Market Update – January 25, 2010

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On to what I read today…




1. Markets

Stocks dropped 2.1% on Friday. There were concerns about the uncertainty at the Federal Reserve, the new proposals about the banks and the slowdown in China.




Things get tough for Bernanke. Two Democratic senators announced that they would oppose him. Senators up for re-election are getting nervous after Scott Brown won in Massachusetts. At least 16 senators have said that they would oppose the chairman and this includes four Democrats.  Approximately 27 have said that they will support him.  He needs 60 votes in a procedural vote to get to the actual confirmation vote.  The White House, as well as Republican Senator Mitch McConnell, said that Bernanke will be confirmed.  Personally, I think that Senators up for re-election are in a tough spot: it’s hard to vote for Bernanke when your opponent is bashing you but it’s hard to vote against Bernanke and cause chaos in the markets.  I continue to believe that he will win confirmation.




Say what? The Treasury Department is considering allowing banks like Goldman Sachs to undo their decision to become bank holding companies. This way, they could continue on with their proprietary trading.  If you’re going to do this, why make this proposal at all?  If the Administration believes that the current set-up creates systemic risk, it makes no sense to allow legal technicalities to dictate who can create risk for us and who can’t.




Key risks in today’s markets:

1. earnings risk – high earnings expectations are already priced in and it’s hard to expect large positive surprises with high unemployment
2. valuation risk – if you use ten-year average earnings, the market p/e was 13.3 in March.  Now, it’s 20.8 and the historical average is 16.
3. Policy risk – will the Fed raise interest rates
4. Bernanke’s reappointment
5. Fed’s exit strategy
6. High unemployment
7. Can the economy survive without huge stimulus
8. China’s slowdown

2. Financials

Bank of China is raising capital. They are considering selling $30 billion (!!!) of new shares and $6 billion of convertible debt.  In the first six months of this year, their loan portfolio increased 38%, much faster than other large Chinese banks.




Five banks closed by FDIC. The five banks bring this year’s total to nine.  Since 2008, 174 banks have been shut down.  The five closings on Friday are estimated to cost the FDIC a total of $531.7 million.




Capital One’s bad news. The WSJ argues that Capital One’s dismal report about consumer lending may contradict the belief that consumer lending will lead banks into recovery.  Capital One’s CEO said that there is a “striking” lack of demand for credit.  In addition, people have less equity in their homes, so that makes loans riskier.  Finally, competition is high and marketing expenses are rising.




Timing matters! JP Morgan priced the stock portion of its bonuses on Wednesday.  Since then, the stock is down about 10% after the Administration announced their desire to tax the banks and break them up.  Goldman priced their stock on Friday after it had fallen 8% in two days.  Another good trade for Goldman!  You could argue that Goldman employees were helped by these announcements.  It’s a conspiracy!!!

3. The Debt Issue

We’ll let you censor if you’ll start buying our debt again! China’s holdings of US Treasury securities increased by just $62 billion this year. That was less than 5% of the money that the Treasury raised. China’s holdings at the end of November were less than their holdings at the end of July. Treasury securities owned by the public increased $1.4 trillion, a 23% gain, to $7.8 trillion.

Until 2007, foreigners were buying more treasuries than the government was issuing. This meant Americans were reducing their holdings. In the first 11 months of 2009, foreigners bought only 39% of the debt.

This debt issue is huge. It’s estimated that we’re going to be issuing over $2 trillion of debt this year.  If foreigners are buying less, rates are really going to head north.

4. Real Estate

California’s inventory of unsold homes shrank to a five-year low (3.8 months). This is down from 5.6 months a year ago and 16.6 months in January 2008. The median price of a single-family home rose 8.4% from a year ago.




Home market improvement? The WSJ writes that there may be some positive signs in the residential real estate market.  They include the fact that price declines have slowed, inventories of new homes are down to their lowest level in nearly 40 years and existing home sales are back to an annualized rate of 6.5 million homes.  The problem is that the market was supported by low mortgage rates (Fed bought $1.25 trillion of MBS) and the $8,000 home tax credit.  When these stop, we have no idea what will happen.




More on the ethics of walking away from your home. Richard Thaler (Chicago Professor) wrote a piece in the NY Times.  He mentioned some research that showed that homebuyers in California paid more for a nonrecourse loan.  If that expense was clearly explained, maybe homebuyers would be more likely to exercise that option.  He also cited a paper that referred to “norm asymmetry” whereby borrowers feel an ethical duty to repay, but the lender is willing to do anything to maximize profits.  (I’m not sure that I buy into this.)  There are also other reasons why people don’t default: economic and emotional costs of giving up home and moving, social stigma of default and hit to credit rating.  You could have a contagion of defaults in the future – people are more likely to default if “everyone is doing it.”




5. Random

Unions lost 10% of their members in the private sector last year, the largest decline in more than 25 years. Now, only 7.2% of the private-sector workforce are represented by unions, down from 7.6%. The total share of union membership is 12.3% when you include the government.




Wal-Mart is cutting more than 10,000 jobs at Sam’s Club. They are outsourcing their product demonstration (where you can try food or see how a product works) to an independent marketing firm.  The employees can apply for a job with the marketing firm.  It strikes me as strange that Wal-Mart can outsource this and reduce expenses.  This is a real bummer for me.  Valentine’s Day is coming up and I had told Jenny that I was taking her out for something to eat and a show.  Now, I’m going to need to find someplace else to take her.




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