matisse capital management

The State of the Recession

The Commerce Department revised its fourth quarter 2007 numbers and it found that the gross domestic product shrank 0.2%.  This was the first decline since 2001.  The Financial Times has the full story.  And, apparently in 2008, stimulus checks did not have the impact expected.

Tomorrow will be the release of non-farm payrolls, the unemployment rate, and the ISM Manufacturing Index.  The latter is an indicator, and although the index is forecast to be at 49, any number below 43 indicates a recession.  Below, left, is the index to date from Barron's.

In my opinion, this recession is part 1989-92 real estate recession and part 1973-1975 oil price recession.  There have been two shocks to the economy.  And we have a ways to go.  In other economic news, travel and hotel occupancy has "fallen of a cliff;" story New York Times.  From Chicago to Philadelphia, Los Angeles and Boston, hotel occupancy rates are down this year, in a pattern that is starting to resemble that of the 2001 recession.  See the interesting NYT graphic here.

3 Dividend Plays From the S&P Global Challengers

In mid-July, Standard & Poor's published its Global Challengers List for 2008.  According to the company, this list identifies "300 mid-size companies that show the highest growth characteristics along dimensions encompassing intrinsic and extrinsic growth.  These companies are expected to emerge as challengers to the world's leading companies."  This is a good place point to look for companies you may want to add to your watchlist.  To compile the list, S&P considered listed companies from every corner of the world.  More than 25% of the firms are in China, but there are also 73 domestic stocks on the list, which I have culled through to find companies paying a 'reasonable' dividend.   Below are three of the best. Each company is trading well below its 52 week high:

Around the World - Economic News You Need to Know

RealtyTrac reports that US home foreclosures have doubled since last year: BBC   And the market has decided that steel stocks are not the place to be.  ArcelorMittal (MT) is down 12%, Gerdau SA (GGB) is down 13%, and US Steel (X) is down 13%, all over the last 10 days.  More news follows - it has been a litigious week:

Russsia sues Bank of New York Mellon (BK) for RICO. Intl. Herald Tribune

Opinion: Russia for speculators not investors.  Telegraph

Regulators seize banks in California and Nevada. Financial Times

Bank of America (BAC) announces regular dividend and buyback.  CNN Money

Brazil's central bank raises rate to 13%.  Reuters

Mechel (MTL) shares drop 30% on Putin comments.  Reuters

New York sues UBS for fraud. Wall Street Journal

City of Los Angeles sues bond insurers alleging fraud. Forbes

San Diego sues BAC to stop foreclosures. CNBC

 

Banks Have Bottomed Out? Don't Bet On It

On Monday the 21st, Barron's had a cover story entitled "Buy Banks/What to Bank On."  The article cited better earnings from Wells Fargo (WFC) and JP Morgan (JPM); perhaps this was the turning point it pondered.  Unfortunately, the next day Wachovia (WB) posted a second quarter loss of $8.9 billion, and slashed its dividend.

The first shoe has dropped - the housing market.  The second shoe is a bit down the road, but I think it's becoming apparent.  Commercial real estate is likely to be the next problem for banks.  Vacancies are rising; see this article in the Wall Street Journal about Phoenix.  And the problem is similar in many parts of the country.  The recession is taking some businesses under and forcing other to cut back on space.  Some reports estimate that office vacancies could average around 17% nationwide in 2009 (see Financial Week).  The same factors that inflated values in residential property have impacted commercial property, where I believe prices were inflated as well.  I think more write-downs are around the corner, but from a different source.

Canadian National (CNI) - Best Railroad for This Recession

Canadian National Railway (CNI) reported its second quarter results on July 21; earnings per share declined 6% from last year to $0.94 (US) and net income was down 11%.  Even so, CNI shares are up 4% since last week and up 12% since the beginning of the year, while the Dow is down about 12%.  Why is CNI so steadfast in this recession; aren't railroads sensitive to the economy?  One reason could be the just-announced buyback of 25 million shares.  But I believe there are many other important factors that make this stock a compelling long-term value play.

Around the World - Economic News You Need to Know

US Mortgage Debt Exported Globally

The Economist and the New York Times have excellent articles this week about Fannie Mae (FNM) and Freddie Mac (FRE).  According to the New York Times, $1.5 trillion worth of securities issued by FNM and FRE are held around the world.  The largest investor by far is China, with $376 billion.  Japan Russia, Luxembourg, Belgium and Britain also hold large amounts.  "No less than the international perception of the credit quality of the U.S. government is at stake," was the comment of Richard Hofmann, an analyst at CreditSights.  And the Economist writes that: "Their importance (FNM and FRE) lies in what their rescue says about the financial system... At Fannie and Freddie and, shockingly, at the investment banks, the profits were privatized, but the risks were socialized."  Other news from around the world follows: 

FDIC was one of the lenders giving out high interest rate subprime loans.  Beal Bank is suing in US Court. Wall Street Journal

Despite recession, Boeing (BA) and Airbus have a backlog of orders.  Only 10% of orders from US.  Economist

£3.5 billion HBOS fundraising: investors only take up 8% of the offering - a clear message about bank stocks and their desirability.  Telegraph

"The global economy is at the point of maximum danger." Telgraph opinion piece: How will regulators handle it?

EU plans to cut farm tariffs by 60%.  This may help agricultural exporters like US, Brazil. Globe and Mail

Intel (INTC) accused of "bribery and corruption" by EU; may levy fines.  Intel controls 80% of global CPU market .  Deutsche Welle

Still More Dividend Slashers

Per the Sydney Morning Herald: "17 out of 20 financial stocks in the S&P 500 index have cut dividends this year."  Here are some more dividend slashers to add to the list:

FSP, Franklin Street Properties - from $0.31 to $0.19 per share

FPFC, First Place Financial - from $0.17 to $0.085 per share

GM, General Motors - from $0.25 per share to suspended (a first since 1922).

MBWM, Mercantile Bank Corp. - from $0.08 to $0.04 per share

RF, Regions Financial - from $0.38 to $0.10 per share

WB, Wachovia Corp. - from $0.375 to $0.05 per share

In addition, Wachovia analysts are warning of hotel industry dividend cuts: "Strategic Hotels & Resorts Inc. (BEE), Ashford Hospitality Trust (AHT), DiamondRock Hospitality Co. (DRH) and FelCor Lodging Trust Inc. (FCH) may not be able to cover their current dividends from operating cash flow next year.  Strategic Hotels and Ashford Hospitality would likely have to cut their dividends between 40% and 60% to make up the cashflow shortfall, while DiamondRock and FelCor could borrow from their existing credit lines to keep their dividends intact."

Dividend Growers: The Insurance Sector

If you are an income investor, you want to buy companies that are increasing their dividends.  Why?  If inflation averages 3.0% annually over a 10 year period, your dividends will have to grow by more than 34% or you are losing ground to inflation.  Most insurers have exceeded this rate, but some have not.  Travelers (TRV), for example, has increased its dividend only 20% in 10 years, while Cigna has cut its dividend over this time frame.  And, importantly, dividend growth is evidence of business growth; a company will not aggressively raise its dividend unless it has the economic growth to support this policy.  Below is a list of the 10 insurance companies with the highest rate of dividend growth over the last 10 years, adjusted for splits.  They are domestic and foreign firms listed on the NYSE.  A few have not been demutualized for the full 10 year period of study, and this has been noted.  And, while LFC, China Life Insurance, has grown its dividend faster than any of the companies below (+911% since 2006) it has only paid a dividend for three years, and is therefore not included on the list.

AZ, Allianz SE, +514%, current yield = 4.9% (analysis since 2001)

AIG, American International Group, +566%, current yield = 3.5%

MFC, Manulife Financial, +380% (since  2000), current yield = 2.7%

Money Quotes of The Week

"Dividends are usually the last thing to go.  You might as well put a big sign on your lawn saying you have liquidity problems."

    -Howard Silverblatt, analyst at Standard & Poor's

"Millions of decent taxpayers will foot the bill for institutional idiocy."

     -Jeff Randall, in the Telegraph UK, on the collapse of Equitable Life

"...from what we see and what we project, we see no reason to cut the dividend,"

     -Ken Lewis, Bank of America CEO

"In 1995 Malaysia's finance ministry reportedly proposed caning as a punishment for abusive shorting."

     -Economist, article on short selling

Dollar Cost Averaging This Recession

Can you call the bottom to the Dow or S&P?  I know I can't.  Of course the bottom is the best place to buy, but if you're not sure about exactly when it will occur, dollar cost averaging can be your ally.  I believe this might be a good time to start accumulating shares of industrials, and other companies that have been beaten down, and if you think stocks will go down over the near term, i.e. the next one to two years, or that they will be range bound, this can be a good way to buy.