Ed’s Daily Notes for January 30th   2 comments

Bloomberg: Fed Policy Makers Rally Behind Tapering QE as Yellen Era Begins

The big news yesterday:

The Federal Open Market Committee said yesterday it will cut monthly bond purchases by $10 billion to $65 billion, citing labor-market indicators that “were mixed but on balance showed further improvement” and economic growth that has “picked up in recent quarters.”

It was the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers concerned the Fed’s record $4.1 trillion balance sheet risks causing asset price bubbles with those who, like Vice Chairman Yellen, say more needs to be done to reduce unemployment.

My prediction: They will reverse course before they reach the end of tapering. Keep in mind that it will take about 6 months for the effects of tapering to be seen in the economy, roughly around May-June. July’s economic reports should show enough of a negative effect for the Fed to reverse course.

Bloomberg: Fourth-Quarter U.S. Growth Probably Boosted by Stronger Spending

The big news today:

The economy probably expanded at a 3.2 percent annualized rate in the fourth quarter as U.S. consumer spending climbed the most in three years, according to the median forecast of 87 economists surveyed by Bloomberg.

The projected gain in gross domestic product, the value of all goods and services produced, would follow a 4.1 percent advance, completing the strongest six months in almost two years, Household purchases, which account for almost 70 percent of the economy, may have increased 3.7 percent.

The pickup in spending allowed the economy to overcome cutbacks in government outlays caused by the partial federal shutdown in October. Diminishing fiscal challenges and progress in the labor market will probably sustain consumer and corporate demand in 2014, helping explain why the Federal Reserve decided yesterday to keep paring stimulus.

What is odd is that such a strong report should be reflected in the 4th quarter earnings, but too many earnings reports have disappointed so far. I wouldn’t be surprised to see a disappointing GDP number, although I am sure it isn’t too big of a disappointment, or else the Fed wouldn’t have continued their tapering.

Bloomberg: China Manufacturing Index Shows Contraction

A Chinese manufacturing gauge signaled the first contraction in six months in January as companies cut jobs and credit-market stresses damped confidence in the world’s second-biggest economy.

A Purchasing Managers’ Index fell to 49.5 from 50.5 in December, HSBC Holdings Plc and Markit Economics said in a statement today. The reading compared with the median 49.6 estimate in a Bloomberg News survey of 14 economists. A number below 50 indicates contraction.

Is China entering a recession? A PMI number below 50 is a first step towards recession. Avoid Chinese stocks for now.

Bloomberg: Santander Profit Doubles on Lower Charges for Bad Loans

My favorite Spanish bank isn’t doing so good:

Banco Santander SA (SAN), Spain’s biggest bank, said fourth-quarter profit more than doubled as it made fewer provisions for bad loans and income increased in the U.K.

Net income rose to 1.06 billion euros ($1.44 billion) from 423 million euros a year earlier, the Santander, Spain-based bank said in a filing to regulators today. That compared with the 1.2 billion-euro average estimate in a Bloomberg survey of 16 analysts. Loan-loss provisions were 2.28 billion euros in the final three months of 2013, the lowest in eight quarters.

…Earnings from Brazil, the biggest contributor to Santander’s profit, fell 28 percent from a year ago to 1.58 billion euros for the full year. Net interest income fell 21 percent from the year earlier to 10.1 billion euros. Fourth-quarter profit fell to 301 million euros from 518 million euros a year earlier.

…Profit from Spain fell 45 percent for the full year to 478 million euros as lending shrank 11 percent and net interest income fell 15 percent. Net interest income rose 3.2 percent in the quarter to 1.1 billion euros. Spain’s economy, which has suffered two recessions since 2008, expanded 0.3 percent in the fourth quarter, data showed today.

…Santander said bad loans as a proportion of total lending at its Spanish banking business rose to 7.49 percent from 6.4 percent in the third quarter.

On the bright side:

In the U.K, quarterly earnings rose to 357 million euros from 256 million euros a year earlier, as net interest income rose to 962 million euros from 796 million euros. Current account balances grew by 75 percent, the bank said.

…On a group level, bad loans as a proportion of total lending rose to 5.64 percent from 5.43 percent in the third quarter. Net loans newly classified as in default reached 3.8 billion euros, down from 4.1 billion euros in the third quarter.

Santander’s core capital under Basel II criteria, a measure of financial strength, rose to 11.71 percent from 11.56 percent in September, the bank said.

I would rate Santander as a “hold” based on this news. I only have a small position in my 401k, so I could add to it if it drops more. But my main reason for holding it is the dividend, and I don’t see anything threatening that.

Bloomberg: Lenovo to Buy Google’s Motorola Unit for $2.91 Billion

We discussed this in the comments yesterday:

Lenovo Group Ltd. (992) agreed to buy Google Inc. (GOOG)’s Motorola Mobility phone unit for $2.91 billion, as the world’s largest personal-computer maker continues a buying spree of U.S. technology businesses. Lenovo fell 8 percent.

The sale includes $1.41 billion in cash and Lenovo stock paid at the close of the deal, with $1.5 billion to be paid in a three-year promissory note, Google said in a statement yesterday. Google will retain a majority of Motorola Mobility’s patent portfolio, with Lenovo receiving a license to the intellectual property.

That last part is key. Without it, Google and their hardware partners would be at Apple’s mercy in the courtrooms. With the patents, it forces Apple to think twice before filing lawsuits. We can argue all day as to what the patents are actually worth, but there is an indirect value which Google’s patents bring to the table with them.

On top of this, by getting rid of Motorola, Google gives their hardware partners a bit more confidence in the Android system. It is a win-win for Google and their hardware partners.

All in all, I think the Motorola deal was good for Google based on what they did with it. And I still rate it a long-term “buy”.

Speaking of Google…

The Street: Google Is the Best Tech Company, Cisco the Worst

Here is a conversation starter:

“What do you think is the best and the worst of the big tech companies?”

Although the article names Google best and Cisco worst, I will leave it up to you folks to consider your own answer.

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Posted January 30, 2014 by edmcgon in Federal Reserve, Market Analysis, News, Stocks, Technology

2 responses to “Ed’s Daily Notes for January 30th

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  1. Like I said before: Spain is a disaster. How good STD may be run, it will catch some part of the ricochet. Just look at was is happening in South-Europe: the unemployment, politics, … South-Europe will blow up. Some day. I do not know when, but it will. I’d say to avoid Europe untill the dust settles, how long it may take – or after a crash ofcourse, we’ll not be sinking at once. Nothing has changed in the past 5 years. Nothing. It even got worse.
    btw: looks like Hungary is getting crushed again.

    About your MyRA: I do agree it is just about taking more money from the middle-class. When the now-middle-class retires, there will be no more money. I don’t like our own retirement programs: I am paying now for the now-retirees, I don’t think there will be money left when I retire. Private programs are invested in government bonds or European stocks. Two things I’m not bullish at for the next 30 years, not at all – for those things you have to look at the really long-term. It’s just about taking the money now to look good for the next elections – that is all that matters to them.

    • plas,
      Admittedly, Santander has issues in Spain. If they were primarily a Spanish bank, I wouldn’t even buy it in the first place. But they are pretty well spread out. It would take the world’s economy to crash to really hurt Santander. I will admit this is possible, but if it does happen, we will all be screwed.

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