Farrell: Maybe Carville Was Right
I think it was James Carville ("It's the economy, stupid!") who said he wanted to come back as the bond market since he could then rule over everyone.
I guess there could be a slight modification to that and you could come back as a derivative or a credit default swap but the idea is the same. Look to the credit markets for guidance where the next problem will be. If the players have targeted a country's debt or if the CDS spreads are roller-coasting, watch that country enter the Twilight Zone.
The outlook for Greece appeared a bit better with the announcement of another massive attempt to get the deficit under control.
A bunch of new taxes and some pay cuts were announced. Since they were done with the participation of some EU officials present, the March 16th deadline for becoming born again should be met.
The meeting this Friday with Chancellor Angela Merkel of Germany and the PM of Greece is probably enough to reach for the antacids. But the Greeks might have the terms of the oft-delayed bond offering queued up by then.
The UK is becoming more the focus of the American press as potentially the next basket case.
The New York Times had a Wednesday article that said the UK's deficit is 12% of GDP (as we mentioned yesterday), which is about the same as Greece's and twice the average of European countries. The author of the article, Landon Thomas, stated, "The overall level of debt in the Britain is the second largest in the world, after Japan's, at 380% of the country's Gross Domestic Product." The quantitative easing program in Britain has kept rates low, and household debt is now 170% of annual income.
I believe it is about 123% in the US, and we are way overleveraged.
Adjustable rate mortgages are still popular, and 40% of new mortgages are of that ilk. Andrew Haldane, director of financial stability for the Bank of England (how's that for a job!), says a one percent increase in rates would double debt service costs relative to income to 13%. Forget about the pound and stay away from the euro. If there were to be an announcement that Germany and the EU were bailing out Greece, expect a counter-trend rally, but I don't believe it would last long. Spain, Italy, Portugal, and Ireland are in the wings.
ADP had its monthly job announcement on Wednesday, and it looked ok at -20,000 (although last month was revised down to -60,000). With the disruptive snowstorms we have experienced, a modest decline is a sigh of relief. More important was the non-manufacturing Institute of Supply Management number that was a very nice surprise coming in at 53 (50 is the over/under for expansion/contraction). New orders were 55 (54.7 last month), business activity, which relates well to GDP, was 54.8 (52.2 last month), and that is the highest since October of 2007. The employment sub-index is still in contraction, but at 48.6 it was well above the last reading of 44.6. The bulk of jobs are in the service sector as opposed to the manufacturing sector, and this report was welcomed.
The Fed's Beige Book, or as old guys like Art Cashin and myself like to call it, the Tan book, showed a modestly better economy. Nine of the twelve Federal Reserve Districts reported some improvement.
Residential real estate improved in a number of districts as the recent string of better Case-Shiller numbers have implied. Loan demand is soft, but standards are tight still. Labor is generally soft, as the high rate of unemployment also tells us, but consumer spending is up slightly. That jibes with the latest increase of 0.5% in spending recorded last month. Manufacturing is strengthening; indeed, there is other evidence that shows manufacturing in a "V"-shaped recovery. It's no surprise that commercial real estate remains weak, but there are little price pressures beyond some commodities. Along with the non-manufacturing ISM, the economic data for Wednesday should make us look forward to Thursday.
Back over the research wall at Soleil, Harry Fong still has Allstate ( ALL, Buy- rated, recent price $32) as his stock of the year in his group. His estimates are $4.35 for 2010 and $4.60 for 2011. Book value is just shy of $35 and it pays a 2.5% dividend. Harry says the auto insurance industry finished 2009 in a loss situation with a combined ratio of 104%-105%. State Farm, the largest, had a combined ratio of 110% or so. Allstate's was 94%. Hence, ALL does not need to raise rates much while its competitors probably will. That should lead to market share gains.
Homeowner insurance rates have been raised aggressively in response to storm losses and that ought to restore margins in that business. The balance sheet is in good shape and the company has substantial cash & equivalents. Price target is $38 which would be equal to one times Harry's book value estimate at the end of the year. He sees book growing to $42 in 2011. Contact your Soleil salesperson for a copy of Harry's report.
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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.