Leap Day!

February 29, 2012

"Service to others is the rent you pay for your room here on earth" - Muhammad Ali

Equity markets continue to get a solid bid as the European version of quantitative easing (QE 2.5?) continues. The ECB has been offering banks three year loans, and yesterday 800 banks accepted 529.5 billion Euro ($712 billion), which follows December’s hand out of 489 billion Euro. “The astonishing number this time is the number of banks participating….” “So the impact may be bigger than the first one” said Barclay’s head of fixed income strategy Laurent Fransolet. Roughly 300 billion euro is new cash, the rest being accounted for by existing ECB loans.

The impact on risk assets of these programs has been significant. Looking at the S&P chart below, you can see when the Fed has stepped on the pedal, equity markets have soared, and the ECB action is having a similar action in today’s market. Other anecdotal evidence that risk assets are benefiting can be found in the yields of Spanish two-year bonds, whose yields have fallen to 2.28% from 3.6% when the first loans were issued December 21. Banks seem to be engaging in a so-called “Sarkozy trade”, where they are using some of the low cost loans to acquire higher yielding sovereign debt.

It seems that tax policy does matter, and hopefully Washington figures that out soon. Durable goods orders for January were a disaster yesterday, falling by 4%, the most in three years vs. expectations of -1%. Ex-transports they fell 3.2% vs. an expectation of 0.0% change. What does that have to do with tax policy? At the end of 2011 a tax incentive allowing full depreciation of equipment purchases expired. It appears that orders were pulled ahead into 2011 to take advantage of the tax incentive.

In spite of the durable goods numbers, economic data is still coming in slightly better than anticipations. Consumer confidence yesterday was reported a t 70.8 vs. expectations of 63.0 and last month’s 61.5. This morning GDP for the 4^th quarter was actually revised up to 3.0% from 2.8%, and the Chicago Purchasing Manager index came in at 64.0 vs. expectations of 61.0. In the GDP report, consumption and government spending were revised up.

Just when it looked like Mitt Romney was going to lose the Republican nomination before Super Tuesday, he pulled off his own Super Tuesday and won both Arizona and Michigan yesterday.

We have discussed the housing market quite a bit. This came from Merrill earlier in the week:

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The slowdown in the pace of processing foreclosures has helped to reduce housing inventory. Over the past year, inventory of existing homes on the market for sale has declined by 23% or by 700,000 properties. This has helped to bring supply at the current sales pace to 6.1 months, the lowest since before the housing bubble burst. However, we believe this is a temporary dip and look for months supply to head higher over this year. The AG settlement, which puts in place guidelines for servicers, will speed up the foreclosure process, thereby increasing the flow of distressed properties into the market. In addition, if homeowners perceive home prices are close to a bottom and confidence in the economy improves, we should see an increase in voluntary sellers, which also adds to inventory.”

Search Engine Optimization (SEO) is a method firms use to improve their results in Google (GOOG) and other searches. Consulting firms help companies maximize their online results via data mining techniques which ensure certain words and key links to other sites help drive search results for the lowest possible cost. A new trend that has appeared online and will have a long-lasting and disruptive impact on the SEO market is people as SEO’s. What does that mean? Think about the Facebook “like” button or group pages, and Twitter. Marketers are now focusing on influential users of both services (among others) to build traffic to their sites. As an example, a product mention by a well-followed celebrity on Twitter can be just as effective, and much cheaper than other sources of advertising. Influencers get this, and are now charging for mentions and likes. No wonder GOOG’s rev per click has been declining.

There’s a lot going on in the chart below. I thought the bottom panel, showing the unemployment rate of various regions, was interesting.

It’s no secret the Fed has been gorging itself on treasuries. The table below, from Global Macro Monitor, shows that the Fed owns over 40% of the 2019 maturity, 7-year bonds. The Fed has been taking roughly 40% of every auction, but has been especially aggressive on the 7-year, often accounting for over 50% of the auction.

Is Greek’s “voluntary” restructuring a default or not? It may be semantics to most, but to holders of Greek CDS it is a critical definition. ISDA is reviewing the restructuring now to determine whether it constitutes a “credit event” or not. If it is determined to be so, CDS totaling roughly $3.2 billion will be paid on the country’s bonds.

H.J. Heinz, broke records for the lowest coupon ever on 5 and 10 year triple B paper. The company issued $300 million of each maturity at 1.5% and 2.85%.

Here’s a nod for maturity and experience. The Economist is reporting that there are twice as many successful business founders older than 50 as there are younger than 25. The study found that the greatest amount of entrepreneurial activity is by people ages 55-64.

Remember, today is an extra day for everyone that only comes once every four years. Don’t waste it-time is the only commodity you can’t buy.

Have a great one.

Ned