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Five Things You Need to Know: Durable Goods, How Do You Read This Stuff?, Japan On Hold, Conventional Copper Wisdom, Payday Excess


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Durable Goods

The Commerce Department this morning reported Durable Goods orders for December were up 3.1%.

  • What exactly are Durable Goods orders and why should we care?
  • Durable Goods, as far as the Commerce Department is concerned, are manufactured goods with a normal life expectancy of three years or longer; things like furniture, household appliances, aircraft.
  • The definition may seem arbitrary - why three years? why not five? or two - and, in fact, it is, since no one really has a good answer for why durable goods must last three years before being replaced.
  • But the utility of tracking orders of things considered to be "durable goods" has a certain logic to it.
  • Most market participants believe that Durable Goods orders are a fairly sensitive indicator of economic changes.
  • The reasoning is that when we (consumers, large businesses) are feeling good about economic conditions then we are not reluctant to buy expensive, durable items.
  • On the other hand, when we are feeling risk averse we are more likely to put off buying that new washing machine or computer.

2. How Do You Read This Stuff?

Ok, so when we look at a report like Durable Goods, what exactly are we looking for?

  • A couple of things. For one, we want to look at Durable Goods orders Ex-Transportation.
  • The headline Durable Goods numbers (up 3.1% in December) includes expenditures for things like large civilian aircrafts, which are very expensive and also tend to fluctuate rather unpredictably.
  • So the first thing we do is look for Durable Goods ex-transportation, which the Commerce Department usually reports in the second paragraph of the release.
  • Last month Durable Goods orders ex-transportation rose 2.3%, the first increase in two months. How do we know that? Because Table 1, line four shows us the last three months' worth of data and new orders declined by 1% in November and 1.8% in October.
  • Another useful nugget contained in Durable Goods orders is "Capital Goods" orders.
  • Why are "Capital Goods" important? Because they are products used in the production of other products. So a rise in "Capital Goods" obviously implies overall production strength down the road.
  • When we scan down the left hand column of Table 1 we see that the Capital Goods category reports several different numbers.
  • What we are interested in is the Excluding Aircraft report of new orders.
  • This shows a very strong 2.4% rise in Capital Goods, following a decline in November of 1% and a decline in October of 4%.
  • So all in all, another "better-than-expected" economic release which should keep the Fed on "inflation watch" through next week's meeting.

3. Japan On Hold

Some economic data that wasn't "better-than-expected" was Japan's Consumer Price Index.

  • The core consumer price index, which excludes prices of fresh food but includes energy, was 0.1% higher year-on-year in December.
  • The good news is that was the seventh straight month that CPI had increased.
  • The bad news is the increase was less than what economists had expected.
  • Moreover, if food and energy both are excluded, the CPI was actually 0.3% lower year-on-year, declining for the 12th consecutive month.
  • This will make it even more difficult for the Bank of Japan to convince politicians to go along with a rate increase at their next meeting.
  • The carry trade has been unwinding a bit in expectations of a BoJ rate hike, but it is increasingly looking like any rate hike in Japan will come later than many have been expecting.

4. Conventional Copper Wisdom

Conventional wisdom, by which we mean "previously reported data from Chinese government sources," was that China's demand for copper actually declined in 2006. If, by "declined," one means "surged by more than 15%," then conventional wisdom is correct.

  • China's copper imports in December surged by 55% year-on-year, the Beijing-based customs office said yesterday.
  • Most believed China's usage of copper actually declined in 2006, but the latest government figures show that simply isn't the case thanks to the surge of buying December.
  • Of course, if you're the world's largest consumers of copper like China, it certainly doesn't hurt to fool speculators into thinking you're done buying.
  • In December alone the price of copper fell more than 9%.
  • Year-to-date copper was down 7.5% heading into today.

5. Payday Excess

A dozen international shareholder groups, managing more than $1.5 trillion in assets, have written to US regulators, politicians and stock exchanges urging regulators and companies to give shareholders the right to vote on compensation packages at 44 companies, including General Electric (GE) and Citigroup (C), the Financial Times reported.

  • Why the fuss?
  • "Institutional investors are fed up with the unbridled excesses of executive compensation in the US," William Thompson, New York City comptroller, who manages the city's $93 billion-plus pension fund, told the Financial Times.
  • Shareholder anger at excessive executive compensation has been rising amid evidence that many US chief executives are raking in huge compensation packages regardless of their companies' performance.
  • The long-standing issue of excessive executive compensation was renewed recently after Bob Nardelli resigned as chairman and chief executive of Home Depot with a $210 million severance package despite the fact the stock declined by more than 40% during his tenure.
  • Naturally, many companies oppose giving shareholders a greater say on executive compensation.
  • The argument, according to the FT, is that it could encourage activist hedge funds and other investors with short-term horizons to essentially hold companies ransom.
  • Of course, the issue of excessive executive pay is not exactly new. Below Minyanville takes a look at a couple of historical examples of egregious executive compensation.

Horenfeldt Sugar Company – 1813

Horenfeldt Sugar Co. laborers agitated to learn CEO Samuel L. Higgenbotham's compensation package includes a base salary of $25,000 per year, full use of the company's ship, and the lifetime indentured servitude of the first-born children of all employees. The average pay for Horenfeldt laborers at that time was one penny-like "coin" object per day and a periodic kick in the seat of the pants.

Lodestone Golden Financial – 1929

Harry M. Pittsford

Lodestone Golden Financial board approved a then-record compensation package for CEO Harry M. Pittsford of $250,000 per year plus a bonus of 1,000 shares of company stock for every dollar of salary earned. The results were scandalous. Within a month Pittsford had accumulated enough stock to retain full ownership of the company, which he immediately sold back to the original shareholders at a premium of $85 per share on the condition that he remain CEO.

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