Tonight I'll be hosting "Cavuto" on the Fox Business Network at 6:00 pm EST
"Who that hath a hed of verre [glass], Fro cast of stones war hym in the werre!"
"Troilus and Criseyde"- Geoffrey Chaucer
There's an old saying about people in glass houses, and hardly a day goes by when I don't think about how appropriate it truly is. These days it's all about the dig, the insult, and the false accusation. Or, it's all about the lies and false hopes. Professional market watchers are pressed to explain the action on a minute to minute basis and often grapple with this task. (I must say that it's something of a ridiculous task.) Lately there has been a palpable anxiety that has led to steady inconsistency. The message of the market is that the market isn't sure. The government is at war with prosperity but the White House is trying to sound friendlier. The same President that rode class warfare to a stunning victory now holds no grudges against successful people. The smartest guys on Wall Street struggle to explain how they can be on both sides of a trade and often on the opposite side of their own clients.
This isn't the climate to engender confidence in the market. Still, in many ways the market is relying on hypocrisy. Case in point is the bailout of Greece, which has opened that age-old debate about moral hazard while also establishing precedence. Of course we are dealing with this issue in America, especially since our wise leaders decided to bailout Wall Street with Main Street money. Of course the conundrum here is to prevent America from shifting to socialism... the debate overseas is to fix the mistakes of socialism. As Margaret Thatcher warned...it looks like they are finally running out of other people's money. Still, even if it's smoke and mirrors Wall Street wants a short-term resolution to all these lingering economic disasters in Europe. The ECB, EU leadership, and maybe the IMF are going to be busy writing checks.
By the way, on the topic of throwing stones and glass houses, there was yet another auto recall news item. I was a little surprised when some automakers leaped on Toyota's (NYSE:TM) recall woes when it seems to be as common in the industry as teenagers fighting pimples. Ford (NYSE:F) had one of the largest recalls ever late last year. I know it's all about being cutthroat in love and war, politics and business.
Recent Auto Recalls
Real Green Shoots
That being said, there are interesting things going on beyond the headlines. Life goes on and people endure and think beyond simply surviving. Case in point yesterday is news broke that homebuilder Lennar (NYSE:LEN) cut a fantastic deal with the FDIC for a package of $3.05 billion in loans. Through their Rialto Capital Advisors subsidiary, the company will own 40% of the venture and put up $243.0 million, with the FDIC providing zero percent interest for up to seven years. The total package involves 5,500 distressed real estate loans. I think that this is an amazing deal and even greater sign of a company that's taking a major shot anticipating things will get better. I love it, and I really like the trading action in the homebuilders. I understand how the Lennar news gave them all a lift but I wonder if buyers also interpreted positive news on the foreclosure front, too.
There is risk to this deal as its current value assumes none go bad, and at some point the housing market has to stage a marked improvement. I realize that it's easy these days to dismiss the expertise of any industry, especially the homebuilders whose inability to communicate with the Street continues to lead to wild divergence in financial results against estimates. These are the same guys, on the front line of housing, yet continued to build new homes even when the storm clouds were directly overhead and no longer on the horizon. Of course homebuilders are still something like modern day wildcatters that simply believed if you build it they will come. Most industries are fraught with similar tales of everyone going mad or a company that simply should have known better.
Yesterday one of the biggest percentage losers in the entire market was Boston Scientific (NYSE:BSX).
From Folklore to Unforgivable Mistakes
I remember always telling the story of the success of the guys that started this little medical device company that became a giant. It was the quintessential American success story. At one point, the founders found themselves on the vaunted Forbes 400 list of richest Americans.
Like any legend there are different versions of its genesis. There are two stories on how John Abele the scientist and Pete Nicholas the businessman met, one says their children were playing together and another says they met at a small neighborhood dinner party. That was 1978.
So far so good as the company invents a niche in the medical industry and the rewards are rich, but management continues to want to grow through acquisitions.
The day that the deal was made Fortune magazine called it the second worst ever! BSX was changing hands around $23.00 a share when the deal was completed, and has never been higher. It's hard to imagine it all fell apart the way it has. The company has just settled a longstanding lawsuit with JNJ for $1.7 billion, announced it lost $1.1 billion, and will release 1,300 employees or 10% of its workforce. Some smart people in the industry think the company is doomed. What a shame.
From Horatio Alger to cautionary tales I guess I will tell the story over and over again in the future, but what a story it could have been.
We need deals like this, and we also need more industry consolidation. It's picking up but nowhere near a level that suggests that the economy is on the verge of turning. That should change as the year progresses.
January Retail Sales
Thus far, the market is paying more attention to the U.S. dollar and continuing developments from the EU and China this morning, somewhat tossing aside the January retail sales numbers. Equity futures did pare their losses following the better than expected readings, however. January headline retail sales came in at +0.5% (consensus: +0.3%); December was revised to
-0.1% from -0.3%. Ex. auto retail sales were +0.6% (consensus: +0.5%); December was revised to -0.2% from -0.3%. The number we study, retail sales ex. auto, building materials, and gasoline stations clocked in at a strong +0.7% from a revised -0.2% in December. This "core" number has been positive in five of the last six months, with gains ranging from +0.5% in October to +0.8% in August and November. This morning's 0.7% number fits right into the trend. The data, overall, mirrors the generally favorable chain-store sales results announced last week.
The majority of the report's components were positive in January; m/m gains in electronics (+1.15%), sporting goods (+1.04%), general merchandise (+1.53%), and non-store retailers (+1.62%) were the most prominent performers. Furniture, mired in a wave of discounting and overall sluggish volume trends, had the worst m/m sales decline, -1.4%.
Consumers have indeed become increasingly open to purchases that extend beyond everyday staples. Confidence on the part of the consumer has improved, 2009 was used to boost savings (savings rate approaching 5%) which suggest non-debt spending is a possibility, and income growth has moved along amid stimulus efforts and an increase in worker hours. We caution, however, that February retail sales may break the trend seen in spending since last summer given very poor weather conditions across the country. Moreover, the volatility in equity markets may begin to play out in retail sales; arguably what we have been seeing is a lag effect following the rebound in stocks, 401Ks, and to a lesser extent jobs since the depths of the recession in the middle of 2009.
The "surprise" hike in reserves by China's central bank put the brakes on what was shaping up as a plus day for global equity markets. Perhaps the timing threw people off, but with talk of China being overheated so common as to constitute water-cooler chatter the decision itself isn't a shock. The result is a reversal of the best parts of last year's rally as the dollar is edging higher and commodities are edging lower. I think that this knee-jerk reaction is unwarranted, but par for the course. The market is angst-ridden looking for help, looking for catalysts and hoping for smooth sailing. Strong retail sales for January and a positive revision for December isn't enough to turn the tide early on, but it's the kind of news that coupled with additional positive trends later could be part of the answer.
More details on retail sales on our afternoon report.