Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 10-21-09

October 21st, 2009 at 5:11 am by CB | No Comments

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing, which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

10:30 AM EIA Petroleum Status Report

2:00 PM Beige Book

Initial Public Offerings for the Week of October 19 -23, 2009

10-20-09 ZST Digital Networks – Network equipment supplier

10-20-09 AGA Med Hldgs – Manufacturer of transcatheter occlusion devices

10-20-09 Dole Food – Distributor of fresh fruit and vegetables

Source: WSJ Market Data Group.

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Business Spending Looks Up – The Wall Street Journal

Summary: On Tuesday, Caterpillar Inc. and Parker Hannifin Corp. stated that they believed the worst of the recession was past and that they see customers buying again. Caterpillar expects sales will increase between 10% to 25% next year, despite a 44% drop in third-quarter sales from a year earlier and a 53% drop in third-quarter earnings from a year earlier. A shift upwards in business spending would be beneficial to the economic recovery; however, with the current amount of economic slack many companies can increase their utilization of their assets to meet potential increased demand before making investments in new people and assets. Separately, the high-tech companies like Google, Apple, and Intel that have already reported appear poised to do well in the near future. Furthermore, Gartner, a research firm, stated that spending on computer hardware, software and services should increase 3.3% in 2010, compared to its earlier estimate of 2.3%.

CB: Investors can very easily become confused in the current environment with (1) the contradictory economic data being released on a daily basis ,and then (2) the various company executives voicing their own opinions on the economy. First, CB remains skeptical of the belief that business investment will pick up significantly with the current level of economic slack. Companies can save money by utilizing more of their assets than buying additional assets. However, CB is aware of the possibility, which would require some additional research to confirm, that some companies have saved money this year through their various cutbacks in spending and may have a significant cash load they are anxious to use for business expansion, which would favor increased business investment. Basically, its an issue that depends on the industry and must be considered more deeply.

Second, CB would like to focus on Caterpillar and its optimistic statements regarding 2010. Company management is usually optimistic by default when talking to shareholders and the public. As many already know, there is a pressure on management to steer the company’s stock price higher. After reading Caterpillar management’s comments, CB investigated whether management had bought shares in Caterpillar recently. To the surprise of CB, no one in a management position has purchased shares in more than a year. Human nature and greed indicate that if management was as optimistic as the article above implied, then there would be some hint of buying in their filings. In fact, the company has actually issued more shares to public during the second quarter of 2009. Such an action is not a crime, but could imply that management thought the price level of their shares were high at the time. Furthermore, Caterpillar projected its sales to be between $32 to $33 billion for fiscal year 2009 followed by 10% to 25% growth for 2010. If one were to take the mid-point of the 2009 guided sales figure, which is $32.5 billion, and then applied the 2010 growth rates to the mid-point the range of estimated 2010 sales are between $35.75 billion and $40.63 billion. Thus, the 2010 guided sales range is between Caterpillar’s sales levels during fiscal years 2006 and 2005 (and is not near the $51.3 billion sales level for 2008). Basically, Caterpillar still has a way to go before it has recovered the ground it lost in the recession. On a quick pricing note, the current price of $59.63 a share is very close to its historical pricing levels during the beginning of 2007 – when the company had more sales and more certain expectations of the future. Basically, investors need to keep the optimism from management in perspective. Its great that the economy is showing potential signs of recovery, but there is still a long way to go to return to 2008 levels for most companies. Given its current pricing and other qualitative factors, Caterpillar is not a company CB would spend much time looking into as a potential investment.

Housing Starts Post Anemic Rise – The Wall Street Journal

Summary: The following points regard the economic data that was reported on Tuesday:

(1) Housing starts rose for the third time in four months with an increase of .5% in September, or a seasonally adjusted annual rate of 590,000, but still remain down 28% from a year earlier. Despite the recent housing increases, many houses are being rushed to completion so that buyers can qualify for the $8,000 first-time home buyer tax credit, which expires in November. As a result, housing starts from late 2009 and early 2010 are being shifted to the current time period, which may result in a decline in housing starts once the home buyer tax credit expires. Furthermore, August housing starts were revised down by 11,000 to an annual pace of 587,000, while building permits dropped 1.2% in September and are down approximately 30% from a year earlier.

(2) The Producer Price Index dropped .6% in September and is down 4.8% from a year earlier indicating that: (1) there is still much slack in wholesalers’ operations; and (2) increased worker productivity combined with price competition has allowed wholesales to maintain low prices on their products. Furthermore, in September, energy prices decreased 2.4%, food prices decreased 0.1%, raw-material prices decreased 2.1%, intermediate goods prices increased .2%, and core intermediate goods increased .9%.

(3) The Architecture Billings Index increased to 43.1 in September from 41.7 in August; however, the index remains below 50, thus indicating a continued decrease in billings. (From the Related Reading Section)

For Car Buyers, the Brand Romance is Gone – The New York Times

Summary: During the 1980s approximately four out of five Americans were repeat buyers of the brand of their previously owned car. However, according to a CNW Marketing Research study, approximately 20% of new car buyers this year have stayed with the brand of their previous car. As a result, observers believe band loyalty may no longer exist, thus adding another factor to the changing automotive industry. This demise of brand loyalty has been driven by widespread improvements in automotive products. Consumers tend to trust one car as much as another, regardless of brand. These changes in consumer behavior are evident in the market share shifts that have occurred over the last five years among the automobile manufacturers. Five years ago, Chevrolet and Ford topped the U.S. market, each with more than 16% market share; however, currently, Toyota is leads the market with nearly 14% of the market.

BOE’s King: Big Banks Should Get Broken Up – The Wall Street Journal

Summary: On Tuesday, Bank of England governor Mervyn King stated that he believes that large banks not only in Europe but globally should be broken up to avoid exposure to systematic risk. Moreover, he stated that regulation cannot prevent speculative activities from causing future failures. The current regulations being proposed state that regulators will impose capital requirements for the large banks to ensure their survival during a financial shock. Mr. King argues that such capital requirements are usually arbitrary and the unpredictable nature of financial crisis makes it difficult to know what level of capital is necessary to avoid bank failures. Mr. King also suggested that utility banking practices be separated from market related activities.

Conditions are in Place for Oil to Pass $100 a Barrel Once More – Telegraph

Summary: The authors state their belief that the previous rise of oil beyond $100 a barrel in 2008 was not driven by oil supply-and-demand fundamentals, but instead was primarily driven by a large supply of easy money from commodity funds and industrial buyers. With liquidity continuing to flow into the market they believe oil may again rise above $100 a barrel, despite the current excess supply of oil.

Ackman Backs Corrections Corp. of America – Barron’s

Summary: On Tuesday, the Value Investing Congress, a conference where famous value investors present some of their investment ideas and strategies, closed out its two-day session. This article listed some of the investment ideas presented at the conference by Bill Ackman, the head of Pershing Square Capital Management, and Zeke Ashton, the managing partner of Centaur Capital Partners. The ideas are as follows:

(1) Mr. Ackman presented Corrections Corp of America (ticker: CXW), an operator of privatized U.S. correctional and detention facilities, to the audience as a great investment primarily due to: (1) the growing prison population; (2) the low capital expenditures requirements of the business; (3) the federal government being the main customer; and (4) CXW being the market leading in building prisons.

(2) Mr. Ashton presented the following companies as good investments that didn’t participate in the recent rally: (1) Allegheny (ticker: Y), a holding company of mainly property and casualty insurers with an attractive price-to-book ratio of approximately .73x; (2) Laboratory Corp. of America Holdings (ticker: LH), a medical-testing company with great free cash flow; and (3) MVC Capital (ticker: MVC), a business-development company with a good investment philosophy.

More Links of Note

How Dirty Are Hedge Funds? – Forbes

Back to the Future: Rosenberg says its like the Crisis Never Happened – Credit Writedowns

The Guru Outlook: Hedge Fund Master Julian Robertson – The Pragmatic Capitalist