Jun 30, 2011

Q2 and QE2 Both End Today!

June 30, 2011

“Spending is the real measure of government’s burden on the private economy” Milton Friedman

Today marks the end of Q2 and QE2. After a smart rally that pushed 10 year treasury rates below 3%, demand for treasuries has waned over recent days and the yield has risen to 3.09%. The yet to be answered question is what will happen to rates once the Fed’s purchasing program is cut back?

The S&P is up 4% YTD and down 1% for the quarter. Yields on 10 year treasuries began the year at 3.3% and the quarter at 3.5%, and are 3.1% today. The Russell 2000 small cap index is up 4% for the year and down 2.8% for the quarter.

Bank of America agreed to make an $8.5 billion settlement to MBS investors relating to securities that were originated by Countrywide, which BofA purchased in 2008. The irony to the story is that Ken Lewis, the former head of BofA, was voted the Banker of the Year in 2008 by American Banker magazine for his purchase of Countrywide. The purchase has ultimately cost the bank billions, and this recent settlement exceeds the company’s profits for the past three years.

The Federal Reserve decided to cap the debit card swipe fee banks may charge retailers at $.21, compared to the original proposal of $.12 and the prior cap of $.44. The bill is expected to cut approximately $16 billion from the annual revenues of card issuing banks. It is anticipated that most banks will either 1) issue new, debit like cards to usurp the cap and 2) raise fees on consumer checking accounts in an effort to offset the lost revenues.

The Greek parliament voted to implement sweeping austerity programs in exchange for additional financial support from the IMF and ECB. The vote was close, 155-138. Protests have erupted across the country, with an estimated 25% of workers striking today. Striking school teachers have forced parents to stay home to take care of their idle children.

German banks and insurance companies followed the Greek vote to accept austerity by voting to accept a plan to roll over their Greek debt through 2014.

The Wall Street Journal is reporting that the median pay of S&P 500 chief financial officers rose 19% last year to $2.9 million.

After the Obama Administration dragged its feet for two(+) years, the White House and Congress finally came to an agreement that should clear the way for long-stalled free trade agreements with Colombia, Panama, and South Korea.

After studying restrictions on coal fired electric utilities for decades, the EPA appears to be close to requiring power plants to reduce pollutants dramatically. Some experts are estimating that the new restrictions could idle as much as 25% of the country’s electricity generation. I'm sure that will help the economic recovery!

Bloomberg is reporting that mortgage fraud at Fannie Mae may have begun years earlier than previously expected. Documents show that Fannie Mae executives had purchased from mortgage originators loans that they didn’t own, but never reported it to authorities. The avalanche of fake, nonperforming, or defective loans to follow eventually topped $3 billion, one of the biggest fraud schemes in history.

The price of pork in China has risen over 40% from last year, driving inflation to a 34 month high. Rising grain prices and a shortage of live pigs have elevated pork prices for the past few months.

I'm not sure this is actually news, but the President is pushing for higher tax rates on those “who are doing extraordinarily well.” He hasn't defined "extraordinarily well", but given his recent attempts at taxation, I'd guess anyone making above $80K should be concerned.

A recent government study showed that families earning the median income in 1981 paid 11% of their income in federal taxes, and today pay 4%. Those earning one-half of the median in 1981 paid 6% in federal taxes, and today get a tax credit.

A recent study shows that overlapping coverage between Medicare and Medicaid accounts for 39% of Medicaid costs and 27% of Medicare costs but is attributed to about 15% of enrollees. The combined cost of these “dual enrollees” is $300 billion of the $900 billion spent annually by Medicare and Medicaid.

The chart below, from a recent Goldman Sachs report, shows the level of mortgage debt as a percentage of GDP for various countries. The higher levels of Australia, the UK, US and Spain could be a large reason why these countries’ economies are struggling right now.

Corn futures are down today in spite of a report showing that stockpiles have been falling. Evidently an additional 100K acres of previously uncounted corn was recently discovered, resulting in higher than expected stockpiles. In spite of the recent release of oil from the SPR, oil prices are up the past couple of days and are now higher than when the SPR release was announced. That lasted about a week!

Have a great day!


Jun 27, 2011

Bearing Down on the End of the Quarter

The markets are opening up this morning on benign macro data and after a quiet weekend across the globe. Personal income for May came in just below consensus at 0.3% vs. expectations of 0.4%. Personal spending for May came in flat vs. expectations of a 0.1% increase. April’s personal income and personal spending were both revised down from 0.4% to 0.3%. Higher inflation in the form of the PCE Core pulled real spending growth into negative territory, with real personal spending declining 0.1% for the second straight month, the first time we have experienced that since March-April 2009.

The treasury market is preparing for the first auctions without QE2 next month. Today four-week treasury bills traded negative for the first time since January 2010, which compares to an average of 1.8% over the past decade. A negative rate effectively means investors are willing to pay the government to hold their money. An increase in demand near the end of the quarter is not unusual as banks typically spruce up their balance sheets to meet quarter-end reporting requirements.

There have been a number of estimates recently estimating the size of the Fed’s continuing demand for treasuries generated by its balance sheet, which is now $2.9 trillion. There appears to be roughly $300 million of maturities and interest coming from the portfolio, which should generate $25 billion per month in demand. About $110 billion of treasuries will mature in the next 12 months while approximately $10-12 billion of mortgage-backed debt and Freddie/Fannie debentures will also mature each month.

Gasoline prices have fallen along with declining oil prices. The average price in the US declined by $.11 last week to $3.69 per gallon. California is still closer to $4.00 gallon due to special blend requirements and higher taxes per gallon.

The auto industry is now starting to understand the risks of accepting all that government assistance during the financial crisis. The Obama Administration announced this morning that they want to push average fleet fuel efficiency to 56 miles per gallon by 2025. Auto makers are balking, saying it will add at least $3000 to the cost of an auto. It would appear that would also be a recipe for higher traffic fatalities as cars must get lighter and smaller to achieve those goals.

A positive data point for the employment market showed up in the Treasury Department’s tax withholding data. After turning negative at the end of May, the index rose by 1.9% as of last Wednesday. This data measures the year over year changes in withholdings, and tend to track well with initial jobless claims.

Stanley Black & Decker agreed to buy Niscayah for a 47% premium, or $1.2 billion. Bloomberg is reporting that acquisitions of US based targets grew by 35% to almost $500 billion YTD, up from #360 billion in 2010.

Cars 2 opened with a box office take of over $60 million this past weekend, making it the 12th Pixar movie to open #1.

Have a great day


Jun 24, 2011

RTN: Return to Normal

June 24, 2011

Yesterday was a crazy day in the markets as the market opened down hard, then reversed course as the Greek situation gained some clarity and the oil market fell on reports the IEA would be releasing 60 million barrels of oil from emergency reserves. The release, coordinated with 27 countries but led by the US, who is contributing half the supply, is a token amount in the overall oil market, accounting for eight hours of global consumption, but sent a message to market participants. This is only the third release from the reserve since it was created, the other two being during the 1991 Gulf War and in 2005 after Katrina. The release more than likely will only have a temporary impact on oil prices, however, it does help offset the loss of 115 million barrels per year of production from Libya.

Futures are up slightly this morning, following through on yesterday afternoon’s short covering as well as some better than expected economic data. Durable goods orders (see chart below courtesy briefing.com) for May rose by 1.9%, better than the 1.5% survey and -2.7% in April. The strength came from transportation as the measure ex-transportation rose 0.6% vs. expectations of 0.9%. As expected, first quarter GDP was revised up from 1.8% to 1.9%. Personal consumption for the first quarter rose by 2.2%, in line with consensus.

RTN (Return to Normal) is the new acronym to describe the post QE-2 environment. Chairman Bernanke spoke on Wednesday after the FOMC meeting, and while he didn’t say anything noteworthy, what he didn’t say rang loud to the markets. While the chairman insisted he had “more arrows in his quiver”, it is apparent that he only has the same arrow he has been wielding over the past year-printing money and buying securities. With an indication that the Fed would let QE-2 conclude and run its course while the economy continues to slow, the market had a quick decline yesterday morning towards the “risk off” trade-sell cyclical and buy defensive issues. The Federal Reserve lowered its 2011 and 2012 forecast for gross domestic product growth, acknowledging that the U.S. economic slowdown is not temporary. The central bank offered no indication that it is considering further action to stimulate the economy. Chairman Bernanke said he does not know the reason growth remains so weak after two years of tepid recovery. The yield on the 10 year treasury has dropped to a 2011 low of 2.9%.

Add Russia to the list of country’s having severe financial problems. The Russians are very reliant upon energy and wheat exports to fuel their economy. The price of what has declined by about 25% this year, natural gas continues to hold in the $4.20 range, and oil is trading below Russia’s breakeven price of $115 per barrel. The country has a huge debt burden, surprising given their default just 13 years ago.

I hate to keep bashing the Fed, but they make it so easy. In a repeat of his comments of 2007 that the sub-prime mortgage collapse would have minimal impact, Chairman Bernanke said that a Greek debt default would have little impact on the US banking system. He said the banks had conducted stress tests to gauge the impact of default on their capital. I can guarantee that none of these stress tests considered the fallout of derivative contracts on their counterparties and the potential for default. Meanwhile, Jean-Claude Trichet, the president of the ECB, said the sovereign debt crisis could hit the banking system and financial. There are "potential contagion effects across the union and beyond,” he said.

Typically a dissenter to official Fed policy, Dallas Fed President Richard Fisher said he sees economic growth picking up in the 2nd half of 2011, while remaining slow, essentially agreeing with the official Fed statement.

According to the Congressional Budget Office, the U.S. government's debt will climb to about 70% of the nation's gross domestic product this year, the most since right after World War II. If major policy changes aren't made, debt will exceed 100% of GDP by 2021 and approach 190% by 2035.

Mail those letters!!!! The U.S. Postal Service said it would suspend payment of its contribution to the Federal Employees Retirement System, to avoid running out of cash. The USPS said it may not be able to pay its debts by September.

Demonstrating the declining barrier to entry to becoming a Knight, Mervyn King, UK central bank governor, was recently knighted. During his tenure the British pound has lost 66% of its value.

The NAR announced that for the 5th straight month home buyers paying all cash represented 30% of the market. In Las Vegas cash buyers represented 49% of the market. The median price of an existing single-family home fell 4.5% to $166,700 in May as volume dropped by 15%. Thanks Steve.

Final Four! I mentioned the College World Series last week, and now we are down to four schools. #1 ranked Virginia, defending champion South Carolina, Florida and Vanderbilt. Florida and South Carolina each need a single victory either tonight or tomorrow to advance to the best of three finals which run Monday-Wednesday next week. Virginia and Vanderbilt must each win twice to advance. Vandy has faced Florida six times this season, losing five of them, including a 3-1 loss on Tuesday. The tournament hasn’t been as entertaining as 2010, but there has still been some great games.

Have a great weekend.


Jun 22, 2011

Waiting for the Fed

June 22, 2011

Equity markets are trading flat on the open, waiting for the Fed to announce the results of their meeting concluding this morning. Chairman Bernanke is planning to conduct his 2nd press conference after the meeting. The market will be looking for a bit more color on the Fed’s balance sheet plans given the end of QE2, which is scheduled to conclude next week.

The chart below shows the S&P500 over the past 12 months. While the move from the top has been long, you can see the decline has only been a modest 7% and the market still sits well above its levels of last August.

FedEx reported better than expected earnings and revenues this morning, and added in positive guidance due to burgeoning global shipping volumes. Oil is up this morning, partially attributable to FedEx’s commentary. CarMax reported a strong quarter, highlighted by 6% comps and broad strength in their used car business.

The Greek parliament gave Prime Minister George Papandreou a vote of confidence yesterday, paving the way to approve austerity plans next week. The vote puts the onus back on Germany and the ECB to unlock the stalemate holding back an additional $17 billion loan. Greece must push through a 78 billion euro austerity measure to qualify for the loan.

From The Big Picture: “In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure,” according to calculations by LPS Applied Analytics. Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade. The NAR announced that sales of existing homes in May, typically the start of the peak home-selling season, fell to their lowest level in six months to an annual rate of 4.8 million.

The US Conference of Mayors adopted a resolution saying that the money being spent on wars in Iraq, Afghanistan and Libya should be used at home to create jobs and rebuild infrastructure. It is estimated the US has spent $1.3 trillion on wars over the past decade.

APAC markets rallied last night after the Greek Parliament vote. The Nikkei rose 1.8%, ASX 0.7%, Kospi 1%, Hang Seng 0.3%, and Indonesian shares rose 0.6%.

Bad news for breakfast as orange juice hit a four year high because of unusually dry weather in Florida, the #2 producer of orange juice behind Brazil.

Have a great morning


Jun 20, 2011

Greece, Greece, and More Greece

June 20, 2011

Equity markets broke their six week losing streak last week with a slight increase. Markets are opening soft this morning on concerns the Greek bailout package may be delayed, US banks continue to struggle, and QE2 approaches termination. Regarding QE2, the program is scheduled to end June 30th, however, because of heavy front end loading of the purchases, it is likely that the Fed has either completed the program, or is effectively out of bullets as it concludes the program over the next week. Bloomberg is reporting that, similar to Japan, US banks now hold deposits that exceed loans. Deposits hit a record of $1.45 trillion last month. In Japan, loans dropped and savings surged. Lending has declined 27% since 1996 in Japan while bank holdings of government debt jumped 5x to $1.98 trillion. This buying power has helped keep interest rates low in both countries, with the possibility of negative real returns over the next few years.

Greece is turning into a Greek tragedy. The Eurozone finance ministers delayed a $17 billion loan tranche in an effort to pressure the government to cut spending and sell assets. Additionally, the ministers will implement a “voluntary” rollover of debt held by private investors, although it seems unlikely many will bite without additional incentives.

The Financial Stability Board will meet next month to finalize a plan to implement a surcharge on the world’s largest banks. The goal is to protect taxpayers should a systematically important bank collapse. A surcharge of up to 3.5% has been discussed. Bank executives-yes, the same ones who ran themselves into the ground and then into the arms of the Fed-have warned that the requirement would include a prolonged battle. Is anyone else thinking we should have required management changes when we gave them TARP funds?

The IMF is now looking for a worldwide slowdown through the end of the year due to high public debt and slowing growth in the US as well as European risk. Additionally, inflation and rising rates are beginning to pressure growth in key developing countries.

Oil continues its decline as the global economy slows and investors speculate demand will soften. Oil futures are down 2% this morning. The WTI is now at $92.

Wal-Mart won a ruling at the Supreme Court that may limit future class-action suits. The ruling blocked an effort to sue Wal-Mart for discrimination on behalf of potentially one million female workers.

APAC markets were weak last night, as are EMEA markets this morning.

Rory McIlroy ran away with the US Open yesterday, shattering the tournament scoring record and erasing the bad memories of his Master’s collapse in April.

Have a great day


Jun 17, 2011

Kicking the Can Down the Greek Road

June 17, 2011

Markets in the US and Europe are getting a bid this morning after the EU and the IMF agreed to release to Greece more of the rescue package, assuming the Greek government pushes through additional austerity measures. German Chancellor Angela Merkel backed down from her stance that bondholders be forced to shoulder a substantial share of the rescue. She is now looking for a voluntary participation by private investors. After seeing their yields peak at over 30%, 2 year Greek debt rallied today to just under 29%.

Yesterday initial jobless claims were slightly better than expected at 414K, but still well above the 375K level considered to be acceptable. Housing starts came in better than expected for May at 560K vs. expectations of 545K. Building permits were also better than expected at 612k. The Philadelphia Fed Business Outlook Survey came in at -7.7 vs. expectations of an increase to 7.0. The Michigan Consumer Sentiment Indicator came in at 71.8 vs. expectations of 74.0 and last month’s 74.3. The best upside economic report in a number of weeks hit this morning as the Index of Leading Economic Indicators came in at 0.8% vs. expectations of 0.3%.

Showing the market may not be as irrational as the LinkedIn IPO suggested, Pandora’s IPO broke deal price and is now trading at $12.75 (it priced at $16) after peaking at $26 on the first day of trading. The company now boasts a market cap in excess of the entire radio industry it hopes to replace. Rich Greenfield of BTIG launched coverage yesterday with a sell rating and a $5 price target.

A day after rejecting a Republican measure to repeal ethanol tax breaks, the Senate approved a measure introduced by Democrats repealing the $6 billion annual break. The measure is not expected to take effect because it has been attached to a bill that isn’t expected to pass. The President has said he supports eliminating the tax break, but would veto any bill that cuts it off. If you understand any of that, please respond with an “aye”. Just another day in Washington I suppose. It certainly seems more and more apparent that if we are relying on these guys to lead us anywhere we will be sorely disappointed.

Better late than never-the SEC is considering bringing a civil fraud suit against the rating agencies in connection with their role in mortgage-securitization deals that triggered the financial crisis.

Research in Motion (RIMM) missed earnings and guided down again last night after the close. The stock is down 16% today and now sits 58% below its February high.

In an interview with The Wall Street Journal, Lakshman Achuthan, the co-founder of the Economic Cycle Research Institute, said that over the last few months key indicators of long-term economic growth have all begun pointing in one direction: downward. “We’re talking about a cyclical turn that’s pronounced, pervasive and persistent, not a one or two month affair,” Achuthan said. He added that the slowdown is likely to last a couple of quarters at least.

China’s Dagong credit rating agency says the U.S has already defaulted. “In our opinion, the United States has already been defaulting….Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China,”

The China comments follow the German credit rating agency Feri’s downgrade of U.S. bonds a full notch – from AAA to AA – saying: “The U.S. government has fought the effects of the financial market crisis primarily by an increase in government debt. We do not see that there is sufficient attention being paid to other measures,“ said Dr. Tobias Schmidt, CEO of Feri Rating & Research AG. “Our rating system shows a deterioration in economic health, so the downgrading of the credit ratings of U.S. is warranted.”

Oil has pulled back over the past month, with WTI now trading just under $94 per barrel after topping $113 at the end of April. The chart below shows the price of oil over the past decade.

99 Cent Only Stores (NDN) has a weekly discount ad. This week’s ad takes a shot at Miami Heat player LeBron James, offering a discount to $.75 “when you don’t have a fourth quarter.” James has faced criticism for failing to lead the Heat to the NBA title against the Dallas Mavericks, being criticized for his lackluster 4th quarter performance. The offer is only valid in Texas stores-home of the Mavericks.
Have a great weekend

Jun 15, 2011

History May Not Repeat, But it Certainly Rhymes

June 15, 2011

After rocking yesterday to the biggest gain in a month, equity markets are pulling back hard this morning. Why all the volatility? Blame it on the economic data I mentioned would be coming out in Monday’s note. Yesterday, retail sales posted their first negative month in 10 months, but were better than expected, declining by 0.2% vs. and expected decline of 0.5%. PPI was also reported yesterday, with the headline number rising 7.3% and the core number 2.1% vs. expectations of 6.8% and 2.1%. Today, CPI came in above expectations at 3.6% for the headline number and 1.5% for the core number. Industrial production and capacity utilization (chart below) also came in worse than expected. The Empire Manufacturing report declined to -7.8 versus expectations of 10.0. The NAHB Housing Market Index came in at 13 in June versus expectations of 16 and 16 last month.

Pandora priced its IPO this morning with a coveted single letter listing, P. Typically a single letter listing has been reserved for high profile, blue chip companies, however, the NYSE is attempting to woo tech companies to the big board by offering the coveted tickers. Zillow has filed to go public with the symbol Z, and the exchange is supposedly holding I for Intel should they migrate to the big board.

I was negative on the economics and environmental impact of ethanol subsidies in Monday’s note, and in response to my musings (just kidding), the Senate decided to vote on a measure to eliminate the subsidy yesterday. The bill failed, but obtained 34 Republican votes, a striking number given their unwillingness to eliminate tax breaks. The Congressional Research Service said the US spends about $1 trillion per year on “tax expenditures”, i.e. tax subsidies.

The Greece situation continues to deteriorate, as European officials struggle with how to structure another bailout without triggering a Greek debt default. This scenario sounds a lot like what the market faced a year ago. History may not repeat, but it certainly rhymes.

Moody’s is looking at the credit rating of BNP Paribas, Credit Agricole, and Societe Generale because of their exposure to Greece. The rating service put all three banks on ratings review.

It shouldn’t come as a surprise to anyone that our government is inefficient in handling the various programs we have tasked it with. Bureaucracies in general are efficient at enhancing their power without being especially efficient, however, the latest revelation coming from a Los Angeles Times investigation showed that the US Social Security Administration mishandled at least $8 billion in payments in 2009. Wow!

APAC markets were mixed last night after China raised its bank reserve requirement ratio again. The Shanhai fell 0.4%, the Hange Seng -0.3%, ASX 200 -0.4%, Kospi -0.4%, and Taiex -0.2%. The Nikkei rose 0.1%, NZX 0.6%, Kuala Lumpur 0.3%, and Indonesian shares rose 0.8%.

The British government is planning to “ring-fence” bank activities, in other words separate retail units from investment-banking. Not surprisingly HSBC, Royal Bank of Scotland, and Barclays have opposed the idea, saying it will reduce their capacity to lend and raise expenses. I say this is an idea which is long overdue and should be readdressed here in the US. The Gramm-Leach-Bliley act of 1999, which removed the restrictions of Glass Steagall and allowed the combination of retail and investment banking units, was one of the top contributors to the global financial crisis. While former Fed Chairman Paul Volcker has called for a repeal, officials in the US have brushed off attempts to “ring-fence” our banks. A skeptic would think that the lobbying and campaign contributions by the major banks are playing a role in keeping this common sense legislation from occurring.

Consumer discipline has been a bugaboo issue for the past 20+ years as consumer debt has risen faster than incomes. The SNL skit below highlights the thought process issues facing the American consumer. Hope you enjoy.

Jean-Claude Trichet, president of the ECB, defended the viability of the Eurozone by comparing its disparate member economies to that of the US states. What Mr. Trichet misses in the argument is that the authority backing the US Dollar, the Treasury, also has the ability to influence tax policy, whereas there is no tax policy for the ECB. The ECB must rely upon its member states to maintain fiscal discipline. The Euro is the purest form of fiat money, backed only by the good faith of its members.

In sports the College Baseball World Series begins this weekend from Omaha. If you like baseball at all, you should tune in to a few games. Great baseball and typically very exciting finishes. In the NHL, the season will finish tonight as the Canucks travel home for game 7 against the Bruins.

Have a great day


Jun 13, 2011

Another Merger Monday

June 13, 2011

After a six week decline, the markets are opening with a positive bid today. As I mentioned last week, history is on the side of the bulls for at least this week as typically six week declines are met with a positive 7th week. This week will be full of key economic data beginning tomorrow with retail sales, PPI and business inventories kicking off the data deluge.

Merger Monday is back with VF Corp agreeing to buy Timberland for $43 a share, a 43% premium to Friday’s close but below the stock’s April 28th close of $45.72. The deal is valued at $1.8 billion. Wendy’s/Arby’s agreed to sell a majority stake in Arby’s to the Roark Group, which valued the division at $430 million.

APAC markets fell last night as the risk-off trade continued. Oil fell back under $100 as markets in Japan, South Korea, Hong Kong, China, Taiwan, New Zealand, Singapore, Kuala Lumpur, India, and Thailand all declined. EMEA markets are mixed this morning.

Copper has continued its decline, falling another 1%+ after China announced that May imports declined 36% year over year, signaling a potential slowdown in Chinese construction. Bank lending in China fell to $85 billion in May, well below the year over year average as the country’s money supply showed its smallest monthly increase since 2008.

Wheat has begun to spike on higher demand as US farmers substitute wheat for corn as an animal feed. Corn has been under pressure due to federal mandates for ethanol production. As most outside of DC are aware, ethanol is not only uneconomical and contributing to global food inflation, it doesn’t reduce the overall carbon footprint of a mile driven by a car, reduces the fuel economy of most internal combustion engines, and accelerates the deterioration of car engines. I’m not sure how this is good policy for anyone except corn farmers.

Bloomberg is reporting that three of the worst performing diversified funds this year are managed by three of the top long term managers: Bruce Berkowitz, Ken Heebner, and Bill Miller. All three run very concentrated portfolios and have excellent long term track records, demonstrating the difficult investing environment this year.

The chart below (courtesy www.thechartstore.com), shows the number of hours required to purchase a single unit of the CRB index. As you can see prices have typically dropped during recessions (gray bars). After a 21 year decline from 1980 to 2001, commodity prices have jumped almost 3x over the past decade (as measured by hours worked). It is interesting to note that of the 23 hour of work increase over the past decade, only 3 can be attributed to oil.

I was finally able to confirm that the NBA did in fact hold an NBA Finals without either the Lakers or Celtics. The Dallas Maverick’s prevailed over the star-studded Miami Heat in six games, winning the title last night 105-95. It was a great series, with the first five games being decided in the last two minutes.

Have a great day


Jun 9, 2011

Exxon Oil Discovery

June 9, 2011

After six consecutive down days in the market, futures are bid up slightly this morning. History is on the side of the bulls today as there have been nine instances of the market declining for six days over the past 15 years, and on all but one instance the market rose on the 7th day. According to Bespoke Investment Group, if the S&P closes down for the week, it will be the sixth consecutive losing week for the market (the S&P is down 6% from its high), only the 17th time since 1928 that a losing streak has lasted that long.

Initial jobless claims missed the mark once again, coming in at 427K. Job openings are down significantly from historical levels, with only 3 million openings nationally versus 4.7-5.0 million under typical circumstances.

The trade deficit narrowed slightly for April, coming in at $43.7 billion, a decline of $3 billion from the prior month. Exports rose $2.2 billion while imports dropped by $1.0 billion on lower imports of automotive vehicles, parts and engines as well as a $2.4 billion drop in crude oil. The auto weakness is expected to be a temporary repercussion of the production disruptions caused by the Japanese earthquake.

A UN Food and Agriculture Organization report yesterday showed that global food prices have jumped 37% year over year. The “dangerous levels” of food prices has pushed about 44 million people into poverty since June 2010, according to the World Bank. Another 10 million may join them should the price index rise by another 10%.

Margin debt has been rising while the market weakens, and a further weakening could cause an unwinding of leverage that puts further pressure on the market. The chart below (www.kimblechartingsolutions.com) shows NYSE margin debt versus the S&P 500. As you can see, there have been two prior occurrences in the past decade of high margin debt and a technical breakdown in the market, albeit from more extreme levels. Both times occurred at market tops, just prior to bear markets.

Exxon announced a major oil and gas reserve discovery in the Gulf of Mexico. The company estimates the find could produce 700 million barrels of oil. The big question will be whether the Administration will actually let them develop those reserves.

Steven Eisman is leaving FrontPoint Partners as the firm liquidates his funds amidst client redemptions. The firm reportedly had $7 billion in assets in November, just before one of the firms portfolio managers was charged with insider trading.

APAC markets were weak last night on concerns about global economic growth. Japan reported that Q1 GDP was weaker than expected, falling by 3.5%. EMEA markets are up this morning.

Have a great day


Jun 6, 2011

Monday Report

June 6, 2011

Futures are flat this morning on a typically quiet summer morning as market participants are still trying to figure out the significance of last Friday’s job report. Perpetually bullish JP Morgan feels the economy has hit a soft patch, while others are more concerned about a more prolonged and serious slowdown. The primary argument for the soft patch links recent employment weakness to supply chain disruptions in Japan and domestic demand destruction resulting from skyrocketing gasoline prices. The optimistic views for a rebound by the end of summer cite the recent pullback in gasoline prices and Japan beginning to return to normal.

In spite of what has felt like a long and large correction, the chart below shows that the market has only pulled back 4.7% from its late April peak. The action since the beginning of the year has been a churning or consolidation. From a technical standpoint the market may have double topped and recently broken support. Interestingly, the last time the market had similar action was in late 2007, just before the recession began.

As a signal to incumbents presiding over weak economies, the ruling Socialist Party in Portugal was defeated in a national election last week. Protesters gathered in Greece for a 12th day to object to government austerity programs designed to help ease the country’s debt crisis.

Nobel Prize winner Peter Diamond has withdrawn his name from consideration for the Federal Reserve’s board of governors.

The UN released a report suggesting that governments may need to intervene in commodity markets to ease the bubble that has developed in certain commodities.

Michigan recently eliminated some tax breaks given to businesses and individuals as incentives to locate their business in the struggling state. Ohio and Oklahoma are both looking at similar tactics to close their gaping budget deficits.

M&A activity is quiet this morning, however, YTD the oil & gas industry has led the M&A action with over $82 billion in announced deals, slightly ahead of the telecommunications industry.

APAC markets were weak last night following Friday’s weak US market action. The Nikkei fell 1.2%, ASX 0.3%, Singapore Straits Times -1.1%, Sensex 0.2%, while Philippine shares rose 1.4%. Markets in China, Taiwan, Hong Kong, South Korea, and New Zealand were closed for a holiday.

Have a great Monday


Jun 3, 2011

Deja Vu-Internet IPOs and Bad Economic Numbers

June 3, 2011

Stocks are headed towards their first five week losing streak since the summer of 2008. Treasuries are strong as the yield on the 10 year hits a low for 2011, below 3%. Weak economic data all week has been exacerbated this morning by exceptionally weak non-farm payrolls data of 54K and private payrolls of 83K, both about 100K below consensus. The weak jobs data combined with weak ADP employment, ISM manufacturing, higher than anticipated initial jobless claims, and an uptick in the unemployment rate indicate that the economy is quickly slowing down just before the Fed completes its QE2 program. The strength in the bond market comes in spite of a Moody’s warning of lowering the US credit rating if Congress and the White House continue to dawdle over raising the national debt limit and lowering spending.

Groupon announced yesterday that they will be joining LinkedIn, Pandora, and Zynga in filing for IPOs while the market is receptive to internet IPOs. The deal is expected to be in the $750 million range, with insiders selling over half of that amount.

Goldman received a subpoena from the Manhattan District Attorney looking for information about their role in the financial crisis. The inquiry appears to be focused on the Senate Subcommittee report which concluded the company misled Congress and clients about their activity related to mortgage-backed securities. It figures that the DA would have to make these charges since the entire Federal government is stocked with former Goldman employees (Government Sachs).

Same store sales came in much weaker than expected against a relatively easy comp, rising 4.9% vs. expectations of 5.4%. Of the 25 stocks in the comp group we follow, 15 missed their comp estimate for May. Much of the weakness is focused in low and mid-tier retailers as consumers continue to be constrained by fuel prices, which are up $1 per gallon over the prior year. Misses were reported by the Gap, Limited, JC Penney, Target, TJ Maxx, and Kohls. Higher end retailers such as Saks (+20%) and Nordstrom (+8%) posted robust comps, as did club stores which sell gasoline such as Costco, up 13%.

For profit colleges are benefiting from less draconian than expected Gainful Employment rules from the Department of Education. Companies have been given until 2015 to comply with the new rules before they run the risk of losing their federal funding vs. earlier versions of the rules which would have penalized them next year. The rules are “meaningfully watered down” from previous versions, according to an analyst at Robert W. Baird. RBC called the new rules a “big win” for the industry, and Height Analytics said the new rules won’t limit growth at a majority of schools.

Bloomberg is reporting that more than 90% of sporting-goods manufacturers paid higher input costs and that 41% have already increased wholesale prices. Rising cotton, fuel and wage costs are slowly pushing through the supply chain, and should hit retail shelves by later this year and early 2012. Dean Maki, the chief US economist at Barclays, said that “sporting goods is the latest industry to exercise pricing power, following similar moves by airlines, restaurants and the apparel sector”.

As expected, the House rejected a bill to raise debt limit, 318-97. All Republicans and 90 Democrats voted against the bill, which didn’t address any spending cuts.

S&P warned of a potential commodity decline of up to 75% if the slowdown in China worsens. Commodities fell 6.8% in May, the largest drop in a year. Silver, the worst performer, lost 21%. Ironically, oil and gas prices have been falling, which should help ease pressure on a weak consumer.

The S&P/Case-Shiller Home Price Index fell to 2002 levels, and homes are in a double dip across most of the country. The chart below, courtesy of the Big Picture, shows the index since 2000. In spite of massive federal efforts, this market will eventually get to the market clearing price we have been discussing for the past three years. Government intervention can only delay the inevitable.

As opposed to the “transitory” inflation being caused by rising fuel prices, rents, which constitute roughly 40% of CPI, have risen 5% for the year ended April 30. A higher rent could push core CPI up at a time when the US Treasury can ill-afford CPI based increases in entitlement payments.

APAC market were weak last night, with the exception of the Shanghai, which rose 0.5%. EMEA markets are weak today, down about .75% across the board.

I keep hearing a rumor about an NBA final being played in a warm weather city, so I drove by the Staples Center last night and once again found that not to be true. These rumors are getting annoying.

Have a great weekend