Mar 30, 2012

Strong Q1 Finish

March 30, 2012

Happy Friday! It’s the end of the quarter, the best for US equities since 1998. The S&P 500 is set to close the quarter up 11.5%, the Russell 2000 over 12%, and the Dow just under 8% (get some Apple).

Research in Motion (RIMM) announced another weak quarter, with revenue declining 19% year over year. Founder Jim Balsillie has announced he will be leaving the board as the company examines plans to stem the decline. RIMM now has 77 million subscribers (up 3 million in the quarter), and given the company’s $7 billion market cap, those subs are valued at under $100 each. By comparison, Netflix (NFLX) subscribers are valued closer to $300 per subscriber. I don’t have the economics per subscriber at RIMM, but I know that NFLX subs generate approximately $1.20 per month in EBIT.

The BRIC countries, meeting in New Delhi yesterday, criticized US and UK economic policy as well as the IMF. The countries urged the US to abandon quantitative easing and pursue “responsible” economic policies.

You might want to think twice before posting your whereabouts on Facebook. Thanks to The Onion for this video clip.

The Fed issued a report saying the market for mortgage backed securities has improved over the past three months. The report also cited improved liquidity in other consumer loan backed assets.

Sir Howard Stringer, the longtime CEO of Sony Corporation, is officially serving his last day as CEO. He will be the chairman until June 30th.

Demand for the Mega Millions lotto has reached a feverish pitch as it climbs to almost $550 million. The prize is a record for the multi-state lottery. The odds of winning are 175 million to one. My 10-year old suggested it would be a good idea to buy all 175 million combinations to capture the prize. He is correct, however, it would require a large bundle of $20 bills, and quick picking 17.5 million $10 tickets would take roughly 11 years to purchase at a pace of three per minute. I do like the way he’s thinking.

The Final Four is this weekend. CBS is in heaven with no Cinderella stories in the mix, just old time traditional powers.

Have a great weekend


Mar 28, 2012

The Dodgers Sell for $2 Billion!

March 28, 2012

Equity markets are slightly down this morning as we approach the end of the first quarter. Durable goods orders were weaker than expected, rising 2.2% vs. expectations of a 3.0% increase. Durable goods ex-transports rose 1.6% vs. expectations of a 1.7% increase, and non-defense capital goods orders rose by 1.2% vs. expectations of 1.5%.

We’ve discussed at length the issues facing California and how the economic weakness has been more severe here than in most parts of the country. A portion of the weakness can be blamed on California’s heavy exposure to real estate, the other of course on a long-running policy debacle in Sacramento. The chart below, courtesy of Merrill Lynch, shows that unemployment claims across the country have been falling, but claims in California (red line) have diverged and stopped improving.

Despite commentary supporting a fledgling stabilization in the US housing market, the numbers don’t support the argument. The Case-Shiller Home Price index fell 3.8% in January.

The OECD warned that Europe’s sovereign debt crisis isn’t over yet. They said that although financial markets have calmed for the time being, the Eurozone shouldn’t become too complacent and that economic reforms are still needed to quell the situation. I think that’s a nice way of saying they’ve been kicking the can down the road.

In a minor blow to Obamacare advocates, it appears the Supreme Court justices agreed that the Anti-Injunction Act of 1867 doesn’t preclude the court from hearing the case challenging the Healthcare act. The court will conclude two days of hearings today on the constitutionality of the new law. One quote I heard from the plaintiff’s counsel asked “can the government determine that we must buy a cell phone?” while questioning the legality of forcing consumers to purchase insurance. The individual mandate is at the core of the argument, and both sides have agreed that without the clause the law is rendered useless.

Copper spiked to its biggest gain in a month on a weakening dollar. Meanwhile, natural gas futures have dropped to a 10 year low as analysts expect a huge surplus to be announced this week.

I’ve discussed issues with the FHA in the past, but now Moody’s is saying the agency is close to requiring a taxpayer bailout. The FHA was counting on “robust” market growth in their forecasts for 2012, growth which hasn’t occurred. The projections assume that the insurance fund would be bolstered by the growth, but now is in trouble. Is anyone, besides the leadership at FHA and Congress, surprised that lending to weaker credits and extending 97% LTV loans doesn’t seem to be working?

Brazil is struggling through pension problems that make California look prudent. Payroll taxes used to fund pensions in Brazil are 32% of gross salary, larger than any major country except Italy.

The bidding for the Dodgers appears to be over, and a group led by Magic Johnson and Mark Walter of Guggenheim Partners has won the bidding with a price tag reportedly over $2 billion. Owner Frank McCourt had been seeking at least $1.5 billion as the Dodgers became the most valuable US sports franchise ever sold.

Have a great day


Mar 26, 2012

Pedal to the Metal

March 26, 2012

Fed Chairman Ben Bernanke reiterated this morning his stance that, in spite of recent gains in employment and economic activity, accommodative policy will remain in place for the foreseeable future. Without the threat of rate hikes, equity markets are once again off to the races after the worst week of the year last week. With the Fed out of the way, global macro incidences and domestic inflation should be the only issues facing the market in the near term.

The MF Global fiasco just got a bit more interesting as an email was found approving a $200 million transfer from a client account, and in the memo was the notation that the transfer was approved by “JC”. Now, I’m guessing the author meant Jon Corzine, not Jesus, so if this is accurate, Mr. Corzine may find himself in a bit of trouble.

The Supreme Court will begin hearing arguments today over Obamacare. Today the justices will hear arguments on whether the Anti-Injunction Act bars the court from considering the constitutionality of the law. A decision on the hearings isn’t expected until June.

A group of central bankers has issued a warning to banks and governments against relying upon low interest rates instead of resolving financing issues. “While aggressive monetary easing is definitely needed after the bursting of bubbles, its side effects and limits should also be taken into consideration” said Masaaki Shirakawa, governor of the Bank of Japan.

Hunger Games opened the weekend with the third largest box office for an opening weekend ever. The picture grossed roughly $155 million over the weekend in North America.

The Central Statistics Office is reporting that Ireland slipped back into a recession in the 2nd half of 2011. GDP contracted 0.2% in Q4 after a 1.1% decrease in Q3.

The final four is set for New Orleans this weekend, with Kentucky the only #1 seed left. Ohio State and Kansas, both #2 seeds, are joined by #4 seed Louisville. After a successful opening round, the underdogs went down pretty quickly this year.

Have a great day


Mar 23, 2012

BofA Becomes a Landlord

March 23, 2012

“Essentially, TARP successfully stabilized markets and helped prevent another Great Depression, but it failed horrifically in meeting its equally important Main Street goals—including preserving home–ownership—and institutionalized Too Big to Fail and the moral hazard that accompanies it.” –Neil Barofsky, NYU law professor

US markets are set to conclude their worst weak of the year after a tremendous start to the first quarter. After opening flat, markets today inflected downwards after new home sales fell short of expectations. Month over month sales declined by 1.6% vs. an expected increase of 1.3%. Measured in units, new home sales hit 313K vs. expectations of 325K.

Bank of America (BAC) has announced a pilot program in which they will take over the note on a delinquent home and rent it back to the owner at market rates. My guess is that they will eventually repackage these notes for sale, but should be able to garner a higher sales price than just selling the unmodified notes. If the bank rolls the program country-wide, It should be a boon for property management companies.

EnergySource opened the first geothermal plant in 20 years, near the Salton Sea in California. Geothermal is the most efficient, low cost method of generating electricity via renewables. The biggest downside is the release of heavy metals and other toxins from deep in the earth’s core.

King Abdullah of Saudi Arabia vowed to use his nation’s oil to lower global prices in an effort to stimulate the global economic recovery. He said he will work with other Gulf producing nations to ensure adequate and stable supplies. Oil pulled back on the news.

The Washington Post is citing a study done by economists refuting the notion that increases in productivity have resulted in a significant loss of manufacturing jobs. The report concluded that manufacturing employment fell due to an inability to compete globally.

The Fed sold $225 billion in mortgage back securities for a $25 billion profit. The profits from Fed activities are sent back to the Treasury.

The President may be reversing course on his stance against new pipelines after backlash from killing the Keystone XL and a corresponding spike in gasoline prices. Yesterday he called on federal agencies to move quickly to review the southern leg of the pipeline, and cited the importance of pipelines in fulfilling our energy needs.

The UK is taking a page from Margaret Thatcher and supply side economics by targeting cuts to their highest income tax rate of 50%.

We have discussed the swing in exports for Japan, but nothing prepared us for the swing in the country’s trade surplus in February-$395 million. The yen has declined by 7% vs. the dollar since mid-February, pushing exports up as the economy slowly gathers steam.

Nike (NKE) reported slightly better than expected earnings last night, but cited weak demand out of Europe. The stock is down slightly on the open.

What happens if two countries with huge current account surpluses, China and Japan, continue shrinking those surpluses or, frighteningly, turn them into deficits? The result could be negative for the Yen, gold and US treasury bonds. Jack Cooks wrote the following:

If so, it means Japan and China recycle less of their yen and yuan, respectively, back into the U.S. capital markets. And that means the global economy could finally see some rebalancing between the major deficit country, the U.S., and the major surplus country, China.

It also means the U.S. current account deficit, which seems to worry many people and economists alike, is likely to improve, as Japan and China morph increasingly into capital importers instead of capital exporters.

Has this rebalancing begun?

We don’t know yet. But interestingly, given the needs for Japan to rebuild and China to change its growth model, it could very much be the next major global macro trend for the global economy.

APAC markets were weak last night with the Nikkei losing 1.1%, ASX 2000 flat, Kospi down 0.1%, Hang Send -.1%, and Shanghai down 0.7%.

Have a great weekend


Mar 19, 2012

Do I Own Apple?

March 19, 2012

Apple (AAPL) announced today a dividend and share buyback. The dividend of $2.65 per share (quarterly) represents a 1.8% yield and should make the stock available for purchase by funds unable to own non-dividend paying stocks. The shares, presently trading at just under $600 per share, are valued at 13.5x the calendar year 2012 estimate. The median price target of the 58 analysts covering the stock is $629 per share.

Owners of the Mets reached a $162 million settlement with the trustee in the Bernie Madoff case. By settling the defendants avoided a trial set to begin soon. The question in the trail was whether the Mets’ owners had acted in bad faith when they withdrew money from Madoff. The Attorney General must think the Mets owners are smarter than the SEC, which had been conducting annual audits on Madoff for years and had received numerous inquiries about his operations without identifying any wrongdoing.

The IMF is reporting that China is “heading for a soft landing”, not a hard landing. The National Bureau of Statistics said apartment prices dropped in 45 of 70 cities last month.

Seventeen Chevron (CVX) and Transocean (RIG) employees are being held in Brazil. The employees are facing charge related to an oil spill in November. The detained employees were forced to turn in their passports to police.

We discussed the surge in bonds last week. The 10 year treasury jumped from 2.04% to 2.31% last week, and is down slightly again this morning, trading at 2.33%. Mortgage rates have risen slightly, from 3.87% to 3.92%.

CoreLogic is reporting that the price of non-distressed houses increased by 0.7% from December to January.

The first weekend of the 2012 NCAA tournament kicked off this weekend with 48 games over three days. The biggest first round upsets were #15 Lehigh knocking off #2 Duke and #15 Norfolk State squeaking past #2 Missouri. In the second round #3 Georgetown was upset by #11 North Carolina State. The biggest surprise in the Sweet 16 is #13 seeded Ohio, who will face #1 seed North Carolina on Friday. UNC will be without point guard Kendall Marshall, who fractured his wrist.

Have a great day