Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 1-11-10

January 11th, 2010 at 8:15 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: Be sure to check out a new weekly feature at Chain Bridge Investing: Insider Trading: Significant Insider Buys from 1/1 – 8/10.

News items not covered below are as follows: (1) NBC Universal stated that it is projecting losses on televising the Winter Olympics, which is primarily due to the large rights fee NBC paid to broadcast the games; (2) Japan Airlines plans to cut 15,600 jobs and file for bankruptcy, the company rejected cash bids from Delta and American Airlines; (3) NBC is moving Jay Leno back to the 11:35 pm time slot for a half hour show; (4) after devaluing Venezuela’s currency, President Hugo Chavez has threatened to seize businesses with troops that raise prices; and (5) Belarus claims that oil talks with Russia have failed due to Russia ignoring information.

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 10-Yr TIPS Auction

Initial Public Offerings (”IPOs”) for the Week of January 11- 15, 2010

Data from the WSJ Market Data Group

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

News

U.S. Banks Braced for Bonus Backlash – Financial Times

Summary: The banks are preparing to unveil their bonus packages and are likely to face much backlash due to the size of these packages. While bankers state that the bonuses will represent the smallest percentage of revenues in years, the absolute numbers are large enough to provoke public outrage. One expert believes that the bonuses will be roughly $150 billion for last year. Yet, the banks are still calculating their final compensation ratios. No one doubts the fact that the large banks were profitable this year; however, many returned to their old practices and would not have been able to make those profits if the government had not aided them considerably.

CB: This is one of those issues where the majority of the people feel the same: large bonuses at banks that were near collapse nearly a year ago is unacceptable. The banks did not fix themselves, the government helped and also prevented AIG from failing, which would have been a much more traumatic experience for the whole financial industry. Some additional thoughts on this matter were written in a closely related post in the Daily DL for 12-10-09.

China Becomes World’s No. 1 Exporter, Passing Germany – The Associated Press

Summary: With China’s December exports increasing 17.7% for the first increase in nearly 14 months, China passes Germany as the lead exporter in the world. Total 2009 exports for China were estimated to be $1.2 trillion, while Germany’s total 2009 exports were estimated to be $1.17 trillion. China’s exporting success is primarily due to the ability of its low-cost manufacturers to maintain respectable sales levels abroad during the global recession. China is best known for supplying shoes, toys, furniture, and other basic goods to the world, while Germany’s primary exports are machinery and higher value products. Furthermore, in 2009, China surpassed the U.S. as the world’s largest auto market.

Junk-Bond Rally Loses No Steam – The Wall Street Journal

Summary: According to Dealogic, despite the default of four high-yield borrowers last week, there was $2.37 billion of high-yield debt issuance in the same period, which rivals the start of 2005 in regards to high-yield supply entering the markets. Market participants continue to remain optimistic regarding high-yield investments due to: (1) their optimistic views on the recovery of the economy; (2) easier refinancing situations; and (3) better performances from the more economically sensitive industries like the industrial and container industries. Many market participants expect 2010 default rates to be much lower than the 10.9% rate that Standard and Poor’s calculated for 2009. At present, the following are the rating agencies’ estimates for the 2010 high-yield default rates: (1) Fitch Ratings expects defaults to range from 6% to 7%; (2) Standard & Poor’s expects the default rate to be near 6.9% for the end of the third quarter; and (3) Moody’s Investors Service is expecting a default rate near 4.3% for the year, which would be close to the long-term average in the markets and much less than the default rate for 2009. Furthermore, one expert believes that the way the market is trading implies that the default rate this year will be much lower than past years.

CB: In response to the expert who believes that “the way the market is trading implies that the default rate this year will be much lower than past years,” CB would say that the market can be and often is wrong. The market reflects a consensus of many current views and perceptions. Since none of these market participants can foresee the future (nor do any disclose their full list of assumptions), relying on the consensus as a factor to estimate the default rate is an error. The optimism surrounding high-yield debt was discussed more in the Daily DL for 12-21-09.

China’s Growing Hunger for Steel Dominates Sector – The Wall Street Journal

Summary: At present, China is the world’s largest producer of steel and is expected to produce 600 million metric tons this year, nearly half of the world’s output. Meanwhile, Japan, the world’s second largest steel producer, is expected to make nearly 100 metric tons for 2010. As a result of the increased demand for steel, iron-ore spot prices are near $110 a metric ton and continue to climb, while coal prices have risen more than 30%. China’s increased output and demand growth in steel has helped to increase the prices of most metal commodities. Companies that expect to benefit are: (1) BHP Billiton; (2) Rio Tinto, which is China’s largest seller of iron ore; (3) Fortescue Metals Group; and (4) Vale. All of these companies are increasing iron-ore production and some are increasing coal production to match China’s growing demand. One potential problem in China regarding steel, is that the demand for steel is leading to price increases and rising raw-material costs, which could create an inflationary surge. For instance, Baosteel, a Chinese steel maker, will increase steel-sheet prices by 5% in February – the third price increase in three months. Furthermore, China’s steel manufacturers are exporting less steel to foreign countries, thus helping large steel producers across the globe to maintain and increase their steel prices. Yet, the increased demand in China for iron-ore and coal, will likely increase the raw material costs of steel manufacturers across the world.

CB: China’s increased demand for steel has rippling effects to many companies and industries. In the following, CB briefly reviews a few of these effects:

(1) China is not alone in its increased steel demand. In the Daily DL for 1-7-10, an article discusses India’s 5% export duty on iron-ore to discourage domestic producers from exporting the key raw material for steel to other countries. India intends to maintain its iron-ore supplies for its own steel industry. Both China and India are expected to be fast growing and in the process of increasing industrialization, which implies that their need for steel and iron ore will likely remain strong for some time. Their policies of keeping their resources domestic will help to support prices of both steel and iron ore.

(2) In response to the expected growing demand for iron ore in Asia and more specifically China and India, Rio Tinto and BHP Billiton have proposed an iron-ore joint venture in Australia, which China’s steel industry has officially opposed. More details regarding this proposal can be found in the Daily DL for 12-10-09.

(3) According to Peabody Energy, China and India will continue to lead both economic expansion and coal demand growth. At present, China is believed to be structurally short on metallurgical coal, which is used in the production of steel, while India states that it may be 200 million tons short of coal by 2014. The best place for China and India to obtain additional coal supplies will be Australia and then Mongolia. The most likely location to benefit in the U.S. will be on the West Coast using Powder River Basin products.

(4) Jim Chanos, as discussed in the Daily DL for 1-8-09 and CB’s coverage of his interview with CNBC, believes that one of the proper ways to short China is through the miners and construction companies that have exposure to China. There are many large miners, those mentioned above are a few, that would experience a significant operation setback if China’s demand for steel, iron ore, and coal were to disappear or diminish. One may also want to consider companies dependent on those miners in Australia.

Chinese Grab Top Slots in Lenders’ League – Financial Times

Summary: China Merchants Bank, China Citic, ICBC, and China Con-struction Bank took four of the top five rankings as the most highly valued financial institutions, as ranked by price-to-book ratios. All four banks had price-to-book ratios greater than three, which is high considering that during the last six years the average price-to-book ratio of the largest 50 banks has decreased from 2 to 1. The recent market trends have shown that investors are continuing to increase their valuation of emerging market banks. The reason for the value assigned to the Chinese banks is primarily due to the view that China’s economy is less vulnerable to downturn, while the western markets are experiencing the worst prospects for 20 years.

More Links of Note

John Taylor Responds to Ben Bernanke – The Wall Street Journal

7 Reasons Investors are Complacent – PragCap

2010: A year of Uncertainty – John Mauldin

America Slides Deeper into Depression as Wall street Revels – Telegraph

Lessons from Merrill Lynch – Must Read

Wall Street, Politicians still Don’t Get it – Bill Fleckenstein

The First Phase of the U.S. Recovery and Beyond – James Bullard