Friday, August 20, 2010

CEOs explain why they're not hiring despite cash, rising profit

The Washington Post published an interesting article tonight discussing some reasons behind lack of hiring in the current economy (  Many of the main points made in the article were inline with what we have been saying for a while.  They are summarized below:
  • No hiring is due to lack of certainty about if and when consumption will pickup.
  • Many executives continue to say that the period of inventory replenishment has ended.
  • Companies are not expanding capacity as they don't expect significant growth. In fact, some are investing in technology only to make production much more efficient and lessen the need for human labor.
  • And for the many that throw geopolitical factors at our economic problems - "None of the executives interviewed linked a specific new government initiative with a specific decision to refrain from hiring."  Of course, many did complain about health-care reform and potential expiration of Bush's tax cuts.
  • Many do not expect any of the stimulus policies to convince them to hire more aggressively. As we have said, those policies only up the values of stocks artificially. This will not improve consumer confidence or create consumption growth (for many reasons that we have discussed on this blog).  We should also note the participation rate of individual investors (or retail investors) in the market continues to decline.
Many may ask what the companies will do with their stronger balance sheets.  We do believe that the latest trend of M&A will continue but due to companies’ inability to grow organically, which is again driven by lack of demand.  This is very different from growth periods when M&A spiked up due to increasing competitiveness in the markets as a result of strong overall economic growth.

More are tapping into their 401k's before retiring ...

This is another indication of continuing hardship for many Americans (  We will post our thoughts regarding overall debt, disposable income and savings levels in the next few days.

Thursday, August 19, 2010

Initial claims disappoint once again

Initial claims came in at 500K, higher than last week and significantly above the 480K consensus. It appears that the Consensus employees hit the initial claims teller windows more quickly than we thought.

Based on the report, a large percentage of the layoffs were also in construction and manufacturing. Layoffs in Indiana included the auto industry. This is somewhat surprising as just yesterday we saw that motor vehicles and auto parts grew 9%+ compared with the prior month. We hope the auto-related layoffs in Indiana were not from a GM plant, as that great government-aided company just filed for an IPO. The government sure knows how to make money - first take the tax-payer cash to help the 'obese' companies, and then bring them back into the market to make returns off of the free capital provided by the tax-payers.

The story gets even better as extended benefits and EUC (Emergency Unemployment Compensation) went up 49.2K and 260.1K, respectively, during the week of July 31. Not much of a surprise regarding EUC given that the government extended it on July 22 to the end of November, just enough time to get votes of the unemployed! This is another indication that the labor market is not moving at all; and any movement may be in the wrong direction.

Lastly, we note that the 13K decline in continuing claims is misleading. After 26 weeks of receiving initial claims benefits, the recipients are no longer included in the continuing claims figure. Of course, they can come back the next year and file a new claim, which we believe many have been doing.

Tuesday, August 17, 2010

Some thoughts on today's numbers

Housing starts of 546K came in lower than expected, with decline in single-family houses partially offset by increase in multi-family homes. We note that today's number, although slightly lower than expectations, was higher than the previous month. However, such growth appears to be due mainly to the usual and significant revisions that we keep seeing more of. June's numbers were revised down to 537K from 549K. Not surprisingly, permits did decline in July compared to the original and revised June figures. Overall, as mentioned earlier this week, a decline in these housing figures is positive as it limits inventory growth. Such decline combined with a slowdown in foreclosures, which we have not yet seen, could actually create a tiny light at the end of the dark housing market tunnel.

Industrial production and capacity utilization for July were better than expected, which was surprising to us.

Capacity utilization of 74.8% was slightly higher than the 74.6% consensus. We note that this figure has slowly but surely declined since the 1970's. We do not expect it to reach 85.0%+, which means that employment recovery will take longer than many think.

Industrial production grew 1% from June. All components of this indicator showed growth, with manufacturing, mining and utilities, growing at 1.1%, 0.9% and 0.1%, respectively. Manufacturing growth was mainly driven by a 9.9% increase in motor vehicles and parts, which is not likely to continue. In our opinion, this is not an indication of expected strong auto sales going forward. We believe such growth is also driven by auto parts due to the upcoming maintenance season of the government-driven increase in motor vehicles sales earlier this year. In addition, historically, growth in motor vehicles and parts manufacturing has been between -5.0% and 5.0%.

Although inventory replenishment is close to end, we fear that many companies may have begun their fall and 2011 stock-piling too aggressively.

Lastly, ICSC (International Council of Shopping Centers) released its weekly chain store sales index. It declined 1.3% from the prior week. This was the third consecutive decline. The index was up 3.3% from the prior year, but then again, given last year's bad numbers, even a winter jacket retailer should show annual growth during the summer in California.  Maybe not, as WMT reported a decline in Y/Y same store sales in the U.S.  In addition, HD lowered its revenue guidance for the year.  We must say that both companies beat expectations on the bottom-line.  There is still no sign of strong and stable revenue growth and we are in the third quarter of the so-called recovery.  We are seeing minimal growth in non-government-aided consumption.  But let the stock market go higher.  The government has basically eliminated all other options for investors, except the one with a potentailly high reward and certainly much higher risk ... the stock market. 

Sunday, August 15, 2010

Interesting quote and some other thoughts ...

Before mentioning the quote, we'd just like to point to the fact that the economy is moving in the wrong direction, and that's become clearer since the start of 2H '10 (as we've been discussing since Q3 last year). Recovery will take a while, although the equity market may remain over-valued (in our opinion) due to the government making risky assets more attractive (we must say that S&P500 is down more than 3% YTD). Its amazing that consumers are at a stage where they not only have to pay down their debt (which can be helped by actually saving more) but they are also being enticed or 'pushed' to allocate their limited and possibly declining disposable income (due to uncertainty of employment) towards riskier assets! There will come a time, when the Fed, Congress, the President and the market will realize that this economy cannot be turned around merely by enticing consumers to buy or borrow more.

In addition, as much as we hate to say it, as we consider ourselves 'supply-siders', the supply-side strategy will not work. This is due to lack of credit available for consumers. And we certainly are not blaming the banks. Again, consumers no longer have credit because they borrowed and borrowed and borrowed, which has been the driver behind US economic growth since mid-80's. That's no longer possible, unless the government decides to 'force' banks to lend, and promises consumers that they won't have to pay it back. Yes, it sounds unrealistic, but it actually is becoming more realistic everyday. Let's put it this way, in California, some long-time recipients of jobless benefits have begun to use those government checks at casinos, while at the same time not paying their mortgages waiting for government to provide more protection from the ‘ruthless’ banks, which the government bailed out. It all just goes round and round.

We've mentioned this before, for this economy to stabilize and maintain it for the long-term, it must transition back to more manufacturing/production. Consumption can no longer be the growth driver. We look for consumption growth to continue in Asia (incl. China and India) as it remains untapped compared with the US, which will likely be followed by demands for higher wages in those countries (as we're already seeing in China). This could once again make labor more attractive here in the US, which could drive the transition towards more manufacturing and in time, a more balanced production and consumption driven economy.


Now, after such a lengthy argument/explanation, here's a quote from someone whom CNN was interviewing - "All the people that helped perpetuate the bad loans are now perpetuating the rescue scams". Sounds like banks and their little 'made-to-look-local-and-consumer-friendly' side businesses; whether you're talking about mortgage loans or credit card debt.  We note that we are NOT marketing CNN or any other of the too-many cable news networks.

Week of 8/16 – 8/20

Some potentially market-moving indicators will be released next week.

We think last week’s jobless claims will be inline with the current 475K consensus as many of the now-jobless government temp workers will likely take a bit longer to file. Continuing claims will likely show increase given the latest uptick in the 4-week moving-average (MA) of initial claims, combined with minimal job growth in the private sector. Last week’s disappointing July employment figures (as we’d expected) support our belief.

July housing starts will likely be in-line with the 555K consensus (an increase of 6K from June) given June’s surprising higher than expected housing permits. However, we believe July’s housing permits figure will be disappointing (which is positive in our opinion) as we are getting closer to the end of the summer construction season. Although the equity market reacts positively to strong housing permit figures, we believe that more permits could once again push inventories higher in 3 – 6 months, putting more pressure on home values and the overall housing market.

We don’t expect July’s capacity utilization to surprise on the upside mostly because exports were likely disappointing in July as they were in June (reported last week).

Lastly, the Leading Indicators will likely come in better than expected. We note that the better figure is driven mainly by the stock market’s performance in July; S&P500 went up nearly 7%. Although we must paradoxically say that we believe the Leading Indicators is actually a lagging one; it weighs too heavily the stock market’s performance.

Sunday, August 1, 2010

Comments on July's upcoming employment figures

Unemployment figures for July will be released next week. We believe the net jobs added figure (excl. government jobs) will be slightly below the 82.5K consensus. 

This year's first half earnings were very good. This was mainly due to - easier comparable first half of 2009 (1H '09), inventory replenishment after a state of paralysis in 1H '09, aggressive and certainly necessary cost cutting measures implemented within nearly every sector, and analysts' 'conservative' estimates and expectations. However, as we mentioned last year, the second half of 2010 may be a different story. The Y/Y comparison is not nearly as easy as it was in the first half. In addition, revenue growth, if any, remains very disappointing. Although some sectors reported stronger than expected revenue growth (Y/Y) and some companies have provided positive revenue guidance for Q3 or the entire 2010, strong revenue growth for most companies remains unlikely. For this reason, we believe the majority of companies remained hesitant in increasing their headcount in July. 

Management teams' main objectives include impressing Wall Street. The best way to do this is to beat Wall Street's earnings expectations and have impressive Y/Y bottom-line growth (knowing that an impressive top-line growth is not likely). That is why we believe companies have not and will not increase their payroll significantly until at least 12 months down the road. 

Maybe our thoughts regarding the state of employment no longer being a lagging indicator were correct. This topic was discussed again this weekend in an article on Reuters. Just remember that the 'trickle-down' theory will work only when regular middle-income consumers, including the ones unemployed, can use their credit cards or may still have equity on their home, or can still borrow from their banks. None of these is applicable to the current state of the economy.