THE ECONOMY:
Same store sales 'mixed' once more.
The teen retailers were surging, the luxury marketers were solid, but the rest of the retail market was sluggish. In short, no change. AEOS +20%, URBN +11%, WTSAL +35%, ANF +16%. Kids are spending with their usual wild abandon, something else that started back in the 1980's when marketers discovered a multibillion dollar market in baby boomer children. They are the next 'I want it now' generation (pioneered by their parents), and they are getting it now.
Contrast WMT's 0.9% gain, JCP's lowered guidance, and misses from TGT, LTD, DDS. The 'usual' crowd was posting the 'usual' results. Discounters have it tough now that the recession is over. There is a lot of political talk about how the economy never really recovered, and while the job market has not recovered to its pre-recession norms (and it may not for years given the fundamental changes in the economy) and has left many hurting to this day, the fact that discounters are no longer dominating retail sales as they were in the recession speaks for itself. If things were that bad still, then the discounters would still be ruling the day in retail.
This is just a cycle in a familiar theme. Back at Christmas 2001 and even 2002 the department stores and other specialty retailers along with the retail commentators were moaning about poor sales. At the same time WMT, TGT, KSS, COST and the other discounters were stockpiling the cash in the back rooms because it was coming in so fast. That is the nature of retail today; depending upon what cycle the economy is in, one group wins, the other loses, and the teen retailers rule. That was affirmed again with the Thursday sales.
Q1 productivity at 2.6% swamps the 1.8% expected and beats 2.1% in Q4.
Greenspan watches a lot of 'indicators' when sizing up inflation pressures, a holdover from the late 1990's when he found his old yellowed, crumpled copy of the Phillips Curve, saw his shadow, and crawled into the 'protectionist' mode. What is that? It happens when the Fed suddenly gets scared of prosperity and starts playing to protect the lead from creeping inflation. Greenspan came up with a whole laundry list of inflation indicators, most of which sane people would say are indicia of prosperity. Indeed they are. The Phillips Curve equates low unemployment and strong production with inevitable inflation. If you go by this measure, you walk in fear of being too happy.
The productivity argument is a bit more accurate than the 'fear prosperity' model outlined in the Phillips Curve. The theory is that if productivity is high then businesses can absorb costs such as rising materials and even labor because they get more out of each worker. Companies have been playing that to the hilt in this recovery as they have been quick to continue layoffs but slow to hire. Thus even though unit labor costs rose 2.2%, topping the 1.7% from Q4, the rising productivity helps keep pricing pressures offset.
Thus strong productivity helps offset rising prices because companies can produce goods and services more efficiently and thus cheaper. That sure sounds like the supply side. Indeed, it is, or at least part of it. Productivity is a subset of supply, and when supply is strong then there are less inflationary pressures. Problem is, the Fed only looks at productivity and does not really buy into the supply side/inflation connection directly. Instead it looks at output gaps, slack demand and the like and thus leans too much on demand. Not that it could do much about supply with just rate hikes or cuts, but it would help if the Fed stopped being so PC (Phillips Curve) and embraced prosperity. Despite his proclivities to revert to the PC, Greenspan still understands the value of free markets. We are very concerned a post-Greenspan Fed will be even more PC. Too bad Bob McTeer decided to leave the Fed; he would have made a great chairman.
In sum, the productivity reading will give the Fed some comfort that inflation is not running wild (long term inflation is well contained, right?) and thus no desire to jack rates higher at a faster pace. It won't change the Fed's course of action, but it will help keep the Fed from worrying itself into a hiking frenzy.
GM versus Greenspan.
Here is one to consider. GM is a big, big company. So is Ford. A downgrade to junk status, though expected, does not change the fact that they are considered a poor risk to survive. That is what this means. Their paper is rated as junk because the paper raters believe it won't ever be paid. It does not mean failure is imminent, and indeed, it does not mean there will be failure. It does bring up that possibility, however. Chrysler got a bailout in the 1970's. Would GM and F warrant the same? Are they too big to fail? Moreover, does their problems translate to the rest of the big names?
Some are saying that this downgrade is the harbinger of the Fed closing out its rate hiking campaign. To us that presumes that the Fed will view GM's problems wider spread and that it is too big to allow to fail. With companies flush with cash (from what we hear and from the tax collections) the problem does not seem widespread. The auto industry's problems are with labor and how that has impacted its ability to compete with foreign makers. Drawing the conclusion the Fed will not hike further because of this debt downgrade is thus dubious.
It does not hurt, either. The Fed funds futures are still showing just two more hikes by the Fed in this campaign, and problems such as GM and F certainly won't extend the hiking. Moreover, you cannot ignore what the market is telling you. When the downgrade hit the wire homebuilders jumped higher along with other interest rate sensitive stocks. When they move higher that is an indication that the market is pricing in the end to rate hikes. You cannot ignore the market or key individual sectors. |
