing resolution that delays sequestration another year or two when there is a less-heated political environment, but the government implements the first and perhaps second year of cuts, which some refer to as the “mini-sequester.”

FEDERAL GOVERNMENT

  • TARP - The U.S. Treasury Department sold shares in a dozen banks for about 14% less than its original investment, highlighting challenges for its planned sales of more bank shares in the coming months.
    • Overall, the government didn't take a loss on this group of banks, thanks to dividends it received on its shares.
    • However, the 14% discount on the latest auctions was steeper than the 10% average on the first batches of bank shares the Treasury sold earlier this year. Plus, holdings in two banks, in Illinois and Colorado, were only partially sold this week after bids fell short of the minimum set by the Treasury.
    • The bank share sales are part of a broader effort to wind down the government's federal rescue programs dating back to the 2008 financial crisis.? The Treasury has lately been accelerating the sale of its bank holdings, auctioning off 32 since April. Still, more than three years after the launch of the Troubled Asset Relief Program, in which Treasury invested capital in various banks and other institutions, the federal government still owns stakes in 311 banks.

FOREIGN POLICY

MIDDLE EAST

  • ISRAEL - An Israeli newspaper reported Sunday that the Obama administration's top security official has briefed Israel on U.S. plans for a possible attack on Iran, seeking to reassure it that Washington is prepared to act militarily should diplomacy and sanctions fail to pressure Tehran to abandon its nuclear enrichment program. A senior Israeli official, speaking on condition of anonymity to discuss confidential talks, said the article in the Haaretz daily was incorrect.
    • Haaretz said U.S. National Security Adviser Tom Donilon laid out the plans before Israeli Prime Minister Benjamin Netanyahu during a dinner at a visit to Israel earlier this month. It cited an unidentified senior American official as the source of its report, which came out as presumptive Republican presidential nominee Mitt Romney was telling Israel he would back an Israeli military strike against Iran.
    • The American official also said Donilon shared information on U.S. weapons that could be used for such an attack, and on the U.S. military's ability to reach Iranian nuclear facilities buried deep underground, the newspaper said. It cited another U.S. official involved in the talks with Israel as concluding that "the time for a military operation against Iran has not yet come.
  • SYRIA - Syria has expanded its chemical weapons arsenal in recent years with help from Iran and by using front organizations to buy sophisticated equipment it claimed was for civilian programs.
    • The buildup has taken place despite attempts by the United States and other Western countries to block the sale of precursor chemicals and so-called dual-use technology to Damascus, according to the documents.
    • Arms experts say Syria has pursued a two-pronged strategy to build and grow its chemical weapons stockpile: overt assistance and procurement of chemical precursors and expertise from Iran, coupled with the acquisition of equipment and chemicals from seemingly unwitting businesses in other countries, in many cases through a network of front organizations. The materials are often dual use, with purposes in civilian plants and in weapons facilities.
  • IRAN - Iran expects to hold more talks with world powers on its nuclear program following an inconclusive round of negotiations in Istanbul earlier this month, its foreign minister said in a newspaper interview published on Monday.
    • The failure of the talks to secure a breakthrough over Tehran's uranium enrichment, which the West fears is aimed at developing nuclear weapons, has raised international concerns that Israel may carry out a military strike.
    • U.S. Secretary of State Hillary Clinton said earlier this month that Iran's proposals made in talks with the so-called P5+1 group of the United States, Russia, China, France, Britain and Germany were "non-starters".
  • IRAQ - The U.S. Defense Department has promised a swift and "unrelenting" response to the resurgence of al Qaeda in Iraq as the terror faction fights to regain ground lost to U.S. and coalition forces during the war.
    • On Thursday, leaders of al Qaeda in Iraq (AQI) claimed responsibility for a string of attacks on Monday that left at least 160 dead and over 200 wounded. The attacks were the beginning of a new push by AQI to regain its foothold inside Iraq, terror cell leader Abu Bakr Baghdadi said in a statement released on Thursday.
    • The Pentagon condemned the violence and said U.S. officials are working closely with their counterparts in Baghdad to stomp out the group's comeback.
    • While the devolving security situation in Iraq has caused concern inside the Pentagon, it remains unclear whether DOD will tackle AQI in the same way it has gone after al Qaeda's Yemeni terror cell. The department is currently seeking congressional approval for a $75 million counterterrorism package for Yemen.


EUROPE

  • EURO ZONE - The head of the Euro Group, Jean-Claude Juncker, said the countries sharing the common currency, their rescue fund and the European Central Bank will soon act to save the euro. The Euro Group is an official meeting regarding the political control over the euro currency.
    • Mr. Juncker indicated the European Financial Stability Fund and the ECB will buy Spanish government debt to bring down yields after a summit of euro-zone leaders in late June had paved the way for sovereign-bond purchases by the bailout fund.
    • His statements seem to be the first official confirmation of media reports that European leaders are drawing up a plan of purchases of Spanish and Italian government debt by the ECB and the rescue fund.