Jan 30, 2012

Another Manic Monday

January 30, 2012

“The percentage of Americans with a job is at the lowest in decades. One in five men of prime working age, and nearly half of all persons under 30, did not go to work today.”-- Governor Mitch Daniels

Equity markets are weak this morning once again on Greek debt concerns. As discussions continue, it appears that the latest offer from Greece is around $.30 on the dollar, and even the ECB may have to take losses on their holdings. Additionally, Wolfgang Schauble, Germany's finance minister, warned that unless Greece gets its economy in order, there might not be additional bailout funds coming their way.

It appears the EU is considering a permanent bailout fund as they anticipate that currency block members will continue to have problems due to the mispricing that occurs with a common currency. Reportedly they are looking at legislation requiring members to adopt a balanced budget.

Beef futures spiked to a record $1.26 per pound after the Department of Agriculture reported a decline in the heard. The number of live cattle in the US is at its smallest level since 1952.

Personal income rose 0.5% in December vs. expectations of a 0.4% increase. Personal spending was flat vs. an expected 0.1% increase. The PCE deflator rose by 2.4% vs. expectations of 2.3%.

Not surprisingly, investigators are concluding that the missing $1.2 billion at MF Global is just gone. Officials have speculated that the money "vaporized" during the panicked trading that took place during the firm's final days.

Supporting Governor Daniels’ comment above, the chart below shows the percentage of the working age population actually working over the past 60+ years.

The market is close to the famous Golden Cross, where the 50 DMA crosses above the 200 DMA (see chart below, where purple line approaches yellow line). Although the indicator has a somewhat mixed result, it has typically been a positive confirmation of market action. The last time we had a Golden Cross, October 2010, the market continued its surge by rising roughly 18% over the subsequent six months.

Earnings continue this week. Last week I showed some numbers suggesting earnings results have been weaker than expected. Bespoke Investment Group produced the chart below showing the net percentage of companies lowering guidance vs. raising guidance. After an extended number of quarters with positive earnings guidance, the past two have been weak.

The Orange County Register reported last week that Orange County remains one of the 10 most expensive places to live in the US. Home prices, whose median value peaked around $600K and eventually dropped to $370K, now sit at $400K, slightly down from $425K two quarters ago. The study did show that office and industrial vacancy rates have been declining over the past two quarters.

This weekend the Giants and the Patriots will meet in Indianapolis to mark the official end to the football season.

Have a great day


Jan 27, 2012

Canadians! Love Em!

January 27, 2012

Expectations for earnings and economic growth have been rising with the stock market over the past few months (or vice versa). As I mentioned last week, earnings have been coming in soft overall with the under performance being driven by weak revenues. This morning GDP for the 4th quarter came in below expectations at 2.8%. I'm not sure if the Fed had much in the way of insight into these numbers when they met earlier this week, however, they decided to extend their present course of accommodative policy until the end of 2014 from 2013, and hinted at further quantitative easing. Moderating growth and easy money around the globe could be positive for risk assets in the short run. Copper and oil umped on the news.

Treasury Secretary Timothy Geithner said on Bloomberg TV that he will not stay on as treasury secretary for a 2nd Obama term. Remember he tried to quit in the summer of 2011 but was corralled by the administration to finish out his term.

Earnings have been rolling in heavy this week. A couple of the biggest positive surprises (outside of Apple's blowout) came from Netflix (NFLX) and Caterpillar (CAT). NFLX announced a reversal in their declining subscriber growth and a more positive outlook. The company presently has roughly 22 million subscribers generating just under $1.50 per month in EBIT, and is valued around $260 per subscriber. CAT announced a great quarter and gave very bullish demand guidance for 2012, citing North America as a source of strength.

Facebook has requested a halt in the trading of their shares in the private secondary markets for three days. Many are speculating this is being done in preparation of an IPO filing in the works.

As a result of the budget settlement last summer, defense spending is now set to decline for the first time since 1998. Although the economic times were different, the last decline preceded the last budget surplus in the US.

A study by the Economist concluded that private equity doesn't add nor subtract jobs on the whole. The study also concluded that investors overall receive poor returns as 2/3 of income to the managers comes in the form of fixed fees, as opposed to performance fees. A recent Wilshire Trust report concluded that private pension funds have increased their allocation to private equity from 3% to 11% of total assets over the past decade.

India plans to circumvent the US trade embargo against Iran by paying for oil with gold. After doing a near 180 against Iran, starting with appeasement and now a trade embargo, I'm sure US officials are just happy that India didn't decide to pay with enriched plutonium.

I love the Canadians, especially as their relative economic strength has given them a new level of courage in bashing questionable US policy. Bank of Canada Governor Mark Carney was critical of a provision in the Volcker rule that puts US treasuries in a category all alone, yet lumps Canadian, Ethiopian, and nearly all other sovereign debt into the risky bucket. Mr. Carney stopped just short of saying what I will say, that Canadian bonds are rated higher than those of the US, and should be included in the safe bucket or that those of the US should be included in the risky bucket. Energy, hockey, and smart bureaucrats, I love it!

I apologize about the lack of charts this morning, I had a couple for today, but am having some self-induced computer issues this morning. I will include them next week.

Have a great weekend.


Jan 25, 2012

Apple! Holy Cow!

January 25, 2012

Every time it seems that the Greek situation seems to be resolved, a new issue pops up and throws the situation back into turmoil. The threat of a default increased once again after finance ministers in the Eurozone rejected a proposal from the private bondholders proposing a 4% coupon. The private holders say this is their last offer.

The World Economic Forum in Davos kicks off this week and the sovereign-debt crisis looms large on the stage. Participants will be looking for a solution to the problem, a “path to resolution”.

Natural gas has plummeted dramatically since fracking production started ramping in 2008 (see chart below) In response to plummeting prices, Chesapeake Energy said it would cut spending and production of the commodity, which helped the price to jump slightly this week.

Apple (AAPL) posted jaw dropping numbers yesterday. iPad sales were over $9 billion in the quarter, just six full quarters after launch. The company said they have sold over 55 million iPads since the initial launch in April 2010. If you think that AAPL is still a computer company, think again as iPhone sales were 53% of revenues, an increase of 133% from the year ago period. Combined sales of iPhones and iPads were 73% of total revenues.

APPL’s stock is up 7% on the open, suggesting the company’s market cap is beyond the point where it can make big moves. Typically I would expect an earnings beat of this magnitude to generate at least a double digit jump in a stock. At $417 billion, the market cap may be too large to allow for increases commensurate with their performance.

I pilfered this from elsewhere. It appears that Goldman Sachs, ticker GS, has applied with the NYSE to change their ticker to “1%!”. No word yet on the response from the NYSE.

APAC markets were up slightly last night, with the Nikkei rising 1.1%, ASX 200 1.1%, Kospi 0.1%, and Sensex up 0.7%. Hong Kong, China and Taiwan are closed for the Lunar New Year as the Year of the Dragon begins.

I know that many of you are expecting my comments on the President's speech last night, but honestly, I didn't watch it. The man makes me nauseous with his divisiveness and lies. I did see some clips this morning that reinforced to me I made the right decision. "No more bailouts"-hasn't he been hat in hand for the past three years trying to get bailouts for banks, autos, unions, states, etc? Also, he made an obviously erroneous statement suggesting that Warren Buffet's secretary pays "higher taxes" than Warren Buffet, when in fact she pays a higher tax rate because the bulk of his earnings are taxed at the more favorable long term capital gains rates. I understand he never mentioned his signature legislation, Healthcare Reform, and avoided the national debt that has soared in his three years in office.

The NY Times ran this graphic on Wednesday regarding Apple’s foray into education.

Have a great day


Jan 23, 2012


January 23, 2012

Greek restructuring talks continued over the weekend without resolution. Government officials are expecting a resolution, but private holders are balking at the offer, specifically citing the interest rate on the post-restructuring debt.

Research in Motion (RIMM) announced that co-CEO’s Jim Ballsillie and Mike Lazaridis would be turning over their role to Thorsten Heins, the company’s chief operating officer, as the new CEO. The stock is down after Heins commented that major changes aren’t needed.

A funny thing happened on the way to the Republican nomination for Mitt Romney, he lost again. Over the weekend Mr. Romney lost to a very under-funded Newt Gingrich by 12% in South Carolina. The problem Mr. Romney faces, and the rest of the field for that matter, is that voters don’t seem to like him after seven years of campaigning for President. Where is Monty Brewster when you need him?

Target (TGT) has contacted suppliers as they look for relief from “show rooming.” I’ve discussed this in the past, where people use the bricks and mortar retailers as a showroom, finding and testing products before buying them cheaper online. The company will be asking vendors for special items, versions or models available only in TGT. Wal-Mart, Sam’s Club, and Costco already do this with certain vendors. TGT may be one of the few retailers left with the heft to make these demands as they are the #2 retailer in the US. Smaller retailers won’t have this opportunity and will continue to see margin erosion on non-unique products.

Our good friends in Canada have some bad news for the US economy. Mark Carney, the governor of the Bank of Canada, said it will take many more years for the US to get back on its feet, and that we may “never completely recover. In fact, they are not in our opinion ultimately going to get back fully to the US we used to know.” Ouch!

The Economist recently analyzed US tax policy and concluded that “it would be far better to close or limit loopholes and deductions, currently worth up to 7% of GDP, which distort behavior and mostly benefit the affluent.” Flat taxes anyone?

Warren Buffet, thrust into the tax debate after mentioning that his tax rate was lower than his assistant’s, can’t seem to avoid the topic. He recently offered to match the donations to the government made by members of Congress, and triple the donation made by Senate Minority Leader Mitch McConnell. To my knowledge there have been no takers yet.

The United States Postal Service raised the price of a first class stamp by $.01 to $.45.

The Super Bowl participants are set, New England and New York. Both games yesterday were exciting, with New England winning after Baltimore missed a last second field goal and the Giants winning in overtime after the 49ers fumbled a punt.

Have a great day


Jan 20, 2012

Obama Says No to Jobs!

January 20, 2012

President Obama declined the allow the Keystone XL pipeline, saying he didn’t have enough time to consider the project, which has been under consideration since he took office three years ago. In my view he decided to make a weak volley to his environmental constituency at the expense of unions and jobs. While officials have cited the need for energy independence, which this pipeline would have helped achieve, we will now be forced to continue buying oil from Venezuela and OPEC as opposed to Canada. The Canadians are now looking to run the pipeline through British Columbia, and offload it primarily to the Chinese, who have expressed an interest in purchasing the crude. Unfortunately, cancellation of the project also results in a massive loss of high paying union construction and refinery related, non-government funded jobs in the US, additional tax revenues, and an thousands of derivative jobs. This President has shown time and again that he'd rather spend $2 to create a government funded $1 job than allow the private sector to spend $1 to create a $2 job. Anyone else wondering why this country is on the path to bankruptcy?

Economic data continues to roll in, but earnings have taken front stage this week. It’s still early in the earnings season but results have been mediocre, with roughly 2/3 of companies beating estimates, well below the prior eight quarters. Less than 60% of reporting companies have beaten sales estimates so far in what appears to be a concerning trend.

Eastman Kodak filed their much anticipated Chapter 11. At one point EK was the 10th largest US company by market cap. Citi (C) is providing a $950 million line of credit for the restructuring. Where did Kodak go wrong? Around 1975 they actually invented the digital camera, but ditched it because they were rightfully concerned it would eventually replace film.

We haven’t discussed mortgage rates for a while. The US 30-year is now at a record low 3.88%, the seventh consecutive week under 4%. Refi activity has been robust, and the Mortgage Bankers Association reporting that applications are up 23%.

Manufacturing data from China fell for the third consecutive month. The purchasing managers’ index, a survey by HSBC, came in at 48.8, suggesting declining production. These diffusion indices indicate growth when they are above 50 and contraction when below. The report is putting pressure on the metals markets, especially copper, this morning.

Bank of America beat estimates amidst a slew of charges, but were able to build more capital in the quarter. General Electric (GE) missed on revenues this morning as did Google (GOOG) last night, citing lower CPCs. IBM and Microsoft (MSFT) both beat on better sales, the later partially fueled by strong X-Box results. Intel (INTC) exceeded estimates slightly. American Express (AXP) is off after a slight EPS beat but revenue miss.

After a day of protests and emails nine of the co-sponsors of the SOPA/PIPA bills have withdrawn their support for the bills. Hopefully both bills will die in the hands of their sponsors and someone will draft legislation that is balanced for all affected parties.

What goes into the price of gasoline? The chart below, from the Global Macro Monitor, shows the breakdown of the process. In California the tax piece is quite a bit larger.

The NY Times as taken a different look at the class warfare battle being staged in Washington. Instead of using income (as the Census does) to measure wealth, they looked at assets instead (as the Federal Reserve’s Survey of Consumer Finances does).

Estimates for the top 1% is a household income of about ~$380,000; ~7.5 times median household income. Measured by net worth, the top 1% = $8.4 million — 69 times median household’s net worth of $121,000.

The wealthiest 1% received 16% percent of income — 8% of salaries and wages, but 36% of self-employment income. 1% controls a third of the nation’s financial assets (equities, private investments), and 28% of nonfinancial assets (RE, cars, jewelry, etc.).

Apple (AAPL) launched their textbook solution yesterday. Their goal is to get rid of the enormous pricing arbitrage in textbooks and make them more available to the public, similar to what they have done with music and movies. In addition to textbooks, lectures, classes, and other materials will be available through their new apps.

Rick Perry is out of the Republican race, and is now supporting Newt Gingrich, even though it appears that his ex-wives won’t. In a less impactful version of the famous hanging chad incident of 2000, Mitt Romney is no longer the winner in Iowa as Rick Santorum benefits from the recount.

APAC markets rose last night as exporters and financial firms drove the gains. The Hang Seng rose 0.9%, the Nikkei 1.5%, Shanghai Composite 1%, Kospi 1.8%, and ASX 200 0.6%.

Have a great weekend


Jan 18, 2012

Improving Economic Data Fueling Gains

January 18, 2012

December economic data is starting to roll in. The Producer Price Index (PPI) came in at 4.8% vs. expectations of 5.1% and the prior month’s measure of 5.7%. The core measure, ex-food and energy, rose by 3.0% vs. expectations of 2.8% and the prior period 2.9%. Industrial production rose 0.4%, slightly less than the consensus of 0.5%. The November measure was revised down from -0.2% to -0.3%. Capacity utilization ticked up to 78.1% from 77.8%, in line with estimates.

S&P cut the debt rating of most of Europe, including the EFSF. The rating agencies have become so irrelevant to the investment process that after the downgrades of the US and Spain, both markets rallied significantly. In other rating agency developments, the rating agency’s actions and role in the mortgage crisis are being investigated aggressively for criminal behavior.

China equities and commodities have been strong on anticipated easing by the Chinese central bank. Demand from China is helping to fuel copper and commodities while growth remains above that of most of the world, with GDP coming in at 8.9%.

The World Bank has reduced its forecast for global growth in 2012 from 3.6% to 2.5%. The bank cut Europe from a 1.8% increase to a decline, and the US from 2.9% to 2.2%.

Jerry Yang, the Chief Yahoo, has resigned from the firm’s board of directors and is now no longer officially involved in the operations of the company. This could open the door for a management sweep or potentially a sale of the company.

Earnings really kick in this week. CitiGroup (C) missed while Wells Fargo (WFC) beat. Loan growth for both increased better than forecast, reiterating what JP Morgan (JPM) said last week. Goldman Sachs (GS) beat lowered guidance, posting a 52% decline in earnings. Morgan Stanley (MS)announced that they are capping the cash portion of bonuses to $125K, a move that is expected to lead to an outflow of talent at the firm. In what could either be a sign of a turn in fundamentals or a dead cat bounce, the financials have been the second best performing sector in the S&P so far this year.

From a tax practitioners note: In January 2013, the highest marginal rate is scheduled to increase from 35% to 39.6%. With the Medicare tax increase, the highest marginal rate will be 43.4%. That’s a 24% increase for 2013 taxes due.

Research in Motion (RIMM) has been volatile over the past week. Yesterday the stock got a bump on a rumored sale to Samsung. Today the stock is down after Samsung went to the unusual effort of denying they are interested in the troubled handset maker.

A number of websites will voluntarily shut down today to protest the SOPA act making its way through the US legislative branches. SOPA is being pushed hard by the US movie studios as a way to protect against piracy. One analysis I saw said that the annual cost of piracy was less than the cost of shutting down the top five websites for a single day.

The Washington Post reported that 28% or 687K high-tech manufacturing jobs left the US over the past decade. The bulk of those jobs were outsourced to Asia.

Have a great day