Category Archives: Recent Market Action

the IMF request to the US–don’t start raising rates until 2016

June 4, 2015 By in Current Market Thoughts, economics, EU financial crisis, Federal Reserve, Recent Market Action, stock market Tags: , , , , , , 1 Comment

the report

In its annual review of the US economy, the IMF has included a request that the Fed postpone raising rates until the first half of 2016  (I’ve searched without success for the 10-page analysis on the IMF website, so I’m relying on the FT and Bloomberg for my information.)

To start with the obvious, this can’t be the first discussion of the idea of pushing back rate hikes between the IMF–dominated by EU interests–and the Fed.  The release isn’t the act of some nerdy economist (is there any other kind?) tacking the request on to a report that the top figures in the IMF didn’t review.

No, this is the IMF going on record as saying  it thinks the Fed beginning to normalize rates this year is a bad idea   …and that its request for delay has been rebuffed by the Fed.

the rationale

Its rationale seems to be that higher short-term interest rates might cause a sharp contraction in credit availability in the US and a consequent inadvertent loss in domestic economic growth momentum.  Given that the EU is counting on reasonable demand in the US for its exports, the follow-of effect of the US stalling might be disappearance of green shoots of recovery in the EU as well.

Higher rates might also cause the US dollar to rise.  While a stronger currency would slow the US economy further, it would also increase the attractiveness of foreign goods and services (including vacations) vs. domestic.  The latter factor would be an overall plus for the EU.  Companies would be the main beneficiaries, however.  Ordinary consumers would be hurt through a rise in the price of dollar-denominated goods like food and fuel.

the response

The consensus view in the US, I think, is that:

–official statistics understate the strength of the US economy,

–seven years of intensive-care-low interest rates in the US is long enough,

–a rise of .25% or .50% in rates would have no negative effect

–it might also be a positive, in the sense that the Fed would be signalling that the economy can at least partially fend for itself.

In short, the view is that prolonging anticipatory anxiety is far worse than raising rates a tiny bit and seeing what happens.

The EU economy, on the other hand, is maybe two years behind the US in absorbing the negative effects of the near collapse of the financial sector.  Instead of flooding the area with money–the US approach–it has relied on collective austerity to heal itself.   Sort of like leeching vs. antibiotics.

So the EU has less ability to deal with the negative effects of a US slowdown than the US itself has.  Dollar strength would be another blow to an already beaten-down EU consumer, fueling further politically disruptive far right sentiment, which to me already looks pretty ugly.

In the Greenspan era, the US would probably have accommodated the EU.  Post-Greenspan Fed chairs have made it clear, in contrast, that US interests come first.  The IMF comments reinforce that this is still the case.

cyclical growth vs. secular (ii)

May 15, 2015 By in currency markets, Recent Market Action, securities markets, stock market, Strategy Tags: , , , , , , , , Leave a comment

Same topic as yesterday, different starting point.

When the monetary authority begins to tighten policy by raising interest rates, it does so for two reasons:

–the domestic economy is giving signs of overheating, that is, of growing at an unsustainably high rate, and needs to be reined back in before runaway inflation results

–too much money is sloshing around in the system, and finding its way into more and more speculative investments.

For stock market investors, the tightening process implies two things:

–the rate of profit growth in business cycle-sensitive industries is peaking and will begin to decline, and

–playing the greater fool theory by holding crazily speculative investments will no longer work as excess money is siphoned out of the economy.

However the Fed proceeds, the second effect will surely happen, I believe.  But the US economy can scarcely be said to be overheating.  Despite this–and the Fed’s promised vigilance to prevent a meaningful slowdown in economic activity, I think all stocks–and cyclical ones in particular–will be affected.

Why?

…because the Fed tapping on the brakes lessens/removes the ability of investors to dream of a possible openended future cyclically driven upsurge in profit growth.  Whether specifically aimed at this or not, Fed action will have the effect of tempering Wall Street’s avaricious dreams.

What about dollar weakness, EU growth, China…?

In every cycle there are special factors.  They don’t change the overall tone of the market, though.

The main effect of a weaker dollar and stronger EU economic performance will be to increase the attractiveness of EU stocks, and of US names–principally in Staples and IT–with large EU exposure.  Look for the stocks with big holes in December and March quarterly income statements.

As for China, who knows?   My guess is that the Chinese economy won’t deteriorate further from here.  But the main China story , as I see it, will be the country’s gradual shift to consumer  demand-drive growth along with the substitution of local products for imports.  To me, both aspects suggest that well-known US, EU and Japanese China plays won’t regain their former glory.

My bottom line:  the shift from cyclical to secular may be more modest than usual this time, but it will still be there.  A more conservative mindset argues against further price earnings multiple expansion for the market.  So future market gains will depend entirely on earnings growth. The larger immediate effect will likely be in the loss of market support for very speculative stocks.

 

Whole Foods (WFM) and Millennials

May 11, 2015 By in earnings conference calls, Recent Market Action, Retail, Stock ideas, supermarkets Tags: , , , , , , , 1 Comment

What should we make of the announcement by WFM that it’s launching a new chain of supermarkets–smaller stores, selling less expensive merchandise, targeted to Millennials?

preliminaries

I was an early investor in WFM.  My family shops there on occasion.  But I haven’t followed the company for years.

Over almost any period during the past decade, the traditional supermarket chain Kroger (KR) would have been a better investment.

The stock’s strong performance from the depths of the recession comes in part from its starting point–a loss of over 3/4 of its stock market value and the need for a $425 million cash injection from private equity firm Green Equity Investors.

my thoughts

new brand–As I once heard a hotel marketing executive say, “You don’t start selling chocolate ice cream until the market for vanilla is saturated.”  Put a different way, if there’s still growth in the tried and true, it’s a waste of time to segment the market.  Therefore, the move to a second brand signals, at least in the minds of the managers who are doing this (and who presumably know their company the best), the end to growth in the first.

less expensive food–Pricing and brand image are intertwined.  Paying a high price for goods can confer status both on the product and the buyer.  Lowering prices can do the opposite.  It seems to me that WFM judges it can’t lower prices further in its Whole Foods stores without risking the brand’s premium image.  It may also be that WFM thinks it needs the pricing to pay for the big stores/prime locations it already has.  That would be worse.

smaller stores–This is less obvious.  The straightforward conclusion is that WFM has exhausted all the US locations where the demographics justify a big store.  My impression is that this happened years ago, however, when WFM began to decrease the square footage of its new stores.  On the other hand, it may also be that in their search for “authenticity,” Millennials react badly to big stores.

Millennials–Millennials and Baby Boomers are each about a quarter of the population.  Boomers have about twice the income of Millennials.  But as Boomers fade into retirement, their incomes will drop.  Millennials, in contrast, are just entering their prime working years, when salaries will rise significantly.  So targeting Millennials makes sense.

 

It’s not surprising that WFM shares dropped on the news.   It signals the end of the road for the proven brand and a venture into the unknown for which no details have been provided.  Why announce this now in the first place?