Michelle Obama Declares War!

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Now on to what I read…




1. Markets

The Dow fell 104 points. There are fears of the Greece problem spreading and the Fed slowing the economy.  The Dow closed below 10,000 for the first time in three months.  The Dow first crossed 10,000 in 1999.  When it happened, Maria Bartiromo was on the floor of the New York Stock Exchange doing her best imitation of Meg Ryan in the diner (in When Harry Met Sally).




Risk premiums rose. Risk premiums on corporate debt rose to their highest level this year.  Spreads on investment grade bonds are now at 1.61%.  Risk premiums for high yield bonds have increased from 5.99% (on January 11) to 6.81%.




Greek bailout? Talk continues that Germany and France may have to bail out Greece.  I’d actually be pretty excited for France if they get to come to the aid of someone…




Spain’s problems. Spain plans to issue $104.9 billion of debt in 2010, down 34% from 2009.  Last week, Spain raised its 2009 public deficit to 11.4% of GDP from 9.5%.  Their goal is to get this back down to 3% by 2013.




Traders and hedge funds have bet $8 billion against the euro. This is the biggest short position ever in the euro.  The thing to think about is that when sentiment changes back, it could be quite a move.  If the fear over the euro is alleviated, these positions can be reversed very quickly.




The evil empire is dominant in private equity! GS has $14 billion of corporate and real estate private equity holdings on its balance sheet.  That’s huge compared to Blackstone’s $1.35 billion and KKR’s $4.1 billion. This is the big issue to the President — firms using their own capital (not when they are managing other people’s money).

As a separate issue (and not subject to regulation), GS also has more private equity assets under management ($90.7 billion) than any other firm.  Carlyle is second with $86.2B.




China underweights the US. China Investment Corp. (CIC) filed forms with the SEC showing that they have $9.63 billion invested in US stocks.  This is not a complete list, but the main takeaway is that their $300 billion fund is likely underweight the US.




2. Economy

California budget woes. A recent poll of Californians showed that 83% of likely voters believe that the state’s budget situation is a “big problem.”  What the hell do the other 17% think?  Was one of the other choices “pass the ganga?”




This was probably a good idea at one time. One of California’s big problems is that they are one of three states that require 2/3 approval of the legislature to pass a budget.




UPS layoffs. I mentioned several days ago that UPS’ bullish comments on the economy seemed inconsistent with the numbers they released.  Today, they announced that they were going to furlough 300 pilots.  Apparently, this is part of a $1.4 billion cost-cutting plan.




Commodity drop. Corn has dropped 16% and soybeans have dropped 7% since January 12^th, when the Dep’t of Agriculture said that American farmers had produced record crops.




Home entertainment. The average American spent $903 in 2008 on cable tv, internet connection and video games.  If you add another $1000 for cellphone service and you’re at $2K / year.




Who needs magazines? Single issue magazine sales continue to sink.  In H2 of 2009, they dropped 9.1%.  In H1 of 2008, they dropped 6.3%, then 11% in H2 and 12% in H1 of 2009.  These sales are significant because they reflect true appeal of magazines.  Subscriptions, on the other hand, reflect huge discounts.




News magazines were killed. Newsweek fell 41%, Time dropped 35%, Economist lost 24% and BusinessWeek and Fortune were also down in the mid-20s.  Maybe this reflects the fact that no one wants to know what’s going on.  Or maybe in the recession, people don’t want to spend $5 for something that they can read for free online.  Or maybe China is censoring these magazines somehow…

Here’s what’s alarming – some magazines had big gains including Real Simple, O (Oprah), Vanity Fair and Men’s Journal.

3. Fannie and Freddie

More of what we already knew. Fannie, Freddie and the FHA are behind 90% of the mortgages currently being originated.  In addition, Fannie and Freddie are being used to help keep homeowners in their homes and I suspect that they will be used to help support the MBS market after the Fed is done buying.




You delinquents! At Freddie, 3.87% of single-family mortgages are at least 90 days delinquent.  Fannie is at 5.29%.  One year ago, the numbers were 1.72% and 2.13% respectively.




Many more defaults to come. There are estimates that 6% of Fannie’s loans and 4.9% of Freddie’s loans will default over the next 18 – 24 months.  These seem like high numbers based on the current delinquency rates.  But, you have to think of it as being 3% / year for Fannie and 2.5% / year for Freddie.




HAMP is hardly working. Through December, Home Affordable Modification Program has signed up 903,000 borrowers for trial modifications.  Approximately 66,000 have received a permanent modification.




If only it was this easy. Activists are pushing for lenders to reduce the principal of home loans (so fewer people default).  Instead, lenders have been more willing to lower interest rates.  The problem is that shareholders (and Americans in general) don’t want to give modifications to people who speculated, lost and have the ability to bear the loss.  It’s hard to distinguish between good modifications and unnecessary modifications.




5. Random

Rep. John Murtha (D – Pennsylvania) died. He was 77 and had served in Congress for 36 years.  He was known as a Vietnam vet whose opinion on war / defense issues was really important.  He was also known for bringing home the pork to Pennsylvania.  Apparently, there were complications from recent gall bladder surgery.




Do we really have a solution? There is growing concern that Toyota might not actually know what has caused the sudden acceleration of their cars.  Congressional hearings start Wednesday.




The first lady and her fighting words. Michelle Obama says that she is going to fight childhood obesity.  Well, that’s fine.  Today my fat kid announced that he is going to fight federal budget deficits.

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