Tuesday, February 9th, 2010

Daily Download: Financial and Stock Investing News for 10-30-09

October 30th, 2009 at 5:21 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 Personal Income and Outlays

8:30 AM Employment Cost Index

9:45 AM Chicago PMI

9:55 AM Consumer Sentiment

3:00 PM Farm Prices

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 10-30-09

News

Economy Snaps Long Slump – The Wall Street Journal

Summary: Gross domestic product (“GDP”) increased 3.5% at a seasonally adjusted annual rate in the third quarter driven primarily by spending on automobiles and housing, both of which were propped up by significant government stimulus. The GDP component of motor vehicles and parts accounted for 1.0 percentage point of the 3.5% total GDP growth, while the private residential investment component, which increased 23.4%, accounted for a half of a percentage point of total GDP growth. According to the GDP report, the economy appears to be emerging from its nadir. Yet, according to the president of the White House Council of Economic Advisers, without government support it is unlikely that spending on automobiles and housing would have increased much, if at all. Separately, the Labor Department reported that initial claims for unemployment last week dropped by 1,000 to a seasonally adjusted 530,000. Productivity increases allow companies to continue to layoff employees.

CB: According to another Wall Street Journal article, on Thursday, the Obama administration endorsed the efforts to extend tax credits to home buyers and increase their availability. Nevertheless, if investors were to look at the economy as a company, they would describe its earnings’ quality as terrible. A significant portion of these gains result from the stimulus and are unsustainable, but does it matter? CB is more concerned about the unintended consequences of the current economic supports. The focus ultimately has to be based on the condition of the economy when the stimulus is removed. For every action there has to be a reaction – in most cases. For instance, decreased tax revenue now, will likely lead to decreased future expenditures at the state and local government levels over the next few reporting periods. Consider that reduction in GDP, along with a reduced or decreasing growth rate in automobiles and housing due to the government’s supports being removed. The possibilities are not pretty. Moreover, the U.S. runs the risk of becoming increasingly dependent on these government supports in the future, thus leading to further deficit expansion – which has many other consequences.

FDIC Chief Criticizes Reform Plan – The New York Times

Summary: On Thursday, the details of the legislation meant to regulate the financial industry were discussed before the House Financial Services Committee. Treasury Secretary Timothy Geithner stated that the legislation would give the proposed council of regulators the proper tools to oversee large financial institutions. Yet, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, believes that the council of regulators would not be able to protect the system from the shock of a large failure due to its lack of authority to confront systemic risks. Ms. Bair particularly believes that : (1) the proposed council of regulators should be headed by an independent chairman, instead of the Treasury secretary; (2) a prefunded Financial Company Resolution Fund has more advantages than an after-the-fact funded system; and (3) the council should be allowed to write rules that would serve as a floor instead of a ceiling for other financial agencies. Meanwhile, some republicans on the House Financial Services Committee are against the legislation because the taxpayer remains the first in line to bailout the failing firms, even though they would be reimbursed. Yet, Barney Frank, an author of the plan, stated that firms that fail under the proposed plan would experience the evaporation of the value of their stock, top executives would be dismissed, and creditors would not be able to recoup their loans.

CB: CB is in favor of Ms. Bair on this argument. CB doesn’t understand how consequences after the fact will prevent failures. Consequences, deter but do not prevent malevolent behaviors. If consequences worked well, then prisons would be empty. Furthermore, the consequences that Barney Frank propose will only add to the financial hardships in the economy. If a large bank were to fail and all the stock would lose its value, then that’s a tremendous hit the shareholders and the creditors have to bear. For the sake of the economy, preventive measures that would reduce systemic risk would be preferable to mainly after-the-fact remedies.

Nintendo Faces Profits Blow as Wii Sales Slow – Financial Times

Summary: On Thursday, Nintendo posted a 52% decrease in first-half profit from a year earlier as the company suffered from: (1) a lack of titles that could drive hardware sales; (2) the rise of the yen; and (3) the price cut on the Wii. Consequently, there are thoughts that Nintendo could release a new version of the Wii in 2010 in order to revitalize sales. Furthermore, sales of Wii games decreased 6% this year from a year earlier, even with a larger customer base to service. Finally, Nintendo revealed a new version of the DS that has a larger screen to make internet browsing more enjoyable. Many see this move as a way to make the DS more competitive against the iPhone.

CB: Nintendo is interesting in the sense that historically they have not hedged their foreign currency risk. CB has always felt that this was a bit irresponsible. It will be interesting to see how the company reacts to the new world of a weakening U.S. dollar and British pound.

Oil Firms’ Profits keep Dropping as Recession Shrinks Demand for Energy – The Washington Post

Summary: Even though a weakening U.S. dollar allowed oil prices to rebound from their lows earlier this year, oil prices remain much lower than the highs reached in 2009. These lower prices along with the lack of consumer demand for energy has resulted in steep profit declines for many oil companies. Refiners, in particular, are feeling the brunt of the current situation as they have to pay more for oil with the rising prices, but do not have sustainable demand for their end products. According to Bloomberg, crude oil has averaged $59 a barrel in New York for 2009, while last year it averaged $99.75 a barrel. According to industry analysts, the oil industry is still a long way from reaching the production and the profit levels witnessed in 2007 and 2008.

Asian Shipping Lines Suffer Further Losses – Financial Times

Summary: Neptune Orient Lines, which operates the fifth-largest container ship fleet in the world, and China Cosco, which is the worlds second-largest dry bulk shipowner, both announced losses during the third quarter. With a large excess supply of ships, the container shipping segment has been the worst hit segment of the industry. Several shipping lines across the world have already been bailed out or are in the process of being restructured. In general, container shipping freight rates remain at uneconomic levels.

Why the Renminbi has to Rise to Address Imbalances – Financial Times

Summary: When global leaders state that global imbalances must be reduced they are referring to both the U.S. current account deficit of $500 billion and China’s surplus of $350 billion. In order to reduce these deficits, the U.S. must increase its national savings and rely less on foreign funds, while China must increase domestic spending without so much dependence on exports. In the U.S., some increased household and business saving has occurred; however, this is not enough, a budget must be created that minimizes future deficits. In China, domestic spending primarily driven by fiscal incentives and credit expansion has managed to increase 15% this year. Yet, in order to significantly reduce global imbalances, the U.S. dollar must continue to weaken in order to increase U.S. exports and decrease imports. Nevertheless, China’s current policy of capping the rise of the renminbi will cause inflation to erupt in China and will result in an increasing trade surplus for China. Until China allows the renminbi to rise, global imbalances will not be resolved.

CB: Can there be a sustainable global recovery while these imbalances continue to exist? There must be a reason China is against relinquishing some of its export demand. China, which is a country considerably concerned with its GDP growth rate, may believe that the recent increases in domestic demand are not enough to make up for the potential decrease in exports. Yet, with asset prices rising all over China, its citizens must be experiencing a wealth-effect, which would likely support additional domestic spending. Nevertheless, CB would be interested in learning of their current credit expansion levels and how sustainable of a driver that is for domestic demand.

IMF Official Warns on Risk of LatAM Bubble – Financial Times

Summary: Nicholas Eyzaguirre, a director of the International Monetary Fund (“IMF”), stated that the Latin American economies that successfully managed the recession could be at risk for bubbles. These bubbles could result from the currency appreciation and the large inflows of foreign capital that these countries are currently facing. A potential problem is that if the current levels of public and private sector spending in these countries continues, then the central banks will have to resort to increasing interest rates to avoid inflation. Consequently, raised interest rates will likely attract more foreign capital. Mr. Eyzaguirre recommends that countries facing increasing foreign capital inflows begin to remove their stimulus supports. At present, Brazil has imposed a 2% tax on capital inflows to the equity and bond markets, while Colombia has begun to buy dollars to dampen the rise of the peso.

More Links of Note

Goldman, J.P. Morgan Economists Debate Shape of Recovery – The WSJ Blogs

Behind the Downfall of Washington Mutual – DealBook

Wall Street’s Sham Profits – Deal Journal

Economy is Getting an Artificial Boost – PragCap