Saturday, July 25, 2009

Noteworthy - Week of July 19th

The biggest piece of news this week had nothing to do with business, the economy, or public policy but rather comments President Obama made about the arrest of a black Harvard professor, a friend of the President's, in Cambridge, Massachusetts by a white police officer during the week. Mr. Obama criticized the arresting officer during his national press conference on Wednesday, which he put together in order to rally public support of his health care reform plan. Unfortunately for the President, a black officer, who was also on the scene, corroborated the arresting officer's story. The President attempted to rescind his remark on Friday, which has triggered a racial firestorm in the media, but Mr. Obama failed to apologize to the police force or the officer for his comments. (Video)

Three New Jersey mayors, state officials, and multiple rabbis-- 44 in total-- were arrested this week after a decade long investigation into public corruption and international money laundering. The arrest leaves New Jersey, which has struggled to find direction and honest representatives during recent years, scrambling to find credibility amongst its constituents.

Health care reform is struggling to find support among conservative Democrats, also known as "Blue Dogs," as Democrats look for new ways to cut the costs of the proposed House bill. The Blue Dogs, many of which represent wealthy democratic areas, are concerned about the cost of the bill to taxpayers. The President has accepted that the bill will not be voted on prior to Congress' August recess. Peter Orszag, the White House budget director and former head of the Congressional Budget Office, is the President's point man for controlling health care spending. Coke is fighting a "soda tax" that Congress says would help pay for the U.S. health care reforms. Louisiana Governor Bobby Jindal offered a solution for a bipartisan agreement in an op-ed in the WSJ this week.

The WSJ issued a report this week on what citizens can expect if health care reform is passed and offered 10 questions on health care reform.

President Obama visited the famed Cleveland Clinic on Thursday. The president would like his new reform plans to emulate the hospital, as it has successfully achieved exceptional quality, while keeping costs under control. However, replicating its success under the government's proposed health care reform policy poses a major challenge, as the hospital's doctors remain fiercely independent.

U.S. officials have urged the Food and Drug Administration to approve or license a vaccine for the H1N1 virus, otherwise known as swine flu, without data from clinical trials. According to the Centers for Disease Control and Prevention, the flu could affect up to 40% of Americans during the next two years.

Corruption, in-fighting and lack of goodwill in Kenya's ruling coalition is fueling resentment among the urban poor, which threatens to rekindle violence in the country. Last year the coalition promised an ambitious reform agenda and stated that it would lead the country to the most dramatic transformation since the end of colonization in 1963; however, instead, they have only caused paralysis within the government.

Fed Chairman Ben Bernanke gave his semi-annual monetary report before Congress this week. The chairman told Congress that he sees a slow recovery as consumers cut back on spending. Bernanke also announced rules to protect borrowers.

A watered down derivatives legislation bill was brought to the floor of the House this week. The bill does not include many of the stringent regulations that the Obama administration would like to see in the bill, such as requiring all derivative market participants to offer collateral. The bill only requires, for instance, large banks to provide collateral.

Treasury Secretary Tim Geithner urged Congress to end "dumb regulation" and quickly accept the Obama administrations plan for reform.

Breaking the historical norm, job cuts are outpacing the fall in GDP, suggesting that unemployment could weigh heavily on the U.S. recovery.

President Obama proposed new transaction fees for financial firms that engage in "far-out transactions." Although the president did not shed light on the types of fees that would be accessed, he did liken them to those that institutions pay to the FDIC.

The International Monetary Fund in a delayed report on China, urged the country to continue to use fiscal stimulus to boost growth and allow its currency to appreciate. China traditionally has not allowed the IMF to finish reviews because it objected to criticism of its monetary policy. The IMF called the Chinese Renminbi "substantially undervalued." (Please see my report on the Chinese Renminbi for further analysis.)

California's new budget agreement is expected to hurt many state residents, as the government plans on cutting several programs, including many educational programs.

Connecticut is pushing ahead on its plan to offer uninsured citizens health care insurance, despite budget pressures.

Detroit's public school system is on the brink of filing for bankruptcy, in a move aimed to gain control of its costs.

In an unusual move, Standard and Poors flip-flopped its outlook on certain commercial mortgage backed securities this week, restoring some of the CMBS ratings that it cut last week to a notch above "junk" back to AAA, citing "recently updated criteria" as its reasoning. The move prompted investors to question the firm's credibility.

Bad loans are still haunting banks, as Wells Fargo, U.S. Bancorp, SunTrust and Keycorp all reported sharp increases in defaults over last year's second quarter.

Regulators seized seven banks on Friday, raising this year's total to 64.

Home sales are all over the map, according to a Wall Street Journal report.

The Dow ended the week above 9000 for the first time since early January. Profit surprises have led the recent rally, although many contend that a short squeeze is the cause. The Dow reached a 12-year low on March 9 at 6547.05 before rallying to its current level.

Microsoft's profits fell 29% this quarter on weakened computer demand. The company plans to release a new operating system, Windows 7, as well as a new Office suite by year's end.

American Express' net income fell by 48% during the second quarter, as consumers spent less and debt delinquency rose. posted a 14% jump in revenue this week, but net income dropped on a legal settlement and weakness in video game sales. The firm also announced that it is purchasing Internet shoe retailer Zappos for $847 million.

Morgan Stanley's commercial real estate investments are expected to hurt the firm for some time to come. The Wall Street Journal broke down both Morgan Stanley's and Goldman Sachs' earnings reports this week.

Pepsi admitted that sport drink maker Gatorade's growth days are over. The division's earnings weighed on profits this quarter, as the world's second largest drink maker, reported that revenue and profit for the quarter fell by 3% and 2%, respectively, from its first quarter figures. Pepsi acquired Gatorade when it purchased Quaker Oats in 2001 for $13.8 billion.

Earnings in China and India strengthened Coke's bottom-line this quarter.

In other earnings related news:

Chrysler reported losses this week, GM reported sales losses but is forecasting a global upturn in sales, Boeing's 787 Dreamliner remains stuck in a holding pattern but the defense company reported better-than-expected earnings, Delta and TranAir painted a grim outlook for the airline industry, while Southwest returned to profitability.

Bristol-Meyers Squibb agreed to acquire partner Medarex for $2.1 billion-- it and Wyeth reported increased earnings this quarter. Pfizer and Elly Lilly boosted their forecasts for 2009 earnings, eBay's profits fell in the 2nd quarter as its auction business weighed on both its Paypal and Skype units, Altria's recently acquired smokeless unit helped its second quarter profits to rise by 8.6%, Apple reported a 15% jump in profits with the company stating that it was unable to keep up with iPhone and Mac demand during the quarter, Yahoo! continued to struggle, but Starbucks swung into positive earnings territory due to cost cut initiatives.

Wynn Resorts and Las Vegas Sands are planning to take their Macau assets public in hopes of a brightened outlook for the Chinese enclave. The proceeds of the sale are certain to lessen the debt of both firms. Macau, however, is headed for the first year-over-year decline since it opened its doors to foreign competition in 2002.

Las Vegas continues to remain bleak as a tourist destination. Just this week, government agencies, such as the Dept of Agriculture, suggested that its employees hold meetings in low-key destinations like St. Louis, MO, rather than their traditional "fun" destinations like Florida and Las Vegas.

Talk of a global deflationary pandemic is starting to brew.

(Please see my new article for in-depth analysis as to why I believe deflation is an imminent concern-- rather than inflation-- and why I believe a buying opportunity in gold and silver is coming.)

Bond mutual funds offset stock fund outflows this week, as mutual fund assets rose for the 18th consecutive week.

An alleged hedge fund purchased $10 million worth of December $95 S&P 500 puts and sold $20 million of December $82 S&P 500 puts this week, in one of the largest trades in options market history. The options purchased on the SPDR Trust Series I represent about half of number of shares typically traded in the ETF each day. The move, indicating a strong bearish stance, caught most professionals off guard.

Individual investors are moving into currencies as an alternative to stocks.

Treasuries were pressured this week ahead of next week's record sale of $205 billion in various time incremented bonds.

A Hon Hai Precision Industry Co. employee committed suicide this week after losing a prototype of Apple's next-generation iPhone. Apple is notorious for its secrecy surrounding product launches, often requiring employees to sign agreements that institute substantial fines on workers who fail to keep the sensitive data under wraps.

CIT is still trying to find financing and is starting to contemplate selling some of its businesses in order to withstand bankruptcy.

In an auction held this week, Ericsson won the rights to the bankrupt Nortel's CDMA business for $1.15 billion. The CDMA unit is the most profitable piece of the Nortel pie.

A top Citigroup trader is pressuring the bank to honor a 2009 pay package that could be worth up to $100 million, setting the stage for a potential showdown between Citi and Kenneth Feinberg, the government's new pay czar.

JP Morgan Chase is raising the salaries of its bankers whose bonuses represent 25-50% of their pay, as the firm sets to reduce its variable pay.

Bankrupt auto supplier Delphi received a $6.2 billion bailout of its pension obligations by the Pension Benefit Guaranty Corporation, a government entity, making it the 2nd largest bailout of pensions ever (United Airlines in 2005 was the largest).

Credit card disputes are under attack, as two major arbitration firms backed away from resolving disputes between customers and credit card and cell phone companies.

Medical marijuana is growing rapidly in California, as growers are now more concerned with the state Board of Equalization, which collects tax and ensures that growers have a retailer ID number, than they are with government raids. The Obama administration has eased raids on growers, which is causing many to switch careers in the midst of the deepest recession since the 1930s.

Consumers of e-books have fewer legal rights to share and resell than owners of hard copy books, a recent article in the Wall Street Journal stated.

The senate killed funds to purchase an additional 7 F-22 fighters for $1.75 billion this week. The jet is considered to be the most advanced in history. The Pentagon has already ordered 187 of the fighters.

TD Ameritrade agreed to buy back $456 million auction rate securities this week as part of a settlement with regulators.

Sovereign wealth funds, estimated to be valued at $3 trillion at the end of the 1st quarter, have fallen by $600 billion since 2007, according to Deutsche Bank.


East Africa launched the first undersea fiber optic cable this week. The connection would link Africa to Europe.

The Financial Times issued a special report on Nigeria this week.


South Korea grew at its strongest level in 5 1/2 years during the 2nd quarter; however, Thailand stated that this year's contraction would be worse than earlier anticipated. The news signaled that not all economies in Southeast Asia are recovering.

Officials in Namibia are looking into corruption allegations involving Chinese President Hu Jintao's son, a potentially embarrassing incident for the leaders of the communist nation, especially considering that last week a former executive of state-run Sinopec was sentenced to death after being convicted of accepting bribes.

"Chinese scientists reprogrammed mature skin cells of mice to an embryonic-like state and used the resulting cells to create live mouse offspring. The reprogramming may bring the scientists one step closer to creating medically useful stem cell lines for treating human diseases without having to resort to controversial lab techniques," according to an article in the Wall Street Journal.

China is reversing its famed one-child policy, allowing specific parents to have two children, as the country fights ageism.

The China-Africa Development Fund plans to raise $2 billion by November in order to expand business links between Africa and China.

The dramatic rise in iron-ore prices is forcing Chinese steel producers to pay more than their worldwide competitors, as the country has decided to hold out for lower prices from mining companies.

China State Construction Engineering raised $7.34 billion in its IPO offering this week to become the world's largest IPO this year.

Falling demand and cut-throat competition are hitting the Japanese manufacturing sector hard.

Thomson Reuters has started a Japanese service that will allow equity traders to compare prices across all venues in real time.

India's Tata and Suzlon are rushing to raise public funds in order to take advantage of the country's strong stock market. The heavily indebted companies intend on using the proceeds to reduce their massive debt.

India plans on opening its doors to foreign investment and some of the world's leading universities next year as the country struggles to keep up with its growing demand for skillful jobs.

Tensions rose in Indonesia this week as gunmen opened fire on police and other workers on the road to the country's biggest mine site, owned by Freeport McMoRan Copper & Gold Inc. In unrelated news, the country announced that current president Susilo Bambang Yudhoyono won a second five-year term in office in July's presidential election.


Porsche ousted CEO Wendelin Wiedeking on Thursday, setting up a VW buyout of Porsche, ending, an arduous saga between the two German auto manufacturers.

Poland chose bidders for the Warsaw Stock Exchange and announced plans to privatize strategic energy and mining companies this week in an effort to alleviate its budget deficit.

Entrepreneurship is thriving in Poland-- just ask the ice cream king himself!

Four feuding Russian oligarchs are headed to court in London, offering a rare glimpse into the how the country has divided up its assets.

The entertainment industry is losing the fight against the illicit use of their products, according to a Financial Times article. Sweden, which just sentenced the founders of Pirate Bay, a torrent file sharing service, to one year in prison now has a member of the Pirate party in the European Union parliament.

The U.S. proposed that Ukraine be added into NATO but faulted its government for its energy issues with Russia.


BHP Billiton reported a 10% drop in 4th quarter iron-ore output, with a series of employee accidents and the impact of expansions weighing on its results.

South America:

Ousted Honduran President Manuel Zelaya returned to his country this week, even as the leaders in the country promised military action against him.


Oil finished the week at $68 per barrel, as refiners cut back on production.

Occidental Petroleum announced a major discovery this week in California this week.

Corn prices declined this week, reaching close to a three-year low, due to ideal growing weather in the Midwest.

Sugar prices continued their rise as lack of rain in India threatened the country's output.


This week's Barron's "Up and Down on Wall Street" by Alan Abelson.

Barron's review of last week's market news and its preview of next week's market events.

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