Market Update – February 17, 2010

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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:

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Now, on to a summary of what I read…




Summary: the markets rallied due to a New York manufacturing index and stable credit card delinquencies.  In my opinion, the most interesting long term numbers are those that show China is no longer buying our debt.




1. Markets

The Dow jumped 169.67 points, closing near the day’s high.  The Federal Reserve Bank of New York’s Empire Manufacturing Survey showed manufacturing conditions rose significantly to 24.91 (from 15.92 in January).  Of course, this is a diffusion index and these numbers are still relatively ugly.  Bank stocks were helped by credit card data that showed a leveling off in delinquencies.




Dollar dropped. Investors stopped worrying about Greece and this drove the value of the dollar down.  The cheaper dollar drove gold prices up 2.6%.  The DJ-UBS Commodity index increased 2.5%.




The ten-year Treasury increased in price, pushing the yield down to 3.665%.




2. Economy

Credit card delinquencies are stable.  BAC and AXP reported drops in credit card delinquency rates.  Capital One, Discover Financial, JPM and C had numbers that were little changed.

As an example, Capital One said credit card delinquencies in January increased from 5.78% to 5.80%.  International delinquencies rose from 6.55% to 6.66%.  Auto loan delinquencies dropped from 10.03% to 9.61%.

BAC’s delinquency rate dropped from 7.44% to 7.35% and that means the company is worth 5% more?




Toyota’s problems hurt us. Toyota is going to temporarily idle two plants (San Antonio, TX and Georgetown, KY) as a result of their massive recall (8.5MM cars globally).

Toyota says that they have repaired 500,000 of the 2.3MM cars recalled because of a sticky gas pedal.




Interesting truck indicator. The Pulse of Commerce Index showed a sharp decline in January.  This index measures real-time diesel consumption of trucks.  It fell at an annualized rate of 36.8%.




Astounding numbers. Arkansas hopes to keep their Medicaid spending flat next year.  But, costs are increasing $400MM due to more people qualifying for service.  Approximately 775K of the states 2.8MM residents get some sort of benefit during the year (with 650K on the rolls at any one time).  For every dollar that the state pays, the federal government pays three dollars.  So Arkansas is trying to avoid the incremental $100MM expenditure.




Mortgage delinquencies continue to get uglier. In Q4, 6.89% of mortgages payments were 60 days (or more) delinquent.  In Q4 of 2008, that was 4.58%.  In 2009 Q3, it was 6.25%.  This is the 12^th consecutive YOY increase.  Some say that Q4 is particularly bad because of holiday spending.  That seems a little strange to me because I would think that people pay for their holiday spending in Q1.

The delinquency rate in a few states is particularly bad: Nevada (16.2%), Florida (14.9%), Arizona (11.3%) and California (11%).  The fewest delinquencies were in the Dakotas.  (Who gets a mortgage on a $20,000 house?)

TransUnion estimates that foreclosures will peak between 7.5% and 8%.




The average national mortgage debt per borrower is $193,690.




3. The Debt Issue

Foreigners don’t want our Treasuries. Foreign holdings of US Treasuries fell by $53 billion in December, the largest amount ever.  (The prior high was $44.5 billion in April 2009).  For the entire year, foreign holdings dropped only $500MM.  (We’re seeing an acceleration of the trend.)




China is no longer the biggest holder of Treasuries. China reduced their holdings by $34.2 billion.  They now are second on our list of largest holders – Japan regained first place (even though they reduced their holdings by $11.5 billion).  The Japanese are notoriously bad investors…




Unfunded liabilities outside of US. As you know, I frequently comment on the US’ unfunded liabilities.  If you include unfunded liabilities, US debt would probably be closer to 4.5X GDP.  But, the US is not alone.  The WSJ says that Greece’s debt (including unfunded liabilities) is 9X GDP, Portugal is 5X GDP and the UK is 4.5X GDP.  Barclay’s forecasts that US and UK bond yields will be 10% by 2020 as a result of this mess.

Last year’s budget deficit was $1.4 trillion.  Next year’s is expected to be $1.6 trillion.  Who is going to buy these bonds?




State deficits hurt GDP. From mid 2009 – 2010, state deficits are expected to reduce GDP by .6% – .7% (according to GS).  The total state deficit for 2011 is expected to be near $142 billion.  This could cost 900,000 jobs.




The Cato Institute estimates that public pensions are 70% more generous than private pensions.




If you think that Greece will solve their own problems, you’re a moron. Here’s a perfect example of why it can never happen…Greek customs officials and finance ministry employees (!!!) went on strike for three days (starting Tuesday) to protest the austerity measures.  The finance ministry includes the statistics group which submitted false economic numbers.  The austerity measures include higher taxes, increases in the average retirement age, a salary and hiring freeze and cuts in bonuses.  Other groups are planning on going on strike in the coming days.  The customs group will affect imports / exports.  This should help the economy…

A bomb exploded at the Greek offices of JPM.  Fortunately, no one was hurt.  Everyone was out spending their bonus money.




4. Financials

We’re between a rock and a hard place. The increasing deficits and debt levels will make it more difficult for the Fed to raise rates (according to KC Fed President Thomas Hoenig).  In other words, even if we have inflation, it will be difficult to fight it.  That should make you feel good.  He said that we need to cut spending and increase revenues (i.e., taxes).  He also said that the IMFs idea that we tolerate higher inflation will be a disaster.




Risk to regional banks. Approximately $1.4 trillion in commercial mortgage loans come due over the next four years.  Most of these loans have balloon payments.  The Congressional Oversight Panel estimates $300 billion of losses.  This will crush regional banks




The FT reports that big banks are doing a tremendous number of short sales in order to clear bad loans from their books.  Short sales occur when the home is sold for less than the amount owed (and the bank takes the loss).  Moody’s predicts that share sales will total 20% of all distressed home sales this year.




5.  Haiti

AMR returns to Haiti. American Airlines will resume flights to Haiti on Friday.  Remember: they will be charging $30 per bag you check and the fees increase if you are smuggling children.




The huge losses in Haiti. Haiti’s earthquake caused between $4.4 billion and $13.2 billion of damage and killed approximately 200,000 to 250,000 people.  This is approximately 2% of the population!




6. Random

Dividend recovery? Dividends dropped 21% last year.  S&P forecasts a 5.6% increase this year.  There are 367 companies in the S&P 500 that pay dividends.  The expected dividend yield is 2.45%.  Over time, dividends account for approximately 45% of total stock returns.




Broadband access. Approximately 40% of Americans don’t have broadband at home. Approximately 89% of Americans with household income above $150K do have this access.  Only 29% of Americans with household income less than $15K have this access (that number strikes me as high).  Only 46% of people 55 years old or older use broadband at home.




Do your little part! The cost of the census will be cheaper if you return your form in the mail.  If you don’t, census workers will come to your house.




Today’s thought about the Olympics. I find myself rooting for Canadians almost as much as I root for Americans.  At the end of the day, Canadians are simply Americans who drink a lot.  But, as much as I love the Canadians, I still find myself missing the Beijing games.  Maybe it’s just me, but I really loved those little seven year-old Chinese divers and gymnasts.
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