The Guest Blog

Farrell: Good News For Bulls and Bears

There was news enough recently for the bulls and/or the bears and you can take your pick.

Initial unemployment claims reported Thursday morning rose 11,000 to 444,000. That in and of itself is not that big a move and we saw continuing claims move down when the last Bureau of Labor Statistics official jobs report was issued. With three different unemployment programs- State, Federal assistance, and the new extended benefits program- it is tough to tell if the improvement in the continuing claims number (the regular continuing state benefit claims number was down 211,000 to 4.6 million at last tally) was from people getting jobs and leaving the unemployment rolls, or if they ran out of benefits and dropped off. If initial claims were to continue to go up- and one week is just that, one week- then we could assume since people are still being laid off, the drop in the continuing claims number would not be the result of getting a job, but rather running out of benefits and that presents a big problem.

At the same time on Thursday, the four week moving average of initial claims registered a decline to 441,000. The four week is looked at since it smoothes out the drama and instant analysis of the weekly. The four week is off something like 18 weeks in a row. It is also at the lowest level since August of 2008, and that was before Lehman collapsed. I'm sure of that date since I am reading Andrew Ross Sorkin's "Too Big to Fail" on my Christmas Kindle.

Retail sales for December were off a disappointing -.3% when the estimate had been for a gain of .5%. November's number was revised to +1.8% from a prior +1.3%. December was the first time in three months the retail sales number hadn't improved. "Core" retail sales were also down -.3%. Core sales eliminate the volatile sales of auto dealers, building materials, and gasoline. This report is the first core number to be down since July, but if you combine the two months, sales would be up +.3%. The last three months sales have annualized at an 11% pace, and about half of that if you take out autos. I guess it depends on what numbers you want to look at.

Because consumer credit fell -$17 billion in the month, it would have been nice to think that the consumer could have done that and still found their way to a retail sales gain for the month of December. Especially since the savings rate had also ticked up a bit. But I guess if credit is slashed to the extent it was, something has to give and this December it was retail sales. If I had my wish I would opt for a decline in credit as the consumer is still way too leveraged.

Business inventories rose +.4% in November, the same as October. Two components of business inventories had already been announced. Manufacturing inventories were up .4%, and wholesale inventories advanced 1.5%. Retail inventories were announced today and disappointed slightly falling .2% in November. But the overall inventory to sales ratio moved down to 1.28 from 1.30. This ratio provides evidence that businesses want/need inventories as they believe demand is picking up.

I saw a report that Bill Dudley, President of the N.Y Federal Reserve Bank gave an interview on PBS. He used to be an economist with, of course, Goldman Sachs, and I always thought he was first rate. He said "short rates are going to stay low for a considerable period of time to come." At least six months, but "it could be a year from now, two years from now. It's going to depend on how the economy develops." He added he would need to see the unemployment rate come down before supporting a rate increase.

I would not want to have to debate Dudley, it would be over in minutes, but if you wait to see the lagging indicator of unemployment come down before a rate increase, it will be too late and the specter of inflation will be on your door. I am hoping that he is part of the Fed's effort to calm inflation "expectations." The steepness of the yield curve is great for bank profitability, but it does raise the idea that a lot of people are expecting a rising rate of inflation. With capacity utilization still around 70% and wage gains anemic, though, I don't see a near term threat of inflation. But it's the expectation of inflation that sometimes rules the interest rate world, and the Fed has said they are very aware of that.

The Beige Book never gets the attention I think it deserves. It was barely mentioned in the paper on Thursday. The headline on the report was "While economic activity remains at a low level, conditions have improved modestly and those improvements are broader geographically than in the last report." Ten of the twelve Federal Reserve districts reported some improvement compared to eight last month. I am glad for the headline since I skimmed the 60 page report and the headline read a lot better than the details. So I'll stay with the headline summary.

One stock I want to mention comes from our retail analyst, Jeff Stein. He has a buy recommendation on Brown Shoe (BWS; buy rated; recent price $11.) He sees the company as a beneficiary of improved demand for footwear as budget conscious customers look to accessorize their existing wardrobe. Management recently announced that comp store sales at its Famous Footwear division rose 7% the first nine weeks of Q4, which includes the holiday selling season. The Specialty Retail division (primarily Naturalizer) saw a 4.9% comp increase. These divisions account for more than half of revenues.

The company has also undergone several years of cost cutting that has reduced overhead by $40 million and they should benefit another $12-$18 million from new IT initiatives in FY 2011. Jeff has raised his estimates including the Fiscal Year 2011 number by $.20 to $.90 total. The company has a sound balance sheet with an expected $109 million in cash at the end of the fiscal year, $150 million in debt and about $400 million in shareholders' equity. He thinks the stock is worth $16 a share which would be a P/E of 17.8 times fiscal 2011E (versus the historic 18.5 times), or 6 times EV/EBITDA (versus the historic 6.2 times.) The yield is 2.4% and the market cap is a bit under $500 million.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC. 

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