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We Refuse to See By Charles Payne.


 "I close my eyes
only for a moment, and then the moment's gone
all my dreams
Pass before my eyes, a curiosity

Dust in the wind

All they are is dust in the wind
Same old song
Just a drop of water in an endless sea
all we do
crumbles to the ground, though we refuse to see

Dust in the wind"
-Kansas

By now, we are all aware the U.S. economy is brewing into what could be the ultimate perfect storm. The thing is that we can see it coming; it's not something that will descend upon us one otherwise sunny afternoon. It's not like that dust storm that engulfed Phoenix this week. The pictures were frightening. I actually got caught in a dust storm years ago when I lived in Minot, North Dakota. Along with two buddies, we headed out for a drive and spent two hours with zero visibility. The canvass roof on the jeep we were in was ripped off and we had to hold it down. I was wearing a white sweater that was completely brown by the time we limped out of the storm and found ourselves in a small town in Canada.

Right now, our political leaders are riding through a storm, holding onto hopes of getting reelected even if it means we stay the course and eventually face a storm that leads to a desert of despair. The haboob (sandstorm pushed by strong winds) that swept through Phoenix delayed flights and will have everyone there washing cars, clothes, and pets for the rest of the week. For the economy, it works the opposite. We have to clean up our act now to avoid the financial haboob. This is not just an American story but one about the decline of the Western world. The rest of the world has taken notice, and instead of fear there is joy and anticipation. It's not just about the fall of the West but the belief the Earth keeps spinning.

Case in point was the selection of Pyeongchang, South Korea as the host of the 2018 Winter Olympics. America and European countries have come up short trying to host these big-time sporting events. The excitement and growth around the world can't be matched in the West. If we keep our eyes closed much longer, even for what seems like a moment, that moment could be gone, forever. It's time to toss out gimmicks and rhetoric and fix this thing once and for all. But, I think best case scenario is a deal loaded with phony spending cuts, some tax increases, and another blank check for $2.5 trillion. Or as the song says "just a drop of water in the endless sea" of debt and untenable obligations that only become more expensive as time goes on.

Picking Winners and Losers

The market determines the winners and losers, period. Obviously, when the government is shelling out billions of dollars it creates temporary demand that feels as good as legitimate free market demand, but it's different. In the case of alternative energy, there has been an untold amount of money from governments around the world looking to curry favor with the green movement, and clumsily create jobs at the same time. The job part is the farce for the public, which gets bled out of money to produce something it doesn't want and yet they are told it's a great thing.

Yesterday, during the Obama Tweet Festival, the DOE tweeted that we have quintupled our market share (advanced batteries) over the last four years. Shortly thereafter Governor Granholm tweeted: "Obama: whoever wins the advanced battery race wins the clean energy race." Of course the governor of Michigan is touting her book as they say on Wall Street. Talk about leads, automakers in her state had the world on a string but mismanagement and union greed destroyed their lead. If not, they wouldn't be touting non-combustion engine vehicles. Even though the statement comes out of desperation it doesn't mean it's not disingenuous.

(To be honest, even the concept of first mover in industries with real demand isn't a big deal anymore. I don't know that it ever was a big deal, but first movers from Kodak to MySpace aren't considered winners by any measure.)

How interesting her comments were on the same day Wunderlich Securities upgraded Ener 1 (NASDAQ:HEV) to a Hold from a Sell rating. The stock soared 6% higher for the session, closing at $1.06. Of course this stock rallied to $4.36 ahead of VP Biden's January visit where he touted the $118.0 million in stimulus funds the company received. In addition, Mr. Biden talked about the $7,500 tax credit being turned into cold hard cash up front for people buying electric cars; so far about 4,000 people have taken the bait (probably less subtracting government purchases). Mr. Biden said the facility he visited would add over 1,000 jobs by the start of 2013 after adding 120 last year.

VP Biden said the "future looks bright" in part because the ARRA included $2.4 billion in taxpayer funds for battery and electric car manufacturing. Look at the chart below. Does it look bright or hopeful? Does the chart of HEV give you confidence government can pick winners? The fact is the government doesn't have the right to pick winners or losers and in fact, only getting involved in such activities to promote ideology and not economic prosperity is wrong. It's always the wrong time for such actions, but now more than ever it's the wrong time.

 

 
Playing Monopoly

 

 

We have always known a deal had to happen so it looks like it's getting closer. I'm talking about resolving the debt ceiling issue. It looks like Republicans are ready to give in on $150.0 billion to $200.0 billion in tax hikes in return for tax reductions elsewhere. I've said from the moment President Obama went on the offensive over corporate jet benefits it was misguided and disingenuous.

That being said, it's also low hanging fruit with respect to a compromise. If the President wants to give up trillions of dollars in spending to adjust corporate jets from LIFO accounting then it's a deal I'd take.

(This morning, on TV, Warren Buffett echoed what I said about the so-called breaks for corporate jet owners not being unlike the Administration's deal for businesses to rapidly write off investments in plants and equipment this year.)

In the game of Monopoly, throwing oil companies and corporate jet tax gimmicks under a bus for massive spending cuts is like trading Baltic for Marvin Gardens. Of course, any kind of "Grand Bargain" with President Obama would feel Faustian to say the very least. But, driven by a desire for reelection maybe there will be a push for $4.0 trillion in spending cuts over ten years rather than $2.0 trillion over twelve years. Toss in a reduction in repatriated corporate profits and serious adjustments in Social Security and we might be looking at all the yellow properties. I think Republicans have the upper hand, especially if they make choices based on our children's future and not their own political skin.

I don't think we turn the corner in this Monopoly game on other things like the incredible war on business being waged by the EPA and NLRB. Moreover, a second term would see an attack on prosperity, and even the notion of achieving wealth that makes Baltic look like Boardwalk when the dust settles. The entire game would be Community Chest, and those willing to make a difference would be taxed and berated while passing money to those that never roll the dice.

Economic Data

According to ADP, private businesses added 157,000 jobs during June up from the 36,000 jobs that were added during May (revised down slightly from the 38,000). Economists had expected ADP to report a job gain of just 95,000 last month. Through the first six months of the year, ADP has averaged 164,000 new jobs per month.

 


Jobless claims fell to 418,000 from 432,000 last week. That is mostly in line with the consensus estimate of 420,000, so no real surprises here. Sure, it's always good to see jobless claims go down, but it is really disappointing to see it continue to loiter above the 400,000 level, that's just too high for a healthy economy.

 

Consumers Come Out in June
By: Brian Sozzi, Equity Research Analyst

The scorecard is weighted to the bulls rather than the bears on retail stocks this morning as Costco (NASDAQ:COST), Hot Topic (NASDAQ:HOTT), Zumiez (NASDAQ:ZUMZ), and countless others have eclipsed consensus sales forecasts. Importantly, the afterhours moves in Hot Topic and Zumiez (positive) and Costco pre-market (positive) suggest the market is generally pleased with the June prints, and that there is reason to bid up the sector further from the snapback that began in mid-June (in analytical jargon "valuations are being viewed as attractive). Drilling down into the numbers, there is a definitive impact on sales from inflation whether it's on apparel (testing of price increases) or food and consumables. Additionally, within the specialty apparel sector I happen to think consumers stocked up on heavily promoted merchandise in advance of inflation hitting in the second half of the year. So better than expected top line leverage creating upside to lowered consensus forecasts is a thought that the market is latching onto this morning.

All in all, July is shaping up as the month that will set the tone for the retail sector for the balance of the year; the consumer's receptiveness to price increases is the 500 pound gorilla that is not going anywhere anytime soon. I continue to be very selective in retail names, preferring to be 100% sure on a specific call than loading up on stocks that tend to have tight correlation.