Market Update – June 9

Hi All,


My next two blog posts will be Tuesday (June 15) and Friday (June 18^th).  In other words, you won’t receive anything for six days.  But on Tuesday, you’ll hear everything I’ve been thinking about for the week.  I have to put together a couple of presentations (as well as give them), so I’m a little tight on time.


Now, on to what I’ve read in the last couple of days…


1. A very weak recovery. Bernanke said that we will have a continued recovery, “but it won’t feel terrific.”  Growth will not be enough to drive unemployment down.


2. Deleveraging. Consumer borrowing increased .5% in April (up $954.8 million to $2.44 trillion).  But, March was revised down, showing a decline of $5.4 billion (2.7%).  Previously, the March number had been a $2 billion increase.


3. Small business optimism increased 1.6 points to 92.2 in May, according to the National Federation of Independent Business.  The good news is that this is the highest reading since September 2008.  The bad news is that this low reading is not a sign of a strong recovery.


4. Slight improvement for the job market. For the first time in a year, the number of unemployed workers per job opening fell below five (it went down to 4.96).  This is the right direction, but it’s still a dismal number.


5. Domestic outsourcing. In 2005, the government estimated that 31% of U.S. workers were contingent workers – temporary or contract workers. Experts say that number could increase to 40% or more in the next 10 years.  I have been referring to this trend as domestic outsourcing.


6. Stimulus or deficit reduction? Here’s a ten second summary of this past week’s G-20 meeting.  Think about this argument: should we increase government spending to stimulate the economy or should we cut government spending so that the lower deficit will encourage investors?  Increasing spending creates risk that the market will get fearful over the debt.  Cutting spending could increase unemployment.


7. We may start pushing for deficit reduction. We are starting to see the ramifications of having so much debt.  We are faced with low growth and high unemployment, yet we can’t stimulate the economy.  Political sentiment is turning to cutting our deficit and promoting growth by promoting stability.


8. A quarterly poll by Bloomberg (of investors, traders and analysts) found that 39% said the US was the most promising place to invest for the next year, followed by Brazil (29%), China (28%) and India (27%).  In January, China was the favorite (and that wasn’t a good pick).  Forty-two percent think that the world economy is deteriorating, while only 21% felt that way in January.


9. The European Financial Stability Facility was finalized. It has the potential to sell bonds worth $524 billion with guarantees from member nations and loan the money to weaker countries.  They will issue debt only after an aid request is made by a country.  It strikes me that this is problematic – you want to raise money when investors aren’t thinking the worst about the EU.  I think that they are trying to signal safety without having to act.  Of course, it reminds of being told that you never pull a gun unless you’re ready to use it.


10. Germany announced spending cuts of $95.7 billion by 2014. They are trying to reduce their deficit and protect the euro.  They plan to cut social spending and reduce the number of civil service jobs.  They will not increase income taxes or VAT.


11. As a result of the recent turmoil in Europe, credit spreads have increased, interbank lending has become more costly and commercial paper issuance has slowed down.  In addition, the dollar has appreciated relative to the euro.  This means that the Fed is less likely to raise rates anytime soon.


12. Another result of the European turmoil is that the 10-year Treasury is yielding 3.18%, its lowest level since May 2009.  Thirty-year fixed rate mortgages are costing 4.79%.  A 15-year mortgage is 4.20%.


13. Some investors think that there is a bond bubble. Of course, it’s really strange to think of a bubble that is caused by risk-aversion. In 2009, bond funds saw a record $375 billion of new money, bringing the total to $2.2 trillion in assets.  Stock funds saw $40 billion leave and they ended the year with $3.7 trillion of assets.


14. From 1985 – 2009, average bond fund returns have been negative only three times, with losses in 1994 (4.7%), 1999 (1.2%) and 2008 (7.8%).  US stock funds had six losing years.


15. Another possible bubble.  Great description of the next bubble: the buyers think that what they’re buying will appreciate in value (making them rich in future), the product is growing more elaborate and expensive and the expense is offset by easy credit.  Buyers see everyone else taking on debt to buy the product and this makes them more willing.  What product / industry is the author talking about?  Education!  Say it’s not so!  Certainly, most of you wouldn’t mind taking on $100K of debt to sit in a class and hear some of my bad jokes?  Remember, you can’t walk away (or strategically default) from student loans.

http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html


16. It’s interesting to ask how much of education is (A) learning to think; or (B) practical skills; or (C) signaling (that you can be admitted to a certain caliber college); or (D) building a network? I saw a great comment from an unrelated article (in The Chronicle of Higher Education) where someone asked whether you could currently pass a test in your undergraduate major and whether you use anything from what you studied.  You may not have retained that material, but you still have your debt.


17. In my last blog, I mentioned my disbelief that BP would be acquired. But, the NYT reports that Shell and Exxon would love to acquire BP.  There is talk about how BP could enter bankruptcy and separate into two entities: the cleanup entity and the good assets.  I should also say that a very good friend who has A LOT of experience in the energy industry emailed me on Monday morning (after he read my blog) and said that he really thought that Exxon could acquire BP.  Personally, I think that the politics would be very tricky – if an American company scoops up the good assets of a British company.  But, I’ve been surprised before.


18. Credit Suisse estimates that BP’s cleanup costs could run as high as $23 billion.  In addition, BP could face $14 billion of claims from fisherman and the tourism industry. The company has $12 billion in cash and short-term investments.  Of course, this doesn’t mean that they can’t sell assets, raise more money or get bailed out by the British government.


19. Is anyone happy about the BP oil spill? Possibly GS.  As breakingviews points out, we only have the capacity to hate one villain at a time.


20. The Financial Crisis Inquiry Commission is complaining loudly that GS delayed in responding to their requests for information and then dumped millions of pages on them. The Commission has now used their subpoena power to make further “requests” of GS.  The Commission says that GS has given them hundreds of millions of pages of information.  It would be enough to fill up 6,386 CDs.


21. China is losing its labor advantage.  Controversy over working conditions (and suicides among factory workers) and high profile strikes (such as a Honda plant in China) are leading to higher wages.  There are fewer young workers (age 15 – 25), they have higher expectations because they have seen the generation before them, they are more aware of their rights.  The number of 15 – 24 year olds in China is expected to fall by a third over the next dozen years from 225 million today to 150 million in 2022.  At the same time, demand is increasing (more factories).  Higher wages could help China transition from an export-driven economy to a consumer-driven one.


22. I find it amazing that Apple’s new iPhone announcement has garnered such media coverage. Apple has 15.8% market share in the smartphone market, trailing Nokia and RIMM.  The iPhone accounts for 40% of Apple’s revenue.


23. The most important article that I read this week was not a finance article.  It was “Hooked on Gadgets, and Paying a Mental Price” by Matt Richtel (NY Times). http://www.nytimes.com/2010/06/07/technology/07brain.html?src=busln Here are some of the key ideas (lifted almost directly from the article):

1. Our ability to focus is being undermined by bursts of information.  Scientists say juggling e-mail, phone calls and other incoming information can change how people think and behave.
2. We have a primitive impulse to respond to immediate opportunities and threats.  The stimulation provides excitement – a dopamine squirt – that researchers say can be addictive.  In its absence, people feel bored.
3. These distractions can limit creativity and deep thought, interrupting work and family life.
4. Research shows that multitasking is very difficult.  Heavy multitaskers actually have more trouble focusing and shutting out irrelevant information, scientists say, and they experience more stress.
5. Scientists are discovering that even after the multitasking ends, fractured thinking and lack of focus persist.  In other words, this is also your brain off computers.
6. In 2008, people consumed three times as much information each day than they did in 1960.
7. Computer users at work change windows or check e-mail or other programs nearly 37 times an hour.
8. At home, people consume 12 hours of media a day on average, when an hour spent with the internet and tv simultaneously counts as two hours.  That compares with five hours in 1960.
9. Computer users visit an average of 40 websites a day.
10. Multitaskers tend to search for new information rather than accept a reward for putting older, more valuable information to work.  In other words, they are more sensitive than non-multitaskers to incoming information.
11. The chime of incoming email can override the goal of writing a business plan or playing catch with the children.
12. It’s difficult to shut off multitasking tendencies when you’re no longer multitasking.
13. People interrupted by email reported significantly more stress than those left to focus.
14. While there were workaholics in other generations, nowadays we can multitask anyplace, anytime.
15. Digital stimulation may create attention problems for children with brains that are still developing, as they already struggle to set priorities and resist impulses.
16. Technology may diminish empathy by limiting how much people engage with one another, even if they are in the same room.

All I can say about this article is “guilty as charged.”  I’m just glad that they didn’t put my picture in the paper.


Have a great week.  You’ll hear from me on Tuesday.
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