Week in Review Part II: Street Bytes

The Dow Jones rose a 5th straight week in advancing 3.6% to 12231, the first close above 12000 in three months. The S&P 500 rose a 4th straight, up 3.8%, while Nasdaq added an equal amount. All major indexes, except the Russell 2000, are now up for the year. For the month, the S&P is up 14% and the Dow 12%. For the S&P it would be its best single month since 1974.  Unbelievable.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.29% 10-yr. 2.32% 30-yr. 3.38%

Yields continue to inch up on the longer end of the curve as money flows from Treasuries into stocks.

--Hong Kong’s market had its best week in 2 ½ years, up 15.2%, while China’s Shanghai Composite gained 6.7%.

--In housing, sales of new homes climbed at an annual pace of 313,000 in September as inventory fell to 6.2 months, the lowest level in almost a year and a half, so this is mildly encouraging, though the pace of construction remains at putrid levels.

Pending home sales unexpectedly fell in September, 4.6 percent, the biggest decline since April, which isn’t helpful.

Separately, the S&P/Case-Shiller index showed home prices in 20 major metropolitan areas were flat in August vs. July, but down about 4% from year ago levels. Year-over-year results in 16 of 20 cities were better, however, than they had been in recent months.

--Don’t tell Occupy Wall Street (OWS) protesters the following:

“Sales of homes commanding prices of $5 million and up continued to drive activity in the Hamptons, New York City’s popular summer destination, in the third quarter of this year…

“During the quarter, there were 30 sales of homes fitting that bill, almost triple the number racked up in the same quarter of 2010.” [Amanda Fung / Crain’s New York Business]

--Here’s another one OWS (London version) won’t like, from Brian Groom of the Financial Times:

“FTSE 100 directors saw their total earnings rise by 49 percent in the past financial year….

“The increase will fuel controversy over executive pay as Vince Cable, business secretary, consults on proposals to clamp down on the ‘escalation’ of awards, including putting employees on remuneration committees and making shareholder votes binding.”

Bonuses this year in the City of London, however, are set to fall 38 percent to a level just over a third of the peak seen in 2007-08, which makes the increases for those at the top all the more egregious.

--Jesse Eisinger summed up the popular feeling perfectly in a piece for the New York Times.
“(Last week) the SEC announced that it had agreed to a measly $285 million settlement with Citigroup over the bank having misled its own customers in selling an investment it created out of mortgage securities as the housing market was beginning its collapse.

“In addition, the SEC accused one person – a low-level banker. Hooray, we finally got the guy who caused the financial crisis! The Occupy Wall Street protesters can now go home.

“After years of lengthy investigations into collateralized debt obligations, the mortgage securities at the heart of the financial crisis, the SEC has brought civil actions against only two small-time bankers. But compared with the Justice Department, the SEC is the second coming of Eliot Ness. No major investment banker has been brought up on criminal charges stemming from the financial crisis.”

I wrote the other week that this is what OWS should be focusing on as well, the whole CDO game and how they were sold, and dumped, on investors. It was out and out fraud, regardless of the legal mumbo jumbo inserted into prospectuses and the like.

But as Eisinger points out, regulators are intimidated by the prospect of going up against high-powered Street execs. The SEC’s chairwoman, Mary L. Schapiro, “while deserving credit for pushing investigations of structured investments, is sending the signal that she does not want to lose. Her agency is meekly willing to get token settlements when the situation calls for Old Testament justice….

“This seems to be our fate: our bankers took reckless risks, but our regulators take none.”

--Meanwhile, in a different sphere of Wall Street, former Goldman Sachs director, Rajat Gupta, was arrested on federal charges of insider trading as part of the Raj Rajaratnam case, though the charges are based on evidence uncovered by the FBI more so than evidence provided by Rajaratnam, who refused to inform on Gupta or wear a wire to record him for the FBI.

--Shares in Amazon plunged after the online retailer missed badly on third quarter earnings (despite a 44 percent rise in sales) and forecast a possible earnings loss in the fourth quarter as it spends heavily on the Kindle Fire tablet, a rival to Apple’s iPad.

Here’s the thing, though, as I’ve noted over the years. I could never touch the stock because of its valuation, today with a P/E still over 95 (after recovering much of the loss later in the week). Of course the shares just continue hitting one new high after another. I’m just not that kind of investor.
--ExxonMobil reported a 41 percent rise in earnings to $10.3 billion, in line with expectations, but actual oil production was down 4 percent. The high price of crude was the difference vs. year ago performance.

--Ford Motor Co. earned $1.65 billion, compared to $1.69 billion in the year-earlier third quarter as margins slipped due to losses on commodity bets.
Ford suffered in another area this week. Consumer Reports came out with its latest reliability ratings and Ford is 20th out of the 28 brands. Ford was 10th last year. The Focus and Fiesta compact cars had below-average reliability ratings, as did the new Explorer SUV. In June, Ford had fallen from fifth to 23rd place in J.D. Power and Associates’ annual quality study.

[Scion, a Toyota division, received the best ratings in Consumer Reports, followed by Toyota’s Lexus division, Acura, Mazda and Honda. Honda had been first last year.]

--The average minimum wage in most of China rose 21.7% in September vs. year ago levels. Rising costs threaten China’s edge as one of the world’s cheapest manufacturing centers.

--Dr. W. reported in again from Vietnam, where he is training physicians.

“The average income in Vietnam is now about $1200 per year. The average experienced physician employed by the government makes $200-$250 per month (they can make more if they have a private clinic on the side). The ones I spoke to don’t have private clinics and referred to these state salaries as ‘poverty wages’ in Vietnam. Nurses make $70-$150 per month, teachers make about $100 per month. The average rent for a small apartment in the big cities is about $250 per month and $500 per month for a ‘decent’ apartment. Inflation is running about 20 percent. Many of the decently employed, decently educated state workers are getting upset and angry about their inability to earn enough to keep pace with inflation and status. They all participate in leverage to try and get ahead. The temptation for leverage, corruption and theft has to be huge when you see examples of outrageously disproportionate wealth all around you in this very secular society. The price of property and the price to develop property here is just mind-boggling.

“On the other hand, the people could not be nicer and the country is very safe to travel in.”

Earlier, Dr. W. told me of playing an exclusive Greg Norman golf course where his foursome was the only one on it; a resort with condos going for $585,000, none having been sold. Yup, a rather severe bubble.

--As a piece in Bloomberg pointed out, Eastern Europe is set to suffer the most from the continent’s credit crunch as the Western lenders who bankrolled the former’s boom before the 2008 swoon pull back anew.

--The U.S. Agriculture Department expects retail food prices to increase 3.5% to 4.5% this year, after climbing just 0.8% in 2010, the slowest rate since 1962.

--Hewlett-Packard decided to retain its personal computer unit, a flip-flop in strategy as new CEO Meg Whitman said the company was “stronger” with it.
--IBM named Virginia Rometty, 54, to succeed Sam Palmisano as CEO at the start of next year, the first female to lead the company in its 100-year history. She is currently head of sales, marketing and strategy and has been at Big Blue 30 years.

--Novartis, the Swiss drug giant, announced it was cutting 2,000 jobs, mostly in Switzerland and the U.S.

--Whirlpool is eliminating 5,000 positions as it reduces capacity and lowered earnings targets in a big way owing to reduced consumer spending around the world.

--The SEC is investigating whether Avon Products violated “Regulation FD,” a rule governing “selective disclosure” of company information. The company’s shares fell 18 percent on the news and are down 35 percent over the past year, thus shining the spotlight on highly-overrated CEO Andrea Jung; she of the massive pay packages and continually sliding share price.

--California Gov. Jerry Brown proposed raising the retirement age for state workers in a sweeping package of changes that also bans “pension spiking” and “double dipping.” Brown is looking to cut the state’s pension costs “in half.” The increase in the retirement age for full benefits would rise from 55 to 67. The changes obviously face stiff opposition in the state legislature but good luck to the governor.

--Former New Jersey senator, governor, and Goldman Sachs CEO, Jon Corzine, is now running futures broker MF Global Holdings Ltd., and this week he drew down its revolving credit lines of some $1.3 billion in an attempt to stave off bankruptcy as Corzine seeks a buyer, while Moody’s and Fitch downgraded MF’s debt to junk. MF reported a loss of $186 million in the third quarter – its largest ever.

The problem for the brokerage is that Corzine made a decision about a year ago to invest heavily in sovereign debt, to the tune of $6.3 billion in the paper of Italy, Spain, Belgium Portugal and Ireland.

--Shares in Netflix continued to crater. After hitting a July high of $304, the stock plummeted to $77 on Tuesday (before closing at $84 on Friday), an absolutely stunning fall as the company reported a shareholder exodus and rising costs. It was back in July that CEO Reed Hastings announced plans for a 60 percent price hike, sparking a customer backlash (800,000 leaving since June, far worse than anticipated). Then he split the company into two divisions, further angering folks. Despite the mistakes, with Hastings saying it would be “accurate” to say that “we shot ourselves in the foot with the abruptness” of the price increase, the company will not reverse itself on this front.

--In a rare display of bipartisanship, 84 senators voted to discontinue certain farm subsidies for people making more than $1 million in adjusted gross income. The current limit is $1.2 million, so the actual impact is minimal, but it is very symbolic of a change in attitudes.
--One of my favorite topics, mislabeled fish, is in the headlines again as Consumer Reports revealed that “22 percent of the seafood it tested at supermarkets, restaurants, fish markets, gourmet stores and big-box stores in three states was either mislabeled, incompletely labeled or misidentified by store or restaurant employees.” [Bruce Horovitz / USA TODAY]

The investigation was in New Jersey, New York and Connecticut. Among the findings, “Not one of the 10 lemon soles tested was lemon sole….And of 22 red snapper samples, not one was definitively red snapper.”

--No problem mislabeling the McRib, McDonald’s elusive sandwich that is now back on the menu at all U.S. locations through Nov. 14, as opposed to being offered in only select ones. The company declines to give specific sales figures but if you miss out this time and still want a McRib, it’s sold year round in Germany, so hop a flight there!