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June 11, 2010 BREAKFAST WITH DAVE
Although we arent so hot on the income statement and the view that earnings
are going to new highs in the coming year especially with little prospect of It should be noted that as
more margin expansion, little pricing power and slowing nominal growth we impressive as yesterdays rally
think the corporate balance sheets are in great shape. The quality of the was in the U.S., it is nothing
balance sheet and the associated default/delinquency risks, carries with it more than a thinly traded
less uncertainty than the outlook for earnings hence the preference for technical bounce
spread product here. The Fed just reported that the nonfinancial corporate
sector has built up its cash hoard to a record $1.84 trillion up 26% from a
year ago and now representing a 47-year high of 7% of total assets. This does
nothing to help equity investors in their ROE assumptions but it sure is a
positive for bond investors because all they care about in the end is ...
receiving their coupon payments and being paid out at par upon maturity.
Moreover, there has been a dearth of supply of late with new-issue activity
declining for seven weeks in a row. Yet, the weekly mutual fund data show no
decline at all in what is increasingly proving to be a secular drive for income
from a 78 million-strong boomer population whose median age is 55, not 25
or 35 and prepped for capital appreciation strategies. Hate to break it to you
but that theme ended a decade ago.
LABOUR PAINS
U.S. jobless claims fell 3k in the June 5th week, to 456k, but from an upwardly The key here is that claims
revised 459k the prior reading. The key here is that claims have now been have now been above 450k for
above 450k for four weeks running and the four-week moving average has four weeks running
drifted up, to 463k, the highest it has been since mid-March. Over half the
time in the past, such a level of claims was consistent with net job loss so
barring any improvement, one would expect to see the June nonfarm payroll to
look a lot more like the tepid May report than what we saw in April, as far as
private payrolls are concerned.
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June 11, 2010 BREAKFAST WITH DAVE
There is little doubt that claims are going to rise quite sharply over the near-
term as the fallout from the oil spill hits the data. Recall that in the six weeks
following the Katrina disaster in 2005, claims jumped by 133k over a six-week
time span. So expect to hear calls for a double-dip if claims surge above
500k and end up staying there.
Chart 2 puts the latest 463k reading on the four-week moving average into
some perspective.
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Desert Storm Mexico Asian Crisis LTCM/ Tech Wreck 9/11 Enron/ Fannie and Bear Stearns Lehman Now
Russian Crisis Worldcom Freddie Collapse
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June 11, 2010 BREAKFAST WITH DAVE
Canada posted a very small surplus of $200 million, which was below the $600
million consensus estimate and again, two-way trade deflated with exports down
1% and imports down a sharper 2.2% (these are in nominal terms). In volume
terms, imports were flat while exports fell 1.6% in what was the second
contraction in the real trade balance in a row. Upside growth risks for Canadian
Q2 GDP are subsiding if fact, we are at 3.3% (annual rate) right now versus
3.6% as per the consensus and we believe the risks are to the downside,
especially in light of the weak May housing data.
As for the U.S., we have yet to even see the full effects of the stronger dollar and
weaker European economy hit the trade data just yet. The deficit is going to
soar again and this is downside risk to GDP growth going forward.
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June 11, 2010 BREAKFAST WITH DAVE
70
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55 60 65 70 75 80 85 90 95 00 05
Yet, for the first time since October 2007, all 12 Fed districts reported improved
economic conditions, and we were also surprised at the broad strength across
industries contained in the report. We always look at the sectors mentioned in
the Beige Book and lump them into two categories strong/improving and
weak/deteriorating. We provide the lists below you may be surprised:
Strong/Improving:
Tourism
Steel
Autos
Consumer staples
Staffing firms
Commercial real estate
Metal fabrication
Petrochemicals
Airlines
Trucking
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June 11, 2010 BREAKFAST WITH DAVE
Rail stock
Agri-business
Food processing
Energy/mining
Home improvement
Jewellery
Autos
Weak/deteriorating
Construction
Media
Banking
Department stores
Medical supplies/pharma
Appliances
There are almost three strong or improving sectors for every one that was weak
or deteriorating. You would have never thought that the leading indicators and
the equity market were both rolling over as this book was being written.
Anyways, it never hurts to do a gut-check over ones view.
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June 11, 2010 BREAKFAST WITH DAVE
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