Friday, November 30, 2012

Arrrghhh! MSM please dig a little deeper

So I was going to let it go, but they just keep hitting me over the head with bad data so I have to say something.  Last week the National Retail Federation put out a laughable estimate of $423/shopper  for Black Friday spending.  Most media outlets have blindly repeated this ESTIMATE without questioning how it was calculated.

I thought I'd give you their sophisticated statistical formula that was used to calculate this number. 

Step 1) Ask a customer what they spent last year on Christmas.

Step 2) Ask them if they plan to spend more or less this year.

Step 3) Estimate that 40% of all sales occur on Black Friday and you get your "estimate"

Think about that for a second - we're not talking about transaction data, we're talking about using consumer estimates and the one thing that has been proven time and again is that consumers wildly overestimate what they are going to spend. 

I suspect that the National Retail Federation reports these "estimates" in order to create a bit of a shopping "frenzy" among the public.  The more times someone hears that the average shopper spent $423 on Black Friday, the more likely they are to feel like they are behind and they'll feel a need to get caught up.

Until we get some real data can we at least refer to this as a forecast or an estimate from a retail trade group?

Sunday, November 25, 2012

Was Black Friday a Boom or a Bust?

My old nemesis the National Retail Federation is out trumpeting the boom that retailers saw this past weekend with record sales everywhere.  However, the real data that's been collected so far is much less flattering.

Do you remember how the National Association of Realtors constantly preached the value of housing throughout the housing boom and bust?  Well, that is what trade groups do best.  They spin the data to make it look great and lazy media outlets sometimes take the bait hook, line and sinker.

At least according to the National Retail Federation, Americans spent an average of $423 PER PERSON for total Black Friday WEEKEND sales of $59 billion.  Here are the problems with this number ---
1) Black Friday sales tend to be a negative indicator even though no one ever mentions this.  People don't maul one another for $4 DVD's and $50 prepaid cell phones when they are feeling "confident" about their economic situation.  If we believe the NRF's numbers I'd argue they are just pulling forward sales that would normally occur in the weekend after Black Friday.

2) Comparing 2011 to 2012 is really not possible b/c so many more major retailers moved their opening times from 6am Friday to 8pm Thursday.  This really changed the amount of shopping hours available in 2012 and again altered the total sales figures.

I'd offer my own anecdotal evidence from spending much of Black Friday weekend in the mall at -- traffic was up but the number of people carrying packages was very small.  Also, because they stretched Black Friday into a weekend event I think many casual shoppers just bailed on the whole concept. 

Quick market update - the markets have gone into hyperdrive in the past week on rumors of progress being made on the fiscal cliff.  Again, this fiscal cliff stuff is mostly made up media nonsense, but the pending debt ceiling debate could really screw up the markets like it did in 2011.  The rumored progress seems to be very difficult to pinpoint (a couple of Republicans have hinted at accepting some tax increases and a couple of democrats have hinted at entitlement cuts) and I'm hearing that behind closed doors the "progress" have been negligible.

I'm also a bit worried that everyone seems to be on one side of this trade.  Everyone is all in on the long side that stocks are going up and we'll get a grand deal by 12/15.  Remember my number one lesson of investing - when everyone thinks X, you should be looking at Y.

Just a final note of thanks to the many loyal readers that continue to listen to my ramblings.  I am also very thankful for the customers that have taken a chance on my new venture - NNY Math.  Enjoy the rest of 2012 and keep checking back for updates as news breaks.

Friday, November 16, 2012

I swear I had no inside info :)

However, it only took about 12 hours since my last post for many of the guesses that I put forth to start hitting the wires.  Here's the my summary - I believe Wall St. has told the White House and Congress that all of this "fiscal cliff" talk is freaking people out and that is why the market has tumbled for a week.  This is not the case, in my opinion, but then again why let facts get in the way of a good story.  

So, instead of working hard to get a deal struck in the next few weeks, the White House and Congress are in talks to take the easier path and (oh, goodness we'll get tired of hearing this phrase in about 48 hours) "kick the can down the road".

The markets have reacted positively to this rumor so far (remember the markets want the status quo - easy money and no spending cuts or tax hikes - good for their immediate bonus outlook, but bad for the future of the US).

Here's what the WSJ is reporting....

"White House officials are in advanced internal discussions about a plan to replace the sweeping spending cuts set to begin in January with a smaller, separate package of targeted spending cuts and tax increases."

By postponing the sequester cuts, Washington would essentially push off a number of large deficit-reduction decisions into mid-2013. This would include a long-term plan to replace the remaining sequester cuts, a plan to overhaul the tax code, and separate decisions about how to restructure Medicare and Medicaid.

 The plan that has been discussed by White House officials is similar in many ways to what lawmakers have discussed. It would terminate the spending cuts for a period of six to 12 months, and replace the cuts with more targeted reductions and revenue increases. House Republicans have proposed a similar model, though they have called for terminating the cuts to defense programs only and haven't accepted a deal to include tax increases as part of any package."

Remember that this will be sold to you as some sort of grand compromise when all it really is is a deferral of the deadline to make some hard choices.

Thursday, November 15, 2012

What's going on?

The market really can't get out of it's own way right now.  Given Apple's overwhelming dominance of the stock market we can't overlook the $150 Billion (yes, that's billion with a B) drop in the market value of Apple in the past 2 months.  Apple is now being thumped over the head with two old fashioned market rules "reversion to the mean" and "all stocks eventually discover gravity". 

The talking heads remain obsessed with the fiscal cliff talk and it is a convenient boogie man for a down market.

Let's review what we're talking about when we talk about the worst cast scenario:

Spending cuts (less than 1% of GDP)
* $87 billion in across the board cuts
* $35 billion - expiration of extended unemployment benefits
* $15 billion - reduced Medicare Dr. payments

New taxes (about 3% of GDP)
* $24 billion new taxes
* $87 billion other taxes that expire
* $127 billion payroll tax holidays
* $295 billion tax rates return to 2001 levels and AMT

As a reminder the impact of fiscal cliff would be a short-term negative and a long-term positive.  If we do nothing our ratio of debt held by the public to GDP will rise from it's current 67% to 90% by 2022.  In contrast, if the fiscal cliff changes are implemented the CBO projects that our debt to GDP would actually FALL to 58% by 2022!!  However, the impact on growth in the near-term would be meaningful and would likely take us back into recession in 2013.

Having said all of that ,look at those cuts and taxes again -- which ones can you see Congress having the guts to defend? 

I suspect we'll see something around $20 billion of unspecified "spending cuts" vs the original $137 billion estimate.  On the tax side I expect another extension of the payroll tax holiday, a deal on AMT and no change in rates for people earning $1 million or less.  So, instead of $500 billion in new taxes collected, I'm going to estimate that roughly $50-$75 billion in new taxes will make it's way to the treasury.

Net/net, our long-term fiscal problems will get worse and we will have created a great deal of uncertainty fretting over this issue.


Monday, November 12, 2012

Fiscal Cliff HYPE coming to a theater near you

Yes, there is a real deadline coming that should force some compromise in Washington.  I'll give you my best guess of how it plays out but first let's separate hype from reality.

What is this cliff the talking heads are all talking about so breathlessly?  Well, the Budget Control act of 2011 instituted a combination of forced spending cuts and the forced expiration of temporary tax cuts which could cut up to $500 billion from our projected deficit in 2013.  That's the good news (I guess) that we'd only have about a $500 billion deficit left to deal with.  The bad news is that these moves (primarily the spending cuts) will likely lead to a contraction in our economy and in all likelihood a slide back into recession. 

The worst case scenario would be no compromise and a complete implementation of the BCA's  cuts.  However, I think this is an unlikely scenario.  The much more likely scenario is that we hit a fiscal "speed bump" and a compromise is reached to maintain the status quo.

Here's my 50,000 foot view of what I think will happen:

* taxes on dividends and capital gains are going up (this raises revenues but allows the Grover Norquist's of the world to say "See he/she didn't raise marginal tax rates) the only question is how high the rates will go.

* The payroll tax cut will probably be extended again.  This is an easy giveaway that is popular on both sides of the aisle.

* Special tax benefits - like accelerated depreciation for companies and the sacred mortgage interest deduction are in the cross hairs.  I never thought Congress would really touch the mortgage interest deduction but if you think about it where would the effect of this be the most pronounced?  Where property values are the highest and guess where property values are the highest?  Those blue coasts on both sides of the US (NY, NJ, MA, CT, CA, WA) and the impact on someone with a $85k home in Montana will be less pronounced.  I hate to see politics driving economic policy but it could play a role here.

* Military spending - this will probably be the most difficult negotiation and I don't know how it will end.  I suspect there will be some cuts in civilian staffing but I do not think we'll come close to cutting $100 billion from defense.  If I were President Obama I'd call up Gov. Romney and ask if he'd like to head up a special project.  The US defense department would be the perfect private equity target - valuable assets, workforce issues, an industry that technology could change - and Mr. Romney would be the perfect person to head a commission on streamlining the military.  I'm only half-joking on this idea.

So hopefully, at this point you can see that the fiscal cliff is likely to be a little more than a road bump.  It is unlike the debt ceiling debate which nearly crippled the economy in 2011 (unfortunately, we'll probably have another one of those debates in the next 3 months).

However, this won't stop the media from reporting on the fiscal cliff like it is the second coming of Superstorm Sandy.  Look at the google search index for the term fiscal cliff in the past 2 weeks.

Every time the market dips expect people to jump to the "It's the uncertainty caused by the fiscal cliff!!!" line.  However, the bigger factors are Asia's slowdown, Europe's slowdown and weakness of our export data.


Wednesday, November 07, 2012

Well, two out of three ain't bad

Well, the results are in and as predicted ....

"Scenario 4 - President Obama wins both the electoral college and popular vote. Again, I think the market's would welcome this news because it would remove some uncertainty but then the focus would shift to the House to see what sort of political capital the President would have earned."

It appears as though the President did win both the popular vote and the electoral college which was an outside of the box concept on Monday.  However, the market's reaction has been anything but positive.

My expectation was that the market would look at the election maintaining the status quo - President Obama, Ben Bernanke, Democratic Senate and Republican House - and expect much of the same for the next four years.  The market may still come to that realization but the early results seem to be "sell, sell, sell".

But, why?  Well, we can look at the obstructionist comments from the House leadership last night which will make it very hard to deliver meaningful legislation needed to avoid the fiscal cliff.

Or maybe it's just Apple breaking down as a stock. It's hard to say that a stock that is up $160 billion in mkt cap or 40% in the past 12 mths is breaking down, but since the iphone 5 flop.... I mean launch way, way back 6 weeks ago, the stock has lost a staggering $140 billion in market cap and has broken through many technical levels.  One of the 10 greatest risks to the stock market is our reliance on Apple as a stock.

Finally, people could just be suffering from President Obama fatigue and they are voting with their wallets. 

I suspect the major drivers of the market in the next 2 months will be ---
* Europe's economy
* The war drumbeat with Iran
* Sandy's impact on the Northeast economy
* and finally, that fiscal cliff.......

It should be interesting.

Thanks for voting!

PS - look for the NNY Math commercial on various cable channels in the North Country.  You can also check it out on our website.  Thanks! 

Monday, November 05, 2012

Is anything happening tomorrow?

Finally, we get to move beyond the "Local TV Reinvestment and Recovery Act of 2012" aka, the election season, tomorrow.

I won't offer any endorsements or advice because politics remain the third rail of the blogosphere, but I will encourage everyone to vote.  I will, however, give some thoughts on the national campaign and its potential impact on the markets.

The consensus right now is moving toward an ugly, ugly forecast.  Many pundits predict that Romney wins the popular vote by 1 - 1.5 million but loses the electoral college by 15 votes or so.  This is roughly the same scenario as 2000 (when Gore won the popular vote by 500k or so) but the implications in today's increasingly partisan world are scary.  The likelihood of this happening has increased as a result of the East Coast superstorm which will suppress voting in the Northeast.  It doesn't put any of these traditional democratic states in play but it will likely lower the overall vote totals for President Obama.

Scenario 1 - If the electoral victory for Obama is clear I think the initial reaction by the markets would probably be positive, but concerns over the pending fiscal cliff and resistance to compromise from both parties would like dampen any enthusiasm.

Scenario 2 - The same as #1 but what happens if the victory is not clear?  I've heard that the parties have plans in place to demand Florida-style recounts in up to 5 states.  This is a nightmare scenario for the markets as they struggle with the uncertainty this would create.

Scenario 3 - Romney wins both the popular vote and the electoral college.  I think the markets would welcome this news because it would remove uncertainty.  However, the Senate should remain in Democratic hands and that would still cause some concern about Governor Romney's ability to craft a plan to avoid the fiscal cliff.

Scenario 4 - President Obama wins both the electoral college and popular vote.  Again, I think the market's would welcome this news because it would remove some uncertainty but then the focus would shift to the House to see what sort of political capital the President would have earned.

Last week, I was leaning toward Scenario 1 as being the most likely but I'm uncomfortable being part of the consensus.  When everyone is expecting A, B usually happens.  In this case, the market seems to be focused on a President Obama electoral victory (betting odds are running around 75%-80%) but more and more people are coming around to the idea of a Romney popular vote victory.

I usually like to be a contrarian so I'll switch my leanings toward scenario #4.  I suspect that the trend we've seen in polling in recent years will continue ie; missing the under 25 crowd.  Pollsters are really, really bad at getting in touch with the under 25 crowd despite their best efforts because this group of voters either doesn't have a landline or ignores the pollsters when they call on their cell phones.

This leads to an even bigger question when it comes to the validity of polls.  Recently, a Pew Research paper indicated that for every 100 homes contacted only 9 actually answer their polls.  I wonder what the response rate was like 1952 or 1972?

However, it turns out make sure to have your voice heard and get out and vote!