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Five Things You Need to Know: The Power of Critical Thinking, Don't Believe the Hype, Never Look a Gift Card In the Mouth, Axis of Euros?, Politics? Economics? Or Both?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Power of Critical Thinking

One of the primary objectives of Minyanville is to try and teach folks how to think critically about financial information. Our intentions are not to shape thoughts, but hopefully to provoke them. Therefore, whenever possible, we link to the original sources of financial data and information so you can read it for yourself. We do this for a number of reasons.

  • First, most stories reporting economic data and information are filed by reporters as quickly as possible.
  • Financial media outlets, for a variety of reasons, feel intense pressure to report, say, the Producer Price Index data, as quickly as possible after it is released. It is not uncommon to see a three paragraph story on the PPI filed within three to five minutes of its release.
  • Second, although the people who file the stories are probably smart and talented reporters, who says they know more about economics than you do?
  • And why should you automatically believe that what a reporter pulls out of an economic release is the most important information contained in it, especially when you can go to the original source and within 10-15 minutes formulate your own opinions about what it means and which parts of it are most relevant?
  • The point here is that most people are far more intelligent than they give themselves credit for being, and are just as capable of parsing an economic release and understanding what it means as a reporter for a wire service.

2. Don't Believe the Hype

Over the weekend, I was reminded of the importance of going to the source myself when someone sent me a brief story about the recently-released 2006 Financial Report of the U.S. Government.

The story I was sent concluded the following about the report:

- It was purposefully released late in the afternoon by Treasury and the GAO on Friday, Dec. 15 to cover up the horrendous fiscal condition of the U.S.
- The U.S. is essentially insolvent.
The Comptroller said the GAO found so many deficiencies in the government's accounting systems that it is impossible to express an opinion about the financial statements.

  • Well, that's all very disturbing.
  • The only problem with those conclusions is that when I combed through the 172-page report myself I reached slightly different ones.
  • For example, on page five of the linked pdf, in the first paragraph of the statement from Treasury Secretary Hank Paulson, I learned that the statutory deadline for the report is actually March 31, 2007.
  • The report was not released on December 15 in an effort to cover up the results, but in an effort to present the findings early enough to inform the budget process.
  • Oh, and by the way, the reason the report was released on a Friday is because December 15 just happened to be a Friday this year.
  • The report was released on December 15 in 2005, 2004 and 2003 too.
  • Ok, but what about the important stuff. Is the U.S. really insolvent? Hmmm, not exactly, although writing that makes for good copy.
  • As the report lays out quite clearly, the U.S. government has broad responsibilities that are not included in the liabilities typically presented on the balance sheet, including Social Security and Medicare. But it also has broad assets that aren't presented as well, including the ability to tax, print money and nonoperational resources such as existing natural resources over which the government acts as steward.
  • Well, is it true that Comptroller David Welker and the GAO found so many problems with the government's accounting systems that it is impossible to express an opinion about the consolidated financial statements?
  • Yes, that actually is true, although when we read the report ourselves we learn the reality is a bit more complex:
    "While over the past 10 years significant progress has been made in improving federal
    financial management since the U.S. government began preparing consolidated financial statements, three major impediments continue to prevent us from rendering an opinion on the consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. Until the problems outlined in our audit report are adequately addressed, they will continue to have adverse implications for the federal government and American taxpayers
  • Who knows, maybe the original conclusions were right. But isn't it nice to be able to make up our own minds about their veracity?

3. Never Look a Gift Card In the Mouth

Visa USA said yesterday that it would lower its forecast for holiday spending, the New York Times reported.

  • Based on purchases by credit and debit card holders, Visa said sales rose 6.5 percent in November and December, compared with the same period last year, down from its initial forecast of a 7.5 percent gain, the Times article said.
  • Industry analysts said that, after a strong, discount-induced start the day after Thanksgiving, consumer spending slowed in December and never fully recovered.
  • The lackluster performance, well below the 8.3 percent increase in 2005, came despite last-minute sales over the weekend.
  • Meanwhile, according to Visa USA, from Dec. 1 to Dec. 24 the cost of the average purchase dropped by 1 percent.
  • To make up for disappointing pre-Christmas sales, stores are now focusing on gift cards.
  • According to the Times, retailers such as Coach and Bloomingdale's are introducing dozens of new products this week to encourage shoppers to spend their gift cards before the year is over.

4. Axis of Euros?

Venezuela has indicated it may join Iran in asking oil buyers to pay in euro rather than US dollars.

  • Although the dollar is the currency in which oil is usually traded, Iran has asked customers to pay for a portion of their oil purchases in euros because of the weakness of the U.S. dollar.
  • Iran still prices its oil in dollars, but currently receives payment for 57% of its crude exports in euros, according to the National Iranian Oil Company, the BBC reported.
  • Venezuela said it planned to see if a similar scheme could be introduced to its crude exports.

5. Politics? Economics? Or Both?

While the move by Iran may seem entirely politically motivated and grounded in a desire to pressure the U.S. economically, even if indirectly, by working to erode the U.S. dollar's status as the world's reserve currency, the reality has far more to do with economics.

  • According to the Associated Press, Roger Stern, an economic geographer at Johns Hopkins University, recently completed an analysis of Iran's oil industry that suggests the country may see its oil exports halved in five years, and possibly disappear completely by 2015, if present trends continue.
  • Iran earns about $50 billion a year in oil exports.
  • Iran produces about 3.7 million barrels a day, about 300,000 barrels below the quota set for Iran by the oil cartel, the Organization of Petroleum Exporting Countries, the AP reported.
  • The shortfall represents a loss of about $5.5 billion a year, Stern said.
  • As well, the economic reality of Iran's declining oil and gas production may explain why the country is adamant about pursuing nuclear power.
  • "With an explosive demand at home and poor management, the appeal of nuclear power, financed by Russia, could fill a real need for production of more electricity," Stern said.
No positions in stocks mentioned.

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