Chinese Auto Sales

Chinese economic data are sometimes viewed as NINJA loan applications--you need to look to other sources to verify the data. Still the growth in Chinese auto sales, verified by GM (ok, another government enterprise) looks promising in two ways. First, it indicates that china's stimulus and incentive plans may be having some positive demand, and that consumers are spending in China. As the US consumer retrenches from a low savings rate, it is possible that China's consumers might move in the other direction.

What is most interesting about strong auto sales, and it is possible that auto sales in China this year will be greater than in the US, is the transformational effect the automobile can have on society. So much retailing in China consists of very small shops, in walking distance of customers. There is little room for increasing efficiency or developing scale economies in distribution. Walking customers are limited in their shopping by what they can carry, and how far they can travel to find a better price. The automobile changes all that, and begins to facilitate large-scale retailing, as customers develop the means to travel to a mall or supercenter and take advantage of the lower prices and broader merchandise selection. This is also good for the growth of of consumer products manufacturers, as consumer savings can be plowed into more goods and services. As retailers scale, manufacturers will co-evolve and grow as well, and there will be more investable opportunities beyond the typical emerging market menu of power, telephone, and banking companies.

This process should take considerably less time than it did in the US.

Tatum/Roulston Report

The Tatum survey this month clearly reflects the inventory reduction cycle is over and business trends have bottomed. We seem to all know that it has stopped getting worse in the economy. Time has passed and access to capital is available if the balance sheet is there to support it. So now backlogs are improving (seemingly so far to rebuild inventories that had been drastically reduced) and companies thru employment cuts and capital spending reductions have pared costs to the bone. Most executives remember recent downturns and when this one started it seemed worse. Corporate America really downsized in a hurry. With the financial panic that ensued alternatives for capital were perceived to be scarce and budgets were set with as little reliance on outside support as possible. Finally capital spending plans were also ratcheted down dramatically. All of this makes sense. The difference this time is just the quickness and velocity with which this occurred.

Although all signs point to this adjustment period now being over and the downward movement being halted, the fact remains that growth at this point is simply hard to recognize in any numbers to date other than the bounce off the bottom. We have talked many times how the Tatum Survey remains the best real indicator of corporate trends in America. The data base is consistent month to month and the people responding are the same. The data report therefore does not just reflect a mood change but more decision makers and the real data they are seeing day to day. The key is now how does the market, corporate profits and economic growth move forward from here. Government stimulus has had some short term boosting effect but “flat is the new up”. At Roulston, we remain unconvinced that any growth other than a flat environment where cost cutting boosts profits is happening. The most unique aspect of this is how universal this trend is and how many companies seem to be pausing to reconsider what lies ahead. The worst definitively seems to be over not only for their company but everyone they talk to and do business with in their world.

There is a certain calmness in the absence of consumer spending, the bounce in housing numbers and the employment picture that seems so tempting. The question we continue to mull is without a consumer (now saving and not spending) that makes up 70% of the economy and without a healthy financial system (the government tells us 200 banks will fail in the next 12 months) how do we get meaningful growth? Baby boomers inherently know they dont have enough saved for retirement. The numbers tell us this. The savings rate tells us this and the fact that the market scared the ... out of folks. This change has never happened before. It may not be a depression under some terms but it was very depressing. Other than for the economists that continue to point to past cycles where neither of these issues are comparable and we would argue there may be no past precedent, this is a hard time to be doing any forecasting.

Zimmer presented in New York

Our NY presenter likes Zimmer (ZMH) at this level. The company is in a turnaround mode after two years of dealing with issues stemming from 2007 settlement with the Department of Justice. ZMH has seen its market share stabilize in the recent quarters. Demographic and lifestyle trends will help the company return to mid to high single digit top line growth beginning in 2010. The balance sheet is very strong. Zimmer generates $800 million in free cash flow on annual basis.

HealthCare Roundtable

Yesterday had a full house to hear Chris Goff and Andrew Webber tell us that the next 60 days are critical to health reform. Lots of good stuff about hospitals that will benefit and others that wont. What they see happening to doctors, prescription management and other interesting tidbits about why certain parts of legislation may find its way thru while others will not. They think public option is a killer to plan although dems will go down kicking and screaming. Maybe 3-6 year trigger for this option. Maybe employer mandate. To early to tell but politics really creating "dig the feet in" atmosphere. One interesting point. Actions always cause reactions. Some expected some not. Then further reactions as we saw in Massachusetts where the market reactions after initial reactions are where surprises occurred from an investment standpoint as example what about managed care players with high Medicare Advantage exposure like Humana. Are they a winner after all the reactions. Stay tuned.

Market forecasting

Never being one to try to "predict the market" I can't help continuing to ask businesses how the fall is looking. The run up in the market is making folks feel better and as a leading indicator it does seem to be saying the correction overreacted in the winter and that the economy reached bottom in August /September. Thus a spring market recovery indicated not only improvement in the economy but an end to the gloom and doom that the financial/credit meltdown would cause a return to the 30's. So it wasn't as bad as some thought it might get and maybe the worst is behind us. But I am not hearing manufacturers talk about anything other than inventory reductions overshot and rebuilding supply chain. Outside of auto stimulus and government spending economic improvement is very spotty. So how will a market act when it realizes we are not in a "U" or "V" curve and maybe not a "W" even. But what about an "L" what happens in a market. It seems to me after an initial retrenchment it should hesitate to see any signs of sustaining. As a forecaster it seems to indicate stability but from this point earnings wont come from continued cost cutting. Businesses cut fast and hard. Now not much left to cut. Those that cut SG&A the most have outperformed. Now we need revenue growth for any more move. Not seeing it yet in any sustainable form and with consensus saying we are in a recovery the banking system is not going along. When was the last time the economy grew without loan growth or the consumer. Very hesitant right now.

Reasons to Buy?

We have had three down days, for the first time since June. Maybe it's the start of the long-awaited, over-anticipated correction. Or maybe it's not. At any rate, at some point there will be a correction. Given the robust rally we've had, against the backdrop of a halting recovery, we're bound to see a resurrection of D&D (doom and depression) stories in the media if there's a selloff. Just as in March, it will be difficult to pull the trigger and buy stocks at the bottom of the correction. It might be easier to think about the reasons for buying a dip now, before the atmosphere gets poisonous. So we'd like to ask our readers for their thoughts on the reasons to buy the correction. Let us hear your thoughts.

Financial Services Innovation

Talked to a suburban community bank CEO the other day. He's glad his bank is only three years old--very few bad loans. The reluctance of other lenders to commit funds is giving him solid pricing on deals and relationships. He is concerned that a financial products czar will make it difficult/expensive for small financial firms to create new products. This could have the effect of increasing the brand value of big firms by stifling the new product flow necessary for the little guys to compete with the behemoths. But, then, the government owns stakes in the big banks...