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Five Things You Need to Know: Consumer Conundrum; Federal Reserve Raises "Four" to "Unlimited"; FedEx and the Economy; Winnebago and Consumer Credit Tightening; ConAgra Trades Its Way to Profitability


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


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

1. Consumer Conundrum

Consumer spending rose in November by the most in more than two years even as consumer confidence fell in December by the most in more than two years.

  • The Commerce Department reported a larger-than-forecast 1.1% increase in consumer purchases in November and a revised 0.4% gain in October that was more than previously estimated.
  • Adjusted for inflation, spending increased 0.5%, the largest increase this year.
  • But those are November numbers.
  • Retailers are for the most part reporting weaker-than-expected December sales, and the consumer confidence number this morning would seem to mirror that.
  • The Reuters/University of Michigan final index of consumer sentiment dropped to 75.5 from 76.1 last month, higher than forecast, but nonetheless the lowest level since 2005.
  • Meanwhile, PIMCO's Bill Gross said the U.S. probably entered a recession this month that would last "four-to-five months" depending on the "unperceived and unforecasted" degree of fiscal stimulus politicians are willing to push forward.

2. Federal Reserve Raises "Four" to "Unlimited"

The Federal Reserve loaned $20 billion in 35-day funds at a rate of 4.67% in the
second of four planned special auctions (Treasury Auction Facilities (TAFs)), according to Bloomberg.

  • The rate was higher than the 4.65% received at the initial auction two days ago.
  • The bid-to-cover ratio was 2.88, lower than the prior auction.
  • The bid-to-cover ratio is simply the number of bids received divided by the number of bids accepted.
  • It's used to express demand for an auction.
  • In general, a ratio above 2 is considered a "successful" auction with aggressive bids.
  • The interesting thing about this auction was the Fed's clarification of what they mean by "four."
  • You may recall that initially the Fed proposed four special TAFs.
  • Today the Fed said that, by "four," they meant as many "as necessary to to address elevated pressures in short-term funding markets"; not "four" as in "the number that falls between three and five and as an indication of how many TAF's they will really hold."

3. FedEx and the Economy

FedEx reported a decline in profit yesterday morning, and the company also took down their 2008 capital expenditures target 11% to about $3.1 billion. The stock is down a little more than 1%.

Going through the FedEx (FDX) conference call for clues to the economy, it really doesn't get any more explicit than this: "The profit decline was primarily due to the net impact of substantially higher fuel cost, and continued weakness in the US economy, which is limiting demand for our US domestic express package and less than truck load freight services." That's according to CFO Alan Graf. However, later in the call Graf backtracked a bit from the seemingly strong language, saying, "we are not expecting a recession, we are expecting continued growth although it would be low."

Meanwhile, with respect to holiday sales, the company noted that they are not seeing the surge in package volume traditionally associated with the holiday season. CEO Frederick Smith said, "the quarter relatively speaking did not see the increases that you would expect to see as you approach peak season approach the Christmas holiday period." The company also reports seeing an increase in the percentage of packages originating through Internet shopping.

Working in FedEx's favor is the fact the company has been aggressive in expanding operations in other countries that are showing significant economic growth. All in all, the company is far less dependent on the U.S. economy than it was in 2000 and 2001. They are 60% bigger in terms of worldwide air freight than their nearest competitor. The company is also a beneficiary of a weaker dollar.

But is the company underestimating the global macroeconomic conditions and the potential for economic weakness here to spill over into the global economy? That is a key question. I am sympathetic to the idea that perhaps the U.S. isn't the global economic engine it once was, but I wouldn't go so far as to say a significant slowdown here, should it accelerate in 2008, would be immaterial to global macroeconomic trends.

Take a look at where FedEx is relative to the S&P 500 in the chart below. This is the most significant step down below S&P 500 performance we have seen since the bull market began. Perhaps FedEx's stock price is telling us more about the economy than we really want to know.

Click to Enlarge
FedEx (FDX) vs. S&P 500

4. Winnebago and Consumer Credit Tightening

Scanning the Winnebago (WGO) conference call transcript, I noticed the following comments on consumer credit from CFO Sarah Nielsen. WGO does not participate in direct financing, but Nielsen said the company has been proactively checking with lenders to get a handle with what's going on.

"On the consumer side, RV loans have historically enjoyed a very, very low delinquency rate under 1%. They have indicated there has been a slight uptick in the delinquencies, but we still are under 1%, and it's much more favorable than typical consumer loans. I think there is tightening on the side of the credit availability, but that doesn't necessarily reach the Motorhome consumer, because our typical customer is 55 years old, very, very strong in relation to their FICO score and their credit worthiness. But I think there is some tightening going on and a little bit of an uptick on delinquencies," Nielsen said.

5. ConAgra Trades Its Way to Profitability

ConAgra (CAG) yesterday morning reported earnings, but there were a couple of problems. The headlines all focused on high food inflation; the company said it was seeing inflation running north of 8%, far higher than it had anticipated.

To combat this food inflation, the company intends to be far more aggressive on pricing in 2009. The question is one of elasticity, however. How can the company be sure it can successfully pass through price increases? After all, its consumer foods unit was its weakest segment.

CEO Gary Rodkin said, "given the continued high level of inflation and so much news and noise about the escalating input costs across almost all the food commodities and materials and energy, it's a very very different environment when we present our pricing actions. Everybody, all competitors are under pressure, including private label. So this makes us less nervous -- much less nervous about passing on some significant pricing. It's just hard to argue with that logic."

But there's more to this story than inflation. The company in the quarter booked strong gains in its commodities trading unit. Makes sense, commodities have been on fire. But the company gave its traders more capital to work with. The company was adamant in the call that it "planned very conservatively" and "we are not rolling the dice shooting for the moon." But more capital equals more risk taking. Period.

CFO Andre Hawaux deflected this notion, saying, "I would just end by saying we expect attractive returns, but the capital will vary up and down based on the opportunities. So, it really isn't about a desire to take on more risk, it's a desire to earn more money for the company."

Oh, Ok. Just like that; magic. I was discussing this with Minyanville Professor Scott Reamer who noted, "By that logic ConAgra should totally shut down it's consumer foods unit and become a commodities trading firm." Yes, then they can really focus on earning more money for the company. The reality is that no matter how one verbally spins it, this is increased risk taking.

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