Sunday, August 15, 2010

US Consumers' Credit Scores Rising

U.S. consumers have tightened their belts to the point where they could take on a lot more debt if they wanted it- but they don't.  The average credit score rose to 704 in July, a level not seen since the first quarter of 1998, according to data that Equifax, one of the largest U.S. credit bureaus, provided exclusively to Reuters.  That means lenders consider consumers to be improved credit risks and would be happy to have more of them as customers. Yet many consumers still seem to find debt too risky, said Dann Adams, an Equifax executive.  "Traditionally, what you see is after a recession is that consumers are the engine on the locomotive for economic growth," Adams said. "Now it looks like they're the caboose." 

The data is based on Equifax' 200 million-plus files of U.S. consumers using credit. The credit risk score forecasts the likelihood a consumer will fall 90 days or more behind on debt within two years, with 850 the highest score. The higher the score, the less likely a borrower will fall behind on debt.  A decline in debt mirrored the rise in credit scores. July saw total consumer debt outstanding fall to $10.8 trillion from a peak of $11.5 trillion in October of 2008. Consumer debt includes mortgages and credit cards.  The savings rate rose to 6.4% in June from 6.3% in May to reach the highest level since June of last year. 

"The big question is whether that money moves back into the economy," Adams said.  This protracted reluctance on the part of consumers to take out debt and spend it is unmatched in recent memory. Even after the September 11, 2001 attacks on New York City's World Trade Center, spending rebounded within four months, he said.  The United States will not see a similar upward trend until unemployment abates and home values stabilize, Adams said, adding he doubts the unemployment numbers will drop in the near-term.  In the meantime, U.S. consumers are husbanding their resources instead of spending on items big or small.

Friday, August 13, 2010

Fed Official- Low Rates a 'Dangerous Gamble'

Keeping interest rates at record lows is a "dangerous gamble" that could hurt the economy later on by unleashing inflation or new speculative bubbles, a Federal Reserve official said Friday.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, made the comments just days after dissenting with the Fed's decision to take an unconventional step to strengthen the fragile recovery by buying government debt.  Hoenig did say the economy still needs the support of ultra-low rates now. Interest rates have been at record lows near zero for nearly two years.  But he worries that keeping rates too low for too long could create problems later on. For instance, low rates could spur bubbles in the prices of commodities, bonds or other asset prices. Or, they could encourage people and businesses to take on too much debt again and overly leverage themselves, he suggested.  "If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring," Hoenig said in a speech in Lincoln, Neb.

Critics like Hoenig blame the Fed for keeping rates low for too long a period after the 2001 recession. Those low rates fed a housing bubble that eventually burst, and plunged the economy into a severe recession in late 2007, they say.  "I believe that zero rates during a period of modest growth are a dangerous gamble," Hoenig said.

James Bullard, president of the Federal Reserve Bank of St. Louis, is concerned that the weak recovery could push the United States into a deflationary period, like the "lost decade" Japan suffered through in the 1990s. Low rates help combat deflation, a widespread and prolonged drop in prices of goods and services, values of stocks and homes, and in wages.  Hoenig, however, said he sees "no evidence that deflation is the most serious threat to the recovery today."

Nonetheless, the economy's growth slowed sharply in the spring, and unemployment -- now at 9.5% -- has stayed high all year.  Low interest rates cannot solve every problem faced by the United States, he argued.  "In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long," Hoenig, said. "I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut."

CPI Rises, But Consumer Still Weak

U.S. retail sales and consumer prices rose in July in a hopeful sign for the economy.  Retail sales rose, but the gains were concentrated in auto and gasoline station sales, suggesting underlying momentum in consumer spending remains tame.  Sales climbed 0.4% last month following a revised 0.3% drop in June, the Commerce Department said on Friday.  Economists polled by Reuters had been looking for a slightly firmer 0.5% gain.

Excluding vehicles, sales advanced just 0.2% compared with a median forecast of 0.3%. Gasoline station receipts, which sometimes reflect price rises rather than increased demand, jumped 2.3%. When autos and gasoline were stripped out, sales actually fell 0.1%.

After emerging from its longest slump since the Great Depression, the U.S. economy has slowed in recent months, raising fears of a "double-dip'' recession. Retail sales are a key component of growth for a country where consumer spending makes up about two-thirds of total economic activity.

US Consumer Prices Rise 0.3% in July
Higher energy costs helped lift U.S. consumer prices in July, the first rise in four months, according to a government report on Friday that could ease concerns about deflation.  The Labor Department said its seasonally adjusted Consumer Price Index rose 0.3% last month, after falling 0.1% in June.  Analysts polled by Reuters had forecast consumer prices to rise 0.2%.

In the 12 months to July, the consumer price index rose 1.2%, in line with market expectations, after rising 1.1% in June, the report showed.

Thursday, August 12, 2010

Take a Look at the Fertilizer Names

Today, the US Department of Agriculture release a report that said there is a shortage of crops in the United States.  This could potential be a huge opportunity for the fertilizer names, which was a sector that turned positive this afternoon.  This is a bullish sign for the sector, and based on this report, I expect there to be much more upside for the fertilizer companies.  The three companies I like are:
          Monsanto (MON)
          Potash (POT)
          Mosaic (MOS)

A more 'close to home' name that I like is Scott's Miracle-Grow (SMG).  SMG announced earnings this week, reporting a quarterly net income of $175.9 million, or $2.65/share, from $147.8 million, or $2.27/share in the year-ago period.  Analysts expected a profit of $2.44/share.  The company also announced plans to buy back $500 million shares over the next four years and doubled its quarterly dividend to $0.25/share. "Our business and cash-flow are strong, our balance sheet is healthy and our low debt-to-EBITDA level gives us tremendous flexibility in managing our business," said Cheif Executive Jim Hagedorn in a note. Looking ahead, SMG reiterated its full-year earnings forecast of $3.25 to $3.35 cents a share.

Company Symbol Stock Price 52 wk Range
Monsanto MON 57.17 44.61-87.06
Potash POT 111.9 83.75-128.42
Mosaic MOS 51.29 37.68-68.28
Scott's Miracle-Grow SMG 47.94 37.50-49.58

Stocks Slip on Bad Earnings

Technology companies led the stock market to its third straight loss Thursday after Cisco Systems' (CSCO) earnings report raised more questions about the economy.  The Dow Jones is down 80 points in afternoon trading.  The NASDAQ composite index had a steeper loss in percentage terms, a reflection of the drop in tech stocks.  Analysts said many traders were on vacation, and the market's resulting light volume helped skew price changes. 

Cisco Systems Inc.'s revenue from its latest quarter and its forecast for future revenue both fell short of analysts' expectations.  The company's stock fell almost 10% and other tech stocks also fell.  Investors have been focused on revenue since companies began reporting second-quarter earnings almost a month ago.  They're concerned by the connection between revenue and the economy -- if revenue is down, it's a sign that consumers' reluctance to spend is starting to affect companies' sales and profits. Investors see the revenue shortfalls as another sign of a weakening recovery.

Sara Lee Corp.'s (SLE) revenue also missed analysts' forecasts. And retailer Kohl's (KSS) disappointed the market by lowering its earnings outlook because it expects sales to slow during the second half.  That period includes the holiday season, when retailers hope to make a large part of their profits.

Stocks extended their losses from Wednesday, when the Dow fell 265 points as investors reacted to the Federal Reserve's lowering of its assessment of the recovery on Tuesday. Economic data from several countries including the U.S. contributed to the heavy selling.  Investors don't have a sense of whether the recovery will hold. The uncertainty has led to big losses, but many traders are staying out of the market and not making any moves. That has made trading volume even lighter than usual during July and August, when vacations leave trading desks thinly staffed.

Charlie Smith, chief investment officer with Fort Pitt Capital Group in Pittsburgh, predicted few major market moves for the rest of the month because so many key market players are away.  Smith said the market's drop over the past few months was due more to investors' more negative outlook rather than a fundamental change in the economy.  "We had a weak recovery back in March and April," Smith said. At that point, the market was moving toward its post-financial crisis high. Stocks began falling after the major indexes peaked in late April.

More Bad Unemployment Data

The number of people filing new claims for unemployment insurance unexpectedly rose in the latest week to its highest level in close to six months, a fresh signal of a weak jobs market.  The number of new claims for jobless benefits rose 2,000 to 484,000 in the week ended Aug. 7, the second straight increase, Labor Department data showed on Thursday.

The four-week moving average, which economists prefer because it smoothes out weekly fluctuations, rose 14,250 to 473,500, also the highest level since the week ended February 20th.  Economists polled by Reuters had expected claims in the latest week to fall to 465,000 from the previously reported 479,000.

The number of people still collecting unemployment benefits after an initial week of aid in the week ended July 31st  fell 118,000 to 4.45 million, the lowest level since late June.  Economists had expected 4.53 million. The four-week moving average of continuing claims fell 64,500 to 4.52 million, the lowest level since December 2008.

Wednesday, August 11, 2010

Did the Fed Mess Up?

Stocks stumbled Wednesday in an apparent rebuke of the Fed's announced plans to start using proceeds from mortgage- and agency-backed principal payments to buy U.S. Treasuries.  In recent trading, the Dow was down 269 points and the S&P was off 2.8% amid notable weakness in big-cap financials like Citigroup and JPMorgan, tech stocks like Intel and industrial names like Ford and GE.

Dan Greenhaus, chief economic strategist at Miller Tabak, and Michael Pento, senior economist at EuroPacific Capital, don't agree on much, but they do agree the Fed's announcement yesterday was a mistake.
"The Fed acknowledged that GDP growth was slowing," Pento says. "However, their symbolic move isn't really going to do much to boost economic growth."  Greenhaus agrees the Fed needs to do more if they really want to boost the economy but notes negative economic data is also weighing on the market today, including:
  • A day after its trade surplus rose to an 18-month high, China reported industrial production slowed in July, as did urban fixed-asset investment.
  • Japan machine tool orders rose a weaker-than-expected 1.6% last month.
  • The U.S. trade deficit rose 19% in June to $49.9 billion, its highest level since October 2008.
The 3% rise in U.S. imports last month is arguably a bullish sign of a recovering consumer, as were the stronger-than-expected results from Macy's. But a higher trade deficit subtracts from GDP because "we don't measure gross domestic consumption, we measure gross domestic product," Pento says. "The fact that consumers are borrowing more to consume more is not something we should cheer about."  Pento also argues the market is weak today because the Fed "put an anchor" around the dollar by announcing its plans for a second round of quantitative easing.

Greenhaus disagrees with Pento on the impact of a weaker dollar - in the short term - setting up a broader debate about the value and utility of government stimulus, which you'll see in an upcoming segment.

Lower Open Gives Opportunity

This morning, the market is selling off ue to concerns of a global slowdown (read post below for details).  This decline has created a good opportunity to get into two companies that reported great quarters and are trading much lower than they should be just because the broader market is down big today.  These two companies are Macy's (M) and Disney (DIS).

Macy's (M)- Macy's net income rose to $147 million, or $0.35/share, from $7 million, or $0.02/share, in the year-earlier period, which included $0.18/share in restructuring charges. The company raised its full-year profit outlook to $1.85 to $1.90 a share from a previous forecast of as much as $1.80 a share. Also, and more importantly, Macy's management talked about taking market share from their competitors.  This is huge, and no one seems to be talking about this statement.

Disney (DIS)- Disney reported a net income of $10.0 billion, or $0.67/share vs what analysts expected of $9.34 billion, or $0.59/share.  Disney said the media networks revenue rose 19% to $4.70 billion and studio entertainment revenue rose 30% to $1.6 billion. Also, cable networks revenue rose $561 million to $1.70 billion and parks and resorts revenue rose 3% to $2.80 billion.  This was a great quarter for Disney, and ESPN has shown a huge improvement in ad revenue. 

Company Symbol Stock Price 52 wk Range
Macy's M 20.32 14.01-25.25
Disney DIS 34.37 24.89-37.98

Market Sharply Lower at Open

U.S. stocks opened sharply lower Wednesday after weak manufacturing data out of China and a gloomier assessment of the economy from the U.S. Federal Reserve.

The Dow Jones Industrial Average (DJIA) was down 200 points, or nearly 2%, at the open, after shedding 0.5 percent in the previous session.  All 30 Dow components were lower at the start, led by DuPont (DD), Disney (DIS), and Cisco (CSCO).

The pace of growth in Chinese investment and factory output slowed in July, raising worries about the nation's economy, which has been expected to drive the global recovery. Retail sales were also softer than expected.  In U.S. economic news, trade deficit widened more than expected to 18.8% in June on a surge of consumer goods from China and other suppliers, while U.S. exports fell, a government report showed on Wednesday.  Mortgage purchase and refinancing applications, meanwhile, rose by less than 1% in the first week of August, even as 30-year loan rates fell to 4.57%, the lowest in 20 years of record keeping by the Mortgage Bankers Association. 

European stocks were down  in morning trade, led lower by banks such as Societe Generale and UBS, while the Nikkei index fell 2.7%, suffering its worst session in nearly a month as a stronger yen deepened worries about the longer-term prospects for Japan's economy. 

The dollar fell to an eight-month low versus the yen on Wednesday as traders pared back on risk following the decision from the Fed to invest proceeds from mortgage backed securities into government debt.

Tuesday, August 10, 2010

Fed Signals More Easing

The Federal Reserve on Tuesday took fresh steps to lower borrowing costs amid a softening economic recovery, announcing it would use proceeds from its maturing mortgage bonds to buy more government debt.  The decision to reinvest proceeds from the more than $1.3 trillion in mortgage-related debt the Fed holds, an effort to keep market-set borrowing costs down, represents a significant policy shift.  Just a few months ago, the central bank had been avidly debating an exit strategy from the extraordinary stimulus delivered during the financial crisis.

"To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the Fed said in a statement.  The move was somewhat surprising.

Although many analysts and investors had expected the Fed to announce it was reinvesting the mortgage proceeds, most had thought it would buy more mortgage debt instead of government bonds.
Some analysts believe the Fed will end up having to go further in coming months and restart its shuttered program of outright asset purchases.

"The Fed is a step closer to reviving its program, but it will likely take somewhat slower growth to push it off the fence," said Sal Guatieri, senior economist at BMO Capital Markets.  The Fed also left benchmark overnight interest rates steady in a zero to 0.25% range, and renewed its pledge to keep them low for an extended period.

Treasury Yields Continue to Fall

In the latest battle over who does a better job of forecasting market movements, bonds are nearing a strong signal that a bear market for stocks is right around the bend.  Since hitting its most recent high yield of 4.01% on April 5, the 10-year Treasury bond has slid nearly 1.20 percentage points, a metric that signaled in 1990, 2000 and 2007 that a steep drop in stocks was only two months away, according to research from Gluskin Sheff strategist David Rosenberg.

With the 10-year yield at 2.82% in early Tuesday trading and the bond market still red-hot despite continued predictions of its demise, the big bear indicator is looming large.  "Declines of this magnitude very often presage the onset of bear markets and recessions," Rosenberg says.  "Typically, equities and then economists are late to the game...What is key to note is that the bond market is the tail that wags the stock market's dog—it leads."

Whether the bond market again is foretelling a bear market—a 20% drop in stocks from the most recent high—is part of a long-running debate over who does a better job forecasting—stock or bond investors.  Conventional wisdom is that bond investors tend to be more conservative and thus less influenced by fear and greed. That's cited as the reason by some that the bond market does a better job of getting the economy right.  "With all due respect to the stocks guys, the bond guys, when it comes to the economy, tend to sniff things out a little earlier and eventually get things right," says Mike Larson, analyst at Weiss Research. "Bond yield levels have given you key insight into what's going on in the economy. The verdict in my mind is pretty unmistakable."
The concern over what bond market movements portend for the economy come as Wall Street awaits word from the Federal Reserve on what its plans are to juice the economy. The FOMC meets Tuesday to discuss rates and possible future quantitative easing measures, though some think the central bank has become less an influence after three years of aggressive policy moves.

In the meantime, economic signs, particularly in employment and consumer and business sentiment, are progressively weakening, indicating that if deflation is not on the horizon, then strong economic growth is unlikely either.

Productivity Declines- Economy Slows

U.S. non-farm productivity declined for the first time in 1-1/2 years during the second quarter this year and labor costs barely edged up, according to a Labor Department report on Tuesday that underlined a slowing pace of economic recovery.  Productivity declined by an annual rate of 0.9% after rising at a revised 3.9% rate in the first quarter, the first time since the fourth quarter of 2008 that output per worker fell.  Analysts surveyed by Reuters had forecast that productivity, a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it, would expand at a 0.2% annual rate in the second quarter and that unit labor costs would rise 1.3%.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, edged up at a 0.2% annual rate after shrinking at a revised 3.7% rate in the first three months this year.  The weak productivity figure is in line with other broad signs that the economic recovery is losing momentum. The overall economy grew at only a 2.4% annual rate in the second quarter, down from a 3.7% rate in the first quarter.

Fed policymakers were holding a one-day meeting on Tuesday to consider interest-rate policy, but with rates already near zero the speculation was that the U.S. central bank may be mulling other fresh steps to stimulate the economy amid signs that inflation poses little or no current risk.

Monday, August 9, 2010

Tuesday's FOMC Meeting- Much Anticipated

The Fed holds its regular, one-day meeting Tuesday and is expected, as always, to release a statement at around 2:15 p.m. But what it will say in that statement is at the heart of a debate among Wall Street's deeply divided economists over what steps, if any, the Fed will take.  One view is that the Fed will embark on a new quantitative easing program, by reinvesting the proceeds of its maturing mortgage securities in Treasuries, or even more mortgages. Another group does not think the Fed would make such a move unless the economy significantly worsens later on. Yet, they all agree the Fed could give a nod to a weakening economy.

"That's the only story tomorrow," said Knight Equities managing director Peter Kenny of the Fed meeting.
"Earnings season" is winding down, and now the focus is going to revert back to the economy and frankly that's not particularly good," said Kenny. There are a few pieces of economic news ahead of the Fed meeting, including the NFIB small business survey at 7:30 a.m.; productivity and costs, at 8:30 a.m., and wholesale trade at 10 a.m.

Fed Could Downgrade Outlook for US

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.  Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth.

Smaller measures to help the economy could initially take the form of a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank, thereby preventing the Fed’s balance sheet from shrinking naturally.

Investors will also examine closely any changes to the pledge made by the FOMC in June to “employ its policy tools as necessary to promote economic recovery and price stability”, which could be hardened if policymakers choose to signal the potential for more aggressive move to boost the economy in the future.  But even if that happens, most economists believe that it would take several more months of poor data for the Fed to actually begin a new round of asset purchases on the scale of those carried out during the recession. 

In congressional testimony last month, Ben Bernanke noted “unusual uncertainty” in the economic outlook and in a speech last week the Fed chairman warned of a “considerable way to go” before the US achieves a full recovery.  Although Fed policymakers still believe the basic trajectory of the economy remains one of moderate expansion, there may be more attention given to heightened dangers of a sharp slowdown.

SKT and FDO Will Continue Higher

After we learned on Friday that unemployment has not really turned around yet, we need to look for companies that will prosper in a weaker economy.  Tanger (SKT) and Family Dollar (FDO) are two names that come to mind, and both happen to be at 52 week highs.

Tanger Factory Outlet Centers (SKT)- The company is a fully-integrated, self-administered and self-managed real estate investment trust, which focuses on developing, acquiring, owning, operating and managing outlet shopping centers.  SKT had good Q2 results and has raised their dividend 17 consecutive years.  The company will continue to do well because consumers still want name brand items, but they cannot afford the name brand prices.  This is when outlets thrive.  Outlet are a way for companies to get rid of excess inventory, at very reduced prices.

Family Dollar (FDO)- The company operates a chain of more than 6,600 general merchandise retail discount stores in 44 states, providing consumers with a selection of merchandise in neighborhood stores. The Company’s merchandise assortment includes consumables, home products, apparel and accessories, and seasonal and electronics.  Out of all the dollar stores I think this is the 'best of breed'.  FDO recently announced Q3 earnings of $0.77/share compared with $0.62/share just one year ago.  Family Dollar is taking all the right steps to continue this great growth.  Although the dividend is small, FDO did raise it 15% this year, which is also a very positive sign.

Company Symbol Stock Price 52 Week Range
Tanger SKT 45.27 33.79-46.51
Family Dollar FDO 42.00 25.52-42.49

Saturday, August 7, 2010

Why Market Rallied Friday

Why, after such a bad jobs report on Friday (check out August 6th post for jobs report) did the broader market rally 1.3% off its lows of the day?  The numbers missed analysts' expectations and the unemployment rate sits at 9.5%.  What could possibly be positive about this?

My answer to why the market rallied has nothing to do with the economy; rather, it deals with the amount of cash that companies have on their balance sheets.  The financial crisis allowed companies to issue debt, in the form of corporate bonds, at very low interest rates.  Also, companies were able to take out large long term loans from banks at unbelievably low interest rates.  This means that companies were able to raise tens-of-billions of dollars at a low cost to the company.

Companies have spent very little of this money, and shareholders are starting to get angry that they are not putting this money to work.  I feel that companies will start to do one or two of the following three techniques to increase shareholder value, which would raise the stock price, and overall stock market.
          1.  Announce a dividend increase
          2.  Announce a share buyback program
          3.  Acquiring competitors
In my opinion, in the next couple months, the market will rally on large down days because investors think that these announcements could be coming soon, so they are buying on the dips. 

Currently, the economy is still sick, but the stock market (in particular companies' balance sheets) is rather healthy.  No one knows for sure how long the unemployment rate will remain at this level, but based on the health of the stock market, I think that you can buy the dips.  Make sure you stay in high quality companies with consistent growth.

H.P. Board Ousted CEO on Friday

Mark V. Hurd, who turned Hewlett-Packard (HPQ) into the world’s largest technology company on the back of fierce fiscal discipline, has been ousted from his post for the lowliest of corporate offenses — fudging his expenses.

H.P.’s board stunned Silicon Valley and Wall Street late Friday by announcing Mr. Hurd’s resignation as chairman and chief executive of the computing and printing giant, involving what it said was a “close personal relationship” with a contractor who helped with the company’s marketing. 

The woman’s lawyer contacted the company in late June, charging sexual harassment. While the directors were investigating that charge, they found inaccurate expense reports that covered payments made to the woman. The directors said, however, that the sexual harassment charge was unsubstantiated.  The board charged that Mr. Hurd, 53, failed to disclose his use of company funds. It urged Mr. Hurd to resign, but he balked and offered to compensate the company for the disputed funds, said to range from $1,000 to $20,000, according to a person close to Mr. Hurd who was briefed on the situation but was not authorized to speak publicly.  The board, however, insisted. “This was a necessary decision,” said Marc L. Andreessen, a venture capitalist and a director.

Mr. Hurd’s actions “showed a profound lack of judgment,” said Michael Holston, executive vice president and general counsel whom Mr. Hurd had brought into the company in 2006 after he investigated a boardroom scandal involving company spying on board members, employees and journalists. That investigation ended with the resignation of the company’s chairman and the elevation of Mr. Hurd.

Friday, August 6, 2010

Jobs Data Not Pretty

U.S. employment fell for a second straight month in July as more temporary census jobs ended while private hiring rose less than expected, pointing to an anemic economic recovery.

Non-farm payrolls fell 131,000 the Labor Department said on Friday as temporary jobs to conduct the decennial census dropped by 143,000.  Private employment, considered a better gauge of labor market health, rose 71,000 after increasing 31,000 in June. In addition, the government revised payrolls for May and June to show 97,000 fewer jobs than previously reported.  Analysts polled by Reuters had forecast overall employment falling 65,000 and private-sector hiring increasing 90,000.

The unemployment rate was unchanged at 9.5% in July for a second straight month, just below market expectations for a rise to 9.6 percent. The steady jobless rate largely reflected a drop in the labor force as discouraged workers gave up the search for jobs.

Job growth has taken a step back after fairly strong gains between February and April, putting in jeopardy the economy's recovery from its worst downturn since the 1930s.  Growing unease over the health of the economy is weighing on President Barack Obama's popularity and hurting the Democratic Party's prospects of keeping control of Congress in November's mid-term elections.

The state of the labor market is one of the factors that will determine the timing of the Federal Reserve's first interest rate rise since reducing overnight lending rates to near zero in December 2008.

Thursday, August 5, 2010

Important Job's Report Tomorrow, August 6th

US private sector employers likely added about 100,000 jobs in the month of July, but a new round of state and local government layoffs may add new weight to the jobless rate.

Economists expect the loss of 65,000 non-farm payrolls and a slightly higher unemployment rate of 9.6%, when the July employment report is released at 8:30 am Friday. Within that number, they expect to see the reduction of more than 100,000 temporary workers hired for the US census, but there may also be tens of thousands of new job losses among state and local government workers.

"We could get some surprises because we're starting to get the pink slips at the state and local level," said Diane Swonk, chief economist at Mesirow Financial. Swonk said there are estimates that local governments could furlough as many as 500,000 workers in the next two years. 

Economists say this is the time of year, typically, when public school teachers are let go; and that number will be much larger than usual this year. The teachers will also be joined by other state and municipal workers, as local governments struggle with budget shortfalls. 

Barclays Capital chief US economist Dean Maki expects to see 30,000 state and local government layoffs, but he also expects the private sector to add 125,000 workers. His estimate is for a total loss of 50,000 payrolls, including 145,000 from the decline in census workers.   "There is still a lot of caution among firms, and worries about whether this is going to be a sustainable recovery. As those concerns fade, we believe the numbers will be firming. We look for job growth in the fourth quarter of 150,000 in total and next year, we expect it to be averaging more than 200,000 per month," said Maki. 

Job creation has been one of the biggest disappointments in the current recovery, and economists expect to see a continued drag on the consumer until hiring picks up.

Buy Whats Working- Auto Parts Stores

Although the stock market is much higher than its recessionary lows of March 2009, the economy has yet to really follow suit.  The unemployment rate maybe off its recent high of 10.6%, but it still sits at 9.6%- far from good.  For this reason, the auto parts stores have done extremely well the past couple of years.  This is for two main reasons.  First, the consumer is now starting to fix their own vehicles.  Car owners can save a lot of money by performing simple tasks, like changing the oil, as compared with taking the car into a service center.  Second, people cannot afford to purchase a new or better used car; so, they are forced to continually fix their broken down cars.  I do not see this trend ending anytime soon.  Even if the unemployment rate turns around, people will still continue to do the DIY work because they saw how much money they saved.  There is a reason that all auto parts stores' stock prices are near a 52 week high.  The consumer is not totally dead, they are just being very selective on how and where they spend their money.  In my opinion, the consumer will continue to buy from the auto parts stores as a way to save money.

My favorite plays are AutoZone (AZO), O'Reilly Automotive (ORLY), and Advanced Auto Parts (AAP). 

Company Symbol Stock Price 52 wk Range
AutoZone AZO 205.76 135.13-213.65
O'Reilly Automotive ORLY 47.75 33.61-51.70
Advanced Auto Parts AAP 53.36 36.11-55.78

Wednesday, August 4, 2010

42,000 Private Sector Jobs Added in July

The private sector created 42,000 jobs in July, helped primarily by a big surge in the service sector, a report Wednesday from ADP and Macroeconomic Advisors showed.  The ADP calculations coupled with another report showing layoff activity slowing helped to provide a slightly more optimistic picture of the US jobs market.  Planned layoffs rose 6% in July to 41,676, but downsizing activity stayed at its lowest level since before the 2001 recession, global consulting firm Challenger, Gray & Christmas said Wednesday.
Job cuts remain well below the pace of last year, with the total for July about 57% lower than planned layoffs announced in the year-ago period.  Overall, there are 64% fewer job cuts announced so far this year—339,353—compared with the planned layoffs recorded in the first seven months of last year, according to Challenger, Gray & Christmas.  "It is true that job cuts have increased in each of the past three months," John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement.  "However, the increases are so slight and the monthly totals so low when compared to recent years, that the trend in no way suggests a reversal of the significant slowdown in job-cut activity witnessed over the past year."

The government was the biggest sector to shed jobs for the fourth time in 2010. It announced plans to lay off 7,193 workers last month, 36% higher than in June.  "This sector has the biggest potential for additional job-cut spikes between now and the end of the year," John Challenger said.  

The government and non-profit sector plans to eliminate 105,969 jobs this year. The second-biggest job-cutting sector is the pharmaceutical industry, with 37,010 cut planned, 30% lower than in the first seven months of 2009.

Info from

Tuesday, August 3, 2010

Pending Home Sale Down 2.6% in June

Contracts for pending sales of previously owned U.S. homes fell to a record low in June as buyers sat on the sidelines, a survey from the National Association of Realtors showed on Tuesday.  The Realtors said its Pending Home Sales Index, based on contracts signed in June, fell to a record low 75.7 from a revised 77.7 in May. Economists polled by Reuters had expected a rise of 0.6%.

"We really need to see stronger job creation to have a meaningful recovery in the housing markets," said NAR chief economist Lawrence Yun, adding "there could be a couple of additional months of slow home-sales activity before picking up later in the year" if the job market improves.

The June decline followed a 30% drop in May after a popular tax credit expired at the end of April.  The index was 18.6% lower than in June 2009 and fell in three of four regions compared to the prior month.  Contracts rose 3.7% in the South, the country's largest region, but dropped by 0.2% in the West, by 12.2% in the Northeast and by 9.5% in the Midwest. 

Procter & Gamble Earnings Miss

Procter and Gamble's (PG) fourth-quarter net income fell 12 percent, while sales rose as the maker of Tide and Pampers stepped up marketing and new product development, and PG projected more sales growth for the year ahead.

The company says it has been spending more on innovation and marketing. It has boosted sales in a tough economy with price cuts, cheaper versions and upgraded premium products of its big-name brands, and more advertising.  Foreign exchange impacts also undercut profits in the quarter, PG reported Tuesday.

The Cincinnati-based consumer products giant says it earned $2.2 billion, or 71 cents per share, down from nearly $2.5 billion, or 80 cents a share, a year prior. Revenue increased 5 percent to $18.9 billion. Analysts expected 73 cents a share on $19.1 billion in revenue.  Organic sales, a key measure that excludes currency fluctuations, acquisitions and other such changes, grew 4 percent for the quarter and 3 percent for the year.
PG totaled $78.9 billion in sales for its fiscal year, up 3 percent. PG expects more sales growth in the coming year, projecting organic sales up 4 to 6 percent with net sales up 2-4%
The company expects earnings in a range of $3.91 to $4.01. Analysts surveyed by Thomson Reuters expect $3.98 on average. For the current quarter, P&G expects revenue to grow between 1 and 3 percent.
Adjusted for discontinued businesses, acquisitions and foreign exchange effects, it expects revenue to grow between 3 and 5 percent, with earnings of 97 cents to $1.01 per share. Analysts expect $1.04.

"The investments we've made in innovation, marketing support and consumer value have delivered accelerating unit volume and profitable market share growth throughout the year, which are clear indications that our strategy is working," Bob McDonald, president, CEO and chairman, said in a statement.

Monday, August 2, 2010

First Move Monday- Buy Goodyear

On Thursday, Goodyear (GT) reported great earnings.  Goodyear reported net income of $28 million, or 11 cents per share, for the second quarter, compared with a net loss of $221 million, or 92 cents per share, a year earlier. Revenue rose 15 percent to $4.5 billion.  Yet, shares of GT sold off sharply on Thursday and Friday.  Why- because investors are worried that an economic slowdown could hurt earnings in the second half of the year.  Really?  GT does a lot of business in Europe.  These second quarter earnings include the time when everyone was worried that a bunch of countries in Europe, ie Spain, Greece, etc, would need to be bailed out.  Its not like the economy in the US has turned around much either in the past quarter, and yet, investors sell this stock into great earnings.  I think you buy some on Monday and sit on it for a year.  GT is going to have much better numbers over the next year than analysts expect.

Goodyear (GT) 10.67  52wk 9.65-18.84

Sunday, August 1, 2010

Possible End to Deepwater Drilling Moratorium

The U.S. House of Representatives Friday voted to end the federal moratorium on deepwater drilling for oil companies that meet new federal safety requirements.

The proposal to end the moratorium was an amendment to a pending energy bill the House was poised to vote on.  The moratorium will not end unless the Senate also votes to terminate it and President Barack Obama signs the legislation into law.  The fate of the proposal in the Senate is uncertain. 

The Obama administration imposed the six-month moratorium on exploratory drilling in waters more than 500 feet deep in response to the BP oil spill.  The moratorium runs through the end of November. 

"An indiscriminate blanket moratorium punishes the innocent along with the guilty for the actions of the poor judgment of one reckless company,'' said Rep.  Charlie Melancon, a Louisiana Democrat who co-sponsored the amendment. 

"If a rig meets all the tough new safety requirements issued by the Department of Interior, if it has been fully inspected and deemed safe, why should it sit idle?  And the workers of that rig, why should they go jobless until the arbitrary six-month period is over?'' he said. 

Come Monday morning, this news could help to boost some offshore drilling companies- APA, RIG, etc.

Saturday, July 31, 2010

Markets Now Need Economic Numbers to Improve

Economic reports on jobs, manufacturing and the consumer could be what trips up stocks in the week ahead, deflating some of July's 7 percent gain.  More than 100 of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.

"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."

"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst." 

The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar.
Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports. The market was nearly flat Friday, overcoming an initial sell off after second quarter GDP of 2.4 percent disappointed some investors and sent economists to work adjusting their second half forecasts.

Mark Zandi of Moody's is one of those looking to revise his third quarter GDP forecast, and he may trim it to under 2 percent. "One very big concern was a very large contribution of inventories to Q2 and that sets us up for a soft Q3. That's consistent with the idea the economy is growing but still below trend, and that gets to the employment report of next week," he said.  Zandi expects a decline of 50,000 non farm payrolls for July, including the elimination of 150,000 government census workers. He expects to see private payrolls grow by 100,000. In June, the economy added 41,000 non farm payrolls. 

Stephen Stanley, chief economist at Pierpont Securities, expects a decline of 100,000, including a reduction of about 150,000 census workers. He said some consumer driven data in the coming week may show some signs of improvement.  "June was clearly a very soft month for the economy. My sense is July is better. The reports on auto sales are going to be up for the month...The weekly numbers suggest consumers were spending at the mall again," he said.

Friday, July 30, 2010

GDP Up 2.4%

U.S. economic growth slowed in the second quarter as a capital investment drive by businesses sucked in imports at the fastest pace since the first quarter of 1984.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said in its first estimate on Friday, after an upwardly revised 3.7 percent growth pace in the January-March quarter.
Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 2.5 percent rate in the second quarter. The government had previously estimated a 2.7 percent growth rate for the first three months of this year.
"The anticipated slowdown in the economy is happening. Will business investment fall off a cliff next quarter if domestic consumer spending continues to flag?" said Lee Olver, managing director of financial strategies at Madison Williams & Co. in Houston.

The economy, which is digging out of its longest and deepest recession since the 1930s, has now grown for four straight quarters. However, growth has been too tepid, making little impact on a high unemployment rate.

The sluggish economy and a 9.5 percent unemployment rate are eroding President Barack Obama's popularity and dimming Democrats' prospects in November's mid-term elections.  A Reuters-Ipsos poll this week showed only a 34 percent approval of Obama's handling of the economy and jobs compared to 46 percent who deemed it unsatisfactory.  This is a sharp decline from early 2009, shortly after he took office, when more than half of those surveyed approved of Obama's handling of the worst financial crisis in decades.
In other economic news, a report showed that business activity in the Midwest was stronger than expected in July.

Growth in the last quarter was held back by a 28.8 percent surge in imports, which eclipsed a 10.3 percent rise in exports. The widening trade deficit lopped off 2.78 percentage points from growth, the largest subtraction since the third quarter of 1982.  While the import surge subtracted from GDP, growing imports and robust business spending suggest strength in underlying demand.

Thursday, July 29, 2010

2010 Q2 Earnings Reports- Friday, July 30th

Before the Bell

Chevron (CVX)- Oil Company

Q2 Actual Estimate Year Ago
EPS $2.70 $2.44 $0.87
Revenue $53.00 B $52.53 B $40.21 B

Merck (MRK)- Drug Manufacturer
Q2 Actual Estimate Year Ago
EPS $0.86 $0.83 $0.83
Revenue $11.35 B $11.45 B $5.90 B

Simon Properties (SPG)- Real Estate Company
Q2 Actual Estimate Year Ago
EPS $0.52 $0.46 ($0.08)
Revenue $934 M $917 M $904 M

Weyerhaeuser (WY)- Timber Company
Q2 Actual Estimate Year Ago
EPS $0.20 $0.14 ($0.59)
Revenue $1.81 B $1.68 B $1.39 B

AsiaInfo- Oversold, Take Advantage

Shares of AsiaInfo Holdings (ASIA) fell 23 percent in the first hour of trading on Thursday, following the release of 2010 Q2 earnings. The company reported in-line top line growth but missed EPS target of $0.36 by 7 cents.

Looking at the cold numbers, AsiaInfo Holdings (ASIA) doesn't look as bad. The company reported revenues of $65.6 million for the second quarter, an increase from previous quarter. But the problem is with earnings per share or EPS. The company delivered GAAP earnings of $0.29/share vs. consensus estimates of $0.36/share.

Another difficulty is the interpretation of the outlook. The company will consolidate books of Linkage as of the next quarter, throwing off current growth chart. These two handicaps certainly contribute to the twenty plus percent drop in stock value.  The intergation of Linkage is definitely costing ASIA much more than the comapny and analysts first expected, but this acquisition will help in the long haul.

I say that you can buy a little of ASIA right here.  The stock has traded sideways for the past one and a half hours- which appears could be a bottom in today's trading.  

AsiaInfo (ASIA) 20.01 -5.99(-23.02%)  52wk 15.55-32.60 

Take a Look at K and CL

There were very mixed earnings reports this morning, but the market seems to only be listening to the good reports as the major averages opened higher today.  Both Kellogg (K) and Colgate-Palmolive (CL) lowered their full year earnings estimates.  This is interesting because these companies are supposed to be recession resistant, but they seem to be struggling in this environment.

Colgate-Palmolive's (CL) second-quarter earnings rose to $1.17/share from $1.07 in the year-ago period. Net sales climbed to $3.81 billion from $3.76 billion.  Analysts polled were looking for $1.17/share on sales of $3.95 billion.  The consumer-products company also lowered its full-year earnings estimate due to currency related losses.

Kellogg (K), the cereals giant, cut its full-year forecast after reporting second-quarter earnings that fell below analysts expectations.  Kellogg said second-quarter profit fell to 79 cents a share from 92 cents a year earlier.  Sales dropped to $3.06 billion from $3.23 billion.  Analysts estimated profit of 94 cents a share on sales of $3.29 billion.

These were disappointing reports, but historically these companies have given investors a great return on investment.  Both K and CL raise their dividend on an annual basis and historically their increase in stock price has easily beat the S&P 500.  Over the past 10 year, the S&P 500 is down 21.5%;  while K is up 88% and CL up 40.5%.  In my opinion, these are two well run companies that have hit a little rough patch.  If you have a long term perspective on stocks, this could be a good time to start building a position in these names.  For the record, I do prefer K over CL.  Historically its the better performer and pays a better dividend.

Kellogg (K) 49.09 -2.43(-4.72%)  52wk 45.58-56.00 
Colgate-Palmolive (CL) 78.30 -5.56(-6.63%)  52wk 70.45-87.39

Wednesday, July 28, 2010

2010 Q2 Earnings Reports- Thursday, July 29th

Before the Bell

Exxon Mobil (XOM)- Oil Company
Q2 Actual Estimate Year Ago
EPS $1.60 $1.46 $0.84
Revenue $92.49 B $98.49 B $74.46 B

AstraZeneca (AZN)- Drug Company
Q2 Actual Estimate Year Ago
EPS -- $1.60 $1.64
Revenue -- $8.13 B $7.96 B

Kellogg (K)- Cereal Maker
Q2 Actual Estimate Year Ago
EPS $0.89 $0.94 $0.92
Revenue $3.06 B $3.29 B $3.23 B

Sony (SNE)- Electronics Maker
Q2 Actual Estimate Year Ago
EPS $0.29 ($0.15) ($0.39)
Revenue $18.66 B $18.76 B $16.67 B

Southwest Air (LUV)- Airline
Q2 Actual Estimate Year Ago
EPS $0.29 $0.27 $0.08
Revenue $3.17 B $3.15 B $2.62 B

After the Bell

Amgen (AMGN)- Biotechnology Company
Q2 Actual Estimate Year Ago
EPS $1.38 $1.30 $1.29
Revenue $3.80 B $3.74 B $3.71 B

Expedia (EXPE)- Travel Booking Website
Q2 Actual Estimate Year Ago
EPS $0.44 $0.42 $0.38
Revenue $834 M $845 M $770 M

MetLife (MET)- Insurance Company
Q2 Actual Estimate Year Ago
EPS $1.23 $1.00 $0.88
Revenue $12.80 B $13.05 B $12.23 B

Moody's Outlook Negative on Financials

On Tuesday, Moody's changed its outlook on Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) to negative, from stable, citing lessened government support for the institutions under new U.S. regulations.  A negative outlook indicates the banks are more likely to be downgraded over the next 12 to 18 months. The credit ratings agency also said it may cut its ratings on ten regional banks on reduced government support.

Moody's has boosted its debt and bank deposit ratings on large financial institutions since early 2009 on the assumption that they would receive government support in a time of trouble because of the risks they pose to other financial firms and the economy as a whole.  The new financial reform bill, however, is intended "clearly to eliminate government—i.e. taxpayer-support to creditors," Moody's said. Some support, however, is likely to remain for large institutions as regulators work to implement new laws, it added.  "Over the next 12 to 24 months ... we expect that our support assumptions for systemically important banks will likely revert to pre-crisis, or even lower, levels—though we do not anticipate that we would completely eliminate support from these firms' senior debt and deposit ratings," Moody's said.

Moody's rates Bank of America's senior debt A2, the sixth highest investment grade, Citigroup A3, the seventh highest investment grade and Wells Fargo A1, the fifth highest investment grade.  Moody's also said it may downgrade subsidiaries of BB&T, Fifth Third, KeyCorp, PNC, Popular, Regions Financial, SunTrust Banks, US Bancorp, and Zions Bancorp.

Expect a Market Sell-Off

After four days of having the broader market indexes (DJIA, S&P 500, NASDAQ) up nearly 4.5%, I expect there to be some profit taking over the next couple of days. With lackluster earnings reports from Boeing (BA), Aetna (AET), and others, as well as a durable goods number falling short of estimates as demand remains weak, it could be the catalysts traders were looking for to take some profits. And I personally do not think this, but many traders still feel that a double dip recession is very likely. The one metric that has me worried is the Treasury market. Yesterday, a two year Treasury auction supposedly went better than expected, but still its the lowest yield ever on a two year Treasury- with a 0.665% return. This auction shows, that even though the stock market has had a nice rally the past few days and Q2 earnings have been much better than expected, investors are still very cautious. Like I said, I do not think we will have a double dip recession, but I do feel a pull back in the stock market will happen. So, I would not commit new capital into this market right now- wait for the market to sell-off. I think you could see 2.5%-3.5% shaved off this market over the next 3-5 trading days. Also, this sell-off may be delayed if we do have a collection of good earnings before the bell someday this week.

Tuesday, July 27, 2010

2010 Q2 Earnings Reports- Wednesday, July 28th

Before the Bell

Boeing (BA)- Aerospace Company
Q2 Actual Estimate Year Ago
EPS $1.06 $1.01 $1.41
Revenue $15.57 B $16.13 B $17.15 B

Allegheny (ATI)- Iron and Steel Manufacturer
Q2 Actual Estimate Year Ago
EPS $0.36 $0.37 $0.03
Revenue $1.05 B $954 M $710 M

Corning (GLW)- Diversified Technology Company
Q2 Actual Estimate Year Ago
EPS $0.58 $0.52 $0.39
Revenue $1.71 B $1.65 B $1.40 B

Dominion (D)- Electricity Company
Q2 Actual Estimate Year Ago
EPS $0.72 $0.67 $0.68
Revenue $3.33 B $3.47 B $3.45 B

WellPoint (WLP)- Healthcare Company
Q2 Actual Estimate Year Ago
EPS $1.67 $1.55 $1.50
Revenue $14.22 B $14.60 B $15.27 B

After the Bell

Akamai (AKAM)- Internet Service Company
Q2 Actual Estimate Year Ago
EPS $0.34 $0.34 $0.40
Revenue $245.3 M $243 M $205 M

O'Reilly Automotive (ORLY)- Autoparts Store
Q2 Actual Estimate Year Ago
EPS $0.71 $0.74 $0.63
Revenue $1.38 B $1.35 B $1.25 B

Visa (V)- Credit Card Company

Q2 Actual Estimate Year Ago
EPS $0.97 $0.93 $0.67
Revenue $2.03 B $1.97 B $1.65 B

Good Housing Data- Buy Home Depot

After the home buyer tax credit expired, the housing data plummeted, dropping even more than analysts expected during the months that followed.  Recently though, the housing data has turned around.  Yesterday, new home sales rose sharper than expected, and this morning, home prices rose more than expected in May.  It may still be to early to buy the homebuilders since they are competing with tens of thousands of foreclosures- which are far cheaper in price than a new home.  A much safer way to play this good housing data is with Home Depot (HD).  HD management has done a great job turning this company around.  Its now a much leaner company, and the costumer service is far better than is was even five years ago.  Last time HD reported earnings, the company beat estimates and rose their FY 2010 guidance.  How about Lowe's (LOW), HD's main competitor.  Last time LOW reported earning, the company's earning were below estimates, and the guidance was on the lower end of estimates.  HD has a track record of paying a good dividend, which they raised at the beginning of this year.  The company announced a share buyback program last time they reported- I am sure they are taking advantage of these depreciated prices.  The stock is well off its 52 week high of 37.03, currently at 29.30.  HD has not announced when they will release Q2 earnings, but it should be around the middle of August.  This is a great company- well run- and seems to be making all the right moves.

HD 29.03  52wk 24.47-37.03