Memorial Day Financial Markets MusingsStock-Markets / Financial Markets 2010 Jun 01, 2010 - 02:36 AM GMT
It’s been a quiet weekend and our futures are up about a quarter point as the EU session draws to a close.
The DAX gave up half it’s gains into the close and the CAC never could get going while the FTSE is closed today. Asia was pretty flat, except the Shanghai, which fell 2.4% steeply into the close. Our futures were up about half a point but gave up half of that in what is, of course, thin to nonexistent trading. 12 of Spain’s 45 banks are in merger talks as they scramble to become too big to fail and Trichet made some nice noises this morning.
In the best commentary yet on the global situation, the 6 month-old "Best Party," which is headed by a comedian, won the Reykjavik elections, after campaigning with the catch slogan "Whatever Works." The Best Party promises to get a polar bear for the zoo and preaches the benefits of "anarcho-surrealism." While the Best Party’s critics implored its team of comedians, actors and musicians to end their campaign, soon to be-mayor Jon Gnarr insisted he would follow through to the end. It was the best way to expose the "ridiculous" state of traditional politics, he said. Gnarr also promised free towels, to lobby for a Disney Iceland, getting Parliament drug-free by 2020 and to cut down on the number of Santas at Christmas. Heck, sounds good to me!
I love this video from Barry Ritholtz’s site: "The Surprising Truth About What Motivates Us"
Another good catch from Barry is Alan Abelson’s Barron’s article that notes that insiders have been outnumbering buying during May at a rate of 77:1, a worsening situation we’ve been tracking all year in Ilene’s "Insider Zone." Insiders aren’t supposed to sell based on specific events they know about but they can be a good indicator of long-term economic problems that are currently being sugar-coated, even in their own outlooks.
One of the big ones I’m seeing and have been talking about for some time is margin pressures, brought about by persistently high commodity and labor prices in the face of slowing consumer spending. Deflation rears its ugly head this weekend as Wal-Mart is slashing prices pushing the cost of 32 essential grocery items like Coke and ketchup down by 30%. In fact, Wal-Mart is bearing the cost of some of the deep price cuts, not its suppliers, according to Bill Pecoriello, an analyst who heads ConsumerEdge Research LLC, based on discussions with industry officials. According to Pecoriello, on a basket of five food items, from Coke to Lay’s potato chips, the total price was $11.23 at Wal-Mart, 24 percent less than it was a year ago. It’s also almost 14 percent lower than Kroger and almost 26 percent lower than Safeway, according to Pecoriello’s estimates. The firm gathers pricing data representing 15,000 stores across the country.
We passed a major milestone this weekend as our National Debt Clock rolled past the $13,000,000,000,0000 mark. That doesn’t include another $2Tn in local municipal debt or $1.1Tn in state deficits and we are, of course, not even mentioning the $14Tn Social Security Liability or the already $19Tn Prescription Drug Program that was passed by Bush just 7 years ago, which is kind of funny because it costs more money per year than Obama’s entire Health Care Reform is projected to cost over 10 years yet it has done pretty much nothing other than funnel Billions of dollars to the drug companies that lobbied for it.
But I digress. Speaking of health care, ALL of those outstanding debs and liabilities pale in comparison to our $75Tn Medicare Deficit. This massive unfunded liability is what Hillary tried to get a handle on 20 years ago and what we are now tackling in a very half-assed way with the current watered-down reform. I guess Iceland has it right as this number is so big (5 times GDP) and so unfixable that you may as well make a joke out if it and elect the funny guys because it’s way too depressing otherwise…
There were a few great graphics this weekend. One came from Kipliger called "How Much Does It Cost to Retire?" and the other one is a "must view" because it says so much about consumer psychology and we at PSW spend a lot of time studying investor psychology so think of ways investors do the same thing with "brand name" stocks:
Now that we have this firm basis for discussion with margin pressures and brand-name vs. generics - let’s look at how they combine in coffee wars, where McDonald’s is facing off against Starbucks with their McCafe brand that already grabbed $1.5Bn in business last year - some of which certainly affected SBUX. Now the Baristas strike back by putting their downscale Seattle’s Best Coffee in Burger King and Subway restaurants as well as AMC movie theaters and supermarkets across the country. Will this lead to coffee deflation or just over-saturation and, if so, how do we get the stains out?
Speaking of over-saturation, there can be only one in the wireless telecom endgame and T and VZ have now passed the 60% mark in market share with the beheading of competitors Aloha (eaten by T), Suncom (eaten by TMobile) along with Rural Cellular and Alltell, who were snapped up by VZ.
The DOJ has labeled the wireless market to be "highly concentrated," which is just a step before "in need of breaking up" so we’ll have to keep an eye on this sector but I think T and VZ are now frozen out from anything but internal growth and they have to be careful about that because 66% market share will be a call to action.
Speaking of Ireland (or was it Scotland?) - Ireland is, according to IrishCentral.com, TOTALLY SCREWED. These guys need a comedy government stat as it seems, according to former IMF chief economist Simon Johnson: "Ireland’s politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly… When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission data (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011."
Time has a good summary of Germany’s attempts to prop this whole mess up but it’s a weak old and I’m really starting to get worried that Merkel is losing the power to force Germany to bail out the EU for Germany’s own good. I’ve been reading Der Spiegel but I think all news from Germany needs to monitored closely as any change from their government in policy towards maintaining the Europe could doom it. I don’t think it’s likely but the possibility is frightening, pretty much the same way I didn’t see how Al Gore could lose the 2000 election - sometimes entire nations make irrational decisions and the unthinkable happens and we are left to deal with the inevitable disaster that follows. Sorry, I tend to get political when I do a lot of reading as all roads to economic hell have been paved with Bush’s intentions…
Speaking of Bush - It turns out our 43rd President was one of The Richest Presidents Ever but only half as wealthy as the man who preceded him. Bill Clinton has an inflation-adjusted net worth of $38M while GWB is only good for $20M - even with the tax cuts. Obama has $5M, Poppy Bush $23M, Reagan $13M, Carter $7M (same as Ford), Nixon had $15Bn but poverty fighting Johnson had $98M (radio and TV stations) and ultra-liberal Kennedy was our only Billionaire President. What I found most interesting was our #2 man - George Washington! Adjusted for inflation, the General’s 8,000 acres of Virginia farmland (that was cared for by 300 slaves) was worth $525M. Washington’s salary was, at the time, also the most of any President, consuming 2% of the US budget - what would be $60M a year today!
Of course Kennedy didn’t mind paying 70% on his additional, marginal income, nor did any President since the Great Depression when the low-tax policies of the 20s were blamed for leaving our country in a weakened financial condition that led to economic disaster. Bush the First drove top rates down from 70% to 50% and Bush II took us to 37% but no individual tax breaks compare to what our richest citizens are getting today - the Corporations!
They say nothing is certain, but death and taxes, right? Well, not quite, it turns out, if you’re a large corporation. According to Forbes, many of America’s 25 largest companies pay less – much less – in taxes than the average American. How so? Unlike most Americans, large companies can operate losing businesses in the U.S. – and profitable ones abroad, where tax rates are lower. That’s how a company like General Electric has managed to owe a negative $1.1 billion in income tax in 2009 ( that’s quite a refund), despite its $10.3 billion pretax income and $157 billion in sales. Some banks made out quite well last year, too: Bank of America did not pay a dime in taxes on its $4.4 billion income, thanks to a slew of deductions and provisions for credit losses; neither did Citigroup. Zero taxes on $10.3Bn in earnings - keep that in mind when you are wondering if GE’s CNBC may or may not have a bias…
On the rarely seen opposite side of the corporate coin, Panera Bread Co has opened a "Saint Louis Bread Company Cares Cafe" as a nonprofit with the door policy of "Take what you need, leave your fair share." The café, which reopened Sunday as a nonprofit, has cashiers who provide receipts with suggested prices and direct customers to the store’s five donation boxes. The menu is the same as Panera, except for the day-old baked goods brought in from sister stores in the area. “I’m trying to find out what human nature is all about,” Ron Shaich, who stepped down as Panera’s CEO last week but remains as chairman, told USA Today. “My hope is that we can eventually do this in every community where there’s a Panera.”
See, if I read long enough, I can find one story that brightens my day - something that does give me hope for the future and restores my faith in humanity. It only takes one man to change the whole world so my most profound thanks to Ron Shaich for trying - I’m already a customer and I’ll now become a shareholder too as it’s nice to own a stock you can be proud to be associated with.
Our thanks should also go out to all the troops today, who have fought and are fighting for us around the world. It’s up to those of us at home to work towards giving them a country they can be proud to come home to.
Have a happy holiday,
Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)
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