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Futures and Indices from the ground
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Have The Effects Of The Fed's Shock−And−Awe Tactics Worn Off?
Tue, Jun 10 2008, 10:27 GMT
by Grace Cheng
GraceCheng.com
A leading New York-based financial portal, is a must-read for traders and investors who want high-impact financial news, market information and opinions from the ground.In this recent financial crisis, the Fed has pulled out all its big guns: it helped finance JP Morgan’s (JPM: 37.51 0.00 0.00%) purchase of floundering Bear Stearns; it gave credit lines to institutions it otherwise wouldn’t have, took “worthless” assets as collateral in exchange for loans, and basically anything it could think of to restore faith in the markets.
There are many who say that some of these things are “reckless” and can only lead to further inflation, and that it is a wasteful spending of taxpayers’ money. But right now, the bulk of inflation is coming from oil and other commodities, and it seems caution can be thrown out the window. Besides, if these things can only inspire faith in the markets and they can turn around, then it will be worth it.
For a few weeks, it seemed these tactics might have worked. The markets took to optimism and moved higher. It didn’t matter that oil was going through the roof, that home owners were increasingly defaulting on loans, or that financial institutions had billions in losses and writedowns. The worst must be behind us, or so the market hoped.
Last Friday seemed to bring the markets to a brutal awakening: the unemployment numbers were terrible, oil had its biggest ever daily gain to a new record high, and the Dow fell the most in 15 months.
Is this a sign that the Fed’s shock-and-awe tactics are wearing off? How much more can the Fed do to help? It can’t very well cut interest rates further, that would only increase inflation, make the US dollar fall further and oil prices rise. The Fed is already providing lines of credit to financial institutions which aren’t banks and has indicated its willingness to help any that are in trouble.
The most important thing the Fed has going for it is the faith that investors place in its “all powerful” nature in controlling financial policy. That faith is what pushed the markets up after the Fed’s bailout of Bear Stearns.
If you compare the current crisis to a deck of cards that’s falling, then you could say the Fed is running around trying to stick its cards where others collapse so as to keep the system intact. But how many more cards does the Fed have up its sleeve? If investors feel the Fed has overextended itself and run out of tricks, then we might see more stock dumping and commodity hoarding like we saw on Friday.
Published on Tue, Jun 10 2008, 10:27 GMT
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Are Credit Cards The Next Subprime?
Thu, Jun 5 2008, 08:05 GMT
by Grace Cheng
Last week the Fed said that credit card delinquencies hit 4.86% and credit debt increased by 7.9% to $957.2 in March. American Express (AXP: 45.64 0.00 0.00%) is experiencing mounting credit losses but today reassured investors that it still expects annual profit to increase by 4%-6%. Companies like Visa (V: 85.48 0.00 0.00%) and Mastercard (MA: 297.40 0.00 0.00%), which shoulder very little credit exposure, have been reporting excellent earnings growth.
This explosive growth in credit card spending seems intrinsically tied to the rising costs of bare necessities like food and oil and the diminishing financial resources that US consumers have to cover these costs. Basically, if they don’t have the money to buy these basic items, they put them on their credit card.
In the short-term, this added credit card spending will boost these credit card companies’ incomes, but what will happen when consumers get stretched too thin and can’t pay off these loans?
American Express has set aside $1.27 billion this quarter to cover the write-offs of debt defaults, the biggest chunk was set aside by the US division at $881 million, up 52%. Mastercard and Visa will have less to worry about as they have far less debt exposure. And in the end, a lot of the problem could fall on banks already struggling with the last big thing - subprime.
Lehman Brothers (LEH: 31.40 0.00 0.00%) continues to hog the headlines in its struggle to rid itself of its risky positions. It said it has already sold $100 million of these assets and is closing down some of its prop-trading divisions. Just as others before them, Lehman is saying it has enough capital and has not needed to access the Fed’s discount window. There is also speculation that Lehman may be buying back some of its own shares, although hedge funds with a short position are working hard to “break the bank”.
In the end what happens to banks like Lehman Brothers, Citibank (C: 21.08 0.00 0.00%), Bank of America (BAC: 31.99 0.00 0.00%), UBS (UBS: 23.77 0.00 0.00%) & Merrill Lynch (MER: 40.77 0.00 0.00%) with major credit exposure will depend a lot on the economy, the consumer, and of course how much taxpayers’ money gets spent to keep them all making money.
Published on Thu, Jun 5 2008, 08:05 GMT
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Bank, Airline, Car And Hotel Stocks Get Slammed
Tue, Jun 3 2008, 08:20 GMT
by Grace Cheng
The market was in for a beating this morning as investors dumped stocks across the board. Some of the hardest hit stocks were in the financial sector. Wachovia (WB: 23.40 0.00 0.00%), the 4th largest US bank, ousted CEO Kennedy Thompson after subprime losses pushed its share prices down by nearly half. This ouster further squashed its share prices to levels not seen since 1995.
UK bank Bradford & Bingley plunged over 24% as it announced it will be raising capital by selling its shares at a whopping 33% discount. It also announced that loans in arrears had increased to a total of 2.16% from 1.63% at the end of last year.
Lehman Brothers‘ (LEH: 33.83 0.00 0.00%) shares also took a fall as Merrill Lynch (MER: 42.62 0.00 0.00%) downgraded them to ‘underperform’ from ‘neutral’. Merrill said the downgrade was due to a risk of further writedowns in the already troubled securities firm. Merrill’s shares were also punished as it fell 1.8%. Citigroup (C: 21.46 0.00 0.00%), JP Morgan (JPM: 42.15 0.00 0.00%), Bank of America (BAC: 33.58 0.00 0.00%) and most other financials also joined in the fall.
Another sector to see a fall are airlines as high oil prices push them further into the red. The international airline industry is expected to lose $2.3 billion compared with a projected profit of $4.5 billion announced in March. Giovanni Bisignani, IATA director general, said that for every dollar that oil moves up, airline costs go up by $1.6 billion. Total fuel costs for airlines are expected to be $176 billion for the year and now make up 34% of operating costs.
Merged Dutch & French carriers KLM/AirFrance recently announced that they will be building plants to grow and extract fuel from algae. Test flights with mixed algae fuel and standard jet fuel are expected this year and they’ve set a goal to move to fuel entirely produced by algae in the future.
Car manufacturers are also feeling the pinch of high oil and Toyota Motors (TM: 102.51 0.00 0.00%) said it is considering cutting its US sales forecast as sales in trucks and other big vehicles continues to worsen. General Motors (GM: 17.44 0.00 0.00%) and Ford (F: 6.64 0.00 0.00%) have already been feeling this for a long time and their shares continue to mirror this decline.
And if recent earnings from tourist related businesses made investors think that foreign tourism to the US would offset a decline in US travelers, then Marriott’s (MAR: 32.19 0.00 0.00%) announcement that revenue will increase slower due to slumping demand should set them straight. Marriott’s shares declined on the warning and pulled down others in the business like Starwood (HOT: 46.36 0.00 0.00%) & Wyndham (WYN: 20.89 0.00 0.00%).
Published on Tue, Jun 3 2008, 08:20 GMT
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Credit Card Spending Surges, Retailers Slump
Fri, May 30 2008, 10:08 GMT
by Grace Cheng
Today MasterCard (MA: 309.00 0.00 0.00%) raised its long-term net income growth to 20%-30% annually up from a previous 15%-20% and that revenue may grow an average 12%-15% annually, up from a previous 8% to 10%. This growth takes place as more consumers switch to credit card spending and away from cash or checks. It is now estimated that 55% of all US transactions will be done using cards, up from 40% in 2005.
Visa (V: 85.25 0.00 0.00%) is the other big beneficiary of this growth, and as neither of them assume the credit risk of customers, they both seem to have a fairly low-risk, high growth business business model. The current economic crisis has done nothing but boost these company’s growth as consumers struggling with higher prices and lower incomes are forced to make payments on credit.
Retailers on the other hand, especially those in the mid-end range are suffering from higher prices and lower spending. Sears (SHLD: 86.14 0.00 0.00%) reported an unexpected net loss of $56 million, or 43 cents per share in Q1, vs a profit of $223 million, or $1.45 a share last Q1 and analysts’ expectations of a 15 cents per share profit.
What went wrong? A lot of things. Revenue fell by 6%, US same store sales were down 9.8% for Sears and 7.1% for Kmart, gross margins dropped to 27.3% from 28.2% last year as the company slashed prices, and sales and administrative costs rose 6%. It seems Sears is experiencing what many of their consumers are going through, a time of higher costs and lower income.
At least for today, the higher cost of living is continuing to rise as oil jumped back up to above $132 a barrel after government data showed a surprise decline in stockpiles last week.
Published on Fri, May 30 2008, 10:08 GMT
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Is Recent Oil Spike An "Irrational Exuberance"?
Thu, May 22 2008, 08:51 GMT
by Grace Cheng
Many banks and investment firms have come out to defend the rise in oil prices saying that it is based on fundamentals and that prices could rise much further. While they go on saying this and prices move upward, open interest in crude futures contracts has been moving steadily downward since a high of 1.58 million last July to 1.36 million now. What’s more, in the recent oil spike, open interest actually fell 8% in a week as oil moved up over 2.6%. Could this be a sign of a short squeeze with small traders who had shorted oil closing their positions as major banks like Goldman Sachs (GS: 178.836 +0.236 +0.13%) predict oil will continue higher? Some might even think it was major banks tripping short stops so that they could exit their long positions at better prices.
But aren’t there fundamental reasons for this rise in oil prices? In some ways yes, demand from China and India is increasing, but at a slower pace than oil has gone up. In markets such as the US, gasoline prices have not moved up nearly as much as crude, squeezing refineries margins, and slowing their orders of crude, which shows that demand for gasoline isn’t justifying higher prices.
So is this recent rally be a short squeeze so that banks and funds can exit their long positions while small speculators are filled with “irrational exuberance” over the price of oil? Opec ministers might think so, they’ve said that the recent spike is caused by speculation rather than by an increase in demand and that their level of supply is more than sufficient. John Hofmeister, president of Shell Oil said that the “proper” range for oil should be somewhere between $35-$90 a barrel.
Meanwhile, those holding the bag of the last big bubble - housing - won’t be too happy to hear that home prices posted their biggest quarterly decline since the government started tracking them 17 years ago. The housing market is suffering from a double whammy of record foreclosures and a huge amount of real estate inventory left over from the boom days.
Published on Thu, May 22 2008, 08:51 GMT
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Microsoft Plays Games With Yahoo
Mon, May 19 2008, 16:16 GMT
by Grace Cheng
Many Yahoo (YHOO: 27.8699 +0.2098 +0.76%) shareholders thought that Microsoft (MSFT: 29.5401 -0.4499 -1.50%) wasn’t done with Yahoo even when it said that it was walking away from the takeover bid. Some investors like billionaire Carl Icahn decided to take matters into their own hands and work on a hostile takeover of Yahoo. Now Microsoft has come back to Yahoo and proposed a deal which would involve some sort of partnership or joint-venture rather than a full Microsoft takeover of Yahoo.
This is probably not what most of the arbitrageurs who are holding on to Yahoo shares hoping that Microsoft would buy them out were hoping for. And based on Icahn’s investment history, it is most likely not what he wants to get out of this deal. He’s bought shares at a discount to the price Microsoft offered for them and he wants to flip them over to Microsoft and take his profit in as little time as possible rather than waiting to see if a joint-venture works out and benefits Yahoo. Is this a Microsoft ploy to make Yahoo shareholders worried that they will get a bad deal, and prompt them to force the hand of the board?
On the other hand, some analysts think this is a better deal for Yahoo as it will avoid the integration problems Microsoft would face if it were to buy Yahoo outright and absorb it as a division of Microsoft. And while that may be a relevant topic to Microsoft shareholders, is that really relevant to Yahoo shareholders? Many hedgefunds and institutional investors holding Yahoo shares are siding with Icahn and looking forward to a proxy take-over of Yahoo and a sale of their shares to Microsoft at the premium that Microsoft had offered.
Published on Mon, May 19 2008, 16:16 GMT
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Stocks Continue To Rise Despite High Oil Prices
Mon, May 19 2008, 10:41 GMT
by Grace Cheng
Despite oil prices reaching a new record high above $127, the worst consumer confidence in 28 years and the worst housing starts in individual family homes since 1991, the stock markets finished on a higher note last week. The Dow was up 1.89%; the S&P 500 was up 2.67% and the Nasdaq finished the week up 3.41%. Can this winning streak continue into next week?
First let’s look at oil: after President Bush’s begging while visiting Saudi Arabia, the Saudis have agreed to increase oil output by 300,000 barrels a day. Bush wasn’t happy though, saying it isn’t enough to ease U.S. energy prices. If traders take this as a negative sign, we could see prices going up further and that could put a damper on stocks in the week to come.
Next week we’ll see earnings from Hewlett Packard (HP: 61.26 0.00 0.00%), Home Depot (HD: 29.10 0.00 0.00%), Target (TGT: 54.88 0.00 0.00%), Gap (GPS: 18.43 0.00 0.00%), Campbell Soup (CPB: 35.95 0.00 0.00%) and Lowe (LOW: 24.89 0.00 0.00%). If retailers like Target and Home Depot can show reasonable results, it might inspire hope that consumer spending in essentials is at least propping up these companies. If Hewlett Packard can show strong results as other technology giants like Intel (INTC: 25.00 0.00 0.00%) have done, it would be a strong sign that tech spending has continued and could lift other tech companies.
Also keep an eye out for the PPI on Tuesday as any inflationary pressures there could quickly spread to the rest of the economy, and the CPI. But more importantly, any increase in oil and other major commodities could put pressure on the stock markets. Having said that, in the past few months oil has climbed tremendously yet stocks have continued to move steadily upward as many companies reported better-than-expected earnings.
Published on Mon, May 19 2008, 10:41 GMT
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Subprime Skeletons Still In Closets
Thu, May 15 2008, 10:05 GMT
by Grace Cheng
Freddie Mac (FRE: 27.25 +2.29 +9.17%) today reported a net loss of $151 million, or 66 cents a share, which was better than the 84 cent per share loss analysts had expected. Investors were happy with this, although in reality most of this was simply due to some new accounting rules which allowed Freddie to boost its earnings by around $1.3 billion. Freddie also said it would be raising $5.5 billion to help cushion any losses in its home loans. Considering that RealtyTrac, the online foreclosure site, reported it had seen a 65% increase in foreclosure notices compared to last year, lenders would need all the liquidity they can get.
Analysts are also concerned that British bank giant Barclays’ (BARC.L: 427.25 -10.50 -2.40%) numbers might not add up and that it might have to report further writedowns tomorrow. So far Barclays has reported just $4.5 billion in writedowns which seems little when compared with HSBC’s (HSBA.L: 893.5001 -1.9999 -0.22%) $18.3 billion or RBS’s (RBS: 6.42 -0.33 -4.89%) $11 billion. And if these numbers are so good, why have so many of the people running the credit businesses at Barclays Capital been shown the door in recent months? Is there something they - or their bosses - know that investors don’t?
Some are more optimistic though, Fitch Ratings believes that banks have already reported 80% of their subprime related losses. So if banks have already announced around $165 billion in losses and that is 80%, then there’s only around $41 billion left to go. According to Fitch, the biggest losses so far have been concentrated on just a few major banks like Citi (C: 23.25 +0.22 +0.96%), Merrill Lynch (MER: 48.87 +0.61 +1.26%), UBS and IKB which accounted for 60% of losses reported. So the big question is whether the bulk of the remaining $41 billion of subprime losses that Fitch estimates are yet to be made public, will come from these same banks, or whether it will be spread over a wider range of financial institutions.
Published on Thu, May 15 2008, 10:05 GMT
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Bernanke: Markets Still Far From Normal
Wed, May 14 2008, 07:11 GMT
by Grace Cheng
Today Bernanke said that the financial markets are still “far from normal” and that the Fed is ready to lend money to banks as needed to help them maintain their liquidity. Bank of America (BOA: 0.00 N/A N/A), the second largest US bank, might want to give Bernanke a call as it said that it estimates losses of over 2.5% in its $118 billion home-linked loan portfolio. Putting it in dollar amounts it would be a loss of over $2.95 billion - a paltry sum compared to some of the other writedowns we’ve seen lately, but nonetheless worse than they had previously expected.
Adding to the overall market gloom is the report that the U.S. median price for a single-family home fell 7.7% in Q1. The biggest decline took place in Sacramento, California, with a 29% fall in home prices. And as expected, homes in neighborhoods with a large amount of subprime loans have taken the worst price hit as reposessed homes have been sold at fire-sale auctions which have pushed down the prices of other houses in the neighborhood.
During this time of financial uncertainty, you’d think consumers would be shopping for bargains, and indeed they have. Wal-Mart (WMT: 56.65 -1.37 -2.36%) reported a 7% increase in profit to $3.02 billion, or 76 cents a share, from $2.83 billion, or 68 cents per share. This increase was due to a 10% increase in sales, and a 22% increase in international sales. This would seem to be in line with what Bank of America said that spending of bare necessities had increased overall spending on their credit card portfolio and we can just imagine that Wal-Mart, Visa (V: 82.38 +0.48 +0.59%), and Mastercard (MA: 288.80 -1.46 -0.50%) are benefiting from this. Despite this, Wal-Mart lowered its expectations for the next quarter leaving investors wondering just how stretched consumers really are if even Wal-Mart, one of the cheapest retailers, is expecting slower growth.
Published on Wed, May 14 2008, 07:11 GMT
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HSBC Bucks Trend Of Banking Losses
Tue, May 13 2008, 06:14 GMT
by Grace Cheng
Bucking the trend of loss reporting financial institutions, HSBC (HSBA.L: 882.00 +16.00 +1.85%) said today that its profit had been better than last Q1 despite having to write down over $5 billion. It said that growth in Asia had helped offset these losses, and that capital ratios remained strong and at 2007 levels. Not everything was rosy though, it warned that the US economy was likely to go into a recession and that it expects the US housing market not to recover till at least 2009. Despite this, it expects continued growth and that it will reach its 10% revenue growth forecast this year.
MBIA (MBI: 9.85 +0.42 +4.45%), the troubled bond insurer, didn’t fare as well and today reported a loss of $2.41 billion, or $13.03 per share, versus a profit of $199 million, or $1.46 per share last Q1. The loss was less than what some feared and the stock was up slightly for the day, although still down over 80% from late last year and is being traded at a price not seen since 1991. The drop in share price is understandable when you think that the per share loss announced for this quarter is more than the share price the company is even trading at and less than the $8.70 book value of the company. The fact that with all these negatives the stock went up today is a sign that bulls want to be optimistic regardless of the bad news.
A long-time player in the game of quarterly losses, Sprint (S: 9.24 -0.14 -1.49%) reported a Q1 loss of $505 million, or 18 cents a share, compared with a loss of $211 million, or 7 cents a share last Q1. Revenue fell to $9.3 billion from $10.1 billion lower than the $9.4 billion in revenue analysts expected. Much of these losses from the US number 3 wireless carrier are due to customer defections, and now even Sprint is talking about a possible liquidity crisis and having to defer payments to creditors although it says it should have enough cash on hand to last it through 2009. Sprint also warned that it may lose more customers. All in all, it’s not looking good for this carrier and it will need to take some major steps to remain relevant.
Published on Tue, May 13 2008, 06:14 GMT
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Is The Worst Really Over For Financials?
Mon, May 12 2008, 15:42 GMT
by Grace Cheng
Just as some were saying the worst was over for Wall Street, AIG (AIG: 39.85 -0.43 -1.07%), the world’s largest insurer, reported a $7.8 billion, or $3.09 per share, Q1 loss and reported it would raise $12.5 billion in the coming months. This is far worse than the 76 cents per share loss that analysts had expected and this news sparked fresh fears that the worst may not be over in the financial sector and pushed AIG’s shares down by over 8%. European and Asian shares also fell on higher oil and worries about the financial sector, with companies like Allianz (ALV.DE: 128.85 -0.20 -0.15%) and HSBC (HSBA.L: 884.00 +18.00 +2.08%) feeling the ripple effect of AIG’s report. Even Morgan Stanley (MS: 46.80 +0.84 +1.83%) recommended selling shares in HSBC on capital concerns.
Not to let AIG steal the limelight, Citigroup (C: 23.56 -0.07 -0.30%) announced that it would be selling $400 billion of its $500 billion in “legacy” assets, prompting concern that the giant banking group may split up. Some investors however, think a breakup wouldn’t be such a bad idea as they think the group may be too big to manage and would be better off spun into individual, more manageable companies.
Driving away from the continued problems of Wall Street, Kirk Kerkorian is so optimistic about Ford (F: 8.14 +0.04 +0.49%) that he is running ads to announce that he is buying up to 5.6% of the company and may decide to buy more. He says that he is buying them as a vote of confidence in CEO Alan Mulally’s turnaround plan. Toyota (TM: 100.91 -0.40 -0.39%) on the other hand is concerned about the economic slump saying that the higher gasoline prices and economic weakness will eat into its profit. Toyota has good reason for concern, especially since U.S. trade deficit narrowed more dramatically in March on a record plunge in the value of imports. Some of the imports that were affected were autos and auto parts.
Published on Mon, May 12 2008, 15:42 GMT
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Wal−Mart Benefits From Bargain Hunters
Fri, May 9 2008, 09:11 GMT
by Grace Cheng
It has been a good day for stocks and commodities. Major US indices like the Dow Industrials ended 52 points higher while S&P 500 added 5.11 points. With fuel and food prices going higher and higher, consumers are getting squeezed, opting for cheaper value household goods, clothing and groceries in lower-end shopping malls outlets. A major beneficiary of this change in shopping habit is the discount retailer Wal-mart. Wal-mart (WMT: 57.16 +0.33 +0.58%), the largest retailer in the world, reported Thursday that same store sales climbed 3.2%, more than its own forecast of a 3% gain and other analysts’ forecast of a 2% rise, sending its stock prices higher as a result. This increase in sales didn’t come easy for Wal-Mart; it had to adjust to slower consumer spending by cutting prices as much as 30% back in January in order to attract more bargain-hunters. Americans, in the process of receiving their checks electronically as part of the stimulus package enacted by US president Bush, are encouraged by the government to spend the extra money, and not just to use it all to repay their existing debts. For sure, Wal-mart and other retailers are hoping some of this money will go to them.
Meanwhile, commodities just keep going higher. Corn rose to a record high Thursday on concerns that rainy weather in the US, which is the world’s largest grower and exporter of corn, will disrupt planting work and thus limit corn production. Corn futures for July delivery rose 17.25 cents, or 2.8%, to $6.3025 a bushel on the Chicago Board of Trade. Grain traders will be looking forward to Friday’s supply-and-demand report from the US Department of Agriculture. Many are expecting the report to show a sharp fall in corn stocks for the 2008-2009 marketing year to 707 million bushels.
To the dismay of consumers, crude oil rose to another record high, rising above $124 to $124.61 a barrel for the first time ever. Crude oil for June delivery closed at $123.69 a barrel, the highest closing price since trading started in 1983. And it’s not just crude oil which is making record highs, but also gasoline and heating oil.
Published on Fri, May 9 2008, 09:11 GMT
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Disney Works Its Magic This Quarter
Thu, May 8 2008, 07:28 GMT
by Grace Cheng
Disney (DIS: 34.70 +0.97 +2.88%) managed to work its magic for investors this quarter. Even with the writers’ strike, it managed to increase net profit by 22% on earnings of $1.13 billion, or 58 cents per share, compared with $931 million, or 44 cents per share, last year. Revenue also increased 10% to $8.71 billion. This beat analysts’ expectations of 51 cents per share and revenue of $8.47 billion.
Revenue from Disney’s media networks grew 5% despite the writers’ strike on strong international sales of its TV shows. The strike also helped raise prices of spot ads which are helping its ABC channel bring in more revenue now that the strike has ended and ratings have returned. The lower dollar also helped boost visitors at Disney’s parks and resorts where revenue grew 11% to $2.73 billion. Although US attendance grew by only 5%, parks in Paris and Hong Kong experienced much stronger attendance growth. It also experienced an 18% growth in its studio revenue as it managed to snare some box office hits like “National Treasure 2: Book of Secrets” and “Hannah Montana/Miley Cyrus: Best of Both Worlds.”
On the subject of entertainment, Take-Two Interactive Software (TTWO: 0.00 N/A N/A) reported it has sold $500 million worth of Grand Theft Auto IV in its first week of sales. This is a record in first week sales of a video game and should help boost Take Two’s negotiating position in the takeover offer from Electronic Arts.
Published on Thu, May 8 2008, 07:28 GMT
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Are Investors Optimistic Or Is There Market Manipulation?
Wed, May 7 2008, 07:51 GMT
by Grace Cheng
Stock investors are generally seen to be wearing bullet-proof vests these past few weeks. Oh, Citi missed earnings? No big deal. Fannie Mae (FMN: 14.50 -0.14 -0.96%) (the biggest US mortgage lender) had a bigger-than-expected $2.19 billion loss and has cut its dividend for the second time in six months? No biggie either, especially after federal regulators said it will cut surplus capital requirements from 20% to 15% once the company has raised $6 billion in capital in a move to ensure that it can buy and guarantee more mortgages. Fannie Mae stocks did an unbelievable move today, initially falling as much as 7.3% before U-turning up to gain 8.9% before the end of the trading day. Fannie Mae’s condition is very telling of the overall housing market situation in the US, as it owns or guarantees one out of every five housing loans. Instead of letting fear wash over them and keeping them drenched, investors changed their minds after drinking some beer, and the Dow industrials ended up 51 points higher for the day. Or could this have been a case of market manipulation?
Maybe investors do have nagging thoughts about a possible further deterioration of the housing market and general economy, but they chose not to to think about the negative, but about more hopeful outcomes. Institutional firms are too big and important to fail (look at the Fed’s rescue of Bear Stearns), much less Fannie Mae which was set up by the US government. If they get themselves in a pile of mud caused by either external circumstances or internal bad decision-making, they have to get rescued, simply because they must keep on functioning. Already many taxpayers are complaining about why they have to foot the bill each time for other people’s mistakes, especially when many of those other people own(ed) maseratis. This stock run-up reminds us of the stock rally late last year, just as the world began to see the unfolding of the subprime mortgage crisis.
Published on Wed, May 7 2008, 07:51 GMT
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Oil Climbs, Yahoo Slides
Tue, May 6 2008, 12:17 GMT
by Grace Cheng
As expected, Yahoo’s (YHOO: 24.37 0.00 0.00%) shares dropped significantly in the pre-market session and opening at $23.02 per share, or a $5.65 drop from Friday’s closing price of $28.67 after Microsoft (MSFT: 29.08 0.00 0.00%) announced it was withdrawing its bid for Yahoo. Throughout the day the stock has inched slightly higher as some investors are holding out, hoping for Microsoft to try to acquire the internet search company again, either by pressuring shareholder action, or through a hostile takeover as soon as the stock drops enough.
On the commodities side, oil moved above $120 again on concerns of increasing demand and instability in Nigeria and Iraq. Light, sweet crude reached a new high of $120.21. In contrast, gasoline futures managed to inch down slightly, something that will further eat into refineries profit margins as they have to pay more for crude oil and yet cannot sell gasoline for that much more. Big oil companies are probably hoping for that tax cut from McCain and Clinton, so that they can keep charging the prices they are charging and pocket the tax cut to make up for their squeezed profits. As we’ve said before though, this most likely won’t benefit consumers all that much.
Warren Buffett, in an interview with CNBC, said that he thinks the Fed has lowered interest rates enough and should probably stop, and that the stimulus package will probably not help the economy all that much and that it will bring further inflationary pressures. He advised consumers to use the stimulus package to pay off credit card debt rather than spend it all, even though this might not be what government economists are hoping for, as that would help many out of the huge debts they have got themselves into.
Published on Tue, May 6 2008, 12:17 GMT
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Yahoo Shares Set To Plummet
Mon, May 5 2008, 09:36 GMT
by Grace Cheng
Microsoft (MSFT: 29.24 0.00 0.00%) has decided to withdraw its bid for Yahoo (YHOO: 28.67 0.00 0.00%) as the price of $37 per share that Yang and the Yahoo board wanted was higher than the latest revised offer of $33 per share that Microsoft has made. This will probably lead to a blood bath in Yahoo shares on Monday as arbitragers who had bought the shares and expecting to sell them at $31+ will now have to exit their positions in a hurry. Since Yahoo is also traded on the Tokyo stock exchange, the first round of sales will happen there as the market opens on Monday. Even traders who opened positions in the US markets will be short selling on the Tokyo exchange to square their positions. After that, the next round of shorts will come in the pre-market session in the US, and finally when the US exchanges actually open, most of the action may already have taken place.
This could of course be just a negotiating tactic for Microsoft. Yahoo shareholders who see their shares plummet after Yahoo refused Microsoft’s offer will file lawsuits and put pressure on the Yahoo management. Furthermore, with share prices plummeting, Microsoft will be able to buy shares on the open market and possibly launch a hostile takeover at an even lower price. And then they’ll have many options if they still want Yahoo, use shareholder pressure/lawsuits to replace the board, or buy a big enough stake on the open market that allows them to replace the board themselves. In the meantime, the biggest winner will be Google (GOOG: 581.29 0.00 0.00%) who can take advantage of the distractions of these two companies to forge ahead with its own business.
Published on Mon, May 5 2008, 09:36 GMT
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Fed Pumps More Money Into Economy
Fri, May 2 2008, 15:16 GMT
by Grace Cheng
The markets are feeling happy today: First of all the US payrolls numbers were better than expected, and now the Fed has also increased the money it will be pumping into the credit markets. The Fed increased its cash-loan auctions to banks by around 50% to $75 billion and also increased its currency-swap arrangement with the ECB to $50 billion. According to the Fed, these actions were taken “in view of the persistent liquidity pressures in some term funding markets.” So there is still a liquidity problem, but it seems to be easing somewhat; after all Mars was able to obtain a significant amount of funding to purchase Wrigley (WWY: 75.97 -0.20 -0.26%), and that might signal others to look at funding similar deals.
Factory orders were also up 1.4%, thanks to stronger exports due to a weaker dollar. This beat analysts’ expectations after a 0.9% decline last month and shows that the weaker dollar is continuing to benefit US companies.
Chevron’s (CVX: 94.79 -0.15 -0.16%) profit is up 10% to $5.17 billion, or $2.48 per share in Q1, from $4.72 billion, or $2.18 per share last year’s Q1 on higher oil prices, beating analysts’ expectations of $2.41 per share. On the downside though, they said that margins were continuing to tighten for their gasoline refining business as gas prices at the pump haven’t increased as fast as crude oil prices. If Clinton and McCain have their way, oil companies could soon have even fatter profits as they enjoy the benefits of the “gas-tax holiday” which would make them pay less taxes and would make it easier for them to widen their spreads on the oil/gasoline price differential. In the long run, this probably won’t benefit the consumer much, but shareholders of these companies should be happy.
Published on Fri, May 2 2008, 15:16 GMT
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Who Is Benefiting From High Commodity Prices?
Fri, May 2 2008, 09:09 GMT
by Grace Cheng
Consumer spending increased 0.4% today, giving the markets cheer, although after taking inflation into account, it is only a 0.1% increase. Credit card companies like Visa (V: 85.40 0.00 0.00%) and Mastercard (MA: 293.94 0.00 0.00%) already gave us a preview to that, showing how credit card spending in the US had increased in the last quarter. Also, how many of us truly believe inflation is at only 2.6%? If it’s more than that, then inflation-adjusted consumer spending would have declined considerably. This is also what the credit card companies noticed, that spending moved to essentials such as food and gas which would explain why the US manufacturing index shrank for a third straight month.
So who is benefiting from the high commodity prices? Credit card companies definitely are, and gas companies should be. Exxon Mobil (XOM: 89.70 0.00 0.00%) reported a 17% increase in Q1 profit on net income of $10.9 billion, or $2.03 per share, from $9.28 billion, or $1.62 per share last Q1. Although this may seem good, it was lagging behind Shell’s 25% and BP’s 63% profit increase and almost 10 cents below what analysts had expected. It seems Exxon was unable to take full advantage of the higher oil prices due to several reasons: its oil wells produced less output, gasoline prices increased slower than crude oil, squeezing its refineries of profit margins, and foreign governments demanded a bigger share of revenue from higher oil prices.
And talking about government intervention in oil prices, it is interesting to note that a gallon of gasoline costs around $0.12 in Venezuela, $0.45 in Saudi Arabia, $3.45 in the US, and around $8 in much of Europe. Many things play a role in that, namely the taxation or subsidy level each government applies to gasoline.
You’d think farmers are also be benefiting from the higher food prices, but many of them say they are suffering from higher fuel prices and the fact that it is harder for them to hedge their food prices on the futures market as the futures price is so much higher than the cash price, and the prices don’t converge close to the futures contract expiry date as they normally would. If that’s the case, it could support arguments that a lot of the rise in food prices is due to speculation.
So yes, spending is up, but people are getting a lot less for their money, and that means “real” inflation is probably a lot higher than the 2.6% estimate. And who is benefiting from the high commodity prices? Mainly foreign governments in the Middle East and other oil producing nations like Venezuela (many who have questionable human rights records), and traders who saw this coming and were generally long commodities.
Published on Fri, May 2 2008, 09:09 GMT
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US Credit Card Spending On The Rise
Wed, Apr 30 2008, 15:39 GMT
by Grace Cheng
Yesterday it was Visa (V: 84.18 +3.30 +4.08%) and today Mastercard (MA: 279.89 +5.91 +2.16%) reported its earnings. The results for both were good, with Mastercard earning more than double last Q1 at $446.9 million, or $3.38 per share up from $214.9 million, or $1.57 a share last year. Some of these earnings came from “one time” events such as the sale of holdings in Brazilian company Redecard. Even after excluding those earnings, the results were still far better than what analysts had expected at $2.59 vs the expected $2.
Internationally, Mastercard had a surge in gross spending volume of 30% with regions such as Latin America, South Asia, the Middle East and Africa showing strong card growth. Much of this is probably due to the lower dollar which give those outside the US higher purchasing power in dollar-denominated goods and gives US companies higher dollar profits when they book income made abroad.
Mastercard’s gross US dollar volume also rose, although somewhat less, to 8.9%, indicating that US consumers are spending more on credit and debit cards. However, Mastercard’s CEO Robert Selander said that US consumers continue to move away from luxury purchases towards necesities like food and gas, which are both rising in cost. What this looks like is that US consumers are being squeezed: on the one hand their home equity has gone down tremendously, there is job insecurity and increasing unemployment, and on the other hand the basic cost of living is going up so much that they have to increase spending just to cover the bare necessities. This seems a lot like stagflation.
As if to underline this possibility, Countrywide (CFC: 5.82 -0.03 -0.51%), the largest mortgage lender in the US reported a loss of $893 million in Q1; the S&P/Case-Shiller home price index reported a 12.7% fall in February, and BP (BP: 0.00 N/A N/A) reported a record 63% profit increase to $7.6 billion from $4.4 billion last Q1 on the back of record breaking oil prices. The companies making money now are those that have a strong international presence or those whose profit is strongly correlated to the rising commodities prices.
Published on Wed, Apr 30 2008, 15:39 GMT
Archive
- Have The Effects Of The Fed's Shock-And-Awe Tactics Worn Off?
Published On Tue, Jun 10 2008, 10:27 GMT - Are Credit Cards The Next Subprime?
Published On Thu, Jun 5 2008, 08:05 GMT - Bank, Airline, Car And Hotel Stocks Get Slammed
Published On Tue, Jun 3 2008, 08:20 GMT - Credit Card Spending Surges, Retailers Slump
Published On Fri, May 30 2008, 10:08 GMT - Is Recent Oil Spike An "Irrational Exuberance"?
Published On Thu, May 22 2008, 08:51 GMT
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