Thursday, March 11th, 2010

Daily Download: Financial and Stock Investing News for 10-29-09

October 29th, 2009 at 5:00 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)

8:30 AM Gross Domestic Product (“GDP”)

8:30 AM Jobless Claims

10:30 AM EIA Natural Gas Report

1:00 PM 7-Yr Note Auction

4:30 PM Fed Balance Sheet

4:30 PM Money Supply

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

List of Selected Companies with Third-Quarter Earnings Calls for 10-29-09

News

Mixed Data Show Recovery’s Rocky Path – The Wall Street Journal

Summary: On Wednesday, the Commerce Department reported that new home sales dropped 3.6% in September primarily driven by the declining effect of the tax credit for first-time home buyers. This decline in new home sales may suggest lower home sales in the near future if the tax credit expires; however, there is a tentative deal currently in place to extend the credit. Furthermore, the the supply of new homes was listed at 7.5 months in September, down from the 9.5 months in May. Separately, the Commerce Department also reported that orders for durable goods, items that should last more than three years, increased 1% in September thus indicating that consumer and business demand may be recovering. Furthermore, orders of core durable goods, which excludes orders for civilian planes and defense capital goods increased .5% in September. Meanwhile, inventories decreased by 1% in September, a slower pace than the 1.5% decrease in August.

CB: Also, on Wednesday, the Mortgage Banker’s Association reported that for the week ending October 23, 2009 the Market Composite Index (the measure of mortgage loan application volume), the Refinance Index, and the Purchased Index decreased by a seasonally adjusted 12.3%, 16.2%, and 5.2%, respectively, from the prior week. These results indicate a drop in mortgage applications during the reported time frame, meanwhile the average 30-year fixed-interest rate decreased to 5.04% from the 5.07% reported a week earlier.

CB: First, if the tax-credit is indeed having a declining effect than extending it might not be enough to support new home sales. Yet, as mentioned in the following article, the deal currently in place to extend the tax credit applies to a broad group of individuals, which could very well spark additional new home sales. As mentioned yesterday, CB wonders if the tax credit has increased home prices to the point that homes are now more expensive to buy then they would have been without the tax credit. Furthermore, weekly mortgage applications have been decreasing each week this month, which cannot bode well for new home sales figures in November and December. What is impressive is the increase in the orders for durable good, which CB will look into at a deeper level when the GDP numbers are released this morning.

Home Buyer Credit Gets New Life – The Wall Street Journal

Summary: A tentative deal was reached in the Senate on Wednesday to extend the first-time home buyers tax credit to all contracts entered into before April 30, 2010. Moreover, this deal provides a new credit of as much as $6,500 to home buyers that have been in their current homes for a consecutive five-year period in the past eight years. Under the deal, the tax credit for first-time home buyers will be limited to those individuals with incomes less than or equal to $125,000 a year and to couples with combined incomes of less than or equal to $250,000 a year. Yet, there is no guarantee that the agreement will pass, especially given that House Democrats tend to believe it increased the cost to the government.

CB: This is a very narrow approach to saving the U.S. economy. While the government continues to run a deficit, the extension of this tax-credit will continue to reduce potential tax revenues and further hurt other sections of the economy. For instance, the expansion of the fiscal deficit is not a good thing for the U.S. and helps to continue to weaken the U.S. dollar, which some would argue strengthens the U.S. economy. Yet, if the U.S. dollar weakening creates turmoil in other countries around the world and constrains their recovery, then the U.S. will likely feel the consequences of their economic troubles.

Galleon Paid Banks Millions for ‘edge’ – Financial Times

Summary: A person familiar with the Galleon Group stated that the hedge fund paid nearly $250 million to its banking partners last year, but paid even more during the boom years. Galleon was a large client at both Morgan Stanley and Goldman Sachs. As the Galleon Group grew, it increasingly sought additional market information regarding real-time market developments that had not been disclosed to other clients. Galleon would take the various information bits that it received from the different banks, and then piece them together to form ideas for short-term market plays. The hedge fund was very focused on short-term results. Even though the distribution of market color or information to an investor is not insider trading, the Galleon case may effect the future distribution of market color to other hedge funds.

CB: The distribution of market color or information to hedge funds from their banking partners is a very common practice on Wall Street. In fact, the system is rife with gossip as some fund managers spend most of their time on the phone trying to discern what their businesses partners and friends know. The part that is not clear in the article, is whether any part of the $250 million Galleon paid to its banking partners last year was in addition to the fees laid out in the contract. Yet, the situation could reveal that Galleon paid higher contract fees with the expectation of an information advantage. While offering market color, which is rather broad, is not insider trading, it is unethical for a bank to shower certain information on one client, while not telling the same information to all of its clients.

Citing Boosts in Market Share and Sales, G.M. Says it Sees Progress – The New York Times

Summary: General Motors (“GM”) estimates that with U.S. sales improving and three-consecutive months of market share gains it will have 21% of the U.S. market by the end of October. GM believes that its success is also a reflection of the recovery taking place in the overall auto market. The company projects that the industry will sell cars in the month of October at an annual rate of 10.5 million, which would be the highest rate this year when excluding the effects of the “cash-for-clunkers” program. According to GM, its four core bands Cadillac, Chevrolet, Buick, and GMC are all experiencing sales momentum. Yet, GM’s management admits that they still have a ways to go before declaring victory.

CIT Rejects Icahn Offer; Its Creditors Extend Loan – The New York Times

Summary: CIT accepted a $4.5 billion loan from a group that included some of its largest bondholders in favor of Carl Icahn’s similar offer. CIT’s acceptance of the additional financing enables it to follow a restructuring plan that would allow it to retain the company’s current management and board. CIT management claimed that there wasn’t enough evidence that Icahn had arranged the necessary financing that his offer would have needed to be implemented. CIT also stated that only five of the 13 directors that will sit on the company’s board after the prepackaged bankruptcy will be incumbents. A committee of CIT’s largest bondholders will choose four of the directors, while another three directors will be chosen by other bondholders. Moreover, the final director will also be the company’s next chief executive. However, the management must approve of the chosen directors.

Related Reading: Part of CIT’s problem with the Icahn plan was that it would replace all senior management and the board of directors. On the surface, CB would agree with Icahn’s actions. The company’s record speaks volumes about management, regardless of a financial crisis or not. Separately, CB thinks there is no point in having bondholder’s choose the new directors if management has to approve of them. Management should not have that right and it has not earned that right.

The Dollar’s Fall is Felt Overseas – The Washington Post

Summary: While aiding the U.S. economy’s recovery, the continued decline of the U.S. dollar, which has been primarily driven by the continued printing of money and the adoption of near-zero interest rates, may threaten the recoveries of Europe and Japan. The declining U.S. dollar has helped to improve the U.S. trade deficit and analysts believe that the recession along with unemployment would be worst if the U.S. dollar were stronger. Not only is the weaker U.S. dollar making U.S. goods more competitive abroad, but it is also making Chinese goods more competitive and thus increasing China’s already world-leading surplus. The increased Chinese competitiveness results from China pegging the value of yuan to the U.S. dollar, thus when the U.S. dollar declines so does the yuan. At present, there is increasing international tension regarding the U.S. dollar’s fall as countries all over the world try to help stem the U.S. dollar’s decline.

Fund-Buying Run Grows to 32 Weeks – The Wall Street Journal

Summary: The following figures are reported weekly by the Investment Company Institute regarding the flow money amongst various funds for the week ended October 21 (“this week”):

(1) Long-term mutual funds witnessed net inflows for the 32nd consecutive week, with total inflows estimated at $13.84 billion during this week.

(2) The stock funds experienced their first inflows in nearly two months as they received $1.68 billion of inflows this week, compared to the $3.4 billion outflow in the prior week. However, U.S. stock funds had $1.22 billion of outflows, while foreign funds had $2.9 billion of inflows this week.

(3) Bond funds had estimated inflows of $11.18 billion this week, an increase from the $8.8 billion inflows from the prior week.

(4) Hybrid funds, funds that invest in both equity and fixed income, had estimated inflows of $979 million this week, a decrease from the 1.38 billion inflows from the prior week.

(5) Money-market funds saw their assets increase by $3.22 billion this week to a total of $3.342 trillion in assets.

More Links of Note

Financial Historian on ‘29: ‘Great Crash’ Vs. ‘Break in the Market’ – The Wall Street Journal MarketBeat

Efficient Market Theory and the Crisis – Jeremy Siegel

Midnight Candles – Bill Gross

Jeremy Grantham Third Quarter 2009 Letter

The Great Liquidity Race – Why Gold will Soar – PragCap