Five Things You Need to Know: Socionomics of Bottled Water
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Socionomics of Bottled Water
Forbes calls it "Bottlemania." BusinessWeek thrust the issue into it's so-called "Debate Room,": "Bottled Water IS a Big Drain, Pro or Con?" New York City Mayor Michael Bloomberg intends to co-sponsor a resolution to prohibit city spending on bottled water. Meanwhile, Americans drank more than 30,000,000,000 bottles of single-serve water last year. What's going on here? After all, the bottled water industry is, technically, 30 years old. Suddenly, bottled water is a ripoff? A waste? Or worse, dangerous? What changed?
One thing. Social mood.
Make no mistake, there is nothing wrong with tap water, and there never has been. As the BusinessWeek article points out, we pay up to 4,000 times more for bottled water than tap water, and more than three times what we pay for gasoline; all this for water that is far less regulated and which frequently tests worse than tap water in both taste and purity. Pepsi's (PEP) Aquafina label bottled water is actually tap water. So is Coca-Cola's (KO) Dasani bottled water.
So why do we suddenly care now? Simple, as social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye.
There is absolutely nothing wrong with bottled water other than its cost over tap water. For 30 years it's been fine to pay for the convenience and fashionable appearance of water in a bottle. Now, however, it's something to rail against as mood shifts. Social mood will seek to portray this as a war against waste and excessive cost, but it's actually grounded in the psychological need to vilify the old signs of overconsumption in order to accept the reality of cutting back. The acceptance of that reality is easier if we are able to manufacture something "wrong" with that which is just beyond our economic reach.
So sit back with a tall glass of refreshing tap water and enjoy the rush to disassociate from yet another fading idol of the bull market.
2. Philly Fed: Don't Mind Us, We're Not Passing Through
Yesterday's Philadelphia Fed Survey slipped by the majority of media outlets without a single commentary on the most important part of the report: pass through of higher input costs. Just about everyone noted the prices-paid index "surged to 69.3 in June, "the highest since 1980." But there wasn't enough attention paid to the ability of firms to pass through those costs.
I mean, look, we already know firms have been facing dramatically higher input costs. What is important, however, is how much of those higher input costs get passed through to consumers. Incredibly, the index for prices received actually fell in June, from 31.6 to 29.7.
The special questions in the report are worth noting. "What impact are these recent cost increases having, or expected to have, on the prices of your finished products over the next
three months?" A little more than 65% expect price increases, with the average expected price change is 5.4%. Meanwhile, since the beginning of the year, the average reported price increase is just 3.8%.
And for those wondering about price increases related to delivery of raw materials, more than 70% reported not experiencing any shortages or delayed delivery of raw materials or intermediate products.
Finally, from the Producer Price Indexes released earlier this week we can build this chart showing the spread between crude goods prices and finished goods prices. This chart goes back to 1987 and we can see how stretched this spread has become. This is precisely how inflation sows the seeds for deflation. Margins will continue to be squeezed, and every day that goes by with food and energy prices elevated adds what is essentially a layer of leverage to the eventual unwind.
3. Banks Getting "More Creative" in Classifying Troubled Borrowers
The Wall Street Journal yesterday took a look at the changes banks are adopting to dress up their balance sheets.
From lengthening the time it takes to write off troubled mortgages, to dumping bad loans in subsidiaries that don't count toward regulatory capital levels, banks are increasingly adopting (perfectly legal) maneuvers to spruce up their appearance. According to the Journal.
- Astoria Financial (AF) recently shifted its policy to count home loans as non-performing when borrowers miss three payments instead of two.
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Wells Fargo (WFC) used to write off home-equity loans when borrowers fell 120 days behind, but now wait until 180 days.
We've seen this movie before. "Getting creative" is the last thing you want to see from a financial institution. Meanwhile, the one surprise is that neither Fannie Mae (FNM) or Freddie Mac (FRE) were mentioned in the Journal piece. After all, didn't they invent the game of reclassifying borrowers out of default?
4. Speaking of Main Street...
Recently we've written about how the real issue with the regional banks is not that they necessarily finish the year lower than where they are (the New York Times yesterday noted how far many of these banks have fallen in the past year) but that the perception of trouble hits harder than problems with Wall Street banks like Bear Stearns, Lehman Brothers (LEH) or Citigroup (C).
Another ongoing issue is the continuing tightening of credit for Main Street business and consumers. The Wall Street Journal yesterday had an interesting piece on the lengths to which credit card issuers such as American Express (AXP) are going to evaluate consumer credit risks. Bank of America (BAC) said it is raising FICO score thresholds and having human beings look at individual consumers.
This is an important story. The net result is a continuing tightening of credit for Main Street.
5. Shoplifters of the World Unite
According to USA Today, "shoplifting seems to be rising at many retail chains, and experts are pointing at a prime cause: the sputtering economy." Of 116 retailers surveyed recently about shoplifting by the National Retail Federation, 74% said they believed that shoplifting incidents last year had risen from 2006.
Looking at more localized reporting, the Knoxville News Sentinel reports that shoplifting arrests in Knoxville have skyrocketed from a little more than 300 in 2001 to 1,900 in 2007. This is despite policies from retailers such as Wal-Mart (WMT) which reportedly let shoplifters cart out $25 or less in merchandise without facing prosecution.
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Now, however, they appear to be more vulnerable, because their high prices are directly in conflict with the coming shutoff in financing (your point #4) and the accumulating increases in raw material costs (your point #2).
Plus, how much of the small cap price rise in the last few months has been speculation by small investors? Who are usually wrong and buy at the top.
I'm talking my book. My clients have a position in TWM.
Kevin, I cannot make sense of this statement. Sorry for the obtuseness...
Best Regards.
Doug
fixed now. thanks, Doug.
People no longer trust anything that comes from our municipal institutions.
It some how seems more safe and pure if it comes from a bottle that's been filed from a tap in some corporate back lot where we know the value of The American Heartland still resides.
Take for instance the US Federal Reserve. We could have trusted their assessment of where the economy was headed but instead we turned to corporate America. And we got the bottled, filtered version.
I know I feel better about the water I drink if it's carefully wrapped in plastic instead of the free range stuff you get from faucet.
I wonder if a decline in bottled water consumption is really a function of an increase in trust that people now have for their local municipalities.
thanks for the idea. I had been short the IWO for several years and finally caved with a loss. Have had success in shorting home builders and then financials. Now I am short retailers as the next shoe to fall hard.
However, the TWM is a way to allow my short market bias to perform without trying to pick stocks. I do wonder about decay of the instruments they hold though and may consider the IWO as a way to bet but not so big.
I'm guessing it's because their models are set up to perform a little more than 2X and they punt out the gains to keep share price in line with the underlying index.
But that's a wild guess and I could be wrong.
The plastic bottles that the water comes in are manufactured from petroleum, they are shipped via train/truck/tanker/whatever using huge amounts of oil to transport, and something like 85% of the bottles sold containing bottled water are not recycled.
Hundreds of millions if not billions of bottles every year end up in the dump because people drink their water from a disposable bottle then chuck it in the trash and reach for another one when they're thirsty again.
The economics of shipping the water are also absolutely staggering. Think about it, you're paying to have the water shipped to you, probably across hundreds or thousands of miles. Water. The same stuff that comes out of your faucet in your kitchen! If you don't like the "taste" of your local water, filter it with a Pur or Brita and then buy a nalgene or aluminum or stainless steel bottle to take with you when you want some water on the road.
Bottled water is one of the single biggest wastes of resources on the planet today. You might as well run your AC full blast while you're sitting by yourself in your Escalade with the windows down while idling, because regularly drinking bottled water has the same impact on the environment and on your wallet.
Sorry to rant, I'm realy not some soft-shelled, don't-eat-anything-that-casts-a-shadow kind of person. It's just this nation is so wasteful on so many levels and then we complain about how unfair it is when prices rise because of our willingness to be wasteful. Think about the consequences of your actions. Reduce, reuse, recycle and all that is great. But just THINK.
