Friday, February 26, 2010

Bernanke's Next Trick



Ben Bernanke says the Fed has an exit strategy, but it doesn't involve raising interest rates. Sounds like magic to me. One thing is for sure, the fed funds rate will not stay at zero forever.

Thursday, February 25, 2010

No Slave to Fashion

I tend to be a skeptic by nature. So at a time when the economy is weak, employment numbers are terrible, consumer credit is contracting, and foreclosures are rising, I am particularly skeptical of high flying stocks whose fortunes depend on spendthrift consumers.

True Religion Apparel (TRLG) comes to mind. This is a company that sells incredibly pricey jeans to both men and women. Because I can't bring myself to pay more than $25 or $30 for a pair of Levi's, I am particularly perplexed as to why anyone in their right mind would pay $250 for one pair of jeans. My daughters say this proves I am out of touch. I prefer to think instead that it proves there are a lot of consumers out there who are not in their right minds.

It's true that I am not a slave to fashion, but I do have some appreciation for the stuff. After all, my wife subscribes to Vogue, and her brother Serge Gandzumian is a professional designer who has achieved some success and fame with his Lithuanian company SwanPh. Thanks to capitalism, those who really care about fashion have lots of choices; unlike in this parody of Soviet fashion made famous by an old Wendy's television commercial.

Don't get me wrong. I actually liked TRLG back when it was selling for $11 per share. I even recommended the stock in March 2009 to subscribers of my newsletter, the Forbes Growth Investor. However, now I have to wonder if it still makes sense to own the stock.

My concern has nothing to do with fundamentals. TRLG is selling for about two times sales and 12 times the low end of expected 2010 earnings. Furthermore, the company has lots of cash on hand and no long-term debt. Its latest financial release was actually quite good. Revenues and profits are still growing nicely. Although sales are falling in the company's U.S. Wholesale segment, they are surging in the more profitable Consumer Direct segment. This segment includes the growing number of company-owned stores where TRLG commands the highest prices for its products. Yet at the same time, the overall operating profit margin is slowly declining. It will probably go lower in the near term as the company ramps up advertising expense.

The stock jumped higher immediately after the earnings announcement. Although I remain bewildered, I have to ask. Does anyone know where I can buy some True Religion jeans for my daughters at a big discount?

Wednesday, February 24, 2010

Market Skeptic Needs Convincing

About three weeks ago, while many experts were growing more optimistic about economic growth and the stock market's prospects, Karen Gibbs asked why I was so skeptical. Click here to watch the interview.

Monday, February 22, 2010

Trying Too Hard to Assuage Investors

After last week's hike in the discount rate, a number of Fed officials have said that the fed funds rate will not be increased for a long time. It seems they are trying a bit too hard to convince skeptical investors.

The latest salvo came from Janet Yellen, San Francisco Federal Reserve President. Yellen said interest rates must be kept "extraordinarily low" because economic growth will fall short of its potential through 2011. Yellen and others believe interest rate hikes are not yet necessary, especially since the Fed is planning to take other measures to reduce liquidity. For example, it will stop buying mortgage-backed securities (which could result in another round of declines in housing sales and prices), and it may start reducing the size of its balance sheet by selling some of its assets, thus draining money from the economy.

While such tightening measures can be effective, an increase in the fed funds rate sends a much stronger signal. In my previous post, I argued that a modest increase in the fed funds rate should be welcome news. I continue to believe the Fed will raise the fed funds rate sooner than it is currently telegraphing. If it fails to do so, investors should worry that the economy is sicker than the Fed would like us to believe.

Friday, February 19, 2010

Discount Rate Hike is no Surprise

The announcement late yesterday that the Federal Reserve was raising the discount rate by 25 basis points to 0.75% came as a surprise to many investors. It shouldn't have. The Fed has been broadcasting its intentions for several weeks. For example, in its Jan. 27 press release, the Fed said, "economic activity has continued to strengthen." This was the strongest statement yet from the Fed that the crisis is over. And just a week ago, Chairman Ben Bernanke actually said in a speech that the Fed might raise the discount rate. So yesterday's action should have been fully anticipated. It should also be seen as good news. Extremely low interest rates are not good for the economy. They signal a continuing crisis. Yet the Fed has been trying to convince investors for quite some time that the worse is over. It finally figured out that actions speak louder than words. By raising the discount rate, the Fed is signaling that it actually believes what it is saying. The Fed may deny it, but it will probably start raising the more important fed funds rate before long. Contrary to popular opinion, stocks will probably hold up well on the news. A modest increase in the fed funds rate should give investors confidence that the economy really is getting stronger.

Monday, February 08, 2010

Orlando MoneyShow

I gave a couple of talks last week at the World MoneyShow in Orlando. I have spoken at this event numerous times in the past. My impression is that attendance at the MoneyShow provides a good, albeit imperfect, indicator of investors' interest in the markets. To my untrained eye, attendance looked strong. In fact, I heard registrations were up about 12% from last year's event. There were also plenty of sponsors and exhibitors around. Of course, strong interest isn't too surprising given the double-digit gains in all stock market indexes last year.