Breakfast on Wall Street – 09 September 2013


The market finished flat on Friday, September 6, 2013, with the S&P 500 gaining less than 1 point, while the Dow Jones fell about 15 points, or 0.1%, and ended at 14,922.50.

The jobs report, which was worse than expected, helped ease some of the Fed’s tapering risks and the stocks, reacting to the news, rose sharply during the first hour. However, the Russian President, Vladimir Putin’s remarks at the G-20 summit made the market move down nearly 1% from these initial optimistic levels. Putin has asserted that it was the Syrian rebels themselves who had provoked the chemical attacks. He has not only promised to support Assad’s Syrian government in case of an American attack, Putin has also confirmed that the Russian government is already supplying arms to Syria. The S&P moved up yet again, but a further report from Damascus that Bashar-al-Assad’s forces were now using gas shells against the rebels, made the market more confident about the increasing violence of Syrian military action and the Index reacted by falling 0.6%.

We had predicted that the Unemployment rate would move down by 0.1% and come in at 7.3%, while consensus estimates had predicted a 7.4% outcome. Our forecast was correct and the headline rate fell, but the employment data was worse than expected. Change in non-farm payrolls came in lower than expected at 169K, while market consensus had been 180K. Previous releases had to be significantly revised from 162K to 104K. The sign is clear – the economy is not adding the jobs at the pace that would make tapering easy.

Although mostly ignored by the markets, we keep a close watch on two metrics that were also published on Friday – the Underemployment Rate and the Labor Participation Rate. Both of these metrics have shown nearly no improvement. The BLS release on Underemployment that shows what percentage of workers are working below their potential abilities, fell marginally, and came in at 13.7% (a little less than the 14% last month).

Unemployment Rate is calculated as a percentage of the labor force, that is, workers who are actively looking for jobs. It maybe that if the labor force participation rate increases, you might have higher actual unemployment with headlines numbers moving. This has happened in the US during this crisis and the rising numbers of disgruntled workers are still at alarming rates. Labor Force participation rate has fallen from 63.40% to 63.20%, which means that only 63.20% of working age adults are active in the job market.

Today’s Menu


On August 15th, we analyzed the Federal Reserve’s data on lending and based on the granular data analysis, we predicted that the US automobile companies would have a sharp growth trajectory ahead.

Over the past month, multiple data releases have supported our thesis and the stocks we had looked at—Ford Motor Company (NYSE: F), General Motors Corp (NYSE: GM) and Toyota Motor Corporation (NYSE: TM) —are all up. On Thursday, the Fed’s Beige Book data and the US companies’ auto sales data helped the automobile stocks move up even more sharply. While the Beige Book announced improved auto lending and sales, Ford and GM announced favorable YoY sales growth numbers. Ford sales have risen 12% YoY, while GM sales are up 15% YoY. The markets reacted favorably to the news and Ford and GM have risen over 3.5% and 5% respectively. Today, we will provide some additional analysis on the sector and an outlook of what we expect in the coming months.

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US Car Sales are now back to 2008 pre-slump levels and YoY growth is increasing sharply. However, for more than two years since 2007, car sales growth was in the negative, and thus, there is significant pent-up demand for cars in the system.
Through 2009 to early 2013, there was significant volatility in the growth numbers, which, although positive, were from a very low base number. It is only in the last few months that we see a steady growth from a high base number.

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The price movement for GM and Ford also reflect some of the demand growth seen from the data. While GM, after it came out of the government-aided bankruptcy, is the ‘new’ General Motors Corporation, Chrysler, the third of the three Detroit-based American auto giants has now been acquired by Daimler Benz.

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We provide a way for the individual investor to cross invest in all these names with a single ETF.

mm pic 4The First Trust NASDAQ Global Auto Index Fund (NASDAQ: CARZ) might be an interesting option since the largest holdings of the fund are Daimler, Toyota, Ford, Volkswagen, GM and Honda (NYSE: HMC). While the ETF may be an easy way of gaining exposure to all the stocks, most of the Japanese car manufactures trade as ADRs on NYSE, and so do the stocks of Ford and GM. Only Daimler and Nissan trade in the US on the OTC Markets, which most investors tend to avoid. In our investable universe of large-mid caps and NYSE/NASDAQ listed large ADRs, we prefer the US car companies due to their lower leverage ratios.

mm pic 5Post restructuring, through the government’s intervention, GM has gained a clean balance sheet. The discerning investor may utilize this to get exposure to a low leverage behemoth with strong fundamentals.

We see easing of lending standards, significant pent up demand for 5 years, lower Consumer ABS spreads and a growing demand for US goods helping Ford and GM outperform other car manufacturers and the broader markets in the coming months.


Neiman Poised for Sale at $6 Billion

The deal to purchase Neiman Marcus by private equity firms Ares Management LLC and the Canada Pension Plan Investment Board for around $6 billion is in the final stages of negotiation. The luxury retailer, which had been bought by private-equity firms TPG and Warburg Pincus LLC for $4.9 billion eight years ago, has reported $4.5 billion in sales for the 12 months ending in April. This is a little below Neiman’s pre-crisis revenue level of $4.6 billion in 2008.

Japan Leading Global Growth

Japan’s economy grew 3.8% on an annualized basis, the third straight quarter of expansion, while the reading on capital expenditures was raised to a 5.1% expansion, the first increase in six quarters. This upward GDP has beaten all earlier forecasts and Japan’s economy is now leading global growth. The economic growth has also provided an even greater impetus to Prime Minister Shinzo Abe’s planned sales tax hike from April next year.

Fed’s Potential Response to Disappointing Jobs Report

Fed officials were contemplating scaling back the $85-billion-a-month bond-buying program that had been designed to encourage growth. Fed Chairman Ben Bernanke had announced the pulling back on bond buying in June without providing any further details, stalling a final announcement till incoming economic data was positive. However, Friday’s disappointing jobs report might make the Fed more cautious since it is obvious that the economy has not yet steadied and inflation is still below its 2% target.

Moderate Inflation and Increased Exports Foretell Chinese Economic Recovery

The third-quarter of the year may prove to be more positive for the Chinese economy since trade figure released on Sunday show that inflation is now moderate and exports have risen more than predicted. It is unlikely that inflation will cross the 3% threshold in 2013, while exports have risen by 7.2% and imports have gained 7%. Premier Li Keqiang has promised sustainable growth as the country moves away from its “old model of high consumption and high investment.”

US investors Invest $65 Billion in Europe

Early signs of economic recovery together with continuing cheap prices have encouraged US investors to put more than $65 billion in European stocks in the early half of 2013, the highest volume of US investment in Europe since 1977. Stocks have risen 27% since June 2012; rising corporate confidence and a tide of stronger earnings later in the year gives hope that the region will recover from its sovereign debt crisis.


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