Market Update – January 22, 2010

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Now, on to what I read today…




1. Markets

Stocks dropped. The Dow fell 213 points (2%).  It has dropped 3.1% in two days.  The market is now down slightly (.4%) for the year.  Commodities fell 4% — showing that there might be fear about world growth.  Treasury bonds rebounded as investors looked to move into low risk assets.




2. Economy

Jobless claims were unexpectedly high. New claims for jobless benefits increased by 36K to 482K last week.  Economists had expected a 4K decrease.  The four-week moving average is 448,250.  Some say that the increase was caused by backlogs from Christmas and New Years.




Leading economic indicators increased 1.1% last month. This index has risen for nine consecutive months.  The index is above its most recent peak (March 2006).  The biggest positive contributions have been the interest rate spread and housing permits.  (Of course, when the government subsidies end, you have to wonder how these two will behave.)  The lagging index is still dropping.  Economists are interpreting these facts to conclude that we’re early in the recovery.




Google had a big quarter. Revenue in Q4 increased 17% YOY.  In Q3, the YOY revenue growth was only 7%.  Apparently, the online ad business is really growing after a short slump.  They reiterated that they would like to stay in China, but they want to do so on different terms (no more censoring).

3. Financials

GS has huge quarter. GS reported a record Q4 profit of $4.95 billion and beat estimates by a far way ($8.20 vs. $5.20).  Their profits exceeded the combined profits of JPM, C, MS and BAC. (That may be a little unfair to say since C and BAC both lost money in Q4.)




Lower compensation at GS. GS “only” paid $16.2 billion in compensation in 2009.  They didn’t add anything to the bonus pool in Q4.  This kept compensation far below the $20.2 billion of compensation paid in 2007.  This year’s compensation was 35.8% of revenues, the lowest percentage since going public.  I’ve been told that GS employees love Lloyd Blankfein, but I have to wonder how many of them feel like his joke about “doing God’s work” turned out to be a really, really expensive joke.




Revenue from principal investments dropped from $10.03 billion (Q3) to $6.41 billion (Q4).




President makes his announcement. As mentioned yesterday, the President wants to limit proprietary trading at banks (that take deposits).  They would not be allowed to own, invest or advise hedge funds or private equity firms.  In addition, he wants to expand the rules which state that no bank can control more than 10% of insured deposits to include non-insured deposits and other assets.  There was not much detail disclosed.  It’s hard to say how much pure proprietary trading goes on.  Some estimates (which surprised me) are that this is only 3% of revenue at some of the big firms.




Fannie and Freddie. The CBO projects the total cost of bailing out Fannie and Freddie will be $291 billion.  Currently, we have put in $112 billion.




American Express has positive news. The said that customer spending increased 8% in Q4.  Investors look to AmEx as a signal as to what wealthier consumers are doing.  CEO Chenault said that the economy and his company are in better shape than a year ago, despite high unemployment, low real estate values and reduced household balance sheets.

Average spending rose 15% from a year ago to $3,209 in Q4.  Prior quarters had shown declines.  For Q4, the company wrote off 7.5% of US card loans.  This was 8.9% in Q3 and 6.7% one year ago.

Approximately 3.7% of cardholders were one month behind.  This was 4.1% in September and 4.7% a year earlier.  The company’s card loans has shrunk 16% YOY to $52.6 billion.




More on China’s inflation. Yesterday, I mentioned that consumer prices in China increased 1.9% in December (YOY) after only being up .6% (YOY) in November.  Now, we’ve also seen a big increase in producer prices.  In December, they rose 1.7% (YOY), after November had reported a 2.1% decrease.  China’s industrial production increased 18.5% in December (YOY), slower than November’s 19.2% increase.  China’s Q3 growth was revised up to 9.1%.




Interesting comment from China. According to the WSJ, a representative of China’s statistics bureau said, “regardless of where China’s economic output ranks, there is still one basic fact, our per-capital GDP is behind 100^th place.  We have a large population, a weak economic foundation, relatively few resources and many poor people.  This is China’s actual situation.”




4. Sovereign Debt

Greece is still out there. Greece is preparing to sell $1.5 billion in global bonds.  While Greece still has an investment grade rating, buyers will probably demand a premium more consistent with a junk rating.  Dollar denominated three-year debt would probably require a 3% premium to Treasuries.  But realize this…$1.5 billion is a really small amount.  It’s about 1/1000 of the US deficit this year.




You’re hearing a lot of bad news about the euro. Don’t lose sight of the fact that the euro has appreciated close to 75% (vs. the dollar) in the last eight years.  But, the euro is down about 7% in the last two months.  Major reasons include:

1. fears about Greece
2. fears that the European recovery will be very gradual
3. fears that the US and England will raise rates before Europe

IMF describes Portugal like Jenny describes her future with me. The IMF said that if there are no major changes, the outlook is “bleak.”  The IMF encouraged Portugal to cut public sector wages and welfare payments to lower their debt level.  If I were writing the SAT, I would say that Bear Stearns is to Lehman as Greece is to Portugal.




Looking ahead with China. China has little debt – less than 20% of GDP.  Nonperforming loans at leading banks are under 2%.  But the question is what percentage of recently-made loans will go bad.  There was a tremendous increase in lending and this was accompanied by a booming real estate market.




5. Politics

Chaos ahead? Bernanke needs 60 votes in a procedural vote to avoid a filibuster and have his nomination be voted upon.  The estimates are that this will be very close.  This would be a shock to the market.  It’s hard for me to imagine Bernanke losing this vote.




Just what we need…more political spending. The Supreme Court struck down limits on corporate political spending.  Businesses and unions will now be able to spend on commercials favoring or opposing candidates.   This has to be at least a marginal win for media companies.  It’s a huge loss for anyone who doesn’t have the technology that allows him or her to skip over commercials.




Pointless debate upcoming. The Senate is starting to debate a bill to increase the federal debt ceiling by $1.9 trillion to $14.3 trillion.  Is this what they waste their time on?  Is voting against this going to prevent our deficit this year?  This is politics at its worst.  I’m all in favor of balancing our budget.  But that’s a real issue – looking at our revenues and our spending.  The debt ceiling is a question of “should we finance our deficit or should we default?”

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