Archive by Author | JonathanLuciano

Fed’s Lacker Says More QE Won’t Boost Growth While Posing Risk

There’s always a critic it would seem, especially when it comes to monetary policy and the direction Ben Bernanke has taken with Quantitative Easing. Federal Reserve Bank of Richmond President Jeffrey Lacker spoke out against Ben Bernanke’s policies, citing risks that could occur with little potential for growth benefits if Q.E. continues. 

Although the Federal Open Market Committee has stated that it will continue making large purchases of bonds, versus tapering off their spending, it has since shifted their opinions to that of uncertainty about the future. Now, although it is still buying, the F.O.M.C. may decide to reduce spending if certain signals are sent concerning inflation and the labor market. Lacker claims that the current pace of purchases will not be sustainable. Also, the amount of regulations and weakness in Europe will pose a risk of hurting businesses. However, Lacker does not have a vote on the current policy at the moment.

“Recent reports on retail sales, factory production and household spending have pointed to a slowdown in economic growth this quarter.” Whether or not that will affect the Fed’s future decisions remains to be seen, since the slowdown could worsen if the wrong actions are taken.


China Affair With Cheap Diamonds Heats Mass Market: Commodities

Before, the trend in China for the demand of luxury goods, such as diamonds, was that the consumers wanted the best of the best. Only the richest elite could afford luxury goods. However, a shift in the demand for diamonds specifically points towards a new trend of a growing middle class, both in size and in income. Lower quality diamonds are now being purchased, and although they are lower in price, they make a much higher portion of diamond makers’ revenues now.

“China surpassed Japan in 2011 to become the biggest diamond consuming nation behind the U.S.” The fact that most of these diamonds are now lower quality, the indication is that the majority of the population are buying them. Specifically, the urban population, of which China has seen a growth of 230 million people since 2000, “the greatest urbanization in history.” Also, income has seen a growth of 13 percent, or about $330 a month, allowing greater spending on luxury goods.

The long term view of the diamond industry is that the population and consumption of goods will only increase in China through 2020. This means diamond producers will have to expand their resources to try and ensure that their supply can meet demands.


Biofuel Pioneer Forsakes Renewables to Make Gas-Fed Fuels

Since 2006, Royal Dutch Shell Plc. has invested $375 million a year into Codexis inc., a biofuel company whose C.E.O. had resigned and is now renouncing the use of biofuels. The former C.E.O., Alan Shaw, has stated ” it’s impossible to economically turn crop waste, wood and plants like switchgrass into fuel.”

Defendants of biofuels say that it is too soon to make judgments about the whole industry since it is still in its infancy. Compared to Wind and Solar energy, biofuels are very young. There are still many other methods that fall under the biofuel category that are being developed. Also, there seems to be a temporary shift of funding from biofuels to gas due to the recent boom in oil commodities, which may be reducing support for the biofuel industry.

” Codexis fell 4 percent to $2.15 at 12:39 p.m. in New York, down 83 percent from the IPO price.”

The fact that there has been a huge boom in the amount of oil available makes a big difference to the energy industry. If oil is so prevalent  there is no need to panic for finding new energy sources. Of course, environmental factors are still being considered, but in terms of profits, the need for new fuel sources doesn’t seem as immediate if the oil is available.


Detroit Three Zombie Slayers All Gained U.S. Market Share

There is a major shift occurring in the U.S. with the market share of automobiles, and the U.S. manufacturers are taking full advantage of it. After many years of painful turmoil and restructuring, the American vehicle manufacturers are new and improved, ready to win over a larger portion of their domestic markets. Ford, the only major car company spared from bankruptcy, is in the lead with a 17 percent increase in sales. A large portion of the sales are from the F-Series trucks. The Escape and Fusion are selling well also, and Ford is planning to expand its luxury line with the Lincoln.

Chrysler and GM have seen gains as well, which is significant, as this is the first time this has occurred in two decades. Chrysler had a net income drop of 65 percent, but they reaffirmed their long term forecast and put the blame for the drop on temporary issues.

A major macroeconomic issue to observe is how Japanese car companies are going to utilize the change in the Yen’s value to increase their competitiveness. Also, Toyota is currently leading as a major competitor with the Camry. It has held the spot for top sold car in the U.S. for twelve consecutive years.


Perth Mint Works Through Weekend as Gold Demand Surges on Price

It would seem that the drop in the price of gold was only a temporary occurrence, and investors are looking for a return to higher levels. Also, the demand for gold is on a global scale, even from the U.S. Orders were so high over the weekend, “the highest level in five years after prices plunged,” that the U.S. Mint had to suspend sales. Ron Currie, sales and marketing director of Perth, said that sales in April tripled in comparison to that of March.

Billionaire John Paulson has been an advocate of gold, maintaining a bullish stance on the market. He expects “central-bank buying and demand in Asia will support the metal in the near term.” “Central banks will buy as much as 550 tons this year after boosting holdings by 534.6 tons last year, the most since 1964, the World Gold Council estimates.”

If there is a bubble in gold, it isn’t going to be popping anytime soon. Investor demand is clearly still present, and the drop in price must have been a temporary sell off. The devaluation of money is definitely a strong motivator to invest in gold. I think that the sell off may have resulted from talks about the Fed tapering off their policy by the end of the year, but since it has reaffirmed continued economic stimulus, confidence in gold must be rising.

Lazard’s Profit Falls 17% in First Quarter

When it comes to the mergers and acquisitions market, investment banks often go through unstable quarters due to the unpredictable nature of the deal timings. Unfortunately for Lazard, profits fell 17% this quarter when compared to the same time a year ago. Total revenue fell 17 percent as well.

A surprising detail is that Lazard had a decrease in revenue for both deals and restructuring. “The two are meant to be counters to each other, one waxing as the other wanes, as the economy does.” In contrast, Lazard’s asset management arm saw revenue rise by 14 percent and compensation expenses fell roughly 2.7 percent.  Lazard’s rivals saw strong growth in the advisory practices.

The M&A market is difficult to use in predicting the economy’s future, in that the health of the market is never consistent. While Lazard claims that a surge of deals earlier in the year created a dearth of deals now, that does not explain how Lazard’s rivals were able to maintain revenue growth. Also, the fact that compensation is down could be considered a sign of weakness, although C.E.O. Kenneth Jacobs has advocated for more restraint concerning pay. Overall, however, I still remain positive about the M&A market, and I feel that the growth overall of deals can still be used as evidence that the economy headed in a positive direction at least for the corporate side.


J.C. Penney’s Johnson Cleanup Includes Unpaid Contractors

J.C. Penney is still dealing with multiple issues left behind by former C.E.O. Ron Johnson, including litigation that claims construction work orders by the company went unpaid for. The construction work was ordered to create Johnson’s new vision of the shopping experience in J.C. Penney stores, but the vision did not fare very well with consumers.

J.C. Penney has been having cash issues for a long time apparently, as the construction companies allege that J.C. Penney continuously put off payments for work, which in turn raised costs of construction due to delays. At the moment, the costs are still going to be unpaid and add on to the money woes of J.C. Penney. One of the largest issues surrounding the company is how much money it has spent under Ron Johnson. Now, investors are still giving funds, like George Soros, and J.C. Penney also has a $1.75 billion loan commitment from Goldman Sachs. However, given that the company lost $985 million last year, that money may not last for very long if the new C.E.O. can not turn things around.

With these new costs appearing and sales continuing to decrease, I still remain highly pessimistic about the company’s future. Given that the economy statistics recently released were less than stellar, there is even more concern for J.C. Penney if consumer spending as a whole drops. I do not think J.C. Penney will be able to successfully fix its problems for a long time, if ever.



Treasuries Gain as U.S. Economic Growth Is Slower Than Forecast

It would seem that the celebrations about a recovering economy started a little too early. There is a looming slowdown threatening to appear in the U.S. recovery. Recently, some economists were considering the possibility of tapering off the current stimulus policy in place by the Fed, but those plans will surely be halted now. Consumers seem to be losing faith. Confidence has slipped, and “the economy has already lost momentum.”

In observing the treasury markets, there seems to be the belief that the government will be continuing its quantitative easing for quite some time. Volatility has hit a record low and the ten-year note yield continues to fall. The current yield, 1.155, is lower than the forecast from a Bloomberg news survey, 1.163.

It would seem that the lingering recession is still on the economy’s tail, forcing the Fed to remain aggressive in its fight against deflation. Thankfully, the Fed has set benchmarks that it hopes to reach through its quantitative easing, and until those goals are all reached, it is expected that Bernanke will stay the course. However, Bernanke may not be the one in charge of the recovery efforts if the process takes too long, since his second term ends in January 2014.


Japanese Seek Refuge in Bullion as Yen Slumps, Inflation Looms

The price of gold has been fluctuating wildly, dropping one day and hitting new lows and then the next day the price is up again. While an improving economy may draw money from gold, certain economies, Japan specifically, are certainly filling their reserves with the precious metal. Japan is going to be buying a lot of gold in the years to come, and “consumers are poised to become net buyers of gold for the first time in eight years.”

There has been a direct correlation created between the drop in the Yen and the price of gold. “Every one-yen depreciation in the Japanese currency against the dollar can boost bullion prices in Japan by 50 yen a gram, assuming the international market is unchanged…” meaning that as the value of the Yen drops, the change in price of gold will only intensify.

I think that by looking at gold, a good picture is given of how Japan’s consumers feel about the inflation plans set by the government, and it’s saying they are confident that the government is going to be successful. There has been a lot of doubt surrounding Japan’s inflation initiative, but Shinzo Abe has firmly supported the plan and does not seem to be wavering. I think that Japan will successfully decrease the value of the Yen. However, I thought of a major concern while reading this article. Growth is largely created by increased consumer spending, but that spending does not do much to aid the economy if consumers are just purchasing gold. I think that, if the gold buying pattern continues, Japan is going to have a much harder time creating inflation, since the consumer mindset is still stuck on the idea of conserving money, rather than the need to buy more goods.


Ackman-Backed CEO Pushes CP Rail Profit Above Estimates

In recent news, Bill Ackman has not been the most favorably viewed activist investor, facing criticism for his announcement of a major short in Herbalife and personally announcing why he thinks J.C Penny, a company he owns a large stake of, failed to turnaround its sales. However, things are looking up for Ackman since he was vital to changing the CEO of Canadian Pacific Railway, which just posted profits that beat analyst estimates. Canadian Pacific Railway is working to remove its name as the “least efficient North American railroad.”

Since Hunter Harrison, the new CEO, took over, the stock of the company has seen a 72 percent gain. It is expected that the company will continue to cut and become a lean efficient railroad, utilizing its current momentum to further reduce costs. So far, Canadian Pacific Railway has only cut three-fourths of the total jobs planned, and the total is expected to reach 4,000 by 2013. Also, the better economic environment will help all companies involved with transportation of goods. Revenue growth is expected to grow at a very rapid pace in Canada due to crude oil. “Demand for oil is such that Chief Marketing Officer Jane O’Hagan said today that Canadian Pacific may be able to achieve a run-rate of 140,000 crude carloads by the end of 2015. The railroad carried 53,500 carloads of crude oil last year, a 19- fold increase from 2010.”


Yum Profit Tops Estimates as Taco Bell Bolsters Sales

Amidst turmoil in China, Yum! Brands is experiencing much better growth in the domestic market as sales of Taco Bell are up in America. The increase in sales was enough to offset losses in China. China recently has been facing a drop in sales due to a scare in the chicken supply and the current environment involving bird flu.

Although the net income of Yum! Brands has decreased from a year ago, it was still able to beat analysts in terms of profit per share, hitting 70 cents per share versus the average estimate of 60 cents. The stock rose 5.7 percent, off-setting losses from the incident in China, but the stock is still down an overall 3.4 percent for the year.

I feel that the increase in sales in the domestic market is a strong indicator of the confidence the consumer has in America, especially considering that Yum! Brands was still able to top estimates with China dragging down total sales overall. However, although Yum! Brands is working to introduce new products that will boost sales in America, I think it is very important that they resolve the problems that plague the brand in China, or else sales will continue to drop and hurt total sales to the point where the domestic market alone will not be enough to pull up the average.


S&P Early Victory in U.S. Fraud Suit Seen as Unlikely

McGraw-Hill is fighting a lawsuit from the U.S. Government, and the deadline to file their response is today. Specifically, the S&P unit is the one in trouble, recently drawing fire from the government that had made claims that their credit ratings were fraudulent and a major cause of the 2008 financial collapse. The S&P unit is facing more than $5 billion in penalties if the government’s claims are uncontested.

The government has cited emails between S&P employees that indicate fraudulent business practices, such as giving lower ratings to attract more business. Since the raters did not have any actual connection to the ratings they gave out, they could easily inflate ratings without any direct consequence. The focus of the government is the allegedly fraudulent ratings of collateralized debt obligations, which were a major factor of the housing bubble and the ensuing plummet. In their defense, S&P will have to consider the best way to present their case against the government while also working to preserve their name in the public’s eye so that they can continue to draw business as a reliable credit rater.

According to an expert’s opinion, the case will probably not go to trial, and instead, S&P will settle with the government. The government is “looking for a scapegoat.” In my opinon though, I wonder if S&P can really just settle and basically admit fault by paying the penalties without severley affecting their business. Their stock dropped significantly after the announcement of the lawsuit.


SeaWorld C.E.O. Hints at Overseas Ambitions

SeaWorld is one of the best known brand names, easily recognizable by people across America, but SeaWorld has remained just that, an American chain. Now, C.E.O. James D. Atchison has announced plans to change that and move the chain to an international level.

After a very successful I.P.O., SeaWorld has the assets available to reduce debt and expand aggressively, assisted by much greater confidence in the economy boosting consumer spending. This new consumer mindset is much different from that of 2008, when SeaWorld halted plans to expand. There are possible plans to build in Dubai.

SeaWorld’s confident stance is an example of how large owners in the company can make a big difference in how a business fares. Under their prior owner, Anheuser-Busch InBev, the focus of the SeaWorld brand name and entertainment chains were not the best for the company, affected by Anheuser-Busch InBev’s focus on alcoholic drinks. Now, under Blackstone, Atchison is excited to see a better utilization of the SeaWorld name.

I think that if SeaWorld is planning expansion internationally, an entertainment business reliant on extra disposable income, there must be a lot of confidence in a brighter economy. Although the short term may still be uncertain, by the time the arrangements are made and the park is established, I’m sure Atchison is expecting a much more favorable environment.


Gold Wipes $560 Billion From Central Banks as Equities Rally

There is a major shift occurring in the way that gold is perceived as an investment, and it is causing the price of the metal to plummet. After reaching a record high in September 2011, it has now reached a two year low. Money is moving from the standard safe-haven metal to equity markets, indicating further confidence in the overall economy and possibly reinforcing the belief that the price of gold is a bubble on the verge of collapse.

I think the price of gold is something very important to watch given the aggressive macroeconomic policies of many countries. It is expected that the value of currencies would drop, and there are even talks of currency wars, but the price of gold continues to drop in spite of that. I think that means either investors are not concerned with the inflation risks anymore or that the bull market created by economic stimulus is just too attractive to have money sitting on an investment primarily used just to hedge against inflation. However, there is also the underlying factor of fear that the gold bubble could collapse at any moment, and I wonder what the effect of a dramatic drop in gold could have on the banks’ measurements of assets given that so much of it is in gold at the moment. Overall though, I understand the shift at it’s most basic level, in that the movement of funds to equities is a positive indicator of growth, especially considering that gold contributes little to creating any growth at all.