Monday, 12/2, Market WrapUp (Higher sales don't equal bigger profits)

Financial Sense Online ^ | 12/2/2002 | James J. Puplava

[rohry]

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Today's Market WrapUp by Jim Puplava 12.02.2002 Back to Market Monitor Commentary Mon  Tue  Wed  Thu  Fri

If You Discount It, They Will Come

The all-important Christmas season is here. This year the season will be shorter with fewer days to shop. Out of the gates, the numbers look good. Year-over-year sales are expected to rise 3 percent in the November-December period. That is up from 2.2 percent from last year. Sales have risen 11 percent in the first two-days after Thanksgiving. It was a spectacular start that started to fizzle as the weekend wore on. The shoppers were there, but they were only buying steeply discounted merchandise. From deep discounted TV’s and DVD players to photo printers, if the discounts were steep, the shoppers appeared. Discounters such as Wal-Mart experienced a record single-day in sales. Wal-Mart had sharp discounts on TVs and DVD players. The sizes of the discounts were substantial. An HP color photo printer was discounted from $248.88 to $198.99. Wal-Mart also offered DVD players and large TVs for bare bones prices.

In a survey of residents nationwide, shoppers said they intend to spend less this year than last year. If they spend, it will be on sharply discounted items. Carefree spending days of the 90’s are gone. Now it takes substantial discounts to get shoppers in the stores. It is becoming a game of chicken with shoppers waiting until the last minute expecting the discounts to get even larger. One interviewed shopper said if they’re discounting this much now, just think of how much lower prices will fall after Christmas.  Retailers don’t want to take a chance, so inventories are being kept tight. So don’t expect a lot of leftovers. If it didn’t sell, it will be because it was needed. So bigger discounts will be needed to move unwanted goods. The good stuff is already discounted and inventories are kept tightly controlled. Nobody wants to take chances sitting on a bunch of unsold goods.

Buyer Expectations Control The Day
So sales may be up this season by 2-3 percent. However, those higher sales numbers won’t necessarily translate into bigger profits. Discounting, special financing and falling profit margins have plagued the retailing sector. Like the auto sector, general merchandise retailing has become a buyer's market. Once discounts and easy finance terms are in place, it is pretty hard to go back to the old days. In fact the only thing that brings out shapers these days is bargains. This weekend papers in our area of the country were full of special discounts, coupons, zero-percent financing, and no down payments, or extended payment plans. One furniture store offered discounts, no sales taxes, zero percent loans and no payments until 2004. I drove by the store and saw they were doing a brisk business. The store looked busy, the sales people anxious. A conversation I had with one salesperson told me they were hoping interest rates would fall further. Knowing I was in the financial business, the salesman wanted to know if I thought interest rates were going to go down further. Lower rates and the mortgage boom have been great for business. Lately things had been slowing down and the store was offering more discounts, special financing and payment plans to get buyers in the stores.

A Sense for Sectors
The higher retail sales figures helped the Dow to gap up this morning. Then the ISM manufacturing report came out showing that the manufacturing sector has remained below 50 for the third consecutive month. A figure below 50 indicates a contracting manufacturing sector. The markets tumbled afterwards. Not even positive spin coming from the financial media could turn things around. The problem Wall Street is having with this rally is taking a negative and turning it into a positive. The best one-liner I heard on regarding this rally this morning describes it all. One reporter from the floor of the NYSE called it a “no common sense” rally. The worse the news, the lower the earnings, the greater the political risks, the higher the market would go. However, it is taking intervention and a collective leave of your senses buying of a few key select large cap stocks to drive the markets higher. This rally is definitely a rally driven by mutual fund managers, hedge funds and Tommy Trader against short sellers. John Q and Herbie Homeowner have been conspicuously absent. It is estimated that another $5 billion went out of stock funds last month. The general public has been putting money into real estate or consumption or in other words, tangible goods. Paper investments are becoming less popular with the public. This will be the third year of double-digit losses for the fund industry. Interest rates offered on savings are at 1 percent or less. So it doesn’t pay to save or invest. After tax returns on savings are actually negative, something we haven’t seen for over two decades.

The Grand Experiment
In the Fed’s Grand Experiment to fight off deflation and burn the currency, the public is being rewarded to borrow and consume; while savers and investors are being punished by negative returns. The Fed has indicated and alerted Wall Street that it will monetize assets in the bond market to keep interest rates fixed or within a narrow range. This is a heads up alert for fund managers to leave the bond market and bid up stocks; while the Fed stands ready to prop up the bond market or any other asset market in order to keep things afloat. Fed officials admit they don’t exactly know where this is going to lead them. All they know is that they don’t want to revisit the Great Depression again. The ghost of John Maynard Keynes has come back to haunt the economy and the markets again as a Grand Experiment in combined Keynesians and Monetarism is played upon the economy. The results will be similar if not worse than the last Grand Experiment. I can’t imagine anything good coming out of printing loads of money and encouraging debt accumulation. America’s total debt is estimated to be around $32-34 trillion with external debts in the neighborhood of $9 trillion. Inflation, stagflation, or even hyperinflation would be more palatable it seems to policy makers than face reality. The only problem is that any government that has gone this route has seen its currency plunge. Argentina, Brazil, Ecuador are recent examples of this madness. Rather than face reality of dwindling tax revenues and burgeoning expenses, governments would rather inflate their way out of a problem. It is one more reason to own gold as insurance against the madness of uncontrolled printing presses. Speaking very clearly, the Fed has told the financial markets they will do whatever is necessarily to avoid deflation even if that means printing wheelbarrows of money per person.

They have tried hard to keep the price of gold down, but have been unsuccessful. They have tried to short, sell and keep the price of gold equities from rising. They have capped the rally temporarily but they won’t be able to prevent the metals from rallying in the long run. Anyone who knows how to read and is in the financial markets knows what those speeches meant two weeks ago. The Fed is changing its policy of one of fighting inflation to one of creating inflation. The misnomer here is that the Fed was in the inflation fighting business when in fact it is the creator of all inflation. The problem the Fed has is that as fund managers have exited the bond markets to bid up stocks the bond market has been plunging with rates back up towards their October highs. The 30-year bond yield has risen from a low of 4.63 percent in September to today’s yield of 5.05 percent. The 10-year note has gone from a low of 3.569 percent on October 9^th to today’s 4.231 percent. What this means is that it is getting more expensive to borrow. It has helped to soften the real estate market and it will eventually impact the refi market, the source of all of this consumption.  The bond market isn’t the only problem the Fed has to face it may also have to start monetizing all of the governments debt. The official debt limit of $6.45 trillion is about one month away from being breached. Passed late spring, the debt limit has been raised by $450 billion. Tjhere is only about $60 billion of that left. This means that when Congress returns after the holiday recess, they will have to raise the debt limit by another trillion dollars just to be safe. Who is going to finance these deficits? It is a question that currency investors and bond vigilantes are monitoring closely. We certainly live in interesting times. Stay tuned for this is going to get more interesting.

Today's Market
Back at the casino, the Dow industrials fell for the second day after a disappointing manufacturing report. The Dow and the S&P 500 rose over 1.5 percent in the first half hour of trading then plunged and gave back all of those gains. The major averages are running up against key resistance levels that may be hard to penetrate without more intervention. The markets have already discounted the best of all possible news. So it is going to take something much bigger to keep prices afloat. The markets are news driven and very susceptible to losses on account of any surprises that are less than perfect from estimates.

Volume was 1.54 billion on the NYSE and 1.91 billion on the NASDAQ. Winners beat losers by a 18-14 margin on the big board And by 17-15 on the NASDAQ. The VIX fell 1.03 to 30.05 and the VXN rose .68 to 50.16.

Copyright © 2002 Jim Puplava
December 2, 2002

[rohry]

"In the Fed’s Grand Experiment to fight off deflation and burn the currency, the public is being rewarded to borrow and consume; while savers and investors are being punished by negative returns. The Fed has indicated and alerted Wall Street that it will monetize assets in the bond market to keep interest rates fixed or within a narrow range."

[rohry]

Market WrapUp is delivered...

[RightWhale]

The Fed has indicated and alerted Wall Street that it will monetize assets in the bond market to keep interest rates fixed or within a narrow range.

What is this and how do they do it? Is it like a second mortgage on the house?

[SamAdams76]

I picked up DVD Players at Circuit City for $49 last Thursday. They had them stacked up practically to the ceiling right by the doors as you come in. They were priced to move and they did!

[donozark]

WHAT BRAND NAME? Apex?

[SamAdams76]

Make that Friday that I was there. Thursday was Thanksgiving Day, of course.

Anyway, the entire weekend went by way too damn fast.

[SamAdams76]

Yes, it was the APEX model. I couldn't believe the price. I know APEX is not exactly a well-known brand name but how can you go wrong for $49.99? There are DVDs that cost more than that. The Godfather trilogy will still set you back $99.

[Sungirl]

All I think of when they talk about people spending more money is that the bankruptcies are going to skyrocket next year.

[junta]

I got my Best Buy Cyberhome brand for the $39.95 now I'm waiting to retire ol' Red the pickup with a zero percent forever loan, which I'm sure is coming soon.

[A. Pole]

Fed’s Grand Experiment to fight off deflation and burn the currency

I remember when Fed was zealously fighting "potential" inflation by raising the interest rate many times (in 2000). Fed did it long after the stocks started to collapse. Now Fed is doing the reverse.

I wonder if such pattern of intervention does not increase the size of pendulum swings? Maybe Jude Wanniski is right, suggesting that the gold at a fixed price should be a reference? (In other words money should be issued to keep price of gold fixed?)

[steveegg]

Don't have a clue what the Grand Experiment means, but I know damn well what this little tidbit means:

The bond market isn’t the only problem the Fed has to face it may also have to start monetizing all of the governments debt. The official debt limit of $6.45 trillion is about one month away from being breached. Passed late spring, the debt limit has been raised by $450 billion. Tjhere is only about $60 billion of that left. This means that when Congress returns after the holiday recess, they will have to raise the debt limit by another trillion dollars just to be safe.

More taxes.

[dalereed]

"What is this and how do they do it? Is it like a second mortgage on the house?"

It's called printing money to finance the national debt instead of selling bonds. It's called inflation, only the fed can create inflation. Wages nd prices are an after the fact result of their horrid policy.

That's what they did durring the Carter years.

[RightWhale]

We should expect inflation at some point. The Federal debt can be brought under control in that way, as well as private debt. Those on fixed income will starve, of course.

[A. Pole]

Wages and prices are an after the fact result of their horrid policy.

But now wages and prices could be falling. If inflation is bad, is deflation so great?

[dalereed]

If the fed fires up the presses and we return to the Carter years, i'll leverage what I have into real estate. Used right, inflation is a real wealth creator.

[dalereed]

"If inflation is bad, is deflation so great?"

If wages fall in relation to prices it's good as potentially it puts you into a lower tax bracket resulting in greater purchasing power per hour worked.

[rohry]

"What is this and how do they do it?" This is what Federal Reserve Governor Ben Bernanke had to say:

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. ......If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

Bernanke goes on to point out that the Fed could also supply interest free loans to banks, monetize foreign assets, buy government agency bonds, private corporate assets or any number of things that could induce inflation.

[RightWhale]

Used right, inflation is a real wealth creator.

It can be, no doubt about it.

[arete]

One reporter from the floor of the NYSE called it a “no common sense” rally. The worse the news, the lower the earnings, the greater the political risks, the higher the market would go. However, it is taking intervention and a collective leave of your senses buying of a few key select large cap stocks to drive the markets higher.

There is a real push on to keep the market up at least until the end of the year. I believe that it has been well planned, coordinated and executed. The goal seems to be to avoid yet another negative year for the averages. Reality doesn't matter. The media has become nothing more than the propaganda arm of Wall Street and government. The spin, excitement and hype is almost too obvious.

TXN is trading over $20 in AH on news that its revenues won't DECLINE AS MUCH AS previously estimated. With media spin and hype, that is accepted as a positive.

Texas Instruments Raises Outlook

The headline is blatantly deceptive and misleading. I find this continuing scamming of the public disturbing.

Richard W.

[RightWhale]

monetize foreign assets, buy government agency bonds, private corporate assets

In other words, sell these assets and put money in circulation here, or buy back bonds here, both public and private and put money in circulation.