Jun 25, 2012

Oil Falls as Global Economy Stalls

Grupo Modelo, the maker of Corona beer, is up strong this morning as Anheuser-Busch InBev is close to acquiring the remaining stake in the company for $12 billion.  The deal values Modelo at $20 billion and further expands the branding and reach of the world’s largest beer maker.

A long running question during the Euro crisis has been whether backstopping all of Europe will take a toll on Germany.  The answer is yes, and now bunds are beginning to reflect that concern.  After bottoming at 1.12% a month ago, the yield on 10-year bunds are now approaching 1.6% as institutions have been aggressively selling the securities.  The German populace hasn’t been supportive of throwing a lifeline to the periphery, and if voters feel they are being impacted by providing this support, leadership could find themselves soon unemployed.

Economic growth in India has been weak, and the recently collapsing rupee has put pressure on businesses carrying foreign loans.  Because of the lack of a liquid capital market, businesses in India have historically relied upon foreign sources of capital for growth.  The decline in the currency is pushing borrowers to the limit.  The Indian government and central bank are preparing to take actions designed to bolster the value of the rupee. 

In a “be careful what you ask for” decision, it appears that cities, states and local-government entities will be required to disclose their previously hidden pension obligations.  Recent changes to US accounting rules will force the disclosures, heretofore buried in a blizzard of paperwork.  The revised standards are expected to shed more light on the explosion in underfunded public pensions. 

The Supreme Court is expected to rule on Obamacare later this week.  Experts seem to think there’s a 60/40 chance the individual mandate will be overturned, in effect rendering the legislation dead. 

In response to declining demand from weakening global economic activity, oil prices have declined 22% over the past two months.    Gasoline in California has broken below $4 per gallon for first time in nine months, easing pressure on consumer pocket books just as the summer driving season begins. 

In a bit of bright news, new home sales came in at 369K, a rise of 7.6% month over month and better than expectations of 347K.  

Have a great day


Jun 20, 2012

Mr. Softy Battling the Legacy of Jobs

Despite the robust rally yesterday, JC Penney (JCP) was a notable loser, dropping 10% after president Michael Francis, a recent recruit from Target (TG), was asked to step down.  Francis was charged with the company’s new marketing, branding and pricing program, which has stumbled out of the blocks,  driving comps down 19% in the most recent quarter. 

The G-20 finalized their meetings with a draft communique supporting further stimulus.  “Should economic conditions deteriorate significantly further, those countries with sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand, as appropriate,” said the communique.  The Fed will be winding up their two day meeting this morning, the last before Operation Twist officially ends.  Expectations are for additional Fed stimulus, at a minimum an extension of Operation Twist.

Nearly 80% Chartered Financial Analysts expect the European debt crisis to last for several more years.  Only 3% thought it was close to being over. 

Walgreen (WAG) has announced plans to acquire a 45% share of Alliance Boots, a UK based health and beauty retailer.  WAG has an option to purchase the remaining 55% within three years.  The first stage of the deal is valued at $6.7 billion.

According to the JOLT (Job Openings and Labor Turnover Survey), the number of vacant US jobs dropped to their lowest level in five months in April.  The 8% decline from March was the largest drop in eight years. 

Microsoft (MSFT)announced their new tablet, the Surface, on Monday.  Optimized to work with the new Windows 8 operating system, which I ballyhooed in a note in January, the product should be available in the fall.  This product represents MSFT’s first hardware launch since they launched their own mouse and keyboard, and may cause friction with hardware partners such as Lenovo, HPW, and Dell.  Two versions of the device will be available:  one based upon Intel powered chips and one relying upon ARM powered chips by Nvidia (NVDA).

China is starting a trial program to securitize bank loans which would free up more capital for lending.  The plan is another step in the country’s efforts to build and deepen their capital markets. 

UCLA and Florida are both out in the CWS.  Arkansas and Arizona both look strong.

Have a great day


Jun 18, 2012

Obama Blunders, Struggles to Find Talking Points

President Obama, anointed by his minions as the greatest orator of our time and one of the smartest Presidents ever, delivered a speech last week that was not only lacking in quality, but has inflamed both critics and supporters.  While speaking in Cleveland, the President tried to change his spin on the economic situation, which he has avoided discussing.  He said that the "private sector is doing fine" under his administration.  In reality, private sector employment has declined over the President's four years by a higher rate that at any time since the Great Depression, while government employment has soared by a higher rate that at any time in US history.  I guess the President was referring to the "private sector" in those favored industries that have been huge beneficiaries of government largess:  banking, alternative energy, and automakers.  

Pro-bailout parties have gained control of Greece, lessening concerns that the Euro implosion is imminent.  The election “makes the formation of a pro-European government more likely, removing political uncertainty in the short-run” said Panagiotis Kladis of National Securities in Athens.  Equity markets, which are down this morning after a strong run-up into the election last week, arguably have been discounting this outcome.  The Euro is weak, and Spanish 10-year yields are spiking above 7%, the highest since the Euro was created, after a downgrade by Moody’s late last week.   

The Bank of England announced a novel plan to help their wobbling banking system and credit markets-pump in massive, low cost liquidity. The program, called “funding for lending”, may be in place in the next few weeks and is expected to increase loans from banks to avert a credit crunch.  Let’s hope they implement that a bit more effectively than we did here.  

 Bloomberg is reporting that investment capital has poured out of emerging-market equity funds over the past three months at a faster rate than at any time since 1998.  Concerns about slowing growth in the BRIC countries (Brazil, Russia, India and China) has accelerated the capital outflow. 

The Fed is reporting that home equity in the US has jumped by 7% in the first quarter, to $6.7 trillion.  This is the largest jump in over 60 years.  On a percentage basis, home equity represents 41% of residential property values, the most since 2008 when it stood at 43%. 

Don’t expect to be bumping into Allen Stanford any time soon.  The former financier accused of running a $6 billion Ponzi scheme was sentenced to 110 years in prison. 

Felda Global Ventures, a Malaysian operator of palm oil plantations, went public last week in the second largest IPO of the year.  The $3.3 billion deal was reportedly oversubscribed by 29 times, primarily by institutional investors. 

Nokia’s (NOK) woes continue as the company announced plans to shut down production facilities in Canada, Finland, and Germany.  The company’s handset sales fell by 24% in the first quarter as Samsung moved into the #1 spot in the world.  The company plans to lay off 10K workers with the closures. 

LT-eleven years, 13K yards, well done!  Let’s hope he avoids the fate of 78% of NFL players-bankruptcy within 24 months of retirement. 

Have a great day


Jun 13, 2012

Market Finds Support

 JP Morgan’s (JPM) Jamie Dimon will become the first Wall Street executive to testify on Capitol Hill since Lloyd Blankfein of Goldman Sachs (GS) enthralled us with his bravado and arrogance.  Mr. Dimon is expected to tell the US Senate Banking Committee that the bank’s much publicized trading losses were an isolated event.  He will be emphasizing that no client, taxpayer or customer money was impacted by the loss. I wonder whose money that was, maybe Jamie's?

It’s no secret that Germany has been carrying Europe on its financial back.  Now it appears that concerns are starting to appear in the financial markets about Germany’s ability to support the entire continent.  Credit default swaps on German debt, which serve as insurance in the case of default,  have been rising even though yields on that debt are falling.  The rise in CDS prices means insurance to protect against a German default is rising, historically an indicator of investor angst.   The CDS market is thinly traded, so this may be an anomaly, but it is certainly worth monitoring. 

How about some good news?  The Financial Times is reporting that the rapid expansion of shale gas should add 455K jobs in the US by 2015. 

The S&P 500 has shown a high correlation to the Australian dollar.  Both are sitting right on support, a break of which could be ugly.  The support provides some technical justification to begin going risk on once again.  Thanks to Chris Kimble for the chart.

Shanghai Securities News is reporting that the pace of property sales has picked up in several key cities in China.  Lenders have become more aggressive, and reportedly new rules will be implemented that will relax controls on real estate investment. 

After a short hiatus, Europe is back in the news.  Greece has their follow-on election this weekend; Spanish banks got a huge bailout, and  Italy appears to be the next country in the tumbler as they carry roughly 2 trillion euro in debt, a higher level as a percent of GDP than any other developed nation besides Greece and Japan. 

Retail sales for May fell for the second consecutive month on lower employment and weak wage growth.  Sales were down 0.2%, comparable to April’s decline.  Retail sales ex-autos fell by 0.4% vs. expectations of no gain.  The PPI came in at 1.2% vs. expectations of 0.7%, and ex food and energy rose by 2.8% vs. expectations of 2.7%.

Without becoming too esoteric, the Fed releases a quarterly flow of funds report which shows the amount of cash on corporate balance sheets.  Over the past two years the report has shown a big jump in cash levels, but the latest report contained a $500 billion downward adjustment to cash, effectively wiping out the buildup in cash so often cited as a bullish story for the markets.  As a percent of total assets cash levels are at the lowest point in the past 50 years.

Companies, investors and individuals have been filing applications for the new web suffixes being released by Marina del Rey based ICANN, the nonprofit web-management company which monitors domain registration. Over 1900 applications have been filed, including .jpmorgan, .walmart, and .microsoft.  The new suffixes will allow companies to alter the way they market online.  Each application costs $185K.   The new sites may be ready early in 2013.

Need I say more?

Have a great day


Jun 11, 2012

Spain Asks, and Recieves

Equity markets are continuing their rebound this morning after news of a rescue package for Spanish banks was announced yesterday.  Yields in Spain fell and equity markets jumped last night as investors showed relief after the bailout announcement, which totaled 100 billion Euro ($125 billion).  APAC markets rocketed last night on news of the deal, with the Hang Seng jumping 2.1%, Nikkei 1.9%, Kospi 1.5%, and the Taiex 1.4%.  In the US and Europe financial shares are rallying.  The S&P 500 (chart below) has bounced off support.

US Treasury yields continue to fall as uncertainty about the global economy heightens.  Interestingly, Federal Reserve data shows retail investors bought more treasuries than both the Fed and foreign investors combined in the first quarter.  Retail investors are typically a contra-indicator-could it finally be time to move away from treasuries after a 30 year bull market?

Weakness in foreign economies have conspired to slow down the fledgling US economic recovery.  US exports to China were down by 14% in April, and down 11% to Europe.  Exports have been one of the bright points for the US over the past few years.  Domestic consumption will have to accelerate to offset the declines, an unlikely scenario given the recent declines in savings rates and stagnant earnings. 

The Bipartisan Policy Center is reporting that the $1 trillion in spending cuts that kick in at the end of 2012 will cost the US 1 million jobs and won’t help the budget deficit due to the impact on economic growth.  I do find it interesting that their report suggests that for each $1 million in cuts the US will lose one job.  There must be some pretty good benefits with those positions. 

I’m not sure that it is a surprise to anyone that the twin entitlement programs Social Security and Medicare are on track to consume 100% of US tax revenues in a few years.  The chart below, courtesy of Bloomberg, shows the trajectory using a baseline for tax collections of 18.46% of GDP.  Without structural changes these two programs are unsustainable in the long run. 

Sky-rocketing college tuitions are no surprise to anyone with a  high school or college aged student.  In response to the rising costs, government aid in the form of grants and loans has also soared.  Now it appears that the Department of Education is beginning to understand the impact of money on inflation as they believe there is a link between the jump in federal aid and tuition increases.  My first boss in the money management world once told me that “inflation is a monetary event”, and it would appear the secondary education world is beginning to learn that lesson.   The difficult part for the universities will be when the tuition increases slow or even decline as the population of college bound teens begins to wane, yet the expensive fixed cost infrastructure and salaries continue to rise. 

A surprise in the NFL came from the Kansas City Chiefs as they announced signing quarterback Alex Tanney.  Who?  Alex Tanney, from Division 3 Monmouth College.  Tanney is the D-III record holder for yards passing (14,250) and TD’s (157).  He wasn’t drafted, but became famous for his trick shot videos (see below) 

Have a great day


Jun 8, 2012

Obamaism-Can it Work?

All that we see or seem is but a dream within a dream.”—Edgar Allan Poe

NASDAQ has announced plans to reimburse investment firms $40 million to compensate for losses generated on the first day of trading in Facebook (FB).  The losses are attributable to computer glitches that slowed down settlement on trades.  The settlement will consist of $14 million in cash, the rest in credit for future trading fees. 

The chart below, courtesy of Chris Kimble at Chartingsolutions.com, shows the markets are now sitting on long term support while the AAII Bull ratio has fallen to a level which has coincided with market rebounds.  In other words, the bounce this week could be the start of another in a long running series of rebounds. 

The Economist is noting that major consolidation is occurring amongst fund of hedge funds due to significant underperformance in eight of the past ten years.  “Investors are voting with their feet” said the magazine.

The ECB decided to leave rates unchanged at their meeting this week.  ECB President Mario Draghi said the economy should recover later this year, but also left open the possibility of a rate cut in July.  Can anyone say “whistling past the graveyard?” 

The Fed’s Beige Book was released this month, and the analysis of the twelve districts has an optimistic bent.  The report focused on healthy expansion in manufacturing, travel, and tourism.  The report also cited improvement in the housing market as well has a steady-moderate increase in hiring. 

Fitch Ratings is threatening to downgrade the US unless the government addresses its looming financial predicament.  “The US does not have a credible fiscal consolidation plan, and if we don’t see one after the election, I would expect a downgrade” said Ed Parker, a  managing director at the firm.

In a blow to full disclosure, China’s Administration of Industry and Commerce is refusing to release information to investors on public company asset transfers, financial reports, and shareholder changes. 

China made a surprise interest rate cut, the first since 2008, lowering the benchmark 1-year lending rate to 6.31% from 6.56%.  Reports have been indicating that the economy there is slowing faster than expected by analysts and inflation is slowing.  APAC markets fell last night. 

One of the biggest questions that has been raised over the past few years by President Obama relates to income inequality and whether it is good or bad for the economy.  This discussion below sheds some light on the argument:

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama style socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, "OK, we will have an experiment in this class on socialism".  All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A.... (substituting grades for dollars - something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little..

The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F. As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.  To their great surprise, ALL FAILED and the professor told them that Obamaism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. It could not be any simpler than that.

Kings in five?  If so, their overall playoff record would be 16-3, extremely impressive. 

Have a great weekend