Chain Bridge Investing: Financial and Stock Investing News for 12-17-09

December 17, 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) the Abu Dhabi Investment Authority (“ADIA”) has accused Citigroup of fraud in regards to its November 2007 $7.5 billion investment in the bank, but some analysts believe ADIA is pursuing this due to potential near-term liquidity issues; (2) crude oil futures increased nearly 3% due primarily to a 3.689 million barrel decrease in stockpiles, which was more than twice the decline analysts had expected; (3) Boyd Gaming made a second offer of $2.45 billion, consisting of both debt and cash, for control of Station Casinos Inc; (4) Standard & Poor’s downgraded the debt of Greece and stated that there could be future downgrades; (5) the merger agreement between ExxonMobil and XTO contains a provision that allows Exxon to terminate the transaction if the “fracking” drilling technique becomes commercially impracticable due to legislation; (6) Citigroup will suspend foreclosures for nearly 4,000 homeowners during the holiday season; (7) the board of Autozone authorized $500 million in stock buybacks; and (8) Dominion will spend $253 million to upgrade a network of natural gas pipelines in West Virginia to better handle future gas demand.

Upcoming Economic Data for the Day (all times EST)

8:30 AM Jobless Claims

10:00 AM Leading Indicators

10:00 AM Philadelphia Fed Survey

10:30 AM EIA Natural Gas Report

4:30 AM Fed Balance Sheet

4:30 AM Money Supply

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

News

Treasury Halts Plan to Sell Off Citi Stock – The Wall Street Journal & Government Reconsiders Quick Sale of Citigroup Stake – The New York Times

Summary: On Wednesday, due to poor investor demand, the U.S. Treasury canceled its plans to begin selling as much as $5 billion of its Citigroup stock holdings to the public. In order to attract investor demand the shares had to be priced at a discounted $3.15 a share, which is 10 cents less than the price the government had previously paid for its purchase of 7.7 billion Citigroup shares. Consequently, the U.S. Treasury decided to postpone selling the government’s shares for at least 90 days and will try to unload the shares over the next 12 months, instead of the originally stated six- to 12-month period. Some analysts believe that the weak demand for Citigroup’s shares results from: (1) the demand for Citigroup’s shares already being satisfied by the bank’s current efforts to sell additional equity to the market in order to repay its TARP funds; (2) investors’ remaining concerns regarding the financial health of Citigroup after the repayment of the TARP funds; (3) the dilution Citigroup shareholders have experienced may have left them a bit cautious of acquiring more shares; and (4) the additional equity raised by Wells Fargo on Monday may have sapped overall demand for Citigroup shares. Nevertheless, the rest of the agreement by Citigroup to repay TARP funds remains in place. Separately, the following doubts from senior Citigroup officials regarding the TARP repayment have reached the press: (1) some company officials beleived that issuing this magnitude of shares would demoralize investors; and (2) these officials believed repaying TARP could have waited until next year when the price of Citigroup rebounded.

CB: In the Daily DL for 12-10-09, CB warned that Citigroup’s share price faced significant headwinds as a result of (1) the dilution of the shareholder and (2) the government’s plan to unload its stake in Citigroup. The market reacting accordingly has begun to punish Citigroup’s share price. Furthermore, investors appear to be expressing some concern regarding the company’s financial stability after the repayment of its TARP funds, also further discussed in the Daily DL for 12-15-09.

Nevertheless, there is more to think about regarding today’s latest Citigroup news. First, both Citigroup and U.S. Treasury officials appear to be working under the assumption that the price of Citigroup shares will increase from its current levels in the near- to mid-term future. This is an assumption, not a fact. CB does not know Citigroup well enough to have a solid understanding of the company’s intrinsic value, but in the markets price directions in any direction are never guaranteed. What would the U.S. Treasury do with its holdings if the price of Citigroup continues to drop? This loss-averse behavior could force the government to maintain its stake in Citigroup for much longer than planned, or it could result in the government taking a much larger loss. This uncertainty exists and some fund managers manage this uncertainty by actively adjusting their position sizes as the market changes. Of course, many fund managers do not have to unload 34% of Citigroup on to the market. Such a large sized position should not be forced onto the market, especially a market that showed it does not have much demand for even a portion of that 34% stake. Perhaps, the U.S. Treasury should consider breaking up the trading blocks more and selling them a little at a time instead of waiting for the price to go up (CB understands this cannot be done for the next 90 days). Consequently, the U.S. Treasury may then take some losses on individual trades, but the losses will be relatively small and if the price begins to rebound then the U.S. Treasury will be able to unload larger positions for gains, but by following this strategy effectively one can reduce the potential magnitude of the losses.

Furthermore, CB wonders if the some of the heavily followed investors currently holding stakes in Citigroup are beginning to increase their Citigroup buying efforts, given the current price dips.

Fed More Upbeat, but Keeps Lid on Rates – The Wall Street Journal

Summary: The following are some takeaways from the Fed’s statement subsequent to its December policy meeting :

(1) The Fed stated that it plans to maintain short-term interest rates at near zero levels for several more months.

(2) The deterioration in the jobs market is slowing, while the economy and the functioning of financial markets have continued to show signs of improvement.

(3) Household spending, although constrained by various economic headwinds, is increasing at a moderate rate. Meanwhile business spending is still decreasing.

(4) At this time, there is not enough evidence to support that the recovery is self-sustaining.

(5) The Fed plans to finish its purchase of as much as $1.25 trillion in mortgage-backed securities by March, while some officials on the committed believe this program should be extended.

(6) The Fed anticipates that the majority of its special liquidity facilities will terminate on Feburary 1, 2010. finish its purchase of as much as $1.25 trillion in mortgage-backed securities by March, while some officials on the committed believe this program should be extended.

(7) Current resource slack will continue to apply downward pressure on prices.

BofA Taps Moynihan as New CEO – The Wall Street Journal

Summary: On Wednesday, Bank of America promoted Brian T. Moynihan to president and chief executive. Mr. Moynihan currently runs the consumer and small-business operations, which includes nearly 6,000 retail branches in the U.S.. At present, Mr. Moynihan doesn’t foresee implementing and significant changes in company strategy, but believes the company needs to focus on execution. Yet, Bank of America still faces potential losses on loans that were issued during the housing bubble. Some detractors state that Mr. Moynihan’s youth will work against him and will not inspire the 282,000 employees. Also, Mr. Moynihan’s role in the Merrill deal could make him a target for early criticism.

Funds of Hedge Funds Plummet – The Wall Street Journal

Summary: According to Eurekahedge, at present, total assets in the fund-of-hedge-funds industry is currently $440 billion, compared to its peak level of $823 billion of assets in May 2008. Furthermore, the Eurekahedge fund of funds index has posted a gain of 9.17% for the 11-month period ending in November, compared to the overall Eurekahedge fund index’s gain of 18.24% for the same period. Meanwhile, according to Hedge Fund Research, the HFRI fund-of-funds index posted a gain of 10.69% for the 11-month period ending in November, while its overall hedge-fund index posted a gain of 18.72% for the same period. For the full listing of the November performance figures for Hedge Fund Research’s indices please visit an earlier post.

U.S. Reports Upturn in Home Building – The New York Times

Summary: According to the Commerce Department, home construction increased to a seasonally adjusted annual rate of 574,000 in November, an increase of 8.9% from the prior month. Analysts believe that part of the increase was driven by a generally warm and dry November. Furthermore, the quantity of building permits increased 6% in November and reached the highest level in a year. Meanwhile, apartment construction achieved an annual rate of 92,000, while single-family home construction increased 2.1%. Considering all this information, some analysts believe that construction will account for nearly 50 basis points of additional GDP in the fourth quarter. Separately, the Consumer Price Index increased .4% in November and was primarily driven by a 6.4% increase in gasoline prices and a 7.3% increase in oil prices. Furthermore, the Consumer Price Index increased 1.8% from a year ago. Meanwhile, the core Consumer Price Index, which does not include energy costs, did not rise in November. Finally, the Commerce Department reported that the current-account deficit increased 10.3% to $108 billion during the third quarter primarily due to increased oil imports and industrial goods.

U.S. Trade Body Sues Intel Over Alleged Abuses – Financial Times

Summary: On Wednesday, the U.S. Federal Trade Commission (“FTC“) sued Intel and accused the chipmaker of abusing its market-leading position over the last 10 years as well as citing new anti-competitive behavior in the graphics chip market. Intel claims that the FTC has not investigated its most recent claims against the company and these claims were added last minute after settlement talks with the FTC stalled. According to Intel, these talks stalled when the FTC insisted that Intel implement unprecedented remedies, such as “the restrictions on lawful price competition.” Yet, the FTC is concerned that Intel is using its unfair tactics to slow down rivals in the graphic chip market in order to catch up with them and further extend its monopoly.

More Links of Note

The End of Chimerica – Harvard Business School

The Big Money is Bullish While Small Money is Bearish – PragCap

The 8 Beneficiaries of Further Cost Cutting – PragCap

In Pictures: Seven Looming Financial Bubbles – Fortune

David Rosenberg and his 2010 Outlook – ZeroHedge

7 Stocks for Buffett’s Christmas List – MSN Money

A Tax on Short-Term Debt would Stabilize the System – Financial Times

Cap and Trade in Practice – The Wall Street Journal

Debtor’s Dilemma: Pay the Mortgage or Walk Away – The Wall Street Journal

Sphere: Related Content

Filed under Finance News · Tagged with Abu Dhabi, Autozone, Bank of America, Boyd Gaming, Citigroup, Core CPI, Credit Downgrades, Dominion, Fed, Fund of Funds, Greece, Housing Starts, Natural Gas, TARP, U.S. Treasury