Waiting for Ben

August 26, 2011

Today is the day. Ben Bernanke will be speaking from what was once an obscure gathering of central bankers but is now the most awaited speech since JFK’s inaugural address. The good chairman will begin his speech at 10AM EST. Markets are down on the open this morning and were weak yesterday afternoon as weakening economic fundamentals combined with a desire to lower equity exposures in the event Mr. Bernanke doesn’t indicate another lifeline will be thrown to investors.

Bank of America has been struggling since mortgage foreclosures picked up in 2005, but recently the stock has touched lows not seen since the market bottomed in early 2009. Questions abound as to the viability of the bank and its true book value. Yesterday Warren Buffet stepped into the fray by investing $5 billion in a new preferred issue. The investment gives the bank’s stock some badly needed credibility and also some additional capital.

In a bit of positive news a Capital One survey showed that 44% of small business owners felt that business conditions are improving in the second quarter. The survey noted that there has been modest improvement over the past few quarters.

Yesterday initial jobless claims came in at 417K vs. expectations of 400K. Part of the increase, roughly 8500, can be attributed to the recently ended Verizon strike. The Michigan Consumer Sentiment index came in at 55.2 vs. expectations of 55.8.

Steve Jobs announced that he will be stepping down as the CEO of Apple. "I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple's CEO, I would be the first to let you know," Jobs wrote. "Unfortunately, that day has come." He will remain the firm’s Chairman.

There has been much debate about the cost of obesity in this country, with some estimating the total near $500 billion in additional health related costs. Many, including the gentleman pictured below, feel that individual rights trump those of the republic and have vowed to fight for their right to eat, even at McDonald’s.

RealtyTrac announced that sales of homes that were in some stage of foreclosure or bank owned accounted for 31% of all U.S. residential sales in the second quarter of 2011. In a separate report they noted that foreclosure filings were reported on 212,764 U.S. properties in July, a 4% decrease from June and a 35% decrease from last year. July's total was a 44-month low for foreclosure activity.

Bespoke Investments is reporting that even with the 5% jump in stocks earlier in the week, the S&P 500 is still on pace for its fourth worst month of August in history. The only months of August where the S&P 500 had a worse performance through August 24th were in 1990, 1939, and 1974.

A survey of CFA charter holders found that 68% of 993 respondents indicated that they think Europe's financial troubles will spread to North America. U.S. holdings of European debt are substantial, and an escalating crisis in the EU does compound the crisis in the U.S. While many European investors seek a Eurobond bailout for their banking system, it is clear that the EU needs Germany to comply. However, in recent days, numerous statements out of Germany -- ranging from Chancellor Angela Merkel to Finance Minister Wolfgang Schaeuble to lower-level administrators -- confirm that Germany remains unenthused about participating in a broad European bailout. While a Eurobond could work in theory, asking citizens of well-managed countries to pay the fiscal and interest costs of troubled countries is tenuous at best. Moreover, public-opinion polls in the stronger countries, such as Germany, are sharply against a broader European bailout. -- Ron Rimkus, CFA, content director of CFA Institute

Gold contracts for December delivery fell $104 an ounce Wednesday on the New York Mercantile Exchange and closed at $1,757.30. Over two days, gold fell more than $150 an ounce. The exchange imposed higher margin requirements for gold trading, which should only have a temporary impact on the price of the shiny metal.

Wheat futures for December delivery fell more than 1% yesterday. Earlier, reports said the Canadian crop is bigger than expected and that good weather in Australia's major grain-producing regions could increase crop yields. This comes on the heels of a bump in the futures after Midwest flooding raised concerns about the size of the US crop.

Since Mr. Buffet spoke on taxes last week there has been a lot of discussion about taxing higher income earners. US News and World Report did a study showing that if you taxed 100% of earnings over $250K per year plus 100% on corporate profits, you would have enough to run the government for roughly six months. While I agree the tax code needs a lot of work, the reality is we have a major spending problem.

OK, the Angels have been on a tear since losing three of four to the Rangers, picking up five games on the Rangers in the past week, and travel to Texas this weekend for a series which will help decide the American League West. The Angles trail the Rangers by two games. College football kicks off next Friday.

Have a great weekend

Ned