Bad News is Good News

February 25, 2011

Evidently we have entered the point in the cycle where bad news is good news. The bad news this morning is that the revised GDP for Q4 2010 came in at 2.8% vs. expectations of 3.3% and an initial reading of 3.2%. While still enough growth to slowly reduce unemployment in private payrolls, the reduction is being attributed to lower levels of state and local spending. The reduction in state and local spending is going to put a damper on employment growth. Why is this good news? The markets are up on the data as it decreases the likelihood of the Fed cutting back on QE2.

Violence in Libya is escalating as protestors have begun utilizing weapons and tanks confiscated from the military. Qaddafi has pulled his troops back to Tripoli to bolster his defense of the capital. As if he didn’t have enough troubles, Switzerland levied a huge blow to the troubled leader by freezing all of his foreign assets.

The US Air Force awarded a $35 billion tanker contract to Boeing after the close yesterday. Boeing has estimated this will save/create 50K jobs over the course of the project.

The White House has floated a trial balloon to the markets, saying they might tap the Strategic Petroleum Reserve to counter rising crude prices. As a candidate the President was very vocal in his support of using the SPR to dampen the rise in oil prices. Across the country gas prices are soaring, and here in California the price of gasoline is approaching $4.00 per gallon. A station in the San Gabriel Valley reportedly has the highest prices in the country at $4.80.

Higher oil prices could pressure a fragile US economy. According to Bloomberg, a $.10 per gallon increase in gasoline costs the US economy $10 billion.

The focus on mass transit in the US is primarily folly in my view. If you consider Europe, which has 288 people per square mile, mass transit works because of the population density. The US has a population density of 87 people per square mile, which means that high speed rail and other mass transit proposals would also require a mass migration back to urban areas.

The US government is moving closer to a shutdown as the continuing resolution currently in place expires March 4th. Republicans want spending cuts, Democrats are asking for more time.

Japan’s Government Pension Investment Fund set it expects to become a net seller of bonds. The fund presently manages $1.4 trillion in assets. The proceeds will be used to pay retirees in Japan, which has the highest rate of aging in the world. Next year the first Japanese baby boomers will begin retiring.

Treasury Secretary Geithner told the Senate Finance Committee that Congress should revisit the rules that allow businesses a choice to report as either an S corp, C corp, or partnership. This could be harmful to small businesses, law firms, and investment partnerships.

GM posted its largest annual profit since 1999, $4.7 billion last year. The stock was down as this was less than analyst expectations.

Google demonstrating its first Robotic Car. The car utilizes high speed cameras, CPU’s and radar to drive itself. The passengers just enter destination data and sit back and surf the net, watch a movie, or enjoy the scenery.

Risk-margin debt now sits at 3-year highs. It is ironic that market participants, mainly hedge funds, are increasing their risk and market exposure after the market has moved 100% off its bottom.

A recent Tax Foundation study showed that New Jersey residents have the highest state and local tax burden in the nation at 12.2% of income. The average state burden is 9.9%.

APAC markets were strong last night, and EMEA markets are very robust today.

Have a great weekend

Ned