Yesterday's earnings results from Caterpillar (CAT) were remarkable, and yet for most of the pre-market action and early hours of trading the shares were actually lower (much to my chagrin since our Hotline subscribers are long the stock). The story with Caterpillar, and many other companies with strong earnings results, is the rest of the world continues to come on strong. Asia and Latin America continue to be growth dynamos while North America plods along and Europe swoons. (Adding Africa and the Middle East to EAME calculations masks the degree of weakness in Europe.)

The world is galloping ahead, sometimes at breakneck speed, while America continues to erect roadblocks. A couple of weeks ago the CEO of Illinois Tool Works (ITW) said American companies are outsourcing because they need to be close to the customer. The notion of penalizing these companies further is preposterous.

Still, we hear about higher taxes and penalties for multinationals that hire outside the country. This week, China officially moved ahead of the United States as the top user of energy on the planet. This is only the beginning. I'm not sure if it's inevitable but I know we can push off the day China, India, and the rest surpass us in the economic pecking order. I know some people say it's no big deal, but it is a big deal. Economic might translates into quality of life unless you're lucky enough to share a continent with the greatest economic and military power in the world, then you don't need to be number one. It also doesn't matter if you live in a small nation with a lot of natural resources or ancient banking secrets. (Speaking of Canada, there are no mortgage interest deductions and everyone says it hasn't hurt their housing market- so are we ready for the same?) We must make it easier for American companies to compete at home and abroad, and that means lowering taxes on foreign income that comes homes and helps to create jobs.

That's not going happen, however. Right now, businesses are spending time, not money, and trying to figure out how to work under such harsh conditions. When job creators become enemy number one they look for friendlier places. I once had an acquaintance, which has an excuse for everything that hasn't gone his way, who said we should punish the rich and innovators and job creators because they are still going to do their thing. He had a great point. Just as the masses just aren't going to do what it takes to move up the ladder of success (got to make it home in time for American Idol or Monday Night Football) people that love achieving don't only do so for financial rewards. But, nobody wants to be punished or ostracized for working hard and making incredible sacrifices including family, health, and reputations. So, just as opportunities mushroom around the world entrepreneurs and businesses will seek out ways to take advantage.

With that in mind, the avalanche of new laws, rules, and taxes will have a dramatically negative impact on domestic business opportunities. And then there are the Bush tax cuts, which benefited taxpayers and saw revenue at Treasury climb along with the stock market, home ownership, and fortunes. Those taxes coincided with tax breaks for multinationals that allowed them to bring money (already taxed in local jurisdictions) home. At least three Democrats say the Bush tax cuts should be extended...for everyone. On that note, Tim Geithner chimed in to say those of us that are "more fortunate" than others must take a tax hit. The most fortunate part suggests everyone making more than $250,000 a year is all in the lucky sperm club. Those small business owners that gave up everything to reach a certain level of success deserve so much more than higher taxes. The real deal is we will all pay an economic price.

Yesterday, Mark Zandi told a real estate forum at a U.S. Chamber of Commerce gathering it's time to ditch mortgage interest deductions. He said it would save Treasury $100.0 billion, even as it's obvious to anyone it would crush the housing market, which is already sitting on toothpick-like stilts. These deductions have been in place since 1913 when income taxes were introduced, and no doubt this was a compromise. I have a lot of respect for Zandi and told him as much a couple of years ago, but he has become something of a mouthpiece for the White House. When a woman in yesterday's audience balked and said it would crush her business he stated: "It's time to give back."

Economic Data

Business confidence in Germany is running at a three year high for July, which seems like a contradictory result with all of the fear in Europe. Nevertheless, a surge in exports and generally strong economic growth left survey participants quite optimistic about present conditions and the future as well. The index jumped from a reading of 101.8 in June to 106.2 in July, the highest level since July 2007. In fact, the monthly increase was the largest on record since they began in 1990. What's more, the consensus estimate was calling for a decrease. The boost to activity leaves manufacturing capacity utilization just slightly below historical averages, indicating that activity could almost be back to "normal" levels. It's a highly optimistic report that makes you wonder if the hysteria surrounding the situation in Europe has been way too overblown.

Final Note

The market received a good U.K. GDP number and German confidence number this morning. Yesterday, UK retail sales were quite solid, in spite of concerns regarding tax rates and regulations (sound familiar?). These sets of data fit well with what our companies under coverage are saying on conference calls...that Europe is not as bad as many expected. Spain still seems to be under pressure, however.