Browsing articles in "Weekly Market Update"

Congress Corrects Their Trading Ways

Feb 10, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The market tried to make new highs this week but, lacking escape velocity, was unsuccessful due to news out of Greece. As mentioned a couple of weeks ago, the market appears to be losing steam after what was widely viewed as a great start to the year. Unfortunately, improving economic indicators and reasonably good earnings reports only go so far. At the end of the day, the issues facing Europe remain serious and unresolved.

If this was a baseball game, we’d be in the bottom of the 7th inning. There’s still plenty of time for a resolution but everyone knows that time is running out. At issue are the debt reduction talks and the austerity expense cuts that we’ve talked about ad nauseum over the past several months. Without belaboring the point, the negotiators reached an amicable agreement (like a prize fighter threatening a scrawny kid) and Greece must now vote on the resolution. No less than four government officials have resigned this week over what they view as a distasteful agreement which hands Greece’s sovereignty over to European technocrats. With strikes promised and civil unrest right around the corner, we anticipate this story to continue for some time yet.

The largest non-consequential story this week has to do with the $25 billion settlement between the five largest loan originators and the states. This agreement has been very controversial to many people on many levels. In essence, it assists people who bought more house than they could afford, put little to no money down, stopped making payments and/or walked away from their homes. So who won’t have any chance of a principal reduction? That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration (FHA). Combined, these agencies hold about 56% of existing home loans. The Federal Reserve estimates that 12 million mortgages are underwater, but that 8.6 million of those underwater are current on their payments. And if you were worried about the moral hazard that this creates, that went out the window in 2008.

The third story that caught my attention this week is two bills that made their way through both the House and the Senate over the past couple of weeks. It turns out that Congress, embarrassed by claims of insider trading, has finally taken up measures to stop this behavior. We reported on the original story and subsequent outrage several months back when this story broke. However, the news that caught our attention this week has to do with a first of its kind case involving a member of Congress for violating insider trading laws. In recent years, Rep. Spencer Bachus (R-Ala) has made numerous trades, some of them coinciding with major policy announcements by the federal government and industries under his congressional oversight, according to a review of his financial disclosure forms by The Washington Post. The Office of Congressional Ethics (OCE) has notified Bachus that he is under investigation and that they have found probable cause to believe insider-trading violations have occurred. Note that these alleged violations took place while he served as the chairman of the House Financial Services Committee. We’re encouraged that action is being taken on this seemingly common practice.

For the most interesting story of the week, we turn to the case before a California federal court which is set to determine whether amusement park animals are protected by the same constitutional rights as humans. It turns out that People for the Ethical Treatment of Animals (PETA) has filed suit in San Diego on behalf of five orcas that perform water acrobatics at the SeaWorld amusement park. PETA argues that the whales’ “employment” at SeaWorld violates the 13th Amendment, which prohibits slavery. According to PETA, “It’s a new frontier of civil rights.” The case is unprecedented and should prove good fodder for the evening news. Now you know.

February 10, 2011: Market Update

Freddie Mac, “A Nightmare on Main Street”

Feb 3, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The markets moved higher again, pushing past 12,850 and making a new high that harkens back to May 2008. Like last week, the lack of adverse news coming out of Greece has allowed the market to continue to move higher.  Relatively good earnings announcements and a couple of surprise economic indicators also helped to make this week a good one.

By far, the biggest news came today in the form of the January jobs report.  It turns out the economy added 243,000 jobs in January which is far more than economists had expected.  This reminds me of the joke that economists have predicted 9 out of the last 5 recessions.  But more to the  point, it suggests that the economy, post Christmas season, is actually growing in ways that require employers to hire again.  In fact, hiring accelerated across the economy and up and down the pay scale.  The high-salary professional services industry added 70,000 jobs, the most in 10 months.  Manufacturing added 50,000, the most in a year.  All told, the unemployment rate dropped to 8.3%, the lowest rate in three years.

While earnings announcements garnered most of the attention this week, the Greek negotiations continue out of the spotlight.  I listened to a podcast that shed some light on why this process is taking so long.  The simple answer is that negotiations have stalled over how big a haircut the creditors will take.  However, this is far too simple an explanation.  When we think of Greece’s creditors we might think of a unified group of investors with a similar objective.  You would be wrong in making that assumption.  Greek banks own a substantial amount of Greek debt and are willing to take a larger hit in order to ensure a larger national bailout.  It turns out many Greek banks are owned by the state.  So we might look to institutional investors as being more homogeneous.  You would be wrong there too.  It turns out some investors took out insurance on their Greek debt holdings.  This insurance only pays out if Greece were to default.  So these investors are all for a Greek collapse in order to receive one-hundred cents on the dollar.  Yet other investors made the unfortunate decision to own Greek debt and sell  insurance to others owning Greek debt.  These investors have the most to lose and are the least willing to agree to a large write-off.  In a nutshell, it’s more complicated than ever imagined.  If you are interested in this topic, you’ll want to listen to the following podcast by NPR Planet Money “Who Loaned Money to Greece Anyway”.

Earnings announcements continued unabated this week.  Next week they will begin to taper off and allow attention to focus once more on Europe and Greece.  For the most part, the earnings announcements remain pretty good.  Cummins reported great earnings following Caterpillar’s lead last week.  Qualcomm announced they shipped 156 million units in the fourth quarter as more and more of their chips make their way into smartphones and tablets.  The only disappointment was from Chipotle which narrowly missed earnings expectations by $0.02 but more importantly guided future growth into the mid single-digits from their current double-digits.  While the stock continues to trade at 52-week highs, it’s worth keeping an eye on this one.

And finally, the story of the week isn’t really a funny one this time.  It has to do with Freddie Mac, the taxpayer-owned mortgage giant.  We learned that they placed multibillion-dollar bets against the homeowners to whom they lent money.  Freddie Mac is supposed to be dedicated to backstopping mortgages and making it easier for people to get housing loans.  Instead, it tightened the terms under which it would extend credit to homeowners and raised fees associated with refinancing.  This is a blatant conflict of interest.  Freddie Mac and sibling company Fannie Mae purchase loans from lenders, package them into bonds with a guarantee against default and then sell those bonds to investors.  Together, the companies own or guarantee about half of all U.S. home mortgages — or 31 million home loans — and nearly all new mortgage loans.  Now you know.

February 3, 2012: Market Update

$100 Billion and Counting

Jan 27, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Has the tide turned this week?  For the first time in over a month, the market looks to be headed for a slightly lower finish.  We are right in the middle of earnings season and while some companies have reported stellar earnings, many are openly cautious about the first half of 2012.  To sum up the week, the markets closed in lackluster trading, weighed by Greece’s failed debt restructuring talks and a mixed bag of earnings reports.

The debt restructuring talks in Greece continued this week despite what seems like months of ongoing “talks” and an insistence that all parties involved are “very close” to striking a deal.  This week was a little different though in that it raised an interesting question.  If private parties are expected to write off fifty percent of the Greek debt they hold, isn’t it fair to expect the European Central Bank (ECB) to do the same?  It turns out that the ECB expects full repayment and as a creditor believes that they come ahead of all other creditors.  This is the first time this question has been raised and poses an interesting quandary for central banks around the world.  Time is running out for Greece with the recognition that a number of EU nations are no longer in the mood to hand Greece more money knowing full well that it cannot be repaid.

Aside from earnings announcements, the other big news this week was the report from the latest Federal Open Market Committee (FOMC) meeting.  While many expected interest rates to stay low for a “prolonged time”, many took this to mean through 2013.  However, the Fed made clear this week that they intend to keep rates at or near zero percent through 2014, a full year longer than most had expected.  On the one hand, these low rates are a form of stimulus and generally help the stock market.  On the other hand, it is an acknowledgement that the economy is weaker than previously thought and still too feeble to stand on its own.  In addition, we learned that the fourth quarter gross domestic product (GDP) came in at 2.8% versus the 3.0% expected.  While this is higher than the 1.8% we saw in the third quarter of 2011, projections for 2012 are being revised lower.

Earnings announcements were the centerpiece this week.  There are simply too many companies to discuss in detail so let’s focus on just a handful.  Apple was by far the standout.  Not only did it eat its competitor’s collective lunch but it blew well past analysts’ expectations.  With cash approaching $100 billion, they are now the 58th largest country in the world.  In other news, Starbucks announced good earnings with further plans of expansion in China and Latin America.  Domestically, they are looking into going further into food service and potentially expand into wine and alcohol.  Caterpillar was perhaps the most optimistic company to report this week.  According to management, there simply are no economic headwinds strong enough to slow down this company.  That’s a bold statement from a company that depends on global growth.  Other companies reported decent numbers but were less enthusiastic with their forward guidance.  For many, commodity costs are really cutting into their earnings even in cases where revenue growth is strong.  At the end of the day, this quarter is more about company specific news rather than broader industry or sector trends.

In closing, the story of the week is a puzzler.  Which is more valuable… the White House or a single Apple Store?  It turns out the White House wins, but just by a smidge.  Apple sells an annual average of $4,709 worth of merchandise per square foot (in FQ4) in its hundreds of stores around the world, while Zillow values the White house at $4,752 per square foot.  The runner-up is Tiffany’s which averages $2,974 per square foot.  There’s a tidbit of trivia for your next social event.

January 27, 2012: Market Update

Don’t Smile: It’s Not Quite a Kodak Moment

Jan 20, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The market looks to finish just less than three hundred points higher this week.  Not bad for a week in which we received a mixed bag of earnings announcements. What tilted the playing field in our favor was a lack of news out of Europe and some generally favorable economic data suggesting things at home are improving.

Earnings announcements have been a minefield of uncertainty as companies tiptoe lightly around analysts’ expectations.  Those companies that lowered expectations in the weeks preceding the announcements are doing better than those that did not.  Intel comes to mind as having reduced their guidance a month ago, only to beat their lowered numbers this week.  Investors were happy that Intel “beat” and rewarded the company nicely.  Others that failed to lower expectations and reported disappointing earnings met the ire of analysts and were duly punished.  Some companies that come to mind are Google, Fifth Third Bank, Parker-Hannifin and Johnson Controls.  Forward guidance is another area that we’re watching closely and there’s simply no consensus.  Companies are reporting guidance from rosy to dire depending on the sector, industry or amount of exposure to Europe they have.  Thus far in 2012, the percentage of early reporters beating earnings estimates is, by a wide margin, the lowest in recent memory, reports Bloomberg.  It really is a mixed bag.

The economic picture looked a little better this week with several economic announcements showing improvement.

  • January Empire State Survey: Manufacturing +13.48 vs. +10.5 expected, +9.5 prior.  New orders +13.7, +5.1 prior
  • December Consumer Price Index: flat vs. +0.1 expected, flat in November.  Core CPI +0.1% vs. +0.1% expected, +0.2% in November
  • Initial Jobless Claims: +50K to 352K vs. -14K consensus

While far from being out of the woods, the economy continues to make small steps toward recovery.

The big news this week was the announcement that Eastman Kodak has filed for Chapter 11 bankruptcy protection.  The 132 year old company has been struggling for some time as it failed to transform with the changing times.  Ironically, it was the digital sensor they invented that would go on to later take the place of traditional film and make the company largely irrelevant to consumers today.  While it does have a war chest of patents that could be worth billions of dollars, it is unlikely that the company will come out of bankruptcy like GM and Chrysler did just a few years ago.  More likely, the company will be sold piecemeal to the highest bidder.  As one of the few remaining film shooters (by choice), this is a sad week.  Yet Kodak is just another in a long line of iconic brands that didn’t make the jump into the twenty-first century.

In closing, I came across a bit of trivia that I hadn’t seen before.  We all know that times have changed with the advent of computer trading.  Trading volumes ballooned over the past decade as high frequency trading became commonplace.  In fact, as recently as 2011, it was reported that computerized high-frequency trading made up about seventy percent of all trades.  But that’s not the shocking part.  The part that surprised me is that the average time a stock is held in the United States is only twenty-two seconds.  Foreign currency investments are held on average only thirty seconds.  I’m sure they would argue that their role is to provide liquidity since, in many regards, they have taken the place of market makers.  But it is also clear that their goals and objectives are quite different than that of the average investor.  This is something worth keeping in mind.  Now you know.

January 20, 2012: Market Update


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