Daily Download: Financial and Stock Investing News for 11-10-09

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:  .

Upcoming Economic Data for the Day (all times EST)

7:45 AM         ICSC – Goldman Store Sales

8:55 AM         Redbook

11:30 PM       4-Week Bill Auction

1:00 PM         10-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 11-10-09

News

Dow Leaps in Skeptics’ Rally – The Wall Street Journal

Summary:  On Monday, the rally continued as the Dow Jones Industrial Average posted a gain of 2.03% on its way to 10,226.94, its highest finish in 13-months.  The market surge is thought to be fueled by the trillions of dollars in debt-financed stimulus that the world’s nations have been placing into the global economy.  Despite being skeptical of the rally, many fund managers have participated trying to post gains in order to keep up with the market.  In fact, many of these fund managers are fully invested.  Yet, they feel similar to Gordon Fowler, who oversees $17 billion for Glenmede Trust, and says that he does not foresee a peaceful outcome considering the currently unsustainable large debt levels.

CB: How does an investor managing billions of dollars fully invest in a rally that he does not believe in?  Again, as mentioned yesterday, there is nothing wrong with betting a portion of one’s capital in a beneficial risk-reward situation, but to fully invest, especially if it does not feel right, is irresponsible behavior to the fund’s investors.  These large funds cannot simply close out some of their positions.  Also, hedge funds tend to group up in similar companies.  Thus in some situations when one large fund closes out of a company, the price dips and the others tend to follow causing a drastic drop in the price.  Separately, CB has observed that the recent up days for the market have occurred on decreasing volume.

Fewer Banks Decide to Tighten Credit – The Wall Street Journal

Summary:  On Monday, the Federal Reserve released the results of its Senior Loan Officer Opinion Survey on Bank Lending Practices, the following summarizes some of the main points implied from the banks surveyed, which covers a three-month period ending in October :

(1)  Approximately 15% of the banks stated that they increased the strictness of their loan standards for businesses of all sizes during the three-month period, a reduction of nearly half from the prior three-month period.  These banks tightened their lending primarily due to economic uncertainty or industry-specific issues.

(2)  Demand for most loans is still weak.

(3)  Approximately 16% of the banks increased their lending standards for small businesses with annual sales of less than $50 million during the three-month period.  Yet, for the prior three-month period, more than a third of the banks decided to tighten these standards.

(4)  Nearly 15% of banks stated that they increased lending standards on credit cards and other consumer loans.

(5)  Similar to the July period, nearly 30% of the banks tightened standards on revolving home-equity lines of credit.

(6)  Approximately 26% stated that standards for residential real-estate loans tightened, an increase from the 22% in July.  Yet, demand for these real-estate loans did increase.

CB: While generally less banks tightening their credit standards is good news, it would be better if demand for loans was increasing and banks were actually relaxing their standards – yet neither of these events has occurred.

Life on Severance: Comfort, The Crisis – The Wall Street Journal

Summary:  Newly unemployed people tend to spend and live as they did before unemployment primarily due to support from unemployment benefits and severance pay.  Yet, as job searches start to take longer than six-months, the unemployed generally begin to realize that their severance and unemployment benefits are depleting much faster than originally expected.  According to the National Employment Law Project, if unemployment benefits had not been extended by nearly 20-weeks this year, then approximately 1.3 million people would have stopped receiving benefits by the end of the year.

CB: CB focused more on the facts of the article than the personal stories.  Unemployment is not a pretty subject and, at times, it can be very sad when one considers the faces behind the weekly and monthly statistics.  Nevertheless, the article seems to imply that even though unemployment has been rising, people do not immediately adjust their spending habits.  In fact, they seem to adjust their habits after their severance or unemployment benefits are nearly finished.  Consequently, the negative impact on consumer spending may take longer than expected to realize, which may lead one to question the near-term sustainability of the retail sales increases currently being witnessed.  However, this adjustment period, which seems to be near six months, could become shorter as companies continue to reduce the severance offered to former employees.

Gold Breaks $1,100 Mark,  View of Day:  Gold’s New Standard,  & Dollar Drops to 15-Month Low – Financial Times

Summary: On Monday, gold reached a new high of $1,110.85 per ounce, a gain of 26.5% for the year, before closing at $1,107.  Analysts believe that if more emerging market countries decide to replicate India’s gold purchase from last week, then the gold rally will become stronger and possibly break through the $1,500-per-ounce level.  Currently, a floor of support is being established at the $1,000-per-ounce level.  Furthermore, RBC Capital Markets believes that the current valuations for gold mining equities are “attractive” as many are being valued with the long-term price of gold being near $900 an ounce.  Separately, the U.S. dollar fell to its lowest level in 15 months on a trade-weighted basis.  The general belief is that the Fed’s announcement last week has helped to support an increased risk appetite for risky assets and thus continued to pressure the U.S. dollar.

CB: While many investors and traders believe that gold will continue to go higher, CB is not sure it can support the endorsement of the gold miners as investments.  As Jim Rogers has stated, if you want to invest in gold then invest in gold or an exchange traded fund (“ETF”) that tracks the performance of gold.  Currently, CB’s data shows the price/earnings ratio for the gold and silver mining industry near 35.3 times, one of the highest ratios for all the industries.  Meanwhile, this same mining industry is trading near a 36.7 time price/free cash flow ratio, which is also very high.  Mining, as an industry, does not have consistent earning periods and usually witnesses very volatile operating results quarter-to-quarter.  Furthermore, there haven’t been any new significant discoveries of gold in years – most of these companies’ mines are depleting.

Related Reading: Gold Extends its Record Run – The Wall Street Journal

Not all Bubbles Present a Risk to the Economy – Financial Times

Summary: There are two types of asset-price bubbles: (1) a credit boom bubble and (2) a pure irrational exuberance bubble.  The credit boom bubble is fueled by a positive feedback loop amongst rising demand for assets, rising asset prices, and lending against these assets.  Eventually, asset prices drop and loans default, the result being eroded balance sheets, much financial wealth destruction, and likely financial crisis.  The pure irrational exuberance bubble is not as dangerous due to the fact that it does not involve lending against the financial asset to fuel its rise.  Thus, when the second type of bubble bursts the damage is relatively contained and does not result in as many destroyed balance sheets.  If there are bubbles in the U.S. and Europe, they are not of the credit boom variety especially with credit markets remaining tight.  As a result, there is little sense in the Fed tightening monetary policy at this time for the sake of preventing a bubble.

Buying One, Buffett Aims to Sell Off 2 Railroads – The New York Times

Summary: Despite not being required to sell his holdings in Union Pacific and Norfolk Southern, Warren Buffett will liquidate both rail companies before the completion of Berkshire Hathaway’s purchase of Burlington Northern Santa Fe.

Electronic Arts to Cut Workers, Buy Playfish – The Wall Street Journal

Summary: Electronic Arts (“EA”) reported a 12% decline in revenue and a larger quarterly loss for the third quarter.  In efforts to save EA $100 million on an annual basis, the company’s management plans to cut nearly 1,500 jobs by March as it closes down a few facilities.  Furthermore, the industry slow down in gaming sales has caused EA to focus on developing fewer games than it has in the past.  Moreover, EA acquired Playfish, an online-gaming company, as it tries to establish a presence in the still small but growing social gaming arena.

CB: In the early spring of this year, many analysts and investors made remarks on the strength of the video game industry and its ability to resist the downturn.  Some assigned credit to the industry’s historic ability to resist a downturn, while others cited the Wii’s appeal to the causal gamer for this feat.  However, a few people concluded that the gaming industry would not evade the effects of the downturn in 2009 when considering: (1) the weak line up of games in 2009, compared to last year; (2) the saturation point of Wii consoles; (3) the decreasing quality of Wii games, or essentially the Atari effect; (4) the fact that the major crisis occurred towards the end of the year and did not have ample opportunity to show its force on the gaming industry; and (5) this downturn was much worst than the last two.  This became more obvious throughout the year as large titles scheduled for release before year end, continued to be delayed until calendar year 2010.  Nevertheless, EA’s current situation is a result of: (1) the industry headwinds mentioned above; (2) its overlapping-operational bureaucracy; and (3) its inability to limit its focus to a few core and very profitable franchises.  Basically, EA has much household cleaning to conduct if it wants to substantially improve its bottom line.

Related Reading: Electronic Arts Plans to Cut 1,500 Jobs – The New York Times

Google Wagers on Cellphone Ads -  The Wall Street Journal

Summary: On Monday, Google announced that it would purchase mobile advertising start-up AdMob Inc., which is estimated to have between $45 million to $60 million in annual revenue, for $750 million in stock.  This purchase is an attempt by Google to extend its large Internet advertising empire to mobile phones.  At present, AdMob, one of the largest mobile-advertising providers, sells its ads across thousands of websites customized for cellphones and has ads that run on Apple’s iPhone.  While a still small market, the emergence of larger-screen phones has increased the demand for mobile advertising.  According to eMarketer, U.S. spending on mobile advertising is expected to increase 43% from 2009 to 2010 to $593 million.

CB: Google’s stock price is at a 52-week high, CB would not be surprised to watch Google deploy more of its stock for acquisitions, especially if the company’s management believes the stock to be expensive.

Related Reading: Google Set to Acquire AdMob for $750 Million – The New York Times

More Links of Note

A Chart of Roubini’s Horrible Trackrecord in 2009 – Wall St. Cheat Sheet

Jim Rogers on Gold, Bubbles, Commodities, Equities, and Roubini – Wall St. Cheat Sheet

Chain Bridge Investing (“we” or “CBI”) states at the outset that the opinions, judgments and derivation of thinking in this writing are solely Chain Bridge Investing’s. It is imperative that any judgment or valuation you take from information dispersed by CBI be examined within the context of your portfolio investment and overall objectives. To that end we urge you to contact your investment advisor or portfolio manager to insure that the information or suggestions proposed by CBI conforms to your needs and financial strategy.

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Tagged with bubbles, Credit Markets, Electronic Arts, Gaming, Gold, Google, Market Rally, Tightening, U.S. Dollar, Unemployment