Leeds on Finance

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Slightly shorter blog today as it just seems like a day that is light on news.  Now, on to what I read…

1. Markets

The Dow dropped 53 points. There was bad news about jobs and more concern about Europe.  But, the market had been down almost 200 points and rallied in the afternoon.




Palm dropped 19%.  Apparently, it was a surprise that their smart phones aren’t selling?




Yields dropped (bond prices rallied) as signs of low inflation (high unemployment and weak durable goods orders) accompanied a flight to quality resulting from more concern about Greece and the EU.  In addition, there was very strong demand for the Treasury’s auction of seven-year bonds.




The SEC said that it is examining credit default swaps for potential abuses and destabilizing effects.




2. Economy

Weekly jobless claims increased by 22,000 to 496,000.  This was the highest level in three months.  The four-week moving average increased 6K to 473.75K.  Part of the problem was caused by past snowstorms.  State agencies were processing a backlog of claims.  Regardless, this was somewhat dismal news.  It’s simply reinforcement that we have no real evidence of a recovery in the jobs market.  There’s fear about what will happen when the stimulus spending slows.




Durable goods orders increased 3%, but fell 2.9% if you exclude defense and aircraft.  This led Morgan Stanley to lower their Q1 GDP estimate from 2.5% to 2.2%.




Bernanke continued to warn that investors could lose confidence in the US if we don’t get our budget and deficit in line.  He said that this could affect interest rates and the dollar.  He said, “and those things could directly or indirectly affect the state of the economy.”  You think?




I watched a little of the “bipartisan” health care meeting that President Obama held.  As a teacher, I can best compare it to trying to do a business case with first year students.  No one listens to anything anyone else has to say.  They simply make their prepared statements.  With that said, I don’t want to carry this analogy too far.  It’s insulting to first-year MBAs to compare them to these idiots.  I think that most of our students actually understand how to balance a budget.




JPM CEO Jamie Dimon said that he doesn’t want to raise the firm’s dividend because “there are huge potential negatives out there.”  He said that he worries about a double dip recession.




3. International

The Fed is looking into the transactions that Goldman used to help Greece appear to have lower debt levels.  It’s alleged that JPMorgan set up similar transactions for Italy.




Greece had planned to issue $2.7 billion – $3.4 billion of debt this week.  They have delayed the offering until next week because of the one-day strike and S&P’s threat that the sovereign debt could be downgraded.  Greece is hoping that the markets will be calmed when they issue additional austerity measures.  They are also hoping for more direct support from the other EU members.  Personally, there’s not much that would make me feel better about Greece.  As I’ve said many times, they are structurally unsound; this is not a short-term cyclical issue.  I’m particularly bothered by the strikes during the past two weeks – they serve as glaring evidence that a huge percentage of Greeks just don’t get it.




Betting against the euro. The WSJ reports that several star hedge fund managers are making career bets that the euro will fall to parity with the dollar.  Currently, it’s around $1.35.




No defaults any time soon. S&P said that they don’t expect any sovereign defaults among the EU nations.  They also said that they don’t expect any nation to leave the EU in the intermediate term.




Here’s something Democrats and Republicans can agree on: China! A bipartisan group of Senators asked the President to investigate allegations that China keeps their currency artificially low.  It was also reported that China is conducting stress tests to understand the impact of letting the yuan rise.




4. Random

Shares of Rosetta Stone (RST) increased more than 10% after the close when they announced good earnings.  The company makes software to learn foreign language.  This is more evidence that it won’t be long before we’re all speaking Chinese.




I found this on cnn.com (Sports Illustrated), where they had the “Quote of the Day” from the Olympics:

My name is Odd-Bjoern Hjelmeset. I skied the second lap and I f—– up today. I think I have seen too much porn in the last 14 days. I have the room next Petter Northhug and every day there is noise in there. So I think that is the reason I f—– up. By the way, Tiger Woods is a really good man.
– Norway silver medalist Odd-Bjoern Hjelmeset, on his performance in the men’s 4 x 10 relay (Writer’s note: By far the craziest quote released by the VANOC information desk over the past 13 days.)




Now, I think my students will understand the problem whenever I have a bad lecture…
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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.
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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.

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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:

Webinar Link




Now, on to what I read…




1. Markets

The Dow dropped 100.97 points.  The bad news was highlighted by the consumer confidence numbers and the FDIC report.  Cyclical stocks such as Caterpillar and Alcoa dropped the most.  Gold, oil and higher yielding currencies all fell – in other words, there was a flight from risk to safety.  Some large retailers (Home Depot, Macy’s and to some extent Nordstrom) reported good numbers.  But, retailers warned of slow sales gains in coming months.




2. Economy

Consumer confidence plummets! The Conference Board’s index of consumer confidence dropped from 56.5 in January to 46 in February.  (Expectations had been for a reading of 54.8.)  The present situation index dropped from 25.2 to 19.4.  This was the lowest reading in 27 years.  Future expectations (next six months) dropped from 77.3 to 63.8.

The cutoff for the consumer confidence data was February 17th.  The market was trending lower during the survey period and my guess is that this is what got captured in this survey.




Approximately 47.7% of people described jobs as “hard to get.” There were 3.6% of people who described jobs as “plentiful!”  My guess is that these people would describe the 15MM unemployed people as “picky.”  Only 13.4% of respondents expect more jobs in the six months ahead.




There were 17.2% of people who expect their income to fall over the next six months.  At the same time, 9.5% expect an increase.




The S&P / Case-Shiller Home Price Index was 2.5% lower in Q4 YOY.  Of course, this is better than the 18.2% drop that was recorded a year ago.  On the positive side, seasonally adjusted prices increased .3% in December (a .2% drop without the seasonal adjustment).  This was the same increase as November.  Prices fell in five of the 20 markets, increased in 14 and stayed the same in one.




Home prices seem to be stabilizing if not rebounding. If you look closer at 2009, home prices fell 11% for the six months ending Apri 2009 and then rose 5% for the next six months.  But, as I’ve said loads of times, we have no idea what will happen to home prices when the subsidies end.




Robert Shiller, who co-founded the index (and teaches at Yale) said that his biggest fear is that angry homeowners will start to walk away from homes.  If you want to understand another reason why people have problems with bank bonuses – this is it.  It promotes the feeling of maximizing my own value rather than doing the right thing.




When will the Fed start raising rates? The WSJ reported that the Fed waited approximately 33 months (on average) after the last two recessions before raising rates.  In addition, this recession is much worse.  The WSJ pointed out that when they started raising rates in 1994, the credit card charge-off rate was 4.6% (currently 11.2%), the high yield bond default rate was 3.7% (currently 13.6%), bank held loans were increasing at a 5.9% annualized rate (currently decreasing 5.3%) and the mortgage foreclosure rate was .96% (currently 4.58%).




Greenspan described the economy in the same way that Jenny describes me: “unbalanced.”  He said that it was driven largely by high earners benefiting from recovering stocks and large corporations.  He said that small business and the unemployed are getting killed.  He doesn’t see how we can have a strong recovery when car sales and the housing market are both weak.




Fly away! After 14 months of decline, passenger revenue at US airlines rose 1.4% in January.  The industry is seeing benefits of reduced seats and slight pricing power.  Cargo revenue for December was 17% higher than December in 2008; but the January cargo numbers are not yet available.




Don’t die! Casket sales are down.  They peaked at 1.9MM in 2000.  For the year ending September 2009, sales totaled 1.69MM.  Approximately 37% of families choose cremation.  There has been a long-term move towards cremation – some of which may be economic.  The average cost of a burial is $7,200, while a cremation is $1,400.  Jenny said that she wants to spend the money and bury me so that she has someplace to walk the dog.




3. FDIC and Banking

In Q4, the FDIC’s insurance fund dropped $12.6 billion to negative $20.9 billion.  The situation sounds similar to my net worth.




The number of problem banks increased from 552 in Q3 to 702 at the end of Q4.  This is the largest number of banks on the list since June 1993.  These banks have $402.8 billion of assets.   FDIC Chair Sheila Blair predicted that 2010 would see more bank failures than 2009 (140).




Loan losses for banks increased for the 12^th straight quarter. The quarterly net charge-off rate was the highest level recorded in the 26 years of data, as was the total number of loans that were 90 days delinquent.  More than 5% of all loans were at least three months past due ($391.3 billion of loans).




Loan balances for banks fell.  It’s been reported that banks recorded their largest full-year decline in total loans outstanding in 67 years.  But, that’s misleading since the total loans outstanding grows each year (so you really need to look on a percentage basis).




Banks have reserves equivalent to 58.1% of noncurrent loans.  That’s down from 60.1% in Q3.




On the positive side, banks reported a $914MM profit in Q4 (after losing $37.8 billion in Q4 of 2008).




The FDIC may start selling bonds tied to the assets of failed banks.  They currently hold $40 billion of assets from failed banks.




Wall Street bonuses for the NYC securities industry increased 17% to $20.3 billion in 2009.  While higher than the $17.4 billion in 2008 (when the industry lost $42.6 billion), it’s significantly less than the $32.9 billion paid in 2007.




Happy bankers. In late 2008 / early 2009, Credit Suisse gave bonuses in the form of an interest in a pool of “toxic” securities.  These were mostly commercial mortgage-backed securities and leveraged loans.  Some bankers complained.  But, this portfolio increased 72% during the past year.  You can look at this in either of two ways: (1) they took the crap that no one else wanted; or (2) the shareholders rode the securities down and the employees rode them up.




Securities industry jobs dropped by 31,500 from November 2007 to August 2009 – a drop of 17%.  But, there were 3,900 jobs added in the last four months of the year.




4. Europe

Bad news about Europe. Bank of England Governor Mervyn King said that the UK is facing a big risk: their largest trading partner (the EU) is showing signs of a weak recovery.  German business confidence fell in February, Italy consumer confidence fell (in February) more than expected and French consumer spending fell (unexpectedly) in January.




Here’s what happens when the world gets tired of funding your bad spending habits. Greece is considering raising their value-added tax, cutting civil service entitlements and raising taxes on luxury goods.  In addition, the EU wants Greece to cut one of the two extra months pay that public employees receive (in addition to their 12 month salary).  Both the public and private sector unions are planning a general strike for Wednesday.




5. Random

ABC News is cutting approximately 25% of their staff (300 – 400 out of 1,500).  We’re going to get to the point that one person is reporting / investigating and the rest of us are commentating.  The reality is that we’re starting to see the “free” model of the internet go away (slowly).  But, it’s still wreaking havoc with the mainstream media.




Toyota’s US President said that their recall may “not totally” fix the sudden acceleration problem! Does this mean it “sort of” fixes it?  This is really quite shocking.  It sounds like, “we’ve got to do something even if it’s not quite right.”  There was testimony from a customer about how her Lexus accelerated to 100 MPH for six miles before finally slowing down.




After my comment about the Canadians beating us in curling (and that should make them feel better about losing in hockey), I received a few emails reminding me that they also beat us in “Ice Prancing” on Monday night.  Congratulations.




Tonight is a big night for me.  I’m trying to feign interest in the Women’s Short Program to get Jenny’s interest in my version of the men’s short program.




I’ve received countless emails asking whether I have a joint appointment at NYU. The answer is no, but this certainly could have been written by me… (click below for an amusing story):

NYU Professor\’s Email — Link

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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.

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.




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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If you want to be on my email list:

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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.

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.




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:

Webinar Link




1. Market

Slight continuation to rally. Stocks rose for the fourth day in a row, with the Dow up 9.45 points.   While the gain was small, the market was up 3% for the four day trading week.




Two year Treasury yields have risen from .747% in early February to .924% on Friday.  This is a really big move in this market.  Some of the move came from worries about sovereign debt (triggered by Greece) and then a lot of the move was triggered by the Fed’s increase of the discount rate (which made investors believe that a move in the Fed funds rate would follow).




More supply coming. This week, we’re going to sell $118 billion in two, five and seven year Treasuries.




Some people argue that relatively low Treasury yields reflect the fact that this is still considered the worldwide risk free asset.  But, there are reasons that rates could increase and investors could stop thinking of the Treasury as risk-free, including:

1. the rise of emerging markets will consume more capital and make investment in the US less attractive
2. the US problem is structural, not cyclical.  We have long term unfunded liabilities
3. more economic growth will lead to higher interest rates and this will lead to a much bigger interest expense for the US (where the average maturity of our debt is less than five years)

S&P cut all AAA rated Greek ABS and MBS to AA. This is only $17 billion worth of securities, but it reflects the increased risk that will result from austerity measures.  Moody’s said that they will also review several Greek issuances.




Fears of trickery. There are fears that other EU countries have used derivatives and other mechanisms to hide debt.  EU countries are supposed to avoid having a deficit that is larger than 3% of GDP or debt that is greater than 60% of GDP.




2. Economic News

China continues to restrict lending. The China Banking Regulatory Commission issued two regulations over the weekend:

1. individual borrowers may not obtain loans if they do not specify what the money is to be used for; and
2. with respect to working capital loans, banks must calculate borrowers’ actual needs and also consider their cash flow, liabilities, repayment abilities and other factors

Again, these are clear signals that China is worried about lending practices and bubbles.




Low inflation. Consumer prices increased .2% in January and 2.6% YOY.  But, the core number (excluding food and energy) dropped .1% in January and was up 1.6% YOY. Much of the price decrease came from the price of shelter. This report furthers the belief that inflation is not a risk and focus must remain on creating jobs.




Hourly wages are not keeping up with inflation. Average hourly earnings for employees were unchanged in January.  Over the last year, average weekly earnings are down 1.5%.




It’s no big deal! NY Fed President William Dudley said that changing the discount rate was “a very small technical change.”  The Fed is arguing that this was simply a signal that banks are recovering and that this is simply a move back toward normal. It is certainly possible that this was the Fed’s attempt to signal recovery of the economy.  Investors are scared that this is the start of the tightening process.




Delinquencies. At the end of Q4, 15% of home loans (7.8MM households) are either delinquent or in foreclosure.  In Q4 of 2008, this was 11%.  One reason that this number is increasing is that the system is logjammed and people are staying in their house longer (before being foreclosed upon).  Approximately 2.9MM households are 90 days or more delinquent but not in foreclosure.




The good spin. The Mortgage Bankers Association (which gave us the report mentioned above) also said that 3.63% of mortgage borrowers were 30 – 59 days overdue in Q4 (down from 3.79% in Q3).  This category reflects “new problems” and it is declining because fewer people are losing jobs.




The human side of unemployment. The NYT had a really good article about the human side of unemployment.  The story described people who had reached the middle class, lost their jobs and are unlikely to regain their financial footing.




The bottom line is that we will see many people fall out of the middle class.  In addition, we will see a heavy burden fall upon food banks and other social welfare networks – at the same time that they are receiving fewer donations.

For several months, we’ve been talking about the fact that it’s going to take a long time to return to full employment.  In April, approximately 2.7MM people will lose their unemployment check unless Congress extends the benefits.  Approximately 6.3MM Americans have been unemployed for six months or longer.  (This is the highest number since the government has been collecting data and is more than twice as large as the next worst period.  Of course, our work force has grown significantly.)




Fundamental changes have made a quick recovery in the job market less likely (NYT article):

1. the control of companies by institutional investors and the importance of the quarterly number (which discourages hiring more people)
2. declining importance of unions which makes it easier to shift work to part-time workers
3. the shifting of manufacturing jobs (and even white collar jobs) to low cost countries
4. automation (which has cut 5.6MM jobs since 2000)

We have seen slower job growth in each economic expansion. Before 1990, it took an average of 21 months for the economy to recover the jobs lost in a recession.  After 1990, it took 31 months.  After 2001, it took 46 months.




In the past year, approximately 2/3 of unemployed people received unemployment compensation.  The remaining third either exhausted their benefits or didn’t meet the requirements or didn’t apply.




3. Really Important Political Issues

I think that we have two huge problems in the US: we have incredible unfunded liabilities and our Congress is dysfunctional.  In other words, we have a huge financial problem and we don’t have a way to solve it.




I would suggest that you read Evan Bayh’s editorial in the NYT. Senator Bayh (Indiana Democrat) recently announced that he would not run for re-election (even though he is supposed to be leading in the polls).  He describes several huge problems in our political process (and he recommended voting against all incumbents), including:

1. strident partisanship
2. unyielding ideology – citizens are increasingly extreme (conservative or liberal) and any type of compromise is seen as weakness
3. a corrosive system of campaign financing – it’s hard to finance a campaign from small contributions, so politicians approach the wealthy, the parties and the PACs.  This will get worse as the Supreme Court has said that corporations and unions cannot be limited as to their spending on political ads.  This is likely to force politicians to support most of the views of particular groups.
4. gerrymandering of House districts – seats become Republican or Democrat and that means that the party is actually choosing the Representative.  This means that the Representative is a party ideologue.
5. endless filibusters – it is too easy to filibuster and stop the country’s business
6. holds on executive appointees in the Senate
7. dwindling social interaction between senators of opposing parties – we’re less likely to compromise with people that we don’t know or understand
8. caucus system that promotes party unity at the expense of bipartisan consensus

Senator Bayh\’s NYT Editorial

In case you’re wondering…it takes 60 votes to end a filibuster. To end a filibuster, there must be a motion for cloture.  If it takes 41 Senators to block a bill, that could conceivably represent as little as 11% of the population (if the Senators come from the least populated states).  The idea of the filibuster is to force the majority to work with the minority.  But, we’ve become so partisan that everything simply grinds to a halt.  (In my house, it just takes one vote to cause cloture and it’s not a vote that I have…)




Some people feel like Congress can handle acute problems (like averting a depression) but can’t handle chronic problems (unfunded liabilities).




The Governator shows a nonpartisan streak! California Governor Scwarzenegger said that President Obama’s stimulus plan is “terrific” and has created 150K jobs in his state.  He complained about his fellow Republicans who are blasting the President.




States have a $1 trillion unfunded liability in pension liabilities to their employees. This is probably significantly understated, since the Pew Center based their analysis on data from fiscal 2008 (ending the middle of 2008).  Approximately 84% of state employees have a defined benefit plan.  Only 21% of private employees have this.




As mentioned a year ago, a study by Carmen Reinhart and Ken Rogoff indicate that public debt increases 86% following a financial crisis.




This could end badly. In past weeks, I’ve discussed the “bipartisan” debt commission that seems to have little hope of success.  One disaster from this commission could be if they highlight the problems, cause more concern and then show that we have no solution.




GM CEO Ed Whitacre (who forced out Fritz Henderson) is going to receive compensation of $9MM. In addition, Fritz Henderson will receive $59K / month for 20 hours of consulting per month.  I am also trying to get my hourly rate up to $3,000, but I have not been successful so far.




4. Credit Card Laws

New credit card laws take effect on Monday. Credit card companies must disclose how long it will take to pay off the balance if a customer only makes the minimum monthly payment.  In addition, customers can exceed their credit limit only if they agree ahead of time to pay a penalty fee.  Importantly, interest rate increases will only affect new purchases, not existing balances (unless you miss payments for more than 60 days).  There are estimates that these changes will cost the industry $12 billion per year.  As a result, annual fees are being increased, as are balance transfer charges and fees for international transactions.




Credit card companies can still raise rates – but they need to give you 45 days notice.  From December 2008 through July 2009, the average increase in credit card interest rates was two percent.




Borrowers can expect to see higher fees for many things (such as year end itemizations). Currently, only 20% of cards have annual fees.  Some banks are charging inactivity fees.  In addition, banks are trying to move customers to variable rate cards.




5. Random

This is going to hurt! Toyota turned over documents which described how they bragged about saving $100MM by limiting the US government recall (for sudden acceleration).

Some Japanese view this entire Toyota incident as manufactured by the US in order to help GM (which is largely owned by the US).




USA! USA! USA! Really exciting hockey game last night where the US beat the Canadians.  Even though both teams were full of NHL players, this would be like our NFL stars losing to CFL starts.  Canada will be in mourning today.  For me, this was an exciting game and while I was obviously rooting for the US, I like Canada and the Canadians.  If we don’t win the gold medal, I want them to win it.




Maybe I just need to move to Canada?  While I’m not a big hockey fan, this game shows exactly what’s wrong with the US.  This game was the biggest event of the Olympics for the Canadians.  In the US, the game was carried on MSNBC and we put some goofy skating on NBC.  That’s an embarrassment.




How skating could be improved. As you know, I’ve voiced my share of complaints about skating in the Olympics.  But, I’ve decided that I need to suggest positive change, rather than simply complain.  I think that we should keep skating as part of the Olympics.  BUT, I think that four teams (or individual skaters) should conduct their routines simultaneously.  Not only will this reduce the amount of time that we are subjected to this “sport,” I think it may actually leave us wanting more.
_____________________________________
If you want to be on my email list:

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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.

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.




Maybe a slightly shorter blog tonight…just got back to my hotel after speaking to our Houston Alumni Association.  Loads of fun, met a lot of nice people.  Thanks to everyone for coming out.




On to what I read…




1. Markets

Three in a row! The Dow rallied for the third consecutive day, increasing 83.66 points.  After the market closed, the Fed raised the discount rate (see below) and stock futures fell.  In addition, the two-year Treasury note yield increased from .88% to .92%, a relatively large move.  The Fed’s move helped the value of the dollar (and hurt the euro) – as it was a sign that the Fed will raise the Fed funds rates in the future.




Important Greek offering. Apparently, Greece is getting ready to issue $6.8 billion in bonds.  It will be interesting to see the market’s acceptance of this offering.  In January, investors bought Greek bonds and lost 3.5% within a few days (a big move in the bond market).  Of course, I’m always skeptical about the information from offerings like this – there are many parties with a vested interest in making this offering look successful.  As a result, they can make the offering appear successful.




2. Economy

The Fed raised the discount rate – the rate that they charge banks for emergency loans – from .5% to .75%.  It was clear that the Fed was going to do this in the future, but most of us were surprised with the timing.  I had expected this to be their signal that they were going to start tightening.  The Fed claims that this is not an immediate precursor to more general tightening.  The Fed funds futures contracts indicated that market participants now expect a greater possibility of two increases in the Fed funds rate during 2010.




The producer price index increased 1.4% in January. Excluding food and energy, the increase was only .3%.  Most of the headline number’s increase was caused by an 11.5% increase in gas prices.




The number of people filing first time unemployment claims was 473K, significantly higher (31K) than last week.  It’s possible that some of this was caused by the recent snow storm.




Wal-Mart said Q4 sales were down from the prior year and Q1 sales would also be soft.  Same store sales were down 1.6%.  (It’s important to note that WMT is comparing Q4 to last year’s Q4 which was particularly strong (same-store-sales were up 6% last Q4)).  While I don’t report much about individual companies, the WSJ reports that WMT is approximately 10% of US retail spending.  It’s hard to say whether this 1.6% drop is good news or bad news.  It could indicate that consumers are becoming less cost conscious.  Interestingly, Nordstrom (which is a higher end retailer) saw sales increase 14%.




The WSJ argues that the US has had a stronger recovery than Europe for several reasons:

1. The US experienced a lot of inventory rebuilding (or shrinking at a slower rate) and that helped our GDP number
2. The US went into decline earlier and may simply be coming out earlier.
3. The Fed has been more aggressive than the EU.
4. The US has been more aggressive in getting our banks to clean up their balance sheets.
5. The stress tests (as silly as they were) forced banks to raise more capital.  The test also promoted confidence.

More on state problems. Approximately 55% of state revenue (before federal transfers) comes from personal and corporate income taxes and sales tax.  These all dropped precipitously.  Expenditures did not drop.  States have a collective $145.9 billion deficit for 2010.  This is the equivalent of 9.2% of last year’s total expenditures.  (The fiscal year ends at the end of June for state.)  In addition, the Pew Center on the States estimates that there was a $1 trillion funding gap on $3.35 trillion of state retirement and health-care obligations.




3. Political Issues

This is incredibly discouraging. As I have mentioned during the past week, Congress didn’t support the President’s debt reduction panel, so he had to implement it by executive order.  In addition, with ten democrats and eight republicans, I don’t see it as bipartisan.  It’s hard to believe anything will get done when you need 14 votes to make a recommendation!




The Commission has two goals: to address the deficit in the short term and to address the long term problems of Social Security and Medicare / Medicaid.  Apparently, groups like the AARP and others are already fighting to protect these programs in their current state.  How will anything get done?  It’s a joke.  This debt problem is going to eventually be a disaster and we can’t even address it in a bipartisan way.  We need term limits.




The General Accounting Office reports that stimulus spending has been delayed by “red tape.” In other words, projects have so many restrictions (e.g., “buy American” rules, requiring contractors to pay local prevailing wages, etc.), that it’s hard to get anything done.  Approximately $19 billion of $180 billion appropriated for infrastructure projects has been paid out.




The UN said that Iran may be working to build a nuclear warhead. I find it hard to believe that Israel will let this happen.  It seems like the US normally tries to stop Israel from taking drastic action.  But, I’m not sure what we’re going to say to them when we’re in Afghanistan and Iraq.




This is awesome.  President Obama met with the Dalai Lama on Thursday. China has complained vehemently about this meeting.  The Dalai Lama said that “since my childhood, I always admired America not as a military power, but mainly as a champion of democracy, freedom, human value and human creativity.”  EXACTLY.  We are the exact opposite of the Chinese government and this is why we should all celebrate the President’s meeting.  America needs to reclaim our position as the people who truly care about the welfare of others, human rights and freedom.  With respect to the Chinese government, my suggestion is that we try to appease them by telling them that we have made a videotape of the meeting and they can bootleg it and sell it for $1.  They respect intellectual property rights as much as they respect human rights.

My only complaint about the President’s meeting was that it was done in the White House residence, rather than the Oval Office.  This was to signal that we don’t view the Dalai Lama as a political leader.




4. Random

There’s a WSJ story about Smithtown Bancorp that is interesting.  The bottom line is that the bank’s president was the leader of the American Bankers Association and fought regulation.  He had gained stature as the result of his bank’s success.  But, now his bank is having significant problems.  I see stories like this all the time.  The bottom line is that many people are making bets against “low probability / high impact events.”  They are right for a long time and they are seen as geniuses.  Then, the low probability event actually happens.




Toyota’s President (Akio Toyoda) acted like one of his cars and unexpectedly went into reverse. Now, he says that he WILL testify before Congress next week.  (Yesterday, he said he wouldn’t.)  It’s rare to see a company’s reputation plummet like as abruptly as Toyota’s has.




It was amazing to watch Lindsey Vonn on Wednesday night. If you watch the replay carefully, you will see that she was skating on one leg.  It was also amazing to see some of the women walk away after falling while going 70 MPH.




____________________________________
If you want to be on my email list:

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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.

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.




If you are a McCombs alumni in Houston, please consider coming to the alumni event tonight – Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

Houston Alumni Event




Now, on to a summary of what I read…




1. Markets

The rally continues. The Dow rose 40 points after getting good news from Deere and Whole Foods.  Bond prices fell, pushing the yield to 3.73%.




The Fed minutes were viewed as somewhat optimistic.  This leads to the belief that the US will be first to raise interest rates (before Europe) and the dollar appreciated.  Even though the dollar appreciated, oil also rose to $77.43.




2. Economy

House construction increased. Construction of new homes increased 2.8% to a seasonally adjusted rate of 591,000 units.  Single family housing starts increased 1.5%.  This is 21.1% higher YOY.  This should solve a lot of problems because we need new houses.  We need new houses like Tiger needs another girlfriend.




Building permits fell. Applications for building permits fell 4.9% (following two months of large increases).  This is still 16.9% higher YOY.




Industrial output increased .9% in January. This was the seventh consecutive monthly increase. All three components (manufacturing, mining and utilities) increased.  Industrial output is just slightly higher (.9%) YOY.  Consumer durables increased more than nondurables.  In particular, auto manufacturing increased.




We’ll never find solutions with the political climate. President Obama said that the stimulus bill saved 2MM jobs.  This is one of those things that I can’t stand from any politician.  We have no idea how many jobs were saved (or not saved).  Republicans are saying that while there is a trillion dollar stimulus, we’ve lost millions of jobs and the deficit is soaring.  I really can’t tell you how little respect I have for all of these politicians (on both sides).  I’ve seen more rational arguments from my five year old.




Capacity utilization has increased. Factories are operating at 72.6% of capacity, an increase of .8% from the prior month.  This is far below the 80.6% long term average.  There is anecdotal evidence of hiring in the manufacturing sector.




The US deficit with China was $226.83 billion in 2009. With our 10% unemployment rate, there is going to be intense pressure for China to let the yuan appreciate. From 2005 to 2008, China let the yuan appreciate 21% against the dollar.  When the crisis hit, China stopped the appreciation.  Some estimate that the yuan is still 25% undervalued. In April, the US will have to decide whether to label China a “currency manipulator” under the Omnibus Trade and Competitiveness Act of 1988.




HAMP makes very small dent. The Treasury Department said that their foreclosure prevention program (Home Affordability Modification Program) reduced mortgage payments for 947,000 borrowers.  That’s an increase of 11% from December.  There are approximately 1.7MM borrowers who are eligible for the program.  (This is 3% of those with mortgages.)




Interest rates can be lowered to as low as 2% and loans can be extended to 40 years.  Program participants are given a trial modification and then it can be made permanent.




To date, only 116,000 have permanent modifications.  The average modification results in a savings of $522.




So far, Citi has modified 50% of eligible borrowers, JPM and WFC were at 38% and BAC is at 22%.




3. The Fed

Stop buying and SELL! Fed minutes showed that some members of the FOMC are ready to start selling some of the assets on the Fed’s $2.2 trillion balance sheet.  But, there’s concern about what that will do to interest rates.  We want to reduce the excess reserves, but we’re worried about the consequences of selling the securities.




The first signal. Most likely, the Fed’s first move will be raising the discount rate (which is the rate that the Fed charges for loans).  Currently, the rate is .5%.  When this happens, it could be the first signal of a change in Fed policy.




Leaving the Fed Funds rate low for an extended period. Fed governors think that there are three reasons why they can leave the Fed Funds rate low: (1) slack in the economy; (2) low inflation; and (3) low inflation expectations.  With that said, market based inflation expectations (seen by comparing TIPs with regular Treasuries) have been increasing.




Fed’s forecast isn’t particularly rosy. The Fed predicts growth between 2.8% and 3.5% this year and somewhere between 3.4% and 4.5% for the following two years.  Of course, this will hardly be enough to lower the unemployment rate.




The Fed predicts that unemployment will stay high for the next two years. They think that unemployment will be between 9.5% and 9.7% this year and between 8.2% and 8.5% next year.  They think it will be in the 6.6% to 7.5% range in 2012.




The Fed thinks that recovery will be slowed by: (1) household and business uncertainty; (2) slow improvements in employment; and (3) slow improvements in the credit markets.  A “sizeable minority” of Fed officials thing that it could take more than five or six year to fully recover from the recession.  I have asked Jenny to give me five to six years to improve.  I didn’t get a response.  Apparently, she has given up speaking to me for Lent.




Growing federal deficit. The federal deficit is $430.69 billion for the first four months of this fiscal year.  Currently, this is 8.8% higher than where we were at this time last year (when we ended with a deficit of $1.42 trillion).  On the good side, January’s deficit was $20 billion lower than one year ago.




Changes at Fannie and Freddie. The Federal Housing Finance Agency (Fannie and Freddie’s regulator) is proposing that Fannie and Freddie should not reach their goals of helping low income families by purchasing private label MBS.  This was a high risk way of reaching their goals.  Of course, the question is whether they can reach these goals in any way that isn’t risky.




4. Random

A special place in hell. The FTC is warning about con artists who are targeting the unemployed with bogus job placement  and work-at-home schemes.  They are targeting the 14.8MM unemployed Americans and the 11MM who are working part-time but want full-time work.  I have to believe that there’s a special place in hell for someone that would do something like this.




It doesn’t seem to end! Toyota is investigating complaints about the steering of Corolla’s.  Toyota’s CEO is now saying that he is not going to come to the US (and will not testify before Congress.  Some people believe that he doesn’t want to answer the interrogation.  Another line of thought is that he’s afraid because his US rental car was a Toyota.




Hackers. A computer security company said that hackers in Europe and China hacked into 2,500 companies over the last 18 months.  They also broke into computers at ten US government agencies.  The belief is that this is an Eastern European criminal group.  The thought is that they use China because there is lax oversight.




I had a really proud moment this week. My seven-year old turned on the tv and said, “Daddy, the Olympics aren’t on. Skating is on.” I said, “exactly son,” and I wiped the tear from my eye.




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.

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.




If you are a McCombs alumni in Houston, please consider coming to the alumni event on Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

1055609623?view=Detail&id=108161




Now, on to a summary of what I read…




Summary: the markets rallied due to a New York manufacturing index and stable credit card delinquencies.  In my opinion, the most interesting long term numbers are those that show China is no longer buying our debt.




1. Markets

The Dow jumped 169.67 points, closing near the day’s high.  The Federal Reserve Bank of New York’s Empire Manufacturing Survey showed manufacturing conditions rose significantly to 24.91 (from 15.92 in January).  Of course, this is a diffusion index and these numbers are still relatively ugly.  Bank stocks were helped by credit card data that showed a leveling off in delinquencies.




Dollar dropped. Investors stopped worrying about Greece and this drove the value of the dollar down.  The cheaper dollar drove gold prices up 2.6%.  The DJ-UBS Commodity index increased 2.5%.




The ten-year Treasury increased in price, pushing the yield down to 3.665%.




2. Economy

Credit card delinquencies are stable.  BAC and AXP reported drops in credit card delinquency rates.  Capital One, Discover Financial, JPM and C had numbers that were little changed.

As an example, Capital One said credit card delinquencies in January increased from 5.78% to 5.80%.  International delinquencies rose from 6.55% to 6.66%.  Auto loan delinquencies dropped from 10.03% to 9.61%.

BAC’s delinquency rate dropped from 7.44% to 7.35% and that means the company is worth 5% more?




Toyota’s problems hurt us. Toyota is going to temporarily idle two plants (San Antonio, TX and Georgetown, KY) as a result of their massive recall (8.5MM cars globally).

Toyota says that they have repaired 500,000 of the 2.3MM cars recalled because of a sticky gas pedal.




Interesting truck indicator. The Pulse of Commerce Index showed a sharp decline in January.  This index measures real-time diesel consumption of trucks.  It fell at an annualized rate of 36.8%.




Astounding numbers. Arkansas hopes to keep their Medicaid spending flat next year.  But, costs are increasing $400MM due to more people qualifying for service.  Approximately 775K of the states 2.8MM residents get some sort of benefit during the year (with 650K on the rolls at any one time).  For every dollar that the state pays, the federal government pays three dollars.  So Arkansas is trying to avoid the incremental $100MM expenditure.




Mortgage delinquencies continue to get uglier. In Q4, 6.89% of mortgages payments were 60 days (or more) delinquent.  In Q4 of 2008, that was 4.58%.  In 2009 Q3, it was 6.25%.  This is the 12^th consecutive YOY increase.  Some say that Q4 is particularly bad because of holiday spending.  That seems a little strange to me because I would think that people pay for their holiday spending in Q1.

The delinquency rate in a few states is particularly bad: Nevada (16.2%), Florida (14.9%), Arizona (11.3%) and California (11%).  The fewest delinquencies were in the Dakotas.  (Who gets a mortgage on a $20,000 house?)

TransUnion estimates that foreclosures will peak between 7.5% and 8%.




The average national mortgage debt per borrower is $193,690.




3. The Debt Issue

Foreigners don’t want our Treasuries. Foreign holdings of US Treasuries fell by $53 billion in December, the largest amount ever.  (The prior high was $44.5 billion in April 2009).  For the entire year, foreign holdings dropped only $500MM.  (We’re seeing an acceleration of the trend.)




China is no longer the biggest holder of Treasuries. China reduced their holdings by $34.2 billion.  They now are second on our list of largest holders – Japan regained first place (even though they reduced their holdings by $11.5 billion).  The Japanese are notoriously bad investors…




Unfunded liabilities outside of US. As you know, I frequently comment on the US’ unfunded liabilities.  If you include unfunded liabilities, US debt would probably be closer to 4.5X GDP.  But, the US is not alone.  The WSJ says that Greece’s debt (including unfunded liabilities) is 9X GDP, Portugal is 5X GDP and the UK is 4.5X GDP.  Barclay’s forecasts that US and UK bond yields will be 10% by 2020 as a result of this mess.

Last year’s budget deficit was $1.4 trillion.  Next year’s is expected to be $1.6 trillion.  Who is going to buy these bonds?




State deficits hurt GDP. From mid 2009 – 2010, state deficits are expected to reduce GDP by .6% – .7% (according to GS).  The total state deficit for 2011 is expected to be near $142 billion.  This could cost 900,000 jobs.




The Cato Institute estimates that public pensions are 70% more generous than private pensions.




If you think that Greece will solve their own problems, you’re a moron. Here’s a perfect example of why it can never happen…Greek customs officials and finance ministry employees (!!!) went on strike for three days (starting Tuesday) to protest the austerity measures.  The finance ministry includes the statistics group which submitted false economic numbers.  The austerity measures include higher taxes, increases in the average retirement age, a salary and hiring freeze and cuts in bonuses.  Other groups are planning on going on strike in the coming days.  The customs group will affect imports / exports.  This should help the economy…

A bomb exploded at the Greek offices of JPM.  Fortunately, no one was hurt.  Everyone was out spending their bonus money.




4. Financials

We’re between a rock and a hard place. The increasing deficits and debt levels will make it more difficult for the Fed to raise rates (according to KC Fed President Thomas Hoenig).  In other words, even if we have inflation, it will be difficult to fight it.  That should make you feel good.  He said that we need to cut spending and increase revenues (i.e., taxes).  He also said that the IMFs idea that we tolerate higher inflation will be a disaster.




Risk to regional banks. Approximately $1.4 trillion in commercial mortgage loans come due over the next four years.  Most of these loans have balloon payments.  The Congressional Oversight Panel estimates $300 billion of losses.  This will crush regional banks




The FT reports that big banks are doing a tremendous number of short sales in order to clear bad loans from their books.  Short sales occur when the home is sold for less than the amount owed (and the bank takes the loss).  Moody’s predicts that share sales will total 20% of all distressed home sales this year.




5.  Haiti

AMR returns to Haiti. American Airlines will resume flights to Haiti on Friday.  Remember: they will be charging $30 per bag you check and the fees increase if you are smuggling children.




The huge losses in Haiti. Haiti’s earthquake caused between $4.4 billion and $13.2 billion of damage and killed approximately 200,000 to 250,000 people.  This is approximately 2% of the population!




6. Random

Dividend recovery? Dividends dropped 21% last year.  S&P forecasts a 5.6% increase this year.  There are 367 companies in the S&P 500 that pay dividends.  The expected dividend yield is 2.45%.  Over time, dividends account for approximately 45% of total stock returns.




Broadband access. Approximately 40% of Americans don’t have broadband at home. Approximately 89% of Americans with household income above $150K do have this access.  Only 29% of Americans with household income less than $15K have this access (that number strikes me as high).  Only 46% of people 55 years old or older use broadband at home.




Do your little part! The cost of the census will be cheaper if you return your form in the mail.  If you don’t, census workers will come to your house.




Today’s thought about the Olympics. I find myself rooting for Canadians almost as much as I root for Americans.  At the end of the day, Canadians are simply Americans who drink a lot.  But, as much as I love the Canadians, I still find myself missing the Beijing games.  Maybe it’s just me, but I really loved those little seven year-old Chinese divers and gymnasts.
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If you want to be on my email list:

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If you are a McCombs alumni in Houston, please consider coming to the alumni event on Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

1055609623?view=Detail&id=108161




Now, on to a summary of what I read…




1. Markets

The Dow dropped 45 points on Friday, after being down as much as 160 points.  The market received bad news about the European economy and also digested China’s increased reserve requirements.




The corporate bond market is getting weaker. Prices have had their biggest decline since the rally started last March.  Credit default swaps have risen to their highest level in three months.  In the past week, investors withdrew $984MM from high yield bond funds, the largest outflow since September 2005.  New debt issuance has slowed: US investment grade and high yield debt new issuance totaled $5.1 billion this week, compared to $32 billion the prior week.  Some offerings were pulled.




The dollar rally is at its highest level since May.  There are 57,000 net short contracts by speculators against the euro.  This is $9.9 billion of bets – which is large by historical measures, but small as a percentage of the market.




Lumber prices are up 32% this year. This is bad news for homebuilders.  My recommendation to homebuilders…buy some houses out of foreclosure.




2. Economic News

Retail sales rose .5% in January (vs. December). Core retail sales (which exclude autos, gas and building materials) increased .8%.  Interestingly, people are buying appliances and electronics.




Maybe this is part of the explanation for retail sales. Northeastern University’s Center for Labor Studies reports that unemployment for the top income decile (individuals earning > $150K) was 3% in Q4.  That compares with 31% for the bottom decile and 9% for the middle decile.




Consumer sentiment fell. The University of Michigan / Reuters preliminary consumer-sentiment index fell in February to 73.7 (from 74.4).  Future expectations dropped.




Two corporate studies (by John Burns Real Estate Consulting and S&P’s Financial Services) predict that more waves of foreclosures will maintain pressure on home prices for several years.  They also said that modification efforts will result in delay of foreclosures, but will not avoid foreclosures.  The firms also said that there is huge inventory that will need to sold.




3. Municipality Issues

State problems flowing through to education. There are estimates that 25 – 30 states cut funding for K-12 education in fiscal 2010 and at least 15 expect to do the same in 2011.  The result is that many classes are becoming larger.  In California, approximately 75% of the state’s public elementary schools increased class sizes this year.

We are seeing similar cuts in police, fire and emergency medical services. In the past year, 14% of cities have cut public safety budgets.  Public safety accounts for 22% of general municipal spending.  (Education accounts for 27%.) You’re going to see fewer police departments respond to property crimes, more abandoned vehicles on the road (because the police won’t get involved) and fewer administrative officers.  Some police departments aren’t even responding to assaults!




Municipalities are struggling with issues related to home-based businesses. Many unemployed people are starting businesses from their homes.  That can result in customers coming to neighborhoods and creating traffic and noise.  It seems like it’s one thing for a customer to come to your house for a haircut or to design a wedding dress.  It’s another when you start to warehouse fish in your garage.  (These were all stories from the article!)




4. International Economy

China raised the share of deposits banks must hold as reserves. Now, Chinese banks will have to hold 16.5% of deposits as reserves.  This is the second increase of the year.  China relies on reserve requirements while the US relies on interest rates.  January loans totaled $203.6 billion, approximately 1/5 of their goal for the year! Property prices were up 9.5% in January (YOY).  Consumer inflation was up 1.5% YOY (and this is a drop from December’s 1.9% YOY increase).  Power demand rose 40% in January.

This creates fear that China’s slower demand will hurt the global recovery.  In addition, there is further fear that the Chinese government will not get the tightening correct and China will slow too much.




The euro zone expanded .4% on an annualized basis in Q4. This is down from the 1.7% rate in Q3.  This was bad news for the euro.  It tells us that even with all of the government policies, the EU can hardly muster any growth. France’s 2.4% growth is what saves the EU numbers.  Germany’s growth stagnated (after 3% growth in Q3).  It’s hard to believe that this is the type of environment which will allow Greece to cut their deficit.  (Greece is assuming 1.5% growth in 2011.)




Spain and Ireland have unemployment of 19.5% and 13.3%. Youth unemployment in those countries is 45% and 31%.  Greece unemployment is 9.7%.




A little good news for Japan. Amid all of the Toyota problems and Japan Airlines bankruptcy, Japan’s GDP grew at a 4.6% annual rate.  Japan’s exports to Asia increased 31/1% YOY in December.  Unfortunately, prices show a 3% decline.  For all of 2009, GDP is down 5%.




5. Sovereign Debt

On Monday, the finance ministers of the EU told Greece that they had to reduce their budget deficit by 4% of GDP within one month (by March 16).  Otherwise, the EU will demand spending cuts and new taxes.




Bailing out Greece is necessary in order to protect European banks. In addition to bond holdings, there was fear of higher interest rates (which would increase the banks’ financing costs).  Also, government tightening could lead everyone back into recession.




A NY Times article argues that the investment banks helped to hide the debt of Greece and other countries.  I don’t know if that’s true or false, but the article certainly didn’t convince me of that.  It sounds like Greece sold future rights to income (such as airport fees and lottery revenue).  That tells me that Greece is in significant trouble and that they are even more likely to have a catastrophe in the long term, but it doesn’t bother me that this is an unrecorded loan.  I could see it as simply a sale.

Investors are talking more about UK debt. The UK’s four major banks held $110 billion in UK government debt.  If this debt is seen as risky, these banks may have to pay more to attract funding.  In early September, it cost $57K (per year) to insure $10MM of UK debt.  Now, the cost is $97K.




Dubai is back in the news. Dubai World may offer creditors just 60 cents on the dollar, paid back after seven years.




The cost of insuring Dubai’s debt increased $50K to $636K / year. Dubai is estimated to have $80B of debt and their property prices have plummeted.




6. Ideas About the Market

Interesting article about stock market indexes in the WSJ. As I often discuss in class, certain round numbers in the index (e.g., Dow 10,000) get a lot of attention, even though it makes no sense.  Our brains tend to focus on particular triggers that seem to allow us to have order.  Some studies show that trading is actually different when the indexes approach a round number.  Stocks tend to exhibit “herding” – where they all move in a coordinate way (rather than based on the merits of the individual stocks).  One researcher also found that stocks do better when they pass $5 or $10 increments.  It’s possible that some investors will only buy stocks when they are above these levels.




Quadrophobia. There’s a ton of research that suggests managers try to meet earnings expectations.  But some new research is getting press because of its approach.  Researchers studied close to half a million earnings reports and found that when you look at EPS down to tenths of a cent (e.g., $.321 – in other words, 32.1 cents), you find that 4, 3 and 2 are underrepresented in the tenths column.  The idea is that companies find ways to get to a higher level so that they can round up to the next cent.




Two thirds of institutional investors under-estimated how much turnover they had in their portfolio.  On average, they under-estimated turnover by 26%.  According to Morningstar, mutual funds with the highest turnover have underperformed those with the lowest trading by an annual average of 1.8%.




7. Olympic Thoughts

More evidence that skating isn’t a sport.  Read the quote below:

“We don’t want to give him too heavy a workload. We treated him carefully, like a flower bouquet that should look fresh on the day of the competition. –Russia’s figure skating coach Alexei Mishin, on Evgeni Plushenko’s preparation following his European Championship victory.

If your “coach” compares you to a “flower bouquet”, what you do is not a sport.




People have no sense. The International Luge Federation said that their was no deficiency in the luge course in which a Georgian luger died.  They basically blamed it on the athlete.  Who would have ever thought that something bad could happen when these guys are going 90 MPH and there are exposed steel beams if you crash.  It’s slightly difficult to believe that there was nothing wrong with the course after the Olympic Committee shortened it and covered the steel beams.  If I were the Olympic Committee, I’d get my checkbook ready.




I don’t want to brag, but I watched figure skating last night. It might sound odd to you (after past posts) that I’m bragging about this.  I can’t disclose details, but you can figure that I must have done something really bad to have to watch this crap.  I’m not even sure what the hell I was watching.  I think it was the men’s pairs or something like that.




8. Random

Losing popularity. A recent WSJ / NBC News survey showed that 65% of voters believe that President Obama inherited the nation’s economic problems.  (The other 35% were busy sniffing glue.)  But, voters disapprove of Obama’s handling of the economy by a 49% to 43% vote.




Google “Karl Rabeder.” He is an Austrian millionaire who is giving away all of his wealth ($4.5MM).  His goal is to have nothing left.  He thinks that it is making him unhappy.  Personally, I wouldn’t mind being a little less happy.




The FHLB of Seattle filed 11 lawsuits against investment banks, claiming that the FHLB was misled during the sale of mortgage backed securities.  Apparently, it’s difficult for an institutional investor to recover in this type of suit.  But, if there was ever a time that it could happen…this seems like the time.  Some of these bonds have a 25% foreclosure rate (for the mortgages they hold)!  My fear is that this will cut into bonuses.  (That was a little Populist humor.)




Irony can be so ironic…Sunday was the Chinese New Year.  It’s the year of the Tiger.  I could be wrong, but I think the last few years on tour were the year of the Tiger.  But, I certainly don’t think it’s this year.
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If you want to be on my email list:

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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.

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.




Two Public Service Announcements

If you are a McCombs alumni in Houston, please consider coming to the alumni event on Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

http://utmsb.convio.net/site/Calendar/1055609623?view=Detail&id=108161




I received an email from the News Director at www.teamusanews.org asking me to plug their site on my site.  I don’t know much about their site, but I briefly looked at it.  Their site is dedicated to promoting the US Olympic athletes.  You can sign up for update or scores.  I recommended that some people might like to be able to keep up with the actual athletes and not the crazies or the skateboarders.  I didn’t get much of a response to that request.




NOW, on to what I read today…




1. Markets

The Dow rose 106 points after being down as many as 82.  As mentioned yesterday, news that Chinese inflation is moderating was very good news to the market, as was a reduction in the fear about Greece and the EU.




The EU “sort of” “kind of” “I think” declared that they would support Greece. (I haven’t seen such hemming and hawing since I asked Jenny whether she would marry me all over again.)  There were no details given about the plan.  The EU countries really seem to be saying that they want a stable euro.  Rather than a bailout, the EU countries simply seem to be saying that they will prod Greece to get their finances under control.  It sounds like telling a drug addict to “get your crap together.”  I’m not quite sure that does it.

As I mentioned yesterday, don’t forget that Greece is not simply going through a cyclical downturn.  Rather, they are structurally unsound.  No problems have been solved.  All that’s happened is you have others guaranteeing Greece.  Bailing out Greece is very unpopular in Germany and France.




A financial bailout would wildly unpopular. Approximately 70% of Germans oppose financial support for Greece.  This is also unpopular in France, but it’s hard to tell the significance of this since the French whine about everything.




It’s always interesting to see how the markets respond. The euro fell.  Greek bonds rallied.  In other words, this was a wealth transfer.  Investors believe that Greece became safer and the currency became weaker.




Is this Greece’s future? Latvia has undertaken austerity measures so that they could adopt the euro in 2014.  Government spending has been reduced during the recession.  The estimates are that their GDP has shrunk 24%.




2. Economy

Some job losses are permanent. Economists predict that approximately two million jobs that were lost since the recession began won’t be returning.  They need to be replaced by new jobs in growing industries.  The idea is that there has been a particularly large amount of automation and outsourcing that occurred.  The economists estimate that we will add about 133K jobs per month over the next year.  That will not be enough to significantly lower the unemployment rate.  Interestingly, the White House projects just 95K jobs to be created each month.  That could result in a higher unemployment rate.




The President’s Economic Report predicted 95K jobs being produced each month this year, 190K in 2011 and 251K in 2012.  This was premised on a $100 billion job package.  The result was a prediction of unemployment of 10% this year, 8.2% by 2012 and only reaching 5% again by the end of the decade!




The President’s economic paper said that there are three choices for bringing the deficit down:

1. curb the rising costs of health care
2. undo many of President Bush’s tax cuts
3. eliminate wasteful spending

Is #3 just a euphemism for getting rid of Congress?




Home prices rose in more than a third of metropolitan areas in Q4.  The median price for home sales was up from a year earlier in 67 of the 151 areas.   The national median price for a home was $172,900 in Q4, down 4.1% from last year.  That was the smallest decline in two years.

The biggest gain was in Cleveland, which may provide an answer to the age-old question of why the hell anyone would want to live there.  Apparently, this increase is merely a reflection of fewer foreclosed homes being sold (compared to last year).  Nationally, foreclosures accounted for 32% of Q4 sales, compared to 37% last year.

Las Vegas, Ocala (FL) and Orlando showed the largest declines (20%+).




We may be under water, but at least we’re not alone. At the end of 2009, 21% of households with mortgages were under water.  Approximately 3.9% of first-lien home mortgages were 120+ days delinquent but NOT in foreclosure.  (That’s approximately 2MM households.)




Really interesting thought. A new IMF paper suggests that central banks should aim for a higher inflation rate (closer to the 4% level, rather than 2%).  That way, they have more room to act when crises erupt.  There would be less chance of getting to a zero percent interest rate (like we’re at) – at which point, you’re out of ammo.




Farm income bouncing. The Department of Agriculture forecast that farm income would climb 12% this year (after falling 35% in 2009).  As a result, Caterpillar and Deere rallied.




3. Banking

Small banks hurting. The Congressional Oversight Panel warned that 3000 banks may have to curtail their lending because of commercial real estate losses.




This seems crazy to me. Georgia, the state that leads the nation in the number of banks which have failed, has eased their lending laws.  Banks chartered by the state may now loan more than 25% of their capital to one single borrower if it is secured with collateral or 15% if it is unsecured.  Allowing banks to have a concentration risk is not a good idea.




Europe’s big banks have been lobbying EU countries to bail out Greece. There’s a shock…a bank wanting the government to bail out a debtor. French lenders to Greece (government and corporations) had $78.9B of exposures, Switzerland has $78.6B, Germany has $43.2B and the UK has $12.5B.

If Spain has troubles, German lenders have $240B of exposure, France has $185.3B, the Netherlands has $125.5B and the UK has $120.7B.




4. Random

India thinks that they’re China. Interesting article in the WSJ argues that India is not doing anything to protect patents and this is making it very difficult for pharmaceutical companies to do business there.




It’s going to be more difficult to hire foreign farm workers. New rules were passed that require documentation that farmers unsuccessfully tried to hire Americans.  Doesn’t anyone realize…we’re service workers?




Human rights alert. Chinese courts upheld the 11-year sentence for Liu Xiaobo.  He was convicted of “inciting subversion.” He was arrested after he co-wrote “Charter 08.” The US and EU called for his immediate release.  Both the EU and the US have expressed dissatisfaction with China’s human rights violations.  I encourage everyone to read, think and TALK more about these issues.  We don’t question our freedom here because of what a lot of other people have done for us.  We can’t pay them back…but we can pay it forward.




US sales of videogames and consoles fell 13% in January. Maybe sales will pick up when they make videogames an Olympic sport.




Former President Clinton is in the hospital after having two stents put in. Doctors say that he’ll stay in the hospital until he grabs a nurse.  At that point, they’ll know that he’s regained at least 25% of his strength.




We set a date! The President is going to meet with the Dalai Lama on February 18^th.  China disapproves of this meeting and has urged us to cancel it.  Fortunately, we don’t take orders from China’s communist party.
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If you want to be on my email list:

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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.