June 1, 2010

With the VIX closing at 40.10 on May 21^st and correlation across almost every single asset class locked at 1.0 it would appear that investors are battening down the hatches early for what the National Oceanic and Atmospheric Administration (NOAA) says could be the busiest hurricane season since 2005.  The federal weatherman (imagine the chance of being right when you put those two together!) believes there is a 70% chance of 14-23 named storms of which 8-14 could grow into full fledged hurricanes.  “If this outlook holds true, this season could be one of the more active on record”, said Jane Lubchenco a NOAA administrator.

The forecast of storms ahead seems like little else but more of the same as Fitch arrived late to the downgrade party on Friday knocking a notch off of Spain’s debt putting it at AA+.  If the CajaSol conundrum turns out to be more than an isolated incident Fitch’s forecast will look timid at best with NOAA having a higher probability of being correct.

The move in the S&P 500 from the intraday high of 1219.80 on 4/26 to the 1040.78 intraday low on 5/25 came to 14.68% which is a healthy number for a correction but no so robust that crossed over the technical definition of a bear market which wakes from its hibernation at 20%.

Whether we get there or not is still for the future to decide but strategists at HSBC found that the timing of this correction is in line with others they looked at going back to the 1940’s and averaged around 12% which is the number for this one if you look at closing levels.  Additionally, the Bespoke Investment Group found that a drop similar to May’s produces double digit gains in the following three months.

The American Association of Individual Investors (AAII) weekly poll showed 51% of its respondents to be bearish last week while 30% still had their horns on.  This number is used by some as a contrarian indicator and to the extent that it is true it supports the move in the Bloomberg Financial Conditions Index which closed last week at -1.027 after hitting a low of -1.530 on 5/20.

Morgan Stanley’s global strategist, Gerard Minack, thinks, “there is a risk the growth slowdown is more pronounced in 2011, but we doubt investors will see enough news to price in such a risk in, say, the next one or two quarters”.

Thomas J. Lee, J.P. Morgan’s head of U.S. Equity Strategy also thinks we’ve seen the worst of the correction citing “analysis paralysis” by investors, the AAII Diffusion Index’s move to negative territory (-21%) and the amount of time since the “Flash Crash” as reasons for his upward bias.

For all of the worries about Greece, Nicolas Bornozis, President of Capital Link, published a 12 page advertisement in Barron’s this weekend with a number of charts included.  Among them was a depiction of the Baltic Dry Index from 2001 to the present which showed renewed upward movement, once again nearing highs seen in 2009 along with a bar chart of Chinese iron ore imports estimated to reach close to 700MM tonnes topping last year’s number.  World oil demand was also shown to be over 87.25MM bbls/day, very close to the high of 87.50MM bbls/day seen in January of 2008.

Vito Racanelli used the recent sell-off in Europe to highlight 10 stocks he thinks are worth owning among which are BMW and LVMH.  The basis for his rationale was companies that have a majority of their costs in Euro’s but get a majority of their revenue from outside the Eurozone.  Andrew Garthwaite, an equity strategist with Credit Suisse is in Vito’s camp as he notes that “47% of the market cap of the Euro Stoxx 50 offer a dividend yield higher than their respective government bond yields.”  “88% of the time the Euro weakens, Europe outperforms in local-currency terms”, he says.

Paul Hickey, founder of Bespoke Investment Group, was siding with Vito saying the that the recent correction was “the baby getting thrown out with the bath water” for emerging markets and came up with his own 10 names of companies that have ADR’s listed here in the States including Companhia de Bebidas das Americas (ABV), Baidu (BIDU) and Credicorp (BAP)

While maybe not one of Vito’s 10 picks but definitely within the realm of luxury, Daimler AG CEO, Dieter Zetsche, was ebullient when describing his outlook for the company’s Mercedes-Benz Cars unit after announcing a 12% increase in sales for the brand.  “From today’s perspective, assuming there is no further downturn of the world economy, we expect Mercedes-Benz Cars to achieve its targeted return on sales of 10% in the second half of 2012 and to maintain it as of full year 2013”.  The engine for this growth?  “China is increasingly becoming the center of gravity of the automotive industry”.

The revival of luxury brands is not just a Euro thing as Tiffany & Co recently announced that its fiscal first quarter earnings more than doubled.  “Our business performed exceptionally well in the first quarter, continuing the broad-based improvement we began to experience in the second half of 2009”, CEO Michael Kowalski said.

It would also appear that the recovery is not just at the top as George Pipas, sales analyst for Ford Motor Co (F) said “the U.S. auto industry will continue its current pace and finish May on track for an annual sales rate of slightly more than 11MM new cars and trucks”.

Speaking of driving another part of the silver lining to come from the recent correction was an average price for a gallon of gasoline of $2.827 according to AAA.  “We expect retail gasoline prices to fall even as Memorial Day approaches”, said Tancred Lidderdale, a senior economist at the federal Energy Information Administration.  Given that the average household spends about 4%-5% of it’s budget on gasoline Goldman Sachs found recently that a $10-per-barrel drop in crude oil prices could result in saving households about $20BN a year in energy costs.  If 70% of those savings were spent elsewhere Goldman notes, it would boost GDP by about 0.1%.

Other signs that the rebound continues can be found in the technology sector where “the days of I’ll take what I can get are over”, according to Mark McClain, CEO of SailPoint Technologies Inc, referring to the company’s ability to attract talent.  “As hiring improves in the Valley, I’d expect that we might have to start looking at bonuses, salaries, or options again as ways to attract people.  We feel some of that tightness coming back”, he said.

And for those who think “all work and no play makes Jack a dull boy”, Polaris Industries Inc. (PII) maker of ATV’s and snowmobiles is finding it a challenge to keep its dealers with enough inventory.  Having cut back during the downturn Scott W. Wine, the recreational vehicle maker’s CEO says that cutting inventory might crimp 2010 revenue growth.  Brunswick Corp (BC) cut boat shipments to its dealers by 54% in 2009 but the company is now finding “sales this year are better than we expected for all products” said Bruce Byots, a BC VP, said.

One of the keys to sales is advertising and Jon Swallen, Kantar Media’s VP of research says, “Ad spending has started to improve, and TV is at the forefront of the pickup”.  Jon noted that spending on TV rose 10.5% in 1Q10 and that “the indications are that it’s continuing into the second quarter”.  One network executive thought that overall upfront commitments could be 15% above last year.  “Once it starts to move I think it’ll move pretty quickly”, he said.

It would be naïve to ignore the risks that exist at the moment but equally innocent to ignore all the progress that is being made.

Enjoy the week.

Jim Delaney

May 24, 2010

It can be debated whether the Keynesian school of economics is the right or wrong way of managing a nation’s finances but one thing John Maynard said has remained true since the words were uttered.  “Markets can remain irrational longer than you can remain solvent”.

With this in mind and in light of the market’s movements since the “Flash Crash” on May 6^th I have noticed an increase in the number of bears that have resurfaced to proclaim the end of the rally and resumption of the coming of the end of the world.

The CBOE’s VIX or Volatility Index peaked at 46.37 on Thursday closing just below that at 45.79, giving credence to the level of trepidation that currently exists.  All of this had even more of an impact since the VIX had closed at a multiyear low of 15.58 on April 12^th.  How quickly things can change.

As I have written before good news doesn’t sell newspapers and the media has been feasting on all things downward related since the first week of this month.

In trying to rationalize all of the irrationality I searched to see if there was any heft to the hype and came up with a few interesting tidbits.  I will warn you however, that they aren’t all necessarily in tune with beat of the bear dance.

All those worrying about the Fed raising rates should note that the latest inflation numbers, a YoY increase of 0.9% excluding food and energy, were the lowest in the last 44 years which gives Ben Bernanke & Co. a break on at least half of their stated mandate of price stability and full employment.  With rates near zero and no real reason to raise them another Wall St. adage comes to mind: “Don’t fight the Fed”.

The U.S. trade deficit’s expansion by 2.5% to $40.4BN in March was the result of an increase in both imports and exports.  Ted Wiesman, an analyst with Morgan Stanley said, “If the European crisis prompts the Federal Reserve to keep interest rates lower for a longer period of time, it could spur growth in the U.S.”

In line with a brighter outlook Jeffries & Co. expects a $1.2TN Federal deficit this year while Nomura is predicting a $1.28TN shortfall and Deutsche Bank $1.3TN.  While these numbers are nothing to sneeze at the government’s own projection was for a $1.4TN deficit after digging at $1.6TN hole last year.

The lower deficits will translate into less debt being auctioned which will lower the competition in the capital markets ultimately making it easier for corporations to borrow.  Credit Suisse expects the Treasury to sell just $900BN in debt between now and the end of the fiscal year in September.  That is down from the $1.4TN it sold from last October to April of this year.

A lower deficit and less borrowing would also make the country’s CEO’s less nervous as many cited the nation’s red ink as a major worry when polled by the Business Council and Conference Board which showed that 70.4% of respondents expect the U.S. economy to expand 2.1% – 3.0% this year.  Jamie Dimon, CEO or JP Morgan Chase (JPM) said, “The health of the companies, both large and small, seems to be getting stronger all the time”.

CEO confidence would appear to be more than just words as Credit Suisse’s North American research group said in a recent note: “We believe that U.S. companies are now ending their recent enforced hibernation.  Survival mode is over and Corporate America is breathing easier, with cash as a percentage of market cap and aggregate free cash flow yield at all-time highs.  Now it’s time [for the companies] to cash out.”  Mark Flannery CS’s U.S. director of research believes “share repurchases will be the most predominant – and, generally the most appropriate – choice”, for how the corp’s spend their cash.

The results of the most recent earnings season also support CEO confidence as profit growth is expected to rise 87% for the companies in the S&P 500, a new record and one that blows away the previous high mark of 35% in 2Q93.  “Earnings season was much more impressive than I expected said Alan Lancz, president of Alan B. Lancz & Associates.

Confident CEO’s are a good thing but all we hear is that 70% of our GDP is consumption based and the logic there says people need money to consume and a job to have money.  The news here shows promise as well as the statistics for April showed a net gain of 290,000 jobs.  Alan Levenson, an economist for T. Rowe Price Associates, said: “We’re on more solid ground after these data than we thought we were.  That should reduce, at least at the margins, the concerns that ones might have had of the impact on our economy of what’s going on in Europe”.

Some countered the good news of the increase in non-farm payrolls by saying that the unemployment rate ticked up from 9.7% to 9.9% but Julia Coronado, a BNP analyst, countered right back saying: “People are encouraged to come back in the labor force and start looking for job, its good they’re not so discouraged anymore”.

Monster Worldwide Inc. (MWW) Chairman and CEO Sal Iannuzzi thinks the April jobs numbers could be the start of a trend, “It’s across the board, it’s in virtually every segment, every professional or occupational sector, we are seeing increases in demand.  The mood, the discussion, for our customers is much more positive than it has been.  It looks sustainable”, he said.

The numbers, here too, seem to back up the impression as the jobless rate in 34 states and the District of Columbia fell last month even though the headline number ticked up by 2 tenths.  From a payroll standpoint the numbers were even better with 38 states plus D.C. marking gains.

It’s appears the improvement is not just the number of jobs but that the environment is also improving for those with jobs as a number of companies are giving employees raises.  “They are feeling more confident in how 2010 will shake out” and want to ward off poaching was how David Smith, MD of Accenture PLC’s talent and organization performance group put it.

Another statistic, although a bit quirky, backs up the improving jobs picture; 1.9MM people quit their jobs in March while 1.8MM were fired in what is being interpreted as a sign of growing confidence on the part of employees that more positions are becoming available.

Industrial production was also higher, gaining 0.8% in April as manufacturers raised output of raw materials and construction supplies according the Federal Reserve.  “It’s important to recognize that we’re now in a solid recovery”, said Frederic Mishkin, a Columbia Business School professor and former Fed Board Governor.

The Institute for Supply Management survey of factory purchasing managers showed 17 out of 18 industries experiencing growth in March while the index for new orders rose 4.2 points to 65.7.  This was taken as a sign that the sector’s expansion wasn’t solely relying on growth from businesses restocking inventories after deep drawdowns during the recession.  “It really suggests the strength is sustainable” Michelle Girard, an RBS Securities analyst said adding, “Now what’s becoming evident is consumer and business spending is picking up.”

As evidence that the strength is being built on a solid framework ArcelorMitall, (CSDFY), the world’s largest steelmaker, said recently that it would restart production at a major operations center in Indiana that makes steel for nearly all markets.  French steelmaker Vallourec SA (VK.FP) is expanding its Youngstown Ohio operation and Welspun Corp. (WG.IN) the India based manufacturer is increasing the  hours of operation at its Little Rock, AR facility to 24/7.

One of the major users of steel is the auto industry and Sergio Marchionne announced this week that Chrysler Group LLC is planning to hire 1,100 workers at the plant in Detroit that is set to assemble the new Jeep Grand Cherokee.  “This is the great thing about Chrysler, we announce things and then we do them.  We announced a second shift, and it will be here on July 19^th”.  Chrysler also announced that it made a $143MM profit in 1Q10 and is sticking to its pledge to break-even this year.

Chrysler is not alone, Ford Motor Co. (F) recently reported a 1Q10 profit of $2.1BN saying it would be “solidly profitable” the rest of the year and GM might even operate in the black for the first time since 2004.  Ed Whitacre, GM’s CEO said, “Our overarching view is that we have gone through a historic structural change in the industry.  We are going to have better profitability for a while”.

If the 20% increase in car sales isn’t enough evidence of a turnaround Nissan Motor Co. Ltd. (7201 JT), Santander Drive Automobile receivables Trust and Navistar Financial Owner Trust all priced bonds last week.  Mary Kane, MD for global securitized markets at Citigroup (C), said the ease with which they tapped the markets demonstrates that securitization “remains an attractive source of funds diversification”.

The other big worry for many has been the housing picture.  The U.S. Census Bureau reported that single family housing starts surged a seasonally adjusted 593,000 or 10.2% in April.  This could well be in part because of the April 30 deadline for the federal tax credit thinks Ivy Zelman, CEO of Zelman & Associates but the analysts surveyed by MacroMarkets, a Madison, NJ firm co-founded by Robert Schiller an economist at Yale and co-creator of the S&P/Case-Schiller indices thinks the national price index of homes could rise 12% in the next five years.  Joe LaVorgna, Deutsche Bank’s economist sees a number more than triple that as he expects home prices to rise 37% by 2014.  At that rate homes could well turn into ATM’s again.

Retail sales rose a seasonally adjusted 0.4% in April, after rising 2.1% in March which experts say is consistent with annualized inflation adjusted growth of more than 3% in the current quarter.

On one end of the retail spectrum Macy’s Inc. returned to profitability in 1Q10 and kept it’s full year forecast intact saying that its efforts to tailor merchandise to local tastes is paying off.  Michael Niemeira, VP of research at the International Council of Shopping Centers (ICSC) believes a recovery is quietly under way for both the consumer and retail industries, “During the past recession retailers slashed inventories, reduced their personnel and closed unprofitable stores, but that adjustment is now yielding healthy profits which are boosted further by recovering consumer demand.  The hardest-hit retailers, the luxury stores are coming back the strongest”.

Hermes International (RMS FP) is a good example of what Mr. Niemeira described as they recently announced a 19% increase in 1Q10 sales.  LVMH Moet Hennessy (LVMH IX) the maker of Louis Vuitton handbags posted an 11% increase in 1Q10 sales so it seems there is increased demand across the sector.

The “Lux” crowd not only shops but travels and Istithmar World and its partners Mandarin Oriental Hotel Group Inc. and Related Cos. are optimistic on the outlook for the hotel business and especially its New York property.  “The Mandarin Oriental New York is an exceptional property with a strong management team which we think will regain a great deal of value in the coming years” said Andy Watson, Istithmar’s acting CEO.  Lawrence Wolf, SMD for Eastdil Secured Ltd brokerage agrees saying “It’s the most modern hotel of its competitive set”.

While it’s a good sign that people are looking up on Lux others are so optimistic they are buying the whole company, at least when that company is the famed London landmark Harrods’s.  Qatar Holdings recently purchased the L700MM annual revenue generating retailer from Mohamed Al Fayed for E1.5BN or $2BN who announced his retirement after a 25 year reign as its CEO.

Since we’re on the subject of spending why not part with $106.5MM for a “Nude, Green Leaves and Bust” by Pablo Picasso?  The price, recently paid at an auction held by Christie’s once again made Pablo the world’s most expensive artist.  Pablo held the record from 2004 until earlier this year for his “Boy With a Pipe” which sold for $104.1MM but lost the title temporarily to Alberto Giacometti three months ago when Alberto’s “Walking Man” sold for $104.3MM.

In general the spring auctions are coming in above expectations although the older, more established works seem to be where the demand is.  An Andy Warhol painting, “Self Portrait” sold at Sotheby’s for $32.5MM which was twice its high estimate in early May.  Other notable transactions at the Sotheby’s sale included Monet’s “The Effect of Spring at Giverny” ($15.2MM) and the 1880 “End of the Afternoon, Vetheuil” ($6.2MM).  These last two were purchased over the telephone with the caller dialing in from Asia.

The U.S. stock market lost its footing in May, possibly because of some errant computer program, possibly because all of a sudden people started to worry about Greece, a country of 11MM people with a GDP of $356BN, which represents 2.15% of the Euro zone’s $16.5TN GDP and 0.6% of global GDP

Regardless of whether it was one or the other or a bit of both there seems to be plenty of positives to ponder as well.

Enjoy the week.

Jim Delaney

May 7, 2010

After a recent bout of severe headaches and upon the urgent urging of friends and family I have undergone a series of MRI’s, CAT Scans, EKG’s and whatever other test they could throw at me.  The results show that the skeptisus and cynicis areas of my brain are enlarged.

For those not familiar with cranial topography, as I was not before all this went on, these are the areas of the brain that produce skepticism and cynicism.  The doctors say these areas of the brain, like the body’s muscle tissue, grow when exercised and will equally atrophy when rested.

As such my prescription is to take a week or so off from watching the goings on of Wall Street and what has become more and more the case these days, Washington.

There is no reason to worry as the doctors say a full recovery is expected and one specialist I saw predicted that given time and the proper medication, I will come to perceive Washington as 20% more intelligent and Wall St. as 20% less avaricious.

Being on the front end of my treatment I am skeptical that will be the case but the good doctor said that was just me being cynical.

Regardless, I look forward to being back in touch with you all shortly.

Enjoy the weekend.

Jim Delaney

May 6, 2010

On March 6^th of 2009 the intra-day low on the S&P was 666.79.  It was not only the low price traded on that day but the lowest price seen for the previous 10 years.  The ubiquitous gallows humor on Wall St. made quick work of the three 6’s and their representation as the “Number of the Beast” in the New Testament of the Christian Bible.  For many investors it did indeed feel as if they were on the “devil’s doorstep”.

Although we are just 14 months to the day past that date, the heated frenzy seems to have cooled and most prognosticators are focusing these days more on higher numbers not lower; at least as the stock market is concerned.

In the “everything that goes around comes around” category another set of triple 6’s has been in the news but this one refers to that iconic address on 5^th Avenue in New York City which the Carlyle Group is trying to sell for somewhere between $600MM and $700MM.  Yes, I was thinking that too, what are the chances it sells for $666MM?

That a trophy property of this caliber is even on the block is a sign that we are in very different times than we were on 3/6/09.  If further confirmation is needed it might be that the average rent on the two floors of retail space in the building is going for $2,500/sq. ft. which is more than that fetched for similar squats on the Champs-Elysees in Paris, Ginza in Tokyo or Causeway Bay in Hong Kong.

Wanting to sell is one thing but as we now know from watching Goldman Sachs’ (GS) four horsemen school Congress, every seller needs a buyer and vice versa.

The question then becomes whose got 2/3’s of a brick lying around to plop down on 41 stories of steel and glass growing out of the Big Apple’s bedrock?

The answer is: the world.  At least according to Ken Krasnow, a managing director with building-sale specialist Massey Knakal, who says, “foreign governments are almost the only game in town”.  KK states that as long as a building is within walking distance to the U.N. foreign governments are among the very select few that are willing to pay top dollar and most frequently do so in cash.  The downside to dealing with this type of buyer is the associated bureaucracy as deals can take years vs. months to close.

Things appear to be picking up on the residential side of the street as well.  Real-estate brokerage firms are reporting the strongest start to the spring selling season in two years.  Dolly Lenz, a top-selling broker at Prudential Douglas Elliman, says of her perspective buyers, “everybody feels richer, or at least less poor”.

Understanding that everyone has a different idea of what “rich” and “poor” is, it is interesting to note that last year only 18% of the apartments priced at $2MM and above sold while they currently make up about 40% of sales.  “Where people perceive values sales are happening”, according to Hall F. Willkie, President of Brown Harris Stevens.

Value in real-estate, like beauty in art, lies in the eyes of the beholder and nothing proves that more than the purchasing of at least six apartments by Rebekah Mercer and Sylvain Mirochinikoff in Trump Place at 240 Riverside Blvd. whose intent is combine the contiguous spaces spanning three floors to create a 13,962 sq. ft. triplex.  “It’s going to be one of the all-time great apartments”, according to Donna Olshan of Olshan Realty.

I’m not sure any of us could disagree Donna.

Enjoy the week.

Jim Delaney

May 5, 2010

On this day in 1862 4,000 troops in the Mexican Army led by General Ignacio Zaragoza beat of force of 8,000 of French Count Charles Latrille’s soldiers at Puebla in Mexico, winning their independence in the process.  That the majority of folks think of today as a marketing gimmick sponsored by Corona is not due to a lack of respect for our neighbors to the south but more a result of the power of advertising.

For some the age old adage; “It takes money to make money”, brings to mind visions of robber barons, corporate titans and all those populist pariahs that work on Wall St. but  the saying is equally true in the advertising business.  For the producers of most products the way to get it to sell is to inundate the consumer with ads using all types of media and messages.

As we entered 2010 things were looking far less promising than they are today.  ZenithOptimedia, the media buying arm of Publicis, had reported a 10% drop in global ad spending in 2009 with the U.S. experiencing a 13% drop.  “It’s ‘the worst’ the business has seen since Zenith began tracking ad spending 21 years ago and ‘likely the worst since World War II’”, was how Zenith’s CEO, Steve King put it.  Ad spending by Detroit was also on the scrap heap with YoY ad sales comparisons dropping for a record 17 months.  “That kind of drop-off is virtually unprecedented”, Jon Swallen, SVP of research for TNS Media Intelligence, a division of WPP said at the time.

Things seem to be changing now as recent economic statistics show spending on durable goods surpassing the pre-recession peak set in November of 2007 and real consumer spending rising by 3.6% YoY in 1Q10 while the savings rate fell to 2.7% YoY in the same period.

While much of this may be attributed to necessity as regardless of how well things are maintained they eventually wear out and need to be replaced; the 20% increase in “consumer impressions” (a nicer way of saying “ad blitz”) planned by Proctor & Gamble (PG) shows that companies are not afraid to spend a little of their money if they suspect the consumer is ready to part with theirs.  Part of PG’s plan is to introduce 30% more “significant” innovations in its products this year.

On a broader level Ali Dbadj, a Sanford C. Bernstein analyst, expects consumer-product companies to spend about 9.7% of their annual sales on advertising this year up from 8.6% in 2009.

Advertising takes many forms but one area where companies spend a good portion of their ad dollars is television and there are signs that things might be improving in this arena as well.  The cost of last-minute ads is rising and people on both sides of the transaction are saying the yearly “upfront” market for commercials (a.k.a. the opposite of last-minute) is expected to see higher per-viewer prices and greater overall spending.  “How rapidly things have come back has been a nice positive surprise” for the networks Bank of America analyst, Jessica Reif Cohen said.  Jessica also thinks “it’s pretty clear this is going to be a pretty buoyant upfront”.

Jessica’s theory was supported in part when it was reported that U.S. outlays by auto makers on national TV ads rose 22% YoY to $742.7MM in the first two months of 2010 by Kantar Media, an ad-tracking firm owned by WPP Plc.

Throughout the malaise we heard that the consumer was the key to the recovery.  From the spending numbers by both consumers and advertisers it would appear that that both sides are stepping things up.

The next step is sustainability.

Enjoy the week.

Jim Delaney

May 4, 2010

Total Vehicle Sales coming in at over 11MM for April marks the 7^th straight month above the 10MM mark, the second with an 11 handle and a marked improvement over the 9MM of April a year ago.  Add to this the seasonally adjusted sales rate for 1Q10 was 11MM vehicles and you have what Jesse Toprak, an analyst for TrueCar Inc., calls “a full-blown recovery in the automotive industry.”

What has been good for the car makers has also been good for the auto-parts makers with American Axle (AXL) recently reporting a profit of $0.22 per share compared with a loss of $0.59 a share a year ago.  AXL’s CFO, Michael Simonte attributed cuts made during the crisis for the swing to profitability saying; “We are seeing the results we expected after cutting our fixed costs by 50% over the past two years.  We are optimistic about the improving economy, but we know it is fragile.”

AXL sells 75% of what it makes to General Motors Co. which is and independent company.  Most of us here in the States have seen General Motors Co.’s CEO, Edward E. Whitacre on TV talking about the firm’s resurgence.  One of those ad’s has Ed boasting about the repayment of the TARP money to the government “five-years ahead of schedule”, and even our Treasury Secretary, Timothy Geithner was recently heard to say, “This continued progress is a positive sign for our auto industry – not only more funds recovered for the taxpayer, but also countless jobs saved and the successful stabilization of a vital industry for our country”.

A closer look at the $4.7BN payment, however, reveals what Sen. Charles Grassley of Iowa called “nothing more than an elaborate TARP money shuffle”, with the funds coming not from General Motors Co.’s earnings, but a Treasury escrow account.  Senator Grassley believes the hoopla being made over the repayment is actually an attempt to divert attention away from another issue, that being that while General Motors Co. will generate some of the biggest losses of any company that received TARP funds it won’t be required to pay what is being called the TARP tax.  This tax is designed to help Uncle Sam recoup funds lost under the TARP plan but in letting General Motors off the hook the tax seems primarily focused at those other TARP recipients, the “Fat Cat Bankers” so rued by the populist media.

If General Motors is getting off easy due to “TARP shuffle” uncovered by Senator Grassley then two questions come to mind.  Doesn’t this make Geithner’s claim of “more funds recovered for the taxpayer” extremely misleading and since the UAW are now part owners of the rescued auto makers doesn’t the loan “repayment” become, in effect, a tax-payer funded cash payment to one of the administration’s largest voting blocks?  I’m not saying I know the anwer; I’m just asking the question.

Far away from the smoke and mirrors of D.C. the folks of Flora, Illinois, all 4,772 of them, are very happy to see the revival of the U.S. auto industry regardless of its source.  Five-hundred-fifty of Flora’s family members were laid off when General Motors and Chrysler filed for bankruptcy last year.  But, as the fortunes of those two companies reversed, so have the employment statistics in Flora with 400 of those same folks being recently rehired.

In order for AXL’s Simonte to continue to be “optimistic about the improving economy”, it will take many more Flora’s to flourish again.  Hopefully, as that happens, Mr. Toprak’s “full-blown recovery” will extend beyond the automotive industry.

Enjoy the week.

Jim Delaney

May 3, 2010

While the Troubled Asset Relief Program (TARP) and the Term Asset Backed Securities Loan Facility (TALF) were designed to alleviate the severe stress in the financial markets as a result of the seven sigma event known as the Credit Crisis the American Recovery and Reinvestment Act which is not known by its acronym (which would be ARRA and sounds a lot like “error”) but is more commonly referred to as the Stimulus Package was supposed to be focused at Main Street and prompt businesses to climb out of their storm cellars and . . . well, do business.

That a good portion of said stimulus was actually transfer payments to the states so they could begin the Great Redistribution is not the point of today’s piece, that some of the money seems to have made it to where it was supposed to is; as various economic indicators have more plus signs in front of them often than minus signs these days.

President Obama held a press conference after the 1Q10 GDP number of +3.2% was released on Friday to say that “an important milepost on the road to economic recovery” had been reached.  Whatever milepost that was Larry Summers, the 8^th Director of the National Economic Council, evidently thinks the road trip is going to take a bit longer than planned as he said on Friday that “joblessness is likely to be and enduring problem even as the economy grows”.

One of the few things that is as popular as placing blame for all that has occurred on someone or something has been making comparisons between this recession and the one’s that came before it.  Some folks believe the closest comparison is to the 1982 recession but if that is the case, the comparisons are not good.

The National Bureau of Economic Research (NBER) is formally tasked with dating when recessions begin and end.  That august body says that the ’82 recession ended in that year’s 4^th quarter when GDP expanded by 0.3%.  The four quarters of 1983 saw growth of 5.1%, 9.3%, 8.1% and 8.5% respectively.

The NBER has not called an end to the current chaos but if we draw a line in the sand at the 3^rd quarter of 2009 we have had GDP growth of 2.2%, 5.6% and 3.2% in the three quarters that followed.  Not sliding into a double dip but not roaring out of the hole either.

As we enter a week that will end with the release of April’s employment statistics it is worth keeping in mind that temporary help, an indicator that is believed by some to foretell permanent job growth, is not growing as fast as the people who run those businesses would like.  Keith Waddell, CFO of Robert Half International Inc. (RHI), said when reporting 1Q10 results recently that the pace of improvement “is a little uneven, it’s more measured than we would like.  RHI’s 1Q10 revenue was down by 10% and net income eased about 3%.

These results were countered by RHI’s main competitor, Manpower Inc. (MAN) which saw revenues climb 13% in the 1^st quarter but MAN’s CEO, Jeffrey Joerres, said there is still a “sense of trepidation” among its clients”.

Scott Krenz, CFO of Heidrick & Struggles (HSII) joined the chorus noting his firm is “not alone in feeling some uncertainty about the scope and speed of this recovery”, going on to say that HSII was going to be “quite cautious and targeted in our hiring, in our investment plans and certainly in our view of 2010 growth”.

Mr. Krenz’s cautious outlook on growth does not bode well for Uncle Sam as the expansion in entitlements and other redistributive policies is coming at a time of lower tax receipts.  The $2.1TN hand the government had in our pockets last year was $400BN lower than 2008 and represented 15% of our GDP which was below the post WWII average of 18%.  Corporate taxes were 65% lower last year than they were before the GR in 2007.

As the saying goes: “when your outflow exceeds your inflow, your up keep becomes your down fall.”

Jim Delaney

]]> http://www.marketstrategiesmgmt.com/2010/05/c-m-o-5-3-2010/feed/ 0 http://www.marketstrategiesmgmt.com/2010/04/c-m-o-4-30-2010/ http://www.marketstrategiesmgmt.com/2010/04/c-m-o-4-30-2010/#comments Fri, 30 Apr 2010 10:56:03 +0000 Jim Delaney http://www.marketstrategiesmgmt.com/?p=3154 Credit Market Overview

April 30, 2010

When the Morton Salt company came up with the slogan “when it rains, it pours” it was to tout the fact that its “iodized” product did not cake or clump, regardless of the humidity.  Joy Morton, son of J. Sterling Morton, Secretary of Agriculture under Grover Cleveland, came up with the idea of adding MgCO3 (magnesium carbonate) to the NaCl winning the “Good Housekeeping” seal of approval in the process.

That slogan has become part of the lexicon, the rapper 50 Cent has even put out a song with that title, and has come to mean: “It hasn’t happened for a long time, and then it happens all at once” according to the “Lexicon Library”.

The multiple global coal mine disasters and current oil rig issue off of Louisiana verify that the Morton Salt girl had the right idea when holding her umbrella as the acquisition of the raw materials necessary to build and maintain growth around the world seems to go unnoticed until such events occur and once they do, a chain reaction is often the result.

Although it is not known what, if any, disaster will result; the world today seems intent on increasing the amount of electricity it gets from the wind.  On the surface it makes some sense.  It’s clean, constant in certain areas and sans the odd tornado or hurricane, relatively benign.

The NIBY (not in my back yard) issue here is the disruption of scenic vistas as the purists loath any man made objects obstructing their view.  It is interesting that many of those same purists go home and switch on the lights without connecting the dots between the desire for light and the need for power.

President Obama approved a 25 square mile niche out in Nantucket Sound on Wednesday called The Cape Wind project that will generate enough electricity for 200,000 homes in when it’s complete.  In deference to the late Ted Kennedy, who fought tooth and nail to prevent the project’s approval off of his beloved Hyannis Beach compound, Interior Secretary Ken Salazar conceded to having only 130 turbines in the plot versus the 170 originally planned.

On the “other side of the pond” the Brits are planning to build the world’s largest offshore wind farm with turbines as tall as “The City’s” Norman Foster designed Swiss Re building affectionately known as the “Gherkin” due to its bulging sides and conical top.  Her Majesty’s subjects are wrestling with a few details at the moment as “The equipment we need to operate in such rough waters doesn’t exist yet”, according to Vattenfall AB’s Bigum Nielsen, the project’s manager.

As far away from New York as London but in the opposite direction, Los Angeles want to have a few more things “blow’in in the wind” as the City of Lost Angels wants to generate 40% of its power from green sources by 2020, up from 20% currently.  LA currently gets about half of its power from coal which is made more interesting by the fact that there are no black rocks to be found anywhere in the state.

The problem with LA’s plan is that green power will cost homeowners more of their greenbacks.  The local utility is already in a row with the city and has withheld a $73MM payment pending successful negotiations for a rate increase.  The starting point for the power provider is a 2.7 cent/kilowatt hour increase this year alone.  Given LA’s dire financial straights it is uncertain how much bargaining power they have.

The wind is there, the trick will be how to use it.  As for the hot air, that’s enough for this week.

Enjoy the weekend.

Jim Delaney

April 29, 2010

While there were eleven explicatives uttered during the Congressional hearings on Tuesday one might think there were a few more than that spoken (albeit more hushed) around the EU yesterday as S&P, with its new found conscious, continues its post “We’ll give anything you want a AAA” mantra with its new mission statement; “Downgrade first, ask questions later”; knocking a ratings notch off of Spain just one day after moving Greece below the investment grade line.

This has, once again, brought correlations across and among asset classes to that ominous 1.0.  It should be noted, however, that since this mess started about three years ago the only time 1.0 is not preceded by “ominous” is when it is lead by “euphoric”.

Inclusive in this world of 1.0 are  the most basic components of growth, raw commodities, and prices for all those things we pull from the ground be they liquid, solid or green shoots sunk along with Greece’s rating on Tuesday.

But, as we have seen all too many times in the last little while, today’s goat is tomorrow’s hero and vice versa.  As such a bit more perspective might be needed to determine what is really going on in the raw materials space.

A first clue might come from auto sales figures in China in March which were up 56% YoY to a new all time record high of 1.74MM vehicles, topping the previous record set in January of this year of 1.66MM.  India, too, reported a sharp rise in passenger car sales with 1.53MM units sold, a 25% increase from the 1.22MM sold the previous year.

Those not so sleepy on this Thursday morning might ask why I am talking about the growth in finished products when my stated theme was raw materials?  Given their inclusion in the durable goods category and the amount of raw materials they consume, both during and after production, cars seem to be a pretty good indicator of what might be going on with a good number of those things we categorize as “commodities”.

Before their recent retreat crude oil and copper, to name just two, had regained levels seen in 2008.  The March employment figures seemed to provide evidence that the U.S. economy is continuing to recover and “Although the number on Friday wasn’t a game changer, it does offer hope [for] a swifter emergence from a jobless recovery”, according to Jason Schenker, president of Prestige Economics.

Copper has had the double bang of demand in both the wiring for autos as well as in houses; even if some still live by the credo that “you can sleep in your car but you can’t drive your house”.

With the demand for both cars and housing growing disproportionately in places like India and China, the rise in prices caused by the need for the materials necessary to meet that demand is being felt, disproportionately, in the more developed economies with lower growth prospects.

“The rest of the world is simply not waiting on the U.S. and Europe to fully get their act together,” Douglas Porter, economist at BMO Capital Markets said making a nautical analogy by comparing the “plodding tugboats” of U.S. and Europe to Asia’s “super-charged cigarette boat”.

An example of this can be seen in the cost of rubber which has posted a 74% YTD increase in 2010 after rising 92% in 2009.  Goodyear Tire (GT) has warned of the impact of this on profits but not all producers are feeling the pinch.  Morry Taylor, CEO of Titan International Inc. (TWI) said simply, “I make tires for people, so I charge them more money.  You pass it through”.

Now while Morry’s motto might elicit a few more expletives there is a positive in the fact that his customers are still around and able to pay the higher prices.

Enjoy the week.

Jim Delaney

April 28, 2010

Eleven explicative’s, admission of regularly placing wagers outside of licensed gaming facilities compounded by a lack of organization including incorrect attributions along with the fabrication of e-mails to be “found later” and in a majority of cases, a clear lack of understanding of the mechanisms and machinations under discussion, but feed mostly by the desire to out “grandstand” the prior inquisitor in hopes of saving the Congressional seat in which they sit, Carl Levin and his crew made mockery of the thought of these people as our leaders in questioning current and former employees of Goldman Sachs yesterday and this was only made worse by the fact that we elected them.  Hopefully at least some of these wrongs can be righted come November.

What does not seem to be waiting until November is the growing strength in the economy.  While it was reported last week that durable goods orders dropped by 1.3% to a seasonally adjusted $176.7BN, when the 12.9% drop in transportation-related goods which itself was caused by a 67% in nondefense related aircraft was removed the number was a positive 2.8%.  “Except for civilian aircraft, it looks like the demand for most other big-ticket items is on the rise”, was how Joel Naroff of Naroff Economic Advisors, interpreted the numbers going on to say, “If these costly products are in demand, it can only follow that the economy is moving forward.”

That report was also behind Morgan Stanley’s revision of its estimate for 1Q10 GDP raising its previous 3.0% number to 3.4% saying the “stronger capital spending during the quarter was ‘a very positive starting point for further gains in Q2’”.

While the government reports take a very broad view of the economy it would appear those with their feet on the ground, the industrial companies, are also seeing brighter days ahead.  Eaton Corp.’s (ETN) CEO, Alexander Cutler told analysts, “We’re really seeing strength in every quarter of the world”, when the company reported earnings recently.  Illinois Tool Works (ITW) CEO, David Speer, echoed this sentiment last Tuesday saying, “We have a growing sense of optimism that the business environment will improve as the year progress”.  Donald Washkewicz, CEO of Parker Hannifin (PH) joined the chorus describing North America as “continuing to show signs of recovery” as “Latin America continues to recover at a steady pace and Asia continues to be very strong”.

While many of the things ETN, ITW and PH make are used to make other things there has also been a resurgence in the big ticket households items.  Conn’s Inc. a Texas retailer with about 6% of the state’s appliance market share could add as much as a couple of percentage points to its same-store sales in 1QQ10 according to Dan Binder, an analyst with Jefferies and Judd Slivka, a spokesperson for the Missouri Department of Resources said “We’re still getting reports from around the state that say there’s been a huge business” at appliance retailers.  Best Buy (BBY) reported a 6.5% increase in 4Q09 U.S. comparable-store sales of appliances last month which represents about 4% of total U.S. sales across its brands.

Some of the appliance sales increases can be attributed to the federal appliance-rebate program, the white-goods equivalent to “Cash for Clunkers”; although to hear my washer during the spin cycle it would seem more equal than equivalent.

That program, $300MM in size, has spurred many of the purchasers but prior experience with the C4C program showed that although the boost was followed by a lull, demand did follow.  Krystyn Moroz, manager of Pacific Sales Kitchen & Bath, a unit of BBY said, “It was just an exciting day to sell appliances.  It’s not just people coming in to check out appliances.  People were serious and were saying, ‘We’re ready to go.’”  Krystyn also mentioned that some of the shoppers were buying even though they could not secure a rebate.

Confidence in the economy is a good thing and will hopefully feed on itself to produce a lasting recovery.  After watching the kangaroo court come circus yesterday I’m not sure that same confidence can be had in Congress.

Enjoy the week.

Jim Delaney