Thoughts From Joe - February 8, 2013

Top Eight

1. FCC Proposes Plan for free Wi-Fi for all. The Federal Communications Commission will include free telephone and internet service across the U.S. triggering fierce backlash from the wireless industry. The wireless industry is a $178 billion business. Does anyone really believe the government could do this for free?
   
2. The Trade Deficit narrowed significantly in December due to a surge in oil exports. Petroleum exports reached an all-time high, revealing newfound production strength that will likely convert the fourth quarter's GDP estimate from negative to positive. While it is easy to lie with statistics, it is also easy to use them honestly and still end up with the wrong answer. Because of this, it is very dangerous to boil down words like recession, recovery, and growth to a single measure as we usually do with GDP.
   
3. ECB President Mario Draghi expresses concern over the value of the euro. A rising currency makes exports less attractive and exporting goods and services is a desperate need for the eurozone these days. Balancing these concerns, the value of a currency is often a good measure of the world's confidence in that region. Last year Draghi stated the ECB would "do whatever it takes" to keep the euro together, which drove the currency off its lows from $1.22 to a high of $1.36. Now he is talking the euro down to ensure exports can keep pace. The market is putting a lot of faith in the ECB, however I wonder how long this credibility can be maintained without true reform (and pain) within the zone.
   
4. The government is suing the S&P rating agency for activities leading up to the 2008 financial crisis. The Justice Department is alleging S&P intentionally understated the credit risk of mortgage backed securities by rating them AAA and is using internal email discussions as their primary evidence. McGraw-Hill, owner of S&P, saw its stock drop nearly 27 percent during the week. Ratings agencies are compensated by the issuers they rate, who can determine service providers after knowing what ratings they will receive. The crux of this case turns on the intentions of S&P managers who may have overrated securities in an attempt to maintain market share. Any correlation to the fact S&P is the only agency to downgrade the U.S. from AAA is supposedly purely coincidental.
   
5. Ireland reaches debt deal with ECB. Ireland's debt relief deal with the ECB swaps 8% debt for 3%, saving the country $27 billion over ten years. Ireland was the first to receive bailout funds and has executed their austerity program successfully, bringing the country's financial situation more in-line. Ireland's path to recovery is not mentioned much in the press, but the country's successful efforts may allow them to borrow in the public markets again as early as this year. Yes, part of the pain was experiencing a deep economic recession. There is no free lunch.
   
6. Democrats are pushing for a short-term budget deal to delay sequester spending cuts. President Obama said this action would give lawmakers time to work out a comprehensive deficit-reduction plan, putting to rest the current fiscal debate. Sequester spending cuts were invented by the "Super Committee" in 2011 with the goal of being so egregious that Congress would have to come together on fiscal policy. When we neared implementation of these cuts on January 1, 2013, Congress decided to delay them for two months rather than work on the fiscal situation. Now Congress may decide to delay them again in order to gain more time. Some progress has been made (tax hikes implemented on January 1), but no real debate is occurring on the nondiscretionary spending that is our biggest challenge. Implementing a third delay in the process does not engender confidence solutions will be found before a fourth is needed.
   
7. Nasdaq is pushing for a settlement on its allegedly botched role in the Facebook IPO. A multitude of orders on the first day of trading created systems problems that prohibited the dissemination of trade data. The settlement may include a $5 million fine and has been approved by several of the firms claiming damages. Does it bother anyone else that a single branch of government (executive, through the SEC) has the power to be prosecutor, judge jury in cases such as this?
   
8. Happy Birthday! Six years ago today HSBC announced huge losses due to subprime lending and a requirement to restate its earnings for the year ended 2006. This was the first publicly announced indication that the subprime market was blowing up and widely regarded as the kickoff to the financial crisis. The link above is to a non-journalistic website as opposed to a publicly available news source. I typically don't like to use such links, however I could find no news source that recognized this anniversary. I would argue such an oversight is congruent with their reporting on the financial crisis since.

Key Indices

Source: Bloomberg

Looking Ahead

• Economic data next week includes retail sales figures that are expected to be lackluster.
• Earnings releases next week include:
  • Tuesday: Theravance, Rackspace
  • Wednesday: Cisco, NetApp, Equinix, Zillow
  • Thursday: Alexion Pharma, Agilent Technologies, QLIK Technologies
• Scheduled IPO activity for next week Cancer Genetics ($40mm, Tuesday) and Xoom ($86mm, Thursday)