Is this the August Before anoter Black Monday Tuesday?

In August, 1987, the Economist magazine ran a cover that looked like the poster of a horror movie entitled "The Return of Inflation." The U.S. stock market started falling culminating in the crash of October 20th ("Black Monday".) From August to Black Monday the Dow Jones fell a thousand points (when a thousand points was a lot.) Five hundred of those points were lost on October 20th.

Are we on the same path?

The U.S. housing bubble has ended with a large amount of mortgage backed securities backed by subprime mortgages that are turning sour. Hedge funds and other investment funds are holding large amounts of these. As they try and sell these securities, they are finding there is no market. This global run from risk is causing treasury securities to rise in price and the world's central bankers rush in shoring up the liquidity of their banking systems.


Listen to Phil Resler, Chief Economist of Nomura Securities, discusses the current liquidity scare with the Wall Street Journal's Phil Izzo and David Wessel.

The S&P 500 may seem cheap at 17 times earnings, but it spent most of my life below 15x.

John Rogers' Ariel Capital Management Increases its Stake in McClatchy, the Wichita Eagle's Owner

John Rodgers is an old and savvy investor. Media Daily News reports that his investment company has raised its ownership stake in the McClatchy Company to 15.5 percent. The Chicago Tribune reports, "'Our firm is based on contrarianism. We often find that's where opportunity is,' said Ariel founder John Rogers."

The McClatchy family owns about 30% of the outstanding shares and has super shares to allow it control. Hedge fund Citadel Investment Group also has accumulated 3.2 million McClatchy Class A shares.

Newspapers have always been great cash generators. John Rodgers, Citadel, Rupert Murdoch, and Sam Zell all seem to think they are worth investing in. Everyone else is avoiding them like the plague. At least in Murdoch’s case we know that his strategic insight is that he who controls the content commands the audiences.

Ft.com has an interview with Zell that provides a view of the business that he back up with a very large bet.

The Decline in Newspaper Ad Revenue is Accelerating.

The Wall Street Journal reports today that "The downturn in the newspaper industry is getting worse.

"Last fall, newspaper executives and analysts were caught by surprise by the severity of a slump that took hold last summer. Since the beginning of this year, the rate of decline in advertising revenue has accelerated. Total print and online ad revenue was down 4.8% to $10.6 billion in the first quarter from a year earlier, according to the Newspaper Association of America, compared with its full-year decline in 2006 of 0.3%." You can see the acceleration in the chart from the Journal on the right.

Newspapers continue to increase their internet revenues: their 2006 online ad revenue was up 31.5 per cent. However, at only 5 percent of the total, the internet revenues are no where ner enough to offset the losses.

Direct mail spending continue to grow, but faces a strategic problem. While newspapers are rich in content, they are increasingly poor in ad revenues. Direct mail revenues grow, but the medium is increasingly poor in content.

Coen’s Midyear Forecast for Direct Mail: Up 5%

Robert J. Coen’s midyear forecast for Direct Mail is for a five percent growth in spending to $61.6 billion during the current year. That compares with a growth of only 3.1 percent for total advertising spending. If these figures hold up through the end of the eyear, Direct Mail will have a 21.2 percent market share of the ad market.

Robert J. Coen of Universal McCann is the world's leading authority on advertizing expenditures.

Boeing projects $2.8 trillion new airplane market

Boeing is forcasting demand for 28,600 new commercial airplanes over the next twenty years. According to the Wichita Business Journal, "The forecast is based on a projected 5 percent annual growth in passenger traffic and a 6.1 percent annual increase in air cargo traffic. "

Manufacturing and Housing: Which Way is the Economy Going?

The monthly reports on April's Housing starts and industrial production give us some insight into which way the economy is headed. The April employment report had demonstrated weakness in each.

Construction: Housing Starts 19% Below Last Year

The Wall Street Journal reported, "Home construction unexpectedly rose during April, making a surprise increase despite bloated inventories and tighter credit for subprime borrowers, but building permits took their sharpest fall in 17 years." Bloomberg's consensus forecast for housing starts were 1.475 million new units. The actual (a 1.528 million annual rate) was better, but that level is 19 percent below the year before.

Manufacturing, especially Aerospace, Is Up

The Federal Reserve Board published its April Index of Industrial Production. America' mines and factories produced 1.9% more than a year ago and their capacity usage (80.2% ) was 2.3% higher. Motor vehicles were a little stronger, a good sign.

Aerospace production was up 9.7 percent over last year.

Jobs Grew Modestly in April

Low expectations. Even lower job growth.

Wall Street expected a weak employment report for April and it got it. According to Bloomberg, the consensus estimate was for a growth of 100,000 jobs. According to the Wall Street Journal, the expectation was for 110,000. The Bureau of Labor Statistics announced April's job growth was 88,000.

April's payroll's were 1.4% higher than a year ago. The economy has produced slower year over year job growth in first four months of 2007 than we saw last year. Yet 1.4 percent growth is fast enough to keep up with labor force growth and slowly pull down the unemployment rate. These comparisons need to be weighed against the very rapid growth experienced the same time last year.

The unemployment rate increased from 4.4 percent to 4.5 percent. This reflects the month to month sampling fluctuation more than it does a fundamental reversal of trend.

Aircraft manufacturing booming

The Bureau did not report separate jobs data for aircraft manufacturing. However it did report that total jobs in the transportation equipment sector fell by 200,000 and that motor vehicles and parts fell by 4.8 million. This implies the rest of the sector grew by 4.6 million jobs which would be principally in the aerospace industry.

Wichita Job Growth is Strong and Accelerating

Jobs grow 4.1 percent.

Employment grew a rapid 4.1 percent in the Wichita labor market since March of last year according to the federal Bureau of Labor Statistics. Not only was Wichita's job growth strong, but it is accelerating compared to the 3.9 percent year over year growth recorded in February. By way of comparison payrolls nationwide grew only 1.4 percent. Wichita’s economy produced twelve thousand new jobs over the last twelve months.

The unemployment rate is down and well below the national rate.

The Wichita unemployment rate was 4.1 percent well below the national average of 4.5 percent. Things have changed dramatically over the last twelve months. A year ago, both the national and the local unemployment rates stood at 4.8 percent. One major reason is the booming aircraft industry. Commercial aircraft order backlogs are up 40 percent over a year ago. The financial recovery of the domestic airline industry, its aging fleet of planes, and a huge demand abroad are all contributing to this sanquine cycle in a very boom and bust business. The Eagle reports that passangers on Air Tran grew 12.9 percent in April.

Murdoch Bids $5 Billion for Dow Jones

Want a Journal Mate?

The rule of media empires is he who owns the content rules. Whether content pays is another matter! Wall Street seems convinced that top shelf journalism and having a business model in the black are two diferent things after all. (And I do not mean Conrad Black!)

Rupert Murdoch's News Corp has bid $ 5 billion for Dow Jones, publisher of the Wall Street Journal, Barrons, and the Dow Jones Newwires among other media properties.

Is Murdoch paying too much? he does not think so: "[W]e feel it's worth this. This is the greatest newspaper in America, one of the greatest in the world. It has great journalists which deserve, I think, a much wider audience. We feel that with coming both online and offline, there's a great deal to be done here. It's got great journalists, it's got great management, but it's got a rather confined capital. It's got to be part of a bigger organization to be taken further."

The Bancrofts say "No."

Although the bid is a 67% premium over the stock price that does not mean it is a deal.

Like many traded newspaper companies, Dow Jones has more than one class of shares. In this instance, the Bancroft family, which has a minority of the shares has a voting majority. The Financial Times quotes Michael Elefante, a Dow Jones director and lawyer representing the Bancroft family, as saying “Members of the family and the trustees of trust for their benefit have advised him that they will vote shares constituting slightly more than 50 per cent of the outstanding voting power of Dow Jones against the proposal.”

Stay tuned, the fun has just begun.