Market Update – January 20, 2010

Please help the blog grow.  Please forward it to anyone who may be interested.  At the bottom of the article, you will find instructions as to how to sign up.

Here’s what I read today…




1. Markets and Investments

Stocks hit a 15 month high.  Health care stocks rallied on anticipation of a Republican victory in Massachusetts.  At night, it turned out that the Republican (Scott Brown) did win, eliminating the Democrat’s super-majority (of 60) that allowed them to avoid a filibuster.  The irony is that this election was for Ted Kennedy’s seat and may result in killing the health care bill.




Risk tolerance is back! Average cash balances of funds is down to 3.4%, the lowest level since mid-2007.  In December 2009, this was 4%.  Approximately 55% have no protection against declines in the next three months.  This was 48% in December.  More than 60% of investors think earnings will increase at least 10% in the next year.  This is an increase from 46% in December.




More M&A. Firms in the US, Europe and Asia have $290 billion more cash on their balance sheets than they did in 2007.  Low interest rates have led to a tremendous amount of debt issuance.  Citi is forecasting a 17% increase in merger activity.




Foreign direct investment fell in 2009. Global foreign direct investment fell 39% in 2009.  There was ~$1 trillion of foreign direct investment in 2009, compared to $1.7 trillion in 2008.  Investment in the UK dropped 92.7%, the US dropped 57% and China only dropped 2.6%.  Investment in Germany increased 40.7%.  The US is still the largest recipient of foreign investment, but now China is second (passing France and the UK).




2. Debt and Housing

Foreigners keep subsidizing us. Foreign investors purchased $118.3 billion of Treasuries in November, up from $38.9 billion in October.  Foreign investors own over half of our Treasuries.  In addition, there is evidence that they are buying longer-term Treasuries again.  Interesting that foreigners are buying our Treasuries, but not making direct investments in private assets.




Bipartisan commission to reduce debt. The commission is supposed to report at the end of this year and have a plan to bring the deficit from 10% of GDP to 3%.  I am setting up a similar commission in the Leeds household.




FHA increasing premiums. The FHA (which insures mortgages) is raising the insurance premium that borrowers pay from 1.75% to 2.25%.  Minimum payments will remain at 3.5%, but people with a credit score below 580 will need to put 10% down.




Drop in home builder confidence. The housing market index dropped to 15 (where it was last June) as did the index for builder confidence for new sales.  The index which measures optimism for sales in the next six months was steady at 26.  The index which measures prospective buyer traffic fell to 12 – the lowest level since March 2009.   An index above 50 shows more builders view the world positively than negatively.




3. Financials

Citi’s woes continue. Citi lost $1.6 billion in 2009.  This was a great improvement from their $27.7 billion loss in 2008.  To some extent, Citi didn’t have a chance…the fourth quarter included a $10.1 billion accounting charge ($6.2 billion after-taxes) related to the bailout repayment.  This resulted in a Q4 loss of $7.6 billion.  If you’re a Citi employee…don’t worry.  The annual compensation totaled $25 billion.




Things will be a little different this year. Goldman normally tells employees about their bonuses prior to releasing Q4 earnings.  This year, they will announce earnings first.  It sounds like they are either going to announce huge earnings (to justify compensation) or that they will announce disappointing numbers and employees will then be forced to understand lower bonuses.  I’ll put my bet on a big quarter.  They have already put aside $16.7 billion for bonuses through Q3.




Will this get everyone off my back? Fed Chairman Bernanke sent a letter to the Government Accountability Office, asking them to audit the Fed’s actions in the AIG bailout.  Next week, a House committee starts hearings on whether the NY Federal Reserve Bank improperly limited disclosures about payments related to AIG’s credit default swaps.




AIG trying to sell subsidiary. Newspapers are reporting that MetLife may buy an AIG subsidiary (American Life Insurance Company) for $14 – $15 billion.  This would allow the Fed to recover $9 billion that they have invested in preferred stock.  It may also help to recover some of a $35 billion credit facility that the Fed has extended to AIG.  There are separate reports that say that the Fed has large paper gains on securities which they bought from AIG (as part of their bailout of AIG’s credit default swaps).  The proposed MetLife transaction price implies a very high value (3 – 4 X book value).




4. Random

Hedge funds did well. From 2000 – 2009, Hennessee Group said that its hedge fund index increased 88%.  This compares with a 9.3% drop in the Dow, a 23% drop in the S&P 500 and a 44% drop in the Nasdaq.  Most importantly, hedge funds seemed to capture half of the upside in good months and only 1/5 of the decline in bad months.  Interestingly, the best performing funds included ones that focused on financial stocks – as they made money shorting these stocks in 2008.




You must give me a date. California will require HMO family practitioners to see patients within ten days.  Specialists will have 15 days.  If a patient needs urgent care that does not require prior authorization, they must be seen within 48 hours.  I’m trying to get Jenny to agree to similar terms.  Unfortunately, my view of what constitutes a need for urgent care is different than her definition.




Chrysler quality. Chrysler is recalling over 24,000 cars and trucks for the model years 2009 and 2010.  They have a tiny little defect…they were built with an improperly formed or missing part in the braking system.  Other than missing a part in the braking system, the cars are high quality.  Chrysler said that this problem could cause a crash.  You think?
________________
If you want to receive a daily email:
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.