matisse capital management

What's behind the 5.7% GDP Growth Reported Today?

It's all about inventory levels.  Fourth quarter US GDP growth was 5.7%.  Per the LA Times, it was "driven largely by a rebound in manufacturing and better-than-expected gains in consumer spending and commercial investments."  And what indicated the rebound in manufacturing? A big jump in inventory levels that made up 3.4% of the growth rate.   The NYT more pessimistically characterized it as "businesses ran down their stockrooms at a much slower rate than they had earlier in the year."  Either way, a jump in inventories could be a one-off, and is not in my opinion, indicative of a sustainable recovery.

S&P's Tough Stance on UK Banks, Japan's Debt

UK banks are no longer rated 'most stable.' Standard & Poor's publishes a list entitled "Banking Industry Country Risk Assessments," or BICRA.  The list rates and groups the banking industries of various countries on a scale from 1 to 10, with 1 being the most stable.  The groupings are determined by weighing gross problematic assets, banking regulations, and the strength of the local economy, among other factors.  Group 1 consists of Australia, Canada, Finland, France, Netherlands, Sweden, and Switzerland.

The UK was recently downgraded from Group 2 rating to Group 3, after being downgraded to Group 2 in December.  Other banking systems rated as Group 3 are the United States, Austria, Chile, Portugal and Saudi Arabia.  Specific causes for the downgrade were the tough UK economy and the high levels of household and government debt that will be a drag on any banking recovery.  Ireland was downgraded to Group 4  at the beginning of the year. Perhaps this is a precursor to a downgrade of the UK's sovereign debt rating? Recently S&P said it may downgrade Japan's sovereign debt and revised its outlook on Japan's "AA" long-term government bond rating to "negative" from "stable."

Berkshire Hathaway (BRK-B) Added to S&P 500

Share are up 4.5% since last night's closing price of $68.00.  From ABC:

"Shares of Berkshire Hathaway Inc surged on Wednesday after Standard & Poor's said it will add the company run by billionaire Warren Buffett to its S&P 500 stock index...S&P late Tuesday said Berkshire will replace Burlington Northern Santa Fe Corp in the S&P 500, and the S&P 100 index of big blue-chip companies, on a date to be announced.  The addition of Berkshire...follows the Nebraska-based company's 50-for-1 split last week of its B shares...Adding Berkshire to the S&P 500 also forces the portfolio managers who track the index to buy its shares."

November Case Shiller Index Falls Again

The 20-city index fell 0.2% in November, after falling 0.1% in October.   A third month of falling prices will create a new trend.  Overall the 20-city index is down 32.6% from the peak.  Over the past 12 months, home prices are down 5.3%, an improvement from the 18.2% drop the prior year.  However, the numbers are disappointing, as only five of 20 markets showed any price improvement.  Per David Blitzer, Chairman of the Index Committee at S&P: "On balance, while these data do show that home prices are far more stable than they were a year ago, there is no clear sign of a sustained, broad-based recovery.” The November data follows:

Companies Raising or Reinstating Dividends - 1/24

    CCL, Carnival Corp., reinstated at $0.10, quarterly; yield = 1.1%

    ED, Consolidated Edison, from $0.59 to $0.595; yield = 5.5%

    JEF, Jefferies Group Inc., reinstated at $0.75 quarterly; yield = 1.2%

    PLL, Pall Corp., from $0.145 to $0.16 quarterly; yield = 1.8%

VIX, the Street's Fear Guage, up 22.6%

The VIX ended the week at 27.31.  It began Wednesday at 18.51; a 22.6% rise in three days.  VIX is the Chicago Board Options Exchange volatility index for the S&P 500.  It is calculated using option prices and, at 27.31, it mathematically means the index options market expects the S&P 500 to move up or down 7.9% in the next 30 days.  According to Reuters, this was the largest three-day increase in the VIX in three years.  Note the steep rise last week at the right side of the chart:

The Berkshire-B Share Split

Berkshire Hathaway B shares (BRK-B) sold for $3,476 on January 20th.  They opened the next morning at $71.00 after a 50:1 split.  This makes Berkshire more accessible to small investors, but it really had to do with the acquisition of Burlington Northern (BNI).  Markel (MKL) which is similar to BRK-B in holdings trades at $330.50.  From WSJ:

"Berkshire's cash and stock offer will pay Burlington Northern shareholders $100 per share at 60% cash and 40% Berkshire Hathaway stock. Chairman Buffett proposed the split to accommodate holders of small amounts of Burlington Northern shares who would want to receive Berkshire Hathaway shares when the acquisition closed....'By splitting Berkshire "B" shares 50-for-1, we can accommodate even the smallest holdings of BNSF shares that elect a tax-free exchange,' Berkshire Hathaway said in the November announcement...It also said that the split was advisable regardless of the Burlington Northern transaction....Berkshire Hathaway shares aren't included in the Standard & Poor's 500-stock index, but the new, lower price could mean that the B shares would be eligible.

 

Companies Raising Dividends -1/21

    AFG, American Financial Group, from $0.13 to $0.1375, quarterly; yield = 2.2%

    CVS, CVS Caremark Corp., from $0.07625 to $0.0875, quarterly; yield = 1.1%

    DEP, Duncan Energy Partners, from $0.4275 to $0.445, quarterly; yield = 7.1%

    OKE, ONEOK Inc., from $0.42 to $0.44, quarterly; yield = 3.9%

    SJR, Shaw Communications, from C$0.07 to C$0.073 monthly; yield = 4.3%

    TIF, Tiffany & Company, from $0.17 to $0.20, quarterly; yield = 1.9%

    WPO, Washington Post Co., from $2.15 to $2.25, quarterly; yield = 2.0%

Will Inflation Force Bank of England's Hand?

In December, inflation jumped to 2.9%.  This represents a 1.0% jump from last month's annualized rate and exceeds the 2.0% inflation target of the Bank of England (BOE).   Currently, the bank's main rate is at 0.5%, a record low.  Will it be forced to raise rates in a weak economy because of inflation?  From the Telegraph:

"It was the first time since May that inflation has risen above the Bank of England’s 2pc target, and economists predict inflation will rise above 3pc this month, reflecting the reversal of the VAT cut on January 1 (2010)...At that point Mervyn King, the Bank's Governor, would be required to write a letter to the Chancellor, explaining why inflation was more than a percentage point above the target...The retail prices index (RPI) - which includes housing costs - rose even more sharply, to 2.4pc from 0.3pc in November...The staggering one percentage point jump in CPI in December was the biggest since monthly records began in 1997, and presents the Bank’s Monetary Policy Committee (MPC) with a dilemma, as it weighs up the need to maintain support for the economy with the threat of inflation."

Real Estate Prices in Japan

What have they done, historically?  You might wonder, since many have compared the current US recession to the lost decade or two in Japan.  Below is a chart from The Japan Real Estate Institute (JREI), tracking commercial, residential and industrial prices in the country's six largest cities, between the third quarter of 1985 and the third quarter of 2009.  The index base of 100 was set in March 2000 for each property type and the chart plots the percentage change in prices year over year.  The top line represents commercial property, the middle line is residential and the bottom line is industrial.  You can find other JREI data here.  Note that home prices are at, or below, 1985 levels.