Posts filed under “Think Tank”
Good Evening: And so it continues. The pattern of an early drop in stock prices, followed by a late day rally held true to form again today. This trend has become so entrenched in recent weeks that, according to CF Global’s Philip Grant (who writes a fine market recap of his own), “the S&P 500 has now gone twenty one consecutive trading days (dating back to July 7) without sustaining a loss of 0.5% or greater.” Despite some choppy economic data and an earnings miss by Dow stalwart, Procter & Gamble, all it took was a hint of improvement in the July charge off data from American Express to bring the major averages back from their early declines. Since the transaction volumes at AXP are still falling at a double digit rate, what struck me about today’s news flow is that PG, AXP, and the ISM services survey all portray a less healthy U.S. consumer than Mr. Market would have us believe.
When Procter and Gamble announced an 18% decline in its Q4 earnings this morning, U.S. stocks were bound to take an early hit. Sales fell across the board for PG, a company that is supposed to be in the “recession-proof” category. The pre-opening economic data didn’t help, either. The employment data (Challenger Job Cut Report, ADP payroll estimate) were both on the weak side, setting up a potentially wider range of outcomes for Friday’s unemployment figures. The first dip in equities was bought once trading commenced, but that buying dissolved as soon as the ISM services survey results were posted. Against consensus estimates for a rise to 48.2, this survey of non manufacturing businesses inconveniently fell to 46.4 in June. Since, like many other data points of late, this piece of data had been getting less bad (remember, 50 is zero growth), a relapse for the worse was unwelcome. Factory orders were on the high side of expectations, but the major averages wasted little time in dropping 1% to 1.5% in the wake of the ISM release.
After bouncing around in the lower half of the day’s range for the next few hours, stocks recouped all their losses after American Express told analysts that AXP’s charge off rate in July would likely fall to 9.2% in July, versus 9.9% in June. The green shoots crowd seized upon this wonderful piece of news and bid up the company’s shares (AXP rose 5.75%). Not satisfied, market participants then presumed that all financial companies would soon see declining credit losses and bid up the whole financial sector (the BKX finished + 3.5%). Buyers even latched onto the lowly AIG and sent it zooming ahead to the tune of almost 63% today. First, the shorts trying to cover sent the name higher; then, rally established, the trend-seeking Quants bought more.
After trading above the unchanged mark for a short spell, the averages fell back a bit into the close. Wednesday’s losses ranged from 0.3% for the S&P to 0.9% for the Dow Transports. Treasurys had been up this morning, despite a larger than expected refunding schedule announced for next week, but the equity rally acted like gravity on government securities as the day progressed. Two year notes were flat, but yields rose as much as 8 bps on the long end of the curve. The dollar was a bit weaker and commodities were a bit firmer. The CRB index finished with a gain of 0.5%.
Just last year, Procter and Gamble was raising prices on many of its household products to combat the rising costs of raw material inputs. Presto! Margins were restored. But the consumer products giant will now have to rethink its strategy due to falling volumes (see below). Consumers are cutting back, even on items in PG’s sweet spot that are considered non-discretionary. Procter’s troubles aren’t behind it, either, since the company said it expects the weakness to continue for the rest of the year.
This picture of a consumer who is skimping on the basics was also confirmed by American Express today, it’s cheerful credit news notwithstanding. According to Reuters, CFO, Daniel Henry, said billed business declined 13 percent in July, compared to a 14 percent fall in June and a 17 percent drop in May. Double digit declines in a company’s main business are not good, even if the trend has a gentler negative slope. Consumers are charging less on their credit cards, including items like Crest, Tide, and quadruple-bladed Gillette razors. With today’s ISM non manufacturing survey saying that the largest sector of the U.S. economy (services) is still under pressure, it’s hard to see how PG and AXP will see better days any time soon.
If these behemoths are struggling, then what do their woes imply for the rest of the economy — or the stock market? Now that Q2 earnings season is largely in the books, the basic theme has been one of falling revenues but better than expected profits. The difference has been cost cutting (layoffs, less travel, etc.), but one company’s cost cuts hit the revenue line of other businesses. In the final article you see below, Charles Rotblut, CFA. and Senior Market Analyst & Editor at Zacks, argues this trend cannot persist.
Zacks lives and breathes earnings estimates, and Mr. Rotblut notes that earnings estimates aren’t rising as much as they should be if a recovery were truly taking hold. Even using the highest estimates for the combined earnings of the S&P 500 ($60.00), an index level of 1000 puts the P/E at a non bargain level of 16.67. These are only operating estimates (the “as reported” figures are far worse), so I think Mr. Rotblut’s caution is justified. The economy may be getting less worse, but the 50% leap in the S&P since March implies an economy that is getting better. All the more reason to pay close attention to Friday’s employment data. More than the number of the newly jobless, and more than even the unemployment rate, I’ll be watching to see if hours worked and average hourly earnings can tick higher. These last two series are the stuff of real incomes, the very stuff, in fact, that consumers need in order to pay for a load of P&G items with their American Express cards.
– Jack McHugh
A friend (A) at a major trading house is a young but astute market oberver. He notes some details of today’s action: 1. Volume is tracking for 11.7 billion shares, which if accomplished would be the largest volume day since June 26th. On that particular day, personal income and spending data for May revealed a…Read More
Coincident with the US$ weakness, rise in bond yields, increase in inflation expectations in the TIPS and relentless rally in stocks, the fed funds futures are moving closer to pricing in a 100% chance of a Fed rate hike of 25 bps by January. Looking at the Feb fed funds futures contract, odds right now…Read More
The ISM services index (services make up about 80% of the labor market) was 46.4, 1.6 points less than estimates and down from 47 in June. Business Activity fell 2.7 points to 46.1 after almost reaching 50 in June. New Orders fell .5 point to 48.1 but off the highest reading since Sept ’08. Backlogs…Read More
Today we ran an interview with Robert Feinberg, who is one of Washington’s veteran observers of the financial industry. We also commented on the latest outburst by Treasury Secretary Tim Geithner. Enjoy. Chris
August 5, 2009
On Friday we described to subscribers of The IRA Advisory Service why we downgraded our outlook on US Bancorp (NYSE:USB) from “positive” to “neutral,” and reaffirmed our “positive” outlook on Cullen/Frost Bankers (NYSE:CFR). For more information about this report or our coverage universe, please contact us: email@example.com
Today we are in Samoset, Maine, at the meeting of the National Business Economic Issues Council (NBEIC). Despite the interesting presentations and views expressed at NBEIC, we could not help but take a moment to comment on the regulaltory reform process since it seems that the Secretary of the Treasury forgot to take his Xanax last week.
The WSJ reports that “Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation.” Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair. Friday’s roughly hour long meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies that are, by law, considered independent of the White House.
Secretary Geithner reportedly reminded attendees that the Obama Administration and Congress set policy, not the regulatory agencies. Presumably the target of Geithner’s ire was FDIC Chairman Bair and SEC Chairman Schapiro, who expressed a collective unwillingness to yield power over to Fed Chairman Ben Bernanke. Chairman Bernanke, of note, seems to be running for reappointment based on the FOMC’s incredible, single-digit unemployment projections for 2010.
Secretary Geithner is correct that the Congress makes policy. The executive branch only proposes and implements, right? Until the Congress actually votes and the President signs the legislation, though, there is no new policy. Given the complete lack of leadership from the White House on regulatory reform, the agency heads can probably be forgiven for focusing their attention on the Congress and not the wants and needs of Secretary Geithner, who we still believe is not long for this political world. When the next round of good news comes out of American International Group (NYSE:AIG), we expect that Secretary Geithner’s inability to sell his home in New York may cease to be a problem.
The fact is, there is no great push from either the public nor the Congress for regulatory reform, no more than there is a great groundswell of public demand for health care reform. In both cases, the Obama Administration is playing political poker with a very weak hand. It looks to us like both regulatory reform and health care, if they get them done at all, will look nothing like the proposals emanating from the White House.
For example, we hear that the Obama Administration’s new proposal for regulating OTC derivatives (it will cover ALL OTC derivatives, not just credit default swaps or “CDS”, including interest rate swaps). Our sources expect the headline language will represent very real regulation of OTC and may negatively effect the larger dealer banks. We hear that the proposal will ensure that the system evens the playing filed between the dealers and end-users in terms of economics, access and information.
ADP said there were 371k private sector jobs shed in July, 21k more than expected but it’s the slowest pace of decline since Oct ’08. As has been seen, small and medium sized businesses led the way. The goods producing sector shed 169k jobs, 99k of which was manufacturing. The service providing sector lost 202k…Read More
Unlike the world of consumer products where lower prices bring out the buyers (free money from CF clunker’s as an example), investors get more bullish the more expensive stocks get. The weekly II data said the number of bullish newsletter writers rose to 47.2, up 5 points for the week while bears fell to 25.8…Read More
Good Evening: After a morning decline, the major U.S. stock market averages rallied back to close higher today (this is a recording). Worries about a drop in personal incomes was overcome by a rise in pending home sales, though, as we’ll see, the former should matter more than the latter. The reflation trade (stocks &…Read More
This week I am in the office for just one day, but I can rely on my friend Dave Rosenberg to give us solid insight on the latest GDP numbers for this week’s Outside the Box. Dave slices and dices to show us what really happened. David was the former Chief Economist at the former Merrill Lynch (ah, Mother Merrill, we barely knew ye.) and is now Chief Economist at Gluskin Sheff + Associates Inc., which is one of Canada’s pre-eminent wealth management firms. Founded in 1984, they manage $4.4 billion. David notes that the data gives us a mixed picture.
I am in Maine later this week. It is likely I will be on CNBC, as they will be shooting live from our fishing camp. Also, they plan to do a one hour special with a number of interviews. I will let you know when it airs. A quick note from me: The third quarter is likely to be positive, especially given the success of the “Cash for Clunkers” program which it looks like our Congress is going to pass another round of spending which taxpayers (our kids) will get to pay off, or more likely pay $50 million per years for decades in interest. Sigh. Essentially, we are moving up car sales today which would have been made later, except that if you can get someone else to make your down payment, why not make that purchase today? A very reasonable response on the part of the consumer.
A teaser from Dave’s work below: “Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam’s generosity recedes in the second half of the year. Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!”
John Mauldin, Editor
Outside the Box
Lunch with Dave
by David A. Rosenberg
U.S. GDP Review — Consumer, Where Art Thou?
While the headline real GDP number came in a tad better than expected, at -1.0% QoQ annualized rate, the back data were revised lower and show the recession to be deeper. First quarter of this year, for example, was revised to -6.4% from -5.5% previously. And, it may not be lost on anyone that the four consecutive quarters of economic contraction was unprecedented in the post-WWII era; ditto for the -3.9% year-on-year trend. In other words, while nobody is willing to go out on the limb and call this a depression (the same academics that brought you “The Great Moderation” during that last great albeit leveraged economic expansion are now labeling what we have endured over the past year-and-a-half as “The Great Recession”). This does go down as the worst economic performance both in terms of duration and intensity since “The Great Depression”. While we are past the most pronounced part of the downturn, it may still be premature to call for the end of the recession merely because of the prospect of a positive third-quarter GDP result. After all, we saw GDP advance at a 1.5% annual rate in last year’s second quarter, and if memory serves us correctly, the NBER did not subsequently declare the end of the recession. And even if the recession is ending, as we saw in 2002, that does not guarantee a durable rally in risk assets. Sustainability is the key, and it remains the wild card.
Category: Think Tank