News this week
- Employment
Adecco SA, the world’ s largest recruitment firm, reported a loss in the most recent quarter and said it saw continued permanent and temporary job cuts worldwide. Along these lines, the U.S. Labor Department reported that jobless claims had a very modest increase last week. Many economists believe the recession has ended; however, unemployment lags the economy. As such, we could see the economy and stock market rebound but unemployment continue to climb (at a reduced pace) for the foreseeable future.
The Federal Reserve’s Open Market Committee stated this week that “economic activity is leveling out” and “conditions in financial markets have improved further in recent weeks.” However, the Fed also realizes the housing market is just beginning to stabilize and individuals are still losing their jobs. This creates a fragile environment which resulted in the Fed promising to keep interest rates exceptionally low “for an extended period of time.”
I have read articles and spoken with professionals and business owners whom report that they are beginning to see a rebound in sales or activity. On the flip side, I spoke with a local CPA today who works with many small businesses. He stated that many of the owners he works with laugh when they hear comments about the recession ending and the economic recovery, because they sure aren’t seeing it. Only time will tell when we are permanently out of the “recessionary” woods.
- Retail sales
The U.S Commerce Department reported this week that retail sales fell 0.1% in July, as opposed to expectations of a gain of 0.8%. In addition, if you exclude auto sales which have exploded due to the “cash for clunkers” program, then retail sales declined 0.6% versus an expected gain of 0.1%. One retail analyst noted that the “cash for clunkers” program just stole sales from other retailers (i.e., food, clothing, etc.). This recession may be unlike any in recent memory and leave consumers spending ability negatively affected for some time to come.
In addition, there are concerns that the “cash for clunkers” program created even more harm to consumers by them surrendering cars with at least some residual value for debt and ownership in sharply deteriorating asset. The incentive program proves the consumer is not dead, and it has definitely revived car sales, which is a huge boost to car manufacturers, dealers and all associated employees. The big concern is what will occur to car sales once the program ends.
- Cash for Clunkers
As previously noted the government’s “cash for clunkers” program has been a huge success for car sales, and the program is being extended. The program has been so successful that it prematurely ran out of “tax credit funds” allocated to it, and many dealers have sold out their inventory. Ironically, the government program is not as “green” as you may think. I have read that some Ford F-150 trucks and Hummers are eligible for the clunker rebates, even though they are not technically “fuel efficient” vehicles. Some politicians were against extending this program since it was subsidizing purchases of non-fuel efficient vehicles. So if that is the case, why not make the program open to all vehicles.
As much as the Russian President and Prime Minister like to extol Russia’s global economic influence and how they don’t want to become “Americanized,” they are now considering a similar “cash for clunkers” program to revive their countries’ auto sales and economy.
- Technology
On a positive note, Applied Materials (the largest supplier of machines used to fabricate computer chips) stated this week that it saw for the first time in a long time positive trends in their business. This is good news since any uptick in technology companies is a sign that corporations may be beginning to spend on new equipment (i.e., computers, servers, printers, flat panel monitors, etc.).
This past quarter economists estimate that productivity rose at a 5.5% annualized pace, which is the biggest jump since the third quarter of 2003. This was mainly the result of companies laying off workers, not giving raises and taking the axe to all costs and expenses. Consider this, the Wall Street Journal reported this week that 73% of S&P 500 companies beat their earnings expectations last quarter; however, 52% of these same companies reported worse than expected revenue / sales growth. They accomplished this by squeezing costs like you squeeze the last bit of tooth paste out of the tube. At some point you can’t squeeze any more. This is why many economists, analysts and advisors have some concerns that the stock market and economy can’t continue to improve on cost cutting. At some point you need consumers and corporations to increase their spending which contributes to new sales which is the life blood for corporations and spurs new hiring which in turn increases employment and improves the overall economy and stock market.
Internationally
- Oil prices and property stocks
We all know the effects of higher oil prices – less money in our pockets. However, there can be some positive outcomes for U.S. companies and investors. The Wall Street Journal reported this week that Saudi Arabia has committed $400 billion over the next five years to build infrastructure and stimulate growth, and much of that work will be done by Western companies. This is separate of the billions of dollars targeted for infrastructure projects in the U.S.. Ironically, its neighbor, Dubai is still facing financial challenges. Dubai has become world renowned for converting its oil wealth into large luxurious malls, office buildings, etc. However, the recent decline in oil prices and world recession has caused property prices to decline up to 50%, and they have a huge debt pile they will now need to address. This means the U.S. may not be the only country offering real estate deals of a lifetime.
In Europe property stocks (i.e., real estate) have turned in a strong performance this year as a result of signs of improvement in residential properties. Analysts have expressed concerns that property stocks are becoming too expensive due to declining rents, tenant vacancies and defaults still on the rise and debt financing remaining hard to get. Just this week J.P. Morgan published a report noting that China recently reported signs that a bubble is returning. As such, some analysts think the same scenario could be playing out in Europe and that property stocks should fall back, but in the short-term they could continue to show improvement. Continued improvement in these stocks runs counter to their fundamentals.
- Bubbles on the horizon?
Both China and India have seen their stock markets rebound dramatically in 2009, and both offer good exposure to large expanding economies. That being said, there are concerns that bubbles are brewing in both markets in the short-term.
Chinese banks made a record amount of loans in the first half of this year in an attempt to stimulate their economy. This is separate of the billions of dollars the government “stimulus” funds. Now it is being reported that bank lending has decreased dramatically in the third quarter and economic growth may begin to slow down in the second half of the year.
In India “micro-financing” has been a godsend for many small business upstarts. Micro loans are loans made to individuals who have or are starting new businesses. They vary in amounts of one hundred to several hundreds of dollars and traditionally have had a low default rate. These loans have been the seed capital for many new businesses in India and allowed individuals to start a business and earn enough income to sustain their family and even grow and hire workers. All of this is good. However, something has begun to change all that.
Over the last several years, international financial firms (large and small) have flocked to India and gotten into the game. Unfortunately, in a rush to establish themselves in this market, some of these lenders have relaxed their underwriting standards and “no-doc” and “liar loans” are now taking place (sound familiar). Also, some individuals are using the loans not for business start up, but to buy TVs, pay for weddings, etc, and are even taking out multiple loans. In some cases additional loans are being taken out to cover prior loan payments.
The net result is, India is now becoming “Americanized” by speculative and irresponsible lenders and consumers. The result could be very similar to our housing bubble if it is not addressed in short order. India has great long-term economic potential for its people and investors as well, but it can be restrained by this type of speculation in the near term.
Quotes
“Value investing is a strange mix of common sense and contrarian thinking.”
Andrew Beattie, Investopedia, April15, 2009
“Most stock market indicators have never actually been tested. Most don’t work…Most investors’ time horizons are too short. Statistics indicate that day trading is largely based upon luck.”
Richard Bernstein, Merrill Lynch Strategy Update, April 14, 2009
“We’re evolving into a ‘post-levered’ financial economy which will witness intense regulation, and a redistribution of profits and wealth, most importantly, to previously disadvantaged groups, and so that’s the ‘new normal’ that in no way resembles past experience.”
Bill Gross, CNBC, April 3, 2009
Tony Moeller, President
Integrity Investment Advisors, LLC
12721 Metcalf Ave., #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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