US Rating Affirmed; Google Appeases Chinese

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Now, on to what I read today…




1. More Excellent Analysis From the Credit Ratings Agencies

How’s this for analysis? Fitch affirmed the AAA rating of the US.  Their argument was that “the near term risk to the … AAA status is minimal given its exceptional financing and economic flexibility and the U.S. dollar’s role as the world’s predominant reserve currency.”  Now, I’m not sure because I don’t speak gibberish, but here’s what I think this means: “we’re going to stick by this AAA rating because there are a lot of crazy folks out there who keep buying Treasury bonds and there are a lot of crazy foreign governments that are holding their reserves in dollars.”  In effect, we’ll stand behind the Treasury until there is a run, at which point we’ll tell you that we knew something bad was fixin’ to happen.




(The dollar is the predominant reserve currency at $2.73 trillion in Q3 (up from $2.68 trillion in Q2).  Dollar reserves account for 61.65% of reserve holdings.)




Fitch also warned that the US needs to do something to control their deficit.  Interest payments will use up 11% of revenue by 2011!




2. The Crisis

How to recoup losses. The Obama administration is considering charging banks in order to recover losses from the recent crisis.  They refer to it as a levy.  Now I only made a 220 on the verbal part of the SAT, but I’m pretty sure that a levy is a tax.  They are discussing taxing liabilities (as a proxy for risk), or riskiness of loans or income (as a proxy for ability to pay).  One estimate is that $120 billion has been lost through TARP.  Of course, here’s the issue: the Administration really wants this to reduce bonuses but we all know that the cost will be passed on to customers.




Who knows? Apparently, Fed officials are split as to what will happen when the Fed stops buying MBS.  Some think that the spread between MBS and Treasuries will increase 25 bps.  Others think that the spread will increase 75 bps.  (In other words, people think mortgage rates will increase .25% to .75%, holding all other things equal).




More bubbles to come? The classic signs of a bubble are rapid growth in credit and extreme public enthusiasm for particular assets.  The Economist argues that as long as governments keep interest rates low, we risk bubbles.  Most likely, those bubbles would be in emerging markets and commodities.




The big problem is that high asset prices, low interest rates and huge fiscal deficits are not a sustainable combination.  If profits start to grow, rates will increase.  If profits don’t grow, prices will drop.




More charges for BAC? Previously, the SEC brought suit against BAC for failing to disclose (to shareholders voting on the ML acquisition) the $3 billion in bonuses that they planned to pay Merrill employees.  Now, the SEC is asking the judge to allow them to add on additional charges.  The SEC wants to charge BAC with not disclosing the ML losses from October and November.  The SEC claims that these losses constituted 1/3 of the deal’s value.




I hope that this is a different government lawyer arguing this case. Just as the SEC lawyers argue for more disclosure, lawyers for the Fed went to court to argue that the Fed is not required to disclose information about individual banks borrowing from its discount window.  Wouldn’t investors and creditors want to know this?  Sort of like the SEC says that investors wanted to know about the ML losses?




In Spitzer’s footsteps? NY Attorney General Cuomo has requested information about 2009 bonuses from the largest banks.




3. The Economy

The good kind of traffic! The volume of container traffic entering North American ports in December showed the first YOY increase in 2.5 years.  There was a 1.7% increase over December 2008.  This must mean that retailers are starting to increase inventory.  Of course, it could be that inventory just went too low or it could mean that they are expecting growth.




Small business troubles, especially in Europe. A survey of small and medium European firms that applied for a bank loan in the first half of 2009 showed that 43% felt that available credit had declined and 10% felt that it had improved.  A net of 15% of US small businesses said credit (in November) was more difficult to get (than less difficult).  Small business (<250 workers) is more important in the EU, accounting for 70% of all private sector employment, compared with the US (49%).




Is this supposed to be good news? The S&P 500 has started the year with six days of gains.  The last time this happened was 1987!




Orange juice markets. Everyone is talking about the price of orange juice.  Cold weather pushed prices up 7% on Friday, but when the freeze wasn’t that bad, prices dropped 13% on Monday.  Everyone is making references to the movie “Trading Places.”  It’s a little known fact that if it wasn’t for this movie, I most likely would have played in the NBA.  Unfortunately, there was a scene with Jamie Lee Curtis that stunted my growth.




Venezuela devalues the bolivar. Venezuelan President Hugo Chavez weakened the bolivar to 4.3 per dollar from 2.15.  Now, as companies convert their Venezuelan currency to dollars, they receive fewer dollars.  The Venezuelan market represents 11% of Avon’s profits and 9% of Colgate’s profits.  Overall, this is expected to reduce profits of consumer-goods companies by 2% – 3%.  This also eliminated $1 billion in profits for Telefonica SA, Europe’s largest telecom company (that had left this money in Venezuela).




D-Ram shortage could cause computer prices to increase. D-Ram memory chips make up 10% of a PC’s cost and are increasing 23% in price due to a shortage.  PC’s are expected to increase in price for the first time in six years.  Flat screen monitors are expected to increase 20% in price because of shortages.  Many shortages are occurring because suppliers did not invest during the financial crisis.  Again, we’re seeing the effects of a deep recession – where demand drops significantly and large cuts are made.




Alcoa kicks off earnings season. Alocoa reported a $277 million loss (much better than the $1.2 billion that they lost in Q4 of 2008) in Q4.  Their revenue number beat expectations but they cited lower sales in construction, aerospace, commercial building and gas-turbine markets. Alcoa restructured, cut dividends, terminated employees and idled plants.  (Still, Alcoa is not considered a low-cost producer.) The company said that most of the loss was from restructuring and tax charges.   They said that without the charge, they would have been profitable.  Similarly, Jenny said that if I had hair and money, I’d be good looking.




Chevron warns. Chevron (the second largest US oil market cap company behind Exxon) warned that Q4 earnings would be lower than Q3 even though there was a 9% increase in production (which one analyst said was somewhat unprecedented for a large company).  The problem is a sharp drop in profits from refining and marketing.  One analyst blamed a weak downstream and chemicals environment.




Some jobs aren’t coming back. Since December 2007, we’ve lost 7.2 million jobs and the jobless rate has increased from 5% to 10%.  Some of the jobs in housing and credit may be gone forever.  Since 1997, six million manufacturing jobs (1 in 3) have been lost.  Construction has cut 1.6 million jobs in two years (more than 20% of all lost jobs).  The financial sector has lost 548,000 jobs (6.6% of the total).  There are 10.1% fewer workers doing office and administrative work.  In the recession that went from July 1981 to November 1982, the number of people employed hit a new peak again by the end of 1983.  This is b/c many job losses were temporary.  That is unlikely to happen anytime soon.




Car manufacturers hiring? GM, Ford and Chrysler said that they may start to hire in the next year.  US auto manufacturing jobs are currently at a 47 year low, after cutting 126,000 positions last year.  The companies are talking about hiring a handful of people and paying them lower wages.




China surpasses US in car sales. As mentioned previously, auto sales in China were higher than the US for the first time ever.  Sales grew 46% to 13.6 million vehicles.  December sales grew 92%.  Approximately 10.4 million cars were sold in the US.  (China’s sales include heavy commercial vehicles; that would have added 500K to US sales.)  In 2007, the US sold 16.2MM cars (and 16.6MM in 2008).  China sold 9.4MM in 2008.




Auto industry still has loads of problems. While North America has reduced capacity from 18.3MM units (2006) to 16MM units, global capacity is 90MM while we only expect sales of 62MM units.  There are high barriers to exit and this has led to overcapacity.  Ford and GM are heavily weighted to low growth areas (US and western Europe).  Almost half of industry growth between now and 2024 is expected to come from China.




4. Random

What does this say? AIG has asked Lehman’s former top lawyer to be AIG’s general counsel.  Maybe next they could hire Enron’s compliance director?




Please walk around while you read my blog! A recent study said that people who sit on the couch for a longer period of time (watching tv or looking at the computer or reading) are more likely to die!  Those who watch tv for more than four hours per day are 46% more likely to die of any cause and 80% more likely to die of cardiovascular disease than people who spend less than two hours.  This is even true for people who get lots of exercise.  The bottom line is that you don’t want to sit for prolonged periods of time.  The average American watches five hours of television per day.  Maybe we would have been better off if Fox and Time Warner hadn’t settled their differences.




These Irish are whacky! The head of Northern Ireland’s Democratic Unionist Part was forced to temporarily step down after a scandal involving his 60 year old wife having an affair with a then-19 year old.  She obtained loans for her boy toy and some say that the husband failed to report the loan to authorities when he learned of it in December.  As we often say around this time of the year, “ho-ho-ho.”  I’m sorry, but it’s time to dial 1 800 D-I-V-O-R-C-E and get back to work.




This is rich. Google apologized to Chinese writers for digitizing their books and for any misunderstanding.  First, let me say that I don’t know much about this whole digitization issue, but it doesn’t sound right to me.  With that said, I wish Google had asked me to write the letter for them.  I would have written it straight to the Chinese government.  The pertinent part would have said, “we are so incredibly sorry for this misunderstanding.  Simply put, we had absolutely no idea that you dirtbags had any understanding of laws pertaining to intellectual property rights.  But now we understand that you do know what they mean.  You just don’t stop your own people from stealing.  Again, our bad.”  If you’re at Google, you should feel free to use this letter.  No charge.  (And I won’t claim any intellectual property rights to it.)




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