January 31, 2013

DJIA:13,910 NASDAQ:3,142 10-YR TRS: 6/32, yield 2.009% Oil:$97.94 EURO:$1.3567 YEN:91.09

An Underfunded Riddle

What is growing by $17 million in debt each day, valued at roughly $100 billion, has a debt-to-liability ratio of 39%, and has UNFUNDED written all over it? Illinois’ state pension fund, of course! In 2008 Illinois paid out $1.8B in pension payments alone, which is forecast to grow to $5.1B for this year and $6.1B for 2014. Over $32B has been extracted from the state budget for pension payments, forcing the closure of many state-run institutions, including juvenile detention centers and prisons, and taking money from college financial aid, student scholarships, and pre-k centers. Illinois has no long-term plan for their pension fund, yet the General Assembly closed session without a deal on pensions on January 8th. Naturally, unions posit pension payments as a constitutional right, which only makes matters worse. On January 11th, Fitch Ratings downgraded the state to “negative outlook” based on the ballooning pension plan. However, the Fitch downgrading is the least of Illinois’ troubles. Both the unions and the state of Illinois will have to take responsibility for their pension fund’s mismanagement and produce a long-term plan that will stabilize and systematize the fund’s financing; the only alternative is the fiscal ruin of nearing default. 

Domestic News

• Market Update. Little changed as investors wait for the job report. 
• California is set to receive an increase of $5B in tax revenue for January that it has previously expected. 
• Weekly jobless claims will be released at 8:30 and is expected to rise to 355,000 up from 330,000.
• The employment-cost index for Q4 will also be released at 8:30, forecast to show little changed labor costs.
• Consumer-spending and personal-income data for December will also be released at 8:30, and is forecast to rise 0.2% and 0.9% respectively. 
• The Chicago purchasing-managers index on factory activity will be released after the bell at 9:45, there is expected to be some improvement but still expected to remain below the 50 growth threshold for January. 

International Updates

Asia

• Market Update. On a whole Asian markets traded down, but investors are swallowing the losses and taking profits from a solid month of gains for most regional equities.  
• Japan’s industrial production for December is +2.5% M/M, must higher than November’s 1.4%. This is another indicator that the Japanese economy may be recovering. 

Europe

• Market Update. Trading down for the second day from a mix of earnings reports and German retail sales that has disappointed investors. 
• German retail sales suffered the biggest drop since May declining -4.7% Y/Y for December, which is lower than the forecast of -1.6%. Food, drink, and tobacco were down -4.1% Y/Y, clothes, shoes, and textiles down -6.5%.
• German unemployment has fallen for the first time in ten months! For January, it fell 16,000 to 2.92M, which is better than expected. It fell to 6.8% unemployment from 6.9% in December. 

Corporate

• Facebook down almost in premarket trading 4% after reporting a plunge in profits due to higher spending. Net income fell 79% to $64M, operating expenses rose 82%, and 40% revenue gain. Lots of concern about margins as they may come under pressure.
• Barclays (BCS), HSBC (HBC), Lloyds (LYG, and RBS (RBS) have agreed to compensate small businesses for improperly sold interest-rate derivates after U.K. regulators discovered that they did not follow rules in 90% of the 173 deals. 
• Earnings: