C.M.O. 4.28.2010

Credit Market Overview

April 28, 2010

Eleven explicative’s, admission of regularly placing wagers outside of licensed gaming facilities compounded by a lack of organization including incorrect attributions along with the fabrication of e-mails to be “found later” and in a majority of cases, a clear lack of understanding of the mechanisms and machinations under discussion, but feed mostly by the desire to out “grandstand” the prior inquisitor in hopes of saving the Congressional seat in which they sit, Carl Levin and his crew made mockery of the thought of these people as our leaders in questioning current and former employees of Goldman Sachs yesterday and this was only made worse by the fact that we elected them.  Hopefully at least some of these wrongs can be righted come November.

What does not seem to be waiting until November is the growing strength in the economy.  While it was reported last week that durable goods orders dropped by 1.3% to a seasonally adjusted $176.7BN, when the 12.9% drop in transportation-related goods which itself was caused by a 67% in nondefense related aircraft was removed the number was a positive 2.8%.  “Except for civilian aircraft, it looks like the demand for most other big-ticket items is on the rise”, was how Joel Naroff of Naroff Economic Advisors, interpreted the numbers going on to say, “If these costly products are in demand, it can only follow that the economy is moving forward.”

That report was also behind Morgan Stanley’s revision of its estimate for 1Q10 GDP raising its previous 3.0% number to 3.4% saying the “stronger capital spending during the quarter was ‘a very positive starting point for further gains in Q2’”.

While the government reports take a very broad view of the economy it would appear those with their feet on the ground, the industrial companies, are also seeing brighter days ahead.  Eaton Corp.’s (ETN) CEO, Alexander Cutler told analysts, “We’re really seeing strength in every quarter of the world”, when the company reported earnings recently.  Illinois Tool Works (ITW) CEO, David Speer, echoed this sentiment last Tuesday saying, “We have a growing sense of optimism that the business environment will improve as the year progress”.  Donald Washkewicz, CEO of Parker Hannifin (PH) joined the chorus describing North America as “continuing to show signs of recovery” as “Latin America continues to recover at a steady pace and Asia continues to be very strong”.

While many of the things ETN, ITW and PH make are used to make other things there has also been a resurgence in the big ticket households items.  Conn’s Inc. a Texas retailer with about 6% of the state’s appliance market share could add as much as a couple of percentage points to its same-store sales in 1QQ10 according to Dan Binder, an analyst with Jefferies and Judd Slivka, a spokesperson for the Missouri Department of Resources said “We’re still getting reports from around the state that say there’s been a huge business” at appliance retailers.  Best Buy (BBY) reported a 6.5% increase in 4Q09 U.S. comparable-store sales of appliances last month which represents about 4% of total U.S. sales across its brands.

Some of the appliance sales increases can be attributed to the federal appliance-rebate program, the white-goods equivalent to “Cash for Clunkers”; although to hear my washer during the spin cycle it would seem more equal than equivalent.

That program, $300MM in size, has spurred many of the purchasers but prior experience with the C4C program showed that although the boost was followed by a lull, demand did follow.  Krystyn Moroz, manager of Pacific Sales Kitchen & Bath, a unit of BBY said, “It was just an exciting day to sell appliances.  It’s not just people coming in to check out appliances.  People were serious and were saying, ‘We’re ready to go.’”  Krystyn also mentioned that some of the shoppers were buying even though they could not secure a rebate.

Confidence in the economy is a good thing and will hopefully feed on itself to produce a lasting recovery.  After watching the kangaroo court come circus yesterday I’m not sure that same confidence can be had in Congress.

Enjoy the week.

Jim Delaney

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