Weekly Markets Review 12-24-2009

December 24, 2009

“Christmas, my child, is love in action. Every time we love, every time we give, it’s Christmas.” -Dale Evans Roger
“ You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people's initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves.” -Abraham Lincoln
Markets drifted higher during the holiday shortened week, largely on light volume and positive economic news. The S&P 500, DJIA and Nasdaq gained 2.4%, 2% and 3.7%, respectively.
Still, recent polls show that Americans are as pessimistic as they have been in some time regarding the economy, our leadership institutions like the Fed and Treasury Department, and President Obama’s administration. An NBC/Wall Street Journal poll last week showed that 55% of Americans feel the nation is heading in the wrong direction. This is the highest level since January of this year, when the financial crisis raged and President Obama had just taken office.
Merrill Lynch researchers picked up on this and in a recent note to clients, saying that 2010 would be the year we finally break out of the “pessimism bubble.” As there is much to be optimistic about, we agree. The economy continues to progress towards a robust recovery, given that there will be setbacks. Net new jobs and payroll growth could be just on the horizon. Just today, orders for durable goods rose and fewer Americans than anticipated filed claims for jobless benefits. Companies may, in fact, be gaining confidence that this economic expansion is sustainable.
Ten years ago, the mood was the opposite. Optimism reigned, techs roared, and the markets continued upwards unabatedly. The decade that followed brought two recessions, two bear markets, two wars and a poisonous political atmosphere. Every major asset class beat U.S. stocks by delivering positive returns. It shook our faith in equities to the core. But that is the way Wall Street works. Optimism to pessimism. And from low expectations can come good things. Equities could be the direct beneficiary of outperformance of such low expectations. Jon Markman points out that “periods of widespread pessimism have historically coincided with excellent times to buy stocks for the long haul.” He continues by saying that, with pessimism high, interest rates low, more stimulus expected to take place, corporate earnings on track for upside surprises and so many investors still waiting for the proper entry point, stocks could be positioning themselves for an upward run throughout 2010. Stay tuned…
Equity Markets Review
* Gross domestic product in the United States grew at a rate of 2.2 percent, according to the revised, third estimate from the Bureau of Economic Analysis. The advance estimate of third quarter GDP growth, issued Oct. 29, was 3.6 percent, and the second estimate, issued Nov. 24, was 2.8 percent.
* The Treasury yield curve, the difference between two and 10-year Treasury note yields, grew to a record 281.4 basis points Monday. A barometer of the U.S. economy's health, the gap increased from 145 basis points at the beginning of the year as the U.S. Federal Reserve kept its target interest rate at near-zero levels and the nation extended the average maturity of its debt. "If you are going to have a recovery you are going to have higher inflationary pressures, so the curve should continue to steepen from here," Dan Greenhaus, chief economic strategist at Miller Tabak & Co. told Bloomberg News.
* The Equipment Leasing and Finance Association, a trade group for the lenders that finance half of all the capital equipment investment in the U.S., says the sharp pullback in business borrowing that marked the recent downturn moderated notably in November. ELFA's capex financing index fell 7% to $4B, the smallest year-on-year decline this year. "While by no means robust, demand for capital equipment seems to picking up," ELFA president Ralph Petta said. " But other metrics, particularly a jump in chargeoffs and delinquencies suggested businesses were still struggling to service existing financings.
* Sales of previously owned homes jumped to the highest level in nearly three years in another sign the economic recovery was gaining steam, reports the National Association of Realtors.
* Following a strong rise in existing home sales Tuesday, new home sales came in at a dismal 355,000 units/year (consensus 425K), down 11.3% from last month's 400K, itself revised from an earlier 430K. The striking downturn was attributed to uncertainty over the extension of the first-time homebuyer tax credit, which kicked-in in November for new home sales. With the credit now having been extended, sales could regain momentum in coming months, which may be why the data made few waves on Wall Street. Still, the reading exposes how dependent the housing recovery is on Uncle Sam.
* University of Michigan's Consumer Confidence Index fell to 72.5 from a preliminary reading of 73.4; economists were expecting 73.8. Still, confidence remained vastly improved from a year ago, when the index stood at 60.1.
* General Motors Co. hired Microsoft Corp. Chief Financial Officer Chris Liddell to the same position, GM said Monday. Liddell replaces Ray Young, who will be transferred to China as the automaker's vice president of international operations.
* French drug maker Sanofi-Aventis SA has agreed to buy U.S. consumer healthcare group Chattem Inc. in a deal valued at roughly $1.9 billion in cash, or $93.50 per share, a premium of 34% to Chattem's Friday closing price. The deal should give Sanofi a presence in the over-the-counter U.S. drug market
* Ford Motor Co. is offering buyout and early retirement incentives to all 41,000 of its hourly workers in the United States to reduce its work force. The buyout includes $50,000 cash plus a $25,000 car voucher or $20,000 more in cash. The retirement package is consists of $40,000 cash for skilled trades and $20,000 for production workers. Ford still has too many factory workers for its current sales levels, spokesman Mark Truby told The Associated Press.
* Galleon Group founder Raj Rajaratnam and co-defendant Danielle Chiesi yesterday (Monday) both pleaded innocent to charges of securities fraud in a U.S. district court in what prosecutors call the biggest hedge fund insider trading case ever. Assistant U.S. Attorney Joshua Klein said he expects the trial to last one month and is pushing for it to start in June or July to correspond with the August case with the U.S. Securities and Exchange Commission. Prosecutors allege Rajaratnam and Chiesi made $20.8 million in illegal profits.
* Gold futures for December delivery fell 1.4% to end at $1,095.40 per ounce as speculation of an eventual hike in interest rates increased, MarketWatch.com reported. The speculation was spurred by several indicators that are expected to show the United States' recovery is gaining momentum.
* The U.S. FBI is investigating a computer-security breach that resulted in the theft of tens of millions of dollars from Citigroup Inc., government officials told The Wall Street Journal. The attack, which appears to be linked to a Russian cyber gang, was aimed at Citi's retail subsidiary Citibank, which includes more than 1,000 branches throughout the United States. The lender flatly denied the report: "We had no breach of the system and there were no losses, no customer losses, no bank losses," Joe Petro, managing director of Citi's security and investigative services told The Journal, adding, "Any allegation that the FBI is working a case at Citigroup involving tens of millions of losses is just not true."
* Sources say Warren Buffett is in talks to buy troubled residential-mortgage originator and servicer Residential Capital. ResCap stumbled after making mortgage loans to shaky borrowers, and has required repeated cash infusions from its parent, GMAC. Buffett and others are said to have large debt positions in ResCap, which is on the brink of dipping below the net worth of $250M it is required to have to stay in compliance with its loans. A buy would mark Berkshire's first entry into residential real estate.
* Sources say the FHFA has approved compensation packages for Fannie Mae CEO Michael Williams and Freddie Mac CEO Charles Haldeman in the $4-6M dollar range. Regulators and executives wrangled over how to structure the pay, largely because it's difficult to tie compensation to the firms' long-term performance considering how unclear their futures are. Still, the decisions, expected today, will be controversial because the government and pay czar Kenneth Feinberg (who has no jurisdiction over GSEs) have urged companies to tie executive pay to long-term performance.
Amidst the Recession, Government Salaries Increase
"Data from Cato Institute of Federal Pay Vs Private (i.e. taxpayers) shows federal pay and benefits in 2008 of $119,982 vs. $59,909 private industry. Twice as high! And, the gap is growing fast. A decade ago, the average federal civilian employee earned 66% more in wages and benefits than the average private taxpayer. Today, it is double. In 2009 Federal Government budget for wages is up 3%, while private employees are losing their jobs and pay is being reduced. And, state and local town employees are paid about 35% more than private taxpayers. (source: The Daily Reckoning)
"The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA Today analysis of federal salary data.
"Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months - and that's before overtime pay and bonuses are counted… Federal workers are enjoying an extraordinary boom time - in pay and hiring - during a recession that has cost 7.3 million jobs in the private sector… The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available… When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000."
How will the government arrest its deficit by paying their own bloated bureaucracy more money, you ask? What? Haven't you been paying any attention at all? There is no plan to reign in the nation's spiraling debts. They're voting to RAISE the debt ceiling, not REDUCE it. But we wouldn't worry too much. They're only paying themselves in US dollars, and when they eventually do kill the currency, the men and women who rely on the strength of those dollars will be at their doors with pitchforks and kerosene... (source: The 5-Minute Forecast)
Senate Approves Sweeping Healthcare Reform
The Senate approved President Obama's sweeping healthcare overhaul early this morning, extending health coverage to more than 30M uninsured - covering 94% of all Americans - and putting an end to industry practices such as refusing insurance to people with pre-existing medical conditions. The bill will also give subsidies to help the underprivileged pay for mandatory health insurance. Critics say the bill is an expensive intrusion into the healthcare sector that will drive up costs and increase the budget deficit.
The bill will significantly increase federal healthcare spending - by about $185 billion in 2019, according to Congressional Budget Office. It will involve a substantial increase in taxes - by about $100 billion in 2019. It will compel everyone to buy healthcare, even the young and healthy, which ought to reduce costs. But the political classes seem to have brought forth a miracle: According to the CBO, the plan will actually increase healthcare premiums for individuals and small business by an average of 10% to 13% in 2016.
How is it that one of the most important bills of our time, seeking to overhaul and improve the nation’s healthcare system, places so many restrictions on doctors and medical practitioners (see article link) yet refused to consider one of the most effective means of reducing costs across the board—tort reform? How can we take our congressmen and senators seriously when they refused to even consider discussing the crushing burden of flagrant, opportunistic litigation upon the healthcare system? Where is the outrage over this abject hypocrisy and political pandering? If the American Bar Association was not among the largest contributors to the democratic party, would Reid and Pelosi have included tort reform in their cost cutting efforts?
Link to http://online.wsj.com/article/SB10001424052748704254604574613992408387548.html
Sports, Culture & Politics
* The Senate voted today to raise the ceiling on government debt to $12.4 trillion, a massive $290 billion increase over the current limit, reports the AP.
* Sources say California Governor Arnold Schwarzenegger will ask President Obama for $8B in relief to ease large-scale cuts to the state's already diminished social programs amid a $21B anticipated deficit. "We've already gone after the low-hanging fruit and the medium-hanging fruit and the higher-hanging fruit, so it's going to get tougher and tougher now to balance the budget," the governor said recently. The state was the biggest bond issuer this year, selling $36B.
* Senior White House officials said the move to impose sanctions against Iran for its feared pursuit of nuclear weapons will begin in January but will take time to gain speed and specificity, Fox News reported Dec. 23. No move will be made until expiration of the Dec. 31 deadline imposed by President Obama. Another top White House official said there is a high degree of confidence Russia will back a confrontational strategy against Iran once the process begins.
* Sen. John Kerry suggested becoming the first high-level U.S. emissary to make a public visit to Tehran since the 1979 Islamic revolution, a move White House officials won't oppose, the Wall Street Journal reported Dec. 24. The offer comes as mass protests against Iran's regime are resurfacing and a U.S.-imposed deadline nears to broach international sanctions against Iran. It's unclear whether Iran would welcome the visit, and it would be controversial within both countries. The Iranian government rebuffed other recent White House efforts to establish a direct dialogue.

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