Monday, June 14, 2010


Duke and CFO Magazine have again released their CFO Survey.  As I always state, the CEO is the sales man and the CFO is the guy we need to pay attention to.  (Yes, I'm biased I worked in Corporate Finance for years).


CFO SURVEY--Chief financial officers in the U.S. say they have limited plans to hire over the next 12 months, although nearly 60 percent won’t return their staffing to pre-recession levels until 2012 or later. Benefits and wages also remain at reduced levels at many firms, and credit is still tight for small firms, which is hindering hiring plans and constraining growth.

GOATMUG INTERPRETATION- Ok, get this.  The recovery is not going to include hiring.  Only 40% of CFOs are projecting getting back to pre-recession levels (if everything goes well) by 2012!  Oh yes, and if you still have a job or will be one of the lucky ones getting rehired, you might expect lower pay or reduced benefits.

CFO SURVEY--The recovery is not completely stalled, however, as CFOs predict strong business spending and earnings growth.
GOATMUG INTERPRETATION - Businesses are hoping and praying for a rebound although they are not confident enough to bet on it (hire).  As I've mentioned, my belief is that during the peak crisis months company's quit reordering to replace inventory.  Ultimately we had a situation where firms HAD to reorder and begin acquiring materials for their products just to replenish them.  We've done that, now let's hope we have someone to buy all of this new inventory.
CFO SURVEY--Borrowing conditions remain tight, with roughly an equal split between firms reporting that credit conditions have tightened and those saying credit has eased. One-third of micro-firms (100 or fewer employees) say credit conditions have worsened in the past six months.

GOATMUG INTERPRETATION - Lending is still a problem?  Either banks aren't lending or the loan officers are suddenly looking a realistic levels for debt and requiring firms and borrowers to actually be credit worthy.  I think this is got to be a very accurate piece of data in that I'm sure 50% of the firms are actually decent credit risks while I'm sure another 50% are scary and probably don't deserve the lines of credit they previously consumed.  I guess this is why we see that credit is actually worse than 2009 in many cases.  I'm sure there will be a rollout of a new Federal loan program that loses billions of your tax dollars to bail out credit starved firms that "deserve" all the credit they can handle.

CFO SURVEY-- Earnings are expected to rise 12 percent and capital spending 9 percent in the next 12 months. Research and development and tech spending will increase 4 to 6 percent. 

CFO SURVEY - The top two concerns for U.S. CFOs are weak consumer demand and the federal government’s agenda. U.S. CFOs, who expect to raise the prices of their products by 1.5 percent, are also worried about price pressure from intense competition. Maintaining employee morale is among the top company-specific concerns.

GOATMUG INTERPRETATION - Wait a minute, we have growth forecasts and profit expansion predictions, but our top concern is the anemic consumer demand and the not so invisible hand of the government?  On top of that, CFO's say that management can't raise prices because price competition, these guys are trying to spin this.  I'm not buying it and I don't think they even believe it!
CFO SURVEY - Health care costs also have reappeared among the top four concerns for U.S. companies, with corporate health care payments expected to rise 8 percent in the next year.
GOATMUG INTERPRETATION - Healthcare costs an issue?  Just wait for 2011, 2012, 2013, and 2014.   That is 4 and 1/2 years for the insurance companies to prepare (increase prices) for the national healthcare system.  Employers with 50 or more employees will suffer most in the business community right along with the tax payer.
All in, I don't think this is a very positive report.  This should be a report that suggests that CFO's are seeing increased momentum and better long term visibility about revenue growth and margin expansion.  We should not hear that CFO's are concerned about weak demand and a lack of pricing power.  In addition, boards and executive teams are worried about our government's plans for business.  It is incredibly hard to predict and create strategic plans when you don't know where big government will decide to regulate or takeover within the business world. 
A closing word on credit.  We are really hearing two stories when it comes to credit.  Strong firms are being lavished with amazing opportunities to borrow at ridiculously low prices (interest rates).  In fact this will be a monster year for highly rated corporate bond issuance (at least so far year to date).  This is driven by the fact that overall the FED and central banks have lowered the alternative lower risk yield so much that investors are DRIVEN to take more risk just to outpace inflation.   On the other hand, smaller firms or high yield firms are facing tremendous problems funding their operations and rolling debt.  Europeans are also having a terrible credit funding year.  The market has dissected the risk and is punishing poor creditors (forcing them to pay much higher rates) and rewarding good creditors (giving away cheap money).  At least the system is starting to appropriately price some risks! 
I think the CFO's are hedging their bets and remain totally cautious because they know that demand is falling and they may have one more quarter of upside and then down we go.  June's update shows that the rate of change on many metrics is absolutely falling and the actual real levels have also dropped from their peaks.  No amount of government stimulus is working and the economic disaster in the Gulf will only increase the speed of the double dip.  We had all better be praying a hurricane or tropical storm does not form in the Gulf. 
Having said that beware, our government is still involved in the house bubble it is trying to reflate.  Hence we see a tremendous mispricing of residential home mortgages where we can obtain a 30 year $400,000 loan today for at 4.8% in Baton Rouge, LA with zero points!  They will attempt to roll out any plan to keep the plates spinning.  I fully expect the Fed and Treasury to execute Quantitative Easing Part Deaux within one or two more months.   They will blame it on the crisis in the Gulf as we remember that they never waste a good crisis.
This market is and has been really hard to trade.  If you are a short term trader, you are being ground up as moves of plus or minus two to four percent a day will ravage you.  If you are a longer term investor you are either back to where you were in August of 2009 or have been crushed if you bought after that period. 
We could still see a rally here to the 1140 area, but I ultimately believe that we'll end lower for the year.  I've made it a point to highlight those posts that are simply suggesting that you get out of the market because you need to see these.  If you don't get out, you need to have some protection in investments that will get you out if possible or at least earn you interest or dividends despite things going down (dividend paying stocks or bonds).  Several indicators I watch are beginning to confirm a rollover in the market and if we end June under 10,000 in the Dow, we'll have a confirmation.  These are traditionally very long term signals too, so I'm sitting up in my chair and waiting for them to trigger.  If they don't trigger, I'll still be sitting up watching.  Be very careful.  The Dow was up today almost 80 points and then ended down  20 - just another 1% reversal - nothing to see here!