Friday, 15 February, 2013 - February 15th - An Historic Date

February 15th - An Historic Date

by Sinclair Noe

DOW + 8 = 13,981
SPX- 1 = 1519
NAS – 6 = 3192
10 YR YLD +.01 = 2.01%
OIL – 1.23 = 96.08
GOLD – 24.30 = 1611.10
SILV - .60 = 29.90

Today marks the 10^th Anniversary of the largest single coordinated protest in history. Roughly ten to fifteen million people (estimates vary widely) assembled and marched in more than six hundred cities: as many as three million flooded the streets of Rome; more than a million massed in London and Barcelona; an estimated 200,000 rallied in San Francisco and New York. From Auckland to Vancouver to the streets of New York and Los Angeles—and everywhere in between—tens of thousands came out, joining their voices in one simple, global message: No to the Iraq War.

And there it was. We failed. Slightly more than a month later, the U.S. was shocking and awing its way through Iraqi cities and Saddam Hussein’s defenses and bedding in—though it didn’t know it yet—for a near decade-long occupation. The protests, which by any measure were a world historic event, were brushed aside. The UN Security Council was bypassed. Congress rubber stamped the war. The media was little more than a puppet. The U.S. spent nearly a trillion dollars on a pre-emptive war that didn’t need to happen and a nation-building exercise that has achieved only fragile, uncertain gains. Far from a “Mission Accomplished,” the American adventure in Iraq has become a cautionary tale of hubris and poor planning.

February 15^th was a global day of protest; the biggest ever.

For the week, both the Dow and Nasdaq fell 0.1 percent while the S&P rose 0.1 percent in its seventh straight week of gains, a period during which the index rose 8.4 percent. The last such seven-week run was between December 2010 and January 2011.

Wall Street dealmakers are off to a busy start to 2013, as some of corporate America’s most recognizable names have become involved in multi-billion-dollar mergers and acquisitions. Check this article from Christopher Matthews: Just yesterday, American Airlines and US Airways announced they would be merging in an $11 billion deal, to form the world's largest inconvenience, or airline.

Private equity firm 3G and Warren Buffett‘s Berkshire Hathaway announced a $28 billion joint acquisition of  food conglomerate H.G. Heinz. That private euqity firm is from Brazil. American private equity firms look for something much sexier than ketchup. The Brazilians are looking for profit.

And these two deals follow hard upon $24.4 billion leveraged buyout of Dell by private equity firm Silver Lake Partners and the firm’s founder, Michael Dell.

US companies have spent $219 billion on mergers and acquisitions so far in 2013, a sharp increase from 2012, when firms spent just $85 billion during the same period. And US firms are on pace to have the biggest year in M&A activity since 2000.

While all this activity will be surely benefit shareholders of acquired firms — as well as lots of Wall Street investment bankers — what does it say about the health of the economy? Since the late 19th century, mergers and acquisitions have tended to come in waves, spurred by the availability of credit, changes in government policy, or bursts of private-sector innovation. Deregulation, for instance, motivated a wave of mergers in the airline industry in the 1970s and the consolidation of the banking industry in the 1990s. But perhaps the most important factor in motivating these bursts of M&A is economic conditions, particularly the strength of the stock market. Mergers in particular are often financed with stock, and high stock values give companies the resources with which to make purchases.

But the stock market has been doing pretty well for a few years now, with the S&P 500 up more than 138% since its bear-market lows of 2009. So why are we only now seeing the first glimmer of an M&A boom?

Surely one reason is that today’s market is heavily fortified by quantitative easing. The Federal Reserve has taken unprecedented action to keep interest rates low in both the short and long term, and those efforts have kept stock prices high despite the weak economy. In other words, given central bank stimulus, a rising stock market isn’t quite the indicator it used to be. We can see this in GDP growth figures as well.

In addition to predicting M&A activity, the stock market is also considered a leading indicator of economic growth, meaning increases in GDP generally follow bull markets.  This is because stock prices reflect investors expectations for a company’s future income. A high stock price today represents investors’ belief in big profits tomorrow. Taken in the aggregate, a surging stock market index is a predictor of increases in GDP down the line.

But, just as we’ve seen the link between rising stock prices and M&A severed, the huge gains we’ve seen in stock prices since 2009 have also not been followed by robust economic growth. Again, this is probably because Fed action has done more to promote stock price increases than economic fundamentals. But this is exactly why we should be encouraged by this fast start to M&A activity in 2013, especially if it keeps up in the coming months. It may mean that recent stock market gains are once again reflecting confidence about future profits, and not just central bank stimulus.

What makes this plausible is the fact management won’t seek out — and boards won’t sanction — expensive acquisitions if they’re not confident about future growth. And given the fact that corporate profits have been strong while unemployment remains high and wage growth stagnant means the corporate sector will eventually have to start spending if economy is to recover fully.

So while high profile M&A deals are often times more about CEO empire building than creating real shareholder value, this boom may be a positive sign for the economy nonetheless. It may finally be that rising stock prices are actually telling us something about the real economy around us — and perhaps more important, that corporate leaders are finally feeling frisky once again.

The Group of 20 is meeting this weekend and they are acting like they won't throw Japan under the bus; in other words, they say they won't target Japan over policies that have weakened the yen. The yen initially fell on a draft communique prepared for G20 leaders at their meeting in Moscow. The draft omits part of this week's Group of Seven statement declaring fiscal and monetary policy may only be used for domestic economic aims. The yen has reversed early gains and is now the weakest major currency on reports the language of the G20 statement may differ from that of the G7 countries. The G20 is expected to urge members to avoid competitive devaluation, but not echo the G7 view that exchange rates should not be a target of policy. That's a new phrase: “competitive devaluation”.

Federal Reserve Chairman Ben Bernanke said the United States is acting in line with the position of the G7 nations by using domestic policy tools to boost growth and reduce unemployment.

A new study published by the Government Accountability Office says the 2008 financial crisis cost the US economy more than $22 trillion. The GAO report says: "The 2007-2009 financial crisis, like past financial crises, was associated with not only a steep decline in output but also the most severe economic downturn since the Great Depression of the 1930s." The agency said the financial crisis toll on economic output may be as much as $13 trillion -- an entire year's gross domestic product. The office said paper wealth lost by homeowners totaled $9.1 billion. Additionally, the GAO noted, economic losses associated with increased mortgage foreclosures and higher unemployment since 2008 need to be considered as additional costs.

The GAO report concludes that an ounce of prevention is worth a pound of cure: "If the cost of a future crisis is expected to be in the trillions of dollars, then the act likely would need to reduce the probability of a future financial crisis by only a small percent for its expected benefit to equal the act’s expected cost."

In other words, Wall Street and its many allies and lobbysists have been complaining about the cost of regulation and reform but they never mention that it was Wall Street’s reckless investments and trading that caused the biggest financial collapse since the Great Crash of 1929 or the trillions of dollars in costs they inflicted on our country. That economic wreckage can still be seen from coast to coast in unemployment, foreclosed and underwater homes, lost retirements and educations and so much more.

Another quarter of data shows that the austerity solution has not been working in Europe. A deepening recession in the 17-nation eurozone revealed evidence that the problems of the single currency’s crisis-hit periphery were spreading northwards to affect monetary union’s core economies of Germany and France.

Despite an easing of financial tensions in the second half of the year, gross domestic product in the members of the monetary union dropped by 0.6% in the final three months of 2012, a heftier decline than the markets had been expecting. The US grew by 2.2% in 2012 and Japan by 1.9%, while GDP in the eurozone contracted by 0.5%.

The Treasury Department said Friday that foreign holdings of U.S. Treasurys rose 0.3 percent in December from November to $5.56 trillion. It was the 12th consecutive monthly gain. China, the top foreign holder, increased its holdings 1.7 percent to $1.2 trillion. Japan, the second largest holder, boosted its investment 0.2 percent to $1.12 trillion.

Demand kept rising in December even as Congress approached a deadline to raise the government's $16.4 trillion borrowing limit. In January, Congress approved a measure to temporarily suspend the borrowing limit until May 19. That has allowed the government to take on more debt while the debate continues.

 Remember how Congress managed to delay the fiscal-cliff and debt-ceiling fights? That's right, they kicked the can down the road. What's left of that mess, a big round of spending cuts called "sequestration," takes effect on March 1 and will shave about $85 billion from government spending this year, with more to come in the years ahead. And it is almost universally agreed that sequestration would hurt the economy if it happens; it would nip potential growth in the bud; just nip it. And the economy is, how do you say, not so good! In fact, it shrank in the fourth quarter of 2012.

When the going gets tough, the wimps leave town. Congress has recessed, and the recess is scheduled to end with four full days to fix the sequestration problem. They couldn't fix it in two years, but they have four days to clean it up after their vacation. A new survey indicates that 94% of Americans have no problem with Congress taking a vacation right now, as long as they all take a vacation together on a Carnival Cruise.