Saturday, August 1, 2009

Noteworthy - Week of July 26th

While anyone in the U.S. would have thought that the biggest headline this week was President Obama's "Beer Summit" with professor Henry Louis Gates, Jr. and the officer that arrested him, Sgt. James Crowley, which was arranged to deflect attention away from the president's gaff last week in which he stated that the Cambridge, MA police department "acted stupidly," and the brand of beer that each would be summit participant drinking, the actual biggest news stories pertained to the economy.

The U.S. economy slowed at its lowest rate in a year during the second quarter. The 1% decline was contributed in large part to a sharp decline in business inventories, which many believe will lead to an uptick in the economy during the second half of the year. Several analysts raised their outlook for the 2nd half of the year based on the surprising 2nd quarter figures.

Many companies are seeing signs of a bottom and are becoming cautiously optimistic about a second half turnaround in the U.S. economy. Job cuts, lean inventory and Asian demand have contributed recent in-line and above Wall St. projection earnings.

The House has approved an additional $2 billion for the "cash for clunkers" program. The Senate now must pass the increased budget for the program, which devoured its initial $1 billion in just four days at the end of July.

The House Energy and Commerce Committee rushed to pass the $1 trillion health care reform bill ahead of Congress' August recess, even though a WSJ/NBC report came out earlier in the week showing that public support for the bill was deteriorating quickly. Meanwhile, President Obama has found himself in a sticky situation as a proposed tax on health benefits is taking direct aim at his campaign promise to not raise taxes on the middle class.

The House passed a bill that will give the FDA more oversight into the resources to prevent and stop food-borne illnesses.

Connecticut Senator Chris Dodd reported that he has prostate cancer but that the diagnosis was made early enough for recovery not to be an issue.

UBS and the Swiss government reached a deal on the IRS' tax probe into 52,000 UBS accounts that are alleged to have been used as tax havens. The IRS reported four times the number of voluntary applications of tax evasion last week than it did for all of 2008.

The Financial Industry Regulatory Authority and the Massachusetts Securities Division have launched an investigation into the sales practices of inverse and leveraged ETFs. The vehicles mimic their intended targets on a daily basis but, due to compounding, their returns vary dramatically from those same goals over a longer term basis.

Here's a look into the world of high frequency trading, which has gained attention this year from regulators and the public, alike.

Nine banks that received money under the TARP paid out bonuses of nearly $33 billion last year, including $1 million or more to nearly 5,000 employees. The amount of the bonuses is one-third larger than the California budget deficit.

The Federal Reserve and the Comptroller of the Currency are on pace to issue more "moratoriums of understanding" to U.S. banks than they did for 2008, as the main banking regulators aim to prevent futures failures from occurring.

The alleged absence of China from direct participation in two of the U.S. Treasury bond auctions this week left investors wondering if the Chinese appetite for Treasuries is waning.

The world's largest miner, BHP Billiton, said that it has settled iron-ore price negotiations with more than half of its steel industry clients. Some of its customers have agreed to annual contract rates at a 33% decrease from the year prior, while the remaining have agreed to quarterly negotiated quarterly prices.

Microsoft and Yahoo! have agreed to a 10-year web-search partnership, which will take direct aim at market leader Google. The two companies had been in merger talks for most of 2008.

Sprint Nextel, the 3rd largest wireless provider in the U.S., lost more than 1 million customers during the last quarter and has lost more than 7 million in the past two years, even as the firm added the highly anticipated Palm Pre to its hardware repertoire. The firm announced that it will acquire smaller competitor Virgin Mobile for $483 million in a move that will strengthen its position in the highly competitive prepaid wireless market.

U.S. home prices rose for the first time in nearly three years in June. The S&P/Case-Schiller Index rose 0.5% during the three month period ending in May, compared to the three months ending in April. Home prices are down 17% for the year.

Chinese officials expressed continued concern over the stability of the U.S. dollar and the U.S.'s continued mounting debt as it met with their American counterparts in the U.S. this week for the U.S.-China Strategic and Economic Dialogue.

The EU will impose tariffs on steel pipes imported from China in order to protect its industry from the cheap Chinese equivalents. The move is a very significant one from the 27 nation group, as it is likely that other industries will ask the EU for similar protection from cheaper imports.

The sudden closure of a giant wholesale market in Moscow dominated by Chinese merchants has strained trade relations between Russia and China. Russia is attempting to clamp down on the smuggling of items, also known as "gray imports," between the two nations, which have entered into Russia via middlemen and bribed custom officials since the early 1990s.

In a unique move, private equity firm KKR is planning an IPO of Dollar General and will be one of its underwriters.

Vornado Realty Trust, one of the largest REITs in the U.S., is planning a bond sale of between $550-600 million that would qualify for the government's Term Asset-Backed Security Loan Facilty (TALF).

The Obama administration's effort to reduce foreclosures is suffering under the counterproductive assistance measures that it has set for home owners. In order to receive government assistance, homeowners are being told that they must be behind in their payments.

The SEC unveiled new rules for short sellers this week.

Lending shrank 2.8% in the 2nd quarter as banks and borrowers remain skeptical of an economic recovery.

The U.S. Pay Czar, Kenneth Feinberg, is preparing to rework contracts deemed by him to be too lucrative. The effected companies include those that received the most significant government bailouts, including Citigroup, Bank of America, AIG, GM, Chrysler, Chrysler Financial and GMAC Financial Services.

The government's guarantee on new debt issuance is bolstering the income statements of the financial sector.

Emerging market debt issuance has risen to its highest level on record (1962), as risk-hungry investors are attracted to high yields amid a perceived world economic recovery.


The Americas:

Apple is working with the four largest record labels to bundle interactive booklets, sleeve notes and other features with digital downloads in an effort to revive album sales. The company is also working to release a new entertainment tablet offering to consumers in time for the Christmas season. Apple also banned iPhone applications based on Google's voice service-- a new sign of the emerging rivalry between to two tech giants.

Falling New York rent is hurting property companies, such as Equity Residential, AvalonBay Communities and Post Property Inc.

Sunrise Senior Living Inc may file bankruptcy as the company faces debt issues related to its over-expansion during the last decade.

High flying Diedrich Coffee Inc., the 2nd largest producer of k-cups, is planning to expand from a wholesaler of the popular single-serving coffee and tea products, to grocery stores.

Bank of America plans to close 10% of its branches.

Organic private-label foods are gaining steam among grocery store chains in an effort to attract budget, health conscious shoppers.

Videogame makers are being affected by the recession, an industry once thought to be recession-resistant.

Ebay plans to change its marketplace website in order to help large vendors to sell new goods in greater volumes.

Station Casinos Inc. filed for bankruptcy this week. The casino struggled amid billions in debt and weakened consumer spending.

Southwest has jumped into the bidding for former rival Frontier Airlines. An acquisition of Frontier's assets would make Southwest the 2nd largest airline in Denver, a highly competitive market, but would raise questions as to its ability to maintain its low-cost business model.


Asia:

The murder of a state-run company executive in China this week offered a glimpse into the country's concern over reform there.

Chinese cities are raising their tariffs on water prices in an attempt to conserve the natural resource, which is becoming increasingly scarce.

Chinese regulators are ordering Chinese banks to ensure that new loans are being channeled into the real economy and not into equity or real estate, as officials remain concerned that new asset bubbles are forming there.

China's two biggest state-owned commercial banks might dramatically reduce new loans in the 2nd half of the year, according to a report issued this week, creating concern that investors may turn risk averse again.

Sichuan Expressway, the first IPO to list on the Shanghai exchange in almost a year, tripled on its first day of trading, sending a message loud and clear to investors that the Chinese market is frothy these days.


Europe:

Lithuania's GDP shrank 22% during the second quarter, creating concern over the country's finances and its peg to the Euro.

Slovakia is struggling as the country has fallen a victim of its own success.

As U.S. banks suffer through record loan defaults, attention is turning to the U.K., where household debt is even more leveraged. Rising credit card debt is making its way across the Atlantic from the U.S. to the U.K. and the rest of Europe, creating a growing concern among financial institutions.

Deutsche Bank fell this week amid concerns over its exposure to the economic crisis and increased provisions against bad loans.

Eurozone home loans are showing signs of a turning point as consumers are starting to return to the marketplace.

The world's largest steelmaker, ArcelorMittal, is contemplating spinning off its stainless steel business, worth an estimated $3 billion, in an attempt to reverse its course of expansion during the previous decade as the steel industry continues to struggle during one of the deepest recessions on record.

The owners of Hapag-Lloyd, Germany's biggest container-shipping line received a $471 million loan from its largest shareholders in an emergency influx of cash to keep the company afloat.

Volkswagen is looking into the possibility of raising $5.7 billion as part of a plan to buy Porsche.


Commodities:

New analysis suggests that coal miners will have to cut production by an additional 50 million tons this year in order to align supply with demand.

The chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, said this week that the agency must "seriously consider" setting strict limits on those who trade energy contracts. In a reversal of opinion by the agency under the Bush administration, the CFTC intends to suggest in a report next month that speculators played a significant role in the price of oil last year.

Exchanges are moving to limit the trading of natural gas contracts, sparking outrage amongst the traders.

Texas is suffering from its worst drought in 50 years as the state grapples with record-high heat and record-low rainfall, which have cost farmers $3.6 billion in crop and livestock losses during the last nine months.

BP's profit dropped 53% during the 2nd quarter, as the firm was effected by lower oil prices and weak refining margins. Shell and Exxon profits also tumbled.

Occidental Petroleum, the 4th largest U.S. oil and natural gas company by volume, is concentrating its efforts on domestic cheap resources, during a time in which its competitors are focused abroad.

Et Cetera:

This week's Barron's "Up & Down Wall Street" by Alan Albelson.

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

A special report by the Wall Street Journal on the Great Recession.

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