Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 11-9-09

November 9th, 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 at the following email address: .

Most of the news today revolves around quantitative easing and how the additional liquidity is propping up various financial asset markets. Readers should be aware that this weekend CB posted a new book review/summary of Jesse Livermore’s Methods of Trading in Stocks by Richard Wyckoff. CB believes that there are some quality insights in this book that any investor/trader can benefit from.

Upcoming Economic Data for the Day (all times EST)

11:30 AM 3-Month Bill Auction

11:30 AM 6-Month Bill Auction

1:00 PM 3-Yr Note Auction

Initial Public Offerings (“IPOs”) for the Week of November 9 -13, 2009

11-12-09 Dollar General – Broad selection of discount merchandise (“DG”)

11-12-09 rue21 – Teenage apparel retailer (“RUE”)

Source: WSJ Market Data Group.

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

List of Selected Companies with Third-Quarter Earnings for 11-9-09

News

Markets’ Inflation Readings Edge Upwards – Financial Times

Summary: According the Fed, U.S. Treasury Inflation Protected Securities (“TIPS”), which are Treasuries that adjust their principal and interest payments to account for inflation, have witnessed a surge in demand during the last 30 days as supply levels have dropped to the lowest point in three years. This increased demand for TIPS results from increased inflation expectations from market participants. Furthermore, the difference in yields on the 10-year Treasury and the 10-year TIPS has reached its highest level in the last 15 months. This difference in yield can provide an indication of the magnitude of the inflation expectation of market participants. At present, it appears there is a group of participants supporting increased interest rates, and some participants like “bond vigilantes” may be willing to help force long-term yields up to force the Fed’s hand.

CB: The Fed reported last week that increased inflation expectations were one of the factors that could change its policy regarding interest-rate targets. This sudden surge in TIPS demand is interesting due to the fact that inflation expectations have been holding at a stable level over the last few months. Rising interest-rate targets would be one of the many ways of tightening monetary policy and if done too early by any of the large central banks in the world, there could be very painful adverse effects. On the surface, the major concern with CB is that an uncoordinated tightening policy amongst the various nations could end up being harmful to the world economies. However, the Fed, as mentioned below, does not have to raise interest-rate targets to tighten monetary policy, instead it could sell assets back into the market. Yet, this course of action is not without risk either.

Uncertainty ‘High’ Over Inflation Outlook – Financial Times

Summary: James Bullard, the president of the Federal Reserve Bank of St. Louis, had the following comments regarding inflation and the current economic situation:

(1) The risk of deflation is declining, while the combination of large fiscal deficits and easy monetary policy could fuel inflation beyond targets for the next two to four years.

(2) For the rest of the year and into the first part of 2010, the Fed has to worry about creating a solid recovery, then it must monitor for inflation.

(3) For 2010, Mr. Bullard believes that GDP growth will be near 3.5% – 4%, while unemployment will peak slightly above 10% and then decline by approximately a point-and-a-half before the end of the year.

(4) Historically, the Fed waits approximately two and a half to three years after the end of a recession to raise rates; however, due to the very low current interest rates and their potential to fuel an asset bubble the Fed may act differently. Furthermore, the Fed has used tools that it has never used in the past, thus making this an unprecedented situation.

(5) Monetary tightening does not need to be raising rates, but can also be done through selling of assets. The Fed needs to reduce the size of its balance sheet.

CB: At the end of the day, this situation is scary due to the fact that it is unprecedented and the probability of this recovery being completed without hitch is very small. CB does not lack faith in the Fed or other central banks, but these officials are human and don’t know what will happen as a result of various actions. They have an idea, but won’t know for certain until they try their theories on the real-life laboratory of the global economy. However, unlike in an experiment or an economic model one cannot hold most variables as constant. Thus, it is highly unlikely that any plans to tighten monetary policy will proceed cleanly. Furthermore, one must factor in the effect of other economies on us, and that implies that other central banks have to get their recovery and tightening of monetary policy correct as well. This situation would be different if most of the economies did not exhibit so many vulnerabilities, but they do. Finally, if something does go wrong with the initial attempts to remove the extra money from the system, then does the government implement a short-term solution that only puts the economy in more long-term danger?

Fears as Price of Long-Dated Oil Soars – Financial Times

Summary: Significantly increased global liquidity and investor flows have contributed to shifting the crude forward curve up. Last week, the December 2017 on West Texas Intermediate increased to $99.43 per barrel, the highest level since October 2008. This rise in crude forward prices coincides with the release of a draft World Energy Outlook that reports that high-oil prices increased inflation, dampened growth, and reduced disposable income, thus increasing the vulnerability of oil-importing countries to the recession. Furthermore, the draft report states that another large increase in oil prices ,while countries are still recovering, could have a similar weakening effect on their economies. Yet, some believe that the rise in long-term oil prices reflects future supply fears, while others believe that too much focus should not be given to the long-term futures market as it usually is not an accurate predictor of the future.

For Stock Investors, Bad Economy Isn’t Bad – The Wall Street Journal

Summary: Many fear the effects of the weak economy regarding the long-term future of the stock market, while in the near-term the weak economy appears to foster continued positive performance. This performance results from the Fed keeping short-term interest rate targets near zero and continuing to inject billions of dollars into the financial system. Consequently, much of this easy money finds its way into the stock market, while also helping the corporate profits grow. Morgan Stanley relies on an indicator that tracks the amount of cash circulating in the global economy as a percentage of total economic activity. Due to the injections of money into the global system by many of the world’s central banks, this indicator is at its highest level since it began being monitored 30 years ago. While the other main economic motors struggle, the existence of cheap money continues to prop up the stock market. Some fund managers stated that they continue to be heavily invested in stocks as they see the rally extending into sometime next year. Yet, the long-term stability of the economy and the stock market are in doubt when considering the increasing deficits, the declining U.S. dollar, and eventual inflation. When the Fed begins to indicate that it will contract the stimulus, the probability of a market downturn will increase.

CB: Many investors are doing their best to time this market, which there isn’t anything wrong with that behavior. Yet, CB does not believe one should be “heavily” invested in stocks. It appears that many people are “heavily” invested in stocks and if there is a steep downturn, there is a chance that these investors will (1) not be able to take advantage of it and (2) could quickly lose their profits, especially if they are not able to quickly close out a position. If an investor believes the S&P 500 will reach 1200 before a potential downturn, then that is only an additional 12% gain from the current market level. Is that gain worth being heavily invested? Especially if the investor has been invested since March. All CB is saying, you want to protect yourself from the sudden drop, which could happen before the Fed begins to indicate stimulus contraction. The extra 12% gain is not worth risking a loss on the majority of one’s capital.

S&P Gauges Bond Loss Potential on Mortgages – The Wall Street Journal

Summary: Beginning in 2007, Standard & Poor’s (“S&P”) has downgraded approximately $1.5 trillion of U.S. residential-mortgage-backed bonds from triple-A to junk. Consequently, many banks and insurers, who rely on the S&P ratings when buying these bonds, may have to obtain additional capital in the billions as protection against the potential bond losses. Furthermore, in order to improve its rating system, S&P is now offering a service that will not only estimate the probability of a loss on the bonds, but also estimate the magnitude of the losses. Some believe that this is a step in the correct direction; however, more discussion must be held regarding what rating measures insurers should rely on in the future. Yet, for 2009 state insurance regulators have decided that the current bond ratings will not determine the amount of additional capital insurers must obtain to back up the 18,000 residential-mortgage bonds.

CB: What type of calculations are these insurance regulators going to use to determine the appropriate amount of capital required to back-up these bonds? Coming up with a new temporary system that does not rely on the ratings seems to be costly and rushed. At the end of the day, the amount of capital held should not be arbitrary, but instead dependent on the risk of these bonds being held. The regulators will also have to determine what to do if an insurer does not have adequate capital.

Stock Study Laments the ‘Great Depression of Listings’ – The Wall Street Journal

Summary: According to a Grant Thornton LLP report, over the last 11 years, the number of publicly traded businesses has declined 39% as IPOs have lagged behind stock delistings. Last year there were 5,401 listings on the Nasdaq Stock Market, the New York Stock Exchange, and the American Stock Exchange, compared to the 8,823 listings in 1997. Meanwhile there has been a surge in listings in the Chinese markets. Furthermore, the London Stock Exchange, the Borse Italiana, the Tokyo Stock Exchange, the Toronto Stock Exchange, the Australian Stock Exchange, and the Deutsche Borse have all grown from 1997 levels. This report cites the advent of online brokers and decreasing commission costs as the major cause of the decline in U.S. listings. The theory is that the decreased commissions made supporting small company trading and research unprofitable, thus resulting in fewer smaller company IPOs.

CB: CB would like to obtain this report to see how Grant Thornton came to its conclusions. For several years, the general sentiment regarding small companies not filing for IPOs was that increased compliance costs like Sarbanes Oxley deterred them from seeking financing from the public-equity markets.

Retailers Boost Spending on Holiday Advertising – The Wall Street Journal

Summary: Major retailers are aiming to start their holiday advertising and specials earlier than last year. For example, for the first two weeks of October, retailers reached 35% more viewers on cable and television than they did during the same period last year, according to TNS Media Intelligence. The goal is to cater to the consumer that is looking for early deals and does not want to wait until the last minute. Furthermore, retailers are increasing their ad spending. For instance, Gap plans to increase its spending by $25 million in the third quarter, and by $45 million in the fourth quarter. Yet, these retailers are competing for a shrinking-holiday market,which Deloitte estimates will be near $810 billion for 2009.

More Links of Note

Are ETFs Causing an Emerging-Markets Bubble? – The Wall Street Journal

Everyone In the Same Dollar Bet – PragCap

The Nation of Zombie Households – PragCap

The Second Wave Begins – Hussman