Chain Bridge Investing: Financial and Stock Investing News for 11-23-09

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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:  .

General News & Headlines Summary

Tim Geithner, the U.S. Treasury secretary, continues to come under attack from various congressional members regarding the handling of the bailouts and the current unemployment situation of the U.S..  While many in the financial community are not exactly pleased with the job done by Mr. Geithner, CB highly doubts those in Congress could do a much better job.  The problem with Congress wanting to increase control and oversight over the Fed and the Treasury is multifaceted: (1) the economy is partly a confidence game, thus some information is better not released to the public; (2) most Representatives, Senators, and their staffs do not have a clue about the economy or the financial world, as proven by the stimulus bills and handling of various events related to the crisis in 2008; and (3) if the Fed or Treasury is limited in regards to access to certain economic information, then they may not be able to act in the best interests of the U.S..  CB agrees things can be fixed and executed better at both the Fed and the Treasury, yet the way these congressmen are going about this change is not the correct way.  Their words and criticisms demonstrate their lack of knowledge and the tools necessary to correctly fix the system.

Meanwhile, other news items are as follows: (1) Charles Evans, the president of the Federal Reserve Bank of Chicago, believes that U.S. unemployment will peak near 10.5% and will not drop until mid 2010; (2)  Coca-Cola has plans of doubling its bottling plants in China over the next 10 years in an attempt to triple its China sales as it appeals to the ever increasing middle class; (3) over the past year, the volume activity associated with credit-default swaps (“CDS”) has doubled for the CDS linked to the U.S., the U.K., Japan, and Italy; (4) Cadbury would welcome a bid from Hershey as long as it is high enough, especially since the companies know each other and share values; (5) the average maturity of U.S. banks’ wholesale debt has dropped to 3.8 years, compared to 5.8 years in 2006, thus bank regulators are likely to prod banks to take on longer-term debt, which will lead to higher interest rates and a possible reduction in future earnings of near 15%; and (6) News Corp. and Microsoft Corp. are in early discussions regarding News Corp. removing its newspaper content from Google’s search engine, while leaving the newspaper content on a Microsoft’s services.

Upcoming Economic Data for the Day (all times EST)

10:00 AM         Existing Home Sales

Initial Public Offerings (”IPOs”) for the Week of November 23-27, 2009

11-23-09       Westwood One Inc. – Supplies radio television stations with information services and programming (“WWON”)

11-24-09         Authentidate Holding Corp. – Manufactures personal computers (“ADAT”)

11-24-09         GeoResources Inc.  – Explores and produces oil and gas as well as mines leonardite and manufactures leonardite-based products (“GEOI”)

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

List of Selected Companies with Third-Quarter Earnings for 11-23-09

News

Investors Dial Back Risk as Year-End Nears – The Wall Street Journal

Summary: The reduced trading volumes and rising demand for U.S. Treasuries last week could imply that market participants are becoming more cautious and reducing risk exposure before year end.  This behavior by investment firms to protect gains from potential year-end losses and by banks to improve capital positions  for the year end is fairly common; however, it appears to be occurring earlier this year than in the past.  A few uncertainties that are driving this less-risky behavior revolve around the potential effects of: (1) the Fed’s removal of support form the mortgage-backed securities market; (2) the eventual increase in interest rates; (3) the general lack of revenue growth amongst corporations; (4) unemployment; and (5) housing-market prices and supply.  These issues helped fuel increased demand for short-term government securities, thus resulting in the negative yields the Treasury Bills due in January 2010 experienced on Thursday and Friday.  Furthermore, trading volume averaged 4.2 billion shares a day last week, compared to the 5.5 billion daily average from August to the end of October.

CB: Investors need to monitor this year-end behavior, which is occurring earlier than usual.  One reason for the earlier occurrence may be due to the knowledge that other financial firms are trying to shift to less risky assets, and thus firms are trying to implement their switch before the others.  Yet, if the switching out of riskier assets continues, there could be significant drops in the equity markets, which could trigger others to sell and create larger drops, especially if any significantly negative news or economic data  is released for the remainder of the year.

States Hit By Drop in Tax Collections – The Wall Street Journal

Summary: According to a Nelson A. Rockefeller Institute of Government report, tax collections dropped 11% across 44 states in the third quarter fueled by third-quarter drops in every major category of state tax revenue, including: (1) sales taxes, which declined 8.2%; (2) corporate-income taxes, which declined 19.4%; and (3) personal-income taxes, which declined 11.4%.  Furthermore, sales and personal-income taxes account for approximately 80% of the states’ total tax revenues.  Consequently, high unemployment and pressure on wages could cause  state-tax and local-tax revenues to decrease for months.      

CB: One component of the most recent GDP report that few commented on was the future trend of  state- and local -government expenditures, which can account for roughly 12% of total GDP.  This component of GDP should not be ignored by investors and analysts.  The majority of state- and local- governments must maintain a balanced budget, thus as tax revenues decrease so do expenditures.  Thus the future of state- and local-government expenditures are dependent on the effects of prolonged unemployment, wage pressure, and decreasing property values.  Consequently, going forward, investors should be aware that this component of GDP will likely slow the overall GDP growth for the near future.

Bullard Favors Extending Fed Asset Buying – The Wall Street Journal

Summary: James Bullard, the president of the Federal Reserve Bank of St. Louis, believes that the Fed should maintain the asset-purchase program beyond the March 2010 cutoff, at least at a low level.  Keeping the program operational allows the Fed more options to influence the economy and smooth the transition in the markets away from Fed support.  Yet, the program has its opposition primarily due to its affect on increasing the Fed’s balance sheet from $800 billion before the crisis to $2 trillion currently.  Separately, Mr. Bullard states that GDP growth would have to grow at 4% annually to reduce unemployment materially.

Wave of Debt Payments Facing U.S. Government – The New York Times

Summary: The U.S. Treasury faces the following problems as the recovery begins to take hold: (1)  $12 trillion of debt, which will likely cost the government $700 billion a year in 2019 to service – compared to $202 billion for 2009; (2) nearly $1.6 trillion of short-term borrowings maturing in the next few months has to be refinanced; and (3) interest rates that will increase due to the eventual increase in federal funds rate and the end of Fed’s purchase program for U.S. Treasuries.  Furthermore, according to White House estimates, the government will have to borrow approximately$3.5 trillion over the next three years.  At present, in order to save taxpayers money and avoid the eventual rising interest-rate levels, the Treasury is trying to switch short-term debt with 10- and 30-year Treasuries.  Yet, long-term interest rates remain significantly higher than short-term rates, thus the U.S. will have to pay billions of dollars in additional annual interest fees to refinance the short-term debt for the long-term debt.  To provide some clarity, a one percentage point increase in the Treasury’s average cost of borrowing would cost taxpayers an additional $80 billion this year.  Yet, sound debt management alone will not resolve this situation.

CB:  Where does one begin?  The debt cannot continue to increase and the balance sheet of the Fed needs to be fixed.  Yet, the biggest issue in CB’s mind is the amount of current debt and the relationship with interest rates.  Many market participants are asking for the Fed to raise the interest-rate target; however, such a maneuver would likely result in increased interests costs when the short-term debt is refinanced.  These increased interests costs may require more debt or more printing of money to resolve.  Thus, potentially creating, a continuous loop of debt creation and money printing.   As in physics, for every action there is a reaction.  When the officials go to fix one hole, they create another hole or make an existing hole worst – very similar to a rubik’s cube. These complexities in the economy are part of the reasons, CB never saw a “V” shaped recovery, but instead a protracted recovery.

While the financial aspect is  briefly discussed here, the solution is not entirely financial.  The solution has to involve reductions in spending and sound fiscal policy.  Just as consumers in deep debt have to conserve money and cutback on goods, so must an economy.

Copper Rises Despite the Stockpiles – The Wall Street Journal

Summary: Despite continued increases in copper stockpiles across the world, the market continues to price copper higher.  Given the supply glut, the price of copper should be declining if the markets were dictated strictly by fundamentals; however, this base metal is trading like a precious metal.  Analysts believe that the following items have more than offset the bearish fundamentals of copper: (1) the economic recovery; (2) a weaker U.S. dollar; (3) concerns over labor disruptions; and (4) forecasts that the future demand for copper will increase significantly.  As copper is primarily used in housing and power generation, it tends to move with the economy.  Consequently, investors expecting a strong recovery could then expected a significant increase in demand for copper.

CB:  Yes, the demand for copper may comeback in 2010 as some are predicting, but what will happen to the price of copper?  Will it recognize this run-up in the price was a result of the expected demand, or will it continue to increase as demand increases?

Reliance to Offer About $10 billion for Lyondell – Financial Times

Summary: Reliance Industries, a large Indian conglomerate, submitted  preliminary non-binding cash offer of $ 10 billion for a controlling stake in LyondellBasell, a bankrupt U.S. petrochemical company based in the Netherlands.   If this deal were to close, then it would represent one of the largest offshore acquisitions from by an Indian group. Reliance’s ambition to expand globally represents an increasing trend amongst the larger companies in India.  At present, Reliance is the world’s largest producer of polyester yarn and fibre and does more than $30 billion in annual revenue.  Meanwhile, LyondellBasell is the third-largest independent chemical company in the world with nearly $50.7 billion in revenue.  Yet, Lyondell took on too much debt to complete a leveraged buyout of Basell during the credit boom and thus filed for Chapter 11 bankruptcy protection for its U.S. operations and a European holding in 2009.

More Links of Note

Government Debt Default

Insider Selling Soars Higher – PragCap

Duke’s Rogers: Why Nuclear Power will Probably Trump Coal – WSJ Blogs

China Money Leaks Offshore -WSJ

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