Market Update – March 3, 2010; Microcosm of the US

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Now, on to what I read…




1. Markets

Stocks were up a whopping 2.19 points. In the absence of any other big news, investors are waiting for Friday’s employment report.  Earnings season is basically done and investors realize that the Greeks will never change and will have to eventually be dealt with.  But, we still wonder what is going to happen to our economy.




Speaking of Greece…there’s a great article in the WSJ.  The EU limits budget deficits to 3% of GDP and government debt can’t exceed 60% of GDP.  But, other than 2006, Greece has always violated the 3% rule.  In addition, they’ve never been within 30% of the 60% rule.  Finally, every year since 1997 Greece has revised their deficit numbers upward!  In 2009, they initially estimated a 3.7% deficit before hitting 12.7%.




Supposedly Greece will announce their “new and improved” austerity plan on Wednesday.  This plan will cut their budget by $5.4 billion and reduce their deficit by 4%.  They need a positive reaction so that they can sell approximately $5 billion of bonds.  I’m sure that the Greek citizens will have a positive reaction…assuming you consider a strike to be positive.




Attention may be turning to England. The pound hit a 10 month low against the dollar.  The British have a deficit that is 12.5% of GDP.  British household debt is 170% of annual income (compared to 130% in the US).




Be careful of being right! The Justice Department is investigating a group of hedge funds that made bearish bets on the euro.  Ultimately, the government is trying to figure out whether they were colluding to manipulate the price.  Apparently, this would be an infringement into the government’s territory – because governments collude all the time to affect the currency markets.  But here’s the thing…governments have very little success doing this, so I’m not sure why I believe the hedge funds (with much less fire power) can move the price of a currency.  I simply don’t see how an investigation like this could ever be successful.  It’s not as if there wasn’t bad news out there about the euro.




There are more and more people arguing that credit default swaps should be reserved for investors who hold the underlying bonds.  In other words, I shouldn’t be able to buy insurance on your house or your driving.  We start to create a situation in which I have an incentive to create a dangerous driving condition for you.  Most importantly, when my purchase of CDS leads to higher prices and this is interpreted as fear about a company or country, the increased financing costs could create a self-fulfilling prophecy.




If tax rates increase, it will be interesting to see what happens to demand for muni bonds. (Of course, this demand could be offset by the horrendous condition of many issuers.)  In addition, if the muni interest exemption is taken away in the future (but left for already outstanding bonds), it could lead to a rush of issuances.  In 2007, 6.3MM out of 143MM returns claimed $76 billion in tax-exempt interest.




2. The Economy

KC Fed President Thomas Hoenig said that our zero percent fed-funds rate is “inviting future excesses” and that higher rates will not derail the economy.  Mr. Hoenig dissented in January when the FOMC voted to leave rates unchanged.




Approximately 37% of all borrowers who have 30 year conforming fixed-rate mortgages pay rates of 6% of higher. This represents $1.2 trillion of debt.  Many could lower their rates by 1% if they refinance.  Yet, refinancing applications are at their lowest level in the past year.  Many people can’t refinance because they’re under water.  Others cite the high fees to refinance.




In a survey of 1,000 executives, more than 60% say that their workforce will be the same in a year.  Approximately 30% see an increase and 7% see a decrease.




Paul Voker said that there was not risk that dollar would serve as the world’s reserve currency.  But, he warned of risk of inflation.




The Economist had an article about how bad the decade was for us (2000 – 2010).  Real GDP growth was 1.9% per year.  For the prior six decades, this had been 3.9%.  Only the 1930s were worse (.9% / year).  From 1940 – 1999, the number of workers grew 27% per decade (on average).  In the last decade, it fell .8%.




3. The Car Market

Ford catching GM. Ford’s light-vehicle sales increased 43% in February, resulting in them beating GM by 55 cars! GM’s sales rose 12%.  Both GM and Ford experienced large increases of fleet sales.  It’s been over ten months since Ford beat GM in a month (Feb. 2008).  Toyota’s sales fell 8.7%.  Chrysler’s sales were basically flat.  Honda’s sales rose 13% and Hyundai rose 11%.




Here’s the bad news…February’s industry wide car sales were estimated at an annualized rate of 10.6MM.  We’re still far below the 17MM annual sales that we had been at a few years ago.




GM is recalling 1.3MM cars because the power steering could fail.  I think GM and Toyota should do a joint venture and produce a car that accelerates on its own and loses steering.  Of course, when we don’t have hearings about this, the Japanese are going to complain that Toyota was treated differently (in order to help the US profit).




4. A Microcosm of the US

The Post Office is considering eliminating Saturday delivery. They have a $7 billion deficit this year and potentially $238 billion over the next ten years!  They are becoming significantly less important, having delivered 177 billion pieces of mail last year, down from 213 billion in 2006.  Apparently, a huge problem for the USPS is that they must make an annual payment of $5.5 billion to prepay expected medical benefits for retirees.  The bottom line is that the USPS is a microcosm of the US.  Our expenses (led by healthcare) are out of whack and we need drastic changes.




5. China

For a really interesting piece on China, see the link below.  It’s written by a Chinese dissident (now living in London).  He makes several interesting arguments, including:

1. The absurd 11 year sentence given to Liu Xiaobo was really done to get the attention of foreigners, not the Chinese
2. China has opened their economy in order to help maintain control over its people
3. The world’s democracies have lost their willingness to stand up for their beliefs
4. As a result of the global crisis, democracies are willing to put commercial interests ahead of human rights – and this will make people question democracy
5. Sentencing Liu Xiaobo to 11 years was a way of forcing countries to decide: are you going to fight about human rights or do you want access to China’s markets
6. As the US and other democracies choose the Chinese markets (over standing up for human rights), the Chinese people will realize that economic modernization will not set them free

http://www.project-syndicate.org/commentary/ma4/English




6. Politics

Apparently, Charles Rangel (D, NY) is close to losing the chairmanship of the House Ways and Means Committee (a powerful committee because of its role in writing tax law).  He has been accused of several unethical acts.  Even some Democrats are turning on him.  I’d love to see the percentage of Democrats that are in tough elections that have turned on him versus the percentage who are not in tough elections (who have turned on him).   He says that he won’t step down.




Kentucky Republican Bunning got what he wanted (a way to pay for the passage of unemployment benefits extension) and has relented.  Apparently, some of his Republican colleagues were starting to distance themselves from him.  Benefits are expected to be extended on Wednesday.




7. Enron Back in the News

The Supreme Court heard Jeffrey Skilling’s appeal on Monday.  Commentators always try to read the leanings of the Justices.  I saw several articles that argued that the Justices seemed very interested in Skilling’s complaints about the jury selection process.  Two issues seemed to have their interest:

1. the trial judge should gave granted the motion to change venue (move the trial out of Houston) because Skilling couldn’t get a fair trial there
2. the jury selection process was cursory – it took only five hours, jurors were not questioned enough and as an example, a prospective juror was allowed to remain even though she said she had lost $50 – $60K in the fraud.  It seems pretty obvious that you can’t have the victim of a crime be a juror.  (The defense used one of their peremptory challenges to strike this juror.)

8. Random

This scares me.  The Pentagon is going to transfer smart-bombs to Pakistan.  I’m wary when I hear of giving advanced weapons to countries that lack political stability.




Maybe I’m Chinese! Apparently, while Tiger Woods is losing sponsorships, he is gaining popularity in one place…China.  According to this short article (link below), the Chinese respect men who have had more mistresses.

http://www.sbnation.com/2010/2/28/1329865/tiger-woods-china-tag-heuer-china-is-ridiculous




It was ten years ago this month that the stock market peaked. I mentioned that to Jenny this morning and she said, “that’s’ interesting, it peaked four years after you did.”
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