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Sunday, November 21, 2010

How's the Economy Doing?.... Hmmm, Really? Yes, Let's Give a Quick Look

We plan to have a post on Sonic Foundry (SOFO) within the next few days (for reference: link to earnings and Webcast). We're also still planning to share more commentary on Global Ship Lease (GSL) per our post a few weeks back. This one remains on the backburner. In addition, we're overdue in updating our "How's the Economy Doing? - Under the Hood" series. Since we've recently fielded questions on the economy, we now focus on this topic.
  • Someone outside of the investment/business world asked us last week: "How's the economy doing?"
  • Our response: "Stable to better."
  • After a pause, their subsequent response: "Really?"
  • Our response: "Yes, really - most sectors are experiencing stable to better fundamentals."
As we briefly relay below, this is what business fundamentals reveal. Still, most Americans wouldn't know that things are "stable to better" given headlines around the weak job market, government deficits, and the Fed's much debated "QE2." On the latter point, we recommend reading an 11/16 WSJ opinion piece, A Significant Letter - Prominent economists write a letter to Ben Bernanke opposing QE2. Here at CS$, we're in this camp -- we believe the additional bond purchases are not necessarily the best course of action, particularly when equities are a significant bargain relative to bonds (per our prior post). For well-written commentary specifically on the Fed and QE2, we recommend reading Jeff Matthew's “QE 2” or “Ben’s Titanic”?

Why is additional stimulus not necessary? Consider four points (*if we had more time, we could probably share ten or more), starting at the macro level and then moving to the micro level (with possible macro implications):

Number One: From Briefing.com, personal income and consumption trends are higher Y/Y (off easy comparisons, but still better than the alternative):

In addition to this graph, we could also share durable goods orders and non-farm payrolls. Of course, the above uptick carries cautious "Big Picture" commentary from Briefing.com (note: a major Fed concern):
  • While off their lows, sustainability in the personal income and consumption sector look weak. High unemployment will put heavy downward pressures on wage growth. Since consumption has a direct relationship with the amount of income a consumer has to spend, lower incomes will cause consumption growth to be weak. We believe there is pent up demand for more consumable goods, but until the employment situation stabilizes consumers will hold on spending.
Number Two: freight traffic continues to improve, an area we've been tracking closely over the past several years and where we initiated exposure in summer 2009 through container shipping companies Seaspan (SSW) and Global Ship Lease. For those interested, we sometimes Tweet volume metrics regularly reported by various sub-segments of the global freight/transportation sector. The other week, we came across this comprehensive 11/14/10 article from The Kansas City Star:
A handful of points directly from the article:
  • After about 17 months on furlough, Heather Herbst this year returned to her full-time job working on the railroad....
  • Indeed, railroads and truckers are picking up steam as the economy recovers. That’s important for Kansas City, the nation’s second-busiest rail hub and crossroads of the nation’s highways.
  • Economists often look at railcar loadings as a harbinger of things to come for the bigger economy.
  • This October compared with October 2009, U.S. railroads each week moved 11 percent more carloads — including intermodal containers that ship on rail and trucks. Such double-digit percentage increases have been common in 2010, with the year’s high of 17 percent coming in May.
  • Trucking, too, is rising. Tonnage hauled this September was 5.1 percent higher than in September 2009. It was the 10th consecutive month of gains in year-over-year comparisons.
  • FedEx Corp. said it expected to have its busiest day ever on Dec. 13, when it anticipates moving nearly 16 million shipments around the world.
  • When asked by a CNBC reporter last year what set of economic numbers he’d want if he were stranded on a deserted island, investor Warren Buffett replied, “freight-car loadings” and “truck-tonnage moved.”
  • Rising demand for rail services reflects growth in other sectors of the economy, said Dan Keen, economist with the Association of American Railroads.
  • “No one puts a load of lumber or scrap steel or chemicals on a railroad for fun,” he said. “Rather, they put these things on a railroad so they can be turned into houses or rolled steel or fertilizer or whatever.”
  • Railcar loads are still far below peak levels in 2006, said Matt Rose, BNSF’s chairman and chief executive. BNSF and Union Pacific Railroad are the two mega-railroads in the United States.
  • “Every metric you look at shows the economy is growing,” said John Wagner Jr., president of the logistics and warehousing firm Wagner Industries Inc. “But it’s coming in very slow, baby steps.”
Number Three: see handful of positive headlines from the WSJ's earnings page over the weekend, including results from discretionary retailers (acknowledge: plucked from amidst some mixed to negative headlines - see recent reports/commentary from Walmart/WMT and Cisco Systems/CSCO):
  • Heinz Earnings Rise 8.6% Heinz's earnings rose 8.6% as the food company benefited from price increases and growth in emerging markets.

  • AnnTaylor Posts Higher Profit AnnTaylor Stores reported a sharply higher quarterly profit rose, aided by better-than-expected sales growth.

  • Dell's Quarterly Profit Jumps Dell's third-quarter earnings more than doubled on strong corporate demand and lower component costs. Sales to large corporate customers rose 27%.

  • Williams-Sonoma Raises Outlook Williams-Sonoma, bouncing back from the recession, reported strong gains in sales and earnings. The housewares retailer also raised its outlook for the full year.

  • Limited Brands' Profit Jumps Limited Brands reported a sharply higher quarterly profit on improved sales and margins and declared a special stock dividend that will cost the specialty retailer $1 billion.

Number Four: higher attendance and wagering at Churchill Downs (CHDN), in which we continue to hold shares thanks to Churchill Downs' acquisition of Youbet.com last June. From an 11/8/10 article, Attendance, betting rose for Breeders’ Cup:
  • Both attendance and wagering for the two-day 2010 Breeders’ Cup Championships at Louisville’s Churchill Downs racetrack notched double-digit increases from the levels reported during last year’s event at Santa Anita Park in Arcadia, Calif.
  • After an 11 percent increase in attendance to 41,614 Friday, another 72,739 were on hand for Saturday’s races, an increase of 23.6 percent, according to a news release from Lexington, Ky.-based Breeders’ Cup Ltd.
  • The total two-day attendance of 114,353 was an increase of 18.5 percent from last year.
  • Total wagering, meanwhile, rose 13 percent to $163.6 million for the two days, $53 million on Friday, $110.6 million on Saturday.
  • The on-track handle was $8.1 million on Friday, up 14 percent, and $14.5 million on Saturday, up 19 percent.
AND, from a Churchill press release on Friday:
  • For the second time in a week's period, Churchill Downs Racetrack will raise overnight purses because of higher than expected all-sources wagering levels. Effective immediately (Friday, Nov. 19), overnight race purses will be increased 20 percent for the final eight days of the Fall Meet, which concludes its 21-day run on Sunday, Nov. 28.
  • On Nov. 12, Churchill Downs announced that overnight race purses would jump 6.3 percent for the final 10 days of the season.
  • Purses for the final 83 scheduled overnight races – which include allowance, maiden special weight, claiming and maiden claiming events – will rise from the announced prize money in the condition book by an approximate blended average of $6,600 per race.
  • The revised projection for total overnight purses awarded at the meet is $6.8 million, up from the original forecast of $6.2 million at the start of the season. The daily average purse distribution (not including the Nov. 5-6 Breeders' Cup World Championships programs) will be approximately $459,000 per day.
  • "We've been fortunate to have good weather and full, competitive fields during our boutique, four-week Fall Meet, which has limited competition from other racetracks during the fall," said Kevin Flanery, president of Churchill Downs Racetrack. "Also, some of our high-level allowance and claiming races for our top-tier horses have not filled and were not used, which means there's more money available to distribute. We're thrilled that horse racing fans have responded to our product through strong all-sources wagering, and that our owners, trainers, jockeys and breeders will benefit from a 20-percent increase in prize money over the final stretch of our season.
So, there you have it. Although reports of economic malaise and federal/state government debt burdens -- legitimate problems that need to be addressed -- dominate mainstream media, many sectors and companies are seeing stable to better fundamentals. We may not be out of the woods, but no one can deny this truth.

We again echo the headline of our July post, Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals. Fortunately, as in July, fundamentals are moving in the right direction. THUS, when someone asks you, "how's the economy doing?," please don't be shy. Feel free to share this post and/or verbally point to favorable reports from a variety of sources.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, GSL, SSW, CHDN
© 2010 Jeffrey Walkenhorst
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