Thoughts

Starbucks Is Not a Surprise

Companies with food and agricultural products as an inputs -- think Starbucks -- will face margin pressure this year.

Tom DeMark was on CNBC with a dire market prognosis.

Yawn

Fed comments = nonevent.

Run, don't walk, to read Pimco's report on monetary policy.

New-Homes Sales Built on a Weak Foundation

We are in a market that appears to interpret every statistic positively.

Case in point -- today's housing report, which appears to have been the proximate cause for the upside move in the indices this morning.

Sometimes, such as in this morning's December new-home sales report, the positive interpretation is nothing more than a sound bite from a bullish cabal that incorporates little analysis and overstates the case that a broader based housing recovery is in place.

December new-home sales rose to 329,000, easily beating expectations of 300,000 and compared to 280,000 in November. But the bulk of the rise was in the Western region, increasing by an outsized 71%. By contrast, sales only increased modestly in the South and Midwest. The Northeast's sales actually declined!

I suspect that during the last few months, the West Coast (California) numbers artificially inflated the national and state housing statistics, owing to the California first-time homebuyer tax credit (Assembly Bill 183), which expired on Dec. 31, 2010 (well after the national credit expired). This California home credit could be used regardless of income and was worth up to 5% of the home's price or $10,000, whichever was less.

I haven't heard a single person in the media or elsewhere focus on the notion that December's new-home sales were inflated by the expiration of the California tax credit.

No one!

This credit likely positively affected September to December new-home sales activity and prices. Since December was the last month of the state tax credit, it probably had a particularly outsized impact on today's sales report.

For example, if you go back to Case-Shiller's October report, home prices in San Francisco, San Diego and L.A. rose by about 3%, though the total country (20-city composite) reported a 0.8% drop in home prices.

But the skew in new- and existing-home sales is even more pronounced (than prices) by the California tax credit.

For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27% that month!) During the same period, existing-home sales in the West rose by 13%, even though the national activity was flat.

What, Me Worry?

The federal government's budget deficit is now expected to grow by about 14%, to $1.48 trillion this year, well above prior forecasts.

Weak Mortgage Data

Housing bulls should read the very weak mortgage application data this morning.

Applications for new mortgages declined by almost 9%, the fourth straight weekly drop. This reading represents a marked reversal of the entire increase since summer 2010.

The refinancing index declined by 15%, standing at its lowest reading in 12 months.

This is a meaningful negative for consumer cash flows in early 2011.

Aggregate federal debt is now above 90% of GDP now. (In This Time Is Different: Eight Centuries of Financial Folly, authors Carmen Reinhart and Kenneth Rogoff point out that once you get to the 85%-90% threshold of excessive debt/GDP levels, there is a secular erosion in country growth rates.)

Stated simply (and from my perch), our domestic economy is now mature, and U.S. economic hegemony is a thing of the past.

This is a P/E-deflating, not P/E-inflating, phenomenon.

Look East for above-average and sustainable economic growth.

Citigroup maintained a hold rating and slightly increased its price target on YHOO, which seems right to me:

* 2011 EBITDA reduced 3% to $1.89 billion, but price target bumped from $18 to $19 on larger cash balance, Asia assets appreciation, and reduced share count assumptions. $19 = 5x 2012 EBITDA of $2.20 billion. Staying conservative with their estimates -- modeling slightly below the guidance of 13% display revenue CAGR and below the guidance for 30% 2013 operations margin.

* Valuation is undemanding at 4x 2011 EBITDA. Yahoo! has a very attractive Asian Internet investment portfolio and a strong balance sheet. And YHOO's display ad segment is pacing the market and not underperforming. But Citi remains concerned about:
1. Long-term Display growth -- given increasing competition from Google (GOOG) and Facebook
2. Continued Internet usage share loss -- now less than 10% of U.S. Internet usage minutes
3. Lack of mobile, social, local and video advertising assets.

My view is that the quarterly results and 2011 guidance likely hasten a corporate transaction.

long YHOO