Friday, December 21, 2007

Hurry Nurse, the Patient Needs a Cash Infusion!

I am a steak lover. There is nothing like a great steak period. My favorite is the Ruth's Chris Steakhouse. I have gone to the one in Maui, and many times to the one in Boston. Nothing compares. I will spend over $180 on dinner for two and feel like I robbed them! Last night I went to the Longhorn Steakhouse. I had the prime rib, and it was fantastic. Longhorns is several levels up from the meat you will get at places like Applebee's and Pizzeria Uno. The serving size is immense, and the price was very low for such quality. $60 for a great dinner for two people is a good deal. Longhorns gets the Economic Disconnect recommendation. If you know a steak lover and there is a Longhorn restaurant near you, a gift card is a great idea.

Consumer Continues to Surprise and Spit in the Face of Common Sense
In a previous post I had questioned whether or not there possibly can be a consumer spending recession. I argue that no matter what economic situation occurs, consumers will tap any credit line they can and keep spending. They simply do not know how to do anything else. Today we see it happen again:
AP
Consumer Spending Surges in November
Friday December 21, 5:20 pm ET By Martin Crutsinger, AP Economics Writer
Consumer Spending Surges in November, Reducing Fears of Imminent Recession.
WASHINGTON (AP) -- Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years. The better-than-expected surge lessened fears of an imminent recession.
The Commerce Department reported Friday that consumer spending shot up 1.1 percent last month, nearly triple the October gain. It was the biggest one-month jump since a 1.2 percent rise in May 2004 and was significantly higher than the 0.7 percent gain analysts had expected.
Incomes were also up last month, but the 0.4 percent increase was far below the rise in spending. Consequently, the personal savings rate dipped back into negative territory as households spent savings and borrowed to finance November purchases.

Analysts attributed part of the spending to heavy discounting and longer store hours at the start of the holiday season by retailers worried that the all-important Christmas shopping period may not be as strong this year given the factors weighing on the economy.
Still, the strong November relieved some concerns that a recession might be looming.
"Consumers did their part in November, but we will see whether they are up to it for the full Christmas season and into next year," said Mark Zandi, chief economist at Moody's Economy.com. "Their financial fire power is fading due to the weaker job market, surging gasoline and food prices which cut into their purchasing power and the evaporating housing market."

Another article that captures the sickness that is the US consumer very well. House prices cratering? Gasoline prices high? Food cost more? Heating oil through the roof? Whuppity Doo. The consumer is far too sophisticated to allow such things to alter their spending habits.

I believe there has not been a drop off in spending because for the most part, people do not actually pay for anything they are buying. What do I mean? Glad you asked. In the past things like gas, heating oil, food, and most other things were paid for in cash. When prices went up, you scaled back purchases. Now all items are paid for by credit card. As long as the monthly bill bomb is not too big, most folks have no idea the kind of debt they are collecting. This is a key point. A big payoff of the debt has been through home price equity extraction. That game should be over now. All that's left as a capital reserve may be 401k plans. How far can that go? My guess is about mid year 2008.

I absolutely love the line from Mak Zandi:
"Consumers did their part in November, but we will see whether they are up to it for the full Christmas season and into next year"
That is how the mindless spending masses are viewed on wall street folks. The consumer must do their part and buy tons of crap they don't need to keep America and Wall Street strong. Common sense tells us that spending should be going down. Reality tells us we are stupid. History will judge who is right over the long haul.

Hurry Nurse, the Patient Needs a Cash Infusion!
I was home today and watched some CNBC. The commentators were giddy about all the cash infusions from all over the world for the US banks. It was pure comedy as usual. Today's big news was the Merrill Lynch cash prize win from Singapore. In the past month here are some of the "investments" from helpful foreign countries:
  • Citigroup - Abu Dhabi in for 7.5 Billion
  • UBS AG - Government of Singapore Investment Corp. invested $9.75 billion
  • Merrill - 5 Billion more from Singapore
  • Morgan Stanley - China Investment Corp. paid $5 billion

As fast as the banks can lose it, other countries replace it! This is the coolest thing ever! If I was a bank like Bank of America I would lose something like 100 Billion and then see how much I could get for that. I would think Russia or China would be good for at least 80-90 Billion.

Seriously, these events cannot be viewed as positive. When a person loses over 20% of their blood volume, they require a blood transfusion. The term infusion also applies. The key point here is that bleeding must be stopped for a blood infusion to have any effect. If the source of the bleeding is not stopped, the new blood is lost as well. Eventually the bloodbank runs out of blood and the patient dies. Either the investment bankers in those countries know the bleeding has been stopped, or something else is pushing them to flush money down the toilet.

It seems to me that foreign investors are pretty quick to jump in here. With the paltry 20 billion dollar auctions being done by the FED (compare with the 500 Billion the ECB dumped) one cannot but help thinking there is something going on here. It would not shock me to learn in the next week, year, or 5 years from now in Bernanke's new book that the foreign capital flooding the markets is in fact guaranteed by the US Federal Reserve. It both fits and makes sense. maybe I am just a conspiracy nut, but I cannot help but think there may be something to this idea. The FED can sidestep the calls of "moral hazard" and "bailing out lenders" by using the foreign countries as money fronts. We shall see. The new poll asks this question, so please vote!

Super SIV Plan Now Dead; Who Needs it Anyway?

Word came today that the Super SIV fund that was backed by the treasury and several large banks will not get off the ground. In light of the vast oceans of cash that banks have access to through the FED and through foreign countries this makes sense. There is no reason to disclose a banks holding to other banks and possibly the FED now that any collateral can be used at the FED discount window and cash is rolling in from overseas. The banks will be able to delay price discovery for some time if they are able to keep up cash infusions. All the bank deals announced lately and now the death of the Superfund are not independant of each other. It all fits together. It also makes me sick.

Friday night rock blogging time!

I will say it one more time, when I include music here I make no statement about any beliefs a band may have nor commentary on their behavior. I just love rocking tunes!

Rage Against the Machine with their cover of "the Ghost of Tom Joad". There are few bands that can ever match the sheer energy of Rage in a live show, I have seen them twice and they were really something!

A band I really like is Radiohead. "Karma Police" is one of my favorites:

Two tunes from Iron Maiden. First is "Hallowed be thy Name". Lead singer Bruce Dickinson simply has no match when it comes to heavy metal vocals. Both the beginning and end showcase his rare talents:

Not convinced? Check Bruce's solo album song "Tears of the Dragon" for more great vocals:

Have a good night.

7 comments:

Anonymous said...

"Do you think the convenient cash infusions from the world over are fronts used by the FED to bail out banks?"

No I think they are because the FED is going to bailout the banks. Plus the foreign SWF are making 9% on their equity options as in the case of shitty and will become the asking rate which is a hell of a lot better then the return they are getting buying treasuries.

"In the past things like gas, heating oil, food, and most other things were paid for in cash."

They still are paid for in cash my place and while I note that you hammer on consumer spending there is no way in hell I would lay down 180 bucks for dinner for 2. I will add though that my mother-in law has been a restaurant cook for 25+ years and owned her own for several years. My wife learned all of her secrets and can whip up a great prime rib. I do have one thing that bugs me out here in Nebraska, the meat is some of the best I have ever eaten compared to CA but you can't buy a prime rib with the bones still attached, you also can't buy Tri-tips which are great for summer BBQ's. I'm tight as bark on a tree and 180 bucks would be adding 12oz. to my pile of silver, or buying about 5-8 day-old calves for the farm. If one of those calves make it it would stock me in beef for a year.

I didn't always use to be this way but now that I'm older and also retired it is one of those things I think back on of all the money I just blew in my youth and say to myself you could have retired at 40 if you hadn't been so stupid. I did manage to retire at 53 but 40 would have been much nicer.

Kevin

getyourselfconnected said...

Kevin,
good points as usual. As far as my hammering the consumer then spending almost $200 on dinner, it's because I can. I have been very good about money and investing. I live well within my means. I also recognized the last bubble (tech and biotech in 2000) and cashed out a bundle. Spending is not wasteful if it is for things you truly want/need. A Ruth's Chris dinner is more important to me than a plasma TV! I still have the last generation tube projection TV as I do not watch it much except for sports. Thanks for coming by!

Anonymous said...

Getyourselfconnected

There was no doubt in my mind as to whether or not you could afford it or your financial standing. I could easily afford it also if that was what really pulled my chain. The question is in my mind what percentage of the population is in our shoes?
When I was in CA I lived close to Harris Ranch restaurant where people all over the world would fly into the restaurant which has it's own airport just to have dinner. I had much better steaks at a local Perkoes then I ever ate a Harris Ranch for a fraction of the cost.
http://harrisranch.com/calendar.php

I worked at Harris feedlot when I was in collage during the summer, tax subsides made him one of the largest land owners and farmers in CA and one of the wealthiest.

I don't own a TV as I find it just part of the bread and circuses of our modern day empire, an empire I might add that I see as suffering the same fate as all empires and we are in the late stage of our reign.

Kevin

Anonymous said...

the rich and poor that are his best customers, the middle class would rather just pay retail.

http://www.youtube.com/watch?v=m-TLfmLTiqA&eurl=http://www.itulip.com/

Saw this over on CR I think it is very accurate as to what is going on in some respects CEO is pretty bearish for an on-line discounter.

Kevin

getyourselfconnected said...

My wife is always on Overstock.com. I cannot imagine she all by herslf will not keep that online sale site permantly high in stock price! Pretty grim take on the situation, maybe he should be a guest writer at Economic disconnect?

Anonymous said...

Getyourselfconnected

Overstock.com stock price got creamed a day or so after that interview Wall Street didn't like what he had to say aparently. Stock is trading about 15.69 down from 39.39 on 10-31 I almost want to buy some because at least the guy seems honest although looking at the chart it will probably go lower after this bounce off of the 14.75 low.

http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=ostk&time=&freq=

Kevin

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