Friday May 27, 2011
Assessing the World Social Mood
Socionomics holds that social mood which is determined endogenously, free of outside force, determines the course of human events in markets, politics, and entertainment. While anyone can read the WSJ for a couple of dollars, it is the trend of events that the socionomist examines. The objective to detect a change in social mood which will alter the markets. John Naisbitt built and entire career (Megatrends with books, websites, lectures, www.naisbitt.com) by examining news reports in papers. He observed that the size of the paper rarely changes but the content changes drastically. So let’s take a look at what is happening as reported in the media.
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The reason to read an independent newsletter is for perspective, hence our title. One never gets this from a brokerage firm as they are in business to sell things to the public, period. Even shorn of brokers, firms like Fidelity.com still push stocks. So here is our independent take.
In Summary
The conventional view is that the Financial Crisis has ended. The FED has gotten the markets to recover, unemployment is improving, and the worst is past. However a socionomic view clearly demonstrates that social mood is already in decline. Yes luxury goods are on display, wealth is back in vogue in some places. This however is the sign of the market top. Yet violent rage stalks many countries and a sense of loss pervades Western Europe. Obama’s own party rebukes his budget 100% and his Israel proposal. Netanyahu receives with multiple standing ovations form both sides of the aisle in his rebuke to Obama. The Republicans are at a loss for a popular candidate even as Obama’s popularity sinks. Americans are buried in books about vampires, werewolves, and apocalyptic end of the world scenarios. Recall that Orson Welles famous broadcast of the War of the Worlds occurred October 30, 1938 as the markets swooned to the downside again. Well, same emotion, same market. And it is all in today’s paper.
Seriously, if there is this much violence at new stock market highs, we should expect a good deal more in the two years ahead.
We will use today’s Wall Street Journal, the current May 2 Newsweek (aka thedailybeast.com), and the current June July Town and Country ( not one of my normal reads but interesting).
Deflation
WSJ Page B 4 Amazon was unprepared Monday for the response to the 99 cent offer for Lady Gaga’s Born this Way’ album. So AMZN is repeating the offer Thursday. But that is not the important news.
AMZN is losing money on the album which has a wholesale price of about $9, but hopes to draw more business with such popular deals. This is sort a replay of the old joke about losing money on each transaction but making it up on volume. WMT admits to losing customers due to high gasoline prices. Customers will go shopping on the net but they tend to do so at highly discounted prices.
Page B 3 Sony is losing money on its flagship tv business for the 8th year in a row! Sony has lost its way. Decades ago it was the Apple Computer of its day with innovative designs like the Trinitron TV and the Walkman, the first portable music player. Now as the losses pile up, it is taking low prices to move product.
While ‘bond vigilantes’ claim to be worried about a return to inflation, and indeed crude oil is $100, in the real world of market prices not fueled by QE II free money, it takes low prices to promote business.
Williams Sonoma WSM is getting hit by AMZN sales of its own products reported on page C12. WSM reports lower gross margins and a stock price down 8%.
AMZN is now selling more e books than print books, why, it’s cheaper for the consumer.
A scan of headlines in the local San Antonio Express News reveals
- Lean Times Ahead in Texas, Legislature Cuts $15.2 billion
- Save bucks on appliances this weekend, sale tax holiday
- Big Box Retailers Feel Pinch, High Gas Prices Change Shopping Habits
- Gasoline decreased 2% last week compared with a year ago
All of these items scream deflation not inflation. Bill Gross and Jim Rogers have predicted inflation as a result,. They are early. For now deflation is only realy beginning. The result is a slowing economy.
Sometimes anecdotal observations can be quite right. A dental technician tells me that demand for her skills has collapsed People out of a job or without dental insurance simply do not get their teeth cleaned. Say hello to the real economy.
Here We Go Again –Dot.coms to Social Media
In 1990 it was different that time, or so we were told. The dot.coms would revolutionize retail. In truth it was really the original Sears Catalog come to life on the personal computer, an old idea made new again. As shown in the previous section online buying has occurred. But first, the new dot.com IPOs had to burn through all their public money. A mew term was coined, the burn rate, the amount dot.coms spent each month from their IPOs to stay in business. Once the money ran out, the new industry and the market collapsed.
Now we are told social media will change the world. Tell that to Rupert Murdoch whose MySpace just two years ago looked like a sure thing. Yet investors are gobbling up the few IPOs in that area. Andy Kessler reports on page A15 that Linked In LNKD was valued at $9 billion, 30 times sales and 666 times earnings. Yandex Russia’s Google started trading at $10 billion. Can Linked In make $900 billion after tax in the next ten years to support the valuation?
It is truly amazing, as though no one remembers Fall, 2008, or Fall 2000, or Fall, 1987. Yet here we are, the crowd is paying absurd multiples for companies with little or no track record in a brand new ‘industry.’ It is this swing from the pessimism of March, 2009 to the new giddiness of May, 2011 that is typical of these periods of economic stagnation. It is the result however of socionomic changes in mood.
You will never get a recommendation from a brokerage firm to get ‘out of the market.’ All brokerage firms suffer from the inevitable conflict of interest. Who is the client, the firm they take public, say Linked In or the customer who buys the LNKD? If things start going bad, is the firm going to warn you the customer, and risk losing the next underwriting for LNKD? Of course not, you will get a message that the fundamentals are sound, the media is unnecessarily worried, this might be a good time to add to positions with lower prices. I digress from our socionomics theme, we will have more to say on the conflict of interest for brokerage firms versus clients in another letter.
History repeats, here is a picture.
Fidelity Brokerage sent an e mail recommending I move money to large capitalization stocks. Capitalization is the number of shares times the price per share. Large capitalization firms are represented by the SPX dominated by the GEs, IBMs, JNJs. But even a novice should be able to look at the above chart and sense the need for caution. Note my comment in red, you are here, hello Wiley Coyote chasing the Road Runner, the cliff lies ahead.
Now comparing the dot.coms to social media we should look at small caps below. A small capitalization stock has traditionally been represented in what used to be called the OTC or Over the counter Market. Now it is referred to as the NASD for National Association of Security Dealers. This is the heartland of high tech stocks with four letter abbreviations, hence GOOG, INTC, APPL. None of those are ‘small caps’ anymore given the voracious growth expectations of hedge funds. This however was the penny stock playground where the dot.coms were offered. What more can we say but here we go again!
Social mood has recovered form the depths of the two previous sell offs. Sky high valuations absent any dividends always occur at market tops. The number of IPOs going public in the US is down drastically. Recall hat the dot.coms were pre-SARBOX. The Sarbanes Oxley act was passed after Enron and Worldcom collapsed, and after the dot.coms went up in smoke. Sarbanes Oxley and continuing government regulations have discouraged companies from going public in the US. There’s a solution for you, the government makes compliance so complex and complicated and expensive that Facebook refuses to go public. No one else can generate unintended consequences like the Federal Government on a mission. But the lack of new firms going public has kept the NASD from reaching its former heights, there is just not enough speculative froth to drive the prices back to 5,000. Hong Kong led the world in IPOs last year. Well that’s irony for you. Just a few years after taking over Hong Kong the Communists have made it a capitalist haven. But our point is the lack of sufficient IPOs has left the NASD over 2,000 points of its Year 2000 high.
Luxury Goods
We were early on our look at Tiffany’s this week. TIF reported higher earnings and the stock jumped up. It would make sense that luxury makes a top with the market though we can see the cracks at Ralph Lauren and WMS. Sootheby’s is finding support and no doubt we will now see highs in TIF and BID. The desire to display wealth is prominent at market peaks. We noted earlier this week that insiders are vigorously selling their shares in TIF, BID, RL into these new highs. The June July issue of Town and Country lists mega-yachts as well as who has been invited on board. There is also an article on beach resorts as well as the requisite full page Cartier ads. Last week we mentioned Ralph Lauren’s car collection on display at the Lourve and there is an interesting article on how those art objects were moved from Westchester to Paris.
When I attended UT Austin in the last 1960s Austin, TX was a sleepy state capitol. Its quirky neighborhoods were stylish and hip, but there wasno way to make a living. All that changed with the move to high tech in the late 1980s. Austin just celebrated its own
Ferrari Festival. Observers have noted that big projects, like skyscrapers, happen at the end of bull markets. The ambitious City Center project in Las Vegas is a great example, now we have a proposal to build a
$250 million Formula One Race Track in Austin. How does such a venture return the requisite $25 
million a year after tax to justify its construction? I cannot imagine but who worries about such things at market tops? With the first race scheduled for June 2012, ground breaking has yet to occur. Perhaps the inability to raise capital is proving the froth on this overheated market.
Real Estate
But let’s give Bud and Betsy Knapp, owners of Architectural Digest and Bon Apetit, the market listing award of the week. Their 15,000 sf Bel-Air mansion is on sale for $24 million. It borders Bel-Air Country Club; for those not up on trendy CA neighborhoods Bel-Air is even fancier than Beverly Hills. Better hurry Bud if our predictions are on target or, have you called Lady Gaga? There are more pages of Distincitive Properties in Section D, again high priced luxury, along with the multiple ads for mechanical watches on pages A 2 and A 3 speak volumes about the ‘show off’ public mood.
But all real estate is not created equal.
On page C3 Goldman ‘Restructures Hotel Debt.’ (This echoes the MGM Mirage ‘restructuring’ we discussed earlier this week.) This means that United Arab Emirates will ‘inject’ $475 million to secure the new loan of $975 million as the payments could not be made on the old loan. The old loan had been delinquent since last month. We don’t quite understand what the article means when it says property owners are working through some of their most troubled assets. If GS could not make the payment on the old loan, what changed? Nothing, the banks and GS and UAE are just postponing an inevitable write down on 138 hotels sold in 2006. Again this is all very deflationary, already the UAE is getting a margin call. How many such loans are still on the books of banks, this is just like Japan’s two lost decades with their refusal to write off bad loans.
On a drive today in San Antonio, one of the better cities weathering the storm, it seemed as though every office building and every new strip mall had a For Lease sign in front, have you noticed in your communities? Yesterday at a pet wash shop where we had family pooch Bentley’s toenails trimmed, 80% of that new strip mall was vacant.
Again all of this is quite deflationary and a sign that we are emulating Japan.
Civil Breakdown
Bear markets result from negative human emotions. The most negative human emotion results in death . And so wars usually begin amid poor economic conditions As the US pledges billions for Afghanistan and now Tunisia and Libya, Mexico has become a sort of ‘Mad Max’ on display. Mad Max was a 1975 Australian film which debuted Mel Gibson in a futuristic, violent, anarchic society. Consider these snippets from a page A9 article
- Local media in states like Michoacan have largely stopped covering the carnage on orders from drug gangs.
- Three days of raging gun battles killed an unknown number of people, forced hundreds to flee their homes and raised fresh fears that another major Mexican state has become all but ungovernable.
- The cartel has infiltrated local police forces and city halls throughout the state and largely displaced local governments in many areas.
The violence is spreading to this side of the border, no matter what Janet Napolitano says on television. Fewer companies are willing to set up operations in Mexico border town. The corruption in Mexico coupled with the low wages make this a perfect market for drug money rich cartels. As Bob Prechter has speculated, this will finally end like Prohibition in the 1930s. The public will tire of the violence, government will legalize drugs, and collect taxes. But the point is that negative sentiment is on display
Revolution has spread across North Africa; Egypt will try Mubarak on murder charges. Today was an Official Day of Rage in Egypt; what could be more clear than that? The break down in societies like this of course leads to less not more legitimate economic activity. And so again deflation hits home. Our friends at the Socionomist have an interesting take on authority regimes. Negative mood gives rise to more, not fewer authoritarian regimes. Hitler for example came to power at the depths of the Depression.
How many wars can one region support? Pakistan versus India; the US versus Pakistan; Saudi, Pakistan, Malaysia, and Indonesia against Iran. Revolts are underway in Tunisia, Libya, Yemen, and Egypt. The Palestinians refuse to recognize the Jewish State, as always. And we remind you this is all happening at stock market highs! Let the markets collapse and revolutionary fervor will really take hold.
Sun Sets on the British Empire
All civilizations do not end violently, like MacArthur, some just fade away.
Ian Jack offers a Tale of Two Britains. Regrettably the link does not have the same two page photo spread as the May 2, 2011 Newsweek magazine. These pictures are what this Market Perspective report is all about. The left page features Will and Kate in a loving embrace. The right page features a rioter breaking a store window with a wooden two by four. The cover headline says it all, Can Will and Kate save Britain? The story is one of decline. The single remaining Royal Navy Aircraft Carrier is docked and for sale. We featured the article photo of Charles and Camilla attacked by a mob last December. This was the first attack on a Royal Couple since the 18th Century! The thrust of the article is that Britain has lost its manufacturing capability. There is not a single British owned car manufacturer. Manufacturing creates wealth. I doubt social networks create much wealth, advertising yes, but for goods made in what country? Ian Jack is author of The Country Formerly Known as Great Britain. We urge you to click and read the article. As we said April 29 was the zenith of social mood, world-wide.
None of this is escaping China’s attention. Hong Kong that great British outpost is back in Chinese hands. But it is a question of choice. Britain politicians gave up on manufacturing or at regulated and taxed it to its present sorry state. Will the US with its current government expansion on all fronts go the same way? The debate over the entitlement mentality and its cost is underway. A this point there is no clear answer, see the next section on Leadership. France wants Khadafy to get out of Libya, but defends its lack of real force by saying, we are not killers. This is the formula for long term unrest.
A read of this story is necessary to grasp that Western Europe is in decline. Greek two year debt now sports a 15% yield, always a sign of expected default. Now Greece, Portugal, Ireland, Iceland, Spain, and next, rumors of Italy in trouble.
Leadership
Bear markets are famous for de-throning figures made famous in previous bull markets. We think the 1966-1982 period parallels this one from 2000 to 2018 as far as public attitudes about public figures. From 1930-1948 one party and near one man FDR held sway nationally. But from 1966-1982 every President was thrown out of office (literally in Nixon’s case). In 1979 Bill Clements was the first Republican elected as Texas Governor since Reconstruction. Clearly the times were changing. That set the tone for the eventual Republican sweep in the 1990s.
Bush’s unpopularity swept Obama into office but now he is subject to the same sort of dissatisfaction that came to plague Bush in term two as well as his counterparts from 1966-1982. Consider this comment (op ed page) from Walter Russell Mead.
Obama’s record of grotesque, humiliating, and total diplomatic failure in his dealing with t PM Netanyahu has few parallels in American History. Netanyahu beat Obama like a red headed stepchild; he played hi like a fiddle; he pounded him like a big bass drum.
Well you get the idea that this student of foreign policy is not impressed. If past history holds, and the negative sentiment sweeping the world continues, it will be extremely hard for Obama to be re-elected even as current belief holds that he will. Our outlook for markets is such that by November 2012, many incumbents will likely be swept from office. It will not be possible to withstand the negative tide of public opinion.
On the preceding page A13 Kimberly Strassel points out that this week’s score was Paul Ryan 40, Obama 0, forty Senators voted for the Ryan plan. In contrast the Senate voted 97-0 against the Obama budget, a stunning rebuke. Our point is that the conventional wisdom about Obama’s strength, like Bush’s in his second term or Jimmy Carter in his first, is simply not correct.
Recall that Obama had followers fainting at his rallies during the campaign. During times of stress people want to believe in larger than life heroes. Recall that Schwarzenegger billed himself as the Governator. Now CA is even more in debt and it is doubtful that Arnold will be able to return to the screen in front of or behind the camera. Such is the nature of a bear market.
We have had a series of embarrassing revelations about former stars of the bull market era. Recall that the socionomic moment is the desire to find a hero amid chaos.. Greg Mortenson author of
Thre Cups of Tea, fit the bill perfectly. His story was that after a failed attempt to scale the mountain K-2, he stumbled into a Pakistan Village and was nursed back to health with liberal doses of, yes, tea. Mortenson built on the best selling story to start a Foundation which has built hundreds of schools across Pakistan and Afghanistan. Now a 60 Minutes expose reveals that the story was a hoax, the Foundation is mismanaged, and many of the ‘schools’ are storage barns. Here is the socionomic moment as described by a former Mortenson colleague.
He’s a symptom of Afghanistan. Things are so bad that everybody’s desperate for even one good news story. And Greg is it.
And that summarizes the Fall from Grace for Lance Armstrong, Tiger Woods, Arnold S. the Million Tiny Pieces author, and others appearing almost weekly now.
Surrounded by Pirates
Lawlessness is always on the rise during bear markets. Economic conditions are one component but the disregard for law and order (see Mexico) is another. The Somalia Pirates are just that, thieves that seize ships and kidnap their sailors.
Bill Gates hosted the Chinese President Hu Jintao in 2006. Steve Ballmer reports that MSFT revenue in China is only 5% of what it is in the US, with the same number of computer sales. Piracy of Intellectual Property IP is rampant. China does nothing to stop it. Clearly China thinks Gates and the US are just that much weaker for doing no more than mildly protesting. Again this is negative social mood, daring the other party to do something about it. And again the result is hugely deflationary. Now that the US has moved to a service industry, dependent on such IP, how will its revenue be protected? The answer is, it won’t be. How can this be building a strong economic future now that we have ceded manufacturing (remember Britain) to the Chinese?
Rise of the Zombies and Vampires
But it is Section D about summer books, The Season of the Supernatural, that really sets the tone for the upcoming bear market. This is typical of the transition to the bear market.
After a string of failed novels, Glen Duncan hit on a novel approach. He created Jake. Jake is a melancholy erudite Londoner who chain smokes Camels and downs single malt Scotch. When the moon waxes full, he sprouts fur and fangs, and a lusty appetite for human flesh.
Actually there is nothing novel about this at all. Near the end of the last bear market, Director John Landis did a fine job with, yes
An American Werewolf in London. David Kessler did not drink Scotch or smoke but he did turn into a werewolf.
Of Jake, Mr. Duncan says, ‘Thus far, it’s been the smartest move I’ve made.’ No kidding, Ridley Scott, director of Alien, has already bought the rights for the movie version. We checked an yep, Alien was a 1979 release as the bear market headed down again in that era. Mr. Duncan has been successful simply because he is now in tune with the social mood. And that mood is dark. This is the same mood that brought Frankenstein and the Werewolf to the screen in the 1930s, as well as Batman The Dark Knight in 2008.
The Leftovers started out as a novel about the apocalypse but the author notes it quickly became a book about, grief. We are not negative, we just report what is happening.
Our point, this is not the science fiction of Wells, Verne, or Asimov, but supernatural tales of zombies and werewolves that devour their prey by night. The author notes that people who contact him say, “I never read books like this but you brought me in.” These readers do not quite realize what has happened. Their mood has changed to the dark side. The book therefore appealed to them in ways they simply do not understand, but buy the book they did. We have previously noted the success of True Blood and Twilight, Recall that Anne Rice’s Interview with the Vampire was popular in the late 1970s bear 
market. Anne was early. The 1973 release of Badlands will soon be out, the story of a psychopathic killer. The tag line says the film has come to be viewed as masterly. It should do well now in re-release.
The mood is bleak and authors profiled in Season of the Supernatural are , shall we say, in synch with the mood of their readers.
Conclusion
The information is all in today’s (May 27) paper, in plain view. The trick for the independent newsletter is to synthesize the meaning of all that into relevant information which helps an investor prepare for a turning point in the markets. We hope this piece did just that for our readers. We welcome your constructive comments.
As We Go to Press
As I began this piece Friday I noticed that the WSJ.com magazine would be out this weekend. I waited to put out this piece on May 27 to see what would appear May 28. Wow, everything talked ab out here is on vivid display in the Weekend Journal and ‘magazine.’ Too bad Marie Antoinette did not live to see WSJ.com, she would have loved it. We have given you some insight and tools with this piece to better examine what you are reading. We will have more observations on the ultra, uber luxury texture of WSJ.com later this weekend.