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Five Things You Need to Know: The Coming Decade of the Entrepreneur

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Necessity is the mother of invention, and that's a good thing, because we are facing a whole heap of necessity right about now.

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

1. The Coming Decade of the Entrepreneur

They say necessity is the mother of invention, and that's a good thing, because we are facing a whole heap of necessity right about now. We need some invention, mama. So first thing we're going to invent are a few reasons why the coming decade will see a shift away from Corporatocracy and back to the entrepreneur.

When you hear the word "Entrepreneur," the first thing that probably comes to mind is the magazine, "Entrepreneur." Why? Because if it doesn't, they will sue you. Seriously. The magazine has a penchant for suing people for using the word "Entrepreneur." We'll take our chances. But back to our point, why entrepreneurialism? Why now?

Let's tick off a few news-related reasons below, then we'll wrap up in number five with our main thesis and its investment implications.


2. Producer Price Index

First up, the Producer Price Index. Producer prices rose twice as much as forecast in April, according to the Labor Department. The PPI excluding food and energy rose 0.4%, the year-over-year gain ratcheting up to 3%, the highest level since 1991.

But what is interesting about this report is the ongoing widening of the spread between finished goods prices paid less core goods. See the chart below:

CLICK TO ENLARGE

This shows increasing pressure on producers to rein in raw materials costs that are outpacing finished goods costs. In other words, the inability to pass through increasing costs is reaching extreme levels. Virtually every conference call we listen to says the same thing. That is why the consumer is so important now. Corporate profits are getting crushed right as we head into a consumer recesson.

So how are businesses responding? Take a look at Home Depot's (HD) tactics...


3. Home Depot

Home Depot (HD) this morning said first quarter profit fell 66%. The company experienced negative sales growth in all departments except garden, chairman and CEO Craig McNair said.

So how is the company, whose profit has now declined in each of the past seven quarters, handling a housing-driven slowdown? By cutting 1,300 jobs, closing 15 stores and removing 50 stores from their future growth plans.

The company is not alone in managing a slowing economy and rising raw materials prices by cutting jobs or closing stores. And this leads us to why we may be on the cusp of a new era of corporate distrust...


4. Not Working for the Man

A piece in USA Today this morning, "Debt Squeezed Gen X Saves Little," runs through a litany of fiscal difficulties facing "The Gratest Generation." Ok, I made that part about the "Gratest" generation up, but as a member of Gen X, I can say that it's precisely that kind of loose play with truth, lack of attention to detail and sense of ironic detachment that defines who we are. In other words, anyone over 50 relying on us to straighten things out is screwed. You got us into this mess. We're just here for the ride.

Anyway, the article pointed out the following:

  • "Nine out of 10 consumers in their 30s are in debt, compared with 76% of those in their 20s, according to the Federal Reserve's Survey of Consumer Finances."
  • "About 20% of adults in their 30s are still paying college loans, according to the Federal Reserve study; the median balance exceeds $13,000."

"This generation is in the ironic position of paying for their own student loans and feeling the pressure to put away for their own kids for college," Tamara Draut, a new mom and author of Strapped: Why America's 20- and 30-Somethings Can't Get Ahead, told the newspaper.

  • "The median income for men now in their 30s, when adjusted for inflation, is 12% lower than what their dads earned three decades earlier, a report by the Economic Mobility Project, an initiative of The Pew Charitable Trusts, concluded.

That same study shows that from 1974 to 2004, family income rose only 9%. Most of that gain came between 1964 and 1994. Meanwhile, we now spend a record amount of our income on what most of us see as essentials (more on the definition of "essential" in a moment.

But here's the kicker: "Some specialists suggest that Gen Xers, faced with escalating financial obligations and shakier job situations, have developed a wary, skeptical stance toward the corporate world. "They want to make the most of their opportunities," says Rebecca Schreiber, a financial planner in Silver Spring, Md., who specializes in counseling Gen X clients. "They've got the dot-com boom and Enron behind them, which makes them skeptical about relying on any corporation entities.""

So, while corporate America is busy laying us off, closing the stores or factories we used to work in, downsizing us, cutting our hours or simply paying us wages that are rising less than the cost of our basic necessities, we're accumulating too much debt, not saving for retirement and beginning to conclude that this whole corporate work life is a bad joke, a charade of fulfillment and emptiness wrapped in branded polar fleece wear.

What will we do? What would you do? The answer is fairly simple and obvious...


5. Decade of the Entrepreneur

We'll go into business for ourselves. The word Entrepreneur is an import from the French, meaning, a person who owns her venture and assumes full accountability for the risks and outcome.

This idea is not new. It stretches back to the mid 1700s and early 1800s, drawing upon the works of Richard Cantillon and Jean-Baptiste Say. But the iconic image of the Entrepreneur as a "self-made" person, one who takes all the risks and assumes accountability isn't always uniformly fashionable. It's not accident the magazine, "Entrepreneur," was founded in 1978. The tail end of the 1970s, following on a near decade of sluggish economic conditions and layoffs, forced many to create their own jobs.

So too will we see the coming decade shift the balance of power back to the Entrepreneur from the large corporation. The driving forces are a strange cocktail of lowered expectations, diminishing corporate job security, too much debt, the desire to reduce consumption and the re-valuing of intangible assets such as family, community, time and independence.

The downside for stock investors is the coming decade will consequently see below-average returns for stocks. But what if we still have to have some money committed to stocks? Where do we turn? How do we play it? In my mind, two areas stand out because they are industries that make products we can't easily substitute away from or create ourselves: Consumer Staples and Health Care.

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No positions in stocks mentioned.

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