Farrell: Slew of Okay Data Not Good Enough

A lot of economic news came out of Tuesday, and the score was two to one on the okay side. But the bad one was enough to hit the market hard. The Chicago Purchasing Managers Index (PMI) was 39.9, up from the six-month average of 36.6. This index uses 50 as the dividing line between expansion and contraction, so a 39 doesn't brighten the skies. But when you figure where it was coming from and that Chicago would be impacted by the auto industry, the number washes well enough.


The Case Shiller housing index, at -18.1, was in line with expectations and was a very slight improvement over the prior month. Certainly not a good number, but not worse than expected and indicates the rate at which house prices are falling has slowed. As I said yesterday, though, being less bad is no longer good enough. Improvement in the "second derivative" is no longer acceptable. We will soon have to have outright good news, in my opinion, to move the markets. Our housing analyst, Anna Torma, feels that, with high unemployment, continued foreclosures, and tight lending standards, we are not likely to be led to the Promised Land by the housing sector.

The number that deflated the markets was the consumer confidence survey. Hopes had been high that the number would be in line with last month's reading of 54.8. The Conference Board reported a dismal 49.3, and that took the wind out of the market. The consumer is still more than 70% of all economic activity. I would guess the recent 15% or so rise in gasoline prices and an uptick in mortgage rates fed through very directly to the consumer psyche. While still well above the depression-like low of 25.3 in February, it is still below the 61.4 that was current when Lehman collapsed.

I think we should soon enough get some relief on the gas side of the equation. Worldwide inventories of crude oil are at 62.5 days of usage. My experience has been that over 55 days was enough to put downward pressure on prices. The recent volatility of the dollar, the thought that economic recovery would bring renewed demand for energy, and production cutbacks by OPEC have, I believe, pushed the price of crude to unsustainable levels. The marginal cost of production is around $60, and I think that is what we will trend towards.

Mike Ward is our ace automotive analyst, and he thinks that Ford is doing the right things to see a rise in the stock price over the next few years. Cash flow is a critical metric in valuing auto companies. While Ford burned through $19 billion in cash in 2008 and $3.7 billion in the first quarter of this year, Mike thinks that the total cash burn for 2009 will be $7 billion. That would come as a surprise to many, as some estimates are for a burn of $12 billion. Mike figures Ford would break even at an annual production of 500,000 vehicles. The company just raised its Q3 production level to 485,000 units, so with some modest improvement in the economy such as Lyle Gramley thinks is likely, Ford could break even in the first half of 2010. Mike thinks a 12-month target of $12-15 is reasonable if the pieces fall into place.