Can I Get a Recession, Please?

Bloomberg and the Los Angeles Times have a new poll out talking about consumer confidence in the economy. The article points out a few interesting things about how people are feeling out there, and it is pretty pessimistic. The tail often wags the dog on these types of things, so the presence of the article is probably more important than the actual numbers.

Six in 10 who were surveyed predicted a recession, similar to the 64 percent who anticipated the economy would contract in a December 2000 poll by the Los Angeles Times three months before the last decline. In the current survey, 71 percent of those earning less than $40,000 said they expect a recession compared with about half for those making more than $100,000.

Those in high income brackets feel better about the chance of a recession? The disparity when broken down by wage class is significant (~21%). There is a much bigger narrative here. Some more detail would be need to get to the heart of this, but I suspect it has something to do with the upper income earners ability to shield themselves from inflationary and recession pressures.

A few other interesting things to note from the article.

“People tend to be pretty optimistic about their own situation, but when it comes to the larger economy they’re much more pessimistic,” said Karlyn Bowman, a polling expert at the American Enterprise Institute in Washington. Sixty-four percent of those polled said their own finances are very or fairly secure compared with 35 percent who described them as shaky.

People generally live in a dream world. Their personal situation is never (in their minds) as bad as it actually is, and everyone else’s is always worst than it actually is. The realization than one is loaded with debt and about two steps away from losing it all generally requires one to change. People don’t like to change. It is easier to wait from the foreclosures and bankruptcies.

 

The Best Catalyst Ever!

How nice would be to get a 6.6% bump in return, just by announcing you own a stock? Nice!

Buffet buys heavily into US railroad sector

Monday Apr 9 2007 18:15

The value of the largest North American railroad companies was boosted on Monday after Warren Buffett’s Berkshire Hathaway emerged as a big investor in the sector.

Over the weekend, Mr Buffett’s conglomerate disclosed that it had amassed a 10.9 per cent stake, worth more than $3bn, in Burlington Northern Santa Fe (NYSE:BNI), the Texas-based freight company. The news sent Burlington shares soaring to close up 6.6 per cent at $88.17 on Monday.

The effect of Mr Buffett’s investment in Burlington quickly spread to other big railroad companies, particularly after a Berkshire Hathaway spokeswoman confirmed to Reuters that the company was also investing nearly $1.4bn in two other railroad groups.

Source:
FT.com

Living on Credit

Another surprise from Friday’s reporting was the consumer credit number. They were a little on the light side 5 -5.5B consensus. Not significantly light, but light nonetheless.

Big Picture

Tax cuts and cash out mortgage refinancing provided consumer funding in past years as 5% yoy income growth and equity gains now provide the means outside of credit. Credit cards (revolving credit) make up 36% of total consumer credit which stands at $2.4 trillion. Nonrevolving credit helps finance auto purchases, tuition (including Sallie Mae), vacations and other forms of consumer spending. Annual growth of 4.4% is at the low end of the 3% – 13% yoy growth range over the last 10 years. Consumer credit includes household non-mortgage loans.

Category Feb Jan Dec Nov Oct
Total Credit $3.0 bln 6.6 6.0 20.6 -0.2
  Revolving 2.5 1.2 2.9 10.7 5.3
  Nonrevolving 0.5 5.4 3.1 9.9 -5.5

The shift from nonrevolving to revolving is an interesting part and pretty dramatic. Maybe the consumer can walk down this road a little further.

Hot Numbers

With this mornings hot jobs number and the futures markets headed north, can the consumer continue to prop up economic stability?  Can strong corporate profits continue to remain strong with increasing wage pressure? We have watched the end of double digit earnings growth (Big Picture) and taken some of the pressure off the FED to lower interest rates (the consensus through last fall), but what next?

I am still suspect of the consumers ability to continue on this streak. The consumer is very resilient, but there is a breaking point. We can not forget that point and think this trend is sustainable. We also can not rule out revision since they are the norm and not the exception.

Fearful when others are greedy and greedy when others are fearful?

March’s ISM on Service Businesses…. A Closer Look!

I wanted to get to this yesterday but time got away from me. I think there are some interesting things to note in this report. By no means is this a big trend or dramatic down turn, it is nonetheless noteworthy. I want to touch on some high points mainly related to the comments beyond what we heard about in major news report that the numbers do show a MONTH of slower growth. The pricing section of this report may give some insight into this report and why it may extend beyond one month (my bias). I will leave the employment section for tomorrow – a big employment day.

Here is the overview (manufacturing omitted):

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE
COMPARISON OF ISM NON-MANUFACTURING SURVEYS*
MARCH 2007
  Non-Manufacturing
Index Series
Index
Mar
Series
Index
Feb
Percent
Point
Change
Direction Trend**
(Months)
Business Activity/Production 52.4 54.3 -1.9 Growing 48
New Orders 53.8 54.8 -1.0 Growing 48
Employment 50.8 52.2 -1.4 Growing 32
Supplier Deliveries 50.0 52.5 -2.5 Unchanged 1
Inventories 52.0 50.5 +1.5 Growing 2
Prices 63.3 53.8 +9.5 Increasing 46
Backlog of Orders 52.5 47.0 +5.5 Growing 1
New Export Orders 48.5 59.0 -10.5 Contracting 1
Imports 50.0 54.0 -4.0 Unchanged 1
Inventory Sentiment 63.0 61.5 +1.5 “Too High” 118

Here is the general index overview for the last 12 months. This was the big story yesterday. The 52.4 activity index number.

THE LAST 12 MONTHS
Month Business
Activity Index
  Month Business
Activity Index
Mar 2007 52.4 Sep 2006 54.6
Feb 2007 54.3 Aug 2006 56.9
Jan 2007 59.0 Jul 2006 55.7
Dec 2006 56.7 Jun 2006 56.9
Nov 2006 58.3 May 2006 59.2
Oct 2006 57.4 Apr 2006 61.1
Average for 12 months — 56.0
High — 61.1
Low — 52.4

Beyond this overview number, the contributing factor of note is prices. No real surprise with the consensus being toward an inflationary economy, but this is a pretty big one month sentiment jump. The surprise may be the pace of inflationary pressure on the economy. I would think the sentiment would change in the other direction shaped by the change in the FED statement at the end of March.

Prices %
Higher
%
Same
%
Lower
Index
March 2007 38 58 4 63.3
February 2007 17 74 9 53.8
January 2007 23 62 15 55.2
December 2006 20 71 9 59.7

Overall, the report points to a lot of  relatively small increases and decrease (outside of the pricing measure), which pulled the number down for March. I think the real issue will be the severity of the trend to follow. A “slowing” is a given, but I think the missing factor in the general consensus is the debt level. The core consumer is loaded with debt and therefore unable to responded to inflationary pressure without having a major impact on the overall economy. The consumer can not absorb any type of added pressure. We get some other data points tomorrow. Fun, fun!

Sources:
Institute of Supply Management
BBC

Zell’s Tribune…. What about the Cubs?

As a new Chicagoan, I have been looking over the details of Zell’s buyout of the Chicago Tribune. With Zell’s newly acquired cash – fresh off the sale of Equity Office Properties to Blackstone – he has opted for a venture into a tough media market. Newspapers were at one time a great business venture under the right circumstances. Most notably a single newspaper town (think The Buffalo News and Warren Buffet). But those are days long past now. The Internet has changed the advertising driven business model. The demographics of newspaper readers have changed and classifies are not the only game in town. The drive for innovation has left the newspaper behind and few have changed to match the demands.

So, back to the Tribune deal. Increasing the debt load to 13.4 billion on a company losing revenue at very substantial rates seems like loading the dice pretty heavy toward failure. Sure, selling off television interests and restructuring is great toward the mythical creating of business “synergy”, but resurrecting failing companies is a tall order under the best circumstances and this is a far cry. I could be wrong; it is, after all, the season for resurrections.

Sources:
Bloomberg
Wall Street Journal

Away We Go….

We are back up and running here. After endless travel, moving, and changing my entire existence, we are getting back to the things that matter most. One of which, this blog. After a slow start and a heinous first quarter we need to get things back up and running. I could not have picked a worst time to have this go down. The markets have rocked and rolled (down!) all quarter, oil is headed up, and corporate earnings season left much to be desired. Through it all the positions have stayed strong and continued to  produce higher returns. Hopefully, the ride is only starting and good buying opportunities are around the corner.