Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
July 30, 2010
Asian and European markets were
Preliminary GDP (Three more to come so
investors can trade on them) grew at 2.4% in the second quarter. Demand grew at
4%. Traders (program computers?) don’t like this number even though it was
expected and so the major market measures are lower on the news.
(Notice under which presidents debt growth exceeded GDP growth.)
(WSJ) The U.S. economy slowed in the second quarter of this year and the
government said the recession was deeper than earlier believed, adding to
concerns over the recovery's strength. U.S. gross domestic product rose at an
annualized seasonally adjusted rate of 2.4% in April to June. In its first
estimate of the economy's benchmark indicator, the government report showed
growth was lifted by business investments and exports. Consumer spending made a
smaller contribution to growth.
In the first quarter, the economy grew by 3.7%, revised up from an
originally reported 2.7% increase. But
growth estimates all the way back to the start of 2007 were revised lower.
Since all the numbers were
revised lower maybe we should cancel all the trading that took place on the day
the numbers were release.
(Bloomberg) -- The worst U.S.
recession since the 1930s was even deeper than previously estimated, reflecting
bigger slumps in consumer spending and housing, according to revised figures.
The world’s largest economy
shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of
2009, compared with the 3.7 percent drop previously on the books, the Commerce
Department said today in Washington. Household spending fell 1.2 percent in
2009, twice as much as previously projected and the biggest decline since
.....The government also boosted
personal income levels for each of the past three years, propelling the savings
rate higher and signaling households are further along the process of repairing
.....The rebound from the
recession has been more subdued in the last six months of 2009, as the economy
grew at an average 3.3 annual pace from July 2009 through December, instead of
the 3.9 percent previously projected.
......The worst quarter of the
current economic slump is now the final three months of 2008, in the immediate
aftermath of the collapse of Lehman Brothers
Holdings Inc., rather than the first quarter of 2009. GDP shrank at a 6.8
percent pace from October to December 2008, exceeding the prior estimate of 5.4
percent, making it the deepest quarterly drop since 1980.
.....Consumer purchases, which
account for 70 percent of the economy, were cut for each of the past three
years, with the biggest reduction taking place last year. Less spending on
services than previously estimated, including financial services and auto
repair, was responsible for the change.
We switched Pfizer
to Symantec and sold Yahoo. Both anchovy sales were scratch
losses. Symantec is near a seven year
low and priced at less than 2X revenues and less than 10x earnings with $3 a
share in cash on a $13 share price. We also sold Liz Claiborne flat because we decided we have too much retail.
In the first hour and one half of trading
the DJIA was down 125 points, then rallied back to up 25 and at 10AM the DJIA
is back in negative territory. At least the computers are having fun.
Institute for Supply Management –
The Chicago Purchasing Managers
reported the CHICAGO BUSINESS BAROMETER rebounded, marking a tenth month of
The overall index increased to
62.3 from 59.1. Note: any number above 50 shows expansion. Employment improved
to 56.6 from 54.2 in June. The new orders index increased to 64.6 from 59.1.
Overall this was a positive
report. The national ISM manufacturing index will be released on Monday.
Americans Splurge on IPads While
Broke in New Abnormal Economy
Worth the read: http://noir.bloomberg.com/apps/news
Top 5 Social Security Myths
Rumors of Social Security's demise are greatly exaggerated. But some
powerful people keep spreading lies about the program to scare people into
accepting benefit cuts. Can you check out this list of Social Security myths
and share it with your friends, family and coworkers?
Myth: Social Security is going
Reality: There is no Social Security crisis. By 2023, Social Security
will have a $4.6 trillion surplus (yes, trillion with a 'T'). It can pay out
all scheduled benefits for the next quarter-century with no changes whatsoever.
After 2037, it'll still be able to pay out 75% of scheduled benefits--and
again, that's without any changes. The program started preparing for the Baby
Boomers retirement decades ago. Anyone who insists Social Security is broke
probably wants to break it themselves.
Myth: We have to raise the
retirement age because people are living longer.
Reality: This is red-herring to trick you into agreeing to benefit
cuts. Retirees are living about the same amount of time as they were in the
1930s. The reason average life expectancy is higher is mostly because many
fewer people die as children than did 70 years ago.3 What's more, what gains
there have been are distributed very unevenly--since 1972, life expectancy
increased by 6.5 years for workers in the top half of the income brackets, but
by less than 2 years for those in the bottom half.4 But those intent on cutting
Social Security love this argument because raising the retirement age is the
same as an across-the-board benefit cut.
Myth: Benefit cuts are the only
way to fix Social Security.
Reality: Social Security doesn't need to be fixed. But if we want to
strengthen it, here's a better way: Make the rich pay their fair share. If the
very rich paid taxes on all of their income, Social Security would be
sustainable for decades to come. Right now, high earners only pay Social
Security taxes on the first $106,000 of their income. But conservatives insist
benefit cuts are the only way because they want to protect the super-rich from
paying their fair share.
Myth: The Social Security Trust
Fund has been raided and is full of IOUs
Reality: Not even close to true. The Social Security Trust Fund isn't
full of IOUs, it's full of U.S. Treasury Bonds. And those bonds are backed by
the full faith and credit of the United States. The reason Social Security
holds only treasury bonds is the same reason many Americans do: The federal
government has never missed a single interest payment on its debts. President
Bush wanted to put Social Security funds in the stock market--which would have
been disastrous--but luckily, he failed. So the trillions of dollars in the
Social Security Trust Fund, which are separate from the regular budget, are as
safe as can be.
Myth: Social Security adds to
Reality: It's not just wrong -- it's impossible! By law, Social
Security funds are separate from the budget, and it must pay its own way. That
means that Social Security can't add one penny to the deficit.
Crazy movement with no volume; just another
summer Friday with HFT. The major market measures opened lower by over 1% and
then popped and dropped all day finally closing slightly mixed on the day.
Breadth was flat and volume was summer Friday light. European bourses closed
when U.S. markets were lower and so they followed suit. Oil was $78.90 and
Gold was $1184.
July 29, 2010
Asia was mostly lower overnight
while European bourses are higher at midday. Oil has a $76 handle and Gold is
flat at $1165 as the trading day begins.
When it rains it pours.
Nvidia Corp. lowered Wednesday its
second-quarter revenue estimates, amid weak consumer spending that weighed on
sales of its flagship graphics processing chips. The Santa Clara, Calif.,
company, which specializes in chips that help computers render moving images
more effectively, said revenue for the quarter ending Aug. 1 would drop to $800
million to $820 million from the previous forecast of $950 million to $970
Nvidia blamed its
lowered expectations on increases in the cost of memory, a vital component of their
products, and economic weakness in the European and Chinese markets. Some
customers were moving to lower cost graphics chips, which eats into the
company's revenue, or buying computers with less expensive products from
competitors the revenue warning comes just a day after Apple Inc. offered more bad news for Nvidia. On Tuesday, the Cupertino,
Calif., consumer-electronics giant released a new version of its flagship
desktop computer, the iMac, which now relies only on graphics cards made by
Micro Devices Inc. Nvidia, which made the
announcement after the close of trading, said it wouldn't explain the updated
forecast before its second-quarter earnings report, which is scheduled for Aug.
The company is now
priced at one times sales and at $9 has $3 per share in cash. But that is small
comfort for the loss we have in the shares after
successfully trading the shares earlier in the year. Our first impression
is to hold since most of the damage is done at this price.
(Barron’s) The Street is putting the hurt on Symantec (SYMC) shares.
The security and
storage software company late yesterday reported mixed results for the fiscal
first quarter ended July 2, with in line profits but light revenues. More
disappointingly, FY Q2 guidance was well below Street expectations, and the
company in the June quarter “saw lengthening of procurement cycles driven by
continued cautiousness among IT buyers.”
The news has
triggered a slew of bearish pronouncements on the stock from the Street; I
found five - count ‘em, five - downgrades this morning:
Brian Freed, Morgan Keegan: He goes to
Market Perform, from Outperform, citing “a weak outlook, the struggles of
the storage and server management segment, which we expect to continue, a ramp in [operating expenses]” and
expectations that gains from product transitions in FY 2011 will not likely materialize
until FY 2012. He sees fair value at $12; the stock closed yesterday at $14.67.
Daniel Ives, FBR Capital: He likewise goes
to Market Perform, from Outperform. He thinks that a recent acquisition
spending spree and a more difficult spending backdrop “has essentially derailed
the Symantec recovery story.” His new price target is $15, down from $20.
Kash Rangan, Bank of America/Merrill Lynch: He cuts his rating to Neutral from Buy, with a new target of
$16, down from $19. “SYMC’s weak quarter and slow growth are in contrast with
the broad strength seen in software and we believe growth resurgence may be
pressured further if spending remains weak,” he writes.
Rob Owens, Pacific Crest: Downgrades to
Sector Perform, from Outperform. “The server management division
continues to weigh on growth, and storage results have been disappointing
relative to expectations,” he writes. “Despite the fact that shares are
relatively cheap, they lack any meaningful catalyst, and the business lacks the
consistency needed for share purchase at this time.”
Michael Turits, Raymond James: Downgrades to Market
Perform, from Outperform. “While the stock is cheap…we believe SYMC will be
dead money until it can execute consistently and demonstrate that its portfolio
of security, storage and now security authentication assets can get both got to
market and cost synergies - as opposed to the margin compression the company
has been experiencing.”
SYMC is down
$1.57, or 10.7%, to $13.10.
They should have
told us that yesterday. We are holding.
Initial jobless claims for the
week ended July 24 had been expected to total 464,000, but instead they came in
at a lower total of 457,000. That marks a decrease of 11,000 from the prior
week's upwardly revised total and brings the four-week moving average down to
452,500 from 457,000. As for the continuing claims count, it hit 4.57 million,
which is up from the 4.48 million continuing claims that had been registered in
the previous week's report.
Markets opened higher and we sold some stocks because it
looks like the S&P 500 failed at 1115. We took scratch profits in GE, Alcoa -and Goodyear in
our smaller accounts. We weren’t able to sell all the Goodyear at our price
before it fell into negative territory for the day.
July 29 (Bloomberg) -- Cisco
Systems Inc. stock was halted for five minutes following a 100-share trade
on NYSE Amex that drove the shares up more than 10 percent, triggering a
circuit breaker implemented after the May 6 market crash.
Cisco jumped to $26 at 10:41:33 a.m. New York time from $23.37 in the
preceding transaction, according to data compiled by Bloomberg. At the same
second, six other orders for 100 shares each crossed on NYSE Amex at prices
exceeding $24. When trading resumed, the shares changed hands for less than
$23.60. NYSE Euronext of New York owns NYSE Amex.
The surge triggered curbs implemented by U.S. exchanges after the May 6
stock market crash that erased $862 billion in less than 20 minutes. The curb
pauses trading for Standard & Poor’s 500 Index companies for five minutes
after they rise or fall at least 10 percent within five minutes. The Securities
and Exchange Commission may expand the program to the Russell 1000 Index and
more than 300 exchange-traded funds.
How could a 100 share trade $3 higher that the last trade occur in stock like
Cisco that trades 60 million shares
on an average day. The whole episode is an example of the goofiness of the SEC
trying to control rapid market movement without using the uptick rule.
DJIA opened up 60 points then moved to down 90 points before rallying in the
afternoon to up 25 with thirty minutes of trading left. That was it for the
rally as the program computers that are doing all the volume decided that lower
was better. The DJIA lost 40 and the S&P 500 0.35%. All in all it was
positive action for the bulls, but... Breadth was flat and volume light.
European bourses gave up their gains and closed negative when the U.S. markets
did the same. Oil was $78.37 up $1.25 and Gold gained $6.
July 28, 2010
Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit
Goldman Already a Step Ahead of FinReg.
Citigroup May Move Prop Traders to Hedge Funds for Volcker Rule
Why Nvdia is in
July 27 (AP) -- Shares of Rambus
soared 11 percent before the market opened Tuesday after the chip maker said
the U.S. International Trade Commission ruled against a rival using its
patented technology. Rambus said late Monday that the commission plans to issue
an order that would mean computer graphics chip maker Nvidia Corp. and other
manufacturers can no longer import or sell products containing the technology.
The commission ruled in April
that Nvidia's technology infringes on several of Rambus' patents. Its final
determination has not yet been published.
In 2008, Rambus filed a complaint
against Nvidia, as well as Hewlett-Packard Co., Asus Computer International
Inc. and other manufacturers.
Rambus argued that Nvidia chips
infringe on its patents related to the workings of memory systems in computers,
gaming consoles and mobile devices.
Nvidia has said that the ruling
won't affect its business because it plans to use a license the European
Commission required Rambus to make available as part of an ongoing antitrust
investigation. Nvidia said it plans to appeal the case and argue its
side before the U.S. Patent and Trademark Office.
major market measures were lower most of the day Wednesday and the S&P 500
dropped 0.75%. Volume was summer light and breadth was 2/1 negative. Oil
dropped to $76.85 and Gold bounced $2 higher after yesterday’s large drop.
European bourses closed lower while Asian markets were higher overnight with
Japan up 2%.
July 27, 2010
Our guru comments that yesterday’s
action was a Dow Theory buy signal as both the DJIA and the Dow Transports
closed above their June closing highs. The fact that they both did so on the
same day makes the signal firmer. And
then the guru adds the caveat that the S&P 500 gave a sell signal on July 1
so.............. . Today is Turnaround Tuesday and the higher opening this
morning may turn out to disappoint the bulls. The last move off the 1050 level failed here and may again. Corporate
earnings justify higher price levels but the uncertain economy is a real
damper. Stocks will have to test the downside today and survive before we will
relax a bit.
Asian markets were mixed
overnight but European markets are higher at midday. DuPont and Cummins Engine
reported great numbers and U.S. Steel disappointed. Home prices rose 1% last
(S&P) For the Past Year Home Prices Have Generally Moved Sideways
Data through May 2010, released
today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price
Indices, the leading measure of U.S. home prices, show that the annual growth
rates in 15 of the 20 MSAs and the 10- and 20-City Composites improved in May
compared to those reported for April 2010. The 10-City Composite is up 5.4% and
the 20-City Composite is up 4.6%from where they were in May 2009. While 19 MSAs
and both Composites reported positive monthly changes in May over April, only
12 of the MSAs and the two Composites saw better month-over-month growth rates
in May than those reported in April.
In the first hour of trading the major measure opened
higher and then reversed to move lower. In the second hour they continue to
hover around unchanged. As we said above Bulls need to have an up day. For
those keeping score the S&P 500 exce3eded 1115 (step #3 see Friday 7/23)
but now is lower.
We repurchased Walgreen
and added Pfizer when the market
measures slipped into negative territory. That increases exposure with less
volatile issues than what own. We are betting on an up breakout. If we are
wrong we will hold or add.
Kashkari, TARP Guru, Supports Cutting Entitlements, Citing 'Me-First' Attitude
Remember Neel Kashkari? Back during the financial crisis, Kashkari sat
at the U.S. Treasury's Office of Financial Stability, where he was in charge of
implementing the Troubled Asset Relief Program -- the fancy name for a
wheelbarrow full of $700 billion in taxpayer money that went to revive the
do-not-resuscitate banks of the world, which is exactly what those banks asked
the government to do. Well, the whole experience made Kashkari terribly,
terribly sad! So he went out into the woods to build himself a
Cabin Of Emotions, where
he could grieve over the fact that Washington, DC had lost the lustrous glamour
that attracted him in the first place -- during the Iran-Contra hearings.
But since then, he was rescued from his doldrums by bond giant PIMCO,
where he became its managing director of investment management. Now he's on the op-ed pages of the Washington Post, with a message for the olds: STOP BEING SO
"ME-FIRST" and let us cut your entitlements!
A nation's culture can have a profound impact on its competitiveness.
Our shared beliefs in free markets, fair play and the rule of law inspire
entrepreneurs to pursue their dreams and give global investors confidence to
bring their money to America. These beliefs have passed from citizen to
citizen, from generation to generation. They have strengthened over our history
and brought an important competitive edge to the United States.
Hey, let's remember some basic things before we go any further, shall
we? "Free markets" equals "too big to fail banks will never be
allowed to fail." "Fair play" equals "bailing out these too
big to fail banks when they nearly destroy the economy while small banks die by
the hundreds." "Rule of law" equals "big banks using
derivatives to get around capital rules." Okay? Moving on!
Our belief in free markets is founded on the idea that each individual
acting in his or her self-interest will lead to a superior outcome for the
whole. The financial crisis has reminded us that free markets are not perfect
-- but they do allocate capital better than any other system we know. A
"me first" mentality usually makes markets more efficient.
Okay! So, a person who retires today probably entered the workforce in
the mid to late 1960s. They acted in their self-interest, let's say, and this
led to some "superior outcomes for the whole." It was so
"me-first" of those people to not consider the possibility that
decades after they started contributing to the nation's wealth, that another
generation of idiots would come around and destroy it, leaving us with no other
choice than to push those aging former societal contributors out onto ice floes
to die! What jerks! Where was their foresight? Why weren't they smart enough to
get way into toxic mortgage-backed securities? They could be the ones holding
America hostage today!
Cutting entitlement spending requires us to think beyond what is in our
own immediate self-interest. But it also runs against our sense of fairness: We
have, after all, paid for entitlements for earlier generations. Is it now fair
to cut my benefits? No, it isn't. But if we don't focus on our collective good,
all of us will suffer.
Well, Neel Kashkari isn't going to suffer, because he works for PIMCO,
remember? And PIMCO's brilliance was the way it strictly adhered to a
From the December 31, 2008, Talking Points Memo:
As of June 30th, 61 percent of PIMCO's holdings -- $500 billion -- were
in the very mortgage backed securities that it's now being hired by the Fed to
buy back on behalf of US taxpayers, according to a September Bloomberg report that cited data on PIMCO's own website.
That could explain why, as financial blogger Rolfe Winkler pointed out earlier today, PIMCO chief Bill Gross was sounding the alarm in early
September about the disastrous fate that would befall the US economy unless the
government started buying up troubled mortgage assets.
In a September 4 post on PIMCO's website, Gross warned: If we are to prevent a continuing asset and debt liquidation of near
historic proportions, we will require policies that open up the balance sheet
of the U.S. Treasury. Within days, Treasury did what Gross was asking. In other words, as Peter Cohan, a
professor of management at Babson College, put it at the time in a post on
Bloggingstocks.com: Bill Gross, who manages $830 billion, has convinced the
U.S. Treasury to use your taxpayer dollars to bail him out of his bad
And Gross seems to have had his eye on the endgame for a while here
too. Later that month, he argued in a Washington Post op-ed that a broader bailout -- what became
TARP -- was also desperately needed, and he seemed to suggest that his own
PIMCO would be a perfect candidate to manage the funds.
And now, Neel Kashkari is in the Washington Post today, arguing that
cutting entitlements is akin to TARP because both are "unpopular decisions
that are in our collective best interest." Except that TARP benefited
PIMCO greatly and, having been done a good turn, PIMCO rescued Kashkari from
his sad little cabin in the woods. Some pigs are more collectively
best-interested than others.
But Kashkari says we have to act now now now! Cut entitlements before
it's too late!
If we wait until the bond market shuns Treasurys, the economic
consequences could be dire. Virtually overnight, we could have far less money
to spend on priorities such as defense, education and research. Once confidence
in U.S. Treasury bonds is lost, it could take years to return.
Let's take a look at the bond market, shall we?
That red line indicates the interest rate
yield on 2-year T-Bills, currently at about 0.6%. Now, there are plenty of
market experts who will be willing to debate the fine points of this, but
doesn't it seem like the world's investors a) find 2-year T-Bills to be one of
the safest investments around and b) are really unconcerned about the U.S.
deficit? When, exactly, is the confidence going to be lost? Will it be soon?
Fun fact: Right now, the 2-year T-Bill is seen as so safe that, judging
by the yields, it's apparently riskier to get a 2-year CD from a bank. The
average yield on a 2-year CD is about DOUBLE that of a 2-year T-bill, according to Bankrate.com. So investors are passing up double the
yield in order to buy Treasuries.
Kashkari says, "Our leaders need to make the case for cutting
entitlement spending by tapping into our shared beliefs of sacrifice and
self-reliance." That word -- "our" -- seems awfully ironic! Pare
back now, America, so there's money on hand to save the banks again! Shacks in
the woods for everyone else.
Home Prices Post Unsustainable Increase in May, Consumer Attitudes Sour in June
Diane Swonk, Chief Economist Mesirow Financial
The Standard & Poor
Case-Shiller Home Price Index for the 20 top metro areas increased in April and
May, as buyers rushed to take advantage of the last available homebuyer tax
credits. Prices over the last seven months, however, have remained essentially
flat and are likely to deteriorate a bit over the summer, as a new round of
foreclosures hits the market. Strategic foreclosures - when people opt to
default on a mortgage they can still afford because the value of their home has
dropped so much - are a particular problem. The stigma attached to walking away
from your mortgage commitment has all but disappeared in some of the worst-hit
housing markets. Indeed, the chance of a homeowner strategically defaulting
once they know someone else who has done the same, goes up dramatically.
Separately, consumer confidence
fell in June, as consumers continued to struggle with poor job prospects and
the reality of a subpar recovery.
The Bottom Line: It will be a
rocky summer for consumer spending and for the housing market. A double dip
remains unlikely, but the alternative isn't a whole lot better. We made it
through the crisis, but still have to deal with the structural problems that
Ma! He’s Looking At Me Funny!
That’s basically the thrust of Mort Zuckerman’s op-ed accusing Obama of “demonizing” business.
The op-ed contains the usual — false claims that Fannie and Freddie
caused the financial crisis, false claims that fear of government policy — as opposed to weak demand — is holding back investment and hiring.
But I was struck by this passage:
The predilection to blame business was manifest in one of President
Barack Obama’s recent speeches. He was supposed to be seeking the support of
the business community for a doubling of exports over the next five years.
Instead he lashed out at
“unscrupulous and underhanded businesses,
who are unencumbered by any restriction on activities that might harm the
environment, take advantage of middle-class families, or, as we’ve seen,
threaten to bring down the entire financial system.”
This kind of gratuitous and overstated demonization – widely seen in
the business community as a resort to economic populism on the part of Mr Obama
to shore up the growing weakness in his political standing – is exactly the
That sounded odd, since Obama is not, in fact, given to random
business-bashing. So what’s the context? Here’s what Obama actually said:
“Too much regulation or too much spending
can stifle innovation, can hamper confidence and growth, and hurt business and
families. A government that does too little can be just as irresponsible as a
government that does too much — because, for example, in the absence of sound
oversight, responsible businesses are forced to compete against unscrupulous
and underhanded businesses, who are unencumbered by any restrictions on
activities that might harm the environment, or take advantage of middle-class
families, or threaten to bring down the entire financial system. That’s bad for
Kind of different, isn’t it? That’s only business-bashing if you
believe that there’s no such thing as businesses who cut costs by ignoring the
environmental impact of their activities, or take risks that end up endangering
the financial system. If so, I wish I lived on your planet.
I think this is telling. This is the only actual example of Obama’s
alleged demonization of business that Zuckerman offers — and it’s essentially a
mini-Breitbart, a quote taken out of context to make it seem as if Obama was
saying something he wasn’t. That’s typical of the whole argument.
Oh, and one more thing: are there no copy editors at the FT? When I
quote someone in my column, I supply the source material, and my copy editor
checks, not just to be sure that the quote is accurate, but that it’s not taken
out of context. But I guess such rules don’t apply if you’re a conservative.
major market measures fluctuated plus and minus small all day. The DJIA closed up and the S&P 500 closed flat at
1114. Breadth was 3/2 negative with volume light.
The action was satisfactory for the bulls. But
tomorrow is tomorrow. European stocks closed higher, led by a surge in the
banking sector after investors breathed a sigh of relief that future bank
regulations won't be as tough as anticipated. Gold broke support as it dropped
$25 to $1160 and Oil lost $1.73 to $77.50.
July 26, 2010
HAVANA, July 26 (Itar-Tass) -- Cuban
President Raul Castro will hold a major ceremony on National Revolution Day in
Cuba on Monday. The Cuban leader will deliver a speech at a festive ceremony in
the city of Santa Clara, the capital of Villa Clara Province.
More than 100,000 people are
expected to gather on the main city square named after Ernesto Che Guevara. The
participants in the abortive storming of the Moncada Barracks, which a group of
young rebels led by Fidel Castro were attempting to capture on July 26, 1953,
and other veterans of the armed struggle with Batista’s dictatorship will meet
on the square.
The day of the attack on the
Moncada Barracks is considered the starting point of the Cuban Revolution.
After the victory of the revolution in 1959 July 26 was declared as one of the
most important national holidays.
Asian and European markets
were/are mixed as traders digest the European bank stress test data. Bears
think the stress test were fixed and bulls think the stress tests were just
fine. What else is new?
(Bloomberg) -- Barton Biggs, the hedge fund manager
who sold half his equity holdings around the start of July, said today that
signs the U.S. economy will avoid a recession spurred him to build the stakes
“I’ve definitely changed my mind
to the degree of risk out there,” Biggs said in an interview with Tom Keene
on Bloomberg Radio. “I’m more optimistic. I’ve put risk back on.”
Biggs, whose Traxis Partners LLC
gained 38 percent in 2009 when he bought equities as the Standard
& Poor’s 500 Index fell to a 12-year low, said on July 2 that
concern governments around the world curtail stimulus measures too soon led him
to sell about half of his stock investments.
The S&P 500 has risen 7.8
percent since that day on optimism about corporate profits. Of 152 S&P 500
companies that have reported earnings since July 12, 84 percent have
beaten the average analyst earnings forecast, according to Bloomberg data.
In August of 1998
the S&P 500 breached the 1100 level for the second time that year. Twelve
years later the S&P 500 is again trying to breach and stay above the 1100
level. After hitting 1100 in 1998 the S&P 500 moved back down to the 900
level by October. Hopefully that won’t occur this time. History at times rhymes
but is never the same.
New home sales were up 23% month
over month and when the news was released at 9AM that put a little oomph into
what had been desultory trading. Financial stocks are higher this morning as
are cyclicals and blue chips. The only laggards are tech stocks.
New Home Sales Rebound from
Diane Swonk, Chief Economist Mesirow Financial.
New home sales rose more than 20 percent to a 330,000 unit pace in
June, after being revised DOWN to a new low for the month of May. As a result,
the level of new home sales activity remains extremely suppressed. Everything
from the end of homebuyer tax credits, to the competition created by short
sales and foreclosures, has contributed to the ongoing weakness in new home
Tougher lending conditions and harsher underwriting standards are also
a problem. Fannie Mae has cut back on its purchases of mortgage-backed
securities, forcing banks to actually underwrite the loans they are giving -
which they appear completely unprepared to do. Appraisers are now
in short supply, appraising properties in markets where they have never worked
before. And bankers are asking for more documentation than they did in the
1980s, before securitization became so popular.
The Bottom Line: It will be a tough summer for housing and the
consumer. Although, it is amazing how much consumers are able to spend when
they fail to pay their mortgage. Look for sales and consumer spending to pick
up marginally in the fall in response to somewhat stronger hiring.
A more negative take on new home
sales from Calculated Risk: http://www.calculatedriskblog.com/
Ignore all the month to previous month comparisons. May was revised
down sharply and that makes the increase look significant. Here is the bottom
line: this was the worst June for new home sales on record.... The 267 thousand
annual sales rate for May is the all time record low. This is a very sharp
downward revision. The 330 thousand in June is the worst June on record. With
all the gyrations, it is difficult to see what is happening month to month, but
major market measures closed higher in light summer Monday trading. The S&P
500 gained 1% to 1115 (above the guru’s second target of 1111- see 7/23 post)
and breadth was 4/1 positive. European bourses were higher at the close. Gold
lost $5 to $1183 and Oil was up pennies at $79.12.
July 23, 2010
Ford beats and earns money everywhere, Microsoft numbers were good, Amazon
earnings jump-but not high enough for analysts; McDonalds beats by a penny and so it goes. Europe is mixed at
midday and Asia was higher overnight.
Our guru has five levels for the S&P
500 to overcome before he will consider the bull market revived.
- Must recapture 1100 which is the left shoulder of the last move higher
- Recapture 1111
- S&P must regain the midpoint of the 2010 range which is 1115
- Must rise above 50% of the bear market move which is 1120
- And must exceed the high of the recovery move at 1131
(NYT) The Obama administration on Thursday released its controversial
proposed regulations to end federal student aid to for-profit colleges whose
graduates do not earn enough to repay their loans. Since most for-profit programs get the vast majority of their revenues
from federal student aid, the regulations could effectively shut down the
programs whose students have the most debt and the least likelihood of finding
The for-profit colleges have lobbied strongly against the new “gainful
employment” regulations. ....
The coalition of education groups, student groups and consumer groups
that have pushed for stronger regulations said they were glad to have
regulations proposed in time to go into effect next year — but not impressed
with their toughness....
....The for-profit sector has
mushroomed in the last decade.
While overall postsecondary enrollment increased 31 percent from 1998 to 2008,
the for-profits’ enrollment grew by 225
percent. Although for-profit
colleges, which can get up to 90 percent of the revenues from federal student
aid, enroll less than 10 percent of the nation’s higher-education students,
they get almost a quarter of the federal aid. In 2008-9, for-profit colleges got $4.3 billion in Pell grants and
$19.6 billion in Stafford loans....
Full story http://www.nytimes.com/2010/07/23/education/23gainful.html?hpw
And the economy is still just
As we have said Ford can earn $2 in a
quarter when the economy recovers
(Bloomberg) -- Ford Motor Co. reported second- quarter net income of $2.6 billion,
completing its most profitable first half in more than a decade, as car buyers
pay more for its new models.
Ford earned $4.7 billion in the year’s first six months,
its largest first-half profit since 1998 and its fifth straight profitable quarter.
Excluding some items, profit was 68 cents a share, topping the 41-cent average estimate of 12 analysts compiled by Bloomberg. ...
Chief Executive Officer Alan Mulally overhauled Ford’s lineup, redesigning cars such as the
Taurus and Fusion, and adding extras like heated leather seats and
voice-activated electronics. He also boosted quality, which had customers
paying 14 percent more for Ford vehicles in June than five years ago, according
to Edmunds.com. Ford held 17.5 percent of its U.S. market in the first half, up
from 16.1 percent last year.
“Ford’s on an amazing roll right now,” said Rebecca Lindland, an analyst at IHS Automotive in Lexington,
Massachusetts. “They just have a ton of momentum.”
Second-quarter sales rose 15 percent to $31.3 billion
from $27.2 billion a year ago. Excluding Volvo, which the company is selling,
the year-ago revenue was $26.8 billion, Dearborn, Michigan-based Ford said
today in a statement. The average of eight analysts’ estimates was for revenue
of $29.4 billion...
Ford’s automotive operations had $21.9 billion in cash on June 30, down from $25.3 billion on March 31. Ford
paid down automotive debt by $7 billion in the second quarter, lowering it to
$27.3 billion from $34.3 billion at the start of the quarter.
Ford said today it will have a positive automotive net
cash position by the end of 2011.
“We remain on track to deliver solid profits and positive
automotive operating-related cash flow for 2010, and we expect even better
financial results in 2011,” Mulally said in the statement.
Ford said it won’t earn as much in the second half
because of high costs “to support growth and key product introductions, as well
as higher commodity costs and smaller reductions in reserves at Ford Credit.”
Ford will begin selling the redesigned Explorer sport-utility vehicle and Focus
small car in the second half.
reported second-quarter earnings that beat analysts’ estimates after winning
customers with Android smart phones that browse the Web and capture video.
Profit, excluding costs to cut
jobs, fell to 58 cents a share from 63 cents a year earlier, the New York-based
company said in a statement today. Analysts
had forecast a 56-cent profit, according to a Bloomberg survey.
Verizon has introduced several
phones running on Google Inc.’s Android operating system, including Droids from
Motorola Inc. and HTC Corp., to compete against AT&T Inc.’s iPhone. The new
devices helped Verizon add 665,000 contract customers
-- beating AT&T’s gains -- and the mobile business relieved some of the
costs from job cuts in the company’s home-phone unit.
“They’re doing far better than
AT&T both from a margin standpoint and a net-add standpoint,” said Christopher
King, an analyst at Stifel Nicolaus & Co. “While there’s no
question that Verizon would like to have the iPhone all else being equal --
it’s still the premier handset out there -- it’s not a necessity for them.”
King had forecast 575,000
is important to be fair.
(WSJ) U.S. "pay czar" Kenneth Feinberg on Friday declined to
request 17 financial firms that doled out $1.6 billion in "ill
advised" executive compensation to return the excessive payouts, saying to
do so would be unfair to the companies and could trigger private lawsuits and
additional Congressional investigation.
Mr. Feinberg released a report that found 17 firms—including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc.—made the bonus-like payouts to top executives in late 2008 and
early 2009 even as the companies were receiving taxpayer assistance.
General Electric raised its quarterly dividend
20%. We doubled our positions in Yahoo
as it continues to trade near a two year low.
banks largely passed a round of government stress tests, with just a few
institutions found to need modest amounts of new capital. Bank supervisors said
7 of 91 European banks failed stress tests under the worst-case scenario. But
the overall strong grades, awarded to a banking system that for the last
several months has lurched from crisis to crisis, raised questions over whether
the month long tests were tough enough to be judged credible.
market measures close higher by 0.5% to 1% on Friday in light trading. Breadth
was 3/1 positive. European shares ended the day and the week with gains, buoyed
by strong economic data. Markets closed before much-awaited bank stress-test
results were released. Oil was $79.02 down 30 pennies and Gold lost $8 to
raised cash on Monday we haven’t given up much gain on what we sold and have
the luxury of a good cash position. The S&P 500 closed at 1100 so the first
of our guru’s targets has been met.
July 22, 2010
Ok, riddle us this: How does a company
just out of bankruptcy and owned by the taxpayers spend $3 billion to takeover
a credit company that lends to folks who
have lousy credit. Or rather why does a company do this? Only in America.
(Bloomberg) General Motors, the automaker 61 percent owned by the U.S., is buying
subprime lender AmeriCredit Corp. for $3.5 billion. Chief Financial Officer Chris Liddell revealed the acquisition in a briefing today at GM headquarters in
Detroit. GM and AmeriCredit reached a definitive agreement on the deal, which
has been approved by the boards of both companies. GM said the deal is expected
to close in the fourth quarter. The move
will give GM more ability to lend to customers with damaged credit, which will
help GM reach more borrowers. “Adding AmeriCredit to our team will improve
our competitiveness in auto financing offerings,” Chief Executive Officer Ed Whitacre said in a statement. Whitacre had wanted to buy or start a lending arm
before a fourth-quarter initial public offering, people familiar with the
matter said in May. The automaker had decided a deal couldn’t be reached in
that time frame, people with direct knowledge said earlier this month. The
price of $24.50 a share represents a 24 percent premium to Fort Worth,
Texas-based AmeriCredit’s closing price yesterday of $19.70 a share in New York
Stock Exchange composite trading.
The move will give GM the ability
to reach more customers with damaged credit which will help GM reach more
borrowers. Say what?
By the way, Ford Credit survived
the turmoil because it stuck to auto lending while GMAC –now called Ally-
almost didn’t and had to be rescued (http://dealbook.blogs.nytimes.com/2009/06/01/gmac-vows-not-to-follow-gm-into-bankruptcy/
) by the Fed because of all the lousy subprime loans made by its mortgage arm
Jobless claims climbed back up to
464,000 but good earnings from 3M, Caterpillar, UPS, AT&T and others
have the major measures higher in the pre-opening futures trade. Asian markets
were mostly higher overnight and European bourse indexes are strong at midday.
Diane Swonk, Chief Economist Mesirow
Wednesday, July 21, 2010 - 2:35 p.m. Central Time
Ben Bernanke Reassures
Congress, But Not Many Others
Federal Reserve Board Chairman,
Ben Bernanke, reaffirmed his stance in a testimony to Congress today that the
Fed is willing to do whatever is necessary to keep the recovery going in these
"unusually uncertain" economic times.
What can the Fed do? It can
reinstate the programs that it initiated during the crisis, like expanding its
balance sheet to buy mortgage-backed securities again. Or, it could suspend the
interest that it pays on excess bank reserves to encourage more bank lending.
The list is actually quite long.
That said, it is unclear how
much impact any such actions will have, given how little powder we have left in
the Fed's arsenal of tools to stimulate. Add to that the damage that could be
created by asking the Fed to fix structural problems - instead of more
transitory cyclical problems - and additional interventions could do more
damage than good. There is a fairly strong argument that excessively-low
interest rates contributed to the excessive risk-taking leading up to the
I truly believe that the
actions taken by the Fed during the height of the crisis helped to avert
another Great Depression, or much worse. It is not at all clear, however,
whether they can do much about the structural problems that persist. We all
have our limits, and knowing those are oftentimes more important than knowing
our strengths. Maybe it is time for the Fed to be the grown-up in the room, and
admit that they can't make all of our problems go away with a wave of their
Thursday, July 22, 2010 - 8:20 a.m. Central Time
Unemployment Claims Rise and Could Rise
Further with Unemployment Insurance Extension
Unemployment claims rose back
to 464,000 in the most recent week after falling to a downward-adjusted 427,000
the week prior. Distortions created by NOT closing plants at General Motors
during the first week of July accounted for much of the drop in data the week
prior, and are now working their way out of the system.
We also lost some applications
for unemployment insurance when Congress discontinued extensions for that
insurance on July 1. Claims will likely rise now that Congress voted to
re-extend unemployment insurance yesterday. (More than two million workers were
at risk for losing that insurance by the end of the week.)
The persistence of the
long-term unemployed is a particular problem for the U.S., where unemployment
insurance was designed more for more job-generating than jobless recoveries.
We would all be better served
if unemployment insurance were renewed via a formula, instead of an arbitrary
decision by Congress, which tends to tack on any pet project they can onto
insurance extensions. This would limit excessive and unnecessary spending
during recoveries, and if phased out over time, would allow unemployed workers
time to adjust without major disruptions to the economy. Nobody wants to
encourage the unemployed to remain that way. It strikes me as somewhat barbaric
and unproductive for the overall economy to pull the rug out on insurance when
so many are trying but can't find a job in this economy. There is some evidence
that extensions to unemployment insurance discourage workers to take
lower-paying jobs, especially at higher education and skill levels. The
majority of the unemployed today, however, would rather work than be at the
mercy of politics in Washington.
The Bottom Line: Firing appears
to have abated, but hiring has yet to accelerate. The result is a traffic jam
of a recovery that is moving forward so slowly that it is adding, rather than
Thursday, July 22, 2010 - 9:45 a.m. Central Time
Home Sales Fall in June and
Will Fall Further Over the Summer
Existing home sales fell from
the elevated levels of this spring to a 5.37 million unit rate in June. Sales
continued to benefit from homebuyer tax credits, which expired for homes under
contract by the end of April and closed by the end of June. Moreover, Congress
recently extended the date by which qualified buyers could close, as changes in
underwriting and a lack of qualified appraisers were causing bottlenecks in the
Distressed sales made up almost
a third of all sales, which goes hand in hand with the record levels (24
percent) of all-cash sales. Banks are having a particularly hard time figuring
out how to underwrite a mortgage for a foreclosed property, which means that
the best "deals" in the market are going to those with cash and/or to
The only upside is pricing,
which increased slightly from a year ago and continued to show some signs of
firming despite a preponderance of foreclosures. However, gains remain uneven
on a regional basis and could suffer another setback over the summer as another
wave of foreclosures hits the market. Indeed, "strategic"
foreclosures - those who can afford their mortgage but won't pay because their
mortgage is underwater - continue to rise despite Fannie Mae's efforts to
discourage such activity. (Last month, Fannie announced that it would more
aggressively pursue the assets of those who opted to "strategically"
stop making their mortgage payments and would inhibit their ability to qualify
for a mortgage going forward.)
The Bottom Line: The housing market
was at the core of the crisis and remains the Achilles' heel for the economy.
Housing is likely to lose ground again over the summer. The good news is that
we now appear to be in the process of overcorrecting and will eventually see a
snapback. Rents are actually exceeding the marginal cost of homeownership in
some markets, which suggests that the pent-up demand for housing is building.
The problem is lending, which could make "eventually" a very
long period of time.
One half hour into the trading day and the major measures
are up 2%. The bulls are running today but do they have the stamina to hold it?
The S&P 500 is 1092 and 1090 is the downtrend line from the April high while
1100 to 1115 is heavy resistance.
The NAR reports: Existing-Home
Sales Slow in June but Remain Above Year-Ago Levels
Existing-home sales, which are
completed transactions that include single-family, townhomes, condominiums and
co-ops, fell 5.1 percent to a seasonally adjusted annual rate of 5.37 million
units in June from 5.66 million in May, but are 9.8 percent higher than the
4.89 million-unit pace in June 2009.
Total housing inventory at the end of June rose 2.5 percent to 3.99 million
existing homes available for sale, which represents an 8.9-month supply at the
current sales pace, up from an 8.3-month supply in May.
major market measures closed up about 2%. Breadth was 8/1 positive on the NYSE and
up volume was 10X down volume as the HFT
played their games. They are the only folks in the markets judging by the light
volume. European bourses also gained with France up 3%, Germany up 2% and
London better by more than 1%. Oil gained almost $3 to $$79.82 and Gold was up
$4 at $1195. We are getting whiplash.
July 21, 2010
Asian and European markets were
higher overnight. Apple reported
good numbers that beat and is trading $12 higher in the early going. Morgan Stanley, Wells Fargo and U.S. Bancorp
beat and that had given a positive tone to financials. Yahoo missed on revenues although earnings beat and it is trading
$1 lower at $14 support.
We added shares of Yahoo (at
$14.20) to accounts that own Barnes
& Noble on the $1 drop this morning. $14 has been support for the last
13 months. (AP)Yahoo
said Tuesday that its profit increased more than 50 percent in the second
quarter but that its net revenue fell short of Wall Street expectations.
Yahoo’s shares were down more than 6 percent in after-hours trading. Revenue in
the three months ending June 30 totaled $1.6 billion, compared with $1.57
billion in the period a year ago. But net revenue, which excludes revenue it
shares with Web site partners, was $1.13 billion — below the average analyst
expectation of $1.16 billion, according to Thomson Reuters. Tim Morse, Yahoo’s chief financial officer, said
Tuesday that the company experienced “big customer weakness” among its display
advertisers in the United States toward the end of June, with some pushing
orders to July. “It has definitely made us incrementally a little bit more
cautious,” Mr. Morse said. Yahoo’s search business declined 8 percent year over
year. Mr. Morse said the company did not see the gains in profitable search
business that it had expected. Net income in the second quarter was $213.3
million, or 15 cents a share, up from $141.4 million, or 10 cents a share, in
the period a year ago. That was a penny above analysts’ average forecast of 14
cents. Yahoo forecast a revenue range of $1.57 billion to $1.65 billion in the
Some good news:
BP will keep its damaged Gulf of Mexico well sealed today because
there’s no evidence of a leak that could erupt into another gusher like the one
that caused the largest U.S. oil spill, the government said. Pressure inside
the well has risen slowly to 6,834 pounds per square inch since BP sealed it
July 15, indicating oil and gas is not being forced out elsewhere in the well
bore. A seabed natural gas leak about 3 kilometers (1.9 miles) away is from an
abandoned well, National Incident Commander Thad Allen
said yesterday on a conference call.
We have given up listening and reading the news and have instead been
pouring thought mystery novels all summer. The media is awash with negativism
and talk of another depression. Unemployment is terrible at 9% but in the Great
Depression it was 25%. With 9% unemployment that means 91% of folks are
employed. Some may not like those jobs and/or consider themselves underpaid and
underutilized but that is the case in good times and bad.
Social Security, Medicare and Unemployment pay did not
exist in the Great Depression and that is the reason there will not be another.
In 1992-93 there was the same talk as now that the deficit was going to
bankrupt the country. In 1993 Clinton was able to get a tax increase with a one
meager vote majority in the House of Representatives. 8 years later in 2001 all
the poobahs were worried about the deficit beings paid off. Greenspan testified
in favor the Bush tax cuts because he said that if the deficit were retired
there would no longer be U.S. Treasury bonds available for excess cash in the
world to be invested in. Well, we don’t’ have that worry now.
Times are tough but the doom and gloom is media created
for ratings and politically created by the party out of power. Several grains
of salt are needed when interpreting the news these days.
Corporate earnings are improving, and time will allow the
economy to recover. Fear sells and so the cacophonies of terrible prognostications
will continue. The financial system has survived the 2008-2209 meltdowns and
now must spend time rebuilding investor and consumer confidence. Until is does
the fear mongering and wailing will continue; we don’t have to listen and we
Tom Tomorrow: Retirement is for Losers
PRNewswire-FirstCall/ -- Following a
comprehensive review, Liz Claiborne today announced plans to exit its Liz
Claiborne branded outlet stores in the United States
and Puerto Rico. As a result of this decision,
the Company expects the meaningful operating losses related to this business to
be eliminated in early 2011 when this action is anticipated to be completed.
The Company's other outlet stores in the United States
and Puerto Rico for its Juicy Couture, Lucky
Brand, Kate Spade and Kensie brands are not
impacted by this decision.
McComb, Chief Executive Officer of Liz Claiborne Inc., said: "With
the launches of the Liz Claiborne brand at JCPenney and Liz Claiborne New York
at QVC -- both next month -- we're announcing today that we will be exiting our
87 Liz Claiborne branded outlet stores in the United
States and Puerto Rico, the majority of
which will be exited in the coming months."
Mr. McComb continued, "A
number of factors precipitated this decision. Our current fleet of Liz
Claiborne branded outlet stores was originally designed and leased to handle
clearance for many brands in our portfolio -- an outdated consumer proposition
and one that no longer makes economic sense, given the vast changes we have
made to our portfolio and business strategy over the past three years."
Mr. McComb concluded, "In
addition, our corporate strategy allocates the majority of our capital dollars
to our retail-based Direct Brands, while leveraging a stable of Partnered
Brands for additional revenue generation and to help support our growth
opportunities across the Company. Considering the capital efficient,
licensing-oriented model for the Liz Claiborne brand, our organizational energy
and resources are better used to support successful and profitable businesses
at JCPenney and QVC."
In connection with this action,
the Company currently estimates that it will incur non-cash impairment charges
of approximately $7.0 million in the second quarter
of 2010 and may incur additional non-cash charges in future periods. The
Company also expects to record cash charges related to lease terminations and
severance and is in the process of determining these cash charges. The Company
will provide more comments on this process during its second quarter earnings
conference call, which is scheduled for August 5th
Bernanke testified at 1PM that risks to growth in the U.S. economy are
weighted to the downside AND THE ECONOMIC OUTLOOK IS STILL UNUSALLY UNCERTAIN.
On those comments the major market measures move 1% lower after being in
major measures closed lower with the S&P 500 of 1.5% after Bernanke’s
downbeat assessment of the economy. European bourses closed higher before
Bernanke delivered his comments. Oil dropper over $1 to $76.45 and Gold was
lower by $10. Breadth was 2/1 negative and volume was light.
July 20, 2010
Asian and European markets were
down overnight and U.S. futures suggest a 1% lower opening. IBM disappointed and is $4 lower in the early trade. Also Goldman reported several numbers but
the price action (down $2) indicates the numbers didn’t please traders.
Our recent in and then out moves on a number of stocks are the results
of our confusion over the mixed signals the markets are sending. We did think
the bounce off the 1020 level would hold and that was why we increased
exposure...but Friday’s swoon was a bit much for us and so we decided to return
to higher cash position in case lower work is need to wash out the greed
factor. The shares we own all have the ability to double or more in any real
recovery. Verizon and Walgreen are great stocks but we added them as trades and
sold them because they don’t have the percentage gain potential from present
levels as the issues we held. Dell is a commodity stock and the bank issues are
real anchovies since no one really knows what their balance sheets hold and
what time bombs lurk.
(MarketWatch) Goldman Sachs
reported second-quarter earnings of 78 cents a share, taking a hit from its
settlement with the Securities and Exchange Commission and the U.K.'s payroll
tax. Earnings were down from $4.93 a share in the same period last year. Net
revenue for the three months came in at $8.84 billion. Absent the U.K. tax and
U.S. settlement costs, the company would have earned $2.75 a share, compared to
the $2.70 consensus estimate of analysts. Revenue from the firm's trading and
principal investment unit dropped 39% from a year ago, to $6.55 billion this
After a federal subsidy for buyers
expired, housing starts fell 5% in June to a seasonally adjusted annual rate of
549,000, the lowest level in eight months, the Commerce Department estimated.
The drop was worse than the 3% decline to 575,000 expected by economists
surveyed by MarketWatch. Building permits rose 2.1% on the month, due to a 20%
gain in permits for multi-family units. Permits for single-family homes fell
3.4% to a seasonally-adjusted annual rate of 421,000, the lowest level since
UnitedHealth Group (Health Insurance companies continue to
prosper) said second-quarter net earnings rose to $1.12 billion, or 99
cents a share, from $859 million, or 73 cents a share, in the same period last
year. A survey of analysts had produced a mean estimate of 75 cents a share.
The Minneapolis-based provider of health benefits and services said
second-quarter revenues rose 7% to $23.3 billion. UnitedHealth said it now
expects full-year 2010 revenues of around $93 billion and net earnings in the
range of $3.40 to $3.60 a share. Analysts had forecast full-year earnings of
$3.34 a share.
Business Machines late Monday reported a 9% rise in
second-quarter profit, even as sales fell short of Wall Street expectations.
The company said net income rose to $3.4 billion, or $2.61 a share, from $3.1
billion, or $2.32 a share, in the same period last year. Revenue rose 2% to
$23.7 billion as exchange rate fluctuations knocked around $500 million off the
total. Analysts had expected the group to report earnings of $2.58 a share on
revenue of $24.17 billion.
An hour into the trading day and
the major market measures are over 1% lower. Today is Turnaround Tuesday and if
the bulls can’t rescue their trend today the rest of the week may be sad for
reports on the flood of financial institutions offering some version of what
you might call Black Swan insurance -- products, funds, etc. designed
specifically to hedge against or pay off in the event of tail risk.
PIMCO is the latest to launch a
Black Swan product, though of course it's Mr. Black
Swan himself Nassim Taleb who has been at this the longest, with his
various funds (Empirca, and now Universa, which he advises) designed to pay off
in the event of an extreme event.
There's a lot to be skeptical
about here, quite obviously. For one thing, as Felix Salmon
recently pointed out, designing these products are really, really, hard, since
even if you can basically predict the crisis, knowing how various assets will
actually move in the event of them is dicey, at best.
What's scary are not the products
themselves, but rather what the products indicate about Wall Street's mindset.
Nobody wants to de-risk, in the
sense that they want to actually take some money off the table. Instead -- and
this is something FT columnist
and author John Authers argues -- it's all about pricing and
quantifying risk, and of course hedging against it.
And hedging against risk, and
actually de-risking are not the same thing.
The proliferation of these
products (Deutsche and Citigroup are also offering them) is not just an
indication that Wall Street is peddling fear, but that it continues to pedal
the idea that the solution to risk is to buy another product.
issues are absolutely the thing
for fashion magazines—a few short years ago, they were all competing to see
whose issue could outweigh a watermelon. The last couple of years? Not so great.
This year? Well...better, at
A year ago at this time, the
recession was still in full swing, and there's not a more frivolous-seeming
investment than a dozen glossy pages in Vogue's September issue. For that
reason, Vogue's ad pages were down more than a third
last September, and other fashion mags saw declines in the 20% range. This
year? Vogue is up
23%, to 529 ad pages. Other fashion magazines are also seeing
increases—Glamour is up 57%(!), Harper's Bazaar is up 12%, and
InStyle is up 16%.
Of course, that's not a
full-fledged comeback. That's an increase over last year's numbers, which were horrible. Vogue, for
example, is still well below its rah-rah 2007 peak of 727 ad pages. A better
litmus test of magazines' health may come next
September, when they'll have less apocalyptic numbers to compare themselves to.
Then again, a forecast
last month predicted that magazines' print ad revenue won't start
rising past pre-recession levels until 2013. Assuming everyone can hang on that
The major stock
measures reversed a 1% loss and the bulls were able with the help of HFT to
turn the day into a gainer. The S&P 500 was up 1% as was the NAZZ while the
DJIA gained 0.75%. Breadth was 10/1 negative in the first hour and closed 3/1
positive. Volume was light and the rally was anemic but steady. Higher is
better than lower. European stocks ended lower as a late rally in the
basic-resources sector helped offset another round of weak U.S. housing data
and disappointing results from Goldman Sachs. Goldman finished $4 higher after
trading $5 lower in the early going. Gold ended at $1196 and Oil rose pennies
July 19, 2010
Friday’s action surprised us and suggests that there is more downside work.
The failure of the banks after the passage of the Financial Regulation bill was
not encouraging since the banks got most of what they wanted and what they
didn’t get they will over time through adjustment and rule making. We are
taking advantage of this morning’s up opening to sell our bank positions (FITB, C, and BankAmerica) as
well as Dell, Verizon, Walgreen, Gap and Boston Scientific. We
also reduced positions in Barnes & Noble in many accounts. That will reduce
our overall exposure in the Model and many other accounts to 35%.
Merger and takeover news have
futures higher even though Asia and Europe were lower overnight.
major market measures rallied at the opening, then dropped to negative
territory for a few hours but managed to close up 0.5% on the day in light
trading. Breadth was 3/2 positive. European stocks fell Monday, erasing earlier
gains after disappointing U.S. housing data knocked sentiment, while gold fell
and oil prices rose slightly.
July 16, 2010
Goldman Sachs settled with the SEC for a mere $550 million- a lot
of money to us but chump change for them. $250 million goes to the aggrieved
investors and $300 million to the SEC.
$500 million should go to the aggrieved and $50 million to the SEC to
pay for the time spent. But then that is not how the SEC works. They too need
to get their bite form the aggrieved. On the news Goldman is up another $6 per
share in the early trade.
GE, BankAmerica and Citi all beat on earnings but all are
trading lower in the early going. We own all three. Google missed and is down 5%.
U.S. futures indicate a lower
opening. Today is the second and final Triple Witching for the month. (MarketWatch)
Asian stocks endured a rough session, with the Nikkei 225 sliding 2.9% in Tokyo
on worries about the economy. European stocks veered between gains and losses
through the day, with German utilities struggling but BP advancing. The euro
reached $1.30 for the first time since early May.
(AP) -- General Electric Co.
posted its first quarterly profit gain since late 2007, helped by cost cuts and
improvements at its beleaguered financing business.
The results from one of the
world's largest industrial and financial companies suggest the economic
recovery may still have steam, even as other indicators show a slowdown in
growth. GE is trying to right itself after the recession and financial crisis
punished its profits over the past two years.
Revenue fell 4 percent, in part
because GE is shrinking the size of GE Capital, its financial arm. GE was also
able to cut costs by nearly $3 billion.
GE had net income of $3.0
billion, or 28 cents per share. That was up from $2.6 billion, or 25 cents per
share, a year earlier.
GE said orders are improving in
its industrial units that make everything from jet engines to power plant
equipment. GE Capital, which makes loans ranging from credit cards to office
buildings financing, also posted a 93 percent gain in profits to $830 million.
It was bolstered by lower losses.
(AP) -- Citigroup says its
second-quarter net income dropped 10 percent to $2.7 billion even as its loan
losses fell. The drop in income reflects the bank's sale a year ago of the
Smith Barney brokerage, a transaction that inflated its earnings at the time.
Citigroup Inc. joins JPMorgan
Chase & Co. and Bank of America Corp. in reporting earnings that got a lift
in the second quarter as losses from failed loans fell. That's a sign that
consumers are having an easier time paying their debts. But Citi, like the
other banks, also had a decline in trading revenue because of the stock
market's plunge this spring.
Citigroup says it earned $2.7
billion, or 9 cents per share, during the April-June period. That compares with
$3 billion, or 49 cents per share, during the same quarter last year.
(AP) -- Bank of America said
Friday its second-quarter net income rose 15 percent to $2.78 billion as
improvements in the company's consumer loan businesses made up for a drop in
The bank's results beat
expectations and provided further evidence that losses from failed loans at the
nation's big banks may have peaked in the first half of 2010. Bank of America
says it reserves to cover losses from loans fell 17 percent from the first
quarter of this year and 39 percent from a year ago. JPMorgan Chase & Co.
on Thursday also reported improvements in its consumer loan business.
In a statement, Bank of America
chief executive Brian Moynihan said the company's "credit quality improved
even faster than we expected." Bank CEOs have been cautious throughout the
aftermath of the 2008 financial crisis when reporting progress in their loan
businesses. Economists and investors are looking to those loan loss levels as
an indicator of how well the economic recovery is faring.
Bank of America's second-quarter
net income, which reflected the payment of dividends on preferred stock,
amounted to 27 cents per share. A year ago, the bank earned $2.42 billion, or
33 cents per share. Analysts expected profit of 22 cents per share in the most
recent quarter, according to Thomson Reuters. Revenue totaled nearly $30
billion in the quarter.
The company's trading business,
which includes the Merrill Lynch operation, had a drop in income because of the
steep dive the stock market took during the spring. JPMorgan Chase reported a similar
slump in trading income.
From the BLS report on the Consumer
Price Index this morning:
The Consumer Price Index for All
Urban Consumers (CPI-U) declined 0.1 percent in June on a seasonally adjusted
basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12
months, the index increased 1.1 percent before seasonal adjustment.
The index for all items less food
and energy rose 0.2 percent in June after increasing 0.1 percent in May. ...
The 12-month change in the index for all items less food and energy remained at
0.9 percent for the third month in a row.
The index for owners' equivalent
rent also rose 0.1 percent, its first increase since August 2009...
Even with the slight monthly
increase, Owners' equivalent rent (OER) is down year-over-year.
The general disinflationary trend
continues - CPI is unchanged over the last 8 months - and with all the slack in
the system (especially the 9.5% unemployment rate), CPI will probably stay low
or even fall further.
We added to BankAmerica
as it dropped $1 and we also repurchased Fifth
Third which is down 7% on the day as the gurus suggest that the new
financial bill is going to decimate banks earnings. And they also have a bridge
The major market measures are
down 1.5% after two hours of trading.
(Bloomberg) Confidence among U.S.
consumers slumped in July to the lowest level in a year, signaling the biggest
part of the economy is losing momentum. The Thomson Reuters/University of
Michigan preliminary sentiment index
decreased to 66.5, the lowest since August 2009, from 76 in June. The reading
was lower than the most pessimistic forecast of economists in a Bloomberg News
survey with a median projection of 74. The report showed a record-low share of
Americans expected their incomes will rise in the next 12 months, underscoring
the lack gains in employment. Declining confidence may further restrain
consumer spending, which accounts for 70 percent of the economy, and limit the
speed of the recovery in coming months. “It feels like a wipeout all of a sudden,”
Basile, an economist at Credit Suisse in New York who had the lowest
forecast in the Bloomberg survey. “We’ve basically wiped out all the gains
we’ve had for some time. It builds the case for moderate growth in consumer
spending in the second half.”
today wasn’t fun. The major measures lost 3% and breadth was 4/1 negative (all
100 issues on our screen were red) with down volume 20 times up volume. Volume
was summer Friday Triple Witching light.
July 15, 2010
tells us that some folks are having problems looking at their accounts on
E-View. It seems clients have to re-register to gain access. Since we are not
computer literate please call Kathy at 1-800 -793-3665 if you need assistance
Twelve out of thirteen days down followed
by eight straight up days is enough to confuse even the most diehard
technician. The markets are controlled by the HFT folks and short term trends
are exacerbated by them. With option/futures expiration tonight and tomorrow
(Triple Witching) any action is possible. As the trading day begins futures
suggest a higher opening.
The major market measures jumped
1.5% on Tuesday followed by consolidating action yesterday until a pop a few
minutes before the close. With an 18% correction under its belt and an 8% move
off that correction the S&P 500 should but probably won’t pause.
The rally this week was
occasioned by Alcoa and CSX beating and then suggesting that the outlook going
forward was positive for each of them. On Tuesday night Intel reported its most
profitable quarter ever with excellent profit margins and a rosy forecast and
that helped contain any reaction to the large move Tuesday. This morning JP
Morgan reported good numbers on less than expected loan write-offs. Even the
bears have to take into account real data from real companies. Howling the good
news will continue among the major blue chips is the question. GE reports
(WSJ) Asian markets climbed
Wednesday as Intel's strongest-ever quarterly results buoyed technology sector
shares, while robust economic data in Singapore also aided sentiment. Japan
gained 2%. China's
gross domestic product grew 11.1% in the first half from the same period last
year, after expanding 11.9% in the first quarter, as Beijing's stimulus
spending continued to wind down and the effect of tightening measures began to
Jobless claims dropped to 429,000
last week. The major market measures opened lower reversing the futures
We reduced our positions in Alcoa and Goodyear in
this rally effectively lowering our cost price on each. The reaction to Alcoa
good news after the first day has been tepid and we decided on a smaller but
still significant Goodyear holding in accounts.
Claims Plummet, Producer
Inflation Abates and Manufacturing Loses Steam
Diane Swonk, Chief Economist Mesirow Financial.
Unemployment claims dropped to 429,000, one of the lowest levels
this year. Much of the fall off in claims, however, could be attributed to
a drop in the number of people eligible for unemployment insurance - more
than a million people lost extensions to unemployment insurance on July 1.
Continuing claims - which is a better measure of the underlying health of
the labor market, but still highly volatile - went the other direction and
surged during the most recent week, suggesting that those who are out of
work are still having a hard time getting a job in this economy. (That
should not be a surprise to those who read this report.)
On net, hiring is still lagging, especially in the small-business
sector, which has been critical to employment growth in the past. Indeed,
small business confidence actually dropped in June, as concerns about
future business opportunities intensified.
Separately, producer prices continued to moderate, falling 0.5
percent, mostly in response to lower food prices. Energy prices were also
down slightly, but not the primary mover. Core producer prices were
essentially flat - up 0.1 percent - and supported by cigarette prices ("sin"
tax increases), which do not represent much of a threat to inflation.
Indeed, the Federal Open Market Committee (FOMC) confirmed that most of its
members were still more concerned about disinflation than inflation when it
released the minutes of its June meeting this week.
Finally, manufacturing activity softened with the New York Empire
State Manufacturing Index moderating much more than expected, from 19.57 to
5.08 in June, while the Fed's index of industrial production inched up 0.1
percent in June, after surging 1.3 percent in May. Producers are starting
to curtail production after rebuilding inventories that had overshot on the
downside earlier in the year. The recent weakness in retail sales will tend
to reinforce this trend over the summer.
The Bottom Line: Growth appears to have decelerated fairly sharply
since the start of the year, with the economy growing somewhere close to 2
percent and 3 percent in the second quarter. This would make it one of
the weakest quarters of the recovery, and underscore the difficulty of
recovering from a financial crisis rather than a more traditional inflation
or Fed-induced recession. The dog days of summer have begun, a bit earlier
than we would like.
Former WellPoint VP Liz Fowler to Implement Health
Remember Liz Fowler? The former
WellPoint VP (WellPoint is a health insurance company) whom William
Ockham noted was the literal
author of the health care reform bill?
I’m sure you’ll be thrilled to
learn that WellPoint’s former VP will be in
charge of consumer issues and oversight as our country implements
the WellPoint/Liz Fowler health insurance bill.
Liz Fowler, a key staffer for
U.S. Sen. Max Baucus who helped draft the federal health reform bill enacted in
March, is joining the Obama administration to help implement the new law.
Fowler, chief health counsel for the Senate Finance Committee, which Baucus
chairs, will become deputy director of the Office of Consumer Information and
Oversight at the U.S. Department of Health and Human Services.
“Liz Fowler is an extremely
knowledgeable and dedicated adviser, and while I’m very proud of her new
position, she will certainly be missed at the committee,” Baucus said in a
Obama and fellow Democrats have
been promoting what they say are positive aspects of the reform bill, while the
Health and Human Services Department is drafting many rules to implement the
So Liz Fowler, WellPoint’s gal,
will be writing the rules implementing the law (the rules that will determine
whether this is a worthless bill or a decent one), particularly those designed
to protect (cough) consumers and oversee companies like…WellPoint.
This is the kind of “oversight”
that resulted in the BP disaster.
And remember Obama’s
lobbyist restrictions? The ones that prevent someone from working in
the Executive Branch on an issue that they’ve lobbied Congress on for two
years? Fowler was not a registered lobbyist; rather, she was
the VP of Public Policy and External Affairs. But in any case, it appears that
Fowler returned to
MaxTax Baucus’ staff on March 4, 2008, so nothing prevents the
former VP of WellPoint from writing the “consumer and oversight” rules that are
the only thing protecting Americans from policies — like WellPoint’s — that
It’s a nice trick: send your VP
to write a law mandating that the middle class buy sh*tty products like yours,
then watch that VP move into the executive branch to “oversee” the
implementation of the law. What could go wrong?!?!
minutes into the final hour of trading Goldman Sachs jumped $5 per share. Right
after that CNBC had a flash news item on the TV screen that the SEC was going
to make a significant announcement at 3:45 PM. There is also news that no oil
is flowing into the gulf after the start of BP’s well test. BP is up $2 on that
news and we certainly hope the cap works. Both those news items induced a rally
in the major measures from down almost 1% to slightly mixed at the bell. Breadth
at the close was flat and volume for the day was summer light.
Citi, and GE report Friday morning.
stocks finished modestly lower as downbeat economic news from the U.S. raised
concern about the pace of the recovery, offsetting strong earnings from J.P.
Morgan Chase & Co. and receding fears about the euro-zone crisis. Oil ended
at $76.93 and Gold unchanged at $1208.
July 14, 2010
We will be traveling Tuesday and
Wednesday so our next post will be on Thursday July 15.
July 13, 2010
We will be traveling Tuesday and
Wednesday so our next post will be on Thursday July 15.
July 12, 2010
We will be traveling Tuesday and
Wednesday so our next post will be on Thursday July 15.
Asian markets were higher
overnight except Japan where the ruling party lost control of the upper house
in elections. European bourse indexes are higher and U.S. futures lower as the
trading day begins.
(MarketWatch) Shares in BP (BP)
gained sharply in London on speculation that the oil giant may be sold in parts
or as a whole and as the firm said the cost of the Gulf of Mexico spill had
reached $3.5 billion. The Sunday Times (of London) newspaper said Exxon Mobil
(XOM) and another firm that it believed to be Chevron (CVX) had sought U.S.
regulatory clearance to make a bid worth as much as $150 billion.
The U.S. is back to two telephone
companies (with three others trying) in the U.S. and now it looks like it will
be back to three Oil companies. John D Rockefeller would be proud. (Exxon is
the Old Standard Oil of New Jersey, and Chevron is the old Standard Oil of
California. BP is Amoco which is the old Standard Oil of Indiana plus Standard
Oil of Ohio.
(AOL) Alcoa (AA)
kicks off second-quarter earnings season after
Monday's closing bell, and if recent history is any guide, the aluminum giant
has a 50-50 chance of beating Wall Street's profit and sales estimates,
according to data from Thomson Reuters. But, really, who cares? Of much greater
importance is what the Dow component -- and the slew of companies to follow --
says about future growth prospects. The market, after all, is forward-looking,
says Doreen Mogavero, CEO, co-founder and head of floor trading at Mogavero, Lee & Co. "It's all
about outlooks," Mogavero says. "With all the uncertainty we've seen,
it's going to be very interesting to see what CEOs and CFOs have to say."
See full article from DailyFinance: http://srph.it/def6Uu
Less is More:
(Bloomberg) -- Bank of America Corp. and Wall Street firms that notched perfect
trading records in the first quarter are now depending on an accounting benefit
last used in the depths of the credit crisis to prop up their results. Bank of
America, the biggest U.S. bank by assets, may record a $1 billion second-quarter
gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an
accounting rule that allows banks to book profits when the value of their own
bonds falls, probably represented a fifth of pretax income, Horowitz wrote.
Because the banks bonds are
trading at less than par the accountants let the banks book a profit on the
difference between the price of the bonds –say $95- and the maturity value
$100. The theory is that the banks could buy the bonds back at $95 and realize
a $5 profit. Only in America.
In order to rescue
Social Security there is talk that the retirement age will be raised to 70.
Heck, raise the retirement age to 80 and Congress can use the money saved to
pay off the National Debt.
major market measures floated plus or minus a bit Monday in light volume as
traders awaited Alcoa’s earnings after the close and other biggies this week
like Intel on Tuesday night and JP Morgan Thursday morning with BankAmerica and
Citi on Friday. European stocks closed mainly higher and Oil lost $1.20 to
$74.90 while Gold dropped $12 to $1198.
July 9, 2010
Asian and European markets were
slightly higher overnight. China is
going to allow Google to operate and shares of Google are higher on the news.
U.S. futures indicate a lower opening. On top of three higher days traders have
to decide whether they wish to be long or short over the weekend. Investors
remain on vacation.
(NYT) More than one in seven
homeowners with loans in excess of a million dollars are seriously delinquent,
according to data compiled for The New York Times by the real estate analytics
firm CoreLogic. By contrast, homeowners with less lavish housing are much more
likely to keep writing checks to their lender. About one in 12 mortgages below
the million-dollar mark is delinquent.
Our guru - who is bearish - says that 1171 needs to hold on this rally
and 1220 needs to be recaptured if the bull rally is to resume.
Three Reasons Why Going Private
May Be the Best Plot Twist for Barnes & Noble
By Sarah Weinman
See full article from DailyFinance:
There was no sugar coating the losses
that Barnes & Noble (BKS)
reported last week. The largest brick-and-mortar bookstore chain's stock
started nosediving to near-record lows after it released its quarterly report
and a weak outlook that left Wall Street analysts and investors disenchanted to
say the least.
Analysts now expect
B&N stock to fall even further. With the ongoing fight between
billionaire and key shareholder Ron Burkle and company executives Leonard and
Stephen Riggio -- brothers who together hold the biggest stake in B&N --
playing out in a Delaware court on Thursday, signs point ever more clearly to
the possibility that Barnes & Noble will go private. And that just might be
the best step for the company to take.
The Case for Taking Barnes & Noble Private
A public company may choose to go
private for a whole host of reasons. It might be investing more of its time and
capital on new initiatives that take away short-term success but may better
prepare it for the long haul. It may be tired of the stringent regulations and
added expenses placed upon public companies since the Sarbanes-Oxley Act --
recently upheld by the
Supreme Court -- was passed in 2002. It may be facing internal
battles among shareholders that take time away from the business of running a
company. And it may feel that a protracted stock drop precipitated by factors
not necessarily in its control may also interfere with a genuine chance at
turning things around.
The idea that Barnes & Noble
could go private was most recently
brought up by publishing industry newsletter Publishers Marketplace.
But idle talk seems to have more force attached as the company increasingly
fits the bill in almost every case.
Reason One: The eBook Gamble
With the release of its Nook
e-reader in November 2009, Barnes & Noble has made an aggressive bid to go
after the e-book market and challenge Amazon (AMZN),
which holds the dominant market share thanks to the Kindle. Like Amazon, Barnes
& Noble has developed applications for every conceivable device --
including Apple's (AAPL)
iPad. Unlike Amazon, it doesn't have the luxury of its core business -- the
brick-and-mortar store sales -- buttressing the significant investments needed
to get its digital side truly developed. Going private might alleviate the
stress of producing results too quickly for shareholders and give Barnes &
Noble the time and space it needs to stake its rightful e-book territory.
Wall Street had forecast a profit
for the new fiscal year, but Barnes & Noble now projects that it will break
even at best -- and more likely lose up to 40 cents a share -- as a result of
its plan to significantly increase investment in its Nook e-reader. Of course,
investors aren't too happy about the losses.
It's something of a "damned
if they do, damned if they don't" scenario. Doing nothing would also make
investors unhappy. Barnes & Noble, however, has reason to believe its
investments will pay off. After all, the company's digital revenues jumped 51%
in the fourth quarter of 2009, and its share of the e-book market has increased
an order of magnitude, from 2% before the Nook was released last November to
To reach projected goals of a 25%
share of the e-book market by 2013 (which would yield somewhere between $3
billion and $5 billion in revenue) and a greater share of the overall book
market, the company will need time and money to make these results happen. If
shareholders balk, then, as rumored in publishing and investor circles, private
equity would be more than happy to swoop in and save the day in the hopes such
an investment will pay off three or four years from now.
Reason Two: The Proxy Battle
The increasingly acrimonious
fight between the Riggios and the company's third-largest stakeholder Ron Burkle could be
another catalyst for Barnes & Noble to go private. For the last several
months, Burkle and Barnes & Noble have battled it out over the
billionaire's rapid stock grab and the company's implementation of a
"poison pill" measure to prevent Burkle from buying up more than 20%
of total shares. Relations soured so much that Burkle filed
a lawsuit against Barnes & Noble's board of directors -- and
specifically, the Riggios -- in early May, alleging the poison pill measure
"is unfair and directors have breached fiduciary duties of loyalty, care
and good faith."
will begin on July 8, and it couldn't come at a more fraught time
for both parties. The large stock drop has devalued Burkle's stake in a big
way, likely increasing his ire about how the company is being run. The overall
loss in value also means that Barnes & Noble can hardly afford what looks
to be a long and drawn-out battle with just two months until the next board
meeting, where a proxy fight is expected to be waged -- or another option, like
going private, is put on the table.
Reason Three: The Price is Right
At the moment, Barnes &
Noble's current market capitalization is approximately $750 million -- a lot
less than at this time last year, but not so anemic that the company can't
attract interest in private equity. With eyes on a digital future and beefing
up infrastructure, Barnes & Noble is well suited for a cash infusion or two
by companies seeing promise and renewed strength after a period of turnaround.
Going private also may get around
the Burkle/Riggio battle, which stems in part from Burkle's belief that the
company has one set of rules for shareholders like himself and another for its
chairman (Leonard) and former CEO (Stephen). Burkle has made noises about
engineering a private takeover, and DailyFinance has already speculated that
such a scenario might emerge involving Burkle and money management firm Aletheia
Research and Management, another significant stakeholder. If B&N
does not have to answer to the public, it may be able to take even more risks
not only to stay alive in the book business, but eventually thrive.
Hitching a post to private equity
produces as many, if not more, complications as staying public with declining
stock prices. Opting to go private is a
time-consuming affair that requires all shareholders to approve the
switch. And if they don't, they may revolt in the form of lawsuits. What's
certain is that Barnes & Noble cannot afford to stumble any further.
Leaving for private pastures may smooth the ride as the company tries to secure
its place in the new digital publishing landscape.
major market measures meandered mellowly as traders and tourists tasted sweet
summer scenes rather than tussling with the trials of totally tormenting
trading. At the bell market measures were higher for the fourth day running.
Breadth was 2/1 positive and volume summer Friday light. European shares closed
higher Friday-also for the fourth straight session- to wrap up the best week in
a year. Gold was up $14 at $1210 and Oil gained 70 pennies to $76.22. With the
S&P 500 rally of 5% coming after a two month 18% retracement (need a 22%
rally to get back to where the drop began) we will limit our celebrating to one
July 8, 2010
This is really cool:
Foreign markets played catch up
overnight with the U.S. markets of yesterday. U.S. futures indicate a higher
opening as retail sales numbers were OK and Jobless claims were a bit better
than expected at 454,000.
(Bloomberg) -- The number of
Americans applying for jobless benefits fell more than forecast last week.
Initial claims for benefits decreased by 21,000 in the week ended July 3 to
454,000, Labor Department figures showed today in Washington. Economists had
forecast claims would fall to 460,000 from an initially reported 472,000 for
the prior week, according to the median of 36 projections in a Bloomberg
(BUSINESS WIRE)—Gap today reported that June 2010 net sales were up 2 percent from
last year. Net sales for the five-week period ended July 3, 2010 were $1.31
billion compared with net sales of $1.29 billion for the five-week period ended
July 4, 2009. The company’s comparable store sales for June 2010 were flat
compared with a 10 percent decrease in June 2009. Comparable store sales for
June 2010 were as follows:
Gap North America: negative 3 percent versus
negative 10 percent last year
Banana Republic North America: positive 6
percent versus negative 20 percent last year
Old Navy North America: flat versus negative 7
percent last year
International: flat versus negative 5 percent
“June was a difficult month with
lighter traffic than we anticipated,” said Sabrina Simmons, chief financial
officer of Gap Inc. “Looking ahead, we remain committed to our goal of driving
top line sales balanced with ongoing operational discipline.” Year-to-date net
sales were $5.70 billion for the 22 weeks ended July 3, 2010, an increase of 5
percent compared with net sales of $5.45 billion for the 22 weeks ended July 4,
2009. The company’s year-to-date comparable store sales increased 3 percent compared
with an 8 percent decrease last year.
Gap dropped 8% on the news to
$18.25 after trading at $26 last month. With earnings projected at $1.80 we
added shares to accounts.
HFT boys and girls decided to run them up and the end. At the close the major
measures were up about 1%. Volume was moderate and breadth was 3/1 positive.
Oil gained $1.80 to $75.86 and gold rose $3 to $1198.
July 7, 2010
As we were walking our perimeter control animals last
night the thought came to us that the present market action reminds of 1982. It
was the second year of the Reagan Presidency and his poll numbers were anemic
and the markets moved inexorably lower into August. The low was made on Friday
August 13. There were two seers called Dr Doom and Dr Gloom. One was Henry
Kaufman from Salomon Bros. and the other was Dr Gloom (Albert Winjolower) from
first Boson. Those two firms were the leading investment houses of that time. The
past few years the media has anointed Mohamed El Arian of Pimco and Nouriel
Roubini from NYU as the current prophets of doom and gloom. There is also a
Friday the 13th this year and the markets have been moving
inexorably lower since the top in April this is the second year of the Obama
presidency and the media is predicting political doom for Obama. With 9%
unemployment the economy can’t recover according the experts.
This article from the NJ Star Ledger reviews 1982 and the
New Jersey Star Ledger--Obama shares the blame for this impatience. He promised too much, too
quickly. Worse yet, he never foresaw how swiftly joblessness would jump during
the worst economic decline in almost 80 years and how stubbornly it would
persist. But he should have. For there's a striking precedent for what Obama
faces today. It's the Reagan economic recession of 1981-82. On taking office in
January, 1981, Ronald Reagan, like Obama, inherited an economy
in a downward spiral, not quite as bad as today's but close enough. The Gipper
slashed corporate and individual tax rates to boost the economy and, in his
sunny style, predicted not only a recovery, but a balanced budget. Didn't
happen, at least not as fast as he forecast. Didn't come close. By November,
1982, unemployment reached slightly more than 10 percent -- higher than today's
-- with 9 million-plus out of work, the most since the Great Depression.
Business failures reached 17,000 that year, the second highest since the 1930s.
The public, which had given Reagan a landslide presidential victory, lost
patience, as it almost always does. In that year's midterm elections,
Republicans lost 27 seats to the Democrats. And by January, Reagan's approval
rating had plummeted to 35 percent. As a re-election candidate, the smart money
said, the Gipper was a dead-man walking. We all know that didn't happened. The
lesson here, as Reagan demonstrated, is that we should be wary of public
impatience and premature polls. The economy, as it usually does, recovered, as
it probably will for Obama. But it took almost two years for the Reagan
recovery to arrive -- as it likely will with Obama. Reagan, the object of
national rejection in early 1983 won a massive re-election victory in
1984.Obama's fate depends, as Reagan's did, on the economic recovery he
promised. And he'll pay at the polls if he doesn't deliver, beginning with the
2010 midterm elections. The bulk of infrastructure spending -- the heart of
Obama's stimulus plan to put people to work in shovel-ready bridge, highway,
tunnel, school and other construction work -- won't turn into lots of actual
paychecks until sometime next year. That's likely too late to help Obama and
Democrats in the midterm elections. But it might be just in time to let Obama,
like Reagan, turn the recovery corner in time for his own re-election.
Te reality is that this is 2010 and not 1982 or 1932.
Markets are never the same but they do sometimes rhyme. The 90-% move higher from
March 2009 to April 2010 was unprecedented. And a serious correction was need
to clear the air and prepare a base for an eventual move higher when economic
numbers begin to suggest further recovery.. We are now experiencing that
correction. The 2008-2009 collapse occurred because markets were worried and
confused about the ability of the financial system to withstand the losses from
stupid investment decisions and greed that threatened the capitals structure of
the country. The Fed did its job and stabilized the system. We may not have
liked how they did it but they did do it. It is now apparent that for the
present the financial system is not going to collapse.
Unlike 1932 there are enough automatic payments going
into the system on a daily basis from Social Security and Medicare and defense
spending and pension payments etc. that the collapse of economic activity that occurred
in the 1930s can’t occur again. As long as the financial system is stable
markets have no reason to crash. That doesn’t mean they can’t- anything is
possible witness May 6 - but the odds favor stability.
Our maximum correction target remains 950 on the S&P 500
which is 7% lower from here. We like the stocks we own and will be adding to
them on any further correction.
(MarketWatch) Asian stocks
largely declined Wednesday after weak U.S. data refueled worries about the
strength of the global economic recovery. China said it's not considering
dumping its U.S. debt holdings, saying it has adopted a "go with the
flow" attitude on managing its stockpile of foreign reserves. European
stocks were mostly weaker, with banks and mining stocks lower, though BP
continued to bounce off lows as CEO Tony Hayward visits the Middle East. Oil
has a $73 handle which is higher and Gold has rebounded a bit form its $15 sell
off yesterday in the early going.
Get Real - This is Not 1932
Brian S. Wesbury - Chief
Economist First Trust
Robert Stein, CFA - Senior
Economist First Trust
Want to be invited to “A” list parties? Want people to think you
are smart? Then, don’t smile and don’t say anything positive – especially
about the economy. Pessimism has become so pervasive that people will
believe just about anything, as long as it is negative.
Over the July 4th weekend, after a jobs report that showed 83,000 new
private sector jobs were created in June, the Drudge Report had not one but two
headlines that compared the US economy of 2010 to that of 1932. In other
words, the US is back in Depression. This is a complete over-reaction and
is indicative of the severe case of economic hypochondria that seems to have
gripped the nation and the world.
One symptom of this disease is that common sense is suspended. The
simple explanation is tossed aside and data releases are dredged and sifted to
find the most dire possible explanation for any economic information.
For example, every ten years the United States Government conducts a
census, and every ten years the government hires hundreds of thousands of very
temporary workers to help in the effort. Sometime between April and June
total employment goes up and down by an amount that often swamps the underlying
trends of employment.
In May, total payrolls increased 433,000, but then fell by 125,000 in
June. So rather than explain this to people, the Pouting Pundits of
Pessimism said things like “all the jobs in May were government jobs.” And
then last Friday, after the June jobs report, they said “jobs fell for first
time in seven months.” Both of these reactions were misleading.
They could have said “once we adjust for the census, private sector
payrolls increased by 33,000 in May, and then accelerated in June to
83,000.” While both months were disappointing when compared to previous
recoveries, the data shows six consecutive months of private sector job
Another interpretation that defies common sense involves labor force
data. When 805,000 more people said they were looking for a job in April,
the pessimists said, “see how many people had been discouraged…the unemployment
rate will never fall as they start looking again.” And in June, when the
labor force fell by 652,000, they said, “this is the only reason that the
unemployment rate fell.”
This is crazy. It defies common sense. Economic data is
volatile, so quarterly data might be better. And in the second
quarter the US added 357,000 private sector jobs – more than 50% greater than
the 236,000 added during the first quarter.
New orders for durable goods, a leading indicator, are up 10% at an
annual rate in the past three months. Excluding transportation, they are
up 25%. If we look at just machinery orders, they are up 63% in the past
three months and 23% in the past twelve months. This is not a depression.
Yes, housing has fallen. But what should we expect after a huge
government program to support housing activity ends? Remember “cash for
clunkers?” Activity was artificially boosted by the program, then it fell,
then it recovered as the normal forces of economic activity kicked in
again. The same thing will happen with housing in the months ahead.
So, could we be repeating 1932? We suppose anything is possible,
but these fears are based on a faulty comparison with history. In 1932,
the M2 measure of the money supply fell by 16.5% - the third out of four
consecutive yearly declines between 1929 and 1933. Meanwhile, Herbert
Hoover pushed through the largest tax hike in American history. The lowest
tax rate rose from 1.5% to 4% (at $1 dollar of taxable income), the 6% rate
(which kicked in at $10,000) rose to 10%, and the top rate more than doubled
from 25% to 63%.
Today, the M2 measure of money is growing and tax rates, while
scheduled to go higher in 2011, are nowhere near the levels of the
1930s. And there is no Smoot-Hawley Tariff Act.
None of this is to say that the government is not making it more
difficult for business. Clearly, the uncertainty of new laws, spending,
taxes and regulations is throwing a wet blanket over the entrepreneurial side
of the American economy.
But two things are true. First, productivity is so strong that the
economy is growing despite massive increases in the size of
government. The US is creating jobs, even if the rate of growth is less
than previous recoveries. Profits are still rising. In fact, analysts
are still raising earnings estimates.
Second, the market has so much negativity priced in, that it is cheap
on just about any basis. Based on forward earnings, the PE ratio for the
S&P 500 is under 12. And our capitalized profits model shows that
stocks are severely undervalued. Based on very conservative inputs, we
continue to believe the fair value for the Dow Jones Industrial Average is
14,500. Pessimism creates value. Optimism has traditionally been
rewarded. We remain optimistic.
The major measures are up 1.5% again this morning with the S&P 500
at 1040 resistance after two hours of trading. Today’ rise was firmer and seems
more sustainable than yesterday’s but we don’t under estimate the ability of
the HFT to ruin any party. As long as they are on our side we are content but
when they join the bears we want HFT eliminated.
The Mortgage Bankers Association reported
this morning that refinance activity increased again:
The Refinance Index increased 9.2
percent from the previous week and is the highest Refinance Index observed in
the survey since the week ending May 15, 2009. ...The refinance share of
mortgage activity increased to 78.7 percent of total applications from 76.8
percent the previous week, which is the highest refinance share observed in the
survey since April 2009.
In case 1040 on
the S&P 500 continues as resistance we took a scratch gain and a scratch
loss respectively in KBE and ANN in our more aggressive accounts that owned
them. Both are anchovies that we have been underwater on since purchase and we
are less so today. We added shares of Citi to accounts that own the company to
make the position worth the effort.
Finally we had a strong green day. June 18 was
the last time we used a green arrow. We’ll take it but we have a feeling it may
be a one and done affair. Individual retailers report tomorrow and the numbers
need to match or exceed expectations to continue today’s rally. The DJIA and
S&P 500 we both up over 2% and the NAZZ jumped 4%. Volume was light but at
least we will enjoy the evening. Breadth was 5/1 positive and up volume was 16
times down volume on NYSE stocks. But with HFT trading that number is meaningless.
Shares in Europe reversed early losses as
bank stocks led a late, sharp rally that helped major measures finish in
positive territory. Gold gained $6 to $1201 and Oil ended the day at $74.10 up
real criminals (http://thefourteenthbanker.wordpress.com/)
A few days ago a news story broke about Wachovia (now part of Wells
Fargo) laundering money for Mexican Drug Cartels. Mish adds color
commentary in this piece.
From the original news story:
Wachovia admitted it didn’t do enough to spot illicit funds in handling
$378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s
the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in
U.S. history — a sum equal to one-third of Mexico’s current gross domestic
“Wachovia’s blatant disregard for our banking laws gave international
cocaine cartels a virtual carte blanche to finance their operations,” says
Jeffrey Sloman, the federal prosecutor who handled the case.
And here’s the rationale for the kid gloves treatment:
No big U.S. bank — Wells Fargo included — has ever been indicted for
violating the Bank Secrecy Act or any other federal law. Instead, the Justice
Department settles criminal charges by using deferred-prosecution agreements,
in which a bank pays a fine and promises not to break the law again.
‘No Capacity to Regulate’
Large banks are protected from indictments by a variant of the
Indicting a big bank could trigger a mad dash by investors to dump
shares and cause panic in financial markets, says Jack Blum, a U.S. Senate
investigator for 14 years and a consultant to international banks and brokerage
firms on money laundering.
The theory is like a get-out-of-jail-free card for big banks, Blum
“There’s no capacity to regulate or punish them because they’re too big
to be threatened with failure,” Blum says. “They seem to be willing to do
anything that improves their bottom line, until they’re caught.”
There are consequences for some however:
Twenty million people in the U.S. regularly use illegal drugs, spurring
street crime and wrecking families. Narcotics cost the U.S. economy $215
billion a year — enough to cover health care for 30.9 million Americans — in
overburdened courts, prisons and hospitals and lost productivity, the
“It’s the banks laundering money
for the cartels that finances the tragedy,” says Martin Woods, director of
Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says
he quit the bank in disgust after executives ignored his documentation that
drug dealers were funneling money through Wachovia’s branch network.
“If you don’t see the correlation between the money laundering by banks
and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.
So now I suppose we can say that TBTF in addition to all the other
economic damages and risks, adds additional dimensions of suffering. This is
just one small part of the human cost. Imagine the money laundered for human
trafficking, prostitution, illegal arms sales, protection rackets, and other
organized and disorganized crime.
These kinds of press reports leave bloody hands as clean. In
allowing the corporations to take the blame and provide legal amnesty for the
culpable individuals, we fail to address the most basic causal factors. I can
surmise several things. One, the individuals that allowed the funds to be
laundered were paid handsomely to do so through their incentive plans. Some
were probably recognized as top performers in their firm. In producing all this
business, they also earned their managers bonuses and recognition. As the
excerpt shows, people knew. People higher than the individual producers and
their managers. Someone higher in the organization listened to Mr. Woods and
then disregarded his recommendations. These people have blood on their hands as
surely as terrorist front organizations funneling money abroad.
The bonuses paid and recognition provided folks doubtlessly known as
ethically challenged among peers also sets up a cognitive dissonance to which
other employees will act in a predictable variety of ways. Some will learn to
cheat. Some will leave in disgust. Some will live with it and seek escape in
addiction. Some will become depressed. These management decisions are a
betrayal of the employees in organizations that are supposed to be about trust.
Our regulators and prosecutors also fail us when they do not bring
stern cases against the corporation and both front line and senior bank
officers that participate. These officers continue with reputations unsullied
in their communities. Further, when regulators fail to expose the cognitive
systems that underlie such crime they ensure that these episodes will be
repeated. We can do better.
What is the Vichy regime? During WW II, the Vichy regime was the
official government of France under German control. The regime actively
collaborated with the Nazis, even to the extent of participating in their
racial policies. Meaning, they supported the denouncing of Jews and French
resistance with the inevitable consequences. Frenchmen were in an intolerable
situation and had to choose sides. Some chose wrongly.
July 6, 2010
Kathy tells us
that some folks are having problems looking at their accounts on E-View. It
seems clients have to re-register to gain access. Since we are not computer
literate please call Kathy at 1-800 -793-3665 if you need assistance
We are back a day early. Asian markets were higher overnight and
European and U.S. markets look to open higher.
A rally back to
1040 on the S&P 500 may be in the cards after 11 out of 12 down days then a
test of 1000 and a scary trip to 950 may be needed to wash out the greed. That
would be a 50% retracement of the move up from the March 2009 low.
(AP) — Ilene Woods, the voice of
the title character in the Walt Disney animated feature “Cinderella,” died on Thursday in Canoga Park,
Calif. She was 81.
The major market measures opened
Telecom giant Verizon Communications Inc. saw its price target and earnings
estimates cut on Tuesday by analysts at Auriga.
The firm reiterated its “Hold”
rating on VZ, but lowered its price target on the stock from $31 to $29. That new target
would represent just an 8% upside to VZ’s Friday closing price of $26.81.
Auriga also lowered its second quarter 2010 EPS estimate $0.60 to $0.56,
full-year 2010 EPS estimate from $2.42 to $2.28, and full-year 2011 EPS
estimate from $2.57 to $2.33.
Auriga cited VZ’s recent
completion of the spinout of its Frontier assets for the downgrades.
On this negative news which forced VZ down to two year low. We added shares to larger accounts. VZ
will eventually get the iPhone and
when the announcement occurs we think the stock will pop. And when they finally
do begin offering it we think there will be a lot of switching in the first
year costs be damned. The shares are X dividend tomorrow (7% yield) and so we
only bought in tax free accounts today. We will add to taxable accounts
(AP) Verizon Communications Inc. said its spinoff of land line business
in Washington and 12 other states plus parts of California took place on July
1, 2010. New Communications was formed
as part of Verizon's sale of the landline operations to Frontier Communications Corp. After the spinoff, Verizon
stockholders will collectively own between about 66 percent and 71 percent of
the shares of Frontier and Frontier stockholders will collectively own between
about 29 percent and 34 percent.
In May 2009 Verizon agreed to
sell divisions that offer service to 4.8 million phone lines in 14 states to
Frontier Communications for $3.3 billion in cash and $5.2 billion in Frontier
The deal will triple the size of
Frontier, a collection of rural phone companies that is based in Stamford,
Conn. Verizon will wind up owning at least two-thirds of Frontier’s shares, in
a tax-free spinoff.
The move allows Verizon to concentrate
on its wireless business and on serving large companies. The company says that
after the deal, only 15 percent of its revenue will come from residential
customers. And 70 percent of those will be in neighborhoods where the company
is replacing its copper wires with fiber optic cables that carry television
programs, Internet service and, almost incidentally, voice calls under the FiOS
The local phone business, in
fact, has been contracting quickly as customers shift to phone service offered
by cable companies or simply to using their cellphones. Verizon, which will
have 30.3 million phone lines left after the deal, lost 10.2 percent of its
lines last year in the regions it is selling. Frontier, by contrast, lost only
7.2 percent of its lines.
Maggie Wilderotter, the chief
executive of Frontier, said in an interview that the company could thrive in
sparsely populated areas. “Rural is our business,” she said.
Ms. Wilderotter added that
Verizon had installed equipment to offer high-speed Internet service over
copper wires — a technology called DSL — to only 60 percent of the areas being
sold. Frontier, by contrast, hopes to offer DSL service to more than 90 percent
of customers. It can afford to do that in part because it charges high prices.
Ms. Wilderotter said Frontier has average revenue of $40 a month per customer
for Internet service, the highest in the industry.
John F. Killian, Verizon’s chief
financial officer, said his company did not choose to invest in expanding DSL
in those rural areas because it had better options.
“Capital is finite,” he said. “We
felt the appropriate place to put our capital was into our FiOS footprint and
our wireless footprint.”
Mr. Killian added that the
company had not decided what to do about the 30 percent of its remaining home
customers that are outside of areas where the company plans to offer FiOS. For
now, it offers bundles that include satellite television provided by DirecTV.
But if costs come down, it might install fiber to those homes, or perhaps new technology
that can deliver higher Internet speeds and video over copper wires.
Verizon has been selling off many
of its local phone operations outside of the population centers in the
Northeast. But in a conference call with investors, Ivan G. Seidenberg,
Verizon’s chief executive, said it did not expect further deals.
“This completes the picture of
where we take the local business,” he said.
The S&P 500 is back to 1040
an hour into the trading day. That may be it for the rally.
(Yahoo/Finance) Energy prices are
up markedly this morning, but precious metals prices are presently under
pressure. Specifically, crude oil prices are up 2.1% to $73.65 per barrel after
they had hit a two-week low late last week. Meanwhile, natural gas prices are
up an even sharper 3.8% to $4.86 per MMBtu. Gold prices are down a sharp 1.3%
to $1191.70 per ounce, which marks a new one-month low. The ISM Service Index
for June came in at 53.8, which is below the 55.0 that had been expected, on
average, by a sample of economists polled by Briefing.com. The latest index is
also below the 55.4 that was recorded for May.
Citi offered negative
comments on retailers at the rally peak this morning and those words have
many retailers down on the day and have cabashed what was-at best- a volumeless
Entering the contra hour the
major market measures have given up their 1.5% gains and are now lower on the
day as the bears assert themselves.
European bourses closed higher
but the U.S. markets were up 1% at the time Europe closed. Gold lost $14 to
$1195 and Oil was down pennies to $72.
HFT folks played their games at the end of the day to close the major measures
higher but today’s action (reversal of 170 DJIA points off the high) was not
encouraging for the bullish case. The higher closed ended the string of losing
days but that was about it. We are bulls on the stocks we own but we would just
as soon get the move to 950 over so that the markets can stabilize. Volume was
summer holiday light both ways and Breadth went from 10/1 positive after the
first hour to 3/2 negative at the close. Ugh!!! Go to the beach-- we are here
A review of
thoughts and news from the days we were away:
Jobs fell by 125,000 in June
because of the drop in census workers. Private sector jobs grew 83,000 versus a
growth of 33,000 in May. Markets are flat to lower on the news when they should
be celebrating the dory in government spending on jobs and the fact that
private sector employment improved. But that news doesn’t fit the current end of the world mantra.
Oil is back down to a $72 handle
and Gold is at $1205.
BP Plc’s first relief well aimed
at plugging its Gulf of Mexico gusher is ahead of schedule and about 600 feet
(182 meters) from intercepting the biggest oil spill in U.S. history.
When/if BP can plug the leak
investor psychology will change. The catastrophe will be then be a known
quantity with which the markets can deal. The negative psychology created by
the oil spill is underappreciated by market observers.
(Bloomberg) Students at Utah
Valley University and other public colleges in the state are free to carry
concealed handguns on campus if they have a permit. Nick Moyes is one of them.
“It’s about self-defense, the
ability to defend yourself,” said Moyes, 28, a student who brings his Sig Sauer
P-226 9mm handgun onto campus in Orem, Utah, every chance he gets. “That’s a
God-given right.” Moyes’s pistol-packing privilege has nothing to do with the
U.S. Supreme Court ruling June 28 that will likely be used to attack gun laws
across the U.S. In 2007, Utah said holders of concealed-weapons permits like
Moyes may bring such weapons onto campus, providing that right long before the
Myths of Austerity
By Paul Krugman
When I was young and naïve, I
believed that important people took positions based on careful consideration of
the options. Now I know better. Much of what Serious People believe rests on
prejudices, not analysis. And these prejudices are subject to fads and
Which brings me to the subject of
today’s column. For the last few months, I and others have watched, with
amazement and horror, the emergence of a consensus in policy circles in favor
of immediate fiscal austerity. That is, somehow it has become conventional
wisdom that now is the time to slash spending, despite the fact that the
world’s major economies remain deeply depressed.
This conventional wisdom isn’t
based on either evidence or careful analysis. Instead, it rests on what we
might charitably call sheer speculation, and less charitably call figments of
the policy elite’s imagination — specifically, on belief in what I’ve come to
think of as the invisible bond vigilante and the confidence fairy.
Bond vigilantes are investors who
pull the plug on governments they perceive as unable or unwilling to pay their
debts. Now there’s no question that countries can suffer crises of confidence
(see Greece, debt of). But what the advocates of austerity claim is that (a)
the bond vigilantes are about to attack America, and (b) spending anything more
on stimulus will set them off.
What reason do we have to believe
that any of this is true? Yes, America has long-run budget problems, but what
we do on stimulus over the next couple of years has almost no bearing on our
ability to deal with these long-run problems. As Douglas Elmendorf, the
director of the Congressional Budget Office, recently put it, “There is no
intrinsic contradiction between providing additional fiscal stimulus today,
while the unemployment rate is high and many factories and offices are
underused, and imposing fiscal restraint several years from now, when output
and employment will probably be close to their potential.”
Nonetheless, every few months
we’re told that the bond vigilantes have arrived, and we must impose austerity
now now now to appease them. Three months ago, a slight uptick in long-term
interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was
the headline at The Wall Street Journal, although there was no actual evidence
of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.”
Since then, long-term rates have
plunged again. Far from fleeing U.S. government debt, investors evidently see
it as their safest bet in a stumbling economy. Yet the advocates of austerity
still assure us that bond vigilantes will attack any day now if we don’t slash
But don’t worry: spending cuts
may hurt, but the confidence fairy will take away the pain. “The idea that
austerity measures could trigger stagnation is incorrect,” declared Jean-Claude
Trichet, the president of the European Central Bank, in a recent interview.
Why? Because “confidence-inspiring policies will foster and not hamper economic
What’s the evidence for the
belief that fiscal contraction is actually expansionary, because it improves
confidence? (By the way, this is precisely the doctrine expounded by Herbert
Hoover in 1932.) Well, there have been historical cases of spending cuts and
tax increases followed by economic growth. But as far as I can tell, every one
of those examples proves, on closer examination, to be a case in which the
negative effects of austerity were offset by other factors, factors not likely
to be relevant today. For example, Ireland’s era of austerity-with-growth in
the 1980s depended on a drastic move from trade deficit to trade surplus, which
isn’t a strategy everyone can pursue at the same time.
And current examples of austerity
are anything but encouraging. Ireland has been a good soldier in this crisis,
grimly implementing savage spending cuts. Its reward has been a
Depression-level slump — and financial markets continue to treat it as a
serious default risk. Other good soldiers, like Latvia and Estonia, have done
even worse — and all three nations have, believe it or not, had worse slumps in
output and employment than Iceland, which was forced by the sheer scale of its
financial crisis to adopt less orthodox policies.
So the next time you hear
serious-sounding people explaining the need for fiscal austerity, try to parse
their argument. Almost surely, you’ll discover that what sounds like hardheaded
realism actually rests on a foundation of fantasy, on the belief that invisible
vigilantes will punish us if we’re bad and the confidence fairy will reward us
if we’re good. And real-world policy — policy that will blight the lives of
millions of working families — is being built on that foundation.
Obviously, we agree with Krugman.
But our market scenario is that the debt vigilantes contour to wail and that
the media sees the austerity Republicans (who did nothing when they controlled
Congress) as a way to attract cable viewers. That cacophony will continue into
the fall elections with polls showing that the Repubs will retake the House.
And that news will give a push to the markets. If the Repubs do take control
the markets will rally and we will lower exposure.
(azdailysun.com) Flagstaff homeless shelter hours curtailed
"Because of these people, I have a roof to survive until I find a
place to live," Davenport said. "If it wasn't for them, who knows
where I might be." But the shelter is struggling financially, said Todd
Sherman, director of Flagstaff Shelter Services. It already has closed its
general overnight beds for the summer, And now, to conserve enough funds for
overnight winter operations, the facility has had to go from being open seven
days a week during the summer for day services to just two days a week, and
with reduced hours to boot. Only Davenport and nine other men with long-term
ties to Flagstaff are being allowed to stay overnight during the summer, although
they must leave during the day.
We’ve added this post because the
story the week before a fire consumed 280 Acres and caused the evacuation of
On Saturday, U.S. Forest Service officials, in searching for the point
of origin of the fire off J.W. Powell Boulevard, came upon two transients in
the area where the fire started. One transient ran from officers, but a second
transient told investigators that he and the man who ran away had been camping
in the area. According to information from the police department, the suspect
had made a small fire for cooking and later dumped hot coals from the fire
underneath an open grill on the ground.
Risk (http://www.calculatedriskblog.com/) on the jobs report.
The underlying details of the
employment report were mixed. The positives: the economy added 100 thousand
payroll jobs ex-Census (still weak but better than in May), the unemployment
rate decreased to 9.5%, the number of part time workers (for economic reasons)
decreased slightly helping to push down U-6 to 16.5% (from 16.6%).
Negatives include the declines in
the participation rate and employment-population rate, the slight decrease in
hourly wages, the decline in average hours worked, and a record percent of
workers unemployed for more than 26 weeks. The number of long term unemployed
is one of the key stories of this recession, especially since many of them are
now losing their unemployment benefits.
Overall this was a weak report.
in light trading makes 7 straight down days and 10 days out of 11 down, DJIA down 5% this week. We are getting to
at least bounce territory, maybe Tuesday.
In the week ending June 26, the
advance figure for seasonally adjusted initial claims was 472,000, an increase
of 13,000 from the previous week's revised figure of 459,000. The 4-week moving
average was 466,500, an increase of 3,250 from the previous week's revised
average of 463,250.
Analysts at UBS raised their
rating on Dell to buy from neutral
Thursday, citing limited downside risk to the PC maker's shares. "We
continue to believe Dell will be a beneficiary of an enterprise PC refresh that
should begin in [the second half of 2010] and grow in 2011," they wrote in
a note to clients.
The Dow tumbled to a 10.4% loss for the
second quarter and its worst quarterly performance since the first quarter of 2009.
The Nasdaq Composite fell 12% for the quarter. The Standard & Poor's 500-stock index declined
11.9% for the quarter.
Markets are down 1% this morning which makes 9 out of
last ten days as down. We sold Cienna
and used those funds plus funds from our sale of Nokia to add to GE, Symantec, Alcoa, American Eagle, Goodyear and Dell in
accounts this morning. We improved quality while still keeping exposure close to
50% in many accounts. This sell off is painful but it is providing opportunity
to improve portfolios and increase positions for whenever the selling stops.
Given the relentless pressure it would seem that the selling will never stop.
There should be a relief rally in the next few days after which the downturn
may resume. We are still viewing this selling as a much needed correction and
are adding and refining holdings accordingly.
Warren won’t be happy:
(CNBC) Standard &
Poor's has placed rival ratings agency Moody's on its watch list for a
credit downgrade, citing dangers from financial reform legislation that could
imperil S&P itself. Irony abounds in a research note from S&P—a ratings
agency warning about a fellow ratings agency's exposure to a proposed law
targeted in part at ratings agencies. The note is only a warning that the A-1
status of Moody's
is in danger, and S&P says the worst-case scenario appears to be a
downgrade to A-2.
(Reuters) June auto sales flat but Hyundai gains
(MarketWatch) Auto sales rise across the board
(WSJ) Car Sales Slowed in June
(AP) US auto sales,
in weak recovery, drop in June
close lower for the sixth straight day. Volume was active and there were a
couple of attempts by the bulls to rally the markets.
(Reuters) - Ford said it was paying $3.8 billion in cash to settle a debt to a
health care trust in a signal of its confidence it remains on track to deliver
"solid profits" this year.
In addition, Ford said on
Wednesday it was making a $255 million payment on preferred stock dividends
that had been deferred when the automaker was trying to conserve cash.
The moves sent Ford shares up 5
percent and removed more than $4 billion in debt from its balance sheet,
addressing one of the major remaining investor concerns about the automaker's
"This sends a strong signal
around management's positive view on cash generation at Ford Motor, credit
quality at Ford Motor Credit and their likely view that the stock is
undervalued," said Barclays analyst Brian Johnson.
Ford said it had opted not to use
stock to pay $610 million to a health-care trust aligned with the United Auto
Workers union. Analysts had said the prospect of a stock payment to the UAW had
weighed on Ford shares in recent weeks.
Paying the UAW-aligned trust fund
in Ford shares would have diluted equity for investors and could have been read
as a sign that management viewed the stock as near a peak.
Ford stock dipped below $10 on
Tuesday for the first in five months, partly on speculation that the company
would meet debt payments by issuing more stock.
"Our One Ford plan to
profitably grow our business is working, and we are increasingly confident
about the future," Ford Chief Executive Alan Mulally said in a statement.
Ford said it intended to resume
making quarterly dividend payments on preferred stock starting on July 15.
The biggest chunk of three
separate payments announced on Wednesday was $2.9 billion to pay off a note
owed to the UAW-aligned retiree medical benefits trust at 98 cents on the
The UAW agreed to that discount
in exchange for the early payment, Ford said.
Ford also made scheduled payments
of $860 million on notes owed to the UAW fund, established under a 2007
contract with the union.
Barclays' Johnson called the
prepayment of debt "a bold move" that came as a surprise given recent
market speculation that the automaker would make part of its payment to the
health-care fund in stock.
In afternoon trading, Ford shares
were up 5 percent at $10.40 on the New York Stock Exchange.
The stock is down about 28
percent from its highs in late April. It remains up more than 70 percent from a
year ago, when the U.S. auto industry was mired in the deepest sales downturn
since the early 1980s.
Ford ended the first quarter with
automotive debt of $34.3 billion, but paid down $3 billion of debt in April
that will be reflected in second-quarter results.
The April payment and the debt
cut announced today, which together total $7 billion, leave $27 billion of debt
remaining, Ford said. The $7 billion debt reduction will save more than $470
million in annual interest payments, it said.
Ford was the only U.S. automaker
to avoid bankruptcy last year. It borrowed more than $23 billion in late 2006,
putting up nearly all of its remaining assets, including the familiar blue oval
logo, to maintain a cash cushion for its turnaround.
By contrast, Ford's larger rival,
General Motors (GM.UL), ended the first quarter with about $14 billion in debt.
The question of how quickly Ford
can pay down its debt has been widely seen as one of the remaining risks for
the second-largest U.S. automaker, despite strong gains in quality and sales in
"We expect to continue to
improve our balance sheet as we deliver on our plan," Mulally said.
"Importantly, our business results make it possible to take these actions
while still accelerating the investments we are making in our business to serve
our customers with the very best cars and trucks."
Ford, which surprised Wall Street
with its first annual profit in four years in 2009, despite a severe downturn,
has forecast a "solid profit" in 2010.
(WSJ) Shares of Barnes & Noble Inc. plunged (we bought the
plunge) to their lowest point in 18 months Tuesday as the bookseller
provided a weak outlook, saying it will substantially increase its investments
in digital opportunities. The company faces tough competition in the e-reader
market from both Amazon.com
Inc.'s Kindle and Apple Inc.'s iPad, and Barnes & Noble has also been
putting a bigger emphasis on its Web offerings, naming the head of its online
operations as chief executive earlier this year. William Lynch, who was named
to the CEO post in March, said in the company's fiscal fourth-quarter report
late Monday that it is planning to redirect a significant portion of its
financial resources toward investments in technology, sales and marketing. "These
investments will impact our bottom line in 2011, but we believe they will
enable Barnes & Noble to capitalize on the significant mid- to long-term
growth opportunities presented by the digital markets," he said. The
company predicted the bottom line could range from a 10-cent loss to a 30-cent
profit excluding revenue deferrals.
S&P Equity Research analyst
Michael Souers said investors Tuesday were likely concerned about when Barnes
& Noble will see the revenue gains and profitability from its investments.
He added that the extent of the investments surprised him and he wasn't
expecting the company to forecast a loss for the year. However, he said the
investments are necessary in order for the company to compete effectively.
During its investor conference Tuesday, Barnes & Noble said capital
expenditures will increase to about $150 million from $128 million last year as
the company spends on efforts to boost sales of its Nook e-reader, to add new
product categories such as educational toys and games and certain electronic products,
and to expand a multi-channel college-textbook rental program to more than 300
colleges by August. S&P's Souers said investor worries about gross margin
declines were also likely weighing on the shares.
The company's 2011 financial
outlook assumes gross margin will fall to between 26% and 26.3% from 28.9% in
2010, as it sells a higher mix of digital and college products, which carry
lower margins. But Barnes & Noble intends to reduce selling and general
administrative expenses as a percentage of sales, managing store and labor
costs. In the fourth quarter, the company's selling and administrative expenses
were about $368 million, outpacing its gross profit of $363 million. However,
Souers expressed concern about cannibalization of the physical book market by
e-books, which he said will also pressure margins. He noted that consumers
might make a decision to purchase either a physical book or an e-book, but not
both. He said the solution may be to close stores on a more aggressive scale
than the company's plan, which is to close only six to 10 stores in each of the
next three years. "If they are successful with the e-book strategy, I
think closing stores would make sense since there aren't as many costs
associated with digital distribution and they can leverage their revenue on a
lower cost base and drive profitability," Souers said.
The HFT kids did their downtick thing in the
last half of hour of trading to push the major measures down 1% at the close.
On today’s 3% drop in the major
market measures the only stock on our screen higher was British Petroleum.
In a small trade on the 29th we swapped the Irish Bank shares to Citi. In a falling market for a
speculation we are more comfortable owning a lousy American Banks than the
Conference Board: Consumer
Confidence Index® Drops Sharply
The Conference Board Consumer
Confidence Index® which had been on the rise for three consecutive months,
declined sharply in June. The Index now stands at 52.9 (1985=100), down from
62.7 in May. ... says Lynn Franco, Director of The Conference Board Consumer
Research Center: “Consumer confidence, which had posted three consecutive
monthly gains and appeared to be gaining some traction, retreated sharply in
June. Increasing uncertainty and apprehension about the future state of the
economy and labor market, no doubt a result of the recent slowdown in job
growth, are the primary reasons for the sharp reversal in confidence. Until the
pace of job growth picks up, consumer confidence is not likely to pick up.”
Risk (http://www.calculatedriskblog.com/ ) on the Irish Economy
Liz Alderman in the New York Times: In Ireland, a Picture of the High Cost of Austerity
As Europe’s major economies focus on belt-tightening, they are
following the path of Ireland. But the once thriving nation is struggling, with
no sign of a rapid turnaround in sight.
Rather than being rewarded for its actions, though, Ireland is being
penalized. ... Lacking stimulus money, the Irish economy shrank 7.1 percent
last year and remains in recession
Joblessness in this country of 4.5 million is above 13 percent, and the
ranks of the long-term unemployed — those out of work for a year or more — have
more than doubled, to 5.3 percent.
The budget went from surpluses in 2006 and 2007 to a staggering deficit
of 14.3 percent of gross domestic product last year — worse than Greece. It
continues to deteriorate.
As the Irish government cut the budget, the economy contracted faster
and the deficit as a percent of GDP increased.
And how will they break the downward cycle? Export to England and
[T]he government is pinning nearly all its hopes on an export revival
to lift the economy. Falling wage and energy costs, and a weaker euro, have
This approach works for one country - or a few - but not if every
country is doing it.
Krugman on Calculated Risk’s comments on the Irish Economy
The Conventional Superstition
Risk points us to a speech by Kevin Warsh that strikes me as almost the perfect
illustration of the predicament we’re in, in which policy is paralyzed by fear
of invisible bond vigilantes. Warsh isn’t an especially bad example — but
that’s the point: this is what Serious People sound like these days.
The bottom line of Warsh’s speech — although expressed indirectly — is
that it’s time for fiscal austerity, even though the economy remains deeply
depressed; and no, the Fed can’t offset the effects of fiscal contraction with
more quantitative easing. In short, the responsible thing is just to accept 10
And why is this the responsible thing? On fiscal policy,
market forces are often more certain than promised fiscal spending
Um, but those market forces are currently willing to lend money to the
US government at an interest rate of 3.05 percent. But never mind:
unanticipated, nonlinear events can happen
So it’s these “unanticipated, nonlinear events” that are “more certain”
than the direct effects of fiscal policy? I’m confused.
And on monetary policy,
The Fed’s institutional credibility is its most valuable asset, far
more consequential to macroeconomic performance than its holdings of long-term
Treasury securities or agency securities. That credibility could be
meaningfully undermined if we were to take actions that were unlikely to yield
clear and significant benefits.
OK, but why, exactly, does it help the Fed’s institutional credibility
to do nothing to help a deeply depressed economy?
The point here is that Warsh’s argument basically rests on assertions
not about what markets are saying now, but about presumed market reactions to
policy. And these assertions about how markets will react are
(a) not based on any actual evidence
(b) (b) actually assume that markets will behave
This goes for both fiscal and monetary policy. Again, right now the
bond market doesn’t seem worried about US solvency. And rationally, stimulus
spending shouldn’t change that view: with the long-term real interest rate well below 2 percent, current borrowing has only a trivial
effect on the long-run state of the budget.
You may say that markets will see short-run austerity as a signal of
our willingness to make long-run sacrifices; but why? What the United States
needs to do in the long run, mainly controlling health care costs and
increasing revenue, has nothing to do with the question of whether we have a
second stimulus package.
On monetary policy: again, the large expansion of the Fed’s balance
sheet so far doesn’t seem to have worried markets: right now, the 10-year TIPS
spread is 1.9, showing no sign of exploding inflationary expectations. And for
that matter, a rise in inflation expectations would actually be a good thing
right now, encouraging more spending — unless you believe that markets will
someone react badly, for reasons not specified, to the Fed’s impaired
“credibility” defined as … well, I’m not sure what.
So what we’ve got here is an assertion that bad things will happen if
you do certain things, without either any evidence to that effect or any
explanation of why those things should happen. Yes, maybe bond markets will
punish us if we don’t slash spending right now; also, maybe we’ll have bad luck
if we step on cracks, or fail to turn aside when Basement Cat crosses our path.
But why does this pass for judicious policy discussion?
July 2, 2010
July 1, 2010
Markets are down 1% this morning which makes 9 out of
last ten days as down. We sold Cienna
and used those funds plus funds from our sale of Nokia to add to GE, Symantec, Alcoa, American Eagle, Goodyear and Dell in
accounts this morning. We improved quality while still keeping exposure
close to 50% in many accounts. This sell off is painful but it is providing opportunity
to improve portfolios and increase positions for whenever the selling stops. Given
the relentless pressure it would seem that the selling will never stop. There
should be a relief rally in the next few days after which the downturn may
resume. We are still viewing this selling as a much needed correction and are
adding and refining holdings accordingly.
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Summary of Business Continuity Plan