Aug 31, 2011

Exxon Deal with Rosneft

August 31, 2011

The week leading up to Labor Day is typically one of the lightest volume weeks of the year, and tends to finish in the black. September historically has been one of the two worst months of the year for stocks (April being the other). It will be interesting to see if these seasonal patterns hold true in 2011. This morning futures are up as investors continue to speculate that the Fed will attempt to stimulate the economy once again. The more dovish, majority members of the Fed have been more vocal in recent days than in the past, possibly laying the political groundwork for another round of quantitative easing.

The ADP Employment report came in this morning with an increase of 91K private sector jobs, lower than the expected increase of 100K and last month’s downwardly revised 109K. The Chicago Purchasing Manager’s index came in at a better than expected 56.5 for August vs. the estimate of 53.3 and July’s 58.8. Factory orders for July rose by 2.4% vs. expectations of 2.0%. Overall there has been a slight increase in the rate of positive economic surprises, although they are still negative, as shown by the Citigroup Economic Surprise Index below.

AT&T, facing scrutiny in their attempted takeover of T-Mobile, has promised to add 5000 call center jobs as a concession to getting regulatory approval for the deal. I find it highly unlikely that the merger will result in an overall net increase in jobs as early commentary discussed the operating synergies (i.e. duplicate positions) that could be achieved in the merger.

Exxon (XOM) inked a deal with Russia’s OAO Rosneft that will allow XOM to explore for oil in the Kara and Black seas. Rosneft will be able to purchase stakes in some of Exxon’s projects, the first Russian entity allowed to invest in an American energy asset.

APAC markets were mixed last night as China’s Shanghai fell by 0.7% while the Kospi rose 1.1%, Hang Seng 0.3%, and ASX 200 rose 0.2%. The Nikkei was flat.

Yes Virginia, there is a Santa Claus. We finally have some good news coming from Europe. I’m not talking about that “the bad news that’s viewed as good news” we’ve been receiving lately, such as another bailout. I’m talking legitimate, good old fashioned good news. GDP in Poland grew by 4.3% in the second quarter! That may prove to be the best GDP on the continent this quarter. Good news indeed.

In other European news, ECB President Trichet has indicated that the central bank is reconsidering its position on inflation, an indication the EU rate-increase cycle might end. Remember that they raised their key rate twice in the past several months, which contrasts with those bastions of economic growth and fiscal austerity Japan, the US, and England, all of which have maintained effectively zero rates.

I don’t think that anyone could disagree that consumer income and spending have been challenged over the past three years. The chart below, from Jim Bianco, shows the damage done to personal income during the most recent financial crisis, and how far incomes need to rebound just to get back to par.

India posted their slowest GDP growth in the past six quarters at 7.7%. Finance Minister Pranab Mukherjee said he was “disappointed” even though growth was much stronger than in the rest of the world.

One of my views on the impact of new capital regulations on banks has been that returns on equity will plummet. McKinsey just completed a report that confirms that view, estimating that returns on equity for the world’s top 13 banks will topple from 20% last year to roughly 7%. The report also anticipates a significant increase in regulatory costs, much of which will be passed on to consumers in the form of fees.

I don’t know about anyone else, but my kids go back to school this morning. They weren’t happy about it, but for me it was nice not being the first one in bed last night.

Speaking of back to school, retailers will begin discussing back to school results today and over the next week. I was out looking at stores Sunday, and while they were busy, it didn’t seem as though the register lines were uncomfortably long.

Have a great day


Aug 29, 2011

Last Monday of Summer

August 29, 2011

After initially falling sharply last Friday during Mr. Bernanke’s comments on the economy, the markets reversed mid-comment and have continued with a bid this morning. While expectations of an announcement of QE3 were dashed early in the speech, the market was emboldened by the Fed’s plans to extend their September meeting to two days instead of the planned one day. Mr. Bernanke emphasized that while he still had “tools” available to help the economy, the short term monetary fixes were becoming incrementally less effective and that long term fiscal changes are needed to sustain any type of recovery.

Personal income was in line this morning, rising 0.3%, while personal spending rose 0.8% vs. an anticipated 0.5% increase. Personal spending had dropped in June for the first time in a year. The July increase is the strongest since February, which could indicate better consumer confidence. One measure that has been ignored in the news lately but may be helping the consumer has been the recent decline in gasoline prices, which are down to $3.62 nationwide. Last Friday Q2 GDP was revised down from 1.3% to 1.0%, which translates to an increase of 0.7% for the first half of the year. Per capita GDP actually declined in the first half of the year. Pending home sales rose by 10.1% year over year vs. an expected increase of 13.6%.

A recent investigation by ProPublica and NPR concluded that large US banks manufactured daisy chains of mortgage purchases to create fake demand for CDOs. The report cited that between 2006 and 2007 CDOs bought $107 billion in assets from each other to pump bank profits and fool investors into thinking that demand for the mortgage-backed securities was higher.

The Mexican government has announced plans to work with major Japanese banks in an effort to reduce their dependence on US sovereign-debt buyers.

Markets in Europe are up this morning after most Asian markets were up last night.

Showing no signs of admitting that Keynesian economics doesn't work, the President announced that Alan Krueger, a labor economist and Princeton University professor, has been nominated to lead the White House Council of Economic Advisors. Some of Mr. Krueger’s recent comments have supported a hiring tax credit, increased infrastructure spending, and a value added tax. He previously served as the Chief Economist to the Treasury Department where he worked on the first stimulus package. Mr. Krueger would become the third CEA chairman in three years.

Although there was significant flooding, power outages, 18 deaths, and damage in many parts of the east coast, Hurricane Irene’s force dissipated significantly as it approached the coast. Originally identified as a category 3 hurricane, by the time it hit shore it was a tropical storm. The early cost estimates are $3 billion, well short of the $10-15 billion being discussed at one point last week. Insurers are up this morning after Morgan Stanley commented that they would be able to raise premiums on storm fears but will benefit from the lower than expected losses.

Have a great day


Aug 26, 2011

Waiting for Ben

August 26, 2011

Today is the day. Ben Bernanke will be speaking from what was once an obscure gathering of central bankers but is now the most awaited speech since JFK’s inaugural address. The good chairman will begin his speech at 10AM EST. Markets are down on the open this morning and were weak yesterday afternoon as weakening economic fundamentals combined with a desire to lower equity exposures in the event Mr. Bernanke doesn’t indicate another lifeline will be thrown to investors.

Bank of America has been struggling since mortgage foreclosures picked up in 2005, but recently the stock has touched lows not seen since the market bottomed in early 2009. Questions abound as to the viability of the bank and its true book value. Yesterday Warren Buffet stepped into the fray by investing $5 billion in a new preferred issue. The investment gives the bank’s stock some badly needed credibility and also some additional capital.

In a bit of positive news a Capital One survey showed that 44% of small business owners felt that business conditions are improving in the second quarter. The survey noted that there has been modest improvement over the past few quarters.

Yesterday initial jobless claims came in at 417K vs. expectations of 400K. Part of the increase, roughly 8500, can be attributed to the recently ended Verizon strike. The Michigan Consumer Sentiment index came in at 55.2 vs. expectations of 55.8.

Steve Jobs announced that he will be stepping down as the CEO of Apple. "I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple's CEO, I would be the first to let you know," Jobs wrote. "Unfortunately, that day has come." He will remain the firm’s Chairman.

There has been much debate about the cost of obesity in this country, with some estimating the total near $500 billion in additional health related costs. Many, including the gentleman pictured below, feel that individual rights trump those of the republic and have vowed to fight for their right to eat, even at McDonald’s.

RealtyTrac announced that sales of homes that were in some stage of foreclosure or bank owned accounted for 31% of all U.S. residential sales in the second quarter of 2011. In a separate report they noted that foreclosure filings were reported on 212,764 U.S. properties in July, a 4% decrease from June and a 35% decrease from last year. July's total was a 44-month low for foreclosure activity.

Bespoke Investments is reporting that even with the 5% jump in stocks earlier in the week, the S&P 500 is still on pace for its fourth worst month of August in history. The only months of August where the S&P 500 had a worse performance through August 24th were in 1990, 1939, and 1974.

A survey of CFA charter holders found that 68% of 993 respondents indicated that they think Europe's financial troubles will spread to North America. U.S. holdings of European debt are substantial, and an escalating crisis in the EU does compound the crisis in the U.S. While many European investors seek a Eurobond bailout for their banking system, it is clear that the EU needs Germany to comply. However, in recent days, numerous statements out of Germany -- ranging from Chancellor Angela Merkel to Finance Minister Wolfgang Schaeuble to lower-level administrators -- confirm that Germany remains unenthused about participating in a broad European bailout. While a Eurobond could work in theory, asking citizens of well-managed countries to pay the fiscal and interest costs of troubled countries is tenuous at best. Moreover, public-opinion polls in the stronger countries, such as Germany, are sharply against a broader European bailout. -- Ron Rimkus, CFA, content director of CFA Institute

Gold contracts for December delivery fell $104 an ounce Wednesday on the New York Mercantile Exchange and closed at $1,757.30. Over two days, gold fell more than $150 an ounce. The exchange imposed higher margin requirements for gold trading, which should only have a temporary impact on the price of the shiny metal.

Wheat futures for December delivery fell more than 1% yesterday. Earlier, reports said the Canadian crop is bigger than expected and that good weather in Australia's major grain-producing regions could increase crop yields. This comes on the heels of a bump in the futures after Midwest flooding raised concerns about the size of the US crop.

Since Mr. Buffet spoke on taxes last week there has been a lot of discussion about taxing higher income earners. US News and World Report did a study showing that if you taxed 100% of earnings over $250K per year plus 100% on corporate profits, you would have enough to run the government for roughly six months. While I agree the tax code needs a lot of work, the reality is we have a major spending problem.

OK, the Angels have been on a tear since losing three of four to the Rangers, picking up five games on the Rangers in the past week, and travel to Texas this weekend for a series which will help decide the American League West. The Angles trail the Rangers by two games. College football kicks off next Friday.

Have a great weekend


Aug 24, 2011

I Feel Your Pain

August 24, 2011

Equity futures are down this morning, but have pared their losses after a better than expected durable goods order release. Durable goods were up 4.0% vs. an expected increase of 2.0%, and ex-transports rose 0.7% vs. an expected 0.5% decline. After soaring last week, 10-year treasuries have eased a bit, but the yield is still an ultra-low 2.17%.

Moody’s cut the credit rating of Japan last night one notch, citing their high debt levels and economic-growth challenges. The government announced a new $100 billion credit facility to help domestic companies make foreign investments and offset the impact of the stronger Yen. Oil slumped after the downgrade.

Many prognosticators have been fooled by the economic and market actions over the past few years. Evidently the challenges have extended to those outside the markets, as evidenced by the sign below.

Credit defaults swaps on BofA continue to soar as the company’s stock struggles to find a bottom. The bank is now trading at 0.3x book value and 0.5x tangible book value. Concerns abound regarding the quality of the bank’s loan portfolio.

I spoke with the CEO of a young technology company yesterday who said it was more difficult to raise risk capital than at any time he could remember because of concern about regulations and uncertainties surrounding the tax code. He said that the size of commitments from investors are roughly 15% of where they have been historically.

In a conference call Monday, a CEO said to me “I’m astounded at how politicized the Fed has become.” Two separate conversations, the same conclusion-government is an overhang right now.

It seems as though the President can’t win these days. During his recent 3-day campaign tour, he has been heavily criticized for using tax-payer dollars to build two highly secure travel buses for the trip. Now the citizens of one of the cities he visited, Elkhart, IN, are attacking the President. It seems there was once a vibrant RV industry in Elkhart, and the good people there would have appreciated the work to build the new buses. Alas, the President who is busy trying to create jobs for his minions, decided to have those buses build in Quebec, Canada. I guess Elkhart needs a better lobbying effort? Someday maybe he’ll get it.

Because of the constant movement of the tectonic plates in the Western US, we have daily earthquakes in California, and there is rarely a mention in the news. Yesterday an earthquake in Virginia shook most of the East Coast, and almost immediately the market dropped 1% before quickly rebounding. The evening news and even the front page of this morning’s Wall Street Journal featured stories about the quake. The website posted the picture below showing the magnitude of the devastation from the quake, which brought the East Coast to a halt for almost five minutes.

The latest ASA staffing index, which measures seasonally adjusted temporary jobs, was weak for June (-12K) and continues to be weak. The ASA said the measure declined 1% over the past month, non-seasonally adjusted. Historically there has never been a non-seasonally adjusted decline between June and August. The chart below, courtesy CS, shows the ASA index for the month of August over the past 21 years. Temp jobs tend to be a good leading indicator of overall employment and specifically the non-farm payroll index.

Have a great afternoon.