October 8, 2002
Mart’s Push Higher - Recovery Hopes Pushed Back
It wasn’t pretty but the major U.S. stock markets managed to rally today. What do I mean by it wasn’t pretty? Well, declining stocks beat advancers on both the Dow and Nasdaq, Nas down volume was actually higher than up volume, utility stocks got crushed, and although the Dow closed up 78 points it also suffered nearly a 200 point decline from its morning early peak to noon and a 100 point decline later in the day.
Even so, ‘recovery’ was the word of the day, and many Dow components did not disappoint. Leading the charge slow march was Citigroup and American Express – two companies that were participants in the post labor day plunge – and coming in a close second were retailers Wal-Mart and Home Depot. The drugs also faired well (JNJ, MRK), with the only noticeable weakness coming from tech, tele (T, INTC), GM, and MO.
As for MO (Philip Morris), S&P revised its outlook to from ‘stable to negative’ and Merrill Lynch downgraded the stock from buy to neutral. Oddly enough, the Merrill analyst who downgraded MO today upgraded the stock to a buy at $50+ a share in June (CNBC TV). Moreover, he doesn’t believe MO will be forced to cut its dividend going forward. Think about it: yes, the court developments are a problem, but unless this analyst didn’t realize Philip Morris sold cigarettes back in June his rating changes are baffling. If he doesn’t expect the lawsuits to impact the company’s dividend payouts why did he downgrade the stock and/or why did he like it at $50+ a share? As for MO’s stock price, its slide may or may not be over:
“S&P said it is concerned about the direction of future jury decisions, particularly on the West Coast, where Philip Morris faces two more trials before year-end and juries are already perceived to be somewhat hostile to tobacco companies.” Reuters
‘Somewhat hostile’? Considering $28 billion was awarded for 1 smoker I would hate to see what a truly hostile jury does.
Consumer’s Borrow Less
Refinancings may be running at a record clip but consumer credit growth is slowing. Furthermore the outlook for future consumer credit growth, as if the decline in the markets is not telling enough, has been steadily declining by the according to the Cambridge Consumer Credit Index since July. Quite frankly, those analysts hoping for a pleasant spending season are doing just that: hoping. Credit card delinquencies are rising (ABA), foreclosure rates are at records (MBA), and interest rates on auto loans, which are sitting at all time lows (FDRB), can’t swing much lower.
In August and September consumer spending was weak, but the situation is not yet ‘perceived’ as being bleak.
Utilities Hammered
Widowers and retirees who purchased utility stocks in 1985 were shaking their heads today. To be sure, even retirees looking for quarterly dividend income would not mind some capital gains...
On December 18, 1985 the Dow Jones Utility Average traded at 175. Today the DJI also traded at 175. Furthermore, since 1970 the DJ Utility Average has declined by 5% or more in a single session only 7 times. Today was one of those days:
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Marred by exposure to unregulated merchant energy trades, many utilities continue to search for cash to stay alive. After the bell TXU said its junk rated (Europe) financial position was ‘strong’ and it didn’t know why its stock price fell by 24%. There are similar stories to TXU through out the industry…
Beaten down utilities probably offer numerous opportunities for the long term investor to consider. However, and even if we are close to the last ‘collapse’ in the group, trying to find these opportunities is extremely difficult. Purchasing companies with junk rated debt that are trying to float equity offerings either takes guts or insight.
Keep on Trucking
Following yesterday’s Sears warning Heartland shares took a hit (-7%). However, shares quickly rebounded today (Sears Logistics is Heartland’s biggest customer). It is becoming quite apparent that Heartland’s shares will not break lower to attractive levels unless the company misses a step. The quarter ended September 31 will be the first quarter when Great Coastal’s operations will be included.
-- TCLP traded as high as $27.88 today and closed at $27. Although the stock has entered our target sell range we have not elected to sell.
Fed McDonough, emulating optimistic words from Greenspan yesterday, stole a line from Abby today:
“Businesses reach the point of deciding that we just have to begin to invest in new capacity. That is likely to happen sometime in the course of 2003.”
Are businesses supposed to decide what is good for shareholders or what may be good for the U.S. economy? To be sure, these can be two completely different things.
As consumers aim to save more money to improve their financials and as businesses prudently act to increase capacity only when it is profitable Mr. McDonough and many others continue to push back their recovery forecasts and act as if something was amiss.
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