“And in what could be viewed as another positive for the economy, FedEx says its busiest day this year will also be its busiest day ever. They expect to ship more than 13 million packages on December 14th. The company says it will add 14,000 part-time workers to handle the holiday rush. Shares have been trading to the upside, up over 1%.” — CNBC’s Street Signs 11/10/2009

According to an emailed statement put out by the company, FedEx (FDX) is ramping up operations in anticipation of a record holiday shipping rush.  Estimates from the company are claiming that somewhere in the neighborhood of 13 million packages will be shipped in the busiest shipping day of the year, which if true would make it their busiest day ever.  This would be an increase of 8% from last year’s busiest day.  The projection of 50 million packages for that week is an increase of 11 percent increase over last year.  FedEx, headed by a respected economist Fred Smith, cited conversations with large customers, a return to growth in GDP, and increased industrial output among their reasons for optimism.

FedEx has seen volume increase recently thanks to a closer relationship with the U.S. Postal Service and the exit of competition DHL from the U.S. market.  However, revenue is just starting to recover after four straight quarterly declines.  With the new projections in place, it is very likely that this quarter will buck that dismal trend.  Prior to the announcement of FedEx’s expectations, analysts were anticipating revenue would come in at about $8.1 billion or just about flat from a year ago.  That number would seem to be well within reach if reality does in fact mirror expectations.  Morgan Stanley (MS) raised its estimates for FDX this morning due in large part to general economic improvements.

Shipping gifts around the holidays is always a crucial time for FedEx, and today’s statements from the company are an encouraging sign for holiday sales.  FedEx holds an important place as an economic indicator as the second largest shipping company in America, and retailers can only hope that they will live up to the upbeat forecast.  That being said, shipping volume increased last year even though retail sales were largely a disappointment.  The forecast from FedEx will not necessarily equate to great sales performance in general.  It might be reasonable to expect that more gifts and goods will be shipped this year than ever before, but they also may be cheaper than in the past.

We currently rate FedEx as Fairly Valued at the current price level.  This stock is currently sitting comfortably within the historically normal ranges of price-to-sales and price-to-cash earnings.  The prospects for the company do seem to be improving along with the economy, but we believe there are better bargains available to investors.

Equities world-wide are feeling the weight of another tough day for China’s Shanghai Composite Index, which slumped 6.7% today most since June 2008.  Now, China’s equity market has dropped more than 20% from the latest highs, making this an official bear market. 

The trouble started as the explosive growth of domestic lending has cooled significantly over the last few weeks.  We had wondered, as recently as July in this blog (Leverage Bubble Reinflating, This Time in China), if the breakneck pace of bank lending was sustainable and if it was creating another leverage problem for the world economy.  It is no surprise that the economy appeared to be booming as the state-run banks were dolling out loads of cash, but now that the lending has slowed, so too has the outlook for growth.  New loan growth for August is reportedly going to be about half of what it was in July.

‘Bubble Territory’

The Shanghai Composite has slumped 23 percent to 2,667.75 since Aug. 4, more than the 20 percent drop that is the common definition of a bear market. China’s gauge is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.

China’s economy isn’t “sustainable” and the Shanghai Composite “should be 2,000 or less,” former Morgan Stanley Asian economist Andy Xie said in a Bloomberg Television interview. He added that China’s market remains “in bubble territory.” — from Bloomberg.com

The bottom for the Chinese stock market was in late October of 2008, and from that point on indexes had just about doubled.  The apparent strength in China’s economy was a major reason for the optimism that the U.S. economy had bottomed, as pundits like Jim Cramer talked about China leading the world economy out of recession.  That thesis has held up thus far, and if that remains the case U.S. stocks could be headed for a correction.  Of course, the two equity indexes don’t move in lockstep, but in general, Chinese stocks are a few months ahead of their American counterparts (a fair amount more volatile as well).  The two economies are major trading partners and rely upon each other greatly, so to see them trade in similar fashion makes sense in our increasingly global economy.

The troubling trends in China should pressure energy and basic materials stocks most directly, but it may also have a broader impact on the psyche of U.S. investors.  Right now, investors sentiment is firmly in bullish territory, but at Ockham, we have been expecting a correction for the last few weeks.  There are no more major earnings reports until October to buoy the market, so macroeconomics should be the focus for investors.  The developments in the Chinese stock market suggests that there is a risk of the China leading the market to the downside as well.

“Why don’t we take a look real quick at Sears stock today? The retailer, this is the biggest department store company in the country of course, KMart falling under Sears Holdings as well. Reporting an unexpected loss for the quarter. Same-store sales at Sears stores down 13% and sales at KMart stores falling by nearly 4%.

So, those two stores still really struggling and directly connected to the housing market as one of the weakest segment is the washers, dryers, refrigerators, big appliances is weighing down sales figures at Sears and KMart stores. Of course, back to school shopping season, ever important for the retailers is second only to the big holiday shopping season. Take a look at the forecast here because this is going to be key and crucial for retailers going forward. This is the latest estimates by shopper track at the Chicago-based research firm. Right now, saying that traffic at malls will fall 10% for this back to school shopping season while total sales for the season should be falling by about 5.9%, not a good sign…”– Fox Business Network 8/20/2009

Retailers have been in the spotlight over the last few weeks with so many reporting earnings recently.  However, no retailer has been more starkly disappointing than Sears Holdings (SHLD) which reported revenue declined 10.3% and swung to a loss of 17 cents per share, 52 cents worse than consensus analysts estimates.  The performance was hampered of course by horrendous sales figures but also by severance and pension plan costs, and store closings.  Company-wide same store sales were 8.6% lower in the U.S., with a drop of 12.5% in Sears stores falling the fastest.  The dismal results have pushed the stock downwards, as shares are trading off about 12% in midday trading.

The horrendous quarter reported by Sears puts an end to the streak of two straight quarterly profits.  What is especially troubling about these results is that Sears has been aggressively cutting costs for quite some time (expenses fell 8% in the quarter), but sales are deteriorating more rapidly than first thought.  It appears that Sears will need to further cut costs over the next few quarters in order to become a more sustainable and efficient business. 

Sears management maintains that their performance is closely tied to the housing market, as the appliances and home goods sales tallies were especially weak.  Perhaps a turn around in the housing market would help turn the tide for Sears, but how long can they wait while sales falter?  We did not anticipate Sears would have a loss again anytime soon, and to blame the difficulties on the housing market is a flimsy excuse.  Especially as Home Depot (HD) seems to be surviving the housing decline reasonably well and much more profitably.

Sears Holdings has been universally panned by analysts today, with Gregory Melich an analyst from Morgan Stanley saying, “Ouch…This morning’s 2Q miss was pretty much across the board, with weak comps and lack of gross margin expansion standing out.”  The retail analyst from Credit Suisse called SHLD the most overvalued stock in his coverage following the results.  Clearly, the experts were looking for much more out of the fourth largest retailer, whose stock had nearly doubled year to date. 

As for Ockham, while this quarter was much worse than we had anticipated, we are content to reaffirm our Fairly Valued rating at this time.  Executives at Sears has much more work ahead in order to become a more efficient operation, but we do not believe that the price tag is particularly egregious at this time.  That being said, we would need to see it fall another 10-15% or more before we could consider this stock appropriately priced given the weakness in fundamentals.  The substantial debt burden is certainly a concern as well.  Seems to us that management will have to go back to the drawing board and perhaps think outside the box in order to reinvigorate sales and put Sears on better footing.

“Another story we’re closely following today and that is involving Charles Schwab. New York Attorney General Andrew Cuomo expect today sue Schwab the company for civil fraud according to the Wall Street Journal.  Auction rate securities, we talk about them, fixed income vehicles, value reset at auction, allegedly sold like cash, and many have settled over this. They said they’re like cash, easy to sell, but when the markets, froze up behind the credit crunch in February and they did stop supporting the auctions and several brokerages agreeing to buy back from clients.  Charles Schwab has not and we’ll see what comes from this. We’ll keep an eye on that.” Fox Business Network 8/17/2009

New York AG Andrew Cuomo’s crusade against brokers and investment banks who peddled Auction Rate Securities has hit a road block with Charles Schwab (SCHW).  While most banks who have been targeted by the investigation have been anxious to settle and make this problem go away, Schwab is holding their ground.  The trouble started last year when the credit crisis struck, and the market for auction rate securities became extremely illiquid.  The market was controlled by a small number of Wall Street banks who stopped making a market for the securities, in light of the risks associated with them as the credit market was in crisis last summer.  Institutions and wealthy individuals who had been sold the securities had believed that they were relatively safe and highly liquid instruments, but were left holding the bag in the summer and fall of 2008.  The lawsuit alleges fraud in the way that the ARS were marketed to clients.

Schwab is the first firm to really stand up against the accusations of wrong going in any meaningful way, as Citi (C), JP Morgan (JPM), Bank of America/ Merrill Lynch (BAC), UBS (UBS), and Morgan Stanley (MS) have all settled.  In most cases, the settlement included the banks buying back the ARS’s from clients at par value.  Charles Schwab contends that it did nothing wrong and could not have predicted the financial crisis that brought the credit market and ARS market to its knees.  Furthermore, form Schwab’s point of view, it simply distributed the securities and any fraud that occurred was with the underwriters.  Clearly, the firms listed above who have settled have played a different role in the crisis than Schwab as underwriters, and perhaps should be punished differently.

The total amount of ARS held by Schwab clients totaled $789 million, but now with the impending law suit Schwab will need to set aside a pretty penny in legal fees as well.  According to the Wall Street Journal, “The lawsuit, filed in New York State Supreme Court in Manhattan, alleges Schwab knew or was reckless or negligent in not knowing about rising problems in the auction-rate securities market beginning in August 2007.”  It will be extremely interesting to see how the courts will handle this case, because Schwab’s defense seems to be bordering on negligence saying that they were unaware that of the risks of ARS.  That being said, we are not attorneys and would not suppose to understand the intricacies of this case.

Schwab stock is down a little more than 4% today, and we have reaffirmed our Fairly Valued rating on this stock.  Schwab has certainly stuck its neck out on this one, and taking on Mr. Cuomo is risky as so many others have been anxious to sweep this under the rug. 

On Tuesday, we wrote about Deutsche Bank’s (DB) earnings release which signaled the bank was protecting itself against further difficulty ahead (A Cautious Tone for Deutsche Bank).  The bank worried investors by devoting a great more resources to loan loss provisions than any analysts had expected, a seven-fold increase.  The stock is down 13% this week, and it has suffered downgrades from UBS (UBS), FBR Capital, and Morgan Stanley (MS).  Just a few days later the largest German bank’s CEO Josef Ackermann explained the rationale behind the move.

“The crisis is not over.  When one looks at the developments of global economic growth, then it can be expected that starting in the second half of this year we slowly move into the positive territory. But we’re still moving on a low level…

We were disciplined in our considerations about what risks which we should take.  If we had played it out to the full extent, we could have earned significantly more.” – Josef Ackermann

Ackermann assessment hinges on rising delinquencies among both consumer and corporate borrowers.  Being the CEO of the largest German lender, Ackermann thinks it is prudent to shrink the balance sheet and set more reserves aside for the prospect of any further economic weakness.  Clearly, Deutsche Bank could have made more money in the last quarter were they more aggressive, but eurozone unemployment continues to rise and we think cautious behavior should not be ostracized after the financial meltdown we experienced last year. 

We are not recommending Deutsche Bank shares at current levels, and the risk averse methods of the bank will impact profitability if economic conditions continue to improve.  That does not mean that Ackermann is wrong though, and we have gained respect for his ability to stand in the face of the conventional wisdom that recovery is on the way.  We tend to agree with Ackermann that there are still quite a few difficult headwinds for lenders that will put pressure on banks’ balance sheets once again.  It seems that Deutsche Bank’s board is okay with taking the more defensive tact as they have recently extended his employment contact through 2013.