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

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

[rohry]

Home  l  Broadcast  l  WrapUp  l  Top 10  l  Storm Watch  l  Perspectives  l  Sitemap  l  About Us

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

[razorback-bert]

Year-over-year sales are expected to rise 3 percent in the November-December period.

Well, I ain't going to tell ma to sell the farm, we are moving to the big city on those numbers.

[A. Pole]

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.

Hmm, really? You know, you can give part of your income to me. You will lower your tax and raise mine. I am willing to make this deal with you.

[dalereed]

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

Anyone that would "invest" after reading the article needs a keeper and deserves to have his clock cleaned!

[arete]

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.

It sounds like desperation to me. The FED has resorted to puffing themselves up and threatening the world to go along or they will ruin everyone. If the world doesn't go along or something unexpected happens that calls their bluff, what are they going to do? Those guys are a bunch of idiots. Their best thinking got us here.

Richard W.

[arete]

Anyone that would "invest" after reading the article needs a keeper and deserves to have his clock cleaned!

Yeah, you're right but that hasn't stopped the pumpers from driving the price from about 14/shr to over 20/shr in less than 30 days. Greenspan looked into the abyss and decided bubbles aren't so bad after all -- not that he (as he claims) could recognize a bubble if it hit him between his beady eyes.

Richard W.

[dalereed]

"Their best thinking got us here"

Listing to some AH professor and beliving in the bankrupt theory of John Maynard Keynes is what got us here.

[raygun]

This is one of those days where nothing much happens, and what does happen, is a little bit positive and a little bit negative. When you look below the surface, you see the day was a little bit more bullish than neutral. Days like this should be appreciated, because they don't erode the technical structure of the market on the one hand, and they don't build up overbought tension on the other hand.

[HighWheeler]

It would be far better if the gubmint would cut spending instead. Maybe we can pray for some Repubs with spines and voices to take the day, and push spending cuts.

[STONEWALLS]

"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."

yep, and not only did Reuters run with TXN's press release but so did FT.com, Associated Press, CBS Marketwatch, TheStreet.com and Dow Jones Business News...it's reminiscient of the 90s bubble when a company would issue 3 or 4 press releases a day to keep pumping their stock....

As ever, thanks Rohry and good luck to everybody!

Stonewalls

[razorback-bert]

we aren't moving to the big city

Posting after a nap and before coffee produces these errore, is this secret of the Fed.

[willyone]

So many dollars are in foreign hands that anytime they choose they can destroy the dollar. The only thing stopping them is their own self interest. I would not count on that forever with China. We have turned over control of our destiny to others with our insane immigration and trade policies. In thirty years our children will pay the price.

[willyone]

I think he meant to say if prices fall in relation to wages. The only problem is you pay back cheap loans with expensive dollars. Inflation is good for borrowers and bad for lenders. Deflation is just the opposite. And real deflation will mean all those half million dollar homes are now worth half a mil or less. Not good.

[AdamSelene235]

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.

No, it simply allows debtors to escape their obligations. This makes people less willing to engage in collaborative activity. I.E. economic contraction. A destruction, not creation of wealth.

I would argue that we've already created a spectacular amount of money. The supply has already been inflated but the Fed could not control where it went.

The value of real estate has already been distorted by the runaway creation of dollars, the GSE money pumps, and artificial tax incentives.

Even if they fire up the printing presses there is no guarantee that they can stop deflation. Japan has been printing money like mad, but they still haven't managed to increase the aggregate money supply.

[jwh_Denver]

*It would be far better if the gubmint would cut spending instead. Maybe we can pray for some Repubs with spines and voices to take the day, and push spending cuts.

Can I buy puts and/or short this not happening?

[grania]

Maybe we can pray for some Repubs with spines and voices to take the day, and push spending cuts.

When pigs fly.

[imawit]

Everyone has missed the point and also missed the thrust of the article.

Puplava pumped it from both sides, showing us the cliff and then stopped dead cold. Because he has no answer what will happen next nor does anyone.

There is a very big critical financial mass building and when it implodes there will be a resultant explode, that nobody is even able to imagine.

Puplava puts it there and no one saw it.

What's really going on is that the Fed is pumping blindly to get inflation, doing everything possible to not have deflation. What they are creating is an ever larger explosion when the rubber band can stretch no further.

The Fed will simultaneously destroy both money and commerce. By pumping more credit (increasing money supply), trying to create inflation by definition, more & more dollars chasing the same or fewer goods, the same share will be worth more and cost more each day, the same cup of java will do the same day after day and deflation will be smothered by inflation.

There is a corollary to this however and that is that as more money is pumped in by easy credit, the vehicle that creates that credit, bonds & notes go down in value which leads to another corollary, yields go up which leads to yet another corollary, rates must go up. In other words, there is a point where credit and interest cannot remain low. The Bond and note holder will demand more pay back for the dollar given as credit. The resultant increase in interest or yields of bonds and notes must then be stemmed and replaced by buying them back at large volume (monetizing) which then devalues money further which is also inflation except at some point in time everyone wakes up the the fact they're carring around toilet paper in their bank account and wallet or getting paid interest & principal which is worth far far less than the original principal loaned and yields and rates must go higher which to the Fed means they must print more money. It's a vicious cirlcle.

And this circle jerk will continue ad infinitum. This is a course toward destruction & oblivion, nothing less.

Voila the implosion/explosion at the same time. The system systemically counter balances itself. You can't expand one end of it without also expanding the other end. All one creates is an ever bigger implosion/explosion. The situation only gets worse. Opposing forces only get larger and harder to hold in place. Easy credit does beget more money which inturn begets more less valuable money which begets higher interest, eveyone knows this, even the Feds. That's why they are prepared to monetize bonds and debt to hold the line of increasing yields and interest. They have stated this many times in just the last week.

Puplava puts this scenario there for all to see. Even the Feds see it but they conclude, it's better to have inflation than deflation so they continue to gorge the bomb at one end saying they can always defuse it at the other but once they have done this completely they will have created a critical mass which cannot be defused from either end let alone both ends at the same time.

Don't know if I have explained this sufficiently or simply enough but the biggest bomb to ever hit this planet is being built right before our eyes and absolutely no one knows how devasting the implosion/explosion will be nor does anyone have the guts to call a spade a spade and do something constructive about it.

I can go on and on and on but it's really simple. Just because a share is now worth two dollars instead of on is exactly the same as coffee is now $2 a cup, not $1 a cup. Inflation is simply inflation, it's not the same share is now worth more or the same cup of coffee is now more valuable. WAKE UP ! It's that money is now worth less !!!!!! That's inflation. But every body is buying it hoping there $1 share will go to $10 a share just like a couple of years ago. Well if this is your view point you are only putting in greater and greater deflation or more and more worthless dollars into the future.

Do I get my point across ? Wake up now or realize you've been scammed 6 months from now or sometime in the future.

[steveegg]

I hear you. There's so much waste out there that if even half of it were cut, the debt could be paid off in short order.

[arete]

This is a course toward destruction & oblivion, nothing less.

You don't have to convince me. I've said a thousand times that the FED was out of control and that Greenspan was nothing more than a political punk and Wall Street pimp. Greenspan created the original bubble for Rubin and Bubba, and all those thieves on Wall Street. After the robbery was complete and the bank vaults empty, he raised interest rates to pop that bubble. With the economy in recession, he is now trying to recreate the bubble again by flooding the system with money and easy credit. Wall Street, the bankers and the politicians will be saved while the average guy gets screwed again. It is not only criminal (IMO) but appears to be destined to make things worse. We are now bombing Iraq everyday and Bush has decided that we need a dose of imperialism to make things right or at least provide cover for an economy that is doomed. Put the sons of the ruling class elite on the front lines and see if Georgie is still beating the drums of war every day. It is very troubling.

Richard W.

[STONEWALLS]

"There is a real push on to keep the market up at least until the end of the year."

an interesting comment was made by Joe Kernan on Squawk Box this morning.....Eastman Kodak hit a new 52 week high yesterday @$36.73.....he looks for many more 52 week "highs" among the Dow components......the reason is that the old high numbers have dropped off the back of the 52 week chart...EK used to be in the mid 40s,but those numbers are now on the 104 week chart.....I expect that some of the biz media will cite these phoney "new highs" as proof that the "recovery" is in full swing....

Good luck to everybody, especially us ants!

Stonewalls

[fogarty]

"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. "

Ain't that the truth. And those who are wise (and those still blessed enough to have a job) are clamping down big-time on spending. My wife and I are spending no more that $250 this year for presents. A lot of presents are small <$10 and we are making handmade stuff as well (ceramic dishes, etc).

If indications hold out, the next big wave of layoffs will hit in first quarter - so it's not a time to be spending more than absolutely necessary. It's time to be socking away savings as much as possible.