Greetings-
Hey I blew it yesterday by using GS’s PE ratio for its dividend yield. Dividend yield is 1% and the portfolio yield would be 5.3%. Thanks Rick for pointing that out.
Looking at the margin…Consumption of goods…
If ties make the man, then I am a woman. I own one Hermes tie. It was a re-gift from my son-in-law and it looks great with a burgundy shirt. But, the thought of forking out $200 for one…I would rather where a neon green biking and walk down the beach singing loudly “I’m too sexy for my love, too sexy for my love….” Below you see the $20 ties vs. the $200 ties.
Hey, I like stripes.
Saks and Family Dollar Stores
In early May, Saks was up 58% on the year and Family Dollar Stores was up 40%. Last week: SKS and FDO were each up 39%. On the way to Fifth Avenue…as of the close yesterday, FDO is up 34% ytd and SKS is only up 23%. This is my read on US consumption. It was fun while it lasted. But, the money looks to be heading for the piggy bank.
Abroad…cruising for a bruising … is Hermes International (RMS) and Etam. Hermes makes “priceless” works of art with which to adorn yourself. They are still up 16% ytd after a blistering 70% rally from 65 to 111 over the last year+. They trade at 39+ times earnings and >6 times book. They also collect receipts in EUROS, in Paris, regularly fleecing Chinese and Arab customers. May the Almighty have mercy on their souls, I think the market might not.
Etam, also Paris based…may die of oxygen deprivation. It rallied from 6ish to 32ish and still has only revovered 39% of its fall from 74 to 6. They operate high end retail with 1163 outlets in Europe, in such countries as France, Belgium, Spain, Italy, Poland and others, and 2,671 shops in China. Not all of the P.I.G.S. but Poland Italy and Spain is close. Why am I talking about consumer stocks. Well, they were beaten soundly from 2008 to 2009 but since have rocketed…then not so much since last month.
And now about deflationary potential…
Deflation occurs when there is a prolonged decrease in the availability of money. There have been three significant deflationary periods in US history each marked by a different initiating sequence and each unique in its respective monetary phenomena. The reason to investigate this is to address oddities in the past and line them up with what is going on in the global economy recently. Or because I am dying to know so you will have to put up with it.
Deflation occurs when there is a prolonged decrease in the availability of money. There have been three significant deflation periods in US history each marked by a different initiating sequence and each unique in its respective monetary phenomena. The reason to investigate is to address similarities in the global economy and why TIPS might be a horrible investment for the Chinese and you…
In 1836, money supply fell 30%
From 1875-1896 prices fell 30%
During the Great Depression years of 1930–1933 prices dropped approximately 10 percent/year.
Best I can tell you need some stars to line up to pull off a prolonged deflationary debacle like Japan is dealing with and has been on and off since 1991. Recall the Nikkei Index traded at 39000 in 1989 and it trades at 9,439 now.
Classical belief in economics would have lead one to believe that if you flooded the market with money, you could inflate the world economy. Trillionslater, and the major economies of the world are not growing much.
Intentionally or accidentally you need the following:
1. Strong Currency to reduce export demand-Got it in the US
2. High levels of debt-Got it, everywhere.
3. Oversupply –Got it, everywhere.
4. Inflated prices (bubble)- Had it everywhere, now just Asia
5. An initiating sequence of:
a. Higher interest rates-beginning to
b. AND OR a sudden cut in spending, Europe
c. AND OR a sudden contraction of credit availability, banks are not loaning money.
Results:
1. Decrease in the average frequency with which a unit of currency is spent over a period of time-“velocity of money”. Yes, in G-10 countries.
2. Hoarding cash-increased savings, For sure now..
3. Aggregate demand falls as consumers await lower prices, Yes indeed.
4. Decreases in prices lead to lower production, yep in every industry.
5. Lower production leads to less need for workers, yep in every industry.
6. Lower employment leads to less consumption, yep across the board.
7. Less consumption leads to lower aggregate demand, again widespread globally.
8. Aggegate demand falls as consumers await lower prices…
9. Senile folks become fashion icons:
a. Everyone begins to wear the same clothing for years on end
b. People shop only with free coupons buying only what is necessary
c. Significant purchases are made only at firesale/distressed prices, usually from family
d. Never eat out/never go out/never spend anything.
e. Stupid to own a car, if so, seldom drive it. If it dies, take off the plates, scratch off the ID #’s, begin to walk and mooch rides.Hitchhiking becomes fashionable.
f. Shower only when children complain loudly about the smell. Never bathe (to save on water).
g. Never go to the doctor or the dentist. You must be sent and then only if you are not breathing or can no longer speak
The US Government has been hiding/changing and manipulating the CPI inflation calcs to keep Cost of Living Adjustments down (to lower Social Security payments) since the mid nineties. The question is, are prices going up or down overall?
Deflation overall, I honestly don’t know. My gut says it is already here and it is rolling from place to place. 2009 the CPI had several lower months…that is deflation. If you are a homeowner or a stock owner, it probably fees like we’ve been there for a while whether some bureaucrat labels it so or not. My biggest concern is the hide the weenie game going on globally with the banks. The European banks have about 350% more that the US banks in debt that needs to be re-financed by the end of the year. And, nobody and I mean nobody, is buying EURO denominated debt until we know what the fat a EURO is or is not of if it is around. Spain looks rough at 20% unemployment and starting to cut the budget now, Hungary was a surprise. The Fed is now a net seller of MBS’s (Mortgage Backed Securities) as well. The cycle will not be broken in the near term. How far it slides will determine if we get global deflation or prolonged deflation in the first world countries.
The UK is cutting spending 20%. Voters are sick of banks and government. Companies have done about all the “shrinking their way to great earnings” that they can do and the are not cheap overall. What will cause an increase in final demand? Not higher taxes, not austerity programs and not higher government competition for money. My concern is that the governments collectively now demand money more than the private sector. Fire them all. And do not believe for a minute that you are safe in bond funds. The race to finance and re-finance this mess is going to eat up available credit for years to come. Banks have not come clean. Prices have not been marked. The banks are broke and that sucking noise you here is them wasting your money that you gave them for 1% for a 1 year CD. Buy a safe and fill it up with currency… countries with responsible fiscal policies New Zealand and Canadapreferred.
Reprinted from an article I wrote early last year…
I am reminded of a cattleman I heard of that was operating in the early 1930’s. His last name was George Keiffer. George by all accounts was a very sharp operator. He saw the signs and thought that economic trouble was coming. He decided enough was enough and he called all his ranch hands together and drove all of his cattle to the rail yard, boarded the train with them and headed off to Omaha where the cattle were auctioned to the highest bidder. On a beautiful afternoon, George with his check from the sale in his pocket, after a lovely return train ride home, headed back toward his ranch stopping on the way to deposit his check into his bank. Had George cashed his check in Omaha and put his money in a safe when he got home, he could have bought a good percentage of his County over the next 10 years. As it happened, the bank never re-opened, George eventually let all his hands go, sold his land for pennies on the dollar and he moved in with his good friend (and my great grandfather) Leon Tompkins… where he lived and was employed until his death in the 60’s. George never was unemployed.
I think I am going to look pretty snazzy in my same shoes and suits next year. Kids look so cute with those nose plugs. Have to buy high cash flow businesses at discounts. BP stopped out at 36 on a gap down. CHL acted okay the rest act like dogs. Guard the fort, don’t let ‘em get your money…
Happy trading…what is that smell?
Leon
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