Posts Tagged ‘General Motors’
Frontrunning: May 16
Thursday, 16 May 2013 06:45
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  • As scandals mount, White House springs into damage control (Reuters)
  • Glencore Xstrata chairman ousted in surprise coup (Reuters), former BP CEO Tony Hayward appointed as interim chairman (WSJ)
  • JPMorgan Chase asks Bloomberg for data records (Telegraph)
  • Platts Retains Energy Trader Confidence Amid Price-Fix Probe (BBG)
  • Syrian Internet service comes back online (PCWorld)

    • (Read more…)

  • Japan Q1 growth hits 3.5% on Abe impact although fall in business investment clouds optimism for recovery (FT)
  • Soros Joins Gold-Stake Cuts Before Bear Market Drop (BBG)
  • Factory Ceiling Collapses in Cambodia (WSJ)
  • Sony’s $100 Billion Lost Decade Supports Loeb Breakup (BBG)
  • Snags await favourite for Federal Reserve job (FT)
  • James Bond’s Pinewood Turned Down on $300 Million Plan (BBG)

 

Overnight Media Digest

WSJ

* A heated takeover battle has erupted around generic drug company Actavis Inc as industry players seek to shore themselves up amid increasing competition and fewer new knock-off-drug opportunities.

* U.S. officials dealt a blow to the fledgling digital currency called Bitcoin, freezing an account tied to the largest Bitcoin exchange just months after regulators warned such entities should follow traditional anti-money laundering rules.

* One of Goldman Sachs Group Inc’s top energy bankers, Stephen Daniel, has retired, leaving the firm a year after his personal stock holdings in a pipeline company proved a point of controversy in a takeover deal.

* Mexican home builders and their creditors have been hiring U.S. bankruptcy lawyers and other advisers, as the companies struggle with mounting debt obligations.

Two of the country’s leading builders, Urbi Desarrollos Urbanos SAB and Corporación Geo SAB, missed debt payments in April and have reported dismal earnings. Urbi is considering a bankruptcy filing in Mexico as one option, some people familiar with the matter said.

* The rise in prices for agricultural land slowed somewhat to start the year in parts of the U.S. farm belt, new reports showed, signaling a boom in land values might be moderating as commodity prices cool and incomes for farmers are expected to weaken.

* An industry group wants to add criteria to a form of debt-default insurance that would lead to payouts for bondholders when banks are rescued.

The International Swaps and Derivatives Association is circulating a proposal that would add another item to that list of “credit events” that lead to payouts for swaps holders. The group is circulating its proposal this week to various members of its Credit Derivatives Market Practice Committee.

* Groupon Inc is not likely to name a permanent new chief executive until next year, the daily deal company’s interim chiefs said.

The company, which stumbled badly after going public in 2011, has been looking for someone to fill the top job since it ousted Andrew Mason in February following a string of missteps and disappointing results.

* Texas is pickup truck country and the front line in an expanding battle among auto makers to load up on profits from pickups, one of the richest businesses up for grabs as the global auto business roars back to life.

After years of waiting on the sidelines, pickup buyers are returning to dealer showrooms, offering millions of dollars in profit and potentially lifelong brand loyalty to Ford Motor Co , General Motors Co or Chrysler Group LLC and rivals.

* Comcast Corp’s NBCUniversal unit is projecting advertising sales of more than $800 million for the Olympic Games next year in Russia, which would be a record for the Winter Games, despite the decision of two longtime sponsors to pass on the event

 

FT

Google Inc has launched a subscription-based streaming music service on Wednesday ahead of rival Apple Inc , which pioneered online music purchases with iTunes but is yet to adopt the fast-growing newer business model.

In the last set of quarterly forecasts before Governor Mervyn King retires, the Bank of England predicted that Britain’s economic growth would be faster and inflation lower than it expected three months earlier.

RP Martin, the British interdealer broker that became involved in the Libor fixing investigation when two of its employees were arrested in December, suspended David Caplin, its chief executive, and Alan Farnan, an executive director, on Wednesday.

Lawyers for JPMorgan Chase & Co, one of the biggest customers of Bloomberg LP, have demanded details of which Bloomberg employees accessed data on the use of the bank’s financial terminals.

HSBC Holdings Plc said it would cut between 4,000 and 14,000 jobs as it intensified its cost-cutting efforts and became the first big bank in Europe to hint at a likely share buyback.

Britain’s Prime Minister David Cameron on Wednesday said he wanted Royal Bank of Scotland Group back in a state of “good health” and ready for sale “as fast as possible”, signalling a possible return of the state-controlled bank to private ownership before the next election.

 

NYT

* After the factory collapse in Bangladesh a search for new locations has taken on greater urgency for Western retailers, whose complex manufacturing needs already shrink the pool of potential locations.

* Under pressure from Wall Street lobbyists, federal regulators will soften a rule intended to rein in banks’ domination of the shadowy but lucrative derivatives market.

* In the midst of a closely watched investor vote on whether to separate the roles of chairman and chief executive at JPMorgan Chase, the firm providing tabulations of the vote stopped giving snapshots to the proposal’s sponsors.

* The Obama administration stepped up pressure on the Internal Revenue Service by ousting its acting commissioner and sought to insulate itself from the outcry over the agency’s special scrutiny of conservative groups.

* The U.S. administration is pushing for greater protections for reporters who refuse to identify sources, even as officials face anger over the seizure of Associated Press records.

* On Wednesday, Google unveiled a new Google Maps, by far the biggest redesign since it introduced Maps eight years ago. The company announced the maps at its annual I/O developers conference, where it also showed off new tools for search, photo editing and to-do lists, along with a music service and features for Android and Chrome apps.

 

Canada

THE GLOBE AND MAIL

* British Columbians voted overwhelmingly to send the Liberal Party back to power on Tuesday in one of the most dramatic political comebacks in recent Canadian history. The election was a stunning turnaround for Premier Christy Clark, although she was struggling Tuesday to hold her own seat in Vancouver-Point Grey.

* Canada will take the helm on Wednesday at a ministerial summit of the circumpolar, eight-nation Arctic Council, where Health Minister Leona Aglukkaq faces a clamour from southern nations seeking a greater role in the race to extract the Arctic’s vast oil and mineral riches. China, India, Japan, South Korea and Singapore all want observer status at the council as climate change exposes Arctic resources and opens new, shorter shipping lanes.

Reports in the business section:

* Ron Mock has completed his rise from the ashes of collapsed hedge fund firm Phoenix Research and Trading Corp, putting a controversial failure behind him to become the new chief executive of the Ontario Teachers’ Pension Plan.

Mock, 60, was named on Tuesday as the successor to Teachers Chief Executive Jim Leech, who is retiring at the end of the year. Mock is currently Teachers’ senior vice-president of fixed income and hedge funds, heading the largest of the pension plan’s six major asset management groups.

NATIONAL POST

* Canada’s Conservative government said on Tuesday it would boycott a United Nations disarmament conference chaired by Iran – currently targeted by sanctions over its rogue nuclear arms program – on the grounds that it makes a “mockery” of the effort against arms proliferation. It is the latest sign of a new boldness in Canada’s stance against the Islamic Republic.

FINANCIAL POST

* Canada’s oil sands and U.S. tight oil plays will contribute more than one third of new supplies to global markets between now and 2018, the International Energy Agency says. Production from northern Alberta’s bitumen reserves, the world’s No. 3 deposit, North Dakota’s Bakken play and the Eagle Ford shale in Texas will provide 40 percent of new supplies in the next five years as global output surges by 8.4 million barrels a day, the Paris-based agency said Tuesday.

* Internet video provider Netflix is facing an onslaught of competing streaming services launched by Canadian media giants such as Bell, Videotron and Astral as they clamour to cash in on the increasingly popular platform. But Reed Hastings, chief executive of Los Gatos, California-based Netflix, is nonchalant about the market his company pioneered becoming increasingly crowded.

 

China

CHINA SECURITIES JOURNAL

- The People’s Bank of China Shanghai branch released data that showed individual housing loans continued to soar in the month of April. In April Shanghai’s new foreign exchange personal housing loans rose to 5.3 billion yuan.

SHANGHAI SECURITIES NEWS

- The Chinese trade hub of Yiwu plans to expand its pilot scheme to allow more cross-border yuan settlement at the end of May.

CHINA DAILY

- Chinese airlines will get their first Boeing Co Dreamliners this quarter, said Boeing’s China President Marc Allen. China Southern Airlines is due to receive its first Dreamliner jumbo jet by the end of May.

 

Corporate Finance

* Dish Network Corp has lined up four banks to finance its $25.5 billion bid for Sprint Nextel Corp, escalating the bidding war against Japanese telecom company SoftBank Corp, according to two people familiar with the matter.

* RP Martin Holdings Ltd, the British interdealer broker that became involved in the Libor fixing investigation when two of its employees were arrested in December, suspended its chief executive and a director on Wednesday, a source familiar with the matter told Reuters.

* The consortium of investors seeking to take over Severn Trent Plc offered just under 20 pounds per share for the British water company, valuing it at around 4.7 billion pounds ($7.16 billion), a source told Reuters on Wednesday.

* The Portuguese government and JPMorgan Chase & Co are attempting to resolve a tussle over potentially costly derivative contracts sold by the U.S. investment bank to state-owned companies, a source familiar with the situation said.

* Swiss drugmaker Roche Holding AG is exploring a sale of its blood glucose meters business, three people familiar with the matter told Reuters on Wednesday, as the industry grapples with increased competition and reimbursement pressure.

* Macquarie Group Ltd -backed Asian Pay Television Trust has priced its Singapore initial public offering at S$0.97 per unit, at the bottom of a narrowed marketing range, people familiar with the matter told Reuters on Thursday, raising $1.14 billion.

* Before Optimer Pharmaceuticals Inc even put itself up for sale earlier this year, Cubist Pharmaceuticals Inc offered to buy the antibiotic maker for $20 per share, or nearly $1 billion, two people familiar with the matter told Reuters on Wednesday.

* Bain Capital LLC has emerged as the last party standing in the race for Yankee Candle Co Inc, three people familiar with the matter said, making it likely that the largest scented candle maker in the United States will stay in private equity hands.

* Singapore’s Changi Airport Group has sold its 8.36 percent stake in Italy’s Generale Mobiliare Interessenze Azionarie SpA at 1.43 euros per share, a source close to the situation said on Wednesday.

* British tour operator Thomas Cook Group Plc will announce plans to raise about 400 million pounds ($609.02 million) through a placing and rights issue on Thursday, according to two travel industry sources.

* Austin Brown, a portfolio manager with a focus on metals at Caxton Associates, has left the London office of the $6 billion U.S. hedge fund, according to a source at the company.

* Publishing company Mecom Group Plc is set to appoint veteran investment banker Rory Macnamara as its chairman as it continues to restructure its business, the Financial Times reported, citing people close to the company

 

Fly On The Wall 7:00 Market Snapshot

ANALYST RESEARCH

Upgrades

Beazer Homes (BZH) upgraded to Buy from Fair Value at CRT Capital
Con-way (CNW) upgraded to Hold from Underweight at BB&T
First Busey (BUSE) upgraded to Market Perform from Underperform at Keefe Bruyette
InterXion (INXN) upgraded to Buy from Neutral at Citigroup
Palo Alto (PANW) upgraded to Overweight from Equal Weight at Morgan Stanley
Rosetta Resources (ROSE) upgraded to Outperform from Market Perform at Wells Fargo

Downgrades

3D Systems (DDD) downgraded to Underperform from Market Perform at William Blair
ABB (ABB) downgraded to Neutral from Buy at Citigroup
AMD (AMD) downgraded to Sell from Neutral at Goldman
CSC (CSC) downgraded to Hold from Buy at Deutsche Bank
Chesapeake Utilities (CPK) downgraded to Neutral from Outperform at RW Baird
Chesapeake (CHK) downgraded to Neutral from Overweight at JPMorgan
Comstock Resources (CRK) downgraded to Hold from Buy at KeyBanc
Covanta (CVA) downgraded to Equal Weight from Overweight at Barclays
Everest Re (RE) downgraded to Equal Weight from Overweight at Morgan Stanley
Great Plains Energy (GXP) downgraded to Neutral from Overweight at JPMorgan
Iconix Brand (ICON) downgraded to Hold from Buy at Benchmark Co.
Jack in the Box (JACK) downgraded to Outperform from Top Pick at RBC Capital
Lincoln National (LNC) downgraded to Underperform from Neutral at Credit Suisse
MB Financial (MBFI) downgraded to Underperform from Market Perform at Raymond James
Medtronic (MDT) downgraded to Neutral from Outperform at Credit Suisse
Piedmont Natural Gas (PNY) downgraded to Neutral from Outperform at RW Baird
SodaStream (SODA) downgraded to Hold from Buy at Deutsche Bank
Stratasys (SSYS) downgraded to Underperform from Market Perform at William Blair
tw telecom (TWTC) downgraded to Equal Weight from Overweight at Morgan Stanley
Unum Group (UNM) downgraded to Underperform from Neutral at Credit Suisse

Initiations

Amazon.com (AMZN) initiated with a Buy at Lazard Capital
Apple (AAPL) initiated with a Neutral at Susquehanna
Churchill Downs (CHDN) initiated with a Buy at Brean Capital
Interpublic Group (IPG) initiated with an Overweight at Evercore
Monarch Casino (MCRI) initiated with a Buy at Brean Capital
Stillwater Mining (SWC) coverage resumed with an Outperform at Wells Fargo
Wabtec (WAB) initiated with an Overweight at Atlantic Equities
eBay (EBAY) initiated with a Buy at Lazard Capital

HOT STOCKS

DDR Corp. (DDR) acquired select prime power centers from its Blackstone (BX) JV for $1.46B
TC PipeLines, LP (TCP) unit entered agreements for $1.05B in pipeline stakes
Wells Fargo (WFC) confirmed reinstatement of $203M judgment in overdraft case
FDA approved Simponi (JNJ) to treat ulcerative colitis
Arch Coal (ACI), Meritage Midstream Services to form joint venture
HollyFrontier (HFC) announced unplanned downtime at refineries
OCZ Technology (OCZ) to delay filing 10-Qs

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Prestige Brands (PBH), NetEase.com (NTES), Eagle Bulk Shipping (EGLE), Youku Tudou (YOKU), Acxiom (ACXM), Sapient (SAPE), Jack in the Box (JACK), Cisco (CSCO), Flexible Solutions (FSI)

Companies that missed consensus earnings expectations include:
TransAtlantic Petroleum (TAT), Aegean Marine (ANW), Multiband (MBND), Skechers (SKX)

Companies that matched consensus earnings expectations include:
Commtouch (CTCH), NetQin Mobile (NQ), Safe Bulkers (SB)

NEWSPAPERS/WEBSITES

  • The euro zone debt crisis has mutated into Europe’s longest slump of the post World War II era, with no recovery in sight for a broad swath of the continent. Continuing government austerity, banks that can’t or won’t lend and heavy household debts are weighing on many countries, the Wall Street Journal reports
  • Valeant Pharmaceuticals (VRX) and Mylan (MYL) are weighing options after approaches made to Actavis (ACT) were rebuffed, and a report by the Wall Street Journal, citing a source, says Novartis (NVS) is weighing whether to launch its own bid for Actavis
  • Google (GOOG) plans to help create a new laboratory to study quantum computing, a high-profile endorsement of the esoteric technology—and D-Wave Systems, a Canadian company that has been pursuing it since 1999. An unusual supercooled machine built by D-Wave, the Wall Street Journal reports
  • BP (BP) wants Prime Minister Cameron to intervene with the U.S. government over the escalating cost of compensating U.S. companies for the Gulf of Mexico oil disaster in 2010, according to the BBC, Reuters reports
  • Alternative asset managers such as Blackstone Group (BX) and KKR (KKR) have for decades scoured the stock market for undervalued companies. Now they are trying to convince investors that shares in their own firms are a bargain, Reuters reports
  • Gold demand slid 13% to the lowest in three years in Q1 as record exchange-traded product sales by investors outweighed a surge in buying from China and India, says the World Gold Council, Bloomberg reports
  • A year ago the U.S. housing market hit bottom after the biggest plunge in eight decades, and now signs of excess are re-emerging. The U.S. spring home buying season has been marked by a frenzy of demand fueled by the Fed’s move to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes, Bloomberg reports

SYNDICATE

Ambit Biosciences (AMBI) 8.125M share IPO priced at $8.00
Customers Bancorp (CUBI) 5.373M share IPO priced at $16.75
Cyclacel Pharmaceuticals (CYCC) files to sell common stock
DDR Corp. (DDR) files to sell 32M shares of common stock
Diamondback Energy (FANG) 4.5M share Secondary priced at $29.25
OMA Airports (OMAB) files to sell 100M Series B shares for selling holder
Tesla (TSLA) files to sell 2.7M shares, CEO intends to buy $100M of stock
UBIC, Inc. (UBIC) 1.1M American Depositary Share U.S. IPO priced at $8.38
Wave Systems (WAVX) files to sell 1.8M shares for holders
William Lyon Homes (WLH) 8.7M share IPO priced at $25.00

QUARTERLY HEDGE FUND FILINGS

Berkshire Hathaway: NEW STAKES: Liberty Media (LMCA) and Chicago Bridge & Iron (CBI). INCREASED STAKES: Wells Fargo (WFC), IBM (IBM), Wal-Mart (WMT), DirecTV (DTV), and DaVita (DVA). DECREASED STAKES: Mondelez (MDLZ), Kraft (KRFT), and Bank of New York Mellon (BK). LIQUIDATED STAKES: General Dynamics (GD) and Archer Daniels (ADM).
Greenlight Capital: NEW STAKES: Oil States International (OIS), Hess (HES), Spirit (SPR), IAC/InterActiveCorp (IACI), and Capital Bank (CBF). INCREASED STAKES: Apple (AAPL). DECREASED STAKES: Microsoft (MSFT), Seagate (STX), Delphi (DLPH), CBS (CBS), and Computer Sciences (CSC). LIQUIDATED STAKES: Ensco (ESV), Xerox (XRX), Yahoo (YHOO), NVR (NVR), and Google (GOOG).

    



 
Why Policy Has Failed
Sunday, 12 May 2013 12:04
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Put down the Sunday newspaper; grab a pot of coffee; and call ‘mom’ and tell her she has to read this. Doug Rudisch has written a far-reaching summary of the true state of the world and ‘why policy has failed’. Simply put, there is no faith in the system; real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already. (Read more…)

Something has to happen to restore our collective faith. And more short term fixes and empty promises during campaign speeches and the State of the Union addresses are not where to do it. Fed policy has worked with respect to increasing the values of liquid securities and real estate, and failed to date with respect to employment and capital investment. This latest massive and expensive effort by the government and Fed designed to encourage CEOs to increase risk-taking has done the opposite and scared them into a shell or at a minimum just not worked. Whatever CEOs are afraid of; ZIRP, QE, building more roads and bridges and paying out more entitlements is not making them unafraid of those things.

We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels. We wish we could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, we don’t think the U.S. realizes it has a problem.

 

Via Michael Krieger of Liberty Blitzkrieg blog,

The essay below is courtesy of Doug Rudisch, a friend and former fund manager, who I have known and respected since my days on Wall Street.  I am extremely grateful that he took the time and effort to so insightfully write on some of the greatest issues facing our nation today and to provide this content to my readers.  What follows below are some of the most powerful passages from his piece and the entire thing is embedded at the end. The whole thing is simply excellent.

What I can say with absolute certainty is that I have lost a lot of faith and trust in the system. And I am not the only one. This sentiment is running at all-time highs amongst business leaders (their collective in-actions prove it) and guys on the street. It is both sides of the barbell and middle that are upset. Often it’s one or the other, but not all three. This time it’s not at an external state, it’s directed inwards. That is a tough problem to solve. Jingoism is not the answer either as we already tried that.

 

If there is no faith in the system, it has a really hard time working. And I mean real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. These are valid notions, but as a point of clarity I am talking about a something different. There also is a subtle but important distinction between faith and trust versus confidence. Faith and trust are longer term and more powerful concepts.

 

There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already.

 

However as the above chart shows, things clearly changed in the 2003 and 2009 profit cycles as corporate profits surged while employment did not. My explanations:

 

Starting with the 2009 cycle first. In the 2008 downturn companies eliminated a lot of jobs. The depth of the downturn forced them to make the tough decision. Normally that kills consumer spend due to wage loss. But the government plugged the revenue gap with transfer payments and direct investment. See the green line go nearly vertical and it is fascinating how profit growth has mirrored the trajectory of debt growth. The consumer has started to dis-save again as well. Thus corporations kept the revenue, lost the labor, and voila record margins. You could argue unemployment is being subsidized. Like anything else, when something is subsidized, you tend to get a lot of it.

 

For example, see the recent new investor activity in single family homes and farmland of all things, including equity hedge funds who apparently think homes are like stocks. Maybe it’s a sign that other asset categories (equities and credit) are getting toppy or inflation expectations are increasing when hedge funds begin to foray into the single family housing market and farmland (some having little or no prior experience in these markets). At any rate, it seems odd and not good to me when policy results in hedge funds buying single family homes and farms.

 

Sorry Mr. Greenspan we have seen where valuing assets solely on the basis of current rates got us. If we should do that, baseball cards and chewing gum would also be great investments today. My suspicion is from here baseball cards and chewing gum will hold their value over time better than the typical company trading at 15x earnings derived from profit margins that are twice its average levels. And in point of fact according to the CPI the price of candy and chewing gum increased 31% between the years 2000-2012, while the S&P index including this year’s rip is only up 6% since 2000. Yes it matters what the price is that one pays for an asset!

 

There is much more going on than technology replacing labor at an accelerating rate, globalization, or a structural mismatch of skills to available jobs. Sure they are part of the problem, but not a majority. They are a convenient excuse to rationalize failed policy. Productivity growth was always hailed as a good thing, both in terms of job creation and its ability to contain inflation.

 

The important similarity to both profit cycles is that they were driven by credit growth that supported corporate revenues above what consumer income alone would have. In both cases corporate profits were the offsetting asset relative to the liability of government and consumer debt. The credit growth of 2003 proved itself not only un-sustainable, but tremendously costly. That loss of consumer credit has now been shifted to the government balance sheet and that of the US Federal Reserve. By definition, this also is unsustainable in some form. Sure it can continue to grow, but if it does at some point I believe it has to resolve itself painfully through higher rates or inflation, some other form of taxation or confiscation, or something else I can’t think of.

 

Won’t it be interesting if going forward economic cycles are not marked by the supply of excess production capacity, but instead the supply of excess credit which creates asset bubbles as opposed to excess production capacity? I believe CEO’s have more rational expectations than certain classes of investors, namely the renters, who are a very big group collectively investing enormous amounts of capital. Thus policy causes a rice in price in certain asset classes (often as we have seen recently to irrational levels) more effectively than it stimulates investment by businesses in capital or labor. The costs and risks of monetary policy attempting to substitute for un-sound structural policy are much greater than the potential benefits! It just causes asset bubbles and does not drive employment.

 

Counter- intuitively Japanese gross fixed business investment over the last 10 years has averaged 13.7% of GDP versus the U.S. at 10.5% of GDP, yet Japan has still grown less quickly than the U.S. Monetary policy which doesn’t work perfectly to begin with cannot overcome structural, demographic, or political problems. Oftentimes monetary policy makes these issues worse for numerous reasons including causing capital misallocation and providing steroid boosts that enable politicians to ignore making the necessary structural change that needs to occur for an economy to become sustainably healthy. This may be the worst of all the negative side-effects of monetary policy.

 

Ultimately either price will decline to meet wages or wages will rise to meet price.

 

I am sure the Fed believes that if all the sudden this money starts to work its way into the economy and it begins to overheat they can remove money or credit at the exact appropriate time and rate such that excess inflation never happens. They probably also convince themselves this is the better problem to have. The same guys that get every forecast wrong, have missed at least 2 bubbles, and who have been flummoxed by QE and ZIRP not doing what they thought it would, think they can anticipate all the global knock-on effects of this policy action and also remove the stimulus at exactly the right time and rate and engineer a smooth landing?

 

Where I may be understating QE’s impact is the excess liquidity and consumption that has entered the economy through specialty finance companies (consumer finance, mortgage REITs, etc.). Specialty finance companies and mortgage REITs can access capital from banks via securitizations and the repo market incredibly cheaply now (30 day rate currently 15bp) because banks have excess reserves, and then turn around and lend it, which they have started doing aggressively again (and last time this did not end well). So some segments of the economy may have received disproportionate liquidity from QE. Here are some data-points and they are scary about the degree to which certain segments of the economy seem to have re-bubbled or over- consumed due to ZIRP and excess liquidity:

 

  • The average maturity for car loans to borrowers with blemished credit contained in asset-backed securities surpassed 70 months last year for the first time since at least 2005, according to Moody’s Investors Service, which uses General Motors Co.’s GM Financial as a bellwether for the segment. All loans longer than 72 months more than doubled to 14 percent as of April 20 from six percent in 2010, according to J.D. Power & Associates.
  • Auto loans which specialty finance companies crowded into that were made in 2012 are already running at a rate of non-performance that equates to the 2006 vintage which had the record rate of non-performance
  • Auto sales back to roughly 2007 levels when U-6 unemployment was about 8% and now it is 14%. How does that make sense and how is it good to once again pull a bunch a demand forward and put cars in the hands of people that may not be able to afford them, which previously helped bankrupt the industry and cost taxpayers $25b and counting
  • Covenant-light loans on pace to break 2007 record issuance, already at $88b YTD (April) versus 2007 peak of $97b.

 

The Fed has adopted wealth effect driven policy for a long time, but it is only making people poorer. As I pointed out real median annual household income is 8% lower than it was in the year 2000. And it is not creating jobs.

 

By way of analogy and not to belittle the severity of either event, 9/11 became an excuse to try to occupy two countries amongst other things. Now we are figuring out it didn’t turn out so well and was very costly. Similarly the financial crisis turned into an excuse for certain economists and politicians to uncork experiments and spend money like it is going out of style. Hopefully the latter turns out better than the former. But so far, both events have led to an enormous amount of wasteful and failed government expenditure and intervention which has ballooned our deficit and diminished our influence on the world stage.

 

We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels.

 

And by doing it to the degree it is, the Fed is acting as if it has 100% certainty it is correct when what they are directionally doing has a long history of ending badly.

 

It would be interesting if the American public were able to vote on Fed policy. Both sides argue their views in several very public debates, and the population votes. My strong suspicion is ex those in the financial industry, the vote would be a resounding no.  And it would be by a larger margin than by what the current president was elected with. So is the Fed having all this power and leeway a good structure? Maybe. Democratic? Certainly not.

 

And to be clear, I am not arguing the Fed should be politicized or even become a democracy. I do think part of the problem is it has become politicized. But I am arguing there needs to be a stricter limit on what the Fed’s powers are and how they are measured as the current governance mechanism (the mandate alone) and measurement system (the CPI and employment) has given them too much leeway.

 

The twelve members of the FOMC average 57 years of age with a standard deviation of only 4.5 years. The three members of the President’s Council of Economic Advisors average almost the same 56 years of age with a standard deviation of only 2.6 years. All PhDs, and a big overlap in academic institutions. Talk about a tightly grouped bunch. Now this does not guarantee they all think the same way (come from same school of thought), and self-selected themselves, but it sure increases the chances.

 

No system will work optimally if everyone thinks the same way, anchoring and confirmation bias will just take over. If there are twelve people in a room, and they all think the same way, you might as well just have one. As CEO if one pursues a strategy and it doesn’t work, you change it, or lose your job. In investing, if you make a bad investment, you sell it. In life, if you are in a bad relationship, you change your behavior, or end it. But apparently in economics, if a policy isn’t working, you sit in a room and agree with each other that it is great and do more of it and get promoted through the system?

 

As a reality test, how about a simpler basket comprised of actual home prices, college tuition (which by itself is interesting because a lot of cost factors are embedded in college tuition including labor), food (maybe just the prices of a Big Mac which are up 5.2% per year since the end of the recession and labor is also part of the price of a Big Mac) and energy (gas) and health insurance prices (includes labor). Look at how these actual prices have changed and then tell me whether or not there is inflation. Is it a perfect measure? Probably not. An interesting reality test and point of compare? You bet! And it is probably a fair bit closer to what the average consumer seems to be feeling now. This basket also would have set off giant red flags about Fed and Government policy long before the financial crisis reared its ugly head in 2008.

 

I wish I could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, I don’t think the U.S. realizes it has a problem, so that is why I picked on that issue, and did my best to provide potential solutions.

Full essay is embedded below.  It’s most definitely worth your time.  Enjoy!

Why Policy Has Failed

    



 
Frontrunning: May 7
Tuesday, 07 May 2013 06:24
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  • Microsoft prepares U-turn on Windows 8 (FT), Microsoft admits failure on Windows 8 (MW), After Bumpy Start, Microsoft Rethinks Windows 8 (NYT)
  • China reports four more bird flu deaths, toll rises to 31 (Reuters)
  • Republicans shift stance on US budget (FT)
  • NYC Tallest Condo Corridor Gets New Entrant With Steinway (BBG)
  • U. (Read more…)S. Says China’s Government, Military Used Cyberespionage (WSJ)
  • China rejects Pentagon charges of military espionage (Reuters)
  • Bank of China Cuts Off North Korean Bank (WSJ)
  • Libya defense minister quits over siege of ministries by gunmen (Reuters)
  • London Recruiter Says City Job Vacancies Rose 19% (BBG)
  • Colleges Cut Prices by Providing More Financial Aid (WSJ)  or, said otherwise, loans
  • Jeweler agrees to plead guilty in KPMG insider-trading case (LA Times)

 

Overnight Media Digest

WSJ

* The SEC has put local government officials on notice that it is closely monitoring the way they describe their cities’ fiscal health, charging Harrisburg, Pennsylvania, with securities fraud for allegedly failing to disclose information on its financial troubles.

* Deep in the president’s new budget is a plan that could transform public housing in the nation by allowing housing authorities to increasingly set time limits or work requirements for participants.

* Bank of America agreed to pay MBIA $1.7 billion to settle a dispute over soured mortgage securities, in the second-largest U.S. bank’s latest bid to reduce legal risks tied to its home lending business.

* Adobe Systems, publisher of graphics software such as Photoshop, is pulling back from the packaged software business and doubling down on delivering its design tools through an online service.

* A fledgling mobile-payments system in Rwanda is both an important pilot project for Visa and a key part of the government’s plan to make the country into the “Singapore of Africa.”

* Americans are finding it slightly easier to get a mortgage, yet banks remain wary of lending to would-be home buyers with weaker credit histories, a potential stumbling block for the housing recovery.

* TPG is beginning the sales process for China’s UniTrust Finance & Leasing Corp this week. UniTrust provides leasing services to clients in a number of industries.

* The private-equity firms buying BMC Software Inc have also discussed buying Compuware Corp and combining the two software companies, according to people familiar with the matter

 

FT

Facebook plans to incorporate video advertising in its newsfeed starting July as the company looks to new revenue streams.

IMG Worldwide this year received an unsolicited bid of over $2 billion from private equity company Colony Capital.

Bank of America and MBIA Inc have resolved a long-running legal tussle with the bank agreeing to pay the bond insurer $1.7 billion.

The European Commission said Google’s Motorola Mobility was abusing its position in the market by seeking and enforcing an injunction against Apple in Germany over a wireless patent.

The U.S. Treasury plans to sell the remainder of its stake in General Motors acquired when the government bailed out the automaker.

Environmentalists have expressed their anger over a plan to build a convention center in Alabama using money given by BP to restore the Gulf of Mexico coast.

Senior officials at the U.S. Commodities Futures Trading Commission are evaluating whether cyber-currency Bitcoin could fall under their regulatory jurisdiction.

 

NYT

* Pfizer will sell Viagra, its billion dollar erectile dysfunction drug, directly to men with a doctor’s prescription through its website.

* Google Glass, a wearable computer not yet formally released, is raising questions about whether it will distract drivers, upend relationships and strip people of what little privacy they still have in public.

* The electronics contractor Foxconn, known for its ties to Apple, is moving to develop its own products, like a flat-screen TV.

* YouTube, the world’s largest video website, will announce this week a plan to let some video makers charge a monthly subscription to their channels.

* One of the economic mysteries of the last few years has been the bigger-than-expected slowdown in health spending, a trend that promises to bolster wages and help close the wide federal deficit over the long term – but only if it persists.

 

Canada

THE GLOBE AND MAIL

* The Ontario government will draw up new rules to make sure local residents have a say in where future power plants and other energy infrastructure is built, in a bid to avoid a repeat of the costly cancellation of two gas plants before the 2011 election.

* A New Brunswick farmer who languished for more than a year in a Beirut jail cell on allegations he shipped rotten potatoes to Algeria is suing the Canadian government, arguing it didn’t protect his Charter rights.

Reports in the business section:

* The Quebec government is boosting its take from a mining sector already beset by a global downturn, introducing minimum royalty payments and other tax increases aimed at generating up to C$200 million ($198.25 million) a year.

NATIONAL POST

* The Harper government has a plan to “dismantle vital public services and drive down wages of all Canadians,” according to Paul Moist, president of the Canadian Union of Public Employees (CUPE). Moist’s inflated rhetoric appeared in the National Post after the government introduced plans to give Cabinet powers to oversee collective bargaining between Crown corporations and their employees.

* On the eve of what could be a critical debate on transit funding in Toronto, Mayor Rob Ford continued to lob political threats at those who dare to debate taxes and tolls.

“If 30 councillors want to put their name to implement taxes on the back of hardworking taxpayers in the city, I’ll hold them accountable in the next election. I’ll guarantee that,” Ford said on Monday.

FINANCIAL POST

* Loblaw Cos Ltd, country’s biggest grocer, debuted on Monday its new PC Plus loyalty card in Ontario and plans to roll it out nationally by the end of the year to its Real Canadian Superstore, Zehrs, Provigo, Atlantic Superstore divisions.

 

China

SHANGHAI SECURITIES NEWS

- China’s cabinet issued a detailed list of reforms, including a call for a specific plan for full convertibility of the yuan under the capital account, indicating the government’s determination to push forward economic reform.

- Economists expect China will post a slew of weak economic data for April in all three major fields of foreign trade, investment and consumption, due in part to weak global economic and market conditions. The data is due this week and next.

PEOPLE’S DAILY

- Data showed Beijing’s suffered from serious air pollution on Monday, despite a sharp rise in temperature in the Chinese capital. Experts believe that air quality in Beijing is not likely to improve much in the near term.

- China has become Germany’s third largest investor, investing in 98 projects in the European country last year, with significant investment in auto parts and machinery manufacturing.

CHINA SECURITIES JOURNAL

- The People’s Bank of China is likely to let banks raise their deposit rates to up to 1.2 times the central bank’s benchmark rate later this year, up from the current cap of 1.1 times the benchmark, in a further step to liberalise the country’s rate regime, according to analysts and industry insiders.

- Experts believe foreign capital inflows into China’s red-hot property and local-government projects were key factors that prompted the foreign exchange regulator to announce tightened rules to curb inflows on Sunday.

CHINA DAILY

- Luxury car sales in China, including Audi, BMW, and Mercedes-Benz, slowed to four percent growth in the first quarter this year, down from 13 percent annual growth last year, amid a central government clampdown on government extravagance, the China Association of Automobile Manufacturers said.

SHANGHAI DAILY

- Shanghai’s government is inviting tenders for the construction of a 77,492-square-metre public transport hub, including five bus terminals, car and taxi parking lots, wash rooms, and six lounges, to serve visitors to Shanghai Diisneyland, which is scheduled to open in 2015.

 

Corporate Finance

* Antero Resources, an oil and natural gas company controlled by Warburg Pincus LLC, is preparing for an initial public offering that could value it at as much as $10 billion, three people familiar with the matter said.

* Third Point, the hedge fund run by billionaire Dan Loeb, has hired banks for an initial public offering of its reinsurer business, according to three sources familiar with the matter.

* IMG Worldwide, the marketing group put up for sale by Forstmann Little, drew an unsolicited bid from California private equity firm Colony Capital of more than $2 billion this year, the Financial Times reported.

* JPMorgan Chase & Co has yet to convince three of its largest shareholders to support the company in an upcoming vote on whether Jamie Dimon should retain both his CEO and Chairman titles, the Wall Street Journal said.

 

ANALYST RESEARCH

Upgrades

Abercrombie & Fitch (ANF) upgraded to Outperform from Market Perform at Wells Fargo
Apollo Global (APO) upgraded to Outperform from Perform at Oppenheimer
Arch Coal (ACI) upgraded to Neutral from Sell at Goldman
Brunswick (BC) upgraded to Buy from Neutral at Longbow
Gap (GPS) upgraded to Outperform from Market Perform at Wells Fargo
Noah Holdings (NOAH) upgraded to Buy from Neutral at BofA/Merrill
Tyson Foods (TSN) upgraded to Buy from Hold at Miller Tabak
Urban Outfitters (URBN) upgraded to Outperform from Market Perform at Wells Fargo

Downgrades

Aeropostale (ARO) downgraded to Sell from Hold at Brean Capital
AIG (AIG) downgraded to Neutral from Buy at Goldman
Alpha Natural (ANR) downgraded to Sell from Neutral at Goldman
American Eagle (AEO) downgraded to Market Perform from Outperform at Wells Fargo
Coach (COH) downgraded to Market Perform from Outperform at Wells Fargo
Iconix Brand (ICON) downgraded to Hold from Buy at Brean Capital
International Rectifier (IRF) downgraded to Market Perform at JMP Securities
Mettler-Toledo (MTD) downgraded to Hold from Buy at Jefferies
TJX (TJX) downgraded to Market Perform from Outperform at Wells Fargo
Tiffany (TIF) downgraded to Market Perform from Outperform at Wells Fargo

Initiations

Ann Inc. (ANN) initiated with a Market Perform at Wells Fargo
BioMarin (BMRN) initiated with a Buy at Goldman
Carpenter Technology (CRS) initiated with an Outperform at Credit Suisse
Chico’s FAS (CHS) initiated with an Outperform at Wells Fargo
Chimerix (CMRX) initiated with an Outperform at William Blair
EverBank Financial (EVER) initiated with an Outperform at Credit Suisse
Evertec (EVTC) initiated with a Buy at Deutsche Bank
Infinity Pharmaceuticals (INFI) initiated with a Neutral at Goldman
J.C. Penney (JCP) initiated with an Underperform at Wells Fargo
Kohl’s (KSS) initiated with a Market Perform at Wells Fargo
lululemon (LULU) initiated with a Market Perform at Wells Fargo
Macy’s (M) initiated with a Market Perform at Wells Fargo
Michael Kors (KORS) initiated with an Outperform at Wells Fargo
Nordstrom (JWN) initiated with a Market Perform at Wells Fargo
Ocwen Financial (OCN) initiated with an Outperform at Wells Fargo
Omthera (OMTH) initiated with an Overweight at Piper Jaffray
Pharmacyclics (PCYC) initiated with a Neutral at Goldman
Pinnacle Foods (PF) initiated with an Outperform at BMO Capital
Pinnacle Foods (PF) initiated with an Outperform at Credit Suisse
Rally Software (RALY) initiated with a Buy at Deutsche Bank
Rally Software (RALY) initiated with an Outperform at JMP Securities
rue21 (RUE) initiated with a Market Perform at Wells Fargo
Sanchez Energy (SN) initiated with a Buy at SunTrust
T-Mobile USA (TMUS) initiated with an Underperform at BofA/Merrill
Walter Investment (WAC) initiated with a Market Perform at Wells Fargo

HOT STOCKS

Crest Financial, Clearwire’s (CLWR) largest minority stockholder, urged Clearwire holders to reject proposed merger with Sprint Nextel (S)
Baidu (BIDU) acquired PPS online video business for $370M
Disney (DIS), Electronic Arts (EA) announced multi-year Star Wars games agreement

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Vitamin Shoppe (VSI), Forest Oil (FST), Alleghany (Y), CUI Global (CUI), Plains All American (PAA), Hologic (HOLX), Nautilus (NLS)

Companies that missed consensus earnings expectations include:
Cimarex Energy (XEC), Cinemark (CNK), Regis (RGS), Liberty Global (LBTYA), Midstates Petroleum (MPO), Skilled Healthcare (SKH), First Solar (FSLR)

Companies that matched consensus earnings expectations include:
RDA Microelectronics (RDA), Endeavour Silver (EXK)

NEWSPAPERS/WEBSITES

  • Some of the world’s biggest handset makers and telecom carriers are embracing alternative mobile operating systems this year in an attempt to become credible challengers to smartphones run by Apple (AAPL) and Google (GOOG), the Wall Street Journal reports
  • JPMorgan Chase (JPM) has yet to persuade three of its largest shareholders–BlackRock (BLK), Vanguard Group and Fidelity Investments–to back the company in a coming vote over whether James Dimon should retain his dual role of chairman and CEO, the Wall Street Journal reports
  • SoftBank (SFTBF) President Masayoshi Son said he will go to the U.S. today to meet Sprint Nextel’s (S) major shareholders about the Japanese company’s takeover bid, after rival bidder Dish Network (DISH) said a U.S. company would make a better suitor, Reuters reports
  • Microsoft (MSFT) has sold 100M Windows 8 licenses in the six months since launch, but wants to combat sputtering interest in its flagship software with a substantial update to make it easier to use, and compatible with smaller tablets, Reuters reports
  • Rio Tinto (RIO) will likely pursue a $5B expansion of its iron ore output in Australia, CEO Sam Walsh said, according to two people present at a meeting with investors and analysts, Bloomberg reports
  • Saudi Arabia, home to the biggest Arab bourse, seeks to boost institutional investments in its $390B stock market as the top OPEC producer weighs plans to allow foreigners to buy shares directly, Bloomberg reports

SYNDICATE

Colfax (CFX) files to sell 10M shares of common stock
Franklin Street (FSP) files to sell 15M shares of common stock
Generac (GNRC) files to sell 9M shares of common stock for holders
General Growth (GGP) files to sell 23.4M shares for Blackstone Group funds
Golub Capital (GBDC) files to sell 5.5M share of common stock
Hertz Global (HTZ) announces sale of 49.8M shares of common stock by holders
Local (LOCM) files to sell 4.57M shares of common stock for holders
Parametric Sound (PAMT) files to sell $75M of common stock and warrants
Stemline (STML) files to sell common stock
Teekay LNG (TGP) files to sell $100M in common units representing limited partners
Vantiv (VNTV) to offer 38.6M shares of Class A common stock for holders
Velti (VELT) files to sell up to 16.53M ordinary shares for holders