Category: Markets, Business, and the Economy

…At least that’s what the retailers are thinking. This Forbes article outlines the ways in which you, the consumer, have disappointed retailers. Keep this up and Santa will be giving you… oh I don’t know, something practical.

Everybody knows a turkey and some mistletoe help to make the season bright, and that the Christmas shopping season is the time of year when retailers make most of their profits. But this year, consumers — the people who used to be called customers — are shopping judiciously. Specifically, they are concerned about debt.

At long last, consumer debt worries are coming home to roost. Half of all Americans are concerned about their debt levels. That includes one in five who worry about their debts “all the time.” About one in ten isn’t even sure how much money they owe. A lot of that debt is on credit cards. It’s pretty serious; if this sounds like you, read the rest of the article:

Americans are declaring bankruptcy at record rates, with one in every 100 families affected by a bankruptcy…. Americans are now carrying $683 billion in revolving credit card debt. That’s not the amount we charge every month; it’s the outstanding unpaid balances on which people pay interest. And, according to a report by Cambridge Consumer Credit Index, 47% of the people who paid less than the full amount on their credit card bills in a recent month, made only the minimum payment due. In fact, only 13% of Americans with an outstanding balance could afford to pay more than half the balance.

Many people are having trouble paying the rent, let alone having a lavish holiday with lots of gifts under the tree.

Finally, I bring you these Christmas tidings: a majority of Americans believe the literal Biblical Christmas story; but the figure that frightens me is that 15% of Americans believe that Christ will return in their lifetimes. Think about that. More than one in eight Americans believe The World Will End before they die. When that is what you believe, what point is there in worrying about the environment, or Social Security, or much of anything else beyond today’s needs?

Never mind that everyone that has ever said they knew when the world would end has so far been proven wrong. Knock on wood.

We’ve been hearing a lot about the Ownership Society. What the heck is the Ownership Society? According to the Cato Institute:

An ownership society values responsibility, liberty, and property. Individuals are empowered by freeing them from dependence on government handouts and making them owners instead, in control of their own lives and destinies. In the ownership society, patients control their own health care, parents control their own children’s education, and workers control their retirement savings.

Don’t you get warm fuzzies just reading that, the radical notion that people should be responsible for themselves and their own families, and nobody has the right to interfere? There is, of course, another way to state that paragraph: eat what you kill.

The Bush Administration has been using this idea of the Ownership Society as a big umbrella to cover everything from school choice (vouchers and charter schools) to Social Security “reform” (private retirement accounts) to tort reform (protecting corporations from you).

The bottom line is that “eat what you kill” is great when you are a big predator, not so great if you are not. To succeed in an Ownership Society, you must have money with which to Own. If you don’t have the money to sink into very illiquid Health Savings Accounts and Private Savings Accounts and A House, the opportunities offered seem rather hollow. Most people don’t have the money or the skills to succeed in an Ownership Society. Indeed, most Americans are in debt, and not just mortgage debt.

Which brings us to the lynchpin of the Ownership Society, the idea that home ownership is good and desirable for absolutely everyone. Some people are finally starting to question the universal wisdom of that idea; not saying that owning real estate is bad, but rather that it is not for everyone, and that not everyone will benefit from owning a home. A plethora of new lending products and low down-payment options means that people who really can’t afford to do so are buying houses. And the fact that Fannie Mae and Freddie Mac are willing to buy the mortgage, regardless of quality, exacerbates the problem. For that matter, the idea that home ownership is universally good assumes that people can afford to own quality homes in decent neighborhoods; homes that can be maintained, are safe, and will appreciate in value. This is not necessarily so. And I haven’t even touched on the fact that home ownership puts a geographical damper on employment and educational opportunities.

The Ownership Society is a great idea for the Owners at the top. For the rest of us, it’s the Debtor-ship Society.

First, by way of follow up, two friendly reminders: the TSA’s Trusted Traveler System is still not a get out of the security line free card; and Social Security is not a savings plan of any sort and thus anybody who talks about the “returns” on Social Security either does not understand the system or is trying to manipulate you.

The day’s headline economic news may be the Fed raising short term interest rates, but the Fed is not acting in a vacuum. Part of the Big Picture for the United States economy is the record trade deficit. Not only does this mean that we are importing more stuff than we are exporting, month after month, in spite of a low and dropping dollar, it means that more money is leaving the country than entering it each month. As if that were not bad enough, the trade deficit is one of the factors used to calculate Gross Domestic Product, so don’t be shocked if GDP estimates get lowered.

The Bush Administration says this is mostly because of high oil prices, which OPEC keeps high because the dollar is weak and oil trades in dollars. Another huge factor is our trade deficit with China, which is going to get worse after the first of the year, when textile quotas are eliminated. Many of the 700,000 American textile workers may lose their jobs, but we will all be able to buy cheap anti-microbial underwear.

The part of the trade deficit that nobody is talking about is that the United States no longer has a trade surplus in agricultural goods. It is difficult to overstate the importance of this fact. Over and above the fact that there is no longer a food export surplus to offset other imports, over and above the impact on the family farmers and ranchers for whom we are told “death tax” repeal was critical, over and above the dizzying drop from a $13 Billion annual surplus in 2001 to no surplus now.

In addition to being dependent on foreign nations for oil, we will soon depend on foreign nations for food.

Now does Tommy Thompson’s warning on food safety make more sense?

It turns out that jobless claims are on the rise, and now sit at the worst levels since September. Keep in mind that when the Department of Labor says that, seasonally adjusted, 8000 more people made a first time claim for unemployment insurance, they really mean an increase of 147,256. That link only contains the most recent information, and thus will be gone next week! Remember, these numbers do not include temps, part-timers, and contractors because they are not eligible to receive unemployment benefits. The point remains that there was a larger increase in the state of Wisconsin alone (+10880) than the official seasonally adjusted headline number. If you prefer to think of it this way, the increase in people claimed unemployment for the first time last week exceeded the number of jobs created in all of November.*

Where else on earth does 8 equal 147?

In other bad news for the American economy, productivity growth is down and over 100,000 layoffs were announced in both October and November. Remember, that’s only announced layoffs at companies big enough to bother with press releases about such things. John Challenger, the guy whose job is to be an expert on layoffs and their effect on everything else says “The biggest worry for the economy is that the large number of lower-middle class and middle-class Americans struggling to make it paycheck to paycheck will be short of discretionary income during the holiday shopping season.” Plain and simple, many people will not have money for Christmas presents.

Meanwhile, we have a President who thinks that making sure 4th graders can read will help their parents get jobs.

Finally, I leave you with the most balanced item on currency problems that I have seen to date.

* This is a net jobs created figure, so lay-offs are already taken into account.

If you bought shares in Apple Computer a few months ago when it broke 30, now might be an excellent time to look at lightening up.

In case you don’t watch the blow-by-blow financial news, here is the short version of what has happened. Monday, the stock was upgraded by Piper Jafray, with a new price target of $100 per share. This level was just short of double the previous price target, and 90 percent more than where it traded last Friday. So Monday, the stock jumped! In fact it looks as though the stock has jumped a few more points today to close pennies under $64 per share.

The rationale for this upgrade is that digital music is hot, hot, hot, and no digital music player is more hip than the iPod. Of course, some people point out that this makes them a one trick pony. Where are the computer sales? The Operating System sales? The software sales?

Frankly this thing smells like Blodget’s famous $400 price target for Amazon.com. Yes it got there, and in a hurry, but it didn’t stay there for long. Who are these people bidding Apple up this high? Was there a big short squeeze or something?

Consider a “stop” order on this, so if the price drops suddenly your broker will sell it to keep you from losing money (hence, stopping your loss). Or, if you bought in the low 30s, sell half; the remaining half can go to zero and you still don’t lose money. You get to enjoy the roller coaster almost risk free. Insert the usual disclaimer here that I own Apple shares.

In closing, I hope everybody has a Happy Thanksgiving. As a topical item I offer this item on “heritage turkeys.”

And thank you all for reading.

You have probably heard that Sears and KMart are merging. Or more accurately, that KMart is buying Sears. This is all the more remarkable when you remember that 18 months ago, pundits were wondering if KMart would survive bankruptcy, and Sears was finalizing the purchase of catalog retailer Lands End. The merger will created the nation’s third biggest retailer (behind WalMart and Target, if you are curious). Although the company will be called Sears Holding Company, the retailers will still be run as two different brands. Wall Street is pleased.

Some pundits are skeptical that two struggling retailers can make one healthy company. They point out — and rightly so — that part of KMart’s journey to profitability involved selling off a bunch of stores, some of them to Sears! Others point out that KMart is run by a very smart man, who already owned 14% of Sears, who managed to get KMart from bankruptcy to profit.

In short, if anybody can make this thing work, it’s Eddie Lampbert.

Don’t think that this deal will mean you can buy Kenmore Appliances or Craftsman Tools at KMart; the KMart shopper is looking for $5 sets of screwdrivers, not $5 screwdrivers. Nor should you expect to see KMart brands at Sears. You don’t expect to see Marshall Field’s brands at Target, do you? Sure, there will be economies of scale for certain items, particularly in the IT department. And have no fear, Martha Stewart will get her cut. Instead of a cross-marketing frenzy, I think it is reasonable to expect a streamlined parallel strategy.

On the Sears side, the endless remodels should stop. Yet more paint and paper and “excuse our mess” signs don’t move product nobody wants. All the stores are pretty recently remodeled, and really should focus on merchandise. Another thing that costs money and doesn’t move merchandise is the Sears game of musical managers. Maybe if one team stayed in place long enough to understand their particular store, improvements would come about. Finally, stop undercutting themselves on Lands End products. There is no reason that I should pay a lower price and no shipping if the product I want happens to be in Sears.

On the KMart side…. well make people like me want to go into a KMart for some reason, any reason. The time may well have come for advertising. It made sense not to pay for a bunch of ads when they were emerging from bankruptcy, but now the company is profitable. You can’t sell things if you have no customers.

Although KMart has already addressed the issue of closing underperforming stores and “unlocking value” by selling unused property, the day will come when Sears stores will have to look carefully at its own underperforming stores. Sure, give management a chance to make things work, but some stores will just have to go. Maybe some of these would make better KMarts. Indeed, maybe a few KMarts will become Sears.

Of course these are just my ideas. Mr. Lampbert surely has plenty of ideas of his own.

Oh, and as a follow-up, Alan Greenspan is concerned about the Budget Deficit, the Trade Deficit, and the lows on the Dollar.

That’s what they are saying in London, that the dollar is falling such that it will take $2 to buy one British Pound, the first time that has happened in 12 years. They fear that “more loose fiscal policy” is on the way from Washington, and have “concerns about the future of the US economy as a whole.”

Other nations are concerned as well, with Italy considering monetary intervention to prop up the falling dollar. That’s Italy, a country whose government Lonely Planet describes as follows: “Italy’s parliament has a reputation for scandal and resignation, and at times it has left Italy virtually ungoverned and utterly chaotic.” That Italy is worried about the price of American Dollars.

Even the Chinese want to get out of American currency, which will drive the dollar lower and — since China’s currency is linked to ours — make Chinese goods even lower priced for worldwide export. Unfortunately, it won’t make Chinese goods cheaper here in the States because, well, their currency is linked to ours.

There is some disagreement as to why this situation is occurring. Larry Kudlow, former Reagan advisor (and thus supply sider) beleives the drop of the Dollar against the Euro has little to do with what is happening here and everything to do with what is happening there. In a nutshell, there aren’t enough Euros, driving the price of them artificially high. Why this would effect the Pound and Yen — which float more or less freely against both Dollar and Euro — I can’t say.

Rather the “benign neglect” that international journalists speak of as the cause, I prefer to think this has been a calculated move on the part of the administration. Otherwise, John Snow might have said something about it. Why? Well, first, it’s an attempt to fix the trade deficit. When a nation has more imports than exports, that effectively funnels money out of the country. It’s also a big drag on the Gross Domestic Product. In short, you can’t have monster trade deficits indefinitely. A cheap dollar makes American goods “cheaper” overseas — encouraging people from other nations to buy them — and makes foreign goods more expensive here — encouraging us to “buy American.”

Second, the Administration was hoping to force China to de-link its currency from our own. Unfortunately, the same low dollar which is supposed to make American goods more affordable overseas makes Chinese goods cheaper too. China’s actions this week make it clear that they can play this dollar dump game too, and they are big enough to win: they have a population of over a Billion and a GDP of $6.449 Trillion, growing at over 9% annually.

Of course the falling dollar also has side effects. Aside from the international concerns detailed above, there is the fact that since oil is traded in dollar denominations, OPEC can no longer afford to pump oil for $22 per barrel.

What to do now? Jim Jubak has these tips for investing in a weak dollar world, or if you’d prefer, here’s some down to earth consumer advice from the Chicago Sun Times.

Mr. Bush,

News has been circulating that one priority of your second term will be “tax reform,” specifically simplifying the tax code. Indeed, it seems to have been one of the things your associate Mr. Mankiw was to discuss in his CNBC appearance this morning. If you are truly interested in simplifying tax code and closing loopholes, I have a proposal for you.

Make the standard deduction equal to the poverty line for a family of four, adjusted each year. This means nobody will ever be taxed into poverty. It also means you can eliminate any portion of the tax code meant to lessen taxes on the working poor.

Cap itemized deductions at 3 times the standard deduction. This has the intended effect of the original Alternative Minimum Tax — making sure the very wealthy do not itemize themselves out of taxpaying altogether — with none of complicated rules. Also, because it is indexed, it does not suffer from the “bracket creep” that ensnares some middle class taxpayers. The AMT could then be eliminated with no loss to government revenue.

Leave exemptions pretty much the way they are. This means bigger families will not be taxed into poverty either.

Add a half dozen high priority deductions that anybody can take, regardless of whether they itemize. I propose that these include money paid for Health Insurance premiums, mass transit (bus passes, ferry passes), IRA contributions, and adoption expenses. These items should be things that we as a nation agree are important.

At this point, the tax brackets may have to be reconsidered, but you have a team of people who can figure out what those rates need to be. Also, these proposals do not address corporate taxation, dividends, or capital gains. If these 4 steps are taken, any American whose income comes solely from a paycheck and maybe interest from a savings account can do their taxes on a one page form in less than an hour. This means improved compliance and accuracy. It means the IRS will need to spend less money printing forms and processing paperwork. Also, because these returns will be simpler, the IRS can concentrate on fraud and, more importantly, tracking terrorist funding.

Oh, and if you need an expert on tracking illegal funds, you might consider asking Senator Kerry. He has some experience bringing down money laundering operations.

The new Gross Domestic Product numbers for the 3rd quarter of 2004 were announced today. It was up 3.7%, more than last quarter’s 3.3% but less than the expected 4.2%

What the heck does that mean? Well, GDP is everything any of us spend minus any money that got sent overseas. Consumer spending + business investment + government spending – trade deficit = GDP.

In consideration of comments made earlier this week, I would like to direct your attention to a paragraph about halfway into that last link:

“It’s a pretty good growth rate, but it may not be enough to create jobs,” said economist Robert Brusca of Fact and Opinion Economics in New York.

Now think about that, business investment is up 11.7% over last quarter, and that may not be enough to create jobs? That’s just one leg of this table, but frankly without jobs, there can’t be increased consumer spending, the second leg of the table — accounting for 2/3 of the economy all by itself, it’s the most important leg. We know that there is anemic job growth and wages rose less than a percent, but consumer spending rose 4.6%. Therefore either savings are being depleted or debt is being piled up. Neither is good for us in the long run.

So money is coming out of our pockets. Where is it going? Much of it becomes corporate profit. Another large chunk goes overseas, aided and abetted by tax loopholes that encourage companies to move their headquarters if not their workforce overseas and a Treasury Department that is of the mistaken belief that a weak exchange rate for the dollar will improve the trade deficit.

You can see both these forces at work in the world of oil. Look at oil company profits, which come from money that was spent by consumers, businesses, or the government. Oh, and don’t forget that the lions share of that oil came from outside the United States, and therefore gets subtracted from GDP. OPEC believes that the United States could single handedly bring down oil prices, by the way.

That’s right, the big oil cartel thinks the little ol’ United States is controlling oil prices, keeping them artificially high.

If you only have time to read one more thing today, let it be these 100 facts, complete with supporting links.

Less than a year ago, we were talking about a scandal at Putnam Investments — and many were calling it the actions of “a few bad apples.” Now we are talking about scandal at it’s parent company, Marsh & McClennan. Another “few bad apples”? At what point do we stop talking about bad apples, and instead wonder if the whole tree isn’t rotten? According to at least one analyst, right now: “‘You’ve got to rework the culture of Marsh,” said James Huguet, who manages $1.4 billion at Great Companies LLC and has been selling Marsh shares.”

Here’s the short version of the story. New York Attorney General and future Gubernatorial candidate Eliot Spitzer has launched a probe into a dubious insurance industry practice of “contingent commissions or placement service agreements,” or “fees… over and above ordinary commissions, that brokers receive from insurance companies, mainly for steering volume business the insurer’s way.” In any other industry, we would probably shorten this description to “kickbacks.” As if that weren’t enough, there is also the possibility of nepotistic insider action, as the CEO of MMC is the son of insurance giant AIC’s CEO.

As if this isn’t bad enough, there is the possibility that MMC may have outright fabricated inflated insurance bids to give the illusion of competition, and steer clients to “cheaper” partnering companies.

The fees in question total over a billion dollars during 2003 and the first half of 2004. My inner cynic reminds you that this is $1 Billion in overcharged premiums paid by the public. With this much money at stake, it is no surprise that some investors aren’t sticking around to see who wins.

The Putnam executive who got tossed overboard a year ago has some interesting comments on the whole thing, with what he calls “the luxury of perspective.” Or, maybe you’d like commentary from a guy who has known both Spitzer and the Financial Services industry for decades.

I’m no New Yorker, but I’d vote for Eliot given the chance.