How's the Economy Doing? A Look Under the Hood in August

This is an update of our "How's the Economy Doing" post from June. As a reminder, while our our investment strategy focuses on bottom-up analysis of individual companies, we think awareness of overall macroeconomic conditions is helpful since trends that may impact certain companies or sectors. On 8/12/09, we wrote about the many mixed views regarding what happens next in the Market and the economy. Rather than speculate on which view is correct -- we can't say for sure and the market will do what it does, often detached from fundamentals in the short-run.

On our blog here, we look at some hard data in railroads, trucking, air transit, and other areas. The hard data is decidedly negative on a Y/Y basis and jibes with anecdotal information we've collected:

• The job market for white and blue collar workers is extremely difficult around the country.
• Like commercial real estate (see our June post), residential real estate activity is very slow with plenty of "for sale" signs in most suburban neighborhoods (in particular, we can vouch for the Greater NYC area) -- we think prices will continue to fall well into 2010, especially since real estate typically runs in very long cycles (i.e. seven years up, seven years down, seven years up, etc.) and the last up-cycle lasted approximately ten years (ending in mid-2006).
• All kinds of services are being impacted by the downturn, including barbers (our NYC barber: "business is slow and we're losing customers because they're moving out of the city").
• The hatches remain mostly battened up in the venture capital community and poor returns over the past decade leave many investors scratching their heads over future capital allocations.

Of course, the market is forward looking, and, what we call "the hope rally" since March is based on the hope that things will surely soon get better on the back of government stimulus packages in the U.S. and elsewhere. We're natural optimists and also hope so, however, we're inclined to remain in the cautious camp. Now and always, we need to pick our spots with a preference for very low multiples of current earnings and growth.

Fortunately, we do see some reasons for hope: inventories are being worked downward to adjust for slack aggregate demand and, as noted in June, once we reach 4Q09 and 2010, Y/Y comparisons for all sectors of the economy will be against very weak 4Q08 and 2009 figures, which could at least bring stability and set the stage for inventory restocking (growth) at some point. We should no longer see negative 10 to 20% Y/Y declines in 2010 and could even see areas of growth (which largely explains the hope rally).

Unfortunately, we've missed a number of incredible stock moves -- four to five times March lows -- by being in the cautious camp and avoiding most cyclical companies with still horrendous fundamentals. Yet, we've done well with select cyclical plays where we saw a margin of safety, such as Harry Winston Diamond Corporation (HWD), Brandywine Realty (BDN), Sun Communities (SUI), and Wiengarten Realty Investors (WRI). In addition, we continue to sleep well owning franchise type businesses that are currently generating significant excess cash flow and have limited to no debt. As before, examples in this category include eBay (EBAY), Yahoo! (YHOO), j2 Global Communications (JCOM), PetMed Express (PETS), and Youbet.com (UBET). Finally, given our quick post on Y/Y retail sales declines, people may think we're crazy for owning Bidz (BIDZ), yet we see reasons to own the bombed out online retailer. At the more speculative end, we include another idea on our blog that has a leading market position and current year growth.

Disclosure: Long HWD, BDN, SUI, WRI, EBAY, YHOO, JCOM, UBET, BIDZ, PETS.

Comments

[Larry House:]

More than just an "awareness" of macro conditions is necessary. Macro rules the roost right now.

Aug 21 02:38 PM

[whidbey:]

'we're inclined to remain in the cautious camp. Now and always, we need to pick our spots with a preference for very low multiples of current earnings and growth."

We have all missed moves, but the object is to stay viable for the longer run objective. I think up moves slow, but remain to the end of the year when it will be obvious what is happening. Maybe. If things are as bad as I suspect we go down in 2010 and try it again later. I put the probabilities right now at 70/30 that we correct hard in 2010 if not later this year.

Aug 21 03:10 PM

[W.E. Heasley:]

"....once we reach 4Q09 and 2010, Y/Y comparisons for all sectors of the economy will be against very weak 4Q08 and 2009 figures, which could at least bring stability and set the stage for inventory restocking (growth) at some point. We should no longer see negative 10 to 20% Y/Y declines in 2010 and could even see areas of growth (which largely explains the hope rally)".

Although future “comparisons” would look better (maybe), the Jobless Recovery with persistent high unemployment along with massive and historic deficits will be major drags on Economic Expansion.

Aug 22 11:25 AM

[Patricia013:]

W.E. Heasley - do you mean that if 2008 was pretty darned bad and 2009 was even worse then whatever one does in 2010 will look good by comparison? That's like the old "lipstick on a pig" saying....underneath, its still just a pig. I'm glad I sold the last of my stocks a few years ago.

Aug 22 11:59 AM

[W.E. Heasley:]

Yes Patricia, it will look good by comparison.

Not that it will be good.

In other words, less ugly looks better than ugly. Although "less ugly", by historical comparison, is still mighty ugly.


On Aug 22 11:59 AM Patricia013 wrote:

> W.E. Heasley - do you mean that if 2008 was pretty darned bad and
> 2009 was even worse then whatever one does in 2010 will look good
> by comparison? That's like the old "lipstick on a pig" saying....underneath,
> its still just a pig. I'm glad I sold the last of my stocks a few
> years ago.

Aug 22 12:39 PM

[kool:]

Everything happened for a good reason, in this case.... the technical is influenced by the fundmental, in my humble opinion.

For its 20 some years' existence, Thermogenesis (KOOL) initially in blood rapid freezing/thawing to the most recent 3 years in cord blood processing, storage equipments and stem cell process clinical devices.... Now is the closest time to become sustainable operational profitable.

The technical shows that, the 50 ma crossed 200 ma just recently....

Lots changes has been made since outage of Osgood...

1. scraped the equine lab. - a money drainer and distraction of business focus.

2. reorginized the organization and trimed the cost significantly.

3. prioritized the R&D items and spending.

4. focused on product quality and customer services.

5.introduced new products MXP and Res-Q.

6. rebuilding sales organization.

7. hired the a proven new CEO.

Based on current cost structure, our quarterly operation cost is at about $5.2-$5.6 millions, we reached this revenue in fy 2008 already.

With the expanded business in both cord blood and bone marrow stem cell processing, our sustainable profitability is just right at the corner.

Aug 22 12:52 PM

[Philip Cohen:]

And what about eBay, still going backwards, but not quite as fast?

eBay's September quarter's financials are going to make interesting reading; I wonder how Donahoe will spin the undoubted further reduction in revenue, and the consequential even greater reduction in profits (assuming he cannot find any more staff to "pink slip" to compensate therefor); pretty soon there won't be any staff left to do anything; hang on, I think that has already been the case for some time now ...

I can see Donahoe's epitaph now: "He killed the golden goose".

Aug 22 06:50 PM