Leeds on Finance

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




Now on to what I read…




1. Markets

The Dow fell 104 points. There are fears of the Greece problem spreading and the Fed slowing the economy.  The Dow closed below 10,000 for the first time in three months.  The Dow first crossed 10,000 in 1999.  When it happened, Maria Bartiromo was on the floor of the New York Stock Exchange doing her best imitation of Meg Ryan in the diner (in When Harry Met Sally).




Risk premiums rose. Risk premiums on corporate debt rose to their highest level this year.  Spreads on investment grade bonds are now at 1.61%.  Risk premiums for high yield bonds have increased from 5.99% (on January 11) to 6.81%.




Greek bailout? Talk continues that Germany and France may have to bail out Greece.  I’d actually be pretty excited for France if they get to come to the aid of someone…




Spain’s problems. Spain plans to issue $104.9 billion of debt in 2010, down 34% from 2009.  Last week, Spain raised its 2009 public deficit to 11.4% of GDP from 9.5%.  Their goal is to get this back down to 3% by 2013.




Traders and hedge funds have bet $8 billion against the euro. This is the biggest short position ever in the euro.  The thing to think about is that when sentiment changes back, it could be quite a move.  If the fear over the euro is alleviated, these positions can be reversed very quickly.




The evil empire is dominant in private equity! GS has $14 billion of corporate and real estate private equity holdings on its balance sheet.  That’s huge compared to Blackstone’s $1.35 billion and KKR’s $4.1 billion. This is the big issue to the President — firms using their own capital (not when they are managing other people’s money).

As a separate issue (and not subject to regulation), GS also has more private equity assets under management ($90.7 billion) than any other firm.  Carlyle is second with $86.2B.




China underweights the US. China Investment Corp. (CIC) filed forms with the SEC showing that they have $9.63 billion invested in US stocks.  This is not a complete list, but the main takeaway is that their $300 billion fund is likely underweight the US.




2. Economy

California budget woes. A recent poll of Californians showed that 83% of likely voters believe that the state’s budget situation is a “big problem.”  What the hell do the other 17% think?  Was one of the other choices “pass the ganga?”




This was probably a good idea at one time. One of California’s big problems is that they are one of three states that require 2/3 approval of the legislature to pass a budget.




UPS layoffs. I mentioned several days ago that UPS’ bullish comments on the economy seemed inconsistent with the numbers they released.  Today, they announced that they were going to furlough 300 pilots.  Apparently, this is part of a $1.4 billion cost-cutting plan.




Commodity drop. Corn has dropped 16% and soybeans have dropped 7% since January 12^th, when the Dep’t of Agriculture said that American farmers had produced record crops.




Home entertainment. The average American spent $903 in 2008 on cable tv, internet connection and video games.  If you add another $1000 for cellphone service and you’re at $2K / year.




Who needs magazines? Single issue magazine sales continue to sink.  In H2 of 2009, they dropped 9.1%.  In H1 of 2008, they dropped 6.3%, then 11% in H2 and 12% in H1 of 2009.  These sales are significant because they reflect true appeal of magazines.  Subscriptions, on the other hand, reflect huge discounts.




News magazines were killed. Newsweek fell 41%, Time dropped 35%, Economist lost 24% and BusinessWeek and Fortune were also down in the mid-20s.  Maybe this reflects the fact that no one wants to know what’s going on.  Or maybe in the recession, people don’t want to spend $5 for something that they can read for free online.  Or maybe China is censoring these magazines somehow…

Here’s what’s alarming – some magazines had big gains including Real Simple, O (Oprah), Vanity Fair and Men’s Journal.

3. Fannie and Freddie

More of what we already knew. Fannie, Freddie and the FHA are behind 90% of the mortgages currently being originated.  In addition, Fannie and Freddie are being used to help keep homeowners in their homes and I suspect that they will be used to help support the MBS market after the Fed is done buying.




You delinquents! At Freddie, 3.87% of single-family mortgages are at least 90 days delinquent.  Fannie is at 5.29%.  One year ago, the numbers were 1.72% and 2.13% respectively.




Many more defaults to come. There are estimates that 6% of Fannie’s loans and 4.9% of Freddie’s loans will default over the next 18 – 24 months.  These seem like high numbers based on the current delinquency rates.  But, you have to think of it as being 3% / year for Fannie and 2.5% / year for Freddie.




HAMP is hardly working. Through December, Home Affordable Modification Program has signed up 903,000 borrowers for trial modifications.  Approximately 66,000 have received a permanent modification.




If only it was this easy. Activists are pushing for lenders to reduce the principal of home loans (so fewer people default).  Instead, lenders have been more willing to lower interest rates.  The problem is that shareholders (and Americans in general) don’t want to give modifications to people who speculated, lost and have the ability to bear the loss.  It’s hard to distinguish between good modifications and unnecessary modifications.




5. Random

Rep. John Murtha (D – Pennsylvania) died. He was 77 and had served in Congress for 36 years.  He was known as a Vietnam vet whose opinion on war / defense issues was really important.  He was also known for bringing home the pork to Pennsylvania.  Apparently, there were complications from recent gall bladder surgery.




Do we really have a solution? There is growing concern that Toyota might not actually know what has caused the sudden acceleration of their cars.  Congressional hearings start Wednesday.




The first lady and her fighting words. Michelle Obama says that she is going to fight childhood obesity.  Well, that’s fine.  Today my fat kid announced that he is going to fight federal budget deficits.

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­ Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.

If you’re an alumni of the McCombs MBA program, I’ll be doing a webinar on Tuesday at noon (CST).  I believe it’s free (it better be free…I’m not being paid).  You can find out about it here:

http://utmsb.convio.net/site/Calendar/659542804?view=Detail&id=108001




Now, on to what I read…




1. Markets

Roller coaster day. The market rose 10 points on Friday after being down 167 points.  The euro fell to $1.37, its lowest level since May.




Gold futures are selling for $1,052 an ounce, down 14% from its December high.




2. The Economy

Mixed jobs report. The unemployment rate fell from 10% to 9.7% in December.  This is based on a survey of households.

The survey of employers (called the payrolls survey) revealed that 20K jobs had been lost. Remember…we need to create 125K – 150K jobs per month just to satisfy the (normally) growing labor force.




Fewer part-time workers. The number of people working part-time even though they want full-time employment fell sharply.  This is consistent with people hiring their part-time workers.




China now accounts for more than 9% of global exports. A majority of China’s exports go to developing nations – and they really don’t like losing jobs to China.

China accounted for 19% of US imports for the first half of 2009, up from 16% in 2008.




Keep the spigot open. G-7 financial leaders promised to continue stimulus efforts.  European leaders promised to address the sovereign debt issues.

3. Greece

Hey fellas, I think I may have found the problem. Public wages and pension payments make up 51% of the Greek budget.

The NYT gave a couple of examples of the problem. The administrative staff of the Greek Parliament has increased from 700 to 1,500 in the past few years – with no increase in the number of members of Parliament.  Last year, 29,000 public-sector workers were hired to replace the 14,000 who retired.




Financing risk. The bad news is that Greece has to raise 53 billion euros this year.  The good news is that euros are worth a lot less than they were one month ago.

Who wants to loan money to a country that under-reported its deficit?




The EU is a strange set-up. The EU has centralized monetary policy but each nation controls (or doesn’t control) their own budget.




Will there be a bailout? The EU charter has a no-bailout clause.  The EU’s richest member is Germany – and they don’t want the responsibility of paying for Greece.




Why Greece matters. Greece might have fewer citizens than LA, but it’s a reminder of all of the public debt around the world.  There are fears of higher interest rates.  This is also a reminder that the huge government spending will eventually result in a slower economy.  One analyst said that people shouldn’t worry about a country that’s 2% of EU GDP; they should worry about California which is 10% of US GDP.




Fear about European banks. Investors are worried about European banks which have exposure to European sovereign debt.

The UK banks have big exposure to Ireland ($193B), as do German banks.  French banks have $78B of exposure to Ireland.

German banks have $240B of exposure to Spain.




Japan’s debt problem. Japan’s public debt is expected to hit $9.4 trillion, or 181 percent of its gross domestic product.  One thing that is a little different about Japan…virtually all of their debt is owned by Japanese citizens and institutions (including Japan’s pension fund).  This may make a run less likely.




4. The US Debt Problem

The United States of Greecerica. The Administration’s budget totals $3.8 trillion.  Approximately $1.4 trillion is domestic and military spending that result in appropriations (and can be controlled by the President and Congress).  The remainder is automatic spending for Medicare / Medicaid, Social Security and interest on our $12.4 trillion of debt.




Unbelievable. Apparently House Speaker Pelosi is opposed to the appointment of a commission to deal with the debt problem because she fears that it would result in cuts to Medicare and Social Security.  We have no hope.




Don’t worry about it! Geithner said that the US losing our AAA rating “will never happen to this country.”  He said that the best evidence of our strength is the fact that investors pile in the dollar and Treasuries whenever they’re scared.  The way I describe it is that the idea of the US losing its AAA rating is about as likely as Jenny finding a better guy than me.  Like that could happen…




5. Bonuses

Can he live on this? GS is paying Chairman and CEO Lloyd Blankfein a $9 million bonus for 2009.  This is being described as a sign of restraint.  (I wish someone would restrain me…)  He received $68.5 million in 2007 and nothing in 2008.  All of this will be paid in stock.




Some other bonus info. Jeffries CEO received $12 million.  JPM CEO Jamie Dimon will receive $17MM.  Again, no cash.  He received $28MM for 2007 and no bonus in 2008.




Not too popular. A survey asked Americans how much they trust bankers and other Wall Street leaders “to reduce the risk of the financial challenges the country is facing now.”  On a scale of 1 to 5, the rating was 1.7 (pretty close to “no trust at all”).  If it makes bankers feel any better, Jenny rated me a 1.3.




6. The SEC

Problems at the SEC. There have been a series of partisan 3-2 votes at the SEC (when the Commissioners vote).  Some accuse Mary Schapiro (SEC Chairman) of promoting a political agenda (e.g., disclosure on climate risk).  Go figure that a political appointee would be partisan.  Regardless of what she’s doing, I just remember her as the head of NASD Regulation and I’m in shock that she’s doing anything at all.  As long as she stays true to her roots and doesn’t protect investors, I’ll value her consistency.




Target this. The SEC is looking into “target date” funds where you pick the fund by your retirement year.  The idea that we all have the same needs for a particular target date is absurd.  It shows that mutual funds are marketing companies rather than fiduciaries.  With that said, I’m excited about my retirement in the year 2098.

In 2008, funds with a 2010 “target date” averaged losses of 25%.  Apparently, people retiring in two years needed a 25% loss to reach their goals.




7. Apologies

Toyota’s President offered a “heartfelt apology.” I wish I had a dollar for every time I tried that line with Jenny.  Of course, most of the time, it was dollar bills that got me into this trouble in the first place.  Apparently, he did not make a deep, long bow of contrition.  I’m going to try that next time I’m in trouble (which I have scheduled for Thursday night).

Toyota has recalled 10MM vehicles.




An apology that I hope I never have to make. South African President Jacob Zuma has apologized for fathering a child with a woman who was not one of his three wives.  Apparently, this story is a huge deal in South Africa.  People are really upset about this.  It’s really a shocking story…who would ever imagine that a guy with three wives wouldn’t be faithful?




8. Random

What does this say about the US? Obtaining the permits and approvals to build a mine in the US takes an average of seven years.  This is the longest wait time of anywhere in the world.  Other countries have laws as tough as ours, but we probably have more people that will fight you.




Sarah Palin said she would run for President if it was the best thing for our country.  It’s funny because I had just been saying to Jenny that I think what this country needs is someone who was elected to run Alaska and then quit.  (And before any of you right wing lunatics start emailing me, I’ve voted for both Democrats and Republicans.  But, there’s nothing, and I mean absolutely nothing, that would convince me to vote for Sarah Palin.)




Maybe renting can be better than owning? The Mortgage Bankers Association bought a ten story headquarters in 2007 for $79 million, financed it with a $75 million bank loan and sold it this week for $41.3 million.  I’m reminded of the “Real Men of Genius” commercials that Budweiser used to run.  It breaks my hear to see the Mortgage Bankers Association lose money.
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If you want to be on my email list:

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2. toward the top right corner is a place to click on for email service — click and enter your email address
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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.

If you’re an alumni of the McCombs MBA program, I’ll be doing a webinar on Tuesday at noon (CST).  I believe it’s free (it better be free…I’m not being paid).  You can find out about it here:

http://utmsb.convio.net/site/Calendar/659542804?view=Detail&id=108001




Now, on to what I read…




1. Markets

The market dropped 268 points and even went below 10,000 for a short period of time.  There are several fears in the market:

1. China slowing their economy
2. Sovereign debt issues
3. Fear about the US economy after the weekly unemployment number was released (see below)

The euro hit an eight-month low against the dollar. The euro has lost 9% against the dollar since December.  The dollar’s strength (and weakness in the economy) hurt oil and gold.




Crude oil fell 5% — due to a stronger dollar, slower economy and a move away from speculation.




Interestingly, gold fell 4.4%. Again, stronger dollar was one factor.  But, it’s interesting that investors didn’t flee to gold as a “store of value.”




Leveraged loans showing tiny amounts of life. There were $8.8 billion of new leveraged loans sold to investors in January.  In all of last year, there were only $38 billion.




2. Economy

Initial jobless claims rises unexpectedly. The number of workers filing new claims for jobless benefits rose 8K to 480K last week.  Economists had expected closer to 460K.  This was interpreted as evidence that companies are not confident in the recovery.  Of course, this is also impacted by the productivity increase (see below).  It will be interesting to see the jobs report on Friday morning.




Productivity increased at an annualized 6.2% in Q4. The rate was 7.2% in Q3.  Unit labor costs fell at a 4.4% annual rate in Q4.  This is a strong sign for profits.  Normally, we see productivity gains followed by employment gains and then wages increase.  It’s always interesting to see that productivity is a great thing in the long term (if people are more productive, they can be paid more and their standard of living increases), but it can be painful in the short term (we need fewer workers for the same amount of output).

I recently suggested some possible productivity improvements on the home-front.  Unfortunately, they were not particularly well received, even after I explained to Jenny that her standard of living could improve.  She then proved to me that productivity improvements truly can be painful in the short term.




Retail sales increased 3.3% in January (YOY). This was the biggest increase in sales in two years.  But the 3.3% is in comparison to January 2009, which was a terrible month.  Macy’s, Gap and TJX raised their outlooks for Q4 (most retailers’ Q4 ends January 31).




Friday’s jobs report. Lots of odd things could affect Friday’s jobs report including:

-       gov’t hiring could create 20,000 jobs

-       January employment usually falls by 2.6 – 3.6 million workers (because seasonal work ends); but fewer people were hired this holiday season and so fewer jobs will be lost, but there will still be a large seasonal adjustment




3. Sovereign Debt

Greece is a tiny part of the EU (only about 2.5% of EU GDP), so why do people care?  One reason is that investors also worry about Spain which is the 4^th largest member of the union.  Spain is twice as big as Greece, Portugal and Ireland combined.  Another reason is that it’s a reminder of all of the government debt that is being added worldwide in order to fight this economic slowdown.




The cost of insurance is rising. The cost to insure Greek bonds jumped to $429K / year (on $10MM of bonds). Portugal is at $210K, Spain is at $164K and Italy is at $137K.   Seven years ago, there were less than $3 trillion of CDS contracts outstanding.  Today, it is $25 trillion.




Here’s what’s interesting about the credit default swaps. To me, it represents pure speculation in that my belief is that no one really believes that Greece will default.  We all think that they could, but that the EU won’t let it happen.  But people trade these because they will react to the fear.  I could be wrong, but that’s my feeling.




Failed auction. Portugal was only able to sell 60% of the amount of bonds that they hoped to sell in an auction.




Spain chimes in with bad news. Spain raised their budget deficit forecasts for 2010 – 2012.




Does the idea of the EU work? When the euro was introduced in 1999, advocates argued that regulations on deficits would force weaker countries to become more competitive.  In reality, the union allowed weaker companies to borrow at lower rates during the boom times.  Now, they are suffering.




Moody’s comments on US debt. “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the AAA government bond rating.”  Absolutely prescient, isn’t it?




Not sovereign debt, but Berkshire is selling $8 billion of debt to help finance its acquisition of Burlington Northern Santa Fe.  Investors want short term debt and most of this issuance is very short in maturity.  But, it is an interesting comment that Buffett isn’t trying to lock in long-term rates.

S&P downgraded Berkshire to AA+. S&P was the last rating agency to downgrade Berkshire from AAA.  Do you feel better with Berkshire debt or Treasury debt?




4. Random

I had no idea that this was material information that had to be disclosed to investors! NY Attorney General filed civil charges against former BAC CEO Kenneth Lewis and the CFO for not disclosing losses about Merrill Lynch before shareholders voted to approve the acquisition.  (BAC reached a $150 million settlement with the SEC about the same issue.)  The issue is whether shareholders should have been told about $16 billion in losses in Q4.  Think about this, because it’s not that difficult.  If you owned a company (i.e., you were a shareholder) and the manager of the company acquired another company and didn’t tell you that the company had huge losses, would you think that was right?




Tough times for IPOs. Since early December, only two out of ten IPOs have priced within their expected range.  One IPO that didn’t price was FriendFinder Networks, a company that owns dating and sex-partner websites.  When companies go public, they offer some of the shares to friends and families (referred to as “Friends and Family shares”).  With FriendFinder, I think they should refer to it as “Friends with Benefits.”




You should google “rush limbaugh and retard” to read about this moron’s latest comments. I don’t care where you are politically, this is evidence that he is a total jackass.  Even if you’re a conservative Republican, this was a direct assault on Sarah Palin’s comments about her family.  If you want to read a really good commentary on the story, here’s one:

http://www.bloomberg.com/apps/news?pid=20601039&sid=anEaeFteiOKE
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If you want to be on my email list:

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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




Now, on to what I read…




1. Markets

The market fell 26 points to 10,270.55. With 255 companies in the S&P having reported earnings, earnings are 47% higher than a year ago, but sales growth was only 3.8%.  One analyst noted that 75% of S&P companies (which have reported) have beaten analysts’ expectations, but only 30% have shown revenue growth.




Strong economic data pushed the dollar higher. The dollar hit a two-week high against the yen.  There is thought that a strong jobs report on Friday could lead to the Fed raising rates sooner rather than later.




2. Economy

Better jobs report. The ADP report showed that private sector jobs fell by only 22,000 in January.  This is the smallest drop since February 2008.  Service jobs continue to rise.  We have a great country.  We simply just service each other (which is why I don’t want Jenny working outside of the home).  Everyone is waiting on the real jobs report which will be released on Friday.  Economists are forecasting that no jobs were lost in January.  This number will be skewed by the hiring of census workers.




Less optimistic jobs report. Challenger, Gray & Christmas said that companies announced (in January) plans to reduce 71,482 jobs.  This is the highest number in five months.

Interestingly, TrimTabs Investment Research estimated that we lost 104K jobs in January.  They base their estimate on income tax deposits to the US Treasury.




The ISM non-manufacturing index (service) rose to 50.5 (from 49.8 in December) indicating an expansion.  (Anything above 50 indicates expansion.)




Good news on tech spending. Cisco’s profit rose 23% as the company reported its first sales increase in a year.  Revenue increased 8%.  CEO John Chambers reported broad acceleration in all businesses.  They also said that they would hire 2,000 to 3,000 employees.  Last week, I mentioned that business spending on equipment and software increased 13.3% in Q4.  Cisco’s numbers were consistent with this.  (But spending is still 18.5% below late 2007.)  Capital spending outside of tech is not as promising – GE’s revenue fell 10% in Q4.




Bernanke fights for independence. At his swearing-in ceremony, Chairman Bernanke said that the Fed must maintain its independence.  This will allow monetary policy to be set with long term goals in mind rather than short-term political interests.  (After barely getting re-appointed, I wish Bernanke would have made a speech like “George W” made when he was elected with something like 12% of the popular vote and then said that he was going to spend his political capital.)

Bernanke also said that the Fed still faces “enormous” challenges.  Agreed.

3. Government / Debt / Problems

The federal Centers for Medicare and Medicaid Services are releasing a really scary paper on Thursday. Next year, for the first time ever, government programs will account for more than half of all US health-care spending.  As a result of the recession, more people are relying on Medicaid.  Here are some key numbers:

-       public spending accounted for 47% of the $2.34 trillion of health care spending in 2008

-       estimates are that we spent $2.5 trillion in 2009 (+5.7% YOY)

-       health care was ~17.3% of GDP in 2009 (up from 16.2% in 2008)

-       government spending on health care was 8.4% of GDP in 2009

-       health care spending is expected to reach $4.5 trillion in ten years

-       it is predicted that Medicaid enrollment will increase 5.6% this year and spending will rise 8.9%

-       the first baby boomers turn 65 in 2011 and become eligible for Medicare

-       government spending should reach 52.9% of health care spending by 2019




Everyone is complaining about the budget. Congressmen are complaining about cuts contained in their budget.  I don’t know how anything gets done when no one wants to give up anything.  One proposal suggests a $5,000 credit for each new worker a firm hires in 2010.  Opponents say that a tax credit does not provide incentive for a firm to hire.  Thus, this $33 billion expense is simply a transfer payment to firms that were already planning on hiring.




More to get mad about. The WSJ reports that the Administration’s mortgage modification plan is resulting in first mortgages being modified (reduced) and second (junior) liens being left intact.  In other words, the senior creditor takes a hit, while the junior creditor doesn’t.  That makes no sense.  Of course, it sounds similar to the GM bankruptcy – where capital structure didn’t matter.  Interestingly, most second mortgages are owned by banks.  As a result, this is just another hidden bailout of the banks.  BAC, WFC and JPM had junior mortgage portfolios worth $381 billion and $607 billion of first mortgages.

4. Toyota

Please report to the Principal’s office. US Transportation Secretary Ray LaHood said that he wants to talk directly with Toyota’s CEO.  It’s amazing to see how quickly a company can lose a reputation for quality (although Toyota’s reputation had certainly been sliding in the past couple of years).  Personally, I think that that we should have the Toyota CEO stand in a crosswalk and have people drive their Toyota down the street and see if their car stops or suddenly accelerates.  If he’s comfortable with that, then I’m okay with Toyota.




I didn’t mean that exactly. LaHood had to backtrack on Wednesday after he warned people to not drive recalled Toyotas until they’ve been fixed.  He corrected this comment and said that Toyota owners should contact their dealers. Interestingly, it sounds like the defective parts in the Toyota cars were manufactured by American companies.




Things continue to get worse. Toyota said that Japanese officials had ordered them to investigate braking problems with the Prius.  On the good side, those cars don’t go faster than 5 MPH, so brakes aren’t that important.




5. China

Here comes the Dalai. China urged President Obama to not hold a planned meeting with Dalai Lama, saying that it would further hurt US-China relations.  China’s opposition of our meeting with the Dalai Lama sort of reminds me of when Jenny opposed my watching videos of the Dolly Parton.  Just like China, Jenny said that those videos would hurt already strained bilateral relations.  Speaking from personal experience, I encourage the President to meet either with the Dalai or Dolly.  Either will help you find peace.




Currency debate. To add fuel to the fire, Obama said that China needs to allow their currency to appreciate and that this was going to be a major issue for us.  I think that will be pretty well received by China…   Of course, China is going to respond with the fact that they are our biggest creditor and will tell us to shut up.




China granted 580,000 patents in 2009. This is a 41% increase from 2009.  Some people have complained that China’s rules discriminate against foreigners.  If you complete an invention in China, you must apply for security clearance (which can take up to six months) prior to applying for patents abroad.  This may create risk of trade-secret theft because it extends the period during which people can steal the information prior to the patent.  Who would ever think that China wouldn’t protect intellectual property?  Maybe we can get the Dalai Lama’s opinion on the matter.

6. Random

Organic? There are 14,540 organic farms in the US – less than 1% of the 2.2 million US farms.  The organic farms account for 4.1 million acres.  The total acreage of all US farms is 922 million acres.  California accounts for 20% of our organic farms (I’m not sure how much of that is marijuana, but probably all of it…).  The US does not supply enough organic goods to satisfy all of our needs.
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If you want to be on my email list:

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2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




Now, on to what I read…




1. Markets




The Dow jumped 111 points. Investors were happy with the pending home sales number and there’s a bounce back going on after the recent drop.




Oil prices increased 3.8% to $77.23 per barrel. People are attributing this recent bounce-back to GDP numbers, the ISM numbers and now the higher pending home sales.




2. The Economy

Pending home sales. The National Association of Realtors index for pending sales of previously owned homes increased 1% in December.  This had dropped 16% in November.  The idea of reading anything into a subsidized real estate market seems absurd to me.  We have tax credits and huge purchases of MBS.  Basically, all that means is artificially higher prices and artificially lower interest rates.




UPS said that the economic recovery is under way. UPS and FedEx are often the first to see a recovery (or a downturn).  It strikes me as strange that UPS was bullish when revenue in Q4 was down 2.5% YOY.  While earnings were up, I would think about the revenue number to think about growth.  Maybe the CEO was looking at January revenue figures.




Not much pricing power. Continental said that traffic increased 8.5% in January, but passenger revenue per available seat mile was down 1.5%.




Cutting the budget has repercussions. Economist Joseph Stiglitz warned that Greece’s budget cuts could hurt the country’s economic growth.  I assume that couldn’t happen in the US because we don’t cut our budget.  Greece’s ten year bonds now yield 3.6% more than German bonds.




3. Auto Industry

We’re not done with you! Transportation Secretary Ray LaHood said “we’re not finished with Toyota and are continuing to review possible defects and monitor the implementation of the recalls.”  It sounds as if the Administration put a lot of pressure on Toyota to force this recall.  Even Toyota’s CEO has stated that they announced the recall because they feared damage to their credibility.  There are going to be some very wealthy plaintiff’s attorneys as the result of all of this information.




Here’s the problem. Of course, none of this plays well when the government owns the competition.  Some will accuse the US of strong-arming Toyota in order to help GM.  This is why we really don’t want to be involved in these bailouts.




January car sales. As a whole, the auto industry was back up to 11 million cars on an annualized basis.  This is an improvement from last year, but well below our peak levels (~17MM cars).  Toyota’s monthly car sales fell 16% (to 97K).  Toyota’s market share dropped to 14.2%.  (In 2009, it reached 17%.)




The percentage gains / losses (and cars sold in the month) are as follows:

Ford +25% (116K)

Hyundai +24% (31K)

Nissan +16% (63K)

GM + 14% (146K)

Honda -5% (67K)

Chrysler -8% (57K)

Toyota -16% (97K)




4. Compensation

Since when has capitalism meant being in business for the employees? Morgan Stanley’s compensation ratio in 2009 was 62% of revenue.  The new CEO said management would never see anything like that again.  They paid compensation and benefits of $14.4 billion on revenue of $23 billion.  He said that performance was disappointing for the firm.  He should talk to the shareholders.




BAC is paying $4 billion in bonuses to their investment bankers and traders – average of $300K to $500K per person.  The payout represents approximately 19% of the $23 billion in revenue generated by these groups.  Only about 25% will be paid in cash. Restricted stock will vest over 18 months and deferred cash will be awarded over three years.




JPM set aside $9.3 billion for investment banking employees — $378,600 per person.




Remember AIG. AIG will pay out $100 million in retention bonuses on Wednesday.




5. Government

You’ve caused enough trouble. Fannie and Freddie’s regulator (Federal Housing Finance Association) said that the two agencies will not be allowed to introduce new mortgage products while under the control of the government.




Pay government employees government wages? House Republicans have introduced a bill to put Fannie and Freddie on the federal pay scale.  Salaries on that scale are capped at $200K.  The CEOs are currently set to make $6 million.




We’re getting that $90 billion from the banks, regardless of how long it takes. That’s effectively what Geithner testified, saying that if it takes longer than ten years, we’ll impose those fees on banks for longer.




Jobs vs. deficit? Democrats are about to announce an $80 billion jobs program this week.  It will be interesting to see how people react.  One plan allows employers to hire an unemployed person and not pay the worker’s 6.2% unemployment tax for the rest of 2010.  We can do this because Social Security is so overfunded…




Volker’s testimony. Former Fed Chairman Paul Volker testified that banks should not be allowed to engage in proprietary trading or make private investments.  Mr. Volker says that there’s no way for banks to avoid conflicts of interest when they are engaged in such trading.  Volker’s recommendation is more stringent than Treasury Secretary Geithner’s idea of simply imposing higher capital requirements for banks.




6. Real Estate

Homebuilders losing market share. In the past 20 years, approximately 16% of home sales were newly constructed.  In 2009, that was 7.6%.  Homebuilders are competing with foreclosures by lowering prices, promising speed and warning that buying a foreclosure is risky (the house may have latent problems due to neglect).




When the going gets tough, the tough walk away. The NYT reports that there is new research that says people start to think about walking away when their home value falls below 75% of the amount owed on the mortgage.  In Q3, an estimated 4.5 million people reached this low level.  Estimates are that 5.1 million people will be 25% under water by June – about 10% of all people with mortgages.  It’s estimated that these people have a combined deficit of $745 billion.
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Now, on to what I read…




1. Markets

The market rose 118 points. The ISM and strong earnings led the way.




Let the last be first. Last year’s laggards (AXP, KFT, MCD and PG) are leading the Dow this year.  Last year’s winners (AXP, MSFT and IBM) are lagging.




Loads of municipal debt being issued. Municipalities issued $31.8 billion of debt in January, a 37% increase YOY and a new record for January.  This is slightly misleading because the jump comes from taxable debt (Build America Bonds).  Taxable bonds accounted for 34.8% of the total.




Investors have preferred bonds over stocks. Since the recovery started, $24 billion has gone into equity funds and $178 billion has gone into bond funds.




Warnings from the boy who didn’t cry wolf. Moody’s warned that investment grade corporations may have a more difficult time refinancing in the future.  There is approximately $500 billion of corporate investment grade debt coming due in the next five years.  Approximately 25% of that was issued by the tech / telecom / media companies.  Another 18% was issued by energy / natural resources / chemicals companies.




Asset-based lending. Asset-based lending grew 8.3% (to $600 billion) in 2008.  It is expected that there was a double digit gain in 2009.  This crushes syndicated lending, which dropped 39% in 2009.




I hope they merge and fire themselves. More than 80% of private equity managers expect the private equity industry to experience more mergers.  There are difficulties in raising funds.  Mid-market transactions are expected to grow while large transactions will be difficult.  Private equity funds raised $35 billion in Q4, the lowest quarter since 2003.




2. The Economy

Manufacturing improvement. The ISM Index of Manufacturing hit its best reading since August 2004.  The index reached 58.4 after reading 54.9 in December.  This indicates recovery in the manufacturing sector.




Weak-to-moderate spending. Personal income rose .4% in December and personal spending rose .2%.  The core price index for personal consumption expenditures is up 1.5% YOY.  If you include food and energy, it’s up 2.1%.




Ugly construction spending. Construction spending fell 1.2% for December!  It fell a similar amount in November.  For all of 2009, spending fell 12.4%.  This is largest drop on record since this index has been recorded (1964).   For the month, private construction spending fell 1.1% and public spending fell 1.2%.  (Even though federal spending increased, state spending decreased.)




California’s uneven growth. The WSJ reports that coastal regions are beginning to stabilize while inland areas are not doing well.  Overall, California is weak with 12.4% unemployment.  This reminds me of a recent academic paper that I read which argued that we saw the housing market expand in inland areas (leading to problems), but there was nowhere to build in coastal areas.  The bottom line is that I wouldn’t expect prices to fall as much at the coastal area.




Greece promises…Greece revealed a plan that would bring their deficit down to 3% of GDP by 2012.  It’s currently at 12.7%.  The goal is 8.7% this year, then 5.6% and finally 3%.  If they do not do this, it could cause risks for their bondholders, as well as the euro and possibly Portugal and Spain.  The WSJ states that Greece has a problem with companies and individuals who cheat on their taxes.




Poor, poor China. China’s Ministry of Commerce said that the US has been increasingly engaging in protectionism since the financial crisis started.  It’s hard to listen to this from a country that doesn’t let their currency float.

3. The Budget

The future is ugly. The President’s 2011 budget will result in $8.5 trillion more debt over the next decade.  The next fiscal year is supposed to have a $1.6 trillion deficit.  You really should read some of the comments from the members of Congress.  They all say things like, “we need to balance the budget, but the President unfairly is hurting my constituents.”  (Jenny frequently says that we need to reduce our spending as long as it doesn’t affect her or the kids.)  Our political process is completely broken.  (My house is actually much more efficient because I don’t have a false belief that there is a democracy.  I remember feeling some guilty happiness when our dog passed last year because I moved from 6^th to 5^th in the pecking order.)




You can’t handle the truth! As always, the WSJ mistakenly says that we have $7.5 trillion of debt right now.  It’s amazing that we have to raise the debt ceiling to $14 trillion when we only have $7.5 trillion of debt…




Good luck. Apparently, the budget is based on the assumption of 4.3% growth in 2011.  They expect unemployment to be 9.2% in 2011 and 8.2% in 2012.  Income tax brackets will rise from 33% and 35% to 36% and 39.6%.  Jenny has also submitted a budget under the assumption that I’m going to become an investment banker in 2011.




Higher taxes. The new budget proposes an additional $1 trillion of taxes (over the next ten years) on families making more than $250K.  Banks and multinational companies would pay more and energy companies would lose their tax break.

4. Limits on Proprietary Trading

Paul Volker wrote a really important / interesting piece in Saturday’s NY Times. In it, he made the following key points:

1. We have had the most serious crisis in 75 years and we can see this in lost production and jobs.






2. The government acted because it had to act.  Now the discussion is focused on appropriate capital requirements, better supervision, improved risk management, better board oversight and accounting principles.






3. A long line of decisions has protected creditors and (sometimes) shareholders.  This leads to a belief that some institutions are “too big to fail.”  (He didn’t mention that Lehman caused us to temporarily suspend this belief and that caused a problem or two…)






4. The government protection leads to moral hazard.  There are enhanced incentives to take risk and use excess leverage.






5. In the past, moral hazard was offset by close regulation and supervision.  Now, we’re also thinking about capital requirements.






6. Recently, the President suggested banning the banks from engaging in proprietary trading.  The idea is that commercial banks serve an important function and there is risk inherent in their work.  But, we don’t need extra layers of unnecessary risk (such as proprietary trading).  This is better suited for other parts of the market.






7. Bank capital should be used to respond to customer needs, not to chase speculative profit.






8. Aside from the risk, these pursuits also cause conflict of interest in banks.  In addition, there is no reason that proprietary trading (or hedge funds or private equity) needs to be housed within a bank.






9. We also need an agency to identify and limit systemic risk.  They would be allowed to step in when an institution is on the brink of failure.

10. Institutions would have a “living will” and shareholders and creditors would not be protected.




11. We need to make structural changes.  Otherwise, we are failing to learn from our past and failing to anticipate the needs of the future.




More hearings. Senate hearings begin today to discuss the Administration’s proposed ban on banks conducting proprietary trading.  Possibly the most important issue is to figure out what would fall under proprietary trading as opposed to trading for a customer.




How’s this for fear about the ban on prop trading? Morgan Stanley’s new CEO says that they will hire hundreds of new traders in the next few years.  MS had cut most of its trading operations after suffering losses in 2007.




5. Random

Chips demand was weak last year. Global semiconductor chip sales fell 1.2% in December.  But, they were still 29% higher than last December.  Overall, sales were down 9% in 2009.




Just what we need…more car ads.  Media companies are being helped by a recovery of car advertising (which can generate half of their revenue).  I hope Toyota starts advertising that their cars have great acceleration, even in traffic jams.
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Now, on to what I read today…




1. Markets

In like a lion and out like lion poop. The market dropped 53 points on Friday as the much-watched January return was -3.5%.  As mentioned previously, history shows that a down month in January isn’t a good sign for the market.  Of course, January 2009 was terrible and the market had a good year.  The Dow has dropped 6.1% since its recent peak on January 19.




The easy money has been made. Birinyi Associates examined the nine bull markets since 1962 and broke them into quarters (with respect to how long they last).  They calculated the performance in each quarter of each bull market.  On average, the first quarter showed a gain of 37%, then 10%, 12% and 22%.

In addition, they found that when the market drops 5% (during a bull market), the average loss is 9%.  Less than 1/10 of the time does a 5% drop lead to a 20% drop.   Only 25% of the time does a 5% drop lead to a 10% drop.  The average bull market lasts four years.




US stocks comprise 42% of the world’s equity markets. The average US investor has 72% of his assets in the US.  If you are thinking about putting together a diversified global equity portfolio, you can think about the MSCI’s All Country World Index which contains 42% US stocks, 45% developed foreign markets and 13% emerging markets.




Investors loved the emerging markets. Approximately 95% of the $25 billion that US investors put into international funds in 2009 went into BRIC countries (according to Morningstar).




Assets in ETFs have increased 47% to $791 billion in 2009. ETF trading volume averaged 1.9 billion shares per day in 2009, up 20%.  The ten largest ETFs account for almost 40% of ETF assets.  The ten ETFs with the largest dollar trading volume accounted for approximately 60% of the total volume for all ETFs in December.




Permanent “Build America” bonds? Municipalities issued $64 billion of “Build America Bonds” in 2009.  Interest on these bonds is taxed (as opposed to normal municipal bonds) so investors require a higher rate.  But, the government subsidizes the higher rate.  There is talk that the Administration is considering continuing this program past 2010 (when it is supposed to end).




There is less oil being stored at sea. At one point last year, spot prices were significantly lower than futures prices.   Some speculators would buy oil at spot prices, store it and deliver it later.  It’s strange to think that there were 90 million barrels of oil floating around.  The spread between spot and future prices has narrowed and there is less oil now being stored.




2. GDP and Debt

Strong GDP growth. GDP grew in Q4 at an annualized rate of 5.7%.  Approximately 3.4% of growth resulted from businesses reducing inventories at a slower pace than they had in Q3.  When you remove this effect, as well as the stimulus spending, there’s less to be optimistic about.  Unfortunately, this means that employers are also not overly enthusiastic and they’re not hiring yet.

GDP is still 1.9% below its peak level in 2008.  There was a 13.3% annualized increased spending on equipment and software.  Capital spending often means that hiring will follow.




The deficit in perspective. Since WWII, the federal deficit has only grown to 5% of GDP four times: in 1946 and three years under Ronald Reagan.  Today, we’re at 10.7% and we’re headed for several more high years.

A WSJ article quoted different people who, as usual, say that debt is between 50 – 60% of GDP.  As always, they are ignoring the money that the government has borrowed from our Social Security pool.  This is money that taxpayers have contributed and are expecting to be paid.  This is a debt of the government.  And of course, everyone also ignores the unfunded debt.  I’m going to start saying that I’ve only lost a few hairs by combing my hair and ignoring all the hair I’ve lost in other ways.




3. Jobs

Unemployment will last. It’s been estimated that growth would have to equal 5% for the entire year to lower unemployment by 1%.  In other words, we need to create 3 million jobs this year to lower the unemployment rate by 1%.  When the economy was recovering from the 2001 recession, it took two years to move from 6% unemployment down to 5%.  The bottom line is that you have to consider other factors such as growth in the labor force and change in productivity.




Spending on jobs. The President is pushing a $100 billion jobs bill that would give tax credits for employers who hire new workers, increase salaries or expand worker hours.




Jobs created by stimulus. As of September 30, 2009, stimulus recipients claimed that they had saved or created 640K jobs. Some critics argued that some of the money was spent to give raises or to pay employees who were not going to lose their job. As of December 31, the number is down to 599K.




It wasn’t just me who didn’t get a raise! Wage and benefit costs (both before and after inflation) grew at a slower rate in 2009 than in any year since we’ve tracked the number (starting in 1982).  The cost of wages and benefits rose 1.5% while consumer prices increased 2.7%.  For those of you who are economically challenged, this means that you’re worse off.  As a general rule, benefits accounts for 30% of total compensation.




4. Financials

I’m not sure why you would ever want to loan money to a firm owned by an LBO fund (private equity fund). HCA is paying a $1.75 billion dividend to its owners (private equity firms).  This has been a successful LBO.  The owners have made the firm more profitable and they are taking out cash.  In other words, this is like taking out a home equity loan every time your house is worth more.  The lenders remain at risk of a downturn.  That means that the private equity investors do well and the employees and debtholders are taking the risk.  The debtholders have a choice.  The employees don’t.  I know…I know…I’m just a simpleton populist.




Fannie and Freddie are going after banks. Fannie and Freddie have approximately $300 billion in loans to borrowers that are at least 90 days delinquent.  They are now running investigations of the banks that securitized these mortgages or issued these mortgages, looking for underwriting errors and fraud.

Freddie forced lenders to buy back $2.7 billion of loans in the first three quarters of 2009 and it’s estimated that Fannie asked for $4.3 billion back.  Overall, banks repurchased approximately $14.2 billion in loans from holders of MBS during the first nine months of 2009.  This is an increase from $3.6 billion in 2008.  This simply shows an increase in vigilance on the part of Fannie and Freddie.  If anything, it should irritate you that they didn’t go after the banks in 2008.

Currently, 5.29% of loans that Fannie guarantees are at least 90 days behind (up from 2.13% YOY).  They guarantee $2.9 trillion.  At Freddie, 3.87% of loans are delinquent (up from 1.72%).




Bank closings. Five more banks were closed, bringing the total to 14 for the year.  Two banks were in Georgia, one was in Florida, one was in California and one was in Minnesota.




5. Random

I didn’t know that the rich could be populists! There was an article in Saturday’s WSJ describing the world’s elite business executives, politicians and regulators as blaming the bankers for the financial crisis.




Our relationship with China is temporarily deteriorating. The US is selling military weapons to Taiwan.  (China claims that Taiwan is part of China.  It is part of their “One China” policy.)  China says that this is a “gross intervention into China’s internal affairs.”  China has canceled some military exchange programs with the US.  In addition, China is limiting some business activity in China.  As you might expect, I support our sales to Taiwan and our commitment to defend Taiwan from China.  This is part of my “Zero China” policy.

Charity falls (although I have to believe the Haiti tragedy will bring up the aggregate numbers while making things harder on most charities that are not receiving Haiti donations).  The WSJ reported that private donations to charity more than doubled between 1987 and 2007, but then they fell 6% in 2008.  In addition, state and local government funding (which can provide as much as 2/3 of some groups’ funding) has also dropped about 5% in 2009.  Interestingly, they say that charity begins at home and I’m realizing that I received about 5% less charity from Jenny in 2009.  It never really hit me that it was recession related.

The drop in donations occurs at the same time that there is the highest demand for services.  (Another similarity to home.)

There are approximately 1.5 million tax-exempt organizations in the US and they employ approximately 12 million people (almost 10% of our work force).




More polite drivers. Is it just me or is everyone doing this?  In traffic, I find that I’m always letting Toyotas cut in front of me.  I don’t want them behind me with their acceleration problems.  Maybe I’m particularly at risk, because I drive a Pinto.
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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

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First some thanks. I spoke on Thursday night to the McCombs Alumni group in Austin.  It was a great crowd and a lot of fun.  I appreciate all of the blog readers coming out.




Now, on to what I read today…




1. Markets

The market dropped 115.70 points today. Apparently, investors have lost that lovin’ feeling about the economic recovery.  I think that there are many fears in the market, including the possibility of China slowing their growth, worries over sovereign debt and fears that our economy will slow in the 2^nd half of the year when the stimulus is done.  Commodities are down, stocks are down and the euro is down.  The Dow is down 2.9% for the month – and there’s one day left.




January barometer. The median increase for the market from February through December is 10.4% if January is an up-month and .28% if January is a down-month.




Don’t worry…the Super Bowl indicator has great news for us! The Super Bowl indicator says that if an “original” NFL team wins the Super Bowl, the stock market will rise for the year.  It has been right 34 out of 43 years.  Two “original” teams are in the Super Bowl this year.  For those of you who aren’t quantitative or into game theory, that implies that the winner will be an original NFL team.  The fact that people talk about stupid crap like this irks me.  As an aside, I’ve done a study and found that on days when I pass gas between 8 AM and 9 AM, the market seems to rally.  (I’ll be starting a subscription-based service for people who want real-time info on this indicator but aren’t able to stop by my office.)  We are a nation of freaking morons.




The Dow Jones-UBS Commodity Index is down 6.6% in 2010.




2. The Economy

Bernanke was awarded a second four-year term. The Senate voted 77 – 23 to hold a confirmation vote.  (Seventeen Republicans, five Democrats and one independent voted no.)  He was then confirmed by a 70 – 30 vote.  The big issue is whether Bernanke is now in political trouble and will have to pull the trigger quickly in order to fight potential inflation.




Inflation expectations rising. The spread between TIPS and regular Treasuries indicates that inflation expectations have increased from 2.25% (in March) to 3% today.




Friday’s GDP release. The market is expecting a big GDP number on Friday (5% annual increase).  Much of this will come from inventory declines slowing.




The Greece crisis. Greece has to raise $76 billion this year.  Approximately 70% of this must be raised in the first six months.




Euro continues to drop. The euro is at a seven month low.  Note to self…don’t try to combine 16 different countries with one currency.




Lets all make promises. Spain said it will give details on Friday concerning $70 billion in cuts through 2013.  I will also be announcing details on my plans to start helping out around the house.




Japanese deflation. Japan’s core consumer price index fell 1.3% (YOY) in December.  A leading indicator predicts a 2% drop in January (YOY).




3. Bailout

Small business lending. The $30 billion of TARP money that the President is pushing towards small business loans represents approximately 4.3% of the $700 billion in small-business loans held by US banks and S&Ls.




Lots of smaller banks. There are 7,500 financial institutions with less than $10 billion of assets.  If we split the $30 billion equally, each bank would get $4 million.




More absurdity over the AIG bonues. Approximately 95% of AIG Financial Products division agreed to take a smaller retention bonus if they got it sooner.  Listen to this…they are getting 10% less and they are getting their money six weeks earlier.  It’s a no-brainer.  Any way you can get your hands on this money before any problems arise…I would do.  Now, we’ll hear the spin about how much was recovered.  (These bonuses were part of the $168 million in retention bonuses that caused outrage this past year.  The employees had said that they would return $45 million, but only $19 million has been collected.)  The firm still has outstanding derivatives of $940 billion.




Is this going to help? The federal stimulus plan earmarked $8 billion for high-speed rail projects.  California will receive the biggest slice: $2.34 billion.  But, the California plan will cost $42 billion.

Building this rail system could create 600,000 construction-related jobs  and 450,000 permanent jobs over the next decade.  I’m not sure how they came up with these numbers.

California already approved a $10 billion bond for the project.




NYC deficit. New York City is trying to close a $4.9 billion deficit.  The city is trying to reduce the work force by 1.4%.




Debt ceiling. Regardless of what party you support (personally, I dislike both intensely), this should piss you off.  The Senate voted 60 – 39 to raise the federal government’s borrowing limit to $14.3 trillion (currently at $12.4 trillion).  This was purely along party lines.  I have no problem with the fact that one party wants to reduce spending.  But, if we don’t raise the debt ceiling, we default.  This type of vote is pure politics.  It’s reflective of the crap that is killing our country.




Commission to work on debt problem.  For the second time in a week, the Senate rejected a proposal to establish a commission to examine the debt problem.  I’m glad that there’s no need to work on this – we only have a $1.4 trillion deficit this year.  Considering the fact that these morons can’t agree to have a commission, I’m pretty confident that any commission will be really successful.




4. Company News

There are 140,000 apps for the i-phone. I have an i-phone (long story there) and today I counted up how many apps I have.  It came out to zero.  I’m old.




Amazin’ Amazon. Amazon’s sales increased 42% in Q4 and net income increased 71%!  Operating margins increased from 4.1% (year ago) to 5% in a really competitive environment.  Revenue was $9.52 billion and the estimates are that the Kindle business accounts for approximately 10% of that.  Amazon estimates that Q1 will see a revenue gain between 32% and 43% (YOY).   The stock has risen 150% in the last year.

For books published in both paper edition and digital, there are 1.67 paper books sold for every Kindle book.




Toyota working on problem. Toyota has found a solution for the gas-pedal problem that is affecting the 2.3 million vehicles recalled this week.  If approved by the National Highway Traffic Safety Administration, production of the new part will start next week and dealers would receive it within the next two weeks.




Premature acceleration. There have been 2,200 incidents of sudden acceleration in Toyota and Lexus vehicles in the last ten years.




Huge defense contract. Lockheed Martin has one huge contract with the government: the F-35 Lightning II will cost $300 billion.  It’s the Pentagon’s biggest contract ever.  Full production will take five years.  Eventually, this plane could account for 30% of sales.  (Last year, sales were $45.2 billion.)




Microsoft’s quarterly profits increased 60% (YOY). Sales rose 14% — a good sign after three quarters of shrinkage.  Most of the good news came from the Windows division.  With high unemployment, more people have the time for computers which crash.

Microsoft has increased its share of the search market from 8.3% to 10.7% (December 2008 vs. December 2009).

Office 2010 is due out in June.




Ford, the “non-bankruptcy car manufacturer,” had its second consecutive quarterly profit and its first profitable year four years.  Revenue increased 22% in the quarter.  Revenue for the full year fell 14%.  The company has too much debt ($34.3 billion) and has to make a $1.5 billion of interest payments each year.




5. Random

Lots of cyber attacks. Approximately 20% of 601 surveyed companies said that they had been a victim of a cyber attack in the past two years.




Trading down. About 2/3 of consumers said that they had traded down to less expensive consumer goods over the past year. More than ¾ of those traders said that the cheaper products were as good or better than what they replaced. McKinsey predicts that customers will be slow to return to premium brands.




J.D. Salinger, author of “Catcher in the Rye,” died on Wednesday at the age of 91. As a typical teenage boy, I was pretty sure that I was Holden Caulfield.  I was googling quotes tonight and the big one that I saw a lot was Holden saying, “I hate phonies.”  I should read this again…I think I still relate to Holden.  As Jenny explained to me, apparently it’s very possible that I could age without maturing.  I don’t think that I understood what she was saying at the time, but I’m starting to think that “thank you” wasn’t the appropriate response.  (A lot of things are starting to come together.  She looked angry when I said thank you.  It was somewhere between 8 AM and 9 AM and I had simply thought that she was simply working on her own alternative to the Super Bowl indicator.)

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If you want to be on my email list:

1.  go to www.leedsonfinance.com

2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.

Now, on to what I read today…




1. Markets

The market was up 46 points, led by Boeing.  Boeing shares rose 7%, as their Q4 earnings beat estimates.  They also said that lending is becoming more available (so Boeing won’t have to finance as many of their customers) and that the deferral rate (of orders) slowed.  Caterpillar dropped 4% as they missed earnings and lowered estimates for 2010.




Fed maintains language. The Fed said it would keep rates low “for an extended period,” – language that has been used for the past year.  The President of the KC Federal Reserve Bank said that the markets were strong enough for rates to increase (and he voted against the majority).  The Fed made positive comments about the economy, saying that it continued to strengthen and that business spending is picking up.  The FOMC said that the recovery would be “moderate for a time” which is an improvement from when they had previously said it would be “weak for a time.”  The Fed confirmed that they will conclude their purchase of $1.25 trillion of MBS at the end of March.




Investors continue to worry about the weak EU countries. After Portugal reported a larger budget deficit than expected (9.3% of GDP), investors worried that the EU has many problems: Greece, Portugal, Spain, Italy and Ireland.  Credit default swaps (think of this as “insurance on bonds”) rose in price for Greece, Spain and Portugal.

Investors were also alarmed when Greece stated that they were not making any sales to China.  Earlier reports had said that they were going to issue $35 billion of debt to China and that China might invest in the National Bank of Greece.  Now, there’s a belief that China doesn’t have interest in that much Greek debt.  China issued a statement that “if we wanted more crappy securities, we’d just buy Treasuries – and you don’t have to censor these comments.”  Okay, China didn’t really say that, but it could have happened…

On a related note, the dollar hit a six month high against the euro.




2. The Economy

New home sales hit a nine month low in December.  Sales dropped 7.6% (from November) to an annualized rate of 342,000.  To give you perspective, new home sales peaked in July 2005, at an annualized rate of 1.4 million.  In today’s world, it’s hard to compete with the price of foreclosures.  In addition, the supply of new homes is at the lowest level since 1971.  (Why would builders want to build homes in this environment?)




I must be wrong…I agree with the French. French President Nicolas Sarkozy gave a fiery speech at the World Economic Forum where he (1) criticized countries that under-value their currency (China); (2) said that we have to make capitalism more moral (US); and (3) argued that we need coordinated efforts to regulate the financial system.  I agree with these ideas.  The problem is that no one was listening – everyone was looking around trying to see if his wife was there.




What a bummer. Once the participants realized that Sarkozy’s wife wasn’t there, things got even worse.  Economists and investors predicted that the recovery could slow later this year.  Governments have too much debt (which will result in higher interest rates).  Nouriel Roubini said that the world faces a slow recovery that will end in subpar growth.  Roubini and Soros said that we need more regulation than Obama has called for.  Raghuram Rajan, a finance professor at Chicago said that 10% unemployment in the US and 10% growth in China will result in calls for protectionism and populism.  As the resident dumb-ass populist, I know that I think it’s incredibly unsophisticated of me to want governments to compete fairly, protect intellectual property rights and maybe even respect human rights.




The IMF predicts that the US will grow 2.7% this year and 2.4% next year. The growth will not be high enough to substantially reduce unemployment.  They also said that banks need to increase their capital in order to handle upcoming commercial real estate losses.




3. The Bailout and Other Stories That Will Piss You Off

I think we’re missing the point here! An interesting WSJ article said that some investors are starting to bet that when the Fed stops buying MBS, it won’t be catastrophic for the mortgage market.  Investors will buy government backed MBS in order to get higher yields.  I think that this is right, but this misses the point.  This is still a government subsidy.  I remember when Fannie, Freddie and the government used to say that the government does not guarantee Fannie and Freddie debt.  Fannie and Freddie guarantee these securities and now we guarantee Fannie and Freddie.  As I have argued previously, the government will use Fannie and Freddie to promote their rescue activities.




Currently, you can buy MBS issued by a government backed agency and get 138 basis points above Treasuries.  That’s almost as much as you can get from a “A” rated bond.  But with the MBS, you are backed by the government.




Perfect – it has the appearance of propriety, but bankers like it too! BAC and C are giving compensation in stock, but it’s stock that can be sold within a few months (rather than a few years).  GS and MS are letting employees borrow money.  Some banks are using the deferred stock as collateral for a loan!  This isn’t much different than receiving your bonus in cash.  Some U.K. banks are considering raising salaries – because only bonuses result in the 50% penalty tax.  Some US banks are giving bonuses in “deferred cash.”  Deferred cash is a cash bonus that’s put in an interest-bearing account for some time.  That allows the bank to say that they are giving smaller cash bonuses, but in reality it doesn’t lower compensation and it doesn’t do anything to reduce risk taking.




The whipping boy fights back. Geithner was grilled in a House hearing on AIG.  He fought back, arguing that if they didn’t pay 100 cents on the dollar to AIG’s counterparties, the economy would have had a disaster.  He said that the government was choosing between “tragic” and “terrible.”  He also turned the issue on the Representatives and told them that if they were horrified by AIG, they should be committed to financial reforms that will prevent excessive risk taking.

The Inspector General of TARP (Neil Barofsky) testified that the negotiations (with AIG’s counterparties) could have been handled a lot better.  He said that they should have been done at a high level, rather than with midlevel executives.




Tiny program for business lending. The Obama Administration is putting together a plan where they are going to lend $30 billion to community banks at low rates.  The rates will be particularly low if the banks can show that they are increasing lending.  The $30 billion is left over TARP money.




Signs of things to come. Oregon voters have approved two tax measures which would (1) raise the marginal tax rate by 2% on residents earning more than $250,000 and (2) increase the state’s minimum corporate income tax and tax revenues of companies that don’t have earnings.  Since states have huge budget deficits (totaling about $256 billion between now and 2011), you can expect more plans like this to arise.




4. Companies

Truly amazing! Apple released the new iPad – the gadget that is somewhere between an iPhone and a computer.  I’m not sure what to make of the device, but what’s amazing is that this is the top story on wsj.com and cnn.com tonight.  From what I’ve read about the iPad, it doesn’t excite me (and realize that I’m a Mac user and a big Apple fan).  If I was going to read on it, I’d probably prefer the Kindle.   In addition, the iPad is not going to have great wireless.  You can buy a more expensive model with 3G, but even that doesn’t really do it for me.  Of course, I’m a balding, 45-year old man, so I’m not sure that I’m the target market.

One more gripe (this time about the Kindle)…I’ve looked at subscription prices for The Wall Street Journal and other newspapers on the Kindle and it’s just not economical.  I can read these things on a bigger screen and cheaper on my laptop.  The pricing discrepancy just doesn’t work for me.




Interesting speculation. I read an interesting piece by William Pesek (Bloomberg) who argued that if Google leaves China, it may result in other American tech companies losing interest in China.  This may help India.  He said that while India is much more bureaucratic and less efficient, they are much more innovative, they have more international companies and they have better laws on intellectual property.

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Now, on to what I read today…




1. Markets

Boring day for the market. Market was basically flat for the day (down 2.57 points).  Nasdaq was actually down .32% and the S&P was down .42%.




Berkshire Hathaway is being added to the S&P 500.  Berkshire had been excluded for years.  Some attributed this to the lack of liquidity (due to the high stock price).  Now, Berkshire is doing a 50:1 split of their class B shares.




There are a couple of really interesting things about this.  First, this is a really large stock that’s being added to the index.  It will be the 21^st largest company.  This means that index funds will have to sell some of their other holdings and buy Berkshire.  This reminds me of when Google was added.  The “Google trade” was to buy Google and short the market in anticipation of the effective date.  It will be interesting to see if that works this time (buying Berkshire and shorting the market).  There is approximately $3.5 trillion indexed to the S&P 500.  Second, it will be interesting to see if the Berkshire shareholders are willing to sell their stock.  In other words, there is the possibility that this is a “more loyal” shareholder base than most stocks.




Now we like Bernanke. Or more likely, we’re scared that our constituents will blame us if we create uncertainty and the market drops.  Approximately 52 senators are now in favor of Bernanke and 19 are opposed.  It looks like he will get to the 60 needed to pass the procedural vote and get to the re-confirmation vote (at which point he’ll just need 50 votes).




2. The Economy

Home prices continued to drop. The S&P Case-Shiller home price index dropped .2% in November (from October), but they were actually up slightly on a “seasonally adjusted basis.”  The 20-city index was down 5.3% YOY, while the 10-city index was down 4.5%.  The indexes are down approximately 30% from their peak (in mid-2006).

Several cities (Dallas, Denver, San Diego and San Francisco) have higher prices than November 2008. At the same time, a few other cities (Las Vegas, Charlotte, Seattle and Tampa) hit new lows.  Personally, I find it disconcerting that you can have the government throw $8,000 into many transactions (through the tax credit) and we still have lower prices.




Housing healing. The WSJ argues that the housing market appears to be healing, but is still at risk.  Inventories are far down and there are even some reports of bidding wars on low-end homes.  In some parts of the country, job markets are slightly stronger than the national average.  At the same time, there are cities with really high default rates and weak job markets and it will take a while to come back.  More than seven million households are either delinquent (in payments) or in foreclosure.




Consumer confidence rose for the third consecutive month in January. The index rose from 53.6 to 55.9.  Sentiment about present conditions and the labor market improved.  More people expected job losses to abate (but they didn’t expect new jobs to be created).




China continues to curb lending. Several state-run Chinese banks have suspended lending for the rest of the month.   Chinese banks had already done $146 billion of loans in the first two weeks of this year – more than double the monthly average that was made in the last half of 2009. The banks expect to lend 7.5 trillion yuan (1 trillion yuan = $146 billion) this year after lending 9.6 trillion yuan last year.

They have also increased the amount of reserves that banks must hold against their deposits. In addition, the yield on central bank bills is increasing – which makes it more attractive for banks to buy and hold government debt.  The government left the yield on one-year bills unchanged after raising it twice in the past two weeks.




3. International

Down with Japan? S&P threatened to downgrade Japan if they can’t pull out of their deflationary environment and curb public spending.  (Moody’s said that Japan was stable at Aa2.)  Japan’s debt level is close to 100% of GDP.  S&P seems nervous about the new Japanese government (Democratic Party of Japan).

Japan had $6.13 trillion of debt outstanding as of last March.  In their defense, they do have massive foreign reserves. The warning to Japan is significant because they have the second largest economy in the world.  Virtually all Japanese debt is held by domestic investors.




More bad news from Portugal. Portugal reported that their deficit was 9.3% of GDP – higher than expected.  Many people are worried about Portugal almost as much as Greece.




4. US Debt

The deficit. The 2010 budget deficit is now expected to be $1.35 trillion.  The Congressional Budget Office expects the government to run a $6 trillion deficit over the next decade!  This does not include several trillion dollars more of debt that will be added when Obama extends the Bush tax cuts and if they provide relief from the Alternative Minimum tax.




The government and the media continue provide misinformation about the debt.  I think that this is the single biggest issue in our future.  The WSJ quotes the CBO as saying that the debt held by the public exceeded $7.5 trillion or about 53% of GDP.  By the end of 2020, debt is projected to climb to $15 trillion or 67% of GDP.  With this, interest rates should rise.




While this is technically correct, there is much more debt than “publicly held debt.”  As I have frequently mentioned, we have used Social Security funds to finance our debt and that is simply a substitute for issuing more bonds to the public.  Our debt level (including money borrowed from Social Security) is already close to 80%.  In addition, and MOST important, we have a huge unfunded liability that no one seems interested in.  Social Security, Medicare / Medicaid and Veteran’s Affairs would require close to $50 trillion in order to be fully funded.




5. Company News

Verizon is cutting 13,000 jobs. Their wireless division is doing well.  Their wireline business…not so much.




Doing the right thing! Toyota announced that they would stop selling eight of their models until they fixed a sticky accelerator problem that can lead to unintentional accelerating.  In a show of support GM stopped selling cars a few years ago.  But, my guess is that this is going to give a big edge to Kia who can proudly advertise that their cars don’t accelerate.




6. Random

That’s bullwhip! That is the term that refers to small changes in demand having a big impact on suppliers.  In other words, when demand slowed, producers bought nothing from suppliers because they wanted to work off their inventory.  Then, as demand picked up a little, they needed to produce more goods plus they want to increase inventory.




This should be entertaining! Starting today (Wednesday), we’re going to see lots of Fed emails about AIG in a House hearing.  We’re likely to see lots of evidence that the Fed was really careful about language so that the market wouldn’t know who was actually getting bailed out.  Some of these emails will likely be used against Bernanke.  Excerpts of one email indicate that NY Fed staffers felt that the Washington Fed office didn’t understand that these were big decisions that needed to move quickly (before AIG collapsed).

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