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Five Things: Behold, the Green Shoots!


Meanwhile, the Fed is on tap for Wednesday and the corporate cash stash continues.


1. Behold, the Green Shoots!

It's a good day to be an optimist. A couple of datapoints out this morning surprised to the upside by a significant margin.

First, the Institute of Supply Managements' factory index rose to 55.7, exceeding even the most optimistic economists' forecast, according to Bloomberg. Readings above 50 are considered to show "expansion."

Second, the number of contracts to purchase existing homes rose for an eight-straight month, probably boosted as the deadline for a first-time home-buyer tax credit approaches. In all likelihood, the tax credit will be extended. For more color on the housing "recovery," however, see two things: 1) comments from Weyerhaeuser executives in Number Five, 2) this San Francisco Federal Reserve paper on "Recent Developments in Mortgage Finance."

Meanwhile, back to the ISM report; the two components of interest are Production, which increased from 55.7 in September to 63.3 in October, and Employment, which jumped to 52.1 in October versus 46.2 last month. Of course, keep in mind that after doing everything possible to purge bloated inventories last year, companies this year have had to ramp up production to meet government-induced stimulus demand.

This is the classic push-pull where companies slash inventories, underestimate government-fueled demand, then overbuild inventories just in time for government stimulus programs to conclude.

2. Fed Watch

Tomorrow begins a two-day meeting of the Federal Reserve Open Market Committee. While Wednesday's announcement will show no change in policy, the market will be hanging on one closely watched phrase: "extended period."

The September accompanying policy meeting statement noted the following:

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

A removal of the phrase, "extended period" would be noteworthy, but unlikely. There's no need to be concerned with the Fed's "exist strategy" until that phrase is lifted, and tomorrow it won't be.

3. The Cash Stash Continues

"Jittery companies" have amassed the largest stash of cash in 40 years, according to the Wall Street Journal: "In the second quarter, the 500 largest nonfinancial US firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings."

Google (GOOG), for example, has filled its war chest with $22 billion, 585 of its total assets, according to the Journal.

The question is what, exactly, that cash will be used for; reinvestments, stock buybacks, acquisitions? Eventually, probably a little bit of all three, but let's not get carried away.

Remember, too: Keeping extra cash on hand is what companies and people do during periods of risk aversion. At this point the cash stockpile is less a story of future investment and more a story of present attitudes toward risk.

4. Speaking of Cash On Hand...

An article in today's Financial Times cites a Mintel comperemedia analysis of direct mail market and finds that credit-card issuers sent out 391 million direct-mail offers during the third quarter, a drop of 71%.

Meanwhile, issuers are offering tighter introductory terms and charging higher rates.

"At the peak of the credit boom in 2005 and 2006, the industry was sending out more than 2 billion card offers a quarter," the Financial Times noted.

5. Five Other Little Things You Should Know

  • According to Equibase figures, thoroughbred racing handle in the US for the third quarter this year was down 10% from the third quarter a year ago. Dismal news ahead of this week's Breeders' Cup Thoroughbred Championships at Santa Anita Park.

  • Some interesting data from the Advance America Cash Advance (AEA) earnings call last week: The average amount of a cash advance made during the first nine months of 2009, excluding installment loans in Illinois and lines of credit in Virginia, was $360, compared to $366 last year. The average fee on all cash advances made was approximately $53 during the first nine months of 2009, compared to $56 last year. The average duration of all cash advances was approximately 17.5 days versus 16.7 last year.

  • Barrick Gold (ABX) had taken quite a bit of heat from shareholders earlier this year because of the company's gold hedges. In early September, however, the company announced it would eliminate all of its gold hedges within 12 months. Barrick's old hedges are fixed contracts under which the company sold forward gold ounces and would receive a fixed price upon delivering into these contracts. That amount was three million ounces as of September 8. So, how's the progress? As of October 28, Barrick has eliminated 1.1 million ounces of the gold hedges, or over one-third of the three million ounce position outstanding. Current gold hedges therefore are 1.9 million ounces.

  • While declining sales and lower margins are pretty much what one would expect to hear from furniture manufacturer and home-furnishings retailer Ethan Allen (ETH), the company did offer a couple of interesting datapoints during its earnings call last week. Ethan Allen added 160 associates in the third quarter, noting that a one-day job fair saw more than 1,500 qualified applicants show up. The company says it added 300 independent designer associates as well.

  • Three of Weyerhaeuser's (WY) four business segments are closely tied to housing starts, so the company's call last week was a chance to get a quick glimpse from an industry insider into the possibility housing is stabilizing. Unfortunately, the glimpse wasn't particularly encouraging. Although Daniel Fulton, Weyerhaeuser's President and CEO, did say there were signs of stabilization and even some slight improvement in new housing construction activity throughout the quarter, Lawrence Burrows, Weyerhaeuser Real Estate's President and CEO, said many markets are caught in a state of transition, as "positive trends in housing inventories, home sales and pricing are counterbalanced by increasing foreclosures and mortgage delinquencies." Moreover, Burrows noted that the positive momentum that developed in the second quarter began to erode late in the third quarter in all the company's markets.
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