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Plunge Protection Japanese Style Unwilling to admit defeat, Kydo News reports (BBC Link) that Japan is contemplating buying stocks again to prop up the market. However, this time instead of buying crossed shares from beleaguered banks, as the ‘stock buying body’ did earlier this year, the government is looking at buying Exchange Traded Funds directly from the market. Not unlike a cut that needs stitches being nursed with a band-aid, another round of plunge protection is unlikely to close Japan’s financial wounds. However, remember that following the previous round of government buying the Nikkei jumped to over 12,000 from around 9,500. Point being, it would not take much to send the Nikkei soaring. Nikkei ends up 2% on policy package hopes Reuters Full Week Ahead Some of the reports on tap this week include wholesale inventories, the Fed’s Beige Book, consumer credit, producer prices, retail sales, and Michigan consumer confidence. While each of these reports should offer clues on the state of the U.S. economy, pay specific attention to the preliminary Mich. confidence report – this is the first glimpse of confidence for the month of September. In addition to the economic reports Greenspan’s testimony to the House Budget Committee is an important event, if for no other reason than this will be the first words spoken by Greenspan since his memorable ‘don’t blame me for the bubble’ speech. President Bush will also be speaking to the U.N. – this is the event of the week. Attack Iraq? In response to heightened war fears gold and oil both touched key levels last Friday ($30 oil - $320 gold). Furthermore, judging by the recent push from the Bush administration to try and gain favor for an attack on Iraq these ‘war’ premiums could remain in the markets for some time. However, and even if the U.S. does attack Iraq, any further spike in oil prices are unlikely to be sustained unless conflict in the region spreads. While not immaterial, Iraqi’s 1.5 million barrels a day (2Q02 average) are not that large either. Suffice it to say, the U.S. still has OPEC allies willing to open the spigot. The White House said last week that there was ‘No Link Between Iraq Policy, Oil Price’ (Reuters). While there may not be a link between Iraq policy and the price of oil, there is a link to oil nonetheless. Iraq’s History Is Written In Blood Margolis Wants & Needs Not only did the semi-intelligent CNBC economist turned stock market fortuneteller Larry Kudlow get it (everything) wrong yesterday, but he is still wrong today. To be sure, Kudlow continues to use the words ‘good’ and ‘bad’ to describe stock market gains and losses respectively. In fact, Mr. Kudlow would seemingly have no opinion at all unless the market told him what to think first. The stock markets are not an instrument of confidence to be plucked upon. Rather, resting beneath market prices are real assets and real earnings/losses (real businesses). When Kudlow portends that prices can be made to rise by ‘lowering the capital gains tax!, ‘stopping the double dividend tax!’, and ‘boosting the money supply!, what he is really doing is ignoring the simple truth. Quite frankly, no external actions by the government or Fed can take away the fact that until corporate results tangibly improve and/or historical high market premiums decline there are outsized risks in owning most stocks today. Moreover, anyone who argues differently is doing so with baboonish reasoning: or the argument that falling prices are bad so we must all look to make things good. The reality is that ‘the markets’ are working great today - the computerized systems set up to handle buy and sell orders have never been more efficient and problem free. Thus, the next time Kudlow or anyone else argues that investor’s have lost ‘confidence in the markets’ understand what they are really saying: prices rise mean good, prices fall mean bad. In sum, many investors and fortunetellers want the markets to do well (rally) and for their portfolio’s to rise with the swelling tide. What they need to do, however, is to look at the companies within. Not unlike many in Japan, the Kudlow’s of America are all for ‘saving’ the markets while ignoring the reality that prices are reflective of corporate worth. Quite frankly, until market prices reach historical low valuation levels they are not worth trying to save. United Nation(s)? Speaking of wants and needs, the US may want to take control of Iraqi oil -- they may even want to make sure that Saddam does not spread his brand of ‘evil’ upon his neighbors. What they need to do, however, is ensure they have support for a military campaign. Such is why this week could be an important week and/or why geopolitical tensions may soon escalate. Arguing that since Iraq broke UN inspection resolutions they deserve to be attacked may only be a credible argument if the US itself doesn’t go against the UN… Bush speaks in front of the UN on Thursday and consumer sentiment is due out on Friday. Unless the stock market rally in August helped consumers feel more confident and/or the Bush administration stops signaling they want to attack Iraq now rather than later, it could be a deadly end of the week for ‘the markets’ (‘market’ prices that is). |
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September 6, 2002 |
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The U.S. equity markets ended the week on a strong note following a better than expected jobs report. The unemployment rate in the U.S. dropped to 5.7% (from 5.9%) in August and 39,000 jobs were added (July jobs growth was also revised higher by 61,000).
Wal-Mart had this to say last week: Wal-Mart Stores division's comp sales are currently within the 4-6 percent range for the month. Total company comp sales for the month are around the low end of the 4-6 percent range. Wal-Mart With this in mind, that Wal-Mart reported August sales only 3.8% higher than in 2001 confirms 1 of two things: 1) Wal-Mart’s previous forecast was not properly calculated. 2) Since August 26 sales plunged below previous levels (expectations) dragging monthly sales lower. It goes without saying that Wal-Mart is the retail industry indicator. Moreover, and since Wal-Mart has economies of scale beyond that of their competitors, the company is likely to be one of the more sturdy companies during an economic downturn. Nevertheless, that Wal-Mart is posting results below expectations right now is an important economic indicator – one that deserves much attention heading into holiday season…
As evidenced by strong August auto sales, American’s are driving around in style. However, what they are doing as often as they did just 1 week ago is stopping in at Wal-Mart. WMT is expected to increase earnings by 14% over each of the next 5-years. Not unlike DELL, WMT may be able to keep the ball rolling by stealing more marketshare, but 14%??? If a real recession arrives, or one in which consumers save rather than spend wildly, 14% will be shot down. Moreover, if WMT posts another poor sales week analysts may take aim at Wal-Mart’s near term bottom line forecasts. Wall Street held it’s fire today I do not hold an investment position in WMT.
Contract announcement expected by September 30: “A delay in the allocation of funds by the Defense Supply Center Philadelphia for the purchase of certain boots has caused a temporary reduction in Wellco's production. Wellco has been informed that funds will be allocated, and it should receive an order for boots, not later than the end of September 2002.” Reuters Wellco is certainly a company worth watching - not only as a potential investment, but to also find out about a possible attack against Iraq before it happens. Quite frankly, the size of the awarded contracts on September 30 could speak volumes: if specific boot orders (hot dry desert boot) are exceptionally large this could presage an attack against Iraq or, at minimum, confirm that the DOD does not foresee U.S./Middle East tensions easing anytime soon. Then again, perhaps contract delays have spoken volumes about the lack of support for a U.S. attack against Iraq already? Whatever the case may be, September 30 looms. Who would have thought that the success or failure of a tiny $15 million company like Wellco could act as a crystal ball for predicting warfare. One of the better pages that tracks daily DOD contract announcements: http://www.janes.com/business/procurement/dod_contracts/toc1.shtml Background One of the new companies we began monitoring in June 2002 was Wellco Enterprises (See WL 2Q02). The company showed up on our radar screen last week following a PR release that stated expected contacts for army boots would be delayed. Suffice it to say, we don’t like Wellco the company right now given the uncertainty of the business. Disclosure Wellco is a small company that is very illiquid. Director James Emerson owns just under 60% of the company. The opinions presented here are not a recommendation to buy or sell Wellco stock. Brady Willett does not hold an investment position in Wellco.
The U.S. equity markets clawed out gains today in what was an otherwise anticlimactic follow up to yesterday’s wild session. On an ironic note, Jim Paulson, chief investment officer at Wells Capital Management, had this to say about yesterday’s drop (CBS Marketwatch, Reuters): "I personally think it's overdone, I think we're in a situation where we're not only scared about a double dip, but more scared that the U.S. can go the way of Japan (in the form of a deflationary spiral)...I personally think it's overdone. Paulson said stocks were cheap, taking into consideration the S&P 500 Index's current level of around 880 while 10-year Treasury yields fall below 4 percent for the first time in 40 years.” Although there is slight possibility that Mr. Paulson was misinterpreted, his logic demonstrates the beliefs of many bullish analysts. That being things will not get as bad in American as they did in Japan because stocks are ‘cheap’ and/or because interest rate investment models can not be wrong. Well, this just in: interest rate models will not warn the investor of a Japan type deflationary scenario. If anything, such models will mask the dangers of deflation until the bitter ‘end’ (19 years for Japan and counting). Point being, Mr. Paulson did not provide any evidence to suggest that a Japan type deflationary crisis is not unfolding in the US. Rather, by mentioning the disconnect between interest rates and stock prices (earnings) he unwittingly supported the deflationary argument. (Current 10 Yr Yield - 3.953%)
Ample Autos? On the economic front, construction spending was flat in July but auto sales continued to impress in August registering a 13.2% advance from August 2001. Strong auto sales prompted GM to raise expectations. However, GM also announced zero percent financing on some of its 2003 models (Chrysler called GMs bet soon afterwards but Ford folded saying ‘lets try and sell our 2002 models first’). Quite frankly, there is something about an industry where manufacturers are reporting strong unit sales and offering spectacular incentives at the same time that is ominous. Perhaps Mr. Paulson could offer some sound advice on the subject: “people are worried about pricing power in the auto industry – these worries are overdone. 0% financing says times are good for automakers.” Nikkei Nightmare With the American markets stabilizing (for the moment) all eyes are focused on the Nikkei. There have been a handful of worrisome reports about the impact the falling global financial markets will have on Japanese banks. However, what no one has even mentioned is the fact that the Japanese government was purchasing massive amounts of stocks directly from these banks just a few short months ago, and that prominent Japanese officials were offering strong commentary to the effect that ‘the stock market must be saved’. It is appears that plunge protection didn’t work in Japan. Granted, this story is still developing, as is the case in the United States as well. WMS Industries WMS authorized another $10 million in stock buy back funds today. As suggested in last quarter’s report we would like the company to solve all of its software problems before they delegate money to stock buy backs. WMS shares jumped 5+%, which is not surprising given that previously escalating short interest still may be outstanding (meaning shorts opted to cover). WMS could turn out to be an interesting story if the company can manage to keep their software problems inline going forward. That said, we have learned about the near term risks associated with these types of stocks first hand this year: after selecting and buying WMS stock back in December 2001 the companies problems rapidly escalated and its stock price dove to a low of $9.28 a share (negative 50+%). We do not have any immediate share price expectations for WMS. We would like to see the company run problem free over the next 18 months. Sierra is a reputable company (they are designing the new o/s) and we believe the company is taking the right steps in acquiring their services. Side note: IGT has also had its run in with software bugs, but none have proved as severe as WMS’s.
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All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice. |
