Dallas, TX
July 16, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Well To Do Increasingly Keeping Wallets In Pockets
What's Hot Today:

U.S. stock index futures were flat to slightly higher on Monday. We would not be surprised to see another weak day, especially as the news cycle develops around Washington.

Today's Economic Calendar



News For Thought

Biden Vs. Rasmussen.com polling: Who would you bet on? According to Breitbart.com: "Vice President Joe Biden brushed aside suggestions on Sunday that Democrats will suffer big losses in November midterm elections, vowing that Barack Obama's governing party will "shock the heck out of everybody." Speaking on the ABC News program "This Week," Biden dismissed prevailing wisdom that Democrats, 17 months into Obama's transformative residency in the White House, would suffer a drubbing at the hands of salivating Republicans." Yet, a poll of likely voters on Rasmussen Reports.com, is telling a different story. According to Rasmussen: "a new Rasmussen Reports national telephone survey finds that just 23% of voters nationwide believe the federal government today has the consent of the governed. Sixty-two percent (62%) say it does not, and 15% are not sure. These figures have barely budged since February."

And here is more interesting data. According to Rasmussen: "The frustration that voters are expressing in 2010 goes much deeper than specific policies. At a more fundamental level, voters just don’t believe politicians are interested in the opinions of ordinary Americans." Looking for poll results? Try these. According to Rasmussen: "68% believe the nation’s Political Class doesn’t “care what most Americans think.” Only 15% believe the Political Class is interested in the views of those they are supposed to serve. Another 17% are not sure. Skepticism about the Political Class interest in voters is found across just about all demographic and partisan groups. However, self-identified liberals are evenly divided on the question. Eighty-eight percent (88%) of conservatives and 64% of moderates reject the notion that the Political Class cares."

Why is this important? Because Rasmussen polls have been very accurate and very ahead of the mainstream polls for several years, which means that the likelihood of this poll also being correct is likely to be high and that Vice-President Biden has a greater chance of being wrong on this than Rasmussen. If you want to do the math, there are more conservatives and independents than liberals in the U.S. The independent vote also put Obama over the top, which means that if they take away their support, as they seem to have done, the reverse would be most likely to occur.

November is still a long way off, but this, in our opinion is an important poll, especially since most of these opinions seem to have been in place for several months, and it is commonly believed that voter opinions are set by June of an election year.

Job training is no guarantee of work. According to The New York Times: "Hundreds of thousands of Americans have enrolled in federally financed training programs in recent years, only to remain out of work. That has intensified skepticism about training as a cure for unemployment." And this is not a new problem. According to The Times: 'Even before the recession created the bleakest job market in more than a quarter-century, job training was already producing disappointing results. A study conducted for the Labor Department tracking the experience of 160,000 laid-off workers in 12 states from mid-2003 to mid-2005 — a time of economic expansion — found that those who went through training wound up earning little more than those who did not, even three and four years later. “Over all, it appears possible that ultimate gains from participation are small or nonexistent,” the study concluded.'

What's the bottom line? The government is living in the past, spending money without a clue as to what it's doing, and perpetuating an already bad situation. According to The Times: "Labor economists and work force development experts say the frustration that frequently results from job training reflects the dubious quality of many programs. Most last only a few months, providing general skills without conferring useful credentials in specialized fields. Programs rarely involve potential employers and are typically too modest to enable cast-off workers to begin new careers. Most job training is financed through the federal Workforce Investment Act, which was written in 1998 — a time when hiring was extraordinarily robust. Then, simply teaching jobless people how to use computers and write résumés put them on a path to paychecks. Today, even highly skilled people with job experience of two decades or more languish among the unemployed. Whole industries are being scaled down by automation, the shifting of work overseas and the recession."

Well To Do Increasingly Keeping Wallets In Pockets
The Waiting Game Toward November Is Starting To Gather Steam
As the Obama administration digs in its heels, passing increasingly stifling anti-business legislation, even the very wealthy are starting to curb their appetites for spending, perpetuating the vicious cycle, likely extending the grinding economic climate.

According to The New York Times: "Late last year, the highest-income households started spending more confidently, while other consumers held back. But their confidence has since ebbed, according to retail sales reports and some economic analysis." And if the high end isn't spending, it's not very likely that the beaten down middle and low ends are likely to pick up the slack anytime soon due to the rising uncertainty in the country and the persistently high levels of unemployment.

Aside from the usual littany of problems, ie. the situation in Europe, high unemployment, and so on, there is now the unknown effect of the financial regulatory bill that will be signed into law this week. A great deal of what's in that bill and its effects will be left up to regulators, whose implementation and administration of the principles of the law has yet to be developed, much less felt.

It's pretty simple. The top income bracket is responsible for a very large portion of the economy. According to The New York Times: "the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data. According to Gallup, spending by upper-income consumers — defined as those earning $90,000 or more — surged to an average of $145 a day in May, up 33 percent from a year earlier. Then in June, that daily average slid to $119." That's a nearly 18% pullback. Another way of looking at it is that the big spenders took about one fifth of their expenditures away in a period of a few months. That's a big air pocket, and may be the central reason why things suddenly feel a bit worse.

And you can see it in several places. According to The Times: "At the high end, luxury hotel chains like the Four Seasons and Ritz Carlton said bookings were much stronger earlier this year but had recently slowed. And upscale retailers, including Saks and Neiman Marcus, said sales growth eased in June. Overall retail sales slid in June from May, the government said this week."

Yet, this is an interesting observation: "By spring of last year, the savings rate — which represents the percentage of after-tax income not spent — of the top 5 percent of income earners had turned negative, according to the analysis by Moody’s Analytics. That meant the group was spending more than it made." To us that says that the upper end consumer had little choice but to pull back as their ability to keep up with their spending habits may have run out due to an overall decrease in the economy. It's almost as if a buch of people in a weekend jogging group took off down a trail. By the middle of the run, some couldn't keep up, so those that could lost enthusiasm, and stopped as well.

Conclusion

The 80-20 principle (Paretto's Rule) states that 20% of the capacity of any system does 80% of the work. This is a mathematically derived formula which has been verified and is used on a regular basis by its followers with fairly successful results in multiple applications.

We think that it applies here quite well. If the upper end is responsible for 33% of the economy, and this group pulls back, the effects through the economy are magnified, as Paretto's rule takes over.

That explains the big air pocket that is being displayed in economic statistics, such as retail sales, and last week's sudden decline in consumer confidence.

What makes things worse is that despite the clamor for Washington to do something sensible, nothing is coming, other than more regulation and the threat of higher taxes. That's not a good recipe to get upper income people to spend.

We'll be on Twitter some time today before the market closes with some updated comments.

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Market Moves - Stock Of The Day
Sears Holdings (Nasdaq: SHLD) Tells The Current Story Quite Well
Shares of Sears Holdings (Nasdaq: SHLD) have been in a huge bear market since they topped out in April.



Chart Courtesy of StockCharts.com


When Sears bought K-Mart, it was trumpeted as a stroke of genius. The company was promoted as both a retailer and a real estate play. The former was obvious, K-Mart would give the company access to the low end, and Sears would provide diversification as it was a gateway into the middle end.

The real estate play would come from the prime anchor mall locations held by Sears and by K-Mart's stand alone stores and the ground they were built on.

The problem is that K-Mart can't compete with Wal-Mart, and Sears is struggling in the middle end, while shopping malls are becoming empty parking lots on a much too regular basis.

At the current price, near 63 as of Friday's close, SHLD pays no dividend, and sells at over 30 times earnings. Its return on equity is a mere 2.6%. It does sell below book value, but there may be a reason for that.

Bottom line? The low end of retailing combined with heavy mall real estate is not being viewed by the market as a good business model in this environment.

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