Wall Street Greek with some great commentary today, enjoy Masters --
The market is stabilized, and for good reason. The significance of recent Fed action has been digested, and is now better understood, while fiscal stimulus is on the way. Today, data showed unemployment claims moderate and housing inventories on the downtrend. Oh, and also, after January's double-digit slide, valuations are in bargain territory for many coveted names.
Economic Data & Analysis
Initial weekly jobless claims came in at 301K for the week ended January 19, one thousand lower than last week's revised figure. The past two weeks' reports are really bringing into question just how bad things are in corporate America, and they don't look bad at all based on these figures alone. But, two weeks does not economic growth make. The level of ongoing claimants remains high, but insured unemployment decreased to 2.0% (seasonally adjusted) for the week ended January 12, down from 2.1% in the prior week. Michigan continues to lead all states at 5.1%, and guess what, Ford (NYSE: F) just announced plans for new layoffs today. PA finished third in insured unemployment, and New Jersey was not far behind. Newly discharged veterans rose 6.6% in the last week measured (Jan. 5), so John Edwards may have good reason in bringing the topic to the fore. Still, The Greek views Edwards as perhaps the most threatening candidate to the market.
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The 300K range of weekly claims is not one that should concern economists, but does it perhaps reflect a period of lull before the storm... Retailers post their results later than the rest of the corporate world, due to the seasonal importance of December and January. Many of these firms are just coming to grips with the reality of a poor holiday shopping season, a weak January and likely ongoing weakness in '08. The market has been moving money back into retail shares, and I was probably too early to condemn that. The same driver behind retail rise is behind the financial sector move, partly, and the market is dynamic and is factoring in the likely tax rebate the government is rumored to be near consensus on.
Retail/Restaurant/Consumer Discretionary Sector Woes Ahead
So, retailers get the near-term lift. But, I believe that the group differs somewhat from the already destroyed financial sector. The retail space has more tough times ahead and more realities to face. When these companies start to report results, as dour as they will be, they will also report very conservative if not concerning forward outlooks. They will likely begin to announce layoffs, store closures and other financial restructurings. This will start a second leg lower for the retail and consumer discretionary space, in our view, despite fiscal stimulus.
Depends on the Form of Stimulus
One check for $300 should boost a quarter's worth of results; an $800 check does a heck of a lot more. The government, rather the Administration and Republican contingent wants help for corporate America too. This might lead it to concede a bit of the payback to individuals, reducing it to the $300 level. The Greek, showing again our independent unadulterated view, is presenting the thesis that both are important and that offering small pieces to each ends up ineffective. It's the poor of America who need aid most now, but keeping others from joining the poor class is just as important.
The Administration's thinking may be that they could help stave off future layoffs by offering businesses some form of aid. We need both these pills folks. I say find ways to cut costs in government spending. Give Americans their $800 check and offer American companies their aid as well. Idealism? No! Find a way.
Existing Home Sales December
This is a non-starter at this point. It's simply not a catalyst anymore, as everyone knows housing sucks and is getting worse. Most even understand that the bottom may be near, as rates drop and inventories top out. Prices still have a ways to go before stabilizing, but the drivers behind price stability are moving in the right direction; well, some of them anyway. Economic recession would clearly not help.
Existing home sales dropped 2.2% in December to an annual run rate of 4.89 million units, short of economists' consensus. We say it's not a catalyst at this point, but it perhaps served as a reminder to the market that while help is on the way, the current situation is still poor. For the year on the whole, sales fell to a level 13% below 2006, marking the steepest decline since 1982. A positive aside from the report offered the fact that unsold home inventory dropped by 7.4%. That's a step in the right direction.
Contention With Kudlow
Last night, Larry Kudlow compared business lending activity now with another troubling period. He was attempting to offer reason to disbelieve economic recession, but I have to rebut. The Greek likes Larry, and admires what he has accomplished in his life, but we also get annoyed occasionally with his always positive view of the world. We prefer realism over optimism when money matters. Still, we understand Larry's confidence in America and it is well-founded, as this country is without doubt the farthest progressed economically.
Here's why we disagree with Kudlow on this topic. Business loan growth is doing well because banks have to lend somewhere, and companies had strong balance sheets heading into this period, and thus good collateral. But, things are about to change. Private equity runs on businesses have increased leverage in the business world, and that last bastion of loan demand (business) is going to turn down expansion efforts now. The commercial real estate market is on the cusp of collapse! As consumers stop spending, the consumer discretionary sector full of retail and restaurant establishments should consolidate. Store closures, sales, abandonment should drive values and prices down, and of course demand for new business expansion comes first. Therefore, current business loan demand has no consequence on tomorrow.
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