Modern News

Updated March 14

Matt Miller of Bloomberg Television did a very wide-ranging interview with two prominent market participants: Philip Orlando of investment giant Federated Investors and Todd Colvin of MF Global Inc. I will be commenting on this through the weekend.

Miller raised the issue of interest rates. This is key in the current market environment, as the stock market has been buoyed by short term interest rates that are effectively zero. But what goes down must go up, and should the Fed be forced to raise rates, the market could get the chills, especially if there are earnings disappointments. (2:00-4:00 of video)

Orlando expects an earnings bump in tech stocks, as capital spending by corporate America put on hold at the beginning of the recession resumes. However, an uptick in tech stock prices depends on investor perception that the nascent recovery is sustainable (8:45-10:15)

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It’s not as if Uncle Sam isn’t trying to spend his way out of recession. February’s $221 billion deficit tally turned out to be a blockbuster , easily surpassing the previous record of $194 billion in February 2009.

The government also estimates that the total 2010 deficit will actually surpass 2009’s, coming in at $1.56 trillion compared to $1.42 trillion.

What does a $1.5 trillion deficit mean? Here’s a simplistic illustration. Current short term borrowing rates are extremely low, with the three month T-Bill yielding .15%. If the government financed this year’s deficit via this instrument, the interest tab would be $2.25 billion.

Should the T-Bill rate recover to more normal levels, say 3%, that amount climbs to $45 billion. And since we would have to finance last year’s deficit as well, the tab for both years would be roughly $90 billion. Or, in other words, something that exceeds the famous $87 billion Iraq war spending bill that worried the Democrats so, and which John Kerry voted for before voting against it.

Well, that’s change of a sort. But not much hope for a future.

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Is the Federal Housing Authority heading towards its own financial cliff because of its efforts to prop up the nation’s shaky housing market? Andrew Caplin, professor of economics at New York University, explains his concerns on Bloomberg Television:

Caplin believes the FHA is systematically understating the risk in their loan portfolio. For example, when they restructure a loan, they immediately treat it as a success – i.e., it’s removed from their book of troubled loans. But there is a possibility that the borrower will fall behind on that loan as well, and of course the risk is intensified by the recession, and the fact that the borrower was often a shaky credit in the first place. But the FHA does not reserve for this.

Caplin believes that the need for an FHA bailout is a near certainty. This would continue the “waterfall” phenomenon we have seen throughout the financial crisis. As each segment of the system gets stressed, the problem is not adequately measured and is only partially alleviated to avoid the immediate pain of drastic surgery. In effect, the regulatory powers allow it to flow downstream until it stresses another part of the system. The taxpayer picks up the tab multiple times, prolonging the crisis.

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For those of you who don’t know who Charles Munger is, let’s just say he and Warren Buffett have been making money together for a long time. Munger is the Vice-Chairman of Berkshire Hathaway Corp. and considered by Buffett to be his partner there. He knows what he’s talking about. Mr. Munger often writes parables to explain complicated financial matters in a way that the average person can understand. I think he must be a great storyteller and I would love the opportunity to hang with him for an evening by the fire. It would be fascinating!

His latest parable is disturbing, however. Posted on Slate.com a couple Sundays ago, “Basically, It’s Over” is a tale about the birth, growth and death of “Basicland” (clearly meant to be the United States) and its’ demise into “Sorrowland”. I won’t comment on it other than to suggest you click above and read it. When guys like Munger say things like this, I listen…and I worry.

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In the fall of 2008, at the height of the financial crisis, Warren Buffett bought a huge position in Goldman Sachs preferred stock. While much of the firm’s competition fell by the wayside, Goldman has roared back to life and Buffett, as is his wont, achieved huge returns.

Buffett is still bullish on the company, its management and its franchise position in the financial universe, but is much more cautious about the stock market and the US economy. Check out the first few minutes of the video to see how the mind of an investing legend works.

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By Edward Krudy

NEW YORK (Reuters) – U.S. stocks fell on Tuesday as consumer sentiment dropped sharply and house prices unexpectedly dipped, denting optimism about a economic recovery.

Concerns about the economy overshadowed better-than-expected quarterly earnings from retailers, including Home Depot Inc <HD.N>. The top U.S. home improvement chain beat estimates and raised its profit forecast, sending its shares up 1 percent to $30.62.

The February consumer confidence data fell in February to the lowest in 10 months, and the Standard & Poor’s/Case-Shiller indexes unexpectedly slipped in December. The releases followed an unexpected decline in business sentiment in Germany, which pressured overseas markets and fed uncertainty among investors who were worried about the U.S. Federal Reserve’s plans for interest rates and worries over possible sovereign debt defaults in Europe.

“Overall, there’s not a lot of positive stuff to see,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut. “With equity markets having retraced about two-thirds of their recent decline, today’s report (on consumer sentiment) could be the catalyst that leads to profit taking.”

The Dow Jones industrial average <.DJI> dropped 60.16 points, or 0.58 percent, to 10,323.22. The Standard & Poor’s 500 Index <.SPX> fell 8.84 points, or 0.80 percent, to 1,099.17. The Nasdaq Composite Index <.IXIC> lost 22.37 points, or 1.00 percent, to 2,219.66.

Investors were also confronted by a report from the Federal Deposit Insurance Corp that the total number of “problem” U.S. banks jumped 27 percent to 702 during the fourth quarter of 2009, reaching the highest level since 1993 amid signs the industry’s recovery is still shaky.

(Reporting by Edward Krudy; Additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

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By Wanfeng Zhou and John Parry

NEW YORK (Reuters) – U.S. consumer confidence sagged to a 10-month low on worries about jobs while the housing market remains under strain, data revealed on Tuesday, underscoring the fragility of the economy’s recovery.

U.S. consumer confidence fell in February to the lowest in 10 months, as consumers’ short-term outlook on jobs worsened, according to a report from an industry group.

The Conference Board said on Tuesday its index of consumer attitudes fell to 46.0 in February from a revised 56.5 in the prior month. February’s reading is the lowest since April 2009.

The median of forecasts from analysts polled by Reuters was for a February reading of 55.0.

“This is just a flat-out bad report,” said Tom Porcelli, senior economist at RBC Capital Markets in New York.

(more…)

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By Dhanya Skariachan

NEW YORK (Reuters) – No. 2 U.S. home improvement chain Lowe’s Cos <LOW.N> reported better-than-expected quarterly results and said sales would improve in 2010 as demand for remodeling projects picks up.

The company also said it would buy back up to $5 billion of its stock. Its shares rose nearly 2 percent in trading before the market opened, while larger rival Home Depot <HD.N>, which is due to report on Tuesday, was up nearly 1 percent.

Lowe’s results suggest “the worst of the economic cycle is likely behind us,” Chief Executive Robert Niblock said in a statement.

Falling home prices and high unemployment continue to weigh on consumers, Niblock said. But improving sales trends, especially demand for bigger-ticket renovations, provide an “encouraging sign that consumers are gaining the confidence to take on more discretionary projects,” he added.

The company said it expected sales at stores open at least a year to range from a 2 percent decline to flat for the first quarter, which began on January 30, and to increase 1 percent to 3 percent this fiscal year.

Investors had been waiting for Lowe’s and Home Depot to outline when sales will improve. Many expect Home Depot’s results to outpace Lowe’s as the company faces easier same-store sales comparisons and benefits from efforts to improve efficiency.

Wall Street Strategies analyst Brian Sozzi said Lowe’s full-year sales and profit outlook suggest incremental improvements as the year unfolds.

But he noted that the first-quarter outlook could have been stronger, considering evidence that consumers are becoming more open to home remodeling projects and the housing market is picking up.

Lowe’s profit rose to $205 million, or 14 cents a share, in the fourth quarter ended January 29 from $162 million, or 11 cents a share, a year earlier.

Analysts on average expected 12 cents a share, according to Thomson Reuters I/B/E/S.

Sales increased 2 percent to $10.17 billion, beating the average estimate of about $10.01 billion. Same-store sales fell 1.6 percent.

Lowe’s shares rose 1.6 percent to $23.50 in premarket trading, while Home Depot was up 0.9 percent at $30.45.

(Reporting by Dhanya Skariachan; Editing by Derek Caney, Lisa Von Ahn and John Wallace)

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By Rodrigo Campos

NEW YORK (Reuters) – U.S. stocks fell slightly in choppy trading on Monday on investor uncertainty about the Federal Reserve’s intentions after last week’s increase in the interest rate for emergency loans to banks.

The Standard & Poor’s 500 index also was weighed down by energy shares, while investors took a positive view of the financial sector, sending bank stocks higher.

Shares of oilfield services company Schlumberger Ltd <SLB.N> fell after it agreed to buy Smith International Inc <SII.N> for $11.34 billion in stock, which some analysts said was too high.

Schlumberger shares tumbled 5.7 percent to $60.23 and led declines on the S&P energy index <.GSPE>, which fell 1.4 percent. Smith International rose 6.6 percent to $40.20.

Fed Chairman Ben Bernanke is scheduled to testify on the Fed’s rate hike and monetary policy in general before House and Senate committees on Wednesday and Thursday.

(more…)

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As the US runs record deficits and the Fed floods the market with liquidity, the prospects for inflation become a key concern for our economy. This intriguing debate appeared on Bloomberg TV last May:

The two economists emphasize different factors as the cause of inflation. Bruce Kasman of JP Morgan Chase emphasizes fiscal policy, and thinks inflation is not a threat due to the unused capacity and lack of corporate pricing power in a recessionary environment. Brian Wesbury of First Trust takes the monetarist approach, and believes recent government policy is primed to lead to the classic definition of inflation-too much money chasing too few goods.

What’s a layman to think? A modern economy is a very complex thing, and it is probable that there are multiple causes of inflation. But governments have historically been at the center of major inflationary spirals. And the emergence of global financial markets has provided a newly supersized outlet for inflationary pressures when interest rates are low- worldwide asset bubbles. Our recent experiences with the dot-com bubble of the late 1990’s and the real estate bubble of the past decade, both of which followed periods of decidedly low rates, are worrisome.

Caveat emptor, caveat investor!

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