Search results matching tag 'economy'

Has Microsoft turned the corner?

Jim Jubak — Fri, 23 Oct 2009 19:24:00 GMT

When I added Microsoft (MSFT) to Jubak’s Picks on July 24, 2009 after the company announced results for its fiscal fourth quarter, I wrote “This is as bad as it gets.”

After its Oct. 23 earnings release, the company is now saying the same thing. In the post-earnings conference call, Microsoft CFO Chris Liddell said that the fourth quarter may have been the bottom. Certainly, the company is behaving as if it were: Microsoft resumed buying back shares in the quarter that ended in September, with purchases of 1.4 billion shares.

First quarter earnings for fiscal 2010 fell to 40 cents a share, but that beat the 32 cents expected by Wall Street. Revenue declined by 14% from the first quarter of fiscal 2009 to $12.92 billion. That big drop in revenue came because Microsoft deferred $1.47 billion in revenue from customers upgrading to Windows 7. Put that back in and revenue came to $14.39 billion, a 4% decline from the year-earlier period.

Microsoft beat Wall Street estimates this quarter by cutting costs by more than Wall Street expected. Operating costs dropped 6.9% after the company made its first ever company-wide firings, slashed travel costs, and cut the prices it pays vendors. In the conference call, the company increased its cost-cutting target.

The big question going forward, however, isn’t about cutting costs, but about how many copies of the new Windows 7 operating system Microsoft can sell.

Here, too, the news was good.

Deferred revenue came in above analyst expectations because pre-orders of Windows 7, which officially went on sale on Oct. 22, were higher than projected. The company sold more copies of Windows in the quarter than in any other previous quarter, with sales fueled by demand for Windows 7 and by sales to netbook makers of copies of the older Windows XP operating system.

In the conference call, Microsoft said that it sees the potential for a corporate PC “refresh” beginning in calendar 2010, but expects companies to stretch out their replacement of older PCs (and older operating systems from Microsoft) over a couple of years.

Microsoft also backed up numbers from Intel (INTC) signaling that the PC market could actually show growth of as much as 2% in calendar 2009. Earlier in the year, market analysts had projected that PC sales would decline again this year. (For another way to play the upturn in PC sales, see my recent buy of Taiwan Semiconductor (TSM).)

As of Oct. 23, I’m increasing my target price for Microsoft to $33 by June 2010 from the prior $31 a share.

Full disclosure: I own shares of Microsoft in my personal portfolio.

Is the economic roller coaster at the bottom?

Jim Van Meerten — Fri, 23 Oct 2009 17:22:00 GMT

If there is one economic report I look forward to every month, it's the Conference Board's Leading Economic Index. Most of the stuff written by economist is so full of statistics, formulas, tables and graphs that by the time you weed through it all you forgot what the information says; the Conference Board's report is different. They use only 3 major categories:

Leading Economic Index -- LEI -- 10 indicators
Coincident Economic Index -- CEI -- 4 indicators
Lagging Economic Index -- LAG -- 7 indicators

This month I'll sum up the report by this quote: "All in all, the behavior of the composite indexes suggests that the recession is bottoming out and that economic conditions will continue to improve in the near term." Pretty simple to understand, straight forward and to the point.

Let's look for some gems in the report:

LEI - 8 of 10 increased. The 2 that were down were average work week and building permits. We all know we have excess housing inventory and both present and future foreclosure inventory to work through. What I thought was interesting was supplier deliveries, and manufacturer's orders of nondefense capital goods and new orders for consumer goods and materials were up - more on this in just a minute.

CEI - Unchanged - Industrial production is up with the nonagricultural payroll down. Let's go back to Accounting 101. Industrial production up, supplier deliveries up, manufacturer's orders up, average work week down, nonagricultural payroll down; sounds like improving margins are in store for the manufactures. That is a very good sign.

LAG - Improvement in labor cost per unit of output; again a good sign of future profit margins.

At least this report makes me feel better. Orders, production and deliveries up with labor costs down -- I like that. It seems like the roller coaster may have reached the bottom and all the bad news that hasn't already hit the fan at least has been discussed and accounted for. I think that we can be confident that a year from now the economy will be better than it is today.

Jim Van Meerten is an investor and writes about financial matters here and on Financial Tides. Please leave a comment below or email to FinancialTides@gmail.com.

McDonald’s beats the Street

Jim Jubak — Thu, 22 Oct 2009 17:43:00 GMT

Now that’s the kind of quarter investors own McDonald’s (MCD) for.

Earnings for the third quarter, reported before the market open on Oct. 22, climbed to $1.15 a share from $1.05 in the third quarter of 2008. That was above Wall Street expectations of $1.11 a share. (This puts McDonald’s among the 80% of so of Standard & Poor’s 500 stocks that have beat Wall Street estimates so far this quarter. For more on that, see this Oct. 20 post.)

Revenue fell 3.5% to $6.05 billion. That was below analyst projections of $6.1 billion. But on a constant currency basis, revenue was up 2% from the third quarter of 2008.

Same store sales increased by 3.8% overall and they were up in every region where McDonald’s does business. And by more than Wall Street had projected, according to Bloomberg. Same store sales grew by 2.5% in the United States (analysts had expected 2.2% growth), by 5.8% in Europe (5.4% expected), and by 2.2% in the Asia/Pacific, Middle East, and Africa regions (1.1% expected).

As of Oct. 22, 2009, I’m keeping my target price at $72 a share but extending the schedule from March 2010 to September 2010. On Oct. 22, the stock paid a dividend yield of 3.7%.

Full disclosure: Jim Jubak does not own or control shares of any company mentioned in this post.

Don't look now -- it's a second stimulus

Kim Peterson — Wed, 21 Oct 2009 17:49:00 GMT

A second stimulus won't fly with some Americans, despite the fact that Warren Buffett, Joseph Stiglitz and other experts have called for one.

That's why, even though the White House will likely push something that walks and talks like a stimulus, no one will call it the "S" word.

Lawmakers are set to extend some stimulus measures and create some new ones as well, CNNMoney.com reports. Here's a quick rundown:

Unemployment. One move being considered is extending unemployment benefits after they run out.

An estimated 1.3 million unemployed workers will have exhausted their benefits by the end of the year, according to CNNMoney. One proposal would extend the benefits by as much as 14 weeks, and up to 20 weeks in states with high unemployment.

Health care. Another idea in discussion is extending the Cobra health insurance program for unemployed workers. The current stimulus allows for the government to pay 65% of the Cobra premium for nine months after a worker becomes unemployed.

Seniors. Social Security benefits will see no cost-of-living increase next year because of a lack of inflation, CNNMoney reports. The government is considering making up for that by sending a $250 payment to seniors, veterans and the disabled.

Homebuying. The $8,000 tax credit for first-time homebuyers expires Nov. 30, and some people (namely, ahem, real estate agents) have called for an extension. There is talk of pushing the deadline into next June.

New hires. Finally, some have suggested giving companies a tax break for hiring new workers. But would it truly spur job creation, or just unfairly reward companies that were already planning to hire?

At any rate, it doesn't sound like this one has too much traction in Congress.

So what's the cost of all this? Tens of billions, CNNMoney.com reports.

The White House is smart not to promote this as another stimulus. The "S" word will drive some taxpayers batty, but each of these proposals don't sound that outrageous.

What economic recovery?

InvestorPlace — Tue, 20 Oct 2009 19:11:00 GMT

By InvestorPlace's Michael Shulman.

You hear it all around you. The economic recovery this, the economic recovery that. Only problem is we're not in an economic recovery.

In fact, we are not at the end of this recession, we are in the middle of it. This will not be a V-shaped recession and recovery, folks. It is a U-shaped one at best, meaning we have a while to go before things truly pick up. But, more than likely, we are dealing with a W-shaped recession, in which we are near the end of the second leg, then down we go.

Bing: Economic Recovery

Even if the economy stays flat, the stock market will almost surely head back down when the Street realizes what a jobless recovery actually looks like. So, while the statistics may point to an economic recovery this quarter or next, real people will be feeling recession pains throughout 2010. Here are five key reasons why.

#1 - No Jobs!

The pundits on CNBC get all giggly when we lose "only" 550,000 jobs. If that isn't a true sign of the times, I don't know what is. Uber analyst Meredith Whitney, one of the few people on Wall Street who has been worth listening to during the past three years, is forecasting 13% unemployment in 2010 or 2011.

Officially, unemployment currently stands at 9.8%. But if you add in part-time workers wanting more work and the people who are so discouraged they have stopped looking, the number is a shocking 20%.

Unemployment puts pressure on wages, which are stagnant, and hours worked, which are decreasing. This all adds up to falling national income, which means …

#2 - Consumers Are Afraid to Spend

A fear of a loss of income will continue to squelch consumer spending. People pinch pennies when they are afraid of losing their jobs or seeing a cut in commissions, profits or wages. This mentality will continue into 2010.

The fact is consumers drive 70% of GDP, and a meaningful recovery will not happen without their dollars.

#3 - Changing Consumer Attitudes

Not only are consumers not spending, their actual attitudes toward spending have changed. Sure, some people are flush with cash, but even for them, frugality is the new chic. My neighbors, high-end Saab and Volkswagen types, just bought a Kia Sportage for their daughter (nice car, by the way).

This change in spending habits will not be a passing fad. Just ask Grandma or a neighbor who remembers the Great Depression how their parents changed after living though years of a terrible economy. Changes in spending became permanent and re-shaped the economy until the boom following World War II.

10 Reasons the Economy Won't Recover in 2010

#4 - The Credit Crunch Will Continue

By year-end 2009, we will see a more than $4 trillion pullback in credit lines. And we are a country that runs on credit. In fact, the entire growth in consumer spending from 1997 to 2008 was paid for with home equity lines and credit cards.

Credit standards are already impossibly high. My credit lines literally shrink every month, because I do not use them. But what if I needed them? Heck, I almost couldn't get a lease for a new car even though I have never missed a bill payment. The majority of people cannot borrow money and, therefore, cannot spend. This will not change in 2010.

#5 - Businesses Aren't Spending

Even worse than consumers not spending is when businesses do not spend. Even with public figures talking up the economy (and who can blame them, it's practically in their job description) businesses are not listening.

As the consumer continues to struggle, we will see businesses rein in spending further and push back hiring plans throughout next year. And that, as you know, will continue to have ripple effects throughout the economy.

Click here to see all 10 Reasons the Economy Will Not Recover in 2010.

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Job openings scarcer than ever

Kim Peterson — Fri, 16 Oct 2009 16:48:00 GMT

Here's one of the more discouraging facts I've come across in a while: At the end of August there were fewer than 2.4 million job openings in the country.

To put this in perspective, that equals only 1.8% of all the filled and unfilled positions in the U.S. That's a new record low, according to the Atlanta Fed.

For every job opening, there were more than six unemployed people. That's a very bleak scenario, particularly when you compare it to 2007, when the ratio was less than 1.5.

The underlying message here is pretty obvious. "Finding a job right now is extremely difficult," writes John Robertson of the Atlanta Fed's research department.

You can see how this situation has affected the quit rate as well, which is at a record low of 1.3%. The people that are lucky enough to be employed are staying put.

And the tough job market has also caused people to spend more time unemployed. By the end of August, the average length of time people are unemployed has increased to 26 weeks.

With numbers like this, it's hard to believe the economy is in recovery and expansion mode.

Stock bulls await the dollar's collapse

Anthony Mirhaydari — Tue, 13 Oct 2009 19:05:00 GMT

While the primary trend for stocks continues to arch skyward, we are beginning to see equity traders react to some new developments over in the world of fixed-income, commodities, and currencies. This has made for choppy trading over the last few days.

Much of the catalyst for the recent gains in equities has been the depreciation of the U.S. dollar. Traders are using the greenback as a funding currency in carry trades with riskier, higher yielding assets because of super-low U.S. interest rates. They borrow dollars cheaply, sell them short, and use the proceeds to buy commodities and bonds in countries like Brazil and Australia.

They can do this with confidence because of the apparent support for dollar devaluation among officials in Washington -- who are hoping to boost employment by reviving the competitiveness of our exports -- along with prolonged support for low rates at the Federal Reserve.

With so much leverage at work in the carry trade, investors are very sensitive to unfavorable position movements. So whenever the U.S. dollar rises, stocks fall, bonds fall, gold falls, and the yen sinks, it causes carry traders to cringe in agony. Any indication that cross-asset correlation trends are changing, be it statements by policymakers or rumors in the newspapers, will cause unease.

This is important because you must recognize that at this point in the cycle, it's not corporate earnings reports or economic data causing the most volatility lately: It's changes in currency relationships as traders react to government or central bank officials' comments.

There were a few developments over the past week that furrowed the brows of hedgies in the carry trade.

The first were those comments from Bernanke that the Fed won't print money forever. During a speech last Thursday night, Bernanke discussed how the bank plans to exit its accommodative policy stance. There was lots of talk about reducing the amount of reserves held by money center banks along with interest rate increases to discourage lending.

This is a big change in tone from just a few months ago, when all the Fed could talk about was how much debt it wanted to buy. But I still think he is only saying this to keep the decline of the dollar from being a completely one-way trade. Before becoming Fed chairman Bernanke made a career out of studying and explaining why the Fed should not curb easy-money policies amid a deflation threat until the danger has clearly passed. That moment has been defined by him and others as a point at which rock-solid employment growth has been established. Figure late 2010 at the earliest.

We also had reports that central banks in Thailand, Malaysia, Hong Kong, Singapore, and Taiwan were actively buying the dollar to check its fall against their currencies. The idea is that their exporters can't handle such a dramatic drop in profitability and competitiveness. Since the Asian financial crisis of the late 1990s, export-oriented countries on the Pacific Rim have enjoyed a period of prosperity enabled by their devalued currencies, a strong dollar, and the accumulation of foreign exchange reserves. These people aren't going to give all that up easily.

All of this, along with building political pressure from the Republican Party to halt the dollar's slide, has helped stabilize the dollar over the last month. Yet if stocks are to push higher from here, as I believe they are, then it may be on the back of continued declines in the dollar. U.S. officials will talk about how they prefer a strong dollar, but won't do anything about it.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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The tragedy of Krispy Kreme

Minyanville — Mon, 12 Oct 2009 14:20:00 GMT

This article is written by Minyanville's Carol Kopp

There’s a truism among investors that you should invest in what you know, understand, and like. It’s a commonsense strategy: You spot something new. It’s special. It’s useful or innovative. It’s cool and affordable. Let me buy some of that!

The response to that can be summed up in just two words: Krispy Kreme (KKD).

Bing: Who put the holes in donuts?

Krispy Kreme had been a popular doughnut chain in the South since 1937, but remained unknown to the rest of us until about 1996. That’s when the first Krispy Kreme popped up in New York City, on West 23rd Street.

Believe it or not, the town went nuts.

Doughnuts are a major food group in New York, where people eat many of their meals while walking. These fabulous new doughnuts were favorably reviewed by local newspapers. Lines formed when the “Hot Doughnuts” sign was lit. The two young men who owned the franchise were extolled as modern entrepreneurs.

I lived one block away from the store, and thought Krispy Kremes were a much better thing than sliced bread. I was soon as knowledgeable about the product as any potential investor could be.

Krispy Kreme went public in 2000. Luckily, by then I was living out of the country and didn’t hear about it. After all, what could go wrong?

Turns out that just about everything did.

Early high and then. . .

Krispy Kreme stock hit a high of about $49 in 2003. Then it started on a long downward spiral, losing about 90% of its value.

This company had problems that had nothing to do with its doughnut recipe. It over-expanded and took on crushing debt. There were allegations of management misconduct. Some franchises went bankrupt. Competition was fierce in the cheap eats category. More people started consuming healthy foods.

In short, Krispy Kreme managed to lose money selling something that is both cheap and delicious.

Now the company is under new management and seems to be on a bit of a roll.

For more on earnings, see today's Upgrades and Downgrades.

Since February, when its share price hovered around $1, it has climbed steadily, topping $4 a share before settling at $3.49 as of October 8, 2009. It has fewer and smaller stores, but is parking them in strategic locations around the world. Is there hope for Krispy Kreme? Apparently, the answer is “maybe.”

At the end of September, Standard & Poor’s raised its outlook on the company’s junk credit ratings to Stable from Negative (still just above “highly speculative”) and indicated that its sales declines had slowed and cost pressures would ease.

In its latest quarterly report, the company announced it was close to breaking even, and reported a 5.9% increase in year-over-year, same-store sales for company-owned locations.

A new junk-food craze

The company even got some good press recently, if you want to call it that. A new junk-food craze involves a bacon cheeseburger sandwiched between two Krispy Kremes (Original Glazed). It weighs in at 1,500 calories, give or take a few.

(With this company’s luck, everyone who eats one will have a coronary within the hour.)

So, taking the common sense investing strategy to its illogical conclusion, what about McDonald’s (MCD)?

You hate it, right? Everybody says they do. Nutritionists condemn it as a major cause of the American obesity crisis. Fat teens have tried to sue it for damages. French farmers demonstrated when it started expanding its presence there. In India, people rioted -- all because of a little fib about what those French fries were fried in. (For more on this, see Bad Boys of Business: McDonalds.)

McDonald’s will announce its latest quarterly earnings on October 22, when it's expected to report earnings of $1.10 per share on revenues of $6.09 billion. The company’s sales grew 4.5% last year.

So much for tough competition in the fast-food industry.

Meanwhile, the company’s share price over the past five years has climbed steadily from the mid-20s to mid-50s. They also pay a dividend, currently 3.87%.

So, if there's a shred of truth in the common sense investing strategy, maybe it’s this: Forget about everything you understand, think is new or wonderful, or ought to take the world by storm.

Instead, watch what everybody else is doing.

Pretty soon, what they’ll be doing at The Louvre in Paris is eating at the city’s newest McDonald’s restaurant. They probably needed one because those on the nearby Rue de Rivoli and Champs Elysee are always overcrowded.

No position in stocks mentioned

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Retest of March lows seems unlikely

Vad Yazvinski — Thu, 08 Oct 2009 02:23:00 GMT

“Whenever you find yourself on the side of the majority, it is time to pause and reflect” -- Mark Twain

One of the main arguments "perma-bears" used in justifying why the recent stock rally is (and was) destined to fail miserably, has certainly been a widespread expectation of an upcoming collapse in the commercial real estate market.

See what's in Vad Yazvinski's Top Stocks portfolio

Just yesterday the Wall Street Journal reported that "banking regulators are girding for a rerun of the housing-related losses now slamming thousands of banks that failed to set aside enough capital during the boom to cushion themselves when the bubble burst. 'Banks will be slow to recognize the severity of the loss -- just as they were in residential,' according to the Fed presentation, which was reviewed by The Wall Street Journal".

This is true. It has been clear for a while that hundreds of smaller banks heavily exposed to commercial real estate market are likely to fail or require more capital during the next 18 months or so. But isn't everyone expecting that at this point?

In my opinion, a retest of March lows would require much more than another wave of bank closures, but rather a large external credit shock to the financial system comparable to that of last year's collapse of Lehman. And at this point I just don't see where would it come from. The Fed simply won't let large banks fail, the IMF will bail Latvia/Ukraine and Co. if necessary, and the dollar "devaluation" press is working overtime on solving the balance sheet issue of emerging-market companies.

So that leaves us with commercial real estate as the last "potential cause of the collapse." However, the base misunderstanding on the comparability and potential magnitude of commercial and residential real estate crisises, in my opinion, lies in a simple but very important factor. That's cash flow and its magical ability to reduce debt over time.

Think about it this simple way. Condos and houses in Florida, California and Last Vegas at the peak of the market produced negative cash flows to their owners even with very low loan-to-value mortgages. There was and is absolutely no incentive for anyone to keep paying a mortgage knowing that their homes value would never appreciate above what they paid.

On the other hand, the vast majority of even worst -hit commercial real estate properties still generate positive net operating (pre debt) cash flows, which could be used to pay interest/reduce debt and thus very likely to eventually generate positive profit for owners.

Cash flows also make price discovery, the lack of which helped to sink the residential mortgage market, much easier. It also buys valuable time for the owners and encourages lenders to find ways to "make things work" by extending the loans and altering the payment terms -- a process we can call "extend and pretend".

And while Fed officials and many "perma bears" have been worried/warning about commercial real estate for quite a while, Wall Street has already started to solve the problem (at investors' expense and for a hefty fee as usual) by- issuing billions of dollars of freshly minted equity for pretty much all/any of the major REITS, life insurance companies and large commercial banks out there that want it.

So while it is certainly possible that many of the equity investors who are willingly absorbing all of these newly issued shares are making an expensive mistake, this massive equity fund raising effort has essentially delevered the CRE market and reduced the risk of outright collapse to virtually zero. This extra equity cushion will also help to protect the true "big boys" of the investing world, the bondholders -- i.e. insurance companies, pension funds, banks, etc.

Most individual investors out there tend to forget that the total value of the global equities (stock) market is actually several times smaller than that of the world fixed income (debt) market, and the true rulers of Wall Street are fixed-income traders, not the equity ones . (Remember, it was the fixed income market's credit-default swaps and interbank lending that brought the world to a virtual standstill last year, not the equity market.)

And the fixed income market hasn't looked as healthy as it does today in quite a while. Just look at any bond index (including the favorite "media scare"- CMBX index) and you will see that it's as if the crisis has never happened. Prices are back to sky high levels, mark-to-market losses are now magically converging to gains, and defaults on high yield bonds are now widely expected to be much lower than anyone dreamed of several months ago.

So until Fed starts raising rates, a repeat of last year's collapse seems very unlikely and may be even downright impossible. We'll see short-term corrections, sure, but not another 50% plunge.

That is why I personally have been buying debt/preferred stocks (PFF , LQD, PGF, ESD, EMD ) of many "scary" REITS, insurance companies, sovereign nations and banks since the beginning of the year, and despite the consistent media warnings of all the "upcoming major insolvencies” I still believe that fixed income is attractive even at today's prices

Vad Yazvinski, a CFA, is registered with the state of Georgia as an investment adviser representative of Jordan Capital, where he currently serves as a Chief Investment Officer. This article is his opinion only and shall not be interpreted in any way as a recommendation to sell or purchase any security. Stocks mentioned with the article are for information purposes only, and may or may not be currently holdings in his investment fund.

Surprise under the Christmas tree?

Jim Van Meerten — Wed, 07 Oct 2009 15:57:00 GMT

There are a lot of articles predicting gloom and doom for the Christmas retail season. On one hand we hear the economy is recovering, and on the other hand we hear that we're not out of the woods yet.

I decided to take a very unscientific poll to find out for myself. I'd rather be approximately right than precisely inaccurate, so I called a few friends and asked how they were preparing for Christmas. I got some surprising answers.

Several people told me that they remembered growing up in hard times but everyone's parents had a Christmas Club account. They couldn't find a Christmas Club to join but decided to open a savings account or a money market account and they've been stashing some money away until they see the seasonal sales.

I also heard a term I hadn't heard in years: layaway. I remember how we bought my first big boy bike at Western Auto on a layaway plan. Every week we'd go in and I'd check to see if it was still there in the store and we'd put down another $2 till it was paid off. Stores are again pushing the layaway plans and people are responding.

I followed up with a question: When will you decide how much to spend and what will trigger your decision? Again I was surprised by some rational answers.

Most people said they had been holding back for two reasons. First, they were uncertain about layoffs and secondly, they always used the year-end bonus to pay off the Christmas bills. Most felt that by Christmas they would know if their companies would survive and if they still had a job. Most also said that although year-end bonuses were confidential the rumor mill would know by Thanksgiving if they were going to get one and approximately how much.

Ok, very unscientific but I still think, valid information. People are preparing with savings and layaways ahead of time and most feel even though they haven't been spending recently because of uncertainty that they'd have the answers about their future by year end.

How are you and your friends and family preparing for Christmas? I'd like to see if you have similar responses and please let us know. I think there will be a lot of unexpected surprises under the tree this year.

Jim Van Meerten is an investor and shares his opinions on financial matters on Financial Tides and Top Stocks. Please comment below or email to FinancialTides@gmail.com.

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