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Now, on to what I’ve read…
1. Market Drops – Another Thing to Blame China For
Market dropped 122 points. Commentators pointed to the concern that China is going to slow their economy.
Slow down there! China’s economy expanded 8.7% in 2009 – faster than their 8% goal. Growth in Q4 was 10.7% higher YOY. Consumer prices were 1.9% higher YOY, which was a huge uptick from the .6% YOY increase they reported in November.
Closing in on Japan. If China continues to grow at 8.7%, they will pass Japan at the end of this year and become the second largest economy.
Chinese real estate bubble? Prices of new residential property have been rising at a 20% (annualized) rate over the last several months. This has encouraged further development. Construction starts are up 75% YOY. Housing prices are only affordable for the top 20% of the population (of each city).
Lenders will be shot. To slow inflation, the Bank of China will stop making new loans for the rest of the month. Some smaller banks are going to have to hold higher reserves. In prior days, I’ve mentioned slightly higher interest rates in China.
China’s Banking Regulatory Commission said that banks will extend $1.1 trillion of loans this year, a 22% decline from last year.
It wasn’t just the US stock market that was hurt. Chinese stocks fell 2.9% on Wednesday. Commodities were down 1.6% on fears of tighter monetary policy in China. Copper fell 2.7% — it is very dependent upon worldwide GDP growth.
US stock multiples. The S&P 500 forward P/E has increased from 11.5 last April to 15.2 now.
WSJ argues that there will be more share repurchases. Nonfinancial firms now hold $290 billion more in cash than they did in 2007 because they have not been repurchasing shares, paying dividends, spending on PP&E or doing M&A.
With capacity utilization at 71.3%, don’t expect much capital expenditure. There could be more M&A. Global M&A increased 90% in Q4 (vs. Q3) to $626.8 billion.
But, buybacks are particularly likely. Stock buybacks dropped from $597.8 billion in 2007 to just $89.7 billion last year. Citi estimates that the 100 largest firms relied on buybacks for 1/3 of their growth in EPS from 2003 to 2008.
Of course, be careful what you wish for. Morgan Stanley recently studied 26 industrial companies and found that more than half had made a zero or negative return on stock repurchases since 2000. But, if you don’t have growth opportunities and you’re trying to justify high earnings expectations (implied by high multiples), buybacks may be the answer.
2. Greece Hasn’t Gone Away…Yet
Greek bonds are down. Yields on Greece’s 10-year bond touched a record high, while the cost of insuring these bonds also reached a record. At one point yesterday, the spread between Greek bonds and German bonds reached a record 3.08%.
Fears about Greece are hurting the euro. The euro fell below $1.42 for the first time since August – out of fear about Greece. And remember, it’s not just Greece. While Greece’s deficit is 12.7% of GDP, Spain’s is also expected to top 10%.
Lots of power! BAC, WFC and USB hold 24% of all US deposits and operate more than 15,000 retail branches.
Lots of risk! President Obama is expected to propose limits on Thursday concerning the size of banks and how much risk that they can create for our country. He would give regulators the power to limit size and activities (such as limiting proprietary trading by commercial banks). This could have a big impact on BAC, WFC, JPM, GS, MS and C. The argument goes like this…if you take in deposits, which you can do cheaply because the government insures them, you shouldn’t be trading subprime mortgages.
Lots of write-offs. BAC’s credit card division lost $1 billion. USB had residential loan write-offs of 2.4% (up from 2.1% in Q3) and nonperforming assets increased to 3.1% (from 2.6%).
The good news? Merrill Lynch banking created $2.8 billion profit for BAC. BAC’s provision for credit losses shrank from $11.7 billion to $10.1 billion. Of course, that’s only good news if they’re actually provisioning enough. While their provisions dropped, their nonperforming assets increased 5.7%.
Mixed bag on non performing assets. Wells Fargo’s nonperforming assets grew 18% in Q4. BAC’s increased 5.7%, Citi was flat and JPM’s fell 3.1%. WFC’s nonperforming loans are now 3.12% of outstanding loans. But, WFC said that consumer losses may have peaked. If this optimism is correct, this is the most important news of all.
Lots of bank refinancing in the near future. Financial institutions in the US, UK and Europe have $1.5 trillion of debt maturing by 2012. A lot of this debt was issued with government guarantees during the crisis. Recently, some stable banks have been able to issue debt at really low rates – as spreads have dropped. The question is whether this will continue…will risk in the sovereign debt market make investors fearful of bank debt or will investors actually prefer bank debt?
We’re all waiting to see Goldman’s compensation. Historically, compensation has been between 44% – 49% of revenue. Estimates are that it will be lower and less of it will be paid in cash.
We’ve seen Morgan Stanley’s and it’s not going to make them any friends. MS missed expectations and closed its second consecutive losing year. But, not everyone lost. Bankers and traders received compensation that accounted for 57% of the investment banking revenue. (MS has said that if you exclude an accounting charge, the compensation to revenue is 40%.) I encourage you to pull up a ten-year price chart of this stock and think about how shareholders probably feel about these bonuses.
4. The Economy
Increased growth estimates. The World Bank increased their global growth forecast from 2% to 2.7%. Their forecast for 2011 remains at 3.2%. They warned, however, that if the private sector continues to save, a double dip recession is possible. The US is expected to grow 2.5% in 2010 and 2.7% in 2011. Europe is expected to grow 1% and 1.7%, while China is expected to grow 9% each of the next two years.
New home starts fell 4% in December (from November). Single-family construction dropped 6.9% and multifamily units increased 12.2%. The drop was attributed to weather – this was the coldest December in nine years. Starts fell 19% in the Northeast and 18.5% in the Midwest – where the weather was particularly bad. Starts fell .9% in the West and increased 3.3% in the South.
Get some perspective of where we are with housing starts. The total number of housing starts in 2009 was 553,800, down 38.8% from 2008 and approximately 1/3 of the fifty-year average.
Permits rose (promising for the future). New building permits rose 10.9% in December to 653,000. This is the highest level since October 2008. Permits are less affected by weather. Of course, I’m not sure that we need many new houses.
Producer prices increased .2% in December. The core number was flat (food prices increased 1.4% and energy fell .4%). Year over year, producer prices were up 4.4%. But, the core number is only up .9%. Fortunately, I don’t eat or use energy.
5. Company News
Youtube is going to start renting videos. There will be five movies from the Sundance Film Festival available for $3.99 each.
We’re back to high-end coffee. Starbucks same-store sales increased 4%. This resulted from an average ticket price increase of 4% and the company attributed this to Via (instant coffee).
Amazon is recruiting self-published authors by paying them 70% royalty on sales of all electronic books priced between $2.99 and $9.99. They must be published through Amazon.
Buffett said that Kraft is paying too much for Cadbury. Kraft is paying $19.1 billion and 60% of this is cash. He also said that Kraft sold their pizza business for too low a price (they sold it to Nestle for $3.7 billion). Other than the fact that the CEO overpays when she buys and she sells for too little, Buffett expressed confidence in the CEO. Shortly thereafter, Jerry Jones expressed confidence in Terrell Owens and Wade Phillips.
This should go over well. The US is going to make unrestricted access to the Internet a top foreign-policy priority. In addition to the recent news about China, there have been “honor” beatings and killings of Middle Eastern women who have been caught using social media on the internet. (Personally, I would like a little protection too. I received quite a whipping from Jenny for some of my internet use recently. But, I can’t really talk about that story.)
So this is bi-partisan? The “bipartisan commission” that is supposed to tackle our debt crisis is supposed to be made up of 18 members: six appointed by congressional Democratic leaders and six by Republican leaders and the President is supposed to select two Republicans and four Democrats. For those of you who are quantitatively challenged, that means ten Democrats and eight Republicans. Ten Democrats and eight Republicans doesn’t sound that bi-partisan to me. Of course, regardless of what denomination they are, aren’t these the guys who caused this problem?
If we’re going to put together bi-partisan commissions, I have another idea. Maybe we can also put together a bipartisan commission composed of ten members of China’s communist party and eight members of the Taliban to figure out how to solve human rights issues. (I have a guess as to the solution…ban the internet so that no one will know.) On a positive note, I think both commissions have an equal chance of success.