Market Update – February 25, 2010

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




1. Markets

The Dow rallied 91.75 points, as 28 of 30 companies increased in price.  The market heard Bernanke say “low interest rates” and then said “blah, blah, blah, we’re not listening” while he talked about the risks of continual deficits and rising debt.  It reminds me of a parent saying with total tonality to a child, “you can eat that piece of cake if you really think it’s a good idea, but I’m pretty sure that you’re going to get sick,” and the child responds, “thanks Mom, cut me a big piece.”




2. Economy

Bernanke speaks. Bernanke said that we need low rates to support the recovery.  He also said that continuing to run a deficit could result in higher borrowing costs.  Interestingly, he said that when the Fed stops buying MBS, it shouldn’t affect the market significantly.  We hope…




Need to fix the budget. Bernanke encouraged the Administration and lawmakers to come up with a plan that shows how the deficit will fall to the 3% level in the next ten years.  That scares the hell out of me.  If we are going to run a deficit in excess of 3% of GDP for the next ten years, we’re in trouble.  Of course, the current plan has a deficit of 4% – 7% by 2020!




Sound familiar? Bernanke said that rising US debt could weaken the dollar (and cause inflation).  He also said that it will take several years for the job market to recover.  He sounds a lot like me.  He must also be a populist idiot.




New home sales dropped 11.2% in January (from December) to a seasonally adjusted annual rate (SAAR) of 309,000.  This is 6.1% lower than January 2009 and the lowest level since the government began tracking the number (1963).  It’s possible that some of this drop was the result of bad weather.  Of course, it’s also possible that the economy sucks and new homes can’t compete with foreclosures (and that some people can’t get financing).




3. Housing

Underwater! Approximately 24% of all homes with mortgages were underwater at the end of 2009 (according to First American CoreLogic).  That’s 11.3MM homeowners.  (At the end of Q3, it was 23% and 10.7MM people.)




Unfortunately, what happened in Vegas didn’t stay in Vegas. Nevada leads the nation with 70% of mortgaged property underwater.  Arizona has 51%, Florida 48%, Michigan 39% and California (35%).




Does underwater = default? For some people, being underwater doesn’t matter – they can pay their bills and they are willing to pay.  Unfortunately, the rest either can’t pay their bills (e.g., now they are unemployed or their mortgage reset) or can pay their mortgage but will decide to strategically default.




4. Toyota Update and the Hummer Story

Language barrier. Toyota President Akio Toyoda said, “I am deeply sorry for any accident that any Toyota driver has experienced.”  I’m not sure what that means.  In general, I’m also sorry that anyone has an accident.  Are you sorry that your company caused some of these accidents?  Or are you just generally sorry that accidents happen in this world?  It left me wanting more.  Or maybe it left me wanting less…cars from Toyota.




I’m also troubled that he said that he is “absolutely confident that there is no problem with design of electronic throttle control system.”  It seems to fly in the face of what the Toyota rep said yesterday.




Here’s what I’m wondering. On Tuesday, Rhonda Smith testified before Congress about a crazy car ride that she went on when her Lexus uncontrollably accelerated to 100 MPH.  She specifically said, “Today, I must say shame on you, Toyota, for being so greedy.”  She ended up selling the car with 3,000 miles on the odometer.  Did she disclose this event to the new owner?  I don’t know whether she did or she didn’t.  If she did, I think she’s awesome.  If she didn’t, I don’t want to see those crocodile tears.  If you believe that you have a car that can accelerate unexpectedly and you don’t disclose it, shame on you for being so greedy Rhonda.  My guess is that someone in the media is going to investigate this.




No Chinese Hummer? Sichuan Tengzhong Heavy Industrial Machinery’s $150MM bid to buy the Hummer brand from GM has ended.  It was not approved by the Chinese government.  Some say that the Hummer brand is not consistent with China’s desire to push “green” cars.  A more skeptical person might speculate that they have had a chance to see the technology and don’t need anything else.




5. Government

A bipartisan vote on the jobs bill – which means it must be meaningless. There was a 70-28 vote in the Senate in favor of a $15 billion jobs bill.  Democrats say that it will create 1.3 million jobs.  That’s approximately $11,500 per job.  If I gave you $11,500, would you hire someone?  My guess is that you would if you were already about to hire someone, but otherwise it would have no impact.  Employers won’t have to pay their share of federal payroll taxes for any new workers that have been unemployed for at least 60 days.  This will last for the rest of 2010.  In addition, if the employee is still on the books in 2011, there is an additional $1,000 credit.




I haven’t read the legislation, but I sure hope that it prevents a company from firing an existing worker and hiring a new worker.  In other words, your employment roll should have to increase in order to claim this.




The WSJ said that Democrats claim that this bill will be paid for by cracking down on offshore tax evasion.  What is the connection here?  We’re only going to crack down on tax cheats if we have a $15 billion jobs bill?  I don’t really get that.  But, I clearly don’t understand a lot in this world.




The Volker rule is stalled in the Senate and apparently will not become law. Apparently, there will be a new proposal that would give regulators discretion to limit or ban risky trading at banks.  But, there would not be an outright ban.  Think about the distinction here: we’re trusting regulators to determine risk.  I feel pretty good about that…




Here’s another way of thinking about the Volker rule…five former Treasury Secretaries favor the rule and the investment banks are opposed to the rule.  You figure it out.




Limits on short selling. The SEC voted to effectively prohibit short selling a stock on any day in which the stock is already down 10%.  As many of you know, I strongly favor short selling.  Short sellers bring information to the market.  If it wasn’t for short sellers, stock prices would be set by the average jubilant moron.  With that said, I have no problem with this limitation.  Anyone who is shorting a stock that is already down 10% for the day is simply piling on.  They are not providing any new price information.  Because of our fear of “bear raids,” this is probably worthwhile.  Of course, even if you can’t short a stock, there are plenty of other ways to effectively short the stock or to send negative information to the market.




Let me get back to you. Treasury Sec’y Geithner said that the Administration would deliver a plan for Fannie and Freddie in 2011.  Many had expected that plan to be delivered already.




6. Greece

This is going pretty well. Tens of thousands of Greeks protested on Wednesday as there was a 24-hour strike against the government’s austerity plan.  A newspaper said that 58% of Greeks think that the austerity measures were a move in the right direction.  Interestingly, there are additional austerity measures that are expected to be announced in the next week.




Will pessimism in the Greek media hurt the Greek economy? One might worry that the news of the strike would further hurt Greece’s economy.  But, not to worry.  The journalists are on strike, so there are no newspapers being published on Thursday.




Fitch downgraded Greece’s four largest banks. They expect the austerity measures to hurt the economy and loan demand.  The banks were downgraded from BBB+ to BBB.  The outlook is negative.




7. S&Ls and Banks

The incredible shrinking thrift industry. S&Ls earned $29MM in 2009 after losing $15.9 billion in 2008 and $649MM in 2007.  Twenty thrifts failed last year and a greater number are expected to fail this year.  The failures and the consolidations (two thrifts owned by WFC were consolidated with banks and one owned by ML was consolidation) have resulted in the industry shrinking.  At the end of 2008, there were 810 S&Ls with $1.2 trillion of assets; at the end of 2009, there were 765 thrifts with $942 billion of assets.  Currently, there are 43 “troubled” thrifts.




Thrifts made $254 billion of mortgage loans in 2009, a drop of 37% from 2008.  This is somewhat misleading because of the consolidation.




Lending by the banking industry fell 7.5% in 2009 ($587 billion).




The default rate for commercial mortagages held by US banks doubled in Q4 YOY.  The default rate for loans on office, retail, hotel and industrial properties increased from 1.6% (Q4 2008) to 3.8% in Q4 of 2009.  Approximately $1.1 trillion in commercial loans were held by US banks at the end of the year.  US banks with assets between $100MM and $1B in assets hold 25% of commercial property loans.




China’s banking regulator told commercial lenders to restrict lending to local governments.




8. Random

A killer whale at Sea World Orlando killed a trainer.  It’s still unclear, but it sounds like it might have happened at the start of a show.  There are several other incidents in which these whales have attacked trainers (and probably loads more that we don’t know about).  I’ll deny saying this because my five-year-old LOVES Shamu, but I don’t see this as worth the risk.  There’s a reason why these are called KILLER whales.
__________________________________
If you want to be on my email list:

1.  go to www.leedsonfinance.com

2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.