Italy Gives Counterfeiters the Boot

We thought that this could be a tumultuous week after riots in Greece this past weekend and a heightening of rhetoric with Iran.  But as it turns out, this week was anything but tumultuous.  In fact, the Dow is once again flirting with the 13,000 mark.  At the end of the day, it appears that left to its own devices, the market wants to go higher.

No week would be complete without a brief recap of what’s going on in Greece.  It’s complicated.  The citizens of Greece aren’t happy.  Then again with an unemployment rate of 20% (growing to 50% for those under the age of 25) and the government sector slashing government jobs and pensions, I’m not sure why we should expect them to act any different.  Then there are the investors who, for obvious reasons, don’t want to take a hit on their investment in Greek bonds.  And let’s not forget about Europe who is being asked to bail out Greece despite the indications that Greece is a lost cause.  So when we observe that the media is suggesting that a resolution is right around the corner, we have to laugh a little.  Not in a mean spirited way but in an exasperated, are you kidding me kind of way?  We should add that Greek elections are scheduled for April and it’s almost certain the incumbents will lose.  This game is far from over.

For better news, we turn to the payroll tax cut extension that was passed by both houses of Congress today.  In an about face, Republicans dropped their opposition to tax breaks (that would presumably increase the national debt) without requiring offsetting expense cuts elsewhere.  In the spirit of bipartisanship, both parties came together to pander to us, the voters.  Under the bill, workers would continue to receive a 2 percentage point increase in their paychecks, and people out of work for more than six months would keep jobless benefits averaging about $300 a week. It will also head off a steep cut in reimbursements for physicians who treat Medicare patients.  These measures extend the payroll tax cuts through the end of 2012.

Company news was pretty sparse this week.  Perhaps the piece that got the most attention was when Apple passed $500 per share for the first time in its history.  The company is now worth $466 billion versus Exxon’s $398 billion.  In other news, the deal between Procter & Gamble and Diamond Foods was officially called off.   Diamond Foods had made an offer to purchase the Pringles brand from P&G before succumbing to an investigation for “accounting irregularities”.  Not missing a beat, P&G turned around and within days sold the division to Kellogg for $2.7 billion.  And lastly, in an ironic twist, Pepsico says it knows how to sell more orange juice: Add water.  They are focusing on products with less juice under the assumption that consumers will pay more for a product with fewer calories.

For the story of the week we turn to Italy.  It was announced today that Italian police seized $6 trillion of fake U.S. Treasury bonds.  Apparently this began as an investigation into mafia loan-sharking.  The bad news is that these bonds were on their way to the European Central Bank (ECB) to be used as collateral in the February 29 Long Term Refinancing Option (LTRO).  One astute reader commented that, “the failure of the counterfeiters was disguising the bonds properly.  REAL American T-Bills have ‘Made in China’ printed on the back.  These were ‘Made in America’, easily detectable as frauds.”  Now you know.

February 17, 2012: Market Update

February 10, 2012: Market Update

Congress Corrects Their Trading Ways

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

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

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

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

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

February 03, 2012: Market Update

Freddie Mac, “A Nightmare on Main Street”

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

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

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

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

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

January 27, 2012: Market Update

$100 Billion and Counting

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

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

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

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

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