13 Jul 2001 Foreign Buyers Continue to Support Our Markets
Economic News:
Mostly good news this week pointing to continued recovery in the economy
Wholesale inventories in the U.S. increased 0.2% in May to $302.62 billion on the largest monthly increase since November, the Commerce Department said Tuesday. A consensus of analysts had projected a 0.1% increase. Manufacturers are pushing the inventories from their shelves to those of wholesalers through “good deals”. Meanwhile, wholesale sales slipped 0.1% from April to $229.82 billion. Analysts had expected a 0.3% increase for the month.
Manufacturers first spotted the slowdown in June of 2000, but after five years of running plants at near capacity, they were hesitant to slow production. Operating plants at capacity allows manufacturers to spread fixed costs over a larger number of products, making them more profitable. Hurt most in the slowdown have been pulp, paper, steel, and auto industries. Food and pharmaceuticals have fared better.
U.S. June Retail sales rose .2% to $292.9 billion after rising .4% in May. Economists were looking for a .3% increase. The consumer who represents two thirds of our economy continues to support the longest expansion in history. Lower gasoline prices gave consumers more money to spend on other goods.
Prices paid to U.S. factories, farmers, and other producers dropped more in June than at any time since February of 1999, led by record declines in residential electricity and natural gas costs. The Producer Price Index decreased .4% after rising .1% in May.
Analysts project that the economy grew at only a .6% annual rate in the second quarter, the slowest since the first quarter of 1993. The economy grew at 1.4% pace from October through March, the slowest six-month period since the recession of 1991.
The Conference Board’s consumer confidence index (expectations of the next six months) rose in June to the highest this year, as shoppers refused to let an eroding job market cloud their optimism about a rebound in the economy. The index rose to 117.9 in June from 116.1 in May, the highest level since last September.
The University of Michigan Confidence further supported other consumer confidence measures with a July reading of 93.7 versus 9.26 in June and expectations of 93.0.
Foreign Buyers Continue to Support Our Markets:
Foreign buyers eclipsed mutual funds as the most aggressive purchasers of U.S. stocks in the first quarter of 2001 as the dollar has remained the currency of choice. While the local-currency stock market performance from Europe was quite similar to that in the U.S., the strengthening dollar has made the American performance appear relatively greater. ?Nearly one-third of S&P 500 sales came from foreign demand. The S&P energy, technology and basic materials sectors are the most exposed to the current global slowdown, but may benefit from a more protracted global economic recovery in 2002.
Portfolio Strategy:
Conditions:
Fed Funds rate 3.75%, Fed will likely cut another 1/4% at August 21st meeting
Inflation not a threat – no reason not to ease interest rates further
Commodity prides declining
Energy prices declining as well as demand for energy further reducing inflation threat
Consumer income growth & spending remain relatively healthy
Consumer debt a problem, but increases slowing – mortgage refinancing a positive
Internally generated funds falling (these funds generate two thirds of capex) – further reduces capital expenditures, but 100 bil in bonds offered in Q1 – a record – used for balance sheet restructuring (lower interest rates)
Corporations are increasing their debt load as the Fed is encouraging them to do so. Lays a platform for recovery in corporate sector spending.
Manufacturing continues weak with few signs of bottom.
Likely outcome:
During the third quarter, lead indicators will turn convincingly positive
Improved stock performance on release of actual earnings results
Old economy companies to turn first – consumer cyclicals, retail, manufacturing, construction, equipment, transportation, electronics.
Consolidation in tech land will foretell better times as managements of leading companies aggressively move to capture market share as well as improve efficiency. Semiconductors are usually first, but inventory hangover poses problems for them.
Industry leaders will have best share gains
Monetary policy is working to strengthen corporate liability structures, re-liquefy household asset mixes, and support cars and houses on the real side. Within weeks, private sector cash flows will receive a supplement from tax cuts.
Consumer sentiment is likely to improve further in July with tax rebates.
Watch List:
Government policy – Our government can accelerate or squash economic recovery with some of the issues facing it right now. How will California and FERC handle prices caps and will it reverse the trend toward de-regulation of the power industry? Will the Congress allow the regional Bell companies to effectively compete with the competitive local exchange carriers, thereby accelerating the build out of broadband Internet services to homes and businesses? Will the Justice department and their European counterpart allow businesses to merge in order to improve economies and standards?
Market volume indicates the confidence of Institutional and foreign investors
Price action of early-turn industries such as consumer durables, cyclicals, and technology will indicate a market rebound.
How do stocks react to news? We are in a macro-trading market where news has a global effect with less consideration of the merits of individual companies.
Company guidance – what are they saying about their future earnings potential?
Analyst earnings forecasts – what direction are they moving?
The narrowing of credit spreads predicts recovery.
Consumer confidence
Action Plan:
Maintain long-term focus on economy, industry, company, and management teams
Own top companies in economy-leading industries
Add to under-valued companies while pruning over-valued assets
Concentrate new purchases in undervalued companies that meet the above criteria and have the greatest near-term (and sustained) performance potential
Articles of Interest
From George Gilder:
”Two weeks after the inauguration, the Bush administration established the National Energy Policy Development Group (NEPD) with a mandate to develop a statement of national energy plans and priorities. The group’s 200-page report was issued in May 2001 and has generated weekly, if not daily, commentary and reaction. If there was any remaining doubt before, there is none now: energy is front and center on the national agenda.
“Clearly, energy has become an important political issue. More importantly, however, this is not a made-in-Washington crisis, here today but probably gone tomorrow. There are fundamental economic and technological challenges to be addressed. They are going to be at the center of a lot economic activity for the foreseeable future. Why now?
“First, because energy in general, and electric power in particular, have been ignored (at best) or undermined by wishful thinking and short-sighted policy for most of the last decade. Policy makers have been indifferent or foolish; investors have been indifferent or hostile. As a result, we’ve managed to dig some deep holes, most notably in California.
“Second, because the character of electric demand has changed. As we have been emphasizing now for two years–the digital world has created a new kind of demand for a different kind of power–high-9s power, power available more than 99.9999 percent of the time, good enough for microprocessors and packet switches, not just toasters and light bulbs. But at the same time, a separate cluster of demands, from environmental regulators, place increasingly tight constraints on the fuels and technologies we use to supply power.
“And third, because there have been recent, remarkable advances in power technologies. Though they emerged two decades later, and remain overshadowed (at least in the public eye) by the technologies of bits, the technologies of electrons–of power–are now advancing as fast. Power technologies that have been quietly incubating for a decade or more are now coming of age and bursting into the marketplace. We have not seen anything quite so fundamental or exciting since the rise of telecom and datacom technologies nearly two decades ago.”
“Nearly $500 billion per year are invested annually in U.S. power and energy technologies”
The Rhetoric is Clear, But the Mathematics are Not
Governor’s Mathematics Remain a Mystery
Forbes Magazine
The $8.9 billion refund demand was reiterated by California Governor Gray Davis during a conference call he hosted on Friday afternoon. While the Governor’s accusations of price gouging by the out-of-state generators was made clear—as always, the mathematics behind his claims of overcharging were left unexplained and remain a mystery to industry observers. In particular, Davis continues to avoid providing a definition of what he means by “price gouging.” In his discussions, he appears to simply equate price gouging with high power prices—as if that were proof enough. Indeed, how variables such as natural gas prices, emissions credit costs and short generation supplies factor into his analysis—if they do at all—remain unclear.
Closure will be a Catalyst
In our view, any closure on this issue will be sufficient to serve as a catalyst for the entire group. Our view is that the market’s litmus test for evaluating recent political and regulatory events must focus on their impact on forward earnings, returns and growth rates. It is important to remember that while the prospect of refunds creates some uncertainty for the IPPs, this issue has absolutely no bearing on the forward earnings prospects for any of the companies in the sector. We believe the closure that is needed by the market could come within the next few weeks. The settlement conference may bring some resolution to the situation—increasingly unlikely. Regardless, if no agreement is reached, FERC will issue a final decision on the matter.
From George Gilder’s Weekly Letter:
Stossel’s Genius
Last week we alerted you to John Stossel’s ABC special report on the
environment and biotech, which aired Friday night. “Tampering with Nature,” we knew, was sure to ruffle some lock-step liberal feathers. We didn’t know the report would be so devastating as to get ABC in big trouble and ignite the media story of the week. When word leaked just days before that Stossel had interviewed a dozen or so elementary-aged children and was to air breathtaking evidence of their enviro-indoctrination, Washington-based Greenies turned red in the face. Though all the students’ parents were present for the interview and had signed consent forms, the powerful professional environmental groups demanded ABC not show the children on TV. ABC wilted under the pressure. Stossel, however, just rounded up another bunch of kids, who gave the same pat answers to his questions. E.G.: “Has our air and water gotten cleaner over the last 30 years?” “NO WAY!!!” they replied in unison. (The answer is YES.) One got the feeling the children are generally scared they are going to melt.
Though the children made the news, much of Stossel’s report allowed professional brainwashers to make fools of themselves and eminent scientists (and even the former head of Greenpeace) to debunk the popular enviro-ganda. Now the battle shifts back to Stossel’s job security. Perhaps only his super ratings will prevent the network from feebly giving in to continuing Green demands that he be fired. The groups aligned against him just offer more proof that John Stossel is TV’s best journalist.
