S&P 500: +21.84 (+2.41%)
REITs
REITs have rallied hard as investors perceive that fresh capital will lead to stabilization of balance sheets, guaranteeing that the companies raising money won’t go bankrupt (see: General Growth Properties). In 2009, REITs have raised $10.6 billion from share sales.
Many believe that REITs are building war chests that will allow them to make opportunistic acquisitions of properties from struggling rivals. Still, building a war chest comes at a price, and in the case of these public stock offerings, that price is the dilution of current holders’ interests. The concern seems negligible when market values have swelled by two-thirds in the span of four weeks, but perhaps will become more of an issue if the rally runs out of steam.
Banks still rallying
Lenders are scrambling to raise cash, with several banks already raising capital through equity sales. Adequate capital or not, these shares have been in high demand this week.
Bank shares may be receiving a boost from long-only mutual funds that have very little exposure to the sector, and thus are rushing to add them before they disclose their holdings at the end of the month.
Also helping bank shares is the government’s commitment to not let any of the banks fail. This was the big concern when banks hit their lows in March. Now, it seems that investors are only focused on dilution risk since many firms will raise capital by offering new common equity or converting existing preferred shares into common shares. But, the real concern should be exposure to commercial real estate and credit card debt.
Peter Lazaroff, Junior Analyst
Friday, May 8, 2009
Fixed Income Recap
Treasurys corrected a little today after the shellacking they took this week. The two-year finished up 1/32 on the day, and the ten-year was higher by 13/32. The benchmark curve flattened 4 basis points, and currently sits at +230 bps. A basis point represents .01%.We finally get a break from supply until the end of the month. CPI comes at us on Friday, and is expected to be flat on the headline number and +.1% ex food & energy. Any surprise higher could cause another selloff in the long end.
Credit
Financial Institutions must show the ability to issue debt not guaranteed by the FDIC under the Temporary Liquidity Guarantee Facility in order to be allowed to repay TARP. (This is just one of the few requirements released so far.)
Morgan Stanley and Bank of America did just that this week, giving the banks a little taste of how valuable that guarantee has been to them over the past 6 months. BAC and MS will pay 7.52% and 6.08% respectively for 5-year debt, (537.5 bps and 3.90 bps over Treasurys), a considerable premium over where they were issuing TLGP debt. This is a good sign, showing investors are willing to again take risk, but financial industry credit spreads remain very wide compared to the rest of the market.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Daily Insight
U.S. stocks pulled back from a four-month high as declines in bank, telecom and basic material shares put pressure on the broad market. It appeared we’d be off to the races again yesterday morning, after the latest data on initial jobless seemed to confirm what yesterday’s jobs data suggested -- that we’ve seen the worst of the labor market weakness – but things fell apart about 90 minutes into trading. Stocks had to take a breather eventually after the run we’ve seen and that is probably what the sell-off was all about.
The traditional areas of safety were the outperformers yesterday as health-care, utility and consumer staples were the only S&P 500 sectors that managed to close on the plus side.
Market Activity for May 7, 2009
Chain Store Sales
The International Council of Shopping Centers released their latest look at year-over-year retail sales, showing sales at stores open at least a year rose 0.7% during April. This marks the first monthly increase since September.
However, despite posting the first positive print since the economic world changed seven months ago, the results pretty much smoked the idea that consumer activity is back. The figure was boosted by increases in discount and drug store sales, but apparel store sales fell 2.7% (a really bad number for April), department store sales declined another 10.5% and luxury sales plunged 19.6% -- this segment has posted double-digit declines each month out of the past seven and at least a 17.5% drop in all but one of those months. Maybe we’re getting closer to that income equality some have been desiring.
Jobless Claims
The Labor Department reported initial jobless claims fell 34,000 to 601,000 for the week ended May 2 – the expectation was for a 4,000 increase to 635,000. This is the closest we’ve come to the 500K handle and thus suggests we’ve seen the worst the labor market has to offer. Make no mistake, the job scene is not only tenuous but remains very weak; however, we have to move in steps and this is an important first step.
The four-week average of initial claims fell for the fourth week in a row – the last two readings being the meaningful declines. The figure fell 14,750 to 623,500, the lowest level in nearly three months.
Continuing claims, on the other hand, have yet to halt their march to new record levels rising another 56,000 to 6.351 million. One of the next steps in this process is for this figure to halt making news highs. No one should expect it to improve markedly, but the new high scenario will have to end.
The insured unemployment rate (the jobless rate for those eligible for benefits, and a figure that closely tracks the direction of the overall unemployment rate) ticked up another 0.1% to 4.8%.
So now we wait for the official jobs report for April; we get it this morning at 7:30CT. Everything surely suggests its going to show a much better-than-expected reading. The market expects a decline of 600,000 payroll positions, it may post something in the -450,000 to -500,000 range.
Productivity
The Labor Department also reported that worker productivity (the measure of output per hour worked) advanced 0.8% at an annual rate last quarter, beating the 0.6% expected. Compared to the first-quarter of 2008 (the 0.8% figure just mentioned is measured on a quarter-over-quarter basis at an annual rate) productivity grew 1.8%. This is substantially below the 2.5% annual rate since 1995 and the nearly 3% during the 2001-2007 period.
Overall, productivity readings are not all that meaningful during downturns – that is, the reading does not give one a good sense of where productivity is going over the next, say, year simply because the figure generally gets a boost from cost cutting.
In fact, a reading of 0.8% is pretty weak for this stage in the business cycle, it usually hits 3%-4% simply because firms cuts jobs to a greater degree than production is reduced – productivity is measured by dividing output by hours worked; when firms cuts jobs obviously the denominator is going to fall, thereby boosting the whole number. This low level of productivity shows just how massively production was cut, especially since we know firms slashed jobs at an alarming rate. Firms cut hours worked at a 9% pace during the first three months of the year (biggest drop since 1975), exceeding even the large 8.2% decline in production.
What’s most important is where this figure is headed over the next few years and I’ve got to say it may have a tough time meeting the level we’ve enjoyed over the past 20 years.
Productivity improvements are essential because it allows firms to absorb costs, therefore they do not have to pass all of their input costs on through prices. This helps to keep inflation at bay and drives living standards higher via higher real (inflation-adjusted) incomes – real wages are dependent on the marginal productivity of labor. Productivity is driven by innovations and innovation needs seed money to bring these technological advances to market. If policy drives tax rates to a range that lowers after-tax return expectations, capital may just steer clear of the more risky areas of the capital markets – areas that provide the seed money for innovations.
Now, technology has been put on such a tremendous roll over the past two decades, it will take quite a tax-regime wall to stop it. The point is we must be very careful in this regard because we can, at the margin, do meaningful harm to productivity – and thus real wages and living standards over time.
Have a great day!
Brent Vondera, Senior Analyst
The traditional areas of safety were the outperformers yesterday as health-care, utility and consumer staples were the only S&P 500 sectors that managed to close on the plus side.
Market Activity for May 7, 2009
Chain Store Sales
The International Council of Shopping Centers released their latest look at year-over-year retail sales, showing sales at stores open at least a year rose 0.7% during April. This marks the first monthly increase since September.
However, despite posting the first positive print since the economic world changed seven months ago, the results pretty much smoked the idea that consumer activity is back. The figure was boosted by increases in discount and drug store sales, but apparel store sales fell 2.7% (a really bad number for April), department store sales declined another 10.5% and luxury sales plunged 19.6% -- this segment has posted double-digit declines each month out of the past seven and at least a 17.5% drop in all but one of those months. Maybe we’re getting closer to that income equality some have been desiring.
Jobless Claims
The Labor Department reported initial jobless claims fell 34,000 to 601,000 for the week ended May 2 – the expectation was for a 4,000 increase to 635,000. This is the closest we’ve come to the 500K handle and thus suggests we’ve seen the worst the labor market has to offer. Make no mistake, the job scene is not only tenuous but remains very weak; however, we have to move in steps and this is an important first step.
The four-week average of initial claims fell for the fourth week in a row – the last two readings being the meaningful declines. The figure fell 14,750 to 623,500, the lowest level in nearly three months.
Continuing claims, on the other hand, have yet to halt their march to new record levels rising another 56,000 to 6.351 million. One of the next steps in this process is for this figure to halt making news highs. No one should expect it to improve markedly, but the new high scenario will have to end.
The insured unemployment rate (the jobless rate for those eligible for benefits, and a figure that closely tracks the direction of the overall unemployment rate) ticked up another 0.1% to 4.8%.
So now we wait for the official jobs report for April; we get it this morning at 7:30CT. Everything surely suggests its going to show a much better-than-expected reading. The market expects a decline of 600,000 payroll positions, it may post something in the -450,000 to -500,000 range.
Productivity
The Labor Department also reported that worker productivity (the measure of output per hour worked) advanced 0.8% at an annual rate last quarter, beating the 0.6% expected. Compared to the first-quarter of 2008 (the 0.8% figure just mentioned is measured on a quarter-over-quarter basis at an annual rate) productivity grew 1.8%. This is substantially below the 2.5% annual rate since 1995 and the nearly 3% during the 2001-2007 period.
Overall, productivity readings are not all that meaningful during downturns – that is, the reading does not give one a good sense of where productivity is going over the next, say, year simply because the figure generally gets a boost from cost cutting.
In fact, a reading of 0.8% is pretty weak for this stage in the business cycle, it usually hits 3%-4% simply because firms cuts jobs to a greater degree than production is reduced – productivity is measured by dividing output by hours worked; when firms cuts jobs obviously the denominator is going to fall, thereby boosting the whole number. This low level of productivity shows just how massively production was cut, especially since we know firms slashed jobs at an alarming rate. Firms cut hours worked at a 9% pace during the first three months of the year (biggest drop since 1975), exceeding even the large 8.2% decline in production.
What’s most important is where this figure is headed over the next few years and I’ve got to say it may have a tough time meeting the level we’ve enjoyed over the past 20 years.
Productivity improvements are essential because it allows firms to absorb costs, therefore they do not have to pass all of their input costs on through prices. This helps to keep inflation at bay and drives living standards higher via higher real (inflation-adjusted) incomes – real wages are dependent on the marginal productivity of labor. Productivity is driven by innovations and innovation needs seed money to bring these technological advances to market. If policy drives tax rates to a range that lowers after-tax return expectations, capital may just steer clear of the more risky areas of the capital markets – areas that provide the seed money for innovations.
Now, technology has been put on such a tremendous roll over the past two decades, it will take quite a tax-regime wall to stop it. The point is we must be very careful in this regard because we can, at the margin, do meaningful harm to productivity – and thus real wages and living standards over time.
Have a great day!
Brent Vondera, Senior Analyst
Thursday, May 7, 2009
Fixed Income Recap
The two-year finished down 2/32 for the day, and the ten-year was lower by 1&10/32. The benchmark curve steepened 15 basis points, and currently sits at +234 bps. A basis point represents .01%.Today’s 30-year Treasury auction confirmed the fears of many traders who kept bonds from rallying earlier this week on speculation that demand for the long bond would not be met. $14 billion in new 30-year Treasuries were issued today to wrap up the government’s refunding activity for the month. The bid/cover ratio on the auction was 2.14, well under the 2.4 from last month’s 30-year auction, and came in at a yield of 4.288% compared to a 4.205 market rate before the auction. The 30-year bottomed out at a yield of 4.309% shortly after results were released, but rallied to end the day at 4.303%.
Stress Test
Below are the official results of the Treasury’s Supervisory Capital Assessment Program (SCAP). They are more or less in line with what has been leaked the past few days, except for PNC and Morgan Stanley who were previously expected not to need any.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Who will replace GM in the Dow Jones Industrial Average?
S&P 500: -12.14 (-1.32%)
Who will replace GM in the Dow Jones Industrial Average?
GM’s place in the Dow is, by no surprise, in jeopardy. It represents only 0.2 percent of the price-weighted measure used by the Dow, which makes GM as important to the Dow as Ryder System Inc is to the S&P 500. (Click here for the list of Dow companies)
John Prestbo, executive director of Dow Jones indexes, said yesterday: “There are two choices for GM: bankruptcy or increased government ownership. Both of those events are negative for continued membership. Definitely the trend is in the direction that would force us to remove it.”
So if GM is out, who is in? According to the Dow Jones website, the Dow is intended to “provide a clear, straightforward view of the stock market and, by extension, the U.S. economy.” This would make Ford Motors a logical choice so that the index maintains its exposure to the auto industry, but this seems unlikely given Ford’s still-low share price ($6.26).
After glancing at some companies with big market caps and ruling out all financials – there are already four in the Dow and the timing would be rather inappropriate – it seems that Apple, Cisco Systems, or Google would be the logical choices. Broadly speaking, Apple gives the index more consumer exposure, Cisco Systems gives the index exposure to the internet, and Google gives exposure to advertising.
FedEx or UPS could get the call since both stocks are considered to reflect the overall health of the economy. Another possibility would be Lockheed Martin, which would give the index more exposure to the defense sector and government spending – maybe they should just add the U.S. Treasury to the Dow.
Of course, Citigroup could become a candidate for removal if the government ends up with a controlling stake in the bank making the options more interesting – Wells Fargo or Goldman Sachs could suddenly become candidates.
What do you think?
Quick Hits
- GE to Spend $6 Billion on Health Care by 2015, Double Research
- The Preferred Answer to Stress Tests
- Still Waiting for Stock Picking
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks resumed their roll after preliminary reports on the job market suggested the decline in April payrolls will be meaningfully lower than what’s been expected. Orchestrated leaks regarding the bank stress test results (although the official numbers are not scheduled for released until today) also seemed to help the broad market as bank stocks rallied – even banks that were reported to have the need to raise substantial amounts of capital participated in the upswing.
Stock-index futures were down meaningfully yesterday morning, but reversed course when those preliminary reports on the employment situation were released. That data was the main driver, even for the banks, as less severe job losses will certainly show up in lower levels of consumer credit default rates.
But the stress test leaks also helped. Initially, I found the way the bank stocks rallied on the stress test news stunning. The firms that were stated as not needing new capital were not expected to need it, so no upside surprise there; the banks that were reported to have need to raise additional funds will have to do so in a way that dilutes the shareholder (converting preferred shares to common). If that’s not enough, the White House spokesman stated the administration may choose to remove the management from certain institutions – this degree of government control wouldn’t seem to be market friendly but hey, maybe the market is beginning to embrace the socialist tendencies. I’m obviously being facetious here.
But then we learned of the type of preferred shares the Treasury Department has magically created: mandatory convertible preferred shares – talk about financial engineering. Remember, yesterday we mentioned the government would seek to minimize the concern that they’ll have more control over the banks (as a result of the conversion to common, which has voting rights, from their current preferred-share stakes. Well, this is how they are doing it. These mandatory convertible preferred shares will convert to common shares only as capital is needed – very fancy legerdemain. This may be what sparked the rally in banks, the fear of government control has eased a bit. Personally, I remain skeptical; Washington will continue to direct the way in which banks compensate top employees and provide loans, I don’t think they’ll be able to resist.
Financials and energy were the best performers – a reversal from yesterday when they were the biggest drags on the broad market. Energy stocks got back on their horse as the price of oil shot up 4.45% to blow past the $55 per barrel handle.
The traditional sectors of safety, healthcare and utilities, were the laggards.
Market Activity for May 6, 2009
More on the Stress Tests
The government says the banks that they deem deficient of capital must develop a plan to raise additional funds by June and implement that plan by November. From there they must keep their Tier 1 capital ratio at a minimum of 6% (Tier 1 being the traditional measure of capital adequacy until the government changed the rules of the game to also include Tangible Common Equity, which does not count preferred shares as capital) and TCE at 4% through 2010. Just for color, Bank of America has a Tier 1 ratio of 9.15% right now.
I’m not sure the banks will actually devise a real plan now that we’ve got the spiffy new mandatory convertible preferred shares – it’s really so sweet if you think about it; a government official, say Mr. Geithner, can just make up a new security. But from an investors standpoint it kind of feels like you’re walking across a busy street blindfolded.
This whole game is going to be very interesting to watch. The government says certain banks are deficient capital, yet at the same time they state they must lend – in fact Barney Frank and Co. call bank executives up to Capitol Hill for the explicit purpose of vilifying them in front of the cameras for taking government money while not lending to a degree at which Mr. Frank thinks is appropriate.
The economic environment is still quite fragile, delinquency and default rates continue to climb. Therefore, if banks are going to guard capital then lending activity needs to slow. Bank managers understand this; investors who provide much of the funds essential to keep the lending channels flowing understand this. Government officials do not care to understand this, it’s all of sophistry and pretense to them. This is why when the government decides to push the market aside and allocate resource as they see fit, bad things occur. This indeed will be very interesting to watch unfold. I shouldn’t be this negative as the stock market moves higher, but it just feels like something isn’t quite right.
Mortgage Applications
The Mortgage Bankers Association reported their mortgage apps index for the week ended May 1 rose 2% after the 18.1% decline in the prior week. Purchases jumped 5.0%, marking the first increase in a month, and refinancings increased 1.2%.
Refis continue to dominate the index, but make up just 75% of the total (down from 80% that had been the average for a while) thanks to the nice gain in purchases. Fixed mortgage rates below 5% will certainly help activity over the next few months, but the job market will have to improve markedly before a substantial rebound occurs.
Challenger Survey
The Challenger Job Cuts Announcement survey stated U.S. layoffs increased 47% from the year earlier, down from the 180% increase posted in March.
Firing announcements rose 132,590 compared to 90,015 in April 2008, according to Challenger. Automotive, retail and financial sectors led the cuts. While this rise in job cut announcements is a big number, this is a massive improvement from the huge increase we’d seen over the previous few months.
ADP Report
In another preliminary employment survey, the payroll services firm ADP stated the economy shed 491,000 payroll positions last month (it was forecast to show a decline of 645,000) – again, while this is a huge level of job losses it is also a serious improvement from the 650,000-740,000 decline in payrolls over the last five months, if this survey is measuring things accurately – it’s been a darned good indicator of late so there’s little reason to believe it’s off by a wide margin.
If these two numbers are in the ballpark, we could be setting up for a much better-than-expected April jobs report from the Labor Department on Friday. The consensus estimate is for another 600K decline in payroll positions. If we get a decline of just 500K, as ADP is suggesting, that would be a very nice sign that the labor market has seen its worst and is stabilizing – albeit at very depressed levels – and should provide the impetus for stocks to go meaningfully higher as the market has been expecting worse. Conversely, this also sets the market up for a major disappointment. If what we saw in the preliminary readings fail to show up in Friday’s official numbers…look out.
Following the last two monthly employment reports we’ve talked about how the rate of job losses will ease. U.S. firms have shed jobs for 16-striaght months and the losses have been huge over the past five months – 75% of the 5 million jobs lost over the past 12 months has occurred since October. This pace cannot last, although my view was that it would take another few months before the improvement began to show up. It may be occurring sooner than that.
Initial jobless claims will remain a very important figure to watch, we get the latest reading this morning. Jobless claims continue to show that the labor market is very fragile and we’ll have to see this number move solidly into the 500K handle (last post was -631,000) to provide complete evidence the labor market has stabilized and improve in such a way that we reduce the losses to 300,000-350,000 per month..
Have a great day!
Brent Vondera, Senior Analyst
Stock-index futures were down meaningfully yesterday morning, but reversed course when those preliminary reports on the employment situation were released. That data was the main driver, even for the banks, as less severe job losses will certainly show up in lower levels of consumer credit default rates.
But the stress test leaks also helped. Initially, I found the way the bank stocks rallied on the stress test news stunning. The firms that were stated as not needing new capital were not expected to need it, so no upside surprise there; the banks that were reported to have need to raise additional funds will have to do so in a way that dilutes the shareholder (converting preferred shares to common). If that’s not enough, the White House spokesman stated the administration may choose to remove the management from certain institutions – this degree of government control wouldn’t seem to be market friendly but hey, maybe the market is beginning to embrace the socialist tendencies. I’m obviously being facetious here.
But then we learned of the type of preferred shares the Treasury Department has magically created: mandatory convertible preferred shares – talk about financial engineering. Remember, yesterday we mentioned the government would seek to minimize the concern that they’ll have more control over the banks (as a result of the conversion to common, which has voting rights, from their current preferred-share stakes. Well, this is how they are doing it. These mandatory convertible preferred shares will convert to common shares only as capital is needed – very fancy legerdemain. This may be what sparked the rally in banks, the fear of government control has eased a bit. Personally, I remain skeptical; Washington will continue to direct the way in which banks compensate top employees and provide loans, I don’t think they’ll be able to resist.
Financials and energy were the best performers – a reversal from yesterday when they were the biggest drags on the broad market. Energy stocks got back on their horse as the price of oil shot up 4.45% to blow past the $55 per barrel handle.
The traditional sectors of safety, healthcare and utilities, were the laggards.
Market Activity for May 6, 2009
More on the Stress Tests
The government says the banks that they deem deficient of capital must develop a plan to raise additional funds by June and implement that plan by November. From there they must keep their Tier 1 capital ratio at a minimum of 6% (Tier 1 being the traditional measure of capital adequacy until the government changed the rules of the game to also include Tangible Common Equity, which does not count preferred shares as capital) and TCE at 4% through 2010. Just for color, Bank of America has a Tier 1 ratio of 9.15% right now.
I’m not sure the banks will actually devise a real plan now that we’ve got the spiffy new mandatory convertible preferred shares – it’s really so sweet if you think about it; a government official, say Mr. Geithner, can just make up a new security. But from an investors standpoint it kind of feels like you’re walking across a busy street blindfolded.
This whole game is going to be very interesting to watch. The government says certain banks are deficient capital, yet at the same time they state they must lend – in fact Barney Frank and Co. call bank executives up to Capitol Hill for the explicit purpose of vilifying them in front of the cameras for taking government money while not lending to a degree at which Mr. Frank thinks is appropriate.
The economic environment is still quite fragile, delinquency and default rates continue to climb. Therefore, if banks are going to guard capital then lending activity needs to slow. Bank managers understand this; investors who provide much of the funds essential to keep the lending channels flowing understand this. Government officials do not care to understand this, it’s all of sophistry and pretense to them. This is why when the government decides to push the market aside and allocate resource as they see fit, bad things occur. This indeed will be very interesting to watch unfold. I shouldn’t be this negative as the stock market moves higher, but it just feels like something isn’t quite right.
Mortgage Applications
The Mortgage Bankers Association reported their mortgage apps index for the week ended May 1 rose 2% after the 18.1% decline in the prior week. Purchases jumped 5.0%, marking the first increase in a month, and refinancings increased 1.2%.
Refis continue to dominate the index, but make up just 75% of the total (down from 80% that had been the average for a while) thanks to the nice gain in purchases. Fixed mortgage rates below 5% will certainly help activity over the next few months, but the job market will have to improve markedly before a substantial rebound occurs.
Challenger Survey
The Challenger Job Cuts Announcement survey stated U.S. layoffs increased 47% from the year earlier, down from the 180% increase posted in March.
Firing announcements rose 132,590 compared to 90,015 in April 2008, according to Challenger. Automotive, retail and financial sectors led the cuts. While this rise in job cut announcements is a big number, this is a massive improvement from the huge increase we’d seen over the previous few months.
ADP Report
In another preliminary employment survey, the payroll services firm ADP stated the economy shed 491,000 payroll positions last month (it was forecast to show a decline of 645,000) – again, while this is a huge level of job losses it is also a serious improvement from the 650,000-740,000 decline in payrolls over the last five months, if this survey is measuring things accurately – it’s been a darned good indicator of late so there’s little reason to believe it’s off by a wide margin.
If these two numbers are in the ballpark, we could be setting up for a much better-than-expected April jobs report from the Labor Department on Friday. The consensus estimate is for another 600K decline in payroll positions. If we get a decline of just 500K, as ADP is suggesting, that would be a very nice sign that the labor market has seen its worst and is stabilizing – albeit at very depressed levels – and should provide the impetus for stocks to go meaningfully higher as the market has been expecting worse. Conversely, this also sets the market up for a major disappointment. If what we saw in the preliminary readings fail to show up in Friday’s official numbers…look out.
Following the last two monthly employment reports we’ve talked about how the rate of job losses will ease. U.S. firms have shed jobs for 16-striaght months and the losses have been huge over the past five months – 75% of the 5 million jobs lost over the past 12 months has occurred since October. This pace cannot last, although my view was that it would take another few months before the improvement began to show up. It may be occurring sooner than that.
Initial jobless claims will remain a very important figure to watch, we get the latest reading this morning. Jobless claims continue to show that the labor market is very fragile and we’ll have to see this number move solidly into the 500K handle (last post was -631,000) to provide complete evidence the labor market has stabilized and improve in such a way that we reduce the losses to 300,000-350,000 per month..
Have a great day!
Brent Vondera, Senior Analyst
The two-year finished flat on the day, and the ten-year was lower by 1/64. The benchmark curve was unchanged on the day, and currently sits at +219 basis points. A basis point represents .01%.The Fed submitted bids to buy 22 different Treasury notes as was only successful in buying $6.9 billion of one issue. On a normal day, news like this would roil the market for Treasuries. But help from a well bid Treasury ten-year auction and stress test results, it was largely ignored.
The Treasury auctioned $22 billion in new ten-year notes with a bid/cover of 2.47 and yield of 3.19%. Primary dealers in the US dominated the auction for the second time in a row as the indirect bid, foreign investors and central banks, fell to 18.7% from 31.9% in the previous ten-year auction.
Stress Test Results
Although the stress tests aren’t due to be officially released until tomorrow, results are being leaked left and right. Here is what we know as of Wednesday afternoon.
Bank of America, who needs $34 billion, leads the pack. According to most analyst SunTrust needs some but no numbers have been disclosed, the Treasury told Regions they will definitely need some but wouldn’t give them an amount, and Citigroup needed $10 billion this morning but now only needs $5 billion and thinks KeyCorp will need some. Confused yet?
This is such a mess. In addition to the results being leaked left and right and private analysts being confused with anonymous Treasury sources, there is nothing new about these capital needs. Every one of these companies, with the exception of Met Life, has received a preferred stock investment from the government through TARP. The government has simply switched their preference from preferred equity to common equity, and will officially disclose common equity needs tomorrow ignoring what the company may have already received through TARP.
Bank of America for example received $45 billion in preferred equity from the government. The $34 billion listed in the table ignores that number, and only means that the government would require B of A to convert $34 billion of government’s preferred stake to common equity to satisfy the regulators “ratio du jour” - Tangible Common Equity. Tangible Common Equity is more stringent than traditional capital measures and places a premium on common equity over preferred. “We think we are fine, but it’s now out of our hands,” Bank of America CEO Ken Lewis said at the company’s annual meeting last week. I think that pretty much sums it up.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Wednesday, May 6, 2009
Stress test results are leaked
S&P 500: +15.73 (+1.74%)
Stress test results
Although the results are to be officially announced tomorrow, the stress test results were slowly leaked throughout the day. The leaks were greeted with cheers as the additional capital needed by the nation’s lenders was not as extensive as some had feared. Investors may also be taking comfort in the fact that some of the uncertainty that has plagued the banking sector is dissipating.
The Fed is expected to direct about 10 of the 19 banks undergoing government stress tests to boost capital so they can withstand losses in a worse economic environment. Those that are deemed to need additional capital will get six months to raise that money, which will likely come from private equity placements, a public stock offering, or a conversion of government-owned preferred shares into common equity.
Those that do not need additional funds include:
- Goldman Sachs Group
- Morgan Stanley
- MetLife
- JPMorgan Chase
- Bank of New York Mellon
- American Express
The banks that do need are additional funds include:
- Bank of America - $34 billion
- Citigroup - $5 billion or $10 billion (depending on the source)
- Wells Fargo - $15 billion
- GMAC - $11.5 billion.
- Regions Financial - unknown
Garmin (GRMN) -14.93%
Garmin’s first-quarter sales and profit trailed analysts’ estimates, hurt by declining orders for car-focused gadgets. Revenue from the automotive unit, which accounted for more than half the total, declined 43 percent. U.S. car sales dropped 34 percent in April, the 18th consecutive monthly decline.
Portable internet devices and smartphones, which have access to GPS, remain a long-term threat to Garmin since they are a convenient and more economical substitute to Garmin’s automobile and outdoor products. Garmin continues to develop a smartphone, although this is a notoriously difficult market to crack and the launch date has been pushed back several times.
At this point, however, the portable internet evolution is too callow to cast off the navigation device maker and Garmin’s shares should benefit from an increase in auto sales.
Harris Corporation (HRS) -8.02%
Harris fell after reporting a 27 percent decline in orders due to reduced government purchases, which led Harris to reduce its revenue expectations for 2010.
CEO Howard Lance described the reduced government purchases as a delay and expects several hundred million dollars in radio orders eventually will be received. Lance continued that beyond fiscal 2010, the company is well-positioned to return to growth.
Transocean (RIG) +2.22%
Transocean easily beat first-quarter earnings estimates as a 17 percent drop in operating costs offset weaker oil and gas prices. The results reflect the steadying influence of the firm’s largely contracted rig fleet.
Sticking to its commitment to reduce debt from the GlobalSantaFe acquisition, the company paid down nearly $600 million in debt during the quarter. Management indicated that the free cash flow from its backlog is more than adequate to repay its debt maturities as they come due over the next few years.
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks held in there pretty well yesterday, giving back very little of the prior day’s strong session. Traders were probably unwilling to take additional positions directly ahead of the official bank stress test results due over the next couple of days and the employment figures for April. A better-than-expected reading from the latest service-sector survey kept stocks from falling further.
Ten stocks fell for every seven that rose on the NYSE. Some 1.4 billion shares traded on the Big Board, roughly in line with the three-month daily average.
Energy and financial shares led the declines – financials ahead of the stress test announcement and energy stocks were held back by a decline in the price of oil after a five-session jaunt that pushed crude for June delivery up 12%.
Health-care and industrial shares outperformed, as measured by the S&P 500 indices that track these components. There seemed to be some sector rotation going on, out of financials and energy and into pharmaceutical stocks.
Market Activity for May 5, 2009
Bernanke Testimony
Federal Reserve Chairman Bernanke, in comments to the Joint Economic Committee of Congress, stated the recession appears to be losing steam, with growth likely to resume later this year on the back of higher household spending, a bottoming in the housing market and an end to inventory liquidation. He warned though that the recovery may be slower than usual and the unemployment rate may remain high for an extended period as businesses remain cautious about hiring and business investment remains weak.
This possible lack of activity with regard to the business side is the correct concern. Specifically, business spending on capital equipment must reverse course; we’ve seen this figure rebound over the past two months off of very depressed levels, but that bounce has been slight. Before touching on the business side though, I’m not sure his relative optimism on the consumer is justified. We’ll see intermittent pops in consumer activity but one should not expect a sustained improvement – the consumer still has to deal with large amounts of debt that are tough to manage now with the labor market in the shape it’s in and incomes flat – not to mention the declines in stocks and houses that have the consumer appropriately shy of engaging in much consumption. These debt levels were quite manageable when the unemployment rate hovered around 5% and incomes were growing at a nice clip (and rising investments boosted confidence) but that has all changed.
As a result of this scenario, we will rely on business spending to augment growth. However, as government has inserted itself as the economic driver this may actually have an adverse effect on business activity over time. We will most likely see a two-three quarter jolt in GDP as firms increase production in order to rebuild stockpiles after massive liquidation (the inventory dynamic we often refer to) and the government’s additional billions in spending kicks in. But the government cannot create aggregate demand, no matter how many Keynesian economists say it is so – if this were true, central-planning economies would be the beacons of economic virtue instead of the slow-to-no growth baskets cases they are in reality. Therefore, it will be difficult for sustained growth in GDP if the government effectively crowds out the private sector.
Substantially higher levels of spending and debt mean that taxes will rise and the debt issuance to provide immediate funds for that spending must be purchased – both remove funds from the private sector spending pool. In addition, this activity also has the potential to cause firms to hold back as higher tax rates reduce confidence in future economic activity, and thus firm’s sales growth forecasts. If the policy were focused on reducing tax rates (on capital, labor income and corporate profits) we’d have a much better shot of businesses boosting plant, equipment and inventory spending in an aggressive manner – they have the means. But this is not the case.
Bernanke is right to have focused his caveat on the business side – we will depend on this segment of the economy greatly over the next couple of years. Let’s hope the government’s actions do not scare business into prolonged caution.
Earnings
First-quarter earnings season, while posting big declines, has come in better-than-expected. Even as S&P 500 profits are down 32% (that’s from the year-ago period with 80% of firms reporting thus far), 68% of companies have beat expectations with 26% missing and 6% reporting results that are in line. The longer-term average for the positive/negative reading (positive being those that beat, negative for those that miss) is 59%/24%, with 17% meeting estimates.
The fact that some economic readings suggest the worst in certain areas of the economy have been seen, along with historic levels of cash in this zero interest rate environment, have been main contributors to the rally of the past couple of months; certainly the scenario that roughly 70% of S&P 500 companies have surpassed even very weak estimates has played a major role as well. We shouldn’t get too carried away, estimates were pathetically soft and this is true for second and third-quarters profits, expected to decline -38% and -30%, respectively. Nevertheless, the market has found reason to celebrate the worst-case scenario that was being priced in back in February and early March has not come to fruition.
We have many issues to deal with still, those touched on above along with rising consumer default rates, the commercial side of the mortgage market is only in its early stages of deterioration and (as discussed yesterday) every action that the government engages in has to be viewed as having a consequence that the market will have to deal with in the not-too-distant future. One of the main consequences may be levels of inflation. A harmful inflationary event will have to be met, at some point, by tighter monetary policy. This means we’ll have higher interest rates and higher tax rates combining at the same time – not exactly a mix that augments economic growth, just the opposite in fact.
But for now we should celebrate the market rally and the fact that first-quarter earnings have come in at better-than-expected rates on the whole.
ISM Service-Sector
The Institute for Supply Management reported its service-sector survey rose to 43.7 in April (42.2 was expected) after posting 40.8 for March – this indicates the non-manufacturing sector contracted at a slower pace than the month prior. I was thinking this reading had a shot of hitting 45.0, which would have been very positive for stocks, but we’ll take these smaller steps toward the 50 level. (50 is the dividing line between expansion and contraction)
I don’t think we should expect an uninterrupted march to expansion mode, the trend to that reading may prove choppy (much like the pullbacks in Feb. and Mar. after the Dec.and Jan. readings looked to suggest we were going to move up consecutively from the November low). Still, we should be able to move closer to the 50 mark over the next four months – assuming nothing changes for the worse during this time. A move above 45 when the May figure is released will be convincing.
The new orders (both domestic and exports) sub-indices of the survey offered encouraging signs regarding the next couple of months.
The new orders index hit its highest level since September.
The new export orders gauge jumped too; still in contraction mode, but barely.
Unfortunately, the employment gauge remains deep in contraction mode, but this will be the last of the sub indices to improve.
This morning we get preliminary reports on the April jobs situation. Two surveys, one from outplacement (finding people new jobs) services firms Challenger, Gray and Christmas and the other from payroll services firm ADP, will offer a decent glance of how Friday’s official jobs report will turn out. So the market will be focused on those readings.
Too, we’re getting reports that Bank of America will need $34 billion in new capital, as determined by the government’s stress tests and this may very well put pressure on market as the, in my view, stupid and unnecessarily damaging decision to switch the measure by which capital adequacy is determined may wreak havoc. That is, regulators are now using what’s known as tangible common equity as the way to count capital, moving away from the historically used measure of Tier 1 capital – the former excludes preferred shares, the latter includes it. This will have investors worried about conversion from preferred shares to common shares and the dilution and increased government power within the banking industry that will result.
That Challenger Job Cuts survey is just out and it showed that year-over-year job cuts rose 47%. This may sound bad, and it is, but it is a huge improvement from the 180% increase the figure posted in last month’s reading.
Have a great day!
Brent Vondera, Senior Analyst
Ten stocks fell for every seven that rose on the NYSE. Some 1.4 billion shares traded on the Big Board, roughly in line with the three-month daily average.
Energy and financial shares led the declines – financials ahead of the stress test announcement and energy stocks were held back by a decline in the price of oil after a five-session jaunt that pushed crude for June delivery up 12%.
Health-care and industrial shares outperformed, as measured by the S&P 500 indices that track these components. There seemed to be some sector rotation going on, out of financials and energy and into pharmaceutical stocks.
Market Activity for May 5, 2009
Bernanke Testimony
Federal Reserve Chairman Bernanke, in comments to the Joint Economic Committee of Congress, stated the recession appears to be losing steam, with growth likely to resume later this year on the back of higher household spending, a bottoming in the housing market and an end to inventory liquidation. He warned though that the recovery may be slower than usual and the unemployment rate may remain high for an extended period as businesses remain cautious about hiring and business investment remains weak.
This possible lack of activity with regard to the business side is the correct concern. Specifically, business spending on capital equipment must reverse course; we’ve seen this figure rebound over the past two months off of very depressed levels, but that bounce has been slight. Before touching on the business side though, I’m not sure his relative optimism on the consumer is justified. We’ll see intermittent pops in consumer activity but one should not expect a sustained improvement – the consumer still has to deal with large amounts of debt that are tough to manage now with the labor market in the shape it’s in and incomes flat – not to mention the declines in stocks and houses that have the consumer appropriately shy of engaging in much consumption. These debt levels were quite manageable when the unemployment rate hovered around 5% and incomes were growing at a nice clip (and rising investments boosted confidence) but that has all changed.
As a result of this scenario, we will rely on business spending to augment growth. However, as government has inserted itself as the economic driver this may actually have an adverse effect on business activity over time. We will most likely see a two-three quarter jolt in GDP as firms increase production in order to rebuild stockpiles after massive liquidation (the inventory dynamic we often refer to) and the government’s additional billions in spending kicks in. But the government cannot create aggregate demand, no matter how many Keynesian economists say it is so – if this were true, central-planning economies would be the beacons of economic virtue instead of the slow-to-no growth baskets cases they are in reality. Therefore, it will be difficult for sustained growth in GDP if the government effectively crowds out the private sector.
Substantially higher levels of spending and debt mean that taxes will rise and the debt issuance to provide immediate funds for that spending must be purchased – both remove funds from the private sector spending pool. In addition, this activity also has the potential to cause firms to hold back as higher tax rates reduce confidence in future economic activity, and thus firm’s sales growth forecasts. If the policy were focused on reducing tax rates (on capital, labor income and corporate profits) we’d have a much better shot of businesses boosting plant, equipment and inventory spending in an aggressive manner – they have the means. But this is not the case.
Bernanke is right to have focused his caveat on the business side – we will depend on this segment of the economy greatly over the next couple of years. Let’s hope the government’s actions do not scare business into prolonged caution.
Earnings
First-quarter earnings season, while posting big declines, has come in better-than-expected. Even as S&P 500 profits are down 32% (that’s from the year-ago period with 80% of firms reporting thus far), 68% of companies have beat expectations with 26% missing and 6% reporting results that are in line. The longer-term average for the positive/negative reading (positive being those that beat, negative for those that miss) is 59%/24%, with 17% meeting estimates.
The fact that some economic readings suggest the worst in certain areas of the economy have been seen, along with historic levels of cash in this zero interest rate environment, have been main contributors to the rally of the past couple of months; certainly the scenario that roughly 70% of S&P 500 companies have surpassed even very weak estimates has played a major role as well. We shouldn’t get too carried away, estimates were pathetically soft and this is true for second and third-quarters profits, expected to decline -38% and -30%, respectively. Nevertheless, the market has found reason to celebrate the worst-case scenario that was being priced in back in February and early March has not come to fruition.
We have many issues to deal with still, those touched on above along with rising consumer default rates, the commercial side of the mortgage market is only in its early stages of deterioration and (as discussed yesterday) every action that the government engages in has to be viewed as having a consequence that the market will have to deal with in the not-too-distant future. One of the main consequences may be levels of inflation. A harmful inflationary event will have to be met, at some point, by tighter monetary policy. This means we’ll have higher interest rates and higher tax rates combining at the same time – not exactly a mix that augments economic growth, just the opposite in fact.
But for now we should celebrate the market rally and the fact that first-quarter earnings have come in at better-than-expected rates on the whole.
ISM Service-Sector
The Institute for Supply Management reported its service-sector survey rose to 43.7 in April (42.2 was expected) after posting 40.8 for March – this indicates the non-manufacturing sector contracted at a slower pace than the month prior. I was thinking this reading had a shot of hitting 45.0, which would have been very positive for stocks, but we’ll take these smaller steps toward the 50 level. (50 is the dividing line between expansion and contraction)
I don’t think we should expect an uninterrupted march to expansion mode, the trend to that reading may prove choppy (much like the pullbacks in Feb. and Mar. after the Dec.and Jan. readings looked to suggest we were going to move up consecutively from the November low). Still, we should be able to move closer to the 50 mark over the next four months – assuming nothing changes for the worse during this time. A move above 45 when the May figure is released will be convincing.
The new orders (both domestic and exports) sub-indices of the survey offered encouraging signs regarding the next couple of months.
The new orders index hit its highest level since September.
The new export orders gauge jumped too; still in contraction mode, but barely.
Unfortunately, the employment gauge remains deep in contraction mode, but this will be the last of the sub indices to improve.
This morning we get preliminary reports on the April jobs situation. Two surveys, one from outplacement (finding people new jobs) services firms Challenger, Gray and Christmas and the other from payroll services firm ADP, will offer a decent glance of how Friday’s official jobs report will turn out. So the market will be focused on those readings.
Too, we’re getting reports that Bank of America will need $34 billion in new capital, as determined by the government’s stress tests and this may very well put pressure on market as the, in my view, stupid and unnecessarily damaging decision to switch the measure by which capital adequacy is determined may wreak havoc. That is, regulators are now using what’s known as tangible common equity as the way to count capital, moving away from the historically used measure of Tier 1 capital – the former excludes preferred shares, the latter includes it. This will have investors worried about conversion from preferred shares to common shares and the dilution and increased government power within the banking industry that will result.
That Challenger Job Cuts survey is just out and it showed that year-over-year job cuts rose 47%. This may sound bad, and it is, but it is a huge improvement from the 180% increase the figure posted in last month’s reading.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries were down today despite the selloff in equities. The two-year finished the day down 3/64, and the ten-year was lower by 2/32. The benchmark curve was flatter by 2.5 basis points on the day, and currently sits at +219 basis points. A basis point represents .01%.Today’s auction was well received but the market didn’t react to the results as expected. The three-year Treasury came in at a yield of 1.473%, lower than the market rate of 1.476% just before the auction. The bid to cover was 2.66 and the auction was dominated by bids from primary dealers in the US, all considered to be good signs. However, supply fears took over as the day wore on. Traders all but ignored today’s activity and turned their attention to the ten- and thirty-year auctions later this week.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Tuesday, May 5, 2009
HOLX, PFG, EMR, WAG
S&P 500: -3.44 (-0.38%)
Hologic (HOLX) -20.19%
Hologic missed earnings estimates as a result of significant write-downs to goodwill, but much of the disappointment was in response to delay in the U.S. launch of its Tomosynthesis mammography system.
The company said it would postpone its filing for next-generation imaging device with U.S. health regulators, which was proposed for June 2009. The approval of the tomosynthesis product is expected to be a key growth driver in the Breast Health division, which accounts for more than half of Hologic’s revenues.
Principal Financial Group (PFG) +10.75%
Principal blamed the decline in profit on lower asset valuations, including the impact of “significant equity market declines.” Specifically, Principal said its assets under management tumbled 22 percent from a year ago to $236.6 billion.
Looking to address balance sheet concerns, Principle said it increased its position in highly liquid assets by 76 percent to $5.8 billion and boosted its cash and equivalent holdings by 141 percent to $2.7 billion. Principal noted the earnings power of their three key retirement and investment products, which generated $6 billion of sales on a combined basis in the first quarter.
Because Principal is highly sensitive to the equity markets and the economy, they will continue to face tighter liquidity and depressed earnings in coming quarters. Still, the company has one of the most valuable franchises in the life insurance industry, while its core fundamentals of its pension and asset management businesses are still largely intact.
Emerson Electric (EMR) -1.50%
Emerson’s fiscal second-quarter profit fell 32 percent on slumping sales and a stronger dollar, though the earnings quality was strong – as is usually the case with Emerson.
CEO David Farr doesn’t expect a full recovery in their business to occur until 2011, as end-market demand recovers slowly in Europe and North America. Nevertheless, Emerson reaffirmed its 2009 earnings outlook. The company also said it will not deviate from its plans to acquire complementary businesses and expects to spend about $1 billion on takeovers this year.
Walgreen (WAG) -0.32%
Walgreen posted a 5.7 percent jump in April same-store sales, versus consensus estimates of 4.5 percent, aided in large part by the Easter holiday.
Pharmacy script growth of 4.2 percent was the strongest result reported since July 2007, as the industry continues to benefit from cycling Zyrtec’s shift to over-the-counter and an unusually high number of safety concern issues.
The impact of swine flu in the front-end (hand sanitizer, masks, etc) and pharmacy (Tamiflu, Relenza) was only 20 basis points.
Quick Hits
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks rallied hard yesterday, extending upon the best back-to-back monthly showings since the first two months of 1975, as much better-than-expected economic reports were plenty to keep investor sentiment juiced. The broad market, as measured by the S&P 500 has reached its highest level since January 8 and is fractionally positive for the year now thanks to the 34% run since hitting the March 9 low. The NASDAQ Composite is solidly higher, up 11.8% year-to-date, while the Dow Industrials are still four points below the flat line.
One has to expect that a certain level of fear among those holding short positions is also behind this rally – although something tells me, with the way the government is treating these stress tests, that the shorts will fight another day with regard to the financial sector, banks specifically – although this is certainly a contrarian view right now.
What’s more, with a historic mountain of cash on the sidelines, in a zero interest rates environment, the trigger was set to fire off a substantial rally. This was a key reason we explained in the March 10 letter that it did feel a powerful rally was in store
Yesterday’s economic reports on pending home sales and construction spending (both for March) easily beat expectations. We’ve seen this market move higher even in the face of bad news reports, so better-than-expected news from these data sets made it pretty easy for traders to push shares higher.
Tomorrow we get the ISM service-sector survey for April and it’s got a very good shot of beating a pretty weak estimate – if the number comes in at 45 or higher…wow, that could really provide a spark. Careful though, it’s important not to allow emotions to get the best of you here, we are no where close to being out of the woods. Every action the government has engaged in, and they many, must be viewed as having its own consequence that will have to be dealt with over the next couple of years.
Financials led the market higher, jumping 10.13%, as Warren Buffett says he doesn’t care what the stress test say he believes Wells Fargo is in fine shape – and simply because he is the top shareholder of Wells you can expect at least this bank won’t have an issue with private funds, for the rest it’s very suspect with the government as a partner.
Basic material stocks enjoyed another nice surge – these shares have soared 50% since touching their March 2 low. Investors are excited over the prospects of reflation (dispelling the thought that deflation is still a concern), although we would look for the CRB (commodity index) to hit 250 before it offers total conviction that the reflation trade is good to go without a major pullback.
All of the 10 major S&P 500 industry groups closed to the plus side.
Market Activity for May 4, 2009
An End Around on the Repatriated Income Tax
What’s known as the repatriated income tax is essentially the tax liability a company incurs when a U.S. corporation brings profits from an overseas subsidiary back home – that income is taxed at the 35% corporate income tax rate. Of course, the majority of this overseas income never comes back home as a result of the tax – the U.S. business pays the foreign country’s tax and then must pay this one if they bring it home, which puts our firms at a disadvantage since no other OECD country engages in such activity (only the foreign country’s tax rate is levied) – and thus we have less domestic capital than would otherwise be the case. When the company leaves that profit overseas, the U.S. corporate tax is not applied and that is known as the deferral on overseas profits – the deferral assumes that that money eventually comes home and the tax is then levied – hence why it is often referred to as the repatriated tax..
Well. What businesses do sometimes is borrow money from that overseas subsidiary and thus gain a tax deduction from the interest payments to that subsidiary. This appears to be what the administration is going after, that deduction – they wanted to completely repeal the deferral on overseas income, meaning firms would pay the tax of the foreign country in which they do business plus our own 35% rate, but ran into such a backlash that they have to do this end around. They will also end the tax-credit that firms are granted on the foreign tax paid – legislation that was put in place in the 1990s, I believe, as a way to make our firms more competitive as we have the second-highest corporate tax rate in the Western world.
They believe that by eliminating the deduction on interest paid to overseas subsidiaries and ending the tax credits U.S. firms will not have the incentive to have overseas operations and those jobs will come home. But this view is so benighted it not only pathetic it’s troubling they don’t understand the issues. Firms won’t bring these businesses home. Instead, many will choose to move their headquarters altogether to places that offer more attractive corporate tax regimes. This is nothing more than a corporate tax increase at the worst possible time, not that there is any time driving after-tax profits lower is a good time.
The correct way to go is to eliminate the tax on bringing profits back home, or at least slashing the tax from 35% to, say, 10% -- hundreds of billions in capital would come back home at exactly a time we need it most and the Treasury would see a very nice revenue gain as well. Or, better yet, eliminate deductions and credits completely and move to a very low corporate tax rate of 10%-15%. While this may cause some havoc in the short term, over the longer term it would not only benefit investors via the after-tax corporate profits boost (and thus send stock prices higher) the consumer would benefit as well -- firms don’t pay taxes, they are passed on through prices. Alas, there is no hope of this occurring at the current time – it will come though; we’ll get there after the current ideology, if left unchecked, proves economically damaging.
This proposal from the administration would also target individuals who choose to place their capital in tax-haven countries. According to Bloomberg News, a Treasury official says this will shift the burden of proof to the individual when the IRS alleges assets are being hidden in certain offshore bank accounts.
Again, there are two ways to make sure the U.S. is the place most desired place for capital to reside (the most desired place for investment dollars and businesses to reside) and both must work together. The first is by keeping tax rates on income and capital low. The second is sound monetary policy from the Fed that results in a stable currency value. By eliminating deductions, or raising tax rates, just the opposite occurs.
Pending Home Sales
The number of Americans signing contracts to buy previously owned homes rose for a second-straight month in March. Pending home sales increased 3.2% last month, according to the National Association of Realtors, which followed the 2% increase for February – although that February rise didn’t help actual sales for March as they were down 3%. We’ve seen contracts breakdown over the past several months prior to closing; existing home sales are obviously not counted until the contract is closed. Certainly job losses have played a role in signings failing to turn into closings.
Still, the rise in March pending home sales, which hopefully turn up in April sales, is a good sign. By region, the West and South saw the gains, as pending sales rose 3.8% in the West and jumped 8.5% in the South. The Midwest saw pending sales fall 1.0% and they fell a substantial 5.7% in the Northeast.
We should see some bounce in home sales with mortgage rates so low and prices down significantly. Still, one shouldn’t expect too much until job losses ease.
Construction Spending
U.S. construction spending rose 0.3% in March (a 1.6% decline was expected) as spending on private commercial and government projects offset the continued decline in residential building. This marked the first rise in six months.
Commercial construction spending (private non-residential) jumped 2.7% last month and government non-residential spending rose 1.2% -- both more than making up for the 4.1% decline in private residential construction spending (down 33.3% over the past 12 months) and the 2.3% decline in public residential spending.
I’m not sure where the rise in private commercial construction came from as vacancy rates are rising due to the economic contraction – maybe we’ll get a more clear reading when the number is revised next month, it doesn’t seem to add up.
The government side will be the driver of construction spending for a while as the infrastructure projects begin to take affect. Currently, public spending makes up 30% of the overall reading, that percentage will rise over the next year.
Have a great day!
Brent Vondera, Senior Analyst
One has to expect that a certain level of fear among those holding short positions is also behind this rally – although something tells me, with the way the government is treating these stress tests, that the shorts will fight another day with regard to the financial sector, banks specifically – although this is certainly a contrarian view right now.
What’s more, with a historic mountain of cash on the sidelines, in a zero interest rates environment, the trigger was set to fire off a substantial rally. This was a key reason we explained in the March 10 letter that it did feel a powerful rally was in store
Yesterday’s economic reports on pending home sales and construction spending (both for March) easily beat expectations. We’ve seen this market move higher even in the face of bad news reports, so better-than-expected news from these data sets made it pretty easy for traders to push shares higher.
Tomorrow we get the ISM service-sector survey for April and it’s got a very good shot of beating a pretty weak estimate – if the number comes in at 45 or higher…wow, that could really provide a spark. Careful though, it’s important not to allow emotions to get the best of you here, we are no where close to being out of the woods. Every action the government has engaged in, and they many, must be viewed as having its own consequence that will have to be dealt with over the next couple of years.
Financials led the market higher, jumping 10.13%, as Warren Buffett says he doesn’t care what the stress test say he believes Wells Fargo is in fine shape – and simply because he is the top shareholder of Wells you can expect at least this bank won’t have an issue with private funds, for the rest it’s very suspect with the government as a partner.
Basic material stocks enjoyed another nice surge – these shares have soared 50% since touching their March 2 low. Investors are excited over the prospects of reflation (dispelling the thought that deflation is still a concern), although we would look for the CRB (commodity index) to hit 250 before it offers total conviction that the reflation trade is good to go without a major pullback.
All of the 10 major S&P 500 industry groups closed to the plus side.
Market Activity for May 4, 2009
An End Around on the Repatriated Income Tax
What’s known as the repatriated income tax is essentially the tax liability a company incurs when a U.S. corporation brings profits from an overseas subsidiary back home – that income is taxed at the 35% corporate income tax rate. Of course, the majority of this overseas income never comes back home as a result of the tax – the U.S. business pays the foreign country’s tax and then must pay this one if they bring it home, which puts our firms at a disadvantage since no other OECD country engages in such activity (only the foreign country’s tax rate is levied) – and thus we have less domestic capital than would otherwise be the case. When the company leaves that profit overseas, the U.S. corporate tax is not applied and that is known as the deferral on overseas profits – the deferral assumes that that money eventually comes home and the tax is then levied – hence why it is often referred to as the repatriated tax..
Well. What businesses do sometimes is borrow money from that overseas subsidiary and thus gain a tax deduction from the interest payments to that subsidiary. This appears to be what the administration is going after, that deduction – they wanted to completely repeal the deferral on overseas income, meaning firms would pay the tax of the foreign country in which they do business plus our own 35% rate, but ran into such a backlash that they have to do this end around. They will also end the tax-credit that firms are granted on the foreign tax paid – legislation that was put in place in the 1990s, I believe, as a way to make our firms more competitive as we have the second-highest corporate tax rate in the Western world.
They believe that by eliminating the deduction on interest paid to overseas subsidiaries and ending the tax credits U.S. firms will not have the incentive to have overseas operations and those jobs will come home. But this view is so benighted it not only pathetic it’s troubling they don’t understand the issues. Firms won’t bring these businesses home. Instead, many will choose to move their headquarters altogether to places that offer more attractive corporate tax regimes. This is nothing more than a corporate tax increase at the worst possible time, not that there is any time driving after-tax profits lower is a good time.
The correct way to go is to eliminate the tax on bringing profits back home, or at least slashing the tax from 35% to, say, 10% -- hundreds of billions in capital would come back home at exactly a time we need it most and the Treasury would see a very nice revenue gain as well. Or, better yet, eliminate deductions and credits completely and move to a very low corporate tax rate of 10%-15%. While this may cause some havoc in the short term, over the longer term it would not only benefit investors via the after-tax corporate profits boost (and thus send stock prices higher) the consumer would benefit as well -- firms don’t pay taxes, they are passed on through prices. Alas, there is no hope of this occurring at the current time – it will come though; we’ll get there after the current ideology, if left unchecked, proves economically damaging.
This proposal from the administration would also target individuals who choose to place their capital in tax-haven countries. According to Bloomberg News, a Treasury official says this will shift the burden of proof to the individual when the IRS alleges assets are being hidden in certain offshore bank accounts.
Again, there are two ways to make sure the U.S. is the place most desired place for capital to reside (the most desired place for investment dollars and businesses to reside) and both must work together. The first is by keeping tax rates on income and capital low. The second is sound monetary policy from the Fed that results in a stable currency value. By eliminating deductions, or raising tax rates, just the opposite occurs.
Pending Home Sales
The number of Americans signing contracts to buy previously owned homes rose for a second-straight month in March. Pending home sales increased 3.2% last month, according to the National Association of Realtors, which followed the 2% increase for February – although that February rise didn’t help actual sales for March as they were down 3%. We’ve seen contracts breakdown over the past several months prior to closing; existing home sales are obviously not counted until the contract is closed. Certainly job losses have played a role in signings failing to turn into closings.
Still, the rise in March pending home sales, which hopefully turn up in April sales, is a good sign. By region, the West and South saw the gains, as pending sales rose 3.8% in the West and jumped 8.5% in the South. The Midwest saw pending sales fall 1.0% and they fell a substantial 5.7% in the Northeast.
We should see some bounce in home sales with mortgage rates so low and prices down significantly. Still, one shouldn’t expect too much until job losses ease.
Construction Spending
U.S. construction spending rose 0.3% in March (a 1.6% decline was expected) as spending on private commercial and government projects offset the continued decline in residential building. This marked the first rise in six months.
Commercial construction spending (private non-residential) jumped 2.7% last month and government non-residential spending rose 1.2% -- both more than making up for the 4.1% decline in private residential construction spending (down 33.3% over the past 12 months) and the 2.3% decline in public residential spending.
I’m not sure where the rise in private commercial construction came from as vacancy rates are rising due to the economic contraction – maybe we’ll get a more clear reading when the number is revised next month, it doesn’t seem to add up.
The government side will be the driver of construction spending for a while as the infrastructure projects begin to take affect. Currently, public spending makes up 30% of the overall reading, that percentage will rise over the next year.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries reversed trend today as the long end outperformed for the first time in two weeks thanks to Fed buying in the seven- to ten-year range. The two-year finished the day down 3/64, and the ten-year was higher by 1/64. The benchmark curve was flatter by 3 basis points on the day, and currently sits at +221.5 basis points. A basis point represents .01%.Treasuries were quiet today as the market prepares for this week’s hefty supply ($71 billion in three-, ten- and thirty-year maturities). The market has been concerned about the supply problem for a quite a while now and has sold off as a result. If auction results show any appetite for Treasuries at these yields look for the curve to flatten 15-20 bps with a ten-year yield in the 2.95-3.05% range.
The Fed purchased $8.5 billion in Treasuries ranging in maturities from 2/29/16 to 2/15/19. This brings net total Fed Treasury purchases to $85.3 billion. The Fed intends to buy Treasuries again on Wednesday.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Monday, May 4, 2009
Coal stocks on a tear
Arch Coal (ACI) +11.87%
Since April 28, Arch Coal has risen more than 38 percent in response to increased regulation and permitting constraints on surface mines in Appalachia.
To briefly summarize, the U.S. Environmental Protection Agency (EPA) began an aggressive review of permit requests for mountaintop coal mining, citing serious concerns about potential harm to water quality. Separately, the Department of Interior (DOI) is seeking to overturn a Bush administration regulation allowing mining companies to dump their waste near rivers and streams and return to the standard set in 1983.
Mountaintop removal is the process where companies clear-cut a mountaintop and then blast an average of 800 feet off the top of the mountain to access coal seams that lie beneath. Rubble from the blasted mountains, often containing toxic debris, is then dumped into adjacent valleys. This results in the blocking of natural streams, often causing floods and frequently mixing waters with toxic waste. Thus, many water resources in such areas become contaminated.
According to Credit Suisse, affected surface mines in Central Appalachia account for approximately 9 percent of total U.S. coal production. While it is unclear how much production will actually be impacted, there is still potential for a significant backlog of permit applications in the coming months until more clarity regarding the re-interpretation of both the Clean Water Act and the Surface Mining Control and Reclamation Act (SMCRA).
This serves as a positive catalyst for U.S. coal producers since the U.S. coal market has been widely expected to be oversupplied in 2009. In justifying expectations, many point to the 1999-2002 period when Judge Hayden wreaked similar havoc on Mountaintop mining permits. The end result was higher U.S. coal prices as permit backlogs translated into production shortfalls and ultimately a supply shortage.
Coal producers with heavy-exposure to the Appalachian mines will likely suffer, but companies that produce the majority of their coal elsewhere are smiling. Arch Coal has no mining operations in the Appalachian Mountains and recently acquired additional mines in lucrative Powder River Basin.
Coal giant Peabody Energy (BTU) has insignificant exposure to Appalachia and will also benefit from less production in the area. Peabody is up 27.65 percent in the last four trading sessions.
Quick Hits
- Firms Face Tighter Tax Rules
- ‘Card-Check’ May Be Dropped From Union Measure
- Volcker’s Great Recession Redefines Full Employment as Jobs Vanish Forever
Peter Lazaroff, Junior Analyst
Fixed Income Recap
Treasuries were down all day but rallied from their lows to finish steeper for the ninth day in a row. The two-year finished the day down 1/64, and the ten-year was lower by 15/64. The benchmark curve was steeper by 3.5 basis points on the day, and currently sits at +224.5 basis points. A basis point represents .01%.Credit
April was a great month for Credit spreads. Yields on government guaranteed paper are up due to supply concerns while yields on corporate bonds have come down considerably. The graphs below compare CSJ (1-3 year Credit) and LQD (Intermediate Credit) to their respective treasury ETFs on a price basis. Remember prices move inversely to yields.
Corporates will essentially track equities (S&P 500 +9.4% for April), so this isn’t shocking by any means. But with all the talk about Treasuries taking it on the chin so hard because we haven’t seen any sign of “quantitative easing v2.0” from the Fed, I figured I would make a point of it.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
Daily Insight
U.S. stocks erased early-session losses on Friday, closing the day higher as investor sentiment was certainly helped by a nice improvement in the latest nationwide manufacturing survey. Stocks closed higher for the week and the broad market posted its best back-to-back monthly performance since early 1975 – the last time the market plunged to the extent we’ve endured this go around.
The latest manufacturing survey from the Institute for Supply Management showed meaningful improvement. It remains in contraction mode, but hit a reading that offers strong evidence we’ve seen the worst in the factory sector. Now we have to get past the latest hurdle, the degree to which auto-plant closings weigh on these factory gauges.
Energy, utility, telecom, industrial and tech shares all outperformed the overall market. The laggards were financial, consumer discretionary and health-care shares.
Market Activity for May 1, 2009
Stress Tests
Well, as everyone knows the stress tests will not be released today as originally planned, but Wednesday now – I wouldn’t be surprised if the results were delayed again.
We’ve talked about how harmful the decision to run these tests can be. If the Fed says every bank tested is ok, then no one believes it. If they identify that 5-6 banks lack the appropriate level of capital (as is expected) then those institutions can forget about having access to private capital, which leaves guess who?
But beyond that, the decision to move away from Tier 1 capital as a way to set capital adequacy to what’s known as tangible common equity (TCE) as the capital measure seems blatantly stupid. (For clarity, Tier 1 capital includes preferred shares along with common shares; TCE on the other hand subtracts preferred shares from the assets available if the bank is liquidated and leaves just common equity as the capital source – common equity being the capital received from shareholders and retained earnings)
The really flawed reasoning behind this decision is that the government capital injections and the shift to TCE may actually make these firms worse off. Here’s why:
By shifting to TCE, the government’s preferred shares must be converted to common equity in order to count as capital, but when they are converted, the common shareholder is now diluted as his stake has been reduced due to the increase in common shares – and massively diluted in some cases.
In addition, the government gains more control over the company as common has voting rights. (Yes, the Treasury may say they will give up voting rights or something similar, but give me a break, they will have enormous control over operations)
So, between the dilution of the common shareholder and increased government control, the share price will fall as one would think an investor exodus is highly likely. Since the equity markets live in a Merton Model world, these decisions will do more harm than good. That is, based on the Merton Model a company’s stock price is one variable in determining default risk – if the common stock is pushed lower by investor fears, then the probability of default increases; when this happens the cost of insuring (purchasing credit default swaps) against default rises and that’s when the short sellers come rolling in again.
Oh, and the already hurting personal income figures will get worse as the dividend income component of the data will erode further as high-dividend paying preferred shares are converted into nil-low paying common.
Just as the prior decisions by the government to inject capital via preferred shares had the market scared stiff over nationalization of the banks, and the accounting standard that is mark-to-market unjustifiably caused capital to evaporate, this too will prove destructive.
We remain in a cautious environment; these rallies may cause people to believe otherwise but when the government becomes this involved, nothing good will come of it. This isn’t merely an axiom, but we have mountains of historical evidence as proof.
Crude Oil
Oil futures for June delivery are well-ensconced in the $50 handle again as the latest manufacturing reading and a consumer confidence survey both bounced to the highest levels since the economy went into a tailspin in September.
Crude rose 3.07% on Friday to close the session at $52.69 per barrel. As we’ve touched on over the past couple of months, crude is generally trading on the outlook for economic growth right now rather than very bearish current supply-demand fundamentals – energy demand is down from the year-ago period, while crude supplies remain at 18-year highs. Sentiment is flowing regarding global growth prospects six months out, and thus so goes the oil trade.
University of Michigan Confidence Survey
Confidence among U.S. consumers, as measured by the University of Michigan’s sentiment survey, rose to the highest level since the economic world changed in September. While the index remains very depressed, much like the confidence reading we received from the Conference Board’s Consumer Sentiment survey a week back (the other major confidence gauge), the fact that it is getting closer to the level prior to the economic shock is a really good sign.
Surely, record low mortgage rates (refi activity has reduced monthly expenses) and the 30% rally in stocks from the nefarious low of 666 on the S&P 500 over the past two months have catalyzed this boost in sentiment. It will be interesting to see how these readings hold up as stock prices fluctuate. Ultimately, we’ll need substantial economic growth in order for job losses to ease and this is what it will take to really set stocks on a more sustained path upward and thus confidence.
ISM Manufacturing (April)
The Institute for Supply Management’s factory activity index climbed to 40.1 in April after being stuck in the lowly 30s since September. This is what we’ve been looking for to confirm evidence that the economy has reached a turning point – certainly not close to a full-fledged rebound to expansion but more than just stabilizing at tremendously low levels.
A reading below 50 illustrates the sector continues to contract, which has been the case for the 15th straight month according to this reading. However, getting to the 40 handle was a major step (and a number of 41.2 is believed to show tepid expansion for the overall economy is possible); now it must march higher – even if this will prove difficult with auto plants being idled. That said, there are many other areas within the manufacturing arena that can offer support.
Respondents were fairly upbeat regarding machinery orders, specifically for agriculture-related products and mining. There was also optimism that orders from the chemical industry would change for the better by the third quarter and orders for electrical equipment were slightly improving.
Most sub-indices of the report were moving in the right direction. New orders, backlog of orders and customer inventories were encouraging. Employment and factory inventories remain very depressed.
New order rose six points and closed in on the 50 mark.
The backlog of orders index moved into the 40s.
Customers’ inventories moved below 50 for the first time since July 2008. (This is not factory inventories, but what suppliers think of their customers’ inventory levels. You want this number to move below 50 as it shows suppliers believe their customers’ stockpile levels are too lean; this may offer evidence production will be needed to boost those levels).
The employment index improved, but only from very low levels – it will take some time for this reading to come around, but we’d like to see a bit more of a pop than we got.
Factory inventories barely moved and continue to contract at a greater rate than they were being trimmed prior to September.
Factory Orders (March)
This figure generally mirrors the results we get from the durable goods orders report, which is generally released a week ahead, and it was right in line this time too. Both reports pretty much showed the prior month’s increase was revised down to show half the rise initially estimated and March orders declined. Since we spend much time on durables, I always question whether to put touch on this report, but it’s worth a mention.
The Commerce Department stated factory orders fell 0.9% in March, more than the expected 0.6% drop, and the February gain was revised down to show an increase of 0.7% (initially estimated at +1.8%).
The most important number here is the business-spending figure (technically termed: non-defense capital goods ex-aircraft) and it showed a second-straight monthly increase – up 0.4% in March, which followed a 4.1% gain in February. Business spending has plunged over the past six months, so the increase is off of very low activity. Extending upon this two-month streak is vital as the economy will not be able to count on the consumer boosting activity (not in a sustained fashion at least) over the foreseeable future.
Have a great day!
Brent Vondera, Senior Analyst
The latest manufacturing survey from the Institute for Supply Management showed meaningful improvement. It remains in contraction mode, but hit a reading that offers strong evidence we’ve seen the worst in the factory sector. Now we have to get past the latest hurdle, the degree to which auto-plant closings weigh on these factory gauges.
Energy, utility, telecom, industrial and tech shares all outperformed the overall market. The laggards were financial, consumer discretionary and health-care shares.
Market Activity for May 1, 2009
Stress Tests
Well, as everyone knows the stress tests will not be released today as originally planned, but Wednesday now – I wouldn’t be surprised if the results were delayed again.
We’ve talked about how harmful the decision to run these tests can be. If the Fed says every bank tested is ok, then no one believes it. If they identify that 5-6 banks lack the appropriate level of capital (as is expected) then those institutions can forget about having access to private capital, which leaves guess who?
But beyond that, the decision to move away from Tier 1 capital as a way to set capital adequacy to what’s known as tangible common equity (TCE) as the capital measure seems blatantly stupid. (For clarity, Tier 1 capital includes preferred shares along with common shares; TCE on the other hand subtracts preferred shares from the assets available if the bank is liquidated and leaves just common equity as the capital source – common equity being the capital received from shareholders and retained earnings)
The really flawed reasoning behind this decision is that the government capital injections and the shift to TCE may actually make these firms worse off. Here’s why:
By shifting to TCE, the government’s preferred shares must be converted to common equity in order to count as capital, but when they are converted, the common shareholder is now diluted as his stake has been reduced due to the increase in common shares – and massively diluted in some cases.
In addition, the government gains more control over the company as common has voting rights. (Yes, the Treasury may say they will give up voting rights or something similar, but give me a break, they will have enormous control over operations)
So, between the dilution of the common shareholder and increased government control, the share price will fall as one would think an investor exodus is highly likely. Since the equity markets live in a Merton Model world, these decisions will do more harm than good. That is, based on the Merton Model a company’s stock price is one variable in determining default risk – if the common stock is pushed lower by investor fears, then the probability of default increases; when this happens the cost of insuring (purchasing credit default swaps) against default rises and that’s when the short sellers come rolling in again.
Oh, and the already hurting personal income figures will get worse as the dividend income component of the data will erode further as high-dividend paying preferred shares are converted into nil-low paying common.
Just as the prior decisions by the government to inject capital via preferred shares had the market scared stiff over nationalization of the banks, and the accounting standard that is mark-to-market unjustifiably caused capital to evaporate, this too will prove destructive.
We remain in a cautious environment; these rallies may cause people to believe otherwise but when the government becomes this involved, nothing good will come of it. This isn’t merely an axiom, but we have mountains of historical evidence as proof.
Crude Oil
Oil futures for June delivery are well-ensconced in the $50 handle again as the latest manufacturing reading and a consumer confidence survey both bounced to the highest levels since the economy went into a tailspin in September.
Crude rose 3.07% on Friday to close the session at $52.69 per barrel. As we’ve touched on over the past couple of months, crude is generally trading on the outlook for economic growth right now rather than very bearish current supply-demand fundamentals – energy demand is down from the year-ago period, while crude supplies remain at 18-year highs. Sentiment is flowing regarding global growth prospects six months out, and thus so goes the oil trade.
University of Michigan Confidence Survey
Confidence among U.S. consumers, as measured by the University of Michigan’s sentiment survey, rose to the highest level since the economic world changed in September. While the index remains very depressed, much like the confidence reading we received from the Conference Board’s Consumer Sentiment survey a week back (the other major confidence gauge), the fact that it is getting closer to the level prior to the economic shock is a really good sign.
Surely, record low mortgage rates (refi activity has reduced monthly expenses) and the 30% rally in stocks from the nefarious low of 666 on the S&P 500 over the past two months have catalyzed this boost in sentiment. It will be interesting to see how these readings hold up as stock prices fluctuate. Ultimately, we’ll need substantial economic growth in order for job losses to ease and this is what it will take to really set stocks on a more sustained path upward and thus confidence.
ISM Manufacturing (April)
The Institute for Supply Management’s factory activity index climbed to 40.1 in April after being stuck in the lowly 30s since September. This is what we’ve been looking for to confirm evidence that the economy has reached a turning point – certainly not close to a full-fledged rebound to expansion but more than just stabilizing at tremendously low levels.
A reading below 50 illustrates the sector continues to contract, which has been the case for the 15th straight month according to this reading. However, getting to the 40 handle was a major step (and a number of 41.2 is believed to show tepid expansion for the overall economy is possible); now it must march higher – even if this will prove difficult with auto plants being idled. That said, there are many other areas within the manufacturing arena that can offer support.
Respondents were fairly upbeat regarding machinery orders, specifically for agriculture-related products and mining. There was also optimism that orders from the chemical industry would change for the better by the third quarter and orders for electrical equipment were slightly improving.
Most sub-indices of the report were moving in the right direction. New orders, backlog of orders and customer inventories were encouraging. Employment and factory inventories remain very depressed.
New order rose six points and closed in on the 50 mark.
The backlog of orders index moved into the 40s.
Customers’ inventories moved below 50 for the first time since July 2008. (This is not factory inventories, but what suppliers think of their customers’ inventory levels. You want this number to move below 50 as it shows suppliers believe their customers’ stockpile levels are too lean; this may offer evidence production will be needed to boost those levels).
The employment index improved, but only from very low levels – it will take some time for this reading to come around, but we’d like to see a bit more of a pop than we got.
Factory inventories barely moved and continue to contract at a greater rate than they were being trimmed prior to September.
Factory Orders (March)
This figure generally mirrors the results we get from the durable goods orders report, which is generally released a week ahead, and it was right in line this time too. Both reports pretty much showed the prior month’s increase was revised down to show half the rise initially estimated and March orders declined. Since we spend much time on durables, I always question whether to put touch on this report, but it’s worth a mention.
The Commerce Department stated factory orders fell 0.9% in March, more than the expected 0.6% drop, and the February gain was revised down to show an increase of 0.7% (initially estimated at +1.8%).
The most important number here is the business-spending figure (technically termed: non-defense capital goods ex-aircraft) and it showed a second-straight monthly increase – up 0.4% in March, which followed a 4.1% gain in February. Business spending has plunged over the past six months, so the increase is off of very low activity. Extending upon this two-month streak is vital as the economy will not be able to count on the consumer boosting activity (not in a sustained fashion at least) over the foreseeable future.
Have a great day!
Brent Vondera, Senior Analyst
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