Slope of Hope Blog Posts

This is the heart and soul of the web site. Here we have literally tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. You can also click on any category icon to see posts tagged with that particular category.

Cover Indicator Honesty

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I'll close the day with something utterly trivial, but I need to get it off my chest.

A recent edition of a thrice-weekly online publication mentioned that the cover of Business Week featured a bear on its cover. I couldn't find anything bigger than a postage-stamp-sized version of the cover, but here it is, scaled larger:

0615-bear 

I'm a big believer in the contrary nature of national magazine covers. What irked me was that the aforementioned publication citing the cover stated that the article within Business Week had a "rather dismissive undertone", and thus the cover really didn't have any significance.

Look, I'm the bear's bear, but you can't have it both ways! If someone is going to cite an anecdotal indicator, you can't cherry-pick things so blatantly that only instances of your bias are valid.

Of course, the cover indicator isn't infallible. Business Week had a very prominent cover story in August 2009 that the recession was over, and frankly the market hasn't keeled over yet. My point isn't that the cover indicator works or doesn't work; my point is that consistency promotes credibility.

The Unfolding of WAG

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Over the past five sessions, the bulls have run over the bears with absolute impunity. The double bottom on May 25 and June 8 set up the bulls for a charge higher, and the more I reflect on it, the more I realize how WAG – – first predicted on May 25th, in fact – – was correct in the first place. I wish I had listened to myself more.

Let's take a look at my original scribble:

0615-wag

What caused me and many others to doubt that WAG was unfolding was that the market dipped toward the May 25th low again. This depression of prices since May 25th – which I called the Kagan effect – prevented any real breakout until today.

0615-wag2
  

Just for fun, let's take the price movement since May 25th and shift it upward enough so that the retracement stays above the breakout point. What does the graph look like then?

0615-wag3

If we compare this "un-Kagan'd" graph to the original one, it looks like we're getting close to realizing WAG's push higher. The hedging I did was very constructive – – longs such as RIG, EEFT, MCO, and others have been very helpful – – but my portfolio remains tipped bearish. I've got 97 short positions, 18 long positions, and 1 ultra-long (if you consider TBT to be so). My two biggest positions are a SPY long and a IWM short.

Energy and the Euro is driving everything at this point, so it'll be interesting to see what President Spock says tonight. 

CFO Survey (by Goatmug)

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Duke University and CFO Magazine have again released their CFO Survey.  As I always state, the CEO is the sales man and the CFO is the guy we need to pay attention to.  (Yes, I'm biased I worked in Corporate Finance for years).

http://www.cfosurvey.org/10q3/PressRelease.pdf

HIGHLIGHTS –

CFO SURVEY–Chief financial officers in the U.S. say they have limited plans to hire over the next 12 months, although nearly 60 percent won’t return their staffing to pre-recession levels until 2012 or later. Benefits and wages also remain at reduced levels at many firms, and credit is still tight for small firms, which is hindering hiring plans and constraining growth.

GOATMUG INTERPRETATION– Ok, get this.  The recovery is not going to include hiring.  Only 40% of CFOs are projecting getting back to pre-recession levels (if everything goes well) by 2012!  Oh yes, and if you still have a job or will be one of the lucky ones getting rehired, you might expect lower pay or reduced benefits.

CFO SURVEY–The recovery is not completely stalled, however, as CFOs predict strong business spending and earnings growth.
 
GOATMUG INTERPRETATION - Businesses are hoping and praying for a rebound although they are not confident enough to bet on it (hire).  As I've mentioned, my belief is that during the peak crisis months company's quit reordering to replace inventory.  Ultimately we had a situation where firms HAD to reorder and begin acquiring materials for their products just to replenish them.  We've done that, now let's hope we have someone to buy all of this new inventory. 

 
CFO SURVEY–Borrowing conditions remain tight, with roughly an equal split between firms reporting that credit conditions have tightened and those saying credit has eased. One-third of micro-firms (100 or fewer employees) say credit conditions have worsened in the past six months.

GOATMUG INTERPRETATION – Lending is still a problem?  Either banks aren't lending or the loan officers are suddenly looking a realistic levels for debt and requiring firms and borrowers to actually be credit worthy.  I think this is got to be a very accurate piece of data in that I'm sure 50% of the firms are actually decent credit risks while I'm sure another 50% are scary and probably don't deserve the lines of credit they previously consumed.  I guess this is why we see that credit is actually perceived as worse than 2009 in many cases.  I'm sure there will be a rollout of a new Federal loan program that loses billions of your tax dollars to bail out credit starved firms that "deserve" all the credit they can handle.

CFO SURVEY— Earnings are expected to rise 12 percent and capital spending 9 percent in the next 12 months. Research and development and tech spending will increase 4 to 6 percent. 
 
GOATMUG INTERPRETATION –  They better! 

 

TOP CONCERNS

 
CFO SURVEY – The top two concerns for U.S. CFOs are weak consumer demand and the federal government’s agenda. U.S. CFOs, who expect to raise the prices of their products by 1.5 percent, are also worried about price pressure from intense competition. Maintaining employee morale is among the top company-specific concerns.

GOATMUG INTERPRETATION – Wait a minute, we have growth forecasts and profit expansion predictions, but our top concern is the anemic consumer demand and the not so invisible hand of the government?  On top of that, CFO's say that management can't raise prices because price competition, these guys are trying to spin this.  I'm not buying it and I don't think they even believe it!

CFO SURVEY – Health care costs also have reappeared among the top four concerns for U.S. companies, with corporate health care payments expected to rise 8 percent in the next year.
 
GOATMUG INTERPRETATION – Healthcare costs an issue?  Just wait for 2011, 2012, 2013, and 2014.   That is 4 and 1/2 years for the insurance companies to prepare (increase prices) for the national healthcare system.  Employers with 50 or more employees will suffer most in the business community right along with the tax payer.
 
 
All in, I don't think this is a very positive report.  This should be a report that suggests that CFO's are seeing increased momentum and better long term visibility about revenue growth and margin expansion.  We should not hear that CFO's are concerned about weak demand and a lack of pricing power.  In addition, boards and executive teams are worried about our government's plans for business.  It is incredibly hard to predict and create strategic plans when you don't know where big government will decide to regulate or takeover within the business world.  I am amazed though when you look at the graph below that shows that we are above 2008 levels in CFO optimism.  Clearly we are not near the euphoric levels of 2007, but the graph clearly shows that these guys are more positive.

Optimism1

 
A closing word on credit.  We are really hearing two stories when it comes to credit.  Strong firms are being lavished with amazing opportunities to borrow at ridiculously low prices (interest rates).  In fact this will be a monster year for highly rated corporate bond issuance (at least so far year to date).  This is driven by the fact that overall the FED and central banks have lowered the alternative lower risk yield so much that investors are DRIVEN to take more risk just to outpace inflation.   On the other hand, smaller firms or high yield firms are facing tremendous problems funding their operations and rolling debt.  Europeans are also having a terrible record setting (bad) credit funding year.  The market has dissected the risk and is punishing poor creditors (forcing them to pay much higher rates) and rewarding good creditors (giving away cheap money).  At least the system is starting to appropriately price some risks! 
 
I think the CFO's are hedging their bets and remain totally cautious because they know that demand is falling and they may have one more quarter of upside and then down we go.  June's update shows that the rate of change on many metrics is absolutely falling and the actual real levels have also dropped from their peaks.  No amount of government stimulus is working and the economic disaster in the Gulf will only increase the speed of the double dip.  We had all better be praying a hurricane or tropical storm does not form in the Gulf. 
 
Having said that beware, our government is still involved in the housing bubble it is trying to reflate.  Hence we see a tremendous mispricing of residential home mortgages where we can obtain a 30 year $400,000 loan today for at 4.8% in Baton Rouge, LA with zero points!  They will attempt to roll out any plan to keep the plates spinning.  I fully expect the Fed and Treasury to execute Quantitative Easing Part Deaux within one or two more months.   They will blame it on the crisis in the Gulf as we remember that they never waste a good crisis.