Market Summary: Fri. Feb. 8, 2008

Markets ended the day mixed as financials were dragging down the Dow and S&P while tech kept the Nasdaq in positive territory. Continued talk of sub-prime mortgage losses kept the financials down. MBIA, the troubled bond insurer, announced they would issue $1B in common stock (up from the previously mentioned $750M) in an effort to maintain their AAA credit rating. Shares will be sold at $12.15, below Thursday’s closing price of $14.20.

Tech was strong on the day (that’s the first time I’ve said that in a very long time) thanks to Amazon.com. They announced a $1B buy back program. Remember, less outstanding shares equals a higher price for the stock. Hewlett-Packard, Google, Apple, and Microsoft were also strong.

Crude oil, as well as the energy stocks, was up big on the day thanks to news from OPEC that they would reduce output in an effort “to prevent prices from falling below $80 per barrel” (Bloomberg.com). Also, news of a damaged pipeline in Nigeria helped prices get to almost $92 per barrel.

The economic stimulus package that everyone has been talking about for the last month finally made its way through the Senate. It is valued at $167B and will be distributed to individuals making up to $75,000 and couples making up to $150,000. This rebate will hopefully provide a boost to GDP the second half of the year – assuming people will spend the money.

The G7, consisting of the U.S., the U.K., Canada, Italy, France, Germany and Japan, said they expect worldwide writedowns to be around $400B (so far there have been about $146B in writedowns). Many central bankers announced (or at least hinted) they will lower rates at their upcoming meetings in an effort to stimulate economic growth. Hank Paulson, U.S. Secretary of the Treasury said “The current financial turmoil is serious and persisting.” When asked about the U.S. economy he said, “I am confident in the long-term health of the United States economy and I expect that it will continue to grow in 2008. The housing correction, high energy prices, and capital market turmoil have combined to weigh on near-term growth.”

One interesting fact about the huge decline in stock prices since the beginning of the year: over $6.7 trillion in market value has been erased!

Also,Yahoo! rejected Microsoft’s $44.6B hostile takeover bid over the weekend and they are looking for at least an offer of $40 per share.

McDonald’s was also strong thanks to a 1.9% increase in January U.S. same-store sales. Comparably in Jan. 2007, sales growth came in at 3.6%. Even some of the so-called “immune” companies are feeling the pain of the slowing economy. International same-store sales came in at 5.7% compared to a 4.9% increase the same period last year.

Next week will be fairly slow in terms of economic and earnings news. Pay attention to Monday’s Fed Term Auction Facility when they will auction $30B to banks. Also, on Thursday Ben Bernanke testifies in front of Congress regarding the health of the economy.

Costs/Benefits of Rebalancing

For those of you who are new to investing, rebalancing is adjusting your portfolio so that the percentage you hold in each type of asset (typically stock and bonds) is aligned with the desired percentage you started off with.

Example: You start off with 60% of your money in the S&P 500 indice and 40% of your money in long term US treasury bonds (stocks/bonds 60/40 is a highly recommended allocation). After a year, the S&P 500 indice performs extremely well, whereas the US treasury bonds perform at an average rate. Thus, your portfolio is now 65% the S&P 500 indice and 35% long term treasury bonds. Rebalancing is then simply the act of buying/selling your assets to realign your portfolio with the initial allocation - 60/40.

Bear in mind that this doesn't have to be stocks/bonds ratios (although that's typically where it's used). Moreover, this technique can be used and applied to any set of assets (e.g. two different stocks).

Simple enough, but is it truly beneficial? And if so, why? Well those answers are no doubt beyond my ability to adequately explain; however, the following is a pretty cool article that goes into the effect and efficiency of rebalancing.

Rebalancing Can Be Hazardous To Your Portfolio

For those of you "experts," here's a far more elaborate and confusing article that I only half-way am able to digest. Some interesting bits to pull from it though and certainly worth skimming.

The Rebalancing Bonus

What to Watch for This Week

Economic Data:
Wednesday: Retail Sales
Thursday: Initial Jobless Claims
Friday: Industrial Production Numbers

Earnings Reports:
Tuesday: Credit Suisse (financial),
XTO Energy (energy),
General Motors (auto)

Wednesday: Agrium (agriculture),
Baidu (tech),
Genzyme (biotech),
Rio Tinto (mining/minerals),
Coca-Cola (beverage/consumer staple),
Nvidia (semiconductor/chip),
First Solar (alternative energy/solar)

Thursday: Comcast (telecom)

Friday: Abercrombie & Fitch (retail)


Other:
Monday: The Fed will auction off $30B using their 28-day Term Auction Facility to provide more liquidity to struggling banks - pay attention to the interest rate and demand for this debt.

Thursday: Fed Chairman Ben Bernanke will give his testimony about the economy and financial markets - listen to what he has to say about inflation and growth prospects for this year.

A Couple of Sexy Articles

First, we have an article that quite eloquently ties together the various crises occurring in the American financial sector. Fairly general, but a nifty read that sheds light on some important situations worth understanding.

Financial Engine Failure

Next, here is a crazy cool article from Thew New Yorker (YEAH BOI!) about Stephen A. Schwarzman who is the chief executive of the Blackstone Group - a massive PE firm. It goes into detail about his rise and why he's hated so much and some other fun stuff and while there isn't an excessive amount of insight to be taken from it, it's certainly a cool read if you have the time.

The Birthday Party

hahaha

when Warren Buffet speaks, people freak out

But either way, this is a good time to suggest looking into being compensated in Euros instead of USD when you hit the working world, which I hear some MNCs offer.

Oh Monkeyboy...

Here is an incredible opinions article from Scoble about Google's opinion of the Microsoft-Yahoo! mess. He makes a valid point. Where does google look to make money in the future, and why is Microsoft trying to acquire Yahoo!? The most interesting point made is Google's focus on the mobile phones. See here for info about that.

To dig further into this, here is a great open letter to Steve Ballmer Business Week put out explaining how stupid this acquisition is. This is a very worthwhile read for those of you who are just now learning about M&A.

A Peek into I-Banking

Released late last week were the deal-volume rankings for I banks as of feb 2007. See them here. This list is pretty important for bragging rights, as well as bargaining power.

More importantly, now is a perfect time to mention globalization's role in this incredibly elite club. Unheard of PT Danatama Makmur, an INDONESIAN brokerage house, recently joined the 10-spot for deal-volume rankings for the month of January, advising Bakrie & Brothers $5.1 billion acquisition of 3 different companies.

Certainly, they are just a blip on the radar, but for an investment bank headquartered in a developing country to start playing with the big boys, this is a pretty monumental moment.

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Who will beat earnings by the most this week?

CME beat by $0.15 (4.14% surprise) - 4 votes
NYX was "in-line" - 0 votes
DIS beat by $0.11 (21.2% surprise) - 5 votes
MTW beat by $0.08 (8.8% surprise) - 1 vote

WINNER = Disney (going off highest percentage upside surprise)

Market Summary: Thurs. Feb. 7, 2008

When looking at the market, sometimes you need to forget about all the ups and downs of the day and just look at how we finished relative to where we started. The Dow was up 47, the Nasdaq up 14, and the S&P up 10, while treasuries fell (10-year at 3.77%).

Initial jobless claims for last week came in at 356K, better than last week’s reading of 378K, but the number was higher than what analysts’ were expecting. Consumer credit data was also released and the number was much lower than expected – meaning consumer debt was down in December. Usually this number doesn’t move markets, but because the reading was so low ($4.5B vs. $8B expected) it weighed on the markets.

Cisco was dragging down the tech stocks after they offered poor guidance during their conference call (they reported Wed. after the bell). So far the only tech stocks to please analysts have been IBM, Oracle, and Microsoft, and despite their strong performance last quarter and good guidance, they have been knocked down significantly over the last month or so because of bad earnings from Apple, Google, Intel, and Cisco.

Pepsi, one of the quintessential “recession stocks,” reported very strong earnings and investors were pleased bumping up the stock 5.5%. They beat analysts’ expectations for last quarter and they offered “in-line” guidance. Not every company is hurt by the slowing economy – these are the companies in which you want to invest.

Also, the Chicago Mercantile Exchange (CME) and the NY Mercantile Exchange (NYMEX) were up very big after analysts upgraded them. On Wednesday both stocks were hit extremely hard on news that the Dept. of Justice might rule that “futures market firms controlling or owning clearing operations impedes competition.” Just something to keep your eye on.

December pending home sales declined 1.5%, more than expected, but homebuilder stocks were up 1.5+% on the day. Everyone is forward-looking with this sector and expect things to turn around soon because of the recent Fed rate cuts (and the hope that more cuts are to come).

January retail sales numbers were released today and most came in lower than anticipated; however, the retail stocks were up big on the news. Wal-Mart, Target, Macy’s, and JC Penny all reported data that came in below what the analysts had predicted. Here is a Bloomberg.com article discussing the retailers and how they performed last month.

The dollar was up big, most likely because the Bank of England cut its rate 25 bp to 5.25%. The European Central Bank kept rates at 4%.

Was a today's move warranted? Maybe. Investors are forward-looking and a lot of today's data is backward-looking. I believe we are starting to price in another rate cut (probably a little too soon with so much data to be reported between now and the next Fed meeting).

1812 Revised

Chaps,
Brilliant news from the gents over at Freakonomics, it appears that New York may no longer be the financial capital of the world - instead being replaced by my very own point of nascence, London.

Now understandably, "the Big Apple" as you yanks seem to call it (I still remember it as New Amsterdam before we relieved it from those silly clog-clappers) does have a higher GDP than my fine City, but much goes into GDP, and if we were to focus primarily on the financial sector, and the resources which endow a financial sector with its virility, look no further than this clearly unbiased study.

Yes, London is even today the financial leader of the world, if only by a nose. Oh, and let's not forget... *cough*

Now, this may have something to do with the globalization of the world's economy. London is simply a more international city than New York, and more foreign companies are choosing to sell on the LSE instead of, say, the "big board." This has much to do with the difficult audit standards set by the colonies' regulatory body, the FASB. It is just too expensive to go through all of that auditing, when one can find the same financial support from a different market.