Thoughts

Game-Changer?


Today yet another competitive threat to NFLX was announced, called "HBO Go."

I suspect this is but the tip of the iceberg.

Here is a quote from Warren Buffett:

"I still worry about inflation. I think [the FOMC] see the same things that I'm seeing, but they may interpret them differently. ... There [are] a lot of people that take the approach that because there is excess capacity in the United States industry, that you can't have inflation because it won't get tight. But I can tell you that in the businesses we're in, plenty of them have a lot of excess capacity still, but if we get enough commodity price increases, we raise our prices even though business is not good."

Dour Data


This morning's personal income data is being heralded as positive by the bulls, but it was terrible.

We are beginning to get economic data that incorporates the full increase in higher energy prices and the picture, especially for the U.S. consumer, is deteriorating.

Here's why.

Though personal income rose by 0.5% in March, the real rate of growth in disposable income (adjusted for inflation) was 0.1% in March and just +2.5% year over year. Moreover, the nominal increase of a half of 1% was all a function of personal income that came from government transfers. A record high 18.3% of personal income is now coming from transfer payment. And since we are now entering a period in which the outlook for 2011 government expenditures (local, state and federal) has eroded, optimistic personal consumption expenditure forecasts are in jeopardy.

Meanwhile, personal expenditures, which rose by 0.6%, vastly exceeded adjsusted income growth. This means that the consumer is either dipping into credit or savings in order to maintain his spending.

This can't and won't last, especially if the price of food and gasoline remain elevated.

Here is what Boenning and Scattergood's Rick Farr wrote on the subject this morning:

Today we learned that personal wages are still falling behind personal spending, as consumers still spend every dime they make (and then some). Personal Spending grew +0.6% M/M (4.6% Y/Y), whereas Wages grew just +0.3% (+4.4% Y/Y). Basically, there is no money left over for savings. Contrast this reality with the stated view from one of the money printers at the Fed, Charles Evans. In an interview with the Wall Street Journal on 10/5/10, Evans stated rather explicitly: "I think we're in a liquidity trap where there is excess savings." We'd like to know where this excess cash exists.

The Federal Reserve's inflationary policy makes absolutely no sense in our eyes. The best thing for the Fed to do is to allow prices to decline. That would provide consumers with a bit more disposable income and that disposable income would help to repair consumer balance sheets. The Fed, under no circumstances, should ever try to prevent consumers from increasing their savings.


Two Potential Takeover Targets


Reinsurer XL would be a tasty morsel for Swiss Re or Munich Re or even Berkshire Hathaway. SunTrust would be a natural target for any large European or Canadian bank.

Mister Softee Is a Value Trap


Thoughts:

1. The Fed may not be so friendly as many expect.

2. The assessment of the economy is too optimistic.

3. Secular headwinds are emerging; they are numerous but are being dismissed.

4. We are approaching several economic tipping points -- for example, in food prices, gasoline costs and in a sharp decline in our currency -- that in the past have led to economic and market contraction.

5. Even the most ardent bears are capitulating.

Let's go over these point by point now.

Relying on the Fed

There is now an almost universal view that the fed has given the green light to risk, but I am less certain.

It should be clear to the Fed that consumption and housing are continuing problems. In part, as an outgrowth of monetary policy, we have seen a rising stock market, which has made the rich richer, while raising the costs of necessities such as food and gasoline, which has made the poor poorer.

Whereas food and energy are investment vehicles for the investor class, they are expenses for the American consumer. Zero-interest-rate policy and a lower dollar have not assisted innovation, have not resulted in the creation of new businesses and certainly have not materially reduced employment. These elements might even have served to hurt the jobs market, as there is industry consolidation as well as higher input costs, which require labor cost reductions in order to preserve margins.

In listening to some of the Fed governors and The Bernank's reference to the words "several meetings" before a tightening is considered, they all appear to have begun to recognize this, and a more hawkish turn by the Fed is increasingly possible in order to combat the unintended consequences of easy money. There is no chance for QE3 to follow QE2.

Overly Optimistic

The majority of strategists are gushing over the economic statistics of the last two quarters and incorporating them into the bullish view of a smooth and self-sustaining domestic recovery. But all the data being dissected have been achieved under the umbrella of QE2, under zero-interest-rate policy, with a FICA cut, with the Recovery Act and with 100% depreciation benefit on capital expenditures.

When these influences fall by the wayside -- and they will -- the U.S. is left with an indebted consumer and a deteriorating currency. Look at housing as an example of underlying weakness: It's now double-dipping despite favorable affordability ratios and an unprecedented 30%-plus drop in home prices.

At best, we don't know if the recovery is self-sustaining, and quite frankly, I don't know anybody who can judge otherwise.

As to stocks, they may be somewhere between fairly priced and overpriced.

Numerous Secular Headwinds Being Dismissed

The political winds are forcing major cuts in government spending. Our local, state and federal fiscal imbalances translate into higher marginal tax rates and austerity measures. We continue to be plagued by structural unemployment, and we again saw a jump in jobless claims Thursday morning. Today, the City of Philadelphia, in response to a $1.1 billion reduction in the state's education budget, eliminated 4,000 teachers and school workers. This is happening all across the country and will continue in the year ahead.

I know that most investors recognize these issues, but everyone seems to think they are smart enough to get out before the proverbial door closes.

Strategists and investors are like Scarlett O'Hara in Gone with The Wind who said, "Oh, I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.... After all, tomorrow is another day."

But I think tomorrow is coming sooner than most expect.

Tipping Points Aplenty

When gasoline as a percentage of GDP gets to the levels it is at today, with one exception, the U.S. economy has always fallen into contraction. Maybe it's different this time, but I don't think so. On top of a 30%-plus decline in home prices, the market is also ignoring other tipping points such as rising food costs and a sharp currency depreciation, which I might add was one of the forces behind the October 1987 crash. A weakening U.S. dollar also buoyed exports and contributed to great profit growth in 2007, which eventually trapped investors.

The Capitulation of the Bears

Even uber bear David Rosenberg threw in the towel this week. Enough said?

Recommended Reading


Dr. Ed Yardeni eloquently waxed on the screwflation of the middle class.

The Fed is still your friend if you are invested in cyclical stocks , commodities, and foreign currencies. If you eat food and run your car on gasoline, the Fed will continue to hurt you. If you are looking for a job, you may be wondering why it is still so hard to find ond despite all the money the Fed has spent so far on QE2.0. If you are retired and living on interest from your CDs, then you are getting really squeezed between rising food and fuel prices and the Fed's zero interest rate policy. In other words, the Fed seems to be doing everything to widen the gap between the Haves and Have Nots than to lower unemployment and boost economic growth, which remains "moderate" according to yesterday's FOMC statement.