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Five Things You Need to Know: Calm Before the Storm; FedEx Delivering Cost-Push Inflation; Banking On Dividends; This Is Not Your Father's S&L Crisis; We're Gonna Rock & Sell All Night...


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. Calm Before the Storm

It's quiet today, but this week brings at least 10 economic releases that could shake things up. If that's not enough, the Federal Reserve Open Market Committee meets Wednesday.

  • Light calendar today but this is simply the calm before the storm.
  • The week is full of economic data, so relax while you can, and at your own peril.
  • Tuesday October 30
    10:00 Consumer Confidence: 100.0 cons
  • Wednesday, October 31
    8:30 GDP-adv: 2.1% cons
    8:30 Chain Deflator – Adv: 2.1%
    8:30 Employment Cost Index: 0.9% cons
    10:00 Construction Spending: -0.3%
    2:15 FOMC Policy Statement
  • Thursday, November 1
    8:30 Personal Income: 0.4% cons
    8:30 Personal Spending: 0.4% cons
    8:30 Core PCE Inflation: 0.2% cons
    8:30 Initial Claims: 331k prev
    10:00 ISM Index: 52.0 cons
    10:00 Pending Home Sales: -6.5% prev
  • Friday, November 2
    8:30 Nonfarm Payrolls: 90k cons
    8:30 Unemployment Rate: 4.7% cons
    10:00 Factory Orders: 1.0% cons

See Minyanville's weekly Trading Radar here for a full, comprehensive weekly view of what's happening.

2. FedEx Delivering Cost-Push Inflation

FedEx (FDX) said Friday that rates will rise by 6.9%, the largest increase since 2001.

  • Although the net effective increase will only be 4.9% thanks to a reduction in the fuel surcharge rates, the push is big.
  • The company said it will also boost the charge for special handling of packages by 50 cents, to $6.50, and increase the fee for deliveries to certain remote areas by 10 cents.
  • While UPS (UPS) hasn't set its 2008 rates yet, most expect that carrier to follow suit as well.
  • What is interesting is to see how this classic case of "cost-push inflation" plays out, especially given the backdrop of weakening consumer spending many retailers fear.
  • "Cost-push inflation" is the kind of inflation caused by large increases in the cost of goods or services without attractive alternatives.
  • FedEx and UPS shipping is certainly among those types of services without an attractive alternative.
  • Of course, Austrian economists might argue that without the cooperation of the Fed through an increase in money supply, cost-push inflation simply translates into a decrease in the price of other services to offset.
  • But that only happens when the supply of money is constant, which we know is hardly the case.

3. Banking On Dividends

"Bank shares are so cheap and their dividends so high that some of the world's biggest investors now say the combination is unbeatable," trumpets an article we ran across on Bloomberg this morning.

  • According to the article, dividend yields of U.S. banks now exceed those of telephone companies and utilities.
  • Telephone companies and utilities have averaged the highest dividend payout in the S&P 500 over the past five years.
  • But what does this really mean? Can/should we buy bank stocks because their dividends are high?
  • It might seem like a good strategy on the surface, especially when we consider the last time banks dividend yields surged, 1990-1991.
  • But that was in the wake of the savings and loans collapse, and financial stocks as a group jumped 44% in 1991, the article noted, as the Federal Reserve cut the Fed Funds rate from 7% to 4%.

4. This Is Not Your Father's S&L Crisis

Today's Number Three raises the question about banks and surging dividend yields in the face of anticipated Federal Reserve rate cuts: Is this time different?

  • Considerably.
  • For one thing, financial stocks at that time were not at the epicenter of the S&L crisis, but at the periphery.
  • For another, the New York Times notes that total cost to financial firms and investors of troubles in the mortgage market could reach $400 billion, far more than the $240-some billion, adjusted for inflation, that the S&L crisis cost.
  • Indeed, post-S&L regulation ultimately benefited the banks even as pre-S&L de-regulation created a whole class of competition for them.
  • No, this is not your father's S&L crisis.

5. We're Gonna Rock & Sell All Night...

We ran across an interesting article in the New York Times over the weekend asking the following question: "If It's Retail, Is It Still Rock?"

  • The Times took a look at rock music today and the depths to which branding and advertising have penetrated it.
  • "Band branding appears to know no bounds," the Times said.
  • "The Black Crowes market rolling papers, Bon Jovi offers $1,000 signed canvas art prints and Mötley Crüe peddled Mötley Brüe, a carbonated drink. Celebration Cellars, a California winemaker, teamed up with several rockers, including Bon Jovi, Kiss, Madonna and the Rolling Stones, to issue special-edition wines that feature band logos and sell for $100 or more a bottle."
  • "The right commercials, television shows and movie soundtracks can make or break a band," the Times said.
  • Of course, one can go too far. Mötley Crüe bassist Nikki Sixx told the Times he was "devastated" as a kid when he saw that Kiss was on a lunchbox.
  • "[A]ll of a sudden they were like Shaun Cassidy and the Partridge Family," he said.
  • As Duff McKagan of Velvet Revolver noted, "Fifteen years ago, it would have been totally not cool. You would have been selling out."
  • Indeed, that's the real question, which goes largely unanswered in the article other than a reference to the trend of disappointing album sales.
  • Why today is it not totally uncool to sell Metallica stockings? Or Bon Jovi cabernet?
  • What's changed?
  • Interestingly, once upon a time, rockers had more in common with communists than capitalists.
  • Rock music built a sturdy foundation on being counter-cultural, free, operating outside of capitalism.
  • Making money at rock was an accident, and as any good VH1 docudrama shows, frequently as much a source of despair as good fortune.
  • Today, rock and roll is finally embracing the trend... ironically, as it is in its final throes.
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