Apr 28, 2011

Bernanke Says.......Nothing!

April 28, 2011

Equity markets are opening flat today after the first quarter GDP report was weaker than expected at 1.8% (consensus was 2.0%). Final sales increased by 0.8%, the weakest since Q3 2009, suggesting inventory build accounted for over half of GDP growth. Final sales in Q4 2010 were 6.7%. Personal consumption remained healthy at 2.7%, goods consumption increased by 4.8%, and services increased 1.7%. Construction continues to be weak as nonresidential construction fell 22% and residential investment declined by 4.1%. Government spending was down for the second consecutive quarter, falling by 5%. Federal spending declined by 8%, driven by a 12% decreased in defense spending.

Part of the weakness in spending can be attributed to the very late Easter holiday, which pushes Easter and spring break sales into the 2nd quarter. The last time Easter was April 24 or later was 1875, and this year is the latest since 1943. Easter is not a fixed date, and falls on the first Sunday after the Paschal Full Moon, which is the first full moon after the northern hemisphere’s vernal equinox. The date of Easter typically varies between March 22 and April 25.

Earnings continue to come in with a positive bias as roughly half of the companies in the S&P 500 have now reported first quarter results. Earnings have risen an average of 18.4%, with the average surprise at 8.4%. Positive surprises are running 4:1 vs. negative surprises (201 vs. 54), with financials showing the largest percentage surprise while energy stocks have missed earnings on average. Sales growth has come in at 7.0%, about in line with consensus, with positive surprises outnumbering negative surprises by 2:1. Utilities have beaten sales by the largest percentage, 4.6%, with energy again missing by the widest margin.

Chairman Bernanke held the first ever press conference after a rate decision by a Federal Reserve Chairman. The press conference was benign as the Chairman answered the mostly softball questions with canned responses echoing previous speeches and statements. He continued to defend QE2 and other stimulative measures, insisting that they had very little to do with the decline in the dollar and nothing to do with rising commodity prices. Silver and gold both spiked after the Chairman’s comments. The dollar is down 3% over the past week and 21% over the past decade.

The Fed kept its stance and rates unchanged in its meeting which ended yesterday. They did say they expect that US inflation will increase more than expected this year, and that GDP will fall short of expectations. They raised their price forecast from 1.3-1.7% to 2.1-2.8% while lowering its GDP forecast to 3.1-3.3% from 3.4-3.9%.

The Bank of Japan announced that the country has entered a technical recession. They estimated that GDP declined to 2.8% for the year ended March 31, which would suggest negative growth the last two quarters.

APAC markets were strong last night after Chairman Bernanke reiterated his plan to maintain the size of the Fed’s balance sheet once QE2 is completed. The Nikkei rose 0.9%, ASX 0.6%, Kospi 0.8%, and NZX 0.4%. Only the Shanghai fell among major indices, declining by 1.3% on concerns the Chinese central bank will tighten monetary supply.

Have a great day


Apr 26, 2011

Strong Earnings from Ford

April 26, 2011

Equity markets are opening up this morning on strong earnings reports and a benign housing report. The February S&P Case/Shiller Home Price Index was in line at 139 vs. 141 the prior month. The price composite declined by 3.3% as the national housing market continues to bump along the bottom. Consumer confidence for April came in at 65.4 versus expectations of 64.5 and the prior month 63.4. Commodity markets are down slightly after gold and silver corrected last night.

Ford posted their best first quarter since 1998, and CEO Alan Mulally said the company has never been in better shape. NFLX beat estimates last night, but gave tempered guidance and the stock is bid down 5% this morning. UPS reported better than expected earnings, but missed the revenue line as they battle rising higher fuel costs. The company boosted 2011 guidance on stronger overseas demand. Coca Cola missed EPS on inline revenues, citing higher commodity prices in packaging and inputs as the cause. Demand was strong as unit volume increased 5%. Tobacco maker Lorillard posted better than expected sales and earnings as demand in the US increased for the first time in a decade.

The dollar hit a record low last week versus the US Trade Weighted Major Currency Index. The dollar fell to 69.0337 against a basket of currencies.

The IMF released a study yesterday that predicted the real economy of China will overtake that of the US by 2016, much sooner than most experts expect. The chart below shows their estimate of the contribution of the US and China to global GDP.

House Speaker John Boehner said Congress should consider cutting subsidies to major oil companies. “I don’t think the big oil companies need to have the oil-depletion allowances” he said. He might also want to look at farm subsidies that pay farmers to leave ground fallow in an effort to boost crop prices.

Gas prices are approaching record highs, and some analysts are calling for $6 per gallon gasoline. Here in California you can already find $5 if you look hard enough and don’t want to get out of your car.

Zillow is reporting that a wave of high end defaults on homes are soaring, with 23% being classified as “strategic defaults”. A strategic default occurs when a borrower is capable of making the payments, but walks away because the debt on the property is much larger than the value of the home.

The IPO filing for Glencore, the huge commodity trader looking to go public, contained some interesting data points. It seems the company was instrumental in Russia’s decision to ban wheat exports, which triggered a sharp rise in global wheat prices.

Lawson Software is down this morning after receiving a takeover bid below yesterday’s closing price.

One of the Fed’s new tools (since 2008) gained during the crisis is the ability to pay interest on bank reserves. Although its impact is unknown, Fed officials may rely upon this capability to keep banks from lending if the economy starts overheating.

The Pew Center released a study saying that at the end of 2009 state pension funds had a total shortfall of $1.26 trillion, up 26% from the end of 2008. My guess is that number will be flat or slightly lower when the 2010 figures are released. Market gains in 2010 will be offset by deferred fund contributions.

APAC markets were weak last night, led by a decline in the Nikkei after weak earnings were reported by companies such as Nintendo. The Nikkei fell 1.1%, Shanghai 0.9%, Kospi 0.7%, Hang Seng 1.1%, Taiex 0.5%, and Indonesia fell 0.9%.

Have a great day


Apr 20, 2011

Upside Surprises from Intel and Polaris

April 20, 2011

Equity markets are set to open strong this morning after robust earnings by Intel, which cited improved business demand and robust global demand as key drivers to the surprise. Helping the upside were analyst expectations, which were universally bearish and according to Intel’s CEO, completely missed the international growth story.

Housing Starts came in better than expected at 549K vs. 520K, which is still way off the highs of a 2 million run rate per year. Building permits were also better at 594K vs. 540K. Improvements in housing starts is a mixed positive because it helps the jobs picture, but doesn’t help clear the enormous inventory overhang. The chart below, courtesy briefing.com, shows housing starts and building permits since 1995.

Inflation in Canada accelerated to the highest rate in over two years to 3.3%, well above the 2.8% estimate. Higher fuel prices drove the measure higher. The report showed price increases in every category except tobacco and alcohol.

The chart below, from John Mauldin, shows the strong correlation of Fed treasury purchases and commodity prices over the past two years.

The FBI raided multiple online gambling sites, freezing bank accounts in 14 countries. The founders of PokerStars, Full Tilt Poker, and Absolute Poker, were indicted Friday. All three are based outside the US. By freezing the bank accounts gamblers are unable to access their funds. In response to the shutdown, Disney announced that ESPN would stop airing ads for the companies.

Saudi Arabia announced plans to cut back on oil production due to a glut of oil in the system.

Goldman Sachs beat estimates on stronger than expected trading revenues. Harley Davidson missed estimates, citing domestic sales that were down 0.5% as the cause vs. international retail sales, which were up 11.3%. Johnson & Johnson beat estimates and raised guidance, however, concerns about ongoing recalls and the $20 billion takeover of Synthes continue to weigh on the stock. Most of JNJ’s gains came from currency.

According to the Labor Department, during the 2000s major U.S. multinational corporations have eliminated 2.9 million jobs domestically but created 2.4 million abroad. In 2009, such companies reduced foreign payroll by 1.5% but cut employment by 5.3% in the U.S.

Nobel Laureate Joseph Stiglitz, economics professor at Columbia University in New York:
“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

Surveys are showing overwhelmingly that Americans want the budget deficit reduced. The same polls also show that Americans don’t want tax increases, entitlement cuts, defense cuts, or a reduction in government services. The majority assumes that the budget deficit, which has us borrowing $.40 of every dollar we spend, can be cut by eliminating waste and fraud. I'd really love to a dose of whatever it is they are taking.

APAC markets were up over 1% across the board last night on the back of strong earnings by Intel and other US multinationals.

A year after the BP Gulf oil spill, Gulf Coast Congressional representatives are asking the US government to allow BP and others to resume drilling in the Gulf. Lawmakers from both sides of the aisle criticized restrictions on oil production and the slow pace of issuing permits for wells.

Have a great day


Apr 18, 2011

S&P Warns on US Debt

April 18, 2011

Equities are starting the week down and treasuries are weak after rating agency S&P hinted at a possible downgrade of US credit by issuing a negative outlook due to rising gas prices and slower demand from China. David Beers of S&P’s Sovereign Rating Group warned that the possibility of a downgrade over the next two years rose to 1 in 3. “We believe there is a material risk that US policy makers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013. If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer AAA sovereigns.”

Citigroup reported better than expected earnings this morning and is bucking the trend, rising over 1% this morning. Eli Lilly beat sales and earnings estimates for the first quarter, however, the company’s top-selling drug comes off patent in October. Halliburton beat earnings in spite of a charge taken due to the unrest in Lybia.

The central bank of China increased its reserve requirement by 50bps to 20.5%, the 10th increase in the past 15 months.

The Chairman of the Financial Stability Board, Mario Draghi, warned that the popularity of commodity based ETFs is reminiscent of what happened in the securtization market before the crisis.

Colombian central bank president Jose Dario Uribe said the nation’s GDP may exceed 5.5% on top of 2010’s 4.3% increase.

The Economist is reporting that growth in India may have exceeded that of China last year, an event that went unnoticed because India reports GDP differently than China. Initial reports showed China growing at 10.3% and India 8.3%, but the IMF is now estimating that India’s GDP grew by 10.4%.

APAC markets closed strong last night as the Shangai rose 0.3%, the ASX 200 and NZX were up 0.4%, the Sensex 1.2% and the Nikkei up 0.1%. The Kospi fell 0.5%.

Have a great Monday


Apr 15, 2011

Google and Bank of America Earnings

April 15, 2011

Equity markets are flat this morning after a better than expected Empire Manufacturing report, which measures manufacturing activity in the New York area, of 21.7 vs. expectations of 17.0. CPI came in at 2.7% vs. expectations of 2.6%, with the core measure increasing in line at 1.2%. The Bloomberg chart below shows CPI normalized to 1984 dollars. Industrial production rose slightly faster than the 0.6% estimate at 0.8%. The University of Michigan Consumer Sentiment index snapped back after last month’s drop, beating expectations of 68.8, posting at 69.6.

Commodities are flat this morning, with oil down slightly. Copper continues to be weak on concerns about Chinese inventories and demand. Coffee and sugar are up.

Netflix and Redbox are seeing a new competitor in Corona, CA based startup Flix on Stix, which plans to deploy 2K kiosks by year end which will allow movie rentals onto a USB stick or SD card. There is no need for a return trip as the rentals will have a 72 hour life, then it will disappear from your drive. The company plans to rent games and movies via the kiosks.

BofA posted weaker than expected earnings as one-time charges swamped profitable operations. Google posted weaker than expected earnings on a better than expected sales increase of 27%. Expenses grew twice as fast as sales as the company gave across the board salary increases to employees and invested heavily in growth initiatives such as their browser Chrome.

The $38 billion in spending cuts that U.S. President Barack Obama and House Speaker John Boehner said are in their budget deal would save only $352 million, the non-partisan Congressional Budget Office said. Increased military spending would offset $8 billion in current-year cuts to domestic programs. The Senate approved the plan yesterday.

The President unveiled his plan for reducing the budget deficit over 12 years by asking for $1 trillion in near term tax increases and $3 trillion in longer dated savings. This counters Rep Ryan’s plan which looks to achieve the same savings in a shorter time period with fewer tax increases and more spending cuts. Big government, bigger government, high taxes, higher taxes-the argument never seems to change, just the zeros being debated.

My favorite quote from the budget debate last week came from an old friend, who said "it's like watching a bunch of idiots arguing over the bar tab on the Titanic!" Let’s hope they settle the 2012 budget and the lifting of the debt ceiling quickly.

Robert Zoellick, the President of the World Bank, said that the 36% increase in global food prices has driven an additional 44 million people into poverty. He was critical of the Fed in his commentary. On a counter note, Fed Governor Elizabeth Duke said yesterday that the Fed’s actions have zero impact on global commodity prices and the Fed should stay the course.

APAC markets were weak last night after China announced higher than expected inflation of 5.4%. China’s GDP grew by 9.7%. Premier Wen Jiabao said “Judging from the inflation situation in the first quarter, we are still under great pressure of price hikes.”

The ECB is maintaining its position on inflation. “It is essential that the recent price developments do not give rise to broad-based inflationary pressure over the medium term,” suggesting that the recent rate increase would be the first in a series of hikes.

The chart below, courtesy of Case Shiller, Steve Barry, and The Big Picture, shows the history of US home prices since 1890. The red line suggests that housing still has a way to fall to get back to the long term mean, an aggressive call from my point of view.

Walter Breuning, thought to be the world’s oldest man, died yesterday in a Montana hospital at the age of 114. Some of his secrets to life:

1. Embrace change, even when the change slaps you in the face. “Every change is good.”
2. Eat two means a day. “That’s all you need.”
3. Work as long as you can. “That money’s going to come in handy.”
4. Help others. “The more you do for others, the better shape you’re in.”
5. Accept death. “We’re going to die. Some people are scared of dying. Never be afraid to die because you’re born to die. “

Have a great weekend


Apr 13, 2011

The Start of Earnings Season

The Start of Earnings Season

April 13, 2011

“Why aren’t the honest bankers demanding prosecutions of their dishonest rivals?” –William Black, former regulator

Equity markets are up on better earnings by JP Morgan (up 67%) and the retail sales report, which came in under consensus at 0.4% vs. expectations of a 0.5% increase, but rose by 0.8% vs. 0.7% ex-autos. After a two day sell-off oil is up slightly this morning and commodities across the board, with the exception of copper and sugar, are finding a bid. The dollar is stronger this morning against the Yen, but weaker vs. the Yuan, which hit a 17-year high this morning. US Treasuries are weak this morning.

The IMF estimates that the US will have the largest budget deficit in the developed world at 11%. The shortfall is larger than that of both Japan and the UK. The report estimates that for the President to keep his promise of halving the deficit by the end of his first term he would have to implement the biggest budget cut in history over the next two years. Given the difficulty of achieving a miniscule cut last week, it seems unlikely.

Cisco announced a corporate restructuring and plans to eliminate its consumer group, including shutting down its recently acquired Flip Video division. Alcoa reported earnings Monday that overall disappointed investors. As we discussed the other day, revenue expectations were very high (28% for Alcoa), which may be a familiar story during Q1 earnings season.

Fed President Thomas Hoenig feels that Bank of America, Citigroup, and other major banks should be deemed government sponsored entities (GSEs), similar to Freddie Mac and Fannie Mae. This designation would allow the government to restrict their activities, which he proposes would include a ban on investment banking. “You’re a public utility, for crying out loud,” he said. BofA CEO Brian Moynihan responded by saying “I think customers want it together”, referring to retail and investment banking. Personally, I don’t think that when my mother deposits her social security check every month she breathes a sigh of relief knowing that BofA is engaged in investment banking.

The Economist characterized the US recovery as “tepid” and feels that cutting government spending is premature. “This is why it’s a problem to be obsessively cutting short-term government spending. And this is why it’s a problem when regional Fed presidents start recommending that the Fed end QE2 early.”

Japan upgraded their nuclear disaster to 7 on the international scale of 1-7. This is only the second time we’ve ever had a 7 (Chernobyl being the other). While Japanese government officials have maintained that this crisis is not as bad as Chernobyl, the reality is that it is just as bad, otherwise it wouldn’t have the high rating. As a side-note, Three Mile Island was rated a 5.

A copper shortage forecast for this year may be in doubt because of a buildup of stockpiles in China. Shanghai warehouses hold some 600,000 metric tons of refined metal, with another 100,000 tons in southern ports, which equals about 40% of China’s net refined copper demand. Some warehouses are running out of room to store metal, according to a report by Standard Bank .

The Washington Post is reporting that many of the $38 billion in spending cuts agreed upon by Republicans and Democrats are nothing more than accounting tricks that have no impact on spending. The budget compromise that headed off a U.S. government shutdown includes cutting $4.9 billion from the Justice Department Crime Victims Fund, which won't be spent this year anyway. For many programs, money cut could be restored by Congress next year with no impact on spending.

The Federal Reserve Bank of New York is circulating two lists of bonds acquired from American International Group as it prepares a second auction of the securities. The auction is similar to one held last week, when the Fed sold $1.3 billion in bonds. "It's probably going to look like this each week," said Jesse Litvak, a managing director and head of non-agency trading at Jefferies. "They probably feel like since the first list traded fine, they can continue with this level of bonds."

Higher gasoline prices are having an impact on demand as consumption is down 9% from last year, in spite of higher employment and a slightly stronger economy.

APAC markets rose last night as the weak yen helped the Nikkei.

Have a great day


Apr 11, 2011

Merger Monday

Merger Monday

April 11, 2011

Equity markets are opening slightly up this morning as earnings season gets under way and merger Monday keeps its moniker. In the telecommunications sector two names left over from the tech bubble, Level 3 Communications and Global Crossing, announced a merger today, and both stocks are up significantly. Endo Pharmaceuticals agreed to buy American Medical Systems for $2.9 billion, a 34% premium to Friday’s close. Additionally, French domiciled Schneider Electric is contemplating a $22 billion takeover of Tyco International, a deal which would make it the largest maker of security systems.

The IMF has lowered its forecast for economic growth in both the US and Japan due to rising commodity prices and the aftermath of the earthquake and tsunami. The report, which will be released later today, said that deficit reduction strategies in the US and Japan lack credibility.

The NYSE rejected a takeover bid from NASDAQ and said that an offer from Deutsche Boerse is more likely to gain regulatory approval and create more long-term value for shareholders. NASDAQ is considering a proxy fight in their unsolicited offer to acquire NYSE.

The US government avoided a shutdown as lawmakers came to agreement late Friday on a package of cuts totaling $38.5 billion. The next battle will undoubtedly come later this spring over the debt ceiling, now at $14.3 trillion and growing by $125 billion per month. Republicans are posturing to use the debt ceiling battle to cut potentially trillions from future budgets. In a reversal of position, President Obama has promised to outline a plan this week to control long term deficits. His initial budget released eight weeks ago didn’t contemplate addressing the long term deficit, but political pressure has seemingly forced his hand.

It’s no surprise that pump prices have been rising dramatically. This past week a station in Palo Alto, CA had premium at $5.17 per gallon. Yesterday I went to a station that was out of both regular and middle grade. People were out of their cars, yelling at the attendant.

Libyan leader Muammar Qaddafi agreed to a proposal by the African Union for a cease-fire, however, the rebel coalition has rejected the deal. “We reject any initiative that provides for Qaddafi and his children to stay on” a Muslim Brotherhood spokesman said.

Copper is weak this morning after the China Non-ferrous Metals Industry Association (say that three times fast) indicated that China may have accumulated as much as 1 million tons of copper, three times what was previously estimated.

UK regulators are recommending that banks “ring-fence” retail banking from investment banking. They did not recommend a complete separation of the entities. Will we ever get some sanity back in banking? It’s time to repeal Gramm-Leach-Bliley and bring back Glass Steagall.

China reported its first annual trade deficit in seven years as a result of surging import prices, which rose 33%.

Rory McElroy delivered the biggest collapse in golf since his namesake, Roy McElroy, blowing a 4-shot lead in the final round of the Masters. McElroy shot an 80 yesterday, his payday being cut from $1.4 million to $128K. Ouch.

Have a great Monday


Apr 8, 2011

Budget Impass

April 8, 2011

The big news of the day is the inability of our leaders to come up with a budget for the fiscal year ending in September, a process which should have been completed in 2010. As I mentioned last week, they are squabbling over a few billion dollars. At this moment a shutdown is scheduled for midnight tonight. I haven’t run through the math, but I’m guessing that a 2-3 week shutdown might save more than our leaders are discussing right now.

The fallout of our inability to deal with our fiscal issues is putting pressure on the dollar and bond markets, while helping commodities to rise once again. WTI crude is now trading at $111 per barrel, the yield on the 10 year treasury note has risen from 3.17% in mid-March to 3.6% today, and the Euro is up to 1.44 (chart below).

A large 7.4 magnitude aftershock hit Japan yesterday, pushing equity markets down while damage was assessed and the country waited out another tsunami warning. Fortunately there was no tsunami, damage was limited, and there was no damage to the Fukushima nuclear power facility.

Same store sales for March were stronger than expected as 18 of the 24 companies we follow posted better than expected comps. Costco led the way with a 13% jump in comps, followed by Saks at 11%. Weak comps were posted by Gap (-10%) and Stage Stores (-5%).

First quarter earnings season kicks off next week with Alcoa reporting on Monday. The Street is forecasting a 13% increase in sales , the first double digit increase since 2006.

In a well telegraphed move the ECB raised their benchmark interest rate by 25bps to 1.25% in an effort to fight inflation. The market is pricing in two more increases of 25bps each, to 1.75%, by year end. Germany’s booming economy and inflation were cited as the key reasons for the increase. Concerns about the impact on the struggling PIIGS countries (Portugal, Greece, Ireland, Italy, and Spain)may be overblown as these countries (ex-Italy) are now paying lower than market rates on their debt anyway. In addition to the ECB, China, India, Poland, and Sweden have raised interest rates this year to battle inflation.

Portugal will become the third country in the euro zone to request help from the EU. Portuguese Prime Minister Jose Socrates told authorities in Brussels that the country needs aid, something that has appeared inevitable for several weeks. "It is time to assume the responsibility to the country," Socrates said. "It is in the name of national interest that I tell the Portuguese people that we need to take this step."

PIMCO filed with the Securities and Exchange Commission for approval of its first real estate investment trust with a $600 million initial public offering. PIMCO REIT would buy commercial and residential mortgage-backed securities and other types of commercial and residential real estate debt, according to P&I.

The Curse of the Bambino appears to be alive and well, and I can’t say I’m not smiling with the Red Sox starting 0-6. They’ve ended my Angels’ season far too many times. The Yankees are traveling to Boston this weekend, and I’m hoping for a Yankee sweep.

Have a great weekend


Apr 6, 2011

Progress in Japan

April 6, 2011

Markets are opening with a bid today while bond markets sell off slightly. The 10 year treasury now sits at 3.5%, the 2-year at 0.82%. Commodities are up slightly this morning, led by copper, gold and oil.

The IMF reversed its long standing opposition to cross-border capital controls by endorsing some temporary restrictions. The change in policy is a direct response to US complaints about China, Brazil and other countries using currency controls to stem the inflationary impact of the Fed’s weak dollar policy.

The next deadline for a potential government shutdown, the first one since the Bill Clinton/Newt Gingrich days, is rapidly approaching. The government could shut down Friday at midnight, although the real impact wouldn’t begin until Monday. The President has said he won’t accept a one-week or short term extension, instead holding out for a deal. Democrats have come up to $33 billion in cuts, Republicans have dropped to $40 billion. The composition of the cuts seems to be a bigger sticking point. To put the proposed cuts in perspective, a $40 billion reduction in federal spending would allow the deficit to be balanced in 52 years, assuming all other expenditures (including entitlements) and tax revenues were held steady over that ½ century.

John Mauldin calculates that if you use the number of people in the workforce two years ago as the denominator for the unemployment rate, the rate jumps from last week’s reported 8.8% to over 10%. The question is where have all those job seekers gone?

China increased their benchmark lending rate to 6.31%, the fourth increase in the past six months. Economists are now looking for a slowdown in Chinese growth as incomes rise and the service sector becomes more robust.

Tepco officials announced they were able to stop the leak of highly radioactive water that has been flowing into the ocean over the past five + days. Radioactivity in fish has been detected for the first time since the company began dumping millions of gallons of radioactive water into the sea to make room for the storage of more dangerous fluids. Fisherman in Ibaraki have halted operations after higher than acceptable levels of Cesium were found in fish. Cesium has a half-life of 30 years, and can build up in the meat of fish and move up the food chain.

According to a study from George Washington University, inflation is running at a 5.7% annual rate while weekly wages are growing just over 1%. Demand from BRIC countries and the Middle East in addition to Fed policy is causing the seeming dislocation as typically inflation is driven by higher wages in the US.

There is a growing consensus in Congress that future Medicare beneficiaries will have to accept lower benefits to ensure the program survives. The New York Times is reporting that the program would be tiered, and those now under 55 would see a different level of benefits than those on the plan today. Rep Paul Ryan of Wisconsin proposed a plan that would cut over $5 trillion from anticipated spending over the next 10 years, with major changes to Medicare and Medicaid.

APAC markets were up last night, with the Shanghai rising 0.8%, Hang Seng 0.5%, Taiex 1.7%, and Nikkei 0.2%. New Zealand’s NZX dropped by 0.7%.

Have a great day


Apr 4, 2011

April 4, 2011

Commodities have hit a two year high as both silver and wheat lead the markets higher this morning. The M&A surge continued this morning as Vivendi agreed to acquire SFR and Minmetals Resources offered to buy Equinox Minerals. Deal volume is now up 25% from last year at $630 billion. Traders are becoming more bullish on the US equity markets after Friday’s employment report.

The US government is facing another potential shutdown deadline this week. The “battle” is down to $33 billion, a figure both sides are now targeting but can’t agree upon how to achieve. That $33 billion represents 0.7% of the annual budget. With a deficit estimated at $1.7 trillion and climbing, it is pretty discouraging to watch this battle knowing that they are trying to save pennies while they burn up hundred dollar bills. A House rule requires a bill to be posted 72 hours before a vote, which means any budget legislation would need to be posted by Tuesday.

Bloomberg is estimating that trading revenue on Wall Street will fall for the 4th straight quarter.

Ireland’s Deputy Prime Minister said they are working with the EU to obtain better terms on its rescue package. “We are now in the process of negotiating a reduction in that interest rate.”

After levying taxes on foreign capital flows, the Brazilian government is considering direct controls on capital inflows as a way to control the value of the Real. Discussions are ongoing.

A Southwest Airlines flight headed for Sacramento had a hole blow open in its roof. Investigations have found at least three more 737’s in their fleet with stress fractures in the fuselage.

The Wall Street Journal reported that US municipal bond issuance fell to its lowest levels since 2000. Most experts aren’t expecting a resurgence anytime soon due to a dearth of buyers.

Auto Nation’s CEO Mike Jackson said that auto production delays in Japan would begin to impact inventories around May, and the disruption could last through year end. Although 52% of the company’s sales are Japanese vehicles, nearly 70% of those are built in the US. Shortages of certain chemicals and CPU’s will curtail production.

The Bank of Japan’s Tankan survey of business sentiment fell to 6 (on a scale of 100) from 7. The survey measures confidence among the country’s largest manufacturers.

Commscore announced that smart-phones utilizing Google’s Android operating system occupy the leading market share with 33%.

President Obama officially launched his reelection campaign for the 2012 election. He is hoping to raise $1 billion for his effort.

Markets in Asian were strong last night except for South Korea’s Kospi, which declined 0.5% while markets in the rest of the region were up 0.3-0.5%. Sri Lanka may have been the best performing emerging market last year, rising 915.

Tonight the Butler Rams will undoubtedly have their biggest contingency of supporters ever as they attempt to become the biggest underdog ever to win the NCAA Basketball championship against U-Conn.

Have a great day


Apr 1, 2011

Empolyment Improving

April 1, 2011

Equity markets are getting a solid bid this morning on better than expected monthly employment figures. Nonfarm Payrolls increased by 216k in March vs. expectations of 190K, and private payrolls rose by 230K vs. expectations of 203K. The unemployment rate dropped to 8.8% vs. expectations of 8.9% and vs. the prior reading of 8.9%. The rate of new hiring is the best since the first quarter of 2006. Hourly earnings continue to be weak as they were flat vs. expectations of an increase of 0.2%. Bond markets are trading off on the news as the 10 year moves back to 3.5%.

Hawks are now pressing the Fed to raise rates and pull back on QE2. The odds of a rate increase by year end have jumped to 62% this morning. Given the lagging nature of employment, the economy looks like it is at mid-cycle, which is concerning given the weak growth we are seeing. If the Fed’s hand is forced and they raise rates later this year, the economy may not be able to overcome the increase and could see another significant slowdown in 2012. My sense is that the dovish Bernanke will hold out on raising rates and cutting back on stimulus, erring on the side of aggressiveness in an effort to avoid a double dip. Fed Governor Bill Dudley said this morning that the “recovery is still tenuous”, that “we must not be overly optimistic about the growth outlook”, and that the better employment numbers are welcome but “not a reason to reverse course.”

In what is sure to be a brewing controversy, Bloomberg is reporting that that the Arab Banking Corp, which is 59% owned by the Central Bank of Libya, borrowed over $5 billion from the Federal Reserve in 2008-2009. In spite of the freeze of Libyan assets around the world, an exemption was made to the Arab Banking Corp which allows it to continue operations by borrowing from the Fed.

Ohio followed Wisconsin with much more stringent rules for state workers and their ability to engage in collective bargaining. California is heading in the other direction as lawmakers moved forward a bill that would make it easier for farm workers to unionize by eliminating the need for a secret-ballot election. “We’re increasing freedom by eliminating secret voting” said one union official.

Libyan rebels have called for a cease-fire after the US announced it is withdrawing aircraft and most other support. Secretary of Defense Robert Gates told Congress the US would “significantly ramp down our commitment” to Libya after political pressure caused the Administration to review its strategy. Germany is one of 8 NATO members who have refused to participate in the action. Oil prices have risen 25% since the fighting began in mid-February.

Europe’s sovereign debt crisis continues to worsen. Ireland released results of it bank stress tests yesterday showing banks were in worse condition overall than initially feared. Additionally, Portuguese officials said that last year’s deficit was 8.6% of GDP, 130 bps above expectations. The Portuguese have avoided tapping the EU and IMF for assistance, but many feel that will be inevitable.

APAC markets (with the exception of Japan) were strong last night after China announced strong manufacturing data. The Federation of Logistics and Purchasing said its PMI increased from 52.2 to 53.4. Private measures confirm the increase, but the readings aren’t as strong as those of the government.

Corn futures have soared as supply continues to decline. The USDA said new crop planting won’t be enough to replenish the inventory drawdown driven by global demand for food and bio-fuel. A UN index showed that global food prices hit a record high last month.

The WTO ruled that from 1989 to 2006 Boeing receive $5 billion in illegal government subsidies. US Trade Rep Ron Kirk said that subsidies given to Airbus (Boeing’s top competitor) were much bigger. Both the US and EU are considering an appeal.

David Sokol, who ran Berkshire Hathaway’s energy investing group, resigned on Wednesday after it was disclosed he made over $3 million in profit on his personal holdings of Lubrizol. Berkshire agreed to acquire Lubrizol in March based upon Sokol’s recommendation. It came to light that Sokol acquired his shares in January.

The Final Four kicks off tomorrow in Houston with Butler facing Virginia Commonwealth and U-Conn facing Kentucky.

Have a great weekend.