Market Update – January 27, 2010

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Now, on to what I read today…




1. Markets

Boring day for the market. Market was basically flat for the day (down 2.57 points).  Nasdaq was actually down .32% and the S&P was down .42%.




Berkshire Hathaway is being added to the S&P 500.  Berkshire had been excluded for years.  Some attributed this to the lack of liquidity (due to the high stock price).  Now, Berkshire is doing a 50:1 split of their class B shares.




There are a couple of really interesting things about this.  First, this is a really large stock that’s being added to the index.  It will be the 21^st largest company.  This means that index funds will have to sell some of their other holdings and buy Berkshire.  This reminds me of when Google was added.  The “Google trade” was to buy Google and short the market in anticipation of the effective date.  It will be interesting to see if that works this time (buying Berkshire and shorting the market).  There is approximately $3.5 trillion indexed to the S&P 500.  Second, it will be interesting to see if the Berkshire shareholders are willing to sell their stock.  In other words, there is the possibility that this is a “more loyal” shareholder base than most stocks.




Now we like Bernanke. Or more likely, we’re scared that our constituents will blame us if we create uncertainty and the market drops.  Approximately 52 senators are now in favor of Bernanke and 19 are opposed.  It looks like he will get to the 60 needed to pass the procedural vote and get to the re-confirmation vote (at which point he’ll just need 50 votes).




2. The Economy

Home prices continued to drop. The S&P Case-Shiller home price index dropped .2% in November (from October), but they were actually up slightly on a “seasonally adjusted basis.”  The 20-city index was down 5.3% YOY, while the 10-city index was down 4.5%.  The indexes are down approximately 30% from their peak (in mid-2006).

Several cities (Dallas, Denver, San Diego and San Francisco) have higher prices than November 2008. At the same time, a few other cities (Las Vegas, Charlotte, Seattle and Tampa) hit new lows.  Personally, I find it disconcerting that you can have the government throw $8,000 into many transactions (through the tax credit) and we still have lower prices.




Housing healing. The WSJ argues that the housing market appears to be healing, but is still at risk.  Inventories are far down and there are even some reports of bidding wars on low-end homes.  In some parts of the country, job markets are slightly stronger than the national average.  At the same time, there are cities with really high default rates and weak job markets and it will take a while to come back.  More than seven million households are either delinquent (in payments) or in foreclosure.




Consumer confidence rose for the third consecutive month in January. The index rose from 53.6 to 55.9.  Sentiment about present conditions and the labor market improved.  More people expected job losses to abate (but they didn’t expect new jobs to be created).




China continues to curb lending. Several state-run Chinese banks have suspended lending for the rest of the month.   Chinese banks had already done $146 billion of loans in the first two weeks of this year – more than double the monthly average that was made in the last half of 2009. The banks expect to lend 7.5 trillion yuan (1 trillion yuan = $146 billion) this year after lending 9.6 trillion yuan last year.

They have also increased the amount of reserves that banks must hold against their deposits. In addition, the yield on central bank bills is increasing – which makes it more attractive for banks to buy and hold government debt.  The government left the yield on one-year bills unchanged after raising it twice in the past two weeks.




3. International

Down with Japan? S&P threatened to downgrade Japan if they can’t pull out of their deflationary environment and curb public spending.  (Moody’s said that Japan was stable at Aa2.)  Japan’s debt level is close to 100% of GDP.  S&P seems nervous about the new Japanese government (Democratic Party of Japan).

Japan had $6.13 trillion of debt outstanding as of last March.  In their defense, they do have massive foreign reserves. The warning to Japan is significant because they have the second largest economy in the world.  Virtually all Japanese debt is held by domestic investors.




More bad news from Portugal. Portugal reported that their deficit was 9.3% of GDP – higher than expected.  Many people are worried about Portugal almost as much as Greece.




4. US Debt

The deficit. The 2010 budget deficit is now expected to be $1.35 trillion.  The Congressional Budget Office expects the government to run a $6 trillion deficit over the next decade!  This does not include several trillion dollars more of debt that will be added when Obama extends the Bush tax cuts and if they provide relief from the Alternative Minimum tax.




The government and the media continue provide misinformation about the debt.  I think that this is the single biggest issue in our future.  The WSJ quotes the CBO as saying that the debt held by the public exceeded $7.5 trillion or about 53% of GDP.  By the end of 2020, debt is projected to climb to $15 trillion or 67% of GDP.  With this, interest rates should rise.




While this is technically correct, there is much more debt than “publicly held debt.”  As I have frequently mentioned, we have used Social Security funds to finance our debt and that is simply a substitute for issuing more bonds to the public.  Our debt level (including money borrowed from Social Security) is already close to 80%.  In addition, and MOST important, we have a huge unfunded liability that no one seems interested in.  Social Security, Medicare / Medicaid and Veteran’s Affairs would require close to $50 trillion in order to be fully funded.




5. Company News

Verizon is cutting 13,000 jobs. Their wireless division is doing well.  Their wireline business…not so much.




Doing the right thing! Toyota announced that they would stop selling eight of their models until they fixed a sticky accelerator problem that can lead to unintentional accelerating.  In a show of support GM stopped selling cars a few years ago.  But, my guess is that this is going to give a big edge to Kia who can proudly advertise that their cars don’t accelerate.




6. Random

That’s bullwhip! That is the term that refers to small changes in demand having a big impact on suppliers.  In other words, when demand slowed, producers bought nothing from suppliers because they wanted to work off their inventory.  Then, as demand picked up a little, they needed to produce more goods plus they want to increase inventory.




This should be entertaining! Starting today (Wednesday), we’re going to see lots of Fed emails about AIG in a House hearing.  We’re likely to see lots of evidence that the Fed was really careful about language so that the market wouldn’t know who was actually getting bailed out.  Some of these emails will likely be used against Bernanke.  Excerpts of one email indicate that NY Fed staffers felt that the Washington Fed office didn’t understand that these were big decisions that needed to move quickly (before AIG collapsed).

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