Another Fed Lovefest

Just days before Chairman Bernanke takes the stage at his favorite Wyoming venue, he wrote a short love note to Congress informing them of his intentions to continue with his generous ways.  In the minds of Democrats the assistance couldn't come too soon as the economy continues to falter in advance of the elections.  Republicans have started to howl, to no avail, as the good Chairman has greater job security with the Obama Administration than with the Tea Party, who has called not only for his removal, but also the demolition of the entire Fed. So what if the Fed spends another trillion or so if it keeps the Chairman off of President Obama's ever growing role of unemployment recipients?  

The US government, never one for cutting spending, has actually started doing so in advance of the budget cuts from last year's budget negotiations.  The government has cancelled 14K contracts worth over $2 billion for the fiscal year that ends September 30th, with more to follow next year when the spending cuts really hit hard.  I guess we can look forward to more job creation from government programs that fund green energy programs to offset the job losses in the defense industry.  

One of the key discussion points of this election has been the President's desire to spread the wealth vs. Mr. Romney's goal of spreading the tax burden.  The chart below shows the last 95 years of tax rates for income, corporate and capital gains. 

 I constantly get questioned about how equities can continue to kick off good returns when the economy is so weak.  A look a the charts below (courtesy JP Morgan) show that slower economic growth has historically supported better equity returns.  Why?  Because the threat of inflation becomes muted during a soft economic period, keeping a hawkish Fed at bay.  The chart on the right shows that earnings growth from US corporations is handily outperforming the economy, and has done so at a faster clip than at anytime over the past 60 years. 

We have discussed China's slowdown over the past year, but the chart below show how bad the equity markets have been as well.  Believe it or not, the Shanghai is one of the few indexes that has almost round tripped its recovery from 2008.  A weak China is bad for global growth and commodity prices. 

Shell expects to overcome equipment problems that have put it behind schedule and begin drilling in Arctic waters off the coast of Alaska this summer, said Peter Slaiby, vice president in charge of operations in Alaska. He said that because of unexpected delays, the company is scaling back its plan to drill five wells this year and will probably begin work on one or two.

  

Aetna signed a $5.7 billion cash-and-stock deal to buy Coventry Health Care, making Aetna one of the biggest providers of government-financed health care in the U.S. Aetna agreed to pay $42.08 per Coventry share, a premium of more than 20% to last week's closing price

Finnish Foreign Minister Erkki Tuomioja said the nation is preparing for a breakup of the eurozone. "We have to face openly the possibility of a euro breakup," Tuomioja said. "It is not something that anybody, even the True Finns, are advocating in Finland, let alone the government. But we have to be prepared."  That's a scary proposition.

Best Buy (BBY), aka Amazon's showroom, missed earnings again, posting negative comps for the 9^th quarter in a row.  The company continues to struggle with a lack of unique product offerings and heavy overhead.  When Circuit City (CC) filed bankruptcy in late 2008 I said that BBY would have a nice 24 month window to gain share before they began their invevitable decline.  They have lasted a bit longer than I expected. 

BBY’s woes aren’t good news for electronics manufacturers.  Part of BBY’s problem is a lack of interesting new products which drive consumers into stores.  The other problem is that electronic prodcuts have become commoditized-which means shrinking margins for manufacturers and limited opportunity for differentiation.  Remember the old adage “rent hardware stocks, own software stocks”.  With the exception of Apple (AAPL), there really isn’t a differentiated consumer electronics brand. 

Warren Buffett's Berkshire Hathaway is backing away from municipal bonds. The firm disclosed in a regulatory filing that it terminated credit default swaps covering $8.25 billion in municipal debt.  Mr. Buffet could be getting ahead of a tsunami of municipal defaults.  Investors are warned to tread carefully in the space-there are lots of high yielding securities, just be careful of weak municipalities.  My concern is that once a few bankruptcies occur, what if stronger munis decide to enter strategic bankruptcies even if their finances are robust?

With food production hurt by unfavorable weather in the U.S. and the Black Sea region, the world should prepare for higher prices in the next few months, the International Monetary Fund and the World Bank said. The U.N. Food and Agriculture Organization's food index climbed 6% in July, reaching a higher level than in 2008, when food and oil prices drove millions into poverty.  I guess its time to repeat the call for ending the ethanol subsidy, which consumes 1/3 of the US corn crop each year. 

A U.S. jury convicted Doug Whitman, founder of hedge fund Whitman Capital, of two counts of conspiracy involving insider trading and two counts of securities fraud. Prosecutors said Whitman made $900,000 from tips obtained from insiders at technology firms.

College football season is finally here!  High school (and Pop Warner) started this weekend, and I was able to catch a handful of games.  The college game kicks into full gear this coming weekend.

Have a great day

Ned