OnPrincipleBlog

I will continue to pull back the curtain to reveal the public media pieces I was tracking in March and April which led me to decisively take a stand against the near monolithic message of the pending, deep, dark and deadly national economic recession. That’s why I title this series of posts the “Economic Contrarian”; they run contrary to the media narrative which has cemented conventional wisdom in a decidedly negative direction.

Due to the myriad of headline links included in this Post, I will only provide commentary here in the Summary. What will follow below is a list of the headlines (with links to the original articles) I was following which demonstrated the economy’s strength via the consumer spending sector. Retail spending is traditionally considered an excellent barometer of economic health as it is measure of both:

• The ABILITY of consumers to spend money (which addresses jobs, income, savings, home equity, available credit, credit ratings, etc) and
• The WILLINGNESS of them to do so (which captures the consumer’s confidence to tap credit, savings, etc verse uncertainty in the ability to repay in the future due to concerns over inflation, job security, interest rates, etc).

Thus, when retail spending is expanding across the board, it is a good measure that the economy is NOT in recession. As you will see below, my reading of the popular media was showing that an expansion of retail spending is exactly what we were experiencing in the First Quarter of 2008. What follows below is a summary of the types of retail spending I was following.

Past Posts on This Topic:

The Economic Contrarian

Economic Contrarian – Trade Deficit

Economic Contrarian – Personal Incomes

Economic Contrarian – Sometimes You Win

Economic Contrarian – Banking Rebound

Economic Contrarian – Industry Leaders & Profits

Summary:

Consumer Retail Spending

Consumer retail spending addresses the regular spending in which consumers engage. These purchases are generally referenced as being “necessities”. In recessions (especially sever recessions), however, incomes become constrained due to job losses, spent savings, loss of home equity and “maxed out” credit cards. Thus, finding steady or growing consumer spending is not a sign in an exploding economy, but it certainly nullifies the warning that a recession is skimming all robustness out of the economy.

Examples Include:

Walmart, McDonalds, General Mills (cereals), 3M (products like Post-It Notes), Walgreens, Ebay (it must say something when we place Ebay in the “necessary/consumer” category! – Oh, how dire things are!)

Discretionary Retail Spending

Discretionary spending is an excellent measure of consumer sentiment – the willingness for consumers to part with their cash. While consumer spending may be incorrectly labeled as being “necessary”, discretionary spending is not. Consumers generally purchase discretionary items when they feel confident in the security of their savings and/or the continuation and sufficiency of their income. Growth in discretionary spending is a tremendous indication that consumers feel secure in the economy (at least for themselves). It also indicates a continued ripple of healthy economic activity as most discretionary items are carry higher price tags and involved larger supply chains (like automobiles). When purchased, they are funding larger segments of the economy than when someone purchases box of cereal.

Examples Include:

Ford (Automobiles – purchases which could certainly be delayed a year or two), Williams-Sonoma (up-scale home goods), Aetna (health care services can be decreased through lower coverage or higher deductibles), Intel (new computer models are not exactly a requirement in a recession).

International Retailers

Another interesting element of our economy which the media seems to miss and which the Democratic party loves to hate is the International strength of American companies. International sales infuse our economy with cash, funding salaries, driving domestic consumer spending and further strengthening our economy.

Examples Include:

Coca Cola (drinks sold in darkest, most primitive areas on Earth – and beyond), Boeing and Lockheed Martin (aerospace and high-tech sales to foreign governments), Caterpillar (construction equipment)

Entertainment Spending

Entertainment spending could be considered a sub-category of Discretionary spending. I separate it here as this category is an even more stunning example of consumers feeling comfortable parting with their money. Where Discretionary spending may include the purchase of cell phones (no, they aren’t “necessities”), Entertainment spending would include the upgrade to high-end cell phones and data plans. Where Discretionary spending may include DVD players from Best Buy, Entertainment spending would include movie tickets and rental clubs like (Netflex, etc).

Examples Include:

RIM (Blackberry data service is NOT a necessity – especially as the subscriber base expands), Viacom (video games), Disney (Theme parks.

The detailed list of headlines with links to the original articles follows here:

Consumer Retail Spending

J&J profits beat estimates

April 15, 2008 03:27 PM ET

Discretionary Retail Spending

Intel posts in-line results, stock climbs

April 15, 2008 04:32 PM ET

International Retailers

Cisco reports higher revenue despite economy worries

May 06, 2008 04:21 PM ET

Entertainment Spending

Cellphone market Q1 growth fastest since 2006

April 25, 2008 10:42 AM ET

RIM reports strong profit and rosy outlook

April 02, 2008 04:32 PM ET

Viacom profit rises on “Rock Band”, MTV Networks

May 02, 2008 07:45 AM ET

Verizon profit rises on subscriber growth

April 28, 2008 08:00 AM ET

AT&T profit rises on wireless sales

April 22, 2008 08:15 AM ET

Hasbro’s profit tops expectations as sales soar

April 21, 2008 07:38 AM ET

Disney results beat Wall Street, shares rise 3 pct

May 06, 2008 04:37 PM ET

DirecTV posts higher profit

May 07, 2008 07:10 AM ET

News Corp profit rises on cable, TV ratings

May 07, 2008 04:05 PM ET

Requisite footnote on the “Econ Contrarian” series:

As with so many other complex issues in this modern world, I don’t claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I’ll stand in the gap and shine a small, small light to illuminate a few contradictory indicators – indicators which make the more balanced point that while certain segments of the economy will certainly retract a bit after years of unprecedented growth, this doesn’t exactly mean the expansion of the new era of Mordor.

On Principle,

CBass

Continuing my explanation of why I take a somewhat contrarian view of the media’s push for recession, this post will explore March and April articles I was “clipping” on the topics of Industry Leaders and Corporate Profits.

Summary:

Industry Leaders:

Economics is a game of increasing returns. Under this theory, those who take a market lead tend to expand that lead. This happens due to the proclivity of consumers around the world to purchase products, frequent stores and invest money in ways similar to everyone else around them. Thus, to cut through the complexity of global economics, leaders in each industry are often the early indicators of what will follow among their lesser known competition.

Corporate Profits:

In many of these news clippings, mention is made of the horrendous decline in profits for some companies. Yes, it is true. When profits start to fall, especially for industry leaders, it is an excellent bell weather of turbulent seas ahead. However, that should not negate a very basic underlying principle: profits are good. When business make profits,

Industry Leaders:

Accenture profit gains, raises outlook; shares up

Accenture, one of the “The Big 4” consulting firms, brings in revenue from offering consulting and “outsourcing” services. By making huge profits and raising its outlook, Accenture is sending 2 signals to the market place. First, a consultancy makes record profits when its customers have the liquid cash to pay exorbitant prices, on large contracts, over lengthy time periods. Thus, Accenture could not grow revenues if companies didn’t at least have a little free cash floating around – something which would not exist in “the worse economy since the Great Depression.” Second, some of this cash is probably coming from companies facing tough times and wanting to get leaner (thus the “outsourcing” component of Accenture’s profits). Getting leaner is synonymous with raising “productivity” – the exact measure Greenspan used throughout his tenure to explain our robust and expanding economy.

IBM profit rises on services, software strength

Thus showing that Accenture was not an “outlier”. IBM, another company requiring on the “free” spending of corporate America for services, is marking expanding revenues. Corporate America considers 2008 Q1 to be a time for productivity improvements to be ready for the next economic sprint.

Interpretation: Yes, the economy is rocky. Yes, companies see some lean months ahead. But industry leaders indicate that this economy is retooling for even more growth in the near term.

Barnes Group Q1 results top Street

Barnes Group is a major manufacturer of aerospace and industrial components. While I wouldn’t call them a “leader” in this industry in terms of size, their revenues are tied to the purchasing needs of such leaders. The article states that not only did the company do well in Q1, they raised their forecast for the remainder of 2008, based upon extremely strong demand in aerospace. Aerospace is a sector which requires massive infusion of investment over long time horizons. It doesn’t expand when companies predict a coming Depression. Investment in large, expensive items with long manufacturing terms is an excellent test case for the economic outlook from top board rooms.

Corporate Profits:

Alcoa first-quarter profit falls more than 50 pct

This leader in commodity mining is still profitable. Apparently the manufacturing sector isn’t completely trashed. Hurting? Yes. Limping a bit? Yes. But the worse period since 24% unemployment and soup lines? Not exactly.

Goldman, Lehman profits beat forecasts, shares rise

Read the article: Profits fell, but the company is STILL PROFITABLE. Despite stock market declines. Despite global panic from our mortgage market meltdown. The leading financial firms are still profitable.

Requisite footnote on the “Econ Contrarian” series:

As with so many other complex issues in this modern world, I don’t claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I’ll stand in the gap and shine a small, small light to illuminate a few contradictory indicators – indicators which make the more balanced point that while certain segments of the economy will certainly retract a bit after years of unprecedented growth, this doesn’t exactly mean the expansion of the new era of Mordor.

On Principle,

CBass

As I promised at the close of last week, I am here kicking off a series of posts outlining the data I was tracking in March and April which under girded my being pretty comfortable staking out a contrarian position on the economy – one which called out for reason when so many indicators (see below) were pointing that things weren’t (and aren’t) as bad as the press breathlessly reported.

The data making it through the filters of major media back in March was already indicating that the “crisis” in the banking and finance sector, stemming from the meltdown in mortgage markets, was beginning to abate:

Fannie, Freddie may raise $20 billion: report

Fannie and Freddie, public/private institutions underwrite a huge segment of the US Mortgage market. Their ability to remain solvent and continue to underwrite loans has a major effect upon the mortgage market. Without these two institutions, mortgage prices would likely rise beyond reach for most homebuyers – crippling our economy. As this headline reports, it was known in March that banks and institutional investors predicted Fannie and Freddie to be a wise enough risk as to place $Billions of speculative investments in these two institutions – during the midst of what so many forecasters were calling a global crisis, the worst banking situation since the 1930’s and a full-fledged recession. Maybe these investors saw something else – something like a predictable business cycle. . . ???

Existing home sales post surprise rise

Then of course, media was reporting on the RISE in home sales in February – right in the heart of the supposed recession. This data also emerged in late March. I always greet this sort of data with caution as the real estate market is very susceptible to monthly fluctuations in sales between new and existing homes, mortgage rates, the general economy, local market trends, rental rates, etc. Yet, if the entire economy was caught in the downward pull of the proverbial toilet, one wouldn’t expect to find positive trends in home sales of any sort.

Morgan Stanley earnings fall, but beat Street view

This is a huge point to which I kept returning when reviewing economic news these past couple of months: earnings and profits may be less than in the past (which is why I have acknowledged the pain of the current economy) but if companies are still making positive $’s, they are still making positive $’s. Making $ is a good thing. As long as major companies are still making $, the economy is not coming apart at the seams.

Citi says Lehman has ample liquidity

The mortgage markets are undergirded by huge banks which use these vehicles to diversify their giant pools of investment. When the banks are perceived to lack the ability to weather mortgage bankruptcies, the entire mortgage loses confidence and lenders raise the bars against the very first time home buyers and investors who were spurring growth. When the investment firms are determined to have liquidity, it is a sure sign that lenders will soon start to loosen the reins on new mortgages.

When positive liquidity is being found across the banking sector, it is a definite indication that things aren’t as dire as the reports might otherwise indicate: Bank results soothe investors. Remember, it was the supposed rotting of the entire mortgage market that was supposed to be tanking the economy in the first Quarter.

Yet, any look at the banking sector by March would have provided the insight that a recession was not likely, a down turn was certain and a rebound probably coming sooner than being widely touted.

On Principle,

CBass

I’ve had several folks remark that they thought I was out on a long, slender branch of a young sapling delicately clinging to the side of a steep cliff by striking a Contrarian course on my interpretation of the economy.

In fact, those proven to be possessed of far greater economic insight than I fully tossed their weight into the column of predicting recessions (Buffett, Buffett again and seemingly even more wrong, even eternal optimist Larry Kudlow)

Yet, surprise of all surprises, it looks like I was correct to wave a small flag of reason above the crowds of panicked analysts. Feast upon these headlines:

First-quarter growth stronger than forecast

By definition, a Recession is two (2) consecutive quarters of negative growth (shrinking) GDP. Thus, by definition, when the US economy GREW in the first quarter, we are NOT in a recession.

An economic contraction? Yes.

A tough patch? Yes.

A painful period for investors? Yes.

A time of economic realignment? Yes.

March retail sales unexpectedly rise 0.2 percent

A good hint that an economy is NOT in recession is when retail sales are expanding – no matter how slowly. Thus, when you see headlines of retail sales growth, you can discount any voices of recession. Again, note the appropriate gloom I outline above. The economy is NOT perfect. The economic environment is not a free money machine for everyone. But there is not some sort of massive mess-up.

Just to prove this point, notice that those retail sales continued to expand, yes expand (grow) in April: April retail sales barely budged: SpendingPulse

The reality is that I started accumulating a trove of positive economic indicators in March and April. Based upon my simple, daily clipping of headlines, I knew the weeping and gnashing of recession to be a bit overwrought. In following posts, I’ll provide a few of the snippets of the data I’ve been tracking.

So, breathe a sigh of relief, hug your family and get out into the economy and spend some money! J

Requisite footnote on the “Econ Contrarian” series:

As with so many other complex issues in this modern world, I don’t claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I’ll stand in the gap and shine a small, small light to illuminate a few contradictory indicators – indicators which make the more balanced point that while certain segments of the economy will certainly retract a bit after years of unprecedented growth, this doesn’t exactly mean the expansion of the new era of Mordor.

On Principle,

CBass

Personal Incomes, What? Rise? But We’re In A Recession!

Personal income up more than expected

March 28, 2008 08:34 AM ET

Personal income rises, inflation moderates

The Commerce Department reported that February personal income rose 0.5 percent, exceeding a forecast of a 0.3 percent gain made by analysts polled before the report.

“The decline in the year-over-year core PCE is important in that it supports the notion the Fed is making the right decision in cutting rates aggressively and not threaten long-term price stability. It argues that the Fed can lower rates in the months ahead,” said Zach Pandl, an economist with Lehman Brothers in New York.

Even Fewer People Are Looking For Jobs?

Jobless claims fell 9,000 last week

March 27, 2008 08:38 AM ET

Requisite footnote on the “Econ Contrarian” series:

As with so many other complex issues in this modern world, I don’t claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I’ll stand in the gap and shine a small, small light to illuminate a few contradictory indicators – indicators which make the more balanced point that while certain segments of the economy will certainly retract a bit after years of unprecedented growth, this doesn’t exactly mean the expansion of the new era of Mordor.

On Principle,

CBass

Another installment of posts which stand against the obvious torrent of negative news about the economy.

It seems the US Trade Deficit dropped by 9% in 2007. In my world of consulting, companies pay HUGE bucks to improve their efficiency by 10%. (Note: if you work for one of these large companies and write those large checks, please see my business at www.successant.com).

http://www.forbes.com/feeds/ap/2008/03/17/ap4780608.html

On Principle,

CBass

There is much economic doom and gloom being broadcast and re-broadcast and re-broadcast and re-broadcast and. . . (you get the point).

It seems that every day brings new “wisdom” about how the US Economy is on the crux of a major collapse, how prices are rising faster than 80’s-90’s Argentina, how consumers must stop buying anything but absolute necessities – like milk and bread (oh, sorry, milk is too expensive now – so just buy bread) and how we are all going to lose any and all value from our homes – the quintessential cornerstone of the quixotic American dream.

Run for the hills, chicken little, the global financial sky is about to crumble upon our miserable, poor, recession sickened heads.

Look, as with so many other complex issues in this modern world, I don’t claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I’ll stand in the gap and shine a small, small light upon the few contradictory indicators that while certain segments of the economy will certainly retract a bit after unprecedented growth, but this doesn’t exactly spell the new era of Mordor.

Looks like not ALL jobs are evaporating. . .

U.S. jobless claims tumble 24,000 last week

Does this sound like Stagflation?

Wal-Mart February same-store sales up 2.6 pct

On Principle,

CBass