Stocks rose Monday driven by a bevy of good news. Shares of home builders were sent higher on a combination of news including results from the Case-Shiller Index that home prices in 20 U.S. cities dropped less than estimated and stronger orders. Also, Shanghai’s benchmark stock index was driven to a one-year closing high for the fourth straight session on continued signs of economic recovery and credit markets’ return to liquidity. Lastly, financials continued to post some of the strongest returns for the quarter (The S&P financial sector is up 36.6%) indicating investors belief that the crisis in financial markets has abated. We believe that third quarter 2009 will be another positive quarter for U.S. markets but we do not anticipate gains of the same magnitude as we have experienced in the second quarter.

We have a positive medium term outlook for companies in the residential home building products industry. As the slowdown in the housing market finally appears to be losing steam home building will pick up again. The remainder of 2009 will continue to present a challenge to the home building products industry as the foreclosure crisis has left a glut of houses on the market. That being said, we expect to see a marked pickup in activity early in the second quarter of 2010 as the housing surplus decreases and new home building picks up speed.

The Federal Reserve has decided to allow one of their emergency lending facilities to expire and to trim two others. These decisions are a clear sign that the Fed believes improving financial markets will allow them to begin winding down their unprecedented intervention in the market. The Fed also decided to refrain from pumping more money into the economy, providing further indication of their confidence in the recent signs of economic recovery.

President Obama’s 2010 budget proposal for home health agencies (HHA) calls for a reduction in Medicare payments of $13.16 billion spanning 5 years.  There will almost certainly be increased government regulation of Medicare home health care, resulting in decreasing margins, but the final cuts to Medicare reimbursement will not be as drastic as the ones proposed by the White House. The malaise currently affecting mergers and acquisitions as a whole has spread to the home health care M&A market. 2009 Q1 M&A activity in the home health industry is 30% lower than Q1 2008 and 22% lower than Q4 2008. As the economy picks up speed and and financial markets continue to stabilize M&A activity will follow suit.

In May consumers pushed the national savings rate to the highest level in more than 15 years. At 6.9% the current savings rate represents the highest rate seen since December 1993. Consumer spending also rose .3%, in line with expectations. Both of these changes are most likely a result of rising incomes in May. GE CEO Jeff Immelt made headlines when he made a statement stating that future US economic growth could not rely solely on consumer spending but must also be driven by an increase in exports and increased productivity. We agree with this position since consumers are clearly choosing to save rather than spend.

Transportation

The transportation industry is feeling the effects of diesel fuel prices on the rise and consumer spending remaining low.  Strategic deal flow is down from 44 deals YTD in ‘08 compared to 13 deals YTD in ‘09 with aggregate based dropping to 66.5 ($mm) from 7291.9 ($mm) in ‘08.  With a lack of proper financing, most of the blockbuster deals in earlier years are missing, thus leaving most of the deal flow in the Middle-to-Lower markets.  Expect for freight transportation to see more action as companies try to acquire for geographical expansion in preparation for a recent spike in retail new orders. To see our latest Freight Trucking Star Report, please click here.

Initial jobless claims rose by 15,000 to 627,000 in the week ended June 20th.  Despite the two week rise in initial jobless claims, the Fed released a statement stating the economy’s slump is “slowing” after a two day weekend in Washington.  Even with the encouragement, companies will continue to hold out on hiring until there are sustained gains in demand.

Staffing Industry

The staffing industry continues to face slow sales and declining revenues as the demand for staffing services remained low.  Demand for staffing services tends to run parallel to the general economy so we expect sales to pick up in the last quarter of 2009 and throughout 2010 as the economy continues to recover. To see our latest Staffing Star Report, click here.

An unexpected 1.8% jump in U.S. durable goods orders is the latest sign that the economic slump may be easing up. This gain defied expectations as economists had forecasted a .9% decline. As the US economy continues its slow road to recovery we expect to see activity pick up speed in the M&A markets. This increase in durable goods should continue through May and June Wholesalers Inventory Reports. For more information on how this will impact M&A, please see our most recent article, Second Quarter 2009 Merger and Acquisition Update.

Food & Beverage

M&A activity in the food & beverage industry has remained steady despite a decline in consumer spending.  Deal flow from YTD ended 6/19 is down slightly from from 43 in ‘08 to 37 in ‘08.  However, the aggregate size of deals is striking down with beverage deals rounding out at 53702.7 ($mm) in ‘08 down to 67670.6($mm) in ‘09, and food deals finishing at 22327.8 ($mm) in ‘08 down to 136.1 ($mm) in ‘09.  The steady deal flow but lower equity bases indicates there is most likely consolidating of the lower-to-middle market.

6/18/09

After falling the past few weeks, initial claims for unemployment benefits are back up to 608,00 in the week ended on June 13th.  The optimism built from the falling in initial jobless claims was short-lived, stressing the road to recovery will hit bumps.  Adam Posen, a future Bank of England policy maker, believes the U.S. economy will see a “W” shaped recovery as opposed to steady growth.  Sustained consumer confidence and loosening of the credit market will be the key factors that will drive the U.S. economy out of the recession.