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..
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.
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).
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.
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.
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
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
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 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
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.
There is an investment thesis here. We just need the backround first.
“Davidson” submits:
You may wonder why I have sent you something about sunspots.
I do so because with my background, BA Geology, PhD Physical Organic Chemistry and MBA Finance, I am always looking for those threads of information that will help us make better decisions. Even something that looks off the beaten path can be eye opening such as this piece I found in Don Coxe’s recent commentary. Don’s full commentary is attached.
Don is a macro thinker and provides his views on the appropriate investments. I do not do this, but prefer to use the best investment managers I can locate and let the managers handle the details on individual security selection. My goal is to balance them in an allocated portfolio and then monitor and rebalance the portfolio vs. the asset class Return/Risk relationships.
I think Don is right to consider this information as part of the investment discussion even though its impact on our future is not clear. What may be an obvious play on energy could easily be translated into discoveries yet unknowable and result in new investment directions. Julian Simon discussed the power of human intellect in his “The Ultimate Resource 2” in solving seemingly insurmountable problems.
What is clear to me is that the current mania regarding global warming does not have science on its side and that any massive climate initiative should be approached with greater study. Having a scientific background leads me to look for cause and effect. I do this in investing and providing direction to clients. Often I find that stepping back a few more feet to view the wider picture proves illuminating. I think Coxe’s focus on sunspots and the known connection to global temperature cycles is well worth reading.
The source for all charts is the web site: http://www.swpc.noaa.gov/index.html I added the chart for sunspot activity history from 1845-Present to provide you with perspective.
Don Coxe’s Section on Global Cooling:
Since we last published, the sunspots have been scarce and small, and the most respected measures of global climate show a strong cooling trend in this decade.
(The projections for future sunspot activity are from the two best-known sunspot research centres. For two years, they have been moving them forward as the sunspots disappoint the astronomers by failing to return.)
As clients know, we use our study of history to compare popular views about economics, finance, geopolitics with evidence of what has happened in previous eras.
As all scientific studies have shown, since the early 19th Century, the world has warmed up. Previously, the world went through roughly two centuries of serious global cooling. Whether by coincidence or not, sunspot activity during those centuries was extremely low.
Outside the Tropics, the world was cold. Example: Scotland suffered six straight crop failures during the 1690s because of late Springs and early frosts. Some historians believe this was the major reason why the Scots gave up their dreams of independence and joined England. There were skating parties on the Thames each winter. Polar ice caps expanded dramatically.
Then, in the early 19th Century, the sunspots returned. The pattern: ten years of sunspot activity, a year of rest, then a new cycle.
The last sunspot cycle ended on schedule in 2006. Also on schedule, there was minimal or no sunspot activity in 2007. Not to worry, said the global warmists: they’ll be back next year.
They didn’t come back in 2008. They haven’t returned so far this year. In retrospect, the record-breaking day-long super-spectacular series of 174 sunspot explosions on Bastille Day in July 2001 was the equivalent of Gandalf’s fi reworks display for Bilbo Baggins’s 111th birthday, which ended Bilbo’s ownership of the Ring. Astronomers still speak with awe of the sunspots that day. Satellite and radio communications across the world were devastated, and the Aurora Borealis was seen as far south as Texas. Almost immediately, sunspot activity began to dwindle, and then the spots completely disappeared in 2007. Periods of high sunspot activity didn’t reach the levels seen in the 1980s and 1990s. Minimums were lower. Then the sunspots virtually disappeared.
They haven’t come back, which means we are experiencing the longest sunspot drought in more than two centuries. As NASA notes, solar wind activity is at a fifty-year low. As other astronomers have noted, that decline in solar wind could be the factor that has dramatically reduced the depth of our atmosphere. Earth has had, for most of the time that we could measure such things, 400 miles of atmosphere between ground level and the Absolute Zero temperatures of outer space. We’re down to 250 miles.
As the science writer of the Telegraph put it, we are 150 miles closer to outer space than we were at the dawn of the Space Age.
As clients are well aware, we are infl uenced by the work of astronomers dating back to the Astronomer Royal, William Herschel, who two centuries ago demonstrated a correlation between the price of corn (wheat), and changes in sunspot activity. So we have watched with growing interest as astronomers report surprise at the failure of the sunspots to return.
The Victorian scientists would have swiftly said that the two cold winters we have been experiencing were inevitable, given the collapse in sunspot activity. There hasn’t been such sustained spotlessness on the sun for so long that it seems that the global warmists came to believe that those earlier Minimums were freakish occurrences.
Historians learn to take history as it is reported, and not to impose their own prejudices on it. We believe it highly likely that the temperate zones of the world—where most people and most grains come from—will experience notably cooler weather this year, which could imperil key crops.
Last year, according to some preliminary climatological surveys, the world temperature fell one degree Fahrenheit, the biggest one-drop for which we have authoritative records apart from the short-term cooling after Mount Pinatubo erupted in 1991.
That temperature decline seems to have continued through winter, which has been severe in many regions. It is, as of now, the 10th coldest in Chicago’s history.
Snow has been reported as far south as Malibu. The Pacific Northwest—including Seattle, Vancouver and Victoria—has suffered the kind of snow and ice storms that more resemble New England than the balmy Pacific Coast. London had one of its biggest snowstorms in decades. Louisiana had a severe snowstorm in December that closed the major bridge across the Mississippi, backing up traffic for miles in either direction.
The University of Illinois Climate Research Centre, which researches ice caps and sea ice in the polar regions (“The Chryosphere”), has for years been reporting on the shrinkage of sea ice. When they took their annual year-end portraits of the poles, they were amazed: In just four months, the sea ice had expanded dramatically, and the total ice was now back to the average level of the past thirty years.
But, (you may say), I’ve read the reports on the Arctic ice cap shrinkage and I know that we face a crisis. One of the best-known reports is published by the US National Snow and Ice Data Center, whose work was influential in the move to declare polar bears an endangered species. The Institute kept reporting this year that the ice was still disappearing, and its reports kept getting printed.
The Page 16 story came in mid-February when the Institute had to confess that “sensor problems” had given some misleading readings. In fact, they had managed to miss 193,000 square miles of sea ice, an area 18% larger than California.
Our take on all this is that the global warmists have such control over the universities, politics and media, that discussion of the possibility of a new period of global cooling is treated as something between hysteria and voodoo. Therefore, farmers and agricultural planners are making no provision for the possibility that this growing season could be far more challenging than last year. And, based on the historical evidence, cooling is cumulative: if the spots don’t return, next year is likely to be more problematic for farmers than this year.
’Twas ever thus. Our knowledge of sunspots dates back to Galileo and the records of sunspots have been kept since his time. He wasn’t permitted by the Elites of his time to say publicly that the earth revolved around the sun. The Vatican no longer claims that kind of authority, but the Scientific Left (if that is not an oxymoron) does.
One of Galileo’s contemporaries, Montaigne, expressed his exasperation about the way science was treated. “We parrot whatever opinions are commonly held, accepting them as truths, with all the paraphernalia of supporting arguments and proofs, as thought they were something firm and solid…Thus the world is pickled in stupidity and brimming over with lies.” That could describe today’s situation whenever the subject of global warming is discussed publicly.
This could be the ultimate Page 16 story.
On the other hand, it may be, as Henry Ford so vociferously maintained, that
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