Can Intel Lead The Way?

April 14, 2010  |  

By Charles Payne, CEO & Principal Analyst

Of all the places I didn’t think a piece in the New York Times would question some of the merriness going around. But, indeed, a piece by Andrew Ross Sorkin added some doubt, even if it was tongue and cheek. After echoing numbers on the bailout loss now seen at just $85.0 billion (yippee), and saying Citigroup (C) will make taxpayers money and even AIG could breakeven, he presented the other side of the story. The numbers from Treasury do not include Fannie Mae (FNM) and Freddie Mac (FRE) which the CBO says will amount to a $350.0 billion loss. Then there is the $1.0 trillion the Federal Reserve made available to Wall Street at almost zero percent interest.

The piece goes on to mention doomsayer Joseph Stiglitz, who called the news “disingenuous and a real attempt to distract people.” I don’t often agree with this Nobel Prize winning economist but I do this time. Pointing out the risk taken, it is silly to rejoice over only losing a few billion dollars here and a few there, it adds up to real money at some point, after all. The more I thought about it the more it seems like a person that for no real reason jumps out of a third floor window and breaks a couple of ribs and a collarbone. After heeling, the person would say the jump was good because there was no lasting harm done.

Of course in the case of all those government bailouts it was more akin to Washington tossing American taxpayers out of a window.

But, let’s say the economic bounce gains traction, near-term it could happen. Then we have to begin to consider inflation, which I had put off as a 2011 phenomenon. If all of those printed dollars begin to flood the economy as more and more people buy into the hype, what had been a hibernating event could sprout wings sooner than expected. It’s still early, but there have been signs including significant spikes in ISM data (manufacturing and services sectors). There has also been the move higher in energy prices, which seem under the radar even as gasoline prices have noticeably increased.

In its earnings release after the bell on Monday, Alcoa (AA) reported that it raised prices in the face of slack demand. One could argue higher commodities prices correlate with higher demand and actually support the notion of a stronger economy. But it must be pointed out that “stronger” isn’t the same as “strong.” If they can keep the markets moving higher on the hype that’s okay with me…but beware.

Most people in New York don’t drive on a daily basis so they may not feel a spike in gas prices but everyone, and I mean everyone, eats chicken. Of course gas prices will grab the attention of struggling Americans once the average price cracks $3.00…look and listen for the howls.

I’m not sure that Wall Street will become concerned about inflation until the needle moves on the CPI report but there has been pressure on producers, and if there is a general sense things are getting better it would provide cover for price hikes. I’m not saying sell everything, buy only gold and head for the hills but pay attention because the man on Main Street will know inflation is increasing too fast long before Wall Street figures it out.

Who Needs Card Check?

The White House shelved its card check dreams as it cobbles together (or is it clobbered together) votes for healthcare reform, but yesterday it made a huge leap in its goal of forcing all workers to join unions. On February 9, 2009 President Obama signed an Executive Order (http://edocket.access.gpo.gov/2009/pdf/E9-3113.pdf) for the use of Project Labor Agreements (PLAs). Yesterday this order became final rule. Essentially, it’s a pre-hiring collective bargaining requirement for any government construction project valued at $25.0 million plus.

According to the National Right to Work Legal Foundation a “project labor agreement” is when the government awards contracts for public construction projects exclusively to unionized firms. Although the National Labor Relations Act says construction contractors and employees have the right to choose to unionize or not to unionize. To date, 80% of contractors and their employees have voluntarily opted against unionization. Now, if they want to be involved in big money government projects that right has been taken away. This is scary stuff.

The move underscores the power of executive orders to bypass existing laws and Congress.

In the meantime, Washington, DC based Associated Builders and Contractors (ABC) issued a statement yesterday calling this final rule “anti-competitive” and “special interest kickback schemes that end open, fair and competitive bidding on public projects.” According to the ABC project labor agreements can drive up costs for public construction by nearly 20% and unfairly discriminates against the more than 85% of U.S. construction workforce that chooses not to join a union. The ABC stated what is painfully obvious, that this PLA is a handout to special interest groups and comes at the taxpayers’ expense.

Considering unemployment is at 25% for construction workers this is a heck of time to discriminate…but then again is discrimination ever a good thing?

Speaking of Fair

This week’s poll continues to touch nerves as the responses have been fantastic. Here is a couple I received yesterday.

“Charles,

From someone who’s income has dropped precipitously in the last 2 years ($40K net for a family of 5), I shouldn’t be able to vote on monetary issues (but I still vote against big spenders). We actually got a $2,100 tax return after paying about $300 in taxes. If we’re not aberrational, I can’t see how this can sustain our economy.”

“Mr. Payne,

NO!

I have a brother-in-law out in California, wife and 3 kids. He is smart and could have gone somewhere in life, but instead he has spent the past 25 years sitting around drinking, smoking dope, waiting for someone to make him a CEO. My wife and I have gone back to school at our own cost, worked our tail ends off over the past 25 years.”

There are many others posted on our website http://www.wstreet.com (all with permission) under “Voice of the People.”

Earnings Update

Intel (INTC) chips were inside many high-end laptops that were lapped up by corporations. Consequently, the company posted earnings of $0.43 per share on $10.3 billion in revenue. Consensus was $0.38 per share on $9.8 billion in revenue. Management lifted gross margin guidance for the year to a range of 62% to 66% from 59% to 64%.

CSX Corp (CSX) reported earnings of $0.78 per share compared to the $0.69 per share forecast for the Street (and $0.70 for our forecast). Volume increased about 5% and finally begins to show a rebound in the economy. Interestingly enough, this is one of the first companies to announce they are hiring employees back; it is still targeted, but management indicated it expects hiring to increase significantly in the second half of the year.

Economic Data

Retail Sales

One area of keen interest in this morning’s retail sales data is the -0.3% decline in gasoline station sales. The result is opposite to the sales benefits that wholesalers such as Costco (COST) and BJ’s Wholesale (BJ), which operate gasoline stations at their clubs, have realized. Moreover, it conflicts with the general rise in gasoline prices across the U.S. What may be starting to happen is that in response to gasoline prices creeping closer to, or over, $3.00 a gallon for regular unleaded, consumers are starting to consolidate trips to discounters and malls. In breaking down the consumer base, you have the person that remained gainfully employed in 2009 and is now starting to feel a bit better about his or her finances. However, the psychological impacts of the recession are still present, and with gasoline prices rising once again the spike from summer 2008 and the influence on wallets is fresh on the mind. For the person still in search of work, say 15% of the population if you want to use the underemployment rate, wasteful trips to stores is not a fruitful undertaking. Overall, our sense is that trip consolidation benefits those retailers able to offer one-stop shopping (Target, Wal-Mart) and malls that have big box stores nearby or attached.

Broader thinking aside, the March sales data supports the thesis that the U.S. consumer is out of their bunker mentality. Whether households have stopped paying non-revolving debt to free up spending elsewhere, have returned to work for fulltime employment or temporary employment, or are feeling a little more confident in the value of their largest asset (home), somehow someway a new normal pace of spending is emerging. Credit is still tight, such as on equity lines, so the spending we are experiencing is being driven by savings built up in 2009 and cash from weekly paychecks that went into savings a year earlier given the many unknowns about the economy.

On the headline, March retail sales came in at +1.6% (consensus: +1.2%), with February revised to +0.5% from +0.3%. Motor vehicle sales incentives lured people back into to showrooms, and it was displayed in the 6.6% increase in sales for the category in March. Excluding auto sales, retail sales were +0.7% relative to February, which was also revised higher to +1.1% from +0.9%. The retail sales number we place great stock in is the ex. auto, building materials, and gasoline stations, which was positive for the second consecutive month at +0.5% (year earlier comparison favorable), following a +1.2% February print that resulted despite storm activity. We note that the overall report holds more weight relative to the chain-store sales reports issued last week, which benefited heavily from the Easter calendar shift.

Areas of Interest
* Furniture: +1.5% m/m; sales trends according to our industry contacts continue to pick up as prices remain enticing. First-time homebuyers have been a strong part of the increase in traffic.
* Grocery/other: sales were flat m/m yet sales at general merchandise stores increased 0.5%. May reflect discounters continuing to be aggressive on prices (see Wal-Mart rollbacks) and consumers responding accordingly.

Consumer Price Index

This morning we heard from the Labor Department that consumer prices edged up 0.1%, while core CPI (which excludes food and energy costs) was flat. Through the past twelve months, inflation has increased at its slowest pace in more than six years. The 0.1% increase for the CPI was in line with the Street’s expectations, while core CPI was expected to increase 0.1% as well. The index for food at home rose 0.5%, the largest increase since September 2008. This increase in food costs as well as the cost of energy (oil pushing to new highs), coupled with a drop in hourly earnings, does not bode well for Main Street. Food and energy are getting more expensive, but income continues to fall. Over the last 12-months, CPI has increased 2.3%, before seasonal adjustment. Excluding food and energy, the core has risen just 1.1% over that period, the smallest increase since January 2004.


Of all the places I didn’t think a piece in the New York Times would question some of the merriness going around. But, indeed, a piece by Andrew Ross Sorkin added some doubt, even if it was tongue and cheek. After echoing numbers on the bailout loss now seen at just $85.0 billion (yippee), and saying Citigroup (C) will make taxpayers money and even AIG could breakeven, he presented the other side of the story. The numbers from Treasury do not include Fannie Mae (FNM) and Freddie Mac (FRE) which the CBO says will amount to a $350.0 billion loss. Then there is the $1.0 trillion the Federal Reserve made available to Wall Street at almost zero percent interest.

The piece goes on to mention doomsayer Joseph Stiglitz, who called the news “disingenuous and a real attempt to distract people.” I don’t often agree with this Nobel Prize winning economist but I do this time. Pointing out the risk taken, it is silly to rejoice over only losing a few billion dollars here and a few there, it adds up to real money at some point, after all. The more I thought about it the more it seems like a person that for no real reason jumps out of a third floor window and breaks a couple of ribs and a collarbone. After heeling, the person would say the jump was good because there was no lasting harm done.

Of course in the case of all those government bailouts it was more akin to Washington tossing American taxpayers out of a window.

But, let’s say the economic bounce gains traction, near-term it could happen. Then we have to begin to consider inflation, which I had put off as a 2011 phenomenon. If all of those printed dollars begin to flood the economy as more and more people buy into the hype, what had been a hibernating event could sprout wings sooner than expected. It’s still early, but there have been signs including significant spikes in ISM data (manufacturing and services sectors). There has also been the move higher in energy prices, which seem under the radar even as gasoline prices have noticeably increased.

In its earnings release after the bell on Monday, Alcoa (AA) reported that it raised prices in the face of slack demand. One could argue higher commodities prices correlate with higher demand and actually support the notion of a stronger economy. But it must be pointed out that “stronger” isn’t the same as “strong.” If they can keep the markets moving higher on the hype that’s okay with me…but beware.

Most people in New York don’t drive on a daily basis so they may not feel a spike in gas prices but everyone, and I mean everyone, eats chicken. Of course gas prices will grab the attention of struggling Americans once the average price cracks $3.00…look and listen for the howls.

I’m not sure that Wall Street will become concerned about inflation until the needle moves on the CPI report but there has been pressure on producers, and if there is a general sense things are getting better it would provide cover for price hikes. I’m not saying sell everything, buy only gold and head for the hills but pay attention because the man on Main Street will know inflation is increasing too fast long before Wall Street figures it out.

Who Needs Card Check?

The White House shelved its card check dreams as it cobbles together (or is it clobbered together) votes for healthcare reform, but yesterday it made a huge leap in its goal of forcing all workers to join unions. On February 9, 2009 President Obama signed an Executive Order (http://edocket.access.gpo.gov/2009/pdf/E9-3113.pdf) for the use of Project Labor Agreements (PLAs). Yesterday this order became final rule. Essentially, it’s a pre-hiring collective bargaining requirement for any government construction project valued at $25.0 million plus.

According to the National Right to Work Legal Foundation a “project labor agreement” is when the government awards contracts for public construction projects exclusively to unionized firms. Although the National Labor Relations Act says construction contractors and employees have the right to choose to unionize or not to unionize. To date, 80% of contractors and their employees have voluntarily opted against unionization. Now, if they want to be involved in big money government projects that right has been taken away. This is scary stuff.

The move underscores the power of executive orders to bypass existing laws and Congress.

In the meantime, Washington, DC based Associated Builders and Contractors (ABC) issued a statement yesterday calling this final rule “anti-competitive” and “special interest kickback schemes that end open, fair and competitive bidding on public projects.” According to the ABC project labor agreements can drive up costs for public construction by nearly 20% and unfairly discriminates against the more than 85% of U.S. construction workforce that chooses not to join a union. The ABC stated what is painfully obvious, that this PLA is a handout to special interest groups and comes at the taxpayers’ expense.

Considering unemployment is at 25% for construction workers this is a heck of time to discriminate…but then again is discrimination ever a good thing?

Speaking of Fair

This week’s poll continues to touch nerves as the responses have been fantastic. Here is a couple I received yesterday.

“Charles,

From someone who’s income has dropped precipitously in the last 2 years ($40K net for a family of 5), I shouldn’t be able to vote on monetary issues (but I still vote against big spenders). We actually got a $2,100 tax return after paying about $300 in taxes. If we’re not aberrational, I can’t see how this can sustain our economy.”

“Mr. Payne,

NO!

I have a brother-in-law out in California, wife and 3 kids. He is smart and could have gone somewhere in life, but instead he has spent the past 25 years sitting around drinking, smoking dope, waiting for someone to make him a CEO. My wife and I have gone back to school at our own cost, worked our tail ends off over the past 25 years.”

There are many others posted on our website www.wstreet.com (all with permission) under “Voice of the People.”

Earnings Update

Intel (INTC) chips were inside many high-end laptops that were lapped up by corporations. Consequently, the company posted earnings of $0.43 per share on $10.3 billion in revenue. Consensus was $0.38 per share on $9.8 billion in revenue. Management lifted gross margin guidance for the year to a range of 62% to 66% from 59% to 64%.

CSX Corp (CSX) reported earnings of $0.78 per share compared to the $0.69 per share forecast for the Street (and $0.70 for our forecast). Volume increased about 5% and finally begins to show a rebound in the economy. Interestingly enough, this is one of the first companies to announce they are hiring employees back; it is still targeted, but management indicated it expects hiring to increase significantly in the second half of the year.

Economic Data

Retail Sales

One area of keen interest in this morning’s retail sales data is the -0.3% decline in gasoline station sales. The result is opposite to the sales benefits that wholesalers such as Costco (COST) and BJ’s Wholesale (BJ), which operate gasoline stations at their clubs, have realized. Moreover, it conflicts with the general rise in gasoline prices across the U.S. What may be starting to happen is that in response to gasoline prices creeping closer to, or over, $3.00 a gallon for regular unleaded, consumers are starting to consolidate trips to discounters and malls. In breaking down the consumer base, you have the person that remained gainfully employed in 2009 and is now starting to feel a bit better about his or her finances. However, the psychological impacts of the recession are still present, and with gasoline prices rising once again the spike from summer 2008 and the influence on wallets is fresh on the mind. For the person still in search of work, say 15% of the population if you want to use the underemployment rate, wasteful trips to stores is not a fruitful undertaking. Overall, our sense is that trip consolidation benefits those retailers able to offer one-stop shopping (Target, Wal-Mart) and malls that have big box stores nearby or attached.

Broader thinking aside, the March sales data supports the thesis that the U.S. consumer is out of their bunker mentality. Whether households have stopped paying non-revolving debt to free up spending elsewhere, have returned to work for fulltime employment or temporary employment, or are feeling a little more confident in the value of their largest asset (home), somehow someway a new normal pace of spending is emerging. Credit is still tight, such as on equity lines, so the spending we are experiencing is being driven by savings built up in 2009 and cash from weekly paychecks that went into savings a year earlier given the many unknowns about the economy.

On the headline, March retail sales came in at +1.6% (consensus: +1.2%), with February revised to +0.5% from +0.3%. Motor vehicle sales incentives lured people back into to showrooms, and it was displayed in the 6.6% increase in sales for the category in March. Excluding auto sales, retail sales were +0.7% relative to February, which was also revised higher to +1.1% from +0.9%. The retail sales number we place great stock in is the ex. auto, building materials, and gasoline stations, which was positive for the second consecutive month at +0.5% (year earlier comparison favorable), following a +1.2% February print that resulted despite storm activity. We note that the overall report holds more weight relative to the chain-store sales reports issued last week, which benefited heavily from the Easter calendar shift.

Areas of Interest
* Furniture: +1.5% m/m; sales trends according to our industry contacts continue to pick up as prices remain enticing. First-time homebuyers have been a strong part of the increase in traffic.
* Grocery/other: sales were flat m/m yet sales at general merchandise stores increased 0.5%. May reflect discounters continuing to be aggressive on prices (see Wal-Mart rollbacks) and consumers responding accordingly.

Consumer Price Index

This morning we heard from the Labor Department that consumer prices edged up 0.1%, while core CPI (which excludes food and energy costs) was flat. Through the past twelve months, inflation has increased at its slowest pace in more than six years. The 0.1% increase for the CPI was in line with the Street’s expectations, while core CPI was expected to increase 0.1% as well. The index for food at home rose 0.5%, the largest increase since September 2008. This increase in food costs as well as the cost of energy (oil pushing to new highs), coupled with a drop in hourly earnings, does not bode well for Main Street. Food and energy are getting more expensive, but income continues to fall. Over the last 12-months, CPI has increased 2.3%, before seasonal adjustment. Excluding food and energy, the core has risen just 1.1% over that period, the smallest increase since January 2004.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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