CFO SURVEY - LESS GOOD, BUT NOT THAT BAD

Regular readers know that the Goatmug Monthly Macro Updates tend to be comprehensive, (ok long), and as the author of the posts I love it because the data helps me forge a picture of the broad economy and this allows me to craft a longer term view of the direction of the markets.  Usually, I don't miss a beat, but somehow a section was deleted from the June Monthly report last month.  This section covered the latest release of the Duke University / CFO Magazine CFO Global Outlook Survey.  Sometimes these mishaps are to our benefit as I would not have had the chance to review the report as closely, so let's make the most of the fumble!

US CFO OPTIMISM DECLINES

In the latest series of responses from CFO's we find that they are less optimistic about their own firms and less excited about the prospects for the economy.  Before we declare a confidence crisis here it is important to note that these numbers are about the same as last year and simply slight declines from the previous quarter. 

Concerns for the financial leaders of business organizations include; high oil prices, a lack of skilled workers to fill open positions, and a generally soft economic environment.  Overall, CFO's expect earnings and capital spending to grow around 8% next year.  These estimates are down a bit from last quarter, but still quite strong. 

EMPLOYMENT OUTLOOK
There just seems to be nothing that will take us off a 9 handle when looking at unemployment.  CFO's responded that they believe that unemployment in the US will remain at 9% through next year.  Despite the bleak outlook, financial chiefs in energy, tech, and retail/wholesale all reported that they are hiring actively.  So, if you are in sales, accounting, product development, or an engineer, you have some hope!

ASIAN POINT OF VIEW
Asian Financial Officers were more positive than last quarter, however there was one item that we need to note carefully.  For the first time in the history of the CFO Survey, Chinese respondents reported figures that were less optimistic than their counterparts in other parts of Asia.  Chinese CFOs are reporting that they are concerned about government regulations and policies along with the issues of weak consumer demand and pricing pressures. 

EUROPEAN CFO THOUGHTS ON SOVEREIGN HEALTH
Eighty percent of European CFOs think Greece will default on its debt within one year unless additional financial aid is provided. Only one-third think current proposals to extend maturity and reduce interest rates are sufficient. If Greece defaults, 42 percent of European CFOs think it is likely that Spain will need a bailout to avoid default.


Nearly half of European CFOs believe a Eurozone country will experience an economic depression due to recently enacted severe austerity programs.

Wow!  Did you catch that?  If Greece defaults Spain is up.  Well, this is not a surprise, although I think that their attention is misplaced as I think that Greece is frankly a mouse in the room and it has everyone's attention.  Instead these CFOs need to be looking at the huge elephant in the room named Italy that is about to be a big problem. 

Further, if austerity programs gain traction we'll see an economic depression, why haven't we heard this?  Isn't the kindly IMF, ECB, Fed, and World Bank aware that smart business leaders think that financially crushing economies might be bad for the larger economy of Europe?  Don't these bankers have concern for the markets?

In summary, the CFO Survey shows some mild erosion in confidence in the economy.  There is a desire to hire qualified applicants in about 20% of firms, however the trick is that few potential employees are skilled.  I get the sense that this quarter is an indication of just how fragile the situation really is in the USA and abroad.  If high oil and gas prices prove to be "less than transitory" we could see next quarter's outlook by company leadership to drop significantly.  If price inputs fall, there is a chance that companies could gain some traction.  In general, the CFOs are saying things are less good, but not that bad.  Let's hope for less bad and more good, but we need falling commodity prices and a boost in consumer demand now to make a difference.



GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/



CFO SURVEY - JUNE UPDATE

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).

http://www.cfosurvey.org/10q3/PressRelease.pdf

HIGHLIGHTS -

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. 
 
GOATMUG INTERPRETATION -  They better!
 
 

TOP CONCERNS

 


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.
 
TRADING UPDATE
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!
 
 
GOATMUG