May 29, 2012

Consumer Confidence Waning



Stocks and commodities are both finding a bid this morning after the Case-Shiller home price index fell at a slower pace than expected, declining by 2% in the first quarter vs. expectations of a 3% decline.  Warmer than normal weather helped drive better than expected sales across the country’s snow belt.  For March, prices declined by 2.6% after a 3.5% decline in February.  May consumer confidence missed expectations this morning massively, coming in at 64.9 vs. expectations of 69.2. 

Moody’s Investor Services has issued a report on Europe suggesting that 25% of leveraged buyout firms with debt maturing before the end of 2015 could default.  Moody’s feels that the refinancing risk “remains large and worrisome given our expectations of protracted macroeconomic weakness combined with the weak average credit quality” of the issuers.  The net is that it’s still difficult to find yield.

The Wall Street Journal is reporting that the two largest beneficiaries of the overall weakness in Europe have been US Treasuries (see chart below) and German bonds.  The article noted there is a shortage of safe investment options.  I’m hoping that was an observation and not a new realization.


APAC markets were strong last night in anticipation of China’s central bank taking measures to boost growth.  The country managed their growth better than most through the downturn, however, weakness in Europe combined with restrictive capital conditions have pushed the economy towards a significant slowdown.  Vietnam’s VN Index has outperformed all global equity markets except two after the government decided to cut interest rates earlier this year from three year highs.  It seems that investing where there is stimulus is profitable everywhere, not just the US. 

Jobless benefits will be cut next month for 70K Americans, most of which are among the long-term unemployed.  Government reductions are affecting these individuals sooner than expected. 

It appears that weakness in the European periphery countries may help Germany achieve what it has been unable to accomplish in hundreds of years of wars: dominance of Europe.  The Economist is calling for a form of federalism and centralized bank supervision combined with mutualization of all of the region’s debt.  “The euro zone’s problem is not the debt’s size, but its fragmented structure.  Taken as a whole, the stock of euro zone public debt is 87% of GDP, compared with over 100% in America.”  In other words, Germany is under levered, and the article suggests they should take on the obligations of the rest of the continent in exchange for control over the finances of these countries.  Sixty-seven years after the end of WWII, this thought has some on the continent concerned. 

A recent IMF report has found that while profits in the US are soaring, the increase hasn’t benefited wages yet.  The study found that the only developed countries where workers have fared worse than in the US are Greece and Spain-dubious company indeed. 

Auto sales in the US have been strong for the past nine months, but recently have been slowing.  Sales for May are up mid-single digits, solid growth but well below the double digit gains we have been seeing for the majority of 2012. 

Memorial Day weekend marked the beginning of summer.  For our local sports teams, the Kings are still going, facing the Devils in the Stanley Cup Finals.  The Lakers and Clippers both were knocked out in the second round of the playoffs.  Clipper fans are thrilled with the showing and are looking forward to next year while Laker fans are disgusted and wondering how the rebuilding will occur.  The Dodgers still have the best record in baseball, leading the Giants by 6.5 games.  The Angels have won seven in a row, and have pulled up to .500. 

Have a great day

Ned

May 21, 2012

Solid Open to the Week



Something happened on the way to Facebook (FB) becoming the greatest IPO ever-the deal has been a mess.  Remember that the  size and price of the deal were both increased multiple times, and now the stock has broken deal price and is down over 10% today.  Morgan Stanley (MS) is taking the blame for mispricing the deal and allowing it to break syndicate.  NASDAQ OMX (NDAQ), which had been trumpeting grabbing the listing of FB from the NYSE, reportedly gave FB major concessions in order to garner the deal.  Software issues in NDAQ’s trading systems resulted in a myriad of errors in trade settlement and notification, creating investor angst as the stock traded nearly 700 million shares on the day.  Finally, FB itself is partially to blame as they pushed hard for large allocations to individual investors.  While allocating to individual investors is very noble, the reality is that in successful IPOs large chunks of stock are typically placed with institutions, creating a shortage of tradable stock.   So the net is that much like the Winklevoss brothers, anyone associated with this deal outside of FB’s employees is wishing they weren’t involved. 

Lowes (LOW ) is down almost 10% after missing comps this morning and cutting guidance for 2012.  The company posted strong Q1 earnings, but same store comps trailed estimates, rising 2.6% vs. the 4.2% target.  The company was cautious about both housing and the economy on their call. 

Yahoo (YHOO) and Alibaba finally appear to have settled their issues in separating Alibaba from YHOO.  The Chinese e-commerce provider agreed to repurchase a 20% stake in itself from YOOO for roughly $7 billion, primarily in cash.  YHOO is up 1% on the news. 

Equity markets are up this morning after falling for the past three weeks.  The market’s recent decline has reached 12 of 13 sessions, the worst stretch of negative performance since 1974.  

The Washington Post issued a scathing report of the Obama Administration and their hypocrisy of bashing lobbyists and other politician's exposure to them.  The Post reviewed the White House visitor logs, and the analysis showed the most frequent visitors to the most important house in the world are Democratic lobbyists.  This isn't a big surprise given this administration's double standards.  

Speaking of the President, I met a gentleman yesterday who is friends with a senior White House adviser who had some private words of disgust to share about the entire Administration.  This adviser, a very successful businessman who has worked with other Democratic Administrations, said that the biggest problem in the White House is that "none of these guys has ever held a job.  They don't know what the hell they are doing, and don't have a clue about how the economy or business works."  I know that is a very obvious statement, but I thought I'd share it anyway. 

The G-8 is recommending that Europe join the spending crowd (as if they weren’t already part of it) and increase government spending to help the region’s economies.  The statement called for a boost in infrastructure and education while also reducing sovereign debt.  I just want to be clear, they want to boost spending and cut debt, as opposed the present plan of cutting spending and cutting debt.  Remember, if you don’t know where you’re trying to go, it really doesn’t matter which direction you travel. 

China has begun testing a system which will allow brokerages to borrow stocks for clients who wish to short sell.  The brokerages will also be allowed to borrow money so that clients may engage in margin activities.   

The JP Morgan (JPM) saga will probably linger in the news for a few more weeks.  Bloomberg is reporting that JPM’s risk manager was fired by Cantor Fitzgerald in 2007 after that firm was fined for failing to adequately supervise him.  The Cantor investigation was triggered by “speculative bets triggering a loss big enough to prompt a regulatory investigation.”  JPM reportedly knew of the transgression before hiring him. 

The Dodgers, best record in baseball.  The Angels, last place.  New sports rule of thumb-invest in new owners, not free agents. 

Have a great day

Ned

May 18, 2012

Facebook Saves California!




Well, today is finally the day when Facebook (FB)  goes public.  The company is raising $18 billion and will be the biggest tech IPO ever, and the second biggest US IPO behind Visa.  Mark Zuckerberg will personally have more than enough money to buy Yahoo (YHOO), with a few billion left over, which is ironic since he agreed in 2006 to sell the company to YHOO for $1 billion.  The deal was scuttled when a decline in YHOO’s stock price resulted in them lowering their bid to $850 million, a valuation Zuckerberg ultimately rejected.  I’m thinking the YHOO board is really regretting that decision.


Facebook going public isn’t just good for the employees and investors in the company, but also the State of California.  The Governor has suggested that this IPO could help narrow the budget gap of $16 billion, although the Legislature has reportedly planned more permanent uses for the one time bump in taxes expected from the deal. 

A recent CFA Institute survey had slightly more than half of respondents saying the commodity bull market isn’t over yet.  Respondents also concluded that any future increase in prices would be driven by the devaluation of ALL currencies versus hard goods as opposed to the past five years, which was driven by a huge jump in debt and China as the incremental buyer. 

Bank of England governor Mervyn King said the Eurozone is “tearing itself apart” and the damage will extend to the UK.  Growth in the UK has been revised down for 2012 to 0.8% from 1.2%.  The BofE also guided for inflation running above expectations.

For an example of what happens to old tech companies, look no further than Hewlett-Packard (HPQ).  HPQ, the largest technology company by revenues and employees, is considering cutting back 8% of its workforce, or 25K workers.  The company employs 324K people.  The company is struggling to find growth after a multitude of missteps and management changes. 

The JP Morgan saga continues as the FBI is now investigating their trading losses and the Senate Banking Committee has asked Jamie Dimon to testify next week. 

The Shanghai Securities News is reporting that loan demand in China has waned in recent months.  The weakness is expected to force the central bank to cut interest rates to counter weak corporate demand for credit. 

G-8 leaders have been meeting this week in the US.  German Finance Minister Wolfgang Schaeuble says that Europe’s crisis is “practically normal.  In 12 to 24 months we’ll see a calming of financial markets.”  Oh. 

I mentioned the other day the drop in oil prices, but the stubbornness of gasoline prices to follow, especially in California.  One issue exacerbating the gasoline problem is the inability to move oil from Cushing, OK to refineries.  The US pipeline network is insufficient to handle the volumes required, and the result has been soaring inventories in OK (as seen in the chart below). 



The Kings are close to moving to the Stanley Cup Finals while the Lakers and Clippers are trying to regroup after falling behind 2-0 in their series with Oklahoma City and San Antonio, respectively.

Have a great weekend

Ned   

May 16, 2012

Come On Glass-Steagall


May 16, 2012
“You never can quite get it right because in our particular free-enterprise system-a free flow of capital-stuff moves and it goes up and down.  Even Jamie Dimon just blew $2 billion.  That’s a big risk.  We all have to live with the uncertainties of the business cycle, but we do our best.” –Jerry Brown

The rhetoric in Europe is picking up a bit as finance ministers have warned Greek officials that they could be ejected from the EU if the country fails to deliver as promised on the terms of its rescue and form a new government, and right on cue the newly elected officials failed to organize one.  This means a follow up election will occur in early June to see if a new slate of legislators can form a new government.   Polls are favoring the ant-EU left, and as a result yields in Italy and Spain jumped over 6% yesterday and German yields fell as investors moved capital into Germany. 

Ally Financial’s mortgage subsidiary, Residential Capital, filed a much anticipated Chapter 11 earlier this week.  Ally has been aggressively shopping the unit to potential suitors, and is also reportedly trying to sell its international operations as the company attempts to emerge from government ownership.  The company has been one of the most aggressive lenders since its 2009 bailout.  Ally is the former GMAC. 

There’s always a silver lining, you just need to look for it.  A slowdown in China could be a boost for strapped consumers in Europe and the US as commodity prices could decline (see chart from Monday).  Frederic Neumann, the co-head of Asian economic research for HSBC, said “the US might not be in too bad a shape because it would benefit from cheaper commodity and oil prices.” 




The metals have all broken or are about to break support as you can see in the chart below, courtesy Kimble Charting Solutions.  Gold, which is 20% off its high, and silver have already broken technical support, and now copper is beginning to break down.  Copper has been a very reliable indicator of global economic growth, so this is certainly concerning from a growth standpoint. 


What happens if Greece leaves (or is kicked out of) the Euro?  A few possibilities include massive asset outflows from Spain and Italy towards Germany as investors fear the possible next shoe.  The ECB faces huge credit draws as banks see more liquidity concerns and the value of collateral is further compromised.  Germany could be forced to step in and guarantee directly more debt for the PIIGS to keep their spreads from exploding.  Assets, which have been fleeing from Greece, will explode out the door as investors fear being converted to Drachma. 

If you think JP Morgan losing $2 billion on a trade is bad, wait until you look at California’s updated budget deficit.  Originally estimated at $9.2 billion in January by Governor Brown, the deficit now appears on track to exceed $16 billion, a 74% increase.  I guess that answers the riddle on Jeopardy the other night, when the answer was “California”, and the question was “Which US state most closely resembles Greece?” 

I’ve been a proponent of restoring Glass-Steagall, the Depression era law that separated investment banking from commercial banking, since it was repealed in 1998, so when I rail against it I certainly can’t be accused of jumping on the bandwagon.  Barry Ritholz posted this graphic yesterday showing an advertisement supporting the restoration of the act.  After the very public JP Morgan trading loss announced earlier this week, the catcalls are beginning once again to restore this common sense piece of legislation.  I’m sure once Jamie Dimon endures and FBI sponsored perp walk, he’ll change his tune about opposing restoration of the act.


Have a great day

Ned