DOW + 60 = 12,482
SPX + 4 = 1293
NAS +17 = 2728
10YR YLD un=1.85%
OIL + 2.30 = 101.00
GOLD + 8.80 = 1652.60
SILV + .09 = 30.06
PLAT + 26.00 = 1527.00
On Friday, after the close of business in the stock market, S&P downgraded 9 European countries. Spain and Italy were both taken down 2 notches, leaving Italy with a BBB+ rating and Spain with an A.
But the headline damage was done to France, whose triple-A rating got downgraded to AA+. France had been rated AAA for 36 years.
The French bid adieu to their triple-A status…said they didn’t care about it, expected it, and didn’t need it anyway. But it was a blow. France, with Germany, was one of the strong, big economies at the center of Europe. It was one of the economies the others were depending on to bail them out.
Over the weekend, The Wall Street Journal warned that markets needed to “brace for European fallout,” this morning. And then to put an exclamation point on the matter, this morning Standard & Poor’s downgraded the creditworthiness of the eurozone’s rescue fund, putting the fund’s ability to raise cheap bailout money at risk. The EFSF, the European Fubar Slush Fund was cut by one notch to AA+.
Quite the Tempest in Europe:
“Some kinds of baseness Are nobly undergone, and most poor matters Point to rich ends.”
Spain had a Treasury bill auction today and it went quite well. They sold twice the amount targeted and yields fell, meaning prices moved higher. Yes, this is the same Spain that saw its credit rating cut 2 notches on Friday. Who would be crazy enough to pay a premium for a credit downgrade? Banks that are afloat only because of an injection of European Central Bank funds. This is an indication that the ECB is serious about propping up the market for sovereign debt.
Ever since France lost its AAA-rating… The spread between German and French 10-year debt has only shrunk. Last week it was around 130 basis points; today, less than 120. If the market seems rigged that’s just because it is.
Meanwhile, Greece resumed talks with its international debt inspectors trying to avoid a default. The debt inspectors are looking for more ways to cut spending and raise revenue; in other words, they are trying to get blood out of a turnip. While they go through Greece’s books, the government in Athens is also locked in a battle to convince banks and other private bondholders to forgive half of the Greek debt they hold — an essential part of the second rescue package. Ideally, a final outline of the debt deal should be reached by the end of this week, with a formal public offer at the beginning of February.
What would happen if Greece defaults? Some people predict a global meltdown. Portugal was just cut to junk status and their bond yields jumped about 15%. So, if Greece falls, Portugal will probably fall. But a global financial meltdown? Probably not. We have the example of Iceland. Remember 3 years ago, Iceland defaulted. Its banks failed. Its currency collapsed. Iceland embraced the default – sort of – they allowed their banks to fail; they told foreign creditors to swallow the losses. They allowed their currency to remain weak, and that resulted in a nasty bout of inflation but it also made exports more attractive and made Iceland affordable for tourists. Three years later, the unemployment rate has fallen. Tourism has increased. The economy is growing. The government successfully raised money from investors in the summer for the first time since the crisis.
Iceland made sharp budget cuts but the kept a fairly generous social safety net. They put in place new taxes on the banking system and on wealthy individuals.
Of course Iceland is not Greece, and it is not the European Union. Still, I think it’s a safe bet that quite a few Greeks are looking at the recommendations of the debt inspectors and comparing that to the Icelandic Solution.
Why does this matter to you? Well, Europe is a big trading partner with the US and we are starting to see the negative impact on US exports. The most recent trade report showed exports to Eurozone countries declined 6.9% in November. Exports make up a relatively small part of the US GDP. The more significant impact might be on US credit conditions, and credit stress; lending to European banks has certainly tightened but so far there has not been signs of significant tightening in the US.
Wall Street has started its quarterly version of Great Expectations; earnings reporting season. The idea is to soundly beat diminished expectations.
According to Standard & Poor’s, analysts have raised projections for 366 companies while lowering those associated with another 534 companies. In other words, lowered expectations out number rising expectations by almost 2:1. All ten S&P sectors have had more negative revisions than positive.
That’s in stark contrast to two years ago when analysts were positive at the onset of 2010 for roughly 80% of the market with the exception of healthcare and utilities – which, of course, turned out to be the best performing sectors in 2011.
This doesn’t always happen, but it’s well documented that Wall Street often says one thing and does another. You’d think at this stage of the game things would be different, but they’re not.
Wells Fargo reported a profit of $4.11 billion, or 73 cents a share, up from 61 cents a share a year earlier. Remarkably, the results topped estimates by one cent.
Citigroup hasn’t quite figured out how to manage analysts’ estimates. Citi’s fourth-quarter net income totaled $1.2 billion, or 38 cents a share, down 7.7% from a year ago. Revenue fell 6.5% from a year earlier, to $17.2 billion.
Last week, JPMorgan Chase missed analysts’ estimates, but it wasn’t as ugly as Citi.
Morgan Stanley, Goldman Sachs and Bank of America report later this week.
Morgan Stanley plans to tell employees this week that bonuses will drop sharply, with cash payouts capped at $125,000.
For the first time Goldman Sachs has been forced to disclose, under EU rules, how it pays so-called “code staff” – those who are judged to be responsible for taking or managing risks – in its UK-based operations. Regulatory filings for Goldman Sachs Group Holdings (UK) show that it had 95 code staff in 2010 who shared $269 million in cash (including salaries) and were handed 2m restricted stock units, worth $320 million. At these prices … this suggests an average pay deal of $6.2 million for each of the 95, none of whom is identified by name.
Apparently managing risks is where you want to be. I’ve heard a lot of talk about risk lately. All the politicians are talking about it. Apparently we really need someone who understands how risk, how taking risk is the way we create jobs, create choices, expand freedom. Apparently the whole economy is about risk. If you don’t take risk, you can’t succeed. I’m not sure what kind of risks the Goldman Sachs guys were taking to earn their $6.2 million. It seems the higher you go in the economy, the easier it is to make money without any personal financial risk at all.
Wall Street is a risk vacuum. The bankers don’t risk their own money. Bankers risk OPM, Other Peoples’ Money. If they lose the principal, the bankers still collect their fees, and their bonuses, and the big banks are too big to fail, so the real risk falls back on the taxpayers.
For the CEOs of big corporations, there is no personal risk. They have guarantees; they have golden parachutes; they have walk-away packages that sometimes run into the hundreds of millions – and it’s not based on performance or merit. One of the most egregious examples is Tom Freston, former CEO of Viacomm. He got fired after 9 months on the job. His walk-away package was for $101 million. Where’s the risk?
Remember Conseco? Stephen Hilbert was the CEO who drove that company into bankruptcy, and for his efforts he collected on a golden parachute of $72 million. There’s a long list of well-paid failures. Where’s the risk?
Well the risk has been transferred to the low end of the economy. When a company fails, its’ the workers that lose their jobs. More than 20% of the American workforce is now marginally employed, temp workers, or contingent workers – with no security. And the golden parachute for workers? Well, almost every pension in America is underfunded or non-existent. Pensions? Maybe you’ve heard of them. It’s an archaic term to describe a fixed payment to workers upon retirement. At one time, 30 years ago, 80% of medium to large businesses offered defined benefit pension plans to their workers.
And if you really want to talk about risk, talk about the small business owner; the men and women who bet the house and the credit cards to get a dream launched, many times without health care coverage to start. And if they get audited by the IRS, they don’t have an army of Accountants. And if they get sued by someone, they don’t have an army of Attorneys. And the small business owner only gets paid after the employees and the landlord and the taxman get paid.
Lee Trevino, the famous golfer was once asked if he felt the pressure of standing over a putt that could win a tournament and knowing the putt was the difference of hundreds of thousands of dollars. Trevino said he didn’t feel any pressure making those kinds of putts. Trevino, grew up in west Texas and in his very early career he made a living by gambling on his golf game. He would hustle golfers for a few bucks. Trevino said pressure was when he was playing golf in El Paso, and he was standing over a putt that was worth $50 dollars, and he only had $5 dollars in his pocket. That’s risk.
To the extent free enterprise is on trial, the real question is whether the system is rigged in favor of those at the top who get rewarded no matter how badly they screw up, while the rest of us get screwed no matter how hard we work.
Wikipedia, the online encyclopedia, will close down at midnight ET and will remain closed tomorrow. The protest is to express opposition to two bills headed for Congress: SOPA, The Stop Online Piracy Act, and PIPA, the Protect IP Act. Google and Reddit are also staging virtual protests. This is shaping up as a battle between Hollywood and Silicon Valley, and it looks like Hollywood is starting to back down. Provisions of the legislation have been watered down slightly. SOPA is not dead, yet, but it’s dying.
The Consumer Electronics Show in Las Vegas has wrapped up. What is the newest and greatest in the world of consumer electronics? Ultrabooks; really small laptop computers that you can carry around like a tablet but offer the computing power of a laptop, and turn on in about 10 seconds – no more waiting around for your laptop to boot up.
Smart TVs; while this may sound like an oxymoron, Smart TV refers to the ability to surf the internet, video conference, and control your TV with voice commands – and the flat screens get flatter and the picture gets better. So, the idea is to put something like the SIRI voice recognition on our TVs – and this may be another legacy of Steve Jobs, we’ll all be talking to our televisions – and finally our TVs will listen.
All these super-light laptops, and flat screen TVs need a new material, and it is called Gorilla Glass, made by Corning; it’s really thin, lightweight and it doesn’t break.