Thursday, September 30, 2010

Trouble in the IPO Market

The Liberty Mutual insurance company has announced that it has postponed its planned IPO, which would have been by far the largest initial public offering in the U.S. this year; the company was seeking to sell $1.3 billion worth of stock. Liberty Mutual cited the sluggish economic recovery and weak stock market as its reasons.

The IPO market as a whole has been underperforming this year; at least 45 companies have announced IPOs only to withdraw or postpone them. The biggest IPO this year has been for the little-known oil company Oasis Petroleum, which raised $676 million for its offering back in June. By contrast, back in the crazy days of the Internet IPOs, was briefly worth $10 billion on its first day on the market.

There's still hope for a huge IPO this year: General Motors is planning to take itself public again in November. The word is that the car manufacturer will seek to raise $8 to $10 billion in that stock offering. Its success or failure will probably prove to be an important signpost for this economic recovery.

Wednesday, September 29, 2010

On the Home Front

So how's New Jersey faring in the economic recovery? It depends on which measure you look at. As is typical of this one-step-up, one-step back economy, conflicting measures of our state's economic health came out yesterday.

The good news is that household median income in New Jersey is just about the highest in the nation. The U.S. Census Bureau found that our 2009 household income of $68,342 was statistically indistinguishable from that of Maryland ($69,272) and Alaska ($66,953). For all intents and purposes, we're in a three-way tie.

On the other side of the ledger, that number was down some 2.3 percent from 2008. And the number of New Jersey families living in poverty rose from 8.7 percent in 2008 to 9.4 percent in 2009.

That probably sums up the New Jersey economy pretty well. We've weathered the storm better than a lot of other places, but make no mistake: It's still been a storm.

Tuesday, September 28, 2010

The Engines of Economic Growth

Where is the economic growth that will eventually get us healthy again going to come from? The McKinsey consulting firm has analyzed where the growth has been coming from for the past few decades, and one area stands out: No, it's not small business, but multinational firms. McKinsey found that since 2000, multinational companies have contributed 74 percent of the growth in our GDP.

Interestingly enough, though, multinationals have not contributed nearly as much to jobs growth. From 1990-2007, according to McKinsey, multinationals contributed only 11 percent of our total employment growth, with other U.S. firms accounting for the remaining 89 percent. Apparently, the larger firms are much more efficient: Despite hiring merely 11 percent of all workers, they accounted for 41 percent of the growth in labor productivity.

If those trends continue, we'll have two dynamics working at odds to each other. If we want to see economic growth, we should look toward multinationals, but if we want to see unemployment brought down, it's more likely to happen with U.S.-only firms.

Monday, September 27, 2010

Congressional Report

Many investors are waiting to see how a reshuffled Congress will affect our nation's economy after the November elections: Will a Republican-controlled Congress renew the Bush tax cuts? If the Democrats stay in charge, will there be another stimulus package? What will happen to the estate tax?

No matter who's in charge, it appears that the markets are not too fond of Congress. A 2006 study looked at the gains in the Dow Jones average when Congress was and wasn't in session, and found that more than 90 percent of the index's gains came on days when Congress was not meeting.

That's not to say that the economy is at its strongest when Congress accomplishes the least. According to the New York Times, since 1926, a large-cap stock index returned about 7 percent a year at those times when the federal government was gridlocked - that is, the same party was not in control of both branches of Congress and the White House. But when the government wasn't gridlocked, that same index returned 12 percent a year.

Friday, September 24, 2010

Fresh Indicators

The index of leading economic indicators was up for August, even more than the rise predicted by the economists polled monthly by various organizations. Still, the number rose by only 0.3 percent, portending a continuing but weak recovery.

In all, seven of the ten indicators were positive in August. They were:

* The interest rate spread
* The real money supply
* Average weekly manufacturing hours
* Building permits
* Stock prices
* Index of consumer expectations
* New orders for capital nondefense goods

The indicators that were negative:

* Unemployment
* Index of supplier deliveries
* New orders for consumer goods and materials

Obviously, the big one there is unemployment. Until that gets moving in the right direction, the recovery will continue to be sluggish.

Thursday, September 23, 2010

A Rise in the Ratings

The giant credit-ratings service Moody's came out with a report yesterday indicating that default risk for the companies whose bonds it rates had dropped to its lowest level in two years. In June 2009, there were 288 American companies with a credit rating of B3, which is six steps below investment grade. Now, there are just 195. Moody's added 13 companies to its negative ratings in the quarter ended August 31, as opposed to 35 in the same period a year earlier.

And these aren't just fly-by-night penny stocks; among the corporations that Moody's upgraded were such well-known entities as Clear Channel and Neiman Marcus. That shows another step towards health for this economy, making it less and less likely that we'll see very many more collapses of large American corporations (although Blockbuster will apparently file for bankruptcy today).

It's interesting to see that, in a sense, the bond market had already taken note of this lessening of risk. Purchases of speculative-grade bonds - what used to be called junk - soared in the first half of this year to $119 billion, their highest level since Bloomberg began compiling those figures in 1999. Clearly, the bond buyers had already recognized that those bonds were not likely to default.

Wednesday, September 22, 2010

Commodities on the Rise

There's one market that has pulled out of the recession into full recovery: commodities. Prices of commodities - and especially agricultural commodities - plunged with everything else at the onset of the recession, rose throughout 2008, then dropped again in 2009. But now in 2010, according to a new report from McKinsey, some commodities prices have actually doubled from those 2009 lows.

One result of these rising commodities prices is that the threat of deflation seems to be easing. A deflationary environment combined with our already-sluggish recovery would have been bad news for our economy. If the markets can stop worrying about deflation, that would be good for equity prices.

Of course, the flip side of that is inflationary concern. But the inflation rate has been remarkably stable lately, hovering just above 1 percent in each of the past three months. This economy still has more than its share of trouble; it would be nice if we are now able to dispense with deflationary worries before we turn back to concerns over inflation.

Tuesday, September 21, 2010

Closing the Book on the Recession

It's now official: The recession that started in December 2007 ended in June 2009, according to the National Bureau of Economic Research, the group that's tasked with recording these things. We generally look at the GDP stats by quarter, but the bureau narrows that down with a little more finesse. It noted that the economy shrunk by only 0.7 percent in the quarter comprising April, May and June 2009, and figured that the economy was growing by the last of those three months. That June, real GDP, real income, employment, industrial production and retail sales all took a turn for the better.

So the recession officially lasted for 18 months, making it the longest economic downturn since the Great Depression. The earlier record-holders were the recessions of 1973-75 and 1981-82, which each lasted 16 months.

The official declaration also means that if the economy sinks back into contraction again, it will be a double-dip recession rather than a continuation of the earlier recession. The NBER economists estimate the likelihood of that happening at 25 percent.

Monday, September 20, 2010

An End to "Window Dressing"

The SEC wants to make it a little harder for public companies to disguise their level of indebtedness. In a vote taken on Friday, regulators took aim at what's called "window dressing." That's the practice of artificially trimming debt at the end of each quarter to make the company's financial statements appear a little stronger.

Banks are especially notorious for using this tactic; Lehman Brothers in particular had famously hidden its true levels of debt before its collapse in September 2008. The SEC is hoping that by changing the rules, investors will have better information about a company's health, and that the bottom line reported each quarter will be a little bit closer to reality. The new rule would force the affected companies to publicly disclose their levels of debt on a daily basis, rather than just at the end of the quarter.

At this point, the rules have simply been proposed. The next step is for the SEC to listen to public comments for the next 60 days. Only after that - perhaps in the next few months - would the regulation take effect. We'll keep you posted.

Friday, September 17, 2010

Bungling Bank Robbers

This week's ridiculous bank-robbery story comes from Coral Springs, Florida, where a woman walked into a SunTrust branch and handed the teller a note reading, "Give me cash, I have a knife." After the teller handed over $430, the unsatisfied robber declared that that wasn't enough, and sent the poor teller into the back room to get more money.

Of course, as soon as the teller was out of the thief's sight, she called the police. The cops arrived and arrested the would-be robber even before the teller returned from the back room.

There's a nicer story out of South Carolina, where a robber entered a Wachovia branch with a note demanding $30,000. When the teller told him she didn't have any money, he politely said, "Thank you," and departed. That didn't, however, prevent the police from arresting him for entering a bank with intent to steal.

Thursday, September 16, 2010

The Wealth Gap Narrows

According to a new study of global wealth by the German insurance firm Allianz, the United States remains by far the richest nation in the world. The average American has $130,764 in stocks, bank accounts and insurance, easily the highest number on the planet. We now have 39 percent of the world's wealth, as compared with 31 percent in all of Western Europe.

But our share of the pie is shrinking. Since the recession hit in 2007, American wealth has dropped by 12 percent. The only country that has lost a bigger percentage of it collective wealth in that time has been Greece, Europe's biggest basket case, which has seen its wealth drop by 14 percent.

In the longer term, over the past decade, wealth has risen by around 3 percent annually in the United States. The biggest winner over that time frame? Eastern Europe, which has been up an average of 16 percent per year since 2000.

Wednesday, September 15, 2010

The Other Side

Yesterday we talked about how Warren Buffett remains bullish on the American economy, but it's worth pointing out that a number of American executives aren't quite so optimistic. McKinsey surveyed 868 American executives in August and found that 54 percent of them expect the country's economy to be either the same or worse over the next six months. As recently as June, it was just 45 percent of American executives who felt that way.

In the most recent survey, just 3 percent of the execs thought the economy would be substantially better in six months. Only 1 percent said it would be substantially worse, but 14 percent projected it to be moderately worse.

The last time McKinsey conducted this survey, in June, it was European executives who had the most pessimistic outlook for the future. Now, their American counterparts have taken over that dubious distinction.

Tuesday, September 14, 2010

"I Am a Huge Bull on This Country"

Warren Buffett made a speech in Montana yesterday that may have been the clearest sign yet that we are not headed for a double-dip recession. He's just one investor, of course, but Buffett has been the most successful long-term economic seer of our lifetimes. His investment vehicle, Berkshire Hathaway, owns insurance and real estate businesses among many other holdings, and recently bought Burlington Northern Santa Fe railroad.

And these businesses, Buffett reports, look pretty solid. "I've seen sentiment sour in the last three months or so, generally in the media," he told the Montana Economic Development Summit. "I don't see that in our business. I see we're employing more people than a month ago, two months ago."

There's no reason that Buffett has to be right about this, and that people predicting a double-dip are wrong. But Buffett has a lot of skin in the game, and as a famously long-term investor, he's got no reason to puff up his short-term prospects. "I am a huge bull on this country," he said. "We will not have a double-dip recession at all. I see our businesses coming back almost all across the board."

Monday, September 13, 2010

Up and Down With the Hotel Business

One bright spot for the struggling commercial real estate market has been the hotel industry. The lodging industry hit a 30-year low in occupancies last year, coming off the recession, but hotels have been selling very strongly this year: In the first half of 2010, sales of hotels were up 136 percent over the previous year.

But there are some hidden losses that have been affecting the hotel business over the past decade or so. As recently as 2000, hotels made an average of $1,274 per room annually on telephone charges. With the rise of the cell phone, that number is now down to $178 per room. Similarly, in 1999 hotels made $170 per room annually on movie rentals; that's now down to $125.83, thanks mostly to people watching DVDs on their laptops.

There's a little reminder for you: Every new technology that comes along and builds a new bit of business for itself is likely to be taking away from an older industry.

Friday, September 10, 2010

State of the State

The Fed's Beige Book economic report came out this week, highlighting economic activity in each of the Fed's 12 regions. New Jersey, as always, is split down the middle between the New York and Philadelphia offices. The New York office reports on the northern half of the state, and the Philly office on the southern half.

Interestingly, the two areas showed a marked difference in developments in housing over the past couple of months: The New York office reported a slowdown in the bottom end of the market, fueled by the end of the homeowner tax credit, but the Philadelphia office noted that the high end of the market was harder hit in its area. The New York office also reported higher credit delinquencies and tightening credit on the part of lenders. Philadelphia, by contrast, noted a modest improvement in credit quality, saying there was a definite trend of households being more careful about their debt.

Both offices reported "mixed conditions or deceleration in overall economic activity." It looks as if, here in the Northeast, the recovery will continue to be sluggish for some time.

Thursday, September 9, 2010

Credit Report

One not-so-hidden factor in the sluggishness of the recovery continues to be the lack of consumer credit. The Fed estimates that revolving debt, which consists primarily of credit card, declined by $4.4 billion in July. That's $4.4 billion in consumer spending that was basically taken out of the economy in one month.

Paradoxically, this is mostly good news for individual consumers. Delinquencies are way down, with write-offs falling below 10 percent for the first time in a year. People are being much more responsible about the availability of easy credit.

But the lack of credit card use harms the economy as a whole, since credit can multiply money. On the other hand, non-revolving debt, which includes things such as loans for cars and mobile homes (but not for real estate), was up very slightly in July, rising by $758 million. That was the third straight monthly gain for that category.

Wednesday, September 8, 2010

The Caution of the Young

We've talked recently about the outflows of assets from mutual funds, and a recent study from Merrill Lynch shows one reason for this: Younger investors, who have traditionally taken on the most risk in their portfolios, have become spooked by this market and this economy. Among the affluent, 52 percent of those aged 18 to 34 describe their risk tolerance as low. That's a higher figure than either the 35- to 50-year-olds (45 percent of whom have low risk tolerance) or 51- to 64-year-olds (46 percent). Only those over age 65 are more cautious than the young.

And this risk-aversion is growing. Among that younger group, 56 percent describe themselves as more conservative than they were a year ago, as opposed to only 46 percent of all affluent individuals.

One wonders what the long-term effects of this risk aversion will be. If people are wary of putting their money in the market at the age of 25, when they have 40 years to save before retirement, what will their investment decisions be like when they're 55?

Tuesday, September 7, 2010

The Official Jobs Report

In some ways, Friday's official unemployment report wasn't as dire as the ADP report on Wednesday, which had the economy shedding private-sector 10,000 jobs in August. The Labor Department report had private employers adding 67,000 jobs in August, although that was offset by a loss of over 100,000 public-sector jobs, most of them Census-related.

At the same time, there were two other numbers buried underneath the overall employment report that don't bode well for the recovery:

* The number of involuntary part-time workers - people who want full-time work but can only find part-time jobs - increased by 331,000 in August. The number of workers in this category is now 8.9 million.

* The number of discouraged workers - those who have given up looking for a job - is now at 1.1 million, or 352,000 more than it had been a year earlier.

Monday, September 6, 2010

Thoughts for Labor Day

Labor was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labor, that all wealth of the world was originally purchased. - Adam Smith

Talent is cheaper than table salt. What separates the talented individual from the successful one is a lot of hard work. - John Wooden

If all the cars in the United States were placed end to end, it would probably be Labor Day Weekend. - Doug Larson

Friday, September 3, 2010

September: The Cruelest Month?

September has historically been the weakest month for the stock market, with the S&P 500 losing an average of 0.6 percent per year in September since they started tracking this back in 1950. Only two other months have losing records over that time, February and June. Four times in the past decade, the S&P 500 has lost at least 5 percent of its value in September.

There are various theories put forth as to why this should be so. People roll up their sleeves and get back to work after Labor Day, whether that's fund managers taking profits on their winners or individual investors paying attention to their portfolios once again and trying to get them in order. More recently, bad news has tended to fall in September for no real reason: September 11 ruined the month in 2001 for a lot of reasons, and the crux of the banking meltdown happened in September 2008.

But it's a tendency, not a hard-and-fast-rule. Last September, for example, the S&P 500 gained 4 percent. As they say, past performance is no guarantee of future results. So here's hoping we have a September 2010 that bucks the trend.

Thursday, September 2, 2010

The Manufacturing Surge

The headlines out of Wall Street yesterday mostly focused on some variation of "Stocks surge on manufacturing growth." There's some truth to that, but it doesn't tell the whole story. Wall Street analysts expected yesterday's manufacturing report to be solid, but it ended up outperforming the estimates.

Economists surveyed by Bloomberg News forecast that the Institute for Supply Management's factory index would fall from July's figure of 55.5 to 52.8 in August. That's still in positive territory, considering that any number above 50 is supposed to signal growth in manufacturing. Instead, the August number came in at 56.3, an unexpected increase. That's probably why, on an unusually strong day where the Dow posted its biggest gains in almost two months, the strongest sector was the manufacturing group.

Remember, it's not so much good news that boosts stocks as news that exceeds what the Street is already expecting. With manufacturing leading the way, all ten of the S&P 500's sectors were up by at least 1.6 percent, making the first of September a very good day for the market.

Wednesday, September 1, 2010

Discouraging Jobs News

There's a report out this morning that private-sector jobs declined by 10,000 in August, the first monthly drop since January, which would be a very bad signal for this struggling recovery. Those numbers come from ADP, which is the largest payroll-processing firm in the U.S., and precede the official Labor Department figures, which are due out Friday.

But are those numbers accurate? The ADP figure generally but not always comes fairly close to predicting the more official unemployment number. In February, for instance, the ADP number came within 2,000 jobs of the Labor Department figure. It can also be way off, though: In April, ADP's estimate undershot the official number by a whopping 199,000 jobs.

Bloomberg News' monthly survey of economists shows that they expect the Labor Department to report on Friday that there were 42,000 jobs added in August. Even if we end up with that increase, though, it won't be enough to really move the needle on unemployment; the economists also expect the unemployment rate to tick up from 9.5 percent to 9.6 percent.