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Five Things You Need to Know: Latest Four-Letter Word is D-E-B-T


Be Jones instead of trying to keep up with him.


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

1. ISM: Three Letter Acronym Increasingly Sounding Like Recession

Manufacturing in the U.S. contracted in February at the fastest pace in almost five years, according to the Institute for Supply Management's (ISM) Manufacturing Report on Business. The ISM Manufacturing Index slipped to 48.3 in February from January's 50.7.

Meanwhile, prices paid by manufacturers remain high. The Prices component came in at 75.5, down slightly from January's 76, but still a level indicative of pricing pressures.

On a related note, billionaire investor Warren Buffett told CNBC this morning that Berkshire Hathaway (BRK) retail businesses are reporting a significant slowdown in spending.

Although indicators such as the ISM are not yet at recession levels - a reading below 50 for the ISM suggests factory activity is slowing, but it takes a reading at 41 or lower for the ISM to be considered at "recession level" - Buffett this morning said he believes the economy is in a recession "by any common sense definition."

2. New Housing Price Indicator

Here's a thought: Maybe we can paint a better picture of housing in the U.S. if we just use a new and different price indicator. Back in October Radar Logic, a real estate data and analytics company, began publishing a report that tracks the housing values for major U.S. metropolitan areas that are the basis of the Residential Property Index (RPX).

The RPX is a real market that enables real estate to be traded as a liquid asset, via property
derivatives marketed by major financial institutions.

Ok, so back to the point. Maybe a new housing price indicator will show things aren't quite as bad as price tracking indexes like the Case-Shiller index and even the major media would have us believe. Sorry. Even using the RPX Index data one still has to be quite the
silver lining enthusiast to paint a positive picture. Take a look for yourself:

As one would expect, year-over-year price-per-square-foot has fallen in prime bubble areas such as California, Florida nd Nevada, but take a look at St. Louis, MO, down 20.3% year-over-year. And Atlanta, down more than 10% year-over-year. The silver lining is year-over-year price appreciation holding up in Milwaukee, D.C., Charlotte, NC, New York and Seattle.

One last note The Radar Logic report this month looks at the impact of the fiscal stimulus bill signed into law last month, particularly the increase in the price caps enabling Fannie Mae (FNM) and Freddie Mac (FRE) to purchase more mortgages. A preliminary analysis by Radar Logic shows of the 25 RPX Metro Areas, only nine have median prices high enough for an increase in the conforming loan limit. All are on the East and West coasts.

3. Foods for Thought

Interesting article in Investor's Business Daily today highlighting Cal-Maine Foods (CALM). In 2007, the average wholesale price of eggs jumped 58.3% to 93 cents a dozen. "That's been good for business at Cal-Maine Foods, the nation's largest producer and distributor of fresh shell eggs," according to IBD

Of course, as Five Things readers know, the Foods sector is top on our list of attractive sectors. There exists some pricing power in the industry, but more important is what happens when prices for raw materials come down.

Del Monte Foods (DLM) enjoyed a nice run last week. This is an example of a Foods industry company with some degree of pricing power. In the consumer fruit, vegetable and tomatoes segment the company said it expects pricing to fully offset costs in fiscal 2008. The company is continuing to battle increases in segments such as seafood and pets, where pricing actions have been less effective, but it appears the effectiveness is less a pass-through issue than a rapidity of the cost increases issue. More pricing action is forthcoming.

Notably, DLM says it expects some 4Q softness in vegetables as its customers have bought forward in advance of our mid-January price increase. This is one of the first companies I've followed in the space to note customers pushing forward purchases.

Even Heinz (HNZ), which last week said it had been able to pass through partial price increases to offset rising raw materials costs, has at least some pricing power.

This sector is full of companies I believe can be owned both for defensive purposes and for the possibility that commodities prices are too extended here. These price increases will not roll back in pace with a decline in commodities prices, and that should leave many of these companies well positioned in the second half of the year.

4. Speaking of Food...

An old saying about food: "Hunger is the best sauce." While it's true people still gotta eat during a recession, they don't have to eat at restaurants, and what they eat at home doesn't necessarily have to be expensive. According to researcher NPD Group, dinner traffic fell 2% last year, and lunch is slowing, too.

A USA Today article today compiled some of the evidence of a slowdown in casual dining from The Cheesecake Factory (CAKE) to Ruby Tuesday (RT):

  • 49% of restaurants surveyed by the National Restaurant Association reported same-store sales fell in January, and 54% said customer traffic fell in January, the fifth month in a row.
  • Ruby Tuesday same-store sales at company-owned stores fell 10.8% in the fourth quarter.
  • Same-store sales at Applebee's dropped 2.9% in the fourth quarter.
  • Cheesecake Factory fell 0.4%, and Howard Gordon, senior vice president, said that since going public in 1992, "We've never seen a time like this," according to USA Today.

5. Latest Four-Letter Word: D-E-B-T

Does this sound familiar?

"In a culture constantly bombarding consumers with advertising coupled with peer pressure to buy the biggest, best and latest version of everything, resisting these messages is crucial, Mr. Andrews [said]. "Be Jones instead of trying to keep up with him.""

This appeared in an article in the New York Times over the weekend, "Frugality Can Be Acquired, but It Can't Be Bought."

Increasingly, "being Jones" will take on an entirely new connotation.

See also this article from the Times over the weekend: "Is a Lean Economy Turning Mean?" During the long-running period of positive social mood throughout the 80s and 90s, tough economic times meant adaptation, career shifts and positive attitudes toward "re-engineering the workforce" in the aggregate.

Now that social mood is changing, we can expect to see increasing frustration and resentment. Just read the piece and note the words used throughout the article: Grim, gritty, despair, depressed, anemic, hoax, shambles, disenchanted.

Note too how this increasing tension manifests in attitudes toward debt and credit. From the same article, Dorothy Thomas, 49, a mother of two, says, "My credit is just so in shambles. More and more jobs are checking your credit. They're saying that credit is a reflection of your character."

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