Market Update – February 19, 2010

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Maybe a slightly shorter blog tonight…just got back to my hotel after speaking to our Houston Alumni Association.  Loads of fun, met a lot of nice people.  Thanks to everyone for coming out.




On to what I read…




1. Markets

Three in a row! The Dow rallied for the third consecutive day, increasing 83.66 points.  After the market closed, the Fed raised the discount rate (see below) and stock futures fell.  In addition, the two-year Treasury note yield increased from .88% to .92%, a relatively large move.  The Fed’s move helped the value of the dollar (and hurt the euro) – as it was a sign that the Fed will raise the Fed funds rates in the future.




Important Greek offering. Apparently, Greece is getting ready to issue $6.8 billion in bonds.  It will be interesting to see the market’s acceptance of this offering.  In January, investors bought Greek bonds and lost 3.5% within a few days (a big move in the bond market).  Of course, I’m always skeptical about the information from offerings like this – there are many parties with a vested interest in making this offering look successful.  As a result, they can make the offering appear successful.




2. Economy

The Fed raised the discount rate – the rate that they charge banks for emergency loans – from .5% to .75%.  It was clear that the Fed was going to do this in the future, but most of us were surprised with the timing.  I had expected this to be their signal that they were going to start tightening.  The Fed claims that this is not an immediate precursor to more general tightening.  The Fed funds futures contracts indicated that market participants now expect a greater possibility of two increases in the Fed funds rate during 2010.




The producer price index increased 1.4% in January. Excluding food and energy, the increase was only .3%.  Most of the headline number’s increase was caused by an 11.5% increase in gas prices.




The number of people filing first time unemployment claims was 473K, significantly higher (31K) than last week.  It’s possible that some of this was caused by the recent snow storm.




Wal-Mart said Q4 sales were down from the prior year and Q1 sales would also be soft.  Same store sales were down 1.6%.  (It’s important to note that WMT is comparing Q4 to last year’s Q4 which was particularly strong (same-store-sales were up 6% last Q4)).  While I don’t report much about individual companies, the WSJ reports that WMT is approximately 10% of US retail spending.  It’s hard to say whether this 1.6% drop is good news or bad news.  It could indicate that consumers are becoming less cost conscious.  Interestingly, Nordstrom (which is a higher end retailer) saw sales increase 14%.




The WSJ argues that the US has had a stronger recovery than Europe for several reasons:

1. The US experienced a lot of inventory rebuilding (or shrinking at a slower rate) and that helped our GDP number
2. The US went into decline earlier and may simply be coming out earlier.
3. The Fed has been more aggressive than the EU.
4. The US has been more aggressive in getting our banks to clean up their balance sheets.
5. The stress tests (as silly as they were) forced banks to raise more capital.  The test also promoted confidence.

More on state problems. Approximately 55% of state revenue (before federal transfers) comes from personal and corporate income taxes and sales tax.  These all dropped precipitously.  Expenditures did not drop.  States have a collective $145.9 billion deficit for 2010.  This is the equivalent of 9.2% of last year’s total expenditures.  (The fiscal year ends at the end of June for state.)  In addition, the Pew Center on the States estimates that there was a $1 trillion funding gap on $3.35 trillion of state retirement and health-care obligations.




3. Political Issues

This is incredibly discouraging. As I have mentioned during the past week, Congress didn’t support the President’s debt reduction panel, so he had to implement it by executive order.  In addition, with ten democrats and eight republicans, I don’t see it as bipartisan.  It’s hard to believe anything will get done when you need 14 votes to make a recommendation!




The Commission has two goals: to address the deficit in the short term and to address the long term problems of Social Security and Medicare / Medicaid.  Apparently, groups like the AARP and others are already fighting to protect these programs in their current state.  How will anything get done?  It’s a joke.  This debt problem is going to eventually be a disaster and we can’t even address it in a bipartisan way.  We need term limits.




The General Accounting Office reports that stimulus spending has been delayed by “red tape.” In other words, projects have so many restrictions (e.g., “buy American” rules, requiring contractors to pay local prevailing wages, etc.), that it’s hard to get anything done.  Approximately $19 billion of $180 billion appropriated for infrastructure projects has been paid out.




The UN said that Iran may be working to build a nuclear warhead. I find it hard to believe that Israel will let this happen.  It seems like the US normally tries to stop Israel from taking drastic action.  But, I’m not sure what we’re going to say to them when we’re in Afghanistan and Iraq.




This is awesome.  President Obama met with the Dalai Lama on Thursday. China has complained vehemently about this meeting.  The Dalai Lama said that “since my childhood, I always admired America not as a military power, but mainly as a champion of democracy, freedom, human value and human creativity.”  EXACTLY.  We are the exact opposite of the Chinese government and this is why we should all celebrate the President’s meeting.  America needs to reclaim our position as the people who truly care about the welfare of others, human rights and freedom.  With respect to the Chinese government, my suggestion is that we try to appease them by telling them that we have made a videotape of the meeting and they can bootleg it and sell it for $1.  They respect intellectual property rights as much as they respect human rights.

My only complaint about the President’s meeting was that it was done in the White House residence, rather than the Oval Office.  This was to signal that we don’t view the Dalai Lama as a political leader.




4. Random

There’s a WSJ story about Smithtown Bancorp that is interesting.  The bottom line is that the bank’s president was the leader of the American Bankers Association and fought regulation.  He had gained stature as the result of his bank’s success.  But, now his bank is having significant problems.  I see stories like this all the time.  The bottom line is that many people are making bets against “low probability / high impact events.”  They are right for a long time and they are seen as geniuses.  Then, the low probability event actually happens.




Toyota’s President (Akio Toyoda) acted like one of his cars and unexpectedly went into reverse. Now, he says that he WILL testify before Congress next week.  (Yesterday, he said he wouldn’t.)  It’s rare to see a company’s reputation plummet like as abruptly as Toyota’s has.




It was amazing to watch Lindsey Vonn on Wednesday night. If you watch the replay carefully, you will see that she was skating on one leg.  It was also amazing to see some of the women walk away after falling while going 70 MPH.




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