Lagging Macro Economic Data vs. Positive U.S. Earnings Reports;
Technical Analysis vs. Fundamental Value;
Greed vs. Fear; and, Confidence vs. Caution.
Lately, the bear argument for a collapse has not been manifesting in reality as the Dow Jones Industrial Average (DJIA) is up nearly 1,000 points and S&P 500 is up 100 points from the recent bottom. Has Robert Prechter gone certifiably insane with his Dow 1,000 prediction? I personally invite Robert Prechter to read my recent recap on 3 Dow bellwether earnings reports highlighting improvement and recovery, not Armageddon or doom-and-gloom.
Big names like Pimco’s Bill Gross, fund manager Jeremy Grantham, and Schwab’s Chief Investment Strategist Liz Ann Sonders are all sharing interest in stocks again. They aren’t calling for another huge boom in prosperity, but they are selectively picking names in the current market. As the tides are turning, I believe there are 4 compelling catalysts that could awaken the idle animal spirits on Wall Street:
4) The Re-emergence of an Iconic American Auto Company: General Motors
On Tuesday, General Motors Co. said July sales from its four core brands – Chevrolet, Buick, Cadillac & GMC — leaped 25% from July of 2009. That makes the 10th straight month of year-over-year gains.
GM’s sales of crossovers jumped 41% and combined sales of full-size pickup trucks rose 22%. If you are still unsure the U.S. economy is recovering after such a strong report, let’s examine a list of companies that have all successfully paid back the taxpayer ‘bailout funds’ (a.k.a. Troubled Asset Relief Program, or TARP) once needed to survive the financial crisis of the Great Recession:
American Express (AXP) – Repaid $3.389 Billion in preferred stock purchased by TARP
Bank of America (BAC) - Repaid $45 Billion in preferred stock purchased by TARP
Bank of New York Mellon Corp (BK) – Repaid $2-$3 Billion in preferred stock purchased by TARP
BB&T (BBT) – Repaid $3.1 Billion in preferred stock purchased by TARP
Capital One Financial (COF) – Repaid $3.555 Billion in preferred stock purchased by TARP
Citigroup (C) – Repaid $45 Billion in preferred stock purchased by TARP
Discover Financial (DFS) – Repaid $1.23 Billion in preferred stock purchased by TARP
Goldman Sachs (GS) -Repaid $10 Billion in preferred stock purchased by TARP
J.P. Morgan (JPM) – Repaid $25 Billion in preferred stock purchased by TARP
Morgan Stanley (MS) – Repaid $10 Billion in preferred stock purchased by TARP
PNC Financial (PNC) – Repaid $7.579 Billion in preferred stock purchased by TARP
State Street Corp (STT) – Repaid $2-$3 Billion in preferred stock purchased by TARP
U.S. Bancorp (USB) – Repaid $6.6 Billion in preferred stock purchased by TARP
Wells Fargo (WFC) – Repaid $25 Billion in preferred stock purchased by TARP
The Total Repayment by the 14 companies listed above = ~$190 Billion Dollars
Meanwhile, General Motors repaid its total loan portion with interest to U.S. & Canadian governments as of April 21, 2010 with only $2.1 billion in preferred stock and 61% common equity shares outstanding (source: USA Today).
Founded in 1908, General Motors and the American auto industry became the foundation for driving the industrial engine into the future. GM is now in 140 countries across the globe. This month, GM plans to file its IPO registration during the week of August 16th.
GM represents a diversified automotive company with a variety of brands. Even with latest buzz surrounding the electric Vault in 2011, other GM brands are creating a splash. Have you seen the new Chevrolet Equinox? They are commanding a price premium in the market due to demand for the new crossover. The new Chevrolet Camaro is beginning to pop up on roads alongside its long-time competitor, the Ford (F) Mustang.
The U.S. government has made it clear their intention is not to own and operate GM, but to provide help during a time of financial crisis. Over 60% of GM is currently owned by the U.S. taxpayer, but the IPO will put GM back on its own feet as the government sells its stake in the company back to, none other than, the public. The temporary TARP relief to the 244,500 employee-driven organization was a vital necessity to preserve GM and dodge failure. Down the road it will be viewed as a success when we peer at our rear-view mirrors in a few years.
If you are looking for an iconic American brand that experienced a similar GM path, look no further than Sears Holdings (SHLD) and its masterful comeback from bankruptcy in 2003 with an IPO indicative of the 2003-2007 bull market (a rise from $13 per share to over $190 per share over the course of 4 years). Some may call it irrational exuberance, others may call it the awakening of the animal spirits. Remember, Sears is a brand name known since 1886, GM since 1908. Both of their places in American history are unforgettable.
3) Cheap Debt … Again
No one is surprised the U.S. is a debt money system. The real question is how well the U.S. can manage its debt.
At this moment in time during the business cycle, debt is simply cheap. Moreover, debt is being re-financed at extraordinarily low rates. In fact, companies are borrowing tons of cash to invest in the future growth of their company as more executives warm up to the word ‘recovery.’ For example, at the end of July, both McDonald’s (MCD) and Advanced Micro Devices (AMD) sold $750 million and $ $800 million, respectively, worth of debt securities (source: Bloomberg News)
Just last week, I spoke with an anonymous financial advisor at Morgan Stanley (MS) who said he is “buying stock on margin.” Why? Not only because he wants to take part in the rising return of a company like Ford (F) delivering over 20% stock returns in July, but because margin interest (debt) is just too cheap to ignore.
Those who can afford debt — financial citizens who save for a rainy day and do not overextend themselves by ATM-ing their home, car, and any other assets — rightfully deserve to take advantage of cheap debt. They can start putting that money back to work in the U.S. financial system and reaping a return while competitors are vulnerable.
The resurgence of cheap debt and more capital moving back into the system can only lead to better times ahead: jobs, income, the ability to pay a mortgage, and the ability to consume!
2) Justice Served to Crony Capitalists
According to the Department of Justice, in the first half of the 1990-2000 decade, over 3,600 bankers and fraudulent contributors to the late 1980’s savings & loan crisis were prosecuted and penalized with jail time (source: Financial Times). Since the 2008 Great Recession, only a handful of cronies and crooks have been penalized. However, the FBI is handling 2,100 open cases pertaining to securities fraud during the financial crisis. As we discussed on Yahoo TechTicker on June 25th 2010, if these cases start making headlines with handcuffs there will be renewed optimism to invest in markets without financial terrorists.
1) Job Creation May Surprise Sooner Than Bears Think
On July 27th, Derek Thompson of the Atlantic called attention to a very interesting chart in one of his articles. Thompson noticed that corporate profits were up and I say they could act as kindling for new hiring.
As you can see in the chart above, corporate profits broke above the steady unemployment line at the start of Q4 2009. So far during 2nd quarter 2010 earnings season, over 70% of companies are beating earnings estimates. Thus, it is safe to assume the corporate profit (blue) line is continuing to rise and deviate away from the corporate jobs (red) line.
For example, a Dow Industrial component such as Caterpillar (CAT) delivered a 31% increase in revenue growth year-over-year, while a software tech giant like Oracle (ORCL) delivered a 40% increase in revenue growth year-over-year. Looking deeper, for Q2 2010, Caterpillar generated $10.4 billion dollars and Oracle brought home $9.51 billion dollars.
Moreover, there is roughly $1.8 trillion dollars in corporate cash sitting on the sidelines. A lot of this cash could quickly move into the economy as executives get more clarity after the November elections.
Using history as a benchmark for U.S. business cycle activity, it’s fair to say the U.S. economy operates in a domino effect-type manner. Bottom-line and top-line growth usually lead to an increase in capital expenditures such as new employee hiring. More new-hires equals more consumers with disposable income.
The most evident small-scale examples, which are still better than cost-cutting and layoffs announcements of late 2008 and early 2009, are the SEC announcing 800 new positions available as a result of the financial regulatory legislation. Chrysler announcing on July 30th they will add 900 jobs to a Sterling Heights, MI manufacturing plant. A Japanese auto-parts supplier announcing the construction of a new plant in Tennessee to manufacture seat components for Nissan vehicles beginning in mid-2011, eventually employing up to 224 workers. These numbers are small, but we have to start somewhere.
Confidence is a temporary cure, yet can spark animalistic appetites for fat equity returns. As the S&P continues to ‘remain in a range,’ all eyes are moving toward the approaching S&P 1144 battle line. Which animal are you: a bull or bear?
Disclosure: Ford (F) was a Wall St Cheat Sheet Premium Watch List ‘Buy’ Selection on July 9th at $10.85 per share.