1/30/11…the future is in financials

This week’s economic calendar is quite full. The highlights of the week will be the January ISM Manufacturing Survey (Wednesday) and the January Employment Situation Report (Friday). We will also get December Personal Income (Monday), the Q4 Employment Cost Index, the December Case-Shiller Home Price Index, the January Chicago Purchasing Managers Index, and January Consumer Confidence (Tuesday), the January ADP National Employment Report, December Construction Spending, and January Motor Vehicle Sales (Wednesday), the preliminary Q4 Productivity and Costs (Thursday), and December Factory Orders and the January ISM Non-Manufacturing Survey (Friday). Courtesy of Steve Wood, Insight Economics.

 

Bloomberg Top Stories:

 

*Greek Debt Talks Risk Deflecting EU Summit Focus From Crisis-Fighting Plan

*Stocks Drop as Euro Weakens on Greece Debt Concern; Italian Bonds Decline

*RBS Ch8ief Hester Waives $1.5 Million Bonus, Bowing to Political Pressure – finally!

*Sarkozy to Levy Transition Tax Opposed by Finance Industry, Central Bank

*Loonie Poised for U.S. Parity as Aussie 46% Overvalued in China Slowdown – oh oh!

*Longest S&P 500 Valuation Slump since Nixon Discounting Record U.S. Profit – and it should!

*Morgan Stanley, Credit Suisse Lead Retreat on Investment Bank Compensation

*Homebuilder Puts Hit Highest Since 2006 on Hedge Before Earnings – they were right then!

*Construction Rises as Architect Billings Show U.S. NON-Residential Rebound

*Jobs Returning to U.S. Midwest as Applesauce Joins Cars in Buoying Obama

*Apple Juggernaut Fuels Silicon Valley Hiring Amid Bubble 2.0 Concern

*Goldman Sachs Among Banks Lobbying to Exempt Half of Swaps Books – overseas swaps!

*Don’t Be ‘Fooled’ by ‘Attractive’ Financial Valuations – so says Brian Belski and TB

*U.S. Gap Between Public-Private Union Membership Widens –yep, private is back!

*Bank of Canada’s Carney Says Volcker Rule Could Damage World Bond Markets – and…

*Canada Seen Risking Subprime Crisis With American-Styled Loans – even they caved?

*Gingrich Blasts Romney as ‘Wall Street Elite’ as Florida Prepares to Vote

*Afghanistan War Allies Fracture Over Timetable for Troop Withdrawals – get out now!

*Costa Concordia Wreck May Take as Long as 10 Months to Remove From Ocean – swell!

Volume fell back to an above average 4B shares from 4.5B shares in a second straight MIXED session where only Dow Transports (+0.8% and leader two days straight!), the Nasdaq indices and Russell 2000 rose, but not much. Biggest loser Dow Utilities which fell 1.3%.was NYSE stocks executed on the Big Board slipped to 850M shares from 866M shares, still about 200 million short of the twelve month average. 50 of the last 53 sessions have been less than 1B! Advance/Declines were positive:+1.9:1 vs  -1.1:1 vs +3.3:1 vs +1.2:1 vs +1.4:1 on NYSE and +1.9:1 vs -1.2:1 vs +2:1 vs +1.5:1 vs -1.2:1 on Nasdaq. Breadth was not so much: +1.1x vs  -2x vs +3.4x vs +1.2x vs +1.4x on NYSE and +1.3x vs -2x vs +2.8x vs +1.2x vs -1.1x on Nasdaq. New 52 week fell to 285 from 370 while new lows were steady at 19. The ratio dropped to 14x positive. The S&P VIX barely declined to 18.53 -.04. Investors still unwilling to put their money where their mouth is except day and high frequency.

Here are the results of the past five sessions: Dow -0.6% vs -0.2% vs +0.6% vs -0.3% vs -0.1%; Transports +0.8% vs +0.4% vs +1.5%v vs -0.7% vs -0.8%; Dow Utilities -1.3%!!! vs +0.1% vs +1.6% vs -0.8% vs +0.3%; S&P 500 -0.2% vs -0.6% vs +0.9% vs -0.1% vs +0.1%; Nasdaq Composite +0.4% vs -0.5% vs +1.1% vs +0.1% vs -0.1%; Nasdaq 100 +0.3% vs -0.5% vs +1.3% vs -0.1% vs flat; Russell 2000 +0.8% vs -0.3% vs +0.9% vs +0.7% vs -0.2%; NYSE Financials +0.3% vs -0.4% vs +0.5% vs -0.4% vs +0.6%. NYSE Leaders: BAC -0.1% vs -0.7% vs +0.8 vs +0.6% vs +2.6% vs +1.6% vs +2.4%; PFE-0.7% vs -0.4%; F-4.2% vs -1.1% vs -0.9% vs +1.3%; NOK -6%.

Global equity markets weaker: FTSE -0.8% vs -0.5% vs +1.2% vs -0.7% vs -0.8%; CAC 40 -1.1% vs -0.5% vs +1.2% vs -0.9% vs -1.1%; DAX -0.8% vs +0.2% vs +1.5%; Nikkei -0.5% vs -0.4% vs +1.1% vs +0.2% vs -0.5%; Hang Seng -1.7%! vs +0.3% vs +1.6%; Korean KOSPI -1.2%! vs +0.4% vs +0.3% vs +0.1%; Indian Sensex -2.2%!!! vs +0.9% vs closed vs +0.5% vs +1.5%. U.S. Futures weaker, but off session lows: DOW -76; SPX -9; NDQ -16! Bonds in rally mode: 10’s well below 2%, and now 30’s broke 3%! 10 yr 1.84% +1/2. RECORD low 9/23 of 1.6855%; 30 yr 2.98% +1-1/2; Long TIP 0.64% up1-3/8; 0.57% at high. The 5 yr TIP yields MINUS 1.31% vs -1.21%!!!; 10 yr -0.28% vs -0.22% 3 mo. Libor 0.55%, and 0.78%, starting to slip again! Bills 0.04% 1 month; 0.05% 3 months, 6 months 0.07%. Reverse Repo 0.17%, steady.

Gold rallied again Friday by $5.50 to close at $1735.40 with an intraday high of $1743 for the highest close since 12/6! It is well above the 200 day ($1647), and has been above $1600 for 13 straight sessions. It is now $1728.20 -$7.20. The record high is $1923.70, a buying climax on 9/6. Sup is $1668, the 50 day, further support $1653, the 40 day m/a. Res is $1770, the 12/2 high! Crude failed to rally again, closing at $99.56 -.14. It is now $99.03 -.53, and weak with resistance/support at $100 and further support at the 40 day (99.49), the 50 day (99.27), and $95.20, the 200 day.

…old-timers like TB recall that line from The Graduate…but the industry was plastics. A year ago the knowledgeable analysts all said it would be financials which were far and away the worst performer…taking away more than all other indices combined! This year, we hear it again, despite Basel III, the Greek/Euro crisis, and more.

But strategist Brian Belski said today not to trust valuations or at least don’t use them for your guide…TB would toss in book value per share which is absolutely meaningless in any financial institution as the assets are the people…note that Morgan Stanley and Credit Suisse are leading the way curbing payouts to investment bankers…and Goldman paid out way less.

This dovetails into TB’s theme that we are driving while looking through the rear-view mirror on earnings, they can be fleeting, especially in a slow-growth (no-growth?) economy. GDP in Q4 rose at a below-estimates 2.8% vs 3% yet it was misunderstood…especially since only 0.9% of that was due to growth while the bulk of it was inventory rebuilding from very low levels and which may turn out to be ‘involuntary.’ So far, if TB’s memory serves, about 50% of companies are hitting their marks, with 12% above and 38% missing estimates. Does that sound sustainable?

One other problem is that since Reagan, private sector union membership has been in decline, with the growth in public unions which is what has hurt governments so much. But it is now growing again and can you blame them? Not when CEO’s are grossly overpaid by any standards (for the major companies, not smaller ones), and the employees pay increases have not even kept pace with inflation…not to mention an increased share of benefits costs.

TB just read where Angeion, a med-tech firm went through THREE CEO’s last year at a cost of $1.35 million! The company lost $200,000 on revenue of $29.1 million but the board chairman says they are now on the right track. All that keeps them afloat is a cushion of over $9 million in cash, which has to also be a drain on earnings. This is the worst case of CEO abuse TB has seen but is it atypical of companies which lose, or make little money for shareholders while enriching the CEO? Think financial companies…mainly still run by the same players as before the crisis.

Going back three years or more, TB recalls interviews with people working for Best Buy, who were induced to come into middle-management, only to be forced into 10-12 hour days, and criticized for taking time off. Unions aren’t inherently bad…they serve to keep things in balance, but can they this time? The difference is American workers have little or no bargaining power as companies will merely outsource…and that spells trouble for economic growth. Most of our growth if you recall comes from consumption…how do you suggest we increase it?

. . .   – – –  . . . note that the same old SOS applies…perhaps more so!

The GOP continues to try to hand Obama a second term. They talk of Obama promoting ‘class warfare’ yet that is coming from within their own party as they try to appease the Tea Party by cutting the deficit while refusing to do anything about inequalities in the tax code…promising to do it once they are ‘in.’ Hogwash! They are owned by the groups who benefit most by the current tax code so any changes will be minimal…and non-existent in this election year.

Tom Brokaw had it right, the ‘greatest generation’ succumbed to the baby boomers, whose parents wanted them to not suffer as they did…and that has been passed on for three generations and now we wonder why the standard of living is declining for the first time in our nation’s history.

Thanks to an explosion of credit, we, like the proverbial frog in the pan of water, failed to see the temperature rising. Now we are paying for it.

But it goes farther than that…the main impact of the Viet Nam war was a lack of a desire to pay back…no draft…no obligation…and thus it became ‘all about us.’ What happened to JFK’s ‘ask not what your country can do for you,’ it couldn’t be summed up more than by George W. Bush in the wake of 9/11 telling us to go shopping…no plea for service. Instead, only a few…and virtually none from the families of the members of Congress, decided on their own to do something. What did they get for it? Read the book on Pat Tillman to see…he went over to fight and the only time he saw combat was the day he was killed. We went to Afghanistan to get Bin Laden, bungled it politically, and while staying there, diverted to Iraq, where we made a mess of the country politically, and all we had to show was getting rid of an impotent Saddam Hussein.

Yet the GOP continues to try to find more areas to invade…and if the Dems back off they get criticized as weak…despite global polls…by investors too…showing we are doing it right. They have trumped up the failures of Obama…and believe TB there were many, into the $5 trillion increase in the debt being his fault, even the price of gas and college educations…they have misled us on healthcare by refusing to acknowledge the costs of uninsured flooding our emergency rooms and thus driving up health costs.

Now they leave us in a quandary, who should be president? In TB’s opinion, certainly not the two leading candidates, and that at a time when we need a leader…yet the closest thing to a leader is Obama…who is a great speaker, but not a great leader. Yesterday, Boehner was asked about the do-nothing Congress…he railed pointing to the number of bills passed in the House but DOA at the Senate…blaming it on Harry Reid…yet he made no effort to get the GOP members to support the bills…why not pass them if you know they won’t go anywhere? Is that leaderhip? You decide.

Hope you have a wonderful week!

TB

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