Secession Today – a Texas scenario

March 30, 2012

It’s a popular idea in Texas that the Lone Star State — once an independent republic — could break away and go it alone. A few years ago, Texas Gov. Rick Perry hinted that if Washington didn’t stop meddling in his state, independence might be an option. In his brief run for the White House, he insisted that nearly anything the feds do, the states — and Texas in particular — could do better.

So we’re putting Perry’s suggestions to the test — NPR is liberating Texas. We asked scholars, business leaders, diplomats, journalists and regular folk to help us imagine an independent Texas based on current issues before the state. (Though, to be clear, no one quoted here actually favors secession.)

We begin our exercise in Austin, capital of the new Republic of Texas, where the Independence Day party raged until dawn to the music of Austin’s own Asleep at the Wheel. Lead singer Ray Benson announced to the crowd, “We have severed the ties with the United States of America. Texas is free!” and the masses roared in response.

The former state has reinvented itself as a sort of Lone Star Singapore, with low taxes, free trade and minimal regulation. It enters the community of nations as the world’s 15th-largest economy, with vast oil and gas reserves, busy international ports, an independent power grid and a laissez-faire attitude about making money.

Texas Is ‘Open For Business’

The Texas Association of Business advertises the new nation’s economic potential with a radio ad that declares, “Texas: Now it is a whole other country — and it’s open for business … C’mon over. Be part of our vibrant free-market nation.”

Driving around Texas, it’s not uncommon to spot bumper stickers that tout the idea of an independent Longhorn nation.

“What we have been able to do since we threw off the yoke of the federal government is create a country that has the assets necessary to build an incredible empire,” says Bill Hammond, the association’s president.

Imagine airports without the Transportation Security Administration; gun sales without the Bureau of Alcohol, Tobacco, Firearms and Explosives; land development without the Endangered Species Act; new congressional districts without the Voting Rights Act; and a new guest-worker program without Washington gridlock over immigration reform.

Indeed, new immigration laws sailed through the Texas Congress. Immigrant workers are now legally crossing the border to frame houses, mow lawns and clean hotel rooms.

“We now have a safe and secure guest-worker program that allows immigrants to come and go as the jobs ebb and flow, and fill the jobs that Texans are unwilling to do,” Hammond says.

The new normal is a leaner government that bears little resemblance to the full-service nation it left behind. The Tea Party faithful who embraced nationhood early on say it’s a lot better than being beholden to Chinese bankers.

“What is the Republic of Texas charged with actually doing? [It’s] charged with defense, charged with education, charged with a few things that you have to do, and the rest is wide open,” says Felicia Cravens, a high school drama teacher active in the Houston Tea Party movement. “Liberty may look like chaos, but to us it’s a lot of choices.”

Under statehood, the U.S. government contributed 60 percent of all Texas aid to the poor. In an independent republic, federal benefits like food stamps, free school lunches and unemployment compensation would disappear, according to two Dallas Tea Party leaders.

“Liberty may look like chaos, but to us it’s a lot of choices.”

“The nation of Texas is a living experiment into what we call the empowerment society. It is no longer a caretaker society,” says Ken Emanuelson, founder of the Grassroots Texans Network.

Texas Tea Party member Katrina Pierson adds, “There’s a safety net that’s always been out there. We don’t have that anymore. You will be a productive member of society and our environment doesn’t allow for people to not be productive.”

Southern Methodist University political scientist Cal Jillson imagines that low-wage Texas would become a new magnet for assembly plants that might have considered setting up shop in Mexico or Malaysia.

“Since Texas has become independent, we are surprised — and some are pleased — to see that maquiladora [or foreign-owned] plants are springing up on the south side of the Red River and on the Sabine [River],” Jillson says. “The American South is complaining because some plants are moving to Texas.”

With independence, the epic battles between the state of Texas and the Environmental Protection Agency would finally be over. The state sued the EPA repeatedly for telling Texas how to run its refineries and coal-fired power plants. Business experts say the new republic would rely on voluntary pollution controls with minimal oversight — a boon to the industrial sector. But how would that go over with residents of refinery towns who have to breathe the air where they live?

“I am very, very skeptical that the nation of Texas will do a good job at protecting the health and safety of the people, because the EPA is no longer in the equation,” says Hilton Kelley, founder and director of the Community Empowerment and Development Association in Port Arthur. “It’s all about petroleum; it’s all about money.”

‘Peeling Back The Onion’ Of Texan Independence

As an independent country, Texas’s red granite capitol building would no longer fly the American flag, only the Lone Star. The new nationalism that breaks out inside the new government would soon be tempered by an independence hangover.

“Every day we’re peeling back the onion and finding another level of complexity that I don’t think anybody initially anticipated,” says Harvey Kronberg, longtime editor and publisher of the Texas political newsletter Quorum Report.

According to Kronberg, a modern sovereign nation requires more — not less — government than a state would. Consider all the new departments it would need to monitor things like foreign affairs, aviation and nuclear regulation. And then there are all the expenses Washington used to take care of — things like maintaining interstate highways, inspecting meat and checking passports.

“Reality is beginning to stagger the folks in the [capitol] building,” Kronberg says.

Public education is a good example. In 2011, the Texas state Legislature slashed billions of dollars from school systems at a time when Texas was already 43rd among the states in per pupil spending and dead last in the number of adults who completed high school.

Steve Murdock, the former Texas state demographer and current director of the Hobby Center for the Study of Texas, expects that things would not improve under the budget of a struggling infant nation.

“For Texas to be the competitive nation that we would all wish it would be, it has to make major improvements in education,” Murdock says, “because right now it’s falling short.”

Texas writer Joe Nick Patoski sits on a bench in downtown Austin, ruminating on the hassles of self-rule.

“You can’t get in the car and go to New Orleans [and] be there in six hours anymore,” he says. “Listen, have you been to the Louisiana checkpoint in Vinton? They’re extracting some kind of revenge, the way they treat us as Third World citizens.”

Patoski imagines losing a number of friends to the post-secession “Texodus,” when U.S. citizens fled Texas for the Upper 48 states. He says he’s rooting for the republic, but he’s anxious for its future.

Today, all that marks the state line between Texas and Louisiana are welcome signs. After independence, those signs would most likely be replaced with the customs and immigration checkpoints that come with any border crossings.

“I’m still proud to be a Texan,” he says, “but I wish they would’ve thought this through before they jumped and cut the cord.”

Step 1: Don’t Go To War With Oklahoma

During the state’s first run as a republic, from 1836 to 1845, Texas established diplomatic relations with England, France, the Netherlands and the United States. Today, the modern nation of Texas would find even more countries eager to build embassies in Austin, says Carne Ross of Independent Diplomat, a New York firm that advises fledgling nations.

“Because of Texas’ wealth — [it’s the] 15th-largest economy in the world — [foreign nations] do not want to have bad relations with Texas,” Ross says. “There are many countries, China for instance, that want to preserve their ability to access countries with major oil and gas reserves, so Texas fit into that.”

Unlike the first republic, a modern nation of Texas needs to have positions on things like the Israeli-Palestinian conflict.

“But what was interesting was that Texas’ positions were often quite different from the remaining United States,” Ross says.

What would Texas’s foreign policy entail? Country singer and humorist Kinky Friedman imagines what he would do as the Texas secretary of foreign affairs.

“I think the first thing we would do is go to the Third World countries and teach the women how to grow big hair and give the men Rick Perry wigs,” he says. “I will keep us out of war with Oklahoma. And one of the first countries we’ll open free trade with is Cuba. We will be opening cigar stores all over Texas. We’re not supporting their economy; we’re burning their fields.”

From Texas To La Republica De Tejas

Texas might see itself as culturally akin to its former fatherland, but as time goes on, the nation’s destiny would be determined by its genetic ties to the south. If current demographic growth continues, Texas will become majority Hispanic within a generation. The prospect of Texas as the newest Latin American nation amuses Austin cultural marketing consultant Mando Rayo.

“Texas becomes La Republica de Tejas,” Rayo says. “The panhandle city of Amarillo becomes Amarillo, and our national pride, the Dallas Vaqueros, win the Super Bowl.”

But would the U.S. let Texas go or would there be a constitutional standoff and opposition from the remaining united states? University of Texas, Austin, presidential scholar H.W. Brands doesn’t anticipate a painful separation.

“The Texans were all set for a fight,” he says. “I don’t know, maybe they were a little bit surprised — maybe they were miffed — that much of the rest of the country said, ‘Well we’ve had enough of the Texans, let ’em go. We’ll be better off without ’em.’ ”

The premise of an independent Texas isn’t actually all that popular in the Lone Star State. Last year, Public Policy Polling asked Texans if they favored secession, and fewer than 1 in 5 were for it. As for the 18 percent that said yes — they can just consider our simulation food for thought.

John Burnett is an NPR national correspondent who lives in Austin and plays in a band, so he is not atypical of Austin. He put this together for NPR at the end of March.

Morning Report

Vital Statistics:
 
  Last Change Percent
S&P Futures 1374.5 -3.8 -0.28%
Eurostoxx Index 2312.0 -15.8 -0.68%
Oil (WTI) 102.1 -0.6 -0.58%
LIBOR 0.466 0.000 0.00%
US Dollar Index (DXY) 79.54 -0.002 0.00%
10 Year Govt Bond Yield 1.95% -0.03%  
RPX Composite Real Estate Index 172.8 0.6  
 
Markets are flattish after a successful Spanish bond auction and generally good earnings reports from a slew of companies. Bank of America and Ebay were standounts. Spanish bond yields are starting to increase and the Spanish equity market (The IBEX) is under pressure. US Treasuries and MBS are flat to up.
 
US Leading economic indicators fell. The Philly Fed Business Outlook Survey noted regional manufacturing activity expanded modestly in April, but fell slightly from the previous month. Both indicators seem to imply the economy is still expanding, but not as rapidly as a few months ago. Existing home sales fell to 4.48 million.
 
The press is pointing out the strong demand for the Spanish bond auction. As Bill Gross mentioned, banks are buying all of the excess supply in the Spanish bond auctions, which he views as artificial demand. The interesting question is that sovereign bonds are treated as riskless assets for bank capital requirements. If it turns out they are not riskless… Investors are noticing, and bidding up credit default swaps for Spanish banks.
 
Initial Jobless claims came in at 386k, ahead of the 370k expected. Last week was revised upwards. Interestingly, when I re-ran the data series, the government had revised virtually every week up from the beginning of the year. Not sure what is going on there..
 
A University of Chicago economist gives a theoretical explanation why principal reductions are better for borrowers than interest rate mods which merely lower the payment. In effect, mods which target a percent of income (usually 31%) end up penalizing workers as they earn more – in effect they can be hit (in theory) with a 100%+ marginal tax rate. Not sure I buy the idea that this is influencing behavior, but it is an interesting take on payment vs principal mods.
 
The National Association of Home Builders weighs in on tax policy, urging Congress to increase certainty (read: extend the Bush tax cuts) into the tax code. As the economy slows, Washington will come under increasing pressure to push the 2013 tax hikes further into the future.
 
Do the government’s inflation numbers seem to not jibe with your actual bills? One explanation is the change in methodology over the years. Someone went to the trouble of recalculating inflation using the older methodology, and unsurprisingly, it is higher. The government disagrees.
 
 
Chart: Initial Jobless Claims:
 

Secession revisited

Last week was the 151st anniversary of the beginning of the Civil War, and yesterday was the 151st anniversary of Virginia’s declaration of secession from the United States. The outcome of the Civil War itself seems to have put an end to any questions about the constitutional legitimacy of secession, but there is no reason it should have. Might, as the cliche goes, does not make right, and so the constitutional question of whether the federal government is acting within its rightful powers to prevent a state from peaceably withdrawing itself from the Union cannot have been settled simply because the federal government was able to do so successfully. And of course, the Confederacy did itself and the underlying question no favors by firing on Fort Sumnter, making the withdrawal not so peaceable and providing Lincoln with a justification for sending in the troops. But I think the question still remains: Does the constitution prevent states from seceding from the Union?

It is interesting to note that between December 20, 1860 and April 12, 1961, the day on which Confederate troops fired on Fort Sumnter, 7 states declared secession from the Union, and neither President Buchanan nor President Lincoln, despite his rhetoric, took any official action against the seceding states. Following the war, Jefferson Davis was arrested for treason, but was never in fact tried, and while there were plenty of political reasons for the blanket pardon granted to those in the Confederacy, uncertainty about the lack of constitutional legitimacy of secession was certainly among them. And the southern states were not even the first to contemplate secession. During the War of 1812, a delegation of Federalist representatives from New England broached the subject of seceding, with the Massachusetts governor even considering coming to terms of a separate peace with Great Britain.

Certainly, in any event, it is difficult to square a view of the constitution as prohibiting secession with the foundation of the United States itself, of which an animating feature was the very presumption that a people could, by right, “dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the laws of nature and of nature’s God entitle them”. Indeed, reading the Declaration of Causes of Seceding States, one can’t help but hear the echo of the original Declaration of Independence, upon which they were so obviously modeled.

So, putting aside the moral question with which the secession movement of 1861 was inextricably linked, ie slavery, was the Federal government justified in waging war against the South, and does a proper reading of the constitution really grant it the power to wage such a war?

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1381.5 -2.1 -0.15%
Eurostoxx Index 2331.1 -35.9 -1.52%
Oil (WTI) 104.3 0.1 0.06%
LIBOR 0.466 0.000 0.00%
US Dollar Index (DXY) 79.78 0.307 0.39%
10 Year Govt Bond Yield 1.99% -0.01%
RPX Composite Real Estate Index 172.2 -0.2
Equity markets are slightly weaker this morning on a disappointing earnings report from Intel. IBM and Yahoo also reported last night.  Abbott Labs and Halliburton beat estimates this morning. Spanish bond yields are lower. Bonds and MBS are slightly higher. No economic data this morning.
Part of the reason for the strong market rally yesterday was a strong Spanish bond auction. Many have noted that the Spanish banks have been large buyers of Spanish government debt. Bill Gross called the market “artificially controlled” on CNBC, and he doesn’t trust it. Bloombergnotes the bad debt exposure for Spanish banks, and the possibility for the government to take on contingent liabilities. Spain has the 12th largest GDP in the world (Greece is something like 35th), so don’t think a crisis would be a repeat of last fall.
Housing advocates are worried that a President Romney will take aim at HUD. Of course HUD could remain as the alphabet soup of government housing agencies get re-organized. For all intents and purposes, the US mortgage market is nationalized, and while the GSEs may go away in name, their function will be handled by some other entity. It would take roughly 500 billion to fully capitalize the GSEs and that kind of money can’t be raised in the private sector.
US Bancorp is noting that demand for credit is increasing. CEO Richard Davis told CNBC yesterday that mortgage demand was the highest in the bank’s history. The Minneapolis-based bank had reported better than expected numbers earlier that morning. So, this is one positive data point to throw in the mix of negative ones we have been seeing lately.
Ever done a quick fix on your home with the intention of doing a full repair later, but never got around to it? Here are some good ones (note the uses of hockey pucks)

Legal news

An interesting case was argued at SCOTUS yesterday:

[I]n Christopher v. SmithKline Beecham Corp[, t]he Justices will decide, once and for all, whether pharmaceutical sales representatives (PSRs) are “outside salesmen” and thus exempted from overtime-pay requirements of the Fair Labor Standards Act of 1938 (FLSA) The decision will also settle a circuit split between the Second and Ninth Circuits: the former held that PSRs are not outside salesmen and thus are not exempted from the FLSA’s requirement that they be paid overtime wages, while the Ninth Circuit (in this case) unanimously reached the contrary conclusion. This will be an interesting case with wide-ranging ramifications for the pharmaceutical industry and the ninety thousand people nationwide employed as PSRs.

Christopher v. SmithKline Beecham Corp

Also, the en banc Ninth Circuit decided the AZ voter ID case:

We uphold Proposition 200’s requirement that voters show identification at the polling place, but conclude that the NVRA supersedes Proposition 200’s registration provision as that provision is applied to applicants using the National Mail Voter Registration Form (the “Federal Form”) to register to vote in federal elections. [NVRA = National Voter Registration Act — ed.]

Gonzalez v. AZ

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1370.2 6.3 0.46%
Eurostoxx Index 2334.3 33.1 1.44%
Oil (WTI) 103.8 0.9 0.85%
LIBOR 0.466 0.000 0.00%
US Dollar Index (DXY) 79.54 -0.018 -0.02%
10 Year Govt Bond Yield 1.99% 0.01%
RPX Composite Real Estate Index 172.3 0.3
Markets are higher this morning on a better than expected German investor confidence data and a decline in Spanish bond yields. Bonds and MBS are lower. After falling out its narrow 140 -144 trading range, June 10 year bond futures are back in it again, driving mortgage rates back to February levels.
Johnny John reported better than expected numbers, as did Goldman, who also bumped up their dividend. Ex-highflyer First Solar is cutting 30% of its workforce.
Housing starts missed estimates by a wide margin, falling sharply from 694k in February to 654k in March. Remember, 1.5 million is more or less “normalcy,” and having starts heading downwards for two months in a row this late in an expansion is not a good sign. Optimists will point to the unexpected increase in permits. Nevertheless, forward-looking economic indicators are starting to turn down, indicating the economy is slowing. Remember, the Bush tax cuts expire Jan 1, and that will provide a large fiscal drag. Business (and the markets) are going to start handicapping the possibility of an early 2013 recession, which should mean a slowing economy this summer and into the fall.
Industrial Production was flat in March, vs a .3% increase.  Capacity utilization ticked up .1% to 78.6%, still below the historic 80% average. This shows there is still a lot of slack in the economy, which bodes well for the inflation numbers.
The rental market continues to outshine the purchase market, according to Zillow. The rent index increased 2% YOY in February, while the Zillow home value index dropped 4.5%. The huge backlog of foreclosures remains a wet blanket on the home value index, while ex-homeowners are driving rental prices higher. Localities like Chicago and Philadelphia showed huge divergences.
As if Spain didn’t have enough headaches, Argentina is expropriating Repsol’s 51% stake in YPF. Latin America has been one of the bright spots for Spanish banks, so if money starts fleeing the area, it will put further pressure on the Spanish economy. Granted, Brazil and commodity prices are going to be the main factor, but forced nationalization tends to make emerging markets investors nervous.
Are you trading gasoline futures?  If so, the Obama administration is taking aim at you. Worried that high prices at the pump may endanger his re-election campaign, the administration has announced a series of measures aimed at reducing speculation in the gasoline futures market. The most significant measure would allow the CFTC to increase margin requirements (never mind that the exchanges can do this already..)

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1369.5 4.5 0.33%
Eurostoxx Index 2298.9 7.3 0.32%
Oil (WTI) 102.7 -0.1 -0.12%
LIBOR 0.466 -0.001 -0.11%
US Dollar Index (DXY) 80.09 0.206 0.26%
10 Year Govt Bond Yield 1.98% -0.01%
RPX Composite Real Estate Index 172 0.8
Equity futures are rising this morning on better than expected retail sales data. Citi missed earnings estimates and traded down a couple of bucks early, but has recovered as people digest the internals of the earnings report.
Empire Manufacturing came in lower than expected on weakness in China and Europe. While still positive, the pace of expansion has slowed. The forward-looking indicators continue to weaken, which is something to keep an eye on.
Spanish credit default swaps continue to increase in price, and have passed their high from last November during the Greek crisis. 10 year CDS for Spain are trading at 476 basis points. Spain’s GDP is the 12th largest in the world, so any default there will not be as tame as Greece. Their banks are much more household names – Banco Santander has the same market cap as Goldman. Paul Krugman is nonplussed.
11 state AGs sent a letter to Acting FHFA Ed DeMarco urging him to allow principal reductions on Fannie and Fred loans.
Earnings season gets in full swing this week.

Weekend Report

Fix income inequality with $10 million loans for everyone!

By Sheila Bair, Published: April 13

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough. It can hold our Portuguese debt as collateral just to make sure.

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

Come to think of it, by getting rid of work, we can eliminate a lot of government programs. For instance, who needs unemployment benefits and job retraining when everyone has joined the investor class? And forget the trade deficit. Heck, we want those foreign workers to keep providing us with goods and services.

We can stop worrying about education, too. Who needs to understand the value of pi or the history of civilization when all you have to do to make a living is order up a few trades? Let the kids stay home with us. They can play video games while we pop bonbons and watch the soaps and talk shows. The liberals will love this plan because it reduces income inequality; the conservatives will love it because it promotes family time.

I’m really excited! This is the best American financial innovation since liar loans and pick-a-payment mortgages. I can’t wait to get my super PAC started to help candidates who support this important cause. I think I will call my proposal the “Get Rid of Employment and Education Directive.”

Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923?

That couldn’t happen here. This is America. Why should hedge funds and big financial institutions get all the goodies?

Look out 1 percent, here we come.

outlook@washpost.com

Sheila Bair is a former chairman of the Federal Deposit Insurance Corp. and a regular contributor to Fortune Magazine.

Morning report

Vital Statistics:

Last Change Percent
S&P Futures 1377.7 -8.2 -0.59%
Eurostoxx Index 2316.8 -35.4 -1.51%
Oil (WTI) 103.1 -0.5 -0.49%
LIBOR 0.466 -0.001 -0.11%
US Dollar Index (DXY) 79.53 0.249 0.31%
10 Year Govt Bond Yield 2.01% -0.04%
RPX Composite Real Estate Index 171.3 0.3
Markets are weaker this morning after a disappointing GDP report out of China. The Consumer Price Index showed prices increasing 2.7%, which was more or less in line with expectations. Stocks and bonds didn’t react much to the data. Google, JP Morgan, and Wells Fargo all reported better than expected earnings and are flat to slightly down pre-market.
JP Morgan reported better than expected earnings this morning. The highlight has been the mortgage origination which contributed $1.6 billion in revenue, an increase of 80% from Q111. Servicing revenue dropped 5% and the entire activity broke even. A Bloomberg story on Morgan’s earnings cites a Friedman Billings analyst who thinks Q2 will be the best quarter for the mortgage business in a long time.
Christine Lagarde (head of the IMF) urged the US government to pursue a policy of principal reduction in mortgage debt. As I have discussed in prior posts, that probably isn’t going to happen, at least with respect to conforming loans. Still, I don’t rule out some sort of mortgage relief given that this is an election year.
Google is trying a new wrinkle in corporate governance. As part of their earnings release last night, they announced a stock split. Sort of. Google has two classes of shares – the supervoting shares held by the founders, and the reduced vote shares that currently trade. They are introducing a third share which will be nonvoting. Google shareholders will get as a dividend 1 share of nonvoting stock. The new stock will be used for employee equity-based compensation and other corporate uses, which means Google can issue stock without diluting Sergey and Larry’s control over the company.

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1365.9 1.9 0.14%
Eurostoxx Index 2318.7 -22.7 -0.97%
Oil (WTI) 102.8 0.1 0.06%
LIBOR 0.467 -0.002 -0.43%
US Dollar Index (DXY) 79.57 -0.230 -0.29%
10 Year Govt Bond Yield 2.02% -0.02%
RPX Composite Real Estate Index 171 0.2
Equity markets are generally flat after early strength was given back on disappointing economic data. Bonds have reversed earlier declines and MBS are up as well.
The PPI showed that wholesale price inflation remains broadly in check, although the core numbers (ex-food and energy) were slightly higher than expected, running at 2.9%. Initial Jobless Claims were much higher than expected, 380k vs 355k. The trade deficit was lower than expected due to a drop in imports. Futures sold off on the numbers. Some of the other indicators (NAPM, ISM) have been coming in weak as well, signalling the economy might be headed for a slowdown.
The market may be picking up on the sheer amount of fiscal tightening that is scheduled to begin on Jan 1, as the Bush tax cuts expire and the budget cuts from the debt ceiling debates kick in. Of course, no one really wants this to happen, but it is an election year, and they will take effect if nothing happens to stop it. So the market is probably going to start handicapping this a little.
Bill Gross continues to cut Treasuries and buy MBS. This is basically a bet that the Fed will continue Operation Twist in a different way after it expires in June – by trying to influence mortgage rates directly by buying current coupon MBS and repoing short.
RealtyTrac released its US Foreclosure Market Report for Q1, noting that foreclosure activity was the lowest since Q407. Activity dropped in the non-judicial states and increased in the judicial ones. Foreclosure starts have been ticking up, and everyone expects a wave of foreclosures to hit the market as the shadow inventory gets liquidated.
Janet Yellen said that the Fed may have to maintain ultra-low interest rates even beyond 2014. Yellen is one of the more dovish members of the FOMC, and her statements stand in contrast to other members who are noting pricing pressures.
In earnings, Google and Nationstar report after the close. JP Morgan and Wells Fargo report Friday before the open.