Banking: What you should be buying when consumers are dying
By Adam Lass
In this article
Kansas City Fed Bank President is hoping that last quarter was as bad as the economy will get.
Food costs are currently growing at triple 2006's rate.
This is causing a sector rotation out of consumer stocks and into Tech stocks.
Banking: What you should be buying when consumers are dying
Kansas City Fed honcho Thomas Hoenig figures that this is about as bad as things are going to get, economically speaking. A voting member of the FOMC, Hoenig sees the Fed's “modestly firm” fiscal policy driving GDP gradually from the current 1.3% growth all the way up over 2% by the end of 2007.
“Although we have seen some slowdown in the numbers here recently, but basically over the last year the consumer remains a strong part of driving demand in the economy, exports is another positive sector as the pace of global growth improves and the weakening dollar has made U.S. products more competitive.”
Wow, there are so many ways to go at that. Let's start with a reminder exactly what they are saying when they bandy about numbers like that. First of all they always annualize numbers that would be scary small otherwise. It's sort of as if I took a single, three-day stock of, say 10%, and expressed it as a 1,216% winner.
Bankin: Growth is somewhere between slow and scary
Why “scary?” We are talking about an economy that grew a tenth of a percent in March, give or take a certain margin of error. In point of fact, that growth is smaller than most studies' margin of error. So for all we know, we are actually moving backwards.
But Mr. Hoenig notes that by December, we will be racking up scintillating scores of perhaps even 0.17% monthly growth. Annualize that number to 2.1% and say it quick enough, maybe no one will notice the difference between that and true growth of maybe 1.5%.
But this is the worst sort of hair shaving. Why argue about his cooked numbers when his very premise is most likely wrong. Hoenig has his fingers crossed that American consumers will pull us through one more time. Unfortunately, those consumers are just a little distracted right now from the task that Koenig has set before them.
Banking: Energy prices are growing eight times faster than in 2006
Today the Labor Department announced that consumer prices rose another 0.4% in April. Let's play Mr. Koenig's game and annualize that so that we can compare apples to apples. Now we are looking at retail prices climbing at 4.8% per year for the first quarter of 2007, roughly double 2006's final figure of 2.5%.
Keep in mind that this ganged figure includes the drop in house prices (good news only to neophytes just entering the market for the first time) and highly discounted auto prices (again, only good if you can afford to buy right now). Where it truly matters to most Americans, prices are through the roof: Energy prices are spiking at 25.3% per annum, compared to 2.9% for all of 2006. And now food costs are jumping on board too, rising at 6.7% per year, roughly three times 2006's growth.
And paychecks are not keeping pace: In fact, they fell 0.5% between April and March. Looking over the longer run, adjusted wages grew some 0.9% since April 2006. It appears that the Fed has pinned its hopes on an engine that is rapidly running out of coal.
Banking: Still time to switch tracks before the train hits
This is the set up for a massive sector rotation. In recent weeks in WOW, Bryan and I have asked readers to move away from materials and into energy. In fact, just this week, we dug up the last energy play on the big board that is not priced beyond sanity, a call option that costs only $135 and will expose WOW readers to the entire summer gas spike.
We are, of course, short consumer spending. And now we are asking readers to seek out gains in the tech sector (traditionally slow to suffer from high energy costs) in the form of calls on Cisco (CSCO:NASDAQ), Hewlett Packard (HPQ:NASDAQ) and Qualcomm (QCOM:NASDAQ) to the tune of aggregate max gains of 113% over the course of some six weeks.
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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