Jan 31, 2011

Turmoil in Egypt

January 31, 2011

Egypt continues to garner headlines as riots have given rise to concerns about global trade routes traversing through the Suez Canal, utilized by 8% of global shipments. The key product being transport through the canal is oil, and prices have been moving up in response in spite of recent weakness in other global commodities. Egyptian police have pulled back in fear of the rioters, and the airports are packed with Egyptians and non-Egyptians trying to flee the country. The last time Egypt received this much news was when the pyramids were unveiled to the public.

Domestic economic news was positive this morning as personal income for December was reported in line at 0.4%. Personal spending was well above expectations at 0.7% vs. the 0.5% estimate. Equity futures are up slightly this morning after Friday’s sell-off, the largest in six months. The Chicago Purchasing Manager Survey came in at 68.8 vs. expectations of 64.5 The key report this week will be Friday’s jobs report, which is expected to show an increase of 150K in private payroll jobs.

Earnings continue to pour in this week. Exxon reported better than expected revenue and EPS this morning as sales increased by 17%. Illinois Tool Works reported better than expected sales but lower than expected EPS.

Alpha Natural Resources announced it was buying Massey Energy in an effort to consolidate the domestic coal industry and increase production for export. The deal is valued at $8.5 billion.

The NY Times is reporting that inflation in China and the resulting pricing pressure on US retailers could reduce the US trade deficit with China. Container-shipping companies are noting reduced orders from the US.

The IMF put out a warning on the nonfinancial debt ratios in Brazil, China, and India. The notice cited that the levels are approaching those last seen in 1996, just before the emerging-market financial crisis. “Even low-quality businesses are able to borrow large amounts of money because of the rapid flow of capital from developed nations.”

The People’s Bank of China said that QE programs by other central banks would result in too much global liquidity. They also stated that this policy will not address underlying problems and expressed concern over the potential for competitive currency devaluations.

Markets in the Persian Gulf lost $10 billion last night as the political turmoil in Egypt increased selling pressure. The Dubai Financial Market fell over 4%.

Asian markets were down last night, and European markets are up slightly this morning.

Have a great day


Jan 28, 2011

Consumer's Throwing Caution to the Wind

The equity markets are getting a slight bid this morning after the US economy posted a solid gain on the best consumer spending in four years. The GDP report showed the economy grew at 3.2% last quarter. Although this was below estimates of 3.7%, the number is still indicative of economic improvement during the quarter. Personal consumption increased by 4.4%, in excess of the 4.0% estimate, as consumers shed their shed their spending inhibitions in the last two months of the year. That’s quite a turnaround from August and September, when the entire country was focused on a double dip recession.

A recent BLS study reported that over 40% of US companies that conducted mass layoffs during the recession are now expecting to recall workers. Jobs, typically a lagging indicator, are the key to sustaining the economic recovery.

The US budget deficit is now forecast to reach $1.5 trillion this year. The CBO reported that over the next decade, the cumulative deficit will expand to 97% of GDP. According to the economist, the US political system is not ready to deal with our fiscal challenges. “America’s leaders seem frightened to speak in anything but generalities and platitudes. It is not encouraging.”

The CBO also reported that Social Security will run deficits for now on, and will be completely out of money by 2037.

LinkedIn filed for an IPO yesterday. The market is definitely open right now, and a better IPO market should help private equity and venture fund marks over the next few quarters. The pipeline for deals is the biggest since it peaked in 2007.

Verizon announced an all cash, $1.4 billion deal to acquire Terremark Worldwide, a leading provider of hosting services via independent data centers. Their focus appears to be Terremark’s positioning in managed services, not their data center footprint.

Amazon was a beneficiary of the 4th quarter consumer spending spree, positing a revenue increase of 36%. Unfortunately that result was below street estimates and the stock declined by 10% in the aftermarket last night and is down 9% on the open. Ford missed badly this morning and is poised to open lower as well, by 10%. Chevron beat EPS on weaker than expected revenues.

Marion Maneker reported that yesterday was potentially a very big day in the publishing world with two announcements that could capitalize in the rapid shift toward e-books. “As a measure of that shift, USA Today’s list of the top 50 bestselling titles revealed that 46% of those works sold better as e-books than print copies in the previous week.” This is creating a significant shift in the publishing, book retailing, and printing world.

The IMF warned that bond buyers might dump US and Japanese sovereign debt if the nations fail to reduce their budget deficits. The IMF said that Europe is making progress with its government debt, but that the US and Japan are lagging behind major economies.

APAC markets fell last night after Japan had its debt rating cut by S&P to AA- because of a “lack of coherent strategy” for dealing with its overwhelming debt load.

Have a great weekend.


Jan 26, 2011

Wednesday January 26, 2011

US markets are opening slightly higher this morning as earnings dominate the news. Through yesterday 87 of 119 companies have exceeded estimates, with noted strength in the financial sector. Tech has been the weakest of the major sectors, and the NASDAQ Composite has responded by declining in six of the past seven trading sessions.

Yesterday the Conference Board’s consumer confidence index posted 60.6 vs. 53.3 in December and versus expectations of 54.0. This is the highest reading for this measure since May, just after the market peaked in the spring.

The Fed announces its rate decision today at 11:15 PST. There is no expectation of any change in stance, especially given recent Fed commentary about continuing weakness in the economy and the relentless focus on deflation. Some experts are anticipating the Fed will (gasp!) actually begin discussing plans to remove the stimulus.

Bank of England Governor Mervyn King warned yesterday of “uncomfortably high” inflation this year that could fuel demands for wage increases and force the central bank to raise interest rates. The country’s GDP declined by 0.5%, and that is before austerity measures begin. Is our Fed now the only Central Bank in the world not concerned about inflation?

The Financial Crisis Inquiry Commission came out with their report on what caused the financial collapse, and were pointed in their criticisms of the Fed, Wall Street, both the Clinton and Bush administrations, the banks, and of course reckless mortgage originators. Some of the strongest criticisms were levied against Alan Greenspan, Ben Bernanke, Timothy Geithner, Lawrence Summers, Hank Paulson, and the “bumbling incompetence among corporate chieftains” at Citigroup, AIG, Fannie Mae, Freddie Mac, and Merrill Lynch. The report’s conclusion is that the crisis could have been avoided.

FASB reversed its position on requiring banks to move back to mark-to-market accounting after intense lobbying by the banks to block the rule. The rule would have forced banks to revert back to the accounting standard prior to April 2009, which required banks to carry their loans at market value. Right now, instead of mark to market, loans are carried at a fantasy value better known as mark-to-imagination.

Yesterday the S&P/CaseShiller Home Price Index came in at 143.85 for November, down slightly as the YoY composite declined by 1.6%. As shown in the chart below (courtesy Tyler Durden) only San Diego posted a positive gain month over month. Los Angeles and San Francisco were also better-California is arguably better than the rest of the country because of the relatively aggressive way they have cleared through their foreclosure backlog. The chart looks like the beginning of a double dip in housing prices.

The President gave his State of the Union address last night and called for a boost in job creation, a five-year freeze in discretionary spending (which makes up 14% of the budget), and a focus on infrastructure, innovation, and education. He also advocated cutting “tax loopholes”, especially for the oil industry. The Republican rebuttal address highlighted the 84% increase in spending and $4 trillion increase in the national debt over the past two years. Both parties have a lot of work to do, hopefully they’ll be up to the task.

Asian investors purchased roughly 5 billion Euro (38%) of the European Financial Stability Facility’s first bond offering. The Japanese government purchased 20% of the offering.

Asian markets were strong last night on better economic growth being reported in South Korea. European markets are up today as well.

Have a great day


Jan 24, 2011

January 24, 2011

January 24, 2011

Markets are opening flat this morning after posting their first weekly decline last week in the past 8 weeks. Leaders Apple and Google both were soft last week, which could indicate the beginning of a short term correction. The Russell 2000, a leading index during this most recent really, is beginning to show signs of weakness (see chart below from Kimble Charting Solutions). Bond markets are a bit stronger after Friday’s selloff. Commodities are seeing a slight bid today.

A National Association for Business Economics poll of US businesses indicated that companies are more optimistic about expanding their payrolls than at any times since 1998. Forty-two percent of businesses participating said they expect to increase hiring in the next six months, up 3% from October.

A Bloomberg study shows that by year end 50% of Americans will have smart phones. Spectrum could get pinched as usage could increase 5000% over the next three years. A battle at the FCC is brewing as wireless carriers needing spectrum are pressuring the FCC to release spectrum owned but unused by television broadcasters.

McDonalds profits rose 15.6% in 2010 on a 6% revenue increase, both numbers in line with estimates. Mini mill operator Steel Dynamics missed both revenue and earnings estimates for the 4th quarter on lower scrap volumes. On Friday Bank of America announced a $1.24 billion loss for Q4.

Greek Finance Minister George Papaconstantinou said that the country is moving towards a budget surplus and has no need to restructure its $409 billion of debt.

Asian markets were mixed last night, with strength in Japan, Australia, and South Korea. Singapore, Philippines, and China were weak.

Have a great day


Jan 20, 2011

January 20, 2011

Yesterday the S&P suffered its largest single day loss since the Jackson Hole meeting in August, falling 1.0%. The largest pullback had been 0.3% during this rally. Today the markets are continuing their softness, although the early weakness has been tempered by better than expected initial jobless claims, which came in at 404K vs. expectations of 420K. The LEI posted an increase on better orders of 1% vs. expectations of a 0.6% increase. Existing home sales jumped 12.3% vs. an expected increase of 4.1%, and the Philadelphia Fed Index came in at 19.3 vs. expectations of 20.8.

Earnings will be in the headlines the next couple of weeks. This morning Fairchild Semi, Freeport McMoRan, Parker-Hannifin, and Morgan Stanley reported positive earnings while GATX, Huntington Banc, Knight Capital, and Meridian Biosciences reported weak numbers. Last night F-5 missed number, guided below the street, and is opening down 20% this morning.

The Central Bank of Brazil increased their lending rate by 50bps to 11.25% from 10.75%.

The Congress voted yesterday to repeal Obamacare. Full repeal is unlikely since the Senate probably won’t go along with the vote, and if they do the President certainly would veto it.

The Premier League and UK authorities are closer to an agreement which will require soccer clubs to pay millions of pounds to curb players tax bills.

While the West Texas Intermediate used in the US sits at $88 per barrel, lower sulfur crudes such as Bonny Light and Tapis have risen to over $100 on strong demand from China and India.

Spain is moving quickly to recapitalize their savings banks (cajas) to avoid an international bailout. The Journal is reporting that a $4 billion offering will be made this week.

Asian markets were down over 1% last night on continuing concerns about inflation in China. Investors are concerned that the government will need to further tighten economic policy to control inflation.

The Economist is reporting that the amount of energy required to produce a unit of domestic product is declining almost everywhere as energy intensity is converging in most major economies.

Have a great day


Jan 18, 2011

January 18, 2011

January 18, 2011

Stock futures are flat this morning as earnings season kicks into gear. Citigroup missed estimates after taking $1.1 billion in charges related to tighter credit spreads. The company did earn money in 2010, the first time under CEO Vikram Pandit. European markets are strong on improving sentiment as leaders continue discussing options for ending the sovereign debt crisis. Bond markets are soft and commodities are flat.

According to the Fiscal Times the US is now the #2 destination (behind Australia) for Chinese business investments. A stronger yuan, which hit 6.5824 yesterday, would further exacerbate this trend. The yuan now sits at a 17 year high.

Apple has announced that Steve Jobs will be taking another medical leave, putting pressure on the stock this morning. From a business standpoint the timing is unfortunate as the company faces their biggest competitive challenge in the past four years in handsets, tablets, and apps.

Goldman has decided to limit its Facebook offering only to foreign investors after citing “intense media coverage” of the sale, which US regulators were reviewing as a possible public solicitation.

Rates have risen dramatically over the past two months, however, it appears they haven’t broken out to the upside on a technical basis. The chart below, courtesy of Kimble Charting solutions, shows that yields may be bumping up against downward trending resistance.

Asian markets were flat last night.

Have a great day


Jan 14, 2011

January 14, 2011

Equity futures are weak this morning after China raised their reserve requirements (by 50bps) for the 4th time in the past two months to stem rising inflation. Retail sales for December were below consensus, rising 0.6% vs. expectations of a 0.7% increase. Ex-autos retail sales were 0.5% vs. 0.6% expectations. CPI came in above consensus at 0.5% (expectations 0.4%), but the Core CPI (you know, the one that excludes most of the items Americans purchase on a daily basis) rose in line at 0.1%. Industrial production rose 0.8% vs. 0.4% expectations, with the primary strength coming from energy production. Capacity utilization was roughly in line at 76% vs. expectations of 75.5%.

Intel posted a strong quarter last night, raising guidance after a weaker than expected Q3 report. They raised sales estimates for 2011 to 10% on server strength. They also addressed criticism about their loss of share in the consumer space by discussing their efforts in mobile and tablet computing. JP Morgan also reported better than expected numbers after cutting provisions for future credit card and real estate loan losses. It appears the bank is poised to increase lending as loan demand increased slightly.

Spain sold 5 year bonds yesterday with a face value of 3 billion euro in an auction that was two times oversubscribed. The yield was 4.59%, 100bps higher than a year ago. In a nod to German concerns, ECB President Trichet warned that the bank is ready to raise interest rates before summer to brake inflation.

The Economist noted that Western developed countries are now having to deal with soaring raw material and commodity prices without the associated economic boom. “This combination of still-subdued activity and high raw material prices illustrates a wider truth: that America is no longer the price-setter for these products. Now it is Asia.”

Prices of agricultural commodities (corn, wheat and soybeans) soared after the Department of Agriculture reduced its forecasts of this year’s inventories. Prices of corn and soybeans jumped to their highest level since July 2008 as corn production is at a 15 year low. “Where’s Beaks!??” (a bonus for anyone who gets that one)

Both Asian and European markets were weak last night .

Have a great weekend


Jan 10, 2011

January 10, 2011

Equity and bond markets are both weak this morning as Euorpean CDO prices rose to record levels as Euroland prepares to borrow $43 billion this week. Asian and European markets were/are both weak last night. Portugal, Spain and Italy are holding their first bond auctions of the year this week. The Euro continues to soften, falling to 1.2929, below its beginning of the year value of 1.3361. Emerging markets continued their weakness on inflation and corresponding rate hike concerns.

Brazilian Finance Minister Guido Mantega said last night that “this is a currency war that is turning into a trade war”, referring to currency manipulation by the US and China. He said that Brazil is preparing to impose controls to restrict capital inflow and slow down appreciation in the real. He is recommending that the WTO designate currency manipulation as an illegal export subsidy.

The Massachusetts Supreme Court ruled that two foreclosures by US Bancorp and Wells were invalid due to paperwork issues. The ruling put pressure on bank stocks Friday.

Oil futures are surging after BP had to close the Trans-Alaska Pipeline yesterday due to a leak. Over 15% of US oil comes from this pipeline. Gasoline prices across the country have jumped $.09 over the past week, and in Southern California a gallon of regular unleaded sells for $3.39.

Goldman Sachs is already facing scrutiny from the SEC on their marketing of the FaceBook deal. Now they are facing public scrutiny as it comes to light that one of their top fund managers refused to participate in the deal because he felt it wasn’t “in the best interest of his clients.”

Duke Energy agreed to buy Progress Energy for $13.7 billion, creating the largest US utility. Playboy is getting a bump this morning as Hugh Heffner has announced plans to take the company private.

Investors were disappointed last week when Verizon didn’t make an announcement about carrying the iPhone at CES. They have scheduled a conference call for tomorrow, and speculation is that this is for the much anticipated iPhone announcement.

Copper fell for the 5th straight day as lower Chinese imports soften the demand outlook.

Another indictment of Wall Street research comes from Bloomberg this morning as they have analyzed S&P 500 stocks and the relationship of analyst ratings and performance. Since the March 2009 market bottom, stocks that the analysts “loved” rose 73% on average, while those with the fewest buy recommendations rose 165%. Banks are now favoring retailers, restaurant, and technology stocks-those that outperformed last year. Contrarian plays include utilities, telephone stocks, and banks. For 2010 analysts favored healthcare and technology stocks, two of the three weakest sectors in the S&P 500. Stocks with the most buys rose 8.7% in 2010, while those with the fewest rose 20%.

The BCS championship game is tonight, and while I’ll be rooting for Oregon, my sense is that the trophy stays in the state of Alabama.

Have a great day


Jan 5, 2011

January 5, 2011

Equity markets are opening slightly lower this morning in spite of the ADP Employment report, which showed an increase of 297K jobs versus expectations of an increase of 100K. The ISM Services index also came in ahead of estimates at 57.1 vs. an expected 55.7. Commodities are weak for the second straight day, led down by oil and metals. The bond market is also soft. The dollar is up strong this morning.

The CMBS market, which has been effectively frozen since June 2008, is showing signs of life. DB and UBS are working on a $2.5 billion deal, while JPM is working on a $1.5 billion deal. Moving some of this paper could help bank lending.

Auto sales were reported yesterday for December, and came in slightly ahead of consensus at 12.5 mil units. Domestic sales were also ahead of estimates. The big surprise was vehicles manufactured by both Chevrolet and Ford outsold those made by Toyota (US sales).

The new Republican Congress was sworn in yesterday, and they have stated their first two items are cutting $100 billion from the budget and rolling back Obamacare.

The World Bank issued its first Yuan-denominated bond, raising $76 million.

The Varadero field in the North Sea is expected to yield 50 billion barrels of crude oil. This new discovery is next to the Catcher field, which was found last year and is roughly the same size.

The Fed released their minutes of last month’s meeting, and stated that the economic recovery is gaining strength. They decided to maintain the $600 billion QE-2 in spite of the economic strength because “inflation remains below” their 2% target. Guess they haven’t been to the grocery store or gas station lately?

Qualcomm announced they would be acquiring WiFi specialist Atheros for $3.2 billion in an effort to improve their competitive positioning vis a vis Broadcom.

Bloomberg is reporting that world food prices rose to a record in December, higher than the levels of 2008 that sparked a global riot. The overall cost of food increased by 25% according to the FAO. A positive data point is that rice prices remain below 2008 levels. I guess food producers haven’t read the Fed’s minutes citing a lack of inflation.

European markets are weak today while APAC markets closed down last night on concerns about declining oil, gold and other resource prices.

I thought this was an interesting MP3-based Social Experiment

Have a great morning


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Jan 3, 2011

January 3, 2011

Happy New Year. I hope your holidays were fabulous!

US equity markets are opening strong this morning after the ISM posted an inline result (57.0) suggesting continued manufacturing expansion. The prices paid index was above consensus at 72.5 vs. 71.8 and the prior period at 69.5. Construction spending declined to 0.4% from 0.7%, but was ahead of the consensus of 0.2%. Oil and commodities are rising again today while bonds continue their weakness. The dollar is also up this morning after being weak most of the past 10 days. The risk is that stronger economic growth will either defer the Fed’s QE2 or that the Fed will continue and create inflationary pressures.

Bank of America announced they would pay $2.6 billion to resolve claims by Freddie Mac and Fannie Mae regarding loan sales with faulty documentation. The company had faced at least $13 billion in unresolved put back demands prior to the settlement, about half due to Freddie and Fannie. Most of the loans at issue were originated by Countrywide.

2011 could see a resurgence in the IPO market as private equity firms, long shut out of the equity markets, look to unload inventory from ’04-’07 vintage deals. If the equity markets can maintain their strength, watch for a deluge of sponsored IPO’s in the first half of the year.

Small caps led returns last year, and typically signal an economic recovery is underway. The smalls tend to be more dependent upon US demand and, according to Bloomberg, have preceded faster economic growth during the past 20 years.

Nike turned some heads last week by guiding to roughly 150 bps of margin pressure over the next 2 quarters due to cost inflation. Management does not expect to offset much of the mid-single digit cost inflation in the near term but stated they are not in panic mode because they believe that Nike's market leadership, scale, and leverage with suppliers and retailers ultimately gives it the ability to raise prices and share the pain.

The Port of Charleston’s container volumes increased by more than 14% in November, resulting in the 11th consecutive month of growth for the port. Through the first 11 months of 2010, Charleston container volume was shown to be up 17.5%, while container volume over the past five months was up 15.9%.

Asian markets were mixed while European markets are also strong this morning.

Have a great day