Market Update – February 23, 2010

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Approximately two weeks ago, I did a webinar for the McCombs Alumni.  I discussed my view of the economy.  If you want to listen, it lasts approximately one hour.  You do NOT need to be affiliated with McCombs in order to access this.  You can find it at the following link:

http://utmsb.convio.net/site/PageServer?pagename=McCombsKnowledgeToGo




1. Market

Boring! The Dow dropped 18.97 points, breaking a four-day winning streak.  The dull day was attributed to a lack of news, a consolidation after the market rose 3% last week and the market waiting to hear from Bernanke (later this week).




Oil closed back above $80 (at $80.16). The day’s small increase was attributed to a strike at Total (the French refiner).  Workers are protesting the company’s plans to reduce capacity.  Apparently, the French think that they are Greek.




We need help! The Greek Prime Minister said that they will ask for help from EU countries if Greece is unable to borrow at rates as low as other EU countries.




Greece is to the EU as California is to the US? California has the worst credit rating of all states (Baa1 by Moody’s / A- by S&P / BBB by Fitch) and is planning on issuing $4 billion of debt in March.  The state has a $20 billion deficit between now and 2011.




Average NYSE trade is small. The average size of a trade placed at the NYSE has gone from $19,400 in 2005 to $6,400 today.   Electronic trading has broken orders into smaller pieces.  The whole goal is to better disguise orders.




Tech deals are picking up. There were 107 tech deals in 2009, down from 195 in 2008.  The dollar value dropped 53% to $36 billion.  But, approximately half of the dollar value happened in the final two months of 2009.  PwC thinks deals will increase because:

1. mid-market firms trying to position themselves for the “new normal”
2. divestitures that were on hold because of valuation uncertainty will now proceed

Loading up on Citi? Apparently, many well-known hedge fund managers loaded up on Citi during Q4.  The list includes David Tepper (Appaloosa), John Paulson, George Soros, Bruce Berkowitz and Daniel Loeb.  The average price during Q4 was $4.10 and the stock is trading at $3.46 today.




2. Economy

A dismal outlook from SF Fed President Janet Yellen. She said:

1. interest rates will need to stay low for a long time
2. economic recovery will slow in second half as stimulus fades
3. home market could dip when Fed stops buying MBS
4. consumers and businesses will remain tentative for some time
5. unemployment will remain “painfully high for years”

A slightly more optimistic view. The National Association for Business Economics released a survey of economists:

1. job growth will only average 103K jobs / month resulting in 9.6% unemployment in Q4
2. consumer spending will increase 2.2% this year and 2.8% next year (due to wealth losses and lack of employment gains)
3. home prices will gain 1.6% in 2010 and 2.6% in 2011
4. S&P will rise 23% over next two years
5. Bank lending will become less restrictive as bank earnings and the economy improve
6. Federal debt is the biggest concern

Fill up today! Experts are predicting that gas will return to $3 this summer.  Even though demand is weak, crude oil is becoming more expensive.




Another dying industry. Continental cut 600 reservation agent jobs.  Customers are booking online.  Maybe they could get a job in the newspaper industry?




Still a few months left for the house tax credit. In order to qualify for the home buyer tax credit, you must sign a contract by April 30^th and close the loan by June 30^th.  While this is going on, home price data is skewed.




Thirty year mortgages averaged 5.03% in January. This is the same as the 2009 entire year average.




Mixed news on credit cards. Credit card chage-offs rose sharply (83 basis points) to 11.15% in January, but delinquencies (30+ days) fell to 5.96% (the first time it’s been below 6% since September).  Moody’s expects the charge-off rate to peak at 12% in the coming months.  (The all-time high was 11.50% in August.)  On average, borrowers paid 17.53% of their principal off in January.




Asia is doing well. Taiwan’s Q4 GDP grew 9.22% (YOY), the highest rate in five years.  Thailand’s GDP grew 3.6% from Q3, the highest rate in ten years.  Compared with a year earlier, Thailand’s GDP was 5.8% higher.




The option ARM debacle isn’t over. S&P estimates that 37.5% of option ARMs will eventually default.  Most have a payment spike after five years.  We will start to see a large number reset starting in late 2010.  By the middle of 2011, $10 billion of option ARMs will reset higher each month.  An S&P study of loans originated in 2005 showed that borrowers who have had a reset are nearly three times as likely to default.  Approximately 85% of option ARM holders are underwater.  Approximately 75% of option ARMs were written in California, Florida, Arizona and Nevada.




Japan’s debt. Different estimates put Japan’s debt somewhere around 200% of their GDP.  There are some big fears about Japan: deflation, an aging population and a recent S&P warning of a downgrade from their AA rating.  On the positive side, Japan has its own currency, has a trade surplus and 90% of their debt is held domestically (making a run less likely).




3. Government

Five former Treasury Secretaries (John Snow, Paul O’Neill, Nicholas Brady, George Shultz and W.Michael Blumenthal) wrote a WSJ editorial encouraging adoption of the Volker plan.  They argue that if a bank is benefiting from FDIC insurance, they should not be engaged in speculative activity that is unrelated to essential bank services.




4. Health Care

Obama proposed a new health care plan.  The most important things to know:

1. it would cost ~$950 billion over next ten years
2. government would have ability to deny premium increases
3. it would require most Americans to carry insurance
4. many Americans would require subsidies
5. insurance companies could not deny coverage to people with pre-existing conditions, nor could they charge more
6. the plan would be paid for by Medicare cuts, tax increases and new fees on health care industry
7. it includes restrictions on federal funding for abortions

Health care costs continue to grow faster than inflation.  Towers Watson (consulting firm) says health care costs for large employers will rise more than 6% this year.  This is down slightly from the 7% increase in 2009.




Companies try to adjust to health care costs. Approximately 83% of firms say that they have either changed their health care strategy or plan to do so in the next two years.  This basically means switching plans or changing the amount that employees pay.




5. Random
Crazy people surround us. Iran announced that airlines which use the term “Arabian Gulf” instead of “Persian Gulf” will be banned from Iran.  Here’s what I have to say to that: “Arabian Gulf, Arabian Gulf, Arabian Gulf.”  Consider me banned.




Canada beat the US in curling. I hope that Canada now feels like we’re even.
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