Chain Bridge Investing: Financial and Stock Investing News 12-15-09

December 15, 2009 by cb · Leave a Comment

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

News items not covered below are as follows: (1) Robert Kelly,the chief executive of Bank of New York Mellon, has withdrawn himself from consideration for Bank of America’s chief executive job due to (according to people familiar with the situation) Bank of America’s unwillingness to make him chairman and provide him with a pay package exceeding $20 million; (2) European Union regulators seem to have decreased their opposition to Oracle Corp.’s proposed $7.4 billion takeover of Sun Microsystems and has provided hope the deal may close; (3) Standard & Poor’s downgraded Mexico’s foreign currency debt rating to BBB from BBB+, which is still investment grade, due to the country’s failure to compensate for diminishing oil revenues; (4) Interactive Data Corp., a financial market data provider, agreed to buy privately-owned electronic trading network and services provider 7ticks LLC in an attempt to decrease the delivery time of trading data to customers; (5) Greece Prime Minister George Papandreou stated that the country must stop the growing budget deficit if it does not want to risk drowning in debt; (6) JA Solar increased its fourth-quarter guidance as it expects shipments to exceed 210 megawatts, compared to the earlier guidance of 170 megawatts to 200 megawatts; (7) according to Standard & Poor’s, major companies’ stock buybacks increased to $34.8 billion in the third quarter from $24.2 billion in the second quarter, an increase of 44%; however, buyback levels remain low on a historical basis ; and (8) the price of Ciena shares dropped after Standard & Poor’s announced that the company would be replaced by Visa on the S&P 500 index, other companies being dropped are Dynegy Inc., KB home Inc., and Convergys Corp..

Upcoming Economic Data for the Day (all times EST)

7:45 AM ICSC-Goldman Store Sales

8:30 AM Producer Price Index

8:30 AM Empire state Mfg. Survey

8:55 AM Redbook

9:00 AM Treasury International Capital

9:15 AM Industrial Production

11:30 AM 4-Week Bill Auction

11:30 AM 52-Week Bill Auction

1:00 AM Housing Market Index

Initial Public Offerings (”IPOs”) for the Week of December 14- 18, 2009

12-15-09 Cobalt Intl Energy – Deepwater and offshore oil exploration (“CIE”)

12-15-09 Team Health Hldgs – Healthcare professional staffing and administrative services (“TMH”)

12-16-09 Kraton Performance Polymers – Styrenic block copolymers. (“KRA”)

12-17-09 Intl Beef – Holding company and beef processing company (“NBP”)

Data from the WSJ Market Data Group

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

Third-Quarter Earnings are Done.

News

Citi, Wells to Repay Bailouts – The Wall Street Journal & U.S. Banks to Repay Rescue Funds – Financial Times

Summary: Citigroup and Wells Fargo & Co. have made agreements that allow them to repay $45 billion in government aid, thus decreasing the government’s influence on them. With these agreements in place, the banking system will have repaid $161 billion of the $245 billion in capital that was distributed amongst nearly 700 institutions through the Troubled Asset Relief Program (“TARP”). Citigroup’s agreement includes the company repaying $20 billion to the government and unwinding an agreement from the government shielding the company from most of the losses on $301 billion (the Financial Times reports $250 billion) of assets. As a result, Citigroup will take a $10.1 billion pre-tax loss in the fourth quarter, but save $2.2 billion a year in interest and amortization costs. Wells Fargo’s agreement includes the company repaying its $25 billion aid after it raises $10.4 billion by selling shares. At present, the U.S. Treasury expects a $19 billion return, a revision on the earlier projected $76 billion loss, on all of its investments and infusions to financial institutions. The U.S. Treasury also stated that it will begin selling $5 billion of Citigroup shares, which will reduce the government’s ownership in the company to below 30% from 34% . Yet, the government continues to try to encourage the banks to increase their loan volume to help the economy. According to the Federal Deposit Insurance Corp (“FDIC”), overall loan balances dropped 2.8% during the third quarter. Consequently, Bank of America has stated that it would increase lending by at least $5 billion in 2010 and Wells Fargo stated that it expected to increase lending in 2010 by nearly 25% for those firms with less than $20 million of annual revenue.

The banking industry continues to be supported by the government through the following: (1) the FDIC has guaranteed over $300 billion in bank issued bonds; (2) the Fed has purchased over $1 trillion of mortgage-backed securities, thus allowing the banks to earn fees without the risk; and (3) the Fed has kept interest rates near zero.

CB: Remember, this rush to repay the TARP funds began to intensify last week, after Bank of America repaid its funds to remove the government’s influence over the bank’s compensation programs (Daily DL 12-10-09). Consequently, investors, analysts, and industry executives began to harp on the fact that Citigroup would be at a disadvantage if it could not compete with the other large banks’ compensation packages, and thus Citigroup had to repay these TARP funds, despite the weaken capital ratios the company would have as a result. Most writing seemed (similar to the writings today) to ignore the threat to Citigroup’s capital structure. As CB has stated, this threat to Citigroup’s capital structure needs to be adequately considered, especially when the FDIC was one of the regulators that did not support Bank of America repaying its funds due to the weaken capital position it created. If the FDIC did not support Bank of America, did it then willingly support Citigroup’s repayment, which has worse capital ratios than Bank of America? Unknown to the public was whether the approval was an unanimous decision or if it was heavily debated, and what type of future stresses were considered when assessing Citigroup’s financial stability. There is still the possibility, especially if the economy double dips, that Citigroup may run into troubles and need additional financing. Yet, Fitch did not appear to consider these factors when it upgraded several Citigroup securities on Monday. Fitch cites that since the government approved the transactions, then Citigroup must now have adequate resources for financial stability, that is a very broad assumption to make with out delving into the above stated factors.

Furthermore, in order for the money supply to increase and have a multiplier effect on the economy, banks have to begin extending more loans. Yet, the Obama administration is sending contradictory messages again. Earlier in the year, the Obama administration wanted consumers to increase their savings, while increasing their spending. The two consumer actions are mutually exclusive in most situations. Now, with regards to banks, the Obama administration wants banks to increase loan volume, while continuing to avoid extending loans to those who are not credit worthy. Given the current economic environment, these two actions are contradictory to a high degree. Again, the reasons banks have not been able to increase loan volume results from many people and entities not meeting the tighter credit standards. These tighter credit standards are not met due to: (1) the negative impact the recession has had on companies’ current operating results; (2) the increased uncertainty companies face regarding their future operating results; and (3) the over-leveraged situation companies may be in due to the prior loose credit system. If the banks loosen their standards before an economic recovery appears very certain, then the banks risk continuing to make bad loans, which do not help the economy. In addition, loan volumes remain low due to overall decreased demand for loans. With business investment and hiring on hold, businesses have not sought out loans. So while increased lending is important, the banks should not sacrifice their credit standards to increase loans – doing so too early is a risk to economic recovery.

ExxonMobil Shifts Strategy with XTO Takeover – Financial Times

Summary: ExxonMobil agreed to pay $31 billion in stock and assume $10 billion of debt to purchase XTO Energy. This purchase will give Exxon a large position in domestic natural gas and represents a shift in strategy as Exxon will now have an increased gas footprint and more access to a cleaner-burning alternative to coal. Consequently, Exxon will form a division to manage oil and gas production and use from unconventional sources like shale, tightly compressed sands, and coal bed methane. These unconventional sources will require the use of sophisticated technology and equipment. Previous to this purchase, Exxon had missed the recent boom in the domestic uncoventional gas sector. During this boom, the participating companies have increased U.S. gas reserve estimates from 30 years supply, assuming current usage, to 100 years supply. Natural gas could serve as a substitute for both oil and coal in some applications and remains 30% and 50% less carbon intensive, respectively.

CB: ExxonMobil has now increased its footprint in the natural-gas industry and may have improved the future profitability of the industry at the same time. Readers may remember that in the Daily DL 9-30-09, there was coverage regarding the Waxman-Markey bill that was rushed through the house and basically ignored the future potential of natural gas in cleaner power generation. The lack of consideration of natural gas by congress was blamed on the weak lobbying efforts of the gas industry. With Exxon’s increased natural-gas footprint, the lobbying strength of the natural-gas industry has increased significantly. Both domestic and international interest in natural gas and its capabilities as a cleaner carbon fuel have increased over the last few months. It is hard for one to imagine, a country having large quantities of a resource and not utilizing it. Natural gas will be used in the future. Separately, some analysts reported that Exxon may have over paid for XTO based on the transaction price divided by XTO’s current estimated reserves. Due to the nature of the Daily DL, CB did not have time to delve too deep into this situation; however, Exxon may believe that if the price of gas increases, then more reserves than those currently reported will be economically feasible. Furthermore, Exxon’s superior technological abilities may be able to access more gas reserves than could be accessed by XTO. Yet, analysts’ primary fear is that XTO will lose its entrepreneurial culture when integrated with Exxon.

Study Says Big Impact of the Plug-In Hybrid Will be Decades Away – The New York Times

Summary: According to a study by the National Research Council, the next generation of plug-in hybrids may require: (1) hundreds of billions of dollars of government support and (2) a few decades of time before having a materially presence in the U.S.. Furthermore, the study estimates that plug-in hybrids would not have a significant impact on U.S. oil consumption and carbon emission prior to 2030. At present, several automobile manufacturers are developing the plug-in hybrid models, including Toyota and General Motors. A plug-in hybrid is a car that primarily relies on an electric battery, but for long drives switches to its gasoline engine. These cars are recharged by connecting them to an electrical outlet either at home or at work. The study suggests that of the 300 million vehicles estimated to be operational during 2030, approximately 13 million vehicles, or 4%, would realistically be plug-in electric vehicles; however, the study also stated that this number could be as high as 40 million depending on the cost reductions in battery technology and the amount of government support. The study also states that optimistically 6.5 million plug-in hybrids could be sold annually in the United States by 2030, while under more realistic assumptions the number is likely to be near 1.8 million. The study assumes the cost of batteries would drop 50% during the period to 2030, many other studies assume higher rates.

Travel Industry Expects Only a Modest Recovery in 2010 – The New York Times

Summary: At present, there remains much uncertainty regarding airline figures for 2010, especially when considering business travel. Most industry insiders are not projecting a rebound in business travel for 2010 given the large unemployment rate, possible increases in oil prices, and weak spots in the economy. According to the Air Transport Association, which represents the leading air carriers in the U.S., passenger revenue at member carriers declined 15% in October, compared to a year earlier and represents 12 straight months of declines. Yet, according to Airlines Reporting Corporation, airline ticket sales have increased approximately 7% in November, the first monthly increase since September 2008. Separately, PricewaterhouseCoopers stated that it expects hotel occupancy levels to reach 55.8% in 2010, compared to the 55.2% in 2009; however, the industry’s historical average is 63%.

Wall of Government Debt Raises Concerns – Financial Times

Summary: The U.S., eurozone, U.K., and Japan have issued a record $3.9 trillion in public-sector debt year-to-date, which represents an 86% increase over last year and a 146% increase since 2007. The majority of the increase is fueled by U.S. debt issuance, which has increased to $2.1 trillion year-to-date from $886 billion in 2008. Meanwhile, eurozone issuance has increased to $1.4 trillion year-to-date, from $967 billion in 2008. As a result of these increased public-sector debt issuances, sovereign risk, which is the threat of a government bond market sell-off and the default of a country’s economy, is considered a large concern for 2010, which is expected to experience similar levels of government fund-raising. With the increased issuances, governments have to compete for investors in new ways. Nations with poor fundamentals are at the greatest risk of sell-offs as bond investors have a large selection of investments to buy and sell. The U.S. and the U.K. also have to consider the fact that 50% and 35% of their public-sector debt, respectively, are purchased by foreign investors. Furthermore, both of these countries may face increased pressure in their bond markets after their central banks begin to tighten monetary policy.

Number of Global Defaults at Record – Financial Times

Summary: According to Standard & Poor’s (“S&P) 260 companies, globally, have defaulted in the year-to-date period, the most since global defaults began being counted in 1981. The previous high was 229 defaults in 2001. The defaults are as follows: (1) 188 companies in the U.S.; (2) 20 companies in Europe; (3) 36 companies in emerging markets; and (4) 16 in Australia, Canada, Japan, and New Zealand. Furthermore, 87% of the defaulted companies were rated as speculative grade before their default. At present, the 12-month global speculative default rate has climbed to 9.77% at the end of November, which remains less than the high of 12.86% reached in July 1991. S&P believes that due to the changing economic situations the large amount of defaults it had originally expected to occur in the first half of 2010 might be postponed several quarters beyond the 12-month forecast.

Arcelor to Cut 10,000 Steel Jobs in Sign of Weak Demand The Wall Street Journal

Summary: ArcelorMittal, the world’s largest steelmaker, is considering eliminating nearly 10,000 jobs primarily in the U.S. and Europe where there is limited growth potential. Furthermore, the company stated that it will increase capacity utilization to approximately 70% at the end of 2009 from 61% in the third quarter. Management believes that the utilization rate will most likely remain near 70% until 2013 and does not think steel prices will reach the highs of 2007 for nearly a decade. ArcelorMittal continues to invest in emerging markets, especially as demand has begun to recover in Chin, Brazil, India, and Africa. The company wishes to build a steel mill in Brazil near its iron-ore supply.

More Links of Note

Decidedly Speculative – John Hussman

The Rally may be Running Out of Time – Bill Fleckenstein

The Dollar Link – Joseph Trevisani

The Mother of All Jobless Recoveries – John Mauldin

Merrill Lynch’s Bullish 2010 Outlook – A Bubble in Pessimism – PragCap

8 High Quality Dividend Stocks – PragCap

Sphere: Related Content

Filed under Finance News · Tagged with ArcelorMittal, Bank of America, Bank of New York Mellon, Ciena, Citigroup, Convergys, Dynergy, ExxonMobil, General Motors, Global Defaults, Government Debt, Interactive Data, JA Solar, KB Home, Mexico Downgrade, Oracle, Plug-in Hybrids, S&P 500, Sovereign Risk, Sun Microsystems, Toyota, Wells Fargo, XTO