The bulls are frustrated, the bears are frustrated. The S&P is up 100 pts to 1120 since July 1, after falling 100 pts from Jun 21 - Jul 1. These are big moves 8-9% in weeks. Why. Well we had terrible economic data towards the end of June that gave us 9 out of 10 down days, everything from bad payroll, weaker ISM, lousy retail sales, etc. Then from the middle of July on we had terrific earnings news. They beat their numbers bottom and top and raised full year estimates while giving optimistic guidance.
This points out a great divergence. The S&P 500 which is the stock market to most of us, no longer correlates to the US economy, at least not like it used to. We've got almost 10% unemployment, two months of declining retail sales, new home sales at the second worst level since 1963, and companies are reporting earnings like its early 2008, and expected to do $92 in 2011 for a new record.
Those bears who correctly predicted this wave of dismal economic statistics, were completely blown out by this 10% rally. S&P 500 companies get almost 50% of their revenues internationally. They can cut to the bone in the US and ride the wave of demand in Asia, Europe and Latin America, which is exactly what they have been doing. Sure, if we fall off the table like we did in 2008, everything will go down, but look how well they are doing when we are just bouncing along the bottom. Forecasting the US economy is no longer forecasting the S&P500, except in the very long run. Yes our weakness should manifest itself in China and Europe and loop back to weakness for our multinationals, but that is taking some time.
Tuesday, July 27, 2010
Wednesday, December 16, 2009
MGM
From a high of 100 on Oct 8 2007 to a low of 1.81 on Mar 02 2009, back to 10.35 today what a ride. With the opening of City Center, MGM expects to get it's mojo back. How?
Why is a residential development expected to draw visitors. Yes I know it has a few nice hotels. Who goes to look at apartment buildings. There is no volcano, no pirate ship, no fountains or circus. This is a mystery to me.
To put that much new living space on the market in the epicenter of the real estate debacle is insane, but then they have no choice. They have already cut asking prices by 30%.
Also, does the strip need 3 more casinos and hotels. Not to mention all the supply in Macau and the new casino in Singapore coming on line. More states are also turning to gambling to close budget deficits. Alas, vegas is no longer unique or forbidden as it was in the days of my youth.
Kirk Kekorian doubled down. At his age and wealth I wonder why he bothered. Well prince or pauper we'll soon find out.
Why is a residential development expected to draw visitors. Yes I know it has a few nice hotels. Who goes to look at apartment buildings. There is no volcano, no pirate ship, no fountains or circus. This is a mystery to me.
To put that much new living space on the market in the epicenter of the real estate debacle is insane, but then they have no choice. They have already cut asking prices by 30%.
Also, does the strip need 3 more casinos and hotels. Not to mention all the supply in Macau and the new casino in Singapore coming on line. More states are also turning to gambling to close budget deficits. Alas, vegas is no longer unique or forbidden as it was in the days of my youth.
Kirk Kekorian doubled down. At his age and wealth I wonder why he bothered. Well prince or pauper we'll soon find out.
Wednesday, December 09, 2009
STALEMATE
It seems we have reached a stalemate in the markets as of late. Today we closed at 1095.95 in the S&P. A month ago 11/10/09 we closed at 1096.42. In between we have been as high as 1118 and as low as 1085, a 33 point range or about 3%. Just eyeballing the charts, we haven't gone sideways for this long in years. The forces of good and evil seem well balanced at the moment.
The bulls see continuing economic improvement. Unemployment claims are falling, job losses diminishing, stronger car sales, improving home sales and stronger growth overseas. China's PMI up to a record 55.7 and India's GDP up 14.6%. In addition, the bulk of the stimulus package is still to be spent, oil prices are falling, zero interest rates, low inflation and mortgage refi's liquefying consumer balance sheets are supportive.
The bears are an august group not to be taken lightly, Mauldin, Roubini,Hussman,Grantham, Smithers, Comstock, Rosenberg, Pimco and Prechter.Who wants to bet against them. Some of their arguments are: The economic rebound is tepid and won't last. The markets are overvalued. That the market is pricing in a recovery to peak earnings and peak profit margins. Volume is weak. Credit availability not improving. How can consumers spend when their credit lines are being reduced. Commercial real estate problems still ahead of us. De leveraging, debt reduction takes a long time.
The ying and the yang. The rally started with 2nd derivative improvements, the less bad and moved to absolute improvements, like the PMI's moving above 50. Companies made their numbers through tremendous cost cutting. They seem to indicate that they can hit their numbers going forward with the current level of demand. In that sense they are better off than main street who can't fire themselves to cut costs. But then we have Dubai and Greece. So which way do we break?
The news has been mixed lately. The non-manufacturing PMI was a disappointment, so were chain store sales, but payrolls were a great surprise.
That's why we are at a stalemate. The first leg of the bounce is over and the ride gets more bumpy from here. The numbers haven't and won't show clear uninterrupted trends.We won't have a V shaped recovery nor fall back into recession. Companies have adjusted to the current level of economic activity as well as the 80% of the working population that has jobs. Perhaps what the market is in for is a period like 2004 where the S&P traded between 1060 and 1160 from January to mid November. Most of the time it was between 1080 and 1140. That makes this months 30pts look huge. In other words, without a crises, we just muddle along.
The bulls see continuing economic improvement. Unemployment claims are falling, job losses diminishing, stronger car sales, improving home sales and stronger growth overseas. China's PMI up to a record 55.7 and India's GDP up 14.6%. In addition, the bulk of the stimulus package is still to be spent, oil prices are falling, zero interest rates, low inflation and mortgage refi's liquefying consumer balance sheets are supportive.
The bears are an august group not to be taken lightly, Mauldin, Roubini,Hussman,Grantham, Smithers, Comstock, Rosenberg, Pimco and Prechter.Who wants to bet against them. Some of their arguments are: The economic rebound is tepid and won't last. The markets are overvalued. That the market is pricing in a recovery to peak earnings and peak profit margins. Volume is weak. Credit availability not improving. How can consumers spend when their credit lines are being reduced. Commercial real estate problems still ahead of us. De leveraging, debt reduction takes a long time.
The ying and the yang. The rally started with 2nd derivative improvements, the less bad and moved to absolute improvements, like the PMI's moving above 50. Companies made their numbers through tremendous cost cutting. They seem to indicate that they can hit their numbers going forward with the current level of demand. In that sense they are better off than main street who can't fire themselves to cut costs. But then we have Dubai and Greece. So which way do we break?
The news has been mixed lately. The non-manufacturing PMI was a disappointment, so were chain store sales, but payrolls were a great surprise.
That's why we are at a stalemate. The first leg of the bounce is over and the ride gets more bumpy from here. The numbers haven't and won't show clear uninterrupted trends.We won't have a V shaped recovery nor fall back into recession. Companies have adjusted to the current level of economic activity as well as the 80% of the working population that has jobs. Perhaps what the market is in for is a period like 2004 where the S&P traded between 1060 and 1160 from January to mid November. Most of the time it was between 1080 and 1140. That makes this months 30pts look huge. In other words, without a crises, we just muddle along.
Sunday, November 30, 2008
REBOUND
This weeks post will be short and sweet lest I become too redundant. Biggest 5 day rally since the 30's, even though the news continued atrocious. New homes sales lower as well as prices, durable goods down 6.2%, personal spending -1% and it's not going to get much better. But the market was deeply oversold and more importantly the mother of all fiscal stimulus packages is coming. The bad news is in the rear view mirror and being ignored as consensus over the stimulus package grows. If you recall, the last stimulus package gave us a quarterly growth rate of almost 3%. This one is going to be much bigger. It will buy us a temporary respite. Is it the right thing to do? That is a different question. The market will probably meander in a range of 800-1000 in the S&P. Bad news will be absorbed as good news is coming. Volatility will decrease. The next big leg will not come until we see if the next administration's policies turn things around or otherwise.
Good trading -till next week.
Good trading -till next week.
Sunday, November 23, 2008
We keep making new lows. Maybe Thursday was the washout. We finally broke the 10/10 lows and the 2002 lows. I don't think it is the final bottom. It might be a short term bottom perhaps even a intermediate bottom but not the final bottom. My reasoning is simple. This is much much worse than 2002 in every metric you want to measure, so I think the stock market low will be lower. How much lower? If we go into a depression which I don't believe we will, I don't think we will fall the 86% we fell in the thirties. We have an active Fed and government that we didn't have then. We are a much less manufacturing economy now. We have FDIC insurance and a wide range of social safety net programs we didn't have then. So I think the low will be somewhere between the 50% we are down now and the 86% we were down then. For lack of a better crystal ball, lets take the middle, which is roughly 68% and translate to an S&P of 500. Yikes! Seems improbable but consider we hit a high of 1007 on election day and Thursdays low was 746. That occurred in less than 3 weeks!
The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.
The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.
Saturday, November 08, 2008
WHAT NOW
Well. we have a new president and hope springs eternal. We have a bunch of problems and the hope is Barack has the solutions. Now the auto companies and insurance companies have their hand out. Pelosi wants to pass another stimulus bill even though its pretty much agreed that the first one did not work. Jobs and consumer spending are falling off a cliff and everywhere, everyone feels the need to take some kind of action. Infrastructure spending is the new cry. Eventually, most will come to the realization that there is no quick fix that will return us to the prosperity we just so recently enjoyed. Has everyone forgotten? Governments cannot legislate prosperity. They can only foster conditions for it at best. That does not stop them from trying. They have to get re-elected after all.
We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.
The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.
The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.
Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.
To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.
As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.
We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.
The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.
The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.
Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.
To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.
As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.
Sunday, March 16, 2008
FREE TRADE
I have been a free trader for most of my career, and I still believe free trade works in the long run. By the long run I mean a generation. In the short run there are clearly big winners and losers. This administration and this country has been oblivious to the para dime shift that has been occurring.
Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.
To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.
What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.
Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.
To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.
What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.
Wednesday, April 04, 2007
IN DENIAL
It seems to becoming clear that the economy is slip slidin away. Factory orders, just released were soft, up 1% when a 2.5% bounce was expected. The non-manufacturing ISM came in at 52.4 much lower than the 55.5 expected, mortgage applications were lower again. Yesterday we heard the big three had what can only be described as lousy auto sales. Overall sales are slowing as well. I'll be financing is getting harder to find. The day before, manufacturing ISM came in at 50.9, lower than expected and below last months reading. we've got $64 oil which translates into gas at 2.70 a gallon nationwide.Earlier this week we had an earnings warning from a bank that the sub=prime is spreading into alt-A mortgage sector. Through a tightening of credit standards, availability is being reduced. The S&P is only about 2% off its high. Either we are going to see some better numbers soon or one of them will be the straw that breaks the camels back and down we go again. HAPPY EASTER
Thursday, February 22, 2007
STILL RUNNING ON FUMES
We are up 4% since I said that on my last post 11/16. Its even more true today. The fumes are, the statement the Fed issued at its last meeting, which were deemed to be less hawkish and paving the way to a move to a neutral stance. Secondly, the testimony of Bernanke, again more soothing words interpreted to be bullish, and finally the release of the Fed minutes, which even though superseded by Bernanke's testimony still helped provide a good tone to the markets. I guess the lesson is never underestimate the ability of the market to continue rallying on the same old news., very much like the Fed is done rallies we had earlier in the year.
The hard news has been anything but bullish. The sub prime mortgage market continues to deteriorate. Earnings are indeed slowing down. Retail sales were flat. Net foreign purchases of our securities were weak. Industrial production fell. Microsoft warned we are overestimating demand for Vista. Housing starts fell 14%. The BOJ raised rates, Bank of England said there is one more increase to come, and the ECB is signaling a rate increase for next month. Back on 11/16 71% of NYSE stocks were over their 200 day ma. Today 78.6% are over their 200 day ma.Almost everything is participating. Margin debt is at an all time record.
I didn't mention that the CPI came in a little hot yesterday, because the bond market really didn't react to it. There is the rub. All the negative news I mentioned is being tempered by the bond market backing down to a 4.7% 10 yr yield from 4.9% and the last GDP number coming in at 3.5% after we saw such weak numbers in December. The market has seen this movie before and is not going buy the economic weakness story so easily especially when a little weakness is good for softer bond yields.So we may have to wait for the GDP to be revised down to 2-2.5% and first qtr estimates to come in below that before that story gains traction. So even though we are long in the tooth, the catalyst is not yet upon us, but we may be running out of fumes.
The hard news has been anything but bullish. The sub prime mortgage market continues to deteriorate. Earnings are indeed slowing down. Retail sales were flat. Net foreign purchases of our securities were weak. Industrial production fell. Microsoft warned we are overestimating demand for Vista. Housing starts fell 14%. The BOJ raised rates, Bank of England said there is one more increase to come, and the ECB is signaling a rate increase for next month. Back on 11/16 71% of NYSE stocks were over their 200 day ma. Today 78.6% are over their 200 day ma.Almost everything is participating. Margin debt is at an all time record.
I didn't mention that the CPI came in a little hot yesterday, because the bond market really didn't react to it. There is the rub. All the negative news I mentioned is being tempered by the bond market backing down to a 4.7% 10 yr yield from 4.9% and the last GDP number coming in at 3.5% after we saw such weak numbers in December. The market has seen this movie before and is not going buy the economic weakness story so easily especially when a little weakness is good for softer bond yields.So we may have to wait for the GDP to be revised down to 2-2.5% and first qtr estimates to come in below that before that story gains traction. So even though we are long in the tooth, the catalyst is not yet upon us, but we may be running out of fumes.
Thursday, November 16, 2006
WHERE ARE WE NOW
First let me toot my own horn for a moment, something I do very infrequently. My last post, which was on Walmart was not only timely but right on the money. The stock hit its closing high the next day, 51.75 and went south consistently hitting its low two days ago at 46.32. I took my profits a little early, but I'm not complaining. My post prior to that was also pretty good and timely in laying out the bull case for the overall market. Although it saved me a lot of money, I didn't profit quite as handsomely. It serves as a good starting point to review where we are now.
One of the points I was trying to make then, was how remarkable the stock market rally was in light of all the economic weakness. In that regard, not much has changed, and in fact the economy has deteriorated since then. Back then I argued that the first revision in 2nd qtr GDP, up to 2.9% from 2.6% is what swept away all economic concerns and accelerated the stock rally. Similarly, when the Dow declined 6 days in a row from 10/26 to 11/03, it was the strong rebound in the ISM services index and the large revisions in non-farm payrolls for the prior two months and corresponding drop in the unemployment rate, that once again swept away economic concerns and reignited the rally.
Now however, I believe the rally is running on fumes, and here is why:
Not only was 2qtr GDP revised back down to 2.6%, but 3rd qtr came in at 1.6%.
Auto sales have declined further to 16.1 mln in Oct from 16.6 in Sep and manufacturers have cut production further in the 4th quarter because they are choking on inventories.
Existing home sales and prices continued to drop. Sales to 6.18 vs 6.3 in Aug, prices another 1.9% vs a 3% drop in Aug.
New home sales showed an uptick has they have for the last several months but then is revised away in subsequent data. Prices, however showed a steep drop from 239,000 in Aug to 217,100 in September.
The ISM dropped to 51.2 in Oct vs 52.9 in Sep.
The Democrats have indeed taken the house and Senate.
Walmart sales have been below the low end of forecasts for two months and not at the high end as the were in Aug.
It's hard to be bullish about $60n oil, when most of my working life $40-$50 oil was looked at with aghast.
Eventually, the top line rules. You can continue to generate earnings for a while as the top line slows down as many companies have, but eventually they have to follow.
Technically and sentiment wise the market is extremely overbought. Barchart's momentum indicator shows 79% of stocks are over their 100 day ma and 71% are over their 200day mvg. Newsletter writers are at their most bullish since May.
Those betting on a soft landing are now bucking the trend. We have all been told, the trend is your friend. They economic trend is now down and bulls are trying to catch the bottom. If you are bearish be just as careful and do not try to catch the top. In momentum markets like this, the last 10% in time can be very large in amount. Like Barry Ritholtz said recently on his blog thebigpicture.com you can be early being long, you can even be early going to cash, but the death of a money manager is being early going short. Or as I heard said once, the canyons of wall street are filled with the corpses of those who where right but too early.
Conclusion: Its to late to get in or but more. Its time to scale out and prepare an exit plan. What will be the straw that breaks the camels back? It could be and ISM reading below 50, a drop in auto sales below 16mln units, a further decline in home sales or prices, a renewed climb in oil prices, and actual decline in Walmart SSS, or many other things. Or as John Mauldin discusses in his e-letter of 8/26, fingers of instability, it could be some seemingly trivial event, the market not acting well after a good news item, one bad earnings or Christmas sales report. So as usual, we wait for a fundamental, technical or sentiment signal to ell when to hit the exit door. Time is drawing near.
One of the points I was trying to make then, was how remarkable the stock market rally was in light of all the economic weakness. In that regard, not much has changed, and in fact the economy has deteriorated since then. Back then I argued that the first revision in 2nd qtr GDP, up to 2.9% from 2.6% is what swept away all economic concerns and accelerated the stock rally. Similarly, when the Dow declined 6 days in a row from 10/26 to 11/03, it was the strong rebound in the ISM services index and the large revisions in non-farm payrolls for the prior two months and corresponding drop in the unemployment rate, that once again swept away economic concerns and reignited the rally.
Now however, I believe the rally is running on fumes, and here is why:
Not only was 2qtr GDP revised back down to 2.6%, but 3rd qtr came in at 1.6%.
Auto sales have declined further to 16.1 mln in Oct from 16.6 in Sep and manufacturers have cut production further in the 4th quarter because they are choking on inventories.
Existing home sales and prices continued to drop. Sales to 6.18 vs 6.3 in Aug, prices another 1.9% vs a 3% drop in Aug.
New home sales showed an uptick has they have for the last several months but then is revised away in subsequent data. Prices, however showed a steep drop from 239,000 in Aug to 217,100 in September.
The ISM dropped to 51.2 in Oct vs 52.9 in Sep.
The Democrats have indeed taken the house and Senate.
Walmart sales have been below the low end of forecasts for two months and not at the high end as the were in Aug.
It's hard to be bullish about $60n oil, when most of my working life $40-$50 oil was looked at with aghast.
Eventually, the top line rules. You can continue to generate earnings for a while as the top line slows down as many companies have, but eventually they have to follow.
Technically and sentiment wise the market is extremely overbought. Barchart's momentum indicator shows 79% of stocks are over their 100 day ma and 71% are over their 200day mvg. Newsletter writers are at their most bullish since May.
Those betting on a soft landing are now bucking the trend. We have all been told, the trend is your friend. They economic trend is now down and bulls are trying to catch the bottom. If you are bearish be just as careful and do not try to catch the top. In momentum markets like this, the last 10% in time can be very large in amount. Like Barry Ritholtz said recently on his blog thebigpicture.com you can be early being long, you can even be early going to cash, but the death of a money manager is being early going short. Or as I heard said once, the canyons of wall street are filled with the corpses of those who where right but too early.
Conclusion: Its to late to get in or but more. Its time to scale out and prepare an exit plan. What will be the straw that breaks the camels back? It could be and ISM reading below 50, a drop in auto sales below 16mln units, a further decline in home sales or prices, a renewed climb in oil prices, and actual decline in Walmart SSS, or many other things. Or as John Mauldin discusses in his e-letter of 8/26, fingers of instability, it could be some seemingly trivial event, the market not acting well after a good news item, one bad earnings or Christmas sales report. So as usual, we wait for a fundamental, technical or sentiment signal to ell when to hit the exit door. Time is drawing near.
Wednesday, October 25, 2006
WALMART
There has been a lot of hoopla over Walmart the last two days. Well why not. They had their two day annual meeting giving them a chance to strut their stuff. Let me say at the outset, I didn't listen to their entire webcast of the meeting, so maybe there are some hidden pearls of wisdom I missed. Based on the news and analyst reports I read, I was not impressed. Of course I've been a bear on Walmart for sometime. I also sat out the recent rally from 42 to 52 but was not short. Back to the meeting. They said they were going to slow down new store expansion to a 7% increase in square feet from 8% and cut and plan to keep cap ex equal to their increase in same store sales growth, about 2-4%. This meant an increased focus on profits and their return on invested capital. Wow-wee! The bulls are trying to equate this with McDonalds turnaround of a couple of years ago. They also cut new store opening's to almost zero not a paltry 1% and pushed more of existing and new product through their existing distribution. They increased store hours, started accepting plastic for payment, introduced new products like premium salads and coffee. Walmart is also trying to increase traffic by remodeling stores and hiring a new lead ad agency among others. But they are of course always trying to increase sales and have not been too successful lately. McDonalds was coming off a low base after a couple of horrific years, Walmart is not. McDonalds after going astray had more potential and easier fixes. Adjusting their menu for more mature tastes and staying open longer and accepting credit cards were almost no brainers. They money they saved from stopping new construction they were able to put into huge share buybacks and dividend increases. Walmart plans do not include anything on that scale.
I think Walmart has terrific management. Their problem is the macro environment has just overwhelmed them. They are so large, that it is and will continue to be the largest influence on their performance. One thing you never hear mentioned, is sales growth versus inflation, probably because most retailers have sales at least equal to inflation, otherwise their unit sales would be dropping. So it was with Walmart, in 2000 same store sales were7.7% vs inflation of 2.7%, in the recession year of 2001 the SSS were 5.1% vs inflation of 3.4%. In 2002 inflation dropped to 1.5% and their SSS increased to 6.1%. Inflation was 2.4% in 2003 and their SSS were 5% . In 2004 the inflation dropped to 1.8% and SSS fell to 4%. In 2005, the trouble began, inflation went up to 3.3% and SSS dropped to 3.3%. After inflation they had zero increase in sales. The pattern continued in fiscal 2006. Inflation was 3.5% and SSS increased 3.6%. Only because they have opened new stores equaling about an 8% increase in sq footage that they have been able to show any decent profit growth. That 8% plus 3% SSS have given them the 10-12% total sales growth the last couple of years. No surprise last years EPS growth was 11.2%. It is no wonder they would take a very slow incremental approach to slowing new store growth. Why are they doing it at all? Last year SSS growth actually increased for the first time in 6 years, only marginally 3.6% vs 3.3%, but total sales growth fell nevertheless to 9.9% from 11.2%. They're getting less bang for the buck. Increase new stores by 8% and have total sales growth decline. Secondly, like a lot of companies announcing slowing capex, like Amazon yesterday, they see the slowdown coming and don't have to look any further than their own numbers. Hope the money saved and put into share buybacks can make up the difference.
A final word on gas prices. Walmart, like stocks in general , really took off on the lower gas prices helping their sales. They even said in their webcast that lower gas prices will help them. Yes, if they stay there for 6 months to a year, but a one month drop, even as large as its been, its effect has been over-rated. To prove that point, not widely reported, but they mentioned that SSS in October were only up 1% so far, well below their 2-4% estimate.
I think Walmart has terrific management. Their problem is the macro environment has just overwhelmed them. They are so large, that it is and will continue to be the largest influence on their performance. One thing you never hear mentioned, is sales growth versus inflation, probably because most retailers have sales at least equal to inflation, otherwise their unit sales would be dropping. So it was with Walmart, in 2000 same store sales were7.7% vs inflation of 2.7%, in the recession year of 2001 the SSS were 5.1% vs inflation of 3.4%. In 2002 inflation dropped to 1.5% and their SSS increased to 6.1%. Inflation was 2.4% in 2003 and their SSS were 5% . In 2004 the inflation dropped to 1.8% and SSS fell to 4%. In 2005, the trouble began, inflation went up to 3.3% and SSS dropped to 3.3%. After inflation they had zero increase in sales. The pattern continued in fiscal 2006. Inflation was 3.5% and SSS increased 3.6%. Only because they have opened new stores equaling about an 8% increase in sq footage that they have been able to show any decent profit growth. That 8% plus 3% SSS have given them the 10-12% total sales growth the last couple of years. No surprise last years EPS growth was 11.2%. It is no wonder they would take a very slow incremental approach to slowing new store growth. Why are they doing it at all? Last year SSS growth actually increased for the first time in 6 years, only marginally 3.6% vs 3.3%, but total sales growth fell nevertheless to 9.9% from 11.2%. They're getting less bang for the buck. Increase new stores by 8% and have total sales growth decline. Secondly, like a lot of companies announcing slowing capex, like Amazon yesterday, they see the slowdown coming and don't have to look any further than their own numbers. Hope the money saved and put into share buybacks can make up the difference.
A final word on gas prices. Walmart, like stocks in general , really took off on the lower gas prices helping their sales. They even said in their webcast that lower gas prices will help them. Yes, if they stay there for 6 months to a year, but a one month drop, even as large as its been, its effect has been over-rated. To prove that point, not widely reported, but they mentioned that SSS in October were only up 1% so far, well below their 2-4% estimate.
Wednesday, August 30, 2006
THE BULL CASE
With this mornings GDP release, a revision to 2.9% from 2.5% for 2nd quarter growth, the bulls have strengthened their case. Nothing stops the resilient U.S. economy from chugging along at it's potential of about 3 %, and along with it, corporate profits and stocks.
A weaker housing market, well it's only 6-7% of the economy anyway. Weaker year over year auto sales, well we are really a service oriented economy now anyway. The industrial side has shriveled to about 15% and autos are a fraction of that. Higher interest rates, the Fed has paused and the interest rate cycle has peaked, and bond yields are falling. In addition, that bugaboo, oil prices, have also peaked and are falling, now below $70, adding support to consumer spending.
A potential Democratic victory, taking the House and Senate, well that's too far away to worry about. Inflation worries, the Fed has told us it will moderate as the year progresses, not to worry. A soft landing is in the cards, haven't you heard. That's why the market as acted so well even in the face of bad news, and the latest GDP proves it.
In addition, we have valuations at levels not seen in years, robust corporate share buybacks, and M&A activity being propelled by bigger and bigger pools of private equity. WMT sales were at the high end of forecasts, last months retail sales were better than expected and auto sales were over 17 million units.
Technically, we are breaking out to new highs, and sentiment as a contrary indicator is as bearish as we've seen in sometime, close to where we have seen big rallies in the past.
So if I were a bull I'd say, put that in your pipe and smoke it.
A weaker housing market, well it's only 6-7% of the economy anyway. Weaker year over year auto sales, well we are really a service oriented economy now anyway. The industrial side has shriveled to about 15% and autos are a fraction of that. Higher interest rates, the Fed has paused and the interest rate cycle has peaked, and bond yields are falling. In addition, that bugaboo, oil prices, have also peaked and are falling, now below $70, adding support to consumer spending.
A potential Democratic victory, taking the House and Senate, well that's too far away to worry about. Inflation worries, the Fed has told us it will moderate as the year progresses, not to worry. A soft landing is in the cards, haven't you heard. That's why the market as acted so well even in the face of bad news, and the latest GDP proves it.
In addition, we have valuations at levels not seen in years, robust corporate share buybacks, and M&A activity being propelled by bigger and bigger pools of private equity. WMT sales were at the high end of forecasts, last months retail sales were better than expected and auto sales were over 17 million units.
Technically, we are breaking out to new highs, and sentiment as a contrary indicator is as bearish as we've seen in sometime, close to where we have seen big rallies in the past.
So if I were a bull I'd say, put that in your pipe and smoke it.
Sunday, August 20, 2006
THE BEGINNING OF THE END
Could this be the end of another Fed is done rally? This Fed is done rally has been a little different from the rest. If you recall the initial spike after the Fed announcement was transitory. They did pause, but their words did not indicate that they would stay paused. It was not until the release of the PPI and CPI which were weaker and gave credence to the idea that they would stay paused that the market really took flight.
Why might then this be the beginning of the end? Well, one reason is that volume has been pretty tepid throughout this rally. Secondly, the consumer confidence figures released by the University of Michigan were weak again, around the levels of the last recession. Finally, the Ford production cuts to levels not seen since the 80's are pretty ominous.
In the short run, liquidity and sentiment rule. In the long run sales,production,inflation i.e. fundamentals determine sentiment. Homes are not selling, autos are not selling, inventories are piling up. The growth rate of retail sales are slowing. When Ford says they are going to cut production 20% for the rest of the year, it is not a transitory event. Just like high oil prices it will have slow but grinding effect on the economy.
How about this. The rally was propelled by a CPI a tenth of one percent lower than expected. A large drop in car prices was a big factor. Ford cut it's price on the Expedition SUV $4,000. It cut prices because sales for SUV's are falling off a cliff. Have we got the cart before the horse?
Why might then this be the beginning of the end? Well, one reason is that volume has been pretty tepid throughout this rally. Secondly, the consumer confidence figures released by the University of Michigan were weak again, around the levels of the last recession. Finally, the Ford production cuts to levels not seen since the 80's are pretty ominous.
In the short run, liquidity and sentiment rule. In the long run sales,production,inflation i.e. fundamentals determine sentiment. Homes are not selling, autos are not selling, inventories are piling up. The growth rate of retail sales are slowing. When Ford says they are going to cut production 20% for the rest of the year, it is not a transitory event. Just like high oil prices it will have slow but grinding effect on the economy.
How about this. The rally was propelled by a CPI a tenth of one percent lower than expected. A large drop in car prices was a big factor. Ford cut it's price on the Expedition SUV $4,000. It cut prices because sales for SUV's are falling off a cliff. Have we got the cart before the horse?
Friday, June 23, 2006
NEVER MIND
Wednesday's rally on FedEx earnings, FedEx being a bellwether, was quickly reversed on Thursday's, weaker leading indicators. I think by now everyone agrees the economy is going to slow, and the market is fighting about how much, how soon. Today, the takeover of Kerr-McGee, helping energy stocks of course, was offset by earnings warning of City National Bank blaming the yield curve. So the market overall is kind of sideways.
Next week doesn't look that great either, with new and existing home sales probably showing weakness, potential earnings warnings, the Fed raising rates with the potential for more hawkish rhetoric and the consumer sentiment indexes being a toss up. We will see if month end window dressing can save the day.
Next week doesn't look that great either, with new and existing home sales probably showing weakness, potential earnings warnings, the Fed raising rates with the potential for more hawkish rhetoric and the consumer sentiment indexes being a toss up. We will see if month end window dressing can save the day.
Wednesday, June 21, 2006
UP UP AND AWAY
What I believe the market is telling us today, is that in spite of higher rates and oil and a slowdown in housing, if you stay away from homebuilders and automakers, earnings are good, and projected to stay good. Most companies are doing very well and think they will continue to do so in spite of the gloomy macro economic background. That's the spin today and can continue to be until the next bad economic number or earnings warning.
In my view it's a bear market bounce, but it can carry further. We are up about 1 1/2% today and it could go another 1 1/2-3% . At that point I'd certaintly start putting out some shorts again.
Life is so much easier as a bull. The market went up for four months and gave up all its gains in May. That is typical. Markets fall faster than they rise. In this example, everyone wound up at zero returns, but the bear had one month of bliss and four months of agony while the bull enjoyed the reverse, four months of bliss and one month of agony.
In my view it's a bear market bounce, but it can carry further. We are up about 1 1/2% today and it could go another 1 1/2-3% . At that point I'd certaintly start putting out some shorts again.
Life is so much easier as a bull. The market went up for four months and gave up all its gains in May. That is typical. Markets fall faster than they rise. In this example, everyone wound up at zero returns, but the bear had one month of bliss and four months of agony while the bull enjoyed the reverse, four months of bliss and one month of agony.
Thursday, April 20, 2006
NEW HIGHS
Well the S&P set a new intraday high today after another big rally on the Fed minutes. The market and earnings tell us in spite of all the potential negatives it's all good. Oil averaged roughly $62 this quarter and another quarter of double digit earnings are unfazed. Bond yields are up 75 basis points and that hasn't been much of an issue either, except for slowing housing a little. The Fed tells us the economy can handle a housing soft landing though. We obviously haven't reached a tipping point yet.
It looked to me like the run to new highs today was to blow out the stops at the 5yr highs and it is not uncommon for highs to be made right around option expiration day, which is tomorrow.
A tipping point is close I believe because even though oil is not at an inflation adjusted high, it is higher on an inflation adjusted basis than anytime but once. And even though the 10yr yield is low by 80's standards, an index of inflation adjusted oil and inflation adjusted 10yr yields I deep has never been higher except for the early 80's. True stocks began their long bull market about then but they were propelled by the Regan massive tax cuts, and the trends in inflation and interest rates were sharply down albeit from much higher levels. Today both are moving higher. Perhaps even more important, back then we were much less leveraged. Total government debt of GDP was half of what it is today and the consumer debt ratios were 20% lower with a savings rate of 10% versus 0% today.
A tipping point could come tomorrow or wait until the dangerous months of Sep and Oct. Obviously the Fed raising rates 15 times has been good for the market as it implies robust fundamentals. It;s when they are thinking of easing that we need to be worried.
It looked to me like the run to new highs today was to blow out the stops at the 5yr highs and it is not uncommon for highs to be made right around option expiration day, which is tomorrow.
A tipping point is close I believe because even though oil is not at an inflation adjusted high, it is higher on an inflation adjusted basis than anytime but once. And even though the 10yr yield is low by 80's standards, an index of inflation adjusted oil and inflation adjusted 10yr yields I deep has never been higher except for the early 80's. True stocks began their long bull market about then but they were propelled by the Regan massive tax cuts, and the trends in inflation and interest rates were sharply down albeit from much higher levels. Today both are moving higher. Perhaps even more important, back then we were much less leveraged. Total government debt of GDP was half of what it is today and the consumer debt ratios were 20% lower with a savings rate of 10% versus 0% today.
A tipping point could come tomorrow or wait until the dangerous months of Sep and Oct. Obviously the Fed raising rates 15 times has been good for the market as it implies robust fundamentals. It;s when they are thinking of easing that we need to be worried.
Friday, April 07, 2006
WANT TO KNOW WHAT HAPPENED TODAY
Seems as if everyone one on CNBC is perplexed by what happened to the rally today.
Here is what happened. The market opened higher. The S&P traded as high as 1314.07. The five year high was 1315.93 reached the week of 5/25/01 on a spike. Bonds also initially traded higher and then reversed. The high yield on the 10 yr was reached the week of 6/18/04 at 4.88%. When the bonds broke through that ceiling decisively on their way to 4.95% and the S&P at 5 year resistance, you can bet trading models picked that up all over the world and hence program selling began. That doesn't even take into account that the market was ripe for profit taking on weak fundamentals of higher oil prices, and lackluster retail and auto sales.
Wednesday, March 22, 2006
POSITIVE SPIN
Let's try to put a positive spin on all the things I worry about. After all to climb a wall of worry is a good thing. My worries fall primarily into three categories, the economy, geopolitical, and the market itself.
Economy-
Interest rates- we are in our 4th year of rising rates, but don't worry they are still historically not high, so the market can still move forward. Hey I heard it on CNBC.
yield curve - Its flat to inverted but this time is different Bernanke told me so.
Housing is slowing down, along with prices, but the Fed said the economy can withstand a housing slowdown.
Sales- they have been weak, as stated in housing, autos , and most recently retail sales, but we are not at a danger point yet.
International rate hikes- Both the ECB and the Bank of Japan have snugged up monetary policy and as a result global liquidity is being reduced. The tightening is occurring from such a low level that it's not a problem.
Market-
We are overbought, but I guess we can get more overbought.
Mutual Fund cash is at record low levels so buying power is lacking. But,the little guy is coming back into the market.
Leadership- Some of the bellwethers have been shot down, Google and Intel to name two.
Others will emerge.
Insider selling is very high, especially in semiconductors. The little guy is buying.
NDX short interest is at very low levels, not much buying power left from short covering.
The little guy is buying.
Volume is low. It will pick up as soon as we break through the highs.
Block trades are way off signaling a lack of institutional participation, but you guessed it , the little guy is buying.
This is one of the longest periods ever without at least a 10% correction. So what.
Geopolitical-
Iraq- deteriorating into civil war. I remember when we turned over more responsibility to
ARVN the South Vietnamese regulars. It was the beginning of the end. Maybe it will force us out of there sooner.
Bird flu- the northern migration of wild birds should bring it to our shores soon. Think of all the pharmaceutical stocks that will benefit.
Iran- no end in sight to that confrontation. At least it's not in the headlines every day.
Trade - Senator Schummer is in China trying to get them to revalue their currency and threatening to slap a 27% tariff on their imports if they don't. If he does, that will thrash the dollar which will be extremely good for multinational earnings.
Economy-
Interest rates- we are in our 4th year of rising rates, but don't worry they are still historically not high, so the market can still move forward. Hey I heard it on CNBC.
yield curve - Its flat to inverted but this time is different Bernanke told me so.
Housing is slowing down, along with prices, but the Fed said the economy can withstand a housing slowdown.
Sales- they have been weak, as stated in housing, autos , and most recently retail sales, but we are not at a danger point yet.
International rate hikes- Both the ECB and the Bank of Japan have snugged up monetary policy and as a result global liquidity is being reduced. The tightening is occurring from such a low level that it's not a problem.
Market-
We are overbought, but I guess we can get more overbought.
Mutual Fund cash is at record low levels so buying power is lacking. But,the little guy is coming back into the market.
Leadership- Some of the bellwethers have been shot down, Google and Intel to name two.
Others will emerge.
Insider selling is very high, especially in semiconductors. The little guy is buying.
NDX short interest is at very low levels, not much buying power left from short covering.
The little guy is buying.
Volume is low. It will pick up as soon as we break through the highs.
Block trades are way off signaling a lack of institutional participation, but you guessed it , the little guy is buying.
This is one of the longest periods ever without at least a 10% correction. So what.
Geopolitical-
Iraq- deteriorating into civil war. I remember when we turned over more responsibility to
ARVN the South Vietnamese regulars. It was the beginning of the end. Maybe it will force us out of there sooner.
Bird flu- the northern migration of wild birds should bring it to our shores soon. Think of all the pharmaceutical stocks that will benefit.
Iran- no end in sight to that confrontation. At least it's not in the headlines every day.
Trade - Senator Schummer is in China trying to get them to revalue their currency and threatening to slap a 27% tariff on their imports if they don't. If he does, that will thrash the dollar which will be extremely good for multinational earnings.
Thursday, March 09, 2006
MCDONALD'S
Earlier this week McDonald's reported February sales. Same store sales were up 4.7%, total sales up only 3%. Sofar this year SSS were up 5.7% in Jan and the 4.7% last month, This is the best back to back SSS increase since 2004 but the stock didn't react, and in fact has been acting week for a month. What gives? Total sales growth has been slowing significantly and persistently throughout 2005. Read my posts on 1/25 and 8/15/05 for background. It is now picking back up but the stock gets no benefit. Analysts have the first quarter earnings at .48 a share, about the same as last quarter, although last qtrs .48 included .015 impairment charge for South Korea, but was fairly clean otherwise. 2005 quarterly numbers have been a quagmire to sort out because of impairment charges, repatriation of overseas profits, large tax benefits, etc, making it easy to obfuscate the underlying trends.
To make .48 last quarter, they had 5.235 billion in revenues, which by the way was the first sequential revenue drop in a 4th quarter since 2002. With two months under our belts and total sales growth was 4.2% in Jan and 3% in Feb yoy. Total revenues are always a bit higher than the sales numbers they announce monthly because they do not include affiliated restaurants like Boston Market. So lets assume next month totals sales spurt to 5% and avg 4% for the quarter, throw in another 1% for Boston Market and say total revenues will be up 5% forma year ago. Last year's 1st qtr revenues were 4.8 bil, so a 5% increase would take them to 5.04 bil. Bottom line, I don't think they are going to make their numbers. They could miss by 2 cents. They sold some Chipolte shares and took a capital gain but that was offset with some further impairment charges. They also bought back a lot of share this quarter which will help and they could sell more Chipolte shares, but I think the street would see through that. In any event we will know in early April as they always pre-announce earnings with their monthly sales release. As an aside, I saw on Bernie Schaeffers website that the Mar 37 1/2 calls had large open interest, probably due to the earlier hedge fund interest in McDonald's. They look to expire worthless now.
To make .48 last quarter, they had 5.235 billion in revenues, which by the way was the first sequential revenue drop in a 4th quarter since 2002. With two months under our belts and total sales growth was 4.2% in Jan and 3% in Feb yoy. Total revenues are always a bit higher than the sales numbers they announce monthly because they do not include affiliated restaurants like Boston Market. So lets assume next month totals sales spurt to 5% and avg 4% for the quarter, throw in another 1% for Boston Market and say total revenues will be up 5% forma year ago. Last year's 1st qtr revenues were 4.8 bil, so a 5% increase would take them to 5.04 bil. Bottom line, I don't think they are going to make their numbers. They could miss by 2 cents. They sold some Chipolte shares and took a capital gain but that was offset with some further impairment charges. They also bought back a lot of share this quarter which will help and they could sell more Chipolte shares, but I think the street would see through that. In any event we will know in early April as they always pre-announce earnings with their monthly sales release. As an aside, I saw on Bernie Schaeffers website that the Mar 37 1/2 calls had large open interest, probably due to the earlier hedge fund interest in McDonald's. They look to expire worthless now.
Thursday, March 02, 2006
The markets rally over the past month that recaptured the highs of the beginning of the year was largely driven by lower oil prices. Most other rallies over the past several months were driven by the Fed is almost done mantra. Today we have a real trifecta weighing on the markets. Bond yields are at their highs for the year, oil is back over $62, and retail sales were softer. I won't go into it now, but final demand is critical to the economy, asset prices, the bond conundrum, exchange rates, etc. In that regard we saw evidence this week that it is faltering. New home sales, resales, auto sales, and today retail sales are all showing sign of softness. The housing market we've known about for a while, auto sales were already weaker last month but were obfuscated by fleet sales. Yesterday both GM and Ford said they were trimming production next quarter, so they don't see the softness going away any time soon. Walmart gave forward guidance of 1-3% for sales this month, not great either. One month does not a trend make, but it is time to keep our eyes open for the often predicted consumer slowdown.
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