Covestor

Everything you always wanted to know about the economy*
*but were afraid to ask
 
 Amid the chattering and daily stream of statistics about our economy it can be difficult to hear the truth. Are we still in a recession? Are we in recovery? How long have we been in recovery, and when will we be whole again? If our national mood feels pessimistic, does that mean we aren’t yet recovered? What do you listen to when the steady drumbeat of information turns into too much ambient noise?
When this happens there are often just four beats of the orchestra that can be tuned into for a surprisingly complete picture of the economy.  What are those four beats;– IBM, GTE, UPS and housing.

How can that be?  Simply put, we’re buying things, we’re shipping things, and homes are being bought sold and built.  and The short story is that’s all you need to know about to have a pretty good snapshot of the economy . 
Let’s tackle housing first. 
Housing

EXISTING HOMES: In early 2009, the housing market bottomed out in both the pace of existing home sales and the median price of those sales. At that point, the average home price had declined more than 30% in a 3-year period. To add insult to injury, since then people have predicted that foreclosures would dump an oversupply into the market, imperiling any potential recovery while sending (and keeping) prices even lower. That was the bad news. But something else happened. There appears to be a new cycle in housing.

Numbers in the March existing home sales report by the National Association of Realtors suggest the housing market is set to improve. Existing home sales in March showed an annual pace of 5.35 million units -- above the average estimate of about 5.30 million and up by nearly 7% from the February sales pace of 5.01 million. Even better was the year-over-year gain of 16.1% in existing home sales from March 2009. 

Mining deeper into the NAR statistics, the sales pace of existing homes has grown year-over-year for nine straight months. And even with all those millions of foreclosures that have supposedly been diluting the U.S. housing market, the inventory of unsold existing homes has declined during the past 20 months in a row.

The chief economist at the NAR explains the foreclosure conundrum this way:   "Foreclosures have been feeding into the inventory pipeline at a fairly steady pace and are being absorbed manageably. In fact, foreclosures are selling quickly, especially in the lower price ranges that are attractive to first-time home buyers."  Ah, so the natural forces of the market are at work. The low prices of foreclosures are giving new, first-time buyers an entry point they didn’t have before. If that’s the cake, then low mortgage rates are the icing on that cake.

The NAR report also revealed that the March U.S. median existing home price was $170,700, up by 0.4% from March 2009. This was the highest median price since October 2009.

NEW HOMES: The pace of new home sales in March was 411,000 -- more than 20% stronger than Wall Street's expectations -- the strongest showing since July 2009. The February number was revised upwards from 308,000 to 324,000 (an increase of more than 5%) -- the largest one-month gain in 47 years. Year-over-year, the pace of new home sales in America increased by 23.8%. 

The median sales price was $214,000 -- up by 4.3% from a year earlier. 

Another factor is supply, which is historically low. As of the end of March, the supply of unsold new homes in the U.S. was 228,000, compared to 313,000 homes a year earlier (which was considered a relatively low number). Homebuilders have kept the supply low due to low demand and difficulty obtaining construction loans from banks. So the demand for new homes has increased by 23.8% in the past year, while the supply of homes has fallen by 27.2%. And we all know that when the supply decreases as demand stays even or increases, prices have no choice but to go higher as buyers clamor for the limited supply. 
IBM
In late April, IBM, one of the country’s biggest and oldest companies, announced that its superior cash flow enabled it to invest in the business AND generate substantial returns to shareholders in two different ways.

The board declared a regular quarterly cash dividend of $0.65 per common share, which represents an increase of $0.10, or 18% higher than the prior quarterly dividend of $0.55 per common share. IBM has increased its quarterly dividend over 330% since 2003. This is the 15th year in a row that IBM has increased its quarterly cash dividend, and 7th year in a row of double-digit percent increases. When this latest dividend is paid, IBM will have paid consecutive quarterly dividends every year since 1916.

The board also authorized $8 billion in additional funds for use in the company’s stock repurchase program, which amounts to about 5% of its shares. With this new authorization, IBM will have some $10 billion for its stock repurchase program, with more expected at the October 2010 board meeting.

America is buying what IBM is selling.  As a broadly diversified supplier of computer hardware, software and services IBM is an excellent proxy for business spending and activity.  When IBM increases their dividend and repurchases shares at the same time they are feeling very very confident!

GE
When considering the simple approach, another company in the mix is General Electric, the sole original member remaining in the Dow Jones industrial average. GE is often seen as an economic indicator since it is diversified over a number of key segments of the economy -- infrastructure, transportation, finance and media, and employs more than 300,000 people in more than 100 countries. From aircraft engines and power generation to financial services, from light bulbs to wind turbines, health care solutions and television programming, GE is the largest U.S. conglomerate and does practically everything. It is a big lender to businesses and consumers.
In announcing Q1 results, GE’s CEO said he saw encouraging economic signs, with increases in airline passenger miles and freight loadings, and growth in local advertising markets.

Although Q1 saw a 32% drop in earnings, it beat Wall Street’s view, and there were signs of improvement in GE’s own results and the broader economy.

"We saw encouraging economic signs," said CEO Jeffrey Immelt, pointing to increased airline traffic and freight loads, less bad debt and more local advertising growth. He noted that GE's backlog of equipment and services held steady from the prior quarter at $174 billion
Immelt said the company is returning to "good, solid" earnings growth, plans to raise its dividend "at least" by 2011 and expects to resume adding jobs in the U.S. “The clouds are breaking and the forecast ahead of us is promising," Immelt said.

In addition to the dividend increase, GE plans to buy back the preferred shares it sold to Warren Buffett's Berkshire Hathaway Inc. GE’s products and services are a spate, but equally important, set from IBMs

UPS
Results for United Parcel, the world’s largest package-delivery company (and for its rival FedEx) are closely watched because those companies are considered good indicators of how the overall economy is doing.

An improving economy boosted profits and prospects going forward at UPS, as the company beat analysts’ estimates on first-quarter sales, citing increased demand overseas in its international package and supply chain and freight segments. Revenue rose 7.2% to $11.73 billion, exceeding the $11.64 billion average expected. Net income gained 33% to $533 million, and adjusted per-share profit was 71 cents.

UPS has a solid franchise and a history of increasing dividends. Its current yield is 3%, and 5-year dividend growth rate is 10%. In addition to strong growth in international package revenues, UPS called its U.S. growth a "slow, measured" recovery, and free cash generation "extremely strong."

More shipping is happening on many fronts -- health care companies are shipping more medical devices and prescription drugs, high-tech firms are shipping more equipment and companies are restocking inventories in general. UPS is also seeing increased growth in ground shipping (vs. next-day air), as more customers seek to save money and will accept slower, less expensive methods of delivery to achieve that goal.

IBM, GE and UPS are not the only big guys who are feeling better right now. Q1 earnings for companies in the Standard & Poor’s 500 index are expected to increase 39% from last year. Among those who have already announced better-than-expected results are J.P Morgan Chase & Co., Intel and Chevron, among others. The S&P had earnings growth in the fourth quarter for the first time after a record nine straight quarters of year-over-year declines. 
 
That is why the stock market has rallied over the past 12-14 months.  We do not expect the stock market to rocket up another 70% or so as it has done since last spring.  Doubtless there will be some temporary declines in the market this year (we may be in the midst of one already).  However, keep in mind that at present, the economy is in good shape.  We don’t see any new recession in 2010.  The prognosis for 2011 has yet to present itself.  When it does we will weigh in.