Thursday, April 02, 2009

Economic and EPS FYI....

Call this, an economic FYI.....

At the bottom of this message you will find a compilation of comments from a portfolio manager. The comments speak to the disconnects we see in today's economic analysis. Believe me, I have wrestled with this stuff for years - headline interpretation vs. real analysis. You can see the influence of the former with the way the market is jumping around over the past few weeks. And yes, I know that the stock market was ready for a bounce - that happens even in the most bearish environments.

I don't believe we are out of the woods because we still have some real problems with recognition and acknowledgment.

Over the coming days I am going to send some comments on the semi, semi equipment and tech space. Earnings season is approaching and given the strength of the recent rally it is probably best to put out a look at expectations - certainly do not want any surprises. I've been wrestling with the longer term view for many of the semi and semi equipment segments these past few weeks. I realize there is going to be a pop in semi orders and that will drive some equipment business but longer term I get the sense that the business model really needs to change. There have been several articles published about the need for M&A to narrow the capital equipment playing field and while that all sounds wonderful a number of key issues have been glossed over. Why buy when companies are battling atrophy? The company shrink is going to continue for a while and though there are cases where synergies can be immediately realized I think the general thought process is to sit on your hands and wait it out. No one knows where the bottom will be and haphazardly throwing pieces together because you think you can build critical mass is just lunacy. Why reach for critical mass when your customer base is shrinking?

Allow me to reiterate that in most instances the "A" in M&A stands for "Attrition". Management teams have yet to downsize to levels that are close to sustainable. Again, I say this knowing that there will be flurries of order activity - particularly when factor in the very low pace of business over the past six months. There is bound to be a bounce. Thing is, a bounce is about all it will be. What happens after that? The days of companies announcing that they are going to build two, three, four or five fabs are over.

I hope you are all weathering the storm out there. I know it's a battle for everyone. If I can, I'm going to do some traveling during the coming months to survey the landscape. Hopefully if I am in your neck of the woods we can meet face-to-face.

Last but not least, thanks to all that replied to my Roll Call the other day. It's always great to hear from you.

The rest of this story is below the break....


From another source --

Re: The durable goods IMO not a chance. BA orders we're down from 125 planes to 4 planes and that's like 80 pct of the transportation orders so I don't know where the transport number comes from. On ex transport, emr was out yesterday saying orders down 20 pct so this really does seem like a joke. Dry BUlk down for about the 12th straight day. Siemens CEO saying business has deteriorated since January...not to worry for all those analog semis co's w/big industrial exposure, they are immune and cycle has bottomed... -- Siemens AG dropped the most in a month in Frankfurt trading after Handelsblatt newspaper cited Chief Executive Officer Peter Loescher as saying markets have become “significantly worse.”

The company is no longer “immune” to the effects of the global economic crisis, Loescher said in an interview, according to the newspaper. A slump in demand at the industrial and medical technology units may put Siemens’s goal for 8.5 billion euros ($11.5 billion) profit in the current fiscal year in danger, Handelsblatt said.

Siemens fell as much as 5.2 percent to 43.43 euros and traded at 43.72 euros as of 10:47 a.m. local time.

(For the files that are mentioned in the next few paragraphs drop me a note and I will send them your way if you have an interest -- Carl)

See attached drotoday from Morgan Stanley on the Industrial sector (what the data say). Page 6 – 40 paint a pretty dismal picture of the US (and European) economy for the manufacturing sector. If the SOX was valued like industrials (and most of these industrials earnings OUTGREW some of the big semisby ALOT over the last 2 or 3 cycles, the SOX would be 60-90 vs current 235)

ALSO see three slides on vacant housing supply. THere is ALOT of excess housing capacity. I have also attached some slides on affordability, and IMO the issues constricting demand are largely unrelated to affordability. Banks and other distressed sellers are accounting for nearly half of all home sales today, and they are clearly motivated sellers, so they will continue to slash price without much regard for where affordability numbers are.

Also attached interesting on retail sales and Government data versus what is actually happening

Retail sales recovery appears to be a mirage: We argue that seasonally adjusted electronic and appliance store retail sales data have given rise to amisleading notion that US electronic retail sales are recovering. Seasonal adjustments are made to take out seasonality and while in most cases,especially on a YoY basis, seasonally adjusted data paint a picture similaro unadjusted data (Figure 3). We believe conclusions drawn fromseasonally adjusted data can be premature in some instances.• YoY decline actually worsened in February: While adjusted data showcontinued recovery in sales in January and February, unadjusted datashow that while the retail sales decline was less severe on a YoY basis inJanuary, the decline worsened in February (Figure 1).• Sequential decline in 1Q09 so far same as the mean in spite of a veryweak 4Q08: On an adjusted basis, average sales in January and Februaryare up 4% from 4Q08 average leading to this illusion that retail sales arerecovering. However, notwithstanding a very weak 4Q08, on anunadjusted basis, the January-February average is down 20% from the4Q average – essentially the same as the 17-year mean decline of 21%.Yes, sales are not deteriorating at a pace faster than the seasonal trend,but we believe it is quite optimistic to call that a recovery.• Retail sales in January-February probably supported by aggressiveinventory clearance but what next?

In the first two months, YoY declines are indeed moderating from depressed levels in 4Q08. However,we believe that electronic retail sales were boosted globally by aggressivepromotions as retailers tried to clear inventory after weak holiday sales. Inour checks, some of the TV prices fell 30% or so post December. Nowthat inventory clearance is over, sales could slow further. Already thereare indications that in the first half of March, in the US, TV sales growthfell off to only 10% from ~40% in recent months (Figure 6).

Re: PCs and China stimulus more poor news for PC sector nobody mentions:

Key takeaways:

* Lenovo is neutral/conservative to China's subsidy program because of
the limits of infrastructure, low PC knowledge and likely preferring
TV/refrigerators to PC in rural areas.
* Lenovo has also seen channel inventory increase to 5 weeks now, from
2-3 weeks during the end of December 2008.
* Lenovo will turn more aggressive on consumer PC and netbook market
and will also use more outsourcing (from Taiwan) on these product lines.
* Lenovo is guiding conservative on March09 quarter result because of
the US$120mn restructuring costs and 10% YoY ASP decline and price

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