Killer flu, WSM, Recession, Oil
– This is scary
– Kunal is right, this market is due to roll over
– How to survive one
– Thought provoking
Disclosure (“none” means no position):
Categories
Category: Articles
Categories
Retail Sales: A Reality Slap
Markets have rallied and the common refrain is “the worst is over”. But, “things not sucking that bad” ought not to be the reason for a 20% market rally. We are a long time from being out of the woods…….a long time..
Here is the news…
PPI & Retail Sales numbers from this morning…
But wait…
From the Fed’s Feb. report to Congress
Participants’ projections for the change in real GDP in 2009 had a central tendency of -1.3 to -0.5 percent, compared with the central tendency of -0.2 to 1.1 percent for their projections last October. In explaining these downward revisions, participants referred to the further intensification of the financial crisis and its effect on credit and wealth, the waning of consumer and business confidence, the marked deceleration in global economic activity, and the weakness of incoming data on spending and employment. Participants anticipated a broad-based decline in aggregate output during the first half of this year; they noted that consumer spending would likely be damped by the deterioration in labor markets, the tightness of credit conditions, the continuing decline in house prices, and the recent sharp reduction in stock market wealth, and they saw reductions in consumer demand contributing to further weakness in business investment. However, participants expected that the economy would begin to recover–albeit gradually–during the second half of the year, mainly reflecting the effects of fiscal stimulus and of Federal Reserve measures providing support to credit markets.
Looking further ahead, participants’ growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011. Participants generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped. Nonetheless, participants generally anticipated that real GDP growth would gain further momentum in 2011, reaching a pace that would temporarily exceed their estimates of the longer-run sustainable rate of economic growth and would thereby help reduce the slack in resource utilization. Most participants expected that, absent further shocks, economic growth would eventually converge to a rate of 2.5 to 2.7 percent, reflecting longer-term trends in the growth of productivity and the labor force.
Participants anticipated that labor market conditions would deteriorate substantially further over the course of this year, and nearly all expected that unemployment would still be well above its longer-run sustainable rate at the end of 2011. Participants’ projections for the average unemployment rate during the fourth quarter of 2009 had a central tendency of 8.5 to 8.8 percent, markedly higher than last December’s actual unemployment rate of 7.2 percent–the latest available figure at the time of the January FOMC meeting. Nearly all participants’ projections were more than a percentage point higher than their previous forecasts made last October, reflecting the sharp rise in actual unemployment that occurred during the final months of 2008 as well as participants’ weaker outlook for economic activity this year. Most participants anticipated that output growth in 2010 would not be substantially above its longer-run trend rate and hence that unemployment would decline only modestly next year. With economic activity and job creation generally projected to accelerate in 2011, participants anticipated that joblessness would decline more appreciably that year, as is evident from the central tendency of 6.7 to 7.5 percent for their unemployment rate projections. Participants expected that the unemployment rate would decline further after 2011, and most saw it settling in at a rate of 4.8 to 5.0 percent over time.
It was just last October the Fed thought things would be better than they are now. By this summer they were predicting improvement. Now, we are looking at “end of the year”. Soon it will be “early 2010”. Every time the Fed talks, the projection time for recovery gets pushed out.
If the consumer is not spending, it is all moot. We the consumer are 2/3 of all economic activity. Until we begin to spend again, nothing gets appreciably better. Note the Fed projection of 8.5% to 8.8% unemployment for 2009. Um…we are already there as of March. That means the number will get worse and then the forecast the Fed made in February will have to be downgraded again.
With higher taxes coming down the road for those with the greatest ability to spend, one ought not assume that recovery time is right around the corner.
Disclosure (“none” means no position):
Categories
More Gas Chatter…..
Look’s like CNBC got on the Natural Gas (UNG) bandwagon yesterday. The trader in the video picks EOG (EOH), Chesapeake(CHK) and Quicksilver (KWK). I disagree.
Why? Remember the Chesapeake CEO said under $7 or $8 for natural gas no one makes money? Well, that mean gas can rise near 100% before most producers start turning a profit. Because of that, I would avoid the producers here. If gas rallies to $6 from its current sub $4 level, these guys still do not make any money and the thesis for buying the stock remains null. I like either the pure gas, (UNG) OR the Oil (USE) and Gas Services plays like last week’s Exterran Holdings (EXH).
Disclosure (“none” means no position):None ……yet
Categories
Bernanke’s Upcoming Speech: Inflation???
Here is the speech Fed Chairman Ben Bernanke will give today. Pay attention to the section on inflation. I am very concerned at the almost dismissive attitude about the possible inflation risk.
We have had unprecedented action by the Fed and Treasury and the supply of money has exploded to before unimaginable levels yet, the thought of hyper-inflation is met with an “oh we’ll just withdraw liquidity lickety split”. Oh…that easy is it?
But, what if the inflation is met with no growth? Then what do we do? All the commentary of the subject just assumes growth returns and Fed action then foloows the playbook. Withdrawing liquidity in a no growth (or negative growth) environment suppresses activity and then will cause another perhaps deeper recession and this one is accompanied by rising prices (see late 1970’s). For those not sure, this is very bad.
Why isn’t anyone asking Bernanke about this scenario? I have watched the Congressional hearings and the question has not come up save for Ron Paul and he is dismissed as a kook for lack of a better word.
This is troubling…
Disclosure (“none” means no position):
Categories
Wesbury on "Toxic Government"
I know Wesbury has been a perma-bull and for that many folks discount what he has to say. With that being said, he does nail the current situation (problem) with the US Government and its attempts to “fix” things.
Disclosure (“none” means no position):
Categories
Tuesday’s Links
Retail, Retail, Consumers, Consumers
– Davidowitz is wrong on Sears
– Value is where it is at
– Behavior in recession
– 2/3 of the economy leads it
Disclosure (“none” means no position):
Categories
Latest Wall St. Media Appearance
I apologize before you view it for the voice. Was suffering from the worst head cold of my life last Friday.
Anyway, time ti talk more about Exterran Holdings (EXH):
Disclosure (“none” means no position):none, yet…
More good news for AutoNation (AN) shareholders.
In the first quarter of the year, 271 auto dealers in the U.S. went out of business, according to the National Automobile Dealers Association, as car buyers stayed away from showrooms and credit remained tight.
At the end of the quarter, there were 19,738 auto dealers in the U.S., the dealer group said, down from 20,009 at the end of last year. It said it expects about 1,200 dealers, mostly sellers of domestic brands, to go out of business in 2009, roughly 20% more than last year.
Many dealers closed as their lenders tightened terms and costs outstripped revenue, while some consolidated stores or closed up shop voluntarily. Light-vehicle sales in the first three months of the year were down 38%, with sales of domestic brands down 46%, compared with declines of 31% for Asian auto makers and 27% for European brands.
General Motors Corp. (GM) said 198 of its dealers closed in the first quarter, bringing its total to 6,177 at the end of March.
Chrysler LLC said it shaved dealer numbers by 82 during the first quarter to about 3,218 at the end of March. In the last quarter of 2008, Chrysler, majority-owned by Cerberus Capital Management LP, lost 74 dealers. In its viability plan in February, Chrysler estimated that 27% of its dealers were in financial trouble.
Ford Motor Co. (F) declined to provide the number of dealers the company had at the end of March. Last year, 269 dealers of all of Ford’s brands closed, bringing the company’s total at the end of December to 3,787.
Some brands are expanding their dealer networks even in the current depressed environment. BMW AG’s Mini, for instance, plans to open 13 outlets this year.
Already the largest US auto dealer, AutoNation’s market share continues to grow as the decimation of the dealer ranks continues. The industry is already at about a 9 million annual unit number now. The longer it hold here, the worse the damage will be for dealers.
It is also an unsustainable number. Most information I see has just the basic replacement number of vehicles that need to be sold each year at 13 million. That means there is tremendous growth down the road for the industry as a whole. Now that growth will most likely not come from Detroit and AutoNation has been ahead of the curve there as they are well on their way to having Detroit account for about 20% of sales. For those who do not know, AutoNation is the #1 Mercedes dealer in the US and a top BMW dealer.
Will the market growth happen this year? Probably not until the end of it at the earliest. The key point to take away it that it does have to eventually climb back to those levels and when it does, AutoNation is going to be sitting at the the table with a much larger share of the pie than it currently does.
Disclosure (“none” means no position):Long AN, none
Categories
More Thoughts on Retail
Watch the following video from the Harvard Business School. It speaks to consumer behavior and marketing in recessions.
Professor Quelch in it says that recessions are the time to “expand your voice” through marketing. It is also a time for redefine or entrench your message with consumers as picking up 1 point of market share in a recession is much cheaper than in an upswing. It is during recession that consumer behavior becomes entrenched.
Quelch says, “Recessions are not a time to hunker down….”
This goes back to my post from last week on Target (TGT), Wal-Mart (WMT) and Sears Holdings (SHLD).
Wal-Mart is using the recession to hones its value message with consumers and the results have been nothing short of perfect for them. Sears is using it to redefine itself and the best place for consumers to shop for appliances and it is working as they have picked up market share for three consecutive months there.
Wal-Mart’s message since before the recession started was “Save More…Live Better” and it has resonated with consumers. It re-routed billions of dollars from expansion to improving the look of aging stores. It has a new focus on electronics and is now currently selling Apple’s (AAPL) iPhone.
Sears, while not blanketing consumers with messages, has been very pointed with its “Blue Crew” appliance folks and the price guarantee that allow the consumer to search the internet at Sears to assure themselves they are getting the lowest price. It has spent money improving and rolling out a top notch website tp increase its web presence. Both are working.
Can anyone tell me what Target has done during the current downturn to capture market share or in this case just keep up with Wal-Mart? Target used to be a “nicer WalMart”. It was viewed as cleaner and almost as affordable. Now that Wal-Mart has improved its stores and brought in better merchandise, Target is just viewed as “a more expensive Wal-Mart”. In tough economics times, that is not the place to be in especially when most of your locations sit across the street from the other guy’s.
At least in my area Target’s electronics section is woeful compared to the new redesigned one at Wal-Mart. Since this area seems to be the last bastion of consumer spending, this is now a huge plus for Wal-Mart at Target expense. Target used to be hip, with the iPhone, Wal-Mart now is.
What message is Target projecting to the consumer? I can’t name it. Too be honest I do not remember the last time I saw a Target ad on TV. Can you? If I am, I am certainly not remembering the message it attempted to send me so in that case whatever it said was not effective.
Target in a sense has gone “fetal”.
If Target is banking on consumers returning to prior shopping habits “once things get better”, they ought to watch Professor Quelch, that just is not that way it happens…
Disclosure (“none” means no position):Long WMT, SHLD, None
Categories
Monday’s Links
Twitter % ETf’s, Insanity, CNBC, BJ’s
– You need to know the risk
– Perfect, now “global warming victims” can sue
–
– Have shopped here every weeks for 3 years and did not pull the trigger
Disclosure (“none” means no position):
Categories
Weekend Links
Biden, China, Hockey, Stocks
– Does anyone else think Obama is saying to himself “what was I thinking!!??”
– From Roubini
– The year’s best
– Let’s not get carried away with the rally
Disclosure (“none” means no position):
Categories
Friday Viewing
While I am not optimistic short term, I am not nearly as dire as Rogers. But, in the interest of giving readers multiple points of view, here you go.
Jim Rogers on Glenn Beck
Disclosure (“none” means no position):
In a just filed SEC 13G/A Fairholme Capital (FAIRX) disclosed it now holds 14.5 million shares or nearly 12% of Sears Holdings (SHLD)
This is up from 12.7 million shares reported as of 12/31.
Disclosure (“none” means no position):Long SHLD, none
Categories
Target Continues It’s Slide
I am hoping Target (TGT) shareholders are getting sick of the current strategy by management of sitting back and doing nothing, because those are the results operations are getting.
Here are the latest retail figures.
Here is my problem. Wal-Mart (WMT) has gone back to its “low price” message with consumers and clearly it has worked. They cut back expansion plans and plowed that money into improving existing locations. Sears Holdings is currently in a big push for its appliance sales and internet and both are working. Target, has gone, well, fetal.
Now, the environment out there is clearly very tough, of that there is no doubt. But Target has gone from outperforming Wal-Mart to getting lapped by it. It is one thing to have sales sliding and to be taking steps to stop or reverse it and it is another entirely to do nothing about it.
Curling up in a ball and “waiting for economic conditions to improve” is not a strategy. We may not see actual economic growth until late 2010-2011. Are shareholders prepared to wait until then? Is the theory that people will just return to Target when things get better? Is it a case of current (and becoming entrenched) shopping patterns being reversed without any effort on managements’s part?
Recessions are where the best management shows as they use it as an opportunity to expand market share and entrench their brand with the consumer. Now, Target COULD do those things if they freed up some more cash. IF they choose to put even some of Bill Ackman’s idea to work, that cash would be there.
If I had wrote here last year that at this time this year there would be more positive news coming out of Sears than Target people would have said I was insane, yet that is precisely what is happening now.
Target shareholders are lucky in that they have a real viable option to them other than selling shares. They can elect Ackman’s slate of nominees to the Board and start to see some changes at Target, or, they can do what management is and do nothing….and get nothing..
Disclosure (“none” means no position):Long SHLD, WMT, none
Categories
Time to Look at a Natural Gas Play
With natural gas at insanely low levels, there is value in the sector. I have a potential play on it.
Here is a fantastic post on the inevitable natural gas price spike courtesy of Chris Nedler at getREALlist
Here is the basics on supply/demand/pricing from the post:
Now I am seeing the same pattern in natural gas (or as traders sometimes call it, “natty”), only the danger of constrained supply is possibly even greater, since about 84% of US natural gas consumed is produced domestically and there is very little storage throughout the system.
Gas prices have plunged 72% from their record of over $13 per Mcf1 to $3.75 on Monday, taking it all the way back to 2002 pricing. (The spot price for natural gas has only fallen below $4 once since 2002, in September 2006.)
All that got me to thinking. How to play gas? I could go with the producers of it but since most of them can’t make money with gas under $6, an 80% rally in natural gas prices would do little for their fortunes (except keep them from Chapter 11).
I could play natural gas itself but it can rally to a level and just sit there while affiliated stock keep making money for shareholders.
We can substitute oil for natural gas and all of the above would be true also.
What then? Oil Well Services and Equipment. All producers need serviced on existing wells and close wells. When prices rebound, the corresponding increase in well activity will be a boon for these companies.
Enter Exterran Holdings, Inc. (Public, NYSE:EXH).
From the 10K:
We are a global market leader in the full service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Our global customer base consists of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent producers and natural gas processors, gatherers and pipelines.
We operate in three primary business lines: contract operations, fabrication and aftermarket services. In our contract operations business line, we own a fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment that we utilize to provide operations services to our customers. In our fabrication business line, we fabricate and sell equipment that is similar to the equipment that we own and utilize to provide contract operations to our customers.
We also utilize our expertise and fabrication facilities to build equipment utilized in our contract operations services. Our fabrication business line also provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the construction of tank farms and the construction of evaporators and brine heaters for desalination plants.
In what we refer to as “Total Solutions” projects, we can provide the engineering design, project management, procurement and construction services necessary to incorporate our products into complete production, processing and compression facilities. Total Solutions products are offered to our customers on a contract operations or on a turn-key sale basis. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, gas treating and oilfield power generation equipment.
Why Exteran?
Valuation:
Even after writing off $1.1 billion in Gooodwill due to market conditions in Q4, Exterran still sports a book value of $32 a share. At the current $17 share price it trades at 53% of book. Cash flow and cash on hand are steady.
Stock Repurchase Program.
On August 20, 2007, our board of directors authorized the repurchase of up to $200 million of our common stock through August 19, 2009. In December 2008, our board of directors increased the share repurchase program, from $200 million to $300 million, and extended the expiration date of the authorization, from August 19, 2009 to December 15, 2010. See further discussion of the stock repurchase program in Note 15 to the Financial Statements. Since the program was initiated, we have repurchased 5,416,221 shares of our common stock at an aggregate cost of approximately $199.9 million. See Part II, Item 5 (“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”) of this report for information regarding our fourth quarter 2008 repurchases.
Ownership:
Nearly 45% of the stock is owned by 5 groups including 8% by ValuePlays favorite Seth Klarman’s Baupost Group.
Now, is this a “run out and buy some”? I don’t think so but I am keeping it high on the radar list. While both oil and natural gas are at unsustainably low levels. History tells us they can remain there for some time. It also tells us that the recovery to appropriate levels can be swift and violent.
As Nedler says:
The time it takes to raise capital for new drilling, deploy rigs, and start producing again after gas prices rise is a golden window of opportunity for investors. As long as marginal capacity remains in a razor-thin range, prices will stay high and low-cost producers will be rolling in profits again.
While it’s impossible to say when the US economy will recover and bring natural gas prices back into sustainable territory, I am confident that for those with at least a one-year investing horizon, there is no better time than now to begin accumulating those positions.
One has to watch economic activity for sign. Q1 will be reported in May and by then more data will be available as to global conditions. It is important to note this is not a pure US play but a global one. As global conditions improve, so ought Exterran’s.
Disclosure (“none” means no position):