Some interesting observations by Kevin Depew, on Bottled Water, Philly Fed, Creative Accounting, Tightening Credit and Shoplifting, courtesy of Minyanville.
Kevin Depew’s Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Socionomics of Bottled Water
Forbes calls it "Bottlemania." BusinessWeek thrust the issue into it’s so-called "Debate Room,": "Bottled Water IS a Big Drain, Pro or Con?" New York City Mayor Michael Bloomberg intends to co-sponsor a resolution to prohibit city spending on bottled water. Meanwhile, Americans drank more than 30,000,000,000 bottles of single-serve water last year. What’s going on here? After all, the bottled water industry is, technically, 30 years old. Suddenly, bottled water is a ripoff? A waste? Or worse, dangerous? What changed?
One thing. Social mood.
Make no mistake, there is nothing wrong with tap water, and there never has been. As the BusinessWeek article points out, we pay up to 4,000 times more for bottled water than tap water, and more than three times what we pay for gasoline; all this for water that is far less regulated and which frequently tests worse than tap water in both taste and purity. Pepsi’s (PEP) Aquafina label bottled water is actually tap water. So is Coca-Cola’s (KO) Dasani bottled water.
So why do we suddenly care now? Simple, as social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye.
There is absolutely nothing wrong with bottled water other than its cost over tap water. For 30 years it’s been fine to pay for the convenience and fashionable appearance of water in a bottle. Now, however, it’s something to rail against as mood shifts. Social mood will seek to portray this as a war against waste and excessive cost, but it’s actually grounded in the psychological need to vilify the old signs of overconsumption in order to accept the reality of cutting back. The acceptance of that reality is easier if we are able to manufacture something "wrong" with that which is just beyond our economic reach.
So sit back with a tall glass of refreshing tap water and enjoy the rush to disassociate from yet another fading idol of the bull market.
2. Philly Fed: Don’t Mind Us, We’re Not Passing Through
Yesterday’s Philadelphia Fed Survey slipped by the majority of media outlets without a single commentary on the most important part of the report: pass through of higher input costs. Just about everyone noted the prices-paid index "surged to 69.3 in June, "the highest since 1980." But there wasn’t enough attention paid to the ability of firms to pass through those costs.
I mean, look, we already know firms have been facing dramatically higher input costs. What is important, however, is how much of those higher input costs get passed through to consumers. Incredibly, the index for prices received actually fell in June, from 31.6 to 29.7.
The special questions in the report are worth noting. "What impact are these recent cost increases having, or expected to have, on the prices of your finished products over the next
three months?" A little more than 65% expect price increases, with the average expected price change is 5.4%. Meanwhile, since the beginning of the year, the average reported price increase is just 3.8%.
And for those wondering about price increases related to delivery of raw materials, more than 70% reported not experiencing any shortages or delayed delivery of raw materials or intermediate products.
Finally, from the Producer Price Indexes released earlier this week we can build this chart showing the spread between crude goods prices and finished goods prices. This chart goes back to 1987 and we can see how stretched this spread has become. This is precisely how inflation sows the seeds for deflation. Margins will continue to be squeezed, and every day that goes by with food and energy prices elevated adds what is essentially a layer of leverage to the eventual unwind.
3. Banks Getting "More Creative" in Classifying Troubled Borrowers
The Wall Street Journal yesterday took a look at the changes banks are adopting to dress up their balance sheets.
From lengthening the time it takes to write off troubled mortgages, to dumping bad loans in subsidiaries that don’t count toward regulatory capital levels, banks are increasingly adopting (perfectly legal) maneuvers to spruce up their appearance. According to the Journal.
- Astoria Financial (AF) recently shifted its policy to count home loans as non-performing when borrowers miss three payments instead of two.
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Wells Fargo (WFC) used to write off home-equity loans when borrowers fell 120 days behind, but now wait until 180 days.
We’ve seen this movie before. "Getting creative" is the last thing you want to see from a financial institution. Meanwhile, the one surprise is that neither Fannie Mae (FNM) or Freddie Mac (FRE) were mentioned in the Journal piece. After all, didn’t they invent the game of reclassifying borrowers out of default?
4. Speaking of Main Street…
Recently we’ve written about how the real issue with the regional banks is not that they necessarily finish the year lower than where they are (the New York Times yesterday noted how far many of these banks have fallen in the past year) but that the perception of trouble hits harder than problems with Wall Street banks like Bear Stearns, Lehman Brothers (LEH) or Citigroup (C).
Another ongoing issue is the continuing tightening of credit for Main Street business and consumers. The Wall Street Journal yesterday had an interesting piece on the lengths to which credit card issuers such as American Express (AXP) are going to evaluate consumer credit risks. Bank of America (BAC) said it is raising FICO score thresholds and having human beings look at individual consumers.
This is an important story. The net result is a continuing tightening of credit for Main Street.
5. Shoplifters of the World Unite
According to USA Today, "shoplifting seems to be rising at many retail chains, and experts are pointing at a prime cause: the sputtering economy." Of 116 retailers surveyed recently about shoplifting by the National Retail Federation, 74% said they believed that shoplifting incidents last year had risen from 2006.
Looking at more localized reporting, the Knoxville News Sentinel reports that shoplifting arrests in Knoxville have skyrocketed from a little more than 300 in 2001 to 1,900 in 2007. This is despite policies from retailers such as Wal-Mart (WMT) which reportedly let shoplifters cart out $25 or less in merchandise without facing prosecution.
