Five Things You Need to Know: CPI; Round-Trip Ticket to Deflation; Good Times: Any Time You Meet a Payment; More Geometric Mean Fun; Dow Jones Automotive Average
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay head of the pack on Wall Street:
Consumer Prices measured by the Labor Department rose less than expected last month, good news for the anti-stag-hyper-inflationist crowd.
- The consumer price index increased 0.4% after rising 0.6% in March, the Labor Department reported.
- Core prices, which exclude food and energy, were up 0.2%.
- This takes the year-over-year increase in the core to 2.3%, down from 2.5%.
- Housing costs, which also include some energy costs and account for one-third of the total consumer price index, rose 0.2% for a second month.
- Owner's equivalent rent, which makes up 30% of the core CPI, increased just 0.2% after rising 0.3% in March.
- There's little that was unexpected in the report, especially following the core Producer Price Index for Finished Goods increase of 0.1% we noted this past Friday, and the core Producer Price Index for Finished Consumer Goods, which actually fell 0.1%.
- The, uh, good news is that the slowing economy, steady housing costs and declining OER is slowing inflation too.
2. Round-Trip Ticket to Deflation
Remember that $10 round-trip airfare increase a week ago that we mentioned was beginning to come undone? It has apparently now officially failed.
- Continental Airlines (CAL), American Airlines (AMR), Delta Air Lines (DAL), United Airlines (UAUA) and US Airways (LCC) have now all scaled back the increase in fares they attempted a little over a week ago.
- Fares were raised in an attempt to pass through fuel costs to customers.
- The price of jet fuel has risen more than 15% over the past four months.
- But hey, we're talking airlines here, when have they ever had pricing power?
- We'll tell you when. Last year.
- Airlines successfully raised fares several times last year with no pushback or weakening of travel demand.
3. Good Times: Any Time You Meet a Payment
Two generations ago folks socked away a portion of their income for a safety net to cushion the blow of unexpected expenses or job loss. Then came the "miracle" of credit.
- As recently as 30 years ago it was not uncommon to hear politicians and social commentators decry the practice of redlining lower income markets.
- "Redlining" is the practice of denying services such as banking, insurance or credit to residents in certain demographics or locations.
- "Redlining" can be, and frequently is, racially determined, but it also can refer to an entire segment of the marketplace defined by income, and once upon a time was a quite common practice in establishing who has access to credit.
- My how things have changed.
- No longer viewed as a potential risk factor affecting the consumer's balance sheet, access to credit has successfully supplanted actual savings as a safety net.
- Consumers (especially lower and moderate income families) now view their ability to access credit and borrow during a financial emergency as their safety net.
- A study released this past Friday by the Brookings Institution offers some rather eye-opening figures related to lower and moderate income families, the fastest growing segment of the credit market over the past decade.
- Called, "Borrowing to Get Ahead and Behind: The Credit Boom and Bust in Lower Income Markets," the study found that nearly one-third of lower income borrowers fall behind on bill payments in a typical year and a quarter pay more than 40% of their income every year to service debt, including mortgage payments.
- Of course there's an agenda to the study, and one that is clearly spelled out.
- "In response, federal policymakers need to ease off the gas pedal in promoting access to credit and start addressing the hard reality that millions of Americans now have too much access to credit," the summary paragraph to the study concludes.
- Socionomically this "call to action" is an important signpost along the road to demonizing credit and debt; part of the overall attitude shift that is quietly festering beneath the surface of the "American Dream" revolving credit account.
Temporary lay offs.
Easy credit rip offs.
Ain't we lucky we got 'em
4. More Geometric Mean Fun
Yesterday we discussed briefly the benefits of using the Geometric Mean versus the Arithmetic Mean when evaluating stock market indices. Judging from the responses we received, our explanation was horrible! Fortunately, a Minyan who teaches at Indiana University sent us the following crystal clear (and quite fascinating) example of how using the arithmetic mean can be deceptive.
- Dear Kevin,
I am an evolutionary geneticist and I also teach ecology at Indiana University.
In predicting population growth (which is analogous to the growth of an investment), the geometric mean is preferable to the arithmetic mean because the arithmetic mean can be positive, implying that a population will increase without bound, while the geometric mean is actually negative, meaning that the population is going to go extinct. Quite a difference between extinction and infinite growth.
Example: imagine a population that increases its size each of five years by the following fractions: +.20, +.10, -0.5 (declines by half), +.3, and +.1. The arithmetic mean rate of population increase is +0.04, so the population appears to be growing by 4% a year. The geometric mean, however, is -0.012, the population is losing more than 1% of its members per year. If these five years are representative, then using the arithmetic mean will lead you to believe that the population is in great shape, when it is actually headed for slow extinction.
Whenever the rate of increase is variable from one generation to the next, you can show that the geometric mean is ALWAYS LESS THAN the arithmetic mean. The greater the volatility, the greater the difference. The geometric mean should be reported for all financial investments with a variable rate of return; reporting the arithmetic mean is always an overstatement for variable return rates.
Minyan Mike Wade
5. Dow Jones Automotive Average
Here's a horribly deceptive and potentially ruinous idea we ran across in the Boston Herald: Classic cars make better investments than stocks.
- The article stems from this interesting, yet very deceptive, tidbit from the duPont Registry, a brand of luxury-geared publications: Classic cars sometimes outperform stocks!
- The duPont Registry found that a 1969 Chevrolet Camaro Z28 RS with Corvette brakes cost $3,184 when first sold - but fetches more than $200,000 today.
- As the Boston Herald notes, that's a 7,193% return - about seven times the 1,077% return of the Dow Jones Industrial Average over the same period.
- Tom duPont, who publishes the registry, said classic-car values are soaring because "the collector-automobile market is on fire right now," according to the Boston Herald.
- DuPont added that "unless you absolutely destroy a car, you'll always get something for it. Unlike companies, cars can't go bankrupt," the newspaper said.
- Of course, if your portfolio contains investment like the aforementioned 1969 Chevrolet Camaro Z28 RS, the 1966 Shelby Cobra 427 Supersnake and the 1967 Chevrolet Corvette 435HP, you're doing alright.
- But what if your portfolio contains the 1983 Yugo or the 1974 Ford Pinto?
Dog of the Dow?
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