Archive for November, 2010

  • Morning News: November 17, 2010
    , November 17th, 2010 at 7:45 am

    US Stock Futures Up Before Housing, CPI Data

    Fed May Hesitate on More Easing After Critics Question Mandate

    Consumer Prices in U.S. Probably Rose in October on Gasoline

    Currency Fight With China Divides U.S. Business

    Ireland Prepares to Open Books as EU Weighs Help for Banks

    China Acts to Slow Rise in Food Prices

    GM Increases IPO Size as Treasury, UAW Sell More Shares

    Roche Takes Knife to Costs, Slashes 4,800 Jobs

    Microsoft Investors Not Happy

    U.S. Sets 50 Bank Probes

    Managing Money is Hard…Ask Peter Thiel

  • The Muni Meltdown
    , November 16th, 2010 at 1:16 pm

    Check out the drop-off in the Muni Bond ETF (MUB):

    This chart is slightly deceptive. The ETF is normally very stable. We’re only talking about a drop of a few percentage points, but it appears more dramatic when compared with its normal stability.

  • Food production a bright spot in gloomy economy
    , November 16th, 2010 at 12:32 pm

    Boom times down on the farm:

    While the recession took a toll on manufacturing and other industries, one part of the economy has remained a bright spot over the past few years: food production.

    Across the nation, food producers are seeing enough growth that many are expanding and investing in new equipment.

    For cheesemakers, dairy farmers and vegetable growers, the slow economy has brought opportunities to expand while construction costs are low. Food makers have also benefited from having products that consumers still buy in hard times and from ongoing efforts to open up new markets overseas.

    The result is growth — both in sales and in facilities. The expansions include cheese-making operations in Wisconsin and Idaho and a sweet potato canning plant in Arkansas. Hershey Co. is spending $200 million to expand and update a plant in its namesake town in Pennsylvania, and General Mills Inc. has been pouring millions into yogurt plants in Michigan and Tennessee.

    “Even in tough economic times, people are still going to buy groceries,” said Barbara Gannon, a spokeswoman for Wisconsin-based Sargento Foods Inc.

    While Chrysler, General Motors and other companies tied to the auto industry have closed factories in Wisconsin in recent years, Sargento is among the food makers expanding there. It’s adding a multi-million-dollar building to its headquarters in Plymouth.

    Sargento is the fifth local cheese company to expand in the past five years, Plymouth Mayor Don Pohlman said. Their growth makes his job easier when it comes to attracting other companies, he said.

    “Businesses want to be around other businesses that are growing and expanding,” Pohlman said. “The cheese industry here really helps me sell the city.”

    Unemployment in surrounding Sheboygan County was 7 percent in September, slightly better than the state average of 7.8 percent.

    Gannon said Sargento began considering expansion a few months ago to keep up with demand that has remained brisk even as the economy stalled. The company, which is best known for its cheddar, Swiss and provolone cheeses, had about $900 million in sales last year and projects about $950 million in sales this year, Gannon said.

    Other cheese makers and distributors — from Vern’s Cheese Inc. in Chilton, Wis., to Jerome Cheese in Jerome, Idaho — also are expanding factories and office spaces, saying they expect their good times to last.

    That’s because cheese is recession food, said John Umhoefer, the executive director of the Wisconsin Cheese Makers Association. People are eating more frozen pizzas, he said, or adding string cheese to the lunches they’re increasingly packing at home.

    “Even we didn’t necessarily see this coming,” Umhoefer said, “where a recession is a net positive for cheese sales.”

    Another reason companies are expanding now is that constructions costs have come down. Edith Knoespel, who owns Vern’s Cheese with her husband, said their business hasn’t fully recovered from a dip two years ago but it’s come back enough that now is a smart time to grow. They expanded their retail store so the space that once held 10 customers can now fit 60.

    “It’s just a good time to invest in building costs right now,” Knoespel said.

    If it’s a good time for construction, it’s also apparently a good time to invest in heavy equipment.

    The Association of Equipment Manufacturers is a Milwaukee-based industry group whose members includes companies like John Deere tractor maker Deere & Co.

    Sales of 100-horsepower tractors, which cost about $75,000 to $100,000 each, were up 27 percent last month over the same month last year, said Charlie O’Brien, AEM’s vice president of agricultural services. Combine sales also have been up.

    “They’re purchasing the equipment because there’s pretty good optimism,” O’Brien said of farmers who raise commodities such as corn, soybeans, wheat and rice. “There continues to be good demands for their commodities.”

    That’s partly because China is importing more U.S. food, he said, and poor harvests because of bad weather in countries like Russia have led to even greater demand.

    Michigan, one of the nation’s top producers of fruits and vegetables such as tart cherries, blueberries, apples, dry beans and sugar beets, exports about $1.7 billion in crops each year. Officials said that’s provided some stability in the state with the nation’s second-worst unemployment rate of 13 percent.

    Food producers are “investing a lot of dollars here for the long term,” said Don Koivisto, the director of Michigan’s Department of Agriculture. “That’s led to lot of interest from other national industries about moving here. Agriculture has been one of the real backbones as we’ve struggled with the manufacturing downturn.”

  • GM to Price Between $32 and $33
    , November 16th, 2010 at 11:42 am

    The interest in the GM IPO appears to be strong. The underwriters have moved the offer range up to $32 to $33 per share. That should net the company about $12 billion.

    As I’ve said before, I’m very leery of this IPO. Jeff Reeves spots this gem in the offering prospectus:

    We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.

    That’s not a good sign.

  • Reynolds American Splits 2-for-1
    , November 16th, 2010 at 11:03 am

    Here’s a quick reminder that Reynolds American (RAI) split 2-for-1 this morning. The price has fallen in half but there are now twice as many shares.

    The dividend split as well, and it was just increased. The pre-split dividend was 90 cents per share. The next dividend, post-split, will be 49 cents per share and it’s payable on January 3rd to shareholders of record as of December 10th.

    At the stock’s current price, the $1.96 annual dividend works out to a little over 6% per year.

    For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally divided into 20 stocks at the beginning of each year.

    The original RAI position as of midnight on December 31, 2009 was 943.9305 shares at $52.97. I’ve now adjusted that to 1887.861 shares at $26.485.

  • Signs that the Economy Is Better Than You Think
    , November 16th, 2010 at 8:19 am

    Retail sales rose by 1.2% in October. That’s the most in seven months.

    Corporate profits are nearing an all-time high.

    Jobless claims just fell to a four-month low    .

    Third-quarter productivity was 1.9% which nearly doubled expectations.

    Over the last four months, private sector payrolls have increased by 526,000.

    The ISM Index has been above 50 for 15-straight months.

    Consumer confidence is the highest level since June.

    The U.S. dollar is at a six-week high.

    The total cost of TARP and the AIG bailout will come in at less than $50 billion, which is $300 billion less than estimated one year ago.

    The federal budget deficit for 2010 is $125 billion less than it was for 2009.

    Mortgage rates are at the lowest level since data was first kept in 1971.

    The trade deficit narrowed (slightly).

    Although industrial production fell 0.2% in September, it’s still up 5.4% in the past year.

    The TED spread is currently at 0.16%. Over the summer, it had spiked to 0.48%. Two years ago, it peaked at 4.65%.

  • Morning News: November 16, 2010
    , November 16th, 2010 at 7:38 am

    Stocks Fall for 7th Day, Ireland Premium Rises

    Foreclosure Mess Prompts Call for Stress Tests

    Industrial Production in U.S. Probably Increased in October

    Europe Fears That Debt Crisis Is Ready to Spread

    Under Attack, Fed Officials Defend Buying of Bonds

    China Readies Price Controls to Tackle Food Inflation

    Home Depot’s Net Up 21%; Sales Come Up Short

    Caterpillar CEO Steps Up Deals to Target Emerging Markets

    Apple Said to Reach Deal on Selling Beatles Music via ITunes

    Wal-Mart Profit Up but Same-store Sales Decline

    GM IPO as Climax for the Reflation Trade

  • What Does a “Normal” Yield Curve Look Like?
    , November 15th, 2010 at 8:35 pm

    I was curious to see if there’s a “normal bend” to the yield curve besides that it ought to be positive. I averaged all the yields on several points on the yield curve with data going back to 1985.

    Those are the points in blue. I set the 3-month yield to 0% so you can see how the rest of the curve relates to that.

    I added the points for the current yield curve. Those are the points in red.

    I was a little surprised that the 20-year yields were slightly higher than the 30-year yields. Perhaps there’s a liquidity effect.

    Actually, to get a better sense of how out-of-the-ordinary the current curve is, I could have set the 30-year yield to 0%. Then we could see how the rest of the curve related to that.

    The point is that current short-term rates are very low and the yield curve doesn’t anticipate them rising anytime soon.

  • The QE2 Critics
    , November 15th, 2010 at 2:04 pm

    Alan Blinder has a column in today’s Wall Street Journal inadvisedly called “In Defense of Ben Bernanke.”

    That’s a poor title since Mr. Blinder isn’t really defending Bernanke but rather pointing out the holes in the arguments of QE2 critics. Many of the aspects claimed about QE — that it devalues the dollar or promotes inflation — are true about traditional Fed tools like lowering short-term rates.

    The Fed has a dual mandate: low inflation and high employment. The only tool it has right now is QE. As I see it, the soundest argument against QE is that it isn’t needed since the economy is recovering.

    Here’s an open letter to Bernanke arguing against QE2.

  • Beware the Cyclically Adjusted P/E
    , November 15th, 2010 at 1:40 pm

    Henry Blodget points out that the stock market is 30% overvalued according to the Cyclically-Adjusted P/E Ratio (CAPE) which looks at the inflation-adjusted earnings of the last ten years.

    I’m very leery of the CAPE because the stock market is itself cyclical so there’s no need to adjust for it. Also, a ten-year window is too long to consider. For example, the CAPE maybe high now but it will probably fall very soon due to very favorable comparisons.

    Earnings peaked in September 2000 and hit a bottom in March 2002. This means that those lower earnings numbers will come off the CAPE while higher earnings will be added on. This will appear as an earnings growth upward revamp when in fact, all we have done is ditch the depressed earnings from ten years ago. As a result, the CAPE may soon tell us that the market is fairly valued.