The most important information out today is from
both FedEx and UPS, both of which are reporting
falling shipment volumes:
"UPS, whose domestic volume has outperformed the gross domestic product for almost a century until last year, said April 8 that deliveries dropped in the first quarter. UPS also said earnings for the three months through March will miss its previous projection by as much as 7.4 percent, just the third time the Atlanta-based company has made a new forecast that was below an earlier one.
FedEx's U.S. shipments dropped 2 percent last quarter, and the company said last month it would have 'limited earnings growth' this year because of the slowing economy. Both companies are also struggling with soaring jet-fuel, gasoline and diesel costs after crude oil surged 80 percent in the past year."
The "kingpin" of the bull's case has been that Transports have not confirmed the Dow's relative weakness, and in fact recently have been amazingly strong. This, according to the Bull case, means that we're done recession-wise and are headed higher - both for the economy and the market.
The problem with this case is that most of the Transport strength hasn't come from organic, broad-based traffic growth but from specific sector favor - first "merger fever" in the airline industry, and then again in the rails due to exports both of agricultural products and resources (particularly coal)
And while there have been many who have argued that one of the "big shippers" was cannibalizing the other's customer base, we now have
both reporting unit shipment declines.
There goes that argument.
United Airlines
posted a wider loss and announced layoffs, citing fuel costs (no, you mean $118/bbl oil is a problem for an airline?)
AT&T
posted a nice profit growth, but a lot of it came from merger savings with Bellsouth, mostly by firing 10,000 people. That of course reduces costs and boosts profit, but its not necessarily a good argument for the economy as a whole. The shift to wireless from wireline phones continues apace and is likely to increase even more over time; on-balance the argument for landlines look weaker by the day. As consumers get squeezed more and more the "paradigm shift" will become even more entrenched - why pay $30 for a landline when you already have a $50/month cellphone - that works in your house as well? If you ask me which line I'd drop given a need to get rid of one of them, the landline loses. Every time.
McDonalds
continues to benefit from a "trade down" view, which ain't good for American's "wastelines" (sic) but is likely to be good for the firm's stock, at least for a while. I expect that the real 900lb gorilla for them will be when the cattle "kill off" runs its course later this spring and summer (ranchers giving up on the high price of feed and killing off herds rather than spending the money on finishing feeds) and beef prices start to move materially higher. That is likely to hit the stock and company hard right in the margin gut - if you're late to this party and not in the stock by now, you're probably
too late. That squeeze may have already started - the firm said that US same-store sales were
slightly negative. Further, the firm's intention to go after Starbucks by installing "trendy" coffee bars serving lattes and the like appears to me to be a few years late and potentially ruinous to the bottom line - these installations are not cheap, and if consumers are squeezed, will they really pony up for a $4 latte? I am reminded of the last time that McDonalds went after "expanding" its core competency a number of years ago and literally destroyed operating margins for a number of years, just recently emerging from its malaise. I would stay far, far away from the stock here - too much is already "priced in" on the upside, and not nearly enough of the risk is represented in the price.
Linens-N-Things
is damn close to going under and is fighting mightily to remain where it can breathe air instead of swimming with the fishies. Sharper Image already went "glub" and now these folks. Not a great story, and I suspect that other retailers that are tied to "discretionary" purchases are going to get similarly hammered. Amusingly enough I have noted that a significant uptick in junk mail from Linens-n-Things here in the last couple of weeks - they're clearly doing the "let's stick our claws out and pray something catches" game as they slide down the bowl.
They will not be the last specialty retailer to go down the toilet.
The other piece of "truly bad news" comes from the health care front where
United Health got positively hammered, cutting its outlook and citing
anticipated loss of commercial customers. Oh, you mean that when people get laid off they lose their health "insurance" and that hammers managed care? No kidding? (As an aside, are we ready to have that discussion in this nation yet about health care and its cost? No? There's a ticker brewing on this one aimed for the end of the primary season, and intended for you to think about as we go into the election season. It echoes much of what I wrote years ago in "Musings.")
ICSC came in at -0.7 for the week, from a previous +0.9%. Redbook came in at -1.3%. Neither was reported on CNBC. Surprised? I'm not. I've been harping on this for a while, but you're never going to get reality reported in this regard.
I do expect that the balance of the earnings reports this quarter will be decent, but not great. Why? Because the real "crunch" with withdrawal of unspent home equity lines didn't hit people until March, and that of course is the
end of the first quarter.
Going forward, however, the crunch on consumer credit is going to bite hard, and its one that nobody can fix - in The Fed or anywhere else. Any attempt to "spend our way out" via the deficit simply fuels price inflation and blows back on the very same consumers that are being "prodded" to "get out there and shop."
We have spent like drunken sailors for the last five years and now we've discovered that the rope given to us in the form of HELOCs and insane consumer credit policies in fact has a noose on the end of it and its around our collective necks. Consumer behavior is shifting as I predicted it would early last year, and as it continues to do so the equity markets will eventually be forced to recognize reality.
That reality is that the debt overhang is going to have to be either paid down or defaulted upon. If its paid down then we have an immediate negative impact on consumer spending. If its defaulted then the credit crunch deepens as banks will tighten up the rules to prevent it from happening again, and preserve their capital ratios.
Either way the result is the same - consumers spend less, either by choice or by force.
How much overhang? My "best guess" is that consumers have been spending at from five to ten percent beyond incomes, mostly supported by "home price appreciation" and expanding consumer debt. Now both are unwinding at once, and odds are that we will see consumer behavior shift in the other direction, not only to pay down that debt (when possible) but also to start socking back some sort of cushion in savings. The net impact could be a reduction of 5-7% in consumer spending, which will of course flow through directly into GDP, with the potential impact being as far as -5% in "contribution."
This would be an insanely negative GDP print for perhaps as long as two years going forward.
The media is now picking up on what I've been talking about for some time - the possibility of Fannie and Freddie failing outright and having to be nationalized. CNN/Money is putting this in stark relief, basically parroting what I have been saying -
the bill for this to the taxpayer, if it happens, is likely to be up around $1 trillion!"Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor's recently placed an estimated price tag on this worst case scenario -- $420 billion to $1.1 trillion of taxpayer's money."
Bubble TV continues to look for people who will call for a "huge breakout" north in the stock market, all citing "lots of money on the sidelines."
Beware buying anything that looks like that happening - headfakes are very, very common in the market, and they can ruin your account's balance.
The reality of the market is that ultimately it always - always - responds to the fundamentals of the economy. It often takes a while for reality to intrude, but it always does.
False bottoms and false hope reigned supreme in the 2000-03 tech wreck, and the same sort of "bottom calling" was prevalent then. Yet that "tech recession" was in fact nearly all business-centered; consumers never really slowed down.
This is different because the bubble was blown directly into consumer balance sheets. Now we're getting this ugly thing called "reality" that is intruding into consumer credit card statements, HELOC-revocation letters and other forms of "nastygram" appearing in mailboxes across America.
This recession is far more like the traditional consumer recessions that we had in the 70s and 80s, yet is likely to be deeper than either, because the damage then was more inflationary (or the correction of that inflation) than speculative froth-based. The latter is especially bad because it leads to horrifyingly bad behavior by consumers, and boy, did we live up to our reputation as being "stupid Americans" this time around in the shopping malls.
BTW if you're wondering how those "market callers" would treat you and your money, I will point out that last summer Cramer called for Downey Savings and Loan to be one of his famous "$80-100-120" stocks, and for WaMu to
buy them at $100, with the argument that they
had and will have an insanely low percentage of defaults.Really?
Here's truth folks - a loss of $8.89/share for the last quarter.
Oh, and those "low defaults"? Here's the
actual performance .vs. Cramer's call:
"Non-performing assets increased during the quarter by $521 million to $1.562 billion and represented 11.90% of total assets, compared with 7.77% at year-end 2007 and 0.94% a year ago."
Hmmmm..... Low defaults eh? 11.90% from 0.94% is a roughly 1,300% increase.
That's pretty damn impressive, and exactly what I predicted was coming.
You want to listen to the clowns on TV eh? You could have bought DSL for $74 last spring on Cramer's recommendation.
This morning it will open under $14, for a total net loss from listening to the market callers of 81%. If you did buy it back then, and haven't yet sold, you're running the risk of a 100% loss as this sort of acceleration in NPAs usually winds up with the FDIC stepping in, wiping out shareholder equity (read that as "the stock goes to zero") Bet on a nice little short squeeze, which may be your last chance to get out with some of your money intact before they go to zero.
This is what you get if you listen to Bubble TV, and no, they won't mention that on CNBC before they run the next "Stop Trading" episode, but they will (and are) running ads every 15 minutes telling you that CNBC will tell you how to "protect your wealth" and "keep your money safe."
You've done a great job CNBC, just as you did during the 2000 Tech Wreck.
Existing home sales fell 2%, inventories rose (again), median home prices down 7.7% y/o/y, with the biggest fall in prices in the west - off 14%.
Oh, and 18% of the homes listed for sale have negative equity, which means they are either foreclosures or short sales.
Don't listen to the market crooners.
We're nowhere near the end of this mess.
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