All Things in Moderation

Vital Statistics:

Markets are rallying on the new Italian austerity plan proposed by Mario Monti. Hit proposal includes 30 billion euros of emergency economic measures funded by property taxes, a tax on luxury goods, and a plan to tie pensions to worker contributions. Italian markets are reacting favorably, with the Mibtel up 3% and Italian government bond yields down 59 basis points to 6.09%. The S&P futures are up 18 points pre-market.

Merger Monday is back with a big deal in the cloud computing space: SAP AG is buying SuccessFactors (SFSF) in a $3.3 billion deal. They paid a handsome premium – 52% over Friday’s close. Whenever someone like SAP buys someone, the follow on question is “What will Larry do?” – meaning Larry Ellison of Oracle. The early betting seems to be Taleo (TLEO) which is up 16% pre-market.

As predicted Herman Cain threw in the towel over the weekend and endorsed Newt Gingrich. From what I hear on the Wall Street money raising front, Newt doesn’t even register. It is all going to go to Romney. That money sat on the sidelines hoping that Chris Christie would run, but has now coalesced around Romney. Lots of big fund raisers coming up for Romney. Given the implosion of all of his rivals, he has managed to stay pretty clean and hasn’t had to spend money yet.

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Saying what a lot of people have been thinking….

OPEN LETTER TO THE PRESIDENT OF THE UNITED STATES OF AMERICA from Leon Cooperman.

November 28, 2011

President Barack Obama
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500

Dear Mr. President,

It is with a great sense of disappointment that I write this. Like many others, I hoped that your election would bring a salutary change of direction to the country, despite what more than a few feared was an overly aggressive social agenda. And I cannot credibly blame you for the economic mess that you inherited, even if the policy response on your watch has been profligate and largely ineffectual. (You did not, after all, invent TARP.) I understand that when surrounded by cries of “the end of the world as we know it is nigh”, even the strongest of minds may have a tendency to shoot first and aim later in a well-intended effort to stave off the predicted apocalypse.

But what I can justifiably hold you accountable for is your and your minions’ role in setting the tenor of the rancorous debate now roiling us that smacks of what so many have characterized as “class warfare”. Whether this reflects your principled belief that the eternal divide between the haves and have-nots is at the root of all the evils that afflict our society or just a cynical, populist appeal to his base by a president struggling in the polls is of little importance. What does matter is that the divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them. It is a gulf that is at once counterproductive and freighted with dangerous historical precedents. And it is an approach to governing that owes more to desperate demagoguery than your Administration should feel comfortable with.

Just to be clear, while I have been richly rewarded by a life of hard work (and a great deal of luck), I was not to-the-manor-born. My father was a plumber who practiced his trade in the South Bronx after he and my mother emigrated from Poland. I was the first member of my family to earn a college degree. I benefited from both a good public education system (P.S. 75, Morris High School and Hunter College, all in the Bronx) and my parents’ constant prodding. When I joined Goldman Sachs following graduation from Columbia University’s business school, I had no money in the bank, a negative net worth, a National Defense Education Act student loan to repay, and a six-month-old child (not to mention his mother, my wife of now 47 years) to support. I had a successful, near-25-year run at Goldman, which I left 20 years ago to start a private investment firm. As a result of my good fortune, I have been able to give away to those less blessed far more than I have spent on myself and my family over a lifetime, and last year I subscribed to Warren Buffett’s Giving Pledge to ensure that my money, properly stewarded, continues to do some good after I’m gone.

My story is anything but unique. I know many people who are similarly situated, by both humble family history and hard-won accomplishment, whose greatest joy in life is to use their resources to sustain their communities. Some have achieved a level of wealth where philanthropy is no longer a by-product of their work but its primary impetus. This is as it should be. We feel privileged to be in a position to give back, and we do. My parents would have expected nothing less of me.

I am not, by training or disposition, a policy wonk, polemicist or pamphleteer. I confess admiration for those who, with greater clarity of expression and command of the relevant statistical details, make these same points with more eloquence and authoritativeness than I can hope to muster. For recent examples, I would point you to “Hunting the Rich” (Leaders, The Economist, September 24, 2011), “The Divider vs. the Thinker” (Peggy Noonan, The Wall Street Journal, October 29, 2011), “Wall Street Occupiers Misdirect Anger” (Christine Todd Whitman, Bloomberg, October 31, 2011), and “Beyond Occupy” (Bill Keller, The New York Times, October 31, 2011) – all, if you haven’t read them, making estimable work of the subject.

But as a taxpaying businessman with a weekly payroll to meet and more than a passing familiarity with the ways of both Wall Street and Washington, I do feel justified in asking you: is the tone of the current debate really constructive?

People of differing political persuasions can (and do) reasonably argue about whether, and how high, tax rates should be hiked for upper-income earners; whether the Bush-era tax cuts should be extended or permitted to expire, and for whom; whether various deductions and exclusions under the federal tax code that benefit principally the wealthy and multinational corporations should be curtailed or eliminated; whether unemployment benefits and the payroll tax cut should be extended; whether the burdens of paying for the nation’s bloated entitlement programs are being fairly spread around, and whether those programs themselves should be reconfigured in light of current and projected budgetary constraints; whether financial institutions deemed “too big to fail” should be serially bailed out or broken up first, like an earlier era’s trusts, because they pose a systemic risk and their size benefits no one but their owners; whether the solution to what ails us as a nation is an amalgam of more regulation, wealth redistribution, and a greater concentration of power in a central government that has proven no more (I’m being charitable here) adept than the private sector in reining in the excesses that brought us to this pass – the list goes on and on, and the dialectic is admirably American. Even though, as a high-income taxpayer, I might be considered one of its targets, I find this reassessment of so many entrenched economic premises healthy and long overdue. Anyone who could survey today’s challenging fiscal landscape, with an un- and underemployment rate of nearly 20 percent and roughly 40 percent of the country on public assistance, and not acknowledge an imperative for change is either heartless, brainless, or running for office on a very parochial agenda. And if I end up paying more taxes as a result, so be it. The alternatives are all worse.

But what I do find objectionable is the highly politicized idiom in which this debate is being conducted. Now, I am not naive. I understand that in today’s America, this is how the business of governing typically gets done – a situation that, given the gravity of our problems, is as deplorable as it is seemingly ineluctable. But as President first and foremost and leader of your party second, you should endeavor to rise above the partisan fray and raise the level of discourse to one that is both more civil and more conciliatory, that seeks collaboration over confrontation. That is what “leading by example” means to most people.

Capitalism is not the source of our problems, as an economy or as a society, and capitalists are not the scourge that they are too often made out to be. As a group, we employ many millions of taxpaying people, pay their salaries, provide them with healthcare coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving. To frame the debate as one of rich-and-entitled versus poor-and-dispossessed is to both miss the point and further inflame an already incendiary environment. It is also a naked, political pander to some of the basest human emotions – a strategy, as history teaches, that never ends well for anyone but totalitarians and anarchists.

With due respect, Mr. President, it’s time for you to throttle-down the partisan rhetoric and appeal to people’s better instincts, not their worst. Rather than assume that the wealthy are a monolithic, selfish and unfeeling lot who must be subjugated by the force of the state, set a tone that encourages people of good will to meet in the middle. When you were a community organizer in Chicago, you learned the art of waging a guerilla campaign against a far superior force. But you’ve graduated from that milieu and now help to set the agenda for that superior force. You might do well at this point to eschew the polarizing vernacular of political militancy and become the transcendent leader you were elected to be. You are likely to be far more effective, and history is likely to treat you far more kindly for it.

Sincerely,

Leon G. Cooperman
Chairman and Chief Executive Officer

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Vital Statistics:

Jobs Friday. Payroll data came in at 120k, but the big surprise was a 4 tenths of a percent drop in the unemployment rate, from 9.0% in October to 8.6% in November. Average Hourly Earnings were down 10 basis points MOM and up 1.8% YOY. Average weekly hours were 34.3. All of the revisions were to the upside as well.

While the 8.6% number is certainly encouraging, it was driven by 315k Americans leaving the workforce as much as job gains (278k). In fact, the labor participation rate declined to 64% from 64.2%. This is probably why the futures yawned at the number. The job gains were mainly in retail and the losses were in construction and government. The overall picture is of an improving labor market, which is slowly on the mend. Unfortunately, I don’t really think a lot of momentum can be picked up simply because housing construction is MIA, and it is typically housing construction which leads us out of recessions.

Chart: Unemployment Rate

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Vital Statistics:

Markets are pausing after yesterday’s furious rally. There was a sense of unreality to melt-up, and perhaps it wasn’t a coincidence that yesterday happened to be 11/30, the end of the month. Fund managers don’t do window-dressing at the end of the month, do they? Especially at the end of a month as lousy as November 2011. Yesterday’s coordinated action by the central banks provided the perfect cover to play some mark-up games – the S&P 500 rallied 12 handles (1%) in the last hour of trading yesterday.

Euro sovereign debt continues to rally, and both Spain and France sold 8 billion euros worth of bonds today. Initial Jobless Claims came in at 400k, vs. expectations of 390k for the holiday shortened Thanksgiving Day week. While we are seeing signs of life in some of the economic indicators, employment continues to be a drag. Wall Street has had a lousy year, and the big banks continue to let people go. Construction spending increased .8% month on month for October, and Napalm (the National Association of Purchasing Managers) Purchasing Managers Index came in at 52.7 – better than expectations but still lower than earlier this year.

This is the first Thursday of the month, and that means retailers are releasing same-store sales for March. Overall, same store sales look solid, but the Street may have bumped up expectations a little too much. Costco, Limited Brands, Macy’s, Nordstrom reported better than expected SSS. Kohls, Target, JC Penney, The Gap missed. Promotional activity appears to have driven the divergences.

S&P Case-Schiller was released on Tuesday, with the index coming in at 142, a 57bp drop month on month, and a 3.6% drop year on year. The chart of the index is not a picture of strength, to say the least:

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Vital Statistics:

Markets are gapping higher on coordinated Central Bank intervention in the money markets. The Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, and the ECB have lowered US dollar swap rates by 50 basis points. “The purpose of these actions is to ease strains in the financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.” the statement said. Separately, the Bank of China lowered reserve requirements for its banks. In some ways, this reminds me of 2008, where the Fed of the government would step in to help ease conditions in the financial markets, short covering would cause the futures to gap up, and then futures would sell off as people contemplate how bad things must be to warrant the action in the first place.

In economic data, ADP Employment came in at 206k for November, well higher than estimates. Productivity was light, and unit labor costs fell more than expected. Yesterday, consumer confidence came in much higher than estimates, which shouldn’t have been a surprise if you have been watching the actual spending data. S&P / Case-Schiller came in -3.6% for September. Overall, the data indicate things are on the mend, albeit slowly.

In keeping with the energy story I have been flogging, the WSJ has an article this morning discussing how the US is about to become a net exporter of refined product. This doesn’t mean we are energy independent – we still import more oil than we export – but we are closer and closer to becoming a net energy exporter. And that will have enormous implications for the US, from our trade deficit to our Middle East policy. Perhaps the peace dividend we have been waiting for since the end of the cold war will finally materialize.

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Vital Statistics:

Markets are rallying this morning without any major catalyst. Reporters are searching for reasons for the rally, and have offered a rumor of an 800 billion euro rescue package by the IMF (subsequently denied) and a better than expected Black Friday. If you got in your car this morning and wondered why the S&Ps are up 32 handles, well, there isn’t an earth shattering reason. Sometimes there just isn’t an obvious catalyst. Volatility begets volatility.

The National Retail Federation put out its report on Black Friday Weekend sales last night. The average consumer spent $398.62 over the weekend vs $365.34 last year, a 9.1% increase. Total spending was over $54 billion. Strong promotional activity brought out shoppers, so some caution is in order – we may have only been pulling December sales forward. That said, it is more evidence that consumers are spending, even if the sentiment indicators suggest they are not.

The WSJ has a piece on unemployment this morning that discusses how the US employment market is beginning to resemble Europe’s. While the US labor market doesn’t have nearly the amount of rigidity that characterizes Europe’s labor market, one of the big symptoms of sclerosis – a lack of mobility – has begun to flash warning signs here in the US. The US has always had a very flexible labor force, where the unemployed could easily move to areas of the country where employment was rising. We have seen the Rust Belt lose population to the Sun Belt for decades. However, Americans have been changing jobs and moving locations less frequently than in prior decades. The housing bust of the last 5 years explains some of this, but not all. Demographics and health care may explain some of it. But it doesn’t bode well for a rapid decrease in unemployment.

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Vital Statistics:

US and Euro stock indices are lower on widening Euro sovereign yields and a disappointing GDP report. EUROBOR / OIS is out at 94 basis points, close to a post-crisis high. US 3Q GDP (QOQ) came in at 2.0% vs 2.5% expected. This is the first pass at 3Q GDP and it will probably be revised higher if past experience is any guide. 3Q Consumption came in at 2.3% vs 2.4% expected.

The European banking crisis is causing a credit crunch in emerging economies, the WSJ reports. Latin America is particularly affected by Spanish banking activity, and it appears the French banks have pulled out completely. The most exposed are the Eastern European economies.

So now that the Super-committee failed to reach an agreement, should you be shorting defense stocks? Not so fast, according to the WSJ. There is a loophole (go figure) – wartime costs are exempt from the automatic defense spending cuts. So expect a little budgetary jiggery-pokery as non-wartime costs are shoved into the wartime cost category. The Joint Strike Fighter will probably take a hit, though cutting on weapons procurement rarely produces the anticipated savings, largely due to increased average costs for the remaining items purchased and termination penalties.

There is a slew of economic data tomorrow, but volumes should be light ahead of the Thanksgiving holiday.

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Vital Statistics:

US futures are down on the failure of the super committee to reach a deal. FWIW, I am surprised at the reaction – I don’t think anyone expected much anyway. Euro sovereigns are relatively stable this morning. Merger Monday is back, with a $10 billion deal in the pharma space and a deal in the insurance space. Corporations are sitting on a mountain of cash and valuations are low. We should be seeing a lot more of this.

So was Jon Corzine a crook, or just someone who made a bad trade? It seems some of the biggest distressed investors are betting the latter. Of course all assets are good investments at a price, and MF Global bonds are trading at 36 cents on the the dollar, and the bank debt is around 50 cents. These investors are betting that the missing 600 million of customer funds is out there, and will be found. If that is the case, you can make a case that the equity is actually worth something. Which means a full recovery on the bonds and a double or triple as the case may be.

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Vital Statistics:

Markets are rebounding after the pummeling of the last two days. Italian and Spanish sovereign yields are slightly tighter this morning, and a number of banks are raising their 4Q GDP estimates. This has been the underlying story – the US economy is on the mend, but European headlines dominate the markets. If the US banks are taking up their GDP estimates, then analysts will be taking up their earnings estimates. The S&P 500 is trading at 11.8x forward earnings, which is a multiple last seen in the early 80s. Right before the bull market of a generation. I am not saying the secular bear market which began in 2000 is over, but it is getting long in the tooth, and the pieces are setting up for a new secular bull market, probably in the next few years.

Apologies for no report yesterday – was in the city all day yesterday.

Edit: Update 10:00 am – Leading Economic Indicators came in at .9%, higher than the .6% expected and close to the 2011 highs in March.

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Vital Statistics:

Euro sovereign yields are stable this morning, with Italy a little tighter and Spain a little wider. Oil is rallying on news that ConocoPhillips will reverse a pipeline which will move oil from the Central US to the Gulf Coast. There has been a glut of West Texas Intermediate in the central US, which has caused US oil (West Texas Intermediate) to trade at a substantial discount to International oil (North Sea Brent). At the moment, WTI is trading at 101.90 a barrel, up 2.50 vs Brent at 112.36 up 20 cents. Libya has also accounted for some of the premium as well, but the biggest driver is the absolute glut of oil in the central US.

In economic data we had the Consumer Price Index, Industrial Production, Capacity Utilization, and the NAHB Housing Market Index. All of these indices were net positives for the market, with the CPI indicating inflation remains under control, and industrial production, capacity utilization, and the NAHB index higher than expected. While these indices are still at soft levels, there is improvement, and the show that a double dip is not in the cards. While Europe is still the wild card, people are so pessimistic that the “black swan” may in fact be a garden-variety recession and not a financial catastrophe. Food for thought.

Bloomberg has a story about how there may end up being 200,000 job losses in the financial industry this year. It shows how utterly clueless the Occupy Wall Street people are. They imagine everybody is getting six and seven figure bonuses. Instead they are getting pink slips.
Business is terrible and people aren’t getting paid. The one thing OWS does not understand about the Street is that you eat what you kill. If you don’t generate revenue, you aren’t getting paid, no matter what fraternity you went to, who your parents are, etc. The fantasy that connected people are sitting on their duffs and making multimillion dollar bonuses is just that – a fantasy. Most senior people I know who lost jobs in 07-08 are still unemployed, even if they had nothing to do with subprime loans.

Chart: Capacity Utilization.

This chart gives a picture of how much slack there is in the manufacturing economy. Levels are back to the mid level of the 02-08 expansion, though less than the 90s. It certainly indicates that inflation will not be a problem, and that capital expenditures will be on hold for a while. Still, the trend is positive.

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