Week in Review Part II: Street Bytes

Stocks finished lower after two strong weeks with the Dow Jones losing 2.6% to close at 11866 and the S&P 500 and Nasdaq losing 2.8% and 3.5%, respectively. Despite the good news, including the National Retail Federation hiking its estimate of sales for the holiday season from 2.8% to 3.8%, and solid earnings news out of a key bellwether, FedEx, it was more about Europe. Just two weeks to go in the year. For selfish reasons I’m kind of on pins and needles as I try to nail some predictions.

--U.S. Treasury Yields

6-mo. 0.03% 2-yr. 0.22% 10-yr. 1.85% 30-yr. 2.85%

Treasuries staged a huge rally with the yield on the 10-year declining 21 basis points owing to the ongoing problems across the pond, including Fitch Ratings lowering its outlook for France while putting the grades of nations including Spain and Italy on review for a downgrade.

The U.S. inflation data for November also helped the bond market as producer prices, ex-food and energy, rose just 0.1%, and the core consumer price index rose 0.2%, bringing them, year over year, to 2.9% and 2.1%, respectively.

--The risks of a slowdown in China continue to increase as housing slows rapidly (or so it seems) and the banking sector is beset by problem loans, though remember what I said a few months ago. The Chinese government has no problem letting weaker lenders fail. They want to be there to support the biggest institutions, if necessary, so as to prevent systemic risk. Beijing is also content to maintain property market restrictions in 2012 to bring housing prices down to a “reasonable level,” according to the Central Economic Work Meeting, an annual gathering of Chinese leaders who determine economic policy for the next year. This group “guarantees steady growth,” according to Xinhua news agency, and issued a statement that read in part:

“China will ensure that macroeconomic regulation policies and overall consumer prices remain basically stable and will guarantee the steady growth of the economy and maintain social stability.”

What we did see this week was the release of data on foreign direct investment in November, down 9.8% from a year earlier, a sudden deterioration compared with all the positive readings we are used to on this front, while HSBC’s preliminary reading on December manufacturing came in at 49, a second straight month of contraction though, should this be the official figure at month’s end, at least better than the 47.7 for November.

And then China imposed retaliatory duties on U.S. car imports in response to what it sees as damage to the Chinese car industry from U.S. “dumping and subsidies.” The duties would fall on popular vehicles such as BMW’s and Mercedes-Benz brands made at U.S. plants, as well as any GM, Ford, Chrysler and Honda U.S.-made vehicles. The U.S., in turn, has been fighting China in the World Trade Organization in the areas of poultry and steel.

--India’s industrial production fell 5.1% in October from year ago levels, the first year over year decline in 28 months.

--Japan’s key reading on business sentiment, the Tankan survey, turned negative.

--Former MF Global Holdings Ltd. CEO Jon Corzine has said in three congressional hearings that he “never directed anyone at MF Global to misuse customer funds,” but in his last testimony on Thursday, he said he knew of an overseas transfer to a JPMorgan Chase account in London but was told everything was approved by MF’s back office.

Otherwise, Corzine has said, “I simply do not know where the money is” and “I didn’t intend to break the rules” when it comes to the missing $1.2 billion in customer funds.

But CME Group CEO, Terry Duffy, claims, “Mr. Corzine was aware of the loans being made from segregated accounts,” saying this information came from a CME auditor who heard the comment during a conference call involving senior MF Global employees. Corzine denied the allegation.

--The SEC filed suit against former Fannie Mae CEO Daniel Mudd, Richard Syron, ex-CEO of Freddie Mac, and other executives of both for understating hundreds of billions of dollars in subprime loans held by the firms. According to one SEC complaint, Freddie Mac executives “said the company’s exposure (to subprime) was between $2 billion and $6 billion when it was actually as high as $244 billion.” [Bloomberg]

The SEC filed “non-prosecution” agreements that require Freddie Mac and Fannie Mae to “accept responsibility” for their conduct and to cooperate with the SEC probe of the former executives.

Mudd, now CEO of Fortress Investment Group LLC, said in a statement:

“The government reviewed and approved the company’s disclosures during my tenure, and through the present. Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless – so that it can sue individuals it fired years ago.”

The problem is both Mudd and Syron, in congressional testimony in April 2007, tremendously downplayed their firms’ exposure to subprime loans; Mudd saying it was less than 2.5% of Fannie’s book, while Syron said Freddie hadn’t “been heavily involved in subprime all along.”

--Morgan Stanley plans to cut about 1,600 jobs due to a drop in revenue from investment banking and trading, with the cuts coming in the first quarter at all levels of the firm.

--Noted bank analyst Mike Mayo said revenue growth for U.S. banks this year would be the worst since the Great Depression and is not likely to improve in 2012. Remember the huge expansion in bank branches in your own neighborhood in the years prior to the financial crisis? You will see a ton of them disappear.

--Research in Motion, the Canadian manufacturer of the BlackBerry, once again delivered bad news to shareholders (and users) as it warned its next generation of smartphones running its new operating system will not be available until late 2012, way beyond what was first thought given prior company guidance. RIM’s stock has fallen over 75% this year. The co-CEOs cut their salaries to $1 a year while they attempt to right the ship but investors want them gone. RIM is on the verge of irrelevance, a startling fall, as the company expects sales to decline in the current quarter, the first such decline in years for this historically strong period.

--According to new information from the Census Bureau, nearly 1 in 2 Americans are either in poverty or scraping by on earnings that classify them as low income. The new measure of poverty takes into account medical, commuting and other living costs.

--Republican Congressman Paul Ryan (Wis.) and Democratic Sen. Ron Wyden (Ore.) have reached broad agreement on a sweeping Medicare proposal that would address Ryan’s original Medicare proposal’s flaw, that being its inability to keep pace with the rate of inflation. The new plan, which I’m not even going to begin to explain in detail now, would give future seniors a choice of staying in the traditional federal plan or purchasing private insurance coverage. All I know is that the Republican presidential candidates in Thursday’s debate broadly praised the compromise; yet another reason why Paul Ryan, in particular, has
an exceptional future.

--The above notwithstanding, last time I didn’t have a chance to quote economist Robert Samuelson from his Dec. 4 op-ed in the Washington Post:

“We Americans fool ourselves if we ignore the parallels between Europe’s problems and our own. It’s reassuring to think them separate, and the fixation on the euro – Europe’s common currency – buttresses that mind-set. But Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically. People can’t live with it – and can’t live without it. The American predicament is little different….

“The numbers – to those who don’t know them – are astonishing. In 1870, all government spending was 7.3% of national income in the United States, 9.4% in Britain, 10% in Germany and 12.6% in France. By 2007, the figures were 36.6% for the United States, 44.6% for Britain, 43.9% for Germany and 52.6% for France. Military costs once dominated budgets; now, social spending does….

“The modern welfare state has reached a historic reckoning. As a political institution, it hasn’t adapted to change. Politics and economics are at loggerheads. Vast populations in Europe and America expect promised benefits and, understandably, resent any hint that they will be cut. Elected politicians respond accordingly. But the resulting inertia poses an economic threat, one already realized in Europe. As deficits or taxes rise, the risk is that economic instability will increase, growth will decline, or both. Paying promised benefits becomes harder. Or austerity becomes unavoidable.

“The paradox is that the welfare state, designed to improve security and dampen social conflict, now looms as an engine for insecurity, conflict and disappointment. Facing the hard questions of finding a sustainable balance between individual protections and better economic growth, the Europeans have spent years dawdling. The parallel with our situation is all too obvious.”

At least Ron Wyden and Paul Ryan have acted, while President Obama leads from behind.

--The worst drought in Texas history, which has caused an estimated $5.2 billion in losses to farmers and livestock producers, has led to the largest-ever one-year decline in the cow herd, 600,000, or a 12% decline from the 5 million cows estimated at the beginning of the year. But while most folks talk about the impact this drop in the herd will have on beef prices, I say, boy, that’s a lot of methane removed from the atmosphere. Texas’ air quality has never been better.

--Speaking of climate change, Canada formally withdrew from the Kyoto Protocol, the first such nation to pull out, which led to criticism from the rest of the world.

But, said Peter Kent, Canada’s minister of the environment, “Kyoto…is in the past, and as such we are invoking our legal right to withdraw.” Kent added that Kyoto would cost his country $13.6 billion, or “$1,600 from every Canadian family…that was the legacy of an incompetent Liberal government.”

Meanwhile, the recently concluded Durban Conference was deemed “absurd” by Globe and Mail opinion columnist Margaret Wente, who says climate change conferences are more about power and money and the opportunity for growing economies to “extract billions” from rich countries, as reported by the BBC.

Comedian/commentator Dennis Miller says the Durban forum was primarily an event used by male delegates to pick up women.

[Aside from chasing the opposite sex, delegates reached agreement that a new climate change deal would be in place by 2015 and in force from 2020, plus it is to include top emitters China, the U.S. and India. If I were a cow, I’d begin to change my diet. Or take Beano.]

--Good news…California’s unemployment rate dropped to 11.3% in November, the lowest since June 2009.

--Swiss Re AG estimates that natural disasters such as earthquakes in New Zealand and Japan, and floods in Thailand, let alone the severe storms in the U.S., resulted in the highest-ever catastrophic economic losses in a single year. Total losses in 2011, including insured and uninsured losses, are estimated at $350 billion, up from $226 billion in 2010.

The loss for the insurance industry itself, however, is projected at $108 billion, primarily because Japan hadn’t been fully insured, so on this basis it’s the second-most expensive year for the industry after 2005, which had massive loss-generating storms like Katrina, Wilma and Rita. [Anita Greil / Wall Street Journal]

--Commodities continued to take it on the chin this week. The story is really simple, irrespective of currency fluctuations, such as in a stronger dollar. As China goes, so goes the sector. China consumes 37% of the world’s copper, for example, and accounts for 60% of growth in global oil demand. So in looking at 2012, if you were playing the CRB Index, it’s about whether China will muddle through, have a hard landing, or see renewed growth. Today, I’d be in the muddle through camp (7.5-8.0% growth).

--China’s Shanghai Composite Index hit a new 33-month low before rallying 2% on Friday.

--The Economist had a piece on Macau and the excessive amount of money laundering taking place there, with wealthy Chinese evading China’s strict limits on the amount of yuan that can be taken out of the country by laundering it through the gambling Mecca. When the wealthy cash out, they are paid in Hong Kong dollars, which they can then stash in Hong Kong or take elsewhere. Many point to this as a big reason for Macau’s success, as 72% of its revenues come from high-rollers.

--Atlantic City could use more money-laundering. November revenues at its 11 casinos fell 6.3% from a year ago. [The Borgata Hotel Casino and Spa remains far and away the biggest in A.C. in terms of revenue, by the way.]

--McDonald’s said November same-store sales rose a strong 7.4%, with the company citing breakfast items such as the seasonal addition of the peppermint mocha to the coffee menu. Sales at stores open at least 13 months rose 6.5% in both the U.S. and Europe, and 8.1% in Asia Pacific, the Middle East and Africa.
This is nothing short of spectacular and McDonald’s shares hit another all-time high.

--One of the world’s worst CEOs, Andrea Jung of Avon, was relieved of her command, though for some reason allowed to remain as chairman of the board.
--A USA TODAY analysis shows that electric bills have skyrocketed the last five years, “a sharp reversal from a quarter-century ago when Americans enjoyed stable power bills even as they used more electricity.” [Another hit for the middle class as wages continue to stagnate.]

--When I was golfing the other day with Dr. W., we were talking about the situation in the U.S. and two things that will help kill us; rising healthcare costs and tuition.

So while you all know about both, I did see a telling piece in the Los Angeles Times by George Skelton, talking about tuition hikes at the University of California, up 18% this year over last, which was 14% higher than 2009, which was 23% steeper than ’08. Again, with wages stagnant over the same stretch. Plus, back in 1984, there were no academic fees. Today, it’s $864, annually, assuming a full course load.

Plus, the average textbook now costs $104 (2010), a 24% increase from five years before. “Between 1986 and 2004, textbook prices rose 186%, double the inflation rate. Students can expect to spend more than $1,100 a year on books.”

--I can’t say I’ve purchased any Michael Kors apparel for significant others, or been in one of its outlets, but the IPO did well this week, up 21% in its debut on Thursday.

--The NFL reached agreement with its broadcast and cable networks that will see CBS, Fox and NBC pay a cumulative $3 billion a year, over nine years, starting in 2014, or more than 50% higher than their current deals. [Fox will pony up $1.1 billion, CBS $1 billion, and NBC $950 million a year. Three months ago, ESPN agreed to pay $1.9 billion annually for eight years.]

Add in DirecTV, which pays $1 billion a year for its Sunday Ticket satellite package, and you’ve got a lot of money to divvy up. The players, under the new collective bargaining agreement, get 55% of the TV haul.

--The late Liz Taylor’s jewelry collection fetched a record-setting $115 million at auction, including more than $8.8 million for a diamond ring given to her by Richard Burton, purchased by a private buyer from Asia.

--The U.S. Mint is curtailing production of the $1 golden coin. The government has 1.4 billion of them in its vaults, demand is so low. Dollar coins have never caught on.

--Speaking of pocket change, ever notice how only women insist on searching for the exact change at checkout lines? [Mused the editor, who has coffee cans full of change, probably about $1500 worth, in storage. This is what I’ll cash in when I’m homeless and riding the rails.]

--Lastly, gotta love Barclays CEO Bob Diamond, who has imposed a “no jerks” policy for his U.K. bank. Diamond said the rule applies to bankers considered to be prima donnas, too greedy, too ostentatious or failures as team players. Supposedly, he has encouraged 30 to 40 Barclays employees to find work elsewhere for violating the standard. Diamond cited an infamous 2002 episode, during which six Barclays bankers ran up a $68,940 alcohol tab at a London restaurant, as embarrassing and “the no-jerk rule personified.” [The Post and Courier…Charleston, S.C.]