Daily Insight

U.S. stocks extended upon Wednesday’s decline as concerns over global growth remain in play. Oil’s retreat to $36.85 (so much for those predicting $200/barrel with such certainty just five months back) reinforced the worry due to the stunning degree of decline – crude fell nearly 10% yesterday alone.

This may seem obvious -- you say: “Of course the prospects for global growth are pathetic” – but the concern regarding the extent to which the credit chaos has had on the global economic picture actually ebbs and flows on a weekly, sometimes daily, basis.

Indeed, we do get small indications that the pessimism has gone a bit too far. There is a separation between perception and reality that needs to be addressed – energy demand has actually improved over the past couple of months after falling the most since 1982 for the first 10 months of the year. This is the affect of the price mechanism, but it seems to me we’d see demand continue to decline if the world were as “tapped out” as most seem to assume.


(We’ll note, the January crude-oil futures contract expires today so there was added selling pressure yesterday as those who own contracts simply for financial reasons have to sell to avoid taking possession. Although, at these levels, grab a few galvanized swimming pools and let them back the truck up. Do you think the EPA would have an issue with backyard storage?)

Market Activity for December 18, 2008


In addition, while it’s tough to get terribly optimistic about things right now, the statements that accompany tech-sector earnings in particular show what we’re dealing with is more an issue of confidence than actual economic fundamentals being in the dirt. I can sense the reaction now; you’re thinking I’m off my rocker. But a number of economic data sets show business spending collapsed as if a switch had been flipped (generally we see this kind of grind to a halt as the economy contracts), which proves to me that a lack of confidence/caution is half the battle right now – reverse this mindset slightly and you get a decent bounce in activity from these levels.

Take Oracle’s earnings release yesterday. The company stated they have never seen orders canceled to the extent they did in November -- ever. Apparently, companies had the resources to engage in such spending plans just a couple of months back, but now all of a sudden they are pulling orders. This tells me the dramatic economic retrenchment of the past three months is due more to heightened levels of caution than anything else. This is the obstacle that must be addressed.

Don’t get me wrong, the current quarter’s GDP report is going to make a run at the horrible declines in economic activity seen in 1980 and 1982 (which posted -7.8% and -6.4% readings at their nadirs) but confidence is something that can be returned to the marketplace very quickly if the correct strings are pulled – problem is we’re not pulling the correct strings. You know what I’m referring to.

Ease this current level of caution and a tepid rebound in business spending will combine with a stock market rally and a mild bounce from the consumer. Remember, nearly $4 trillion sits in money market accounts and real incomes have been boosted via the 65% plunge in gasoline prices, offsetting some of the damage due to a weak labor market. The fuel is there, now ignite it.

On stocks, we’re 18% above the November 20 low; if we can manage a rally of an additional 20%, you’ll see caution ease.

Jobless Claims

The Labor Department reported initial jobless claims fell 21,000 to 554,000 in the week ended December 13. While it’s nice to see some easing, the figure remains elevated and the jump in the prior week likely portends the December payroll report will show a decline at least as bad as the 500,000-plus drop in November – possibly worse. Next week’s claims data will correspond with the December job market reporting period and we’ll be better able to assess things then.

Despite the decline last week, the four-week average of claims rose 2,750 to 543,750.


It’s important to watch the ISM (both the manufacturing and service-sector surveys) reports, which have seen their employment gauges slide. The manufacturing survey’s employment index has matched the 1990-91 recession low and we’ll be watching to see if it weakens further and moves to the 1981-82 low. If it holds above that mark, we may see the payroll declines at least stabilize.

We’ll also remind everyone, as touched on a couple of times now, the jobless claims figure would have to approach one million to match what occurred at the high point of 1982 when adjusting for payroll growth. Back in 1982 total non-farm payrolls stood at 88 million; today it is 136 million, so 550,000 in claims is not nearly as harsh as it was back then.

That said, claims have risen significantly over the past three weeks (all due to the December 6 weekly claims report that showed a 60,000 increase) and this is a dismal backdrop for the shopping season. As mentioned above, we expect that the 65% decline in gasoline prices, which has boosted real incomes, will offset some of this labor-market weakness and the December spending numbers will post a better-than-expected reading. But this claims data does cause some doubt.

Continuing claims are approaching the peaks hit in 1974 and 1982, but did fall 47,000 to 4.384 million in the week ended December 6 – there’s a one week lag between initial claims and continuing. .


Philly Fed

The Philadelphia Federal Reserve Bank’s general business conditions index showed activity remains depressed, but not to the degree expected. The index rose to -32.9 in December from -39.3 in November – the number was expected to fall to -40.5. Not exactly an inspiring print but the level remains above even the relatively mild 1990-1991 recession.


The new orders index rose to -25.2 from -31.4; but unfilled orders deteriorated.

The employment index declined to -28.7 from -25.2 last month.


Witching Hour (and no, I’m not referring to Def Leppard lyrics)

We’re without any economic releases this morning, but things will remain exciting (if that’s the correct term) as today marks quadruple witching. This is the quarterly event with which we get the expiration of stock-index futures, stock-index options and single-stock futures and options. As a result, it should be a volatile session, especially in the final hour – unfortunately, nothing new these days.

Have a great weekend!


Brent Vondera, Senior Analyst

Afternoon Review

General Electric (GE) -8.22%
Standard & Poor’s said it has revised its outlook on GE and its units to negative from stable and affirmed its AAA long-term and A-1+ short-term credit ratings. The negative outlook is based partly on the concerns regarding GE Capital Corps’s future performance and funding. Standard & Poor’s said there is at least a one-in-three chance it will cut GE’s credit rating from the top AAA in the next two years.

This announcement comes two days after GE said it could no longer make business decisions that are harmful to its long-term growth prospects for the sole purpose of maintaining their AAA credit rating.

FedEx (FDX) -2.14%
FedEx said its financial performance is increasingly being challenged by some of the worst economic conditions in the company’s 35-year operating history and it expects conditions to remain difficult through 2009.

FDX has already taken actions to reduce over $1 billion of expenses for all of fiscal 2009 and is now implementing a number of additional cost reduction initiatives, including salary decreases, elimination of merit-based salary increases and suspension of 401 (k) company matching for a minimum of one year.

Ingersoll-Rand (IR) -4.65%
IR cut fourth quarter guidance since it has had lower than expected revenues in all business segments, primarily due to softer North American and sharply declining Western European markets (which the company noted was especially severe over the last six weeks).


Quick Hits

• Credit-Card Users Feel Pain as Banks Reap Gain From U.S. Cash
• IBM, Sun Face ‘Reckoning’ in 2009 as Technology Budgets Shrink
• U.S. Spending on Research to Fall
  
  
  
  Peter Lazaroff, Junior Analyst
  

Daily Insight

U.S. stocks fell yesterday, giving back some of Tuesday’s 5% gain as worries over global growth affected investor sentiment. Even a large four-million barrel per day production quota cut by OPEC failed to boost oil prices, illustrating that global growth concerns ruled the session.

Still the decline in the broad market was tepid, for this environment at least. The S&P 500 had been down as much as 1.8% early in the session, bounced to a 0.6% gain in the afternoon but eventually succumbed to the aforementioned concerns falling 1.5% in the final 90 minutes.

Market Activity for December 17, 2008

Utility, technology and energy shares took the brunt of the damage falling 2.92%, 1.73% and 1.59%, respectively. Consumer discretionary and basic material stocks were the only gainers of the 10 major industry groups. (Strange how consumer discretionary shares gained ground on a day global economic worries were the primary concern, but the group was helped by a jump in Macy’s shares after the retailer negotiated a more flexible bank-credit agreement.)

The Dollar

The dollar got clocked yesterday, extending a six-session decline as all of this talk and action of massive fiscal stimulus and the Fed’s latest comments have caused investors to think about fundamentals again. The Fed has flooded the system with dollars, and they signaled they are willing to do much more if they feel necessary. This was setting up for a dollar rout, as much as it pains me to say it, as we’ve touched on for a few weeks now.


The greenback had benefited from the flight-to-safety trade, but it appears some of this trade has moved to gold – up 16% over the past eight sessions. Of course, gold doesn’t pay interest or a dividend, but some don’t seem to care about that right now as the four-week T-bill has traded at a negative yield and 90-day bills trade at 0% -- it’s a crazy world.

Mortgage Applications

The Mortgage Bankers Associations reported their refinancing index rose 6.5% last week. The index has risen four of the past six weeks as the 30-year fixed-rate mortgage has dropped from 6.4% at the beginning of November to 5.18% last week.
The group’s purchases index fell for the second week, declining 4.5% in the week ended December 12, which followed a 17% decline in the prior period.

Crude-Oil

OPEC members agreed to cut production by 4.2 million barrels per day at the cartel’s meeting yesterday. The reduction brings OPEC’s daily production to 24.845 million barrels from 29.045 million which was the official quota back in September. This is a huge reduction and will have on effect on price even with lower levels of demand.

The issue that OPEC generally has to deal with is cheating – individual countries producing more than the quota calls for. When oil prices are rising, especially dramatically like last spring/summer, they have an incentive to keep oil in the ground – it’s free storage and producers are confident a higher price will be captured a month down the road. However, when prices are falling the OPEC members generally produce more than their quota for fear next week will bring less revenue.
(The futures market is currently in contango – future deliveries trade at a higher price than the spot price. This would normally cause producers to allow supplies to build, which is true here in the U.S. but OPEC countries are do dependent and hard-up for oil revenues, they will be cheating.)


Since crude prices have tanked $100 per barrel over the past five months, the members are hurting for revenue – especially countries like Venezuela, Libya and Algeria. The cheating that results will make the reduction less effective. Still, the size of the cut is so large it should push prices higher nevertheless. Not yesterday though.

The market ignored the production cut to focus on the weekly supply report, which was quite bearish and sent crude below $40 per barrel for the first time in four years. It recovered a bit to close above the 40-handle at $40.06.

The Energy Department reported crude supplies rose 525,000 barrels to 321.3 million barrels last week – roughly 5% above the five-year average (effectively more than that considering the drop in demand). Stockpiles have climbed 11% since September 19.

Loans and Mark-to-Market

The Fed continues to pump massive amounts of liquidity into the system, yet banks continue to hoard the cash, unwilling to increase lending. And who can blame them? With mark-to-market accounting rules that determine capital-adequacy ratios, why would they take on assets like car and home loans? Why extend credit lines? Lenders would be holding back in a tough environment already, but even more so due to this rule.

With default rates growing and the housing market showing no sign of reversal just yet, lenders know they’ll just be writing down more assets, which will force them to raise more capital and put up more collateral. This is the insanity of pro-cyclical accounting rules. When asset prices are falling banks have to write-down assets (even those they have no desire to sell), causing them to raise more capital, which forces them to sell more assets, pushing prices down more and thus more write-downs. It’s a death spiral.

Using mark-to-market accounting with which to based capital adequacy ratios was put in place in November 2007; the timing could hardly have been worse. This accounting standard is tantamount to your neighbor having to sell his house today because of special circumstances (and because of the urgency must take a 30% haircut), and you then would be forced you to lower your home’s value by 30%, say from $300,000 to $210,000 – even if you have no desire to sell. Oh, and by the way, you’ll have to come up with $72,000 to keep your LTV at 80%. Wouldn’t that be nice.

If we would have had this standard in place during the S&L crisis we’d still be dealing with the effects. We must return to the former standard, which based capital adequacy on the original cost of an asset; it served us well. Remember, mark-to-market is no better in a rising asset price environment as firms will be required to hold less capital than would otherwise be the case, which obviously carries its own risks.

Sure, if a financial institution is going to sell an asset, then they will have to take the market price and accept the hit to earnings. However, for assets with 10-20 year lives, and most of which continue to kick off cashflows, it makes no sense to continually mark these asset to distressed-market prices. This has greatly exacerbated the current situation.

Have a great day!



Brent Vondera, Senior Analyst

Afternoon Review

Alliant Techsystems (ATK) +0.02% *contact to receive updated tearsheet*
The economic slowdown and subsequent budget constraints by many of the company’s clients has kept ATK’s share price down in recent weeks. Adding injury to insult, funding pressures at NASA and declining satellite activity has brought ATK’s space systems business (36 percent of revenue) into question. Nevertheless, strategic initiatives as well as various recent contract awards should help maintain ATK’s robust free cash flow and profitability.

ATK, the largest supplier of bullets to the U.S. armed forces, raised full-year guidance on October 30 after reporting better-than-expected fiscal second quarter results. The company cited strong armament sales as the primary reason for the outperformance. During the quarter ATK also won many new strategic programs, which led to the signing of several contracts, the largest of which was with the U.S. Navy.


ConAgra (CAG) +7.97%
CAG beat earnings expectations, but operating profits fell by 8 percent to $253 million due to cost inflation. The company reaffirmed its guidance for the full year, which is higher than analysts’ estimates.


Quick Hits

• A 10-point Checklist for Avoiding a Ponzi Fund
• In Spring 2001 Reporter Questioned Madoff Record
• Stock-Picking Dreams Might Pay in Obamanomics
• Companies that May Benefit From Obama Spending Plan (this list gets longer every week)
  
  

--

Peter Lazaroff, Junior Analyst

Fixed Income Recap

FOMC Announces Rate Cut
The Federal Reserve announced a reduction in the Fed Funds Target Rate, the rate at which banks lend to each other overnight, to a target range of between zero and .25%. The market rate has been within this range since the beginning of December, so that part of the announcement was less impactful than the comments that followed.

The Fed announced today that, “The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the Federal Reserves Balance sheet at a high level”. Translation, look for expansion of Agency debt and MBS buying by the Fed. The limits currently sit at $100 billion of debt and $500 billion of Agency MBS. Along with other programs aimed at fostering economic growth through lending.

As financial markets remain strained, the Fed is looking for ways to bring liquidity to the system. The Fed’s balance sheet has more than doubled, from about $900 billion to about $2.2 trillion, in the last 6 months, mostly due to the liquidity facilities implemented recently and relaxed standards on collateralized lending to institutions. Today’s announcement foreshadows a future of creative easing by the Fed as they have “thrown in the towel” with regard to the Fed Funds Target.

Treasuries Rally
Treasury yields dropped to record lows across the entire curve today after the Fed made its announcement. The 2-year traded as low as 62 basis points before ending the day at 64.5 basis points while the 10-year ended the day at its low of 2.25%. The shape of the curve remains relatively unchanged from the beginning of the month after the massive flattening that took place in the second half of November. The spread between the two- and ten- year currently sits at 163 basis points.

Mortgages were tighter to comparable Treasuries before the Fed’s announcement this afternoon, after which they rallied along with seemingly every other bond. Thirty-year Fannie 5.5% mortgage pools widened about 3 basis points to Treasuries on the day, while 30-year 5% pools ended the day about where they closed Monday. Investors continue to be worried about accelerating prepays, resulting from rumors of new, more lenient, refinancing programs, causing “up in coupon”, 5.5% compared to 5%, pools to underperform. If there is any truth to these rumors we would expect to see even further underperformance.

Cliff J. Reynolds Jr.
Junior Analyst

Daily Insight

U.S. stocks jumped yesterday on the Federal Reserve’s version of “shock and awe” as Bernanke & Co. will essentially target fed funds at zero, are willing to sustain the high level of the balance sheet -- and even expand it from here -- and may up the size of their GSE debt and mortgage-backed security purchases. These actions and statements went well-beyond what the market had expected.

Benchmark stocks indices had been up the entire session, despite horribly weak housing data, but the Fed’s afternoon decision provided additional fuel to the rally. The broad market jumped 3.4% in the final 90 minutes of trading.

Market Activity for December 16, 2008

Financial shares led the rally, as the S&P 500 index that tracks the group jumped 11.25%. Basic material, industrial and consumer discretionary shares also outperformed the market.

Economic Data

On the economic front, the Commerce reported builders broke ground on new homes at the lowest level on record – data goes back to 1959. Housing starts plunged 18.9% in November to 625,000 units at an annual pace. Multi-family starts (condos etc.) fell 23.3%; single-family units were down 16.9%.


The degree of weakness was a shock, but the fact that housing starts remained weak was not. Last month’s October building permits figure, showed a 9.3% decline (down 38.2% year-over-year), which was a great indication the reading was going to be very low. Housing starts have declined 72.5% from the January 2006 peak!

Permits for November, which was also out yesterday, do not indicate improvement for December as the figure dropped 15.6% last month to 616,000 – also a record low.

While this news is inauspicious, it is a necessary condition for the housing market to recover. The good news is new homes available for sale have plummeted, so when sales do bounce back the very elevated inventory/sales ratio will fall fast.


In a separate report, the Labor Department reported the consumer price index fell 1.7% in November, the biggest decline in 61 years and follows the 1.0% decline for October. Over the past 12 months, consumer prices are up 1.1% -- that figure was 3.7% in the previous month, 4.9% in September and 5.4% in August – just another illustration how quickly things have changed.


The core CPI was unchanged in November, lowering the year-over-year rate on ex-food and energy prices to 2.0% from 2.2% a month back.


The decline in CPI was virtually completely due to a large 17.0% decline in the overall energy component and a 9.8% in transportation. Gasoline, in particular, plunged 29.5% last month; natural gas was down 5.2%.

This dramatic decline in energy costs is great news for the consumer. As the boys at RDQ Economics point out, energy prices within the CPI fell to their lowest level since February 2007. U.S. consumers spent $670 billion on energy goods and services over the past 12 months – at February 2007 prices, the same level of consumption would have cost just $540 billion. This represents a $130 billion addition to real household incomes. This savings should show up in the December retail sales data.

Energy prices are down some more in December, but the degree of decline will wane and with OPEC planning a production cut oil prices will very likely level out before rising again.

The decline in CPI should not be confused with overall deflation, we’ll point out the food and beverage component rose 0.2% in November and is up 4.1% three-month annualized and 6.0% over the past 12 months. This is an energy-price driven event as we come off of the insanely elevated levels back in the spring and summer of this year.

The Fed has nearly tripled its balance sheet and the trillions in liquidity pumped into the system will combine with an infrastructure-based stimulus package to drive commodity prices and overall inflation higher again.

The price gauges will appear to indicate a deflationary event is upon us for a couple of months still, but it won’t be long before this concern has passed and the Fed will have to start thinking about how they’ll take back some of their easing as the economy slowly and tepidly bounces back. When things do improve, whenever that might be, massive liquidity injections will fire through the system. This is one reason a tax-rate response to the current woes is superior. Such a decision would boost confidence immediately, and offer businesses an incentive to produce over time; we’ll need an increase in goods to absorb all this money that will be flowing. If not, inflation is coming and it will be higher than we’ll like.

The Fed Decision

In a 10-0 decision the Federal Open Market Committee (FOMC) chose to cut the target on the federal funds rate from 1.00% to a range of zero and 0.25% (acknowledging the near-zero effective fed funds rate relative to the target), while stating they will “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” Good luck with that ladies and gentlemen of the FOMC.

The group of 10 signaled they’re willing to keep the funds rate low by stating, “the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rates rate for some time.”

Nine rate cuts and nearly $2 trillion in emergency lending via roughly 10 new facilities over the past 12 months have yet to fully reverse the credit situation – although certainly facilities like their commercial paper funding program has certainly kept things from fully collapsing.

The statement also noted the Fed has already announced it will purchase “large quantities” of agency debt and mortgage-backed securities (to bring mortgage rates lower) and they “stand ready to expand these purchases as conditions warrant.” They continue to think about whether or not to buy longer-term Treasuries. (At 2.19% on the 10-year we’re not sure how much further they think the yield should go, so it’s unlikely they’ll engage in this action)

All-in-all, the Fed went well beyond expectations. The target FF cut was larger-than-expected; the establishment of a range for the funds rate and the discussion of quantitative easing (focusing on supporting financial markets and stimulating the economy through sustaining the high level of the Federal Reserve’s balance sheet) all suggest they will throw everything at the current situation. Overall, we knew this but to get explicit statements in their language is big.

The fact that they suggested they may up the size of GSE (Fannie and Freddie) debt purchases, while entertaining the thought of buying long-dated Treasuries really takes their actions to a whole new level.

If we could only get a tax-rate response to the economic distress that truly began to take hold in mid-September, we could spark confidence in a sustained way, which is more than half the battle in my view.

Have a great day!




Brent Vondera, Senior Analyst

Afternoon Review

General Electric (GE) +5.72%
GE, the world’s biggest maker of power-plant turbines, won an order valued at about $3 billion to provide electricity-generating equipment and services to Iraq. It is the largest single order in the history of the GE Energy segment with GE providing 56 of its 9E models turbines capable of supplying 7,000 megawatts of electricity (nearly doubling the country’s generating capacity).

The order comes amid concern the slowing global economy may crimp the pace of deliveries as some utilities struggle for cash for capital investments. In the third quarter, GE Energy had $7.9 billion in orders, up 18 percent. This new award adds to the $4 billion already ordered by countries including Saudi Arabia, Kuwait and Qatar over the past two years.

In separate news, GE reaffirmed its outlook for the fourth quarter and full-year 2008, but said that it will no longer provide specific quarterly earnings guidance. The company also reiterated its dividend, which has been a point of concern for many investors.


ITT Corporation (ITT) +8.88%
ITT reaffirmed its 2008 earnings forecast and said 2009 profit will be higher than the average estimates (according to Bloomberg). Revenue is projected to be down 2 percent to 6 percent from anticipated 2008 sales, including the expected negative impact of foreign currency exchange.

The company said its management will recommend that the board approve a dividend increase of 22 percent to 85 cents for next year at its February meeting. ITT also said the board approved an indefinite extension of the company’s $1 billion share repurchase program that was set to expire in November 2009. ITT has bought back about $431 million of its common stock under this program.


Johnson Controls (JCI) -1.09%
JCI withdrew its 2009 guidance due to “the rapid decline in global automotive production and uncertain industry conditions.” The company’s lowered production estimates for 2009 (made just two months ago) from 12.3 million vehicles to 9.3 million vehicles in North America, and 21.2 million vehicles to 16.2 million vehicles in Europe.

Actions to reduce costs and the performance of its building efficiency and power solutions businesses should keep JCI profitable in 2009, according to the company.


Transocean (RIG) -0.23%
Transocean received approval to change the place of their incorporation from the Caymans to Switzerland. This is likely to result in the company being removed from the S&P 500 and the Russell 2000 indices. This implies approximately 45.1 million shares are to be sold, which may put some near-term selling pressure on the stock.


Bank of America (BAC) +7.02%
BAC traded lower for most of the day (until the Fed’s rate cut decision) in response to an analyst saying the bank will need to raise more capital to offset rising loan losses.


Quick Hits

• Another View: Blaming the SEC (this article was written by a former SEC employee)
• This article shows that not all real estate is depreciating in value.
  
  

Peter Lazaroff, Junior Analyst

Daily Insight

U.S. stocks fell for only the fourth time in the past 16 sessions, and even as the indices lost some ground the degree of decline was pretty much a moral victory as the benchmark’s appeared destined for a 5% header with about an hour left. But stocks rallied in the final half-hour to pare earlier losses.

The NASDAQ took the brunt of the damage, falling 2.10%, erasing Friday’s nice move in which the tech-laden index outperformed the broad market.

There was a sense on Friday that technology firms will participate in next year’s stimulus program, which is true, but weak manufacturing and industrial production reports reminded traders of the downbeat business spending environment. New York-area manufacturing showed business spending on tech-equipment contracted significantly over the past month and the industrial production survey drew the same conclusion.

Market Activity for December 15, 2008

Among sectors, financials led the decline, falling 3.99%, after a Merrill Lynch analyst stated credit costs in the U.S. will get worse – not sure this of great surprise. Relative winners were consumer staples, energy and basic material shares – down 0.20%, 0.28% and 0.38%, respectively.

The Economy

The New York Federal Reserve Bank reported manufacturing activity in the region remained very depressed, hitting a record low. (We’ll note the index only goes back to 2001, so when we say record low it’s not saying a lot; still we know other factory surveys that have been around for decades are hitting their lowest levels in nearly 30 years.)

The index known as Empire Manufacturing registered -25.8, the lowest in the survey’s history. Factory activity in the New York-region has been extremely weak for three months now (the global economic situation changed on September 15) – certainly this area of the country is one of the hardest hit as it is home to the financial industry.


Forward looking indicators, like the new orders index of the survey, remain near record lows as illustrated below.


The outlook among respondents did improve a bit, rising to 19.5 – a number around 40 would be seen in more normal circumstances.

The capital spending index held near the November low, coming in at -10.6 for December. The technology spending index hit a new low of -12.8, so no help in this regard.

In a separate report, the Commerce Department reported industrial production slipped 0.6% in November. Manufacturing output, or lack thereof, put the most pressure on the reading, falling 1.4% last month.

(On the chart below we explain the September decline just to clarify why such outsized weakness occurred.)


Utilities and mining production rose 1.6% and 2.5%, respectively. Business equipment was also up, rising 3.2% for the month – this was helped by a jump in aerospace orders.

Consumer goods production fell 0.7%, motor vehicle production fell 2.8% and construction supply output declined 3.3%.

The decline in manufacturing output was actually worse than it appeared because a 12.8% jump in aircraft production helped the reading. That jump in aircraft output occurred as the Boeing strike came to an end. The auto industry continues to weigh heavily on factory output – the segment is down 21.4% year-over-year. Still, excluding autos, manufacturing is down 6.3% YOY.

We believe industrial production will remain weak for a few months still, but do not think a mild rebound should be ruled out. The decline in business spending is due more to caution that a lack of resources and once the current bout of pessimism wanes, even slightly, we should get a bounce in this segment.

Machinery orders are holding in there, but high-tech equipment has been hurt for three months. Firms will look to add more tech equipment as productivity improvement will remain in focus as average selling prices fall.

I may be reaching at optimism here, but do believe a mild rebound is on the horizon.

Going for Zero

The Fed ends its two-day meeting today, which means we’ll get their rate decision this afternoon. I won’t go against the consensus expectation for a 50 basis point (1/2 percentage point) cut by predicting they’ll do nothing – the implied probability of a 50 bps cut is 100%. However, cut right now is meaningless since what the Fed does is set a target for where fed funds (FF) should trade; the actual rate is already close to zero, 0.125% as of yesterday.


Beyond the cut, people will be focused on the language, which will key in on what is called quantitative easing – which is simply providing liquidity in ways separate from traditional FF rate cutting by setting up lending facilities, as they have been engaging in for exactly a year now. They will also mention what Bernanke calls the “second quiver,” which includes options such as buying longer-term Treasuries to inject even more cash into the system.

But again, I don’t see what this does to improve spreads – that’s what they say they’re targeting by executing these purchases. Treasury yields are already near record lows – the yield on the 10-year sits at 2.48% for goodness sakes. The problem is not a high risk-free rate, but an issue of confidence, which has spreads very wide. Ten-year BB+ rated industrials are trading 1100 basis points over Treasuries, that’s higher than typical junk spreads.

Yes, spreads should be wide because default rates are up and the market is going to demand a lot more return to compensate for this risk. However, some of this widening is due to a crisis of confidence and the most efficient way to counter this situation is to slash tax rates on income and capital. This is not the Federal Reserve’s decision to make, of course. The legislative and executive branches need to get this done – it’s been a big mistake by the Bush Administration to ignore this tool.

Is the implementation of broad-based tax cuts realistic with a central-planner entering the White House in 35 days? Certainly not.. But it’s still the correct remedy. Combine this with the elimination of mark-to-market accounting rules with which capital adequacy ratios are based upon (put in place just 13 months back; the timing could have hardly been worse) and I think most would be stunned how far these simple actions would get us in leaving the worst of this mess behind us.

But go ahead and target fed funds at 0.50%, even though the rate trades closer to zero. Go ahead and buy long-term Treasuries. Go ahead and triple the Federal Reserve’s balance sheet, from 6% of GDP a year ago to 17% today. We hope it works.

Have a great day!



Brent Vondera, Senior Analyst

Afternoon Review

AT&T (T) -3.73%
AT&T fell after Goldman Sachs downgraded the company citing the potential for peak dilution from remaining growth initiatives, cyclical exposure in certain businesses and an accelerated pension hit.

JPMorgan Chase & Co (JPM) -7.47%
JPM was downgraded by Merrill Lynch who said the firm may post a fourth-quarter loss and a $2.8 billion writedown.


Quick Hits

• Biotechs With Breakthroughs Can Spurn Product-Hungry Drugmakers
  
  
  

Peter Lazaroff, Junior Analyst

Fixed Income Recap

Agencies and Mortgages Tighten
Yields on Agency debt has tightened dramatically to comparable Treasuries due to recent direct buying by the Federal Reserve Bank of New York. Two-year Agencies are currently at 89 basis points over Treasuries, compared to 120 basis points this time last week.

The Fed has announced they will be buying benchmark Fannie, Freddie and Federal Home Loan Bank issues ranging in maturities from 2012 to 2017. Despite only buying the middle part of the yield curve, spreads have tightened across all maturities, in anticipation of more buying in the future.

MBS has followed agencies by tightening to Treasuries over the past week, again as a result of a buying plan announced by The New York Fed. The Fed has yet to announce specific issues that they plan to buy, but most signs point to fixed rate 30-year MBS pools.

As year end approaches, dealers are avoiding adding to their inventories, leaving the street with little to offer buyers. As a result, bids on odd-lots have continued to deteriorate, beyond what we saw last month, and show no sign of improving before year end.

TARP Money for Autos
The Bush administration announced this afternoon that it is considering tapping into the unused cash from the Troubled Asset Relief Program to rescue GM and Chrysler. The initial plan to allocate $14 billion in money directly from the Treasury failed to pass Congress Thursday night. It seems unclear why TARP money would be easier to allocate than the plan that failed to pass, because the TARP money would also need Congressional approval. Perhaps putting a different label on the same thing is enough to woo decision makers.


Cliff J. Reynolds Jr.
Junior Analyst

Daily Insight

U.S. stocks, after getting off to a poor start, rallied 3.4% from the day’s low to manage a solid gain. Technology shares led the advance, jumping 5.52% on Friday as the next stimulus plan will not only boost activity within the industrial sector, but tech-equipment too.

The session began lower by roughly 3.0% probably due to pre-market news that the Senate didn’t have the votes to pass the auto bailout.

It came down to Senate Republicans demanding the UAW become competitive with the industry from a perspective of compensation – a “jobs bank” that pays the laid off 95% of wages and zero premium requirement for retirees has total compensation costs among the Detroit Three 52% higher than the transplants, as they’re being called. Frankly, the deal the Senate was working out would have been beneficial to workers relative to the alternative, which is bankruptcy.

But then the President rode to the “rescue” as he commented the administration would find a way to use TARP funds to keep the D3 going for a few months. Stocks often think short-term on a day-to-day basis and bounced from the session’s lows on these comments.

Obviously, the best long-term strategy is to cut dealerships, payrolls, and plants (along with the “jobs bank” and a zero-premium health-care policy, which I believe will change anyway in 2010). The D3 no longer have 50% market share, but something closer to 18%; it’s about time they began to manage the business to reflect this reality. Still, President Bush likely does not want an additional flood of layoffs in his final month in office – one supposes this is why he’s stepping in.

Market Activity for December 12, 2008

Then we had the Bernard Madoff scandal, a Ponzi Scheme, (taking another bite out of confidence). This could have pressured stocks, but didn’t; maybe we’re onto a rally with additional staying power. The broad-market has bounced 18% from the November 20 low; it will be tough to extend this rally through the year but maybe this strength in the face of bad news is telling us something.

Economic Data

The Labor Department reported the producer price index (PPI) for November slid 2.2% for the month and was up 0.4% on a year-over-year basis – that’s a huge deceleration from the prior month, which had PPI up 5.2% YOY.


Core PPI, ex food and energy, rose 0.1% for the month and was up 4.2% year-over-year, down slightly from a reading of 4.4% in the prior month.


This core figure is showing that the plunge in inflation gauges over the past two months is largely due to the rapid decline in energy prices from their Fed-induced heights of July 2008. Oil prices in particular doubled in a 10-month time span, driving crude per barrel to $145. The slide from those heights has brought the inflation indices down with it but there are underlying factors that shows prices will rebound.

Take core intermediate goods for instance. These are goods, ex-fuel, used to make finished product. While these prices are lower, they remain somewhat elevated and sticky.


When banks begin to lend in a more normal way, all that liquidity the Fed has pumped into the system will flow through to the economy. This money will find an environment in which there are less goods out there as production has been cut – to much money chasing too few goods will cause inflation to rise again.

Further, when this combines with an infrastructure-based stimulus program, commodity prices will rebound, making an inflationary event inevitable in my view. Too bad I don’t know whether this will take six, 12 or 18 months to occur – it would certainly be helpful to know this, but it’s pretty much a done deal.

In a separate report, the Commerce Department stated retail sales fell for the fourth-straight month. For November overall sales were down 1.8%, which was less than the expected decline of 2.0%, but still a very significant decline. This follows a very large drop of 2.9% in October.

Certainly, consumer activity is going to remain weak for a while. We have a lot of people that lack the means to expand activity due to a weak labor market and mortgage interest-rate resets for those that chose a lower adjustable rate three years back. That said, the majority of consumers have the means, but have shut down in a spate of caution due to all of the news over the past three months. Surely, a 40% decline in stock prices is having a huge effect on sentiment.

That said when we exclude auto and gas-station sales, activity rose for the first time in three months – up 0.3% in November. This may be an indication retail sales are set to bounce. This is not to say we’ll see a multi-month rebound, but we should halt the four-month decline streak when the December number is released.

One of the factors behind the slump in retail sales has been the dramatic decline in gasoline prices. Gas-station receipts make up 9% of the overall figure, so when this component falls 14.7%, as it did in November, it accounted for 1.3% of the 1.8% drop -- 72% of the move.

Again, under normal circumstances this decline in pump prices would allow for increases in other segments. Things are not normal right now and we’re not trying to say activity will bounce back in a sustained way, but the rise in ex-auto, ex-gasoline retail sales is setting up for a nice month-over-month increase when the December data is released.

This Week

We’ve got a plethora of data out this week, beginning this morning with industrial production (November) and the NAHB (Nat Assc. Of Homebuilders) Housing Market Index.

Later in the week, we’ll get the Fed rate decision, housing starts, CPI, jobless claims (of course) and Philadelphia-area manufacturing.

Have a great day!

Brent Vondera, Senior Analyst

Afternoon Review

Intel (INTC) +5.28%
Intel is not immune to the effects of an economic recession, which now appears to be dragging down microprocessor and PC demand. However, the magnitude of the change in Intel’s forecast seemed to catch the market by surprise. In fact, semiconductors have been among the more pessimistic over the last 30 days, lowering 2009 earnings estimates with an assertiveness that has not been matched by other parts of the market.

While some believe that companies have been too optimistic in earnings forecasts, this cannot be said of chip makers. A report from Citigroup notes that chip companies’ estimates reflect a decline in 2009 earnings of 20 percent or more, “significantly more conservative than other areas of technology or the broader S&P.” In addition, more than 90 percent of the earnings revisions are negative, which suggests “capitulation” among these companies. With those aspects in mind, this sector appears to be attractive.

Today, Nancy Pelosi said the U.S. House is likely to act next month on an economic-stimulus measure that would increase computer expenditures. This certainly will benefit Intel who absolutely dominates the computer processor market with over 80 percent of the market share. (Computer processors are like the brain or nervous system of a computer.)


First Cash Financial Services (FCFS) +6.47%
First Cash announced the acquisition of Presta Max, a privately-held chain of 16 pawn stores located in southern Mexico. The company believes the transaction will be accretive to its earnings in 2009.

CEO Rick Wessel stated, “The 16 Presta Max Stores will further expand our significant Mexican pawnshop operations. These new stores are profitable, provide us a valuable entry point into markets within Mexico and fit well into our long-term strategy for growth.”

First Cash also sold the operations of its Auto Master unit earlier this week, which the company had planned to exit since September. The cash flow and related tax benefits resulting from this transaction will support the continued expansion of First Cash’s pawn operation in Mexico and the U.S. as well as allow the company to reduce outstanding debt.


Harsco (HSC) +4.84%
Harsco said 2008 profit will be lower than it previously projected, but reiterated its 2009 profit forecast. Turmoil and uncertainty has led to Harsco aggressively reducing costs and exiting some underperforming contracts.

The company statement said the 2009 forecast “is based on the assumption that there will begin to be some relief from the current volatility and the beginning of a return of economic confidence by the second half of 2009.


Quick Hits

• Bailout Scorecard (the list keeps getting longer)
  
  

--

Peter Lazaroff, Junior Analyst

Daily Insight

U.S. stocks, after spending most of the session in an usually tight range, slid in the final hour. Traders shook off a really weak jobless claims reading that points to another month of big payroll losses when the December jobs data is released.

We were pretty amazed activity hovered around the flat line for most of the day, particularly on that claims report, obviously it eventually hit sentiment.

Until the final-hour sell-off gains in energy, basic material and industrial stocks were offsetting financial-sector weakness; however, nothing save health insurers and a couple of energy names held up in the end.


Uncertainty over whether the government assistance to the Detroit Three will have the votes to pass the Senate may have also weighed on stocks today, largely because of the additional pressure a GM and Chrysler collapse would put on the labor market – Ford is in a better position; they’ve got liquidity to get them past the next six months at least. What strength.

I’m guessing fears that the government won’t provide some funding are likely overblown. Once January 20 rolls around checks to Detroit will rip off like there’s no tomorrow.

Market Activity for December 11, 2008

Economic Data

The Labor Department reported initial jobless claims jumped to the highest level since November1982, ending a two-week decline. We’ll continue to match 1982 levels as it will take a reading above 700k to make a new high. Claims jumped 58,000 to 573,000 in the week ended December 6.

The four-week moving average, a less volatile measure, rose 14,250 to 540,500, as the chart below shows.


The insured unemployment rate, the jobless rate for those eligible for benefits, rose to 0.1% to 3.2%, the highest since August 1992 – this figure tends to track the overall unemployment rate.

Continuing claims, those taking benefits for longer than one week, jumped 338,000 to 4.429 million – certainly some of this is due to the government extending the period of time one can continue to take benefits, although most is simply due to deteriorating labor market conditions.


It doesn’t take an expert to understand what all this says, the payroll survey is going to register its fourth-straight month of large declines when the December reading is released, possibly a reading over 500k as we saw in the November data.

The unemployment rate will probably hit 7%, unless the number of discouraged workers rises and keeps the figure artificially low. This is why the unemployment rate is a lagging indicator and generally does not peak until 6-12 month after a recession has ended. It takes these discouraged workers to feel better about the environment again before they re-enter the workforce by actually looking for a jobs. (The definition of a discouraged worker is one out of work and has not looked for employment in the past four weeks.)

This labor market data along with what we know about the overall economy means we need to pull the trigger and go with big bang tax rate cuts – across the board, slash rates on income, capital, corporate profits and repatriated income. Anything less signals a failure to understand what gets things going and does so with staying power.

Of course, the Fed must be reigned in too so they are not allowed to make terrible mistakes like the 2003-2005 decisions to keep rates too low for too long. Real interest rates were negative (fed funds lower than the rate of inflation) which means the Fed subsidized debt. When you do this you get more debt, and this is what led to the housing bubble that caused much of the current harm when it popped. It also encouraged the over-leverages stance of institutions that smashed the financial sector and later everything else.

We understand the likelihood of a tax-rate response is highly unlikely with the administration and Congress that is coming in January 20, but it doesn’t mean to forget the government policy that has the most power. Maybe when we get the next payroll report it will begin to wake people up. It’s a real shame the current administration has not even offered such a move, even if the votes do not appear to be there.

Then again, maybe I’m off base; possibly we’ll be able to spend out way out of this situation. If we do, it will be the first.

In another report the Labor Department reported import prices fell hard again in November, plunging 6.7% on a 26% tumble in petroleum prices. On a year-over-year basis import prices have declined 4.4%, what a round-tripper this has made.


Excluding petroleum, import prices fell 1.8% last month and are up 2.6% year-over-year.


While you can see most of the decline was due to the precipitous drop in energy prices, whether including or excluding energy prices fell faster than anticipated. This is going to augment the deflation argument. However, with monetary conditions as they are – the massive easing and liquidity pumped into the system – it makes a sustained deflationary event highly unlikely.

This is certainly a minority view right now, but we believe prices will begin to rise again 6-8 months in a way that will get everyone’s attention. The dollar will have a rough time advancing from here since what we’re getting as stimulus are plans to throw money at the problem – which will push import price alone higher. A more appropriate response would be to provide incentives to produce that would bring more goods to market that absorb these massive money injections. We shall see how it turns out.

Finally, the Commerce Department reported the trade deficit widened to $57.2 billion in October, which was a surprise – a narrowing was expected as import declines were estimated to be larger than the drop in exports. Imports ended up falling 1.3%, while exports fell 2.2%

The real trade gap widened to $46.4 from $42.0 billion in September. Real exports dropped 0.9%; real imports rose 2.8%.

By region, exports picked up a bit in Europe, after a big decline in September; exports to the Pacific Rim fell 0.8%. The biggest export declines came from Japan, down 2.8% for the month, and Asia NICs (Non-industrialized Countries), down a big 9.4%.

Interestingly, exports to South America and OPEC countries, which feel the effects of plunging energy prices as much as anywhere, kept activity upbeat, rising 20% and 36.8%, respectively.

The widening of the real (inflation-adjusted) trade gap means additional pressure will be put on the Q4 GDP report – it’s going to be a doozy. Good news is it shouldn’t take anyone paying attention by surprise when it posts a quite likely negative 6.0% reading – that’s at a real annual rate. If so, it will be the worst GDP reading since the -6.4% posted in Q1 1982.

It is stunning how drastically things change in mid-September and outside of a few areas, we have yet to see any bounce whatsoever.

Have a great day!


Brent Vondera, Senior Analyst

Afternoon Review

Eli Lilly & Co. (LLY) +1.74%
LLY reaffirmed its outlook for fiscal 2008 and raised its targets for 2009 as it expects robust volume growth in sales. While the company expects robust volume growth in sales in 2009, the outlook is dampened by the negative impact of weaker foreign currencies and the impact of generic competition.

LLY is the second U.S. pharmaceutical company in a week – the other being Merck (MRK) – citing slowing demand and international sales declining in value as the U.S. dollar strengthens.

Meanwhile, LLY said it is halfway to meeting its goal of cutting the cost of bringing a new drug to market to $800 million by 2010 from $1.2 billion in 2007.

Drugmakers, which will be subject to continued patent expiration of blockbusters in the next several years, have been looking to cut costs as their pipelines generally aren’t seen as being able to recoup the revenue losses caused by drugs’ generic competition.


Boeing (BA) -3.38%
Boeing said the 787 Dreamliner is now almost two years behind schedule and won’t reach customers until the first quarter of 2010, the fourth delay for the best-selling new aircraft in Boeing’s history.

In separate reports, Boeing plans to offer cheaper weapons systems based on existing technology to counter potential Pentagon budget constraints under the Obama administration. (Related article)


Procter & Gamble (PG) -0.91%
PG said fiscal 2Q sales will rise less than it thought because of the “difficult economic environment,” but reaffirmed its 2Q and full-year earnings guidance. Because of its size, PG has more levers to pull internally to cut costs that other companies may not have.


Quick Hits

• Treasury Bubble Talk Grows as U.S. Gets Free Money
• Level Three Assets Said to Rise at Major Banks
• Bank of America of America to Cut 30,000 to 35,000 Positions
• Auto Bailout Plan Lacks Votes to Pass U.S. Senate

--

Peter Lazaroff, Junior Analyst

Fixed Income Recap

Mortgages Continue Tightening
Mortgages rallied strong today, tightening to Treasuries. 15-year collateral outperformed the longer 30-year, while Treasuries were more unchanged on the day.

Mortgages were just slightly tighter before tightening further on news of discussions within Fannie and Freddie of waving new appraisals on refinances to assist homeowners with reducing their mortgage burden. This would allow homeowners who are underwater, and therefore currently unable to refinance, an opportunity to take advantage of today’s lower rate environment. No detail has been given on how lenders would handle the depreciated home values if a plan like this was implemented, but this would obviously be an obstacle.
Prepays on outstanding MBS will accelerate as a result of a plan like this. In an environment where rates are low and new issue is nonexistent, most MBS is priced at a premium. Given this potential risk, we will be very selective as we add new positions.

Daily Insight

U.S. stocks, after spending most of the day in positive territory looked ready to take one of those afternoon headers, but bounced again in the final 90 minutes of trading to close well into plus side.

I’m not sure what sparked the late-session rally that erased what appeared to be a post-lunch fizzle, maybe it was comments about waiving appraisals for refinancing GSE mortgages, which we’ll touch on below. Financial shares ended the day lower, but the group pared its losses late in the day, which helped the indices advance – so maybe the comment to waive appraisals was what did it.

Energy and basic material shares led the advance as the two sectors jumped 4.71% and 2.67%, respectively.

Market Activity for December 10, 2008

The weekly energy report showed gasoline supplies rose 3.7 million in the week ended December 5 – supplies were expected to fall 400,000. Further, an industry report showed demand will fall the most since 1983. Nevertheless, energy stocks shook this data off to focus on what will surely be OPEC production cuts, the likelihood that the massive Federal Reserve liquidity injections will cause prices to soar again and the very low valuations at which oil-integrated, coal and drilling shares trade.

The Economy

The Commerce Department reported wholesale inventories fell well more than expected, declining 1.1% in October vs. the expectation for a 0.2% decline. The underlying sales data, which we watch acutely, slid 4.1% -- down 2.9% ex-petroleum. The ex-petroleum figure applies right not as energy prices have collapsed.



The degree to which inventories declined surely won’t help the fourth-quarter GDP reading, already expected to be lowest reading since the 1981-82 recession (the change in inventories is one segment of the GDP report). We’re probably looking at a negative 5.0% at an annual rate for the final three months of the year.

The sales data is disturbing, but this is for October so it’s not of great surprise as we knew that month, and November for that matter, were horrendous. Everything aspect of the report was down save machinery, drugs and paper products. Durable goods sales were down 4.2%, automotive down 4.5%, furniture sales down 4.0%, electrical goods down 1.9%.

Machinery sales were actually up 1.6% in October, which is a bit surprising.

As a result of sales falling more than stockpiles, the inventory figure rose in October marking the fourth monthly increase. Stockpiles, while rocketing off the all-time low hit in June, remain low but we’ll need to see some rebound in sales over the next few months or we may not be able to state this for much longer.


Budget Buster

In a separate report, the Treasury Department reported the 2009 fiscal-year budget picture continues to deteriorate.

The November deficit jumped for the second month of the new fiscal year as the government began to re-capitalize banks via the TARP. While these funds will collect a yield via preferred shares issued to the Treasury (this is more an investment than a traditional outlay), fact is the Commerce and Housing segment of the budget skyrocketed last month to $95 billion from $980 million a year ago.

These funds will flow back to Treasury, assuming the biggest banks don’t go down and become part of the government, which is not a likely scenario, thankfully. Why? Because the SEC will finally be forced to withdraw mark-to-market accounting rules and return us back to capital adequacy ratio standards that served us so well for a very long time if it came to this. Unfortunately we have trouble stating this with ultimate confidence during these times.

The deficit came in at $164 billion last month, compared to $98 billion in November 2007. The shortfall has widened to $401 billion fiscal year to-date, which is just $54 billion shy of the shortfall for the entire 2008 fiscal year. (The government’s fiscal year begins in October, so we’re just two months into it)

This is really sad considering we made so much progress coming out of the 2001 downturn – lowering the budget shortfall from 3.9% of GDP in early 2004 to the virtually non-existent level of 1.2% by the start of the 2008 fiscal year. .

Budget deficits always rise as we enter recession/downturn as corporate and individual tax receipts decline – of course, government spending never declines. This was certainly the case as we entered the 2001 downturn and it took until 2004 for revenues to pick up again; it’s no coincidence revenues jumped following the May 2003 tax cuts on income and capital – the three years that ran 2005-2007 experienced the largest inflation-adjusted increase in tax revenues ever, jumping $785 billion during that stretch.

The budget will skyrocket this year and next, hitting the highest levels in the post-WWII era. We may hit 10%, as a percentage of GDP, which would exceed the current high of 5.3% touched in 1992. During WWII the budget/GDP ratio hit 24% in 1942, which needless to say is the all-time record.

A tax-rate response is needed again to revive things. This will drive the deficit higher over the next 12-18 months, but this is already occurring. Two years out the revenues will come rolling in again – history has shown this is the result (we have the 1965, 1978, 1982, 1986 1997 and 2003 tax-rate reductions as evidence – 1978 and 1997 were solely cap gains tax cuts) as the stock market will rise and the lower tax on capital will encourage investors to actually realize gains and thus pay the lower tax. Individual receipts and corporate tax receipts will also rebound due to a higher corporate profits and the higher tax base that results from job creation.

Appraisal Industry Bailout Next?

Federal Housing and Finance Agency (FHFA) Director James Lockhart made comments yesterday (just comments to a reporters question, not an official announcement) explaining the agency is considering waiving the new appraisal requirement on refinanced loans (regarding Fannie and Freddie mortgages).

This could be big. While I think it is not the way we want to go, it certainly gets at the heart of the issue for now. Many have not been able to refi, because their home values have declined and thus would no longer have an appropriate loan-to-value ratio– this would remove the obstacle.

We know the government has proposed using Fannie and Freddie to issue 4.50% mortgage loans, so one would assume this rate to be in effect for refis too – just a guess at this point. Cha-Ching!

While we’re changing standards, maybe the authorities can eliminate mark-to-market accounting rules that have led to the financial-sector death spiral, which was a totally arbitrary rule pertaining to capital adequacy ratios put in place just a year ago. It sure makes a heck of a lot more sense than the plethora of Fed facilities and Treasury programs – some of which have shown little if any efficacy.

Have a great day!


Brent Vondera, Senior Analyst

Afternoon Review

FedEx Corp (FDX) -4.13%
FedEx has fallen over 17 percent in the last two sessions in response to the company cutting its annual profit outlook due to dwindling demand. The company commented that despite a meaningful decline in fuel and the domestic exodus of DHL, significantly weaker macroeconomic conditions are offsetting any potential benefit.

During its 35-year history, FedEx has weathered multiple economic cycles and oil supply crises. While short-term results may suffer, the firm’s powerful network is here to stay.


Arch Coal (ACI) +10.34%, Peabody Energy (BTU) +19.07%
Coal producers advanced as the fuel rose to the highest in seven days in Europe, spurred by an increase in the cost to ship it.


Quick Hits

• Table from Bloomberg listing companies that may financially benefit from Obama spending plan
• P&G and Wal-Mart’s Impact

--

Peter Lazaroff, Junior Analyst

Fixed Income Recap

FDIC Insured Corporate Bond Issuance Accelerates
As of today, $62.5 million has been issued under the Temporary Liquidity Guarantee Program instituted by the FDIC late last month. Wells Fargo, Morgan Stanley and Regions Financial are among the banks that have joined Goldman Sachs, who was the first to opt into the program.

The new market created with this facility has been very well received. The issues have been bid well at auctions and spreads remain stable. They continue to trade in the open market about 30 basis points over comparable agencies, or about 2.9% for 3 years.

Bills Trade at a Premium
Yields on Treasury Bills have remained at or close to zero for the past few weeks. Treasury Bills are traditionally the safest debt instrument on the market, so it isn’t uncommon to see them trading at very low yields when investors become very sensitive to risk. But for bills, which normally trade at discounts and mature at par, to trade at a premium makes absolutely no sense. Four week bills traded as high as 100.12 today, or negative 5 basis points in yield terms. Investors paying a premium for Treasury Bills are choosing to forfeit some of their principle in exchange for the US Treasury name. Why these people aren’t just staying in cash I do not know.

Treasuries Rally
Treasuries continue to trade near record low yields. With the 2-year at .84% and the 10-year at 2.64% the curve has flattened to 179 basis points from its recent multi year high of 262 basis points on November 11th.

Deflation worries have seemed to subside as of late. If more investors adopt the view that inflation is coming, as a result of the fed pumping large amounts of liquidity into the financial system, then look for the long end of the curve to sell off and the steeper curve to return soon.

Cliff J. Reynolds Jr.
Junior Analyst

Daily Insight

U.S. stocks slid, halting a two-day advance and marked just the third decline in the past 12 sessions, after several companies cut earnings forecasts. We believe the market’s dramatic 42% decline from the October 2007 peak already reflects this bad news, but one never knows and it certainly has an effect on a daily basis when these announcements begin to flow.

FedEx’s forecast was 14% below their guidance just two months back – the stocks dropped 14%. I guess no one cares to pay attention to the fact that a competitor – DHL – has dropped out of the domestic market and fuel costs have plunged. Texas Instruments reported a 50% lower forecast from their October guidance as phones sales have taken a header. Danaher lowered its forecast by 12% citing weaker business activity and additional headwinds due to the 20% jump in the U.S. dollar since mid-July.

Beyond these announcements, the broad market’s 21% rally over the previous 10 sessions likely encouraged traders to take some profits – even bear-market rallies (which are often powerful moves since they’re off of low levels) do not go straight up.

Market Activity for December 9, 2008

Stocks are Cheap

While we’ll have to deal with a weak economy for at least a couple of quarters still, possibly longer if the correct policy responses are not implemented, stocks are cheap. It may take a good deal of patience (which is an essential virtue for investors), but stocks are extremely attractive by a number of measures. We’ve talked about such things as market multiples and dividend yields residing at 15-20 year lows, along with the fact that corporate cash levels sit at all-time highs.

(Even as measured by trough earnings, the multiple on the S&P 500 sits at 14.8, right in line with the long-term average for normalized profits. Assuming trough earnings come in even 33% below what consensus estimates are calling “trough levels” you still come to a P/E of 19, quite low for an earnings trough.)

And on that last corporate-cash point, more and more companies have more cash per share than the value of their stock price. Additionally, cash exceeds both stock price and debt for an increasing number of companies.

The fact that we’re in a disinflationary environment (even deflation-like pressures for the very short term) makes these cash levels more attractive, as a Bloomberg report recently touched on. Very low, or declining price levels, means this cash will buy even more six months down the road. Dividend yields are boosted as well, in real terms.

Now, we don’t expect zero inflation to remain the case for long but for now valuations are extremely low relative to inflation and even when price levels rise this cash may provide a nice catalyst to economic growth – the resources are there for business spending to rebound; it would be extremely helpful if those who will be running the government next year understood this and put in place some policies that would spark optimism and confidence, two things that are in short supply these days. Too bad the Bush Administration has failed to at least offer this type of response here recently, maybe it’s the lame-duck thing.

Which brings us to the next topic:

Credit Crisis Rolls on

The Treasury Department sold $30 billion of four-week bills at 0% and received bids for four times the amount sold as the run for safety continues and money-market managers, foreign central banks etc. care only about getting their dollar back.

We’ll note foreign investors have received a return from these dollar-denominated assets as the greenback has strengthened. The fact that the dollar (compared to a basket of currencies) has jumped 12% over the past three months may have foreigners thinking the run will continue. (The run will likely continue so long as risk aversion remains high, but when things normalize, and it pains me to say this, the massive Fed injections, soaring debt levels and lack of a tax-rate response will very likely result in a weaker dollar over the foreseeable future.)

Treasury sold $27 billion of three-month bills yesterday at a rate of 0.005%. Heck, the three-month bill traded at a negative yield of 0.01% yesterday.

Needless to say the credit chaos continues. Some of this is due to year-end dynamics but it clearly shows risk aversion is heightened to say the least.

We’ve done so much by way of intervention but there is ultimately only one weapon in the government’s arsenal that will get us out of this mess – the Fed can pump all the money it wants to into the system but it cannot make banks lend or consumers and businesses borrow, powerful incentives must be implemented.

We must slash tax rates on capital and incomes; this will get confidence flowing again and as investment dollars come out from under the T-bill rock the stock market will catch fire. As the market rises, optimism will follow, businesses will re-engage in capital outlays and credit will begin to rise. Oh, and disposable (after-tax) income will get a boost, reviving consumer activity. As this combines with the increased activity on the business side the economy will move from stagnation to boom.

Economic Release

The National Association of Realtors reported pending home sales fell at a much less than expected 0.7% in October – a decline of 3.0% was anticipated. This points to a mild decline in existing home sales when the November figure is released in roughly two weeks. Pending home sales is generally a good indication of what occurs the subsequent month on existing sales.

However as we mentioned yesterday, the pending data may not provide the appropriate indication this time around based on the chaotic situation within the credit markets. Pending sales are based on contract signings and some of these potential buyers may have run into trouble actually obtaining a mortgage. Existing home sales are based on contract closings, we’ll see if there is any merit to this thought when existing sales are reported in a couple of weeks.

Mortgage Rates

In any event, mortgage spreads have narrowed nicely over the past 2 1/2 weeks, which has combined with an 80 basis point decline in the 10-year Treasury yield. Fixed mortgage rates moved lower as a result. This should boost home sales for December.

The chart below shows the narrowing in the spread between the 30-year fixed mortgage and the yield on the 10-year Treasury note for which it runs off of. (Notice how the spread hit a high of 2.90 percentage points – which occurred on November 20.) Still, this is much wider than the normal spread of 180 basis points.



Have a great day!



Brent Vondera, Senior Analyst

Afternoon Review

Arch Coal
The struggling U.S. economy, falling prices for competing fuels (crude oil in particular) and waning investor sentiment about the energy sector are the main culprits for Arch Coal’s nearly 80 percent decline since June 19. However, it is hard to ignore the favorable fundamentals for the coal industry.

Supplies remain tight and worldwide demand continues to outpace supply, driven largely by developing economies such as India and China. In fact, worldwide demand is expected to outstrip supply by nearly 35 million tons in 2008, a deficit that may widen next year.

Besides favorable long-term fundamentals, Arch Coal’s incumbent status in the Powder River Basin (PRB) is the major driver for the company’s future.

The PRB contains some of the easiest-to-mine coal in the world, costing Arch Coal 20 percent less than their Central Appalachian peers to mine. In addition, PRB coal contains very little sulfur, which makes their coal even more attractive to utilities trying to meet strict emission standards. PRB’s cost advantage and more desirable product has allowed Arch Coal to gain market share, a trend that should continue as Appalachian coal mining gets more expensive.

While Appalachian mines have hundreds of competitors, the PRB is controlled by five producers, with Arch Coal as the second largest. The barriers to entry in PRB are very high since existing producers have already invested billions of dollars and achieved massive economies of scale.

Arch Coal has sold most of its Central Appalachian properties to focus on the West. In doing so, the company shed much of its legacy liabilities, which includes reclamation liabilities, pensions and future health-care expenses. The divesture also freed Arch from union ties, which should yield cost savings and greater operational flexibility in the long run.


Quick Hits

• Market Recap
• Cisco (CSCO), General Electric (GE) and Emcor Group (EME) among winners of Obama’s plan
• Treasury Sells $30 Billion of Four-Week Bills at Zero Percent
  

--

Peter Lazaroff, Junior Analyst

Daily Insight

Stocks were juiced yesterday as we received additional specifics on the infrastructure-based stimulus plan that will roll out next year. The most economically sensitive stocks led the market’s advance as a result. To no one’s surprise by now, basic material, machinery/construction-related industrials and medical software firms will receive the largest benefit from the program

We’ve engage in a nice 20% run over the past 11 sessions. It’s difficult to tell whether what we’re seeing here is one of those rallies that extends for a couple of months or one that will prove very short-lived and once again test the low – such as the bounce from the October 27 multi-year low that rallied 18% only to make a new low three weeks later. We get the feeling this one has some legs but it’s tough to say.

There are a lot of companies cutting forecasts as the credit crisis that took hold in October did major damage. We’re seeing forecasts adjusted by 15%-50% from guidance just offered in late October, which helps explain how quickly things have shifted. Stocks may have to deal with this news, meaning we surely haven’t escaped big down days on occasion. However, these forecasts are rearview mirror topics, the stock-market damage that has been done, one would think, reflects worst-case profit scenarios.

Congress and the White House have also neared an agreement to extend a life-line to U.S. auto makers. It appears they’ll throw $15 billion at the three as a sort of bridge to January 20. (At that time Congress will have the numbers to issue additional checks to GM, Ford and Chrysler.) It is being reported the government will take an equity stake; although, specifics have not yet been announce. Odds are they’ll do it via preferred shares yielding 5% for the first five years and increased to 9% after that, this has been their modus operandi regarding other deals.

The US autos really need to enter bankruptcy for government spending to make sense. Then government assistance can take the form of debtor in possession financing. Traditional bankruptcy would force the companies to take substantial measures to reduce costs such as cutting the number of dealerships and product lines that pretend the Detroit Three still enjoy 50% market share instead of the roughly 18% that is currently the case. They’ll also need to bring labor costs closer in line with their global competitors. Currently these costs run 50% above the rest of the market due to a “jobs bank” that pays laid off workers 95% wages and massive legacy outlays.

In an event, stocks like any Detroit Three lifeline for now that does not increase job losses, forgetting for now what is the best route with which to make these companies viable over the longer term.

Market Activity for December 8, 2008


Most major sectors rallied Monday, save the traditional areas of safety – health-care, utilities and consumer staples. Basic materials led the advance; the group has been crushed over the past few months but when the $500 billion (which quickly turns into $1 trillion when the government’s involved) spending plan rolls out mining, construction-equipment and metal production stocks are going to get a kick.

Financial, technology and energy shares enjoyed a very upbeat session as well. Industrial names continue to lag a bit, but this sector will benefit nicely, not just from short-term stimulus but longer term as the traditional economic drivers return to that role – a 15-year era of massive leverage had financials playing the lead.

For the market in general, the good news was we held onto gains for the entire session, with relatively low volatility – relative being the operative word here.

Keynesian Stimulus

You understand our concern, as expressed lately, over these spending programs – the historical record on this type of stimulus proves to be short-lived. Surely government spending is not always a bad thing, but we’re hardly short on public-sector non-defense outlays. Indeed, the federal government has spent $500 billion on infrastructure alone over the past five years. There are things we need to improve, such as a revamped electricity grid, the traffic-control system and making public buildings more efficient. These would be beneficial endeavors.

But this should be coupled with private-sector incentive effects via the tax code that continue to increase rates of productivity and profits that has resulted in the massive job creation we’ve seen over the past 25 years. It is no mystery why U.S. job creation over the past quarter century (up 44.7 million) has outpaced that of the previous 25 years (up 37 million 1958-1983) even as population growth has waned – U.S. population rose 50% 1958-1983 vs. up 32% 1983-2008. The reason for this is the private sector has seen burdens removed – tax and regulatory burdens. Lower tax rates on capital along with labor and corporate incomes will provide additional benefits to overall living standards via higher profits, jobs, incomes and stock-market savings. To forget this axiom will cost us living standard improvements over time.

The Economy

We were without an economic release yesterday, but we’ll get back to it this morning with pending home sales, and then a slew of data Thursday and Friday.

Pending home sales, which are an early indication of how existing home sales will shape up are due out this morning. Pending sales will show additional weakness as it reflects the freeze-up in credit that intensified in November.

This measure may prove a less reliable indicator than usual as we deal with this credit-market event because it measures the signing of contracts. Existing home sales are not counted until the contract is closed, and some who signed a contract may have found it difficult to obtain a mortgage prior to closing. Point is the existing home sales data (due out in two weeks) may show more weakness than pending indicates.

Tomorrow we’ll get the October wholesale inventory reading. This data has a large lag to it as it takes six weeks for the government to compile the figures, so it’s a bit stale. Still we’ll be watching to see how bad the hit actually was to the underlying sales data, which have been down for three months.


On Thursday we’ll get the usual initial jobless claims figure as everyone is familiar with. We’ll watch to see if claims fall for a third week in a row. Claims remain elevated, but after Friday’s very weak payroll report, another drop in claims (even if it is a mild one) may offer a nice boost to stocks.


Import prices for November are also due out. It will show further decline, as all inflation gauges will point to deflation over the short-term. We believe these inflation number will rebound in strong fashion 6-12 months out as the combination of massive Federal Reserve liquidity injections and a huge government stimulus program combine to re-ignite commodity prices.


On Friday, November retail sales will show a large decline in consumer activity took place. This is generally one of the more important indicators, but won’t have the weight this time as everyone expects a really bad number. We’re looking to December right now for some sort of bounce. Indications from the first week of holiday shopping are looking good, the question is whether it will extend through the month.


Also out Friday will be business inventories and producer prices.

Have a great day!



Brent Vondera, Senior Analyst

Afternoon Review

Infrastructure soars
Prospects of Obama’s infrastructure-based stimulus package spurred massive gains in companies with infrastructure-services. Some of the bigger winners today include: EMCOR Group (EME) +19.31%; Jacobs Engineering Group (JEC) +15.18%; Harsco Corporation (HSC) +11.32%; Johnson Controls (JCI) +12.96%; Caterpillar (CAT) +10.87%; Emerson Electric (EMR) 6.26%; Ingersoll-Rand (IR) +5.44%; General Electric (GE) +5.77%

Also receiving a boost was medical record companies like Cerner (CERN), up 12.18 percent, after Obama stressed the importance of adopting digital medical records to save the country billions in healthcare costs.

Internet companies rose as well in response to Obama’s plans to upgrade Internet infrastructure, calling the U.S. rank of 15th in broadband adoption “unacceptable.”


3M Company (MMM) -4.13%
MMM dropped as the company projected 2008 earnings forecast of $5.10 to $5.15, down from their previous estimate of $5.40 to $5.48 a share. The company also projected 2009 EPS that was significantly lower than the consensus estimate.

Weak economic conditions underscore the company’s downside guidance, but the U.S. dollar’s resurgence is particularly challenging for 3M’s products since about two-thirds of their revenues come from abroad.

It should be noted that MMM’s recent downturn is underpinned by a short-term slowdown in the business cycle, not long-term weakness. Instead MMM remains a solid blue chip company that stands out as a strong long-term play for value-oriented investors.


Illinois Tool Works (ITW) +1.39%
ITW issued downside earnings and revenue guidance for the fourth quarter. The company said the latest forecast reflects significant further weakening in North American and international lend markets, the negative impact from currency translation and higher than originally anticipated restructuring costs in the quarter.


Dow Chemical (DOW) +7.21%
Dow announced today that it will cut about 5,000 full-time jobs (11 percent of its work force), close 20 facilities and sell some non-strategic businesses as the company looks to speed its restructuring and cut costs. The nation’s largest chemical producer by revenue also said it will temporarily shut about 180 plants and cut about 6,000 contractor jobs in light of the reduced operations.

Once fully implemented, Dow expects the layoffs and site closures to result in roughly $700 million in annual operating savings by 2010. Those savings are anticipated to occur on top of the previously announced synergies derived from the aniticipated Rohm and Haas (ROH) acquisition.

This blog post charts a selection of job cuts by major companies in the fourth quarter.


Dell (DELL) +12.04%
Bloomberg reported that Dell (the world’s second largest computer maker) and Lenovo Group (China’s biggest computer maker) may be interested in acquiring Positivo Informatica SA, Brazil’s biggest computer maker.

The Brazilian currency’s drop, the worst in the past three months among the 16 most-actively traded currencies, has made companies in the country acquisition targets.

This would be no simple transaction because Positivo’s poison pill by-laws would value the company at seven times its current market value.

Positivo shares have outperformed the Bovespa since October 21, when the company reported net revenue rising 36 percent as laptop sales almost doubled.


AT&T (T) +6.50%
Wal-Mart Stores (WMT) is reportedly planning to offer Apple’s iPhone (which runs exclusively on AT&T’s network) by the end of December. A partnership with Wal-Mart would bring the iPhone to the world’s biggest retailer, building on a deal Apple made in September with Best Buy, the largest U.S. electronics chain.

The pricing and release date of the iPhones in Wal-Mart stores is all speculation at this point, but it is clear that Apple is aggressively attacking the smartphone and mobile computer market. AT&T should reap the benefits of customers buying iPhones, and thus switching to their network. Increasing the number of current customers using smartphones would provide AT&T with a boost since smartphone customers tend to have higher monthly bills.


Arch Coal (ACI) +19.78%
Reuters reports that ACI expects production to be flat or slightly lower while overall output for the U.S. coal industry will slow. CEO Steven Leer said, “We see there’s going to be tremendous opportunity to acquire assets…within every crisis there is enormous opportunity.”

ACI, as well as other coal stocks, surged in response to Obama’s infrastructure-based stimulus package.


Quick Hits

• Majority of Modified Loans Fail Again, Regulator Says
• Cheapest Stocks Since 1995 Show Cash Exceeds Market
• Central Bank Cash May Hamper Money Markets, BIS Says
• Obama Bonds to Give Buyers Taste of Japan Lost Decade

--

Peter Lazaroff, Junior Analyst

Daily Insight

U.S. stocks shook off the worst monthly jobs report in 34 years, boosted by financial shares (namely insurance stocks) after a forecast from Hartford Financial was far better than estimated. Also, traders and investors may have figured the significant level of job losses over the past three months may be signaling the worst monthly declines have been seen. (Not saying this with a lot of confidence, but even when we view the rough 1974 and 1981-82 recessions, one can see after three months of 320K-533K in payroll cuts the declines become milder.

Stocks began the session a little more than 3% to the downside, but reversed course as we entered the afternoon session to rally 7% from the day’s nadir.


As mentioned, financials led the advance; the shares – as measured by the S&P 500 index that tracks the sector -- jumped 8.63%. Technology and consumer discretionary shares also outperformed the broad-market, adding 3.91% and 3.67%, respectively.

We were a bit surprised to see industrial shares lag most sectors, as a massive stimulus package (centered on infrastructure projects) will benefit the group, but these shares have enjoyed a nice run over the past couple of weeks so it was probably just a function of money moving to financials and tech shares.

Market Activity for December 5, 2008


The Economy

Wow, so much for estimates!

The Labor Department reported non-farm payrolls declined 533,000 in November, blowing past the 335,000 decline expected. The unemployment rates fell less than estimated, coming in at 6.7% vs. the 6.8% expected – the figure was lower as 398,000 people removed themselves from the labor pool. The bright side is average hourly wages rose 0.4% and on a year-over-year basis accelerated to 3.7%. With energy prices falling like a rock, this means real wages have moved positive again – the growth in real wages came to halt a few months back as fuel prices jumped 65% in a five-month span prior to the current plunge.

Job losses within the goods-producing sectors (construction, manufacturing and computers/electronics) helped to push the payrolls figure lower, as has been the case for nearly a year now, but it was a collapse in service-sector jobs (namely retail, trade and transportation) that made the difference last month; the 533,000 decline in payrolls was the worst reading since December 1974. The service sector shed a massive 370,000 positions last month.


Education, health-care and government jobs remain the only areas of increase. Health-care remains pretty strong, picking up another 43,000 jobs in November and 408,000 year-to-date.

The unemployment rate rose to 6.7% in November from 6.5% for October. The increase would have been larger but labor-force participation dropped 0.3% to 65.8%. The number of people who want a job but quit looking for one in the past four weeks (want is known as “discouraged workers”) rose 398,000.

The jobless rate has jumped from the historically low level of 4.7% just 12 months ago. Although, that low jobless rate was likely a bit artificial –the over-investment within the housing market pushed the unemployment rate below 5.0%. The construction job losses, as the housing bubble popped, had not begun to show up until early this year. Still, even adjusting for this, to see the jobless rates jump nearly two-percentage points this fast is disturbing.


This report suggests the fourth-quarter GDP reading may drop in real terms by more than 5% at an annual rate. This would put the recession on par with the nasty 1981-82 recession. The large downward revisions to the previous two months’ worth of data (showing jobs losses were 199,000 more than previously estimated) show the credit-market chaos that began in September had more effect that previously thought.

That said, with these revisions we now see payrolls declined 403,000 for September, 320,000 for October and this November reading of 533,000. Even the harsh recessions of 1974 and 1981-82 showed declines of this magnitude proved the worst was over. This may prove true this time, one can’t know at this point. We’re going to see payrolls declines for several months still at least, but the worst may already have been witnessed.

The goods news was that average hourly wages rose a healthy 0.4% in November – double the expectation – and accelerated to 3.7% on a year-over-year basis. This is helpful.

This degree of labor market deterioration shows the bold changes in tax rates we discussed on Friday is very much needed. We acknowledge the likelihood of this occurring in the next Congress is remote. Ok, it’s a big fat dream.

But eventually this will occur and that’s when the economy will be put on a footing that will drive profits, job and income growth longer-term. (It has been just over a year since we ended the record double-digit profit growth streak – 20 consecutive quarters. We can do it again but it won’t occur via spending, it will take higher after-tax returns on capital, corporate and labor income.

For now what we’ll get is Keynesian-style approaches like publicly funded infrastructure projects.

Mortgage Stats

Mortgage delinquencies rose to a post-WWII high to hit 6.99% -- this is for the third quarter. Delinquencies measure mortgages that are 30 days past due. Mortgages that are seriously delinquent – 90 days past due and headed for foreclosure – rose from 4.50% to 5.17%.


As the next two charts show, the bulk of the damage is in the sub-prime market.




You’re about to be Stimulated

In a YouTube address on Saturday, the President-elect outlined his stimulus plan, which will focus on energy, road and bridges, schools, broadband and electronic health records -- the energy part of the plan was strangely vague.

The program will probably grow in size, possibly approaching a figure close to $1 trillion now that we’ve received very weak jobs numbers the past three months. The issue with these types of stimulus is that history has shown they just don’t have staying power. No doubt, you throw $700 billion - $1 trillion to infrastructure projects, among other things, GDP will get a boost over the next year. Problem is such programs lack incentives and activity generally fizzles out as a result. This is why a bold and substantial tax-rate response would be preferred, but such spending can still juice stocks and the economy over the short term.

The big concern is when we look back 18 months from now and find the budget deficit has grown by a multiple of four, you know what comes next – proposals to raise tax rates.

This would be exactly the wrong thing to do as the Fed will be in the process of removing the massive levels of liquidity they have pumped into the system. You slash tax rates when the Fed is fighting a significant inflationary event, which will be the case a year to 18 months out. This prescription worked masterfully in 1982 and if we ignore that lesson we’ll regret it. An environment of higher tax rates and much tighter monetary policy is not conducive to growth, to say the least.

Have a great day!



Brent Vondera, Senior Analyst