Tuesday, August 2, 2011

10 signs the double-dip recession has begun

Friday's news on GDP shows the double dip has arrived — an expansion of only 1.3 percent and consumer spending up 0.1 percent in the second quarter. Astonishingly low by any account. The debt ceiling trouble and lack of a longer term resolution to the deficit will make it worse.

The U.S. has entered a second recession. It may not be as bad as the first. Economists say that the Great Recession began in December 2007 and lasted until July 2009. That may be the way that the economy was seen through the eyes of experts, but many Americans do not believe that the 2008-2009 downturn ever ended. A Gallup poll released in April found that 29 percent of those queried thought the economy was in a “depression” and 26 percent said that the original recession had persisted into 2011.

It is any wonder that many Americans believe that the economic downturn is still in progress? Home prices have fallen to 2002 levels. Values have dropped nearly 50 percent in parts of Florida, California, Nevada and Arizona. Property values are also down that much in parts of troubled big cities like Detroit. Estimates are that as many as 11 million homes have underwater mortgages. Banks have inventories of as many as 2 million foreclosed homes which have not even been released to the market. Home prices could fall another 10 percent if current trends persist.

Perhaps the most powerful argument that the recession never ended or that a new one has begun is the persistence of unemployment. Fourteen million people are out of work. A third of those have been jobless for more than a year. May employment data showed the jobless rate rose unexpectedly and that the economy added only 58,000 jobs. Experts believe that the unemployment rate will not improve significantly until the monthly gain in jobs is consistently 300,000 jobs or more. And, at that rate the gains would have to go one for more than two years to bring the economy back to what is traditionally considered a reasonable unemployment figure.

There are several signs that a recession is firmly in place again and that the downturn could last for several quarters. Most are already easy for the average American to see.

1. Inflation
There is almost nothing that damages consumer confidence as badly as a rapid rise in prices. Starbucks recently increased the price of a bag of coffee by 17 percent because wholesale prices have risen by almost twice that rate in the last year. Cotton prices nearly doubled in 2010 but have fallen this year. But, apparel is made months in advance of when they reach store shelves. Summer clothing prices are up as much as 20 percent. That may change in the fall, but for the time being, the consumer’s ability to buy even the most basic clothing has been undermined. Consumers today pay more for sugar, meat, and corn-based products as well.

2. Investments have begun to yield less
Part of the recovery was driven by the stock market surge which began when the DJIA bottomed below 7,000 in March 2009. The index has risen above 12,000 and the prices of many stocks have doubled from their lows. As result, American household nest eggs that were decimated by the collapse of the market have rebounded and enabled people to splurge on themselves. However, the market has stumbled in the last quarter. The DJIA is up only 1 percent during the last three months and the S&P 500 is down slightly. (more)

US Interest Payments as a Percentage of Total Revenues

5 Stocks For Summer: KO, PEP, BUD, HNZ, TUP

Ah, summer. The season for lightning bugs, pool parties and barbeques. But the next time you squirt some ketchup on your burger or pour yourself a cold one, consider the companies behind the products you're enjoying. Load your plate with the five stocks described below, and you could fill your wallet as well as your belly. All of these companies offer their products around the globe and are expanding their sales in fast-growing emerging markets.

Always Coca-Cola

When it comes to multinationals, Coca-Cola (symbol KO) is the real thing. The world’s largest beverage company derives 70% of its sales outside the U.S., and foreign business, particularly in emerging markets, will continue to drive Coke’s bottom line.

But Coke is also taking steps to get its languid domestic sales moving. For example, Coke acquired its North American bottlers last October. That should help it reduce costs -- the company ultimately expects to realize annual savings of $350 million -- and respond more nimbly to changing consumer preferences. Coke has also been coming out with new formats for its fizz, offering, for instance, 1.25-liter bottles to supplement its 2-liter and 20-ounce bottles.

Meanwhile, Coke continues to invest in Asia and South America to capitalize on rising incomes in those regions. The company is aiming to double its total business by 2020. At $68.81, Coke stock trades at 18 times estimated 2011 earnings of $3.88 per share and yields 2.7%. (All prices and related data are through July 28.)

The Joy of Pepsi

Unlike Coke, which is essentially a pure play on liquid refreshments, PepsiCo (PEP) is also a big player in snack foods. But like Coke, Pepsi is benefiting from growing sales overseas, especially in emerging markets. And the company is expanding in those markets. For example, last February Pepsi acquired a majority interest in Wimm-Bill-Dann Foods, a Russian dairy company.

The owner of such brands as Pepsi-Cola, Gatorade, Tropicana, Frito-Lay and Quaker Oats is also revamping its global beverage unit to boost profitability. For starters, Pepsi has begun to market its drinks on a global basis rather than marketing brands differently in each country in which it operates. Last year, the company bought its two largest North American bottlers, which should benefit Pepsi in the same way that Coke’s bottler acquisitions should help that company. Pepsi is also trying to improve the healthfulness of its food and beverage products -- for example, introducing sweeteners that reduce the sugar in soft drinks.

At $63.89 Pepsi sports a 3.2% dividend yield and trades at 14 times estimated 2011 earnings of $4.46 per share.

Give Your Portfolio a Buzz with Bud

As summer heats up, cool down with shares of the world’s biggest brewer, Anheuser-Busch InBev (BUD). The Belgium-based producer of Budweiser, Michelob and Stella Artois is the product of the 2008 purchase of Anheuser-Busch, the iconic St. Louis–based beer maker, by InBev, which wisely adopted Anheuser-Busch’s snappy trading symbol.

The company sells its key brands in the world’s five most-profitable beer markets: the U.S., Brazil, Russia, Canada and Mexico. What’s more, BUD dominates most of the markets it serves. It also owns a 50% stake in Grupo Modelo, the Mexican brewer that owns the Corona brand and has 70% of the Mexican market. The BUD growth story is mainly about Brazil, where the company has a 70% lock on a market in which millions of people are joining the middle class every year. Credit Suisse analyst Anthony Bucalo estimates that Latin America will provide 80% of the company’s sales and profit growth until 2020. That growth will offset sluggish sales in Western Europe and North America.

First-quarter sales in Brazil disappointed some analysts. But they still expect earnings to increase 20% in 2011, to $3.75 per share. The company nearly doubled its annual dividend in March, to $1.16 per share, and once it finishes paying down the debt it took on to acquire Anheuser-Busch, it’s likely to boost its dividend more. The stock, which trades in the U.S. as an American depositary receipt, yields 1.7% at a price of $58.50 and sells for 16 times 2011 earnings projections.

Squirt Some Heinz into Your Portfolio

Heinz (HNZ) is expanding into emerging markets to reinvigorate growth. For example, the maker of ketchup, Ore-Ida potatoes and Weight Watchers frozen dinners bought a Chinese manufacturer of soy sauces and bean curd last November. And in April, Heinz acquired an 80% stake in a Brazilian maker of tomato sauces, ketchup and condiments; the company expects that unit’s sales to double in the first full year of its ownership. Heinz sees emerging markets accounting for more than 20% of its sales in the fiscal year that ends next April, up from 16% in the year that ended April 2011.

Heinz has sought to offset the impact of rising costs for raw materials by increasing productivity and raising prices on ketchup and other products. Like other multinationals, Heinz will also benefit if the dollar continues to weaken, as sales and profits generated overseas are translated into a greater number of dollars.

The stock trades at $52.76. Heinz, which recently raised its dividend by 6.7%, yields 3.6% and sells for 16 times estimated earnings of $3.34 per share for the year that ends next April 30.

Store Your Money in Tupperware

Tupperware parties have gone global. There were 18 million Tupperware parties in 2010, and most of them were overseas. That trend will continue as the maker of food-storage containers takes its concept to Brazil, India, Indonesia and other developing nations. In fact, revenues from developing nations rose 18% in 2010 and accounted for 56% of Tupperware’s sales of $2.3 billion.

Tupperware relies mainly on female entrepreneurs to sell its wares. Expanding in developing countries is allowing Tupperware to capitalize on the lack of jobs for women, as well as growing middle classes.

Tupperware (TUP) shares plunged 13% on July 27 after the company said third-quarter earnings would come in below expectations. At the same time, Tupperware raised its earnings outlook for the full year by a nickel per share, to between $4.50 and $4.60. Analysts on average expect earnings to jump 23% this year, to $4.58 per share and to climb at an annualized rate of nearly 15% per year over the next three to five years. The decline in the stock gives investors an opportunity to buy into an attractive emerging-markets play at a much lower price. At $62.97, Tupperware trades at 14 times estimated 2011 earnings and yields 1.9%.

S&P under pressure over US credit rating

Standard & Poor’s is in the spotlight again.

The question facing the credit rating agency is whether it will downgrade the triple A credit rating of the US, or whether a tentative debt deal struck in Washington involving up to $2,400bn in deficit cuts over the next decade will avert such a move.

“Standard & Poor’s has been the most explicit about a downgrade,” said Eric Green, director of US rates research at TD Securities.

Moody’s Investors Service, S&P’s main rival in the rating business, has already indicated its top-notch ranking of the world’s biggest economy is safe for now. Moody’s said on Friday that its “review for downgrade will more likely than not conclude with a confirmation of the AAA rating, albeit with a shift to a negative outlook”.

But S&P has, so far, not issued any statement. It said on Monday that the review of the US triple A rating, which started on July 14, was continuing.

Investors are unsure what the agency will do.

The main reason for this uncertainty is S&P’s comment in its review that it was looking for $4,000bn of deficit cuts to prevent the level of US debt relative to gross domestic product from rising too far.

“We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4,000bn is not agreed on,” S&P said.

The deal struck in Washington has a lower headline figure of debt reduction, however, leading some analysts to expect that a downgrade is still possible.

“The risk of a downgrade to the US triple A rating remains high,” said analysts at Barclays Capital.

But Deven Sharma, president of S&P who testified before US lawmakers last week, said the firm’s analysts were “misquoted” regarding this figure.

“Since there was a $4,000bn number put forward by a number of congressmen, as well as by the administration, our analyst was just commenting on those proposals, that would bring the threshold within the rating of what a triple A sovereign debt would require,” he said, according to reports of the hearings.

Mr Green at TD Securities believes S&P will hold off on a downgrade.

“S&P are no doubt under an immense amount of pressure to back off, if just for now,” said Mr Green. “I don’t think they will punish progress and this [debt-ceiling deal] is progress.”

Thomas Deas, chairman of the National Association of Corporate Treasurers, said the debt ceiling deal did not resolve the US’s bigger fiscal problems. “The next thing is: will the [credit rating] agencies downgrade the US government securities anyway?” he said.

If S&P’s analysts decide to downgrade the US’s debt, there is likely to be a tide of complaints from politicians – just as rating cuts of eurozone sovereign debt have resulted in an outpouring of scorn and renewed regulations from politicians in Europe.

Some investors, however, have welcomed the more aggressive stance from the agencies.

The agencies were widely criticised after failing to spot the risks in thousands of billions of dollars of securities backed by US mortgages in the run-up to the financial crisis, because many of these triple A-rated debts proved worthless.

However, finding alternatives to the big rating agencies would be no easy matter.

Dow Theory sell signal on horizon

Monday morning’s stunning reversal, from a triple-digit gain at the open to a double-digit loss, is discouraging not just because it indicates that the market faces more challenges than just the political paralysis in Washington. It also puts a possible Dow Theory sell signal back on the horizon.

The crucial levels to watch, according to Jack Schannep, editor of TheDowTheory.com, are the June lows for both the Dow Jones Industrial Average DJIA and the Dow Jones Transportation Average DJT — at 11,897.27 and 5,060.59, respectively.

If both averages fall below these levels, it would be quite bearish according to the Dow Theory — especially since it would come on the heels of what Dow Theorists refer to as a non-confirmation, because in early July only one of these two averages was able to surpass their April highs.

We’re not there yet, so Dow Theorists remind us not to jump the gun. But the Industrials are now only 1.7% away, and the Transports 2.2% away — a lot closer than where they were at this morning’s opening, and close enough to make the bulls sweat.

-Mark Hulbert

Oppenheimer: Buy Industrial Companies Relying on US Sales

Investors should buy “high-quality” industrial stocks that rely most on U.S. revenue because the group should perform better than the broad market in coming years, Oppenheimer & Co. said.

Oppenheimer screened for stocks using criteria including less than 50 percent of revenue from outside the U.S., a price- earnings ratio of less than 15 times forecast profit and earnings-per-share growth estimates higher than 10 percent for 2011 and 2012. It found 11 stocks, including delivery companies FedEx Corp. and United Parcel Service Inc., power-tool producer Stanley Black & Decker Inc. and security-systems maker Tyco International Ltd.

“Despite the sector’s poor performance in recent months, we continue to believe that industrials remain well-positioned to provide leadership in the coming years,” Brian Belski, the New York-based chief investment strategist at Oppenheimer, said in a note dated today. Industrials offer “opportunities even during challenging market environments,” he said, and investors should focus on “high-quality and defensive companies.”

A gauge of industrial companies in the Standard & Poor’s 500 Index has declined 1.8 percent in 2011 as of 1:45 p.m. in New York, compared with a 1.8 percent gain for the broad measure. U.S. manufacturing expanded in July at the slowest pace in two years, with today’s Institute for Supply Management’s factory index falling to 50.9 last month from 55.3 in June. Economists projected the index would drop to 54.5, according to a Bloomberg survey.

Belski forecasts the S&P 500 will rise to 1,325 at the end of 2011, less than the average estimate of 13 strategists surveyed by Bloomberg who predict a year-end close of 1,401.

Italy Burning

Italy undergoing a slow motion crash, with bank after bank getting halted, first Intesa, then Monte Paschi, and most recently, main bank Unicredit. The FTSEMIB is now down a whopping 5.5% from intraday highs, led by the financial sector which may or may not last the week absent another EFSF expansion as we have speculated before. Of course, should that happen, Italy becomes a liability and not a funder, meaning the proportional obligations of Germany and France will surge, just as we explained two weeks ago. And more bad news: the spread between the 10 year Italy - Bund just hit an all time wide of 349, +16 bps on the session, as Italy CDS are now trading 328, +12, and Spain is 9 bps wider to 374. Time for bailout #3, this time to rescue Italy, then Belgium and Spain, then France and the UK, until finally the Fourth Reich, in the darkness, shall bind them.

General Italy

And just the country's top (and we use that term loosely) banks:

NIA Exposes Debt Ceiling Truth

NIA hasn't written about the whole debt ceiling issue over the past few weeks because in our minds it is completely irrelevant. Our elected representatives in Washington along with the mainstream media have been wasting thousands of hours of time and hundreds of millions of dollars debating a topic that has no meaning at all. The President, Senate, and House of Representatives are putting on a show to make it look like they care about cutting spending and balancing the budget. Except for a select few elected representatives like Ron Paul who care about protecting the U.S. Constitution and preserving what little purchasing power the U.S. dollar still has left, every other politician in Washington is putting on a complete charade in order to trick their constituents into believing there is a difference between the proposals from the Republicans and Democrats.

While our incompetent and corrupt mainstream media has been proclaiming there are major differences between the two bills proposed by House Speaker John Boehner and Senate Majority Leader Harry Reid, NIA believes John Boehner might as well be a Democrat and Harry Reid could easily pass himself off as a Republican. There are absolutely no meaningful fundamental differences between Boehner's plan that was approved by the House of Representatives yesterday evening, before being killed by the Senate two short hours later, and Reid's bill, which was just rejected by the House today in a pre-emptive vote before the Senate even had a chance to vote on it.

Both bills are estimated to reduce the U.S. budget deficit by approximately $900 billion over the next 10 years. Of the $900 billion only about $750 billion are actual discretionary spending cuts with the rest being an expected reduction in interest payments on the national debt as a result of either bill passing. When you have an unstable fiat currency that is rapidly losing its purchasing power and could collapse at any time, it is impossible to accurately project what our budget deficits will be 5 or 6 years from now, let alone 9 or 10 years from today. As far as the next two fiscal years are concerned, both proposed bills from Boehner and Reid are estimated to only cut spending by a total of about $70 billion in fiscal years 2012 and 2013 combined. (more)

Who Owns The Central Banks' Central Bank?...

As I’ve pointed out for years, the Bank for International Settlements (BIS) is owned by the world’s central banks, which are in turn owned by the big banks. See this and this.

It turns out there may be a very interesting wrinkle to the private ownership issue.

By way of background, BIS is often called the “central banks’ central bank”, as it coordinates transactions between central banks, and which is the entity determining the level of reserves banks are required to keep worldwide.

As Spiegel reported in 2009:

The BIS is a closed organization owned by the 55 central banks. The heads of these central banks travel to the Basel headquarters once every two months, and the General Meeting, the BIS’s supreme executive body, takes place once a year.

But as the New York Federal Reserve Bank currently states on its website:

As of March 2006, the BIS had 55 shareholding central banks from around the world. As of March 2006, the Bank’s assets were approximately $221 billion, including $5.8 billion of its own funds.When the BIS initially raised capital, participating banks were given the option to buy BIS shares or arrange for those shares to be bought by the public. Currently, 86 percent of the shares of the BIS are registered in the names of central banks, and 14 percent are held by private shareholders. The shares owned by private shareholders consist of part of the French and Belgian issues and all of the shares that were in the original U.S. issue in 1930.

So the private banks own the Fed (and most other central banks), and the central banks – and private shareholders – in turn own BIS, the global bank regulator.

It would obviously be very interesting to find out who these private shareholders are.

And to find out if the shareholders enjoy any special benefits. As Spiegel notes:

Formally registered as a stock corporation, it is recognized as an international organization and, therefore, is not subject to any jurisdiction other than international law.It does not need to pay tax, and its members and employees enjoy extensive immunity. No other institution regulates the BIS, despite the fact that it manages about 4 percent of the world’s total currency reserves, or €217 trillion ($304 trillion), as well as 120 tons of gold…

Central bankers are not elected by the people but are appointed by their governments. Nevertheless, they wield power that exceeds that of many political leaders. Their decisions affect entire economies, and a single word from their lips is capable of moving financial markets. They set interest rates, thereby determining the cost of borrowing and the speed of global financial currents.

Could that mean that the private shareholders owning 14% of the world’s central bank have somehow been “grandfathered in”, and are immune from taxes and other national rules? Wouldn’t it be interesting to find out?

The New York Fed claims that the private BIS shareholders don’t have voting rights:

All shareholders receive the Bank’s dividends. However, private shareholders do not have voting rights or representation at the BIS annual meetings. Only a country’s central bank or its nominee may exercise the rights of representation and voting.

This may or may not be true. It is common for powerful and wealthy people informally influence agency decisions. Just look at every captured financial regulator in the United States.

But whether or not the shareholders get special treatment or influence the decisions of the world’s most powerful banking institution, it is still newsworthy that there are private parties with not insignificant ownership interests.

Go Against the Crowd of Sellers

On Friday, the focus of investors was on the inability of Congress and the White House to come to an agreement on the debt ceiling, and the markets plunged to the biggest weekly decline in a year.

S&P 500 Chart

From a technical standpoint, the most widely followed broad market index, the S&P 500, managed to hold at the important 200-day moving average at 1,285, and that is good news. And at the time of this writing, a deal appears to be in the works between the major parties, but the success of the politicians to gain the necessary votes is uncertain, and the failure to pass an acceptable arrangement could have an impact on the direction of the market early this week.

SPX Daily Chart

Those who have followed the Daily Trader’s Alert are familiar with the long-term chart (monthly) of the S&P 500 and its 12-month simple moving average (red line). For over 10 years, investors who sold when the price line crossed below the 12-month moving average and bought when it crossed above it have enjoyed a better-than-average return.

There are no guarantees that this system will remain an accurate trend predictor, and no single system should be relied on to make major investment decisions. But this chart above is currently telling us to hold investment-grade stocks and buy on dips. However, if the price line crosses under the 12-month moving average (now at 1,256), this system would tell us to sell stocks and go to a 100% defensive investment posture.

Manufacturing growth hits lowest level in 2 years

Manufacturers had their weakest growth in two years in July, a sign that the economy could weaken this summer.

The Institute for Supply Management, a trade group of purchasing executives, said Monday that its index of manufacturing activity fell to 50.9 percent in July from 55.3 percent in June. The reading was the lowest since July 2009 — one month after the recession officially ended.

Any level above 50 indicates growth. The manufacturing sector has expanded for 23 straight months.

Still, new orders shrank for the first time since the recession ended. Companies slashed their inventories after building them up in June. Output, employment, and prices paid my manufacturers all grew more slowly in July.

The disappointing report on manufacturing is the first major reading on how the economy performed in July. It suggests the dismal economic growth in the first half of the year could extend into the July-September quarter.

"The ISM manufacturing report for July is a shocker and strongly suggests that the disappointing performance of the economy in the first half of the year was not just temporary," said Paul Dales, a senior U.S. economist for Capital Economics.

The news of weak factory growth in July also cooled what looked to be a strong day on Wall Street.

The Dow Jones industrial average had risen nearly 140 points in the first half-hour of trading, afterPresident Barack Obama and lawmakers announced a deal to raise the nation's borrowing limit. But the Dow erased all of those gains after the manufacturing report was released, and then fell another 145 points. It later pared most of the day's losses to close 11 points down.

In a separate report, the Commerce Department said builders began work on more projects in June, pushing construction spending higher for a third straight month.

Construction spending rose 0.2 percent in June, to a seasonally adjusted annual rate of $772.3 billion, the government said. But even with the gains, spending remains slightly above an 11-year low hit in March and is just half of the $1.5 trillion pace considered healthy by most economists.

The economy expanded at a dismal 1.3 percent annual rate in the April-June period after an even worse 0.4 percent increase in the first three months of the year, the government said Friday.

The factory sector has expanded in every month but one since the recession ended in June 2009. The ISM's index topped 60 for four straight months at the start of the year.

But manufacturing has stumbled in recent months. A parts shortage stemming from Japan's March 11 earthquake disrupted automakers' supply chains, cutting into the output of new cars. And high gas prices left Americans with less money to spend on discretionary items, such as vacations, furniture and appliances.

The index fell in May to 53.5 from April's reading of 60.4. That was the sharpest one-month drop since 1984.

Employers have responded by pulling back on hiring. The economy added just 18,000 net jobs in June, the fewest in nine months, and the unemployment rate rose to 9.2 percent. Hiring by manufacturers was nearly flat in the April-June period.

The government issues its July employment report on Friday.

Several regional manufacturing surveys for the month of July have been mixed. The Philadelphia Federal Reserve Bank said its manufacturing index rose to 3.2, signaling that the sector is growing again in that region. It had contracted in June for the first time in nine months.

And a private survey in Chicago showed that manufacturing expanded in July, but at a slower pace than in June.

Meanwhile, a survey by the New York Federal Reserve Bank found regional manufacturing activity shrank in July.

Manufacturing represents only about 11 percent of U.S. economic activity and can contribute only so much to the broader economic recovery. For unemployment to fall significantly, consumer income and spending also must pick up.

The ISM, a trade group of purchasing executives based in Tempe, Ariz., compiles its manufacturing index by surveying about 300 purchasing executives across the country.