World News

China

• A study of international scientific output - as defined by the total number of peer-reviewed papers published by scientists in various nations - indicates that China is on course to overtake the US in scientific output by 2013. Over the 12 year period covered by The Royal Society's study, US scientific output increased by 8%. In the same period of time, Chinese scientific output increased by 722%.

Japan

• Traces of plutonium-238, plutonium-239, and plutonium-240 have been found in the soil around the Fukushima nuclear complex. Japan's Nuclear and Industrial Safety Agency has said that the plutonium levels are not harmful to human health, but it could mean that reactor No. 3's containment mechanism has been breached. "Plutonium is a substance that's emitted when the temperature is high, and it's also heavy and so does not leak out easily," said agency deputy director Hidehiko Nishiyama. "So if plutonium has emerged from the reactor, that tells us something about the damage to the fuel. And if it has breached the original containment system, it underlines the gravity and seriousness of this accident." Opposition leaders in the Japanese Parliament are now demanding that the evacuation zone around the plant be widened.

Libya

• In a speech televised last night, US President Obama assured the American people that the United States would not get bogged down in a police action in Libya. "And tonight," the President said in his speech, "I can report that we have stopped Qaddafi's deadly advance." Commentators have observed, however, that he did not actually explain how long the United States would remain involved in the Libyan police action, or outline an exit strategy.
• This morning, Libyan forces pushed the rebels as far east as Bin Jawad.

United States

• Indiana prosecutor Carlos Lam has resigned after acknowledging that he advised Wisconsin Governor Scott Walker to discredit labor union protests by orchestrating a fake assault on himself, possibly with a firearm.
• A man in San Antonio was arrested after a gun battle with police over a price increase in Taco Bell's Beefy Crunch Burritos.

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?

The US Will Destroy The Global Economy. Also, GDP.

Gross Domestic Product - specifically, the initial GDP estimate for Q4 2010 - is the big news for the morning. And since GDP is a measure of the entire economic output of the country - consumer spending, private sector spending and production, and government spending - this is a huge one. Q3 hit a final result of 2.6% growth, and the GDP Price Index (a measure of inflation) came in at a final 2.1%. For Q4, the analysts are optimistic. They're looking for a 3.5% increase, with the price index increasing only 1.5%.

Less spectacular, but also due out at the same time, is the Employment Cost Index. Employees are a substantial expense for businesses, and this index measures the increase or decrease in total employee compensation (wages, salaries, and benefits). There is no particular expectation for the index, but investors will be watching this not just because it will show increases (or decreases) in employer costs, but also because it can indicate whether or not we are experiencing wage inflation. If wages are rising substantially faster than inflation, it increases the odds that interest rates will rise as the Fed tries to suck money out of the economy.

Based on comments from the Fed (and from other sources), my prediction is that the ECI will be up by a small amount.

And while we wait, let's turn to the Chinese rating agency, Dagong Global Credit Rating[1], for an outsider's perspective on the current world economic situation. In their first annual global sovereign credit risk outlook, they are predicting that the developed nations will be the next "major source of global sovereign credit risk in 2011", in the following stages:

1. The financial needs of developed debtor nations will rise, and their debt will continue to expand. Most will have financing requirements as large as 20% of GDP, and debt servicing will account for about two-thirds of their total financing requirements.
2. Weak economic growth and an inability to eliminate structural deficits will both further increase the debt of developed nations and will make it impossible to maintain the solvency of the developed debtor nations. Interest rates will rise and lenders demand increased reward for the risks they assume.
3. Default is not seen as a risk, but more countries (particularly in Europe) will be forced to ask for bailouts in 2011.
4. I'll just quote this one: "Fourth, the United States, as the biggest country involved in sovereign debt crisis around the world, will continue its quantitative easing policy when the country is in danger, and the world credit war will be escalated due to the overflow of US dollars. In particular, the trend of continuous depreciation of US dollar will result in haircut of international creditors' debts dominated in US dollar. The issuance of US dollar encourages numerous speculative capitals into the global commodity market, leading to an increasing pressure on global inflation. Different countries, in order to avoid unpredictable losses on their own interests, will have to seek for adjustment of international credit relations, and the global credit war, no doubt, will become the turning point of reforming international credit relations in 2011."[2]
5. The extremely loose monetary policy of the developed debtor nations cannot and will not be substantially changed in 2011. The excess global liquidity that results is a potential disaster for developing nations; expect to see housing prices fall, emerging market economies slow down, and exchange rates depreciate. In some extreme cases, look for political crises.

And with the end of western civilization predicted, let us turn now to the Bureau of Economic Analysis for the Q4 2010 initial GDP estimate. Failing to meet expectations by a small amount, GDP is estimated to have increased 3.2% in Q4 2010. Mostly on personal consumption expenditures, exports, and nonresidential fixed investment. Also imports, which have a negative impact on GDP, decreased. The price index missed expectations more significantly, increasing 2.1% in Q4. These are far from final numbers, though. Next month we'll get an initial revision, and then March will provide a final revision.

Turning to the Bureau of Labor Statistics, we also have the Employment Cost Index news. Compensation costs for civilian workers increased 0.4% in the month of December. for the year, they're up 2.0%, a greater increase than the 1.4% in 2009. Most of that came from a 2.9% increase in benefit costs, while compensation costs increased 1.5% (mostly driven by retirement costs). Compensation costs for private industry workers increased 2.1% for the year, while compensation costs for State and local government workers only increased 1.8%.

{1] Which has rated China's sovereign debt at AA+, and US sovereign debt at A-.

[2] In other words, they expect the US to continue to crank out dollars by the billions, devaluing the currency. Existing Treasury bond holders will suffer as a result, because their loans will be repaid in debased currency. This will drive inflation on a global scale, because the US dollar is the reserve currency of the world.

Morning Metrics!

Our typical jaunt round the globe begins in Japan, where last night at 6:50 PM EST their Merchandise Trade figures were released. This is more or less the same thing as the US Trade Balance figures, and looks at the trade deficit or surplus on tangible goods and services. The consensus estimate was for a surplus of ¥450 billion in December (up substantially from November's ¥151.1 billion). Analysts were also looking for annual imports to hit a 9.5% increase, while imports were expected to increase 12.3%. In actuality, the December trade surplus was ¥727.7 billion (whupping estimates), while 2010 exports finished up 13.0% and imports finished up 10.5%.

The Japanese markets would be far happier about this if Standard & Poor's hadn't cut their long-term sovereign debt rating to AA-.S&P's reasoning is that "In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer." The yen dropped and credit default swaps widened on the news.

In further Asia-related news, Representatives Sander Levin, Tim Ryan and Tim Murphy are planning to reintroduce the Currency Reform for Fair Trade Act when the House returns in February. This act would allow the Commerce Department to treat undervalued currency[1] as a subsidy under US trade law. This would allow companies to seek higher duties against imports from the nation with the undervalued currency[2] if those imports compete with US production.

In addition, the China Securities Regulatory Commission has drafted a consultation paper outlining rules that will allow qualified foreign institutional investors to invest in the Chinese stock index futures market. The investments can only be used as a tool for hedging, not for arbitrage or speculation, and the QFIIs will not be allowed to issue derivative products on the stock index futures.

Turning to Europe, German CPI was released at 8:00 AM EST. For January 2011 the consensus expectation was to see CPI fall 0.4%, and it beat expectations by falling 0.5%.

[1] coughcoughyuancoughcough, at least as far as the authors of the bill are concerned.

[2] coughcoughChinacoughcough, at least as far as the authors of the bill are concerned.

ISM! Construction Spending! Dead Birds!

We have metrics on a Monday morning! Inconceivable![1] This is not a normal thing.

And what is it we're going to have? The Institute for Supply Management's manufacturing survey for December 2010 (expected to climb 60 bps to a level of 52.2) and Construction Spending (expected to be increasing, but with the rate of increase slipping to be up only 0.1%). The ISM survey is a huge market mover, because its seen as indicating the health of the manufacturing sector. Construction spending isn't as huge, although it is still examined. Rising construction spending is seen as an indicator of economic health and stability, but it doesn't point to the same sort of economic trickle-down that you would expect from - say - new home sales. Still, the Street will be disappointed if construction spending is unexpectedly bad. Particularly if the manufacturing survey misses expectations.

How did we actually do? The ISM Manufacturing Index came in at 57.0, missing expectations (but not badly). Construction spending handily beat expectations, coming in at 0.4% increase.

Looking to the news, China[2] has committed to continue to prop up Spanish soverign debt. "China is a responsible, long-term investor in the European financial market and particularly in Spain, and we have confidence in the Spanish financial market, which has meant the acquisition of its public debt, something which we will continue to do in the future," was the statement from Chinese Vice Premier Li kequiang.

Barron's has decided to join the "well, duh" club early with a news item predicting that, when the government begins selling off the $70 billion worth of AIG stock it owns, the price per share of AIG could drop. I'm sure everyone appreciates their insightful commentary.

Bank of America is back in the news, this time paying $1.28 billion to Freddie Mac as part of an agreement to end all claims related to mortgages sold by Countrywide[3], and also plans to record a Q4 "goodwill impairment charge" of $2 billion to its home loans unit. On the plus side for BofA, these particular bad loans weren't their fault. On the minus side, I'm not sure how much good will they have left to impair.

Look for the commercial real estate market to boom, based on the fact that the Association of Foreign Investors in Real Estate found that the United States is overwhelmingly the number 1 investment choice for overseas investors. That (probably) means climbing construction spending in 2011.

Oil is up above $92 a barrel, with some investors anticipating it will get as high as $100 per barrel. Coincidentally,[4] Russian Energy Ministry data showed that Russian oil output rose 2.2% in 2010 to a record 10.145 million barrels per day.

And finally, the city of Beebe, Arkansas rang in the New Year by watching about a thousand dead red-winged blackbirds drop out of the sky. Stone dead. For no reason anyone has been able to figure out, yet. Charles Fort would be proud.

[1] "You keep using that word. I do not think it means what you think it means."

[2] Still not wanting to replace the US as the sole economic and military superpower in the world.

{3] Specifically described as mortgages sold with faulty paperwork and other problems.

[4] I think not.

Wrapping up 2010

Well, that's it. From a trading perspective, 2010 is dust and ashes. So, how did the year do?

The Dow closed at 11,577.51, up 1029.00 (9.75%) from 12/31/2009. The NASDAQ closed at 2652.87, up 359.95 (15.7%) from 12/31/2009. The S&P 500 closed at 1257.67, up 131.07 (11.63%) from 12/31/2009. Meanwhile, the 10 Year Treasury Yield Index closed at 33.05, down 5.04 (-13.23%). We won't know until January 7th how unemployment ended up for December, but it was at 10% at the end of December 2009 and last month's figures don't give us much hope that things will be better for this year[1].

The Center for Economics and Business Research is predicting doom for 2011, though. they predict that Spain and Italy will have to refinance around 400 billion euros of bonds in Q2 2011, triggering a new sovereign debt crisis in the European Union. This will weaken the euro further, causing the stronger economies of the EU[2] to consider abandoning the currency. This, plus their considered opinion that the nations wit weaker economies[3] will fail to take any meaningful steps towards becoming competitive, will destroy the euro as we know it. "We give [the euro] only a one in five chance of surviving in its present form for 10 years. If the euro doesn't break up, this could be the year when it weakens substantially toward parity with the dollar."

North Korea is learning to "Bend it like Beckham". The North Korean version presumably involves kneecapping the opposing team's goalie the night before the big game, accusing the kneecapped goalie of having provoked the attack, and then swearing to wage sacred war on anyone who attempts to press charges. Also, only the actual members of the soccer team get to eat; everyone else is encouraged by the Glorious Coach to embrace the "Let's Eat Two Meals Per Day Campaign" while they hunt rats and consider cannibalism[4].

China's President Hu Jintao announced his nation's 12th Five-Year Program, which aims to adopt a "proactive" fiscal policy and a "prudent' monetary policy. They will continue the "one country, two systems" policy with regards to Hong Kong[5]. They still also do not desire to replace the United States as the world's sole economic and political superpower. Really. Just ask them.

And on that note, have a happy new year!

[1] Even if they look better, they may not be better. Remember, if you give up on finding a job, you don't count as unemployed anymore.

[2] *cough*Germany*cough**cough*

[3] *cough*PIIGS*cough**cough*

[4] That may have gone to a darker place than I intended...

[5] That is, they're still a repressive Communist dictatorship. But Hong Kong can continue to be a collection of capitalist running dogs just so long as they produce a lot of wealth for China as a whole and specifically for the Party officials.

China In The News (Again), New Vatican Bank Rules, And First Time Jobless Claims

Looking to the global picture first, China is in the news[1]. They've released their Purchasing Managers Index, which dropped from 55.3% in November to 54.4% in December. Even though that's still considered to be an expansion in the marketing sector[2], this does indicate that manufacturing growth is slowing.

In further Chinese news, Jiang Yu has reiterated China's position that they are fully entitled to regulate the mining and exporting of their own nation's rare earth resources. "In the future, China will continue to supply rare earths to the international market and will take effective management steps over their export in accordance with WTO rules." Translated, this says "It's our stuff. It's in our nation. You don't like it? Wah."

Spinning round the globe to Europe, Italy reported a 0.4% increase in the PPI for November (putting it up 60 bps, and at 4.1% for the rolling year). That's not great news for one of the PIIGS, since it's a pretty good indicator that CPI will be going up over the next month or so.

European share trading in general is down a little right now, mostly on declining energy stocks and concerns about the "euro zone debt crisis". Copper prices have hit a new high ($9550 per ton) on expectations of rising emerging nations demand, and US crude oil prices are still near a two-year high. The dollar, on the other hand, is dropping like a stone - everybody expects the Fed's quantitative easing program to churn out more US currency in 2011 - bringing it to a 20-year low against the Australian dollar, a seven-week low against the yen, and a six-month low against the yuan.

Also in European news, Pope Benedict XVI has signed off on new rules to bring the Vatican's banking regulations in line with EU banking regulations. Why? Because Rome prosecutors have put the director of the Vatican Bank[3] and his deputy under criminal investigation for possible money laundering, and have seized 23 million euros worth of Vatican deposits at an Italian commercial bank (which were allegedly deposited without proper identification of the depositor or the recipient). Also, they have until tomorrow to bring themselves into compliance with EU banking regulations[4].

Moving westward across the Atlantic, the United States is braced for the First Time Jobless Claims for the week of Christmas with baited breath. For the week ending 12/18, we had 420k claims. Analysts are expecting a mild Christmas miracle (possibly driven by a last-minute surge in seasonal employment) which will hopefully bring Christmas cheer and a drop in first time claims to "only" 415k. Looking at the report, we see that the actual claims were only 388k - far, far better than expected.

So why are the futures flat? A couple of reasons, really. Everyone is still waiting to see the Chicago PMI (analysts are expecting a mild contraction in the growth rate to 62%) and the Pending Home Sales Index (no consensus yet).

[1] Isn't it always, these days?

[2] Any result over 50% is considered to be a sign of an expanding sector.

[3] Officially known as the Institute for Works of Religion.

[4] The EU, applying the "if it walks like a duck and quacks like a duck" rule, is no longer accepting the Vatican's position that the Institute for Works of Religion is not technically a bank.

German CPI, Rare Earth Excitement, and Man v. Internet

There's just not a lot of market data due out today. Germany has reported its Consumer Price Index for the month of December, and the news is brutal. In November, consumer prices rose 0.1%. For December, they rose 90 bps to 1.0%. But the German economy can take comfort in the fact that the entire jump was driven by the almost irrelevant forces of home energy, motor fuel, and food. If you strip all of that out and look solely at core CPI, prices haven't changed at all![1]

The Swiss KoF Leading Indicators[2] dropped 2 bps to a 2.10%; not great news, but it still points to a reasonable amount of growth in the Swiss economy.

Everybody in the world that is not China[3] is now complaining about China's move yesterday to cut exports of rare earth minerals. The US Trade Representative's office is "very concerned" about the quota reductions. The EU is demanding that China "respect its recent assurance of a guarantee of rare earth supplies to Europe". On the other hand, everyone in the world that isn't China that has the ability to mine these rare earth minerals is ecstatic. Demand for these rare earths is set to increase by more than 125% in the next 5 years, so that's money in the bank for anyone that can supply them.

Speaking of money in the bank, Paul Allen[4] is suing the entire internet for patent infringement. His suit claims that Interval Research holds patents on how data is related to information being browsed, the way information is relayed to a computer screen in an unobtrusive manner, and the way web browsers are alerted to new items of interest based on the activity of other users. AOL, Apple, eBay, Facebook, Google, Netflix, Office Depot, OfficeMax, Staples, Yahoo! and YouTube are the major companies named in the suit, which asks for damages and a ban on products that use the disputed patents[5].

Apple is also getting sued, in what the law firm bringing the suit hopes will become a class action lawsuit, over privacy issues. It is alleged that Apple apps "leak" personally identifiable data, despite Apple's policy that only allows data sharing if an app requires the information to keep running. Google may also face a similar lawsuit.

The SEC is also getting involved in the internet, by looking into trading in privately-held internet companies (such as Facebook and Twitter). It appears that there are some online trading services that allow trading of unlisted Internet firms, and the SEC would like some information about how the shares are being valued, and whether or not this trading violates SEC rules[6]. So far, the probe is in the early stages.

[1] Yay?

[2] A composite of business surveys from the industrial, retail, and wholesale sectors, used to try to project GDP growth about 8 months into the future.

[3] Still not wanting to replace the US as the world's sole economic and military superpower.

[4] Co-founder of Microsoft and founder of Interval Research Corporation, a company you probably have not heard of.

[5] This would include Google's search engine, iTunes, AOL Instant Messenger, Apple's Dashboard, Google Talk, Google's Gmail Notifier, and Google's Android phone system, just to name a few things.

[6] Specifically, private companies must either have fewer than 500 shareholders or else publically disclose significant financial information.

What Happened In The Market?

We had bad Case-Shiller and bad Consumer Confidence figures, and the markets still ended on the up side of mixed (Dow up 20.51, NASDAQ down 4.39, S&P 500 up 0.07). What happened?

Reuters, at least, gives the credit indirectly to the blizzard and directly to energy stocks being boosted by an increase in oil prices. Why the blizzard? It helped push oil prices near to a 26-month high (February oil futures were up $0.38 to $91.38 a barrel), and the rising oil prices helped push oil producers up in the markets.

I haven't seen the figures yet, but it wouldn't surprise me to see that commodities in general were either flat or down today - China announced that it will cut its export quotas for rare earth minerals[1] by 11.4%. This is a concern, because these elements are used in quite a bit of high-tech manufacturing[2], and because China produces something like 97% of these minerals. The EU, the United States, and Japan are particularly upset, and there is some possibility that the US will file a complaint with the World Trade Organization.

The Singapore Exchange is in the process of trying to take over the Australian Exchange to the tune of $8 billion US dollars. This is somewhat controversial in Australia, because their major exchange would become a subsidiary of the Singapore Exchange, and the government of Singapore owns 23.5% of the Singapore Exchange. As of December 15 the deal had been approved by the Australian Competition and Consumer Commission. Now it just has to be approved by the Treasurer of Australia, pass through the Australian Parliament[3], and then be approved by the Monetary Authority of Singapore. Investors are cautious.

[1] There's reasonable list available on Wikipedia.

[2] Wind turbines, hybrid cars, iPhones, flat screen TVs, and anything else that has a use for magnetism, luminescence, and strength.

[3] Which seems to be of the opinion that the merger is "fanatical marketism that is taking away our sovereign right to self determination"

Trading In A Winter Wonderland. Sorta. More Or Less.

Stock performance on Wall Street was mixed today (the Dow was down 18.46, the NASDAQ was up 1.67, the S&P 500 up 0.77, and the 10 Year Treasury Yield Index down 0.42), with blame being placed squarely on God and China.

God gets the blame because of a series of blizzards that have brought the Fimbulvetr[1] to the eastern coast of Canada and the United States. It's cancelled over 2000 flights, disrupted road and rail traffic, left tens of thousands of homes across the eastern seaboard without power, and - worst of all - threw a monkey wrench in the post-Christmas holiday sales. Yes, that's right. This massive blizzard could "push December 26 out of the running for one of the top 10 shopping days of the year." Sure puts that whole blizzard in perspective, doesn't it?

And China[2]? Well, they get the blame because - in what is obviously a Communist plot[3] - went and raised their benchmark lending rate and their benchmark deposit rate by 25 basis points each. Never mind that the Chinese central bank has been concerned about inflation, and so is taking steps to reign it in and keep their economy healthy. No, this was obviously a Communist plot deliberately timed to strike our economy at the same time as the blizzard[4].

Of course, things happened throughout the world without regard to the blizzard. Let's see what else is going on.

H&R Block was down 7% today on news that, thanks to the Office of the Comptroller of the Currency, they will not be allowed to offer tax refund anticipation loans. (Well, specifically, HSSBC can't offer them, and H&R Block uses HSBC.)

18 alleged militants were killed by missiles fired by US drones at the Mir Ali village in Pakistan. The people of Pakistan are not particularly amused.

Anyone remember AIG? Practically the poster child for the 2008 financial collapse? Something like 30 banks have banded together under the administration of JPMorgan Chase & Co to loan them $4.3 billion. That's "billion". With a "b". Assuming they can pay off their Federal Reserve Bank of New York credit line ($20 billion) by March 31.

Also, according to the European Union Times, it appears that WikiLeaks is set to reveal that the United States has been in a covert war against Antarctican UFOs since 2004.

[1] "Hard is it on earth, with mighty whoredom;

"Axe-time, sword-time, shields are sundered,

"Wind-time, wolf-time, ere the world falls,

"Nor ever shall men each other spare" sure seems to describe the current state of the economy.

[2] Still not wanting to replace the United States as the single dominant economic and military superpower in the world.

[3] Obviously.

[4]

Lucky Chinese PIIGS, Sacred (Crazy) War, And World Stocks

Anyone remember this quote from Monday? "Despite concerns from Friday, North Korea has not felt "any need to retaliate against every despicable provocation", and did not end up reigniting the shooting part of the as-yet unresolved Korean Conflict." Well, it's been three days and Pyongyang has apparently decided to change their minds on the subject. Now, Kim Yong-chun (the North Korean Minister of Armed Forces) is on record as saying that "to counter the enemy's intentional drive to push the situation to the brink of war, our revolutionary forces are making preparations to begin a sacred war at any moment necessary based on nuclear deterrent."[1]

China, which must be getting increasingly tired of North Korea[2], confirmed yesterday's report that it stands ready to bail out the PIIGS. Or, in the words of Foreign Ministry spokeswoman Jiang Yu from yesterday's press conference, "China-EU economic and trade cooperation is featured by mutual benefit, win-win outcome and sound development momentum. The two sides agree that in the context of slow recovery of the world economy and existence of many uncertainties and unstable factors, the two should strengthen cooperation for stable and healthy development of the two economies as well as strong, sustainable and balanced growth of the world economy."

And finally, in the (hopefully) good news category, the MSCI world equity index hit its highest level since September 2008 and is up nearly 10% just in 2010.

[1] Security analysts are pretty sure they don't actually have any way to launch the "nuclear deterrent".

[2] And which still doesn't want to replace the United States as the world's sole military and economic superpower. Really. Trust them.

A Day Full Of GDP Is Like A Day Full Of Sunshine

And today? Today has plenty of sunshine.

Great Britain reported it's final Q3 2010 GDP results about 4 hours ago. The first revision had put them at 0.8% growth for the quarter (with 2.8% growth from Q3 2009 to Q3 2010). Going into the day, analysts were expecting no change to the final revision. The final results, while not bad, did not quite live up to that expectation. Growth for the quarter was revised down to 0.7%, while year over year growth was revised downward to 2.7%. Mildly disappointing, but not (on its own, anyway) a source of soul-crushing despair.

US GDP is up next. The first revision put us at 2.5% growth for Q3 2010, with the price index[1] up 2.3%. The Street is feeling quite optimistic this morning, and is looking for the final revision to put us at 3.0% growth for Q3 with no change to the price index. Our results are slightly sunnier than Great Britain's, with the final revision of Q3 GDP revised upwards 2.6% and the price index revised downwards to 2.1%. Most of the GDP increase is credited to a "sharp deceleration in imports and an acceleration in private inventory investment".

The funny thing here? These results seem to have pushed the futures down. Go figure.

The next big domestic economic measure due out today is existing home sales for November 2010. If you recall, October's sales were a depressing 4.43 million units (down 2.2% from September's 4.53 million units and missing expectations). Expectations are a little tamer (but still optimistic), with a consensus estimate for 4.75 million sales. The actual numbers aren't due out until 10 AM EST, though, so we have no idea (yet) how realistic that is.

In the news, South Korea is continuing their largest peacetime military exercise ever. Mostly as a way of making President Lee Myung-bak look tough after what was commonly perceived as a "weak"[2] response to the shelling of Yeonpyeong Island. There has been no specific response to this from North Korea, to the shock of everyone and the disappointment of connoisseurs of fine crazy.

There was a three hour strike in Greece against the 2011 austerity measures about to be implemented by their parliament. So far, the strikers have managed not to murder anyone.

Speaking of the PIIGS, China[3] is coming to their rescue. They have struck a deal with Portugal to buy 4-5 billion euros of Portuguese sovereign debt. At least, that's what has been reported in the Jornal de Negocios. The euro is up in ecstatic jubilation on the news.

Closer to home, the Financial Report of the United States is out (you can choose to read either the 12 page Citizen's Guide or the 268 page full report), and it shows that the budget deficit has increased by 65.9% from FY 2009 to FY 2010 (in 2009 it was "only" a $1,253.7 billion deficit for the year, while in 2010 the deficit has increased to $2,080.3 billion).

And, wrapping up the GDP day, New Zealand's GDP is due out at 4:45 PM EST.

[1] Yet another measure of inflation.

[2] "Weak", because the word "sissy" rarely makes its way into Reuters. Although that's pretty much how the South Korean people looked at his response.

[3] Still not wanting to replace the United States as the sole superpower of the world - just ask them - and still tired of being treated like they're solely responsible for holding North Korea's leash.

Forecast Is for "Bad Craziness"

That's right. We're having one of those news days that cries out for the mad prose stylings of Hunter S. Thompson himself.

Unfortunately, you'll have to settle for me.

So let's get this party started right by inviting in the Crown Prince of Crazy himself, the Dear Leader Kim Jong Il and the People's Glorious Revolutionary Atomic Mushroom Brigade! South Korea has announced that they will be conducting a live fire artillery drill on Yeonpyeong Island from December 18-21. The response from North Korea Crazy? A neopolitan ice cream of insanity, offering three distinct flavors for the price of one. They are now accusing the south of attempting to "kick up hysteria of war of aggression against the DPRK"[1], they have put forward the claim that the reason the south is doing this is to undermine "the progress made in the June 15 era of reunification" and to derail "the dialogue and cooperation between the north and the south", and they are warning[2] that the live-fire exercise "will play out a more serious situation than on November 23 in terms of the strength and scope of the strike"[3].

There is some speculation that all of this is just a way to improve the north's position when negotiations begin again. Rather like the way a small child attempts to improve his position regarding the acquisition of a toy by pitching a tantrum. Only with high explosives. And death.

China, which is no doubt banging its collective head on its collective desk over the antics of its crazy eastern neighbor, has hit a 28-month high for consumer inflation. It's up 5.1% from November 2009 (mostly on food prices), about 210 bps higher than the 3% target they had for 2010 and 110 bps higher than their 2011 goal. This, of course, is considered an omen of rising reserve requirements and interest rates[4].

Spinning the globe around to Europe, Moody's has cut Ireland's credit rating from Aa2 to Baa1, putting them on the same level as Russia and Lithuania. That's still investment grade, but you almost have to throw the air quotes when you say that. Meanwhile, on day two of the EU summit to create a permanent financial safety net for the euro zone, leaders refused temporary steps such as increasing the size of the EU bailout fund or using the bailout fund to buy bonds. European traders pouted and demanded that the summit offer more short term guarantees, and possibly milk and cookies before bed.

On the positive side for Europe - or, at, for the two-time would be rulers of Europe - the Ifo Business Climate Germany is out. The business climate index, the business situation index, and the business expectations index are all showing an across-the-board 60 bps improvement. So, overall, businesses are doing well and expecting to continue to do well in Germany.

Closer to home, the House passed the tax "compromise" on a 277-148 vote. The IMF Managing Director is pleased, although I'm not certain why Reuters felt the need to bring his opinion into the article[5]. In possibly unrelated news, Senate Democrats also threw in the towel on passing a budget, and agreed to a temporary funding measure.

So that's some of what's driving the markets around. Fear and madness and bad craziness. And four witches.

[1] No, really. That's the official English translation.

[2] "Warning" as the word is defined in North Korea, means "kicking someone in the teeth out of nowhere, and then threatening them with a switchblade if they try to punch back".

[3] For good measure, they also threw a diplomatic bone to the US: "The state of armistice is persisting on the Korean Peninsula and danger of war is not defused there because of the U.S. hostile policy toward the DPRL and its wild ambition for aggression."

[4] And you don't even need to visit Delphi on the seventh of the month for that one.

[5] Although the CIA World Factbook confirms that our public debt as a percentage of GDP is actually 30 bps higher than Spain's, so maybe we should be courting the IMF's good graces now...

The Market's Up. Why?

There's green in them thar hills. The three major indices are, at the moment, up. Why should this be?

First off, there's the good news about our narrowing trade deficit in October. Domestic traders love that sort of thing[1]. But on top of that, China announced that it saw a 16% decrease in it's November trade surplus (down to $22.9 billion).as their imports jumped 37.7%. Domestic traders also love that sort of thing[2], because it means we can sell more of our stuff to them. And because it could point another trade deficit improvement in November.

Speaking of China, they have increased their reserve requirements again. For the third time. In the past month. The 50 basis point increase takes effect on December 20, and brings the requirement to 16.5%.[3]. Even more interesting, analysts that follow China are expecting to see that requirement continue to go up - possibly as high as 23%. The end result of this is to reduce China's money supply, which could be a signal that Chinese interest rates won't be going up.

Beyond that? Well, the tax cut "compromise" deal still looks dead in the water. The Senate will vote on it on Monday but, with Capitol Hill Democrats chanting "Just say no!" in closed-door meetings intended to rally the troops, that vote looks like a failure waiting to happen. President Obama remains confident that it will pass, because he feels that nobody on either side of the isle wants to look responsible for making "people's paychecks smaller on January 1st because Congress didn't act."

And finally, we have Consumer Sentiment. November came in nicely improved at 71.6%, and analysts are looking for a further (mild) increase to 72.0%. The actual results indicate a 74.2%, which is almost breathtakingly better than expected. The official press release is not out yet, but can be read here when it is.

[1] Unless they've bet hard against the US economy and invested heavily in the EU and the BRIC. But we care nothing for those unpatriotic fools! Nothing!

[2] See [1] above.

[3] In other words, if a Chinese bank wants to loan out 100,000 yuan it must have 16,500 yuan in cash on hand. For comparison the United States has a reserve requirement of 0% on loans under $10.7 million, 3% on loans from $10.7 to $58.8 million, and 10% on loans over $58.8 million.

Jobless Claims! Also, News!

Last week, we had some depressingly bad results for first time jobless claims - 425,000 were anticipated, and we actually had 436,000. Well, it's new jobless claims day again, and the Street is going for optimism. The consensus is that for the week ending 12/4, we will only see 425,000 new claims.

While we wait for the results, let's check the news.

Futures are up, partly on optimism about the jobless claims expectations and partly on general excitement that 2010 is almost over. No, that doesn't (just) mean that traders are looking to the future and wishing away the last few months of lackluster performance. No, it's also driven by the fact that with only 16 trading days left in the year, underperforming fund managers will be under pressure to snap up stocks with solid fundamentals and good performance. When (if) this happens, the sudden spike in demand will lift market prices.

Debate on the Bush income tax "compromise" deal should hit the Senate by Friday. Senate Majority Leader Harry Reid thinks it's pretty much a done deal, and Republicans believe that the Democrats should "...get together and look at the overall bill and realize this is the presentation on the table." In preliminary statements, the rank and file Democrats do not seem impressed. If it passes, look for the equity markets to have a little party (yay! lower taxes!) and the bond markets to sell off more Treasuries (aiee! increasing Federal debt!).

Looking to Europe, the Bank of England (in a move that surprised no one) voted to keep in place the 0.5% interest rate and 200 billion pounds of quantitative easing they've had in place since February. The response from the European markets was to shrug, watch Fitch Rating downgrade Ireland's sovereign debt (BBB+, down from A+), and then go ahead and hit a 26-month high on optimism about the US economy.

China and North Korea reached a consensus on North Korea Crazy's Yeongpyeong Island Tour. What was that consensus? That they "agree on the need to resolve the situation." The world can now breathe a sigh of relief.

Now, back to the first time jobless claims results. On the up side, the week ending 12/4 saw only 421,000 new claims - better than expected and better than the previous week. On the down side, the prior week figures were revised upwards to 438,000 new claims - which is not so good.

The Future's Are So Meh, You Don't Gotta Wear Shades

Right now, the domestic markets are still being driven by the news about the tax "compromise" from Monday. The news has helped drive Treasury prices down by 2%, pushing up yields. Why? Because this, combined with everyone's reaction to "Big" Ben Bernanke's comments on 60 Minutes, has bond traders worried about a long-term rise in the national debt.

Amusingly enough, the international markets are taking the improving yields as a good sign. According to Adam Cole[1], "the market is taking the rise in US yields as a positive for the dollar rather than a supply story. There are rising expectations for growth." As a result, the dollar is up against the euro and against gold.

China, which does not want to dominate the world thank you very much[2], does not agree. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," said Li Daokui[3]. "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, US Treasury bonds and the dollar will experience considerable declines."

Oh, apropos of nothing else, brace yourself for problems with your credit cards. Anonymous has declared war on MasterCard for blocking donations to WikiLeaks[4].

[1] The Global Head of Foreign Exchange Strategy for RBC Capital markets.
[2] "The international community should welcome and not fear China's peaceful development; help it and not hinder it; support it and not hold it back," says State Councilor Dai Bingguo. It doesn't have quite the same ring as "We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile" or "all your base are belong to us", but it does carry a quiet air of understated menace.
[3] Director of the Center for China in the World Economy at Tsinghua University, and one of the academic members of the PBOC Monetary Policy Committee.
[4] A link that is probably not work safe, no matter where you are, now that Homeland Security is pushing to declare WikiLeaks a "terrorist website".

The Futures Are Up!

And what are they up on? The tax cut compromise, that's what they're up on!

"What compromise?" you ask. Well, let me tell you...

At 6:32 PM last night, President Obama announced the details of the compromise between the Democrats and the Republicans on the subject of whether or not the Bush tax cuts will expire. As a reminder, the Democrats wanted to extend the tax cuts for anyone making less than $200,000 (about 96.9% of the populace, according to my calculations from IRS figures[1]) while the Republicans wanted to extend the tax cuts for everyone (about 100% of the populace, according to IRS figures).

How did the compromise work out? In the words of the President, "we have arrived at a framework for a bipartisan agreement. For the next two years, every American family will keep their tax cuts -- not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills.... Now, under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season."

In other words, the compromise boils down to "the Republicans get everything they want, and the Democrats give it to them." An interesting definition of compromise, don't you think?

But surely that's not it? What else is driving futures?

Well, Reuters is reporting that China's central bank is getting ready to tighten the yuan by raising interest rates. Their CPI has hit a 27-month record high of 4.7% and this, combined with fears driven by US market concerns about the Fed possibly buying more than $600 billion in Treasuries, has China concerned about inflation. Rising interest rates are the universally-accepted cure for inflation, so get ready. Asian markets were down initially on the news, but recovered somewhat (mostly because the markets have already priced in more tightening).

And, of course, there's the Treasury announcing an underwritten public offering of it's remaining 2.4 billion shares of Citigroup common stock, at $4.35 per share. Once these are sold, that will eliminate the Treasury's full position of Citigroup common stock, although it will continue to hold warrants for more common stock as well as $800 million in TruPS[2].

[1] The President puts it at 98% in his speech, but what's 1.1% between friends?
[2] TruPS? Investopedia (http://www.investopedia.com/terms/t/trustpreferredsecurity.asp) defines them as "trust preferred securities), securities similar to debentures and preferreds that are generally longer term, have early redemption features, make quarterly fixed interest payments, and mature at face value. They also maintain the appearance of equities in a company's accounting statements, which sounds to me like an accounting trick to make the company look like it has less liabilities than it really does, but it is in accordance with GAAP. So it's legal.

Statement by the President on Tax Cuts and Unemployment Benefits (http://www.whitehouse.gov/the-press-office/2010/12/06/statement-president-tax-cuts-and-unemployment-benefits)
China rate rise talk builds as loans and inflation rise (http://www.reuters.com/article/idUSTRE6B60XG20101207)
Treasury Announces Public Offering of Citigroup Common Stock (http://www.treasury.gov/press-center/press-releases/Pages/TG994.aspx)

Your Word For The Day: Grotty

First off, the euro is up and PIIGS bond yields are down on rumors. The rumors start with a report from "G20 sources" that deputy finance ministers from the G20 nations had discussed the terrible European situation in a conference call on Monday. This, combined with the US Treasury announcing it would send someone to Europe to discuss the EU's pending economic collapse with governments in Berlin, Madrid and Paris[1], has naturally (obviously) led to the conclusion that the European Central Bank will calm the situation by massively increasing their purchases of European sovereign debt.

Jim Cramer, in his lucid days, said that "tips are for waiters". Keep that in mind, until the ECB actually says it will do something.

The European rumors and good factory data out of China (specifically, their Purchasing Managers' Index hit a 7-month high of 55.2) seem to be driving the futures up. There are a few bits of domestic news that could hinder the joyous rumor-driven market frenzy, however.

First off, the Fed is going to have to release details about the emergency loans they handed out during the 2007-2009 market collapse. You remember those, right? The massive bailouts of AIG, and Goldman Sachs, and Morgan Stanley, and Merrill Lynch, and Lehman Brothers...

Oh, wait. That's right. They didn't bail out Lehman Bros. The people who are really excited about the release of the data are curious to see why they didn't get bailed out. Also, most analysts are expecting the data to be disclosed in a less-than-helpful fashion. Or, as Christopher Whalen (managing director at Institutional Risk Analytics) puts it: "My sense is they're going to give us the disclosure in the same grotty fashion (as before). It's not going to be well organized so you'll have to sort through it."[2]

Imagine that. The Fed might not want people to figure out what they're doing. Shocking. Shocking, I say.

Second, Challenger, Gray & Christmas, Inc. has released a report that employers announced 48,711 job cuts in November, up 28% from the 37,986 job cuts in October. In what passes for good news, this is still down 3.3% from the job cuts announced a year ago in November. But hey, they're being offset by plans to add 15,900 seasonal employees in the retail sector and 500 in the transportation sector last month. {3]

[1] Because the US is obviously in a position to explain to other nations how to bring their economic problems under control, and to explain how to implement austerity measures.
[2] Grotty. Adjective. seedy, wretched, dirty
[3] Because temporary seasonal jobs obviously offset the loss of full time permanent jobs. Obviously.

Articles cited:
ECB talk lifts battered euro as crisis worries spread (http://www.reuters.com/article/idUSLDE6AO0HG20101201)
Futures rally on euro bounce, strong Chinese data (http://www.reuters.com/article/idUSTRE69O1D320101201)
Time for Fed to show who crisis loaned benefited (http://www.reuters.com/article/idUSTRE6B014S20101201)
48,711 November Job Cuts UP 28% From October (http://www.challengergray.com/press/PressRelease.aspx?PressUid=151)
Short on votes, deficit panel delays decision (http://www.reuters.com/article/idUSTRE6AS4Z120101201)

China Punches Back

In a move pretty much guaranteed to catch the attention of the currency markets and upset the American financial system, Russia and China have agreed to forgo using the US dollar as the currency of trade between the two nations. Instead, they will begin using their own currencies for trade settlement. The yuan has already begun trading against the Russian rouble in the Chinese interbank markets, and Russia will soon allow the renminbi to trade against the rouble in its own markets.

Big news? Yes. The US dollar is a world currency. 40% to 60% of all international transactions are denominated in US dollars.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Perhaps. But whether it was intended as a challenge,whether or not the move was intended as the latest gambit in the bickering between Beijing and Washington over Chinese control over the yuan, the US will still see it that way. Particularly since the timing is so interesting.

What's Happening Today? And Why Does Big Ben Hate China?

In terms of market-moving metrics, nothing. Of course, that doesn't mean that nothing's happening. If nothing else it's Expiration Friday, with everything that entails for the market.

Apparently the financial world is flipping out over China's decision to increase the reserve requirements for it's banks by 50 bps (that'll be 18% for their largest banks), effective 11/29. Why are they doing it? To suck excess cash out of the economy and try to reduce inflation. Bloomberg's got more details at http://www.bloomberg.com/news/2010-11-19/china-tells-banks-to-set-aside-larger-reserves-to-drain-cash-from-economy.html, if you want to see what's going on.

Also, Ben Bernanke spoke at the Sixth European Central Bank Central Banking Conference (redundant alliteration!) last night. The text of the speech can be found on the Fed's web page at http://www.federalreserve.gov/newsevents/speech/bernanke20101119b.htm, and the topic was "Emerging from the Crisis: Where Do We Stand?". In summary, he reviews what the European Central Banks and the Federal Reserve did over the past few years to try and prevent the end of Western Civilization as we know it, and then discusses what he sees as the lessons of the last two years:
* "Central banks and other financial regulators must be vigilant in monitoring financial markets and institutions for threats to systemic stability and diligent in taking steps to address such threats."
* "As the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses."
* "...in addressing financial crises, international cooperation can be very helpful; indeed, given the global integration of financial markets, such cooperation is essential."

That was one of his speeches. The other, "Rebalancing the Global Recovery" (http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm), is the one that's been making the news for being an implicit slap against Chinese monetary policy. In it, he laments the apparent loss of common purpose (avoiding a global economic catastrophe) now that the worst of it is past, and he calls on policymakers around the world to "work together to achieve a mutually beneficial outcome - namely, a robust global economic expansion that is balanced, sustainable, and less prone to crises."

The implicit punch at China comes from several statements he makes about how "currency undervaluation by surplus countries ...inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals." His solution? "In the longer term, significantly greater flexibility in exchange rates to reflect market forces would be desirable and achievable. That flexibility would help facilitate global rebalancing and reduce the problems of policy spillovers that emerging market economies are confronting today."

In other words, if I understand his point correctly, "China needs to stop controlling its currency. It's not fair, and I'm going to sulk now."

He also advocates for the creation of an "international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole." Because, yeah. The euro consistently aligned the interests of Greece with the interests of the European Union as a whole.