Chain Bridge Investing: Stock Investing News & Analysis for 2-1-10

February 1, 2010 by cb · 1 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. Some recent CB posts that you may have missed since the last Daily DL are: Company Share Repurchases from 1/25-20/2010; Insider Trading: Significant Insider Buys from 1/25 – 29/2010; S&P Earnings Surprises for the Fourth Quarter as of 1-31-10; Bill Gross: Invest in Less Leveraged Asia, Avoid the Deleveraging Consumer; Household Debt Levels of BRICs & Additional Detail on China; Shell and Total Executives on Oil and its Price; George Soros: U.S. Dollar Attractive, China Overheating; Market Signals: NYSE Group Short Interest as of January 15, 2010; and Market Signals: Monthly Brokerage Margin Levels Updated for December 2009.

News not covered below: (1) Toyota will detail today how it plans to resolve the outstanding gas pedal issue; (2) Obama’s jobs push may cost roughly $100 billion ; (3) Russia’s Lukoil and Norway’s Statoil ASA have completed a deal to develop one of Iraq’s largest oil fields; and (4) the number of full-incoming containers at the ports of Long Beach and Los Anagles, California increase 2.9% in December from the year before.

Upcoming Economic Data for the Day (all times EST)

8:30 AM Personal Income and Outlays

10:00 AM ISM Mfg. Index

10:00 AM Construction Spending

11:30 AM 3-Month Bill Auction

11:30 AM 6-Month Bill Auction

Initial Public Offerings (”IPOs”) for the Week of February 1- 5, 2010

2/2/10 Film Department Hldgs LLC (“TFDI”) – Motion picture finishing and production company.

2/2/10 FriendFinder Networks (“FFN”) – Internet based social networking company.

2/2/10 Patriot Risk Management (“PMG”) – Insurance management company.

2/2/10 Imperial Capital Group (“ICG”) – Independent, full-service investment bank.

2/2/10 Ironwood BioPharm (“IRWD”) – Pharmaceutical company.

Data from the WSJ Market Data Group

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

News

Deficit to Hit All-Time High – The Wall Street Journal

Summary: On Monday, President Obama is expected to propose a $3.8 trillion budget for fiscal 2011 that would require a deficit of $1.6 trillion, which is higher than last year’s $1.4 trillion deficit, but would reduce the deficit in 2012 to $1.3 trillion and $700 billion by 2013. These deficit cuts are based on the assumption of continued economic improvement. To achieve his deficit reduction goals, Obama faces the headwinds of passing several budget cuts through congress as well as implementing new spending to help create new jobs. At present, Obama lacks a clear vision for reducing the budget and is likely to leave those recommendations for the new bipartisan 18-member debt commission. Spending cuts are difficult to implement in the current Congress, but also raise criticism when these cuts could negatively affect people. At this time, some believe that the President must rely on the budget commission and budget rules to overcome any resistance from Congress. The particular group of budget rules that may be imposed are the pay-as-you-go rules, which would impose an increase in taxes or a reduction in spending in order to offset any tax cut or spending increase.

CB: First, CB does not pay much attention to many projections or forecasts, they are usually wrong – especially when based on the general assumption of continued economic improvement. No one knows what the economy will look like in a year, much less four years. Second, the fact that there isn’t a clear plan on where or how these cuts will be implemented fosters the seed of doubt that these deficit reductions will be achieved. When corporations don’t have a clear idea regarding the source of their cost savings plan, they usually don’t meet their plans. Moreover, as time passes unexpected events may occur,which will require additional funding that was not originally foreseen. Third, the economy and the budget are complex beasts. There is little doubt that the U.S. will eventually prevail, but at times its hard to envision the path to success. The budget’s success is dependent, in part, on the success of the economy. If removing certain programs or implementing budget cuts hurts the economy, then additional measures or spending will have to be implemented to help the economy. Thus, providing the possibility of increased deficits and budget spending. At present, the U.S. economy is largely dependent on the government. If the government support is removed or reduced, then it becomes difficult to predict how the economy will respond. Furthermore, it becomes difficult to understand the reactions of voters. It is much harder to take away an item provided from the government that people have grown to accept as the norm than to prevent additional new measures. The prior psychological perspective is one of the reasons CB believes the U.S., Greece, Spain, Italy and others will face resistance when implementing budget cuts. Nevertheless, despite the complexity of the situation, the deficit must be reduced for the long-term health of the economy.

Nations Set Out Targets for Cut in Emissions – Financial Times

Summary: On Sunday, according to the Copenhagen deadline, the majority of the world’s largest economies filed their greenhouse-gas-emissions-reduction targets with the United Nations. Yet, many of the targets were filed in the form of a range. For instance, Australia states that it will reduce emissions between 5% to 25% by 2020. As a result, much time this year will be spent trying to get all countries to push their targets to the upper-end of the range. Furthermore, the 2007 report by the Intergovernmental Panel on Climate Change (“IPCC”) is being attacked by some as (1) not being subjected completely to the peer review process and (2) making an unsubstantiated claim. As a result, some governments may try to walk away from their emissions targets claiming they were pressured into the targets based on the IPCC’s 2007 report.

CB: If looking at this issue from an investment perspective, investors should figure out what would have to take place in the energy industry over the next 10 years in order to achieve the upper ranges of these targets. How much infrastructure must be laid down? What should the price of carbon be set at? What problems arise when increasing the scale of new products that help achieve these new targets? In an interview at Davos with Joseph Stiglitz and Peter Voser, the chief executive at Royal Dutch Shell, the point is made that the long-run price of carbon must be set high in order to offer economic incentives to encourage future development of non-carbon sources of energy. Meanwhile, Peter Voser claims that for a new non-carbon source of energy to account for nearly 1% of the global energy market it requires 25 years to go from the research and development stage to the commercialization stage.

REITs: Better but Not All-Clear -The Wall Street Journal

Summary: While the prices of the underlying property of commercial real-estate REITs appear to be stabilizing, REITs still face the following headwinds: (1) underlying property prices may not stabilize; (2) a rise in interest rates could apply downward pressure on equity values; (3) REITs are becoming increasing correlated with real-estate stocks in the broader market; (4) rents and occupancy levels continue to decline; and (5) REITs currently trade near a 20% premium to the net value of their underlying real estate. Those bullish on REITs believe that the REITs that have raised additional cash through equity and debt channels are in a strong position to begin accumulating distressed properties. Yet, with many banks continuing to extend loans, distressed landlords do not have to sell at distressed levels. The article concludes that current REIT prices most likely reflect any good news related to the industry.

With Fund Managers, Past is No Predictor for Future – The Wall Street Journal

Summary: Several studies have concluded that the past performance of mutual funds is not a reliable indicator of future fund performance. For instance, according to a Morgan Stanley Smith Barney’s Consulting Group study, the top 10% of funds tend to repeat their past market performances, while the worst 20% of funds are likely to outperform the market in the future. Such future out performance tends to result from a fund originally holding positions in a beaten down industry or sector that eventually becomes very popular amongst investors. Furthermore, another study conducted by Eugene Fama and Kenneth French concludes that besides the top 3% of funds, the rest produce results that lag behind results that would be generated due to chance. Moreover, Robert Huebscher of Advisor Perspectives conducted a study monitoring the future performance of funds with Morningstar rankings, which are determined primarily on past performance. Huebscher discovered that many lower-ranked funds outperformed the higher-ranked funds. Basically, these studies state that, in general, past performance cannot be relied on as an indicator of future performance.

CB: Every few years studies are conducted on this topic and the results tend to be the same: in most cases, past out performance is not indicative of future out performance. This is a concept that was discussed thoroughly between a reader and CB less than 18 hours ago. Its very important not to get wrapped up in performance when selecting funds. One aspect that CB looks for in funds are those that have a decent percentage of assets allocated to cash, 5% to 10% in most circumstances. Such cash reserves allow the fund to capitalize on future downturns when they occur without feeling forced to liquidate positions earlier than need be.

Europe set to be Worse Hit by Loan Drought – Financial Times

Summary: According to an European Central Bank study released on Friday, the authors found little evidence of a causal relationship between the credit supply and real output in the U.S., however, they did find a significant causal relationship between those two factors in the eurozone. The reason expressed for the strength of the relationship in the eurozone is due to the fact that bank loans are more depended upon in the eurozone as small and medium sized businesses do not have access to capital markets. Yet, lending to non-financial corporations in the eurozone decreased at an annual rate of 2.3% in December, which was a greater rate of decrease than November’s 1.9%. In December, the European Central Bank, in order to begin removing its support from the markets, ended its provision of unlimited liquidity to eurozone banks for up to 12 months, which was originally implemented to help increase lending.

At Amazon, Giving in to Demands – The New York Times

Summary: After Amazon removed the ability to buy any title published by Macmillan from its website on Friday in response to Macmillan’s request that Amazon raise the prices of its e-books, the web retailer has given in to the Macmillan’s request on Sunday. As a result, beginning in March, Macmillan will set the price of each book sold on Amazon and Amazon will recieve a 30% commission. Furthermore, e-book editions of most new Macmillan books will retail from $12.99 to $14.99. This new contract is very similar to the one Apple has with five of the six largest publishers. In the past, Amazon has purchased e-books at a wholesale price near or at 50% of the print edition, and then discounted the price to $9.99 on the Kindle, thus taking a loss on the transaction. Amazon’s strategy was to provide more e-books at a lower price in order to sell more Kindles. Amazon most likely caved to Macmillan in order to compete with Apple with the same content and not be at a disadvantage.

More Links of Note

No Lover of Unregulated Banking – Brad DeLong

Felix Salmon Interviews Nouriel Roubini – Reuters

Good and Boring – Paul Krugman

An Interview with a Chinese Real Estate Insider – PragCap

This Time is Different – John Mauldin

Eric Sprott on Central Banks and Gold – ZeroHedge

Risks Lurk for ETF Investors – The Wall Street Journal