Mar 30, 2011

The Yen Finally Eases

March 30, 2011

The Yen, which has been on a tear since the earthquake & tsunami, finally gave up some ground last night and the Nikkei popped 2.6%. Hitachi announced that their main plant will resume full operation next month in a possible sign economic activity may finally resume. There are still significant issues with the nuclear problem in Japan as tests showed that sea water near the reactor has radiation levels 3300x higher than legal limits. The local food supply, and probably also the global food supply, is now at significant risk of contamination. A herd in the mid-west tested positive for an isotope of cesium that is not naturally occurring, and has only been released from Japan.

The Case Shiller Home Price Index (see chart below) was released yesterday, and prices fell by 3.1% y/y. There has been much hand wringing about the weakness in new home starts and pricing, however, in my view this is a good trend. There is still an enormous amount of unsold inventory and foreclosures yet to clear the market, and basic economic theory dictates that when supply is high, prices must fall to stimulate demand. The government is out of bullets to support housing prices (ZIRP, HAMP, first time buyers credit, foreclosure prevention, initiatives, etc), so it appears that prices will find the bottom they should have found back in 2009 in the form of a housing double dip. The ADP employment report reported this morning that companies had hired 201K new workers in March, slightly less than last month (217K) and the estimate of 208K. The monthly employment data will be released Friday, with the estimates for nonfarm private payrolls at 203K, nonfarm payrolls 185K, and the unemployment rate at 8.9%.

Biotech drug maker Cephalon’s stock is up 28% this morning after receiving an unsolicited takeover offer from Valeant Pharmaceuticals. Data processing leader Acxiom is down 18% this morning after pre-announcing earnings and accepting the resignations of both the CEO and CFO.

Saudi Arabia announced plans to increase their rig counts by 28% as fast as possible from 92 to 118.

DigiTimes is reporting that prices for 12” blank wafers will rise 15% in Q3 due to supply constraints stemming from the March 11 earthquake in Japan. Japan’s SHE has 15-20% of the global market share, and was forced to shut down its plant in Fukushima. Additionally, interruptions of fiber glass, polishing slurries, and other materials may impact the semiconductor supply chain.

Oil prices have eased slightly the past two days after Qatar became the first Arab state to recognize the rebel forces in control of eastern Libya. The announcement came soon after Ali Tarhouni, a rebel official in charge of economic, financial and oil matters, was quoted in news reports as saying Qatar agreed to market crude oil produced in eastern Libya. Qatar's diplomatic recognition of the rebel forces was supported by the Gulf Cooperation Council. In fighting, the rebels appear to be losing ground due to a lack of munitions and fuel in spite of the NATO air support. NATO members are still prohibited from providing the rebels with arms due to a total arms embargo against the country.

A report by BNP Paribas concluded that inflation has taken away all of the benefits of the payroll tax cut which was pushed through Congress. According to the report there’s no sign of increased spending by consumers as rising food and energy prices more than consume the incremental take home pay.

Tokyo Electric Power announced they would write off four of the six reactors at Fukushima. The company plans to shut them down permanently. “We have no choice but to scrap the units” said interim President Tsunehisa Katsumata.

House GOP leaders have reached across the aisle to moderate Democrats to help avoid a government shutdown. Hard-liners in the GOP are taking a stand, saying they won’t extend the government’s spending authority without agreement on spending cuts of roughly $70 billion. Hard line Dems won’t agree to such “aggressive” cuts, and have proposed cuts of $6 billion. With a $1.7 trillion budget deficit it is obvious neither of these groups is fit to lead.

In a direct effort to minimize dollar inflow into Brazil, President Dilma Rousseff imposed a 6% tax on foreign bond sales and loans with maturities of less than 1 year. Finance Minister Guido Mantega said “the inflow of dollars is too strong, damaging the exchange rate, appreciating the Real and harming exporters.”

APAC markets were up last night. In addition to the strength in the Nikkei, the ASX 200 was up 1.4%, Kospi up 0.9%, hang Seng up 1.7%, Taiex up 0.6%, and NZX up 0.4%. Of the major indices, only the Shangai fell.

European markets are up today.

Have a great day


Mar 28, 2011

March 28, 2011

Stocks are opening up moderately for a 4th straight day while treasuries are sliding (and yields rising) for an eighth consecutive day. Consumer spending rose greater than expected to 0.7% vs. expectations of an increase of 0.5% for February, a level consistent with GDP growth of 2.7-3.0%. Personal income rose by 0.3% vs. expectations of a 0.4% increase. The PCE core inflation increased to 0.9% from 0.8%, and the PCE deflator rose to 1.6% from 1.2%, both in line with expectations. The net on spending is that Q1 spending has decelerated from Q4, unless real spending accelerates to 2.0% in March, which would be the highest level since October 2001.

Leaks inside the containment unit of Japan’s damaged nuclear have led to dangerous levels of radiation outside the reactor. For the first time since the tsunami radiation levels outside the buildings are now high enough to cause death. Water outside the #2 reactor are high enough to cause death after four hours of exposure, and severe illness after just 30 minutes. The struggle now will be trying to keep the leaking water from spreading into ground water or the radiation spreading into the air. Elevated radiation levels have been detected in crops near the plant as well as the water supply in Tokyo, which is 140 miles to the south. Recent soil tests are also showing signs of plutonium, which was only used in reactor #3 and could indicate the fuel rods in that facility also were exposed and partially melted down.

EBAY is acquiring GSI Commerce for $2.4 billion, a 50% premium to Friday’s close.

Cotton prices are finally easing after a record crop in the US will allow stockpiles to increase for the first time since 2007.

GDP growth estimates are being cut for Japan as disruptions due to the disaster are expected to negatively impact production for the next 3-6 months. GDP estimates for 2012 are being increased due to the anticipated rebuilding efforts. Japan’s enormous debt/GDP ratio will cause concern as the country struggles to pay for the rebuilding.

S&P downgraded Portugal’s credit rating on Friday.

The future of the Euro may be in the hands of the German electorate as Chancellor Angela Merkel’s Christian Democratic party faces challenges in this year’s elections. Last week the party lost the Baden-Wurttemberg stat election, losing control of the state for the first time in 58 years.

The German government lowered its projected budget deficit this year from 3% to 2.5% of GDP, and is looking for 1.5% in 2013.

APAC markets were mixed overnight, and European markets are up slightly today.

Kentucky, U-Conn, Butler, and Virginia Commonwealth will travel to Houston to play in the Final Four this weekend. How unlikely was that combination of teams, seeded 4, 3, 8 and 11 respectively? On ESPN’s website there were only two brackets out of six million submitted with that combination of teams in the Final Four.

Have a great day


Mar 25, 2011

GDP Revised Up

March 25, 2011

Equity markets are opening flat this morning after a positive revision to 4th quarter GDP, which came in at 3.1% vs. expectations of a revision to 3.0%. Inventories and nonresidential investment were revised up slightly while personal consumption and net export growth were revised down. Personal consumption for the 4th quarter was also reported this morning, and rose 4.0% vs. expectations of a 4.1% increase. The University of Michigan Consumer Confidence index came in just below consensus at 67.5 vs. 68.0. Yesterday durable goods orders (see chart below courtesy were lower than expected, falling by 0.9% vs. expectations of a 0.2% increase, and ex-transportation fell 0.6% vs. expectations of a 0.5% increase. The weak new orders measure is at odds with last week’s robust ISM and may just be a measurement issue, however, it bears watching as it is the second month in a row of negative orders.

Officials in Japan are reevaluating the nuclear situation after it was determined a pool of water outside the containment area had radiation levels 10K times what was previously expected. Speculation is that the core of one of the reactors may have been breached, which would lead to the release of even more radioactive material. Officials still insist that there won’t be a Chernobyl scale release of radioactive material into the environment.

Oracle (ORCL) reported earnings, revenue and guidance that exceeded the consensus yesterday, the stock is up 3% this morning. Research in Motion (RIMM) beat EPS last night, but reported in line revenues and had mixed guidance, the stock is down 10% this morning.

Moody’s downgraded the credit rating of Spain’s banking sector due to pressure on the country’s sovereign credit and many weak financial institutions.

The IMF is looking for a quick activation of a $583 billion pool targeted to countries in financial trouble.

The Fed is considering auctioning a portfolio of subprime-mortgage bonds that were once held by AIG. AIG recently bid $15.7 billion for the portfolio, which was acquired during the rescue of the company. The face value of the portfolio exceeds $30 billion.

Asian markets were strong last night, led by the Nikkei after Japanese auto makers began restarting production.

As the BOE and ECB consider raising rates, Stephen King (chief economist at HSBC, not the author) warns “the danger is of a policy mistake. In an attempt to control inflation this year, they could set the scene for more disappointing growth in the future as happened in Japan.”

More criticism of the financial reform bill known as the Dodd-Frank Act was issued yesterday, this time by Bart Chilton, who is a member of the US Commodity Future Trading Commission (CFTC). “There is no mention in the law about high-frequency trading. Matter of fact, there’s no mention in our rules or regulations anywhere. And they played a significant part in the ‘flash crash’.”

NATO has taken control of the military effort against Libya as Congressmen from both sides of the aisle aggressively question the President’s authorization for the use of force, funding, and exit strategy. Germany has expressed its disagreement with NATO taking control of the military action by pulling from ships from NATO operations in the Mediterranean. There is speculation that government and opposition representatives may hold cease fire talks today. Rumors are also circulating that Libyan officers may be ready to abandon the embattled Qaddafi.

March Madness continues this weekend. Last night U-Conn, Butler, Arizona, and Florida advanced to the Elite 8.

Have a great weekend


Mar 23, 2011

Egpyt Market Opens

March 23, 2011

US equity markets are opening weaker this morning. Technicians at Bank of America/Merrill are looking for another 10% drop in the S&P 500, which would pull the index down to 1150. They are looking for the defensive stocks to lead on the way down, then the cyclical to regain leadership after the correction. Oil has moved back to $105 (WTI) per barrel and may have an additional $10-12 before hitting technical resistance. Domestic bonds are stronger, continuing their range bound trading (see left hand side of chart below courtesy Kimble Charting Solutions). New home sales came in at a record low 250K unites for February, below the 290K consensus, a 17% decline.

JP Morgan is suggesting that Portugal’s government may collapse this week. The yields on Portugal’s 5 year notes jumped 20bps to 8.2% this morning in front of a parliamentary vote which may push the country towards an EU bailout.

The Fed denied a request from Bank of America to raise its dividend, citing concerns about the bank's capital position.

The Egyptian stock exchange opened this morning for the first time in almost two months, and immediately went limit down (10%).

Authorities are worried that Japan's nuclear crisis is leading to radioactive contamination of fish, milk, vegetables and livestock near the Fukushima Daiichi power plant. Officials said the distribution of marine products was halted after the earthquake. The World Health Organization said a spread of contamination through food is a greater concern than airborne radiation. The U.S. is a major market for Japanese food exports and began blocking food imports from Japan today. In Tokyo signs of radioactive iodine above safety levels were found in the tap water.

European finance ministers agreed on how to establish a permanent rescue fund able to lend as much as €500 billion. The fund will replace a temporary fund in 2013. "We now have a comprehensive strategy to strengthen the foundations of the euro area and to restore confidence in euro-area sovereign-bond markets," said Olli Rehn, the EU's commissioner for economic and monetary affairs.

Apollo Global Management, a buyout firm co-founded by Leon Black, is looking to raise about $400 million in its latest attempt to go public. The firm sold shares in a private placement in 2007 with the intention of following it with an initial public offering, but that plan was pulled due to the financial crisis.

Germany's economy has kept growing this year and is expected to accelerate through 2011, according to a report from the Finance Ministry. Estimates are for GDP to increase by 2.3%. German employers are adding staff and increasing work hours, according to the report.
 The cost of rebuilding Japan after its earthquake and tsunami could be the highest recorded for a natural disaster since such data were first compiled in 1965. The World Bank said the cost could be as much as $235 billion, the Japanese government is estimating $309 billion. The most expensive natural disaster previously was the earthquake that hit Kobe, Japan, in 1995
 Jean-Claude Trichet, president of the European Central Bank, said he has "nothing to add" to the central bank's March 3 statement indicating that higher interest rates could come as soon as April. Other ECB officials suggested that tighter monetary policy is needed to control inflation.

The Federal Reserve will be required to make public the emergency help it gave to banks through "discount window" borrowing during the credit crunch, after fighting a request for the information for two years. The U.S. Supreme Court allowed a lower-court decision ordering the disclosure to stand. The decision requires the Fed to reveal the names of banks that borrowed money and how much they were lent.
Liz Taylor died this morning at the age of 79. For her 1963 role of Cleopatra she signed a then record $1 million, and ended up earning $6 million because of filming delays. She won two academy awards and five total nominations in her career.

Have a great morning


Mar 21, 2011

AT&T Buying T-Mobile

March 21, 2011

Stocks are set to open higher after strong results in Asia and Europe last night following improvements in the Japanese nuclear situation and success with military actions in Libya. Over the weekend Japanese officials appear to have made progress in restoring power to two of the damaged Fukushima power plants, lessening the possibility of a major radiation release. The US, UK, and France have been enforcing a no-fly zone over Libya with a combination Tomahawk cruise missiles and fighter jets in an effort to help rebels in their battle against Muammar Qaddafi. The coalition was led by France, who has “returned” to the diplomatic arena for the first time in years. Treasury yields are rising as the macro fears subside.

The Fed approved Citigroup’s request to issue its first dividend since receiving the largest bailout among US banks. The company announced a $.01 per share dividend as well as a 10:1 reverse split. It is interesting to note that the performance history of stocks undergoing reverse splits has been rather poor.

AT&T announced plans to acquire T Mobile, creating the largest US wireless carrier. AT&T is getting a strong bid this morning in spite of the deal being dilutive for roughly three years, while Sprint’s stock is falling 13% on concerns they will be a distant third in the market behind AT&T and Verizon. AT&T and Verizon will control 80% of the US wireless market if the deal is approved. No timeline was given for a closing, but typically large telco deals take about a year to obtain DOJ and FCC approval. This one may also face Congressional scrutiny because of the expected loss of jobs resulting from the merger.

Leonard Green & Partners completed the all cash acquisition of Jo-Ann Stores today at $61.01 per share.

The World Bank is expecting the earthquake and tsunami will depress Japan’s growth, but only briefly through midyear. They feel that spending on construction will fuel growth for as long as five years, at a cost of $122-$235 billion.

The impact of the Japanese disaster is beginning to spread, adding turmoil to the Middle East, Africa and Europe. Morgan Stanley has lowered its Q1 DGP growth in the US from 4.5% to 2.9% as a result of supply chain disruptions from Japan.

The CBO is now estimating that the budget deficit during the next 10 years will be $2.3 trillion more than the most recent White House estimate. The CBO said that tax revenue will be less than the President’s projections.

The IMF is reporting that debt levels for developed countries is the highest since WWII, and that the average debt ratio of advanced economies will exceed GDP for the first time since the Big One.

March Madness began this past weekend, and while the number of upsets was fewer than in past years, there were some great games and a slew of games determined in the final seconds.

Have a great day


Mar 17, 2011

545 vs. 300 million

March 17, 2011

I don't typically repost other author's work, but I felt this article was worth a quick read. The author, Charlie Reese, recently retired from the Orlando Sentinel.

545 vs. 300,000,000 people.

545 PEOPLE --By Charlie Reese

Politicians are the only people in the world who create problems
and then campaign against them.

Have you ever wondered, if both the Democrats and the Republicans
are against deficits, WHY do we have deficits?

Have you ever wondered, if all the politicians are against inflation
and high taxes, WHY do we have inflation and high taxes?

You and I don't propose a federal budget. The President does.

You and I don't have the Constitutional authority to vote on
appropriations. The House of Representatives does.

You and I don't write the tax code, Congress does.

You and I don't set fiscal policy, Congress does.

You and I don't control monetary policy, the Federal Reserve Bank

One hundred senators, 435 congressmen, one President, and nine
Supreme Court justices equates to 545 human beings out of the 300
million are directly, legally, morally, and individually
responsible for the domestic problems that plague this country.

I excluded the members of the Federal Reserve Board because that
problem was created by the Congress. In 1913, Congress delegated its
Constitutional duty to provide a sound currency to a federally
chartered, but private, central bank.

I excluded all the special interests and lobbyists for a sound
reason. They have no legal authority. They have no ability to
coerce a senator, a congressman, or a President to do one cotton-picking thing.

I don't care if they offer a politician $1 million dollars in
cash. The politician has the power to accept or reject it, no matter
what. The lobbyist promises, it is the legislator's responsibility to
determine how he votes.

Those 545 human beings spend much of their energy convincing you
that what they did is not their fault. They cooperate in this common
con regardless of party.

What separates a politician from a normal human being is an
excessive amount of gall. No normal human being would have the
gall of a Speaker, who stood up and criticized the President for
deficits..... The President can only propose a budget. He cannot
force the Congress to accept it.

The Constitution, which is the supreme law of the land, gives sole
responsibility to the House of Representatives for originating and
approving appropriations and taxes. The House members, not the
President, can approve any budget they want. If the President
vetoes it, they can pass it over his veto if they agree to.

It seems inconceivable to me that a nation of 300 million cannot
replace 545 people who stand convicted -- by present facts -- of
incompetence and irresponsibility. I can't think of a single
domestic problem that is not traceable directly to those 545 people.
When you fully grasp the plain truth that 545 people exercise the
power of the federal government, then it must follow that what exists is what they
want to exist.

If the tax code is unfair, it's because they want it unfair.

If the budget is in the red, it's because they want it in the red..

If the Army & Marines are in Iraq and Afghanistan it's because
they want them in Iraq and Afghanistan ...

If they do not receive social security but are on an elite
retirement plan not available to the people, it's because they
want it that way.

There are no insoluble government problems.

Do not let these 545 people shift the blame to bureaucrats, whom
they hire and whose jobs they can abolish; to lobbyists, whose
gifts and advice they can reject; to regulators, to whom they give the
power to regulate and from whom they can take this power. Above all,
do not let them con you into the belief that there exists disembodied
mystical forces like "the economy," "inflation," or "politics" that
prevent them from doing what they take an oath to do.

Those 545 people, and they alone, are responsible.

They, and they alone, have the power..

They, and they alone, should be held accountable by the people who
are their bosses.

Provided the voters have the gumption to manage their own employees...

We should vote all of them out of office and clean up their mess!

Charlie Reese is a former columnist of the Orlando Sentinel

Mar 16, 2011


March 16, 2011

“There are still a lot of dominoes on the table.”-Art Cashin, UBS

Equity markets are opening weaker this morning after housing starts fell to the lowest level since April 2009, and building permits were the lowest since 1970. Personally I feel we need the new housing market to continue to be weak to give us an opportunity to clear the excess inventory of pre-owned homes. The producer price index came in at 5.6% (y/y), well above last month’s 3.6% and expectations of 4.7%. The core rate rose at 1.8% (y/y). Bond markets are strong again as the flight to safety trade continues, with the 10 year yield now down to 3.26%. In a possible sign the dollar is no longer seen as a safe haven, weakness in the greenback continues as it now sits 17% below its 30 year average vs. a basket of global currencies.

The Fed met yesterday and signaled there would be no additional stimulus when QE2 is finished in June. They discussed a stronger economy and actually acknowledged inflation, although they feel it is “transitory.” I was sent a great analysis yesterday suggesting that even if the Fed completely stopped with QE programs, by holding their balance sheet constant they will be buying in $750 billion in treasuries per year as $250 billion mature annually and they receive $500 billion per year in principal payments on their mortgage back securities. That $750 billion could represent 80% of new debt issuance in 2012. So much for pulling back.

Japan remains in the spotlight as clean up from the earthquake and tsunami has taken a backseat to severe nuclear problems. The six reactors at Fukushima Daiichi are under different stages of meltdown due to a disruption in the power supply as a result of the natural disasters. Cesium from spent fuel rods and plutonium from reactor #3 are the immediate sources of radiation concerns. Cesium is especially dangerous because it can travel through the food chain and reside in the soil, animals and people for over 30 years. A small amount has been released so far. Korea and other countries have announced plans to begin screening food from Japan for radiation exposure. The situation is very fluid and changing almost hourly as officials try everything possible to stop the reactions and cool the cores.

The picture below is a before and after picture of a town in Japan. Clicking on this link takes you to a page that will allow you to slide the bar horizontally across the screen to view the shocking level of damage.

South Korea’s central bank joined the growing list of central banks expressing concerns about inflation.

Sales of sodium iodine in Asia and the US West Coast have been soaring off the shelves. Sodium iodine is used to ‘fill up’ the thyroid so it can’t absorb radioactive iodine after a radiation leak.

While the world focuses on Japan, problems in the Middle East, which were a primary concern just a week ago, are still brewing. In Bahrain the stock exchange was closed after protests between Shiite Muslim protestors against the Sunni government injured hundreds. The country’s 5-year credit defaults swaps have surged over the past few days, and now are higher than those of Lebanon. The government has declared a state of emergency.

China announced this morning that they were halting their nuclear development program. In the US there are two plants under construction and 20 awaiting permit renewals. Entergy’s Vermont plant is facing increasing scrutiny because it is the same GE design as three of the Japanese units facing problems today.

The Nikkei rallied last night, although the ETF’s are down in US trading today after a deterioration in the nuclear situation. Most Asian markets were up yesterday. European markets are down this morning.

Have a great day


Mar 14, 2011

Disaster in Japan

The news is being dominated by the horrible events coming out of Japan. Thousands have been left dead after the 8.9 earthquake triggered a cataclysmic 25 foot high tsunami. Waters from the tsunami reached 13 miles inland.

In addition to the damage from the two natural disasters, the country’s nuclear power plants, which generate 30% of the country’s electricity, are facing severe meltdowns. Much of the country is without power or water after the cooling system at Fukushima failed on the #1 and #3 reactors. This morning the #2 reactor’s cooling system stopped working, and over 200K people have been evacuated due to concerns about radiation leaks. Three US helicopters and 17 crewman from the USS Ronald Reagan tested positive for radiation exposure after assisting with the emergency measures at Fukushima.

The Nikkei reopened this morning and fell 6%, the biggest one day drop since December 2008, while credit risk surged. Japan’s central bank has been active selling US treasuries to provide additional capital for the country’s clean up and rescue efforts. The Bank of Japan has already poured $183 billion into the economy and has doubled its asset buying program to offset the impact of the quake.

Construction stocks may benefit from the upcoming rebuilding effort as roads, buildings, homes and power plants have been severely damaged. Additionally, insurance brokers may benefit as global consumers re-evaluate their insurance coverage after the disaster. Losses to insurers are being conservatively estimated at $34 billion.

Global oil prices have tumbled since the disaster on demand concerns. Japan is the #2 global importer of oil, deriving 100% of its oil from imports. All of the country’s refineries are offline today, and gas rationing has been implemented to insure supplies for rescue efforts.

The quake was the largest in over 1200 inside the boundaries of the North American and Pacific tectonic plates. Japan lies within the “Ring of Fire”, an arc of volcanoes and fault lines surrounding the Pacific Basin. Scientist are already saying that pressure levels on the plates have shifted dramatically, and will provide aftershocks for “a long time.” They are expecting aftershocks up to a 10 magnitude in the ensuing decades. It is estimated that because of the plate rupture, the country may have shifted almost 8 feet and the earth has shifted its axis by 10 inches.

Berkshire Hathaway made a $9 billion offer for lubricant and additive manufacturer Lubrizol. Leonard Green Partners and management made a $1.3 billion bid for 99 Cents Only stores.

The NFL players and owners were unable to come to terms before the preceding labor agreement expired. While it appears the owners may have capitulated some near the end of negotiations, the players moved ahead and decertified their union. The next step will include attempts by the players to use the court system to find the NFL in violation of antitrust regulations. The players will claim that all of the operating rules they agreed to in the now expired collective bargaining agreement are antitrust violations. Meanwhile, players won’t be paid, teams can’t sign or trade them, they won’t receive their health insurance, and roughly 500 free agents can’t get new jobs in football. Newly drafted players (the draft is April 28), won’t be signed to contracts until the dispute is settled.

Have a great day


Mar 9, 2011

Fannie Mae-Will the Pain Ever Stop?

March 9, 2011

Stock and bond markets are opening soft this morning. The dollar is also weaker this morning as oil, metals and other commodities are generally finding a bid as tensions in the Middle East continue. In Libya, the government stepped up attacks on areas where rebel forces have been active, including an air attack at the Es Sider oil terminal. The American Petroleum Institute released their inventory figures this morning showing that oil inventories in the US continue to rise while gasoline and other distillates have been drawn down.

As if taxpayers hadn’t spent enough on Fannie Mae (chart below) after a decade of irresponsible lending, now we are footing a legal bill of over $100 million to defend the former management team from a shareholder lawsuit. Investors are looking to recoup billions from losses they are blaming on misleading accounting practices. Maybe former CEO Franklin Raines will offer up some of the $400 million he was paid when he left the government owned entity?

Two days ago China promised to balance their trade with the US and Europe. Yesterday Boeing received orders for 43 wide-body planes from Hong Kong Airlines and Air China at the Hong Kong air show. The orders are worth about $6 billion after discounts. You can’t say they don’t keep their word.

The Wall Street Journal is reporting a possible change in corporate pension accounting that will have an impact on reported earnings but should increase transparency. Instead of “smoothing” gains and losses, the companies will begin expensing them in the year they occur.

Terry Laughlin, head of the new “bad bank” holding trillions of dollars worth of BofA mortgages rejected a proposal to reduce mortgage balances for underwater homeowners. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?” he asked. “There may be as much as $1 trillion worth of mortgages that are underwater.”

Companies have complained that bank lending is nearly impossible to obtain, which makes sense given banks today are effectively being paid by the Fed not to lend. That doesn’t mean that funding isn’t available as high yield bond issuance remains robust in 2011 after a record year in 2010. Last week alone there were $12.7 billion in high yield bonds issued in the US.

The IPO pipeline in China is robust as companies attempt to tap the equity markets as investors are pulling away. The Hong Kong exchange is preparing to offer up to $8 billion in new deals, including China’s Inner Mongolia Yitai Coal, which is in registration with a $1.5 billion deal.

A Manpower survey predicts that US employers will step up hiring 8% in the second quarter. While this will fall far short of the hiring needed to reduce the rolls of the unemployed (now 9 million below the peak), it is an improvement we have been witnessing anecdotally for 2-3 months.

The Economist is reporting that the recent defense of US agricultural subsidies by Agriculture Secretary Tom Vilsack was so lacking in substance that “it essentially confirmed that there is no rational way to defend them.” The subsidies primarily benefit huge agricultural companies and the politicians who give them public money.

The NY Times is reporting that the SEC is being scrutinized for ethical lapses in the Bernie Madoff case. Evidently the SEC’s general counsel, David Becker, had a financial interest in one of Madoff’s funds.

Sunday is the second Sunday of March, which means its Selection Sunday and time for March Madness!

Have a great day


Mar 7, 2011

March 7, 2011

Stock and bond markets are both getting a bid this morning in spite of rising oil prices and a declining dollar. A warning about global bonds was issued by JP Morgan this morning, saying that we could experience a 1994-style bond rout if emerging market central banks are still raising rates when the Fed is forced to do so later this year.

The US CFTC said that net short dollar positions now total $34.9 billion, the highest since June 2008. Euro net long positions are the highest since January 2008.

I hate to keep harping on oil, but holy cow! I paid $4.09 per gallon on Thursday, and I drove by the same station this morning and the price had jumped to $4.29. That compares to the national average of $3.51 per gallon. I may start biking again. The President is reportedly considering releasing some of the Strategic Petroleum Reserve to stem gasoline prices, although I honestly don’t know what impact that will have given there are record inventory levels of oil in Cushing, OK, which is a major trading hub for crude oil and now houses over 500K barrels.

Bloomberg’s government team produced a report saying that $4.9 trillion in cuts and tax increases would be required to get our deficit down to 60% of GDP. The only programs where there is enough room to cut that much from the budget are the entitlement programs and defense. The most recent budget proposal doesn’t address any of the entitlement programs, so we may have to wait until the next budget cycle to potentially address our deficit problems.

China’s Premier Wen Jiabao said that bringing China’s food and property prices under control are the nation’s most important priorities. The country also vowed to narrow trade imbalances with the US and EU.

After last week’s drop in unemployment discussions have turned to ending QE2 early and ending the ZIRP (Zero interest rate policy). Dallas Federal Reserve President Richard Fisher has joined the chorus of those exploring or supporting an end to QE2. While a positive sign for the economy, this would undoubtedly create some pressure in the equity market.

APAC markets were mixed last night, with the Shanghai up 1.8%, the Nikkei down 1.8%, and both the Australian S&P/ASX and the Sensex down 1.4%.

Have a great Monday


Mar 4, 2011

Employment Again the Big Story

March 4, 2011

The market rallied yesterday after initial jobless claims came in at 368K, the lowest level in almost three years, vs. expectations of 395K and in anticipation of a stronger Non-Farm Payrolls report today. The NFP was only slightly above consensus this morning at 192K vs. expectations of 185K, but the overall employment rate dropped to 8.9% vs. expectations of 9.1%. Hourly earnings and the average workweek were below expectations, which doesn’t confirm the reduction in the unemployment rate. Some of the bump in February is being attributed to weather issues impacting January. Either way, private payrolls are improving as seen both in the numbers and anecdotally through company conference calls. State and local government employment fell by 30K, and that should be the trend going forward given the budget issues. Chain store sales for February were solid, posting a 4.2% increase in spite of difficult weather conditions across much of the country.

It appears that the ECB is on the verge of increasing interest rates as soon as April. ECB President Trichet said the ECB is worried about rising inflation, joining China, Brazil, India and many other emerging countries in battling rising food and energy prices.

A report published by the Washington Post estimates that the total pension shortfall faced by state and local government pension funds is $1.5 trillion. The report finds that the way the government accounts for future pension obligations significantly understates the liability.

Chairman Bernanke was on the defensive again yesterday, denying that the recent liquidity injected into the US economy is responsible for soaring food prices around the world. The United Nations said its Food Price Index is at a 21-year high. I guess the question would be after it goes to the equity markets, where is the stimulus going because rates have risen about 100bps since QE2 was introduced, the opposite of what he had predicted? I’m not sure the Chairman, nor anyone, is sure what the impact of QE2 is or will be.

President’s Obama and Calderon agreed to allow Mexican trucking companies to enter the US. The agreement came after Mexico had imposed retaliatory tariffs on US exports to Mexico in response to a US ban on Mexican trucks in the US, which was found to be in violation of NAFTA. A US DOT program found that Mexican trucks were safer than their US counterparts.

Charlie Sheen set another record yesterday by having the highest first day total of Twitter followers with an initial following of 1.5 million. Why Tweet? Because celebrities and athletes get paid by advertisers to promote their products via Tweets, and the endorsers can earn anywhere from $1k to $10K per tweet.

In spite of oil trading over $100 per barrel, the CEO of Devon Energy was out this morning saying $70-$80 is supported by the fundamentals, the rest is due to hype and speculation.

I picked up this chart from TBP, but it was created by Societe Generale and is one we used in the ‘90’s in a presentation to support the notion of sub-5% interest rates. It is the really long term chart of US interest rates, going back 200 years.

Have a great weekend


Mar 2, 2011


March 2, 2011

Equity markets are opening with a slight bid this morning after falling yesterday. Oil has been the story of the past two weeks, and the commodity is up slightly this morning, just over $100 per barrel in spite of record oil and gasoline inventories here in the US. Yesterday the February ISM was in line with expectations at 61.4, the best level since May ’04. New Orders and Backlogs rose while manufacturing inventories fell back below 50 for the 1st time since June. Customer Inventories fell 5.5 pts to 40, matching the lowest since July, and both well below new orders. Prices paid rose .5 pt to 82, the highest since Aug ’08. Of 18 industries surveyed, 14 reported growth. The ISM had the following caveat to the strong headline figure, “there is also concern as industries related to housing continue to struggle and the prices index indicates significant inflation of raw material costs across many commodities.”

Bill Gross wrote this morning that treasury yields are 150bps too low. In his total return fund he cut US government bonds to 12% of assets from 22% in December. Cash in the fund is now at its highest in a year at 5%.

Qaddafi spoke this morning in Libya, saying he won’t leave the country. Oil exports have stopped in the country as major oil companies such as BP have pulled their people from the country for safety. CIA analysts are predicting that Libya will become the first failed Arab state.

A recent analysis of the 2010 US Census shows that the move to urban life is outpacing demand for life in the suburbs. Many big cities had growth versus prior declines.

The SEC has charged former Goldman Sachs partner and board member Rajat Gupta with insider trading. He is accused of giving tips on Goldman as well as Proctor & Gamble, where he also served as a director, to Raj Rajaratnam, the founder of the Galleon Group. Rajaratnam’s trial for insider trading begins this week.

The government agreed to a temporary spending bill that would cut $4 billion from the budget and keep the government running for two more weeks. The deal holds most discretionary spending at last year’s levels.

The NFL collective bargaining agreement expires tomorrow night at midnight, and the players could be locked out by Friday. Owners are meeting today in VA for two days to decide what to do when the agreement ends. Negotiators met yesterday to determine how to share $9 billion in revenue.

In testimony yesterday, Ben Bernanke said that oil price rises were temporary and, while a short term burden on some families, there is no long term concern. In justifying the size of QE2 at $600 million, he stated that every $150mil in stimulus was the equivalent of a 25bps interest rate cut, and the economy last fall needed a 75-100bps bump to avoid a double dip recession. Remember this information is coming from the guy who said in 2007 the housing crisis would be contained to the sub-prime market.

A US Chamber of Commerce study concluded that state labor and employment laws are costing the US more than 700K jobs. Paring back laws that exceed federal standards would add 40K new companies, and eliminate costs of $1.7 trillion per year. The study focused on issues such as wages, hours, working conditions, discrimination, family and medical leave, and collective bargaining.

APAC markets were very weak last night, and European markets are weak today on concerns of higher oil prices. The Saudi Arabian market fell 7% yesterday and another 4% today, and is now down 11% on the year and 19% in the past 20 days.

Have a great day