Thursday, March 11th, 2010

Daily Download: Financial and Stock Investing News for 10-28-09

October 28th, 2009 at 4:59 am by CB | No Comments

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing, which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

8:30 AM Durable Goods Orders

10:00 AM New Home Sales

10:30 AM EIA Petroleum Status Report

1:00 PM 5-Yr Note Auction

Initial Public Offerings for the Week of October 26 -30, 2009

10-27-09 Addus HomeCare – Provider of home social and medical services.

10-27-09 Vitamin Shoppe – Health and wellness products.

10-28-09 AEI – Provider of electricity and natural gas.

Source: WSJ Market Data Group.

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Consumers’ Malaise Weighs on Shares – The Associated Press

Summary: On Tuesday, Standard & Poor’s/Case-Shiller home price index, which monitors home prices in 20 major-metropolitan markets, reported its third-consecutive gain with a 1% gain in August from July. However, home prices remain down 11.3% from a year earlier. Furthermore, economists believe that the expiring home-buyer tax credit, rising unemployment, and potentially rising interest rates could cause recent gains in home prices to be reversed (Related Reading: The Washington Post Article). Separately, the consumer confidence index posted its second-lowest reading since May as it fell to 47.7 in October, while analysts had expected the index to post a figure of 53.1. Such a result in consumer confidence may indicate that consumers will not be ready to spend for the holiday season. Furthermore, the disappointing consumer confidence report may reduce the positive impact of third-quarter earnings for on the stocks of consumer-based companies. Market participants believe the next few days could be rough in the markets, as investors look for positive information to propel the rally forward. While profits have been growing at many companies, the revenue line has not.

CB: Yes, while consumer-based companies have been exceeding earning expectations, they have not been growing their revenue – generally speaking. Companies have flexibility over their reported profits. This flexibility is displayed every time a company’s profits meet or exceed consensus estimates. Usually larger companies have greater flexibility due to (1) more cost pools to cut from and (2) more potential accounting manipulations. Increased profits on declining sales are not a good indicator of the current state of consumer spending. In fact, depending on the job cuts made to achieve those profits, increased profits may not bode well for consumer spending. Yet, investors will have to wait and see how consumer confidence and spending play out in the next few months. Retailers have already indicated that they are expecting to offer large discounts and smaller inventories for the holiday season. Such actions may indeed help to limit the potential growth in consumer spending. In regards to housing prices, it is hard to imagine them remaining propped up after the tax-credit goes away and other government support is withdrawn from the market. Looking at the trend in Weekly Mortgage Applications could reveal if interest rates will continue to increase as they have over the last few weeks, and if mortgage applicants will decrease. If interest rates increase, then there will likely be less applicants for refinancing, which is usually done to save money, thus potentially placing additional downward pressure on consumer spending.

Draft Law would Extend Fed Powers – Financial Times

Summary: The following are some of the provisions in the draft law released on Tuesday regarding future regulation of the financial system:

(1) The creation of a council of regulators charged with the duty of searching for systemic risks.

(2) If this new council of regulators finds a company where “material financial distress at the company could pose a threat to financial stability or the economy” that company will be considered systemically significant.

(3) The Fed would be able to enforce liquidity rules, leverage limits, and the creation of a resolution plan for those companies that are systemically significant.

(4) The Fed can force any systemically significant company to “sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities, or to impose conditions on the manner in which the identified financial holding company conducts one or more activities.”

(5) If the company cannot be saved by items three and four, then the government has the right to seize it. Furthermore, any bank with more than $10 billion of assets can be forced to repay the government for any of the costs to seize its competitor. As a note, there are currently 120 U.S. banks with more than $10 billion of assets.

CB: As a shareholder CB is not quite sure what it thinks of this law. These regulations give the government significant power to interfere with a bank’s operations. As many readers know, CB is all for regulation; however, CB would prefer to see more preventive and passive regulations than these where an unforeseen action by the Fed or a rival bank can negatively impact a bank’s operations and value. In fact, CB much rather see the Second Glass-Steagall Act reinstated, which would separate investment banks from commercial banks and help reduce systemic risk.

GMAC Asks for Fresh Lifeline – The Wall Street Journal

Summary: Since December 2008, GMAC Financial Services has received $12.5 billion from the government and is now likely to receive between $2.8 billion to $5.6 billion of additional capital in the form of preferred stock. This capital injection would firm up GMAC’s balance sheet and allow it to continue to provide the majority of wholesale financing for GM dealerships across the country. Furthermore, to ensure the company’s operational stability the Federal Deposit Insurance Corp. (the “FDIC”) is guaranteeing $2.9 billion in debt to increase its attractiveness to investors. The government’s willingness to help GMAC reflects its perceived importance in the recovery of the automotive industry. At present, GMAC has $181 billion in assets and is a primary financier for 15 million borrowers. In the second quarter, GMAC reported that its new-car loans are down 55% from a year earlier.

CB: CB is sure that CIT stakeholders, who the government has refused to aid, love reading about GMAC being bailed out for the third time. Such actions may also provide a glimpse into the perceived importance of the automotive industry compared to the small and medium-sized business-loan industry.

India Starts to Tighten Monetary Policy – Financial Times

Summary: On Tuesday, the Reserve Bank of India (the “RBI”), amid worries of maintaining price stability, began to tighten its monetary policy by (1) increasing reserve requirements to 25% from 24% and (2) stiffening the requirements for bank loans to property companies. The RBI projects that the Wholesale Price Index, the inflation gauge for India, will reach 6.5% by the end of March, compared to its earlier estimate of 5%. Yet, the RBI is hindered by the current Congress’s wish that a loose policy be followed in order to continue support growth over inflation. The current government is very focused on returning to 9% annual growth, which has resulted in the largest fiscal deficit in 20 years.

Reflation Trade Shifting into Reverse? – Barron’s

Summary: Since summer, the rising tide of liquidity, primarily driven by a virtual zero yield in the dollar-denominated money-markets, has helped to boost prices in stocks, gold, currencies, commodities, and bonds. The main question in the air is: do these liquidity tailwinds still exist to keep the markets buoyant? According to TrimTabs, the recent rally has been supported by institutional investors rebalancing their portfolios and performance chasing. In support of this claim, the leading 100 institutional investors have increased their equity holdings by $570 billion over the rally’s time period. TrimTabs believes that these institutional investors do not have much spare money left to further support the rally.

FCC Considers Shifting TV Airwaves to Net – The Wall Street Journal

Summary: At present, the Federal Communications Commission (the “FCC”) is seeking to resolve the issue of there being a lack of available airwaves for future wireless broadband services. One potential plan is to compensate TV broadcasters for their digital TV airwaves, and then auction those airwaves to wireless companies that intend to augment their wireless Internet services. Yet, some broadcasters want to keep these airwaves so that digital TV can be viewed on specially equipped wireless phones and other portable gadgets. On Friday, the Consumer Electronics Association (the “CEA”) reported that if the government were to take back all of the airwaves reserved for TV broadcasters, then the government could receive as much as $62 billion for those airwaves. However, the CEA reported that the government would likely have to pay $12 billion to purchase the discussed airwaves and another $9 billion to convert all households to subscription services.

More Links of Note

Fed Self-Evaluation: Making Monetary Policy to Model – Naked Capitalism

A Visual History of the Federal Reserve System

A Diary of the Great Depression

Soros: Market at Risk of Downturn – PragCap