A bevy of new earnings reports brings interesting news about the state of the economy:
- “Colgate 3Q profit rises 18% amid higher prices, prior-year charges.”
- “Lower costs and higher prices help [glass manufacturer] Owens-Illinois.”
- “Panera Bread 3Q profit climbs on higher prices.”
- “Higher selling prices and lower commodity costs boost Kimberly-Clark’s 3Q profit.”
- “Coca-Cola Enterprises Inc.’s third-quarter earnings rose 15%, helped by continued strong growth in Europe and price increases that boosted margins.”
- “Swedish home-appliances maker Electrolux AB Monday posted a stronger-than-expected 93% rise in third-quarter net profit on the back of cost cuts, higher prices and lower raw-material costs…”
- “Philip Morris, Reynolds beat profit estimates on higher prices.”
- “Hynix Semiconductor Inc., the world’s No. 2 memory chip maker, reported its first quarterly profit in two years on Friday, bolstered by higher product prices.”
- “Procter & Gamble Co. reported Thursday first-quarter net income fell 1% as higher prices offset a decline in sales volume and currency translations.”
Notice a pattern here?
- “Samsung Electronics Co., Asia’s biggest maker of chips, flat screens and mobile phones, said profit tripled to a quarterly record as the global economic recovery spurred a rebound in prices.“
- “Chocolate maker Hershey Co., helped by price increases and lower costs, reported Thursday that third-quarter profit rose 30% from last year and its raised its full-year profit outlook.”
This week, IndexIQ introduced the IQ CPI Inflation Hedged ETF (ticker: CPI). The purpose of the fund, I gather, is to provide returns that are highly correlated to the consumer price index. More information here.
According to Calculated Risk, “[t]he Reid/Baucus proposal is to extend the tax credit and phase it out over 2010. The credit would be $8,000 through the end of Q1 2010, and decline $2,000 per quarter after that … ($6,000 in Q2, $4,000 in Q3, $2,000 in Q4 2010).”
This comes as a pleasant surprise. I had expected concerns about the housing market to trump concerns about the deficit and national debt.
Relative to an expansion or extension of the credit, the Reid-Baucus proposal presumably will put downward pressure on housing prices. Assuming this proposal becomes law, the most likely scenario (in my view) is stable or gently rising home prices, particularly among low-end homes where demand in many cities is ridiculously strong. However, even an inflation hawk like me has to acknowledge the possibility that the combination of increased foreclosures and the phasing out of the tax credit will result in renewed housing price deflation. There is enormous uncertainty here. Much will depend on the macroeconomic environment (e.g., the unemployment rate) a year from now.
Update (10/27): Never mind?: Home Buyer Tax Credit to be Extended and Eligibility Expanded. I should have known better than to think that sound policy would trump political considerations.
As of this afternoon, the iShares Barclays 20+ Year Treasury Bond Fund (ticker: TLT) is down 21.5 percent year to date and is down 4.3 percent in the past month. Here’s a chart showing TLT’s performance during the last two months:
By contrast, the iShares Barclays TIPS Bond Fund (ticker: TIP) is up 3.5% year to date and is up 0.4% in the past month. Here’s a chart showing TIP’s performance during the past two months:
TIPS bonds protect investors against inflation, whereas traditional treasury bonds do not. The divergence in the performance of these two exchanged-traded funds is a clear indication that treasury bond buyers are increasingly worried about inflation.
Hot on the heels of privatizing parking meters, Chicago mayor Richard Daley is reportedly mulling a similar deal for Chicago water:
If the parking meter deal put a bad taste in your mouth, try swallowing this: Chicago is considering leasing its water system to help fix the budget. The new boss could charge whatever they want for water, CBS 2’s Roseanne Tellez reports.
Chicagoans won’t be the first to pay more for water. And they won’t be the last.
Hat tip: mm.com.
Gasoline prices jumped nearly 18 cents over the past two weeks, the first two-week rise since early August, according to a survey published Sunday.
The average price of a gallon of self-serve regular was $2.655 as of October 23, said Trilby Lundberg, author of the Lundberg Survey. Since the October 9 survey, the average price per gallon has climbed by 17.82 cents. The current price is 12.3 cents less than the price a year ago.
For the first time in a year, U.S. companies are planning to boost payrolls and investments, indicating the nascent economic recovery will be sustained into 2010, a private survey showed.The percentage of businesses expecting to hire staff over the next six months exceeded the share projecting more firings by 4 points, the first positive reading since July 2008, according to figures from the National Association for Business Economics issued today in Washington. The spread in favor of those looking to spend more on new equipment was even larger.
The survey also showed that companies have begun raising prices of their products:
[P]rice increases are starting to become more prevalent as demand improves. Twenty-three percent of the companies surveyed by NABE this month said they raised prices since the prior survey, up from 8 percent in July. Just one out of every 10 said they had to cut what they charged customers, down from two out of 10 three months ago.
Copper prices have doubled in almost a year. Bucyrus International (BUCY), an equipment mining company with a $3.6B market cap, provided some important commentary in its earnings report last week regarding the state of the global economy. In particular, BUCY expects copper prices to remain elevated (quotes from Seeking Alpha transcripts from the conference call):
“Particularly in oil, sands, copper and iron ore as we’ve talked about in the past, the big five [mining companies] that do mind the preponderance of the copper, their yields are down significantly which means that they need more equipment to get the same amount of ore out of the ground, and quite frankly the lack of the exploration in the low yields has led to the type of copper price that we’re seeing right now, and until more production can hit the market and that’s not going to be immediate, we see that copper pricing will continue to stay where it’s at.”
There has been a lot of debate about how long China’s commodity stockpiling cycle will last and debate about whether “real” demand will pick up the slack once that cycle ends. According to BUCY, it seems that the lack of investment starting from the deflationary panic of 2008 has left copper producers flat-footed. Copper could lead the way in demonstrating how a destructive deflation, followed by historic easy monetary policy, introduce the global economy to its next inflationary cycle. Stay tuned…
“Gwinnett County officials Friday unveiled plans to set a 2009 mill levy that would increase its portion of property taxes by about 21 percent. The proposal would generate $52.6 million in additional revenue to help restore emergency services, parks, recreation and other operations pared by budget cuts earlier this year. The increase, if passed, would add slightly more than $13 a month in county property taxes on a $200,000 house, or about $160 a year.”
This is the second time County Commissioners have proposed an increase in property taxes. Anti-tax activists defeated the earlier proposal, and the county responded with drastic cuts in services. This time around, the tax is likely to pass given that Debbie Dooley, the grass-roots coordinator for Freedomworks, will not oppose the plan:
“‘They explained in detail what this mill rate would fund. It’s what we’ve wanted all along. People just want accountability from their elected officials.’ Dooley said she has issues with some of the restorations in parks and recreation, and while she will not support the budget increase, she will not lead a drive to oppose it. She encouraged county residents to attend the public meeting Thursday to see a presentation on the plan and make up their own minds.”
The on-going tensions between government revenues and household budgets become most intense during recessionary economic conditions. Property taxes are a particularly hot topic because they drive up the cost of owning a home in ways that many struggling families are not prepared to handle. On the other hand, when deprived of these revenues, local governments can sometimes struggle to provide even the most basic services that these same families come to expect.
No matter where your sympathies reside, higher property taxes are inflationary for existing homeowners and are likely inflationary for aspirational homeowners (unless offset by federal tax credits, homebuilder discounts, etc…)
Although producer prices fell 0.6% in September, producers who rely heavily on commodities as inputs have experienced sharp pricing pressures for the past several months. Encore Wire Coporation (WIRE) provides one of many examples.
WIRE is a small producer of copper wiring ($486M market capitalization and net sales last quarter of $169M). The company described the squeeze it feels from higher copper prices during its conference call announcing third quarter earnings (click here for the complete transcript from Seeking Alpha):
“We’re tempted to lead the industry with several price increases during the quarter but met limited success…copper’s doubled since late last year and historically that’s been a fantastic situation for our industry. The change this time around on the copper climb has been there is a competitor that’s been very public with, they don’t agree with the passing on those cost, because they feel like the [market] won’t allow it.
Our approach to that is you pass it on and it is what it is regardless of the demand. It’s very transparent for contractors and distributors alike to see that copper is up $0.10 or down $0.05 or whatever the volatility would lead to and from my 20 years…copper is the deciding factor on a price increase or actually price decreases as well. You can have PVC, you can freight, you can nylon, you can have other cost influences but until copper trends one way or the other, the price increases typically fail.”
In other words, when construction activity picks up again and/or becomes relatively more robust, there is plenty of inflation waiting in the wings for commodity-based products like copper wiring. That inflation will likely translate quickly into higher costs for construction across the board.
From the Los Angeles Times:
Travelers who use the economy parking lots at Los Angeles International Airport will pay $2 more per day starting Nov.19. The Los Angeles Board of Airport Commissioners approved the increase Monday for parking lots B and C, whose rates were last raised in 2002. When the increase goes into effect it will cost $10 a day to park in Lot B on 111th Street and $12 a day in Lot C off Sepulveda Boulevard.
Sumitomo Rubber Industries Ltd. (SRI) is increasing prices for Dunlop-, Falken-, Sumitomo- and Ohtsu-brand tires it exports by 5 to 15 percent, depending on size, category and market …. SRI cited the rising cost of raw materials, including natural rubber and crude oil, as the reason for the increases.
From the China Post:
Nanya Technology Corp., Taiwan’s biggest computer-memory chipmaker, plans to raise prices 20 percent next month because of rising demand, Vice President Pai Pei-Lin said. The company increased prices by 20 percent this month from September, after boosting them 35 percent in the third quarter from the preceding three months, Pai said.
Related: Via the Wall Street Journal:
Contract prices of the dynamic random access memory chips widely used in personal computers increased sharply during the latter part of October, DRAMeXchange, a Taiwanese online chip clearinghouse, said Thursday. The average contract price of the mainstream 1-gigabit double-data-rate-two chip that runs at 667 megahertz rose 15.7% to US$2.06 from US$1.78 in early October, DRAMeXchange data showed.
Even dying is getting more expensive. The average price for basic funeral home services in New Jersey and surrounding states has risen an average of 12 percent over the last year, according to an annual study released Tuesday. The pricing increases are the result of several converging trends, including a growing consumer preference for low-margin services like cremations and immediate burials, according to the 73-page study, conducted by accounting firm Citrin Cooperman.
Bloomberg reports on the results of the latest apartment survey by RealFacts:
Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates. The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
Though some observers portayed the situation as dire (“Apartment Rents ‘Plunge’ in the West,” read the headline at Calculated Risk), it is worth noting that occupancy rates reported by RealFacts increased in many locations, including San Diego, Sonoma County, Marin County, and the huge Inland Empire. This suggests that even in California, with 12.2 percent unemployment, rents may be close to the bottom.
In at least one location — the Tri-Cities area of Washington State — rents have actually begun to rise:
Unlike much of the rest of the nation, the apartment occupancy rate in the Tri-Cities continues to rise — and so does the cost of rent. “We are in an upward trend,” said Jolene DeGarmo with Kennewick’s Crown Property Management, which conducts an apartment rental survey twice a year…. The latest survey shows occupancy rates are at 98 percent in Kennewick and Richland and 97 percent in Pasco, DeGarmo said. And that incredibly tight availability of units means they’re renting for premium prices. Sarah Smith, 21, just ended her apartment search after several months of looking. Last year, her one-bedroom apartment cost $400. A friend who recently moved into the same building is paying $465 for a one-bedroom, she said.
For what it’s worth, investors in Real Estate Investment Trusts don’t seem unduly alarmed. Even after a recent pullback, shares in REITs are up nearly 50 percent since mid-July:
Many businesses are quietly restoring plans to match a portion of their employees’ 401(k) contributions. About half of the companies that suspended matches will be restoring them in 2010, says Byron Beebe, U.S. retirement market leader at Hewitt Associates.
“If you thought home prices were bottoming out, you may be wrong. They’re expected to head a lot lower.” So says Fiserv, a financial information and analysis firm that is predicting the national median home price of homes will drop another 11.3% by June 30, 2010.
Cities that will experience the largest price declines include Miami, Orlando, Las Vegas, and Phoenix, according to Fiserv.
I’m not sure what planet Fiserv is on, but here in the real world, home prices are rising, and in some cities they are rising fast.
Does this look like prices are crashing in Las Vegas?
Does this look like prices are crashing in Phoenix?
The Case-Shiller index, which measures the average home price nationally, is up three months in a row. The latest monthly increase, 1.6 percent, is the largest one-month jump in more than four years.
For much more, see Inflation Watch’s housing archives.
According to CNN Money coverage of a recent Watson Wyatt survey, 44 percent of surveyed employers that cut pay are rescinding the pay cuts; 24 percent of employers that stopped 401(k) match programs are restoring them; 33 percent of employers that froze salaries will be unfreezing them.
CNN Money states that hard drive manufacturer Seagate Technologies, which had cut pay by 10 percent earlier this year, is among the companies restoring pay to pre-recession levels.
Following in the steps of General Motors, Advanced Micro Devices, and American Express, Gatehouse Media New England said it is rescinding pay cuts it had implemented earlier this year.