February 6, 2013

DJIA:13,979 NASDAQ:3,171 10-YR TRS: 11/32, yield 2.013% Oil:$96.64 EURO:$1.3582 YEN:93.65

Tax Deductions & Market Distortion

A rundown apartment building is without air conditioning. The government has offered a tax deduction for landlords who install ventilation units. The landlord decides to innovate and, as a result, the quality of life improves for his tenants at no additional cost to the residents. The landlords do not care about the price or quality of the newly installed ventilation systems, given the tax rebate, leaving the over-burdened government to further compromise itself by handing out rebates it cannot afford in an inefficient manner. This is just an example, but scenarios like these are not unique. But is using taxation policies to incentivize business owners to innovate a logical practice in an economy driven by consumption? Because the innovation was not subject to the laws of supply and demand, the market for low income housing and air conditioning has been distorted. Low income tenants now expect air conditioning at the government’s expense, and the ventilation market is being driven by cheap quantity rather than by quality units. The governments should not interfere with market economies, especially by way of revenue loss it cannot afford.

Domestic News

• Market Update. Futures are in the green as the empty economic calendar lets the excitement and optimism from the massive rally in the Japanese stock market carry into the US markets.
• The Federal Reserve was a victim of a cyber-attack! Richmond’s Fed announced last night the attacked was able to access at least 4,000 bankers’ data. The Fed reassured us that they were able to stop the attack coon after it had been discovered. 
• The deficit will fall below $1T this year for the first time since 2008, according to CBO forecasts. If the automatic cuts go as planned in March, then the deficit will drop to $845B in 2013 and $616B in 2014. CBO also forecast a slowdown in GDP growth to 1.4% in 2013 before accelerating to 3.4% in 2014.

International Updates

Asia

• Market Update. Japanese stocks soared to their highest level in more than four years as the yen skids. Hong Kong markets rebounded from Tuesday’s nasty losses with banks pulling higher. 

Europe

• Market Update. European markets are rallying which is no doubt thanks to the jump in Japanese equities. Drug makers and oil firms are the leading decliners. Investors await German manufacturing data. 

Corporate

• Liberty Global (LBTYA) agreed to buy Virgin Media (VMED) for $16B in cash and stock. The acquisition is the largest media transaction since 2007, putting it in competition with Comcast as the biggest cable provider and open a battle ground with News Corp. 
• Vale  (VALE) wants to dump $7B on developing mines in seven African countries before 2014. These investments include coal in Mozambique, iron and ore in Guinea, and copper in Zambia, the Democratic Republic of the Congo and in Angola.
• Google’s Youtube (GOOG) is rumored to be in talks with Sony’s (SNY) music video service Vevo to invest $50M in exchange for a 10% stake. Vevo attracted 51.6M American viewers in December.