Wednesday, December 2, 2009

Beige Book Analysis: Conditions Very Weak, Commercial Real Estate Awful

Phil Davis analyzed today's Beige Book report in depth. As usual, a very entertaining read:

"Volume is still very weak and I suspect that's because those who planned to pump up the markets today are now in meetings trying to figure out how to get out of this thing". "

Here is the report, with comments:

"Prepared at the Federal Reserve Bank of New York and based on information
collected on or before November 20, 2009. This document summarizes comments
received from businesses and other contacts outside the Federal Reserve and is
not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed

You have to read into this report as it's anecdotal and the Fed is very free to spin the report to get what they want. The key words are the couching language like SOME pickup in activity OR improvement as well as GENERALLY improved MODESTLY - is some, or, generally, modestly a good reason to pay 20% more for stocks than we did at the last BBook. Markets don't go up 20% in 2 years in the real world so for 20% in 2 months I expect to hear words like TOTALLY, INCREDIBLY IMPROVED IN ALL DISTRICTS...

Consumer spending was reported to have picked up moderately since the last
report, for both general merchandise and vehicles; a number of Districts noted
relatively robust sales of used autos. Most Districts indicated that non-auto
retailers were holding lean inventories going into the holiday season. Tourism
activity varied across Districts. Manufacturing conditions were said to be, on
balance, steady to moderately improving across most of the country, while
conditions in the nonfinancial service sector generally strengthened somewhat,
though with some variation across Districts and across industries. Residential
real estate conditions were somewhat improved from very low levels, on balance,
led by the lower end of the market. Most Districts reported some pickup in home
sales, though prices were generally said to be flat or declining modestly;
residential construction was characterized as weak, but some Districts did note
some pickup in activity. Commercial real estate markets and construction
activity were depicted as very weak and, in many cases, deteriorating.

OK, it's official. Steve Leesman is a moron!

Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality. In the agricultural sector, the fall harvest was delayed in the eastern half of the nation due to excessively wet conditions during October and early November. Most energy-producing Districts noted a slight uptick in activity in the sector since the last report. Labor market conditions remained weak since the last report, though there were signs of stabilization and scattered signs of improvement. While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods.

Rising commodity prices cannot be passed on. That means profits are impacted.

Consumer Spending and Tourism Consumer spending strengthened since the
last report, with sales of both general merchandise and autos improving across
much of the country. Non-auto sales were reported to have picked up in the New
York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco
Districts; sales were described as steady or mixed in the Boston, Chicago,
Minneapolis, and Dallas Districts. St. Louis described retail sales as below
expectations and down from a year earlier. Auto sales generally improved since
the last report, in some cases rebounding from a brief dip after the
"cash-for-clunkers" program ended. Increased vehicle sales were reported from
New York, Philadelphia, Richmond, Chicago, St. Louis, and Dallas, while sales
were described as flat or mixed in the Cleveland, Minneapolis, Kansas City, and
San Francisco Districts. A number of Districts reported that used vehicles have
been selling better than new ones.

See, very sneaky. The statement Leesman latched onto and the one they are jamming around the MSM right now was really the Fed trying to confuse people by lumping Auto Sales with General Consumer Spending. That allows them to write that very quotable first line and it's barely clear when they next say "Non-Auto Sales" that they are already backtracking to cover up that ALL Consumer Spending was saved by Cash for Clunkers and otherwise, didn't improve at all.

Most Districts also noted that retailers were holding leaner inventories this
holiday season, though some indicate that retailers have recently become more
optimistic about the holiday-season outlook. Auto dealers' inventories, largely
depleted during the cash-for-clunkers program, have been or are being rebuilt.

The retailers can become more optimistic but if they don't have stuff on the shelves, they can't sell it and it's a little late to change their minds in late November. Also, they are retailers at Christmas - if they didn't say they were optimistic we all may as well dig fallout shelters....

Tourism was mixed across those Districts reporting. Travel and
tourism--especially leisure travel--was described as robust or improved in
the New York, Dallas, and San Francisco Districts. Atlanta and Kansas City
characterized tourism as sluggish, while Richmond and Minneapolis described
it as mixed; Richmond noted that tourism has been adversely affected by
severe and damaging coastal storms, while Kansas City characterized the
outlook as "grim." New York indicated that business travel remained
sluggish, but Minneapolis and Dallas note a slight pickup.

Nonfinancial Services Activity in the service sector generally picked up since the last report, though results were mixed across Districts and across service industries. New York and Philadelphia reported that service-sector activity overall remained steady to up slightly, while St. Louis noted expanding activity. The information technology industry was reported to be showing improvement in the Boston, Minneapolis, and Kansas City Districts. A pickup in activity at staffing firms was reported by Boston and Dallas, whereas New York noted that activity remained sluggish. Strength in health services was noted in the Boston and Richmond Districts. Shipping activity was characterized as flat in the Cleveland, Atlanta, and Kansas City District, while Dallas reports some gain; however, Dallas and Atlanta both noted particular weakness in rail shipping activity. Professional and business support firms reportedly registered some improvement in the St. Louis and Minneapolis Districts but flat to declining activity in Richmond and San Francisco

Oh quick - let's buy more stocks at their 52-week highs! 8-)

Most Districts reported mixed to moderately improving
manufacturing conditions since the last report. New York, Philadelphia,
Cleveland, Minneapolis, Kansas City, and San Francisco all noted modest
increases in manufacturing activity within their Districts. Manufacturing
conditions in the Boston and Dallas Districts were characterized as mixed, with
some improvement noted for biopharmaceuticals companies in Boston and high-tech manufacturing firms in Dallas. By contrast, Richmond and Chicago both reported that manufacturing activity had leveled off since the last report, while
activity continued to decline in the Atlanta and St. Louis Districts, although
at a somewhat slower pace than the last report. Tighter credit limited the
ability of customers to place new orders in the Richmond District, while in the
Chicago District, contacts noted a slowdown in the restocking of inventories.
Increases in activity related to the transportation industry were cited in the
Chicago, St. Louis, Cleveland, and Kansas City Districts, although such activity
was mixed in the Dallas District and reported as declining in the San Francisco
District. Several Districts noted an uptick in food-related production.

Many Districts reported that their contacts were optimistic about the
near-term outlook. Manufacturers in the Boston, New York, Philadelphia, Atlanta,
Minneapolis, and Kansas City Districts expected business conditions to improve
in the coming months, while producers in the Cleveland District expressed
uncertainty about near-term conditions. The outlook in the Dallas District was
mixed, with most manufacturers expressing cautious optimism about the near term and construction-related manufacturers expressing pessimism about the future
largely due to expectations of prolonged weakness in commercial real estate.

Real Estate and Construction
Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end. Increases in sales activity were reported in the Boston, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, whereas sales were described as steady or mixed in the New York and Philadelphia Districts. Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond. In contrast, prices were said to have firmed somewhat in the Dallas and San Francisco Districts and stabilized in the Chicago and Kansas City Districts. Most reports maintained that the lower end of the market has outperformed the higher end: New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Kansas City all noted relative weakness at the high end of the market, with relative strength at the lower end; in most cases, this strength
was largely attributed to the homebuyer tax credit (which was recently
reinstated and expanded to include existing owners).

Despite the firming in sales, the level of new residential construction activity was generally characterized as weak, though recent trends have been mixed--Atlanta, Kansas City, and Dallas noted some pickup in home construction, whereas the Chicago and St. Louis Districts reported declines. Residential construction was described as flat or stabilizing by Cleveland, Minneapolis, and San Francisco.

Commercial real estate conditions were widely characterized as weak and,
in many cases, deteriorating further. Market conditions were reported to have
weakened in virtually all Districts, with rising vacancy rates, downward
pressure on rents, and little, if any, new development. Expectations for 2010
were also quite low. Boston characterized the commercial real estate outlook as
"bleak," Dallas noted that construction was at "historically low levels," and
Kansas City described the sector as "distressed." Still, some Districts noted
scattered signs of encouragement: Cleveland and Chicago referenced public-works
projects as a source of increased business, Richmond noted signs of increased
leasing activity from the health and education sectors, Atlanta indicated a
modest pickup in new development projects, Minneapolis noted some recently
started hotel and retail development, and San Francisco cited slight improvement
in availability of financing for new development.

Holy crap! Don't you think that THIS should be the headline of the BBook report. This is the worst I've heard CRE described yet...

Banking and Finance
Banks reported steady to softer conditions in most Districts. Loan demand was said to have weakened in the New York, Philadelphia, Cleveland, St. Louis, Kansas City, and Dallas Districts. New York noted particular weakness in demand for home mortgage loans, whereas Richmond and St. Louis reported this to be the strongest segment of late. For the most part, the weakness appears to have been concentrated in the commercial sector, though Boston and Chicago reported some pickup in commercial real estate lending--largely refinancing. Credit quality showed signs of deteriorating in the New York, Philadelphia, Dallas, and San Francisco Districts but was described as stable or mixed in Cleveland, Chicago, and Kansas City, with Chicago reporting some improvement outside of commercial real estate. Increasingly tight credit standards were reported in the New York, Richmond, Chicago, St. Louis, Dallas, and San Francisco--largely on commercial loans.

Agriculture and Natural Resources
Excessively wet conditions during October and early November were reported in a number of Districts. As a result, the fall harvest was delayed in many parts of the Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Flooding from Tropical Storm Ida and a November "nor'easter" damaged crops and delayed planting throughout the Richmond District, and Virginia health officials closed fishing in all Chesapeake Bay tributaries and temporarily banned the harvesting of shellfish due to potential storm water contamination. By contrast, rainfall in the Dallas District helped alleviate drought conditions experienced in many parts of the region. Contacts in the Chicago, Minneapolis, and Kansas City Districts noted that corn and soybean prices rallied over the past month, although a wide variation in margins was expected for crop farms due to differences in input
costs. Losses for livestock operations occurred in the Chicago and Kansas City

Most energy-producing Districts reported a slight uptick in
activity in extraction industries since the last report. Contacts in the
Cleveland, Atlanta, Dallas, Minneapolis, Kansas City, and San Francisco
Districts noted steady to increasing oil and natural gas production within their
regions, albeit from low levels of production observed earlier this year.
Contacts in the Cleveland District also reported that a sharp decline in coal
production had leveled out since the last report. In general, oil prices
increased somewhat, while reports on the price of natural gas were mixed due in
large part to differences in inventory levels across Districts. Mining activity
in the Minneapolis District increased.

Employment, Wages, and Prices
Labor market conditions remained weak since the last report, with further
layoffs, sluggish hiring, and high levels of unemployment in most Districts.
However, contacts in the Atlanta, Cleveland, and Richmond Districts reported
that the pace of job cuts generally slowed in their regions, and most contacts
in the Dallas District reported stable employment levels. Despite generally weak
employment conditions, some signs of improvement were noted. For example,
contacts in Boston reported that they were beginning to hire and reverse pay
cuts or freezes that were implemented earlier in the year, and contacts in the
St. Louis District reported that the service sector had started to expand
recently. Expectations for the holiday season were mixed across Districts, with
contacts in the New York and Dallas Districts reporting lighter-than-normal
seasonal hiring and/or increases in the hours of existing employees, as opposed
to hiring temporary workers, to meet the seasonal demand. On the other hand,
most retailers in the Richmond District have hired the usual number of seasonal
workers this year.

Districts generally reported little or no upward wage pressures, while some Districts noted upward pressure in commodity prices, and most Districts reported stable selling prices. Wages were largely reported to be holding steady in the Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas
City, Dallas, and San Francisco Districts. Most Districts reported stable prices
overall, although some reported higher input prices, largely for energy and
other commodities used in production, with a limited ability to raise selling
prices. Prices were reported as moderately lower in the Kansas City District,
and downward price pressures were cited for some professional services and
intermodal transportation firms in the Dallas District. Some makers of food
products and chemicals in the Philadelphia District reported raising prices, and
the prices of computer memory chips continued to firm in the San Francisco
District. Retailers in several Districts indicated that they have managed
inventory levels in an effort to prevent the steep price discounting that
occurred last year, however, some promotional price discounting is expected
through the holiday season.

Man, Steve Liesman is now officially off my list of people I trust. This is a terrible report and that means I now need to see ALL of the November highs broken before I would even consider going bullsh. Volume is still very weak and I suspect that's because those who planned to pump up the markets today are now in meetings trying to figure out how to get out of this thing".

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stock news said...
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The Shocked Investor said...

stock posted this as a comment:

Key benchmark may extend gain in early trade on rise in most of Asian markets. Markets are in consolidation mode and a choppy range, as they attempted to digest the gains of the past two days. However some profit taking at higher levels cannot be ruled out after recent surge. The government will today unveil data on some wholesale price indices for the year through 21 November 2009 viz. the food price index, the primary articles index and the fuel price index.

According to data released by the NSE, in the last session, FIIs were sellers of index futures to the tune of Rs 137.61 crore while bought index options worth Rs 245.49 crore. They were net buyers of stock futures to the tune of Rs 87.22 crore and bought stock options worth Rs 56.29 crore.

marc said...

It is damn bleak, but due to the fact that the PE groups, the I-Banks and the Vulture Funds are holding tight to their cash for even better deals to be had down the road.

On occasion that can be the correct play, but like Buffett states - It is never good to wait for a better deal when a good one is staring you in the face.

What may happen is that the good deals that could have been great will already be snapped up by investors that follow the above theory and the really great deals still left out there will encourage a bidding war with funds that have more capital than they know what to do with.

Again too much money chasing to little deals.

Thank you PEGs, HFs and VFs. We are currently doing deals I never thought I would see at my level.

Marc Mattox
SW Strata Investment Group.

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