Acropolis Now
Greece's two-year note is now at a record yield at over 22%.
Loan Demand Is Comatose
U.S Bancorp CEO Richard Davis referred to loan demand as 'fragile.'
In yesterday's U.S. Bancorp (USB) earnings conference call, Richard Davis, the company's chairman, stated the following in response to questions on loan demand:
[Loan demand] is still measured, slow and slightly positive, but there is nothing remarkable about it. I think we have seen the economy slow a bit in the second half of the first quarter [since] we last had a question in a public forum to talk to all of you. Things are actually not quite as positive as we thought they would be at the middle of the quarter.... And I do think it is fragile."
Whether you agree or disagree, run, don't walk, to read Dr. John Hussman's most recent missive, "Anatomy of a Bubble."
Wells Fargo: A Closer Look
On the negative side, the tax rate dropped, mortgage-servicing rights were written up, net interest margins were slightly worse and the quarter benefited from small security gains.
On the positive side, credit was stronger and loan growth expanded from the prior period and was above consensus.
Wednesday, April 20, 2011
Big Day For INTC
It was one of those days where if you weren't in at the open, there wasn't a chance to do much. The market traded in an extremely tight range all day after the gap-up open. The anticipated AAPL results probably helped keep both sides pinned down.
The action today was all about a surprisingly strong earnings report from INTC. There were a few other strong reports, like LVS and VMW, but it was Intel's report that turned the technology sector around and that caught a lot of folks by surprise. There had been growing chatter about a slowdown in PC sales recently, but Intel's results made it clear that inventory levels were low and corporate business is quite robust.
Breadth was exceptionally strong and volume was decent. Banks were the only blight on the screen as WFC performed poorly amid its report and GS continues to downtrend.
The bears are going to be pointing out that crude oil is running up again and that financials are acting very poorly, but you have to be impressed how Intel didn't sell-off at all today, like it usually does after a good report.
long INTC
The action today was all about a surprisingly strong earnings report from INTC. There were a few other strong reports, like LVS and VMW, but it was Intel's report that turned the technology sector around and that caught a lot of folks by surprise. There had been growing chatter about a slowdown in PC sales recently, but Intel's results made it clear that inventory levels were low and corporate business is quite robust.
Breadth was exceptionally strong and volume was decent. Banks were the only blight on the screen as WFC performed poorly amid its report and GS continues to downtrend.
The bears are going to be pointing out that crude oil is running up again and that financials are acting very poorly, but you have to be impressed how Intel didn't sell-off at all today, like it usually does after a good report.
long INTC
Tuesday, April 19, 2011
Thoughts
A more cautious overall market view?
1. higher oil and input prices;
2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);
3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;
4. the specter of structural unemployment;
5. the absence of a recovery in home prices;
6. the fiscal and monetary "stabilizers" are soon to be taken off;
7. vulnerability to consensus 2011 growth projections, corporate margins and profitability
1. higher oil and input prices;
2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);
3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;
4. the specter of structural unemployment;
5. the absence of a recovery in home prices;
6. the fiscal and monetary "stabilizers" are soon to be taken off;
7. vulnerability to consensus 2011 growth projections, corporate margins and profitability
Strong Finish
The market flopped around early as it tried to bounce back from yesterday's selling and managed to gain strength as the day progressed. Volume was light and the buyers weren't overly aggressive.
We had some strong pockets of momentum in select groups like Chinese Internets, and some of the big-cap momentum favorites like NFLX, PCLN, LULU and AAPL acted well also. That really helped overall sentiment and helped to produce a strong finish, which has been relatively rare lately.
The issue now is going to be earnings and, so far, we have some pretty ones this evening from IBM, WYNN and VMW.
INTC is the one that tends to be the biggest market mover, and it just came in with some solid numbers. It is trading up strongly, but it has a tendency to fade the next day even when the numbers look quite good.
We had some strong pockets of momentum in select groups like Chinese Internets, and some of the big-cap momentum favorites like NFLX, PCLN, LULU and AAPL acted well also. That really helped overall sentiment and helped to produce a strong finish, which has been relatively rare lately.
The issue now is going to be earnings and, so far, we have some pretty ones this evening from IBM, WYNN and VMW.
INTC is the one that tends to be the biggest market mover, and it just came in with some solid numbers. It is trading up strongly, but it has a tendency to fade the next day even when the numbers look quite good.
Monday, April 18, 2011
Thoughts
Here's a wish list with price entry points:
PNC - $60
MSFT - $24
C - $4.25
GM - $28
JPM - $40
MET - $40
Here are my reactions to today's S&P news:
* U.S. debt will not be downgraded. It is not likely that U.S. debt will be downgraded in the next few years. The last two country downgrades (Canada and Japan) were nations that:
1. weren't reserve currency countries; and
2. had debt to GDP ratios of over 100%.
By contrast, the U.S. is a reserve currency, and our debt is only 62% to 64% of GDP.
* Progress will likely be made on the deficit front. There is now renewed pressure on the Democrats and Republicans to make progress on the deficit front.
* Taxes will rise, and austerity measures will be enforced. Along with the budget deficit progress that will come in the fullness of time (or maybe sooner!), expect higher marginal tax rates and more meaningful austerity measures.
* Corporate profit forecasts will be downgraded for 2011-2012.
* Economic growth expectations will be scaled back. Consensus projections for 2011 U.S. GDP growth will be lowered from +3.5% to around +2.5%.
Here are the comments of Miller Tabak's Dan Greenhaus on the concern du jour:
U.S. government officials are out in full force doing damage control with the main points being:
* S&P is making a "political judgment," a phrase that appears intended to dismiss the agencies concerns as partisan rather than economic or fundamental in nature
* Officials are reminding people that this has no bearing on the U.S.'s ability to issue or finance its debt nor does it mean a default is imminent. A default is most certainly not imminent. Indeed, S&P itself noted this morning that a default in the short to medium term is quite low while the "worst case scenario" is for a "mild" deterioration in the credit rating of the U.S. Longer term is a different story.
The 2011 budget compromise resulted in very, very little actual spending being cut. The only way to credibly and sustainably address the medium and long term deficit picture is by attacking Medicare, Medicaid, Social Security and Defense spending.
Worries -
1. Consumer nondurable issues have outperformed, a classical sign of a more defensive market.
2. Former market-leading stocks -- namely, GOOG and AAPL -- have begun to underperform.
3. First-quarter earnings reports have been disappointing and, when combined with No. 4 below, render the $95-a-share consensus S&P forecasts for the year more problematic.
4. The price of energy products and other input prices show little signs of moderating.
PNC - $60
MSFT - $24
C - $4.25
GM - $28
JPM - $40
MET - $40
Here are my reactions to today's S&P news:
* U.S. debt will not be downgraded. It is not likely that U.S. debt will be downgraded in the next few years. The last two country downgrades (Canada and Japan) were nations that:
1. weren't reserve currency countries; and
2. had debt to GDP ratios of over 100%.
By contrast, the U.S. is a reserve currency, and our debt is only 62% to 64% of GDP.
* Progress will likely be made on the deficit front. There is now renewed pressure on the Democrats and Republicans to make progress on the deficit front.
* Taxes will rise, and austerity measures will be enforced. Along with the budget deficit progress that will come in the fullness of time (or maybe sooner!), expect higher marginal tax rates and more meaningful austerity measures.
* Corporate profit forecasts will be downgraded for 2011-2012.
* Economic growth expectations will be scaled back. Consensus projections for 2011 U.S. GDP growth will be lowered from +3.5% to around +2.5%.
Here are the comments of Miller Tabak's Dan Greenhaus on the concern du jour:
U.S. government officials are out in full force doing damage control with the main points being:
* S&P is making a "political judgment," a phrase that appears intended to dismiss the agencies concerns as partisan rather than economic or fundamental in nature
* Officials are reminding people that this has no bearing on the U.S.'s ability to issue or finance its debt nor does it mean a default is imminent. A default is most certainly not imminent. Indeed, S&P itself noted this morning that a default in the short to medium term is quite low while the "worst case scenario" is for a "mild" deterioration in the credit rating of the U.S. Longer term is a different story.
The 2011 budget compromise resulted in very, very little actual spending being cut. The only way to credibly and sustainably address the medium and long term deficit picture is by attacking Medicare, Medicaid, Social Security and Defense spending.
Worries -
1. Consumer nondurable issues have outperformed, a classical sign of a more defensive market.
2. Former market-leading stocks -- namely, GOOG and AAPL -- have begun to underperform.
3. First-quarter earnings reports have been disappointing and, when combined with No. 4 below, render the $95-a-share consensus S&P forecasts for the year more problematic.
4. The price of energy products and other input prices show little signs of moderating.
Concerns
Ratings agency Standard & Poor's cut its outlook on the U.S.'s AAA-rated debt to Negative from Stable today, and that unleashed some aggressive selling. The market recovered a bit late in the day, with help from a strong bounce in AAPL, but it still was a very poor day for the bulls. Volume was not heavy but breadth was 4-to-1 negative and with plenty of technical damage.
There was a little panic that became oversold fast enough to support some sort of snapback.
The good news is that we do have earnings reports coming from TXN after the close, GS and JNJ in the morning and then IBM and INTC after tomorrow's close. That is going to change the focus for at least a little while, and we might be able to generate a little more upside action if the reports are upbeat. But earnings season so far has reflected a desire to exit on the news. If that continues, it is going to be very rocky going.
There was a little panic that became oversold fast enough to support some sort of snapback.
The good news is that we do have earnings reports coming from TXN after the close, GS and JNJ in the morning and then IBM and INTC after tomorrow's close. That is going to change the focus for at least a little while, and we might be able to generate a little more upside action if the reports are upbeat. But earnings season so far has reflected a desire to exit on the news. If that continues, it is going to be very rocky going.
The Real Tax Money Bonanza
A dominant theme, and a stupid one at that, of President Obama's budget speech last Wednesday was that our fiscal problems would vanish if only the wealthiest Americans were asked "to pay a little more." Since he's asking, imagine that instead of proposing to raise the top income tax rate well north of 40%, the President decided to go all the way to 100%.
Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is.
Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.
Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That's five times Mr. Obama's 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.
I recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let's perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world's problems.)
In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.
So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The nearby chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.
This is politically risky, however, so Mr. Obama's game has always been to pretend not to increase taxes for middle class voters while looking for sneaky ways to do it. His first budget in 2009 included a "climate revenues" section from the indirect carbon tax of cap and trade, which of course would be passed down to all consumers. Such Democratic luminaries as Nancy Pelosi have often chattered about a European-style value-added tax, or VAT, which from a liberal perspective has the virtue of applying to every level of production or service and therefore is largely hidden from the people who pay it.
Now that those two ideas have failed politically, Mr. Obama is turning as he did last week to limiting tax deductions and other "loopholes," such as for mortgage interest payments. I support doing away with these distortions too, and so does Mr. Ryan, but in return for lower tax rates. Mr. Obama just wants the extra money, which he says will reduce the deficit but in practice will merely enable more spending.
Keep in mind that the most expensive tax deductions, in terms of lost tax revenue, go mainly to the middle class. These include the deductions for state and local tax payments (especially property taxes), mortgage interest, employer-sponsored health insurance, 401(k) contributions and charitable donations. The irony is that even as Mr. Obama says he merely wants the rich to pay a little bit more, his proposals would make the tax code less progressive than it is today.
Mr. Ryan isn't proposing controversial entitlement reforms because he likes pointless political risk, or because he likes being berated to his face from a front row seat, as he was on Wednesday. Medicare and Medicaid spending are consistently growing two to three times faster than the rest of the economy, while Medicare's cash-in-cash-out financing model means that seniors collect far more in benefits than they paid in taxes over their working lifetime. The entitlement state was designed for another era.
Mr. Obama's speech was disgraceful for its demagoguery but also because it contained nothing remotely commensurate to the scale of the problem. If the President had come out for a large tax on the middle class, like a VAT, then at least the country could have debated the choice of paying for the government we have or modernizing it a la Mr. Ryan so it is affordable.
Instead the President will continue targeting the middle class for tax increases to pay for an entitlement state on autopilot, while claiming he only wants to tax the rich.
Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is.
Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.
Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That's five times Mr. Obama's 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.
I recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let's perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world's problems.)
In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.
So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The nearby chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.
This is politically risky, however, so Mr. Obama's game has always been to pretend not to increase taxes for middle class voters while looking for sneaky ways to do it. His first budget in 2009 included a "climate revenues" section from the indirect carbon tax of cap and trade, which of course would be passed down to all consumers. Such Democratic luminaries as Nancy Pelosi have often chattered about a European-style value-added tax, or VAT, which from a liberal perspective has the virtue of applying to every level of production or service and therefore is largely hidden from the people who pay it.
Now that those two ideas have failed politically, Mr. Obama is turning as he did last week to limiting tax deductions and other "loopholes," such as for mortgage interest payments. I support doing away with these distortions too, and so does Mr. Ryan, but in return for lower tax rates. Mr. Obama just wants the extra money, which he says will reduce the deficit but in practice will merely enable more spending.
Keep in mind that the most expensive tax deductions, in terms of lost tax revenue, go mainly to the middle class. These include the deductions for state and local tax payments (especially property taxes), mortgage interest, employer-sponsored health insurance, 401(k) contributions and charitable donations. The irony is that even as Mr. Obama says he merely wants the rich to pay a little bit more, his proposals would make the tax code less progressive than it is today.
Mr. Ryan isn't proposing controversial entitlement reforms because he likes pointless political risk, or because he likes being berated to his face from a front row seat, as he was on Wednesday. Medicare and Medicaid spending are consistently growing two to three times faster than the rest of the economy, while Medicare's cash-in-cash-out financing model means that seniors collect far more in benefits than they paid in taxes over their working lifetime. The entitlement state was designed for another era.
Mr. Obama's speech was disgraceful for its demagoguery but also because it contained nothing remotely commensurate to the scale of the problem. If the President had come out for a large tax on the middle class, like a VAT, then at least the country could have debated the choice of paying for the government we have or modernizing it a la Mr. Ryan so it is affordable.
Instead the President will continue targeting the middle class for tax increases to pay for an entitlement state on autopilot, while claiming he only wants to tax the rich.
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