Past Week in Review Part II: Street Bytes

Stocks are off and running in 2012, the best start in 15 years. This week the Dow Jones gained 2.4% to 12720, while the S&P 500 added 2.0% and Nasdaq 2.8%. The major indices are up 4% to 7% already in the first three weeks. But when it comes to Friday’s 96-point gain in the Dow, 2/3s of it came as a result of an $8 move in IBM shares.

U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.24% 10-yr. 2.02% 30-yr. 3.10%

Treasuries on the longer end of the curve got whacked a bit on signs of a strengthening U.S. economy and possible progress in Europe, but I’m hardly losing sleep over the move. I mean whoopty-damn-do…the 10-year is at 2.02%.

The inflation news, however, was good. Producer prices for the month of December were down 0.1%, up 0.3% on the core, ex-food and energy. For 2011, the PPI rose 4.8% (not good) but the core was up 3.0%. Consumer prices rose just 0.1% for December, unchanged ex- the stuff we use, and for 2011, the CPI was up 3.0%, 2.2% on the core.
The Fed’s Open Market Committee meets next week and there is a little buzz they may tinker with their previous statement they would keep short-term rates at zero well into 2013. A change in the language could lead to some volatility.

China’s net holdings of U.S. Treasuries fell in November, though just $1.5 billion to $1.133 trillion, making them still the largest foreign holder ahead of Japan, whose position rose a bit to $1.039 trillion. Foreign buying among all investors was up $54 billion, compared with net buying of $15.3 billion in October.

As for the Chinese economy, the World Bank is forecasting growth of 8.4% this year, significantly, unchanged from earlier forecasts, while the IMF slightly lowered its China outlook from 8.4% to 8.2%. I think most of us would snap up 8% in a heartbeat. It’s when you get much below this you have cause for concern.

And so it was that China reported fourth-quarter GDP rose 8.9% [9.2% for all of 2011; 10.4% in 2010], which was better than expected and alleviated a lot of concerns over a hard landing.  Nonetheless, 8.9% is the slowest pace in 10 quarters. So here’s the tale of the tape for last year.

Q1 9.7%
Q2 9.5
Q3 9.1
Q4 8.9

The consensus forecast for the first-quarter this year is in the 7.5% range, which should it come to pass would be cause for some heartburn, like with moi. HSBC issued its flash report on January manufacturing, the PMI, and they come up with 48.8. Last time they said 48.7 for December but the government’s official figure was 50.3.

[I have nothing to report on my large China holding. I’m waiting for word from Fujian before passing on any further commentary. They don’t like to act fast, nor do they like being pushed.]

Separately, foreign direct investment fell again, down 12.7% in December, while home prices declined in 52 of 70 cities last month. Housing continues to be the big question mark for this year.

The World Bank is forecasting growth in Japan of 1.9% in 2012, down from an initial 2.6% estimate, while India was taken way down, from 8.4% to 6.9%.

Japan may face a summer without nuclear power which would result in large-scale power cuts. 30% of Japan’s electricity supply comes from nuclear. All but five of Japan’s 54 reactors are down for scheduled maintenance and by May these five will have to go down for the same reason. The issue is about how quickly the others are brought back online.

Amid concerns over a slowdown, the Indian government announced it would launch $35 billion in infrastructure and overseas energy projects.

Until 2008, for 70 years General Motors was the world’s largest automaker, only to lose the top spot to Toyota. But now GM is numero uno again as sales hit 9,025,942 for 2011 vs. Volkswagen’s 8.156 million and Toyota’s estimated 7.9 million; Toyota having suffered from the Japan earthquake and tsunami. The company said it is back to normal production.

[The European car market fell for a fourth consecutive year in 2011, and this year sure doesn’t look any better. In a direct reflection of the economic environment in Italy and Spain, sales in these two fell 10.9% and 18%, respectively. Germany, on the other hand, saw its sales rise 8.8% compared to 2010.]

On Friday, the National Highway Traffic Safety Administration suddenly ruled that GM’s Chevy Volt battery-powered car does not pose a safety hazard, specifically a risk of fire; this after there had been three cases where a vehicle caught fire days or weeks after being severely damaged in crash tests.

NHTSA said, “The agency’s investigation has concluded that no discernible defect trend exists and that the vehicle modifications recently developed by General Motors reduce the potential for battery intrusion resulting from side impacts.”

In other words, ‘We’re cramming electric cars and their dangerous lithium-ion battery packs down your throat whether you want them or not.’

Both Vietnam and Cambodia reported their first human deaths from bird flu, as new cases of the H5N1 virus were reported in Asia and the Middle East. Both victims in Vietnam and Cambodia had been in contact with poultry but there is still zero evidence the virus can be passed person to person, though that remains the nightmare scenario if it mutates.

[I saw a story in the South China Morning Post by Stephen Chen that a researcher at the Institute Pasteur of Shanghai claims to have “found an antibody that could ‘neutralize’ almost every known variation of the H5N1 virus – and probably future mutations.” A bird flu expert in Hong Kong was skeptical whether the findings would result in a commercially viable vaccine.]

Morgan Stanley posted a fourth-quarter loss of $275 million, its first since 2009, though the loss was less than expected and the company’s stock rose on the news. Quarterly revenue of $5.7 billion was down from $7.7 billion a year ago, owing to a 68% decline in revenue in the institutional services/investment banking areas. MS also said it was capping the cash portion of bonuses at $125,000, with some having their 2011 payouts deferred until the end of 2012.

Bank of America reported earnings of 15 cents per share but mostly as a result of downsizing as it sold off pieces of the business that didn’t fit its basic banking model. BofA’s real estate business lost $1.5 billion after a 74% decline in new home loans. It did say its credit card delinquency rate declined for an 11th consecutive quarter.

The performance of Citigroup’s investment banking arm, as was the case with all the others, also helped lead to a disappointing quarter as revenues from trading and mergers and acquisitions dried up, this as rival Wells Fargo is now well head of Citi in terms of market value as Wells saw its fourth quarter profits rise 20%.

Citi said of its dismal performance in the banking division (including trading) that December was “remarkably weak – people just sat on their hands.” Revenues in equities and derivatives saw a 71% decline for the quarter, while fixed income revenues were down 25%.

As for Goldman Sachs, it reported a 58% decline in fourth-quarter earnings, though it beat analyst expectations.

“This past year was dominated by global macroeconomic concerns which significantly affected our clients’ risk tolerance and willingness to transact,” said Lloyd Blankfein, chairman and CEO. “As economies and markets improve – and we see encouraging signs of this – Goldman Sachs is very well positioned to perform for our clients and our shareholders.” [This is the first and only commercial I’ll ever run for them.]

Separately, despite a 21% reduction in compensation and benefits for 2011, the Financial Times reported that during the past 10 years, Goldman has paid its employees $125 billion, twice what it made in net profits. The investment banks, when presented with similar data, always point to talent wars and the potentially devastating impact on company morale if pay or headcount was cut, which is kind of laughable, even if true, mused the one-time Wall Streeter who knows very few in his old profession are remotely ‘worth’ what they are paid. Had I stayed, I would have been in that group as well.

Google shocked the world, and Wall Street, in not only announcing its costs rose again in its latest quarter, but also that revenue fell far short of expectations.

Google’s operating costs rose 35% from a year ago, adding 1,114 new employees in the final three months that took the total increase in headcount to 8,100 for 2011.

But in its search advertising business, the company reported an 8% decline in the average cost per click; the amount advertisers pay for each user. The number of clicks, though, rose 34% from a year before. It’s the first figure that riled up analysts, a real sign that online advertising is losing its shine. Personally, I never thought it worked in the first place.

[Europe’s slowdown was another reason why Google’s revenue picture wasn’t as rosy as expected. The shares fell over 8%, $53.58, on the news.]

Yahoo co-founder Jerry Yang was pushed out the door. Bye-bye.

General Electric reported earnings essentially in line with estimates, but revenues dropped 8% from a year earlier, worse than expected. G.E. gets about 20% of its sales from Europe.

Meanwhile, IBM, Microsoft and Intel all reported slower revenue growth for the December quarter, though the reports were far from poor. Intel was bullish on its outlook, while IBM’s software and services rose, though its hardware sales fell 8%. Microsoft’s issue was a 6% decline in the division responsible for Windows 7 as its assumed buyers are holding off for the arrival of Windows 8 in the second half of the year. Microsoft blamed Europe in part as well.

Back to Intel, it’s important to remember the company had warned in December that revenues would be reduced to $13.7 billion from its previous forecast of $14.7 billion and fourth-quarter sales then came in at $13.9 billion. Intel said current quarter revenues would be 8% lower than the last quarter but the company’s forecast met expectations.

Kraft Foods announced it would cut 1,600 positions in North America as part of its restructuring into two businesses; snacks and groceries. No word on how many links at Oscar Meyer will be cut.

I have to admit I had never heard of Megaupload, a file-sharing website that the FBI shut down, but the Hong Kong-based collection of sites generated more than $175 million in criminal proceeds and caused more than half a billion dollars in harm to copyrighted owners. Four, including the founder of Megaupload, were arrested in Auckland, New Zealand and charged with copyright infringement.

This comes as two proposed pieces of legislation before Congress, the Stop Online Piracy Act and Protect IP [Intellectual Property] Act were shelved. Both are highly controversial, not necessarily because they would give the Justice Department power to prevent pirate sites from getting U.S. traffic and revenues, but rather in how broad the government’s powers to shut down other sites may inevitably be. [This is a big issue for Ron Paul and his supporters, and I’m on board with them as it pertains to the chief concern. As the legislation was written, down the road someone who doesn’t like what I say about them could potentially shut StocksandNews down; at least that is the civil liberties nightmare some of us potentially face.]

As expected, Eastman Kodak Co. filed for bankruptcy protection, hoping to slash expenses, such as pension costs, while forcing tech companies to pay to use its patents. The company hopes the process takes a year or two, but outright liquidation remains a distinct possibility. Kodak still has 17,000 employees, down from 64,000 in 2003. I don’t see how they make it, seeing as Kodak believes its only future is not just through licensing deals but also the printer division which has failed to catch on.

Oil demand is falling for the first time since the 2008-09 global financial crisis, thanks largely to a mild winter, as well as high prices and softness in Europe. Global oil demand in 2011 was 89.5 million barrels a day, according to the International Energy Agency.

Saudi Arabia is aiming to keep oil prices at $100. As the Financial Times reports, it’s a sign the kingdom needs higher prices “to sustain a big rise in public spending." Back in November 2008, the Saudis said a “fair price” was $75-a-barrel. The IMF estimates Riyadh needs at least $80 to balance its budget, up from $50 in 2008. Ten years ago it was $20-$25.

Back in December 2005, right after Hurricanes Katrina and Rita did a number on our energy infrastructure in the Gulf region, natural gas hit an all-time high of $15.38. This week it hit a 10-year low, closing on Friday at $2.34. Frack Frack.

California home sales rose 4.2% in December, though the median price fell 3.1% compared with a year ago, which made for the 15th consecutive decline.

New York City’s unemployment rate ticked up to 9.0% in December as the city lost 8,400 private sector jobs, with restaurants (2,400) and the securities industry (2,000) losing the most. Health services, on the other hand, added 2,300.

Separately, in a story by Shane Dixon Kavanaugh in Crain’s New York Business, “A third of New York City retail workers support families on less than $10 an hour and more than half rely on government programs for health care or simply live without it.” Yikes…when you realize how little the median income in the sector of $9.50 an hour gets you in this area. Additionally, while retail used to be considered an entry-level job, today more than 70% of surveyed workers had completed some college or possessed a college degree. 71% of retail workers do not receive health benefits of any kind through their work.

Here’s another example of the erosion of the middle class. The state of Connecticut announced it was hiking tuition and fees next fall at its public universities and community colleges by 3.1% to 3.8%, which isn’t much but it is once again more than the percentage wages are rising, and of course in prior years tuition increases were way over the wage rate.

I missed this last time. Atlantic City’s casino revenues rose in December, up 4.2%, for the first increase in 3 ½ years. For 2011, however, revenues were down 6.9% from 2010, the fifth year in a row the take has declined as competition surged.

The 2011 revenue of $3.3 billion compares to the 2006 peak of $5.2 billion, the year Pennsylvania opened the first of what would be 10 casinos across the Delaware River.

In the latest prosecution of insider trading cases, seven traders and analysts at various hedge funds were arrested for “forming a criminal club” that netted them profits of $62 million. Two of those charged are former employees of SAC Capital, Steve Cohen’s $13 billion hedge fund behemoth, bringing to four the number of ex-SACers who have been nailed as part of the government’s ongoing probe of such activity. [I admit to a little confusion on the various stories I’ve read, one of which said that among those arrested was a current SAC employee.]

According to a New York Times study, 60% of those in the so-called “1 percent” succeeded on their own, without inherited wealth, and are three times more likely than the “99 percent” to work 50 hours a week or more. They account for nearly one in three dollars of all philanthropic giving. The 1 percent also pays more than 25% of all federal taxes while earning less than 20% of all pre-tax income.

Pandora, the online radio service, now has 125 million registered users, up 50 million in the past year. Not too shabby. It has a 68% market share of Internet radio listening.

What can you say about the Costa Concordia disaster other than it would appear the captain, Francesco Schettino, deserves life in prison, if the latest stories of incompetence and cowardice are proved in a court of law. 11 people not only died, with another 21 missing as I go to post, but he no doubt will have caused a coming decline in cruise ship bookings until the blowback from this tragedy subsides. That means lost jobs.

It is important to note, however, that it is possible the rock the ship hit was uncharted because Lloyd’s List, a leading maritime publication, said the ship had sailed close to the island, Giglio,  in August, when it came within 230 meters of the coast – “slightly closer to the shore than where it subsequently hit rocks on Friday.” [Sydney Morning Herald]

That said, Schettino then proceeded to make every mistake in the book and there are questions about his sobriety and the sharp turn that may have caused the ship to list severely.

In terms of financial losses, Carnival Corp., which owns the Italian operator, estimated that preliminary losses from having the Concordia out of commission would be between $85 million and $95 million, along with other costs. The company’s deductible on the ship was $30 million. In addition, the company faces a deductible of $10 million for third-party personal injury claims.

The three companies that insured the cruise ship face losses in excess of $500 million. It cost about $580 million to build when commissioned in 2004, according to the current euro-dollar exchange rate.

In 2011, the U.S. consumed 3.7 billion bottles of wine, passing Italy and France in the process to become number one in the world by volume, according to a study by International Wine and Spirit Research. That would be a fun think tank to work at. [Growth in China should carry the industry the next decade or so.]

Headline in the Los Angeles Times:

“Woman offered sexual favors for Chicken McNuggets, police say”
Shares in Mickey D’s hit another all-time this week, not that one has to do with the other.