Market Update – June 7

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In today’s blog, I’ve listed twenty interesting stories that I read this weekend.  Enjoy.


1. BP said that they collected 6,000 barrels of oil in 24 hours from the Gulf leak. The most significant takeaway is that it’s really impressive to collect 6,000 barrels when you claim that you’re only leaking 5,000 per day.  Of course, the government estimate increased last week and this 6,000 capture rate lets us know that there’s a lot more being leaked.


2. BP has lost 36% of its value – a drop of $75 billion. They have agreed to pick up the government’s bill to clean up this mess.  Some politicians have called on BP to halt their dividend.  Other commentators have argued that the government shouldn’t be dictating BP’s dividend policy.  Here’s my opinion…if you injured me and we don’t know how much it’s going to cost to make me whole, I really don’t want to see you spending money elsewhere.  I don’t care how rich you are.  I have one concern – making sure that you are able to pay me.  Of course, there’s no telling what would happen to BP’s stock price if they halted their dividend.


3. Fitch downgraded BP from AA+ to AA and Moody’s downgraded BP from Aa1 to Aa2.


4. There are rumors that BP will be acquired or merge with another company. This strikes me as shocking.  If anyone is thinking about acquiring BP, they should probably take a few minutes to looking at BAC’s acquisition of Countrywide.  It may help to understand what you’re actually buying and what liabilities exist.


5. The jobs report was dismal, as we added 431K jobs. While that number sounds high, the market was expecting 515K jobs.  Most importantly, there were only 41K jobs created by the private sector.  The Census Bureau hired 411K – but most of those jobs will end in a few months.  We really are becoming Greece – everyone works for the government now.  Apparently, the basis of our recovery is that everyone is going to spend their time counting everyone else.


6. Nearly half of the unemployed (46%) have been out of work for longer than six months. This is the highest percentage since the Labor Department started collecting these stats in 1948.  This amounts to seven million people and 4.7 million of them have been out of work for more than one year.  Obviously, this brings incredible anxiety and stress.  We risk creating a class of permanently unemployed.


7. On the positive side of the jobs report, manufacturers hired 29,000 workers last month. Hours worked increased.  Factory employment has increased by 126K jobs over the past five months.


8. If you want to see a really scary chart and commentary, go to http://www.consumerindexes.com/index.html .  They are predicting that GDP will shrink 2% in Q3.  The scary thing is that their indicator seems to have done a great job in the past four years.


9. There are $700 billion of commercial mortgage-backed securities (CMBS) outstanding. This is more than the combined value of securitized credit-card, student-loan and car-loan debt.  The delinquency rate in June (for CMBS) reached 8.4%, more than triple one year earlier.  In the past, when these mortgages ran into trouble, investors have lost 37% of principal.  But, Fitch just released a report that said the loss-severity rate averaged 57% last year (an all-time high).


10. Foreign banks and other financial companies have lent $2.6 trillion to public and private institutions in Greece, Spain and Portugal. No one knows who actually holds the debt and is at risk.  As a result, there is fear in lending to European banks.


11. The euro hit a four-year low, trading for less than $1.20.  The euro has dropped 15% in 2010.  There was fear about Hungary after a senior official there warned that they could be the next Greece.  Many Hungarian mortgages are denominated in the swiss franc (which has been appreciating) and are becoming expensive.


12. Spreads between Spanish and Italian bonds against German bonds have reached their highest level since the start of the euro in 1999.  With that said, yields are still relatively low in nominal terms (e.g., Italian bonds were yielding 4.29%).


13. Germany is planning austerity measures in order to shrink their deficit to 3% of GDP (from 5%). This is going to increase the anger that Germans have with respect to the bailouts of other countries that are protesting against austerity measures.


14. PIMCO’s Bill Gross referred to US Treasuries as “the least dirty shirt.” In other words, all sovereign debt looks bad, but ours looks least bad because the dollar is the reserve currency and we have low inflation and low growth.


15. As inflation slows, we move closer to deflation. Some measures of credit growth are shrinking.  If deflation becomes persistent, it creates even larger problems than inflation.  Consumers wait for lower prices, spending slows and debt is paid back with more valuable dollars.


16. KC Fed President Tom Hoenig said that the FOMC should be prepared to raise the fed funds rate to 1% by the end of the summer. He said this in a speech on Thursday (prior to the jobs report).  In this speech and other discussions, he has cited the strengthening economic recover, the possibility of inflation and the risk of creating other bubbles.  He said that the FOMC should first eliminate their commitment to maintain rates at “exceptionally low levels” and then raise the rate.


17. Buffett warned that municipal debt could be the next disaster. He said that it may be easier for public officials to default on insured debt rather than push through tax increases.  The recession has obviously hurt tax collections.  In addition, pension funds are far underfunded.  The question will be whether we have a federal government bailout of municipalities.


18. How will Warren Buffett be remembered? Last week, Buffett defended the credit ratings agencies and their way of doing business.  He said that he would be much more inclined to come down hard on the CEOs of institutions that needed to be bailed out by taxpayers.  Of course, he didn’t come down hard on Lloyd Blankfein (GS) when he supported him at the Berkshire shareholder meeting (in May).   This past Wednesday, he said that Moody’s managers made the same mistake that 300 million other Americans made.  The problem is that the 300 million of us weren’t paid to study these securities, didn’t have the same information they did and didn’t get compensated to give inflated opinions on these securities.   So, I’m not really sure that I see it.


19. Race and ethnicity are becoming less important to us. Approximately 14.6% of all new marriages in 2008 were between spouses of a different race or ethnicity from one another.  In 1980, this was 6.7%.


20. Apparently, discretion is also becoming less important to us. Two different men claim to have had affairs with the woman who is the leading candidate for the Republican nomination for governor of South Carolina.  She claims that both men are lying.  Where do we come up with these people?  I have no idea who is telling the truth and who is lying, but I have a pretty good feeling that someone is lying.  I will say that I’m suspicious that the accusations are true since there are phone records of 700 phone calls between the woman and one of the men and many of the calls were in the middle of the night.  Given their record, South Carolina should replace the Governor’s mansion with the Governor’s trailer.

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