Archives: March 2011

Walmart CEO Warns of ‘Serious’ Inflation

U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.

  • The nation's largest retailer needs to get back to its roots as the lowest priced one-stop shop for consumers, Walmart CEO Bill SImon said. By Spencer Platt, Getty Images

    The nation’s largest retailer needs to get back to its roots as the lowest priced one-stop shop for consumers, Walmart CEO Bill SImon said.

By Spencer Platt, Getty Images

The nation’s largest retailer needs to get back to its roots as the lowest priced one-stop shop for consumers, Walmart CEO Bill SImon said.

The world’s largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

“Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says. “Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory.”

Consumer prices — or the consumer price index — rose 0.5% in February, the most since mid-2009, largely because of surging food and gasoline prices. Core inflation, which excludes volatile food and energy costs, rose a more modest 0.2%, though that still exceeded estimates.

The scenario hits Wal-Mart as it is trying to return to the low across-the-board prices it became famous for. Some prices rose as the company paid for costly store renovations.

“We’re in a position to use scale to hold prices lower longer … even in an inflationary environment,” Simon says. “We will have the lowest prices in the market.”

Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have “access to any factory in any country around the globe” to mitigate the effect of inflation in the U.S., Long says.

Still, “it’s certainly going to have an impact,” Long says. “No retailer is going to be able to wish this new cost reality away. They’re not going to be able to insulate the consumer 100%.”

Media Source: Tentative Budget Deal Reached

Editor’s Note: Only $33 Billion in cuts out of a $3.5 trillion budget is a shade less than 1%. That isn’t even a good warmup. These people have absolutely no idea of the fiscal woes we’re already in. This is the best we have in America?

Sources tell me that  budget negotiators on Capitol Hill have tentatively agreed on a deal that would involve at least $33 billion in spending cuts from this year’s budget.  That’s $23 billion dollars more than Democrats have previously agreed to in short-term continuingresolutions, and $28 billion less than Republicans previously passed in the House.

Members of the House Appropriations Committee will begin discussing how to hit that number with their Senate counterparts as soon as tonight, and Vice President Biden is heading to Capitol Hill for a 6pm meeting with the Senate Democratic leadership.

The deal could still fall apart over the composition of the cuts, or policy “riders” previously passed by the House. These include issues like de-funding Planned Parenthood and President Obama’s health care legislation.  It’s also not clear that this compromise will fly with rank-and-file House Republicans, which means that the $33 billion goalcould still climb by a few billion.  But this is most significant progress since the beginning of negotiations.

AIG Spurned in Offer to Buy Junk Mortgages from Maiden Lane

Editor’s Note: This is the laugher of the year so far. Suddenly there is a voracious demand for junk mortgages and AIG bonds? Hold onto your wallets folks – you’ll be bailing this mess out again – probably sooner than you think.

The Federal Reserve announced Wednesday that it was declining an offer from American International Group [AIG  36.05  -0.13  (-0.36%)   ] to buy the mortgage-related assets it holds in its Maiden Lane II portfolio.

Instead of selling the assets as a block to a single buyer, the Fed says it will sell the assets in individually and in blocks in a “competitive process.” Earlier reports have said that the Fed was considering an auction for the assets.

The Fed acquired the mortgage-related assets in connection with the bailout of AIG in 2008. At the time, they were considered to be “toxic.”

AIG had offered $15.7 billion to purchase the assets, which have a face value of $30 billion. At that price, the Fed would have made a profit of over $1.5 billion.

“In light of improved conditions in the secondary market for non-agency residential mortgage backed securities (RMBS), and a high level of interest by investors, the Federal Reserve believes that conditions are right for ML II to begin more extensive asset sales while taking appropriate care at all times to avoid market disruption,” the Federal Reserve said.

Outside investors have privately indicated that they are very interested in buying the assets. Offering the assets in a segments or individually—rather than as a complete block—will allow smaller investors and hedge funds to make bids. The Fed believes this will create a large set of potential investors in the assets.

BlackRock Solutions [BLK  198.84  12.34  (+6.62%)   ] is expected to circulate the first bid list sale early next week.

Food Inflation Hidden in Smaller Packages

Editor’s Note: This has been going on for a LONG time now. It is interesting that it is finally getting some attention. This is another way that the BLS can fudge the CPI numbers too. They don’t take into account the unit cost, just the total cost. It never ends.

As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.

With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”

Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.

Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”

In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).

Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.

“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”

Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.

Most companies reduce products quietly, hoping consumers are not reading labels too closely.

But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.

Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.

Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.

And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.

“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at Focus.com, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.

13% of Homes Now Empty – CNNMoney

Editor’s Notes: The last time we reported on this, the number was 11% and that was only a month or two ago. The 11% figure was reported by CNBC. Obviously, we have no inside knowledge as to the actual number of empty homes, but if the numbers are in fact worsening that quickly, then somebody needs to grab Steve Liesman over at CNBC and tell him he’d better lay off the ‘everything’s great’ propaganda he likes to push. (Steve majored in journalism in school by the way, not economics).

High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it’s only getting worse: The national vacancy rate crept up to just over 13% according to last week’s decennial census report. That’s up from 12.1% in 2007. So which is it guys?

“More vacant homes equal more downward pressure on home prices,” said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

The way the census calculates the vacancy rates, however, is problematic. It includes properties such as ski lodges, beach houses and pied-à-terres that many real estate statisticians would not.

These are often summer homes or second homes, but census lumps them together with homes that have been sold but not occupied, empty homes for sale or rent, and homes used by migrant workers. Basically, anything other than a primary residence is considered vacant.

“You can only live in one home,” said William Chapin of the Census Bureau’s Housing Statistics Branch. “If you own five homes that you occasionally live in, four of them will be counted as vacant.”

But Paul Bishop, the vice president for research for the National Association of Realtors, countered that these properties aren’t vacant in the usual sense of the term. “A vacation home is hardly the same situation as a foreclosed home that has been taken back by the bank,” he said.

In Maine, more than two-thirds of the 160,000 vacancies were vacation homes in 2009; Vermont had a similarly high concentration.

Compare them with Connecticut, which has a vacancy rate of just 7.9%, the lowest of all the states. If you back out the vacation properties from the statistics, the states have very similar vacancy rates: 6.1% for Connecticut and 7% for Maine.

Some states have high vacancy rates even after backing out the second homes: Florida’s is about 10%; Arizona’s is 10.7%; and Nevada’s 11.4%.

Besides Connecticut, the other states with lowest vacancy rates are California, Iowa, Illinois, Virginia and Washington, all at 9.2% or lower.

CI’s 10-Year Rate Model Continues to Impress

For the past several years, the Centsible Investor has been providing subscribers with many valuable services including a market-crushing model portfolio, precious metals consultations for subscribers, economic forecasting, and cutting-edge analysis that isn’t found in letters with much higher price tags.

Our interest rate forecast model has been turning heads since last November when it issued a long-term buy signal for 10-Year rates (meaning bond prices would go lower). Since that signal, 10-year yields have risen around 100 basis points. In the meantime, the model has also issued accurate signals on shorter-term moves as well. We’re including a partially labelled chart for anyone who cares to take a look.

5-week MA

If you’ll take a few minutes to look over the above graphic, you will see that this model has been predicting short-term moves in rates for many, many months now. How valuable is this information to the self-directed investor? Only you can answer that. How much does it cost? Not as much as you’d think. We’re currently running a special – $99/year. For that, you get 12 issues of the Centsible Investor, access to our interest rate model, and periodic audio/video updates to keep you up to speed on the markets and economy. Don’t miss another update – Subscribe Today!!

Fed Finally Being Blamed for Inflation

Editor’s Note: Even though this article tried to make a mockery of the issue, it is a somewhat tacit admission of what thinking people have known for a long time: inflation is a monetary event and central banks are in fact responsible for the concomitant loss in purchasing power.

Food riots, deposed Middle Eastern despots and now this? Last week, a Texas man brandishing an assault rifle was involved in a three-hour shoot-out with police and had to be subdued with tear gas after ordering seven Beefy Crunch Burritos at a Taco Bell drive-through and being informed that their price had risen from 99 cents to $1.49.

Late night comedians and serious pundits alike had a field day with the story, opining on issues like fast-food culture, obesity (the seven burritos contain 3,600 calories, double the recommended daily intake) and gun control.

With his petty gripe, the gunman, Ricardo Jones, is no Muhammad al Bouazizi, the self-immolating Tunisian fruit seller who inspired millions across the region to throw off the yoke of tyranny, but 50 per cent is 50 per cent in San’a or San Antonio. Food inflation is a global phenomenon.

Taco Bell may well not be the villain here. It was recently alleged in a class-action lawsuit that only 35 per cent of what the fast-food chain describes as “beef” meets the strict technical definition (meat from a cow). The remaining 65 per cent is claimed to be made from fillers such as potassium lactate, modified corn starch, malto-dextrin and autolyzed yeast extract. Taco Bell has said it vigorously disputes the allegations made about its food – but if the class action claims were proved to be true, it could be seen as an ingenious attempt to hold the line on meat price rises. However, it is not only the price of meat that is rising alas, but also fuel, flour, vegetables and even autolyzed yeast extract.

The finger of blame is increasingly pointing toward central banks and the US Federal Reserve in particular. By printing money through quantitative easing, there are supposedly more dollars, yen and pounds chasing the same number of Beefy Crunch Burritos. Fed chairman Ben Bernanke actually was asked during a speaking engagement last month whether the central bank was culpable for the revolution in Egypt.

“I think it’s entirely unfair to attribute excess demand pressures in emerging markets to US monetary policy because emerging markets have all the tools they need to address excess demand in those countries,” said the clearly annoyed banker.

But an increasingly common view is that, with the very best intentions, he is at fault. Critics regularly cite the words of Milton Friedman, who said that “inflation is always and everywhere a monetary phenomenon”.

The great economist’s words and work are being misinterpreted though. The monetary base has indeed mushroomed but, in the quantity theory of money, it is not a simple increase in the base that causes inflation. It is an excess supply of money, which is not the case – not yet anyway. At the moment, the money shows up as excess reserves on bank balance sheets, for which they receive interest.

If the Fed were to reduce or eliminate what it pays banks to park those reserves at the Fed, or if banks decided to expand balance sheets rapidly, then things would change. A little of this might be welcome but, if the Fed were too slow to put the brakes on a surge in lending out of fear of harming the recovery, serious inflation could result.

QE is not entirely off the hook though. Even if there is actually not more money in the economy chasing assets, the market’s anticipation of future recklessness and the opportunity cost for investors of holding low-yielding cash has increased the appeal of real assets. The Fed is happy to see this when it comes to shares or homes as this creates a benign wealth effect. Commodities are a different matter.

Even so, the price of oil, or of burritos for that matter, corresponds much more closely to supply and demand than, say, a share of Apple, which is not consumed and whose value is in the eye of the beholder. Rising affluence of developing market consumers – the so-called “march of the Chinese meat-eaters” – is the chief culprit. This is exacerbated by distorted currency regimes such as China’s, as Mr Bernanke hinted.

Just don’t shoot the messenger. Or the drive-through employee for that matter.

Global Food Scare Widens From Japanese Nuclear Accident

Countries across the world shunned Japanese food imports Thursday as radioactive steam leaked from a disaster-struck nuclear plant, straining nerves in Tokyo.

The grim toll of dead and missing from Japan’s monster quake and tsunami on March 11 topped 26,000, as hundreds of thousands remained huddled in evacuation shelters and fears grew in the megacity of Tokyo over water safety.

The damage to the Fukushima nuclear plant from the tectonic calamity and a series of explosions has stoked global anxiety. The United States and Hong Kong have already restricted Japanese food, and France wants the EU to do the same.

Russia ordered a halt to food imports from four prefectures — Fukushima, Gunma, Ibaraki and Tochigi — near the stricken plant 250 kilometres (155 miles) northeast of Tokyo.

Moscow also placed in quarantine a Panama-flagged cargo ship that had passed near the plant and put its 19 crew under medical supervision after detecting radiation levels three times the norm in the engine room.

Australia banned produce from the area, including seaweed and seafood, milk, dairy products, fresh fruit and vegetables.

It said, however, that Japanese food already on store shelves was safe, as it had shipped before the quake, and that “the risk of Australian consumers being exposed to radionuclides in food imported from Japan is negligible”.

Singapore also suspended imports of milk products and other foodstuffs from the same four prefectures and Canada implemented enhanced import controls on products from the quartet.

The Philippines banned Japanese chocolate imports.

“Food safety issues are an additional dimension of the emergency,” said three UN agencies in a joint statement issued in Geneva, pledging they were “committed to mobilising their knowledge and expertise” to help Japan.

Japan was taking the right actions, said the International Atomic Energy Agency, World Health Organization, and Food and Agriculture Organization.

“Food monitoring is being implemented, measurements of radioactivity in food are taking place, and the results are being communicated publicly.”

In greater Tokyo, an urban sprawl of more than 30 million people, strong aftershocks overnight and in the morning served as uncomfortable reminders that Japan’s capital itself is believed to be decades overdue for a mega-quake.

The anxiety was compounded by the Tokyo government’s revelation Wednesday that radioactive iodine in the drinking water was more than twice the level deemed safe for infants, although it remained within safe adult limits.

The news triggered a run on bottled water in shops and the city’s ubiquitous vending machines, while the Tokyo government started to give families three 550-millilitre (18.5-ounce) bottles of water per infant.

A measurement on Thursday was in the safe zone for infants again, officials said, but this was not enough to soothe all parents of young children.

“I don’t want to panic,” Kazuko Hara, 39, told AFP as she collected her three allotted bottles of water in Tokyo’s Bunkyo ward.

“I will use bottled water for now. If we run out, I will use tap water. Experts say it’s OK. But when you see people buying bottled water at stores and emptying store shelves, that makes you worry again.”

Japan’s government has also halted shipments of untreated milk and vegetables from Fukushima and three adjoining prefectures, and stepped up radiation monitoring at another six, covering an area that borders Tokyo.

The health ministry has detected 82,000 becquerels of radioactive caesium — 164 times the safe limit — in the green vegetable kukitachina, and elevated levels in another 10 vegetables, including cabbage and turnips.

At the source of the radiation — the Fukushima plant located on the Pacific coast — white smoke could be seen wafting from four of the six reactors.

Fire engines again aimed their high-pressure water jets at the number three reactor, a day after a plume of dark smoke there forced workers to evacuate, in their bid to avert a full meltdown that would release greater radiation.

Highlighting the risks taken by the emergency crew, three workers were exposed to high radiation — at least 170 millisieverts.

Two of them were sent to hospital after they stepped into a puddle of water that reached the skin on their legs despite their radiation suits.

Engineers have now linked up an external electricity supply to all six reactors and are testing system components and equipment in an effort to soon restart the tsunami-hit cooling systems and stabilise the reactors.

On Thursday, they partially restored power to the control room at reactor number one.

The grim statistics from Japan’s worst post-war disaster kept on rising, with 9,737 now confirmed dead and 16,423 listed as missing by national police.

Scientists at the Port and Airport Research Institute meanwhile found that the tsunami that swallowed entire towns was even bigger than first thought. In devastated Ofunato, Iwate prefecture, it topped 23 metres (76 feet).

US New Home Sales Plunge – Again

Sales of new homes in the US dropped for a third straight month in February to the lowest rate on record, adding to worries that the real estate market remains in decline. I can still hear David Lereah in the woods calling ‘Bottom… Bottom.. BOTTOM!!!!’ to no avail…

The commerce department said new home sales fell 16.9 per cent to an adjusted annual rate of 250,000, compared with a revised rate of 301,000 in January. That missed economists’ expectations of 290,000, and represented a 28 per cent decline from February 2010.

“Housing is not yet participating in the broader recovery,” said Ian Shepherdson, chief US economist at High Frequency Economics, an independent research group. “Sales for the previous three months were revised up by a total of 30,000, so the net number is not quite as bad as the headline, but it is still horrible.”

The median price for a new house sank 13.9 per cent to $202,100, the lowest level since December 2003, dragged by the “significant number of homes that are being sold at fire-sale prices”, said Jim Russell, managing director of the Collingwood Group, a consultancy. That includes the high number of foreclosed homes entering the market as banks work through the foreclosures crisis.

Sales fell across all regions. The northeast was hardest hit, with sales plunging 57.1 per cent from January.

The time it would take to sell the homes currently on the market rose to 8.9 months. Economists say inventory would be cleared in about six months in a healthy housing market.

The inventory build-up “indicates to us that we have a lack of demand because [buyers] don’t have access to credit,” Mr Russell said. That picture will only change with a more sustained recovery in employment, he added.

Employment stability creates a “tremendous waterfall” that “goes all the way through the economy” as workers buy homes and spend money to furnish them with appliances, fixtures and electronics. But current levels of job creation are still too low to have that spillover effect, Mr Russell said.

“If were able to produce service-related jobs and manufacturing jobs that increase our productivity and our GDP, then we’re going to have disposable cash that can be used for the purchase of homes. The supply can then dry up very quickly”, he said. “It’s going to take a while to wash through this.”

On Monday, the National Association of Realtors said sales of existing homes fell a greater-than-expected 9.6 per cent and prices dropped 5.2 per cent amid tight credit conditions and the growing backlog of homes for sale.

US on Road to Insolvency – Fisher

The United States is on a fiscal path towards insolvency and policymakers are at a “tipping point,” a Federal Reserve official said on Tuesday.

The President of the Federal Bank of Dallas, Richard W. Fisher

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when,” Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt. “The short-term negotiations are very important, I look at this as a tipping point.”

But he added he was confident in the Americans’ ability to take the right decisions and said the country would avoid insolvency. Based on what?

“I think we are at the beginning of the process and it’s going to be very painful,” he added.

Fisher earlier said the US economic recovery is gathering momentum, adding that he personally was extremely vigilant on inflation pressures.

“We are all mindful of this phenomenon. Speaking personally, I am concerned and I am going to be extremely vigilant on that front,” Fisher said in an interview with CNBC.

Fisher added that the U.S. Federal Reserve had ways to tighten its monetary policy other than interest rates, including by selling Treasurys, changing reserves levels and using time deposits.

He added that he does not support the Fed embarking on an additional round of quantitative easing. (This time he’s playing ‘good cop’)

“Barring some extraordinary circumstance I cannot forsee…I would vote against a QE3,” Fisher told CNBC. “I don’t think it’s necessary. Again, we have a self-sustaining recovery.” Self-sustaining? This guy is obviously completely disconnected from reality and should be discredited as such. This ‘Good Cop / Bad Cop’ routine the Fed governors play is really wearing thin. Outside the lapdog media, none of these people have any credibility whatsoever.

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