Market Update – February 3, 2010

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Now, on to what I read…




1. Markets




The Dow jumped 111 points. Investors were happy with the pending home sales number and there’s a bounce back going on after the recent drop.




Oil prices increased 3.8% to $77.23 per barrel. People are attributing this recent bounce-back to GDP numbers, the ISM numbers and now the higher pending home sales.




2. The Economy

Pending home sales. The National Association of Realtors index for pending sales of previously owned homes increased 1% in December.  This had dropped 16% in November.  The idea of reading anything into a subsidized real estate market seems absurd to me.  We have tax credits and huge purchases of MBS.  Basically, all that means is artificially higher prices and artificially lower interest rates.




UPS said that the economic recovery is under way. UPS and FedEx are often the first to see a recovery (or a downturn).  It strikes me as strange that UPS was bullish when revenue in Q4 was down 2.5% YOY.  While earnings were up, I would think about the revenue number to think about growth.  Maybe the CEO was looking at January revenue figures.




Not much pricing power. Continental said that traffic increased 8.5% in January, but passenger revenue per available seat mile was down 1.5%.




Cutting the budget has repercussions. Economist Joseph Stiglitz warned that Greece’s budget cuts could hurt the country’s economic growth.  I assume that couldn’t happen in the US because we don’t cut our budget.  Greece’s ten year bonds now yield 3.6% more than German bonds.




3. Auto Industry

We’re not done with you! Transportation Secretary Ray LaHood said “we’re not finished with Toyota and are continuing to review possible defects and monitor the implementation of the recalls.”  It sounds as if the Administration put a lot of pressure on Toyota to force this recall.  Even Toyota’s CEO has stated that they announced the recall because they feared damage to their credibility.  There are going to be some very wealthy plaintiff’s attorneys as the result of all of this information.




Here’s the problem. Of course, none of this plays well when the government owns the competition.  Some will accuse the US of strong-arming Toyota in order to help GM.  This is why we really don’t want to be involved in these bailouts.




January car sales. As a whole, the auto industry was back up to 11 million cars on an annualized basis.  This is an improvement from last year, but well below our peak levels (~17MM cars).  Toyota’s monthly car sales fell 16% (to 97K).  Toyota’s market share dropped to 14.2%.  (In 2009, it reached 17%.)




The percentage gains / losses (and cars sold in the month) are as follows:

Ford +25% (116K)

Hyundai +24% (31K)

Nissan +16% (63K)

GM + 14% (146K)

Honda -5% (67K)

Chrysler -8% (57K)

Toyota -16% (97K)




4. Compensation

Since when has capitalism meant being in business for the employees? Morgan Stanley’s compensation ratio in 2009 was 62% of revenue.  The new CEO said management would never see anything like that again.  They paid compensation and benefits of $14.4 billion on revenue of $23 billion.  He said that performance was disappointing for the firm.  He should talk to the shareholders.




BAC is paying $4 billion in bonuses to their investment bankers and traders – average of $300K to $500K per person.  The payout represents approximately 19% of the $23 billion in revenue generated by these groups.  Only about 25% will be paid in cash. Restricted stock will vest over 18 months and deferred cash will be awarded over three years.




JPM set aside $9.3 billion for investment banking employees — $378,600 per person.




Remember AIG. AIG will pay out $100 million in retention bonuses on Wednesday.




5. Government

You’ve caused enough trouble. Fannie and Freddie’s regulator (Federal Housing Finance Association) said that the two agencies will not be allowed to introduce new mortgage products while under the control of the government.




Pay government employees government wages? House Republicans have introduced a bill to put Fannie and Freddie on the federal pay scale.  Salaries on that scale are capped at $200K.  The CEOs are currently set to make $6 million.




We’re getting that $90 billion from the banks, regardless of how long it takes. That’s effectively what Geithner testified, saying that if it takes longer than ten years, we’ll impose those fees on banks for longer.




Jobs vs. deficit? Democrats are about to announce an $80 billion jobs program this week.  It will be interesting to see how people react.  One plan allows employers to hire an unemployed person and not pay the worker’s 6.2% unemployment tax for the rest of 2010.  We can do this because Social Security is so overfunded…




Volker’s testimony. Former Fed Chairman Paul Volker testified that banks should not be allowed to engage in proprietary trading or make private investments.  Mr. Volker says that there’s no way for banks to avoid conflicts of interest when they are engaged in such trading.  Volker’s recommendation is more stringent than Treasury Secretary Geithner’s idea of simply imposing higher capital requirements for banks.




6. Real Estate

Homebuilders losing market share. In the past 20 years, approximately 16% of home sales were newly constructed.  In 2009, that was 7.6%.  Homebuilders are competing with foreclosures by lowering prices, promising speed and warning that buying a foreclosure is risky (the house may have latent problems due to neglect).




When the going gets tough, the tough walk away. The NYT reports that there is new research that says people start to think about walking away when their home value falls below 75% of the amount owed on the mortgage.  In Q3, an estimated 4.5 million people reached this low level.  Estimates are that 5.1 million people will be 25% under water by June – about 10% of all people with mortgages.  It’s estimated that these people have a combined deficit of $745 billion.
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