America’s Net Worth Improves
U.S. households’ net worth rose by $2 trillion to $53.1 trillion in the second quarter, the first increase since before the recession began in 2007, Federal Reserve data showed on Thursday.
The increase in wealth, the first since the third quarter of 2007, came in a period that saw stabilization in the housing market and huge gains in global financial markets. However, even with the $2 trillion rise, household net worth was still well below 2007’s level of $63.9 trillion.
The steep drop in wealth has put a damper on consumer spending, which normally accounts for about 70 percent of U.S. economic activity, and has encouraged households to boost savings.
The Fed’s quarterly Flow of Funds report also showed households and nonfinancial businesses pared debt, while the federal government piled more on as it stepped up recession-fighting efforts.
Household debt contracted at a 1-3/4 percent annual rate in the second quarter, the fourth consecutive quarter of decline, reflecting drops in both mortgage debt and consumer credit such as credit cards.
Nonfinancial business debt also contracted at a 1-3/4 percent annual rate, the largest quarterly drop since 1993, according to the Fed. The decline was concentrated in commercial paper, loans, and commercial mortgage borrowing.
The federal government’s debt increased at a 28-1/4 percent annual rate in the second quarter. The Obama administration has forecast a record $1.6 trillion budget gap for this fiscal year.
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Long Term Investors Selling Into Strength
After a five-month streak of net inflows for US domestic equities, September long-term mutual fund data shows a sharp reversal.
At the current run-rate of net outflows we’ve seen over the last two weeks, long-term mutual fund investors could be set to pull out more money than they injected into the market over the last three months in total. (data via ICI)
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Consumer Train Wreck Coming ???
Check out a rather glum outlook for the Christmas shopping season.
Last year, holiday sales notched their worst performance in nearly four decades.
This year, they could be a “train wreck” says Britt Beemer, founder and CEO of America’s Research Group.
According to the latest Consumer Mind Reader survey released by America’s Research Group and UBS, 81 percent of respondents said they are pressured by family debts, forcing many to shop less and spend less.
“The data foretells a very scary Christmas shopping season with consumers radically cutting back at a time when retailers need shoppers to shore up sagging retail sales,” Beemer said.
“I am fearful Christmas will be a retail train-wreck this year.”
Earlier this week, Beemer told Reuters that U.S. consumers are still cautious about eating at restaurants and are not planning to loosen the purse strings for holiday spending this year despite signs the economy is improving.
“Everybody wants the recession to be over, but nobody has told the consumer,” Beemer told Reuters.
According to the survey released on Thursday, more than three quarters of families are trying to cut back on how much they are spending. The average amount that American consumers are cutting out of their monthly spending is $191.11, the highest figure ever recorded for spending cuts in 13 years of ARG Consumer Mind Reader surveys.
Of consumers cutting back, 60.1 percent said they have accepted this new, lower spending level — even when the economic situation improves and they could afford to spend more.
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SEC To Address Credit Rating Agencies Flash Trading
The Securities and Exchange Commission will discuss later today rules to improve oversight of the credit rating industry, long dominated by Moody’s Moody’s Investors Service, McGraw-Hill’s Standard & Poor’s, and Fimalac’s Fitch Ratings.
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SEC Chairman Mary Schapiro
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At the same hearing, the SEC is expected to propose a ban on flash trades—or buy and sell orders that exchanges send to a specific group of participants before revealing them publicly.
Global policymakers are trying to make credit agencies more accountable after the firms assigned top ratings to products linked to shoddy mortgages that later lost much of their value, costing investors trillions of dollars.
The SEC may force banks to share data used to rate bonds with all credit rating agencies, reducing the risk that investors will buy securities with inflated ratings, people familiar with the situation said.
Data would not be disclosed publicly, but would be shared in an attempt to generate unsolicited ratings for their products, one source said.They requested anonymity because the discussions are private.
The SEC may also require all credit agencies to reveal more information about past ratings so investors could compare their relative performance, with perhaps a one- or two-year time lag, the people said. This requirement would apply regardless whether agencies are paid by issuers or by investors, they said.
The proposals remain in flex as the five SEC commissioners debate the scope of any changes.
The regulator is expected to issue a general discussion paper that questions whether credit agencies should be regulated as ‘experts’ under securities law, and thus subject to tougher standards of liability. Rating agencies are exempt from such regulation.
In contrast, auditors are considered experts, and are more easily sued over their findings.
The SEC is also expected to consider removing references to credit ratings in some of its rules—a move that would force Wall Street to do more due diligence. This measure is supported by the Obama administration.
The SEC has already proposed removing references to the ratings in most of its rules.
However, the powerful mutual fund industry has trampled over that plan because it would scrap a requirement that money market funds hold investment-grade securities. The agency will not consider removing that particular reference for money market funds at its Thursday meeting……
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Commercial Paper Expands For 5th Week in a Row
NEW YORK, Sept 17 (Reuters) – The U.S. commercial paper market expanded for the fifth straight week for the first time since December, reinforcing indications of an economic rebound as the global financial crisis fades, Federal Reserve data showed on Thursday. For the week to Sept. 16, the size of the U.S. commercial paper market, a vital source of short-term funding for routine operations at many companies, rose by $16.1 billion to $1.190 trillion outstanding, from $1.174 trillion the previous week. Asset-backed commercial paper outstanding rose by $18.1 billion after rising by $6.2 billion the previous week. However, unsecured financial issuance fell by $9.7 billion after rising by $6.2 billion the previous week. The overall U.S. commercial paper market is still only just over half its size at the peak of about $2.2 trillion outstanding in August 2007 when the credit crisis broke out. (Reporting by John Parry and Tom Ryan; Editing by James Dalgleish)
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Sector Review on Semiconductors & Software
67 WALL STREET, New York – September 16, 2009 – The Wall Street Transcript has just published its Semiconductors, Semiconductor Equipment, and Software Report offering a timely review of the sector to serious investors and industry executives. This 115 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: DRAM Industry Reorganization — Semiconductor Supply Chain Status — Netbook Growth — LCD TV Growth — NAND Pricing and Demand — Micro-Electro-Mechanical Systems (MEMS) Demand Cycle — Ultra Low Voltage Processors — Semiconductor Inventory Aging and Type — Processor Power Developments
Companies include: Intel (INTC); Micron Technology (MU); Microsemi (MSCC); STEC, Inc. (STEC); National Semiconductor (NSM); Texas Instruments (TXN); Taiwan Semiconductor Manufacturing (TSM); ON Semiconductor (ONNN); Intersil (ISIL); Linear Technology Corporation (LLTC); Monolithic Power Systems (MPWR);Advanced Photonix (API); Waytronx Inc. (WYNX); LTX-Credence (LTXC); Mattson Technology Inc. (MTSN); Oclaro, Inc. (OCLR); Silicon Laboratories (SLAB); Microchip Technology, Inc. (MCHP); Cohu, Inc. (COHU); FSI International, Inc. (FSII); Jaco Electronics (JACO); Cadence Design Systems (CDNS); Synopsys (SNPS); Mentor Graphics (MENT); Magma Design Automation (LAVA)
In the following brief excerpt from the 115 page report, Auguste Richard discusses the outlook for the sector and for investors.
TWST: As we look out a little further, is there anything on the horizon in terms of new technologies that are going to help drive this, besides some of the things we talked about, 4G and netbooks?
Mr. Richard: Again, I think that the big drivers coming up are going to be these netbooks. That’s going to enable the next 0.5 billion to 1 billion users on the Internet. I actually think that that in and of itself is going to be a tectonic shift; you’re talking about a sixth to a twelfth of the global population all of a sudden will have access to the Internet. I mean, that’s a big shift. The second one is video, which I mentioned. Basically it’s just the onward progression of video. Forty years ago you had a choice of three broadcast channels, and then the cable companies came along and you had a multiplicity of channels. Then you got a VCR and you could record it and watch a TV program when you wanted, and then you had a PVR and you could get rid of the commercials. And then the Internet came along and you could watch whatever you wanted whenever you wanted, you just couldn’t watch it on the TV, or the cell phone, per se. The next iteration of this is, one can watch any video on any screen any time and anywhere. This will eat up a lot of bandwidth and there is always a need for more resolution and higher frame rates, which is more bandwidth. Or you can compress more, which is more microprocessor power. Or you can store it locally, which is a lot of storage. So the three vectors of semiconductors – microprocessor power, bandwidth and storage – all can potentially benefit depending on how this rolls out. It’s good for everybody virtually; it’s just a very strong cycle, and it makes a lot of sense. It will consume a lot of silicon. The buildout of 3G networks, I think again, is a big one. Those are the ones that are obvious to me. There is also a PC upgrade cycle looming. In the old days when you looked at the fleet of cars in America, when the average age of the fleet got over I think it was 11 or 12 years, you knew you were going to have stronger sales of cars, and I think PCs are similar. Once they get to a certain age you just have to replace them.
TWST: Is the industry poised or able to handle a deferral if things don’t shape up?
Mr. Richard: I’ve seen more bankruptcies in cap equipment in the last six months than I’ve seen in the last 25 years. To be sure, the industry is going to look a lot different coming out of this downturn. And I think in some sectors of semiconductors the bigger are going to get much bigger and the small are going to dry up and blow away. You’re seeing that consolidation in memory. You’ve had Qimonda go into bankruptcy, you’ve had Spansion go into bankruptcy and the Taiwanese suppliers are definitely having problems. That probably means more market share for Hynix, Samsung and Micron. On the foundry side of things, Samsung is getting into the foundry business. I think Taiwan Semi (TSM) has some issues with their process roadmap and could lose market share. So there is going to be a pretty good shifting of market share, and I think, again, in some of the sectors, memory in particular, you can get a consolidation in cap equipment purchasing. That’s already pretty well consolidated, but some of the smaller suppliers could go bankrupt.
TWST: Is it going to be consolidation through bankruptcy or are we going to see some M&A activity as well?
Mr. Richard: You’ve already started to see some of both.
TWST: Are investors going to get blindsided if we get a downturn in the second half of the year?
Mr. Richard: I think so. That’s the call we’ve been making. We’re kind of contrarian in our view. So I think, particularly given where the stocks are, that they could pull back. The SOX (the Philadelphia Semiconductor Index) is over 300. You easily could correct 50 points and that would be normal in a rising semiconductor market. I think it’s actually probable; it is the call we have been making since mid-July.
TWST: What names would you be looking at?
Mr. Richard: The first of the ones that make the most sense to me is Altera (ALTR). 80% of revenue is from industrial and communication infrastructure. The stock has been held back on fear of a pause in China; that’s baked into the stock. It’s lagged the group and we think that they are well positioned coming out of this as more money goes into these sectors. The competitive technology is ASIC. In this downturn, most of the customers have fired the design groups and increasingly people will have to use FPGAs to differentiate their products, custom products. So that would be one of my best ideas near term.
The Wall Street Transcript is a unique service for investors and industry researchers – providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 115 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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Poll Shows Americans Will Curtail Spending
By Mike Dorning
Sept. 17 (Bloomberg) — Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.
Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.
Respondents were divided over whether the economy will get better or stay the same in the next six months; only 1 in 6 said things will get worse. More than 40 percent of those surveyed said they feel less financially secure than they did when President Barack Obama took office in January, outnumbering 35 percent who said they feel more secure.
“People I never thought would lose their jobs have lost their jobs,” said Angela Payton, 42, a university publications editor in Florence, South Carolina. She kept her children out of summer camp, stopped buying organic milk and plans to curtail the party for her daughter’s 6th birthday in November.
In the poll, conducted Sept. 10-14, 40 percent of those questioned said they have experienced one or more problems from the banking crisis. In the most-often cited repercussions, 27 percent said their credit-card interest rates have risen dramatically and 15 percent report that they couldn’t get a home-equity, car, or other kind of consumer loan.
View on Obama…..
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World Markets RiseTo New Highs
By Daniel Hauck
Sept. 17 (Bloomberg) — The MSCI World stock index climbed to an 11-month high, emerging-market bonds rallied and the dollar weakened on growing signs of a global economic recovery and improvement in the financial system.
The MSCI World Index of 23 developed nations climbed 0.5 percent at 10:22 a.m. in London to the best level since October. The Dollar Index, which tracks the currency against the biggest U.S. trading partners, fell to the lowest level in almost a year. Russian bonds rallied for a 10th day, the longest streak since January 2008.
Nippon Steel Corp. climbed after saying it will open an idled furnace as the global economy rebounds from its first recession since World War II. Irish banks surged as the country detailed plans to purge lenders of toxic assets. Job openings in London financial services climbed the most this year in August, signaling the industry is recovering from the collapse of Lehman Brothers Holdings Inc. one year ago.
“Risk appetite is coming back with a bang,” said Tom Fallon, head of emerging markets at La Francaise des Placements in Paris, which manages the equivalent of $11.8 billion. “We’ve had upside surprises on data in emerging markets and in G-7.”
The Dow Jones Stoxx 600 Index of European shares climbed for the 10th time in 11 days, adding 0.4 percent. A 55 percent increase since March 9 has driven valuations on the gauge to 46.8 times profit, the highest level since 2003, weekly Bloomberg data show.
Irish Banks
Bank of Ireland Plc rose 15 percent and Allied Irish Banks Plc jumped 25 percent in Dublin as the government announced a proposal to spend 54 billion euros ($80 billion) buying real- estate loans. Ireland’s new National Asset Management Agency proposes to pay a 30 percent discount on the 77 billion-euro book value of the loans, Finance Minister Brian Lenihan said in Dublin yesterday.
Futures on the Standard & Poor’s 500 Index were little changed before a report that may show U.S. builders broke ground on the most houses in nine months in August, another sign of stability in the industry that precipitated the worst financial crisis since the Great Depression, economists said. Separate data from the Federal Reserve Bank of Philadelphia may indicate manufacturing in the region increased this month.
The Shanghai Composite Index climbed 2 percent to a one- month high, led by commodity producers. PetroChina Co., the nation’s biggest oil company, rose 1.9 percent as crude traded above $72 a barrel in New York. The MSCI Emerging Markets Index gained 0.8 percent to the highest in a year.
Russian Bonds
Russian bond yields fell 13 basis points to 2.72 percentage points over U.S. Treasuries, the lowest in a year, according to JPMorgan Chase & Co.’s EMBI+ Index.
The gap between yields on emerging-market bonds and Treasuries narrowed 5 basis points to 3.07 percentage points. The ruble advanced 0.8 percent against the dollar to a 30.4745, the highest level since January.
The Dollar Index slid as much as 0.3 percent to 76.010, the lowest level since Sept. 22. The euro rose 0.2 percent against the dollar, trading at its strongest level in almost a year. Gold increased for a third day as the dollar slid. Bullion for immediate delivery advanced to $1,021.88 an ounce in London, 1 percent away from its all-time high.
Confidence in the world economy held at a record high in September, the Bloomberg Professional Global Confidence Index showed yesterday. Measures of sentiment in France and Germany improved after their economies unexpectedly returned to growth last quarter.
The MSCI World Index has climbed 66 percent since March 9 as the Group of 20 nations committed about $12 trillion to revive growth and the Fed kept its target rate for overnight lending between banks at near zero to unlock credit markets after the bankruptcy of New York-based Lehman.
Oil Trades Slightly Higher Holding Above $72pb
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SINGAPORE (AP) – Oil prices held above $72 a barrel Thursday in Asia amid signs the U.S. economy, the world’s largest consumer of crude, has stopped shrinking.Benchmark crude for October delivery was unchanged at $72.51 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange.
On Wednesday, the contract rose $1.58 to settle at $72.51 on news that U.S. manufacturing is improving. The Federal Reserve said industrial activity surged 0.8 percent in August, better than the 0.6 percent increase economists had forecast.
The Fed also revised July’s figures to a 1 percent increase, twice as much as originally reported.
The news cheered stock and oil investors. The Dow Jones industrial average rose 1.1 percent Wednesday and all major Asian indexes gained in early Thursday trading.
Inventory data from the Energy Information Agency on Wednesday was mixed. Crude supplies dropped 4.7 million barrels last week, but gasoline stocks increased by 500,000 barrels and inventories of distillate fuels used for diesel fuel and heating oil rose by 2.2 million barrels.
A weaker U.S. dollar has helped support oil prices. The euro rose Thursday in Asian trading to $1.4727 from $1.4706 the previous day while the dollar rose to 91.07 yen from 90.88 yen,
In other Nymex trading, gasoline for October delivery rose 0.17 cent to $1.85 a gallon, and heating oil rose 0.77 cent to $1.8335 a gallon. Natural gas dropped 4.7 cents to $3.713 per 1,000 cubic feet.
BoJ Keeps Rates Steady
By YURI KAGEYAMA
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(AP) In this file photo taken Thursday, April 23, 2009, Masaaki Shirakawa, governor of Bank of…
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ORCL Misses on Revs As Profit Jumps 4.4%
SAN FRANCISCO (AP) — Oracle Corp.’s profit rose 4 percent in the latest quarter, matching Wall Street’s forecasts, despite a drop in sales that revealed businesses are still being tightfisted about buying new software.
The sales figure was short of analysts’ expectations, and Oracle’s shares fell 4 percent.
The company’s results, reported after the market closed Wednesday, reflect a familiar pattern that has emerged for Oracle during the recession.
Oracle’s sales of new software licenses fell 17 percent to $1 billion, while revenue from software updates and technical support contracts climbed 6 percent to $3.1 billion. While many businesses are still reluctant to pay for new software, existing Oracle customers usually pay the company to do the follow-up work on software they’ve already bought, which explains why the numbers sometimes go in different directions.
The rise in support work helped lift Oracle’s net income for the June-August quarter to $1.12 billion, or 22 cents per share, versus $1.08 billion, or 21 cents per share, in the same quarter a year ago.
Excluding one-time items, profit was 30 cents per share, matching the average estimate of analysts polled by Thomson Reuters.
Sales fell 5 percent to $5.05 billion, short of expectations for $5.25 billion. Oracle said sales would have fallen just 1 percent were it not for currency fluctuations, which change the value of deals done in other currencies when they’re converted into dollars.
Guidance for the September-November quarter, Oracle’s fiscal second quarter, were in line with analysts’ projections.
Oracle expects profit of 35 to 36 cents per share, excluding one-time items. Analysts predicted 36 cents per share, on average. Revenue is expected to be flat to up 3 percent over last year, which translates to a range of $5.6 billion to $5.77 billion. Analysts expected $5.72 billion.
Oracle sees revenue from new software licenses coming in flat to down 10 percent over last year.
The stock fell 91 cents, or 4.1 percent, to $21.22 in after-hours trading, likely on disappointment about the revenue shortfall. The shares had closed down 53 cents at $22.13 during the regular session…..
Slowly But Surely The Spenders Are Returnning
By Emily Kaiser – Analysis
WASHINGTON (Reuters) – U.S. grocery store chain Kroger Co (KR.N) says shoppers are starting to buy national brands again instead of lower-priced store-label versions.
Best Buy Co (BBY.N), the largest U.S. electronics chain, sees sales trends improving and customer traffic stabilizing, although people are still gravitating toward cheaper items.
This certainly isn’t 2005, when Americans were feeling flush from rising real estate and stock market values and buying up flashy cars and flat-screen televisions, piling up a record amount of debt in the process.
But it isn’t late 2008 either, when retailers suffered a sudden, steep drop in demand for everything but the bare essentials, driving several large chains — including Best Buy’s competitor Circuit City — out of business.
Think of it as a return to inconspicuous consumption, and perhaps an early indication of how the economy might look as it adjusts to a new era of frugality after the mid-decade boom.
Any improvement in discretionary spending is a welcome development as the economy climbs out of recession. Indeed, Tuesday’s surprisingly strong retail sales figures for August were seen as a strong signal the downturn was over.
But the trends described by these large retail chains put a bit of a damper on the optimism inspired by the sales figures. They are more consistent with the sort of sluggish recovery the Federal Reserve and many private economists expect.
“The recovery will be slow and uneven, and it could take a decade or more for consumers to restore their sense of financial security to pre-recession levels,” said Richard Curtin, the University of Michigan economist who heads up the Reuters/University of Michigan consumer sentiment surveys….
Eastman Kodak Gets a Cash Injection From KKR
Eastman Kodak Co., bolstering its balance sheet as its business deteriorates, said it will raise up to $700 million in debt in an investment led by Kohlberg Kravis Roberts & Co.
The deal gives the camera and printer maker, which had $1.13 billion in cash at the end of June, more financial breathing room, as well as capital it can use to pay off debt that could come due next year. The financing comes at a steep price, and KKR could end up with a 20% equity stake in Kodak by exercising warrants issued as part of the deal.
Kodak …
Federal Reserve Focuses on Property Exposure
By Tom Braithwaite and Krishna Guha in Washington and Nicole Bullock in New York
Published: September 16 2009 21:29 | Last updated: September 16 2009 21:29
function floatContent(){var paraNum = “3”
paraNum = paraNum – 1;var tb = document.getElementById(‘floating-con’);var nl = document.getElementById(‘floating-target’);if(tb.getElementsByTagName(“div”).length> 0){if (nl.getElementsByTagName(“p”).length>= paraNum){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[paraNum]);}else {if (nl.getElementsByTagName(“p”).length == 3){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[2]);}else {nl.insertBefore(tb,nl.getElementsByTagName(“p”)[0]);}}}}The Federal Reserve is reviewing banks’ exposure to commercial real estate, the troubled sector whose slide poses a risk to many institutions because of the wide distribution of loans and mortgage-backed securities.
In its regulatory role, the Fed will look into a cross-section of banks to build a picture of how resilient institutions are to the troubled market. It is keen not to characterise the exercise as a “stress test”, which has come to evoke the audit of 19 large banks earlier in the year.
A cross-disciplinary team will look at the variety of commercial real estate assets on banks’ balance sheets, encompassing loans and commercial mortgage-backed securities.
The Fed’s own Beige book reported last week that the economy continued to stabilise during July and August, but loan demand and commercial real estate remained weak.
Commercial property prices are now 26.9 per cent lower than one year ago and 33.9 per cent below the level seen two years ago, according to an index compiled by Moody’s Investor Service. Values on commercial property prices are now 35.5 per cent below the peak seen in October 2007.
Commercial real estate ”is ground zero for the distress happening over the next 3 to 5 years,” said Rich Friedman, head of Merchant Banking at Goldman Sachs on Wednesday. It will be five to six years before there is any real improvement, Mr Friedman added. Real estate deals were often more leveraged than the buyout deals done at the height of the bubble, precisely because there was so much leverage, to refinance will be a huge challenge…..
Venezuela & China Sign a $16 bln Deal
Venezuela has announced a $16bn deal allowing China to drill for oil in the eastern Orinoco basin.
Hugo Chavez, Venezuela’s president, did not name the Chinese companies involved in the deal, but said they would form a joint venture with
state-owned Petroleos de Venezuela (PDVSA) to produce 450,000 barrels a day of extra heavy crude.
“Yesterday, a deal was signed in Beijing for the Orinoco basin. It sets out a Chinese investment of $16bn over the next three years,” he said during a school visit on Wednesday.
“In addition, there will be a flood of technology into the country, with China going to build drilling platforms, oil rigs, railroads, houses.”
Venezuela announced last Saturday that it had also signed a similar deal with a Russian consortium during Chavez’s recent visit to Moscow.
Russian investment
The deal will see the group of five Russian companies invest more than $20bn over three years, and gives them rights to drill for oil in the Junin 6 field, which is estimated to hold 53 billion barrels of heavy crude.
“Adding both [the Russian and Chinese investments] it comes to $36bn for the next three years with the objective of producing in a partnership with Venezuela – with PDVSA holding most shares – 900 thousand barrels per day of crude, nearly a million,” Chavez said.”This good crude will be negotiated along with the Russians by Russian companies and Chinese companies.”
Venezuela says it has proven oil reserves of about 142.3 billion barrels, but some experts estimate that the Orinoco basin could hold an additional 235 billion barrels.
Venezuela, the world’s 11th-largest oil producer, relies on its vast reserves for 93 per cent of exports and nearly half the government’s budget.
But this has been hit as world oil prices have fallen 50 per cent from last year’s peak, to trade at $72.51 a barrel on the New York Mercantile Exchange on Wednesday.
TAX, TAX, TAX, & Spend
Here’s how it works with new public health ideas:Some policy wonk at Harvard dreams it up, but it just sits there in Ivy Tower-land for a long time. Then the idea gets discussed in the press, but most people dismiss it as being far-out. And then it’s debated for real, and next thing you know it’s policy.
And so here we are with the soda tax, which has companies like Coca-Cola (KO) screaming bloody murder, but which is starting to get some serious play in the press and among politicians.
What should be scary for the soda industry is that new research suggests the tax would be highly effective at both raising (much-needed) revenue and discouraging consumption (which would have the follow-on effect of reducing obesity and diabetes-related healthcare costs).
A new study came out yesterday in the New England Journal of Medicine.
NYT: The study cited research on price elasticity for soft drinks that has shown that for every 10 percent rise in price, consumption declines 8 to 10 percent.
John Sicher, the publisher of Beverage Digest, a trade publication, said that a two-liter bottle of soda sells for about $1.35. At 67.6 ounces, if the full tax was passed on to consumers, that would add 50 percent to the price. A 12-can case, which sells today for about $3.20, could rise by $1.44, a 45 percent increase.
“A one cent per ounce tax would create serious problems and potentially adversely impact sales for the American beverage industry,” Mr. Sicher said.
Obviously, taxing soda is going to be politically difficult. We’ve suggested in the past that they should get rid of the cigarette tax and replace it with a soda tax, but that’s probably not realistic, given that cigarette taxes are levied in a patchwork of state-by-state laws.
More realistically, how about we just start eliminating any subsidies that go towards high-fructose corn syrup? That would also raise prices, and the soda industry would have a much harder time complaining.
Is The Market Cheap ?
According to the Shiller 10 year PE ratio the stock market is now trading at a hefty 18 PE. This is just slightly higher than the historical norm. Image 1 clearly shows that the market is neither extraordinarily expensive nor extraordinarily cheap, despite what some noted bears say. What is more interesting in this data is not the exact price, but the action surrounding overshoots and undershoots. In each of the instances where the S&P 500 approached an extreme overshoot of 25, the market undershot over the course of the following 5 years and always approached a PE between 5-10. Like Grantham, I am a firm believer in mean reversion and the idea that the mean tends to be overshot.
![IS THE MARKET CHEAP?]()
Chart 2 shows the extreme moves in terms of % above/below the long-term average. Although the market is not overly expensive or inexpensive it is interesting to note that we have not overshot to the downside despite the largest overshoot in the history of the market. This would lead one to believe that there is much more work to be done on the downside as PE’s contract and the market digests its excesses of the last decade.
![IS THE MARKET CHEAP?]()
* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.
Comments »
is exchange-related, clearly ASML has not reduced prices in 2009 and chip companies are willing to pay the price!
