Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 1-6-10

January 6th, 2010 at 6:45 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 (“CB”), 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: .

General News & Headlines Summary

CB: Today some preliminary figures on the holiday retail sales were released to the public; however, more certain numbers will be released on Thursday and those are the numbers CB will consider and report. Currently, the estimates are that retail sales were 1.7% to 2.0% better in December than a year earlier. Again, more analysis and information will be provided when the more certain numbers are released.

News items not covered below are as follows: (1) U.S. prosecutors stated that they plan to bring more insider trading charges against Raj Rajaratnam; (2) Apple agreed to purchase Quattro Wireless, a mobile advertising company, for nearly $300 million and thus Apple has begun to enter Google’s advertising space; (3) ESPN will launch the first 3D television channel this summer in the U.S. and will include coverage of the World Cup and college sports; (4) Nintendo stated that sales of the Wii console rebounded in December and most likely will exceed 3 million units sold for the month; (5) Nestle agreed to purchase Kraft Food’s frozen-pizza operations in North America for $3.7 billion in cash, thus making Nestle a dominant frozen-pizza player in the $37 billion market; (6) Senator Bingaman of New Mexico believes that the cap and trade bill aimed at reducing greenhouse gas emissions is unlikely in 2010; (7) according to Fitch Ratings, the rate of payments more than 60 days delinquent on credit cards reached a record high of 4.54% in December; and (8) Dominion Virginia Power stated that it is spending $4 billion over the next three years to improve and expand its services, such expenditures will include new gas-fired generating units and a hybrid coal station.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

7:30 AM Challenger Job-Cut Report

8:15 AM ADP Employment Report

10:00 AM ISM Non-Mfg Index

10:30 AM EIA Petroleum Status Report

2:00 PM FOMC Minutes

Initial Public Offerings (”IPOs”) for the Week of January 4- 8, 2010

Data from the WSJ Market Data Group

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

News

Google Opens New Front in Smart Phone War – The Wall Street Journal

Summary: On Tuesday, Google unveiled the Nexus One, its new mobile phone, which it intends to sell exclusively through its own web store. The new phone, which was built by HTC, will put Google in direct competition with Apple’s iPhone. Furthermore, the Nexus One will run Google’s Android operating system. Perhaps the most significant factor of the Nexus One revolves around the fact that Google believes it is better to sell the phone directly from its website and not through service providers. Google believes that direct sales to the customers will result in more advanced features reaching the market faster as well as eventual price reductions on the high-end phones. At present, consumers will be able to buy the phone from Google’s website without wireless service for $529, however, if consumers want to enter into a two-year contract with T-Mobile USA the price of the phone becomes $179. Verizon plans to offer network support for the Nexus One through Google’s store in the spring, while AT&T will support the phone but on a slower data network. According to Google, the company plans to profit on the new phones primarily through mobile advertising revenue, the company views profits from the margins on the Nexus One as secondary. Some analysts believe that Google’s move to distribute the Nexus One through its own store could alienate its partners that have been critical to the growth of the Android platform.

CB: Google must believe that selling the Nexus One through its own online store is a better way of distributing the Android operating system and thus its mobile advertising amongst the masses, than the traditional model of phone distribution through the carriers. While the Nexus One maximizes the capabilities of the Android system, many believe that the currently the maximized Android system does not offer a significantly different experience than that provided on other Android phones. Will the maximized Android experience be enough to promote the phone that is being sold exclusively on one website? Granted Google has a large network effect and can easily draw new potential customers to its web store; however, its uncertain whether people will prefer buying through Google and then searching for a service provider versus going to a service provider and finding a phone. Sales will most likely take off after Verizon and other service providers begin to support the Nexus One. If mobile advertising revenue is the primary income stream, then Google needs to ramp up the penetration rate of the Android system. This plan could backfire on Google if the Nexus One is unable to stir much demand, or if that demand cannibalizes other Android phones and does not take market share from players like Apple. Also, one strength of the Nexus One is that it is GSM compatible. The GSM network represents nearly 80% of the global market for wireless services.

U.S. Pending Home Sales Plunge – Financial Times

Summary: According to the National Association of Realtors, pending home sales, which represent deals that are signed but not completed, unexpectedly fell 16% in the month of November primarily due to higher than normal activity in October as home buyers rushed to take advantage of the tax credit before it expired in November. This decline follows nine straight months of increases in pending sales. Yet, home sales remain 15.5% higher than a year earlier. This activity suggests that the rise in home sales has been significantly influenced by the tax credit, and that home sales will most likely decline for a period of time after it expires in April. Separately, the Commerce Department reported that factory orders increased 1.1% to a seasonally adjusted $365.30 billion in November partly due to a rise in oil prices.

CB: Such a drop based on government policy uncertainty suggests that at this time the economic recovery, at least in the housing sector, is not sustainable. These results may make market participants a bit apprehensive as the government and its agencies try to remove stimulus and government supports from the economy later in 2010. Furthermore, analysts are concerned about the impact of strategic defaults on the housing market. At present, nearly a quarter of homeowners have mortgages that are more than the values of their houses. If prices begin to decline again due to lack of demand (and the pending home sales is a strong leading indicator regarding the near-future direction of home sales), then the economy could witness many more defaults. The following is a quote from Robert Shiller, an economist and housing expert, from this weekend:

“Strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem. It will grow because of a building backlash against the financial sector, growing populist rhetoric, declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the Bible that they would repay.”

Prepare for Treacherous Ride as China Risks Multiply – Financial Times

Summary: The Chinese markets are likely to pose the following risks to investors: (1) rising inflation; (2) capital outflows; and (3) the tightening of loose monetary policy. These three factors could put downward pressure on stock prices in the mid- to long-term time period. Many believe that the 80% rise in the Shanghai Composite in 2009 was primarily due to low interest rates and large credit expansion policies. In 2009, Chinese lenders issued more than $1.3 trillion in new loans, while new loan growth in 2010 is expected to be less than 2009 the M2 money supply could still expand up to 20%. Consequently, investors need to pay close attention to changes in both fiscal and monetary policy. Such policy changes could significantly affect market valuations. For instance, many believe that China may fight the increasing inflation with significantly higher interest rates, which would, ideally, constrain and reduce market valuations. The China strategist at Morgan Stanley believes that a continued global recession will help Chinese stocks by constraining inflation, while a global recovery will increase inflation and thus hurt Chinese stocks with the subsequent interest rate hikes.

View of the Day: A GDP Boost for U.S. Stocks – Financial Times

Summary: Bill Miller, the Chairman of Legg Mason Capital Management, believes that the U.S. stock market may gain another 20% due to investors underestimating GDP growth.

“The fall in industrial output seen in the US has far exceeded the actual drop in demand, the shortfall having been made up from inventories. I expect to see a rapid restocking by US companies that will stimulate a sharp rise in economic growth over several quarters.”

Furthermore, he believes that GDP growth could be as high as 8%, while U.S. companies are delivering earnings consistently above expectations. Miller likes the technology and financial sectors.

CB: This is an argument that CB has been hearing recently, stocks will continue to rise as a result of increased corporate profitability and GDP growth. People making these arguments do not seem to be concerned about the quality of a recovery that is essentially government funded, or the consequences of such large increases in government funding. Furthermore, once the government stimulus is removed, does the U.S. expect to operate at the same level of growth it was with the stimulus? The stimulus and lagged changes in consumer behavior are distorting the market’s perception of future GDP growth. Miller could be right, the rally might go another 20%, however, before the year ends it could fall significantly as well.

Fed may Re-Enter MBS Market Later in 2010 – Reuters

Summary: Fed officials have been cited as claiming that the Fed would re-enter the mortgage-backed securities (“MBS”) market later in 2010 if its buying power is needed to hold down interest rates. The Fed is supposed to terminate its $1.25 trillion agency MBS purchasing program at the end of the first quarter. Yet, the Fed will reconsider its plans if needed.

CB: In line with the Fed’s modus operandi, it seems willing to do anything in its power to keep interest rates low. There will be consequences to these actions, that simply shift the economy from one problem to another.

December a Mixed Month for Auto Sales – The New York Times

Summary: According to Autodata, new-vehicle sales in the U.S. rose 15% in December. Yet, for 2009 both domestic and foreign automakers combined to sell roughly 10.4 million vehicles, a 21% drop from 2008. The following are some selected data points from the auto industry:

(1) Ford’s market share increased to 16.1% from 15% in 2008, which represented the first increase in market share since 1995.

(2) 2009 was the first year since 1962 that Chrysler failed to sale more than a million vehicles.

(3) General Motors estimates that the industry will sell 11 million to 12 million vehicles this year in the U.S.

CB: The below graphic shows the December and cumulative year-to-date U.S. sales figures for each auto manufacturer.