Market Update – January 8, 2010

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Here’s a summary of the news that I read today:




1. Economy

Commercial bankruptcies are increasing more than individual bankruptcies. Chapter 11 bankruptcy filings increased 50% last year!  More than 15,000 businesses filed Chapter 11 petitions.  If you include Chapter 7 liquidations, bankruptcy filings increased 38%.  There were 207 public companies that filed for bankruptcy.  The public companies had $600 billion in assets – the second largest on record, but trailing 2008 which was highlighted by Lehman.

Government over Wall Street. The Washington DC office market is catching the NY market.  The financial crisis killed the NY market, but the business of government and lobbying is still holding strong.  Nationwide, rents fell 9% — the largest annual decline on record.  The 17% vacancy rate is the highest on record.

Fed plan is scary. The idea that the Fed will stop buying MBS at the end of March is scaring home-builders, mortgage investors and even some Fed officials.  Thirty year mortgage rates have increased ~ 25 bps during the past few weeks (although they dropped from 5.14% to 5.09% during the past week).  Higher mortgage rates and less lending could really hurt the home market.

British debt. Britain’s budget deficit is 12.5% of GDP.  Reducing this deficit means boosting taxes and reducing spending.  In comparison, the US deficit is 9.6% of GDP.

ECB turns on Greece. The European Central Bank said that EU bailouts are limited to countries that encounter difficulties “beyond their control.”  The chief economist said that Greece’s problems are “home made” and do not satisfy the requirements for help.  He said that markets are deluding themselves if they think that other countries will bail out Greece.  Of course, the problem of letting Greece fail is that investors will start to ask “who is next” (just like we did with the investment banks).  Many would look at Portugal and Spain.

Dividends cut. In 2009, dividends were reduced by more than $58 billion.    For the year, 804 companies cut dividends, up from 110 in 2008.  This was the highest level since S&P started keeping these records in 1955.  But, this seems to be stabilizing.

An investor worth listening to.  James Chanos, well-known for his short-selling (and particularly for identifying problems at Enron) is now bearish on China.  He believes that China is headed for a crash.  He says that their real estate market looks like “Dubai times 1000 – or worse.”  He also distrusts China’s 8% growth rates.  He said that credit excesses (not valuation) are what identifies bubbles and that is what you see in China.




2. Financial Industry

So this is the light of day? An interesting article in the NY Times said that the Federal Reserve Bank of NY (under Geithner) pressured AIG to not disclose the payments that were made to banks as the result of credit default swaps.  There has been a lot written in the past six months about the fact that banks were paid 100 cents on the dollar for these positions – when they would have received very little if we had let AIG fail.  There is a lot of belief that the banks had counterparty risk and should have received less (rather than the taxpayers bailing out the banks).

Kenneth Feinberg finds out what it’s like to be married. Feinberg, the “pay czar” said that he is disappointed to find out that he has no real power over Wall Street pay.  It reminds me of something Jenny explained to me once.  She said, “you’re welcome to have an opinion, just so long as you realize that it doesn’t matter.”

Bank of America bonuses. Now that BAC has repaid $45 billion to the government, they can determine compensation without the government’s blessing.  Their investment banking unit is likely to pay bonuses similar to 2007.  Their goal is to stop the remaining Merrill bankers from leaving (as many already have).

Schwab lowers commissions. Schwab is lowering commissions for accounts with less than $1 million and accounts which trade infrequently.  Trades for these accounts will now cost $8.95, similar to larger accounts and accounts with heavier trading.

What’s good for me is good for you. Citi director John Deutch is stepping down from the Citi board and said that other long-standing directors should do the same.  He is 70 years old.  Many people feel that the longstanding directors should step down.




3. Autos

It’s official…China’s car market surpasses US market. China sold 13.5 million vehicles while the US sold 10.4 million.  Of course, our market is way down and China subsidized their market last year (even more than we did).  China includes heavy trucks in their data, but would still be larger after deducting the 650,000 vehicles from the total.  Remember that all this data is in units, not dollars – and China sells much cheaper cars.

This says it all. GM Chairman and CEO Ed Whitacre said that he expects that hundreds of dealers could be reinstated as a result of arbitration hearings.  (Previously, he had said less than 100.)  After GM closed 1,300 dealerships, Congress gave them the right to arbitration.

Whitacre said that the cutoff as to which dealerships to close was somewhat arbitrary.  How would you like to lose your family business because of an arbitrary decision?  Personally, I think that they should let me arbitrarily set GM compensation or arbitrarily close the company.

The bottom line is that this story tells us all we need to know.  You have a company that arbitrarily closes dealerships.  You have a Congress that won’t let the company easily downsize.  Regardless of whether you blame the company or the government (can we even distinguish between the two since the government owns GM?), it’s hard to believe that they have a recipe for long-term success.




4. Random

Fox cancels show. Fox announced that they are delaying or canceling “Our Little Genius.”  Without disclosing what really happened, producer Mark Burnett implied that contestants might have been fed answers prior to taping.  Don’t tell me reality tv isn’t reality.  Shocking.  Many people were opposed to this show as  a result of the pressure that it puts on these kids (to earn “life changing” money for these kids).  They’re not going to get much sympathy from me.  If you get an email response from me that is time stamped between 10 PM and 6 AM, most likely it’s from one of my kids.  Everyone needs to work in the Leeds household.  If sleep is so important to these kids, that’s their decision.  But then three meals per day must not be that important to them.  Kids nowadays are getting soft.




5. BCS

Terrible BCS Championship! As mentioned yesterday, I spent the day at the BCS Championship.  I actually attended the game with my three siblings who all did their undergrad at Alabama.  Some very close (Texas) friends were with us.

I found the game totally unsatisfying from an Alabama perspective.  I think that I would have been much happier if I was rooting for Texas.  It was horrible to see Colt get hurt.  Not only did that ruin the game for Texas, it ruined the game for Alabama.  It was particularly bad since Texas dominated the game in the first seven minutes (prior to Colt getting hurt).  My dismay was compounded by the fact that Alabama looked out-coached, particularly with respect to special teams.

In my opinion, Texas looked better than they have all season.  I also thought that this game looked identical to the Texas – Oklahoma game.  Oklahoma looked much better than Texas in the first few minutes, but once Bradford got hurt, Oklahoma didn’t have a chance.  But Oklahoma made the game close at the end and kept fighting.  That was certainly what Texas did.

To make matters worse, I was surprised by the crowd.  It seemed to be 55/45 in favor of Texas fans (I expected the reverse).  I also hated when Alabama scored in the last minute.  We could argue about whether Texas would have been able to get the ball back if Alabama had taken a knee, but it was a shame to see the game end that way.

The only thing that I got right about that game was that I expected to not be overly happy with these two teams playing.  But, this game couldn’t have been worse in my opinion.  I went to Alabama’s national championship at the end of the 1992 season and last night’s game can not be compared to that.  Other than seeing my siblings and friends, this game was a total bummer.




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