The aspirational hierarchy used to be Saks (SKS), Bloomingdales (M) and friends, then Macy’s (M), followed by JC Penney (JCP) and Kohl’s (KSS), and then Target (TGT), Wal-Mart (WMT) and Kmart (SHLD). I can’t even place the aspirational desire for Sears [SHLD]. During good economic times the hierarchy was easy to maintain, with cheap material and labor costs and free spending consumers.

The story of this past year has been higher material costs and disappearing cheap labor from so-called developing nations. The profits of higher priced retailers are supported by the brand value of the merchandise they sell. No surprise in Wall Street’s enthusiasm. The trouble comes in the middle and lower tiers.

Given that a $60 shirt does not cost double that of a $15 shirt to manufacture, brand equity plays a big role in profits. This gives a midline retailer a great deal of flexibility

I would like to convey some macro trends in two of the most volatile and perceived economically risky sectors of the S&P 500. My analysis is primarily anecdotal, without taking a deep dive into the numbers.

Macro Trends in Technology
Apple (AAPL), Amazon (AMZN), the cable companies and “brick and mortar” book stores are taking a deep dive into the transition from physical to virtual content. Both sales of files and rental of streams are being heavily promoted. Bloomberg Businessweek’s "Intel Wants to Be Inside Everything" and “Don't Rule Out Apple Ruling Your Living Room” discuss the implications. Most analysts view this mass virtualization as a boom to the current entrenched innovators; too risky for me at their current stock prices.

The key takeaways from the Bloomberg articles is that Intel’s (INTC) low cost Atom processors are being embedded into all types of consumer devices (beyond

The National Association of Realtors’ (NAR) August 24 press release, “July Existing-Home Sales Fall as Expected but Prices Rise”, along with The Wall Street Journal’s inside look at the August 10 Federal Reserve’s “contentious meeting”, “Fed Split on Move to Bolster Sluggish Economy” left the market uneasy Tuesday morning. Headlining the NAR release; “completed transactions … dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.”

Miraculously, Bernanke seems to build consensus each meeting to push mortgage rates lower and lower with little impact on transaction growth. Traders became concerned that the Journal’s inside look showed that Bernanke might not be able to maintain a united front. Publishing this level of detail prior to the Fed minutes is unprecedented.

Treasury Secretary Geithner and HUD Secretary Donovan hosted the Conference on the Future of Housing Finance Tuesday, August 17, 2010. Among the esteemed panelists were PIMCO’s Bill Gross, Bank of America’s Barbara J. Desoer, Wells Fargo’s Mike Heid and the stellar brand builder from Moody's Analytics Mark Zandi. Geithner’s keynote was that the only known fact is that the future of residential mortgage finance must change. But as each party spoke it became clearer that change was the last thing anyone wanted.

Some of the academics talked about counter cyclic mortgage structures such as increasing down payments during boom times and reducing down payments during economic stress. Others countered that affordability would prevent larger down payments when house prices were rising. Many gave lip service to affordability being limited to rental units. But, supporting or constraining the growth of bubbles and the economy in general was not the purpose for

The Wall Street Journal’s “The New Nutritionist: Your Grocer “ reports that Kroger (KR) started testing the NuVal nutritional scoring system in some Kentucky stores, with the potential for a national rollout. Each shelf price tag contains a NuVal rating from 1 to 100; the higher the rating the more nutritional value. Shoppers might be surprised that organic favorites such as Kellogg’s (K) Kashi brand and General Mills (GIS) Natures Valley don’t always score well.

Griffin Hospital’s NuVal system was developed by Yale University based on food labels and federal dietary guidelines. It is best used as a relative scale for slowly improving health. This is a big step in the right direction because as I wrote recently "You Can’t Lose Weight Counting Calories."

HyVee, Wegmans, Safeway (SWY) and Wal-Mart (WMT) have either joined the party or are about to jump in. Their programs range from suggesting

The “got-you” model of investment banking made famous by Goldman Sachs (GS) is reaching obsolescence for the big retail banking franchises according to JP Morgan Chase (JPM) and Bank of America (BAC). With financial reform each customer will now have to carry their own weight. No longer will the financially sloppy, disadvantaged or simply naïve be tricked into paying high fees to subsidize the financially conscientious.

Overdraft fees are dead according to Bank of America. They think it is bad business to induce customers into opting into something the customer will regret the first time a cup of Starbucks (SBUX) ends up costing $30. Bank of America, Citigroup (C) and JP Morgan all see revenue losses related to credit/debit card interchange fees (Durbin amendment), but none has revealed their specific mitigation plans.

Citicorp appears to be shrinking its credit card portfolio to higher quality customers and making progress in selling

Bill Gross is developing a chorus in calling for Federal Reserve Chairman Bernanke to commit a time frame on extraordinary accommodative rates for an extended period of time. The longer the commitment, the better. The theory they are selling is that investors will start absorbing toxic assets if they are assured of low cost funding for a specific time frame.

This argument has many flaws. In fact, a Fed commitment to lower rates for a specific period of time actually reduces the risk in the carry trade of the world’s safest assets. The greatest risk in a leveraged position in Treasuries is changes in the cost of funding, not credit quality. Therefore, guaranteeing the cost of funding would actually move more money to the risk-free trade and away from productive capitalism.

The committed period of time being called for does not eliminate the collateral paradigm of finance. Speaking of

I couldn’t believe what I was hearing on CNBC during the 2:00 PM Wednesday FOMC announcement pregame show. Bill Gross (PIMCO) called for Bernanke to specify a hyper-extended period of time for extraordinary low interest rates. Gross wants the Federal Reserve to add so much confidence to the carry trade that junk bonds and other toxic assets will form a new bubble.

The simplest definition of the carry trade is to borrow short and lend long, capturing the spread. The risk is that an investor’s spread could turn negative if short-term rates rise before they exit the trade or they cannot roll over their short-term borrowings. The Fed has already allowed banks to print money by paying near zero to depositors and commercial paper buyers while capturing higher intermediate term Fannie Mae (FNM), Freddie Mac (FRE) and Treasury yields. But Gross is not satisfied because with 4.69% 30-year fixed mortgages

Is spawn the right verb for Bank of America’s (BAC) new online brokerage called Merrill Edge? This implies a new creation. Bloomberg’s “Schwab, Ameritrade, E*Trade Drop on Merrill's Plan” quotes a Raymond James research note: “We believe this is simply a re-branding of Bank of America’s existing online brokerage.”

While I believe Bank of America has much to gain by leveraging Merrill Lynch’s prestige and brand power, they are cheapening the brand by starting Merrill Edge before it has a compelling offering. I shopped the commercial banks selling free trades and found their packages no bargain.

Merrill Lynch is trying to lure young Bank of America savers into its “farm club” before the banking and the brokerage are fully integrated. The demo is full of “coming soon” and an FBR analyst said the Bank of America “will need to invest hundreds of millions in technology, customer support, and

The Financial Times’ “Goldman in PR bid to stave off crisis” reports that the firm is preparing for an advertising agency bake-off in an effort to improve its connectiveness with the American public. The firm, whose CFO David Viniar emphatically professes in every earnings conference call is not a retail bank, now feels it needs to develop a relationship. The public just does not understand Goldman Sachs’ (GS) economic role as a “catalyst for growth.”

The public be damned attitude is slowly receding with the heightened political and legal risks, but has the client be damned for the sake of maximizing profit or protecting the firm driven change at all? The Financial Times’ “Goldman plans to overhaul practices” reports the firm is initiating a very lawyerly approach to protecting itself from its clients. According to the FT:

Goldman … would now tell employees to seek confirmation from

The Humana (HUM) conference call (4/26/2010) was one of the most informative in recent memory. The market’s early enthusiasm for the stock gave way well before the call concluded. Reversals of accruals and outsized premium increases accounted for much of the earnings. Commercial enrollment continued to fall while Medicare Advantage (MA) increased 19% to 1.74M members. The company’s unbalanced book continues to get worse, increasing its dependence on government programs further.

Humana profoundly stated that healthcare reform is now the law, so they must adapt and become much more efficient. Only the large and dominant insurers will survive; the other smaller players will either merge or go out of business. The dominant players will vary by market.

The company’s perspective on the upcoming medical loss ratio (MLR) regulations differed from other insurers' public statements. While others primarily focused on moving costs from admin to MLR, Humana was more concerned

Goldman Sachs’ (GS) earnings call was startlingly arrogant in not remaining silent on the SEC fraud charges. Not only did they fail to disclose the Wells Notice in a timely manner, but challenged the SEC for not giving them a chance to settle before the public announcement. Goldman’s PR machine is so poor that Republicans are being forced to work with Democrats on financial reform as I write. Being legally right and morally wrong does not make for good politics or client relations.

Goldman has sustained itself being a firm that all others had to deal with, like it or not. They were smart enough to work within the letter of the law to offset much of their credit risk at major inflection points. Goldman turned up relatively unscathed, while leaving a bloody trail in their wake. Of course this is a bit of exaggeration for a firm with

The Wall Street Journal’s “Porsche Presses for Easier Fuel Rules” quotes Daimler’s (DAI) Chief Executive Dieter Zetsche: “We have to stretch but we will get there, and so we don’t complain. And I would prefer if others complain, they not do it in the name of their neighbors.” Speaking in reference to the new US fuel economy fleet wide average of 35.5 MPG and carbon-dioxide average of 250 grams per mile, all luxury and specialty car companies don’t have a uniform voice.

Just like the controversial healthcare legislation, implementation is 90% of the law. In this case the government must develop the regulations which define mileage based on each vehicle’s footprint (wheelbase and track). The idea was to still retain a variety of car sizes while still improving gas mileage and reducing greenhouse gasses.

Porsche’s (POAHF.PK) major complaint is that while it believes its cars provide reasonable mileage compared

Pfizer (PFE) has repeatedly told us during the “great recession” that pharma cannot sell drugs to patients that don’t go to their doctors. This is especially true of the lifestyle drugs such as Pfizer’s Lipitor and Merck’s (MRK) Vytorin that require regular follow up. Whether you believe cholesterol is a real disease or not, you can understand that taking these drugs does not constitute a medical emergency.

Analysts have generally considered big pharma to be a winner in the new era of healthcare. With more insured and correspondingly more doctor visits, the logic goes more “optional” drugs will be sold. Given that the manufacturing cost of most lifestyle drugs, the bread and butter of big pharma, is extremely low compared to R&D and marketing expenses; increased volume could easily protect operating margins from lower prices.

However, this logic faces some challenges. Insurance costs for both employees and individuals

The Wall Street Journal’s “Health Insurers Toughen Stance in Disputes Over Hospital Rates” brings to light that the problem of market concentration does not uniquely rest with private health insurers, but also is in hospitals and other medical service providers. Over the last few decades hospitals have merged to form monopolies or duopolies in smaller and medium metropolitan areas to strengthen their negotiating power. So now we have the dominate medical service providers in a standoff with the dominate health insurers in each region.

The insurers are facing hospital rate increases of up to 40% in regions with no competition. Aetna (AET), Cigna (CI), WellPoint (WLP) and UnitedHealth (UNH) are warning members of standoffs and the possibility of hospitals being removed from the insurers’ networks. The hospitals have a litany of excuses ranging from low Medicare and Medicaid reimbursement rates to higher unpaid care due to the “great

You can get whipsawed by the politicians, economists and media predictions of the housing bottom and recovery. Most of the government’s foreclosure prevention programs have unquestionably failed. But the GSE 30-year mortgage security spread over 10-year treasuries is hovering at a record low 63 basis points. And investors are outbidding owner-occupiers for choice foreclosures.

Will the Federal Reserve actually end its Fannie (FNM) and Freddie (FRE) securities purchases as promised? We have already experienced the Fed’s twisted promise of liquidity to Bear Stearns which was reminiscent of former President Bill Clinton’s “it depends on what the definition of 'is' is.”

Banks are getting hit from both sides. Private mortgage insurers are refusing claims based on warranty breaches and mortgage securitization trusts (MBS and CDO) and forcing buybacks for the same reason. Bank of America (BAC), JP Morgan (JPM), and Wells Fargo (WFC) could be liable for the majority of

The New York Times’ “Ailing Banks Favor Salaries Over Shareholders” reports that while Goldman Sachs (GS) is paying out only 45% of profits in compensation, less fortunate institutions are paying out close to, or up to more than their profits, to keep up. JP Morgan (JPM) is paying out 63%, Bank of America (BAC) 88%, Morgan Stanley (MS) 94% and Citigroup (C) a whopping 145%.

Do shareholders really benefit from hiring the smartest men in the room? Obviously, when Goldman mixes high compensation with political connectedness the results are indisputable. But the imitators have all fallen short. None of Goldman’s competitors have been as astute at managing risk. Greed and jealousy had succumbed caution. But even to this day, I don’t see any signs of banks paying heed to the black swans and long tails.

Can Goldman be agile forever? I have no idea. It’s a little

Intel (INTC) founder Andy Grove said that “only the paranoid survive.” This kept the early Intel at the forefront of semiconductor design and manufacturing. While manufacturing has never fallen behind competitors, design innovation had given way to dirty tricks over the past decade. AMD stunned Intel with innovation while Intel’s dirty tricks culminated in a billion dollar plus settlement. Intel went through an unhealthy period where paranoia turned to fear.

It could be argued that AMD’s sole innovations were onboard memory controllers and 64 bit processors that were software compatible with Intel’s 32 bit processors. And Intel’s misstep of the lack of compatibility in its first round of 64 bit processors. Intel has not brought memory controllers onboard processors until very recently.

I think the issue is far more complex than product. Intel had gone into a mode of product life cycle management similar to the games being played

Federal Reserve Chairman Bernanke revealed intriguing insight into the central bank’s modus operandi during Sunday’s professorial speech, “Monetary Policy and the Housing Bubble”, before the American Economic Association. In this piece I will argue that Professor Bernanke is too dependent on mathematical and statistical economics to the detriment of behavioral economics.

The Wall Street Journal’s “Fed Chief Edges Closer to Using Rates to Pop Bubbles” and Bloomberg's “Bernanke Says Regulation Came ‘Too Late’ to Curb Housing Bubble” chose to report on Bernanke’s economic proof and myriad of excuses as to why the Greenspan/Bernanke extraordinary accommodative policy was not primarily responsible for the housing bubble. The Journal actually emphasizes the slight indication that the Fed might use monetary policy in the future if regulation fails to control assets bubbles.

The excuses ran the usual gambit from excess foreign savings “invading” the US to the difficulty in identifying asset