Olympic Advice

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If you are a McCombs alumni in Houston, please consider coming to the alumni event on Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

http://utmsb.convio.net/site/Calendar/1055609623?view=Detail&id=108161

Now on to what I read…

1. Markets

Snowy day trading. The Dow ended down 20 points.  The big news of the day was Bernanke’s written comments about future Fed action.  There are questions about how vigorous any recovery can be if interest rates are increased.

Dollar rallied. The dollar rallied slightly, as investors are still worried about the EU and Bernanke’s outlined comments were viewed as slightly hawkish.  Gold dropped slightly.

Treasury prices dropped after a $25 billion 10-year auction and in anticipation of Thursday’s $16 billion 30-year auction.  The 10-year auction was slightly weaker than recent auctions.  (It was 2.67X oversubscribed.  The last auction was 3X oversubscribed and the average of the last eight auctions was 2.76.)

Long term mutual funds had net inflows for the 47^th consecutive week! Stock funds had outflows of $1.48 billion and bond funds had inflows of $8.55 billion.  Within stocks, there were outflows of $2.23 billion from US stocks and inflows of $746 million to foreign funds.

2. Bernanke and the Fed

Bernanke’s comments. Bernanke’s hearing with the House Financial Services Committee was canceled because of snow, but his testimony was released.  He said that the rate paid to banks on excess reserves may temporarily replace the Fed funds rate as the main target for monetary policy. (The current interest rate on excess reserves is .25%.  Raising this rate would give banks more incentive to leave money there, rather than loaning it out.)

He also said that the gap between the discount rate that is being charged for emergency loans and the Fed funds rate may increase.  (The spread is currently 25 bps; before the crisis, it was 100 bps.)  He said that he didn’t anticipate selling any Treasuries or MBS in the short term.

When will all of this happen? Interestingly, Bernanke’s comments did not tell us when any of this may happen.  His comments included times such “at some point,” “at the appropriate time” and “when the time comes.”  It reminds me of how many women wanted to go out with me on “the 12^th of Never.”  I haven’t checked my calendar, so I’m not sure how soon that is, but I can guarantee you that I’m already overbooked that day.

3. Economy

Trade deficit. The US trade deficit widened in December to $43.7 billion.  The good news is that the release indicates that global trade accelerated.  The bad news is that it also means that our GDP in Q4 may not have been as strong as we thought.  In other words, more of our sales were goods that were produced elsewhere.  Economists say that GDP will be revised down slightly (to 5.6 or 5.5).

Data disruption. Huge snowstorms on the east coast are going to affect our economic data over the next month.  During the past 20 years, major snowstorms have resulted in an average employment decline of 91,000 from the three-month trend.  While this is a temporary effect, it hurts confidence to hear low numbers.

China’s inflation in January was 1.5% higher YOY. That’s down from December’s 1.9% reading.   Lower Chinese inflation is a good thing…high inflation will lead to China continuing to slow the economy.

4. EU and UK

We must save our weak sister. France and Germany continue to work on a plan to save Greece.  There is talk about how to guarantee Greek debt. I’m hoping that the Greek team will enter the Olympic stadium on Friday night being carried by the French and Germans.

It turns out that our weak sister is on drugs. Greece froze public sector salaries and cut their supplemental income by 10%.  As a result, the civil servants went on strike on Wednesday.  Schools, courts and public offices were closed.  Even air-traffic controllers went on strike.  So here’s the deal.  The French and Germans are not bailing out a country that is worthy of help.  Their people are not ready for austerity measures and their government is not organized enough to actually run the country.  I actually think that this strike is a really scary development.  It tells you how screwed up this country is.  They haven’t accepted that they have a problem.  As Jenny can tell them, her life became a lot better when she admitted that she had a problem (me).

EU or EUSA. interesting FT article compared the states in the US to the EU.  The states don’t have their own currency and don’t control monetary policy.  They are stuck between public employees and angry taxpayers.  In the 30 years ending in 2008, spending at the state level grew 6.7% per year.

Portugal sold $4 billion of debt. There was 3 – 4 times the demand for it because rates were higher and investors are betting that the EU will not let Portugal default.

If there is ever worry about the U.K’s debt…The U.K.’s four major (Lloyds TSB Group, Barclays, RBS and HSBC) banks held approximately $110 billion in U.K. government debt.   If this debt is perceived to be riskier, these banks would have to pay more to attract capital.  Interestingly, the cost of insuring HSBC is less than insuring UK debt (85K vs 97K).

5. Financials

Fannie and Freddie. Fannie and Freddie are buying back loans that they guaranteed that are 120 days delinquent.  The idea is that they will buy them back and remove them from the mortgage-backed securities.  It will be cheaper to hold the loans, rather than to pay the interest on the MBS.  The reason for this is that Fannie and Freddie have cheaper financing.  Freddie has $70B of these loans and Fannie has $127B.

One year ago today. One year ago, Geithner gave a poorly received speech which described his plan for the banks.  The market dropped 400 points.  Now, big banks have raised $112 billion by selling shares.  The large banks seem stable, but they have benefited from a tremendous number of bailouts that are not being called “bank bailouts.”  Examples include the purchase of $1.25 trillion of MBS and the payment of 100 cents on the dollar to AIG’s counterparties.

We can only skimp for so long! GS’ CFO said that investors shouldn’t use Goldman’s puny $16.9 billion compensation (from 2009) as an indication of what compensation will be in 2010.

New pay plan at AIG. AIG is rolling out a new compensation plan where employees will be ranked between 1 and 4.  You have to be in the top 10% get a ranking of 1, the next 20% are 2, the next 50% are three and the remaining people can’t do the math required to figure out that they’re in the bottom 20%.  Employees who are in the top 10% will receive larger bonuses.  I’m guessing that if you have lost less than $100MM in the past year, you are in the top 10%.

6. Technology

Google is expanding! Google is going to start selling ultra-fast internet access.  They are building an experimental fiber network.  The speed would be 100X faster than what many consumers are used to.  They want to show how faster internet can lead to more innovative services.  They are going to select some test cities.

Ha!  The joke is on me! The price of e-books is going up from $9.99 to as much as $14.99.  This makes the Kindle less attractive.  Of course, as a sign of my ability to time the markets, I got Jenny a Kindle for Christmas.  Now, I realize that it was almost as good a gift as the Toyota she’s driving around in.  The hilarious thing is that vigilante customers fight higher prices by giving low ratings (on Amazon) to books that sell for more than $9.99.  It’s interesting to see this price increase and the fact that the NY Times is going to start charging for their website.  We’re seeing less savings from the internet and digital revolution.

7. The Olympics

The Vancouver Olympics start on Friday night. GE expects to lose $250MM on this event.  If you’re going to lose money, allow me to offer some advice.  I really don’t want to watch 16 nights of figure skating.  Here’s the thing…I’ve dated plenty of insane women (don’t worry – this mostly happened before I was married).  I don’t need a nightly reminder that they’re out there.  I remember on my own.  Put on bobsledding, hockey, downhill skiing, luge, etc.  I’d rather watch some old guys do curling.  But, I don’t want my daughter thinking that she wants to be a skater.  And, I sure as hell don’t want my boys thinking that crap is acceptable.

And while I’m talking about this, let me mention one other thing.  I’m sure that skateboarding is a hell of a lot of fun.  I did it as a kid.  But, it’s not a sport.  And taking something that isn’t a sport and then doing it on snow…well that doesn’t make it a sport either.  So I don’t want to watch skateboarding on the snow.  I understand it’s one of the only events that the US can win in the winter games, but that also doesn’t make it a sport.

Less time delay tends to increase ratings. The Salt Lake City games (2002) got 19.2% of US households during the prime-time telecasts.  This was a 17% increase over the 1998 Japan games.

8. Random

Former Rep. Charlie Wilson died Wednesday. He was 76.  He helped to secretly support the Afghan fighters who battled the Soviet army in the 1980s.  Most of us recognize his name because of the book / movie about him.  In addition, he apparently set an example for the political life of Elliott Spitzer and others…

We need to be isolationists. These people are crazy.  India has arrested 1000 people as they try to avoid a violent protest of a film that is about to be released.  People are apparently angry because the star of the movie said that top Pakistani cricket players should be allowed to play in India’s professional cricket league.
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