Thursday, June 21, 2012

Economic Update, FOMC, and FB ...

Last week's initial jobless claims print was 387K versus the 383K consensus.  As usual, the headlines came out saying that initial claims "declined" from previous week, but did not cite what has basically become the 'norm' - prior week's figure was revised up once again.  Upward trend is being seen in the 4-week moving average and continuing claims; not very good news.  What is even more amusing is that the non-objective media is now citing the 400K level as the 'critical' level, while not too long ago that critical level was around 350K.

The Philly Fed manufacturing survey index came in significantly below expectations; -16.6 versus estimates of 0.0, which was to be an improvement from May's -5.8.  All components of the index were worse than the prior month, except for number of employees, which went up to 1.8, from last month's -1.3.  However, we must note that when combined with a significant decline in average workweek, this figure is questionable.

In terms of the survey results regarding six months from now, a 19.5, which was an improvement from May's 15.0, may be good news.  We believe such optimism is primarily driven by the upcoming US elections and the thought that 'we've gone down so much, there's nowhere to go but up.'  By looking at the decline in current inventories, we think the higher 6-month survey result could also be based on inventory replenishment, which we believe will be short-lived.  This is supported by the 6-month out inventory index which declined to -12.0 from -10.8.  In addition, while more manufacturer's said they may increase hiring 6 months from now, more still believe the average employee workweek will decline; again, an awkward combination, which we think represents overall uncertainty that remains among survey participants.

Existing home sales also came in below expectations.  For May, the annual rate of existing home sales came in at 4.55MM, below the 4.57MM consensus and April's 4.62MM.  We are always amused by the biased report that NAR (National Association of Realtors) publishes.  They cite the 8% Y/Y higher median price in May and say that lower inventory was the driver.  That may be the case Y/Y, but sequentially, the month's supply actually rose to 6.6 from 6.5.  In addition, while foreclosures and short sales still accounted for 25% of total sales and were lower than April's 28%, first-time buyers also declined.  We believe consumers, which we assume represent most of the first time buyers, are becoming a bit less optimistic.

Regionally, the Northeast sales were down 4.8% from April, but up 7.3% Y/Y.  The West declined 3.4% from April and was up only 3.6% Y/Y.  May sales in the South were pretty much flat m/m, but up 9.2% Y/Y.  Compared to April, the only bright spot was the Midwest, up 1.0%.  That region was also up 19.5% Y/Y.

Let's now go back to Wednesday.  Should we thank Mr. Bernanke for basically not doing anything surprising?  The way the equity market had risen the last 2 weeks indicated that the Fed may actually bluntly say that a QE3 was coming.  That did not take place.  After the FOMC meeting, the Fed announced that it is extending Operation Twist to the end of this year (it was scheduled to end at the end of June).  The Fed also finally indicated that the economy is not in great shape, as we mentioned in March.  It lowered its economic forecasts and did not sound very optimistic regarding the labor market.  Again, it was not surprising.  However, the market liked it when Bernanke said that all monetary easing options are still on the table.  What made us laugh was when Bernanke actually said that even if short-term interest rates hit zero, the Fed will have tools such as "communication techniques" to help the economy and the market.  We're assuming Bernanke is referring to the propaganda and leaking information to various privileged members of the mainstream media that it deploys at times. 

Lastly, let's briefly discuss the bounce that Facebook (FB) has had since June 6, after the very disappointing IPO.  FB has gone up 25% from its low of $25.52 in two weeks.  As a reminder, our valuation of the Company was at $23.00/sh.  We think the recent bounce is driven by many betting on the upcoming Q2 earnings call, where FB management will likely be much more vocal, positively.  Lately, we are hearing more people praise FB for potentially implementing an ecommerce strategy to help improve returns on the ads it places on its site and at the same time possibly address the mobile ad dilemma.  We mentioned these options in our initial post on the Company.  In addition, more sell-side analysts will probably initiate coverage on the Company given how much lower than its IPO valuation it is still trading.  Many institutional investors would like to bet on FB (not necessarily invest) given its brand name and potential upside, although it also comes with a lot of risk.  This is another reason why we think sell-side coverage will increase, trying to get a piece of trading revenues associated with more buy-siders possibly beginning to stock up on the FB stock or bet on Q2 earnings. 

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