February 16, 2011

Equity markets are opening with a positive bid this morning after a mixed bag of economic data and more takeout activity. On the economic front, housing starts were up 14.6% vs. expectations of a 2% increase, fueling the homebuilders. Building permits declined by 10%. Producer Prices (PPI) increased by 3.6%, slightly ahead of expectations, while the same measure ex-food and energy jumped by 1.6% vs. expectations of a 1.2% increase. Industrial production declined by 0.1% vs. an expected increase of 0.5%, and capacity utilization (chart below) was roughly in-line with expectations at 76.1%.



Deficit hawks have subjected the President’s budget proposal to harsh criticism due to its perceived inattention to the budget deficit. I thought the numbers which highlighted the rising cost of the deficit were that the 2006 budget deficit was $250 billion. This year, fiscal 2011, the overall interest cost is expected to be $225 billion. That number will rise if rates continue their ascent.

Bloomberg reported that S&P 500 companies have been drawing down their cash from an all-time high of $2.46 trillion to $2.4 trillion, the first decline since the middle of 2009.

Merrill Lynch released their fund manager survey earlier this week, and managers are the most bullish in the history of the survey. I haven’t seen any correlation to that study and the markets, but my guess would be that is a contrary indicator. Managers were extremely bullish on technology stocks (a record 52% exposure), with their biggest concern being inflation. Managers also said that they have their highest risk appetite since Jan ’06. Hedge fund net exposure rose to 39%, the highest level since July ’07. Emerging market exposure dropped from 43% to 5%, commodity exposure rose to a at record overweight of 28%, and bond exposure dropped to record low.

The UN warned yesterday that soaring food prices (up 15% since October) could touch off riots in Latin America and Africa. World Bank President Robert Zoellick said the “cost of food and agricultural commodities is climbing to dangerous levels and threaten tens of millions of poor people.”

Sanofi-Aventis agreed to takeover Genzyme for $20 billion in cash. Family Dollar is up over 20% as the Trian Group has offered to acquire Family Dollar for up to $7.6 billion. Competitor Dollar General is up over 10% on the news.

Bernie Madoff told the NY Times that banks and hedge funds he did business with adopted “willful blindness” to his scheme. He insisted that they “had to know” he was doing something wrong, but didn’t want to admit it.

APAC stocks were mixed last night as the Nikkei and Shanghai both rose but the Hang Seng and Kospi were both down.

Have a great day

Ned