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Thursday, September 6, 2007

The Stupid Tax

Yesterday North American, European and most Asian equity indices dropped. This I liked because it had to happen to keep the Bear case alive. However, the volume was ridiculously low and I am therefore less than impressed.

Apple's Jobs Cuts IPhone Price by $200, Updates IPods (Update4): “Apple Inc. Chief Executive Officer Steve Jobs cut the price of the iPhone by $200 and unveiled new iPod media players with touch screens and video games to entice holiday shoppers.”

Apple cut prices significantly yesterday. I mention it here today because I find it very interesting. Basically the original iPhone price of $599 was a stupid tax on early adopters. This is price discrimination, or more specifically the strategy of price skimming where price varies over time. While this is practiced by most market participants to some degree, tech companies are notorious for it. However, a $200 drop from $599 in two months is unusually rapid and steep. While Apple customers are fanatically devoted to the brand, this still has to sting a little with most of them. Apple spins this as a holiday shopping strategy. I am wondering if maybe Apple noticed that the number of US consumers with that kind of discretionary spending power wasn’t as large as they had first anticipated. Could this be a sign of a weakening consumer? Time will tell.

ECB Leaves Interest Rates Unchanged, Shelving Plan for Increase: “The European Central Bank left interest rates unchanged today, shelving plans for an increase as the U.S. housing slump threatens to curb economic growth.”

I can’t say that was unexpected given the recent turmoil. They did toss in some more liquidity… again… Which has me thinking the banks are in pretty bad shape.

“The collapse of the U.S. subprime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.2 billion euros ($57.7 billion) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high.”

Wal-Mart Says August Same-Store Sales Increased 3.1% (Update1): “Wal-Mart Stores Inc., the world's largest retailer, said August same-store sales rose 3.1 percent as customers stocked up on backpacks and computer laptops for the school year.”

That’s actually not that bad. However, Wal-Mart did cut prices on 16 000 items to get those numbers.

China Curbs Bank Lending to Cool Economy, Inflation (Update2): “China ordered banks to put aside more money as reserves for the seventh time this year to cool lending and investment after inflation accelerated to a 10-year high.

Lenders must park 12.5 percent of deposits with the central bank from Sept. 25, up from 12 percent, the People's Bank of China said today. The ratio is the highest in almost 10 years.”
The Chinese are still trying (unsuccessfully) to put on the brakes.

CPDOs Rated AAA May Risk Default, CreditSights Says (Update1): “Credit derivatives awarded the top ratings by Moody's Investors Service and Standard & Poor's may be as vulnerable to default as high-risk, high-yield bonds, according to independent research firm CreditSights Inc.”

Re-read that please. Basically AAA = high-risk junk. Shocking. Can you say, “Sudden forced liquidation from portfolios that aren’t allowed to hold shit?”

Constant proportion debt obligations (CPDOs) were created last year and use credit-default swaps to speculate that a group of companies with investment- grade ratings will be able to repay their debt. An increase in credit rating downgrades for investment-grade companies may cause losses that CPDOs would struggle to recoup.

German July Factory Orders Drop Most in 16 Years (Update3): “German manufacturing orders dropped the most in at least 16 years in July after a decline in sales of ships, trains and airplanes.”

Big ticket items the world over are starting to exhibit serious weakness. Big ticket items also require plenty of financing both on the production and the consumption side of the equation. What did you think would happen when a global credit bubble bursts?

U.S. Total Jobless Benefit Rolls Rose to Highest in Six Months: “The total number of Americans receiving unemployment benefits rose to a six-month high even as new applications fell more than forecast last week, suggesting hiring has cooled.

Benefit rolls swelled to 2.598 million in the week ended Aug. 25, the highest since February, the Labor Department reported today in Washington. Initial unemployment claims fell by 19,000 to 318,000 in the week that ended Sept. 1.”

The big number is Friday’s Non-Farm Payrolls, but with a weak ADP yesterday at 38 000 and now this as well, things don’t look so promising.

U.S. Productivity Rose 2.6% in Second Quarter; Labor Costs Cool: “Worker productivity in the U.S. accelerated more than forecast in the second quarter and labor costs cooled, lowering the risk of a pickup in inflation as the Federal Reserve weighs cutting interest rates.”

At least that’s a decent number.