Posts filed under “Think Tank”

King Report: Paradox of Corporate Cost Cutting

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Because Ben is back in funny money mode, stocks & commodities are rallying.  But the dollar and the Chinese are not happy; and they are clearly expressing their anger.

The FT: China will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.  [China keeps warning; but Ben keeps reverting to pump mode.]

“We should hasten the implementation of our ‘going out’ strategy and combine the utilization of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday…   [It’s going to be an eventful autumn, boys & girls!]…
Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy …to directly support corporations to buy offshore assets.”

http://www.ft.com/cms/s/0/b576ec86-761e-11de-9e59-00144feabdc0.html

Several major corporations (including CAT, UTX, LMT, YHOO) reported top-line misses on Tuesday; however most beat earnings estimates.  The trend of top-line misses is so clear that CNBC commentators uncharacteristically lamented the negativity of the occurrence.

CAT shares rallied sharply on better than expected earnings; but it missed revenue consensus by 8.4%!!!

The following table from Bloomberg shows the incongruity of earnings and revenues.

Bloomberg Data: Caterpillar Inc reported quarterly results for the period ended June 30, 2009. The following table displays earnings figures along with Bloomberg consensus mean estimates. Actual values may differ from those included in company reports to make them comparable. All numbers are in millions of dollars except for per-share earnings, quoted in dollars.

Actual   Estimates     # Estimates      % Surprise
6/30/09        6/30/09           6/30/09         6/30/09
Sales                    7975.000      8703.400            15                -8.4%
Net Income Adjusted      445.376    147.909          11          201.1%
EPS Adjusted                     .720               .215             20          234.9%

CAT beat earnings by curtailing capex and vicious cost cutting in jobs and salaries.  Call this the Paradox of Corporate Cost Cutting – it’s good for the individual company but not for the aggregate economy.

The buzz word on Tuesday was ‘stabilization’.  Bernanke told the House Finance Services Committee that the economy is showing “tentative signs of stabilization.”

This was spun by fin media types and pundits as good news.  What happened to ‘green shoots’?  Isn’t ‘green shoots’ a more bullish condition that ‘stabilization’?  One Bubblevision commentator kept averring that ‘stabilization’of the economy is the reason for the stock market rally.  But the stock market is not priced for ‘stabilization’; it is priced for a roaring recovery…UTX CFO Hayes said 2010 profit growth cost-action led”

Caterpillar said it could lose money in Q3 and close a significant number of factories on a rolling basis. But CEO Jim Owens believes the economy will recover in Q4, so he upped full-year guidance. Owens also uttered ‘stabilization’. A Q3 loss, rolling factory closings, capex curtailment and suspension of stock buybacks are not stabilization let alone green shoots.

By the way, someone knew about CAT’s earnings on Monday because the stock gapped higher and traded sideways without retreat for the remainder of the session…CAT gapped again on Tuesday’s open.

Category: Think Tank

Bernanke Campaigns for Reappointment

Good Evening: Stocks were poised to correct their recent gains today, but a late rally extended the winning streak for both the Dow and NASDAQ to seven straight. The earnings news was deemed positive by market participants, though the bottom line “beats” came even as top line revenue estimates fell short. Cost cutting can always…Read More

Category: Markets, Think Tank

Dennis Gartman, Ben Bernanke & Congress

Dennis Gartman’s letter today hit so many key points with an economy of words that I have excerpted it and scratched my own text on Bernanke’s testimony. Dennis doesn’t mention the changes in “velocity” which is too technical a subject for this missive. Maybe later. He does perfectly characterize our Congress. Go, Dennis, go. Give…Read More

Category: Federal Reserve, Think Tank

All’s Not Well in Kindleland

Here’s an excerpt from my latest update on the slow transition from printed books to electronic books. The course of technological innovation never did run smooth: When it comes to ebooks, no one seems to be able to keep a level head. Publishers are in self-induced swivet; Amazon is being a shortsighted bully, and the…Read More

Category: Think Tank

Bernanke’s testimony

Bernanke in his speech is saying most of what we already know about the economy and specifies that its the household/spending outlook that is the “important downside risk” which we know is the disease of the credit crisis. He says the unemployment rate will remain elevated even as the economy recovers (we need to generate…Read More

Category: MacroNotes

Ben comes to the Hill

If the front page article of today’s WSJ is any indication, Bernanke’s testimony on the economy and monetary policy will be anything but boring. Bernanke lays the groundwork for some of what he’ll say in an editorial that lays out “The Fed’s Exit Strategy.” It sounds great but if the Fed gets the timing wrong,…Read More

Category: MacroNotes

Should the Fed be Responsibly Irresponsible?

This week I offer two short essays for your reading pleasure in Outside the Box. The first is from Ambrose Evans-Pritchard writing in the London Telegraph. He gives some more specifics about the situation in Europe I wrote about this weekend.

He ends with the following sober quote: “My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.” This is a must read.

And the second piece? Last week in Outside the Box we looked at an “Austrian” (economic) view of the inflation/deflation debate from my friends at Hoisington. This week we look at the 180 degree opposite with Keynesian aficionado Paul McCulley, who argues that the Fed should be Responsibly Irresponsible and target higher inflation. This essay has brought some rather heated arguments in print and from some of the people who will be with Paul and me at the annual Maine fishing trip. And you can bet I will put them all together with a little wine to see how the argument ensues. I will report back.

And Paul ends with a great and what is a quite controversial line, “Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn’t work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia.”

And finally, this one last note on European banks: “European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves.” (Bloomberg). Want to think about the US taxpayer paying to bail out Europeans banks? Think that might be a tad controversial? This could be explosive.

John Mauldin, Editor
Outside the Box

Fiscal ruin of the Western world beckons
By Ambrose Evans-Pritchard

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go….Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc….

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

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Category: Federal Reserve, Think Tank

Bulls Win Today; Watson’s Example is Timeless

Good Evening: U.S. stocks stretched their recent winning streak to six straight today, as some good economic news and some potential help for CIT combined to lift share prices. With more investors becoming convinced the worst is over for our economy, the major averages all tacked on gains of 1% or more. The S&P 500…Read More

Category: Markets, Think Tank

On the Economic Outlook and the Commitment to Price Stability

On the Economic Outlook and the Commitment to Price Stability

Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta

Rotary Club of Nashville
Nashville, Tennessee
July 20, 2009

Photo of Dennis LockhartFor my remarks this afternoon, I’ll talk about how I see the economy at this juncture, the near- and medium-term outlook, and the growing concern about inflation. Let me add at this point my usual disclaimer that my remarks are my thoughts alone and may not necessarily reflect the views of my colleagues on the Federal Open Market Committee (FOMC).

It’s especially important that I mention this caveat the day before Chairman Ben Bernanke makes his semiannual monetary policy report to Congress. Tomorrow the chairman will speak for the Federal Reserve System. Today, I am speaking just for myself, informed by advice from my colleagues at the Federal Reserve Bank of Atlanta.

Current economy
Current economic conditions are mixed at best, but the economy appears to be in stabilization mode. Stabilization necessarily precedes recovery. A recovery has not yet taken hold but should begin before too long.

I’ll start with a look at manufacturing, which has been hard hit in this recession. Just last week we learned that manufacturing production was down 0.6 percent in June, month over month. In the past year, manufacturers have cut production by more than 15 percent, and the manufacturing capacity utilization rate dropped to about 65 percent, a record low.

Here in middle Tennessee, manufacturing accounts for about 12 percent of employment. The number of manufacturing jobs here declined by about 12 percent on a year-over-year basis in May, the most recent data available. I know that many of you here today have directly felt the troubles in this important sector.

Recent indicators of business investment are also down but are a bit less discouraging. Durable goods orders increased this spring and in May reached the highest levels in four months. On the other hand, the most recent data showed the liquidation of business inventories continuing, but the pace has slowed.

Consumer spending absorbs about two-thirds of economic output, and the recent picture in this area is mostly negative. After taking price changes into account, it appears that retail spending fell again in June. Restaurants, department stores, and building materials retailers all posted month-to-month declines. Overall, retail results are in line with the ongoing weakness in consumer spending we have been seeing.

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Category: Federal Reserve, Think Tank

Fed member Lockhart calling a mea culpa on Fed policy

I believe for the very first time, a Fed member is admitting that it was an artificially low fed funds rate that ‘helped create the housing bubble’ (I’m quoting Bloomberg). Voting member Lockhart just made the comment in a Q&A after a speech on the US economy. He took office as head of the Atlanta…Read More

Category: MacroNotes