Jun 3, 2011

Deja Vu-Internet IPOs and Bad Economic Numbers

June 3, 2011

Stocks are headed towards their first five week losing streak since the summer of 2008. Treasuries are strong as the yield on the 10 year hits a low for 2011, below 3%. Weak economic data all week has been exacerbated this morning by exceptionally weak non-farm payrolls data of 54K and private payrolls of 83K, both about 100K below consensus. The weak jobs data combined with weak ADP employment, ISM manufacturing, higher than anticipated initial jobless claims, and an uptick in the unemployment rate indicate that the economy is quickly slowing down just before the Fed completes its QE2 program. The strength in the bond market comes in spite of a Moody’s warning of lowering the US credit rating if Congress and the White House continue to dawdle over raising the national debt limit and lowering spending.

Groupon announced yesterday that they will be joining LinkedIn, Pandora, and Zynga in filing for IPOs while the market is receptive to internet IPOs. The deal is expected to be in the $750 million range, with insiders selling over half of that amount.

Goldman received a subpoena from the Manhattan District Attorney looking for information about their role in the financial crisis. The inquiry appears to be focused on the Senate Subcommittee report which concluded the company misled Congress and clients about their activity related to mortgage-backed securities. It figures that the DA would have to make these charges since the entire Federal government is stocked with former Goldman employees (Government Sachs).

Same store sales came in much weaker than expected against a relatively easy comp, rising 4.9% vs. expectations of 5.4%. Of the 25 stocks in the comp group we follow, 15 missed their comp estimate for May. Much of the weakness is focused in low and mid-tier retailers as consumers continue to be constrained by fuel prices, which are up $1 per gallon over the prior year. Misses were reported by the Gap, Limited, JC Penney, Target, TJ Maxx, and Kohls. Higher end retailers such as Saks (+20%) and Nordstrom (+8%) posted robust comps, as did club stores which sell gasoline such as Costco, up 13%.

For profit colleges are benefiting from less draconian than expected Gainful Employment rules from the Department of Education. Companies have been given until 2015 to comply with the new rules before they run the risk of losing their federal funding vs. earlier versions of the rules which would have penalized them next year. The rules are “meaningfully watered down” from previous versions, according to an analyst at Robert W. Baird. RBC called the new rules a “big win” for the industry, and Height Analytics said the new rules won’t limit growth at a majority of schools.

Bloomberg is reporting that more than 90% of sporting-goods manufacturers paid higher input costs and that 41% have already increased wholesale prices. Rising cotton, fuel and wage costs are slowly pushing through the supply chain, and should hit retail shelves by later this year and early 2012. Dean Maki, the chief US economist at Barclays, said that “sporting goods is the latest industry to exercise pricing power, following similar moves by airlines, restaurants and the apparel sector”.

As expected, the House rejected a bill to raise debt limit, 318-97. All Republicans and 90 Democrats voted against the bill, which didn’t address any spending cuts.

S&P warned of a potential commodity decline of up to 75% if the slowdown in China worsens. Commodities fell 6.8% in May, the largest drop in a year. Silver, the worst performer, lost 21%. Ironically, oil and gas prices have been falling, which should help ease pressure on a weak consumer.

The S&P/Case-Shiller Home Price Index fell to 2002 levels, and homes are in a double dip across most of the country. The chart below, courtesy of the Big Picture, shows the index since 2000. In spite of massive federal efforts, this market will eventually get to the market clearing price we have been discussing for the past three years. Government intervention can only delay the inevitable.

As opposed to the “transitory” inflation being caused by rising fuel prices, rents, which constitute roughly 40% of CPI, have risen 5% for the year ended April 30. A higher rent could push core CPI up at a time when the US Treasury can ill-afford CPI based increases in entitlement payments.

APAC market were weak last night, with the exception of the Shanghai, which rose 0.5%. EMEA markets are weak today, down about .75% across the board.

I keep hearing a rumor about an NBA final being played in a warm weather city, so I drove by the Staples Center last night and once again found that not to be true. These rumors are getting annoying.

Have a great weekend


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