The Bul Market Advisory Report
Enviado: 17/2/2003 10:36MARKET COMMENTARY
(from February 10, 2003)
THE BIG PICTURE -- WHAT'S HAPPENING OUT THERE?
MARKET UPDATE
Last week's 3% loss by the major indices capped four weeks of steady declines. The obvious culprit is the Iraqi situation. It is keeping money on the sidelines and dragging down the market. Trading volume on the New York Stock Exchange, for example, is off more than 15% over last year.
But, economic prospects would be eliciting jeers from the trading pit even without an impending war. Consumer confidence is now at a nine- year low and is starting to affect consumer spending, which has been the sole beacon in the economic fog for the past two years. Holiday sales were weak, and January chain store sales were disappointing. Jobs are disappearing in spite of the U.S. economy adding 143,000 new positions in January. That gain was due to seasonal effects (fewer layoffs due to conservative holiday hiring) and did not offset the sharp December employment decline. Firms aren't hiring and won't be until global tensions ease.
More Americans are out of work now than a year ago. Expanding federal and state budget woes and big increases in defense spending mean the initiation of fewer public works projects and other government investments that can help to put people to work and address social needs. The federal deficit is set to balloon past $300 billion annually over the next few years, and that doesn't include the cost of a war and reconstruction in Iraq or another terrorist attack.
Despite the bleak economic and international picture, the market is ready for a rally. Not because of any particular event. It is just time for those who see bargains to step in. That buying will ignite short covering and set the market off to the races. In the meantime, if anything positive happens with Iraq, such as Hussein stepping down voluntarily, the rally could be huge. But, it will be short-lived unless core economic factors improve. That still appears unlikely.
So, we will be cautious managing both LONG and SHORT positions and close them more quickly in the coming weeks. However, as always, some stocks go up and other stocks go down regardless of the economic, political or social events of the day. Last week was no exception. Next week will be no exception either, and we will still be looking for new positions to open.
MARKET OVERVIEW
MARKET WINS THE WEEKLY BATTLE, BUT THE WAR IS STILL IN QUESTION
After the first four days of trading, it looked like the market was headed for another negative week. Then Friday came. In a volatile day, the market finished with gains for the first time since January. Overall, for the week, the Dow rose 0.5%, the S&P 500 traded 0.6% higher, and the Nasdaq climbed 2.2%, putting an end to their four-week declines.
It truly was a week dominated by war developments. Sure, there were some earnings reports. But other than releases from VIACOM (VIA, $37, unch.) and DELL COMPUTER (DELL, $26, up 3), there were no high-profile announcements.
On Monday, it was war news. Iraq allowed United Nations weapons inspectors to use U-2 surveillance planes in their inspections and promised more cooperation. That ignited hopes for a resolution to the situation, causing the market to rise.
On Tuesday, it was more war news. A tape surfaced that was rumored to contain Osama bin Laden's voice. The recording offered support for Saddam Hussein and Iraq, scaring the market into losses.
On Wednesday, the focus shifted to North Korea. U.S. Intelligence officials released a report claiming that the country has ballistic missiles capable of reaching the U.S. The missiles will be able to carry nuclear weapons.
Thursday and Friday belonged to Hans Blix. Investors were nervous in advance of the chief weapons inspector's report to the UN Security Council on Friday. Thus, stocks fell on Thursday. However, even though Blix's comments did nothing to clarify the Iraq situation, stocks surged on Friday following the report.
Why then, did stocks rise? Friday's trading was volatile, leading us to believe that investors were taken over by their bargain-hunting instincts. In the middle of the week, the major indices closed at fresh four-month lows. Thus, many investors took that as an opportunity to buy beaten-down shares.
As for us, we'd wait until we had a clearer picture of both the war situation and the economy. There remains a lot of uncertainty in the market right now. Although we could see a rally following the resolution of the war situation, it won't last unless the economy improves and businesses ramp up their spending. In the meantime, we'll sit back and let the 15% dividends roll in from our investments, such as Mortgage REITs.
ECONOMY WATCH
1. RETAIL SALES STRENGTHEN, FOR THE MOST PART
Retail sales excluding auto sales rose 1.3% in January, according to the Commerce Department. That's the largest non-auto sales increase in over two years. Auto sales, however, fell 7.5%, for their biggest decline since November 2001. Overall, January retail sales slipped 0.9%, worse than the 0.5% drop that economists looked for and down from a 2.0% rise in December. However, sales were up 3.9% year-over-year. The non-auto results were better than economists expected, but auto sales really put a drag on the numbers.
2. JOBLESS CLAIMS MIXED
The Labor Department released its latest figures on jobless claims Thursday morning. Initial jobless claims for the week ended February 8 fell by 18,000 to 377,000 claims. However, the four-week average -- a more stable indicator over the overall job market -- rose slightly, by 3,500 to 389,000. Still, both numbers remain below the 400,000 mark. But like we said last week, the current levels suggest a flat job scene. An improving job market correlates more with an average of 350,000, or below.
3. INVENTORIES RISE
Businesses built up their inventories by 0.6% in December, according to the Commerce Department. Total inventories rose to $1.14 trillion, increasing for the eighth straight month and doubling the expected rise, as total sales rose 4.2%. Though the inventory/sales ratio rose slightly from 1.36 to 1.37, it remained close to its record low of 1.35 in August. That was the key: Inventories remained tight relative to sales. This is positive for the economy, as tighter inventories force firms to produce more in the event of a demand increase. If inventories rise too far above sales, companies cut their production in order to liquidate their excess products. Thus, this report was taken positively by the market.
4. ECONOMY EXPERIENCES INCREASED OUTPUT
The Federal Reserve reported that industrial output rose 0.7% in the month of January. The increase, which was larger than the 0.4% uptick that economists expected, was the biggest rise since July. The numbers were boosted by increased auto production, with an annualized 12.7 million vehicles produced in the month, up from December's rate of 11.7 million, the lowest since 11/2001. In addition, utilities production jumped 4%, as the unusually cold weather caused consumers to use more electricity.
5. CONSUMER SENTIMENT HITS A NINE-YEAR LOW
The University of Michigan released its latest consumer sentiment reading. The index posted a reading of 79.2 in February, declining from the January reading of 82.4. Sentiment is at its lowest level since 1993. Economists expected a narrower decline, to a level of 81.6. War fears were blamed for the fall in consumer sentiment, as consumers expect the weak economic environment to continue if the country gets entangled in a prolonged war.
IN THE NEWS
I. MARRIOTT POSTS A LOSS
MARRIOTT INTERNATIONAL (MAR, $30, up 1) reported a 4Q02 net loss Monday morning. The hotel operator posted a loss of $35 million, or 15 cents a share, improving a year-ago loss of $115 million. Excluding charges related to the firm's discontinued businesses, Marriott earned 55 cents a share, topping Wall Street expectations by a penny. Revenue rose from $2.1 billion to $2.7 billion, with North American revenue increasing by 7%. However, the company lowered its projections for 1Q and 2003 earnings. The firm expects 1Q revenue to fall 3% year-over-year, as earnings could fall as much as 6 cents short of Wall Street expectations for a 42-cent profit. For the full year, Marriott dropped its guidance from $2.10 a share to $1.90 this year. The consensus 2003 estimate was $2.01.
II. SIGNS OF METLIFE
The nation's largest life insurer, METLIFE (MET, $26, unch.) turned a year-ago loss into a lively profit in the fourth quarter of 2002. The company earned $560 million, or 78 cents a share, vs. a loss of $295 million in the year-ago period. Excluding one-time items, MetLife earned 65 cents, topping Wall Street expectations by a penny. Revenue from premiums and fees jumped 16% to $5.8 billion in the quarter. Profits were aided by a $575 million gain from the sale of 17 properties, though the company wrote down $340 million in declining investments. Additionally, the firm took an unexpected charge of $170 million due to asbestos claims. That boosts the total of asbestos-related charges to $400 million. MetLife expects to spend up to $1.2 billion in order to cover all of the expected claims.
III. BLOCKBUSTER REPORTS EARNINGS
BLOCKBUSTER (BBI, $14.48, up 1.90) posted a profit of $30 million, or 17 cents a share, in the fourth quarter of 2002. While the latest results improved upon a $5 million loss in the year-ago period, they missed estimates by 2 cents. In 4Q01, the firm took $40 million in charges related to its efforts to phase out its VHS tape library. Revenue rose 17% to $1.6 billion. For the full year, Blockbuster posted a loss of $1.6 billion, or $9.11 a share, due primarily to a $1.8 billion loss for accounting adjustments. Excluding one-time items, the firm earned $1.04 a share. Looking ahead to 2003, Blockbuster expects to grow earnings by 20% to $1.20. But Blockbuster has seen rental revenue fall because of increased purchases of low-priced DVDs at discount stores like WAL-MART (WMT, $49, up 2) and TARGET (TGT, $28, up 1), and that likely won't change this year.
IV. APPLIED MATERIALS POSTS A LOSS
APPLIED MATERIALS (AMAT, $12.40, up 0.59) reported disappointing fiscal 1Q (ended January 26) "earnings" after the bell Tuesday. The chip equipment maker posted a net loss of $65 million, or 4 cents a share, vs. a $45 million, 3 cent per-share loss in the year-ago period. Revenue rose slightly, from $1 billion to $1.05 billion. However, both earnings and revenue missed estimates, for 2 cents and $1.15 billion, respectively. Orders fell 35% from the previous quarter to just over $1 billion. That doesn't bode well for next quarter's revenue, as orders are a good indicator of sales in the next few months. In addition, Applied Materials lowered its projections for the fiscal second quarter, expecting earnings to clock in at 1-2 cents instead of a 2-cent profit that the firm previously expected. The firm doesn't expect a recovery in semiconductor capital spending in the near future, and said it will continue to cut costs.
V. LOWER EARNINGS AGAIN FROM MAY DEPARTMENT STORES
MAY DEPARTMENT STORES (MAY, $19.87, up 0.53) reported lower earnings for the eighth straight quarter. The operator of Lord & Taylor and Filene's department stores reported net income of $390 million, or $1.28 per share, down from a year-ago profit of $430 million. However, results beat estimates for a $1.20 profit. Sales fell 4% to $4.4 billion. The company's CEO called it a "disappointing year" for the firm and gave no forecasts for 2003, only saying that he hoped that the firm's cost-cutting would provide a "strong foundation" for the coming year. Last year's holiday season was a rough one for retailers, especially traditional department stores like the ones that May operates. Expect more of the same for the first half of this year.
VI. MORE MEDIA EARNINGS; DIFFERENT RESULTS
Rupert Murdoch's NEWS CORPORATION (NWS, $26, up 1) posted a profit in its fiscal second quarter (ended December 31, 2002) after a net loss in the year-ago period. The media giant reported net income of $240 million, or 16 cents a share, vs. a big year-ago loss of $605 million. Excluding one-time items, earnings grew from 17 cents to 24 cents, edging estimates by a penny. Revenue rose 14% to $4.7 billion.
FOX ENTERTAINMENT GROUP (FOX, $27, unch.), which is 80% owned by News Corp., posted earnings of $285 million, or 32 cents a share – beating estimates by 4 cents. However, profits fell 38% year-over-year. Still, these results stand in large contrast to those from AOL TIME WARNER (AOL, $10.51, down 0.13), which reported a $100 billion loss in 2002. It goes to show that media firms can make money without struggling Internet service providers weighing them down.
VII. AES POSTS A WIDER LOSS
Power company AES (AES, $3.20, up 0.21) posted a wide loss in 4Q02. The cash-strapped company reported a huge net loss of $2.8 billion, or $5.08 a share, vs. a $45 million profit a year ago. Excluding the big charge for bad investments, AES turned a 3-cent profit, beating estimates for a break-even quarter. Looking ahead, the company expects to improve its cash flow to $1.5 billion this year, higher than analysts expect. In addition, the firm plans to reduce its debt load by $1.3 billion and cut more than $200 million in costs. While this will help the company get back on track, continued restructuring efforts caused AES to lower its 2003 estimates from 73 cents a share to 50 cents.
VIII. RETAIL SALES ARE SLACK
Retailers experienced another slow sales week. WAL-MART (WMT, $49, up 2) announced that its same-store sales for the latest week fell a bit short of forecasts. However, the company still expects to meet its target of 2-4% sales growth for the whole month. J.C. PENNEY (JCP, $18.72, up 0.07) experienced sales that were slightly higher than expected last week, but the department-store chain sees flat year-over-year sales for all of February. Last year, the retailer's sales surged over 12%. FEDERATED DEPARTMENT STORES (FD, $25, up 1), which owns the Macy's and Bloomingdale's lines of department stores, didn't release numbers on its latest week, but the firm forecasts a 4-5% drop in monthly same-store sales. Last year, sales fell 3%. Retail sales are hurting from a combination of unusual weather and war worries. The cold weather is slowing down spring clothing sales, while war-conscious consumers that expect an economic slowdown are spending less.
IX. BANK OF AMERICA SAYS SELL GENERAL MOTORS
Bank of America slapped GENERAL MOTORS (GM, $33, down 3) with a rare "sell" rating, sending shares of the company tumbling in Wednesday's trading. The investment bank, which previously had a "neutral" rating on the stock, cited increased foreign competition and capacity in the lucrative truck market as one of the main reasons for the downgrade. Additionally, Bank of America believes that GM will have to slash its dividend this year because of a weak financial situation. The bank expects little or no growth (0-2%) in GM's cash flow, and pressure from its growing pension and healthcare liabilities. As a result, Bank of America cut its price target on the stock from $33 to $28.
X. ECONOMISTS LOWER GDP ESTIMATES
The prospect of war and terrorism fears caused economists to lower their growth projections for the U.S. economy. In a Wall Street Journal survey of 55 economists, 23 lowered their projections for 1Q gross domestic product (GDP). That lowered the average estimate from 2.7% annualized, to 2.6%. In addition, 26 of the polled economists dropped their forecasts for the second quarter, lowering the estimate from 3.2% to 3.0%. Many economists attributed their revised estimates to higher crude oil prices, which will dampen business and consumer spending this year. Also, consumers may spend less as the war and terror fears grow larger.
1. SECTOR-RELATED NEWS
TECHNOLOGY
DELL'S PROFITS RISE
DELL COMPUTER (DELL, $26, up 3) posted profits that were on-target for the fourth quarter, with the company gaining strength from all corners of the globe -- impressive indeed in a weak economy and an environment in which PCs are becoming increasingly commoditized.
Dell's revenue for the quarter was $9.7 billion, up 21% over the previous year's fourth quarter, with earnings reaching $605 million, or 23 cents a share -- up 35% over a year-ago $455 million profit. Results matched Wall Street expectations. For the fiscal year, the PC maker's earnings hit 80 cents a share on net earnings of $2.1 billion.
TODD'S TAKE: With 4Q02 operating income of $820 million, this was Dell's best quarter ever. 1Q earnings are typically down due to the post-holiday environment and the firm expects profits to drop 10% sequentially. Nonetheless, 1Q earnings are expected to outpace industry growth. Dell expects to produce a year-over-year increase in unit volumes of more than 25%, compared with overall growth of the industry in the low single digits. The company also expects to see improvement in its operating margins due to an improved product mix and cost improvements, all in all calling for earnings of 23 cents in the first quarter. Dell has met guidance for eight consecutive quarters, and we would expect the firm to do so again for the current quarter.
Dell has made especially good strides in server growth, gaining a 28% increase in shipments of its PowerEdge servers that run Microsoft's Windows operating system as well as the vendor-neutral Linux operating system, both of which have proven to be effective alternatives to the more traditional UNIX platforms. Another noteworthy success during the last successful year is delivering improved margins, ending the year with net margins at 8.4%, a full point higher than the previous year.
Dell indicated that demand remains stable despite a downturn in the industry and little hope for a near-term improvement in macroeconomic conditions. In addition to stable demand, Dell has aggressively decreased its costs -- something that's absolutely essential in this increasingly low-margin business. Dell lowered its costs during the last fiscal year by $1.2 billion. Even more cost savings have been identified for the coming fiscal year.
The combination of both top-line and bottom-line growth, as well as Dell's strategy of gaining market share while cutting costs, will continue to keep the firm at the top of its game. We don't recommend investing in Tech at the moment, but if your mind is set on doing so, then Dell should be one of your top choices.
DEFENSE
DEFENSE GETS A BOOST
LOCKHEED MARTIN (LMT, $47, down 3) and BOEING (BA, $30, unch.) received a boost, so to speak, from the military. The Air Force announced that it would pay $540 million to the two firms over the five-year period starting with fiscal 2004, in order to keep them in the rocket-launching business.
TODD'S TAKE: The rocket launching business has been struggling lately, as the commercial-satellite market has dried up. A recovery isn't expected until 2005 at the earliest.
Without many commercial satellites to launch, Boeing and Lockheed Martin have been struggling to cover the costs of their rocket-launching businesses. Neither of the firm's rocket divisions -- Boeing's Delta IV rockets and Lockheed's Atlas V rockets -- is expected to be profitable for several more years.
In any other sector, both firms would have eliminated their struggling business units. But in this case, their client is willing to subsidize many of their costs. That client is the U.S. government. The government doesn't want to lose its ability to travel into space. Yes, the recent space shuttle Columbia tragedy has the country second-guessing the space program, but we're not going to cease operations any time soon. The U.S. government always wants to be at the forefront of everything, especially space travel.
Previous space tragedies didn't derail the U.S. from traveling into space. After the Challenger explosion in 1986, the space shuttle fleet was grounded. That kept satellites from being launched for several years, but launches did resume. Additionally that temporary shutdown of the space shuttle program brought attention to the need for more than one method of sending satellites into space.
That caused the government to pay two companies to launch rockets instead of just relying on the space shuttle program. And the head of Air Force Space Command said, "We're committed to maintaining two launch providers," so there's no danger of either Boeing or Lockheed being left out in the foreseeable future.
As a result, the government will subsidize many of Boeing's and Lockheed's costs over the next five years, starting with 2004. Next year, the Air Force will pay the firms a combined $165 million for their launch programs.
Looking ahead, Lockheed likely will benefit more than Boeing. In the last batch of launches. Boeing received 22 of the 29 total launches. This time, however, the Air Force plans to put a cap on the number of launches that either firm can receive to 60% of the total. That means more business for Lockheed.
Sure, the rocket-launching business isn't profitable -- right now. But in the meantime, Lockheed is building its relationship with the government and the military, and the firm is strengthening its position for when business recovers. Besides, the company's defense units are raking in the cash for now. We like Defense companies like Lockheed Martin because of their broad range of products that allow them to make money at all times.
OIL
OIL HITS A TWO-YEAR HIGH
Crude oil futures reached a high of $36.29/barrel in Thursday's trading. That's a level not seen since October 2000. In addition, U.S. commercial crude inventories fell below 270 million barrels, the smallest stockpile in over 27 years.
TODD'S TAKE: Oil prices have soared 45% in the past three months. As a result, oil inventories in the U.S. are at levels from the 1970's, when the OPEC oil crises caused prices to soar and stockpiles to plummet. In fact, inventories are below the equivalent of 14 days of U.S. oil consumption -- the level that the government suggests as the minimum operating rate.
Why are oil prices so high? There are a number of reasons, and the big ones don't seem close to a resolution. First, one reason should go away with the changing seasons: Unusually cold weather. It's been a very wintry few months in the U.S. and Europe, so demand for heating oil has surged. This should come to an end within the next few months with the arrival of spring.
The most publicized reason is the tension between the U.S. and Iraq. We all know about the White House's campaign for military action in the Middle East. With each passing day, it seems certain that the U.S. will NOT be dissuaded from its war crusade. Even with strong opposition from other United Nations members, especially Russia, Germany and France, war looks imminent.
These beating war drums are causing oil prices to soar, and with good reason. Iraq is the world's #8 oil exporter, and a war likely would ground its production to a halt. Thus, on these expectations oil prices are surging. And with a resolution to the conflict still over the horizon, expect the upward pressure to continue.
The other main reason is the oil strike in Venezuela. A member of OPEC, Venezuela is the world's fifth-largest oil exporter, even bigger than Iraq. This strike has been going on for two months, and – as with the Iraq situation -- there's no end in sight.
Oil prices are nearing their September 2000 high, which caused the Clinton administration to release reserves from U.S. stocks. So far, the Bush administration has yet to use the Strategic Petroleum Reserve, which holds 600 million barrels of crude. And the European Commission downplayed the need for reserves too, expressing its belief that other oil-producing countries can pick up the slack. But two of the top 10 oil countries? That could prove to be a shortfall too wide to cover.
What does this mean for the economy? Only that it could bring us back into another RECESSION. Every time that crude has risen about $30 a barrel and stayed there, we have gone into recession. Yes, yet another reason why we're very cautious on the economy right now.
HEALTHCARE
HEALTHY PROFITS FROM AETNA
AETNA (AET, $41, unch.) released its 4Q02 financial results Tuesday. The healthcare firm reported net income of $100 million, or 63 cents a share, turning around a loss of $185 million, or $1.30 a share, in the year-ago quarter. Excluding one-time items, the firm earned 77 cents a share, blowing by analysts' estimates for a 59-cent profit. For all of 2002, Aetna posted a huge loss of $2.5 billion, or $16.50 a share. The bulk of this loss came from the first quarter, when the company took a $3 billion charge for the impairment of goodwill. Operating earnings for the year reached $2.50 a share, up from 2001's 44-cent operating profit.
TODD'S TAKE: This was a great earnings report from Aetna. 2002 was a comeback year for the firm, which posted losses in every quarter of the prior year.
Rising profits are coming as Aetna streamlines its operations. In 2001, the nation's #2 insurer struggled with millions of unprofitable health plan subscribers. So what did the firm do? It cut out the fat from its healthcare business. Aetna took a $30 million charge in the latest quarter for cutting 700 jobs. Over the past year, the firm has enacted almost 8,500 layoffs, cutting its labor force to 27,500 employees.
In addition, Aetna became more selective with its customer base. Instead of holding onto unprofitable members with high medical costs, the firm cut its membership base significantly. A year ago, Aetna had 17.1 million subscribers. By year-end 2002, that number had been slashed to 13.7 million.
Of course, by cutting the number of subscribers, Aetna's revenue shrank. Revenue dropped 22% year-over-year to $4.7 billion, with healthcare premiums revenue sinking 27% to $3.5 billion.
However, the key to Aetna's success in the face of lower revenue was the firm's ability to cut costs by more than the drop in revenue. The company's health-care costs fell 34% to $2.9 billion. In addition, its medical-cost ratio (medical expenses per dollar earned from premiums) fell by seven points. This shows that Aetna is successfully targeting its high-cost subscribers for exclusion from its plans.
This year, Aetna expects revenue to fall another 7%. But, the firm will keep shedding members as it raises premiums. As a result, the company expects to blow by current 1Q and full-year projections, at 68 cents and $3.08 a share, respectively. Now, Aetna sees an 85-cent profit in the current quarter and $3.35 in earnings for all of 2003.
With solid past performance and even better future prospects, it's no wonder that Aetna's stock posted clear gains in Tuesday's murky session. Healthcare will be one of the few lucrative sectors this year, and Aetna has proven that it remains a major player in the industry.
BONDS
THE TREASURY MARKET EXPANDS
The Treasury Department announced last week that it will bring back the 3-year Treasury note, which hasn't been offered for five years. Also, the Treasury will offer the 5-year note more frequently, doubling the number of auctions to eight per year. There are no plans as of now to issue new 30-year Treasury bonds. The Bush administration expects the federal budget deficit to hit $304 billion this year and $307 billion in fiscal 2004.
TODD'S TAKE: Much has happened to the bond market in recent years. Back in the late 1990s, Federal Reserve chairman Alan Greenspan voiced concerns that the government's big budget surpluses at the time could diminish the $3 trillion Treasury market, making business tough for bond funds and investors. But over the last two years, the new presidential administration drastically increased its spending. This year, the deficit will reach record levels, at $304 billion. The deficit will widen even further in 2004, to $307 billion.
Now that those government surpluses are now big deficits, a Treasury market slowdown isn't a problem. In fact, the Treasury is bringing back discontinued securities to expand its offerings. For instance, the government will issue three-year notes, which were last offered in 1998. Additionally, the number of five-year note offerings will be doubled, from four annual auctions to eight per year.
The extra bond activity means that business won't dry up for bond investors any time soon. But it also means that existing bonds will fall in value, since the additional debt in the market will put upward pressure on interest rates (remember, as rates go up, bond prices fall).
How will this affect the overall economy? Badly, in our opinion. Excess government borrowing likely will cause interest rates to rise, since the U.S. will have to offer a higher return on its debt as it floods the market. Higher interest rates mean higher borrowing costs, and that will keep many companies from borrowing money and spending. But corporate spending already is depressed. Higher rates could eliminate what little spending there is in our economy. Yikes.
Sure, if the Bush administration provides a convincing argument that the deficits will decline once the economy strengthens, then rates could remain low while government debt piles up. But so far, the White House has failed to do so.
Higher deficits mean more borrowing activity, and that's good for the bond business. But what's good for the bond business isn't always good for the overall economy. This may be one of those times.
(from February 10, 2003)
THE BIG PICTURE -- WHAT'S HAPPENING OUT THERE?
MARKET UPDATE
Last week's 3% loss by the major indices capped four weeks of steady declines. The obvious culprit is the Iraqi situation. It is keeping money on the sidelines and dragging down the market. Trading volume on the New York Stock Exchange, for example, is off more than 15% over last year.
But, economic prospects would be eliciting jeers from the trading pit even without an impending war. Consumer confidence is now at a nine- year low and is starting to affect consumer spending, which has been the sole beacon in the economic fog for the past two years. Holiday sales were weak, and January chain store sales were disappointing. Jobs are disappearing in spite of the U.S. economy adding 143,000 new positions in January. That gain was due to seasonal effects (fewer layoffs due to conservative holiday hiring) and did not offset the sharp December employment decline. Firms aren't hiring and won't be until global tensions ease.
More Americans are out of work now than a year ago. Expanding federal and state budget woes and big increases in defense spending mean the initiation of fewer public works projects and other government investments that can help to put people to work and address social needs. The federal deficit is set to balloon past $300 billion annually over the next few years, and that doesn't include the cost of a war and reconstruction in Iraq or another terrorist attack.
Despite the bleak economic and international picture, the market is ready for a rally. Not because of any particular event. It is just time for those who see bargains to step in. That buying will ignite short covering and set the market off to the races. In the meantime, if anything positive happens with Iraq, such as Hussein stepping down voluntarily, the rally could be huge. But, it will be short-lived unless core economic factors improve. That still appears unlikely.
So, we will be cautious managing both LONG and SHORT positions and close them more quickly in the coming weeks. However, as always, some stocks go up and other stocks go down regardless of the economic, political or social events of the day. Last week was no exception. Next week will be no exception either, and we will still be looking for new positions to open.
MARKET OVERVIEW
MARKET WINS THE WEEKLY BATTLE, BUT THE WAR IS STILL IN QUESTION
After the first four days of trading, it looked like the market was headed for another negative week. Then Friday came. In a volatile day, the market finished with gains for the first time since January. Overall, for the week, the Dow rose 0.5%, the S&P 500 traded 0.6% higher, and the Nasdaq climbed 2.2%, putting an end to their four-week declines.
It truly was a week dominated by war developments. Sure, there were some earnings reports. But other than releases from VIACOM (VIA, $37, unch.) and DELL COMPUTER (DELL, $26, up 3), there were no high-profile announcements.
On Monday, it was war news. Iraq allowed United Nations weapons inspectors to use U-2 surveillance planes in their inspections and promised more cooperation. That ignited hopes for a resolution to the situation, causing the market to rise.
On Tuesday, it was more war news. A tape surfaced that was rumored to contain Osama bin Laden's voice. The recording offered support for Saddam Hussein and Iraq, scaring the market into losses.
On Wednesday, the focus shifted to North Korea. U.S. Intelligence officials released a report claiming that the country has ballistic missiles capable of reaching the U.S. The missiles will be able to carry nuclear weapons.
Thursday and Friday belonged to Hans Blix. Investors were nervous in advance of the chief weapons inspector's report to the UN Security Council on Friday. Thus, stocks fell on Thursday. However, even though Blix's comments did nothing to clarify the Iraq situation, stocks surged on Friday following the report.
Why then, did stocks rise? Friday's trading was volatile, leading us to believe that investors were taken over by their bargain-hunting instincts. In the middle of the week, the major indices closed at fresh four-month lows. Thus, many investors took that as an opportunity to buy beaten-down shares.
As for us, we'd wait until we had a clearer picture of both the war situation and the economy. There remains a lot of uncertainty in the market right now. Although we could see a rally following the resolution of the war situation, it won't last unless the economy improves and businesses ramp up their spending. In the meantime, we'll sit back and let the 15% dividends roll in from our investments, such as Mortgage REITs.
ECONOMY WATCH
1. RETAIL SALES STRENGTHEN, FOR THE MOST PART
Retail sales excluding auto sales rose 1.3% in January, according to the Commerce Department. That's the largest non-auto sales increase in over two years. Auto sales, however, fell 7.5%, for their biggest decline since November 2001. Overall, January retail sales slipped 0.9%, worse than the 0.5% drop that economists looked for and down from a 2.0% rise in December. However, sales were up 3.9% year-over-year. The non-auto results were better than economists expected, but auto sales really put a drag on the numbers.
2. JOBLESS CLAIMS MIXED
The Labor Department released its latest figures on jobless claims Thursday morning. Initial jobless claims for the week ended February 8 fell by 18,000 to 377,000 claims. However, the four-week average -- a more stable indicator over the overall job market -- rose slightly, by 3,500 to 389,000. Still, both numbers remain below the 400,000 mark. But like we said last week, the current levels suggest a flat job scene. An improving job market correlates more with an average of 350,000, or below.
3. INVENTORIES RISE
Businesses built up their inventories by 0.6% in December, according to the Commerce Department. Total inventories rose to $1.14 trillion, increasing for the eighth straight month and doubling the expected rise, as total sales rose 4.2%. Though the inventory/sales ratio rose slightly from 1.36 to 1.37, it remained close to its record low of 1.35 in August. That was the key: Inventories remained tight relative to sales. This is positive for the economy, as tighter inventories force firms to produce more in the event of a demand increase. If inventories rise too far above sales, companies cut their production in order to liquidate their excess products. Thus, this report was taken positively by the market.
4. ECONOMY EXPERIENCES INCREASED OUTPUT
The Federal Reserve reported that industrial output rose 0.7% in the month of January. The increase, which was larger than the 0.4% uptick that economists expected, was the biggest rise since July. The numbers were boosted by increased auto production, with an annualized 12.7 million vehicles produced in the month, up from December's rate of 11.7 million, the lowest since 11/2001. In addition, utilities production jumped 4%, as the unusually cold weather caused consumers to use more electricity.
5. CONSUMER SENTIMENT HITS A NINE-YEAR LOW
The University of Michigan released its latest consumer sentiment reading. The index posted a reading of 79.2 in February, declining from the January reading of 82.4. Sentiment is at its lowest level since 1993. Economists expected a narrower decline, to a level of 81.6. War fears were blamed for the fall in consumer sentiment, as consumers expect the weak economic environment to continue if the country gets entangled in a prolonged war.
IN THE NEWS
I. MARRIOTT POSTS A LOSS
MARRIOTT INTERNATIONAL (MAR, $30, up 1) reported a 4Q02 net loss Monday morning. The hotel operator posted a loss of $35 million, or 15 cents a share, improving a year-ago loss of $115 million. Excluding charges related to the firm's discontinued businesses, Marriott earned 55 cents a share, topping Wall Street expectations by a penny. Revenue rose from $2.1 billion to $2.7 billion, with North American revenue increasing by 7%. However, the company lowered its projections for 1Q and 2003 earnings. The firm expects 1Q revenue to fall 3% year-over-year, as earnings could fall as much as 6 cents short of Wall Street expectations for a 42-cent profit. For the full year, Marriott dropped its guidance from $2.10 a share to $1.90 this year. The consensus 2003 estimate was $2.01.
II. SIGNS OF METLIFE
The nation's largest life insurer, METLIFE (MET, $26, unch.) turned a year-ago loss into a lively profit in the fourth quarter of 2002. The company earned $560 million, or 78 cents a share, vs. a loss of $295 million in the year-ago period. Excluding one-time items, MetLife earned 65 cents, topping Wall Street expectations by a penny. Revenue from premiums and fees jumped 16% to $5.8 billion in the quarter. Profits were aided by a $575 million gain from the sale of 17 properties, though the company wrote down $340 million in declining investments. Additionally, the firm took an unexpected charge of $170 million due to asbestos claims. That boosts the total of asbestos-related charges to $400 million. MetLife expects to spend up to $1.2 billion in order to cover all of the expected claims.
III. BLOCKBUSTER REPORTS EARNINGS
BLOCKBUSTER (BBI, $14.48, up 1.90) posted a profit of $30 million, or 17 cents a share, in the fourth quarter of 2002. While the latest results improved upon a $5 million loss in the year-ago period, they missed estimates by 2 cents. In 4Q01, the firm took $40 million in charges related to its efforts to phase out its VHS tape library. Revenue rose 17% to $1.6 billion. For the full year, Blockbuster posted a loss of $1.6 billion, or $9.11 a share, due primarily to a $1.8 billion loss for accounting adjustments. Excluding one-time items, the firm earned $1.04 a share. Looking ahead to 2003, Blockbuster expects to grow earnings by 20% to $1.20. But Blockbuster has seen rental revenue fall because of increased purchases of low-priced DVDs at discount stores like WAL-MART (WMT, $49, up 2) and TARGET (TGT, $28, up 1), and that likely won't change this year.
IV. APPLIED MATERIALS POSTS A LOSS
APPLIED MATERIALS (AMAT, $12.40, up 0.59) reported disappointing fiscal 1Q (ended January 26) "earnings" after the bell Tuesday. The chip equipment maker posted a net loss of $65 million, or 4 cents a share, vs. a $45 million, 3 cent per-share loss in the year-ago period. Revenue rose slightly, from $1 billion to $1.05 billion. However, both earnings and revenue missed estimates, for 2 cents and $1.15 billion, respectively. Orders fell 35% from the previous quarter to just over $1 billion. That doesn't bode well for next quarter's revenue, as orders are a good indicator of sales in the next few months. In addition, Applied Materials lowered its projections for the fiscal second quarter, expecting earnings to clock in at 1-2 cents instead of a 2-cent profit that the firm previously expected. The firm doesn't expect a recovery in semiconductor capital spending in the near future, and said it will continue to cut costs.
V. LOWER EARNINGS AGAIN FROM MAY DEPARTMENT STORES
MAY DEPARTMENT STORES (MAY, $19.87, up 0.53) reported lower earnings for the eighth straight quarter. The operator of Lord & Taylor and Filene's department stores reported net income of $390 million, or $1.28 per share, down from a year-ago profit of $430 million. However, results beat estimates for a $1.20 profit. Sales fell 4% to $4.4 billion. The company's CEO called it a "disappointing year" for the firm and gave no forecasts for 2003, only saying that he hoped that the firm's cost-cutting would provide a "strong foundation" for the coming year. Last year's holiday season was a rough one for retailers, especially traditional department stores like the ones that May operates. Expect more of the same for the first half of this year.
VI. MORE MEDIA EARNINGS; DIFFERENT RESULTS
Rupert Murdoch's NEWS CORPORATION (NWS, $26, up 1) posted a profit in its fiscal second quarter (ended December 31, 2002) after a net loss in the year-ago period. The media giant reported net income of $240 million, or 16 cents a share, vs. a big year-ago loss of $605 million. Excluding one-time items, earnings grew from 17 cents to 24 cents, edging estimates by a penny. Revenue rose 14% to $4.7 billion.
FOX ENTERTAINMENT GROUP (FOX, $27, unch.), which is 80% owned by News Corp., posted earnings of $285 million, or 32 cents a share – beating estimates by 4 cents. However, profits fell 38% year-over-year. Still, these results stand in large contrast to those from AOL TIME WARNER (AOL, $10.51, down 0.13), which reported a $100 billion loss in 2002. It goes to show that media firms can make money without struggling Internet service providers weighing them down.
VII. AES POSTS A WIDER LOSS
Power company AES (AES, $3.20, up 0.21) posted a wide loss in 4Q02. The cash-strapped company reported a huge net loss of $2.8 billion, or $5.08 a share, vs. a $45 million profit a year ago. Excluding the big charge for bad investments, AES turned a 3-cent profit, beating estimates for a break-even quarter. Looking ahead, the company expects to improve its cash flow to $1.5 billion this year, higher than analysts expect. In addition, the firm plans to reduce its debt load by $1.3 billion and cut more than $200 million in costs. While this will help the company get back on track, continued restructuring efforts caused AES to lower its 2003 estimates from 73 cents a share to 50 cents.
VIII. RETAIL SALES ARE SLACK
Retailers experienced another slow sales week. WAL-MART (WMT, $49, up 2) announced that its same-store sales for the latest week fell a bit short of forecasts. However, the company still expects to meet its target of 2-4% sales growth for the whole month. J.C. PENNEY (JCP, $18.72, up 0.07) experienced sales that were slightly higher than expected last week, but the department-store chain sees flat year-over-year sales for all of February. Last year, the retailer's sales surged over 12%. FEDERATED DEPARTMENT STORES (FD, $25, up 1), which owns the Macy's and Bloomingdale's lines of department stores, didn't release numbers on its latest week, but the firm forecasts a 4-5% drop in monthly same-store sales. Last year, sales fell 3%. Retail sales are hurting from a combination of unusual weather and war worries. The cold weather is slowing down spring clothing sales, while war-conscious consumers that expect an economic slowdown are spending less.
IX. BANK OF AMERICA SAYS SELL GENERAL MOTORS
Bank of America slapped GENERAL MOTORS (GM, $33, down 3) with a rare "sell" rating, sending shares of the company tumbling in Wednesday's trading. The investment bank, which previously had a "neutral" rating on the stock, cited increased foreign competition and capacity in the lucrative truck market as one of the main reasons for the downgrade. Additionally, Bank of America believes that GM will have to slash its dividend this year because of a weak financial situation. The bank expects little or no growth (0-2%) in GM's cash flow, and pressure from its growing pension and healthcare liabilities. As a result, Bank of America cut its price target on the stock from $33 to $28.
X. ECONOMISTS LOWER GDP ESTIMATES
The prospect of war and terrorism fears caused economists to lower their growth projections for the U.S. economy. In a Wall Street Journal survey of 55 economists, 23 lowered their projections for 1Q gross domestic product (GDP). That lowered the average estimate from 2.7% annualized, to 2.6%. In addition, 26 of the polled economists dropped their forecasts for the second quarter, lowering the estimate from 3.2% to 3.0%. Many economists attributed their revised estimates to higher crude oil prices, which will dampen business and consumer spending this year. Also, consumers may spend less as the war and terror fears grow larger.
1. SECTOR-RELATED NEWS
TECHNOLOGY
DELL'S PROFITS RISE
DELL COMPUTER (DELL, $26, up 3) posted profits that were on-target for the fourth quarter, with the company gaining strength from all corners of the globe -- impressive indeed in a weak economy and an environment in which PCs are becoming increasingly commoditized.
Dell's revenue for the quarter was $9.7 billion, up 21% over the previous year's fourth quarter, with earnings reaching $605 million, or 23 cents a share -- up 35% over a year-ago $455 million profit. Results matched Wall Street expectations. For the fiscal year, the PC maker's earnings hit 80 cents a share on net earnings of $2.1 billion.
TODD'S TAKE: With 4Q02 operating income of $820 million, this was Dell's best quarter ever. 1Q earnings are typically down due to the post-holiday environment and the firm expects profits to drop 10% sequentially. Nonetheless, 1Q earnings are expected to outpace industry growth. Dell expects to produce a year-over-year increase in unit volumes of more than 25%, compared with overall growth of the industry in the low single digits. The company also expects to see improvement in its operating margins due to an improved product mix and cost improvements, all in all calling for earnings of 23 cents in the first quarter. Dell has met guidance for eight consecutive quarters, and we would expect the firm to do so again for the current quarter.
Dell has made especially good strides in server growth, gaining a 28% increase in shipments of its PowerEdge servers that run Microsoft's Windows operating system as well as the vendor-neutral Linux operating system, both of which have proven to be effective alternatives to the more traditional UNIX platforms. Another noteworthy success during the last successful year is delivering improved margins, ending the year with net margins at 8.4%, a full point higher than the previous year.
Dell indicated that demand remains stable despite a downturn in the industry and little hope for a near-term improvement in macroeconomic conditions. In addition to stable demand, Dell has aggressively decreased its costs -- something that's absolutely essential in this increasingly low-margin business. Dell lowered its costs during the last fiscal year by $1.2 billion. Even more cost savings have been identified for the coming fiscal year.
The combination of both top-line and bottom-line growth, as well as Dell's strategy of gaining market share while cutting costs, will continue to keep the firm at the top of its game. We don't recommend investing in Tech at the moment, but if your mind is set on doing so, then Dell should be one of your top choices.
DEFENSE
DEFENSE GETS A BOOST
LOCKHEED MARTIN (LMT, $47, down 3) and BOEING (BA, $30, unch.) received a boost, so to speak, from the military. The Air Force announced that it would pay $540 million to the two firms over the five-year period starting with fiscal 2004, in order to keep them in the rocket-launching business.
TODD'S TAKE: The rocket launching business has been struggling lately, as the commercial-satellite market has dried up. A recovery isn't expected until 2005 at the earliest.
Without many commercial satellites to launch, Boeing and Lockheed Martin have been struggling to cover the costs of their rocket-launching businesses. Neither of the firm's rocket divisions -- Boeing's Delta IV rockets and Lockheed's Atlas V rockets -- is expected to be profitable for several more years.
In any other sector, both firms would have eliminated their struggling business units. But in this case, their client is willing to subsidize many of their costs. That client is the U.S. government. The government doesn't want to lose its ability to travel into space. Yes, the recent space shuttle Columbia tragedy has the country second-guessing the space program, but we're not going to cease operations any time soon. The U.S. government always wants to be at the forefront of everything, especially space travel.
Previous space tragedies didn't derail the U.S. from traveling into space. After the Challenger explosion in 1986, the space shuttle fleet was grounded. That kept satellites from being launched for several years, but launches did resume. Additionally that temporary shutdown of the space shuttle program brought attention to the need for more than one method of sending satellites into space.
That caused the government to pay two companies to launch rockets instead of just relying on the space shuttle program. And the head of Air Force Space Command said, "We're committed to maintaining two launch providers," so there's no danger of either Boeing or Lockheed being left out in the foreseeable future.
As a result, the government will subsidize many of Boeing's and Lockheed's costs over the next five years, starting with 2004. Next year, the Air Force will pay the firms a combined $165 million for their launch programs.
Looking ahead, Lockheed likely will benefit more than Boeing. In the last batch of launches. Boeing received 22 of the 29 total launches. This time, however, the Air Force plans to put a cap on the number of launches that either firm can receive to 60% of the total. That means more business for Lockheed.
Sure, the rocket-launching business isn't profitable -- right now. But in the meantime, Lockheed is building its relationship with the government and the military, and the firm is strengthening its position for when business recovers. Besides, the company's defense units are raking in the cash for now. We like Defense companies like Lockheed Martin because of their broad range of products that allow them to make money at all times.
OIL
OIL HITS A TWO-YEAR HIGH
Crude oil futures reached a high of $36.29/barrel in Thursday's trading. That's a level not seen since October 2000. In addition, U.S. commercial crude inventories fell below 270 million barrels, the smallest stockpile in over 27 years.
TODD'S TAKE: Oil prices have soared 45% in the past three months. As a result, oil inventories in the U.S. are at levels from the 1970's, when the OPEC oil crises caused prices to soar and stockpiles to plummet. In fact, inventories are below the equivalent of 14 days of U.S. oil consumption -- the level that the government suggests as the minimum operating rate.
Why are oil prices so high? There are a number of reasons, and the big ones don't seem close to a resolution. First, one reason should go away with the changing seasons: Unusually cold weather. It's been a very wintry few months in the U.S. and Europe, so demand for heating oil has surged. This should come to an end within the next few months with the arrival of spring.
The most publicized reason is the tension between the U.S. and Iraq. We all know about the White House's campaign for military action in the Middle East. With each passing day, it seems certain that the U.S. will NOT be dissuaded from its war crusade. Even with strong opposition from other United Nations members, especially Russia, Germany and France, war looks imminent.
These beating war drums are causing oil prices to soar, and with good reason. Iraq is the world's #8 oil exporter, and a war likely would ground its production to a halt. Thus, on these expectations oil prices are surging. And with a resolution to the conflict still over the horizon, expect the upward pressure to continue.
The other main reason is the oil strike in Venezuela. A member of OPEC, Venezuela is the world's fifth-largest oil exporter, even bigger than Iraq. This strike has been going on for two months, and – as with the Iraq situation -- there's no end in sight.
Oil prices are nearing their September 2000 high, which caused the Clinton administration to release reserves from U.S. stocks. So far, the Bush administration has yet to use the Strategic Petroleum Reserve, which holds 600 million barrels of crude. And the European Commission downplayed the need for reserves too, expressing its belief that other oil-producing countries can pick up the slack. But two of the top 10 oil countries? That could prove to be a shortfall too wide to cover.
What does this mean for the economy? Only that it could bring us back into another RECESSION. Every time that crude has risen about $30 a barrel and stayed there, we have gone into recession. Yes, yet another reason why we're very cautious on the economy right now.
HEALTHCARE
HEALTHY PROFITS FROM AETNA
AETNA (AET, $41, unch.) released its 4Q02 financial results Tuesday. The healthcare firm reported net income of $100 million, or 63 cents a share, turning around a loss of $185 million, or $1.30 a share, in the year-ago quarter. Excluding one-time items, the firm earned 77 cents a share, blowing by analysts' estimates for a 59-cent profit. For all of 2002, Aetna posted a huge loss of $2.5 billion, or $16.50 a share. The bulk of this loss came from the first quarter, when the company took a $3 billion charge for the impairment of goodwill. Operating earnings for the year reached $2.50 a share, up from 2001's 44-cent operating profit.
TODD'S TAKE: This was a great earnings report from Aetna. 2002 was a comeback year for the firm, which posted losses in every quarter of the prior year.
Rising profits are coming as Aetna streamlines its operations. In 2001, the nation's #2 insurer struggled with millions of unprofitable health plan subscribers. So what did the firm do? It cut out the fat from its healthcare business. Aetna took a $30 million charge in the latest quarter for cutting 700 jobs. Over the past year, the firm has enacted almost 8,500 layoffs, cutting its labor force to 27,500 employees.
In addition, Aetna became more selective with its customer base. Instead of holding onto unprofitable members with high medical costs, the firm cut its membership base significantly. A year ago, Aetna had 17.1 million subscribers. By year-end 2002, that number had been slashed to 13.7 million.
Of course, by cutting the number of subscribers, Aetna's revenue shrank. Revenue dropped 22% year-over-year to $4.7 billion, with healthcare premiums revenue sinking 27% to $3.5 billion.
However, the key to Aetna's success in the face of lower revenue was the firm's ability to cut costs by more than the drop in revenue. The company's health-care costs fell 34% to $2.9 billion. In addition, its medical-cost ratio (medical expenses per dollar earned from premiums) fell by seven points. This shows that Aetna is successfully targeting its high-cost subscribers for exclusion from its plans.
This year, Aetna expects revenue to fall another 7%. But, the firm will keep shedding members as it raises premiums. As a result, the company expects to blow by current 1Q and full-year projections, at 68 cents and $3.08 a share, respectively. Now, Aetna sees an 85-cent profit in the current quarter and $3.35 in earnings for all of 2003.
With solid past performance and even better future prospects, it's no wonder that Aetna's stock posted clear gains in Tuesday's murky session. Healthcare will be one of the few lucrative sectors this year, and Aetna has proven that it remains a major player in the industry.
BONDS
THE TREASURY MARKET EXPANDS
The Treasury Department announced last week that it will bring back the 3-year Treasury note, which hasn't been offered for five years. Also, the Treasury will offer the 5-year note more frequently, doubling the number of auctions to eight per year. There are no plans as of now to issue new 30-year Treasury bonds. The Bush administration expects the federal budget deficit to hit $304 billion this year and $307 billion in fiscal 2004.
TODD'S TAKE: Much has happened to the bond market in recent years. Back in the late 1990s, Federal Reserve chairman Alan Greenspan voiced concerns that the government's big budget surpluses at the time could diminish the $3 trillion Treasury market, making business tough for bond funds and investors. But over the last two years, the new presidential administration drastically increased its spending. This year, the deficit will reach record levels, at $304 billion. The deficit will widen even further in 2004, to $307 billion.
Now that those government surpluses are now big deficits, a Treasury market slowdown isn't a problem. In fact, the Treasury is bringing back discontinued securities to expand its offerings. For instance, the government will issue three-year notes, which were last offered in 1998. Additionally, the number of five-year note offerings will be doubled, from four annual auctions to eight per year.
The extra bond activity means that business won't dry up for bond investors any time soon. But it also means that existing bonds will fall in value, since the additional debt in the market will put upward pressure on interest rates (remember, as rates go up, bond prices fall).
How will this affect the overall economy? Badly, in our opinion. Excess government borrowing likely will cause interest rates to rise, since the U.S. will have to offer a higher return on its debt as it floods the market. Higher interest rates mean higher borrowing costs, and that will keep many companies from borrowing money and spending. But corporate spending already is depressed. Higher rates could eliminate what little spending there is in our economy. Yikes.
Sure, if the Bush administration provides a convincing argument that the deficits will decline once the economy strengthens, then rates could remain low while government debt piles up. But so far, the White House has failed to do so.
Higher deficits mean more borrowing activity, and that's good for the bond business. But what's good for the bond business isn't always good for the overall economy. This may be one of those times.