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: Remember that below the summaries are a list of interesting links.

News not covered below: (1) Sony Pictures Entertainment announced that its planning to eliminate as much as 6.5% of its work force; (2) Yahoo and The Associated Press reached an agreement that allows the Yahoo News website to continue its use of various Associated Press content; (3)  despite declining revenues, the Gannett Company reported profits in the fourth quarter due to cost reductions and a deceleration in ad revenue declines; (4) Boston Scientific agreed to pay the Cordis unit of Johnson & Johnson $1.7 billion to end two patent disputes between the companies regarding coronary stents; (5) Humana reported a 44% rise in fourth-quarter profit from a year earlier as its Medicare Advantage segment offset commercial segment losses; (6) Royal Dutch Shell has outlined plans for a $12 billion, 50:50 biofuel joint venture with Cosan, the worlds largest producer of ethanol from sugar cane; (7) Bank of New York Mellon stated that it would purchase the Global Investment Servicing business of PNC Financial Services for $2.31 billion; (8) Copper’s price increased to $6,810 a ton after dropping to nearly a three-month low at $6,600 a ton on Friday; and (9) Google will launch an online store to sell business software made by third parties in an attempt to compete with Microsoft.

Upcoming Economic Data for the Day (all times EST)

7:45 AM      ICSC-Goldman Store Sales

8:55 AM      Redbook

10:00 AM  Pending Home Sales Index

11:30 AM    4-Week Bill Auction

Initial Public Offerings (”IPOs”) for the Week of February 1- 5, 2010

2/2/10 Film Department Hldgs LLC (“TFDI”) – Motion picture finishing and production company.

2/2/10 FriendFinder Networks (“FFN”) – Internet based social networking company.

2/2/10 Patriot Risk Management (“PMG”) – Insurance management company.

2/2/10 Imperial Capital Group (“ICG”) – Independent, full-service investment bank.

2/2/10 Ironwood BioPharm (“IRWD”) – Pharmaceutical company.

Data from the WSJ Market Data Group

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

News

Carriers Try Software for Data Flood – The Wall Street Journal

Summary: Wireless carriers are trying to use software and other tactics to streamline data traffic until more towers are installed and next-generation networks become available.  The increased use of smart phones has been the main source fueling the data explosion.  In the last three-years, AT&T, the carrier of the iPhone, has witnessed its data traffic increase roughly 50-fold.  Video use accounts for nearly 75% of the data traffic.  As a result of the surge in data traffic, in some large metropolitan markets like New York the quality of service is suffering and causing dropped calls and slow speeds.   Some methods to reduce the traffic are: (1) to implement a system  (created by Bytemobile) that allows a video to download as it is being watched, but with less stalling that usual; (2) another tactic is to match optimal file formats with the correct phone, which can reduce bandwidth needs by as much as 50%; and (3) to implement a system that diverts cellphones off the carrier network to local Wi-Fi when possible.  At present, according to Morgan Stanley, approximately 25% of U.S. customers have smart phones, but during peak hours in certain busy markets these networks are operating at or above 80% capacity.

Exxon Grew as Oil Industry Contracted – The New York Times

Summary: During a year when the oil industry in general contracted, Exxon Mobile took the following steps to grow: (1) a $31 billion purchase of XTO Energy; (2) establishing a significant presence in Iraq; (3) bidding $4 billion for a large field off the coast of Ghana; and (4) approving a project based in Papua New Guinea to export gas to China and Japan.  In a year where many rivals reduced capital expenditures, Exxon spent a record $27.1 billion on exploration and development.  Despite its fourth-quarter profit dropping 23% from a year earlier, Exxon’s fourth quarter results still beat analysts’ expectations.  During 2009,  the company managed to offset production declines in older fields with production at new projects in Qata.  As a result, the company managed to keep its production flat at approximately 2.39 million barrels a day compared to 2008’s production

CB: Such moves, if implemented correctly, should favor the company greatly when demand comes back for oil and gas.

Double Dip Risk Rises After Inventory Blowout – Bloomberg

Summary: On Friday, the Commerce Department reported that U.S. gross domestic product (“GDP”) grew approximately 5.7% in the fourth quarter of 2009 (advance estimate) with changes in inventories accounting for 3.4 percentage points of the total growth (CB: nearly 60% of GDP).  According to methodologies used by Alan Blinder, inventories account for less than 1 percentage point of national output, but account for nearly 34% of the historical fluctuations in output.  Historically, inventory levels are volatile due to the difficulty in forecasting the future.  If sales unexpectedly decrease, then inventory levels will be high and the producer will cut back production.  Yet, if sales unexpectedly surge, inventory levels will become depleted and the producer will have to increase production.  There have been nine quarters since 1970 where GDP growth was at least 3% and changes in inventories represented 50% or more of the GDP growth.  Of those nine quarter, the average GDP growth rate was 6.6%, while the average inventory contribution was 4.4% (CB: nearly 67% of GDP).  Yet, the average growth rate of the following quarter was .9%.

CB: It will be interesting to see how the next two revisions for GDP play out.  In the third quarter, the GDP growth was initially stated at 3.5% and was subsequently revised down to 2.2%.  Unless sales dramatically improve and they haven’t at this point, the inventory build-up witnessed in the fourth quarter might not be used much in the first quarter of 2010, which would weigh against next quarter’s GDP growth.  Furthermore, according to John Williams at Shadow Government Statistics, GDP is one of the least reliable government numbers due to the upward-biased changes to its calculation methodologies over the years and the flexibility economists have to massage the numbers especially with the advance estimate.  Separately, David Rosenberg of Gluskin Sheff had the following thoughts on the GDP growth number:

Here is another way to assess the data: We saw history in the making — an eye-popping 5.7% GDP growth rate the exact same quarter that the unemployment rate rose 40 basis points, to 10%. It is like Houdini’s rabbit! This has never happened before. Normally, when we see a GDP number like this the unemployment rate declines 20 basis points during the quarter in question. The flip side is that in the past, when the unemployment rate rose as much as it did in the fourth quarter, believe it or not, in those quarters real GDP actually contracted fractionally (at a 0.5% annual rate).

We went all the way back to 1947 and so we can say with 100% confidence that at no time in the past 62 years has a 5.7% GDP advance coincided with such a rise in the jobless rate. It makes no sense.

As we said in our Friday note, the really big deal in the U.S. GDP report was the slowing in real domestic demand, to 1.7% annualized in Q4 from 2.3% in Q3. Consumer spending actually slowed to a 2.0% annual rate from 2.8%. Here we are, eight quarters after the recession began, and real GDP is still 1.8% below the level prevailing at the onset of the downturn back in the fall of 2007. Until now, it has never before, at least back to 1947, taken more than eight quarters to re-attain the prior GDP peak (it usually takes between four and five quarters). These did not make the headlines.

Related Reading: Rosenberg – Expect Big Time Revisions to the Houdini Q4 GDP

Burkle Targets Barnes & Noble – The Wall Street Journal

Summary: Ron Burkle and his investment company, Yucaipia Cos, sent a letter to Barnes & Noble stating their interest in increasing their current 19% ownership stake in the company to 37%.  In the letter, he states that: (1) it is not fair that the Riggio family, the founders, hold 37% of the company, while no other shareholder can own 20% of the company before setting off the poison-pill rights plan; (2) such a poison pill works against the interests of the shareholders not belonging to the Riggio family; (3) the reason for his accumulation of shares is due to the company being undervalued; and (4) he disapproved of Barnes & Noble purchasing Barnes & Noble College Booksellers, a separate entity, and such a purchase indicates that the company is operated for the benefit of certain insiders.

Related Reading: Barnes & Noble Investor Asks to Raise Stake – The New York Times

Short View: American Bulls – Financial Times & Data Hit Hopeful Notes for Economy – The Wall Street Journal & Demand for Corporate Loans in U.S. Falls – Financial Times & Global Manufacturing Surges Back – Financial Times

Summary: According to the Institute for Supply Management (“ISM”), the ISM index increased to 58.4 during January from 54.9 in December, for the sixth consecutive month of increase.   Furthermore, 13 out of 18 industries experienced growth.  The chair of the ISM survey, even stated that the manufacturing sector is now in recovery.  Yet, market participants need to be cautious of the following: (1) the rise of this index has been fueled by the restocking of depleted inventories, which appears likely to end soon; and (2) exports decreased during the month as the U.S. dollar strengthened.

Moreover, China, India, South Korea, and Taiwan have all reported strong industrial activity for January.

According to the Federal Reserve, despite U.S. banks reducing the hurdles for large companies to borrow money, loan demand for both businesses and households continued to decline.  The Fed’s survey of loan-officers showed that for the first time since 2007, the percentage of banks that reduced their lending standards was greater than those that tightened their standards.  Economists believe that businesses worry about taking additional risks at this time of uncertainty, and thus are not seeking loans.

CB: The following are comments respondents wrote on the ISM survey:

• “Commodity prices are moving up again.” (Printing & Related Support Activities)
• “We now believe that we will not have a good upturn until the 3rd quarter of 2010.” (Primary Metals)
• “Overall activity is significantly higher than we typically see this time of year.” (Machinery)
• “Orders from automotive very strong.” (Electrical Equipment, Appliances & Components)
• “Lead times continue to be a problem for electronic components.” (Computer & Electronic Products)

Despite the good manufacturing news, the article above does express some caveats worth considering.  All the articles attributed the rebound in stocks today to the excellent manufacturing data. While this is true, it should be noted these gains were made on reduced volume and does not say too much regarding the market’s sentiment towards the fundamentals.  CB would have been more impressed by the day’s rise if it had occurred on volume similar to that experienced on Friday.  On face value, the recent news has been good and one would expect more buying power than what is currently being witnessed.  For instance, the Dow Jones Industrial Average ’s(“DJIA”) volume for Monday was: (1) 37.4% less than Friday’s; (2) 15.6% less than its 12-day exponential moving average (“EMA”); and (3) 15.8% less than its 200-day EMA.  Furthermore, the Nasdaq Composite Index reported volume on Monday that was approximately 42% less than Friday’s.

Related Reading: Manufacturing Expanded Last Month – The New York Times

Moody’s Warns on Deluge of Debt – The Wall Street Journal

Summary: According to a report released by Moody’s Investors Service, 995 of the 1,300 companies Moody’s has listed with a junk rating, on non-investment grade, have over $800 billion of debt coming due between 2010 and 2014.  Yet, nearly $700 billion of the $800 billion will come due during 2012 through 2014.  Kevin Cassidy of Moody’s believes that the current maturities can be handled, while the later maturities may cause some problems if the future economic situation has not improved significantly from the current one.

CB: Given the recent strength and demand in the high-yield, or junk, bond market, the current maturities should be easily handled by the market as long as: (1) yields on Treasurys remain low; (2) investors continue to find comfort with taking additional risk to their portfolio; (3) no large default sovereign or corporate occurs; and (4) the general default rate plays out the way many expect it to with decreased defaults.  As long as the junk bonds continue to yield well with few defaults, investors may not fully understand the risk they are undertaking.  Junk bonds had a great year in 2009 regarding both returns and the $145 billion that were issued to the market.  The market in CB’s mind has risk of dropping significantly if there are investors in junk bonds that usually would not be investing in them.  All it takes is a hiccup in confidence before the less familiar people run or pricing reevaluates risk.  Nevertheless, a corporation may be able to take care of these future debt maturities by refinancing in the current high demand market.  Such actions, if done on a large enough scale combined with the right amount of economic recovery, may forestall or eschew some defaults.  In fact, companies that could be potential short candidates or companies to avoid on the long side would be those unable to obtain such refinancing at this time.  For those interested in reading more: (1) in the Daily DL for 1-19-10, there is an article that provides details on junk-bond returns in 2009 as well as the record amount of recent junk bond offerings; (2) Leon Cooperman briefly discusses his strategy for holding nearly 25% of his assets under management in high-yield debt; (3) in the Daily DL for 1-11-10, there is a brief discussion regarding: (a) the reduced expected-default rates for high-yield debt during 2010, with Moody’s expected default rate at 4.3%; and (b) the reasons for the increased demand in high-yield debt; and (4) in the Daily DL for 12-21-09, there is more analysis on the high-yield market as a whole.

More Links of Note

An Analysis of Berkshire Hathaway – T2 Partners LLC

Credit Suisse: Buy the Dips – the Bear isn’t Here Yet – PragCap

The Best Approach to 2010: The Opposite of 2009? – PragCap

Reported Earnings versus “Owner Earnings” – Hussman Funds

How to Reform our Financial System – Volcker

The U.S. has a Currency Problem – Paul Kedrosky

Risks Lurk for ETF Investors – The Wall Street Journal

Cloudy Future for Fannie and Freddie – The New York Times

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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The below contains some interesting data from David Rosenberg from Gluskin Sheff (h/t www.pragcap.com).  The graphic is self explanatory and looks at where we are economically compared to past recessions after the stock market rose 49% from the low.  As we usually state, one should always be careful with historical comparisons as past recessions have different characteristics.  Furthermore, we recognize that historically the market will rise before the economy recovers.

One item of quick note:  We believe that the investor should be careful when looking at corporate profits, which for the most part continue to drop whiling beating analysts’ expectations.  There is a significant amount of earnings management and nonrecurring cost cuts being implemented at this time with companies to prop up their earnings to the level they desire.  The bigger the company, the more easy it is to do and the harder at times for the investor to track.  At Chain Bridge, we believe in looking at the top-line in addition to the earnings.  From our own analysis, we’ve seen many situations where the revenue is decreasing but earnings are dropping while beating expectations.  We would recommend some additional due diligence in such situations (specifically focused on customers and long-term revenue generating ability).

The big question everyone has been talking/writing about is whether this the start of a bull market or a bear market rally driven by short covering and excitement that the recession could be bottoming?  The data below may help you come to your own conclusions for the time being.

Source: Gluskin Sheff

Also, this morning, David Rosenberg discussed a potential deflationary environment and ways to invest in such a dismal scenario.  As investors, we would much rather see inflation, at least in the short-term.  In such a situation, Rosenberg believes it ideal to focus on income and capital preservation.

1 – A focus on safe yield, wherever you can get it. High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs)

2 – Equities: focus on reliable dividend growth/yield; preferred shares (“income” orientation)

3 – Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies at all costs.

4 – Ultra-selectivity with regards to financials. Same for retailing.

5 – Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care).

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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