"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Friday, February 11, 2011

Morning Metrics

We've got two important economic measures coming out today: the international trade balance (due at 8:30 AM) and consumer sentiment (due at 9:55 AM).
International trade is the bigger of the two measures, since it represents our trade surplus (unlikely) or deficit (probable). November had an unexpected improvement to a trade deficit of only $38.3 billion, but analysts are not particularly optimistic about December's possibilities. We're looking for a consensus estimate of a trade deficit that has expanded to $40.5 billion.
How did we do? Well, the US Census Bureau reports that the December trade deficit expanded to $40.6 billion, which technically misses expectations. But not by a lot, so the markets probably will not get bent out of shape about that. Drilling down, we learn that:
  • The goods trade deficit was $53.5 billion, an increase of $2.2 billion from November.
  • The services trade surplus was $13 billion, effectively unchanged from November.
The total goods and services trade deficit for 2010 came in at $497.8 billion, an increase of $122.9 billion from 2009. This included a $44.8 billion deficit in industrial supplies and materials, a $37.5 billion deficit in automotive vehicles, parts and engines, a $39.3 billion deficit in consumer goods, and a $3.7 billion surplus in foods and beverages. Yes, that's right. The only thing we're exporting more of than we're importing is food.
Our trade deficit with Canada increased $6.1 billion to $21.8 billion, our trade deficit with China increased $46.2 billion to $273.1 billion, and our trade deficit with the European Union increased $18.6 billion to $79.8 billion.
There is a glimmer of optimism for consumer sentiment, however. January saw the index rise to 74.2, and a further 80 bps increase to 75.0 is expected for February. But we'll check on that here in about half an hour.

Thursday, February 10, 2011

SEC Suspects ETFs Used in Insider Trading

View this article on our website: SEC Suspects ETFs Used in Insider Trading

SEC Suspects ETFs Used in Insider Trading

The Securities and Exchange Commission suspects traders are using ETFs to conceal insider trading, the Financial Times reports.

Investigators are trying to determine if such traders are engaging in a practice known as "ETF stripping," according to unnamed FT sources said to be familiar with the matter.

To cover their tracks, traders would buy ETFs exposed to stocks they have nonpublic information on rather than buying the stock itself. The traders could then minimize exposure to the other ETF holdings by shorting them.

An unnamed Bloomberg source is also quoted as saying the SEC is investigating ETF stripping.

Regulators are also following hunches that traders are deploying swaps to avoid insider-trading suspicions, the FT reports.

The Justice Department's prosecution into alleged insider trading by hedge funds intensified this week, with charges against multiple fund managers.

By Joe Morris
To read the Financial Times article cited in this story, click here if you have a paid subscription.

First Time Jobless Claims, Exchange Mergers, Night Dragons, and Cranky Dictators

First Time Jobless Claims are first on the agenda, and we may be hard pressed to beat last week's note of optimism. As you hopefully recall, we had seasonally adjusted initial jobless claims of 415,000 (which beat expectations by 10,000), with the unadjusted numbers coming in at 459,683 (down 26,633 from the previous week) but an increase in the unadjusted insured employment level to 4,619,319. The analysts are feeling optimistic, though, and are calling for a 412,000 new claims for the week ending 2/5.
Checking the report from the Department of Labor, it seems that once again the analysts were not optimistic enough. The week ending 1/29 had its seasonally adjusted claims revised upwards to 419,000 (not great, but it still beat last week's expectations by 3000). For the week ending 2/5, seasonally adjusted new claims were 383,000, beating expectations by 29,000. The unadjusted first time claims were 438.548, down 21,000 from last week (not bad at all). The seasonally adjusted insured employment level came in at 3,888,000 (down from last week's revised level of 3,935,250), while the unadjusted level came in at 4,579,513 (also down)[1]. Ten states saw initial claims decline by more than 1000, while only 3 saw new claims increase by more than 1000. So that's not bad at all, and the markets should be fairly happy.
Unless there are a lot of disappointing earnings reports, of course.
Meanwhile, there is an exchange arms race going on, with the status of "biggest in the world" going to the victor. It started with the Australian Stock Exchange looking to get approval to be taken over by the Singapore Exchange, a deal that faces substantial political and regulatory hurdles. Now the London Stock Exchange is looking to buy Canada's TMX, Deutsche Boerse is in talks with the NYSE about a merger, and now other exchanges are jumping on the bandwagon. There is no specific word about what a merger of the NYSE with Deutsche Boerse would mean in terms of regulatory impact on listed US securities (or US member firms, since the NYSE is a SRO), but that will be on the list of things that will have to be resolved before any merger can take place.
According to McAfee Inc, Chinese hackers accessed the computer systems of between five and twelve multinational oil and gas companies to steal bidding plans and other proprietary information. The company declined to identify the five companies they have identified as being compromised by the "Night Dragon" attacks, which depended on exploiting public websites and also on infected emails sent to company executives. McAfee states that they have no evidence that the attacks were sponsored by the Chinese government, but they also do not particularly expect the Chinese government to do anything about the hackers.
The Egyptian government, rather cranky about the United States' amazing political face-heel turn, has expressed concern about the US demands for political change in the nation. "When you speak about prompt, immediate, now - as if you are imposing on a great country like Egypt, a great friend that has always maintained the best of relationship with the United States - you are imposing your will on him," said Egyptian Foreign Minister Ahmed About Gheit. And, from the Egyptian perspective, he has a point. After all, we've spent billions of dollars in foreign aid in helping to prop up Mubarak's military dictatorship for thirty years now, so the sudden demands of the US government to allow actual democracy seem rather... disingenuous.
We now have the official rationale behind the North Korean Crazy[2] walkout on the peace talks yesterday. From the Korean Central News Agency of DPRK;s website, "The south Korean side persists in its nuclear and "human rights" rackets against the DPRK, sticking to its anti-reunification 'policy towards the North' and taking a passive approach towards dialogue.... Groundless accusations against compatriots under the pretext of 'human rights issue' and the like are little short of chilling the atmosphere of dialogue." Yes, that's right. According to Kim "Furry Hat of Power" Jong-un, the failure of the conference is due entirely to the South's unreasonable insistence on talking about human rights [3] and their unreasonable refusal to reunite as a single nation under the Furry Hat of Power[4].
[1] Unfortunately, we have no data on how many people are not counted in insured unemployment through returning to work, versus how many are not counted in insured unemployment through losing benefits. It is probably safe to say that all 39,806 people that fell off the count did not get back to work.
[2] "Don't Hate the Artillery, Hate the South" is yet another disappointing single.
[3] "How dare you claim to judge me for starving my people! My Furry Hat of Power needs food!"
[4] "How dare you not want me to starve your own people as well! Look at my Furry Hat of Power and obey me!"

Wednesday, February 9, 2011

Morning News

We start off the day with the Mortgage Bankers Association's Weekly Application Survey. Not because it's of vast important, mind you (except possibly to people who follow the financial sector), but because it is a bellwether of things to come. And, for the week ending 2/4, things aren't particularly coming. The market composite index declined a seasonally-adjusted 5.5% from the prior week, with the Refinance Index down 7.7% and the Purchase Index down 1.4%. The refinance share of mortgage activity fell to 66.6%, and the average interest rate for a 30-year fixed-rate mortgage rose 32 bps to 5.13%.
In other market driving news, Federal Reserve Chairman Ben Bernanke is going to be testifying before the House Budget committee today, starting at 10 AM. The Street will be watching his remarks closely, hoping for hints about future Fed policy.
In the "how did I miss that category", the Dodd-Frank financial reform law requires government agencies to go through their regulations and remove all references to credit ratings, working on the theory that part of the financial crisis was caused by over-reliance on those ratings. In response to this, the SEC has proposed to strip rating references from the Form S-3[1], replacing the former ratings requirement with alternative requirements. This particular plan is largely considered noncontroversial (although the large rating firms don't like it). What is more likely to be controversial is what impact this requirement to eliminate credit ratings from regulations will have on money market mutual funds. Currently, those funds are required to invest in high-grade securities, and removal of the credit ratings references has been opposed by the industry in the past. Now that Federal law requires it, nobody is quite sure what the SEC will do[2].
Looking to the Middle East, Credit Agricole bank is estimating that the current Egyptian crisis is costing the nation $310 million per day. The Egyptian government has not confirmed that specific number, but has acknowledged that it is causing their economy to suffer.
Anyone remember North Korea Crazy[3]? That little nutjob of a nation that got everyone's attention back in November by shelling Yeongpeong Island? Yeah, they're back in the news. Two days of talks ended in failure today when the North and South failed to set an agenda for the talks. Yes, that's right, it took them two days to work out that they couldn't even work out what they were going to talk about. The final collapse happened when the North Korean delegates all stood up and walked out of the conference.
Also, North Korea is accusing Japan of gearing up to reinvade Korea. This is probably just celebrating the fact that Kim Jong-un is now wearing his big-boy Furry Hat of Dictatorial Authority[4].
[1] "The Form what now?" The Form S-3 is a SEC form that (quoting from the SEC's website) "allows a company with less than $75 million in public float to register primary offerings of its securities". The company has to meet certain specific eligibility requirements, but if it qualifies it can go through a simplified registration process for an IPO.
[2] There is also some legitimate concern that this action will harm investor confidence in money market funds. Most investors like knowing that there is an objective standard for "high quality".
[3] "People See Me Shellin', They Hatin'" was a disappointment on the charts, easily pushed out of the top ten by Tunisia's "Takin' Bank", Yemen's "Steppin' Down (2013 Brutal Dictatorship Remix)" and Mubarak's "Don't Cry For Me, Egypt (You Know I'll Never Leave You)".
[4] Not a joke. Really. Follow the link.

Tuesday, February 8, 2011

Fiat Funnies

a fiat currency deserves a fiat history

What's Happening In The World?

There really isn't a whole lot of economic data coming out (unless you count the 164 companies releasing their earnings announcements for today). We do have the ICSC-Goldman Store Sales figures. If you recall from last week, those showed a 1.0% decrease for the week ending 1/29, and a 1.6% increase year over year. Things have gotten a little better for the week ending 2/5. For the week major retail chain store sales are up 2.2%, and this has boosted the year over year sales to a 2.5% increase.
Mostly, though, the market is going to be driven by news today. And the news that will be driving the market will be largely coming out of China where, in celebration of the end of the Chinese Lunar New Year holiday, the People's Bank of China has increased the benchmark one-year deposit rate by 25 basis points to 3% and the one-year lending rate by 25 basis points to 6.06%. The move is largely designed to fight inflation (which was at 4.6% as of December, but is expected to rise substantially as food prices skyrocket), and this increase is not expected to be the last one for the year. On concerns that this will dampen demand, most commodity prices have already dropped.
Here in the US, the eyes of the financial sector will be on the FDIC's proposal to limit bonuses paid to executives at financial companies with $50 billion or more in assets. The plan requires 50% of the executive's bonuses to be deferred, and then how much of that deferred bonus they actually receive will be based on the performance of the company. Also, since these bonuses are typically paid out as stock or stock options, the FDIC is contemplating not allowing hedging strategies on the deferred bonuses. The idea is that, if the executives aren't allowed to protect themselves from a downturn in the stock, they might actually make good long term decisions[1].
Speaking to the US Chamber of Commerce yesterday, President Obama discussed the possibility of tax reform. "Another barrier government can remove is a burdensome corporate tax code with one of the highest rates in the world," he said[2]. There was a lot of conciliatory language in the speech, largely because the President was speaking to what can charitably be described as a hostile audience. But still, we now have the President at least talking about corporate tax reform, so the markets might like that.
And, in Middle Eastern news, Egypt has announced that it has a plan and a timetable for the peaceful transfer of power. There are no details about what those plans are, other than it is said that there are plans, and there is a timetable. Also, the government has promised no reprisals against the protesters. Other than killing some 300 of them. And using the military and police in plain clothes as agents provocateur. And arresting individuals suspected of being leaders of the protesters and keeping them blindfolded in prison for weeks. And possibly having a lot of them rounded up, imprisoned, and tortured as soon as the West gets distracted by the next big news story. But other than that, no reprisals[4].
[1] It's a great theory. Actual historical data suggests that the executives are far more likely to put effort into changing the regulations, though.
[2] It's up in the air as to how accurate this is. Checking Wikipedia, we find that the US has a progressive corporate tax rate that can run anywhere from 0% to 35%. While there are only 10 other nations listed on the Wikipedia chart that have a rate at 35% or higher, there are two things that make me question his statement. First, only 3 of those nations have a progressive corporate tax rate. The other 7 are flat taxes. Second, according to the GAO, the average US effective tax rate on the domestic income of large corporations is only 25.2%, with 37.5% having an effective tax rate of 10% or less (and, in all fairness, 25.6% of large corporate taxpayers having an effective tax rate in excess of 50%)[3]. So the actual situation is, obviously, far more complicated than a single sentence soundbyte from a speech to a hostile audience would let on.
[3] Here's how that can work, quoting from the GAO report: "A corporation’s average effective tax rate can exceed the statutory rate because of differences between financial and tax reporting. For example, depreciation for tax purposes follows the Modified Accelerated Cost Recovery System, which results in depreciation at an accelerated pace compared to depreciation for financial purposes. Firms that are no longer investing may show financial income lower than tax income in years where they have exhausted depreciation for tax purposes but continue to deduct depreciation for financial purposes. Similarly, items that cause a greater amount of income in the current period for tax purposes than they do for book purposes could result in average effective tax rates above the statutory rate. For example, bad debt expense is deducted when estimated for financial purposes but is not deductible for tax purposes until the debt has actually gone bad."
[4] And if you can't trust the word of a brutal and repressive head of a dictatorship, whose word can you trust?