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Five Things You Need to Know: Money in Motion


The day may come when "showing people what you have" is itself a form of excessive risk-seeking behavior.


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

1. Money in Motion

While the conventional wisdom last week was that the Federal Reserve "panicked" by slashing interest rates 75 basis points, think about it this way: it took all 75 of those basis points to squeeze an 80 basis point gain out of the S&P 500 for the week. That's some good panic.

Meanwhile, today we get a perfect reminder that the issue is not so much getting money into the system, but getting money in motion within the system.

According to Bloomberg, Blackstone Group's (BX) $6.6 billion takeover of Alliance Data Systems (ADS) is "near collapse" after the leveraged-buyout firm said bank regulators had placed "extraordinary requirements" on the deal.

Blackstone is blaming the collapse of the takeover deal on the Office of the Comptroller of the Currency, saying the office has asked for "unprecedented and unacceptable financial and operational requirements that would impose an unlimited and indefinite liability'' on Blackstone.

Alliance Data, naturally, strongly disagrees with this assertion and is "evaluating the company's possible courses of action."

Blackstone agreed in May to purchase Alliance Data for $81.75 per share in cash. Alliance Data shares are down more than 30% this morning, as this was written last trading at $43.30, but have fallen in recent weeks on rumors that Blackstone was seeking to renegotiate the terms of the deal.

Remember, the Fed can cut rates, but it can't force money in motion.

2. New Homes Sales

According to the Commerce Department, purchases of new homes in the U.S. declined by 26% in 2007, the most since 1963. For December sales fell 4.7% while the median price declined 10%, year-over-year, marking the largest yearly price decline in 37 years.

Meanwhile, the inventory of new homes, although down in nominal terms, failed to keep pace with the 4.7% decline in sales, pushing the inventory clearance time out to 9.6 months of supply, the most in more than 20 years.

3. A Business Decision

Last night, CBS' "60 Minutes" took a look at the "subprime loan crisis." You can find the full transcript here, but the following exchange between "60 Minutes" correspondent Steve Kroft and homeowner Stephanie Valdez is a highlight worth examining a bit closer; it's significant both from an economic and, more importantly, a socionomic point of view.

STEPHANIE VALDEZ: Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense.

STEVE KROFT: That's what you agreed to do when you bought the house.

STEPHANIE VALDEZ: Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way.

STEVE KROFT: You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?

STEPHANIE VALDEZ: You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?

The issue Kroft is alluding to here is what one might call "the morality of contractual obligation." Without saying it explicitly, Kroft implies ("That's what you agreed to do when you bought the house,") that Valdez and her husband, by walking away from the house, are engaging in some vaguely immoral behavior. It's a promise. They are breaking their promise. Left dangling for the viewer to arrive at is the conclusion that people who break promises are immoral.

But Valdez is outlining a perfectly rational economic argument for exiting the mortgage contract and is willing to accept the full penalty - credit impairment - for her actions. Still, Kroft carries the vague morality objection a bit further in the segment.

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft observes to real estate agent Kevin Moran. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan," Moran replies. "They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it."

"Just a business decision," Kroft says.

Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008.

4. The Road, it Tolls for Thee

An article in the USA Today this morning points out that states across the country, faced with financially lean times, are preparing to add yet another fiscal tax on the backs of households: major toll road increases.

California, Indiana, Massachusetts, New Jersey, Pennsylvania and New York are all among the states with major toll hikes planned.

"A toll increase is always political melodrama," according to Port Authority of New York spokesman Marc LaVorgna. "The decisions are often avoided until the need is desperate."

Is that supposed to be comforting?

5. Tightening the Alligator Belt

The New York Times yesterday did its part to push one of our key 2008 themes: the psychological rationalization of consumer cutbacks. In the piece, "Tightening the Alligator Belt," the Times looked at the psychology behind discretionary spending cutbacks among affluent consumers, or those who have not yet felt the pinch on disposable income, but who are nonetheless looking for ways to curtail spending.

According to consumer psychologists, for consumers with disposable income the act of pinching pennies has less to do with saving money and more to do with emotional health. "When these dollar-stretching consumers cut back, they do so in ways that make them feel good and enable them to maintain their status," the Times notes.

Larry D. Compeau, an associate professor of marketing at Clarkson University and the executive officer of the American Psychological Association Society for Consumer Psychology, told the Times that such behavior is really "a symbolic tightening of the belt" that enables consumers to feel prudent and responsible. "This is how people who are not fighting paycheck to paycheck can feel they're doing something," he said.

Interestingly, the Times article, by focusing on cutbacks among affluent consumers, fails to see where this is headed. Emblematic is the view expressed in the article by Rachel LeMaster, 29, a grade--school music teacher: "A lot of what you spend goes toward showing other people what you have."

Our view is that this attitude is merely an interim resting point for what is a long-term shift in behavioral attitudes, a shift that has barely even begun. While the affluent focus on "symbolic belt tightening," the less affluent (a far larger and, ultimately, in what will be a major role-reversal, a more influential group) will look to displace the signifiers that have dominated the prior culture of material obsession and consumption with other signifiers. To the extent ones material base of self-worth and prestige is seen as under attack by those signifiers of affluence, part of this displacement strategy may involve a violent backlash against old signifiers. The day may come when "showing people what you have" is itself a form of excessive risk-seeking behavior.

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