Points of View - August 8

Those Wild And Crazy Fords - By Holman W. Jenkins, Jr. - The Wall Street Journal - "Ford is the only U.S. auto company not to land in bankruptcy and need rescue with taxpayer money. It’s also the only company in which control remains with a tight-knit founding family. Coincidence? No."

Pay and Politics - The Economist - "The boardrooms of America were ready for misery. What else could result from Congress’s fury at runaway executive pay, outrageous Wall Street bonuses and handsome rewards for failure? The bosses can breathe a little more easily. The Corporate and Financial Institution Compensation Fairness Bill that won a healthy majority in the House of Representatives on July 31st turned out to be remarkably restrained—in some ways even too restrained (see article). However, with the Senate still to look at the legislation and the practical details of its implementation to be hammered out, there is plenty of time for that to change, for better or worse."

Clinical Trials, Wrapped in Red Tape - By Sally Satel - The New York Times - "It's Christmas in August for hopeful scientists. The National Institutes of Health is now sending out its annual 'priority scores,' the indicators of whether grant requests will likely receive financing from the agency. And hearts are beating faster than ever, as the federal stimulus package has poured an additional $8.2 billion into the institutes’ budget specifically for research."

Outside Edge: Learn to Love That Statistical Feeling - By Tim Hartford - Financial Times - "I am a non-statistician who deals with statistics and statisticians frequently, and in my view statisticians are unsung heroes. Statistics are essential to understanding the world, but statisticians get little credit. We accept the numbers in the news as fact, without considering the skill in producing them from small, non-representative samples."

Quick Notes for the Day - August 7

Jobless Rate Drops to 9.4% - The Labor Department reported Friday morning that the unemployment rate unexpectedly fell back to 9.4%. The report also stated that job losses slowed in July to the lowest total since August. Nonfarm payrolls continued to a 19 month streak of losses by falling 247,000 in July, but this was better than the economists predictions of a decline of 275,000 jobs. Overall, most industries continued to cut jobs in July, but at a much slower pace than they did over the past year.

AIG Makes a Profit - Since we are all "shareholders" in AIG since the US government owns 80% of the company, it was nice to see AIG make a profit. The company reported its first profit since 2007 and easily beat estimates by earning $1.82 billion ($2.30 a share) in the second quarter versus a loss of $5.36 billion ($41.13 a share) last year. Second-quarter 2009 adjusted net income was $2.0 billion. AIG reported total revenue for the second quarter of $29.52 billion up from last year's $19.93 billion.

Cash for Clunkers Will Continue Through Labor Day - President Obama signed a bill that funnels $2 billion to the "cash for clunkers" trade-in program. The money, approved by the Senate Thursday night, will allow the program to continue through Labor Day. It offers consumers up to $4,500 to trade in older, less fuel-efficient vehicles and buy new, more fuel-efficient ones.

Russia Cuts Interest Rates to 10.75% - While The Fed has us sitting between 0.0 and 0.25% on interest rates, Russia's central bank cut its key lending rate by a quarter of a percentage point to an astronomical 10.75%. The bank said it decided to make "a more cautious cut," news reports said, after trimming the rate by half a percentage point in each of the four previous moves. Additionally, while US inflation is non-existent at the current time, Russia's inflation rate in July was an incredible 12%.

Quick Notes for the Day - August 6

Big Drop in Initial Jobless Claims - The Labor Department reported Thursday morning that first-time claims for state unemployment benefits declined by 38,000 to 550,000 last week. The four-week average of new claims dropped to 555,250, the lowest level since January. On Friday, the Labor Department will report on July unemployment figures. Economists estimate that the jobless rate will rise to 9.7%, and there will be 275,000 nonfarm payrolls to be lost.

Mortgage Rates Drop - The national average interest rate on the benchmark 30-year, fixed-rate loan averaged 5.22% versus last week's 5.25% and last year's 6.52%. The 15-year fixed-rate loan averaged 4.63% versus 4.69% and last year's 6.10%.

Sugar Jumps to Record High - White-sugar futures surged Thursday to a fresh record high of $521.80 a ton on Liffe in London, extending their recent rally amid concerns over production drops in India and Brazil while Mexico's bad weather has also been a potential problem. The previous record high of $514.60 a ton was set on Wednesday.

Natural Gas Inventories Rise - The EIA reported Thursday morning that natural gas inventories rose 66 billion cubic feet in the week ended July 31. Most analysts were predicting an increase of 50 billion cubic feet. After the data, natural gas for fell 19.7 cents (4.8%) to $3.847 per million BTUs. Natural gas had been down less than 1% prior to the data.

Fed Buys $7 Billion in Treasurys - The Federal Reserve bought $7 billion in Treasurys on Thursday, the second of two operations this week, from maturities ranging from 2016 to 2019.

The Fed is more than two-thirds of the way through the $300 billion in U.S. debt it promised in March to buy in an effort to keep borrowing costs, particularly for companies and homebuyers, affordable.

Ford to Push Rollout of New Cars by 2012 - Ford said Thursday it plans to accelerate its product rollout by replacing or refreshing 70% to 90% of its vehicle lineups by volume by 2012. Ford also said it is on pace to reduce its structural costs by $14 billion to $15 billion by the end of 2009 compared with costs in 2005. The automaker said it plans to build 680,000 vehicles per core global platform within five years, up from the current 345,000.

News - August 2009

The U.S. economy has posted negative growth over four consecutive quarters now, which is the first time in over 60 years that such a string has occurred. However, the second quarter 2009 GDP was only negative by 1%, beating most analysts’ expectations. And most are forecasting positive economic growth in the 3rd and 4th quarter, some even predicting rather robust growth of 3% on an annualized basis for the third quarter. Housing prices also showed some stabilization, as the index showed a slight rise in housing prices from April to May. This was the first positive monthly change for the index since the housing crisis began.

Equity markets have been the most glaring beacon, pointing to encouraging economic trends in the near future. Stocks continued their five month advance during the month of July, even in the face of some ominous news. Unemployment closes in on the 10% mark and the aforementioned persistent negative economic growth has consistently been in the headlines. Stock markets typically start to rebound long before there is any evidence of an economic turnaround. This market action sometimes puzzles analysts and investors who are focused on the current economic numbers, although the same pattern has emerged time after time. The recent market surge has added nearly 50% from the March lows. This compares favorably to the average 24% gain that has historically followed recession lows in the stock market.

The Dow Industrial Average reached the 9000 level for the first time since last October. While the recent turn in the markets feels good compared to where we were in March, we are sure that investors are well aware equity levels are still roughly one-third of the record highs of October 2007. In essence, we will need to see considerable economic progress before we get back to those lofty levels.

Almost all asset classes marked gains for the month of July except for oil and gold, which are off their highest levels of the year. But most categories of stocks, bonds and other commodities all posted varying degrees of gains for the month. The standouts for the month were developed international stocks and emerging market stocks, which gained 10%, and 11%, respectively, for the month of July. Emerging market stocks have outperformed nearly every other class, posting a gain of 44.4% for all of 2009.

China, Brazil and India have weathered the financial crisis better than some might have expected and have also benefited from rebounding commodity prices. China, for instance, is sitting on $2 trillion in reserves, with which they can use to invest and stimulate their economy. It’s nearly unimaginable for Americans to consider the envious Chinese position, holding all of those savings just as assets across the globe are on sale.

The broadest U.S. stock market index measured by the S&P 500 gained 7.6% for the month of July and is now positive by 11% for the year, through July 31st. The technology focused NASDAQ advanced 7.9% for the month and an impressive 26.2% since December 31, 2008. Technology companies’ strong balance sheets and relative earning resilience has transformed the once speculative sector into a safe haven for investors. The Dow Industrial Average managed to make it into positive territory for the year, posting gains of 8.8% for the month and 6.6% for the year.

High yielding corporate bonds as well as high grade corporate issues have also rebounded well throughout 2009. High yield bonds posted gains of 7% just during the month of July and have advanced by 18.1% for the year. Investment grade corporate bonds achieved a gain of 4.6% for the month of July and 9.3% from the start of the year. Corporate bonds of all stripes were all sold down last year as the threat of economic distress and massive defaults seemed imminent. U.S. treasury bonds, last year’s safety trade, are one of the lone losers this year. Long-term treasuries are down 19.1% for the year, medium-term treasuries have lost 5.9% for 2009, and even shorter-term government bonds have posted small losses year to date.

There is much debate about what the U.S. treasury markets price action means this year. We saw investors flood into the safest investments (U.S. treasuries) denominated in the safest currency (U.S. dollar) on earth as the financial crisis was unfolding. This was evidenced by the historic rally in treasury prices in 2008, accompanied by a surging U.S. dollar.

As the crisis abates, we are seeing those same investors move capital into riskier assets denominated in riskier currencies. These other investments are priced to offer higher potential returns than good old U.S. treasury bonds. This, in our opinion, is the most significant influence – treasury prices and the U.S. dollar. The enormous supply of new treasuries will undoubtedly send yields somewhat higher, all else equal. But we take recent market action as evidence that investors’ appetites for risk, and inflation expectations, continue to be the most significant drivers of interest rates required on U.S. government debt.

As we have said, we are encouraged by the recent rally in the stock markets. In our view, the rally since March has largely been a product of simply avoiding a Depression scenario. A Depression was never a likely outcome considering the unprecedented, while controversial, actions of the Federal Reserve and the Department of Treasury. In addition, there was constant chatter about a collapsing banking system or the only apparent alternative, a nationalized banking system.

There are consequences to these extraordinary measures and bailouts, which most likely saved the economy from even higher unemployment and even slower economic activity. There will be the endless hearings and concern over who benefited more or less in addition to some new regulations and reinstatement of some old regulations. Some additional financial institutions deserved to die, some Wall Street bankers continue to receive grotesque bonuses, and the government influence during this period can make us all uncomfortable.

This environment of bailouts and unprecedented government intervention is not the norm, however, and isn’t likely to be standard practice in the future. Capitalism will survive and thrive, just as it has post the Great Depression when new regulation and many of the government programs we take for granted were created. American style capitalism has been proven as the best economic system in the world, and is likely to remain the model of economic success in the years to come.

Quick Notes for the Day - August 4

Pending Home Sales Rise in June - Boosted by low interest rates, prices, and a tax credit, pending sales of existing homes rose in June for the fifth straight month. The current streak is the longest since 2003 according to the National Association of Realtors. The pending home sales index rose 3.6% in June after an upwardly revised gain of 0.8% in May, and year over year the index is up 6.7%. More importantly, pending homes sales in June rose in ALL regions. *** Note - Pending Home Sales are home for which there is a contract but it has not yet closed. According to the NAR, these contracts usually close within 6 weeks.

Consumer Spending Rises in June, Personal Income, Savings Fall Slightly - Consumer spending rose more than expected in June according to a Commerce Department report. The report said spending rose 0.4% (versus a 0.3% estimate) boosted by expenditures on nondurable goods after a revised 0.1% increase in May.

Also included in the report was the personal income information. Personal income declined 1.3% in June, but this was easily explainable due to the effects of the stimulus checks wearing off in May.

Spending on nondurable goods rose 1.7% in June after a 0.1% rise in May. Spending on services also was up slightly, but consumption of durable goods, like appliances and cars, fell 0.2%.

Savings fell to an annual rate of $505 billion, with the saving rate slipping to 4.6% versus 6.2 percent in May. A measure of inflation closely watched by the Federal Reserve, the year-on-year personal consumption expenditures index excluding food and energy rose 1.5% after a 1.6% increase in May.

PepsiCo to Buy Bottlers - PepsiCo said Tuesday that it has reached a deal to buy Pepsi Bottling Group for $36.50 a share and PepsiAmericas for $28.50 a share. PepsiCo said that the total value of the shares that it will be acquiring is about $7.8 billion. The companies said they expect the deals to close in late 2009 or early 2010. In April, PepsiCo had offered $29.50 in cash and stock for each share of Pepsi Bottling Group and made a separate offer for PepsiAmericas at $23.27.

Quick Notes & Articles for the Day - August 3

ISM Rises - The Institute for Supply Management's manufacturing index (ISM) rose more than expected to 48.9 for July versus estimates of 46.2. The ISM in June was 44.6. The ISM is a gauge of manufacturing activity with readings below 50 meaning a contraction and readings above 50 meaning an expansion. The move back to 50 has meant the dramatic decline in manufacturing has ceased.

Oil, Natural Gas, Gold Higher on Optimism and Lower Dollar - Crude oil rose more than 3% to about $71.50 per barrel, and natural gas jumped more than 7% to almost $4 as manufacturing data in the US and around the world had better than expected numbers.

Gold rose Monday as high as $964 an ounce for the first time since early June as the dollar fell to the lowest level this year. The global optimism, falling dollar, and threat of eventual inflation sparked the metal higher.

Ford Sales Rise 2.3% - Ford Motor Co. said Monday that U.S. July sales rose 2.3% to 165,279 vehicles, reversing nearly two years of monthly year-over-year losses. The automaker said that it benefited from the federal "Cash for Clunkers" new-car incentive program. Sales of cars in July rose 8.7% to 62,176 units, and sales of sport utility vehicles fell 36.1% to 6,526 units. Total truck sales dropped 2.6% to 96,662 vehicles. Ford has not had a monthly increase in year-to-year sales since November 2007.

British & Euro-Zone Manufacturing Rises - The U.K. CIPS/Markit manufacturing purchasing manufacturing index (PMI) rose to 50.8 in July, up from a revised high reading of 47.4 in June and the first leap above the 50 unchanged mark since March 2008. The rise came as manufacturing production rose to the greatest extent since December 2007. New orders rose for the first time since March 2008.

The Markit euro-zone PMI rose to 46.3 in July, up from 42.6 in June, the second strongest rise in point terms in the history of the survey and the highest reading in 11 months.

Articles

Leave Swiss Banks Alone - By Pierre Bessard - The New York Times - "Last week, an American client of the Swiss bank UBS admitted to filing a false tax return and concealing millions in Swiss bank accounts. For some people, his plea will just confirm their impression of Switzerland as a haven for criminals or dictators who want to protect their funds from taxes or oversight."