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Five Things You Need to Know: Nonfarm Productivity & Unit Labor Costs; But Globalization is Supposed to Be Our Friend; Having it Both Ways; General Mills Stock Upgraded to Sneaky; General Mills Stock Downgraded to Mean


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. Nonfarm Productivity & Unit Labor Costs

U.S. Productivity slowed sharply in the first quarter, revised downward from 1.7% reported a month ago to 1% the Labor Department reported. Meanwhile, unit labor costs were revised sharply higher to 1.8% annualized from 0.6% reported earlier. You realize what this means don't you? The Man is paying us more to work less!

  • Manufacturing productivity growth was slower in the first quarter of 2007 than reported on May 3, reflecting downward revisions to output per hour in both durable goods and nondurable goods industries, the report said.
  • Unit labor costs rose 1.8% during the first quarter of 2007, following an 8.9% increase in the fourth quarter of 2006.
  • Separated by industry, unit labor costs rose 4.5% in manufacturing during the first
    quarter of 2007, while in durable goods industries, where hourly compensation increased much faster than productivity, unit labor costs increased 6.2%, the report said.
  • Labor costs account for two-thirds of cost production.
  • Ok, so now we get to see if inflation fears and expectations really are warranted, and more importantly how consumers will react to them.
  • Ordinarily, rising labor costs would make it more likely that businesses raise prices.
  • But, as we've argued, this may not be your father's inflationary environment.
  • Rather than pushing forward purchases in anticipation of future price increases, our belief is consumers will instead cut back.
  • We would write more about this, but we're determined to avoid increasing productivity while our wages are rising, mostly to get back at The Man for our declining personal income.

2. But Globalization is Supposed to Be Our Friend

After years of enjoying the fruits (read: low cost goods) of cheap labor in China and India, central banks are now increasingly worried that global growth is actually fueling inflation, according to the Wall Street Journal.

  • "I sense that global capacity has moved from being a tailwind to a headwind in terms of inflation control," Federal Reserve Bank of Dallas President Richard Fisher told the Wall Street Journal.
  • In an interview with the Journal on May 22, Fisher said he has heard from many business people who say they face higher costs from foreign suppliers.
  • He also said he has begun to pay more attention to the total or "headline" inflation rate rather than the core, because it includes energy and food prices which have been rising steadily.
  • U.S. import prices excluding oil rose 2.9% in the year through April, the fastest rate in more than a year.
  • Much of that cost increase can be directly attributed to recently rising costs of Chinese exports.
  • The Journal story notes that last year Chinese minimum wages, while still paltry compared to U.S. and developed country minimum wages, rose by an average of 21%.
  • On a related note, this morning Richmond Fed President Jeffrey Lacker, consistently one of the more outspoken and contrarian members of the Fed, said there is not yet statistically any slowing in price yet.
  • And in a moment of brutal honest, wondered aloud if perhaps the issue is whether the Fed should "engineer lower price expectations."

3. Having it Both Ways

The new "threat" of globalization illustrates quite clearly the fundamental rock and hard place the U.S. now finds itself in.

  • On the one hand, even as we write this, lawmakers in Washington are conjuring up ways to punish the Chinese for their "unfair" labor cost advantage and manipulative currency practices that serve to make the goods they export so cheap.
  • On the other hand, the flood of cheap imported goods into the U.S. has been quite the boon for U.S. consumers.
  • The International Monetary Fund says all those cheap imports have subtracted about one full percentage point a year from the U.S. inflation rate over the past 10 years.
  • In other words, we want to have it both ways; we need those cheap imports, not only to help hold down the inflation rate here, but also to make possible the levels of consumption necessary to keep our economy running and the debt engine humming, all the while while simultaneously demanding China stop the very practices that make those cheap goods possible in the first place.
  • Of course, we can't have it both ways.
  • One potential resolution is Congress will act with protectionist measures which will have the unintended consequence of raising prices here in the U.S. which will slow overall consumption and provide another drag on the economy.
  • Another potential resolution is China will decide for us when this happens.

4. General Mills Stock Upgraded to Sneaky

General Mills (GIS), the maker of Wheaties and Lucky Charms, said on Tuesday it will raise cereal prices to match recent increases by competitors.

  • "Input costs are definitely a factor" in the increase, General Mills Spokesman Tom Forsythe said.
  • "Grain and energy costs have increased. Most of our competitors in the cereal category have already raised prices, some months ago."
  • The company's stock fell 3% yesterday, prompting Forsythe to apparently try and reassure Wall Street.
  • General Mills' customers should actually see lower prices per box, Forsythe said, but the box will be smaller, so the net effect is a price increase.
  • Seriously. He said that.
  • Forsythe said General Mills cereals often appear more expensive on the shelf because of their larger box sizes, and the switch to smaller boxes will make them appear more competitive, even with the increased price per ounce.

5. General Mills Stock Downgraded to Mean

The move by General Mills to raise the price of its cereal while decreasing the box size so that customers would hopefully be fooled by the cost increase, prompted a mixed response from Wall Street analysts. Some applauded the move, upgrading the stock from "Earnest" to "Sneaky", while other Wall Street analysts found the whole thing confusing.

Minyanville has obtained a transcript from a portion of the analyst call.

Analyst: So let me see if I understand this. The price of your cereal is going up?

General Mills Spokesperson: That's correct.

Analyst: But the price per box is actually going down?

General Mills Spokesperson: Correct.

Analyst: So then how is the price going up?

General Mills Spokesperson: Because we're making the box smaller.

Analyst: Ok, but you just said the price of each box is going to be less.

General Mills Spokesperson: Yes, that's true.

Analyst: So then you're actually lowering prices.

General Mills Spokesperson: No, we're raising prices.

Analyst: How?

General Mills Spokesperson: Look, you're an analyst, you work with numbers.

Analyst: Right. Ok. I got it.

General Mills Spokesperson: Next question.

Analyst: Uh, actually, I don't get it. How can you raise the price by lowering the price?

General Mills Spokesperson: Because we're decreasing the size of the box.

Analyst: Ok, but you're charging less for each box.

General Mills Spokesperson: Yes. Because we're decreasing the size.

Analyst: Ah, I get it. So then the price is really the same, you're just making the box smaller which makes the price look lower.

General Mills Spokesperson: No, no, no! Listen. We're raising the price of our cereal.

Analyst: But -

General Mills Spokesperson: Shut up! Now listen, we're raising the price of our cereal.

Analyst: (Silence).

General Mills Spokesperson: Say it.

Analyst: We're raising the price of our cereal.

General Mills Spokesperson: Good. We're raising the price of our cereal... while simultaneously making the box smaller. Go on, say it.

Analyst: While simultaneously making the box smaller...

General Mills Spokesperson: But... and this is the important part... but we're raising the price more than we're decreasing the size of the box... go on...

Analyst: But we're raising the price more than we're decreasing the size of the box.

General Mills Spokesperson: So...

Analyst: So...

General Mills Spokesperson: That...

Analyst: That...

General Mills Spokesperson: Come on...

Analyst: Come -

General Mills Spokesperson: No, I mean, come on and follow the thought. So that...

Analyst: Oh. So that...

General Mills Spokesperson: The...

Analyst: The... price is lower?

General Mills Spokesperson: No! So that the customer...

Analyst: So that the customer...

General Mills Spokesperson: Will.

Analyst: Will.

General Mills Spokesperson: Oh good Lord. So that the customer will think the price has gone down when it's really gone up!

Analyst: Oh.

General Mills Spokesperson: See? Price increase. Smaller box. Larger price increase than smaller box.

Analyst: Right. I still don't get it.

General Mills Spokesperson: You know what? Just forget it.

Analyst: I'm going to have to downgrade your stock, you know.

General Mills Spokesperson: Good. Good. You do that.

Analyst: I will.

General Mills Spokesperson: I don't even want you to rate our stock positive.

Analyst: Good, because I won't.

General Mills Spokesperson: It would be an insult to the company for you to rate it positive.

Analyst: I'm downgrading your stock to "Mean."

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