CEO Economic Update

America for sale

Too many dollars circulating the globe have pushed oil prices to record high prices, sparked inflation and have made U.S. assets a cheap investment to the rest of the world. Foreign buyers went on a record rampage in 2007 buying up over $100 Billion of U.S. companies a record 46% of all deals that year. 

In retrospect, 2007 was no real surprise. The dollar is just so cheap these days and foreigners have literally more dollars then they know what to do with.  But still the overseas M&A activity surge was amazing.  It rose from an average 18% of all deals from 1998-2006, to 46% in 2007.

2007 highlights:  Dubai sunk over $7 billion into Citibank and Canada scooped up Commerce Bank for $8 billion.

So how is 2008 shaping up?  More of the same.  Even the biggest and oldest companies like Anheuser-Busch, who weren't looking to sell, have been told they're on the auction block. $50 billion is the price, but in Euros (which the European InBev collects) that price is half of what it would have been in 2002 as the Euro/Dollar exchange rate has declined that much and more. (It's closer to 56%)

Here's a list of big overseas deals that have transpired in the first half of 2008.

$50 billion AB to InBev (Belgian - Brazil)
$?  billion Rohm & Hass deal is bought by Dow Chemical. Financed with money from Kuwait Total deal worth $19.7 billion  (Separately Kuwait purchased 1/2 of Dow's other operations)

$7.5 billion Barr Pharmaceuticals bought by Israeli Teva  (8/08 addition)
$5.6 billion Respironics, Visicu, and Emergin, all three bought by Royal Phillips Electronics (Dutch)

$4.7 billion Philadelphia Consolidated Holding bought by Japanese Tokio Marine  (8/08) 
$3.5 billion ChoicePoint bought by Anglo-Dutch Reed Elsevier
$2.5 billion Agri Products bought out by Canadian-based Agrium
$2.0 billion Ford sells Jaguar & Land Rover to Tata Motors (India) 
$1.4 billion as Swift is bought by Brazil-based JBS
$1.0 billion General Chemical purchased by Tata Chemicals (India)
$0.8 billion Esmark steel bought by Severstal (Russia)
$0.5 billion Pavestone Group sold to CRH (Ireland)
$0.3 billion Sorry Charlie, Starkist goes to South Korea

These headline deals are over $70 Billion $82 billion, putting 2008 on pace to smash the record $100 billion in 2007. I'm all for free trade but a reckless dollar policy is allowing others to scoop up hard assets at record low prices and at the same time forcing us to pay record prices for goods from around the world especially oil.  It's well past time to fix the dollar.

 

More:

2007 Foreign acquisitions in US at new highs

Too much inventory

Inventory data is once again available for manufacturers and wholesalers and once again they are over producing. In both cases inventory was up about 1% from the month prior, we don't have retail data yet, but it's unlikely they are selling or demanding that sort of run up.

   

Over the past year this trend has been holding.  Retailers have only increased their invenotory by about 1%, while wholesalers the most aggressive of the bunch have increased it by 6x almost 10%.

 

Pending home sales down y/y

NAR themselves say to ignore the monthly change and only use the y/y number -12.3%.  But there is still so much confusion over this number.  I can't cover it any better than Barry Ritholz did, so follow this link to read his excellent post.

Who Doesn't Understand the Pending Home Sales Index?

Can GM catch a break?

GM is faced with the lowest auto sales since the Great Depression, can't resell the vehicles getting pushed back to them via off-leases, is getting killed because of its exposure to housing in its 49% ownership of GMAC, and now the retail sector is hurting GM via GMAC.

As I wrote recently 5,000 stores are closing and the fallout touches companies as far flung as GM.  Here is the trail.  Boscov's Department Stores and their 50 or so stores just entered Ch. 11 and is closing 10 stores.  They owe GMAC $1.2 million. (see page 11) 

Now a million dollars isn't going to break GMAC or GM, but who knew GMAC had loans out to retail department stores?  How many other GMAC retail loans are out there?  We know 5,000 stores are failing, how many of them owe GMAC?

 

Same store sales drop 23% in July

Without the extra umph from the stimulus checks, retail spending dropped off a cliff in July, down 23% from the month prior. And that's the good news. From the list of 25 retailers who reported same store sales in the WSJ, at least 4 of them (Cache, Children's Place, Dillard's, Pacific Sunwear) are in the process of closing stores or going out of business entirely. For the full list of 5,000 stores which are closing go here.

The same store report only lists year over year sales, so I had to create the data with last month's report, with the rapid store closing occuring last year and this, I can't be certain the stores open in June are still open in July, so the 23% might be optomistic.

Looking at year over year data it still isn't good news.  Sales were down 4.3% from a year ago in the apparel catagory, and sales for discount Target (only discounter that doesn't sell food) were down 1.2%.  The remaining 4 discounters that do sell food, sales were up 3.6%, but adjusted for inflation (running above 6%) real sales were down 2.4% and without a doubt the number of units being sold is contracting.

PDF Table of all 25 stores

 

 

 

 

Education and Healthcare, still pretty safe bets

One of my loyal readers asked me to take a look into Education and Health-care as safe bets during the current storm.  The good news is during recessions both these sectors are relatively safe bets, and long term both have promise as well.  Not surprising since the cost of each is subsidized for those who desire it.

That doesn't mean they are immune from downturn, as nationally renown economist recently said "don't confuse lags with decoupling".  His subject was different but it's an excellent point.  Both Education and Health-care will soften but probably not for another year.

Education

Chart 1

   

Education employment (and by extension spending) rarely declines and during the 2001 recession didn't blink.  It wasn't until mid 2002 a full year after the recession was over that we saw big declines in Government and Private Higher Education employment.  That places any current decline in Education until 2009.  Long term the trend is clear (dark blue line) the number of total employees both government and private is not only growing, but it is growing relative to the number of children there are to teach.  Back in 1990 there was one employee per 5.6 children ages 5-19 and now that ratio is only 4.6.  If every single education worker was a teacher, we'd have an average classroom of only 4.6 kids per class.

Of the three categories, it appears higher education in all forms is the best growth sector as it has added more employees than the other two since mid 2001.

 

Medical

Medical spending surprised me. The below chart has Actual (nominal) spending in blue, but that is comprised of prices (yellow) and the amount of additional care being provided (real).

Real spending like education does decline but long after the recession is over.  After both the 1990 and 2001 recession medical spending started to decline a year or more after the recession was over.  So again medical spending likely won't decline this time around until 2009 or even 2010.

Chart 2

The surprise was how long medical spending dropped.  In both cases spending dropped for two years, and the recovery was surprising as well.  In the 1990's we had a big recovery as medical spending rose sharply and well past the prior peak reached in 1992.  In this past expansion during the 2000 decade spending was practically unchanged for years.  And has never approached even half the growth rate of the last expansion.

Chart 3

Some parts of medical spending are more sensitive to economic conditions than others.  Spending does decline sooner and more significantly for doctor visits.  Folks are less able to visit their primary care provider during difficult times as their health insurance is tied to employment and during tough times, co-pays can discourage or put off regular visits.

Chart 4

 

The lack of growth in medical spending during 2004-2008 doesn't have anything to do with price. In both expansion periods medical prices were nearly identical an average of 3.0% vs. 3.4%.  As the chart above shows we had a surge in the very old.  Those over the age of 85 need and consume medical care at exponential rates compared to the rest of the population and we had a surge of growth in that age group during this expansion.  And their overall numbers are moving the needle too.  Back in 1990, they were only 1% of the population, and they comprise 1.9% now.

The 6 year slowdown in total (nominal) medical spending in Chart 2 (blue line) is unsettling, while I'm still bullish on medicine. I'd have to say of the two education seems the better bet.

 

Every hour a store is closed as 4,975 go bankrupt

Over the past 217 days, at least 4,975 stores have been closed. That's about store an hour, or 23 a day. So far we are nearly double the rate of 12 a day we saw in 2007. And I doubt my list is as thorough as the experts. The recession of 2008 is causing a tremendous shake out in retail. Retailers that survive this storm, will be able to take market share left up for grabs by the departure of nearly 5,000 stores.

I credit Howard Davidowitz who I heard on a terrific podcast by NPR. He claimed in April that 2008 would see 7,000 retailers close their doors compared to the 4,500 which closed in 2007.

So on May 14, I found 3,000 stores which had closed up, well the year is only a little more than half over and already there are 4,975 stores closing their doors. Looks like Howard was optimistic if anything.

Since that time Global Research added a long list of store closing, and I've found a number of others.

(Spreadsheet also available as PDF)

(click for pop-up, which btw, shows up better in Firefox)

And don't forget the watch list, I expect closing from these stores this year.

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The Fed changes its mind on the economy

The Fed decided to hold rates steady at 2% as expected. They agreed that inflation was enemy number one, but they also think the economy has gotten worse. 

In their last statement on June 25, they said "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

In today's statement of August 5, they dropped that clause. Saying "Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee."

ISM up because truckers are slowing down

In today's earlier post "ISM up but it isn't good news" I noticed the supplier deliveries index was up.  Normally that's good news so the index rises which is good.  But it's usually good news because it's a proxy for road congestion.  The theory behind the ISM index is, if roads are congested the economy is red hot and truckers can't get to their destination on time.

Unfortunately, high diesel fuel prices have turned the world upside down. Truckers are voluntarily spending more time on the road, sacrificing time at home, for fuel savings. At these prices something had to give.  More on driving slower, and, 55mph savings.

The US Department of Transportation says the average vehicle's fuel efficiency drops by 23% when increasing their speed from 55mph to 75mph.

 

Source: US Transportation Energy Data Book

What does that mean for a trucker? Ron Dickson gave me a rough approximation of MPG for a 18 wheeler is anywhere from 3.6mpg to 8.5mpg.  So if peak performance is at 55mph let's assume we could get 6.5mpg.  If the Government is right driving at 75mph drops your fuel efficiency by 23%, you'd get 5.0mpg  (a very common quoted average) when you drive 75. For distance, driving 120,000 miles a year is not uncommon and diesel fuel is about $4.50. 

Using all those numbers how much would a trucker save slowing down from 75mph to 55mph?  Wow $25,000 over the course of the year.  Of course this comes at a human price, 582 more hours per year on the road.  That's nearly 12 hours more on the road per week.

Slowing from 75mph to 65mph would give you more than 1/2 the savings.  A fuel savings of $16,000 and you'd be on the road 5 hours more per week.

What else can truckers do to save money? Well keeping their tires inflated saves yet another 3% to 5%, and if they really value their time, there is another way to go.  Purchase an aerodynamic Colani-designed Mercedes semi.  They claim to save you an even greater 30% in fuel efficiency.  But they look like something from a science fiction TV show, so be ready to check your pride at the door.  Here's the picture...

Hey I warned you...