Thursday, November 29,2012 - Place Your Bets

Place Your Bets

by Sinclair Noe

Let's start with the important numbers today: 5, 16, 22, 23, 29, and the Powerball 6. And I did not win.

Somebody in Missouri and somebody in Phoenix are holding the winning tickets. Not me. All I'm holding is a $10 piece of paper which is my donation to the tax fund for the mathematically challenged.

DOW + 36 = 13,021
SPX + 6 = 1415
NAS + 20 = 3012
10 YR YLD un = 1.62%
OIL + 1.23 = 87.72
GOLD + 6.00 = 1726.80
SILV + .50 = 34.27

The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought. The Commerce Department said growth in the third quarter was significantly better than the 2 percent rate estimated a month ago. And it was more than twice the 1.3 percent rate reported for the April-June quarter. The main reason for the upward revision to the gross domestic product was businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.

The fourth quarter GDP is expected to drop back down below 2 percent because of Hurricane Sandy, which put the brakes on all sorts of business activity along the East Coast. And then the other reason cited for the possible fourth quarter slowdown is the fiscal cliff. (Sorry, we just can't get through the day without talking about it.) So, here is the annotated version of today's fiscal cliff report: a little partisan sniping, a few snarky comments; no substantive progress, but talks are ongoing. Despite all the hype about the fiscal cliff, the markets appear to be treating it more like a fiscal bunny hill. The VIX, the volatility index is scraping along bottom at about 15, indicating a broad based complacency. And if you're actually paying attention to one of those countdown clocks, you really need to be doing something different.

Anyway, back to the GDP report. Consumers and businesses appeared to be more cautious over the summer. Consumer spending grew at a weaker 1.4 percent rate in the third quarter, down from the 2 percent rate estimated a month ago and nearly in line with the 1.5 percent rate in the second quarter. Businesses spending on equipment and software fell at an annual rate of 2.7 percent in the third quarter, the first decline since the depths of the recession in April-June 2009. The report showed continued strength in homebuilding, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate 3.5 percent, marking its first positive contribution to overall economic growth in two years. The increase was driven by a big jump in defense spending.

Consumer spending will be a big part of the fourth quarter GDP, and it looks like we are still consuming. The National Retail Federation reports the number of shoppers in stores and on websites rose 9% over the Black Friday weekend to 247 million. Spending per shopper rose 6% to $398 and total spending was up 13% to $59 billion. Retailers were very promotional as we have to come expect during the kickoff of the holiday season. Deals were offered earlier with many stores opening on Thanksgiving and seeing good traffic. Online retailers were at least matching in-store deals and offering many of their own promotions even before Cyber Monday. Black Friday and Cyber Monday promotions appear to be holding for at least an extra week; that's not great for margins but overall it looks like a pretty strong start to the shopping season.

If you've been doing most of your shopping online Microsoft has launched a holiday season offensive against Google, claiming that search results on its rival's shopping site are bought and paid for. Microsoft says: "Google’s new redesigned shopping vertical now decides what to show you -- and how prominently to display what product offers they show -- based partially on how much a merchant selling the product has paid Google.”

This refers to new rules that Google adopted for its shopping site. Google Shopping now charges merchants who participate in its Product Listing Ads program fees on a per-click or cost-per-acquisition basis. Google makes no bones about the program. They say their relationship with merchants results in accurate and timely pricing information. Microsoft begs to differ. Google's pay-to-play program means the results that potential shoppers get will be based more on what merchants are willing to pony up than on query relevancy.

The point here is that if you are shopping online, it might pay to comparison shop by using different search engines, at least that's what Microsoft wants us to believe.

Back to the GDP report. The report reveals a dichotomy between consumers and businesses. Consumers have gone from being cranky and tight-fisted to slightly positive and mildly optimistic. Businesses, meanwhile, appear to be hunkering down in like a gaggle of doomsday preppers.

The most recent Conference Board consumer sentiment survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan consumer sentiment index is up 30% from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984. Of course any measure of consumers' feelings is bound to be subjective. And consumers have been beaten like a drum over the past few years. The surge in morale might be nothing more than a pause in the beatings.

So while the surveys show the most positive results in years, it’s possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren’t actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.

On the flip side, business executives can't seem to get past this idea that uncertainty is the boogie man that lurking in the shadows. The big fear is the fiscal cliff, of course. And frankly it is disconcerting to see the captains of industry cowering like an abused dog. There is a real good chance that the CEO who is afraid of the fiscal cliff, doesn't have the stuff of a real entrepreneur. An entrepreneur will put a second mortgage on the house. An entrepreneur will max out the credit cards to keep the business afloat for another week, or another month. (truck full of canaries)

An entrepreneur sees a fiscal cliff and straps on the bungee cord. A CEO sees a fiscal cliff and breaks down in flop sweat.

From 2009 to 2012, the companies of the Standard & Poor’s 500-stock index generated double-digit profits and even healthier revenue gains. Yes, it looks like corporate profits are slowing slightly but corporate coffers are bulging; there seems to be a little resolution to the crisis in Europe, even if it is just kicking the can out a year or two; emerging markets may not be booming but Brazil, and India, and China are still rolling along.

So, who is right, the consumer or the business exec? Income levels tend to be a better predictor of what people will spend, along with the value of their homes and the ease of obtaining credit. Given that incomes are stable and slightly growing, homes values are on the rise and credit is easing, it’s a good bet that people will spend a bit more and the overall economic picture will brighten.

Business execs are lousy economic prognosticators. While spending by companies is a key component of economic vitality, spending plans are much more elastic than they were decades ago and can be adjusted more rapidly. That may not be true for building a manufacturing plant, but it is certainly true for hiring and marketing and inventory. So present concerns and stated intentions to cut back could change quickly to exuberance and plans to spend more freely.

A separate report today showed the number of Americans seeking unemployment benefits fell 23,000 to a seasonally adjusted 393,000 last week, the Labor Department said. It was the second straight drop after Hurricane Sandy had driven applications to 451,000 three weeks ago. Millions of Americans are unemployed and underemployed, but tens of millions more are gainfully employed,and although they might be feeling some anxiety about their job, most of the deepest corporate cost cutting has already been done. If you still have a job, it's probably because you're good at it, and the company you work for is about as lean as it can get. If it could be outsourced, it probably was. When people feel gainfully employed, they tend to spend and demand increases, businesses respond to demand, not to sentiment.

Expectations have undoubtedly come down in recent years, as people reconcile themselves to more modest changes and more realistic horizons. Business sentiment matters, but it is the consumer and the demands of the consumer that push the economy. The smart business execs will be on the lookout for indications of increased demand, and they will be well suited to go out on the far end of the curve and they should be ready to gamble just a little, ready to invest to meet demand. Americans have shown a remarkable and consistent predilection to spend over the years, with only a few notable pullbacks such as during the worst periods of the past few years.

Take it from someone who knows a lousy bet. You shouldn't bet against the American consumer.

Years ago, the late Mexican dictator Porfirio Diaz utter a famous line about his country: “Mexico, so far from God, so close to the United States.”

Next week the leaders of North America’s two most populous countries are due to meet for a neighborly chat in Washington, DC. According to The Economist The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise.

The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor Mr. Biden mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population).

Mexico's GDP ranks higher than South Korea. It's economy is growing faster than the Brazil's. Can you name the largest exporter of flat screen TV's? It's Mexico. And the place where you will likely see signs of the growing Mexican economy is in the shopping malls. In addition to TVs, they are the top exporter of BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México”.

The doorway for those imports is a 2,000-mile border, the world’s busiest. Yet some American politicians are doing their best to block it, out of fear of being swamped by immigrants. They could hardly be more wrong. Fewer Mexicans now move to the United States than come back south.

Undervaluing trade and overestimating immigration has led to bad policies. Since September 11th 2001, crossing the border has taken hours where it once took minutes, raising costs for Mexican manufacturers (and thus for American consumers). Daytrips have fallen by almost half. More crossing-points and fewer onerous checks would speed things up on the American side; pre-clearance of containers and passengers could be improved if Mexico were less touchy about having American officers on its soil (something which Canada does not mind). After an election in which 70% of Latinos voted for Mr Obama, even America’s “wetback”-bashing Republicans should now see the need for immigration-law reform.

Mexico is poised to become America’s new workshop. If the neighbors want to make the most of that, it is time for them to take another look over the border.

You know who Rupert Murdoch is? Owns Fox News. The same Rupert Murdoch who scandalized England with phone hacking, influence peddling and bribery. The same Rupert Murdoch who stays up late Saturday nights pondering things on Twitter, like what to do about "the Jewish-owned press".

Murdoch already owns the Wall Street Journal, the New York Post, Fox News Channel, Fox movie studios, 27 local TV stations, and much more. And there are reports that he really wants to buy the Los Angeles Times and the Chicago Tribune - the bankrupt-but-still-dominant newspapers (and websites) in the second- and third-largest media markets, where Murdoch already owns TV stations. Under current media ownership limits, he can't buy them. It's illegal ... unless the Federal Communications Commission changes the rules.

Just by pure coincidence, FCC Chairman Julius Genachowski has been circulating an order at the FCC to lift the longstanding ban on one company owning both daily newspapers and TV stations in any of the 20 largest media markets. And he wants to wrap up this massive giveaway just in time for the holidays.

If these changes go through, Murdoch could own the Los Angeles Times, two TV stations and up to eight radio stations in L.A. alone. And he's not the only potential beneficiary: These changes could mean more channels for Comcast-NBC, more deals for Disney and more stations for Sinclair Broadcasting.

For anyone who actually cares about media diversity and democracy, the gutting of media ownership limits will be a complete disaster. These rules are one of the last barriers to local media monopolies. Without them, we will lose competing voices for local news. We will see the mainstream media get even more monotone, monochrome and monotonous, and more than likely, even more inaccurate.

Genachowski's proposal is essentially indistinguishable from the failed policies that millions rallied against in 2003 and 2007. Ninety-nine percent of the public comments received by the FCC opposed lifting these rules when the Republicans tried to do it. Genachowski's proposal is nearly identical to the one the Senate voted to overturn with a bipartisan "resolution of disapproval" back in 2008. The federal courts have repeatedly - and as recently as 2011 - struck down these same rules, noting the FCC's failure to "consider the effect of its rules on minority and female ownership." The 3rd U.S. Circuit Court of Appeals ordered the FCC to study the impact of any rule changes before changing the rules. The FCC has done nothing of the kind.

Yet if Genachowski gets his way, according to reports, the FCC will vote on this major overhaul "on circulation" - that is, in secret and behind closed doors - with no public participation or accountability.