Feb 29, 2012

Leap Day!

February 29, 2012

"Service to others is the rent you pay for your room here on earth" - Muhammad Ali

Equity markets continue to get a solid bid as the European version of quantitative easing (QE 2.5?) continues. The ECB has been offering banks three year loans, and yesterday 800 banks accepted 529.5 billion Euro ($712 billion), which follows December’s hand out of 489 billion Euro. “The astonishing number this time is the number of banks participating….” “So the impact may be bigger than the first one” said Barclay’s head of fixed income strategy Laurent Fransolet. Roughly 300 billion euro is new cash, the rest being accounted for by existing ECB loans.

The impact on risk assets of these programs has been significant. Looking at the S&P chart below, you can see when the Fed has stepped on the pedal, equity markets have soared, and the ECB action is having a similar action in today’s market. Other anecdotal evidence that risk assets are benefiting can be found in the yields of Spanish two-year bonds, whose yields have fallen to 2.28% from 3.6% when the first loans were issued December 21. Banks seem to be engaging in a so-called “Sarkozy trade”, where they are using some of the low cost loans to acquire higher yielding sovereign debt.

It seems that tax policy does matter, and hopefully Washington figures that out soon. Durable goods orders for January were a disaster yesterday, falling by 4%, the most in three years vs. expectations of -1%. Ex-transports they fell 3.2% vs. an expectation of 0.0% change. What does that have to do with tax policy? At the end of 2011 a tax incentive allowing full depreciation of equipment purchases expired. It appears that orders were pulled ahead into 2011 to take advantage of the tax incentive.

In spite of the durable goods numbers, economic data is still coming in slightly better than anticipations. Consumer confidence yesterday was reported a t 70.8 vs. expectations of 63.0 and last month’s 61.5. This morning GDP for the 4th quarter was actually revised up to 3.0% from 2.8%, and the Chicago Purchasing Manager index came in at 64.0 vs. expectations of 61.0. In the GDP report, consumption and government spending were revised up.

Just when it looked like Mitt Romney was going to lose the Republican nomination before Super Tuesday, he pulled off his own Super Tuesday and won both Arizona and Michigan yesterday.

We have discussed the housing market quite a bit. This came from Merrill earlier in the week:

The slowdown in the pace of processing foreclosures has helped to reduce housing inventory. Over the past year, inventory of existing homes on the market for sale has declined by 23% or by 700,000 properties. This has helped to bring supply at the current sales pace to 6.1 months, the lowest since before the housing bubble burst. However, we believe this is a temporary dip and look for months supply to head higher over this year. The AG settlement, which puts in place guidelines for servicers, will speed up the foreclosure process, thereby increasing the flow of distressed properties into the market. In addition, if homeowners perceive home prices are close to a bottom and confidence in the economy improves, we should see an increase in voluntary sellers, which also adds to inventory.”

Search Engine Optimization (SEO) is a method firms use to improve their results in Google (GOOG) and other searches. Consulting firms help companies maximize their online results via data mining techniques which ensure certain words and key links to other sites help drive search results for the lowest possible cost. A new trend that has appeared online and will have a long-lasting and disruptive impact on the SEO market is people as SEO’s. What does that mean? Think about the Facebook “like” button or group pages, and Twitter. Marketers are now focusing on influential users of both services (among others) to build traffic to their sites. As an example, a product mention by a well-followed celebrity on Twitter can be just as effective, and much cheaper than other sources of advertising. Influencers get this, and are now charging for mentions and likes. No wonder GOOG’s rev per click has been declining.

There’s a lot going on in the chart below. I thought the bottom panel, showing the unemployment rate of various regions, was interesting.

It’s no secret the Fed has been gorging itself on treasuries. The table below, from Global Macro Monitor, shows that the Fed owns over 40% of the 2019 maturity, 7-year bonds. The Fed has been taking roughly 40% of every auction, but has been especially aggressive on the 7-year, often accounting for over 50% of the auction.

Is Greek’s “voluntary” restructuring a default or not? It may be semantics to most, but to holders of Greek CDS it is a critical definition. ISDA is reviewing the restructuring now to determine whether it constitutes a “credit event” or not. If it is determined to be so, CDS totaling roughly $3.2 billion will be paid on the country’s bonds.

H.J. Heinz, broke records for the lowest coupon ever on 5 and 10 year triple B paper. The company issued $300 million of each maturity at 1.5% and 2.85%.

Here’s a nod for maturity and experience. The Economist is reporting that there are twice as many successful business founders older than 50 as there are younger than 25. The study found that the greatest amount of entrepreneurial activity is by people ages 55-64.

Remember, today is an extra day for everyone that only comes once every four years. Don’t waste it-time is the only commodity you can’t buy.

Have a great one.


Feb 27, 2012

Markets Limp into Month End

February 27, 2012

G-20 officials are calling for a larger rescue fund in spite of German protestations. German Finance Minister Wolfgan Schaeuble came out against an increase, saying “economic stimulus is ineffective in the face of major structural shortcomings. The strategy of piling up more debt will stunt rather than stimulate growth in the long run.”

Warren Buffet has been on the interview circuit the last few days after posting his annual letter. In the letter the Oracle of Omaha assures investors a succession plan is in place in case he dies or retires (Mr. Buffet is 81). He also disclosed that Berkshire wrote down a $2 billion investment in the bonds of Energy Future Holdings (formerly TXU)as collapsing natural gas prices have pushed the company to extend debt maturities and seek to swap existing debt with new securities.

The Limited (LTD) reported a 210 bps increase in their gross margin last quarter even though merchandise margins were pressured by promotions and cotton costs. The company is expecting cotton prices to fall in the 2nd half of the year, benefiting clothing retailers.

APAC markets fell last night as concerns over rising oil prices pressures markets. The Shanghai Composite was the only index up last night, rising 0.3% for a seventh consecutive increase.

Copper futures have been sliding as oil has increased, and fell another 0.5% last night in London.

Last week the National Association of Realtors (NAR) reported that US home resales rose to their highest level in 18 months, and the inventory of unsold properties fell to its lowest level in seven years. The NAR numbers tend to be overly bullish, but the trend seems to be accurate. It will be interesting to watch the inventory number over the next few months as the foreclosure moratorium from 2011 fades,.

Microsoft (MSFT) is in the process of consolidating all of its somewhat separate online accounts--Windows Live ID, Xbox LIVE, Zune and Zune Pass, and many more--into a single aggregate account it will call Microsoft Your Account.

From the Washington Post: “On Dec. 31, the George W. Bush-era tax cuts are scheduled to expire. The potential shock to the nation’s pocketbook is so enormous, congressional aides have dubbed it ‘Taxmageddon’. Obama and congressional Republicans say they hope to avert the coming blow, which stands to suck roughly $500 billion out of the economy in 2013 (nearly $5 trillion over the next decade). But both sides are bracing for another epic showdown in the weeks after the November election, as Democrats prepare to use Taxmageddon to break the partisan impasse over taxes that has blocked action on an array of issues, from modernizing the nation’s infrastructure to taming national debt.”

If I’m not here next Monday, it’s because I’ll be doing trying this next weekend: http://www.youtube.com/watch?v=LEFCQRwj28w Checklist: helmet, wing suit, video camera, insurance policy. Check, check, check, check.

Eric Bolling (Fox Business Channel's Follow the Money) test drove the
Chevy Volt at the invitation of General Motors.

For four days in a row, the fully charged battery lasted only 25 miles
before the Volt switched to the reserve gasoline engine.
Eric calculated the car got 30 mpg including the 25 miles it ran on the
battery. So, the range including the 9 gallon gas tank and the 16 kwh
batery is approximately 270 miles. It will take you 4 1/2 hours to
drive 270 miles at 60 mph. Then add 10 hours to charge the battery and
you have a total trip time of 14.5 hours. In a typical road trip your
average speed (including charging time) would then be 20 mph.

According to General Motors, the Volt battery holds 16 kwh of
electricity. It takes a full 10 hours to charge a drained battery.

The cost for the electricity to charge the Volt is never mentioned so I
looked up what I pay for electricity.

I pay approximately (it varies with amount used and the seasons) $1.16
per kwh.

16 kwh x $1.16 per kwh = $18.56 to charge the battery.

$18.56 per charge divided by 25 miles = $0.74 per mile to operate the
Volt using the battery.

Compare this to a similar size car with a gasoline engine only that
gets 30 mpg.

$4.50 per gallon divided by 30 mpg = $0.15 per mile.

The gasoline powered car costs about $15,000 while the Volt costs $46,000.

So Obama wants us to buy Volts? The net is that the Volt costs 3 times as much as a comparable car and costs 5 times as much to run and takes 3 times as long to drive on a trip. Sounds like his presidency, doesn't it?

In a throwback, The Artist won the Best Picture award last night, and of course Meryl Streep won another best actress award. Jean Dujardin won the best actor role. The Artist, with a budget of $15 million, won five awards. The producers were able to save money in the production by using black and white film and eliminating most of the dialogue. Brilliant!

Have a great day


Feb 24, 2012

Obama Approves "Many" Pipelines, or So He Says

“Congress, 535 commoditized temple monkeys pawing through the ruins of America in search of bribes. The bicameral whorehouse on Capitol Hill works like a vending machine. You put coins in the slot, select your law, and the desired legislation slides out.”
-Fred Reed, May 30, 2009

Friday-love the sound of that word.

We are finally at the end of earnings season, with retail earnings typically marking the end of the season given most have a January year end. Of the companies reporting, 67% have exceeded earnings estimates, the lowest level since the trough of the financial crisis. The mix of companies beating sales estimates was the lowest in many years at 56%. S&P earnings growth is coming in around 6%, a marked slowdown. There has been a lot of discussion about removing Apple (AAPL) from the numbers, which would push growth down to 2%. Whether we include some companies or not, the end result is that sales and earnings growth has slowed dramatically. The EPS slowdown can be attributed to weaker demand from Europe, margin pressure from higher commodity prices, and higher wage costs as hiring picks up slightly.

President Obama is finally calling the bluff of the Republican Congress, proposing a lower corporate tax rate in exchange for closing most tax loopholes. He is proposing a 28% rate, and, although very short on details, proposes eliminating most corporate deductions except those for clean energy and research and development. If the Congress can take this initial proposal and run with it, they are doomed at the polls in November.

Something funny has happened to high dividend paying companies over the past two months, they have underperformed. Most year-end summaries and 2012 planning guides that I read were heavily in favor of high yielding stocks. Almost on cue they have underperformed, and they could be in for a long period of underperformance. Although the underperformance has only been for a short time period, one possible explanation could be an expected tripling of the dividend tax coming in 2013. When tax rates on dividend were last raised in the 90’s, non-dividend paying stocks ripped, leaving their more conservative cousins in the dust.

Oil prices continue to rise, up for the seventh consecutive day, raising the risk that higher gasoline prices could quash the fledgling recovery. Concerns about Iran have been pressuring global prices. The President was on the stump yesterday trying to ease consumer concerns about the rising prices. “My administration has approved dozens of new pipelines, including from Canada” he said yesterday in Florida. What? Now he is just making things up! Google "Keystone XL" if you don't believe me.

NFLX has had a wild ride in the past nine months, peaking at $305, falling to $62, rebounding to $130, and now trading at $112. Comcast (CMCSA) announced plans to offer a subscription video service which will compete directly with NFLX. The service, Xfinity Streampix, will offer older movies and prior season TV shows for viewing on TV’s and all internet connected devices. The service will be priced at a discount to NFLX, $4.99 per month vs. $7.99. The service will be free to over 2 million subscribers who pay for more expensive tiers of video services. CMCSA has 22.3 million subscribers. By comparison, NFLX has 21.7 million subs, and HBO has 28.2 million. Verizon (VZ) announced a deal last month with Coinstar (CSTR), and Amazon (AMZN) has entered the race as well. It would seem the bundled service providers have an advantage over an independent such as NFLX.

The battle is on-Merrill Lynch (BAC) is offering 1.5x last year’s income for brokers moving over from other firms.

According to Credit Suisse, putting the 2.9% CPI into a longer perspective, a worker who begins working at age 25 would lose 68% of his purchasing power by the time he is 65 at 2.9% per year. Add another 20 years of retirement, and the first dollar that worker set aside would only buy $.18 of goods and services. Ouch.

How to solve the budget deficit? Certainly the recent budget cuts sound big, but let’s put them in perspective by simplifying the numbers:

* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000

Let's now remove 8 zeros and pretend it's a household budget:

* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts: $385

New Jersey Governor Chris Christie is “tired of hearing” about Warren Buffett’s tax plan. While doing an interview with Piers Morgan, Governor Christie said Mr. Buffett should “just write a check and shut up.” I’m not sure where he gets his reputation for speaking his mind.

US retail store traffic declined 1.9% in third week of Feb, bringing the month to date decline to 1.6%.

The Academy Awards are this weekend, and The Artist is gaining a lot of mind share with the press as the favorite for Best Picture.

Have a great weekend


Feb 21, 2012

Fat Tuesday!

February 21, 2012

Happy Fat Tuesday!

The Eurozone has authorized 130 billion Euro ($172 billion) to Greece, avoiding a default at the March 20 deadline. The country has agreed to another round of austerity which will “cut” their debt to GDP to 121% by 2020 from 160% last year. Let’s face it, this is a decision of pouring good money after bad, with the alternative being letting the euro fall apart. Greece hasn’t been in the news this much since Alexander the Great.

Oil has been in the news as it hits a 9-month high of $106 in response to Iran’s announcement they have stopped exporting oil to Britain and France as a retaliation for planned economic sanctions by the EU. Gasoline prices in the US have jumped to the point where consumer spending has been crimped in the past. Interestingly, the last peak in oil (May 2011) coincided with the last peak in the S&P 500 (see chart below).

Now that the EPA has climbed on board the natural gas train, some interesting action is occurring in the domestic energy markets. Nat gas pricing remains weak as supply far outweighs demand, however, domestic consumption is rising as power plants capable of switching from coal to nat gas have been doing so with the EPA’s blessing. Coal pricing is falling as a result, and now there is significant pressure on the rails as they derive a significant portion of their traffic from coal. Nat gas is a local market due to transport issues, which is unfortunate given the enormous consumption coming from Japan in the wake of nuclear shutdowns and the resulting 6x price premium of nat gas in Japan vs. the US.

China’s central bank is lowering its lending reserve ratio in an effort to encourage more short term lending. The reserve requirement will be cut later this week by 50bps to 20.5% for the country’s largest commercial banks. Remember a year ago this rate was raised to offset domestic inflation and an overheating housing market. Now, as speculation mounts that the country’s economy may have slowed too far in response to internal actions to slow inflation and a slowdown in exports to their largest trading partner, Europe, the central bank is taking steps to reignite growth.

Japan, once the world’s leading exporter, just reported a record $19 billion trade gap for January. Weaker demand from its trading partners combined with a stronger Yen have conspired to slow demand for products manufactured in the country. Shipments dropped 9.3% year over year.

I just want to remember you heard this one here first (J). Two weeks ago Ben Bernanke put out a similar warning, now economists and congressional staffers have jumped on the wagon in warning about a long list of tax hikes that kick in at the beginning of 2013. Some old favorites such as the marriage penalty comes back while the child tax credit is cut in half-not very friendly to those middle class working families. The “experts” are saying these tax increases, the expiration of the Bush tax cuts, as well as a slew of taxes hidden inside the Healthcare Affordability Act could drive the country into another recession. I used to write about jobs I could do in my spare time, and Fed Chief, economist, and congressional staffer all fall into that category.

I’ve oft lamented the higher cost of living in California. Check out the picture below.

Facebook has quietly released a new product that is sure to give LinkedIn (LNKD) indigestion. The product, BranchOut, is a Facebook app which links business users. The app was launched last spring. Although LNKD is primarily designed as an online contact organizer, it has great utility for job search, sales, and general networking. BranchOut was originally designed as a networking site to help with the job search, networking, and recruiting aspect of life. While the app has grown quickly (I don’t have user data, yet), it has some limitations. There are many users who attempt to separate their work/home life by maintaining a LNKD profile for the former and a Facebook profile for the latter. Given Facebook’s historical disregard for privacy, consumers will be hesitant to trust the site to keep those profiles separate.

Have a great day