NEW$ TO U(SE)

We do not have any evidence to suggest that we should move to Phase 6 today, or that any such move is imminent. The situation continues to evolve.

Phase 5 represents a spreading out of the virus where we see sustained transmission going on in countries. This virus is beginning to act like a human influenza virus, establishing itself in areas in ways that suggest it’s becoming part of the community, not just travel-related cases.

WSJ blogs

More evidence that inventories reached an unsustainable low level and that production needs to be restarted to replenish inventories. We will need to watch final sales carefully, particularly consumer spending, to assess whether this is only an inventory bounce.

The April Chicago Business Barometer™ recovered dramatically after the third test of the 20 year low value. If this were an average recession, it would end four months after the low point in the Barometer, suggesting an end of the recession in August 2009. A more conservative rule would draw an analogy to the 1981-82 recession, since this is not working out to be an average recession. Using that rule, the end of this re-cession would be projected to be 9 months after the lowest value of the Chicago Busi-ness Barometer. With March as our best current estimate of that minimum, the recession is projected to end in December 2009.

The April Chicago Business Barometer continued to reinforce the observation that this recession is not only deep, but also is broadly based. This month’s issue of the CHICAGO Report is marked by the continued accelerated rate of decline in the Prices Paid index… to the lowest rate in 60 years!. On the other hand, the economy was looking up as PRODUCTION, NEW ORDERS, and ORDER BACKLOGS each continue to fall, but at a slower rate than in March. The EMPLOYMENT situation continues grim, but even there, the rate of decline moderated, reaching the highest index value in 2009.

The U.S. economy posted a worst-than-expected contraction of 6.1% in Q1. Much of the weakness was concentrated in business investment as firms tried to protect their bottom-line through aggressive cost cutting measures – a move that was most certainly exacerbated by dysfunctional credit markets. As today’s Hot Chart shows, non-residential investment shrank by a record 38% during the quarter. Fortunately, the most recent reports on new orders for
durable goods suggest that the worst of the contraction may already be behind us. If there was a silver lining of the GDP report, it came from the surprisingly strong increase in consumer spending which rebounded 2.2%, the best showing since the start of the recession. This is good news as it shows that consumers took advantage from the combination of tax relief, the recent drop in import prices, and falling interest rates. At this juncture, however, it is premature to call for a repeat performance from consumers as soon as Q2. As shown, had it not been for lower taxes, disposable income would have been negative this quarter. A sustainable increase in consumer spending will need to be accompanied by a tangible improvement in labour markets. This is a scenario for H2 2009.

I would add lower gasoline and foodstuffs prices as positive factors in Q1. See my post THE COMMODITY REBATE: Better Than any Tax Rebate. These will fade away during the next 6 months. The Obama tax cut is not large enough to offset. I have doubts that labor markets will improve soon enough to counterbalance these negatives. The risk of a “double dip” remains.

The abolition of the “mark-to-market” rule took effect right after adoption and was conveniently applied retroactively to Q109. This change will, conveniently, have to wait until next year?

(Bloomberg) — The Financial Accounting Standards Board is “pretty close” to approving rules on off-balance- sheet accounting that will force banks to add billions of dollars of assets to their books, Chairman Robert Herz said.

Rules letting companies keep assets including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.

U.S. bank regulators conducting stress tests on 19 banks calculated that the financial institutions would record $900 billion in off-balance-sheet assets in 2010, according to an April 24 Federal Reserve report.

In July, FASB postponed by at least a year the effective date of the changes after banks including Citigroup Inc. and trade groups complained. The Securities Industry and Financial Markets Association and the American Securitization Forum said the measure may make companies appear to be short of capital during regulatory reviews.

Unfair comment that takes absolutely no account of the fact that someone in government had to actually think about another, less costly,  option. That is not in the ways and means book.

Well, it’s not with free Microsoft Paint but it is with a $99 subscription to Adobe PhotoShop:

From Congressman Darrell Issa’s Twitter. Monday’s plane ‘photo-op‘ over New York cost the taxpayer an estimated $328,835.

This entry was posted by Tracy Alloway (From FT)

For a while now, US economic policymakers have been dealing with the challenge of driving a car with a sputtering engine up a hill, says El-Erian, chief executive of Pimco and author of ‘When Markets Collide: Investment Strategies for the Age of Global Economic Change‘.

They needed to do a lot to keep the car moving forward; or at least stop it from rolling back too quickly.

Wednesday’s announcement from the FOMC suggests a possible change in mindset at the US Federal Reserve. Specifically, the language is consistent with the view that the road is now flatter, if not flat. Accordingly, the Fed is taking some pressure off the liquidity accelerator.

The change is consistent with the notion in Washington DC of growing confidence in the “green shoots” of growth developing into a more endogenous and sustainable economy-wide growth process.

This change is not without risk. After all, policymakers are trying to strike a very delicate balance between doing too little and doing too much in stimulating the economy.  In doing so, they inevitably end up targeting a first-best policy outcome, yet are likely to end up with a second, third or fourth-best.

The risk is that this change turns out to be a premature relaxation of a critical policy effort, thereby increasing the possibility of a prolonged period of anaemic growth, employment losses, and deflation. After all, history suggests not only that the right balance is very difficult to strike; it also suggests that it is easier to correct later on for doing too much as opposed to doing too little.

How about the markets’ reactions to the Fed’s policy announcement? Well, it was somewhat confused – and understandably so.

The surge in the US stock market suggests that equity markets are taking comfort in the signal from Washington DC that things are indeed getting better. In contrast, the backup in rates in the bond market points to concern that policymakers may not be doing enough to contain borrowing rates in the economy, including the mortgage rates so critical to stabilising the housing market.

Overall, all this speaks to the reality that we are on a bumpy journey to a “new normal.” Don’t unfasten your seat belt -  just yet.

Posted by FT Alphaville on Apr 30 10:00.

We knew that spending would decline in March as per weekly chain store sales that we monitor. We also know that spending has been better in April. So far the consumer has been pretty resilient, meaningfully contributing to the green shooting observed in recent months. The problem is that consumer income is not rising and Americans need to deleverage. So far American consumers have struck a good balance between spending and saving but as income stall or even decline in coming quarters, they will be faced with a choice between keeping their standard of living or deleveraging. I suspect that they will be deleveraging.

U.S. consumer spending fell for the first time in three months while income growth slipped for a second straight month, indicating that the economy is still struggling to emerge from the recession.

The Commerce Department reported Thursday that consumer spending dropped by 0.2 per cent in March, worse than the 0.1 per cent decline that economists had expected.

Incomes, reflecting the continued massive way of layoffs, dropped by 0.3 per cent, worse than the 0.2 per cent dip that had been expected.

After-tax incomes were flat in March, leaving the personal savings rate at 4.2 per cent, an improvement from a year ago when the rate was near zero. Households have been cutting back on spending and boosting savings during the current hard times, worried that they need to replenish depleted nest eggs in the face of massive job layoffs.

The 0.2 per cent drop in spending was the first decline after two consecutive increases. Spending shot up by 1.1 per cent in January, the largest monthly jump in nearly five years, but that increase followed six straight monthly declines as consumers slashed outlays in the face of a deepening recession.

The fact that spending turned negative again in March was a worrisome sign about future economic prospects. Consumer spending in the first quarter of the year grew at a 2.2 per cent annual rate after two consecutive quarters of declines.

However, many economists believe that spending will dip back into negative territory in the current April-June period, further delaying a rebound from the current recession. Economists closely watch consumer spending because it accounts for 70 per cent of total economic activity.

A price gauge tied to consumer spending showed a modest 0.2 per cent increase, excluding food and energy, and a 1.8 per cent increase over the past year. The country’s deep recession, on its way to becoming the longest in the post World War II period, has dampened price pressures.

The Federal Reserve, which last December slashed a key interest rate to near zero in an effort to fight the downturn, announced on Wednesday that it would keep rates low for the foreseeable future and was prepared to keep employing other means in an effort to jump-start the economy.

The overall economy, as measured by the gross domestic product, fell at an annual rate of 6.1 per cent in the first three months of the year after a 6.3 per cent plunge in the fourth quarter. It marked the worst back-to-back declines in GDP in a half century.

Even with the expectation that consumer spending could turn negative again in the second quarter, economists are looking for the GDP decline to slow to perhaps a 3 per cent fall, reflecting the fact that businesses will not be slashing inventories at such a rapid pace as they did in the first three months of the year. Analysts are looking for GDP to be only slightly negative in the third quarter and then turn slightly positive in the fourth quarter of this year as the recession finally comes to an end.

The main reason economists have gloomy expectations about spending are the continuing massive job layoffs, which are continuing.

In recent announcements, Textron Inc. said it will expand its announced layoffs by 2,100, eliminating a total of 8,300 jobs, or 20 per cent, of its global work force as the recession weakens demand for corporate planes. The maker of Cessna planes, Bell helicopters and turf-maintenance equipment earlier this year said it would reduce its work force by 6,200 jobs mostly at Wichita, Kansas-based Cessna.

General Motors Corp. laid out a massive restructuring plan this week that includes cutting 21,000 U.S. factory jobs by next year.

Globe & Mail

Sales growth expectations have been trimmed down somewhat.

Procter & Gamble Co posted a 4 percent drop in quarterly profit on Thursday as consumers traded down to less expensive products in the challenging economy, leading to a decline in sales.

P&G;, known for products such as Gillette razors and Tide laundry detergent, also said it expects earnings to be in line with Wall Street’s expectations this year even though sales growth could be weaker than its previous forecast.

The company earned $2.61 billion, or 84 cents per share, in the fiscal third quarter, compared with a profit of $2.71 billion, or 82 cents per share, a year earlier. P&G; had fewer shares outstanding in the most recent quarter.

Sales fell 8 percent to $18.42 billion.

P&G; said it is comfortable with analysts’ consensus earnings per share estimate of $4.22 for the year, with a range of $4.20 to $4.25.

Earlier this year, P&G; called for organic sales — which exclude the impact of acquisitions, divestitures and foreign exchange — to rise 2 percent to 5 percent in the current fiscal year, which ends in June. It now expects organic sales to grow by 2 to 3 percent.

Reuters

Fact is consumer spending has improved some in recent months. Starbucks seems to be losing share to McDo.

Starbucks was one of the first companies to recognize the United States was in a recession when it halted its expansion plans last July. Still sensitive to the spending habits of consumers, the company has not glimpsed an end to that recession.

Howard D. Schultz, Starbucks’ chief executive, told investors Wednesday after announcing that the company’s second-quarter net income had dropped 77 percent that, “The global economy continues to be weak.”

He also said, “We did not see any improvement in U.S. consumer spending in Q2,” and added that he was not expecting any improvement in 2009.

Customers continued to cut back at Starbucks. The company said revenue from stores open at least a year in the United States declined 8 percent during the first three months of this year. It said 5 percentage points of that decline were due to fewer transactions and the rest was caused by customers spending less.

Starbucks has for the last year tried to reverse declining revenue by closing stores and recasting itself as an affordable brand for value-conscious consumers. The company has long been characterized as appealing to affluent professionals, while abandoning the lower end of the market to competitors like McDonald’s, which has begun selling specialty coffee drinks.

So in March, Starbucks began offering a breakfast value meal. Customers can buy a cup of coffee and an egg sandwich, cup of oatmeal or piece of coffee cake for $3.95.

Mr. Schultz said the company’s new value-oriented strategy is paying off. While same-store sales declined in the most recent quarter, the decline was less than in the last three months of last year.

Jack Russo, an analyst with Edward Jones, said the fact that same-store sales did not show more improvement was a disappointment, and said that January and February were trying months for the company. “This is a turnaround story, and it’s going to take some time,” he said. “It’s too early to tell.”

The company, based in Seattle, reported net income of $25 million, or 3 cents a share, compared with $108.7 million, or 15 cents a share, in the year-ago second quarter. Revenue declined 7.6 percent, to $2.33 billion, in the second quarter ended March 29.

Charges associated with closing stores and other restructuring costs amounted to $152 million in the quarter. Excluding those charges, the company said it earned 16 cents a share.

Despite beating analysts’ estimates of 15 cents a share, Starbucks shares climbed only slightly in after-hours trading to $13.90. The stock had closed at $13.69, up 19 cents, in regular trading before the earnings announcement. Analysts also expected $2.37 billion in revenue, according to Thomson Financial.

In January, Starbucks announced it would close 900 stores. Since then, it has closed 507 stores in the United States and 64 stores in other countries. The company said it planned to close most of the remaining stores by the end of September.

The company plans a multimillion-dollar ad campaign focused on Starbucks’ ability to offer value without compromising quality. Starbucks executives said the company planned to change the pricing of certain drinks in the coming months, raising the price of some drinks while lowering the prices of more basic ones.

“Speculation that Starbucks is losing retail market share to competitors has been grossly exaggerated,” Mr. Schultz said on a conference call with analysts on Wednesday. “Starbucks coffee does not cost $4, as people are charging.” The comment was a reference to a recent ad campaign by McDonald’s that says, “Four bucks is dumb.”

NYT

Traditional telephony is dying slowly but surely as more and more people are going wireless-only and as the internet ( e.g. Skype)eats away at some markets. Data usage is also more economy-sensitive than voice and carries much higher margins. As a result, telecom profitability is more cyclical than before.

The telecom sector is fast losing its attraction as a defensive play. The strong cash flows and steady demand that made it look immune to an economic downturn are not as resilient as once thought.

First Deutsche Telekom AG issued a profit warning, now France Telecom has reported falling profits and admitted the tough economic climate will continue to weigh heavily on margins. Other European operators are expected to follow suit in the coming weeks.

Yet the sector’s shares have held up relatively well so far, falling 20% in the last twelve months, compared to a 38% drop in the Euro Stoxx 50. The sector trades at 9.2 times forward earnings — a 30% premium to the market. That looks steep compared to an average premium of 14% over the last five years.

The impact of the recession is apparent in the slowing growth of premium mobile services — like data — in mature markets like the U.K. and Spain. In emerging markets growth for basic services like voice has slowed in line with GDP. With competition increasing, incumbent operators such as Deutsche Telekom and France Telecom are having to boost marketing spend and cut prices to retain customers.

Those steps took a toll in the first quarter. France Telecom grew its customer base by 6.3% in the first quarter but group revenue rose just 0.4% and Ebitda margin fell 4.7 percentage points. The only country where it achieved quarter on quarter revenue growth was its dominant home market of France.

Increased regulation could also hit the established players hard. Plans for a new pan-European telecom regulatory body were agreed in Europe this week and will shortly go to a parliamentary vote. The new body, if established, would aim to boost competition and would have the power to split up integrated telecoms companies to do so as a last resort.

Cash flow guidance looks safe for the moment, although they will be achieved by cutting costs and reducing capital expenditure. Trimming costs and prioritizing investment is no bad thing in moderation. But the risk for telecom operators is that cutting back too heavily now could mean the quality of their networks suffer and an unforeseen capex hike is round the corner.

WSJ