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Five Things You Need to Know: Where Your Tax Rebate Is Really Going

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Rebate checks will soon go from our pockets directly to state and local coffers.

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

1. Where Your Tax Rebate Is Really Going

Economic "stimulus" the form of tax rebate checks is on the way, and in some cases may have already arrived in a few mailboxes. But economists remain divided on, a) how much of those rebate checks will be spent to boost the economy, b) how much will be socked away in the bank and saved, or c) how much will be used to pay down debt. The reality is it may be none of the above.

The Financial Times this morning had an interesting piece on what looks like it will be a first wave of a multi-wave event: California state legislators are considering radical revenue-raising measures including a new services levy and a temporary tax on high earners to address a budget crisis that has spiraled into a $20 billion deficit.

As one of the states hardest hit by the real estate bubble collapse, California is struggling. Yesterday Vallejo, a city in in northern California, voted to file for bankruptcy protection after running out of money.

But make no mistake, California is no orphan sitting at the stoop of the budget shortfall poorhouse. States across the country are facing deteriorating budgets. Alabama, Arizona, Florida and Nevada face budget shortfalls of more than 10%, according to the National Conference of State Legislatures.

These state budget shortfalls are crimping spending on everything from basic services, fire and police, to education. And guess what, as those tax rebate checks come rolling in, they will soon very likely go rolling right back out in the form of tax increases at the state and local level.

It's a game of smoke and mirrors; tax money that would have gone to the federal government, instead goes back into our pockets so that it can pay a portion of the tax increases that will soon accumulate at the state and local level. There is no free lunch, not where taxes are concerned.


2. Meanwhile, What Are We Currently Spending On?

According to early estimates by Thomson Financial, 19 retailers have beaten retail sales estimates, while nine have missed. Among the winners so far? Wal-Mart (WMT) and Costco (COST). Both reported results that exceeded estimates, mainly because both are trade-down cost-saving bulk retailers.

Wal-Mart president and CEO Eduardo Castro-Wright, said the economy "continues to get tougher" and that customers increasingly are unable to stretch their dollars to the next pay day. "As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past," he said, also adding with respect to food purchases that, "customers are buying less expensive protein sources and trying to stretch their dollars with purchases of boxed dinners and pasta. Moreover, they are gravitating towards more private label than in the past few months."

One of those retailers missing estimates was Target (TGT), which posted a 3.1% gain that came in below estimates of a 4.5% increase. According to TGT, consumers are focusing on necessities, food and staples, household goods, and shunning higher-priced discretionary items such as jewelry, and decorative home items.


3. Make Way for the One-Armed Bandits

Circling back to state budgetary pressures for a moment, one of our themes for 2008 is the Expansion of State Gambling Initiatives. When the going gets tough, the tough turn to gambling revenues. Among the companies that benefits directly from that theme is WMS Industries (WMS), a company that designs manufactures, sells and leases gaming machines and video lottery terminals.

WMS reported earnings yesterday, showing a 27% increase in total revenues that exceeded the high end of the company's previous guidance. President and CEO Brian Gamache noted that the company is anticipating benefits from product replacement cycles, where old machines are replaced by new ones, as well as substantial casino and gaming expansion.


4. One Goal: Prevent Price Discovery

Today we see where India's government suspended futures trade in basic foods such as lentils, soy and potatoes for four months, hoping to "stop price rises driven by speculators."

Stopping price rises driven by speculators? That's one way to put it. Another way to put it is they are preventing price discovery. Why? Simple, because they don't like the prices that are being discovered.

The irony is that this prevention of price discovery is precisely what the Federal Reserve is doing by swapping out Treasuries for all manner of lesser-quality assets. They are basically preventing price discovery. Why? Because, like India's government, the Federal Reserve, banks, home sellers, mortgage lenders, derivatives dealers, almost everyone, doesn't like the prices that are being discovered.

The short rebuttal to this is that the Fed isn't preventing price discovery, it's simply providing liquidity because there is no price discovery currently taking place because there are otherwise no bidders. But you know what, as anyone who has ever tried to sell a ticket to a baseball game discovers after the first pitch has been thrown, a lack of bids is price discovery.


5. Daily Socionomic Datapoint: Slow Down!

Today we ran across an interesting article in USA Today with important socionomic significance:

AS FUEL PRICES RISE, SOME SPEEDOMETER NEEDLES FALL

"As surging crude oil costs send gasoline prices nearer $4 a gallon, some drivers are keeping their cars going longer by easing off the throttle."

The article notes that the move to reduce speed on the highway hasn't reached trend status yet. "At least two states - Alabama and Connecticut - have considered reducing speed limits, but those efforts haven't gained much traction. And despite the benefits, there seems to be little appetite in Congress for a new national speed limit."

But don't worry, it will. The desire to slow down on the highway may presently be attributed to rising fuel prices, but as the broader themes of downsizing, reducing and slowing down become still more pervasive, not even speed limit postings will be immune.

No positions in stocks mentioned.

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