Saturday, February 06, 2010

Risk Premiums

2/6/10 Risk Premiums

“The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so-called European peripheral nations including Greece and Portugal, Deutsche Bank AG said. ‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote…”

Doug Noland: "The stock market has been under pressure – and that’s not so helpful for already fragile confidence. Yet, how much of an offset is provided by declining Treasury and mortgage-backed yields? How much benefit will the stronger dollar provide in the way of lower energy and import costs? Notably, there has been so far only limited widening of U.S. risk premiums. Is this an indication of U.S. system resiliency - or complacency? ....Junk spreads have barely budged from January lows (487bps) and remain significantly below the high of 1,300 recorded last March. Investment grade spreads are also less than half of the levels from last spring. And while they have widened marginally, emerging market debt spreads are not far off 15-month lows. Brazil and Mexico can still borrow for 10 years at not much over 5%. For the most part, financial conditions remain loose."

David Rosenberg: "The level of employment today, at 129.5 million, is the exact same level it was in 1999. And, during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29 million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. That sounds like pretty deflationary stuff from our standpoint. "

ZeroHedge: JPM ramped the market's close on Friday. "JPM's ETF desk singlehandedly manages to push market higher. It is unknown if this is for prop positions (yes Senator Corker, we know it when we see it), or flow (JPM is RenTec's. and many other quant funds' Prime Dealer) is unknown. What is known is that JPM indicates every single SPY offer was lifted by its sage trader."

Cold weather will cover the U.S. from the Rockies to the East Coast between now and Feb. 19, MDA Federal Inc.’s EarthSat Energy Weather said. Two feet (60 centimeters) of snow may fall in the Washington region. About 52 percent of U.S. households use gas for heating.

“Gas is mostly up on the weather,” said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. “You’ve got a region that uses a lot of gas with a snow cap, so that will keep things a little cooler, which enhances the demand picture for natural gas.”
Natural gas for March delivery rose 9.9 cents, or 1.8 percent, to settle at $5.515 per million British thermal units at 2:36 p.m. on the New York Mercantile Exchange. Prices advanced 7.5 percent this week.
Southern New Jersey and Delaware have been placed under a blizzard warning. In New Jersey, 67 percent of households rely on natural gas for heating, according to the Energy Department. About 65 percent of households in Washington heat with gas.

Friday, February 05, 2010


2/5/10 Freeloaders

The number of U.S. homes listed for sale rose in January compared to December after 18 consecutive months of decline, according to data released on Thursday by real estate brokerage ZipRealty. The increase in listings from a survey of Multiple Listing Services can be attributed to the extension and expansion of U.S. home buyer tax credits, which is prompting sellers to list their homes sooner rather than wait for spring, the peak home buying season, according to Emeryville, California-based ZipRealty.

The growing sovereign debt problems in Europe will continue to keep markets under pressure, Bill Gross, co-CIO and founder of Pimco, told CNBC Thursday.
“The magnitude is not the same as the subprime crisis, but to a certain extent, they're similar,” Gross said in a live interview.

The unemployment rate fell in January to 9.7% from 10% in December, the Labor Department said Friday. Nonfarm payrolls contracted by 20,000 in January. Economists surveyed by MarketWatch had expected a 25,000 gain and for the unemployment rate to remain steady at 10.0%. Under the revisions released today, job losses since the start of the recession in December 2007 totaled 8.4 million. The Labor Department said the economy shed 150,000 jobs in December, compared to 85,000 previously reported, but November was revised to a gain of 64,000, up from 4,000. A sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago.

Last month, the services sector added 40,000 jobs after shedding 96,000 positions. The figure included a rise in federal government employment, partly as a result of the hiring of staff for the 2010 Census. Temporary help employment rose 52,000, maintaining a rising trend seen in the past month.

Manufacturing payrolls rose 11,000 last month, the first gain since January 2007, after dropping 23,000 in December. But the construction sector, continued to struggle, losing 75,000 jobs, likely because of unusually cold weather. Construction payrolls fell 32,000 in December.

In another sign of labor market improvement, the average workweek unexpectedly rose to 33.3 hours, the highest level in a year, from 33.2 hours in December. Total average hourly earnings increased $18.89 from $18.84 in December. Manufacturing overtime rose to 3.5 hours, the highest since September 2008. The Census Bureau hired 9,000 temporary workers in January as part of the decennial census, and now employs 24,000 temporary workers.

The Employment-Population ratio ticked up slightly to 58.4% in January, after plunging since the start of the recession. This is about the same level as in 1983.

The January Birth/Death adjustment was for -427K from +25K in December.

The Labor Force Participation Rate increased slightly to 64.7% (the percentage of the working age population in the labor force). This is at the level of the early 80s.

ZeroHedge: "Yet a number that avoids some of the constant fudging by the BLS, the Non-Seasonally Adjusted number, hit a new recent record: instead of 9.7%, this number was 10.6%, a 0.9% increase from December!

The same can be seen in the U-6 data. NSA U-6 is now at a record 18%, even as the seasonally adjusted number declined to 16.5%."

European policymakers scrambled on Friday to reassure markets on the stability of their 16-nation currency bloc as investors shed euro assets for a second day on fears about debt-laden member states like Greece and Portugal.

European Central Bank Governing Council member Ewald Nowotny tried to play down a sharp fall in the euro, which hit its lowest level against the dollar since May 2009, and called talk of a euro zone breakup "absurd."

Greek Prime Minister George Papandreou, on a visit to India, promised to "credibly apply" an austerity program designed to bring his country's yawning debt and deficit levels under control.

Markets also focused on Portugal, where parliament was due to vote on a regional financing bill that is seen as a crucial test of the government's ability to curb spending.

Alongside Greece and Spain, Portugal is one of a handful of euro bloc countries that face intense pressure to get their public finances in order and calm markets worried about the risks of a sovereign default.

Analysts are no longer discounting the possibility that a smaller member of the bloc such as Greece could be pushed out, though most believe monetary union will survive.

"The market is closely watching each country's ability to pay its debts," said Erkki Liikanen, who sits on the ECB council with Nowotny. "If the faith is lost, rates will go up significantly."

Airgas Inc. said Friday that it received an unsolicited bid from Air Products & Chemicals Inc., offering to buy the company for $60 a share. Airgas said its board will review the proposal and advised its shareholders to take no action at this time. Shares of Airgas were up about 42% in premarket trade Friday on news of the proposed deal.

China announced anti-dumping duties of up to 105.4 percent Friday on imports of U.S. chicken products, adding to trade strains with Washington.

The case comes amid mutual accusations of protectionism by Beijing and Washington which both say will hurt efforts to end the global economic downturn.

A preliminary investigation concluded U.S. exports were being sold at improperly low prices that harmed Chinese competitors, the Commerce Ministry said. It said importers must post a bond until a final decision is reached.

Credit markets were slammed as the cost to insure investment-grade corporate bonds saw their biggest increase in more than two years.

Undoing the carry trade can be dangerous to one's economic viability. Free rides are for only a short distance. It is a lesson that carries out the freeloaders.

"We think that it's substantially different this time, based upon the fact that instead of levering we're delevering and instead of deregulating we're regulating," Bill Gross said. "Both of those conditions in combination produce a very weak economy, very slow growth and ultimately have effects on asset markets that depend on asset appreciation.""The growth has been really based on a check not only by the US government but many sovereign governments," he said. "The minute that check disappears the private market is standing very lonesome and on its own legs."

Los Angeles Mayor Antonio Villaraigosa ordered officials Thursday to eliminate 1,000 city jobs and begin planning employee layoffs, one day after the City Council failed to do so amid a deepening budget crisis.
Disturbed by the council's inability to make a dent in a $212-million shortfall, Villaraigosa sent a letter to department heads saying he was accelerating the effort to shift as many employees as possible to vacant positions not paid by the city's general fund and would impose layoffs where necessary. Police officers would not be affected.
"If you think I'm not going to move ahead, you don't know me well," Villaraigosa told reporters during a late afternoon news conference. "I don't do this because I want to. I do this because I must."

1st American State Bank of Minnesota in Hancock, Minn., became the 16th bank of the year to fail, according to the Federal Deposit Insurance Corp. Friday. Community Development Bank of Ogema, Minn., is set to assume the bank's $16.3 million in deposits. Community Development will also purchase the bank's $18.2 million in assets. The bank is also Minnesota's third bank failure of the year.

Reversing course after a near 200-point drop earlier, the Dow Jones Industrial Average added 10.05 points, or 0.1%, to 10,012.23, leaving the blue chips with a 0.6% weekly loss. The S&P 500 Index gained 3.08 points, or 0.3%, to 1,066.19, down 0.7% for the week. The Nasdaq Composite Index rose 15.69 points, or 0.7%, to 2,141.12, leaving it off 0.3% from the week-ago close.

Outstanding debts held by consumers fell for a record 11th month in a row in December, led by falling balances on their credit cards, the Federal Reserve reported Friday. Outstanding debts - not including mortgage debt - fell a seasonally adjusted $1.73 billion, or an annual rate of 0.8%, in December after a record $21.8 billion decline in November. The decline was much less than the $9 billion forecast by economists surveyed by MarketWatch. For all of 2009, consumer debt dropped by 4% from $2.56 trillion at the end of 2008 to $2.46 trillion. It was only the second annual decline since 1945 and the first since 1991, when debts fell 1.3%.

Thursday, February 04, 2010

Job Losses

2/4/10 Job Losses

Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

First-time claims for state unemployment benefits rose to the highest level since mid-December, the Labor Department reported Thursday. The number of initial claims in the week ending Jan. 30 rose 8,000 to 480,000. The consensus forecast of Wall Street economists was for claims to drop to 455,000. Claims in the previous week were revised to a decrease of 7,000 to 472,000 compared with the initial estimate of a decrease of 8,000 to 470,000. The four-week average of initial claims rose 11,750 to 468,750. A Labor Department official said there were no special factors behind the increase. Meanwhile, the number of Americans receiving state jobless benefits rose a slight 2,000 to 4.60 million in the week ending Jan 23. The four-week moving average of continuing claims fell 51,250 to 4.62 million. Overall, 11.53 million Americans received federal and state unemployment benefits on an unadjusted basis in the week ended Jan. 16, the latest period for which the data is available. This is up from 11.48 million in the prior week.

Productivity of the U.S. nonfarm business sector slowed a bit in the fourth quarter as hours worked increased for the first quarter since the second quarter of 2007, the Labor Department estimated Thursday. The productivity of the U.S. nonfarm business sector rose at an annual rate of 6.2% after a 7.2% gain in the third quarter. Output rose 7.2% in the final three months of the year and hours worked increased 1.0%. Economists were expecting productivity to rise 7.3% in the fourth quarter. Unit labor costs - a key inflationary signal - fell at an annual rate of 4.4% in the fourth quarter. Real hourly compensation fell 1.9%. For the year, productivity rose at a 2.9% rate, the fastest pace since 2003. Both hours worked and output declined by record rates in 2009. Unit labor costs fell 0.9%, the biggest drop since 2002.

Nouriel Roubini, the New York University professor who predicted the credit crisis, expects the dollar to weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.

“I see anemic recovery of economic growth in the U.S.,” and “the U.S. current account is still very large,” Roubini, a founder of Roubini Global Economics, said at a conference in Moscow today. “In the next two or three years, the dollar has to weaken further on a trade-weighted basis.”
International Monetary Fund Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick said this week the recovery is “fragile.”

January is the least important month of the year on retailers’ calendar as stores use the month to clear out winter merchandise and bring in spring merchandise. So analysts say they’ll be studying sales patterns more closely in the coming months to discern shoppers’ financial health. January did offer clues about shoppers’ focus on fat discounts. For the holiday season, stores ordered so conservatively that they ended December with relatively little extra inventory — and less than usual to mark down in January. As a result, some stores pushed up deliveries of spring items from jumpsuits to sandals, but bargains were all that most consumers wanted.

Bloomberg reports that 824,000 jobs will disappear Feb. 5 due to downward
revisions. Job losses during the recession may have been underestimated by close to a million jobs. So instead of employers cutting just over 7 million jobs from their payrolls since the economic downturn began in December 2007, it's expected that the Labor Department's new estimate will be a loss of 8 million jobs.

Boeing and Airbus expect demand for new orders to remain depressed until 2012 as a record drop in air travel prompts companies to pare growth.

Platts analyst expect the EIA to report a drawdown of between 121 and 125 billion cubic feet from natural gas storage for the week ended Jan. 29.
Martin King, analyst at FirstEnergy Capital, told Platts that temperatures had began cooling off last week in key gas-consuming regions, "which bolstered demand mid-week".
U.S. natural gas supplies down 115 bcf - EIA.

Orders for U.S.-made manufactured goods increased 1% in December, led by strong demand for machinery, metals, petroleum and military planes, the Commerce Department reported Thursday. Economists were looking for a 0.6% gain. Orders for durable goods rose 1%, significantly higher than the 0.3% gain estimated a week ago. Orders for nondurable goods also rose 1%, largely due to higher prices for petroleum. Shipments of core capital equipment rose 2.1% in December. Shipments of all factory goods increased 1.9%, while inventories fell 0.1%. November's orders were revised down to 1% from 1.1% earlier.

The Dow Jones Industrial Average sank 268.37 points, or 2.6%, to 10,002.18, its worst daily loss since April 20, 2009. The Dow had lapsed under 10,000 just ahead of the close, its first lapse under that level since early November. The S&P 500 Index fell 34.17 points, or 3.1%, to 1,063.11. The Nasdaq Composite Index declined 65.48 points, or 3%, to 2,125.43.

The U.S. government's borrowing limit would rise by $1.9 trillion to $14.3 trillion under legislation approved in the House on Thursday. Lawmakers also approved a budget-control mechanism known as "pay-go" before sending the bill to President Barack Obama for signature. The vote was 233-187. The Senate approved the borrowing increase and pay-go rules in a tight vote last week.

Wednesday, February 03, 2010


2/3/10 ADP

Private-sector firms in the U.S. eliminated 22,000 jobs in January, the 24th decline in a row, according to the ADP employment report released Wednesday. It was the fewest jobs lost since 22,000 jobs were added in January 2008. In December, a revised 61,000 jobs were lost, compared with the 84,000 originally reported, ADP said. The ADP jobs data come two days before the Bureau of Labor Statistics releases its estimate of January nonfarm payrolls. Economists surveyed by MarketWatch are looking for payrolls to rise 20,000 in the BLS survey

The US could lose its Aaa bond rating at Moody’s (CNBC).

The Obama administration says the government will grow to 2.15 million employees this year, topping 2 million for the first time since President Clinton declared that "the era of big government is over" and joined forces with a Republican-led Congress in the 1990s to pare back the federal work force.

Most of the increases are on the civilian side, which will grow by 153,000 workers, to 1.43 million people, in fiscal 2010.

According to a study from the nation's largest food bank operator, the number of Americans in need of food aid has jumped 46 percent in three years, including a 50 percent jump in the number of children needing food assistance, and a 64 percent increase in hunger in senior citizens' homes.

The study, Hunger in America 2010, found that 37 million people, or roughly one in eight US residents, received food aid in 2009. That's a 46 percent jump from a similar survey carried out in 2006.

A major Chinese bank has raised mortgage rates in one of the first signs of how the government's lending clampdown is rippling through the economy and could tame turbo-charged growth but spook investors. Bank of China's decision to roll back mortgage discounts came after banks throughout the country aggressively called in loans in the second half of January to fall into line with the government's directive to slow lending.

Redbook reported year over year gains of 0.8% and month over month sales of -1.5%. The year over year gains were the lowest since October. Weekly sales reported by ICSC were also weak. Year over year sales were up 0.4% while weekly gains came in at just 0.1%.

The Treasury Department said Wednesday it expects to hit the government's debt ceiling by the end of February, putting pressure on Congress to raise the limit from its current level of $12.4 trillion.

Treasury said it is working closely with Congress to raise the ceiling. The Senate has approved legislation to increase it by $1.9 trillion to $14.3 trillion, but the House has yet to pass the measure. A ceiling that high would equal about $45,000 for every American.

"Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S. If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes, including stocks." - Mohamed El-Erian

David Walker: "Let's put it this way: Spending last year was about $3.5 trillion. The deficit was $1.42 trillion, which means that revenues were about $2.1 trillion. So $2.1 trillion is equal to their annual income.
The total national debt right now is $12.3 trillion. So we owe five to six times more than we make every year. But that's not the big deal.
In addition to that, there is another $45 trillion to $50 trillion in unfunded obligations that are off the balance sheet, which I think you ought to count. Medicare is the biggest part of it by far, and Social Security is a large part, too. So in reality, we owe between 25 and 30 times what we make every year."

On Feb. 6, 400 homes will be auctioned off in Phoenix.

Russia and Britain said Wednesday that they would welcome Iran's readiness to accept a proposal aimed at ending the standoff over its nuclear program as a "positive sign.

The ISM Services Index for January came in at 50.5, which is essentially in-line with the 51.0 that was expected and up slightly from the 50.1 that was posted in the previous reading.

Crude inventories rose by 2.3 million barrels, or 0.7 percent, to 329 million barrels, which is 6.1 percent below year-ago levels, according to the Energy Department's Energy Information Administration's weekly report.

Analysts expected a drop of 1 million barrels for the week ended Jan. 29, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Gasoline inventories fell by 1.3 million barrels, or 0.6 percent, to 228.1 million barrels. That missed analysts' expectations and was 5 percent above year-ago levels.

AccuWeather: "The next storm taking aim at the mid-Atlantic for the end of the week will be a big one, perhaps on par with the storm before Christmas. However, this storm will be much more extensive, stretching from the central and northern Plains to the Atlantic Coast. This somewhat warmer, wetter snowstorm will deliver back breaking snow to some locations and blizzard conditions to others. A nightmare for ground and air travel is in the making into the weekend. An invasion of frigid air during and following this storm could set the stage for more troublesome snow and ice as February progresses."

Wal-Mart Stores Inc Chief Executive Mike Duke said in an employee memo Wednesday that the company plans to cut about 300 home-office jobs in Northwest Arkansas, primarily in the corporate support areas. The move came after the company said last month it would cut more than 11,000 jobs at Sam's Club and outsource its product sampling and demonstration among other restructuring moves.

. Retreating after its best two-day advance since early November, the Dow Jones Industrial Average fell 26.3 points to 10,270.55. The S&P 500 Index declined 6.04 points to 1,097.28. Up for a third consecutive session, the Nasdaq Composite Index added nearly 1 point to 2,190.91.

Tuesday, February 02, 2010


2/2/10 States

ZeroHedge: "As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. Currently all states collectively posses $10.7 billion in trust fund assets(with the bulk held by less impacted states such as Washington ($2.6 billion), Louisiana ($1.1 billion) and Oregon ($1.1 billion). On the other hand, 26 states currently rely exclusively on the Federal Government, and have borrowed a combined $30 billion through December to fund payments. ProPublica estimates that another 8 states will be insolvent within 6 months, as their trust funds also approach 0."

Spending by U.S. consumers increased in December for a third consecutive month, signaling the biggest part of the economy will contribute more to growth in coming months.

The 0.2 percent increase in purchases was less than anticipated and followed a 0.7 percent gain in November that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.4 percent, exceeding expectations.

Don't expect to see much apartment construction in the Inland Empire any time soon. As everyone knows, a glut of foreclosed homes has flooded much of Riverside and San Bernardino counties, and those homes compete with apartments for tenants, according to a new report by real estate brokerage Marcus & Millichap.

That's especially true in outlying areas such as Palm Springs, Perris and southwest Riverside County, the report said.

Waning demand and competition from foreclosed houses should drive Inland Empire vacancy up slightly to almost 10% this year. That's a much slower rise, however, from the jump of 2.4 percentage points last year.

Asking rents are forecast to fall 3.7% to an average of $969 a month, while actual rents should fall 5.6% to $895.

Those dreary numbers for landlords will result in the completion of just 520 new apartments this year, down from 1,260 units last year, Marcus & Millichap said.

Buyers returned to the market for U.S. preowned homes in December after a federal tax credit was reinstated, according to a survey of real estate agents released Tuesday by the National Association of Realtors. The pending home sales index rose 1% in December after plunging 16.4% in November, with buyers reacting first to the expiration and then to the return of the tax credit, NAR data showed. The index is up 10.9% compared with December 2008. The gain in the pending sales index portends a similar gain in existing home sales for January, which will be reported in three weeks. In December, existing home sales fell 16.7%.

Treasury Secretary Timothy Geithner said the U.S. can't make deep and immediate budget cuts.

U.S. housing vacancy rates remained near all-time highs in the fourth quarter, the Commerce Department reported Tuesday. For rental housing, the vacancy rate fell to 10.6% in the fourth quarter from a record 11.1% in the third quarter. For homes typically occupied by the owner, the vacancy rate rose to 2.7% from 2.6%. The home ownership rate fell to 67.2% from 67.6%, the lowest ownership rate since early 2000. Before the housing bubble burst, the rental vacancy rate had never been above 9%, and the ownership vacancy rate had never been above 2%. The data show 2.1 million vacant housing units for sale and 4.5 million units for rent, an over supply that has depressed prices and rents.

Crude oil for March delivery finished up $2.80, or 3.6%, at $77.23 a barrel at the New York Mercantile Exchange. Gold for April finished up $13, or 1.2%, at $1,118 an ounce at the New York Mercantile Exchange.

The Dow Jones Industrial Average gained 111.32 points to close at 10,296.85. The S&P 500 Index rose 14.12 points to 1,103.31. The Nasdaq Composite Index climbed 18.86 points to 2,190.06.

Monday, February 01, 2010

Greece and the U.S.

2/1/10 Greece and the U.S.

Americans increased their spending in December at the slowest pace since September, allowing their savings rate to drift to the highest level since June, the Commerce Department estimated Monday. Real consumer spending (that is, adjusted for inflation) rose a seasonally adjusted 0.1% in December after a 0.4% gain in November. Meanwhile, real after-tax incomes rose a seasonally adjusted 0.3% in December, boosted by transfer payments, small-business profits, income from investments, and a small gain in wages. With incomes rising faster than spending, the personal savings rate rose to 4.8% of disposable incomes, the highest since June.

Exxon Mobil Corp. said Monday its fourth-quarter net income fell 23% to $6.05 billion, or $1.27 a share, from $7.82 billion, or $1.54 a share in the year-ago period. Revenue rose to $89.8 billion from $84.7 billion. Wall Street analysts expected earnings of $1.17 a share for the oil giant, according to a survey by FactSet Research. Capital and exploration spending rose 21% to $8.3 billion. Oil-equivalent production increased about 2%. Excluding the impacts of entitlement volumes, quotas and divestments, production rose more than 3%.

As refineries from New Jersey to New Mexico close at the fastest pace in three decades, traders in Singapore are profiting from a new plant on India’s west coast and a ship heading for Florida filled with jet fuel from Taiwan.

The so-called refinery crack spread in Singapore, representing the value of fuels minus the cost of crude oil, may climb 50 percent to as much as $4.50 a barrel this year, according to a Bloomberg News survey of five analysts. U.S. refinery margins will drop 35 percent by December, futures contracts on the New York

John Hussman: "Presently, stocks remain richly valued on the basis of normalized earnings, book values, dividends, revenues and other metrics. Investors now rely on the renewed attainment of bubble valuations in order to achieve acceptable returns.

If you keep one thing in mind during the current earnings season, it should be that operating earnings significantly overestimate what Warren Buffett would refer to as "owner earnings" - the actual amounts that are paid out or retained for the benefit of shareholders. Again, stocks are nothing but a claim to the long-term stream of cash flows that will actually be delivered to investors over time. Everything else is hype, smoke and mirrors."

President Barack Obama proposes a $3.8 trillion fiscal 2011 budget today that calls for $100 billion in additional stimulus spending and projects this year’s deficit will hit a record $1.6 trillion.This is almost 11% of the GDP.

Foreign central banks' UST holdings at the Fed declined for the first time in over two years.

The ISM factory index jumped to 58.4% in January from 54.9% in December. This is well above expectations. The consensus forecast of estimates collected by MarketWatch was for the index to rise to 56.0%.

Spending on U.S. construction projects fell at a seasonally adjusted rate of 1.2% in December, the fifth decline in the past six months and the lowest rate since August 2003, the Commerce Department estimated Monday. For all of 2009, total construction spending fell 12.4% to $939.1 billion from $1.07 trillion in 2008. It was the largest decline on record, dating to 1964. The 1.2% decline in December was much worse than the 0.4% drop expected by economists surveyed by MarketWatch. November's outlays were revised down to a 1.2% drop from the 0.6% decline earlier reported. Private residential outlays fell 2.8%, private nonresidential outlays rose 0.2%, and public outlays fell 1.2%.

Wells Fargo & Co., unlike its three biggest competitors, is so convinced interest rates will rise that it sacrificed as much as $1 billion last year cutting back on fixed-income investments.

The nation’s fourth-largest bank, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., reduced investments in mostly fixed-income securities by $34 billion in 2009’s second half, company filings show. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. boosted their holdings by an average of $35.5 billion.

By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, San Francisco-based Wells Fargo aims to protect against losses when rates rise. The three other lenders increased investments on the theory that profit will outpace any future losses.

“The bias is for higher rates,” Chief Executive Officer John Stumpf, 56, said on the company’s fourth-quarter earnings call. “We’re willing to wait for that to happen. We think that’s the better trade.”

Ried Thunberg’s survey shows most money managers are bearish on Treasuries. The company’s index measuring the market outlook through June fell to 42 for the seven days ended Jan. 29 from 43 the week before. A figure less than 50 shows investors expect prices to fall. The company, in Jersey City, New Jersey, interviewed 26 fund managers controlling $1.42 trillion.

The Dow Jones Industrial Average rose 118.20, or 1.2% to close at 10,185.53, its biggest point and percentage gain since Jan. 4. The S&P 500 gained 1.4 percent and the tech-heavy Nasdaq added 1.1 percent.

Sunday, January 31, 2010


1/31/10 Bang

This Time is Different (Carmen M. Reinhart and Kenneth Rogoff): "Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits."

Private equity firms have financed the purchase of 100,000 units of rent-regulated housing across New York City since 2005, according to the Association for Neighborhood and Housing Development, a coalition of nonprofit housing groups in New York. These owners account for almost 10 percent of the city’s rent-regulated housing.
Benjamin Dulchin, executive director of the Association for Neighborhood and Housing Development says that harassment is central to rental real estate investments backed by private equity firms because the onerous debt they have taken on requires significantly higher revenue than can be generated in rent-regulated buildings.

And, he argues, even if these properties go into bankruptcy, the pattern of harassment may continue. Distressed-debt investors interested in buying them may continue trying to force out tenants, he said.

John Mauldin: "And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. "Domestic demand" declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of "Cash for Clunkers," but even so that is not a sign of economic strength.

Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.

Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%....In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.

"Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed's National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won't do."

Greece is running a budget deficit of 12.5%. How does that compare with the U.S.?

Mike Burk: "The sell off of the last 2 weeks has the market, by many measures, the most oversold it has been since the rally began last March. At this time there is no evidence of a developing top so the market is likely to recover, at least, to its previous highs.
I expect the major averages to be higher on Friday February 5 than they were on Friday January 29.
Last weeks positive forecast was a miss."