U.S. stock index futures look set to open higher on Monday.
The Euro reversed overnight after early gains, giving the dollar some strength
at least at the start of the day. Crude oil has quietly edged above $80
per barrel.
Today's Economic Calendar:
- 4-Week Bill Announcement 11:00 AM ET
- 3-Month Bill Auction 11:30 AM ET
- 6-Month Bill Auction 11:30 AM ET
News For Thought
Report: Blackstone restructures Hilton debt. With the Federal reserve
owning $4 billion worth of Hilton debt, this item is even more important. According
to The Wall Street Journal citing sources, Blackstone has avoided the sale of
Hilton assets in order to be able to keep up with the $20 billion worth of debt
that it owes on its largest investment. The report notes that "The agreement
calls for Blackstone's funds to contribute $800 million of new equity, which
will be used to buy back debt at a discount. It would also extend the maturity
of some debt issues, these people said." Blackstone bought Hilton for $27 billion
in July 2007, just a few months ahead of the subprime mortgage crisis. And these
guys are supposed to be better investors than the rest of us.
Obama approval ratings crater ahead of health summit and reported attempt
to pass health care legislation via reconciliation. According to Rasmussen
Reports.com: "The Rasmussen Reports daily Presidential Tracking Poll for Sunday
shows that 22% of the nation's voters Strongly Approve of the way that Barack
Obama is performing his role as President. That is the lowest level of strong
approval yet recorded for this President. Forty-one percent (41%) Strongly Disapprove
giving Obama a Presidential Approval Index rating of -19. The Approval Index
has been lower only on one day during Barack Obama’s thirteen months in office." The
report added: "Currently, 39% of voters nationwide favor the health care plan
proposed by the President and Congressional Democrats. Fifty-eight percent (58%)
are opposed. Only 35% believe Congress should pass health care reform before
the upcoming midterm elections anyway. Fifty-four percent (54%) say Congress
should wait until voters select new congressional representatives in November." The
falling ratings coincide with weekend reports that The White House and Congressional
Democrats plan to pass the existing health care reform bills by the use of reconcialiation,
a process that links the health care bill to the federal budget and that only
requires 51 votes in the Senate to pass.
Obama has a 48% approval rating on Gallup and Zogby's most recent poll, (2-9-2010)
gives the president a 51% approval, 49% disapproval rating.
Obama to control insurance rates. According to The New York Times: "President
Obama will propose giving the federal government new power to block excessive
rate increases by insurers, as he rolls out comprehensive health care legislation." According
to the report: "By focusing on the effort to tighten regulation of insurance
costs as a new element that had not been included in either the House or Senate
bills, Mr. Obama is seizing on outrage over recent premium increases of up to
39 percent announced by Anthem Blue Cross of California, and moving to portray
the Democrats’ health overhaul as protecting Americans from predatory insurers."
Here are two examples of what can happen when you bite off more than you can
chew. In Hilton's case, it has some bargaining chips, properties, an excellent
brand, and the fact that Blackstone has some clout. In the case of president
Obama, we're not sure as to what he's thinking. The drop in the polls came in
close proximity to his return to health care as a major topic in his agenda.
It will be interesting to watch if his ratings drop to new lows as the health
care summit runs its course later this week.
Life is about to get oh so interesting.
|
|
|
The Euro rallied for a period overnight, as rumors of a
bailout package from Germany aimed at Greece surfaced. But a denial from the
German Ministry of Finance knocked the European currency below Friday's close.
That's the scenario with which trading will open in the U.S. on Monday.
The situation in Greece isn't going away. In fact, if history is any guide,
just as the subprime mortgage crisis was a big effect on the global financial
markets for months, so is Greece likely to have some sort of effect for some
time to come. There are some differences to be sure, as the subprime mortgage
meltdown was a bigger problem from a tangible standpoint. Yet, Greece, even
though it's a small country, is at the very least a symbol of what could eventually
cause major problems for the Euroepan Union.
It's widely known and accepted now that Greece's problems started in 2001, when
Goldman Sachs engineered a currency swap with the country that allowed it to
take significant liabilities off their books by pushing them forward via the
swap agreement, which is a derivative. The central tenet of the swap, though,
was that Greece's public transportation revenue was used to pay for the swap,
which means that money that was supposed to go into the Greek treasury, instead
went into paying for the swap, and that left a whole in the Greek books.
Now, investors are starting to wonder if there are other small European countries
that have significant surprises to reveal, as they too may have used derivatives
to make their books look better than they were in order to meet the criteria
to join the EU.
In fact, it's more accurate to say that the news media has made it its business
to reveal what the European nations have been doing for years, hiding their complex "sometimes
in secret" deals according to The Wall Street Journal that were designed "to
hide the true size of their debts and deficits" so that they could show that "cap
debt levels at 60% of their gross domestic product and their annual budget deficits
to no more than 3%." In other words, European nations, unlike the United States
at least to the same degree, have been hiding the awful state of their books
making the Euro a potential reserve currency for the world that may have been
based to a significant degree on smoke, mirrors, and complex derivatives.
The Europeans have in fact been running a wild one past the markets for years.
According to The Journal: "To try to meet the targets, which were aimed at building
trust in the stability of the euro, governments over the years have sold state
assets, bundled expected future payments into securities to hawk and even, in
the case of Greece, insisted to the Eurostat statistics authority that large
portions of its military spending were "confidential" and thus excluded from
deficit calculations. In 2000, Greece reported that it spent €828 million ($1.13
billion) on the military—about a fourth of the €3.17 billion it later said it
spent. Greece admitted to underreporting military spending by €8.7 billion between
1997 and 2003."
For example, according to The Journal: "Portugal classified subsidies to the
Lisbon subway and other state enterprises as equity purchases. After learning
that, Eurostat made Portugal redo its accounting in 2002. The country revised
its 2001 deficit from €2.76 billion, or 2.2% of GDP, to €5.09 billion, or 4.1%—well
over the limit." But they were not alone as "France arranged a deal with the
soon-to-be privatized France Telecom in 1997 under which the company paid the
government a lump sum of more than €5 billion. In return, France agreed to assume
pension liabilities for France Telecom workers. The billions from France Telecom
helped narrow France's budget gap to around €40 billion in 1997; it reported
a deficit for that year of 3% of GDP—right on the target, and helping it to join
the euro."
And Germany "Europe's largest economy, tried to reappraise gold reserves for
a fast fix in 1997, though it backed off after resistance from the country's
central bank."
In fact, European countries, until 2008 were allowed to do these swap transactions
and to use derivatives to hedge the risks, which means that there could lots
of other such problems that pop up in the future, if the countries can't meet
their obligations to counterparties involved. According to The Wall Street Journal "In
some cases, governments undertook numerous such transactions, often without publicly
disclosing them, making it difficult for investors to gauge the impact on a country's
finances."
The Journal reports that Goldman Sachs did 12 swaps for Greece from 1998 to 2001,
while Credit Suisse also helped Athens with at least one swap during the same
period. To be sure, some swaps are part of normal business. According to The
Journal "Deutsche Bank executed currency swaps on behalf of Portugal between
1998 and 2003" which according to Deutsche Bank spokesman Roland Weichert 'were
within the "framework of sovereign-debt management,"' and "intended to hide Portugal's
national debt position." For its part, Portugal declined comment only to say
that "Portugal only uses financial instruments that comply with EU rules."
The bottom line is that this is not a new problem. In fact it's been brewing
for nearly a decade. According to The Journal: "Eurostat tried for years to change
the rules on use of swaps. European finance ministries in 2000 overruled Eurostat,
arguing that they needed as much flexibility as possible to manage debt loads."
Swaps are a two edged sword. On one side, they let the country that uses it lock
in a future exchange rate. That's the good part as it lends the current books
some stability. The problems is that stability is cosmetic as any drop in the
Euro, despite what the books showed would be a negative in the real world, which
means that at some point, the real price of the transaction would have to be
faced.
In many ways, swaps act like adjustable rate mortgages, which means that you
can live in a million dollar house for $450 a month for a few months or a few
years. But at some point, the real rent, maybe $4500 per month will come knocking
at the door. And that's why investors are particularly nervous about Greece and
other nations in the EU. No one really knows what the real rent is going to be
when it comes due.
Conclusion
Derivatives, by definition, are takeoffs on reality. Their outcome is derived
from current events, but are placed into the future. And while they take away
the pain in the present, they are just a way to store the pain for later examination.
In a perfect world, at least in the eyes of politicians, and other folks who
don't want to live within their means, they hope that when one derivative expires,
they can just buy another one and thus continue to put off the pain indefinitely.
You can play that game for a while but at some point, something will happen which
makes the game expensive and dangerous. In Greece's case, it wasn't even worth
the trouble, especially the trouble that it's caused.
According to The Journal: "In exchange for the good deal on rates, Greece had
to pay Goldman. The amount wasn't revealed. A payment would count against Greece's
deficit, so Goldman and Greece came up with another twist. Goldman effectively
loaned Greece the money for the payment, and Greece repaid that loan over time.
But the two sides structured the loan as another kind of swap. Treated as a swap,
the deal didn't add to Greece's debt under EU rules. All told, the marginal benefits
were small. Greece's total debt as a percentage of GDP fell from 105.3% to 103.7%,
and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms,
according to people close to Goldman."
Two things here have become increasingly important, aside from the fact that
Greece got duped. One is that the world is flooded with dollars and euros. The
other is that central banks want to mop up that excess liquidity. So far, China,
the U.S. and Australia have begun to tighten, in varying degrees. At some point,
tightening will spread elsewhere and easy money will be gone for a long time.
That's when the stinky stuff will really hit the fan. What we're saying is that
if Greece and others who have been clever for a long time think they have problems
now, wait about six to twelve months when China and the U.S. are both raising
interest rates in tandem. And that's when the cleverness can turn into despair,
just as what happened in Fantasia when the apprentice's magic tricks went all
wrong.
One final thought: "Greece's remaining exposure to the complicated arrangement
remains unclear." From a trading standpoint, until proven otherwise, the dollar
remains a solid long trade.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
|
|
|
Chart Courtesy of StockCharts.com
Humana (NYSE: HUM) and Aetna (NYSE: AET) may be forecasting
a tough future for the health care debate.
Chart Courtesy of StockCharts.com
News of government intervention in setting health insurance
rates in California last week may be eclipsed by news that
President Obama is putting forth a proposal that would
allow the federal government to limit rates for insurers
accross the country.
To be sure, health insurance rates are a problem. And so is access to care in
many cases. But from a market standpoint, the charts of both Aetna and Humana
have been looking increasingly negative for several weeks.
This is important because, until recently, the news about the fate of health
care legislation had been positive for the insurers, as the legislation looked
to have stalled. Yet, the Democrats seem to have regrouped, and the potential
for passage of the controversial legislation that has already been agreed to
by the majority is on the rise.
The clues that something was up started popping up in December 2009 for Aetna,
and in January for Humana. Both stocks have been steadily falling respectively
since then. Both are now trading below their 20 and 50 day moving averages, which
means that their short and intermediate term trends are heading lower.
Aetna is in a bit worse shape technically than Humana, as it's close to breaking
below its 200-day moving average, the line that divides bull markets from bear
markets. A sustained break below that key area would signal that investors are
giving up on the stock over the long term.
Humana is well above its 200-day line, which means that it could fall for a long
time before long term investors decide whether they want to take a chance.
The bottom line is that the market's message is pretty clear. It's a good idea
to stay away from these two stocks for now as the sellers seem to have gained
the edge over the buyers.
Correction: On 2-19, in this space, we reported that Halliburton was reportedly
trying to merge with Smith International. It is Schlumberger that is reported
to be looking to merge with Smith.
|
|
|
|
| |
|
