Sep 30, 2011

Goodbye (and Good Riddance) to Q3

September 30, 2011

Today is quarter end, and what a wild quarter it has been. The S&P 500 is down over 12% for the quarter while the Russell 2000 small cap index is down 20% for the quarter! The quarter has featured a near government shutdown, a looming financial crisis in Europe along with stagflation, Operation Twist, an early start to the 2012 election season with 40% of the President’s term left to serve, and of course an economy that is grinding lower. As a result of the macro uncertainty, we have witnessed extreme market volatility. The chart below shows the VIX over the past 10 years, and as you can see the volatility is as high as at any point over that time period, with the exception of the peak of the financial crisis.

Amazon (AMZN)announced the Kindle Fire, a new tablet designed to integrate with AMZN’s commerce site and their Prime Service. The device utilizes an Android web browser running on Amazon’s EC2 cloud computing engine, AMZN’s Android app store, and their Prime Service to streamline commerce and the viewing/purchasing of digital content. Unlike the iPad, the device doesn’t have a camera, microphone, or 3G option. Similar to how Amazon approaches most markets, this is the Wal-Mart approach to tablets-price it low, drive prices lower. Not only is this a direct competitor to Apple, especially given its $199 price target, but it also takes a bite out of a struggling NetFlix, whose stock is down 64% from its July high.

Speaking of Amazon and NetFlix, both CEO’s own significant stakes in their companies. During the quarter Amazon’s Jeff Bezos saw his stock rise by 8%, and the value of his stock soar to $19.1 billion! Reed Hastings, the CEO of NetFlix, saw the value of his stake fall to $273 million. Personally, I’d rather be in Bezos’ position, not because of the obviously larger stake, but because he seems to be having a lot of fun these days. When I met him back in 1997, he didn’t seem to be enjoying his role like he is today.

As fuel efficiency soars and both federal and state gasoline tax revenues decline, various proposals have been floated to implement a mileage tax. This tax would charge users on a per mile basis. Owners of electric and hybrid vehicles are bristling at the suggestion after paying a premium for their vehicles in exchange for lower fuel costs. Supporters say that not only will it stabilize tax revenues from motor vehicles, it will ensure that alternative fuel owners are “paying their fair share” of taxes to support the highway infrastructure.

From a Paul Volcker letter Sept 18 to the NY Times:

“The siren song of inflation is both alluring and predictable. After all, if 1 or 2 percent has not raised inflationary expectations-as the Fed and most central banks believe-why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later…and maybe wages will follow. Well, good luck! Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970’s…What we know, or should know, from the past is that once inflation becomes anticipated and ingrained, as it eventually would, then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability”, but invokes inflation as a policy, it becomes difficult to eliminate.”

Federal Reserve Chairman Ben Bernanke called long-term unemployment in the U.S. a "national crisis" and called on Congress to take action to fight it. About 45% of the jobless have been unemployed six months or more, Bernanke said. "This is unheard of," he said. "This has never happened in the post-war period in the United States." Duh!!

Japan’s factory production has almost recovered to pre-earthquake levels, according to the Ministry of Economy, Trade and Industry. Industrial output rose by 0.8% from July to August, the 5th consecutive monthly increase. Unemployment fell to 4.3%.

BofA (BAC) and other US banks are expected to implement a new fee on debit card transactions. Additionally, many free services (including free checking) are expected to disappear as the Durbin amendment to Dodd Frank, which limited credit card fees charged to retailers, begins to impact bank earnings.

On the economic front Personal Income came in softer than expected, declining by 0.1% vs. an expected increase of 0.1%. Personal spending was in line, rising 0.2%. the Chicago Purchasing Manager’s index rose to 60.4 vs. expectations of 55.0, and the University of Michigan Consumer Confidence index rose to 59.4 vs. expectations of 57.8.

Unfortunately the markets don’t close for a day at the end of each quarter (they should), and I’ve always felt they should close the last two weeks of the year to allow investors time to regroup. Alas, the drumbeat continues and we’ll be back at it Monday as another earnings season approaches. My anticipation is that pre-announcement activity will be more significant this quarter than we have seen in the past.

Stay tuned and have a great weekend.


Sep 28, 2011

Amazon on the Move

September 28, 2011

Durable goods orders were slightly better than expected, although down from July. Orders declined by 0.1% vs. an expected decline of 0.2%, and the results were the same for both the headline number and the number ex-transports. Remember that in July the headline orders were up 4.1%, driven by orders from Boeing. Nondefense capital goods orders (ex-defense) rose by 1.1% vs. expectations of a 0.4% increase.

Greece has moved further along in their austerity program. Yesterday the parliament passed a very unpopular property tax. There are concerns that modest income property owners will be unable to pay the tax.

Amazon (AMZN) announced plans to sell a new, $199 tablet call the Kindle fire. The tablet is expected to have a 7” display and help drive commerce to Amazon’s site. AMZN is attempting to take a bit out of the myriad of tablet competitors. In other tablet news, Facebook may be launching a long-awaited iPad app at the upcoming iPad developer’s conference.

I had a conversation with the finance manager of a major recreational products company. He mentioned that business had really slowed since mid-summer, typically a high point in their year. His exact words were “business fell off a cliff about eight weeks ago.” That’s only a single data point, but not a great one.

The “Occupy Wall Street” protest continues as a few hundred people camp out in the parks in lower Manhattan. You haven’t heard about it? Very few people have, probably because there isn’t a coherent message coming from the group. Protesters have said that they aren’t concerned with achieving a goal other than “ushering in a long-term shift in consciousness.” OK. While speaking with an analyst yesterday, I asked if had seen the protest. He said “are you kidding? Do you think people in New York would notice more people sleeping in a park?”

Have states in the US ever defaulted on its debt before? The answer is yes. In 1841 there was a terrible depression, and eight states as well as Florida (which was still a territory) defaulted on their debt. According to China, America has already defaulted on their debt by printing too many dollars:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Guan said.

KSL has announced plans to merge Squaw Valley with Alpine Meadows to create new super resort. This comes on the heels of a California ski season that was down 12% last year. Pre-season pass sales are up 10% YTD.

There are unconfirmed reports that Google had the highest bid for Hulu, but that they had conditions that the sellers may not agree to. Dish reportedly had the second highest bid, which was roughly 50% of GOOG’s $4 billion bid.

States have been raising unemployment-insurance taxes in an effort to repay federal loans used to cover unemployment benefits. US businesses, already struggling with a weak demand environment, continue to get pressure from all sides.

The Economist characterized the Fed’s strategy as the “who-knows-what-they’re doing strategy”.

In MLB action the Red Sox finally won a game to remain tied with the surging Rays for the AL Wildcard spot. Both teams play today, the final day of the regular season. Should they tie, there would be a one game playoff to determine the wildcard. Now that the Angels are out, I’m done with baseball and focused on football (and of course soccer).

Have a great afternoon


Sep 26, 2011

Trouble at Apple?

September 26, 2011

Equity futures were up today after a weekend in which no announcements came out of Europe, however, equity markets have rolled over since the open, led by tech stocks. European leaders are reportedly working on a larger bailout package than they wanted after receiving pressure from both China and the US over the weekend. The IMF has been conducting their annual meeting with a lot of talk about a European style TARP and the probability of rate cuts, but nothing concrete has been recommended yet. It almost seems like a forgone conclusion that the ECB will ease in the coming weeks. The question that everyone seems to be waiting for is not if Greece will default, but when. A key will be ensuring the banks are financially sound enough to withstand the losses.

Deutsche Bank has raised their price target on Apple (AAPL) to $530, but JP Morgan (JPM) has issued a warning after noting that Apple has cut orders to iPad2 suppliers by 25%. Eastman Kodak (EK) is down hard again (see chart below) on concerns about their viability after the company tapped into their credit line.

A guest on CNBC this morning was asked to cite regulation that is hurting small business today. The first one he came up with, courtesy of the Healthcare Reform Act, requires all retailers to provide Lactation Chambers in each of their stores. The second, courtesy of Dodd Frank, requires every publicly traded company to provide a study showing how the CEO’s pay compares to that of the average global worker. I can’t even comment.

Berkshire Hathaway (BRK/A, BRK/B) has announced plans to buy back shares with a portion of their $40 billion in cash. Although they didn’t say how large the buyback would be, they did set minimum cash levels (including that spent on acquisitions) at $20 billion.

Fed Chairman Bernanke has begun buying longer dated treasuries, just as Treasury Secretary Geithner has begun issuing the same. Louis Crandell, chief economist at Wrightson, said “the Fed is worried about the US becoming Japan, while the Treasury is worried about the US becoming Greece.” The Treasury’s plans makes sense-lock in ultra-low long-term rates and minimize the monthly rollover required to keep the government funded. This strategy will minimize how often the politicians have to renew government funding requirements.

Speaking of government funding, the Senate is expected to vote on their own bill to extend the government’s spending mandate and approve disaster relief funds. The Senate rejected the House bill passed last week. The Senate’s version excludes any off-setting spending cuts. My question is that if they can’t even agree on $3 billion in cuts, how are they going to agree on $1.5 trillion in cuts?

A Barron’s study over the weekend estimated that by cutting rates, the Fed has cost savers and investors somewhere north of $800 billion in forgone interest payments. The study suggests that unemployment would be 6.8% instead of 9.2% without the rate cuts, as those same savers and investors would have had more discretionary income to spend.

Was that really the Raiders?

Have a great day


Sep 23, 2011

Eerily Like 2008: Time to Buy?

September 23, 2011

After yesterday’s market disaster, it’s hard to keep the news neutral or positive. It seems like there are 30 pieces of bad news for the global economy and markets, and very few bright spots. Often when the markets are in despair, and blood is running in the streets, it is a signal to get bullish. I don’t know if blood is running in the streets yet, but the markets are certainly in despair. As bad as things feel, the S&P is finding some support at the same level it has hit four times in the past six weeks, 1120.

The sell-off this week has been eerily like the sell-off in the fall of 2008. The dollar and treasuries rallied, and correlations of everything else converged dramatically. Supposed non-correlated assets began to swoon as investors reached for liquidity. The hallmark of the 2008 sell-off was that no asset was spared in the decline, and correlations drove rapidly towards 1.0 and stayed there.

Libor in the EU has spiked to levels last seen in September 2008. Part of the Fed’s logic in ensuring liquidity to Europe via swap lines was to avoid a “Lehman like” liquidity crisis. Let’s hope that works.

Evidently I underestimated the market’s expectations of the Fed meeting that concluded Wednesday, because within a few minutes of their statement being released, the market started falling. The market was sitting at 1196 when the release came out, and now sits at 1126, a decline of almost 6%. In addition to Mr. Bernanke’s downbeat assessment of the economy, I think the real shock to the market was the apparent end to the Bernanke Put. The Bernanke Put, which was preceded by the Greenspan Put, has been the Fed’s propensity to loosen monetary policy well beyond what is needed by the economy whenever the markets swooned. The Fed’s prescription from this meeting, Operation Twist, was in line with expectations when apparently many believed the Fed would toss out a bigger lifeline.

Who has a worst board of directors, Hewlett Packard or Yahoo? It’s really close, but I’m leaning towards Hewlett. The former tech icon announced yesterday they will have their seventh CEO in the past decade. The only one that was successful leading the company, Mark Hurd, was fired in a scandal. The others were controversial choices when they were hired and none of them worked out, each one leaving the company in a worse position than when they took over. Now the company has announced they will have Meg Whitman take the role. Ms. Whitman is fresh off her loss to Jerry Brown in the California Governor’s race, and prior to that successfully led E-Bay.

FDX lowered guidance earlier in the week, citing weakness in Asia. The PMI in China was also weak on Wednesday. Combined with the comments of lower coal consumption coming from Asia on Wednesday, and a picture is emerging of slowing growth in the strongest economies.

A disturbing comment I heard this morning was that the world is in financial turmoil, and everyone is looking to the US for leadership. I really hope we have other options for getting out of this mess.

On their second try, the US House approved a bill to let government continue spending after next week. Senate Democrats are expected to block the bill, which includes $3.5 billion in FEMA funding to help with relief from the recent hurricane on the east coast. The offset included a $1.5 billion cut to a green-technology auto-loan program that has been under scrutiny after the Solyndra default last week. This gamesmanship is why I’m concerned when the globe is looking to Washington for leadership.

Moody’s cut the credit rating of Bank of America, Wells Fargo and Citigroup. Moody’s feels the government is more likely to let one of the big banks fail since the “risk of contagion are less acute.” After jumping on the announcement of Warren Buffet investing in the company, BofA’s (BAC) stock has continued its plummet and almost broke the $6 mark yesterday.

Speaking of banks, I heard Josh Rosner speaking yesterday about the impossible task of analyzing big banks today. He quipped that “if they are too big to analyze, they are too big to manage.”

This could finally be the weekend we have been expecting for the past two years, the weekend Greece defaults on its loans. I actually think the Greek default will help the markets when it finally happens.

It’s Friday, which means its football time, both high school and college. The best time of the year. But we can’t forget about the MLB regular season, which wraps up next week. The Wild Card race in the American League is really heating up, and with 6 games left the Red Sox are on the bubble, with the Rays and Angels are two and three games back respectively.

Have a great weekend


Sep 21, 2011

Isn't Everyone Waiting for the Fed?

September 21, 2011

People on Wall Street tend to lose sight of the fact that they aren’t the center of the universe, only their own universe. I was reminded of this yesterday at a meeting when a Wall Streeter, obviously looking for the opinion of a “man-on-the-street”, asked someone what they thought the Fed might do in this week’s meeting. The man replied “why should I care what a bunch of bankers have to say?” And so, with that backdrop, those of us on the Street await the results of the Fed’s two day meeting today.

The Fed has signaled the likelihood they will begin Operation Twist, whereby they begin acquiring longer dated treasuries. The theoretical impact would be to lower longer-term rates, and presumably borrowing rates for consumers and small businesses. Expectations for the meeting are moderate, which gives the Fed ample opportunity to surprise the markets with a bold plan. In my view the biggest problem with relying upon the Fed is that their toolset isn’t suited to correcting our economy’s woes. What we need is logical action coming from DC combined with time and patience, none of which is in abundance right now.

The IMF and EU have issued warnings about nine banks that recently failed their stress tests. The IMF said the banks need to accelerate the increase of their capital buffers, and have estimated the credit risk to Europe at $410 billion.

Equity futures are flat this morning while APAC markets rose last night. The Shanghai was up 2.7%, Nikkei 0.2%, ASX 0.8%, and Kospi 1%. The Hang Seng fell 1%, and the Sensex declined 0.2%.

According to Bloomberg a new growth industry (OK, that was my interpretation) is emerging in the building of vaults for the storage of gold. With gold near all-time highs, the ownership of physical gold outside of central banks is at an all-time high. Companies that build vaults, and those that provide storage, are seeing a boom in demand. One man’s lemon is another’s lemonade.

MolyCorp (MCP), which has been a rocket ship since its IPO (see chart below), fell over 20% yesterday after receiving a downgrade from JP Morgan. The analyst’s concerns revolved around pricing pressures on certain elements such as cerium and lanthanum.

Alpha Natural Resources (ANR) is down roughly 15% this morning. The coal producer is citing weak demand from Asia as putting pressure on the quarter. Coal consumption is a coincident indicator of economic activity, and weakness or even a decline could indicate slower economic activity in the emerging markets.

A report from the IMF concluded that “American output is proving very disappointing in 2011 and isn’t expected to rise much in 2012.” The agency also cut its global growth output and predicted “severe” repercussions if policy makers fail to stem the debt turmoil that’s threatening to engulf Italy and Spain.

The Wall Street Journal has a report out today looking for flat-down US housing prices through 2015. The report expects prices to fall 2.5% this year and then rise by 1% each of the subsequent years.

Income inequality has been a much bandied about topic over the past few years. The chart below, courtesy of The Big Picture, is one way to look at this data. It shows how incomes for the 90th, 50th, and 10th percentile earners have changed since 1967. In 1967 the 90th percentile earned 9.4x the level of those in the 10th percentile, and 2.1x the median earner. In 2010 the 90th percentile earned 11.5x the level of the 10th percentile, and 2.8x the level of the median earner.

I’m waiting for the Fed, are you?

Have a great day