Weak Manufacturing Data

April 30, 2012

Equity markets are weak this morning after soft economic data and Spain becoming the 8^th Eurozone country to fall into recession.  The Chicago Purchasing Manager Index came in at 56.2 for April, below the consensus of 60.0 and last month’s 62.2.  This is a blow to manufacturing, which has been the bright spot in the economy.  Personal spending for March came in less than anticipated at 0.3% vs. expectations of a 0.4% increase and February’s 0.9%.   Personal Income for March was slightly better than expectations at 0.4% vs. 0.3%. 

Shares of Barnes & Noble (BKS) surged this morning after Microsoft (MSFT) announced plans to invest $300 million into a new subsidiary that combines BKS’ Nook digital reader and their collegiate business.  The deal gives MSFT 18% of the subsidiary, which still doesn’t have a name.  The unit’s valuation of $1.7 billion is double BKS’ market cap at the end of last week.  As a condition of the deal, the companies also settled their patent litigation. 

Energy Transfer Partners (ETP) announced plans to acquire pipeline and gas station owner Sunoco (SUN) for $5.3 billion in cash and stock.  The deal price represents a 23% premium over Friday’s close and gives ETP 32% of Sunoco’s 7900 mile oil pipeline in addition to 4900 retail fueling stations. 

Earnings reports will be coming in like a fire hose this week as 25% of the S&P 500 companies issue earnings this week.

Treasury Secretary Timothy Geithner continues to press China to continue their recent financial reforms.  As a carrot, he has offered that the US will open its markets to China if they pursue the reforms.  “We are willing to continue to make progress on these issues, but our ability to do so will depend in part on how much progress we see from China on issues that are important to us,” said Geithner. 

The Bank of Japan has increased its asset buying to almost $500 billion, and announced plans to extend the maturity of the bonds it is purchasing from two years to three years. 

The Wall Street Journal reported Friday that US multinationals are creating jobs faster than other employers, but that 75% of the new positions are overseas. 

Yes, it’s true, the NBA Playoffs began yesterday.  I never thought I’d actually write this, but the Clippers lead Memphis 1-0 in their series after coming back from a 27 point deficit to win.

Have a great day

Ned

Weaker GDP A Concern

April 27, 2012

First quarter GDP came in below expectations at 2.2% (estimates were 2.5%) and less than the 4Q growth of 3.0%.  Strong consumption growth of 2.9% was the highlight of the report, rising the most in six quarters.  Inventories rose, retarding final sales (up 1.6%), which were above Q4 sales but well below the 3.2% increase in Q3.  Nonresidential investment declined by 2.1%, the first decline since Q4 2009, and was pulled down by a 12.0% decline in construction spending.  Residential construction posted its strongest quarter since the homebuyer tax credit in Q2 2010, rising 10%.  Net exports were a wash in the quarter.  Government spending fell by 3.0%, the sixth consecutive quarterly decline.  The upside for stocks is that this economic weakness could result in earlier than anticipated assistance from the Fed. 

Earnings continue to drive individual stocks.  Amazon (AMZN) is up 15% this morning after posting better than expected revenues and profit.  AMZN announced they now have 173 million active accounts.  Starbucks (SBUX) is down 5% after reporting weaker than expected comps as the company cited European weakness as the culprit.  Small cap Ball Corp (BLL) reported in line number yesterday, and was at least the 15^th report I listened to in which management cited weakness in China and Brazil. 

Robert Stevens, the longtime CEO of Lockheed Martin (LMT), announced his plan to retire from the aerospace firm.  Stevens recently rankled feathers by saying that he wouldn’t be hiring or investing in new projects due to the “uncertainty being created by the lack of leadership” in Washington. 

The Fed finished their meeting Wednesday, and Chairman Ben Bernanke had a message for the President and Congress:  don’t send us off the fiscal cliff.  “If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that effect on the economy” he said. 

Think austerity has had an impact on European growth?  Check out the chart below, courtesy of Hale Stewart.  It shows the fall off from a slow recovery over the past three quarters as austerity programs began taking hold. 

Spain, the home of 24% unemployment and spiking yields, might have another problem brewing.  As the country’s growth continues to spiral downwards, Spanish banks are facing another headwind as nonperforming real estate loans are spiking.  The IMF is suggesting that the sound banks will suffer along with the weaker banks as the NPL’s increase, resulting in a bank bailout.  In response, and just before having their debt cut by S&P, Spanish Economy Minister Luis de Guindos ruled out a bailout.  “We don’t need it!” 

The Argentinian (Argentine?-Bueller, anyone?) Senate passed a bill to nationalize 51% of YPF, the nation’s largest energy company.  The Congress will take a look at the bill next week. 

I don’t want to keep pounding on the Angels, because I know they’ll turn it around, but so far the $240 million spent on Albert Pujols hasn’t played out so well.  The great slugger, who has 445 career home runs, hasn’t hit one since September 22, and is only batting .224 with a .280 on-base percentage since joining the Angels.  Had I known that kind of average could garner a big contract, I’m not sure I would have ever given up the game. 

How about three QB’s going in the top 10 last night of the NFL draft?  Luck and RG-III were givens as 1-2 in the draft, but Ryan Tannehill at #8? 

Have a great weekend

Ned

Apple Again?

April 25, 2012

A funny thing happened on the way to Apple (AAPL) missing their quarter-they didn’t!  The stock has been correcting for the past couple of weeks, dragging the NASDAQ down more than the other indices due to its extreme weighting in the tech heavy index.  Equity futures are up this morning, led by the NASDAQ after AAPL reported better than expected numbers, with that stock rising 7% in pre-market trading.  Weak phone sales from both AT&T (T) and Verizon (VZ), combined with a correction from all-time highs, had spooked the market and led to a significant pullback in the stock.  iPhone sales were strong at 35.1 million, in excess of street estimates of 30 million. 

A recent government report is showing that Social Security will run out of funds by 2033, three years earlier than estimated last year.  Medicare will run dry in 2024.  In 2011 Social Security’s 44 million recipients cost the government $736 billion, the US Government’s largest expenditure.  The chart below shows the estimated growth of entitlement programs versus total government tax receipts. 

Earnings reports continue to surprise as 3M Corp (MMM) beat earnings and raised guidance for the 2^nd quarter.  Overall earnings have been better than anticipated, with the manufacturing sector showing particular strength. 

New home sales continue to be weak, with new home sales dropping 7.1% in March.  The median price of a new home fell by 1% from February to $234.5K. 

The Bank of Greece unveiled its outlook for 2012, which includes an estimated decline in GDP of 5%, worse than their late 2011 estimate of -4.5%. 

According to the Economist, the 30% rise in the yuan since 2005 has move the currency to fair value, and claims of the currency’s undervaluation are now misplaced.  “Most economists expect the yuan to resume its rise soon, but at a much slower pace and with greater flexibility up and down.”

In an effort to ensure that no private investor ever owns the debt of systematically important financial institutions, the IMF is proposing that regulators should be allowed to “bail-in” banks.  A bail-in would force the bank’s bondholders to take losses to avoid a collapse of the institution.  Uh, no. 

Have a great day

Ned

Risk Off-Summer Swoon Starting?

April 23, 2012

A funny thing happened on the way to austerity in Europe-the people revolted.  We haven’t seen an Arab Spring quite yet, but we are seeing a revolt at the polls.  French President Nicolas Sarkozy lost the first round of his re-election bid to the anti-Euro National Front party.   Dutch  Prime Minister Mark Rutte’s party lost the support of the opposition and majority Freedom Party as they revolted against spending cuts.  Credit spreads on Dutch bonds vs. German bunds rose to their highest level since 2009 and the country’s credit default swamps jumped 5%.  The dollar jumped 0.4% this morning and yields on the 10year are down to 1.92%. 

Equity markets are weak across the globe this morning after China announced another weak PMI report which suggests the country is in a contraction.  Commodities are correcting as well this morning, with copper falling 2.5% and oil falling as well.  The Hang Seng, one of the worst performing equity markets over the past 18 months, fell another 2.2% this morning. 

The Fed will be meeting this week, and while it isn’t expected that they’ll change course, it seems obvious that Chairman Bernanke is preparing us for another round of Fed action.  His language over the past few months suggests that in spite of inflation running ahead of their stated target, the Fed still hopes to keep their foot on the gas pedal to ensure the economy sustains the momentum from the fourth and first quarter. 

Wal-Mart (WMT) is under investigation for bribing government officials in Mexico.  While this is big news here in the US, and could lead to criminal charges, the practice is so wide-spread in Mexico that it didn’t even make news there.  It’s tough to make a ripple in the Mexican news when the people who take the bribes have their own name, Gester.  In addition to greasing the skids for companies wishing to do business in Mexico, the intermediaries also perform services such as paying your bills or delivering gifts.  Unfortunately for WMT, this could be a violation of the Foreign Corruption Act, which carries stiff penalties, with recent violators paying more than $1 billion in fines. 

Earnings are about 20% in the bag, and the numbers are actually coming in better than the prior two quarters versus consensus.  Of the 101 S&P 500 companies that have reported, 85% have beaten EPS while 74% have exceeded sales estimates.  Revenue growth for those 101 companies is averaging 4.6%.  Last quarter a mere 57% of companies beat their sales estimates, at an average growth rate of 7.1%, while 68% beat their EPS estimates.  The take away is that expectations have come down this quarter after a soft earnings season.   Apple (AAPL) will make a much anticipated report tomorrow.  Kellogg (K) announced weaker than expected earnings and is down this morning on the news. 

Nestle has agreed to pay just under $12 billion for Pfizer’s (PFE) infant nutrition  business, which obtains 85% of its sales from emerging markets. 

The IMF and US Treasury made an interesting request to an already tapped out ECB, asking them to do more to resolve the sovereign debt crisis.  ECB officials countered that they have done what they can, and Jens Weidmann, head of Germany’s Bundesbank, warned banks about becoming addicted to ECB funds.  “Monetary policy cannot solve structural problems.  Our shared monetary policy cannot lead to governments delaying reforms.” 

Another hole in the leaky Chinese boat has been labor costs, which have been rising over the past seven years.  While certain low-end manufacturing has already left the country for lower wage-cost regions, it appears that a flood of companies are looking to Vietnam.  The country’s stock index, the VN Index, recently hit an 11-month high as fund flows follow the manufacturing migration. 

The Federal Reserve, along with regulators, are giving US banks two years to comply with the Volcker rule.  Many of us are waiting for a repeal of Gramm-Leach-Bliley, which itself repealed Glass-Steagall. 

Something is happening to my Angels on their way to their inevitable World Series this season-they keep losing.  The team is now 6-10 after dropping a 3-2 game to the Orioles in extra-innings.  The team has struggled with its bullpen for the past few seasons after letting reliever Frankie Rodriquez go to free-agency, and while they may have both the best rotation and lineup in baseball, the bullpen has blown all its save opportunities this season.  Albert Pujols is still getting used to wearing his red uniform (I know, the Cardinals were red too, but I’m looking for a ray of sunshine here), and is waiting for Home Run #1. 

Have a great day

Ned

Strong Retail Sales

Monday April 16, 2012

Equity markets are starting the week with a bump on better than expected retail sales, which ex-autos rose by 0.8% in March vs. expectations of 0.6%. Retail comps, reported last week, came in better than expected for March as 14 out of 21 retailers we follow beat comps. Big comps were posted by Zumiez (ZUMZ) +14%, PriceSmart (PSMT) +17%, Ross Stores (ROST) +10%, and TJX (TJX) +10%.

China’s central bank doubled the daily band it will allow the yuan to fluctuate vs. the dollar, a move which is expected to ease trade tensions and is another step closer to raising the yuan’s utilization in international settlements. The new range is +/- 1% per day.

The Summit of the Americas broke up without a consensus after President Obama refused to sign a statement promising to invite Cuba to the next gathering. The other Western Hemisphere leaders signed the statement. The trip was also a minor embarrassment to the US after secret service and DOD officials working on the event were sent back to the US due to allegations of misconduct. Does anyone else remember the President's campaign promise to improve the reputation of the US internationally? I'd say this President has done more to damage our international reputation than any President since LBJ.

Yields in Spain have been rising as the effects of the LTRO fade. “The ECB could restart direct bond purchases” suggested Benoit Coeure, a member of the ECB executive board. Eurozone officials have been making a case for a larger IMF bailout fund, however, the US has been fighting this move, saying the Eurozone has the financial resources to handle their issues.

The Chicago Fire and Houston Dynamo played to a draw last night after the game was called due to lightening, an MLS first.

Have a great day

Ned

Friday the 13th!

Friday April 13, 2012

Thursday’s jobs report was weak again, with initial claims coming in at 380K vs. expectations of 355K for March. February’s claims were adjusted upwards from 357K to 367K. Drilling down a bit further, economic and employment strength has been focused in traditional cold weather states which have experienced a mild winter. Momentum in the employment market over the past four months has helped fuel the equity markets; a slowdown could lead to a rough summer for equities. The University of Michigan Consumer Confidence index came in this morning just under expectations at 75.7.

Google (GOOG) reported better than expected earnings and revenues last night, and also announced plans for a stock split via the issuance of a new class of shares. The chart below shows the absolute price of Apple (AAPL) and GOOG over the past five years. AAPL has outperformed GOOG over that time period, however, an irrelevant but much anticipated milestone appears close: AAPL’s price exceeding that of GOOG. Both stocks trade in the $600’s, and were within a couple of dollars of each other earlier this week.

The IMF issued a report raising concerns about a threat to global financial stability: the lack of safe assets. As fewer governments are considered “risk-free”, the IMF is concerned that the pricing and allocation models relied upon by advisors could become irrelevant if there is no risk-free asset to use as a basis for pricing.

China is piecing together a global payment system for cross-border transactions based in yuan. Should the yuan become more readily used in global transactions, reliance upon the dollar as a reserve currency would decline. The People’s Bank of China announced that global banks will be free to use the China International Payment System.

China reported their first quarter GDP this morning, which fell to its lowest level since 2009 at 8.1%.

Iran has engaged in what it has termed “counter-sanctions”, ending oil exports to nations supporting the US embargo of Iran. Germany became the latest country to lose its access to Iranian oil, joining Spain, Greece, France and the UK.

A new spill in the Gulf of Mexico, this time reportedly from a well operated by Royal Dutch Shell, has created an enormous oil slick across the Gulf. Shell is denying responsibility, but has been engaging in cleanup efforts to help stem the environmental damage.

Trivia question of the day: What do Bobby Petrino, Brian Dunn, and Tiger Woods have in common?

Have a great weekend

Ned