Daily Download: Financial and Stock Investing News for 11-18-09
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With the decrease in earnings calls, there is a significant reduction in company specific news articles. Yet, some of the topics mentioned in the news not covered below are the following: (1) Exxon Mobil Corp. and Chevron are expecting to increase capital spending in 2010 to fund more oil projects to increase production; (2) if AIG had collapsed Goldman Sachs would have taken significant losses; (3) Lazard named company insider Kenneth M. Jacobs chairman and chief executive to replace Bruce Wasserstein; and (4) S.C. Johnson & Son Inc. has entered the bidding for Sara Lee’s air-freshener business.
Upcoming Economic Data for the Day (all times EST)
7:00 AM MBA Purchase Applications
8:30 AM Consumer Price Index
8:30 AM Housing Starts
10:30 AM EIA Petroleum Status Report
Initial Public Offerings (”IPOs”) for the Week of November 16-20, 2009
11-17-09 Fortinet – Network security and IT security (“FTNT”)
11-18-09 HealthPort – Healthcare technology (“HPRT”)
11-19-09 7 Days Group Holdings – Company of hotel chains in China. (“SVN”)
11-19-09 Archipelago Learning – Online eduction company (“ARCL”)
11-19-09 Cloud Peak Energy – coal mining (“CLD”)
11-20-09 Global Defense Technology Sys. – Engineering service provider (“GTEC”)
Source: WSJ Market Data Group.
For Daily Market Performance Data, Please Visit the Daily Market Sheet
List of Selected Companies with Third-Quarter Earnings for 11-18-09
News
Manufacturing Slows, Clouding Recovery – The Wall Street Journal
Summary: According to the Federal Reserve, production from U.S. factories, mines, and utilities increased .1% in October from September. The smallest production increase in the last four-months (the prior three months averaged a .9% increase) was driven primarily by higher output from utilities, which offset the decline in factory output. Meanwhile, capacity utilization, a gauge for inflation pressures, remained flat at 67.6% for the manufacturing industry. Some believe that this raises questions about the strength of the recovery. Separately, the Labor Department, reported that producer prices rose .3% in October from September; however, when excluding higher food and energy prices, wholesale prices dropped .6% from September.
CB: Recoveries and down turns rarely follow a linear path. There are bound to be some hiccups from the trend line along the way. The pullback in factory output should not surprise many given the following: (1) there has recently been a restocking of inventories that has helped drive the positive manufacturing data; (2) the U.S. is operating at a new level of output and wealth than it was previously, especially with the credit contraction, thus gains on the production front are likely to be constrained; and (3) the existence of low capacity utilization, in part, keeps manufacturing output down due to the lack of need for new equipment and expansion. The low-capacity utilization figures along with the struggling producer prices currently supports the Fed’s actions to keep interest rates low.
Related Reading: U.S. Wholesale Prices Show Few Inflation Pressures – The New York Times
Hershey Plots Cadbury Bid- The Wall Street Journal
Summary: Hershey Co. is currently considering either (1) making its own bid for Cadbury or (2) teaming with Ferrero SpA, an Italian sweet maker, to make a bid that would be more attractive than Kraft’s revised $16 billion offer for Cadbury. Hershey has been in discussions with J.P. Morgan Chase and Bank of America regarding financing and has found the banks to be receptive. Combining with Cadbury would provide Hershey the opportunity to: (1) expand beyond the U.S. into emerging markets and Europe; and (2) access the higher-growth candy and gum markets. Furthermore, Cadbury and Hershey have a history of working together, as Hershey currently makes and sells Cadbury chocolate brands in the U.S.. However, Hershey, while in a strong financial situation, may have difficulty making the bid alone as it has only $119 million of cash on its balance sheet. Yet, with Hershey’s nearly $1 billion in earnings before interest, tax, depreciation and amortization expenses it may be able to raise a large amount of debt to enable it to make an appropriate offer, which would leave the company heavily leveraged. Thus, analysts believe that the best option for Hershey is to do a combination offer for Cadbury with Ferrero. Such an offer could potentially be done as an all cash deal, which Kraft would have troubles matching.
CB: While it is good that banks are considering financing this potential bid, one has to question the wisdom of significantly increasing leverage during such an uncertain time. There is no doubt that the chocolate and candy market are stable, but a sustained downturn could make it harder for a company to pay its interest fees. However, considering Hershey’s competitive situation, Hershey may feel that it has to stop Kraft’s bid to protect themselves in the future, regardless of the leverage risk. Hershey’s desire to make a competitive offer is further demonstrated by its willingness to team with Ferrero. If Hershey can put together a more desirable bid, then the positive growth of the company should be enough to make up for the increase leverage risk. Such a deal is done both for growth potential as well as protection of market share and profits.
Capesize Bids Push Baltic to High – Financial Times
Summary: On Tuesday, the Baltic Dry Index reached a new high for 2009 at 4,381 points. This rise appears to be driven primarily by (1) increased bids for Capesize vessels that transport iron ore and coal to China as well as (2) increased ship congestion at key ports in China and Brazil. Furthermore, daily earnings on the Capesize ships have increased to $81,795, compared to $234,000 at the market’s peak in May 2008. Despite the expectation of 170 Capesize vessels to be delivered during 2009, the net new ships for the year are only 35 vessels. The lack of net new vessels results from: (1) scrappages; (2) delayed deliveries; and (3) the required shipyards have not been built yet. For 2010, nearly 300 Capesize vessels are expected to be delivered.
Separately, with the central bank of Mauritius buying two tons of gold bullion from the International Monetary Fund, many market participants believe that gold’s price will continue to be supported as the appetite for gold amongst central banks becomes more evident.
Wall Street on Track for Record in Profits – The New York Times
Summary: According to Thomas DiNapoli, the comptroller of New York State, the four largest investment firms in Manhattan have earned a combined $22.5 billion for the first nine months of the year and are on track to exceed the profits record set three years ago. The banks have recovered much faster than the rest of the nation. These large profits have been primarily driven by trading operations where the banks would borrow at near-zero interest rates and then invest in the securities markets. Furthermore, member firms of the New York Stock Exchange earned a record $35.7 billion for their broker-dealer operations in the first six months.
CB: This should not be viewed as a recovery. These are opportunistic profits that arise in a rare situation that is not likely to be frequently repeated in the future. As a result, investors should not view these profits as continuing.
The success of the banks’ trading operations have hidden the glaring deficiencies of the other divisions of these banks. While credit is tight in the rest of the economy, the banks have never had easier access to credit. Thus, they have been given an opportunity that the rest of the economy has not. These banks have received free money (that’s what borrowing at near-zero interest is called), and then they invested it in the markets which have had a rare significant rally across asset classes. Basically, the banks would prefer to invest the money in the better-returning markets, than to loan it to businesses and individuals, thus helping to constrain economic growth. CB is aware of the positive benefits of wealth effects that occur when markets rally, but those effects are indirect and not as reliable as direct effects.
Contemplate the large expansion the economy would initially see at near-zero interest rates if all industries had access to those low rates. Yet, the situation cannot last forever – interest rates will have to rise. Some of the trades these banks have participated in are not economically viable when interest rates increase, thus the life of their revenue streams is limited. Moreover, these banks significantly increased their risk levels when entering into some trades, which could have hurt them if the ensuing rally did not occur. One should note that the markets’ rally was, in part, fueled by the banks’ access to money and ability to place it in the markets. Should the banks withdraw that money too soon from the markets, then the markets could react negatively. Furthermore, since the initial crisis, the existing banks have become larger granting them more power and influence in their market operations.
Basically, the government has allowed this situation to occur, and has placed its support firmly in the banks. Instead of taking the near-zero interest rate money and investing it in the primary markets and helping fuel business, the money has been invested in the secondary markets, which affects wealth levels and only bares an indirect link to helping actual industry growth. If CB were a bank, it would do just as the banks have done. Why not? The government and the situation have provided the easiest and best option to make a large quantity of money. Why lend to businesses or individuals, when a bank can invest in the markets and make much more money? The money the banks have received or can access, will not start being directed to the economy until the market operations are no longer extremely profitable or the banks believe they can start lending because their profits from trading cover their potential losses. If the government wanted to fuel an economy wide growth, it would have to put more detailed restrictions on how the borrowed money at the banks can and cannot be used.
More Links of Note
The Madness of the Inflation Hawks – Paul Krugman
Tagged with Baltic Dry Index, Banks, Cadbury, Capesize, Hershey, Kraft, Manufacturing, Producer Price Index, Production, Recovery, Trading Operations
