Chain Bridge Investing: Financial and Stock Investing News for 1-29-10

January 29, 2010 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

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

News not covered below: (1) Netflix witnessed its fourth-quarter profit increase 36% as the company added over a million new subscribers and reduced the costs to maintain them, thus giving the company a total of 12.3 million subscribers ; (2) Movie Gallery, the owner of the Hollywood Video chain, is currently preparing to file for Chapter 11, which will likely shutter nearly two-thirds of its stores; (3) despite a 65% drop in its fourth-quarter profit, Caterpillar stated that demand is improving for mining equipment in China, North America, Europe and Japan; and (4) while Nintendo’s net income and revenue decreased 9% and 23%, respectively, from the same nine-month period a year earlier due to a stronger yen and price cuts, the company beat analysts expectations and forecasts for the holiday quarter.

Upcoming Economic Data for the Day (all times EST)

8:30 AM Durable Goods Orders

8:30 AM Jobless Claims

10:30 AM EIA Natural Gas Report

1:00 PM 7-Yr Note Auction

4:30 PM Fed Balance Sheet

4:30 PM Money Supply

Initial Public Offerings (”IPOs”) for the Week of January 25- 29, 2010

1/25/10 Andatee China Marine Fuel Services (“AMCF”) – Provides blended marine fuel oil.

1/25/10 Terreno Realty (“TRNO”) – Real estate investment trust.

1/27/10 FriendFinder Networks (“FFN”) – Social networking and multimedia.

1/29/10 Daqo New Energy (“DQ”) – Polysilicon manufacturer.

1/29/10 IFM Investments (“CTC”) – Brokerage and mortgage services.

Data from the WSJ Market Data Group

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

News

Geithner Faces Fresh Fire over AIG Deal – Financial Times

Summary: On Wednesday, Tim Geithner appeared before a House oversight committee and defended himself and the New York Federal Reserve’s actions towards AIG. Geithner claims that it was necessary to pay the AIG counterparties in full due to the lack of proper legal authority to force them to take a discounted payment. He believed that the bail out of AIG significantly prevented the risk of another Great Depression. Furthermore, he believes the names of the counterparties should have been released earlier. While some appeared to be swayed to Geithner’s side, others said he was negligent for not demanding the discount and accused him of being part of a Wall Street conspiracy.

Jobs Unveils ‘Revolutionary’ Apple iPad – Financial Times, For Wireless Carriers, iPad Signals Further Loss of Clout – The Wall Street Journal, For Media Industry, A Mixed Bag in iPad – The Wall Street Journal; Apple-Designed Chip Markets Strategy Shift – The Wall Street Journal, iPad Blurs Line Between Devices – The New York Times

Summary: (1) The new iPad offers the following array of media features: (a) a new online bookstore that will allow publishers to control the prices of their titles; (b) videogame partnerships; (c) enhanced reading and media-rich experience with the New York Times, while other magazines and newspapers participation in the iPad remains uncertain; (d) video and music abilities; (e) an applications store; and (f) ability to surf the web. Despite the hype, there is a lot of uncertainty and mixed feelings regarding the iPad. The iPad is not compatible with Flash, which is the most common software to handle video and animation on the Web, and lacks a camera. Some have called it a really large iPod Touch. Moreover, many companies do not know how large the potential business of the iPad will be. Book publishers are attracted to the iBooks due to the 100 million customers on iTunes and the ability to control prices of their products. At present, the three models of the iPad being sold in March will connect to the Internet via local Wi-Fi, while three later versions will include 3G wireless access.

(2) AT&T, again, has obtained the right to carry the new Apple iPad in the U.S., but on terms that continue to damage the wireless industry’s carrier-centered model. Before the iPhone wireless carriers controlled the way subscribers used their service, but the iPhone and now the iPad have reduced the carriers’ control. These two devices along with Google’s Nexus One are making carrier’s and their service a secondary thought, while consumers are shifting their focus to the devices. These devices are providing their manufacturers with more profit and value, while the carriers could face potential margin erosion under the new model. At present, AT&T will offer two data plans for the iPad: (1) $15 a month for 250-megabytes, and (2) $30 a month for unlimited data. According to Goldman Sachs, the $15 plan can be very profitable given that a 100 megabytes of data on the network will cost roughly $1. The concern revolves around the unlimited plans and an AT&T network that is already facing stress.

(3) The iPad represents a shift in strategy for Apple as the device uses an internally designed microprocessor, named the A4 by industry insiders. Traditionally, Apple has outsourced the chips used in the iPhone and the iPod Touch to Samsung. Apple believes that this shift to internally designed chips will allow the company to create products that run more complex software and applications. Separately, Apple has informed a few that Foxconn Electronics, the manufacturer of the iPhone and iPod, produced the iPad.

CB: The first thought that comes to mind is that the existing iPhone and iPod Touch base could limit the sales of the iPad. If one has an iPhone, is that person going to go buy an iPad and pay another data usage fee? The answer is unknown at this time, but that would worry CB. There is not enough separation between the two items to justify purchasing both in most cases. CB could be wrong, but after reading about the product that’s the immediate thought.

Furthermore, CB is not certain what about the iPad is revolutionary. It doesn’t do many things different from other devices currently available. As far as the device competing in e-books, it can, but it won’t displace Amazon as the market currently stands. E-book reading is a secondary function on the heavier, larger and brighter iPad. A couple of the nice features of the Kindle and other e-readers are that the readers can be carried anywhere and reading the screen is a much different experience than reading on a computer screen. The e-reader screen provides a much more delightful experience for the eyes.

Also, the iPad and any of its other wireless competitors will have to eventually face the limiting factor of bogged down 3G and later 4G networks. Currently, there is a scarcity of available airwaves and this will pose problems for the fast-growth wireless data markets. For more information on this dilemma be sure to look at the Daily DL for 10-8-09.

Shiller’s List: How to Diagnose the Next Bubble – The New York Times

Summary: Robert J. Shiller, the Yale Economist, believes that discovering bubbles may require the same techniques that psychologists use to diagnose mental illness. Many psychologists use checklists to determine if the patient is sick or suffering from a few symptoms. Shiller’s bubble checklist contains the following:

(1) Sharp price increases in the asset being observed.

(2) Great public excitement.

(3) Media attention.

(4) Stories of people earning money.

(5) The general public gains interest.

(6) “New Era” theories to rationalize the rise in prices.

(7) A decline in lending standards.

CB: For the most part this list seems logical and reliable. The one factor that CB would add is public participation in the observed asset class. Prices can rise without increased participation. However, prices can be driven even higher than imagined as the public begins to participate in the asset. For instance, while gold participation is up its not at bubble levels yet and many have not invested in the asset. Nevertheless, the media loves to talk about the gold bubble and how it may collapse. As long as there is excess investment capacity that could support and increase the price of gold further, it is hard to say a bubble has occurred. Also, the bursting of a bubble is usually aided by the panic of the masses,which is more likely to occur with increased investment participation. (In October CB covered some of Shiller’s thoughts on housing, which led to a brief discussion on momentum versus fundamentals regarding housing prices).

Also, CB has included Shiller’s most recent update to his cyclically adjusted price/earnings ratio, which shows that valuations (according to the price/earnings ratio) are high compared to the historical levels, but have room to go higher. Looking at the peaks in the graph at 1901, 1929 and 2000, one can see how quickly the valuations increased and their subsequent quick decline. (Be sure to click the graph to achieve full size)

Housing Recovery Could Take a Decade, Economists Warn – The Washington Post

Summary: Home prices, which peaked in 2006, have declined nearly 30% and some economists believe that as more foreclosures take place this year, home prices will continue to decline. The large threat that continues to worry many people is the removal of the government’s support from the housing market. Currently, the government has supported the housing market through its use of the Federal Housing Administration, lower mortgage interest rates, and the first-time home buyer tax credit. Furthermore, millions of homeowners owe a larger amount on their mortgages than the value of their houses, and this situation is not likely to change very soon. In fact, the longer homeowners stay underwater, with regards to their mortgages, the more likely they are to enter into foreclosure. Nevertheless, there have been the following signs of strength: (1) in 2009, home sales increased 5% from 2008; and (2) the Standard & Poor’s/Case-Shiller home-price index reports a .3% increase in home prices in 20 major cities from October to November. Nevertheless, even as housing recovers the historical data indicates that normally home prices take five to 10 years to regain their losses after a significant downturn. Speculative regions such as Naples, Florida and Las Vegas, Nevada may take even longer to recover. The speculative buying in these areas pushed development away from urban centers and other amenities. Without the speculative force there is little reason to complete many of these undeveloped properties that are located away from key markets. Moreover, one economist believes that historical comparisons are not entirely valid given that past downturns have been regional and not national like the current one.

CB: Currently the housing market has been nationalized with the government supporting in one way or another 85% to 95% of new mortgages. Does one comfortably invest in a company where 85% of its revenue comes from one customer and that customer has stated that it will soon stop buying from the company?

On Wednesday, the Mortgage Bankers Association released its weekly survey of mortgage applications, which reported the following: (1) the Mortgage Composite Index, an index that measures mortgage loan application volume, decreased 10.9% on a seasonally adjusted basis from the prior week; (2) the Refinance Index dropped 15.1% from the prior week; (3) the Purchase Index decreased 3.3% from the prior week; (4) refinance applications accounted for 67.6% of total applications a decrease from 71.7% last week; (5) the average interest rate for the 30-year fixed rate mortgage increased to 5.02% from 5.00% last week; (6) the average interest rate for the 15-year fixed rated mortgage increased to 4.32% from 4.33% last week; and (7) the average interest rate for the 1-year adjustable rate mortgage increased to 6.84% from 6.72% last week.

These numbers would mean more in a time series. CB will see if it can be fit into the schedule of various research and tasks. Briefly, speaking of Naples, Florida and bubbles, CB remembers being in Naples nearly five years ago and talking to a few of the real estate agents. During these discussions, CB presented the question of the real estate market being in a bubble and the probability for a near-term collapse. After a moment of chuckling, these agents believed that the it would be another 10 to 15 years before the real estate market in Naples experienced a significant downturn. They based their logic on the fact that many baby boomers would continue to move to Naples and buy houses as they retired, thus providing support for the market.

The above argument was a commonly recited. Yet, regardless of the number of times these agents were asked for statistics and other figures regarding their clients, none were provided. Most of the time, CB would prefer to see figures to support most claims. Claims are commonly mentioned by people and then repeated as fact, but often times the actual figures do not support the actual claim. Just a thought.

In other housing news, on Wednesday, the Commerce Department reported that the sales of single-family homes dropped 7.6% in December from November. This decline follows a 9.3% drop in November. Some believe that the underlying cause of this decline was primarily due to the high unemployment rates and cold weather.

Fund-Inflows Continue for the 45th Consecutive Week

Summary: CB has decided to start presenting this information as a basic chart. Again, this type of information is most helpful viewed in a time series and at levels, thus readers can expect to see a few additional graphs posted to the site in the near future with some additional analysis. This data and the below chart come from the Investment Company Institute’s website.