Aug 26, 2012

Another Fed Lovefest

Just days before Chairman Bernanke takes the stage at his favorite Wyoming venue, he wrote a short love note to Congress informing them of his intentions to continue with his generous ways.  In the minds of Democrats the assistance couldn't come too soon as the economy continues to falter in advance of the elections.  Republicans have started to howl, to no avail, as the good Chairman has greater job security with the Obama Administration than with the Tea Party, who has called not only for his removal, but also the demolition of the entire Fed. So what if the Fed spends another trillion or so if it keeps the Chairman off of President Obama's ever growing role of unemployment recipients?  

The US government, never one for cutting spending, has actually started doing so in advance of the budget cuts from last year's budget negotiations.  The government has cancelled 14K contracts worth over $2 billion for the fiscal year that ends September 30th, with more to follow next year when the spending cuts really hit hard.  I guess we can look forward to more job creation from government programs that fund green energy programs to offset the job losses in the defense industry.  
One of the key discussion points of this election has been the President's desire to spread the wealth vs. Mr. Romney's goal of spreading the tax burden.  The chart below shows the last 95 years of tax rates for income, corporate and capital gains. 

 I constantly get questioned about how equities can continue to kick off good returns when the economy is so weak.  A look a the charts below (courtesy JP Morgan) show that slower economic growth has historically supported better equity returns.  Why?  Because the threat of inflation becomes muted during a soft economic period, keeping a hawkish Fed at bay.  The chart on the right shows that earnings growth from US corporations is handily outperforming the economy, and has done so at a faster clip than at anytime over the past 60 years. 
We have discussed China's slowdown over the past year, but the chart below show how bad the equity markets have been as well.  Believe it or not, the Shanghai is one of the few indexes that has almost round tripped its recovery from 2008.  A weak China is bad for global growth and commodity prices. 

Shell expects to overcome equipment problems that have put it behind schedule and begin drilling in Arctic waters off the coast of Alaska this summer, said Peter Slaiby, vice president in charge of operations in Alaska. He said that because of unexpected delays, the company is scaling back its plan to drill five wells this year and will probably begin work on one or two.
Aetna signed a $5.7 billion cash-and-stock deal to buy Coventry Health Care, making Aetna one of the biggest providers of government-financed health care in the U.S. Aetna agreed to pay $42.08 per Coventry share, a premium of more than 20% to last week's closing price
Finnish Foreign Minister Erkki Tuomioja said the nation is preparing for a breakup of the eurozone. "We have to face openly the possibility of a euro breakup," Tuomioja said. "It is not something that anybody, even the True Finns, are advocating in Finland, let alone the government. But we have to be prepared."  That's a scary proposition.
Best Buy (BBY), aka Amazon's showroom, missed earnings again, posting negative comps for the 9th quarter in a row.  The company continues to struggle with a lack of unique product offerings and heavy overhead.  When Circuit City (CC) filed bankruptcy in late 2008 I said that BBY would have a nice 24 month window to gain share before they began their invevitable decline.  They have lasted a bit longer than I expected. 
BBY’s woes aren’t good news for electronics manufacturers.  Part of BBY’s problem is a lack of interesting new products which drive consumers into stores.  The other problem is that electronic prodcuts have become commoditized-which means shrinking margins for manufacturers and limited opportunity for differentiation.  Remember the old adage “rent hardware stocks, own software stocks”.  With the exception of Apple (AAPL), there really isn’t a differentiated consumer electronics brand. 
Warren Buffett's Berkshire Hathaway is backing away from municipal bonds. The firm disclosed in a regulatory filing that it terminated credit default swaps covering $8.25 billion in municipal debt.  Mr. Buffet could be getting ahead of a tsunami of municipal defaults.  Investors are warned to tread carefully in the space-there are lots of high yielding securities, just be careful of weak municipalities.  My concern is that once a few bankruptcies occur, what if stronger munis decide to enter strategic bankruptcies even if their finances are robust?
With food production hurt by unfavorable weather in the U.S. and the Black Sea region, the world should prepare for higher prices in the next few months, the International Monetary Fund and the World Bank said. The U.N. Food and Agriculture Organization's food index climbed 6% in July, reaching a higher level than in 2008, when food and oil prices drove millions into poverty.  I guess its time to repeat the call for ending the ethanol subsidy, which consumes 1/3 of the US corn crop each year. 
A U.S. jury convicted Doug Whitman, founder of hedge fund Whitman Capital, of two counts of conspiracy involving insider trading and two counts of securities fraud. Prosecutors said Whitman made $900,000 from tips obtained from insiders at technology firms.
College football season is finally here!  High school (and Pop Warner) started this weekend, and I was able to catch a handful of games.  The college game kicks into full gear this coming weekend.

Have a great day


Aug 19, 2012

Jackson Hole-Bernake's Stage

Aug 17, 2012

Jackson Hole has been Charmain Bernanke's stage in recent years, the place where leading economists gather to hear each other blather on about theory, strategy, and government action.  The Charmain has established the venue as his own special pulpit, using the stage to announce Fed largess and stimulate moribund markets.  The market has been anticipating, no, actually expecting the chairman to extend his generosity as the retreat begins late this week.  If the good Chairman misses the opportunity to please the Street, look out for the fallout. 

I heard a great depiction of the President's economic stimulus plan:  Trickle Up Poverty.  It's the opposite of Trickle Down Economics, where allowing higher earners to keep more of their income leads to more spending and increased hiring.  Trickle Up Poverty is where the President continues to take more and more taxes from higher earners until they approach the poverty line like most of his supporters.  Should be an interesting next four years.

Has anyone else noticed how hot it's been?  Holy smokes!  It must be global warming, which is good for the economy.  Global warming, heat waves, and droughts cause increased spending on fertilizers to offset a lack of moisture for crops; higher fuel prices and therefore better retail comps for retailers such as Costco; better earnings for utilities due to higher air conditioning usage; and of course an increased focus on solar because of higher energy costs and, let's face it, more sunshine. 

A number of economists are focusing again on inflation of food and energy (remember the Fed doesn't count those even though they make up 21% of US consumer spending).  If we truly get a bout of inflation, combined with the weak economy we've had recently, we could get a 1970's style stagflation.  Given Chairman Bernanke makes Arthur Burns look like a spendthrift, any uptick in inflation or credit creation could result in soaring inflation.  Personally I still think we are a couple (+) years from inflation, but once that Genie's out of the bottle, look out! 

Did anyone notice that the Eurozone reported GDP at -0.2%?  Could this be the start of the long awaited European recession?  With GDP in Greece running -6% this quarter, and the rest of the continent (including the UK) grinding slower, its my view that they are already in a recession, and all we need is the official declaration. 

In the US economic indicators have ebbed and flowed, and after another weak summer, it appears indicators are picking back up a bit.  For those perma-bears, don't worry, you're still safe assuming a weak 2013.  Just be careful of the back half of 2012 as a slight acceleration in economic activity combined with more Fed/ECB action could be all it takes to send the market on a year end tear. 

The San Diego Padres sold for $800 million this past week to a group of investors that included some of  the O'Malley family, relatives of the former Dodger owners.  Compared to the Dodgers the Padres were a steal, as the LA team sold for $2.1 billion.  I was fortunate enough to have been given a look at the Padre book, however, it was a bit out of my price range. 

College football is coming, and the Trojans are the AP #1.  While they have a fine team, it appears that they will have to beat Oregon twice in four weeks to advance to the BCS Championship game.  That will be tough for a team with only 15 scholarships to give out. 

Have a great week.


Aug 12, 2012

Climbing the Wall of Worry

Both the market and President Obama are experiencing rebounds in their numbers despite poor fundamentals.  The market has held up with five consecutive weeks of gains despite the potential for a synchronized global recession with Europe, Japan, and the BRIC countries experiencing weakness.  Earnings season just ended, and while it was the weakest since 2009 in terms of the percentage of companies beating either sales or earnings estimates, earnings are still approaching the all time highs achieved just before the debt bubble blew. Why is the market holding up?  How about exceptionally low rates, a reasonable valuation, no real signs of inflation outside of food and fuel (remember, we don't really count those), and the probability of both the Fed and ECB stepping in to support the market, er, I mean save the economy.  It's a Goldilocks scenario for sure. 

The President's rebound is no less astounding.  His lead vs. Mr. Romney and new running mate Paul Ryan has widened.  The President is taking pages from LBJ and Harry Truman's playbooks.  From LBJ he has learned to utlizie friendlies with a big microphone, in this case Senate Majority Leader Harry Reid, to engage in knowingly making false statements.  Governor Romney has been on the defensive about his tax-compliance (does anyone else remember Tim Geithner, among other cabinet members, never paying taxes?).  After a supporter started rumors about his opponent "engaging in intercourse with farm animals", LBJ responded that "of course its not true, but let him prove it."  The page from Mr. Truman's book is of course run against a "do-nothing" Congress.  Mr. Obama has been successful with both strategies, taking the microscope off his failed policies which have added $5 trillion to the US debt burden and added more people to the disability rolls than to the employment roll.

The President stated last week that the auto bailouts were such a success (you remember, when they violated the rule of law and forced a cramdown on bondholders while giving equity to labor unions?) that they hope to do it in more industries going forward.  I view this as either encroaching socialism or bad policy from the people who gave us Solyndra.  Watch your pocketbook and remember, you didn't build your business, the government did. 

Just when it looked as though we would experience a summer with moderate gasoline prices, a fire in a California refinery combined with other outrages have conspired to push prices well north of $4 per gallon for regular.  The jump in prices far exceeds the moderate increase we have experienced in oil prices over the past two months.  The picture below is from filling my wife's SUV this past week, and yes, that is the price of regular.  

Speaking of California, the first phase of Governor Brown's unfunded $100 billion high speed rail project is expected to run through the Central Valley.  The general idea is to build an overpriced rail that would provide riders with a breakeven point between rail and driving from LA to San Francisco.  Evidently they have succeeded, assuming gasoline prices jump from $4 to $44 per gallon.  I'll be interested to see if they can actually get the thing built.  Besides the obviousl impossible funding hurdles, how are the environmentalists going to respond when the proposed route travels through the protected habitat of the endangered red-spotted jumping flea?  This would be fun if it wasn't so disgusting coming from a state that is already struggling with a debt problem so large that, according to Governor Brown (aka Engineer Fred) we must slash school spending in order to pay the overly generous pensions of state employees. 

The Olympics concluded, and even though the opening ceremonies were horrifically boring, the games overall were great.  I regularly found myself up at 1 AM watching the NBC coverage.  I thought the competition was superb across the board.  The only disappointment beyond the opening ceremony was the Women's Gymnastics team.  After winning the team overall and the individual overall, these young ladies engaged in a series of bloopers that caused NBC to pull their "Fab 5" advertisements and replace them with other medal winners.  I thought the women's track team was amazing as was the volleyball combo of Misty/Keri, woman's soccer, men's swimming, and a slew of great individual stories.  

After bottoming at under 1.4%, ten year treasury yields have backed up to 1.66%.  Junk bonds have been the surprise this year, returning 9.8% for the year.  Yields have dropped below the magical 7% hurdle which has signfied sell-offs in the past.  Interestingly, in spite of the weak economy, the default rate is 3.3% versus an historical average closer to 5%.  On the flip side, the risk premium for high yield over treasuries is at almost 600bps vs. an historical average of 5%.  With lower risk bonds yielding peanuts, the demand for high yield debt should remain robust unless there is a deterioration in the default rate.

Well, it looks as though all those political appointees in the Obama Administration have finally paid off for Goldman Sachs (GS).  In spite of what would seem to be overwhelming evidence of wrong-doing, the US Justice Department has decided not to prosecute GS for its deeds in the sub-prime fiasco known as Abacus.  GS notifed the SEC this week that the investigation had been dropped.

I have been avoiding talking about Greece, however, the recent unemployment numbers deserve comment.  For May the unemployment rate in Greece was 23%, nearly three times higher than the 9% rate in 2009. Among people younger than 25, the jobless rate is 55%.  Ouch! 

The Economist is reporting that the US economy, which expanded at a 1.5% rate in the second quarter, is growing slower than any other recovery in US history.  Output has increased 6.7% and employment 2.1% since the recession ended in June 2009.  By contrast the economy in the early 1980's showed an 18.5% increase in real output and an 11.1% increase in employment over the first three years. 

We haven't had a chance to discuss the Knight Trading fiasco, which cost the firm $440 million after a software glich generated buy orders for $7 billion worth of stocks.  The firm will apparantly survive after receiving a cash injection from a group of investors, but the damage to its credibility and that of the entire market have been badly damaged.

Forget about all my musings about the soaring student loan debt levels and rapidly rising default rates.  Fed Chairman Bernanke, speaking to a teacher's group, assured them that the $1 trillion in debt wouldn't jeoparize the US financial system because its backed by the US government.  Whew!  Now I feel better.  Can we restate the official government debt number to $16 trillion now?

OK-it's darn near college football time.  I'm looking forward to a great season and can hardly wait for the first game.  My youngest son and I have been watching replays of games we have taped or those appearing on the myriad of ESPN channels.  We've watched last year's Oklahoma State-Stanford game a number of times, but we're ready for some new action.

Have a great day