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Dual Economy Continues

The dual economy scenario gained more credence yesterday as Harley-Davidson and Motorola reported vastly different earnings reports for the first quarter. Harley reported a 13% increase in sales, with a 10% increase in the number of motorcycles shipped. Additionally, Harley sees no slowdown at all and is forecasting another record year. Jeffrey Bleustein, chairman and CEO, added "Based on continued demand and our manufacturing success we are raising the 2001 production target for Harley-Davidson motorcycles to 229,000 units, up from the previous target of 227,000. Harley has increased its forecast by 2,000 units every quarter since the first estimate was announced in July of 2000. What struck me as interesting is the large increase in Harley's finance receivables accounts. Short-term finance receivables increased 30% and long-term receivables jumped 21%. Harley stated the increase was due to not securitizing the paper. Being slightly cynical, I wonder if the credit market might be tightening up a little bit. Nevertheless, it should be a concern whenever a company grows its receivables faster than sales.

Motorola on the other hand, reported its first loss in fifteen years. In fact Motorola's assessment of current business conditions are almost directly opposite of Harley's. It lowered its forecast for global handset sales to 425 - 475 million units, down from the previous estimate of just under 500 million units. If I remember correctly, this estimate was as high as 575 million units just a year ago. Motorola also said that the current semiconductor downturn is the sharpest in history. Motorola is also cutting back its capital expenditures for the rest of the year.

Economist are trying to figure out why the weak corporate sector has not dampened the consumer's buying binge, especially in light of such huge layoff announcements. The long running economic boom has distorted perceptions of risk to the degree that everyone believes there is none, at least for themselves. USA Today ran a story yesterday commenting on this economic phenomenon. There was an interview with a woman who commented that her children's college fund has tumbled, and believes the economy "will probably get a lot worse before it gets better." However, she anticipates no changes in the family's spending plans because "My husband and I both have secure jobs." She works for a real estate firm in Seattle.

Seattle real estate - Secure? This must be the mindset across the nation as sentiment surveys have differed drastically from economic reality for several months now. What will it take to convince the American consumer that unabashed spending is not financially responsible? It will surely will take a lot to overcome the financial services inundation of marketing. I experienced a very good example of this marking when I went into a Bank of America branch last week. Inside, there was signs everywhere promoting home equity loans. The signs have marketing phrases with a related picture. One was a picture of a cooking whisk with the pitch "A place to cook, or a way to pay for cooking school." While I can understand using built up equity to pay for education, it is more responsible to save for expenses that you know will be incurred. To take equity out to pay for cooking school? But, this pales against the "ad" that showed a pair of tickets for a sporting event combined with the pitch "A place to play or a way to score season tickets." I find this irresponsible at best. It was not long ago when a bank was a steward of your money. Now banks are a part of the Wall Street machine and risk is only another four-letter word.

While we are discussing banks, on Monday, Bank One agreed to buy Wachovia's $8 billion credit card division. Surprisingly, Bank One's stock increased 84 cents on the news. I guess investors have already forgotten about the FirstUSA acquisition fiasco.

A year after the dot-com bubble burst in Silicon Valley, the real estate bubble appears to be showing the first signs of stress. Inventories are building and prices are starting to fall. Yesterday, the San Jose Mercury News published a story, Valley home sellers cut prices to lure buyers, filled with anecdotal evidence. A few highlights include:

  • In Santa Clara County the average selling price for homes closed in March was 1% below the asking price, compared to 12% above the asking price last year.
  • 842 transactions in March, 42% lower than last March
  • At the end of March, 1,021 condos were listed for sale, up 360% from last year.

The author quotes Michael Mullinix's, president of the Santa Clara County Association of Realtors, suggestion "If you're a seller, I'd be aggressively trying to make your deal right now." Mr. Mullinix's reasoning stems from the "big gap opening up right now with inventory increasing very dramatically and sales either staying steady or with a slight decline." When looking at the real estate data going forward Richard Calhoun, a real estate broker in Santa Clara County, makes a very interesting point that "Median prices are more stable than the value of any one particular home, especially when you are going in a downward direction." His reasoning is that, most of the people that can still afford to buy a house are still buying on the top end of their price range. So they are still spending as much as before, but now their $500,000 is getting a house that last year was going for $600,000, instead of last year when $500,000 would have gotten you a house that sold for $400,000 the year before. So while median prices might stay relatively constant, people are getting much more house for the money. Right now the weakness appears to be confined to Silicon Valley. Here in Dallas, existing home sales slipped 5% in March. And the number of existing homes on the market jumped 20% from last March. Growing inventories are usually the first indication of growing stress. Right now industry experts in Dallas are not worried as inventories are still running near historic lows. Residential real estate will definitely be an area to pay close attention to. It is only a matter of time until residents of "Pleasantville" find the value of their home is less than all the mortgages against it.

Just when the retailers would have you believe that the U.S. consumer is closing his wallet, the consumer credit number is released. Consumers added another $13.5 billion to the tally in February, bringing the total to $1.6 trillion. Remember this does not include home equity loans. It also does not included auto leases, which are approximately 30% of the new car market. Granted a lease does not increase a consumer's debt load, but it is still a required monthly payment. Also disturbing, credit now accounts for 22.3% of personal consumption. When the retailers start releasing sales for the month and quarter, please do not fall into the trap of believing that low same-store-sales growth is an indication of the economy slowing in any meaningful way. Pay attention to total sales for the retailers. Yes, there will be several retailers that will be paraded out that experienced declining sales. But there are some retailers out there that are just bad retailers.

These sales report headlines just came in:

  • American Eagle Outfitters Reports Record March Total Sales of $101.7 million And Total U.S. Sales of $93.6 million; U.S. Same Store Sales Increased 5.3%
  • Wilsons Leather Reports 34% Increase in March Sales, Comparable Store Sales Increased by 7.9%

Europe looks less and less likely to miss the global slowdown. Euroland economist now see growth of 2.7% in the first quarter and 2.5% in the second quarter. These estimates are down from 2.8% growth for both quarters. Additionally, German economists expect Germany to grow by 2.1% this year and 2.2% in 2002, well below the government forecast of 2.6%. New car registrations, a key indicator for consumer confidence, continue to fall in Europe. The Financial Times reported that preliminary figures indicate that registrations are down 6.7% for the quarter, with the trend getting worse as March registrations were down 8.3%. In the FT article, Mike Burns, president of GM Europe, subtly cautioned "You cannot solve this business on the cost side. The revenue side has to be addressed also."

In the face of declining economic growth the ECB continues to hold rates constant. The ECB has defied every other central bank in the world in not lowering rates. The way economist are discussing the decisions, it appears that there will be substantial comparisons made between the ECB and the Federal Reserve down the road.

The World Bank joined the chorus and lowered growth forecasts for the world economy. It slashed its estimates to 2.2% growth for the 2001, down from 3.4% growth just five months ago. The lower forecast is due to lower expectations for the U.S., which is now forecasted to grow by only 1.2%. The World Bank's forecast is half the government's forecast and significantly below the 1.9% average of Wall Street economist. The World Bank is still holding the party line by indicating that the US economy should see growth rebound to more than 2% and close to 3% in the third and fourth quarters respectively. The World Bank did admit that "The risks to the forecast are substantial" and "We can't say with any great confidence when that turnaround will occur."

Tuesday, Moody's reported that it expects debt defaults of speculative grade bonds to peak during the first quarter of 2002, rising to 9.9%. For the first quarter, $31.8 billion worth of bonds went into default, which represents 7.1% of the speculative grade bonds outstanding.

Problems continue for the country's aluminum industry. The Bonneville Power Administration is asking the aluminum companies to refrain from using the BPA's power for the next two years. Aluminum prices jumped $40 to $1,528 a metric ton. One analyst interviewed by Bloomberg sees aluminum rising to $1,600 - $1.650 range. If the companies agree to the BPA request, that would reduce global capacity by 5%.

It is starting to look more likely that Americans will be paying more yet again when they load up the family cruiser and head off down the road. While gasoline stocks did increase for the week ending April 6, they still remain at record low levels, and are more than 5% below the levels last year that sent everyone into a panic. Some analysts are suggesting gasoline will reach $2 per gallon with a 25% chance of hitting $3. Higher gasoline prices combined with all but guaranteed higher utility prices this summer will test the U.S. consumer. Just when economists will be looking for the "second half recovery," it appears that the slowdown will be starting to hit Main Street.

Selected emailed questions or comments will be addressed on Bears' Chat.

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