Wednesday January 26, 2011

US markets are opening slightly higher this morning as earnings dominate the news. Through yesterday 87 of 119 companies have exceeded estimates, with noted strength in the financial sector. Tech has been the weakest of the major sectors, and the NASDAQ Composite has responded by declining in six of the past seven trading sessions.

Yesterday the Conference Board’s consumer confidence index posted 60.6 vs. 53.3 in December and versus expectations of 54.0. This is the highest reading for this measure since May, just after the market peaked in the spring.

The Fed announces its rate decision today at 11:15 PST. There is no expectation of any change in stance, especially given recent Fed commentary about continuing weakness in the economy and the relentless focus on deflation. Some experts are anticipating the Fed will (gasp!) actually begin discussing plans to remove the stimulus.

Bank of England Governor Mervyn King warned yesterday of “uncomfortably high” inflation this year that could fuel demands for wage increases and force the central bank to raise interest rates. The country’s GDP declined by 0.5%, and that is before austerity measures begin. Is our Fed now the only Central Bank in the world not concerned about inflation?

The Financial Crisis Inquiry Commission came out with their report on what caused the financial collapse, and were pointed in their criticisms of the Fed, Wall Street, both the Clinton and Bush administrations, the banks, and of course reckless mortgage originators. Some of the strongest criticisms were levied against Alan Greenspan, Ben Bernanke, Timothy Geithner, Lawrence Summers, Hank Paulson, and the “bumbling incompetence among corporate chieftains” at Citigroup, AIG, Fannie Mae, Freddie Mac, and Merrill Lynch. The report’s conclusion is that the crisis could have been avoided.

FASB reversed its position on requiring banks to move back to mark-to-market accounting after intense lobbying by the banks to block the rule. The rule would have forced banks to revert back to the accounting standard prior to April 2009, which required banks to carry their loans at market value. Right now, instead of mark to market, loans are carried at a fantasy value better known as mark-to-imagination.

Yesterday the S&P/CaseShiller Home Price Index came in at 143.85 for November, down slightly as the YoY composite declined by 1.6%. As shown in the chart below (courtesy Tyler Durden) only San Diego posted a positive gain month over month. Los Angeles and San Francisco were also better-California is arguably better than the rest of the country because of the relatively aggressive way they have cleared through their foreclosure backlog. The chart looks like the beginning of a double dip in housing prices.



The President gave his State of the Union address last night and called for a boost in job creation, a five-year freeze in discretionary spending (which makes up 14% of the budget), and a focus on infrastructure, innovation, and education. He also advocated cutting “tax loopholes”, especially for the oil industry. The Republican rebuttal address highlighted the 84% increase in spending and $4 trillion increase in the national debt over the past two years. Both parties have a lot of work to do, hopefully they’ll be up to the task.

Asian investors purchased roughly 5 billion Euro (38%) of the European Financial Stability Facility’s first bond offering. The Japanese government purchased 20% of the offering.

Asian markets were strong last night on better economic growth being reported in South Korea. European markets are up today as well.

Have a great day

Ned