Thursday, 31 January 2008

Initial Jobless Claims Soar

With a dearth of positive economic data, the bull market cheerleaders have been pointing to the low initial jobless claims numbers in recent weeks as an indication that the labor market is still relatively healthy. This week's numbers suggest the permabulls have one less straw to clutch at as evidence the US economy is not screeching to a halt. from the US department of labor:



In the week ending Jan. 26, the advance figure for seasonally adjusted initial claims was 375,000, an increase of 69,000 from the previous week's revised figure of 306,000. The 4-week moving average was 325,750, an increase of 10,250 from the previous week's revised average of 315,500.

The advance seasonally adjusted insured unemployment rate was 2.0 percent for the week ending Jan. 19, unchanged from the prior week's unrevised rate of 2.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Jan. 19 was 2,716,000, an increase of 47,000 from the preceding week's revised level of 2,669,000. The 4-week moving average was 2,705,000, a decrease of 9,500 from the preceding week's revised average of 2,714,500.

This week's data marks the biggest increase since Hurricane Katrina in 2005. The 4 week average remains relatively low at 325,750. Remembering the lesson John Maudlin gave on seasonally unadjusted number shows that unadjusted claims actually fell this week. So again, the seasonal factors are weaving their magic and therefore the seasonally adjusted number should be taken with a grain of salt.

After a positive ADP report yesterday, today's initial jobless claims throws a spanner in the works before the nonfarm payrolls report. Tomorrow should be an interesting day for the most over-hyped and unreliable piece of economic data of the month.

ADP report indicates robust job growth

The ADP employment report continues to have a mixed record as a good predictor of non-farm payroll growth. How will this month's data fare? From

The ADP National Employment Report

January, 2008

Nonfarm private employment grew 130,000 from December 2007 to January of 2008 on a seasonally adjusted basis, according to the ADP National Employment ReportTM. The estimated change in employment from November to December was revised down 3,000 to 37,000. January's increase of 130,000 is consistent with nonfarm private employment growth that averaged 110,000 during the three-month period from October through December 2007.

The usual method is to add 25 -30k government jobs to the ADP number to get an approximate number for the NFP report. That would imply job growth of 155k -160k for the NFP report on Friday. However if you used that method in the past two months you would have significantly overestimated job growth.

Forecasters are well aware of false signals from the ADP report and are factoring in job growth of about 70 - 75k in non farm payrolls. That would be tepid growth but it is not yet recessionary. That said, recessions usually begin while payroll growth is still positicve. It's not until well into a recession that job growth goes significantly negative.

Wednesday, 30 January 2008

A Not So Little Writedown At UBS

Sovereign Wealth Funds may soon be receiving an invitation from UBS. From Bloomberg:

UBS Reports Record Loss After $14 Billion Writedown

UBS AG, Europe's largest bank by assets, reported a record loss after about $14 billion of writedowns on assets infected by subprime mortgages in the U.S.

The fourth-quarter net loss of 12.5 billion Swiss francs ($11.4 billion) was almost double what analysts surveyed by Bloomberg were estimating, and brings the total decline for the year to about 4.4 billion francs, the Zurich-based bank said today in a statement. UBS publishes its official results on Feb. 14.

UBS posted its first annual loss since the company was created through a merger a decade ago, with the fourth-quarter drop exceeding the records reported earlier this month by Citigroup Inc. and Merrill Lynch & Co. The collapse of the U.S. subprime mortgage market has led to more than $130 billion of losses and markdowns at securities firms and banks since June

Case-Shiller Home Prices Cliff Diving

There continues to be no silver lining in US housing data. Yesterday the Case-Shiller Home Price Index fell to another record low for year over year price declines. From Standard & Poors:

Data through November 2007, released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, show broadbased declines in the prices of existing single family homes across the United States, marking the 11th consecutive month of negative annual returns and a full two years of decelerating returns.

The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Indices. The 10-City Composite’s annual decline of 8.4% is a new record low. October’s data, published last month, was the first report of a record low in more than 16 years, with a decline of 6.7%. The previous largest decline on record was 6.3% recorded in April 1991. In November, the 20-City Composite recorded an annual decline of 7.7%. The 20-City Composite does not have data prior to 2000, so it cannot be compared to the 1991 time period. It does, however, follow the 10-City Composite closely, as portrayed in the graph above.

“We reached another grim milestone in the housing market in November,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “Not only did the 10-City Composite post another record low in its annual growth rate, but 13 of the 20 metro areas, each with data back to 1991, did the same. If you look at the monthly figures, every MSA has now posted three consecutive monthly declines. Eight of these MSAs, in addition to the two composites, have had more than 12 consecutive months of falling prices. Fourteen of the 20 MSAs, in addition to the two composites, recorded their single largest monthly decline on record in November. For the 10-City and 20-City composites this was a decline of 2.2% and 2.1%, respectively, over October”

The chart above tells the story. Year over year price rises set records in late 2004 and now the unwinding of the housing bubble is leading to record year over year price declines. Monday also saw some horrible data on New Home Sales. From the Census Bureau:

Sales of new one-family houses in December 2007 were at a seasonally adjusted annual rate of 604,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent below the revised November rate of 634,000 and is 40.7 percent below the December 2006 estimate of 1,019,000.

Sales for Sep, Oct and Nov were also revised down -0.9%, -2.0% and -2.0% respectively. Supply of new Homes hit a 9.6 months at the current sales rate which is the highest since October 1981.

The above data shows that little in-roads have been made into shifting the excess inventory of homes on the market. No doubt buyers are aware of falling home prices and are happy to sit on the sidelines knowing they will be able to get lower prices down the road.

Despite interest rate cuts and mortgage rate freezes the reality is, there are no quick fixes for housing. Individuals are slowly getting used to the idea that housing will not turn around in a matter of months. It will be a matter of years.

Tuesday, 29 January 2008

Dumping ANH

As mentioned on Friday, ANH's 2Q08 cashflow report was a little on the disappointing side. The company failed to build on the momentum of the first quarter when they posted their first pre-tax profit.

Last year ANH acquired a company called Webfirm and at that time noted that Webfirm was expected to contribute $1m pre tax profit to the company's results. Based on the latest quarterly report, that suggests that the rest of the business is doing a little worse than break even.

That puts greater uncertainty over the earnings capacity of the company and thus it's valuation. With that in mind I decided to unload my parcel of ANH shares and realize a quick 20% profit. That's a handy return in just one week however it has more to do with good timing than good stock picking.

I'll continue to monitor the progress of the company, however in the absence of clear evidence that the company is able to grow profits I will be looking elsewhere to make long term investments.

Monday, 28 January 2008

S&P500 4Q07 Earnings Forecasts Plunge

Last week I posed the question; How low can 4Q07 earnings go? The answer as of last Wednesday is -21.2% according to S&P. That puts FY07 earnings firmly into negative territory at -3.5%.

As 4Q07 S&P500 earnings forecasts continue to be slashed, 4Q08 projected earnings growth continues to increase. That's not because analysts are raising their 4Q08 forecasts but rather because they are cutting their 4Q07 numbers much more than 4Q08. 4Q08 earnings may well be positive but it will be a far cry from what is being currently projected.

4Q08 growth is now expected to be 53%. That will prove to be way too high. The chart below shows that quarter over quarter earnings growth has never exceeded 35%. in the last 20 years. That's not to say quarter over quarter earnings can't exceed 35% but rather that is highly unlikely.

4Q08 has a long way to go before it gets anywhere near reality and by implication FY08 numbers also need to come down. Also 1Q08 and 2Q08 growth forecasts are now nearing flat at 2.1% and 1.9% respectively. Expect them to go negative before the end of the first quarter.

The chart above shows that earnings expectations have fallen to levels seen only twice in the past 20 years. Both of those periods were characterized by economic recessions.

In the past couple of weeks, there has been talk of too much pessimism in the markets. However earnings expections beyond 4Q07 don't reflect pessimism. In fact they are still far too optimistic.

Saturday, 26 January 2008

$15bn or $200bn to save Bond Insurers?

This article on the Monoline Bond Insurers has caught a lot of attention. From the TIMESONLINE:

Mortgage bond insurers 'need $200bn boost'

America's biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday.

The failure to maintain their AAA ratings will lead to a further round of multibillion-dollar writedowns among the Wall Street banks and other large owners of the bonds, Sean Egan, of Egan Jones Ratings Company, said.

It would also push some of them into receivership, Mr Egan added.

Egan Jones makes its money by selling its research to money managers, rather than through fees from the companies it rates.

It has the same “nationally recognised statistical rating organisation (NRSRO)” accreditation from the US Securities and Exchange Commission as Fitch, Moody's and S&P, the mainstream credit agencies.

A couple of questions come to mind. How can Egan Jones estimate of $200 billion be so far from the figure of $15 billion being thrown around by New York regulators? Secondly, even if it turns out to be half of what Egan Jones believes, who would be stupid enough to stump up that amount of money?

The answer to the first question can proabably be answered by the fact that Egan Jones know what they are talking about and the New York regulators haven't got a clue. Charlie Gasparino of CNBC reported that Wall Street was unimpressed with the the regulators knowledge of the subject and basically told them to go away and come back with an adviser who had some idea of the magnitude of the problem.

Also, notably absent from this debate is any estimate from Fitch, Moody's and S&P on their estimates for what it would take to bail out the bond insurance industry. It wouldn't matter if they did have an estimate since their ratings have about as much credibility as a bumper sticker.

So who are you going to believe? The gang of three, Fitch, S&P and Moody's who get paid by the very companies they rate, conflict of interest anyone? Or an agency that gets paid by how good their research is?

The answer to the second question according the the Wall Street rumor mill seems to be Wilbur Ross, but this guy is a very shrewd investor and I'm sure he will be availing himself of the information provided by Egan Jones before he does anything silly.

How about US banks? There is no way that a bunch of US banks, with capital problems of their own are going to be able to come up with even a quarter of what Egan Jones believes is necessary.

That just leaves the US government as the final backstop. They are stupid enough to get involved, but considering the panicked 'non' fiscal stimulus package they are trying to ram through congress, do they really want to fork out another $200 billion of taxpayers money to rescue a bunch of stupid business decisions?

I say let them go bust. The market solution to the SIV problem was much better than the government sponsored alternative. This will be no different, even if it means another round of writedowns for banks and AMBAC and MBIA go bust.

Friday, 25 January 2008

ANH 2Q08 Quarterly Report

Ansearch released their 2Q08 Cashflow report today. Cashflow from operations mproved marginally to -155k from -177k in 1Q08. Cash Receipts from customers came in at $4.22m down from $4.64m in 1Q08.

Cash receipts, unlike sales can be affected by the timing of those receipts. Also, the company has noted previously that online advertising is usually softer around December and January.

That said, it is still a cause for concern to see cash receipts drop, albeit slightly. The other cause for concern is that the company didn't issue a statment on their sales performance. With every other Quarterly report in 2007, the company released a sales report.

From the above I can only conclude that the company did not post an increase in sales over the previous quarter, that would be the first time in two years. Given the huge growth in revenues they were bound to slow, but a decline, if that's what it was, is a little disappointing.

In addition the 2Q08 cashflow report shows the company did not pay any tax, they did pay a small amount of tax in the 1st quarter in which they announced a small pre-tax profit of $0.74m.

So the company posted a small decline in cash receipts, probably a commensurate decline in sales and perhaps a small loss as opposed ot the small profit I was expecting for the second quarter. I will endeavour to talk to the company on Tuesday. However at this stage it looks like my holding of ANH will be short lived.

Thursday, 24 January 2008

Beware of the Sucker's Rally

Before I get into the question of whether the latest stock market rally represents a sucker's rally, it's instructive to read the excerpt from John Hussman of Hussman Funds about how stock prices behave in bear markets.

Financial Markets Anticipate Recessions Before They are Obvious

It is crucial to recognize that the market downturns associated with recessions are never one-way movements. The basic feature of bear markets is that they maintain the hope of investors all the way down. The stock market often rides the Bollinger band lower, becoming more and more oversold, but will then unpredictably clear those oversold conditions by producing explosive advances that are fast, furious, and prone-to-failure.

The 2000-2002 bear market, which took the S&P 500 down by half and the Nasdaq down by more than three-quarters, included three separate 20% trough-to-peak advances in the S&P 500, and many more 5-7% rallies. We did capture a portion of those, but "clearing rallies" are always prone to failure, so we could remove only a fraction of our hedges. Unless we observe a very broad improvement in market action, that sort of trade would require more modest valuations than we see at present.

Generally speaking, when valuations are stretched (on normalized earnings) and both market action and economic measures have turned negative (as they have now), you can expect that buying-the-dip・will result in a brief feeling of genius and success followed by profound regret.

After dropping -24% from it's peak in November 2007 the XAO has rallied back more than 7% over the last 2 days. The big question is whether this is a sustainable uptrend or is it merely a sucker's rally? To attempt to answer this I thought it would be useful to have a look at past bear markets.

The chart below shows the 2002-2003 bear market. Of course there are many one or two day rallies but what I am concerned with here are the more major rallies. In this period there were 4 major rallies that failed to eventuate into a new uptrend.

The 1994-1995 bear market saw a similar decline from peak to trough as 02-03 and it also saw 4 major rallies that ended in failure before the market finally bottomed out.

The last example is the famous crash of 1987. From peak to trough the market gave up -50% in just 8 weeks. There were also 2 major rallies that lasted just a couple of days each, before the market pushed sharply lower.

There are definitely some similarities but ultimately all major market pullbacks have their own unique attributes. Returning to the question of whether the current pullback represents a sucker's rally. In all of the previous pullbacks shown above, none turned around on the first major rally and in fact in 2 of 3 cases above it took several attempts.

That does not mean that this time around will turn out to be the same. It is possible we saw the bottom after the record breaking 12 consecutive day decline ending on January 22nd. However I doubt it. I fully expect the XAO to run out of steam rather quickly and eventually head lower past the the lows of Tuesday.

Wednesday, 23 January 2008

Behind The Curve or On Another Planet?

One of the most fascinating (or annoying depending on your point of view) aspects of financial markets and economics is the diverse range of opinions on any number of issues. Equally amazing is the amount of so-called professionals who consistently get things dead wrong, but who escape criticism for their blunders.

This penchant of market guru's to stuff up multiplies exponentially around major market turns and economic cycle shifts. Don't get me wrong, financial forecasting is not easy, but still, the amount of botched calls makes the mind boggle.

I often watch CNBC and have gotten used to a lot of the guests that frequently appear on the show. One character that sticks in my mind because of his steadfast belief that the US economy is in good shape is Brian Wesbury, Chief Economist for First Trust Advisors in Chicago.

Below are some of Wesbury's comments on CNBC over the last month regarding the US economy and stock market. I have also included the level of the S&P500 on each date.

Brian Westbury on Kudlow and Co, 12/12/2007, “This whole recession is a figment of people’s imagination.” S&P500 1486.6

Brian Westbury on CNBC on, 12/24/2007, “The US Equity market is about 25% undervalued today." S&P500 1496.5

Brian Westbury on CNBC on, 1/22/2008, “There is really no evidence that the economy has turned over”

“Initial unemployment claims were at 301 thousand in the latest reporting week. This is so far from a recessionary level I’m like, I’m shaking my head at anybody who thinks we’re in a recession.” S&P500 1310.5

His latest quote yesterday is quite striking as he seems to have fallen for the same line on unemployment claims that I did. Maybe he should read John Maudlin's timely reminder about the hidden traps in using seasonally adjusted numbers. An increasing number of people are shaking their head at you Brian.

I find it difficult to believe, if Wesbury is in fact an economist, that he doesn't see any signs of serious weakening in the US economy. Hence the question in the title of this post. Is Wesbury on another planet? I think he must be.

Wesbury has the luxury of time, noone can say conclusively say that the US is or isn't currently in recession. However I believe in due course Wesbury will have to eat a little humble pie. It will be interesting to watch Wesbury go from his current state of denial to one of acceptance. The good news for Wesbury is that he will have plenty of company.

Tuesday, 22 January 2008

Dipping my toe with Ansearch (ANH)

Well that was interesting. Australia's All Ordinaries index (XAO) plunged -7.2% today in concert with a global stock market meltdown. That's the biggest one day drop for the XAO since October 16th 1989 when it fell -8.1%. The fun really starts tonight when the US markets open up for the first time this week.

I've been on the sidelines for 14 months (the last time I bought a stock was 14 Nov 2006) waiting for such an event to pick up some bargain stocks. Instead of going in for a beaten down blue chip I went for something more speculative. I believe there is value in this company, however the earnings are less than certain as the company is at a turning point, going from losses, to possibly posting a maiden profit in the current half year.

Ansearch (ANH) is an online media company that generates revenue by selling advertising space on a network of search engines, portals and websites. The company specializes in delivering sponsored search, display and media advertising to Australian audiences and has recently partnered with US and UK search engines, websites and third party advertising networks.

The company has a number of partnership agreements, key among them an agreement with Google to deliver Google's Adsense for search program to Ansearch users.

The company has had a mixed past, previously the company was called Optum Health Limited and changed it's name to Ansearch in late 2005. Also controversy arose in the company's early stage of development when they were accused of redirecting traffic from popular sites to their own by listing hundreds of domain names of popular sites with simple misspellings.

More recently the company was embroiled in a boardroom brawl involving the CEO Dean Jones and other directors, chief among them, Glenn Ridge of Sale of the Century fame. Since then Ridge and another director have been booted from the board and Dean Jones the founder and driving force behind the company is back in charge.

In December last year the company announced the appointment of Adrian Giles as a director. Giles founded Hitwise in 1997 which grew to become one of the most recognised global internet measurement brands operating in the US, UK, Australia, New Zealand, Singapore and Hong Kong. The company was ranked as one of the fastest growing IT companies in the Asia-Pacific region for each of the past five years. Hitwise was recently sold to Experian for US$240 million.

Now to the financials. As can seen below ANH's revenue growth has been impressive. FY07 revenue grew more than 400% over the previous year.

Not as impressive has been the company's ability to convert that revenue growth into profit. Quarterly profit figures are not available so I used half yearly numbers in the chart below.

The trend is headed in the right direction. The 2Ho7 loss was just -$0.2m. The big question is whether they can continue that trend into profitability. The company's latest quarterly report suggests they can. In October the company reported a $0.74m profit before tax for 1Q08. The company is due to report their 2Q08 results by the end of this month.

Without predictable earnings it is impossible to accurately forecast second quarter and more importantly full year numbers. Whilst revenue will continue to grow it cannot keep up the current run rate. Therefore I have tried to be conservative in my forecasts.

Although the 1Q08 represented the company's first profitable quarter I have decided to assume no growth in quarterly profit for the remainder of the year. Instead I have just multiplied the 1Q08 number by 4 which gives $2.96m profit before tax. Not scientific I know, but I believe it is conservative enough.

The company has accumulated tax losses to offset profits. However in the interests of being conservative and to arrive at a more accurate valuation, I have assumed a 30% tax rate which gives NPAT of $2.07m for FY08.

According to the latest Appendix3B ANH has 557.8m shares on issue and just over 67m options, none of which are in the money. However I have assumed that the 12.4m options with an exercise price of $0.04 will be exercised (they have been in the money until today when the share price fell under 4 cents). If they are not exercised my valuation would increase marginally.

Given the above assumptions would yield a return on equity of about 30%. The company is debt free. Using a discount rate of 15% I estimate fair value at around $0.08 per share.

As mentioned earlier, the assumptions on profit are not solid and therefore there is definitely some speculation in buying the stock at this point in time. The grid below provides a range of valuations for different profit outcomes and by implication ROE's. As you can see, small changes in profit can cause large changes in the valuation.

I have tried to err on the side of conservatism however my forecasts may prove to be too optimistic. If that's the case the valuation goes out the window. However I'm taking a punt that this company has got itself together and will continue it's trend into profitability. We should know more from the 2Q08 report by the end of this month.

Monday, 21 January 2008

How Low Can 4Q07 Earnings Go?

Financial stocks had a horrible earnings week last week with almost all missing market expectations. As a result S&P500 operating earnings are now estimated to show a -13.6% decline for 4Q07. Expectations can change quickly, only 4 months ago 4Q07 earnings were expected to show double digit growth.

1Q08 and 2Q08 estimates are inching lower, now expected to show earnings growth of 3.3% and 3.2% respectively. Expect those expectations to turn negative in the coming months. 4Q08 forecasts are looking more and more attractive as 4Q07 forecasts keep getting slashed but that will be eventually be revised closer to reality.

Also FY08 forecasts are still way too high projecting 16.2% growth. With 2 negative quarters back to back we have an earnings recession. Last time there was an earnings recession (shown on the graph below by the huge 40% drop in 2001 earnings ) there was an economic recession, fancy that.

An economic recession accompanied the earnings recession in 1990-91. Earnings turned negative for just one quarter in 3Q98, that did not result in an economic recession. What's the bet the current earnings recession will be coupled with an economic one?

Sunday, 20 January 2008

John Maudlin on Jobless Claims

A few days ago I commented on the drop in US initial jobless claims and suggested that, if we see a few more weeks of low numbers we could be in for an upward revision to payroll numbers on Feb 1st. However as John Mauldin points out in his weekly newsletter initial claims are actually on the rise.

Every week I get an analysis of the claims data from long-time reader John Vogel. Mostly it is not very exciting, but he does a very thorough job of examining the actual data and comparing it to previous years. Stick with me here as I run through a few numbers.

Last week there were actually 521,280 initial claims. That number rose to 547,637 this week. So why didn't the seasonally adjusted number rise? Because in week three of previous years the number dropped, often considerably. In 2007 the number was essentially flat. But in 2006, the drop in the third week was 116,000 and in 2005 it was 226,000. There were also big drops in 2004 and 2003, 187,000 and 172,000 respectively.

So, when you smooth the number out by making seasonal adjustments, you expect a large drop in week three from week two. Except that we did not get that drop, we got a rise of 26,000, which is clearly not the trend for the last five years. That also squares with last week's employment survey which shows job weakness.

The bottom line being;

What it really means is that the BLS numbers should be taken with a huge grain of salt around periods when the economy is changing, as it is now. And using them to make a case that the economy is not weakening, as a number of pundits did, could be considered misleading.

I feel a little silly actually, falling for this rookies mistake of not looking closer at the seasonally adjusted numbers. However it does make me more comfortable with my view that the US labour market continues to deteriorate.

Saturday, 19 January 2008

It's all over for AMBAC

AMBAC has moved one step close to bankruptcy with news yesterday that the company's credit rating had been cut by Fitch after withdrawing a planned capital raising. From

Ambac scraps plan to raise capital by selling shares
Bond insurer loses AAA rating from Fitch; broad impact seen

Ambac Financial Group Inc. said on Friday that it's scrapping plans to raise new capital by selling equity after the bond insurer's shares collapsed in recent days.

Fitch Ratings cut the AAA ratings of Ambac's main bond insurance subsidiaries after the announcement and Standard & Poor's warned that it may do the same.

Hundreds of billions of dollars of municipal bonds and mortgage-related securities guaranteed by Ambac may now be downgraded too. That sparked concern about more write-downs at banks and brokers and added to turmoil in the muni bond market. See full story.

It was a ridiculous idea to raise capital at their current share price. The stock is down more than 90% and the capital raising would be more than the company's market cap. thus the dilutive effects on existing shareholders would be disastrous.

The credit rating was knocked down 2 notches to AA but Fitch and S&P might as well might save time and cut it to junk because that's where it is headed. The only way this can be prevented is if someone is stupid enough to want to buy it out. Warburg Pincus seems to be in the business of making stupid bets or how about Bank of America?

Then there is the possibility of a government bailout of the type Jim, the communist, I want government intervention every time my stocks go down, Cramer suggested on CNBC. Click on the image to hear Cramer's proposal.

Cramer's proposal sounds decent on the surface but it raises the whole moral hazard issue - that the government will bail out large distressed institutions at any cost. For once let the free market sought it out. Let the insures go under and open the door for Mr Buffet to walk in and set up shop. Not because he could do with the money but because you know he wouldn't take the stupid risks that have got us into the current predicament.

Friday, 18 January 2008

Parsing the Expected & the Unexpected

This week has seen an avalanche of economic and company specific data. Some of it expected, some of it unexpected. For example it was expected that Merrill Lynch would have a shocker of a quarter. From Bloomberg:

Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. The loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989, sending Merrill down 10 percent in New York trading, the biggest decline since the 2001 terrorist attacks....

The fourth-quarter's writedowns included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less- reliable counterparty....

The emphasis in bold is mine. I haven't seen other financial institutions do this kind of thing yet but given that AMBAC and MBIA are on borrowed time with respect to their AAA credit ratings, there is potential for some very serious repercussions from this.

How about some unexpected? On the positive unexpected side, weekly jobless claims dropped significantly. From the Department of Labor:



In the week ending Jan. 12, the advance figure for seasonally adjusted initial claims was 301,000, a decrease of 21,000 from the previous week's unrevised figure of 322,000. The 4-week moving average was 328,500, a decrease of 11,750 from the previous week's revised average of 340,250.

The advance seasonally adjusted insured unemployment rate was 2.1 percent for the week ending Jan. 5, an increase of 0.1 percentage point from the prior week's unrevised rate of 2.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Jan. 5 was 2,751,000, an increase of 66,000 from the preceding week's revised level of 2,685,000. The 4-week moving average was 2,725,750, an increase of 28,250 from the preceding week's revised average of 2,697,500.

Initial Claims were not only down, they were significantly down, however continuing claims remain elevated. I heard rumblings that seasonal factors may have distorted the initial claims number. A couple more weeks of low numbers could mean an upward revision to December payrolls next month.

Next, the market was expecting continued crappy housing data, just not this crappy, from the US Census Bureau, firstly Permits:

Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,068,000. This is 8.1 percent below the revised November rate of 1,162,000 and is 34.4 percent below the revised December 2006 estimate of 1,628,000.

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 1,006,000. This is 14.2 percent (±8.3%) below the revised November estimate of 1,173,000 and is 38.2 percent (±4.9%) below the revised December 2006 rate of 1,629,000.

Privately-owned housing completions in December were at a seasonally adjusted annual rate of 1,302,000. This is 7.7 percent (±10.3%)* below the revised November estimate of 1,411,000 and is 31.0 percent (±5.8%) below the revised December 2006 rate of 1,887,000.

Sorry, didn't have time to add pretty graphs and stuff, but you can go to Calculated Risk for their always excellent analysis on US Housing.

Then, as expected there was Bernanke on the Hill testifying before Congress and calling for fiscal stimulus, however the big one that caught everybody by surprise was the awful Philly Fed index. Analysts had expected it to come in at -1.0 but came in at -20.9. From the Philadelphia Fed:

Indicators Suggest Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell sharply from a revised reading of -1.6 in December to -20.9, its lowest reading since October 2001

The graph below comes from Calculated Risk. As they note, the current reading does not conclusively prove a US recession is either imminent or in progress (e.g note the -20 reading in 1995), however I don't need much more convincing.

Thursday, 17 January 2008

AMBAC Just Postponing The Inevitable

Ambac Will Cut Dividend, Raise $1 Billion in Capital

Ambac Financial Group Inc. replaced its chief executive officer, slashed the dividend 67 percent and will raise more than $1 billion to preserve its AAA credit rating after announcing the biggest-ever writedowns by a bond insurer.

Ambac, the second-largest insurer of municipal and structured finance debt, fell the most ever on the New York Stock Exchange, extending a 76 percent decline from the past 12 months. Ambac will report a loss after reducing the value of securities it guarantees by $3.5 billion, according to a statement today.

More Capital?

Ambac, which put its AAA stamp on $556 billion of securities, probably will need more capital because the quality of the debt it guarantees will drop, Tavakoli said. Standard & Poor's today said it plans to re-examine the bond insurer ratings after increasing its assumptions for losses on subprime mortgages.

Until 2007, insuring debt allowed Ambac to increase earnings and dividends every year for the past decade. Net income, which rose 17 percent in 2006 to $875.9 million, probably fell in 2007.

Ambac cut its quarterly dividend to 7 cents from 21 cents, three weeks after stating in a regulatory filing that the payout will remain unchanged. The company will report a fourth-quarter loss of $32.83 a share when it releases earnings Jan. 22. The loss equates to more than $3 billion based on the 101 million shares outstanding.

3 weeks ago the dividend was safe now it's been slashed 67%. Doesn't exactly inspire confidence. This could potentially be the last dividend this company pays.

'A Down Payment'?

Ambac's writedowns, which exceeded those announced last week by MBIA, failed to convince analysts that the worst is over.

"It's one thing to have a plan and another to have a plan that is credible and will be a long-term fix,'' said Donald Light, an analyst with Boston-based consulting firm Celent. "Is this just a down payment in what's going to be a series of payments of uncertain length?''

Yes Donald, it's not going to be nearly enough capital in the long term. Although the $1 billion equity raising will be enough to keep their AAA rating from Fitch, the ratings agencies keep shifting the goal posts.

S&P Will Review Bond Insurers With New Assumptions

Standard & Poor's will start a new examination of bond insurers, one month after affirming the companies' AAA ratings, because losses on subprime mortgages will worse than the firm anticipated.

The ratings company will examine whether insurers including MBIA Inc. and Ambac Financial Group Inc. have enough capital to withstand reductions in the ratings of the mortgage-backed securities they guarantee. The credit test will be completed within a week, said Mimi Barker, a spokeswoman in New York. "The rating agencies have lost as much credibility as the bond insurers,'' said Richard Larkin, a municipal bond analyst with JB Hanauer & Co. in Parsippany, New Jersey. "Every time you turn around they're changing their minds about what's going to happen in the subprime mortgage market.''

Mr Larkin is dead right, as mentioned here numerous times the ratings agencies have been hopelessly behind the curve. Getting back to the first point, is $1 billion really going to fix AMBAC's problems? Not according Bill Ackman who has been shorting the stock for months and has recently decided to short even more shares of Ambac.

The interview below is well worth the watch, Ackman believes AMBAC could need to raise as much as $10 billion or more just to stay afloat.

This company is going the way of Countrywide, either being bought out for a fraction of book value or filing for chapter 11. At least Countrywide had a huge branch network of value, I'm not sure what AMBAC has to offer potential investors.

Wednesday, 16 January 2008

As expected Retail Sales were weak in December. Also November and October were revised down slightly. From the Census Bureau:


The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $382.9 billion, a decrease of 0.4 percent (±0.7%) from the previous month, but 4.1 percent (±0.7%) above December 2006. Total sales for the 12 months of 2007 were up 4.2 percent (±0.4%) from 2006. Total sales for the October through December 2007 period were up 4.9 percent (±0.5%) from the same period a year ago. The October to November 2007 percent change was revised from +1.2 percent (±0.7%) to +1.0 percent (±0.2%).

Retail trade sales were down 0.4 percent (±0.7%) from November 2007, but were 4.3 percent (±0.8%) above last year. Gasoline station sales were up 18.5 percent (±2.8%) from December 2006 and sales of nonstore retailers were up 12.1 percent (±1.8%) from last December.

This is not total capitulation but it does show softness and combined with rising delinquencies among all classes of consumer credit, it looks as though the resilient US consumer is starting to act more cautiously.

Tuesday, 15 January 2008

And Now For The Expected

As expected Citigroup (C) produced some horrible numbers for the fourth quarter, slashed their dividend and announced much needed capital injections. From Bloomberg:

Citigroup Reports Record Loss on $18 Billion Subprime

Citigroup Inc. posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the biggest U.S. bank said today in a statement. New York-based Citigroup also cut its dividend by 41 percent and said it will receive $14.5 billion from outside investors to shore up depleted capital.

``We are taking comprehensive action to position Citi for the future with the capital strength that will allow us to refocus on earnings and earnings growth,'' said Chief Executive Officer Vikram Pandit, who was installed in December after Charles Prince stepped down amid mounting subprime losses.

Citigroup racked up record losses as it misjudged the depth of the mortgage crisis. The writedown for subprime home loans and related securities was almost double what the company expected as recently as November. Citigroup's markdown is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank...

...Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion on an annual basis. The company said as recently as November that it had no plans to lower the payout to shareholders.

Not reported in the above story was that some of the writedowns were related to the cutting of 4,200 jobs. The capital injection dilutes existing shareholders by approximately 11%. However the name of the game now is one of survival and institutions like Citi and Merrill Lynch will take capital from whoever is willing to invest it.

Speaking of Merrill Lynch (MER), which is expected to report results on Thursday, they announced today that they too are in the process of substantially diluting their existing shareholders and impairing their earnings ability just to stay afloat. Also from Bloomberg:

Merrill Lynch Gets $6.6 Billion From Kuwait, Mizuho

Merrill Lynch & Co., the U.S. bank battered by subprime mortgages losses, raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

The group also includes the Korean Investment Corp. and clients of U.S. money managers TPG-Axon Capital and T. Rowe Price Associates Inc., Merrill said in a statement today. The mandatory convertible securities carry a 9 percent annual dividend and a 17 percent conversion premium. The investors won't have a say in how Merrill is run, the bank said.

Merrill is raising money after $8.4 billion of writedowns on U.S. mortgage investments led to the biggest loss in its 93- year history in the third quarter. Today's investment comes a month after the New York-based firm raised $6.2 billion from Singapore's Temasek Holdings Pte and Davis Selected Advisors LP.

"We look forward to our relationship with Kuwait Investment Authority providing Merrill Lynch with additional opportunities to grow its presence there," Merrill Chief Executive Officer John Thain said in today's statement. "Because of their extensive corporate client base in Japan and their deep network in China, the Pacific Rim and globally, we expect future collaboration with Mizuho to be very productive."

Yeah, nice attempt to put a positive spin on a dire situation Johnny boy. You've just diluted your existing shareholders by 16% and added almost $600m a year in preference dividend payments to your cost line.

All in all, nothing surprising in either of these reports. Some may argue that Citi's writedowns were less than expected however at the end of the day whether it was $18 billion or $24 billion it's a terrible number and underscores the extent of the problems in the financial sector.

IBM Produces The Unexpected

A couple of days ago I talked expecting the unexpected, both positive and negative. Yesterday IBM came out with the positive, from

IBM expects profit to easily top forecasts

International Business Machines Corp. delivered a surprise Monday, saying fourth-quarter earnings for the information-technology giant will easily exceed Wall Street's estimates and touching off a buying spree in Big Blue shares and across the tech sector.

...the company (IBM) said it expects to earn $2.80 a share from continuing operations, up from $2.26 a share in the year-ago fourth quarter. Revenue will grow 10% to $28.9 billion, the Armonk, N.Y.-based company said.

Analysts polled by Thomson Financial have, on average, been expecting the Dow Jones Industrial Average component to earn $2.60 a share on revenue of $27.82 billion.

"The broad scope of IBM's global business -- led by strong operational performance in Asia, Europe and emerging countries -- drove these outstanding results," said Samuel Palmisano, IBM's chief executive, in a statement.

IBM said it would release more details on Thursday, when the company plans to formally announce fourth-quarter results.

Analysts, however, sounded a more cautious note, crediting IBM with a strong performance but urging caution in terms of drawing more general conclusions from the results.

"The million-dollar debate remains [whether] 2008 tech trends weakening, and if so by how much," said Louis Miscioscia of Cowen & Co.

"While it's impressive that IBM's quarter did hit and overachieve our and the Street's estimates, we maintain our neutral rating at this time, given the uncertainties for 2008 with respect to tech spending," he wrote clients.

The details of IBM's 4Q07 report on Thursday will be interesting, particularly with respect to how much the weak dollar helped earnings. On the negative side but not totally unexpected Sears pre-announced a larger than expected decline in 4Q07 earnings. From

Sears Holdings sees big profit shortfall

Sears Holdings Corp. shares fell 6% in midday trading Monday after the retailer warned that fourth-quarter earnings per share may fall as much as 51% from last year's levels.

Sears Holdings (SHLD) warned it's expecting earnings to fall between $2.59 and $3.48 a share for the three months ending Feb. 2, compared with last year's $5.33 a share.

Analysts polled by Thomson Financial have been expecting fourth-quarter earnings of $4.43 a share, on average.

The stock fell $6.42 to $89.75, eclipsing its earlier 52-week low of $90.80 a share. It's also the first time since early 2005 that the stock has fallen below $90. Downgrades came from Credit Suisse and Goldman Sachs, who cut the stock to sell.

The decline comes after a drop in holiday-season sales for both the company's Sears and Kmart chains. For the nine-week period ended Jan. 5, Sears' domestic same-store sales fell by 2.8% and Kmart's same-store sales dropped by 4.2%.

"Kmart has been crushed by Wal-Mart," said Craig Johnson, president of consulting firm Customer Growth Partners. "It's not a well-managed retailer...

..."We believe that comparable-store sales results reflect increased competition and the negative impact of unfavorable economic conditions, such as a weak housing market and consumer credit concerns," Sears said.

The Sears news was awful but IBM won the day as the market was desperately seeking a catalyst to rally from oversold conditions. To finish this post off it is only fitting to take a look at the effect the unexpected had on one analysts view of Sears, from the same marketwatch story;

Gary Balter, analyst at Credit Suisse, said his previous buy recommendation on Sears was based on the company's free cash flow and asset value.

Now, "over the past few months, we believe the largest piece of that value, real estate, has declined materially, with other pieces including brand value also losing a substantial part of their value in this market," Balter wrote in a note to clients.

He cut his stock price-target to $70, from $150.
This is embarrassing, I hope the dealing desk gives this analyst heaps for what is just a horribly wrong and behind the curve call. Hopefully he didn't convince anyone to buy Sears in recent months.

Monday, 14 January 2008

PWK Gives Green Light For Project Runway

Pipe Networks (PWK) announced today that they have received sufficient revenue generating contracts to proceed with Project Runway. Project Runway is of course PWK's attempt to break up the 'gang of fours' stranglehold on Australian internet capacity by constructing a 6,900 km undersea cable system linking Sydney, to the communications hub of Guam with a spur connecting Madang, Papua New Guinea.

The project is scheduled to be completed by 2Q09 and the company expects to achieve positive cash recovery of the investment within 3 - 5 years. That means the company expects to generate more than $200m in approximately 4 years from the project.

Some back of the envelope calculations suggest that the company could be generating about $100m in revenue by FY10, and given their current NPAT margin of approximately 20%, NPAT of about $20m in 3 years time. That means the company could be generating more than 4 times the NPAT of FY07 by FY10. If that is the case the share price will more than look after itself.

Despite the $200m price tag of the project the company said that they do not expect it to impact previously released guidance of $7.0 - $7.4m NPAT for FY08 and in excess of $10m for FY09. Also they expect to keep their dividend policy the same as previously announced.

Another positive is the fact that the company does not see the need to raise additional capital at this time. However they will seek to extend their existing debt facility of more than $20m. This company is truly on an exciting growth path into the future, the biggest challenge going forward will be their ability to execute the project on time and within budget.

Sunday, 13 January 2008

Attention on US earnings

Fourth quarter earnings season kicks into full swing in the US this week. The latest estimates from Standard and Poors suggest 4Q08 operating earnings will show a decline of about -8.2%. Companies of interest include Citigroup (C), Merrill Lynch (MER), J.P. Morgan Chase (JPM), Washington Mutual (WM), PNC Financial (PNC), Wells Fargo Co. (WFC), General Electric (GE), IBM (IBM) and Intel (INTC).

The market is fully expecting a poor earnings season, particularly from financials. Huge multi-billion dollar writedowns from the likes of Citi and Merrill will also come as no surprise.

Of more interest will be company forecasts for 2008. Especially companies in sectors that have been largely immune from the problems in housing, financials and retail. The market was spooked last week by AT&T's admission about a softening consumer. Unexpected comments both positive and negative have the potential to move the markets which are already teetering on a knife edge.

I have been saying for many months that analysts estimates are too high and they have started to come down in recent months. If 4Q07 earnings come in as expected FY07 earnings will actually be slightly negative. Looking out, 1Q08 and 2Q08 estimates have come in slightly from before Christmas to +4.4% and +4.2% respectively. That's largely because their comps (comparable periods from the previous year) are pre credit market turmoil.

When you get to 3Q08 the comps become much easier because 3Q07 was when earnings fell off a cliff. What that tells you is that analysts expect things to get back to normal. This is what gives me more confidence in my recession call. Company analysts, just like economists, are behind the curve in their expectations. Major segments of the mortgage and securitzation markets have just gone away and with them, a lot of profits for financial institutions.

Forget about the huge writedowns from Merrill and Citi and focus on the health of their remaining businesses. Also watch the bad debt provisions for the likes of WM who have already signaled massive increases. This will effectively wipe out their profits for the year.

But as alluded to above the biggest surprises will be the ones that are the least expected. In this increasingly uncertain environment you should be expecting the unexpected (if that's possible). Note that the unexpected does not have to be all negative, plenty of companies will beat forecasts and raise expectations, however you should also be prepared for plenty of negative surprises.

Saturday, 12 January 2008

Dennis Kneale is a complete moron

For anyone who regularly watches CNBC, the title of this post will come as no surprise. Dennis Kneal is consistently out of his depth on just about every issue with respect to the economy and the stockmarket. This is evident in his complete lack of knowledge on the aforementioned topics and the grade school platitudes he parrots in just about every interview.

However, today he really out did himself, claiming that investors shouldn't second guess corporate CEO decisions and cited former Merrill Lynch CEO Stan O'Neal as supporting his claims. How the irony of claiming that citing a CEO, that presided over one of the worst blunders in recent corporate history to bolster his argument escapes him, is beyond me. Click on the image below to watch Kneale make a fool of himself.

Friday, 11 January 2008

Throwing Good Money After Bad

Bank of America continues to make dumb investment decisions with their latest master stroke to double down on their disastrous bet on Countrywide Financial. From Bloomberg:

Bank of America to Acquire Countrywide for $4 Billion

Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion, five months after making a money- losing $2 billion investment in the unprofitable mortgage lender.

Bank of America will acquire Countrywide for approximately $7.16 a share in stock, the Charlotte, North Carolina-based company said in a statement today. The offer is 7.6 percent below Countrywide's closing share price on the New York Stock Exchange.

"I hope Bank of America isn't throwing good money after bad," said Eric Schopf, a fund manager at Baltimore-based Hardesty Capital Management LLC, which owns 216,000 Bank of America shares, before the takeover announcement. "They struck a deal that wasn't very attractive. Hopefully they can get it right the second time around."

Investors should beware when the word 'hope' is being thrown around by the so-called professionals. Remember what was said back in August when B of A paid $18 a share? Let's rewind:

"We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets," said Kenneth Lewis, Bank of America's chief executive, in a statement. "In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."

The Wall Street lemmings are out in force claiming that B of A has had 6 months to look under the hood of CFC so they should know very well what the company is worth. I think that is a fairly reasonable view if you walk around with your head firmly lodged in your ass. Let's face it, B of A has no idea what Countrywide is worth. They paid $18 a share just 4 and half months ago. Apparently now $7.16 is a good price.

Countrywide, the largest independent U.S. mortgage company, gives Bank of America about 9 million borrowers and fees from servicing $1.5 trillion of mortgages.

No doubt there is value in Countrywide's extensive branch network. However B of A will also be taking on massive credit losses. Remember this chart?

This is clear case where the trend is not your friend. B of A says the deal is eps neutral for 2008 and will be eps positive in 2009. I doubt very much whether this deal will be eps neutral this year with the amount of forecast loan losses CFC is facing.

In the absence of this deal, CFC is bankrupt. CEO Angelo Mozillo's behaviour has been nothing short of criminal as he cashed in on options worth more than half a billion dollars whilst continuing to sing the company's praises when all the while the company was going down the gurgler.

In September I noted that B of A's intial stake in CFC was no bargain and this will turn out to be another poor investment that B of A shareholders will be paying for in the next few years.

More Signs Of US Recession

Just a few cut and pastes of stories that I believe are indicative of a slowing US economy and more specifically an ailing US consumer.

Capital One shows credit woes firmly hitting consumer

Credit-card shares were among the top decliners in the financial sector Thursday after Capital One Financial Corp. lowered its earnings outlook and raised its loan loss reserves, with increasing clarity that the credit crisis sparked by careless home lending has spread to the consumer sector.

As delinquencies on subprime mortgages surged this year, there were initially few signs that similar problems were leaking into the credit-card industry. However, that changed in recent weeks as evidence, like Thursday's news from Capital One, shows that consumers loaded up on credit-card debt to make up for a loss in the purchasing power they once wielded by refinancing mortgages during the real-estate boom.

Early Thursday, Capital One Financial Corp. cut its 2007 earnings view to $3.97 per share, below its previous forecast of $5, and said that it expects fourth-quarter earnings of 60 cents a share.

The McLean, Va.-based financial holding company said that the reduction was driven by increased provision expense and additional legal reserves established in the fourth quarter...

... Capital One said that the fourth-quarter 2007 provision for loan losses was approximately $1.9 billion. This is made up of approximately $1.3 billion in charge-offs and an allowance build of about $650 million.

"The allowance build reflects fourth-quarter delinquencies in the company's national consumer-lending businesses, continued deterioration in the approximately $700 million Held for Investment portfolio of Home Equity Lines Of Credit (HELOCs) originated by GreenPoint Mortgage, and expectations for a weaker U.S. economy in 2008, as evidenced in recently released economic indicators," the company said in a statement Thursday.

American Express Has $440 Million Charge for Quarter

American Express Co., the third- largest U.S. credit-card network, forecast first-quarter earnings below analysts' estimates and adopted a ``cautious view'' for 2008 because of a slowing economy.

The company will take a $275 million fourth-quarter charge as more cardholders fail to repay their debts, New York-based American Express said in a statement today. The company fell 7 percent in extended trading.

"We did see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn,'' Chief Executive Officer Kenneth Chenault said in the statement.

American Express said its first-quarter 2008 earnings from continuing operations will be less than the 90 cents a share in the same period in 2007, missing the 93 cent average estimate of 12 analysts surveyed by Bloomberg.

``Credit-card performance will noticeably deteriorate during the year, given spillover from residential mortgages, weaker economic trends, and higher levels of unemployment,'' Fitch Ratings said today in a report on the U.S. industry.

Weak holiday sales spark profit warnings

U.S. retailers reported disappointing holiday sales in December, sparking several profit warnings, as promotions, last-minute shopping and gift-card redemptions failed to turn around lackluster performance in the largest sales month of the year.

Retailers from Gap Inc. and Kohl's Corp. (KSS) to Limited Brands and Macy's Inc. (MC) missed analysts' forecasts.

Hot Topic (HOTT), American Eagle Outfitters Inc. (AEO) and Men's Wearhouse Inc. (MW) were among the retailers to lower their fourth-quarter profit forecasts.

No. 1 retailer Wal-Mart Stores Inc. (WMT) and No. 1 wholesale club Costco Wholesale Corp. (COST)were rare bright spots, benefiting from budget-conscious consumers seeking bargain electronics and buying bulk-food items. Off-price retailer Ross Stores Inc. (ROST) also benefited from shoppers seeking name brand products at a discount.

Two-thirds of retailers missed what were for many already lowered expectations, well above the long term average of 43%, according to Retail Metrics.

U.S. retailers reported a 0.4% gain in December, Retail Metrics said. Coupled with results from November, sales rose 1.7%, the worst performance since 2002.

More profit cuts expected

"Department stores and specialty retailers were among the losers in December, while discounters served as a relative source of strength," said Morgan Stanley analyst Michelle Clark. "Lackluster traffic levels in the weeks leading up to Christmas drove increased promotional activity."

Retail profit estimates appear to be at least 3 percentage points too high for 2008, the analyst said.

"We'll see a soft year in terms of consumer spending," said Stephen Hoch, Wharton School marketing professor.

According to ShopperTrak, retail foot traffic for November and December combined dropped 2.7%.

Possibly some of the worst data on the US consumer to date, yet the market rallied in anticipation of another interest rate cut. Despite the fact that 100bps of rate cuts have done nothing for the market and will do nothing for embattled consumers and declining company profits.

Thursday, 10 January 2008

Initial Jobless Claims Contained ......for now

Weekly Initial Jobless Claims fell to a 2 month low of 322,000 in the week to January 5th. Investors may breathe a sigh of relief from the latest numbers but for how long? I suspect it will only be a matter of time before the 4 week moving average moves ticks up into the 350,000 - 400,000 danger zone. From the Department of Labor:



In the week ending Jan. 5, the advance figure for seasonally adjusted initial claims was 322,000, a decrease of 15,000 from the previous week's revised figure of 337,000. The 4-week moving average was 341,000, a decrease of 3,000 from the previous week's revised average of 344,000.

The advance seasonally adjusted insured unemployment rate was 2.0 percent for the week ending Dec. 29, a decrease of 0.1 percentage point the prior week's unrevised rate of 2.1 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Dec. 29 was 2,702,000, a decrease of 52,000 from the preceding week's revised level of 2,754,000. The 4-week moving average was 2,701,750, an increase of 17,000 from the preceding week's revised average of 2,684,750.

Wednesday, 9 January 2008

Aussie Retail Sales Power Along in November

Australian retail sales continue to power along increasing a seasonally adjusted 0.8% in November. From the ABS:

  • The seasonally adjusted estimate of turnover for the Australian Retail and Hospitality/Services series increased by 0.8% in November 2007. This follows a revised increase of 0.3% in October 2007 and an increase of 0.7% in September 2007.
  • All states and territories had increases in the seasonally adjusted estimate, except the Australian Capital Territory (-0.3%). The largest increases occurred in Western Australia (+1.9%), the Northern Territory (+1.6%) and New South Wales (+0.8%).

  • In original terms, Australian turnover increased by 3.9% in November 2007 compared with October 2007. Chains and other large retailers (which are completely enumerated) increased by 5.2%, while the estimate for 'smaller' retailers (the sampled units) increased by 2.2%.
  • Australian turnover increased by 8.4% in November 2007 compared with November 2006. Chains and other large retailers increased by 10.3%, while 'smaller' retailers increased by 5.8%.

A strong labour market and robust economy continues to underpin strength in retail sales. However recent interest rate rises, the threat of more to come in February and recent action by 3 of the big 4 banks to increase mortgage rates casts doubts over the ability of Australian consumers to keep up the pace of spending.

In the chart above the 6 month moving average of month on month changes in retail sales looks to be peaking however a significant slowdown in the economy and a sharp rise in unemployment would be needed to see that move down significantly.

AT&T Warn of Consumer Softness

The US Housing market collapse has not spread to the broader economy. This is the mantra still blindly repeated on Wall Street despite mounting evidence to the contrary. Yesterday AT&T provided added to the growing gins that things are not as contained as the so-called experts would have us believe. From Bloomberg:

AT&T Drops Most in 5 Years on Consumer 'Softness'

AT&T Inc. dropped the most in almost five years in New York trading after Chief Executive Officer Randall Stephenson said slowing economic growth led to "softness" in the home-phone and Internet businesses.

The shares fell 4.6 percent, helping to spark a broader decline in U.S. stocks, after Stephenson said San Antonio-based AT&T is disconnecting more phone and high-speed Internet customers who failed to pay their bills.

"We're really experiencing softness on the consumer side of the house from the economy," Stephenson said today at an investor conference in Phoenix.

The disconnections in the residential-phone business, which accounts for about a fifth of sales, have put more pressure on Stephenson, who became CEO in June. Last year, he relied on the popularity of wireless handsets such as Apple Inc.'s iPhone to fuel growth, helping to make up for losses of home-phone customers.

As mentioned here previously, as consumers cannot access the built in ATM on their front lawns any more many will turn to other forms of credit. Yesterday's consumer credit report confirms that this is the case.

U.S. consumer borrowing rose more than forecast in November as Americans used credit cards and auto loans to add to a record amount of debt, Federal Reserve statistics showed.

Consumer credit increased $15.4 billion for the month to $2.51 trillion, the Fed said today in Washington. In October, credit rose $2 billion, less than the previously reported gain of $4.7 billion. The Fed's report doesn't cover borrowing secured by real estate, such as home-equity loans.

The figures suggest Americans are relying more on credit cards and other short-term borrowing to maintain spending after the collapse in subprime lending made bank loans harder to get. An increase of 133,000 U.S. jobs in November and December was the lowest for those two months since 2002 and disposable incomes aren't keeping pace with inflation.

The fun is just beginning, wait until unemployment really tanks. Credit card delinquincies are already rising and will only get worse as the cash strapped Ameerican consumer finds it tougher and tougher to keep up their spending habits.

US Pending Home Sales Index Falls in November

From the NAR and the ever optimistic Lawrence Yun:

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in November, fell 2.6 percent to a reading of 87.6 from a strong upward revision of 89.9 in October, but remains above the August and September readings and indicates a broad stabilization. The index was 19.2 percent below the November 2006 level of 108.4. “Although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” Yun said.

So Yun still sees Existing Homes rising in 2008, well eventually he'll be right but it won't be this year.

Tuesday, 8 January 2008

It's Solvency Stupid, Not Liquidity

The Financial media continues to drone on about the Fed and other central banks efforts to combat the liquidity problems in the banking system by injecting huge wads of cash. However as John Hussman has been pointing out for weeks it is little more than a simple magicians vanishing act.

I posted back in August that rather than bailing out financial institutions the Fed is acting as a pawnbroker. Temporary increases in the amount of cash in the form of repos are just that, temporary, very little new money has made it's way into the economy since August.

These temporary repos are just what the doctor ordered when it comes to addressing liquidity issues however liquidity is not the only problem nor the biggest one. As Nouriel Roubini and others have argued it is the problem of solvency or debt that is the bigger issue. Another excellent article on this issue appeared on Minyanville yesterday:

1. Debt Crisis Vs. Liquidity Crisis

Here is an interesting datapoint that many may not have noticed. Since the Federal Reserve Open Market Committee began lowering interest rates on Sep. 18, the S&P 500 has declined more than 7%. For those that have noticed the decline, particularly the decline in shares of Financial stocks as the PHLX Bank Index (BKX) has plummeted by 24% since Sep. 18 - a bear market by any measure - the most frequently asked question is "Why isn't the Fed's liquidity working?"

It's a reasonable question, after all, central banks in both the U.S. and Europe have said without equivocation that they will provide "as much liquidity as the market needs" to "fix" the problem. So why has this liquidity not been enough to maintain and support asset prices? Because this is not a liquidity crisis, it's a debt crisis. The difference is important, and grasping it can help us sort through a number of market actions that appear to be counterintuitive.

During a liquidity crisis, the issue is one of supplying money to those who, for whatever reason, have suddenly shortened their time preferences. Mr. Practical, writing on Minyanville's Buzz & Banter, characterized it this way:

Suppose there is a rumor that a large bank has made a bad loan. Because banks lend out more money than they have on deposit - this is called a fractional reserve banking system - if everyone goes to the bank and demands their money at the same time, a liquidity crisis can occur because the bank does not have enough cash on hand to satisfy the demand from its depositors. The Federal Reserve will then step in and provide liquidity, allowing the depositor demands to be satisfied. If the rumor of the bad loan proves to be false, then the issue is one of liquidity. Time preferences soon return to a more normalized state, depositors return, everyone feels better. But, if the rumor turns out to be true, it doesn't matter how much liquidity the Fed provides, the bank will go bankrupt.

Similarly, the issue today is not one of temporary liquidity, time preferences being shortened out of a temporary risk aversion. The issue is too much debt supported by too little value and income generation. As a result, time preferences are retreating, risk aversion is growing, and access to credit is diminishing.

The battle in financial markets is currently between reflation and deflation. The reason reflation is not winning is because the Federal Reserve is powerless to make bad debt good. The Fed can only provide liquidity, and then hope that liquidity spawns credit creation. The market is fighting this by taking that liquidity and using it to deflate, pay down debt.

Click on the link for the all of yesterday's "5 Things You Need To Know" and if you don't already you should check out Kevin Depew's 5 Things You Need To Know everyday for an easy explanation of some seemingly complex issues.