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Five Things You Need to Know: Consumers Raise Anchor, Cut Bait and Engage in Numerous Other Things Sea-Related


Consumers continue to shift purchases away from discretionary items.


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

1. Consumers Raise Anchor, Cut Bait and Engage in Numerous Other Things Sea-Related

Consumer confidence this morning fell to its lowest level in five years, according to data from The Conference Board.

Although the decline in The Conference Board's confidence index to 62.3 was smaller than many feared, at least one aspect of the report presents a fly in the ointment for the Federal Reserve Open Market Committee ahead of tomorrow's decision on the short-term Fed Funds rate: consumer inflation expectations.

According to The Conference Board, consumers' inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina. So much for "well-anchored."

2. The Fed Needs You

An interesting article from the Financial Times making the rounds this morning looks at an important shift in Federal Reserve authority and policy that will be discussed in tomorrow's closed door meeting; the ability to pay interest on bank reserves. What does this mean?

First, it's not new. Under a law passed in 2006, the Federal Services Regulatory Relief Act, the Fed will gain the authority to pay interest on reserves beginning in 2011. What will be discussed, according to the Financial Times, is the timing of the policy and whether it should be pushed forward to help deal with the current crisis.

What does paying interest on reserves accomplish? As the FT explains, currently the Fed cannot expand or contract its balance sheet without altering the overall supply of reserves and changing its main policy rate, the Fed funds rate. But if the Fed was able to pay interest on deposits, it could use that rate to put a floor under the Fed funds rate.

Minyanville Professor Scott Reamer has looked at this issue and notes that it is little different than any of the non-traditional methods the central bank has used to stave off debt crises in the past. "In the final analysis, all of these sorts of measures are different avenues of getting people to take up risk (read: credit) again. If they are unwilling to do so, then the avenues the fed takes – as history here and in Japan indicate – are relatively unimportant to the larger question of whether the Fed is able to re-start the hyperinflation of assets that so abruptly turned off in August 2007."

Bottom line, the Fed needs you to continue to expand your appetite for risk and borrow more money to spend more money. That is why we are so focused in Five Things on the many subtle clues accumulating suggesting risk aversion is deepening and becoming part of a larger lifestyle view.

3. Great Expectations

Home prices in 20 U.S. metropolitan areas fell in February by the most since record-keeping began in 2001, according to the S&P/Case-Shiller home-price index.

The Case-Shiller index fell 12.7% year-over-year in February, after a 10.7% decline in
January. Seventeen of the 20 reporting metropolitan areas are posting record low annual declines, according to the report, and 10 of those are declining in double-digits.

The index has fallen for 14 consecutive months in year-over-year terms.

It's almost enough to make one expect home prices to continue to fall. Almost.

4. MasterCard: Consumers Continue to Shift Away from Discretionary Purchases

MasterCard (MA) this morning said first-quarter profit more than doubled as customer spending increased, and that sounds very good for the broader economy until we realize what, exactly, consumers are spending on. Or, rather, what they are not spending on.

MA President and CEO Robert Selander said on the company's conference call this morning that, "the trends that we saw over the past few quarters have the U.S. a consumer shift away from discretionary purchases such as luxury retail and home furnishings to non-discretionary purchases, including food and gasoline."

5. TV: Man's Real Best Friend

Here's an interesting question David Gaffen over at the Wall Street Journal asked us this morning: If retailers such as Circuit City (CC) and Best Buy (BBY) continue to struggle, how is it that Corning (GLW) - maker of LCDs - can continue to blow past earnings expectations? This is a very good question. Have people not head there's a recession on?

We listened to the GLW call this morning and would note a few things:

1) GLW came in with very nice gross margins amid very high demand for LCD TVs. They noted that even the U.S. market for LCD TVs is very strong, so it's the margins at the retail level that are under pressure.

2) GLW also benefited significantly due to the U.S. dollar/Yen exchange rate.

3) The company presented slides from their February investor conference showing that TV sales during recessions really don't slow down.

So, apparently, no matter how tough times get we are unafraid to open up the wallet for a television. Why? It's simple. Because TV, not dogs, are man's best friend.

They cost less to maintain, require no feeding or walking, no vet bills, they don't bite, bark or go to the bathroom on the carpet, and they are always there for us when we need them, listening to our sob stories, showing us pictures of all the poor bastards who are worse off than we are. Yes, TV is man's best friend.

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