Stimulus Jobs, Steel and Consumer Products

In a little while we will get the data it appears the market has been waiting for all week concerning just how many people are working and how many aren’t.

With the fudge factors like the birth/death rate and number of people on Uncle Sam’s payrolls, the number will most likely be whatever the government wants it to be.

Any question that this will be the case is answered by counting the column space devoted to the analysis, discussion and eventual drubbing of the number of jobs created or “saved” by the Stimulus package, which the powers that be would like us to think comes to about 640,000. In the WSJ alone, cutting and pasting the different articles and Op/Ed pieces, you’d get roughly five full pages of print. No advertising, just a lot of good questions and mostly not so good answers.

Given that only 40% of the $787BN has been spent, that still puts the cost of each job at $491K. Now I know efficiency is not Uncle Sam’s bailiwick but heck, handing out checks for $50K would have probably done a lot more to get the economy back on its feet and touched over 6MM people. That is still less than half of the officially unemployed but better than this “jobs saved” figure which has been shown to be completely inaccurate from an analysis in that crucible of capitalism, the WSJ.

Real economics has always been about trade-offs and since I referenced Eco 101 earlier this week and we have a major macro statistic about to be released, I thought I’d go back to one of the basic tenets of the dismal science: the choice between guns and butter. At least that’s how my professor first presented it to us.

Recognizing the euphemism in those options, I thought instead we’d look at steel vs. consumer products.

For steel we’ll go back to John Surma’s, CEO of ArcelorMittal, (MT) comments when he released 3Q09 earnings recently. “Restocking by the distributors caused a brief, temporary upturn in mill sales during the third quarter. This has now come to an end.” This comes as the company said that prices for flat rolled steel dropped 1.8% in the U.S. and 4.8% in Europe in 3Q09.

In India, Tata Steel (TATLY.PK) said the price for its product dropped 29% in the third quarter and would be “under pressure” during the fourth. China, the other supposed driver of the global economy at the moment, has said that mills there were operating at such low volumes they were forced to sell steel below the cost of production. “The steel mills are selling below cost, they are not profitable from the sales of steel,” said Wu Xichun, Honorary Chairman of the Iron and Steel Association there.

As conflicting as each data release is these days, so to is the outlook from Procter & Gamble (PG) with regard to the consumer, when compared to the news from the steel industry.

PG reported better than expected results for the 3rd quarter and made optimistic forecasts for the coming months. “Our focus this fiscal year is on profitable market share growth,” was how PG’s CEO, Robert McDonald put it during the earnings conference call.

“Most of the price adjustments we plan to make are now behind us” was the comment by PG’s CFO in support of his CEO’s sentiments. Supporting that sentiment further was news that some of the company’s higher end products, Gillette’s five-blade fusion and Olay’s Pro-X line, posted sales gains during the period. In total, P&G raised its forecast for organic-sales by 1% to a range of between 2% to 4%.

I am not 100% sure what to deduct from this other than it would appear that everyone wants to look nice while they’re standing on the unemployment line.

MT’s CDS hit is high well before March with a close of 1449bps on 1/5. The stock didn’t bottom until the Ides of March at $17.10. From there is has been a smooth downward trajectory for the CDS but a EKG-like sideways move in the stock. Both the CDS and equity turned up recently so one of the two will probably switch direction soon and when that happens it will confirm the move in the other. (N.B. waiting for confirmation is usually rewarded with a higher probability trade and exhibits lower P/L fluctuation.)

PG started the year near what is still its high for the year of $62.80 got down to $44.18 in March but has risen pretty steadily since closing last night at $60.47, within reach of the ’09 high. The CDS has fallen steadily all year and did little more than move sideways during the March nadir in the stock. The CDS low for the year was touched on 9/23 at 38bps and closed last night at 47bps. The most recent move has been a very slow rise and could reflect the general weariness on the economy vs. a stock specific issue.

Enjoy the weekend.

Comments

[Real Estate...:]

Maybe if P&G sold more razor blades it would cause the steel mills to increase output!

Nov 06 07:47 AM