Will Smart Phones Crush The Stand-Alone GPS Market?

The days of the stand-alone portable navigation device market are numbered.

By 2014, according to research firm iSuppli, the market for PNDs will be eclipsed by GPS-equipped smart phones. In 2009, the firm says, there will be 114 million PNDs in use, compared to 57.8 million smart phones. But by 2014, the numbers will flip: 305 million smart phones will be in use, versus 128 million PNDs, according to a forecast by iSuppli.

In a statement, iSuppli analyst Danny Kim notes that smart phones were not previously seen as a threat to the PND market due to poor phone battery life, unclear pricing structure and inferior interface design. But he says that as the smart-phone market evolves, those issues are being resolved. New smart phones, he says, offer better GPS integration, better usability, larger screens, built-in connectivity - and new GPS-enabled applications. (He counts 8 GPS applications for the Apple (AAPL) iPhone alone.) By 2011, Kim believes, almost every smart phone will include GPS functionality.

And here’s a sobering thought for investors in the space: iSuppliu thinks that from 2009 to 2013, the number of TomTom (TOM2.AS) and Garmin (GRMN) PNDs in use is not likely to change significantly. “The year 2009 marks the dividing line when sales expansion for the PND slows as the product moves from the growth phase to the maturity stage of its life cycle,” iSuppli contends.

UBS becomes first Swiss bank to offer covered bonds

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UBS logoUBS (NYSE: UBS - option chain) stock is trading lower today after the Wall Street Journal reported the company plans to issue covered bonds, an instrument previously shunned by Swiss banks. UBS hopes the usage of covered bonds will allow it to refinance residential mortgages that remain on its balance sheet at advantageous terms. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on

This morning, RIG opened at $17.67. So far today the stock has hit a low of $17.05 and a high of $17.97. As of 11:55, UBS is trading at $17.11, down $1.21 (-6.6%). The chart for USB looks neutral and S&P gives UBS a neutral 3 STARS (out of 5) hold ranking.

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“Job Losses are Not the Problem”

Why has the rate of both job creation and job destruction been falling in recent years?:

Job Losses Are Not the Problem, by Andy Harless: It is sometimes argued that recessions benefit the economy by allowing the destruction of old, inefficient economic structures so that newer, better ones can be created to replace them. On the surface, this story might seem to apply to the recent recession: ostensibly, a lot of useless jobs in finance, real estate, and construction were destroyed, as well as perhaps old manufacturing jobs that hadn’t caught up with the latest technology, and jobs in retail trade that needed to be replaced by the Internet, and so on. But there’s one problem with that point of view: overall (at least during the first four quarters of the recession, up through the end of 2008, for which we have the relevant data), there weren’t an unusually large number of total jobs being destroyed.
But...but...but...haven’t we been hearing about large numbers of job losses month after month since the recession began? Sort of. We’ve been hearing about large numbers of net job losses. That is, the number of jobs that have been lost has been a lot more than the number that have been created. And a lot of job losers have ended up collecting unemployment insurance for a long time, sending the figures for continuing claims up to records, instead of getting new jobs. But the gross number of jobs being destroyed has not been unusually large. In fact, relative to the overall level of employment, job destruction was happening at a faster rate during the boom of the late 1990s than it was during the last quarter of 2008.
How can that be? For one thing, when you take out the business cycle, there seems to have been a general downward trend in the rate of job destruction over the past 10 years. More important, the rate of job creation also had a downward trend, and it dropped to new lows during the recession of 2008. If you lost a job in 1999, you weren’t actually all that atypical, but it wasn’t a big problem, because typically, you could find a new job fairly easily. If you lost a job in 2008, you were (typically) out of luck.
Source: Business Employment Dynamics data from the Bureau of Labor Statistics
The fact is, job creation and job destruction take place during booms at rates that are not dramatically different from the rates during recessions. It’s just the difference between the two that changes. In a typical boom quarter, about 7 million jobs are destroyed, and about 8 million are created. In a typical recession quarter, about 8 million are destroyed and about 7 million are created. There just isn’t much support for the idea that recessions give us a special ability to reallocate resources more intensely than we do during a boom or a period of normal growth. “Creative destruction” is a dynamic process that continues all the time, not one that occurs in separate phases of creation and destruction.
And the most salient feature of the current episode is that there has been unusually little creation. From the 1990’s to the 2000’s, the quarterly job creation rate fell from about 8% to about 7%. Since 2006, it has fallen to about 6%.
Some might argue that this type of slowdown in job creation is inevitable during times of structural change and that it is useless to try to oppose it with monetary and fiscal policy. It takes a long time (Arnold Kling, for example, would argue) for the economy to come up with ideas for new, productive uses of resources when the old uses are no longer productive. Monetary and fiscal policies can’t do much to speed up this process. They can’t make entrepreneurs more creative.
I’m skeptical of that view: entrepreneurs were plenty creative during the 90’s, once the booming stock market gave them a reason to apply their creativity. Monetary policy really did help speed up the process of finding new uses for resources: low interest rates led to high equity prices, which made it easy to raise capital and thereby made it advantageous to find new ways of using capital. Some would say the process went too fast in the end, with a large fraction of the uses proving ultimately unproductive, but statistics show aggregate productivity rising rapidly and continuing to rise during the subsequent years, even (atypically) during the recession that immediately followed the boom. There may have been a lot of froth, but there was plenty of good beer underneath, and monetary policy is what opened the tap.
In any case, even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process, they do help us get the most out of the economy in the mean time. With nearly 10 percent of the labor force unemployed, there are a lot of resources being wasted – people spending their time looking for jobs that many of them just aren’t going to find until we get a lot more economic activity. There are plenty of useful things that those people could be doing in the mean time.
Perhaps more important, monetary and fiscal policies help us reduce the risk that a weak economy – too weak for too long – will fall into a deflationary spiral. As long as job creation remains weak, employers have little incentive to raise wages, and competition will tend to push down prices. Even an “artificial” stimulus, one that doesn’t accelerate the structural adjustment process, will create a demand for labor and force employers to compete somewhat for workers. That competition, in turn, will prevent them from competing too aggressively in product markets and keep prices reasonably stable.
There is, of course (in theory, at least), the risk that policies will go too far and not just prevent deflation but produce excessive inflation. As I have argued before, we are nowhere near that point right now. I made the case against inflation using mostly the unemployment rate, but the case becomes even stronger when you consider the job creation statistics. This unemployment is specifically being induced by a slowdown in job creation. Job creation is specifically what leads to inflation: it’s when companies want to hire aggressively that they start raising wages excessively and competition becomes unable to keep prices in check. If unemployment – which arguably has a more tenuous relationship to inflation – is far, far away from the danger point, job creation – which has a direct relationship to inflation – is even further away.

Quick reaction (I had hoped to say more about the decline in the rates of job creation and destruction, but that will have to wait, so your thoughts on this are welcome):

I think both monetary and fiscal policy can help with restructuring, as noted above monetary policy can increase the return on projects and thus creates an incentive to find "new, productive uses of resources." Fiscal policy can, both literally and figuratively, pave the way for those projects to come to fruition.

But, though fiscal policy in particular could have been devoted more toward helping labor and other resources make the transitions to new industries, and perhaps more could have been done to help with the creation of new opportunities, the main point I want to make is that we should distinguish between cyclical and structural unemployment. Much of the unemployment we are seeing is due to the business cycle, it has little to do with the need to restructure the economy, and both monetary and fiscal policy can be of great help with this problem. I don't know for sure how much of the change we are seeing is structural and how much is cyclical,  but I am willing to assert that most of the change in unemployment is a cyclical rather than a structural phenomena. Thus, "even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process," though I see no reason to concede this, it only speaks to the ability of these policies to help with structural adjustment, monetary and fiscal policy are still very much needed to deal with the unemployment related to the business cycle.

New Yorker The Current Cinema on “American Casino”

David Denby of the New Yorker wrote a favorable review of “American Casino,” a documentary about the financial bubble by Andrew and Leslie Cockburn.


Andrew Cockburn is a long-time friend who has done a great job of reporting the financial crisis and the malfeasance that made it possible.  He documents the process whereby a rating agency is paid to do a job of modeling a structured transaction, takes the fee but then merely uses the bank’s own model:

“The movies are still one of the best ways of giving body, flavor, and emotion to the abstractions and puzzlements of an enormous crisis. In the most fascinating scenes in “American Casino”—a terrific documentary chronicling the subprime-mortgage mess and the financial collapse of the past two years—a former banker for Bear Stearns sits in the dark, his face shadowed and his voice (I believe) slightly altered. We might be watching a retired criminal or spy, a man both proud of his dexterity and ashamed of the disaster that it led to. Out of the shadows, he explains how such bizarre instruments as collateralized debt obligations (C.D.O.s) quieted the normal skepticism of investors. Here’s the drill: when the bank assembled a group of mortgage-backed bonds as an investment product, it submitted them to a ratings agency. But the agency, rather than run its own computer models on the trustworthiness of such bonds, he says, merely handed the job back to the bank, which ran its models. Having received a fee of perhaps a hundred thousand dollars for not doing anything, the agency then signed off on the phony ratings,” writes Denby.

My friend Mark Pittman of Bloomberg News is featured in the film.  Kudos to Andrew and Leslie on a fine project.


Did EBay Make a Profit on Skype Or Not?

Isn’t that interesting.

At $2.75 billion, Skype’s latest valuation is nearly identical to the amount eBay paid four years ago, $2.6 billion. The number short-circuits headline writers, who after eBay announced its intention to sell Skype, were probably poised to write something like: “Ebay Takes Loss on Skype Experiment”.

So, take that. But does the announcement mean that the much-maligned Skype acquisition was actually profitable for eBay?

The short answer: Not so fast.

From an accounting standpoint, eBay already wrote down Skype’s value by $1.4 billion in 2007 after the deal failed to achieve the synergies eBay had expected. Conveniently, it will now be able to write that value back upwards.

On an operational basis, the Skype foray hasn’t been a big money loser. Skype had a loss of $27 million in 2006, its first full year under eBay’s ownership, but the company contributed $44 million in profit to eBay in 2007 and $116 million in 2008, according to Aaron Kessler, an analyst at Kaufman Bros. Equity Research. Skype has contributed $76 million of profit this year.

Sure, those are relatively small contribuitions–less than 6% of eBay’s overall income–but Skype has the potential to generate huge profits if it can figure out how to monetize its 480 million users, who mostly access its free internet phone services.

So if Skype has all that potential, why sell it now after four years of struggles? One reason is that eBay executives may realize they don’t have the technological or strategic skills to convert Skype into more of a fee-paying service.

EBay’s subtle admission is simple: The group of Skype buyers, which includes longtime tech venture-capital firm, Index Ventures, and Netscape co-founder Marc Andreessen, may have a better chance recruiting talent and devising strategies for Skype.

EBay also gets to pass on a lawsuit filed by Skype founders, who claimed they own the rights to a key piece of the phone service’s technology. That dispute would be a sticking point in any future initial public offering because the technology is so core to the business.

EBay will share in the potential upside of a future IPO by retaining a 35% stake in Skype. But that 35% stake may or may not be worth what ebay and the investors say it is worth today. Like all valuations — especially for a deeply illiquid asset — the answer is guesswork.

This whole process was designed to distance eBay from the uncomfortable issue of Skype’s valuation. There’s no doubting that Ebay has lowered its exposure to the unit. But it could well be years before we know whether that $2.6 billion investment was a winner or loser. No matter what the headline numbers say.

Is Bank of America trying to pay back the government or pull a fast one?

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According to the Wall Street Journal, Bank of America (NYSE: BAC) is offering to repay part of the government bailout money it received last year, and the U.S. isn't ignoring the offer.

Supposedly, the U.S. wants the bank to pay at least $500 million in order to stave off a pact that would result in the government losing on certain assets. People familiar with the matter classify the moves as an "extra measure" of federal aid for Bank of America in order to complete its acquisition of Merrill Lynch. Supposedly, both sets of the discussions would allow Bank of America to "reduce a layer of federal involvement in its affairs."

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Unemployment Still Rising in U.S. Metros; El Centro, Calif. Jobless Rate Hits 30%

Unemployment rates in 372 U.S. metropolitan areas continued their upward climb in July, new Labor Department figures show.

Some 19 metros now have unemployment rates above 15%; eight of them are in California, hard-hit by the real estate collapse, and five of them are in Michigan, suffering from the auto industry’s downturn.

El Centro, Calif., continues to have the nation’s highest unemployment rate, rising to 30.2% in July. Yuma, Ariz., is next with 26.2%. The national average in July was 9.7%, not seasonally adjusted. The Labor Department will update the latter figure on Friday, when it releases its monthly employment report.

There were a few bright spots in July, mostly in the nation’s interior states less affected by the real estate boom-and-bust and aided by relative strength in their natural resources industries. Bismarck, N.D., registered the lowest jobless rate in July, 3.1%, followed by two other Dakota cities: Fargo, N.D., and Rapid City, S.D., at 4.3% each.

Among the nation’s biggest cities with population of a million people or more, Detroit’s unemployment rate was highest, at 17.7%, followed by Riverside-San Bernadino-Ontario, Calif., at 14.3% and Las Vegas at 13.1%. Charlotte joined the hardest-hit metros with a jobless rate of 12.4% in July.

Oklahoma City, at 5.9%, and the Washington, D.C. metro area, at 6.2%, had the lowest unemployment rates among the nation’s biggest cities in July.

Investing Like a Psychologist: Listening to Market Themes

Intermarket Correlations

Intermarket Correlations

Quick:  What do great symphonies, great novels, financial markets, and the conversations of clients and therapists have in common?

Answer:  All follow distinctive themes.  Much of the meaning that we find from all of them lies in our ability to track these themes across their many shifts and permutations.

A composer or novelist brings themes to life through the lines of different musical instruments or the story lines of various characters.  Financial markets express themes of economic growth/weakness, inflation/deflation, and stability/instability through the movements across asset classes and national boundaries.

Such communication by themes is familiar to psychologists:  What typically brings people to therapy is the fact that they are living out themes that aren’t of their choosing (and maybe not even within their awareness).  A common example is the abused child that, later in life, finds herself distancing from relationships and fleeing from even normal, healthy financial risk-taking.

As I emphasized in a recent post, the dominant theme in recent market action (risk assumption vs. risk aversion) has been driven by global macro investment.  We can see from the correlation matrix above, taken from my post, that a significant proportion of variance in the daily returns of stocks is shared with the U.S. dollar and commodities, as well as with 10-year Treasury yields.

After strong ISM data around 10:10 AM ET, we saw notable strengthening of the U.S. dollar against the Aussie dollar and euro, as well as a pullback in 10-year Treasury yields and a dip in oil prices.  The confluence of this and subsequent market action suggested that global macro participants were firmly in control of market action, shifting from risk assumption to risk aversion.

Our job as traders and investors is to be the therapist, the concert aficionado, and the sensitive novel reader and track themes as they emerge and shift.  If we view market action as a conversation, then we can appreciate that listening is a core investment skill.

SEC is digging in on derivatives investigations

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Mary Schapiro, chairperson of the the SEC, wants to collect critical data on derivatives transactions to pursue market abuses.

Schapiro said that regulators need the data to construct an audit trail to find out who is doing insider trading and market manipulation. The U.S. Senate is investigating the derivatives markets but is up against a brick wall because it cannot pin down who it is that actually pulled the trigger on the trades. So they are relying on the SEC to provide this data. Schapiro said that the SEC is having difficulty identifying derivative investors and the size of their trades.

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Casey Zmijeski Joins Fifth Street Finance

Casey Zmijeski has joined Fifth Street Finance as a managing director. He will be based in New York and previously was with Churchill Financial. 

Fifth Street Finance Corp. (NYSE:FSC) (”Fifth Street”) today announced that Casey Zmijeski has joined the firm as a Managing Director.

Mr. Zmijeski will be based in Fifth Street’s New York office and will be responsible for developing and maintaining private equity sponsor relationships and sourcing debt financing opportunities in the Eastern Region of the U.S., similar to his role at Churchill Financial.

“With our recent equity raise, we have significant cash on hand and are expanding our team with talented senior people,” said Juan E. Alva, Partner & Head of Origination at Fifth Street. “Casey, who will lead our origination efforts in the Eastern Region, is a key addition. His knowledge and expertise will be tremendous assets as we continue to deepen our sponsor coverage and expand our national footprint.”

Mr. Zmijeski joins Fifth Street from Churchill Financial where he served as a Managing Director responsible for originating and underwriting middle market loans. Previously, he was a Director at CapitalSource Finance and served in senior roles at GE Global Sponsor Finance and Heller Corporate Finance. Mr. Zmijeski has more than 20 years of leveraged lending experience, primarily to the middle market private equity community. He is a graduate of Duke University and received his MBA from Emory University.

Leonard M. Tannenbaum, Fifth Street’s CEO said “While several of our competitors are capital constrained and retreating from the market, Fifth Street is in a strong financial position as we are unlevered and have substantial cash in the bank. We are eager to grow our team and continue to serve our sponsor partners making investments alongside them. We think there has never been a better time to invest.”

Fifth Street also released its updated investor presentation on its corporate website, www.fifthstreetfinance.com.

About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a specialty finance company that lends to and invests in small and mid-sized companies in connection with an investment by private equity sponsors. Fifth Street Finance Corp’s investment objective is to maximize its portfolio’s total return by generating current income from its debt investments and capital appreciation from its equity investments.

Forward-Looking Statements

This press release may contain certain forward-looking statements, including statements with regard to the future performance of Fifth Street Finance Corp. Words such as “believes,” “expects,” “projects,” and “future” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and these factors are identified from time to time in our filings with the Securities and Exchange Commission. Fifth Street Finance Corp. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


Allied Capital’s Debt Restructuring A Done Deal

Allied Capital Corp. released details of its debt restructuring today (read the press release here and our previous coverage of restructuring efforts here).

In summary, the troubled business development company has reduced debt outstanding on its private notes to $841 million from $1.02 billion, and restructured them into three series, maturing at various dates from 2010 through 2012. It has also restructured its revolving credit facility into a term facility that matures on Nov. 13, 2010, and reduced commitments under the facility to $96 million from $115 million.

The restructuring gives it increased financial covenant flexiblity, and some runway to meet its debt obligations.

“In our opinion, the amended agreement with creditors has provided Allied with breathing room that should allow management to shrink the firm and delever the balance sheet,” Standard & Poor’s wrote.

But it’s not all good news. Allied Capital’s noteholders and facility lenders got a “pari-passu blanket lien” on a substantial portion of its assets, which S&P said places its public debt holders at a substantial disadvantage.

The restructuring also results in a significantly higher cost of capital, including fees connected to the closing. After the restructuring, Allied Capital estimates that the weighted average cost of capital for the notes is about 13.75% and the facility, about 17.2%. That compares to an overall weighted average of 8.6% at June 30.

Fitch Ratings Service downgraded the BDC’s long-term issuer default rating to B+ from BB and said the ratings outlook is negative.

“Fitch expects Allied will need to continue to liquidate a meaningful portion of its portfolio, absent a debt refinancing, in order to meet $303.8 million of debt maturities before the end of 2010, $573.7 million of public and private note maturities in 2011 and $529.1 million of public and private note maturities in 2012,” the ratings agency said. On this point, S&P said that many of those exits will be at a loss, contributing to pressure on earnings.

S&P added that it expects the credit quality of the firm’s loan portfolio will continue to deteriorate. The agency said nonaccrual loans have ballooned to 36% of loans at cost as of June 30.

Tuesday links: financial innovation

August was a good month for the global capital markets.  (Capital Spectator)

Taking a look at the components of the JunkDEX.  (VIX and More)

“Those investing in bonds may think they are playing it safe. Instead, they may be taking a bit of a gamble on inflation.”  (ROI)

Where has insider buying gone?  (The Pragmatic Capitalist, FT Alphaville)

Chinese ADRs have been outperforming their local peers.  (Bespoke)

Comparing the global infrastructure ETFs.  (IndexUniverse)

Comparing some mutual fund momentum measures.  (CXO Advisory Group)

More thoughts on the idea of momentum based mutual funds.  (Fundmastery Blog)

“The idea that bedroom day-traders might ever compete equally with professionals is a fiction convenient to the retail broking industry.”  (FT earlier Abnormal Returns)

We only have 82 years of data..So for us to pretend that the equity premium is the birthright of anyone willing to stay the course for 10, 20, or even 30 years might be something we want to reconsider.”  (behavior gap)

“When someone reaches into history for an analogy — -it is the same thing.  It is back-fitting of data, using the human mind, the most powerful computer.”  (A Dash of Insight)

“As a result of this sword of Damocles hanging over them, hedge fund managers need to factor in the possibility of investors and/or prime brokers pulling the plug on their fund.”  (All About Alpha)

On the correlation of endowment fund returns on donor generosity.  (Felix Salmon)

The Dow Jones Economic Sentiment Indicator edged higher.  (Real Time Economics)

Bank of America (BAC) is tired of all that government oversight.  (WSJ, Clusterstock)

More pushback against the notion of TARP profits.  (Market Talk, Matt Taibbi)

What’s in store for the big banks this Fall?  (The Big Money)

In defense of financial innovation.  (Megan McArdle, Clusterstock contra Baseline Scenario)

The problem with LBOs is leverage.  (Matthew Goldstein)

Regulation won’t kill the VC industry — we’ll still have future Googles and Twitters and Facebooks — but let’s not be so daft as to leave a huge part of finance unregulated, and then, down the road, look back and wonder why we left that hole wide open.”  (Silicon Alley Insider)

EBay (EBAY) kicks Skype to the curb.  (DealBook, WSJ, Atlantic Business)

Walt Disney’s $4 billion acquisition of Marvel Entertainment represents the kind of deal that the global financial crisis had practically silenced.”  (Deal Journal)

Who got the better deal:  Disney (DIS) or Marvel (MVL)?  (Breakingviews, Vanity Fair, Money & Co.)

Maybe Goldman Sachs (GS) really does rule the world.  (Vanity Fair, 24/7 Wall St.)

What do the FT/Goldman Sachs Business Book of the Year nominees tell us about 2009?  (Infectious Greed)

StockTwits Desktop is here!  (StockTwits Blog, TechCrunch)

Abnormal Returns is a proud member of the StockTwits Network.

Economists React: ISM ‘More Than Just an Auto Story’

Economists weigh in on the August increase in manufacturing activity.

  • Much stronger than expected report. The composite index rose to its best level since June 2007 with considerable gains in orders, production and vendor deliveries. […]The improvement in the manufacturing sector broadened out somewhat in August, with 11 of the 18 industry groupings reporting growth. This compares with six industries showing growth in July and seven in June. The August gains were led by sectors such as textile, paper, electronics, transportation equipment and chemicals. Clearly, this is more than just an auto story. –-David Greenlaw, Morgan Stanley
  • The August ISM report shot the lights out in terms of broad-based gains across all key indicators. The production index has accelerated for three consecutive months, indicating that recent positive developments in auto sales and residential construction are definitely adding considerable upward momentum to the manufacturing sector. […] Overseas orders have rebounded in the past several months with a distinct V-shaped pattern, indicating that the global economy is picking up considerable momentum. –-Brian Bethune, IHS Global Insight
  • Manufacturing is expanding, according the Institute for Supply Management.  Its August activity index broke over the magical 50 level, indicating that growth had resumed.  And it wasn’t just the motor vehicle sector.  […] The new orders index hit its highest level since the end of 2004. This is a favorite report for many at the Fed and if the members start believing the recovery story is real, then the decision to raise rates will not be too far behind. My guess for the first increase in rates remains either the December meeting or the end of January 2010 meeting. –-Joel Naroff, Naroff Economic Advisors
  • The mix of surging new orders and plunging inventories suggests that the increase in activity is sustainable. Factories continued to shed inventories at a rapid pace. The 34.4 reading for August was up less than a point and remains close to the multi-decade low of 30.8 seen in June (until a few months ago, the index had not below 37 since the early 1980s). Moreover, the customer inventories measure slid by 3 1/2 points to 39.0, signaling that an increasing proportion of purchasing managers think their customers’ stocks are too low. This reading was the lowest since July 2004 and the 34% who felt that their customers’ stocks were too lean was the highest on record going back to 2001. […]It may take a few more months, but we remain confident that this recovery will have legs, and the data over the last month or so have done nothing but bolster our confidence that 2010 will see economic growth that is well above trend. –-Stephen Stanley, RBS Capital
  • The ISM report…concurs with our view that the long, severe manufacturing recession has bottomed out. Manufacturing activity in this early stage of the recovery is being driven by a classic inventory swing—particularly in the automotive sector.  It is less that inventories are being added as it is that firms are not destocking.  Production, therefore, has to rise as fewer products and materials come out of inventories. –-Daniel Meckstroth, Manufacturers Alliance/MAPI
  • After the initial inventory-led boost, a key element going forward will be whether final demand picks up sufficiently to keep the upward impetus in place, or whether momentum will wane once inventories are stabilized. Much will depend on the consumer, and, apart from a very near-term bounce from the “cash for clunkers” program, we feel that the headwinds for consumer spending remain too brisk to expect much help on this front. –-Joshua Shapiro, MFR Inc.
  • The prices paid index jumped 7.2 points to 65.0, a surprising move in the face of oil price changes that — while positive — did not depart sharply to the upside in August. The supplier deliveries index also rose 5.1 points to 57.1. These developments suggest the potential for some price pressure in the production pipeline; however, with utilization rates near post Depression lows, we do not expect this to manifest itself in finished goods or retail prices. –-Goldman Sachs