AGORACOM Small-cap Investor Relations Blog

Clearly, the US consumer and economy are in trouble. Inflation in food and oil costs are sucking real money out of consumer pockets, re-financing homes is no longer an option and the markets had their worst June since the Great Depression. All of this adds up to a 28-year low in US consumer sentiment.

In this environment, it doesn’t take a rocket scientist to conclude that discretionary spending is going to get hit hard in 2008 and I can’t think of a company with more discretionary products than Apple. Consumers may still want to buy MP3 players and smart phones but there are plenty of cheap alternatives to the iPod, iTunes and iPhone in the marketplace.

I am going to exercise PYMWYMI (Put Your Money Where Your Mouth Is) and call for Apple to revisit $110 – $120 over the next 3-6 months. To capitalize on this, I am going to buy October puts in AAPL.

I’ll let you know how it goes.

Regards,
George

My friend, Barry Ritholtz, made a great point on Friday when he stated:

We learned today that consumer spending upwards by 0.8% in May. However, that appears to be primarily inflation driven consumption, fed by stimulus checks, and higher food and energy prices.

To illustrate his great point, consider the fact that you aren’t actually buying more gas, you are simply paying more for it. Buying more gas would imply that you are doing a lot more traveling related to business, travel, etc. and that you are filling your tank more than usual, which would be a good sign for the economy.

On the other hand, simply paying more for gas means you are driving the same (perhaps even less) but spending more money at the pump. Nobody should mistake this as a sign of a robust economy.

If he is right, then what is the actual state of consumer spending? It is an important question and, thankfully, Merril Lynch’s David Rosenberg provides the startling answer via the chart below:

For a great read on the state of consumer confidence, be sure to read Barry’s latest post.

Regards,
George

Good morning to you all. US CPI numbers are out and the news isn’t good except for those buying furniture, women’s clothing and PC’s. Otherwise, the scene is pretty bad. If you like to eat, drive, drink, get an education and get medical attention when sick, life just got a whole lot more expensive.

Rather than giving you raw data, a graph is worth a thousand words:

(Thanks to Barry and Jake for the great graph)

This isn’t a pretty situation. The economy isn’t growing, yet inflation is on the rise. The government can report inflation “ex-food, ex-energy” to soften the blow – but they can’t hide the fact your pockets are still getting depleted every time you step up to the cashier and the pump.

The Fed continues to delay check mate but the fact of the matter is increasing interest rates to control inflation is only going to continue hitting real estate where it hurts. This isn’t good when foreclosures are up 48% in May and 1/483 households received a foreclosure note in May.

In addition, the resulting stronger dollar is only going to weaken exports and further slow the economy, which by most accounts (except for cheerleaders) is in a recession.

So will the Fed increase rates? Fed Funds Futures are now pricing in:

• A 100% chance that the Fed raises rates by a total of 50 bps by the October meeting.

• A 24% chance of a 75bps increase by October.
  

• By the January 2009 meeting, we have a 98% chance that Fed Funds rate will be raised by a total of 100 bps

In my opinion, I don’t think they have the guts to do it for the very reasons I outlined back on January 3rd. Here is the key excerpt:

Unfortunately, you can’t fight inflation and a credit liquidity crisis at the same time. Fighting one only makes the other problem worse. In this case, cutting interest rates will also lead to higher inflation. Afterall, the purpose of interest rate cuts is to get people to spend. Anybody want to guess what happens to gold when inflation starts climbing?

If you are a chess player, you understand the analogy that the Fed is about to sacrifice its Queen to save the King. Unfortunately, cutting interest rates to help save the real estate market is only going to delay the inevitable pain the US economy must suffer for years of excess and greed. They have picked their poison and thy name is inflation. Checkmate.

For now, the dollar is gaining strength and gold is off on sentiment that interest rates will have to increase. I think it’s far from a foregone conclusion. The Fed can argue”Core CPI” is in line with expectations – but the public outcry is going to buy it and should result in significant political pressure. Let’s see.

Regards,
George

If you listen to inflation figures reported in both Canada and the US, you wonder one of two things:

1. Life sure seems a lot more expensive for me..what am I doing wrong?
2. The Government is on crack!

For the record, I’m in camp #2. Come on! Gas and food prices are through the roof and the government tries to tell citizens that inflation is under control?

In Canada, they attributed much of this to the fact that the price of cars dropped by 7.1%, which only applies to that small percentage of consumers buying or leasing a car this year. What about everybody having to pay astronomically higher prices to fill up their cars?

In the US, my friend Barry Ritholtz demonstrates how the CPI (Consumer Price Index) is incorrect … no, WAY OFF. You can view the complete article here but here is the key point:

“…for 80% of the country’s populace, the CPI weightings are dramatically understates what the average American is experiencing in terms of their inflation versus the official CPI measure.“

WHY?

I’m not about to point to conspiracy theories, blah, blah, blah but politics means never telling people the truth when it hurts.

Interestingly enough, my father had a pretty interesting point of view on the underreporting of inflation as well. Specifically, higher inflation leads to higher wages, especially government employees that will demand to keep up with the rate of inflation. Imagine what that would do to government deficit targets?

Hmmm.

Regards,
George

Good afternoon, folks. The US Fed announced their decision on interest rates, as well as (more importantly), its statement about the state of affairs. I’ve provided highlights below via bullet points. Don’t mind the lack of form, the meat is what counts.

• Fed Funds Rate decreased by 25 basis points (.25) to 2.0%.  Was at 4.25% on Jan 1.

• Little to no reaction to Fed statement. There was no real movement in the US Dollar, Gold, Oil or Equities Markets following the news at 2:15.

• The statement was not as strong as the markets were looking for.

• “Uncertainty about inflation outlook remains high. Seen as moderating but will be monitored carefully.”

• “Fed is still ready to act to provide stability.”

• “Financial Markets are under stress.”

• “Economic activity currently remains weak.”

• “Easing to date should provide growth”

• “Labor markets have suffered”

Regards,
George