Jul 21, 2011

Ronald Reagan-keeping it in perspective

“Unfortunately, Congress consistently brings the Government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar. The United States has a special responsibility to itself and the world to meet its obligations. It means we have a well-earned reputation for reliability and credibility—two things that set us apart from much of the world.”

Ronald Regan-September 1987

(thanks to The Big Picture)

Reminder-I'll be on vacation next week, returning August 1st.

Jul 20, 2011

Strong Apple Earnings

July 20, 2011

Please note that I will be on vacation until August 1st. Also, thanks to all of you who have supported my daughter's blog. This first month she has received a ton of support, some great comments, and is quite excited about the few dollars she has earned.

After a somewhat volatile four weeks, we are experiencing a very calm morning. Equity markets are opening flat this morning after strong earnings from Apple (AAPL) but a mixed bag of earnings overall. The macro picture is quiet today, with existing home sales coming in at 4.77 mil annualized vs. expectations of 4.9 million. The political climate is quiet today also as there are no new revelations coming from Europe, and it appears a watered down version of debt reduction and debt ceiling increase will begin making its way through the DC circuit. Bonds are getting a slight bid as the 10 year settles in at 2.90%, and the CRB is down slightly. The Euro is finding a bid vs. both the dollar and the Swiss franc for the second day in a row.

I can’t help but listen to the lunacy coming from Washington, especially when it comes to the discussion about making or not making Social Security payments, and wonder “What about the Social Security lockbox?” You remember the lockbox, right? It’s that place where our 12.9% Social Security withholdings go to be held separately to ensure that budget deficits don’t impact the ability to pay seniors. Looks like someone forgot to hide the key from the politicians because evidently Social Security, like much of America, is just one month of missed income away from insolvency.

Economics professor and former Senior Economist for the President’s Council of Economic Advisers Laurence Kotlikoff: “Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. ” He calculates that to address our budget issue with taxes only would require an immediate and permanent doubling of taxes (federal, payroll, personal income, and corporate) without impacting GDP.

Earnings have been in full swing this week. Solid earnings were posted by Apple (AAPL), driven by strength in China; Harley (HOG), IBM, Polaris (PII), Coca Cola (KO), Johnson & Johnson (JNJ), and VMWare (VMW).

In line numbers were reported by Bank of America (BAC), although the quarter was quite messy with a record loss in the quarter, $20 bil of which came from bad home loans. Additionally, there are rumors they might sell off Merrill. Yahoo (YHOO) also reported in line numbers.

Goldman Sachs (GS) reported a big miss on lower VAR and trading profits, possibly caused by a reduction in leverage as a result of Dodd Frank. The firm is planning to cut approximately 1K jobs. Historically trading has accounted for 35-48% of the firm’s revenues, but only 22% this past quarter. Chipotle (CMG) also missed for the first time since mid-2008. Riverbed (RVBD) missed, citing weakness in Europe as the source of their ills.

The chart below is from the NY Times, and shows how far consumer spending has fallen, and cites high levels of consumer debt as the reason spending hasn’t rebounded as quickly as other downturns.

Tokyo Electric announced they have achieved stable cooling at the Fukushima nuclear station, and expects to have the station to a safe status by October. They are hoping to begin removing fuel rods in about three years. This type of removal has never been done.

I read that in June automobiles passed cows as the largest consumer of corn in the US. Ethanol production consumes 40% of the US corn crop, up 4x from 2002.

Moody’s put Maryland, New Mexico, South Carolina, Tennessee, and Virginia under review for downgrade due to their dependence upon the federal government for a large share of their funding.

NBA labor talks are scheduled for Friday as rumors swirl that the NFL has come to terms to end their lockout. If true, the NFL deal would require a vote of both players and league owners.

Have a great day.


Jul 18, 2011

Misery Index Hits New High

July 18, 2011

Stocks are weak this morning as the European debt crisis continues to crumble. The Euro is down almost 1% this morning vs. the Yen, Italian, Spanish, Portuguese, and Greek bonds are all down once again today and their credit default swaps all rose to record levels. Demand for long term US financial assets (TIC flows) declined to $23.6 billion in May versus the estimate of $40.0 billion. Both Japan and China added to their holdings of US treasuries. The TIC is considered a measure of global confidence in the US economy.

The Misery Index, so named because it combines measures of consumer confidence, unemployment, and inflation to measure consumer comfort, has risen to a 28 year high (see chart below). The gauge has shown a strong inverse correlation to consumer spending.

Amazingly, eight of 90 banks in Europe failed the recent stress tests due to capital shortfalls. These banks will have to seek additional capital to shore up deteriorating balance sheets. Here in the US, Bank of America has been under tremendous pressure as speculation continues that they may have to raise at least $50 billion in additional permanent capital to offset housing related losses.

World Bank President Robert Zoellick was quite critical of US policy during a recent interview with the Washington Post. Zoellick commented that the Obama administration’s refusal to cut ethanol tax breaks and farm subsidies “doesn’t make sense when the US is trying to reduce spending. It’s a missed opportunity for a pro-growth strategy at a time when the US, and the world, could use one.” He also stated the US has failed to exercise “global economic leadership” and has become defeatist regarding the Doha round of trade negotiations.

Linked somewhat to the Misery Index above, 1 in 7 Americans are now relying on food stamps to have enough to eat. Moody’s Analytics feels food stamps are one of the most effective stimulus programs in the US, generating $1.73 in economic activity per dollar.

The Financial Stability Board (FSB) is expected to endorse a proposal aimed at avoiding taxpayer rescues of failing financial institutions. The group is discussing a capital surcharge for large banks. A high enough surcharge could be enough to end TBTF (too big to fail) as banks find it more economical to stay at a size that minimizes or eliminates the surcharge. While there are certainly economies of scale associated with financial services, I think we’ve all seen that there another economic maxim needs to be considered: the law of diminishing returns.

JetBlue was offering $4 one way, and $8 round trip flights between Burbank and Long Beach to observe Carmageddon, the closure of one of the world’s busiest stretches of highway, the 405 between the 10 and 101. The flights reached only 5K feet altitude, and lasted about 12 minutes. All the flights were sold out over the weekend. For those with the means, extended leg room seats were available for $5 each, a 25% premium.

The Women’s US Soccer Team lost in penalty kicks to Japan. It was a match that seemed to be dominated by the US, but they couldn’t convert a number of scoring opportunities. Congratulations to Japan.

Have a great day


Jul 15, 2011

Google It!

July 15, 2011

“The Dodgers are so broke that three players tested positive for Top Ramen”-The ESPY Awards show

Equity markets opened with a solid bid this morning on the back of strong earnings from Google. On the economic front, CPI was in line at 3.6% while the core number rose 1.6%. The month over month data showed a decline of 0.2% for the headline CPI and a 0.3% increase for the core measure, the biggest back-back gain in three years. Capacity utilization came in slightly less than expected at 76.7% vs. expectations of 76.8%, and industrial production rose 0.2%, in line with consensus. The Michigan Consumer Sentiment Index reading came in at 63.8 vs. expectations of 71.4, taking the steam out of the markets after a robust open.

Moody’s announced on Wednesday afternoon they were concerned about a US debt default and placed the US Aaa rating under review for downgrade. Yesterday S&P announced a similar warning.

“What Obama is trying to do is bring the United States under the European system …Why? Because he believes in them. He believes in the ethics of socialism … The consequence of that is no economic growth. The consequence is that you spread the wealth, but you also diminish it … Nobody can climb up. Nobody can move up the socio-economic wrung.”-former Clinton Adviser Dick Morris

Earnings kicked off this week, with big reports from JPM (a beat), Alcoa (slight beat on reduced forecasts), ASML Holding (beat, with mixed guidance), Capital One (messy), Google (blowout), and Citigroup (beat). Next week the slate of releases is heavy as earnings season kicks into full gear. As the macro data continues to weaken, it may take strong earnings reports to drive the market.

Ed Yardley recently noted that in 1988 Alan Blinder and Ben Bernanke co-authored a paper concluding that quantitative easing wouldn’t have an impact on lending behavior. It seems that the intended goals of QE2, improved lending and lower rates, didn’t come to fruition. As David Rosenberg noted, the Fed has added a third mandate to its charter beyond full employment and low and stable inflation: higher equity valuations.

Miller-Coors lost their license to sell beer in the state of Minnesota due to a technical error. Evidently there is an annual $30 fee per brand (total cost for Miller approximately $1100 per year) for every product sold in the state. The company’s filing was on time, however, due to the state shutdown the paperwork wasn’t processed in time and now the company is being forced to pull all of their product from bars, restaurants, and retail establishments. Talk about prohibition!

Asian markets were mixed last night as concerns about a US debt default dominated the headlines. The Nikkei and NZX each fell 0.1%, ASX 200 -0.7%, Hang Seng -0.3%, and Sensex -0.4%. The Kospi rose 0.2%, Taiex 0.1%, while shares in both Indonesia and the Philippines rose by 0.5% and 0.8% respectively.

The US Women’s Soccer team plays Sunday for the World Cup against Japan.

Have a great weekend


Jul 13, 2011

Perpetual Quantitative Easing

July 13, 2011

When my kids aren’t listening, they jokingly tell me it’s “opposite day.” Today is opposite day in the markets after a series of events which normally would be expected to put pressure on them have combined to create a 50bps opening pop. The first piece of data came from the Fed minutes, released yesterday, which showed that while the Fed is standing by its decision to end its bond-buying program as planned (June 30), officials are still considering more stimulus, i.e. QE3. The need for QE3 would suggest that the economy continues to be unusually weak in spite of unprecedented stimulus. While I realize that stimulus seems to be fueling markets, at some point the impact will be muted and you would assume that the weakening economic fundamentals would concern the market.

S&P reported yesterday that in spite of comments to the contrary, US regulators are positioned to, and more than likely will have to in the near future, rescue a troubled, important financial institution.

In spite of central bank efforts to slow their economy, China reported faster than expected GDP last night of 9.5%. Exceptional strength was noted in the housing market, pork, and global exports. Asian markets were strong last night on the news.

I have tried to avoid dwelling on the debate in Washington over the debt ceiling, because in my view it will get extended without substantive reforms. I do want to note that we are now roughly three weeks from the deadline laid out by the Treasury, and the two sides are still posturing. Democrats have firmly staked out the left, pushing for major tax increases. Republicans have firmly staked out the right, pushing for major entitlement cuts. Both sides have left the middle wide open for the President, who in my view has deftly positioned himself between the two and is making both sides, primarily the Republicans, look like fringe extremists. Remember four months ago when these two sides could barely come to agreement on about $37 billion in cuts? Today the Republicans are pushing for a staggering $2.3 trillion, while the President has asked for $4 trillion. Why would the White House ask for a bigger number? Because he knows that it would force Republicans to accept at least $1 trillion in tax increases, which could put them in the George H. Bush dilemma of violating the “no new taxes” promise and angering their base of supporters. Interesting politics.

There is nothing new of note coming out of Europe from a sovereign debt standpoint, however, the News Corp saga has provided the tabloids with tons of fodder, or at least would have if the leading tabloid hadn’t been forced to be closed. After controversy surrounding News Corps’ News of the World tabloid hacking the phone messages of a dead teenager, the company decided to drop its bid for BSkyB, an asset Murdoch has coveted for years. I’d watch for another bidder to step in. News Corp still owns 39% of BSkyB.

Have a great morning