MBIA (MBI) posts $18.61 fourth quarter loss per share, vs. $1.32 EPS a year ago; posts $3.30 fourth quarter operating loss vs. $1.31 operating EPS. It says it's disappointed in its operating results for 2007 as performance of its insured prime, second-lien mortgage portfolio, three insured CDO-squared transactions led to unprecedented loss reserving, impairment activity. MBIA's CEO said the company will have real and significant losses, but nothing to justify the 80% decline in share price since last year. The CEO noted the company's capital plan will exceed all AAA rating requirements. The stock turned higher on the news.
Amazon.com (AMZN) posts fourth quarter EPS of $0.48, vs. $0.23 a year ago, on 42% sales rise. It sees first quarter sales of $3.95-$4.15 billion and 2008 sales of $18.75-$19.75 billion. It expects 2008 operating income of $785-$985 million, including $240 million for stock-based compensation and amortization of intangible assets. Separately, Amazon agrees to acquire Audible (ADBL) for about $300 million, or $11.50 per share. S&P upgrades to hold from sell. Bear Stearns ties the weakness in the stock to margin disappointment.
Starbucks (SBUX) posts first quarter EPS of $0.28, vs. $0.26 a year ago, on 1.0% higher same-store sales, 17% higher total sales. It views fiscal year 2008 as a "year of refocus and renewal." Expects low double-digit EPS expansion for fiscal year 2008.
Procter & Gamble (PG) posts second quarter EPS of $0.98, vs. $0.84 a year ago, on 9% sales rise. It sees $0.79-$0.81 third quarter EPS. For fiscal year 2008, it expects organic sales to grow 4%-6%, sees EPS of $3.46-$3.50. Plans to separate its coffee business and create an independent company named The Folgers Coffee Co. Assuming a split-off transaction, expects deal to be dilutive to EPS by $0.03-$0.05 on an annual basis. S&P maintains strong buy.
Pulte Homes (PHM) posts $3.54 fourth quarter loss per share from continuing operations, vs. $0.03 loss a year ago, on 34% lower revenue. Fourth quarter 2007 loss included $1.28/share of charges tied to inventory impairments, other land-related charges and impairment of goodwill; also, a $2.46/share non-cash charge to eliminate a tax loss-related asset on PHM's balance sheet. The home builder sees $0.15-$0.30 first quarter net loss from continuing operations, exclusive of a tax benefit and any add'l impairments or land-related charges. S&P narrows 2008 loss estimate, raises target price; reiterates hold.
Mattel (MAT) posts $0.89, vs. $0.75 a year ago, fourth quarter EPS on 3.8% revenue rise. S&P maintains strong buy.
AnnTaylor Stores (ANN) plans to cut 13% of staff at its headquarters and close 117 stores as part of a restructuring aimed at increasing its operating margin by more than 200 basis points over the next three years. Also says it is taking a conservative approach to new store growth in fiscal 2008, given the ongoing macroeconomic weakness and uncertainty in the retail sector.
Alliance Data Systems (ADS) posts $0.42, vs. $0.48 a year ago, fourth quarter EPS as merger, other costs offset 15% revenue rise. On purely organic basis, sees 2008 adjusted EBITDA in excess of $700 million, with operating EBITDA expected to be a minimum of $30 million greater than adjusted EBITDA and cash EPS of $4.30. Yesterday, ADS filed lawsuit against the Blackstone entities that are parties to the merger agreement. Wachovia reportedly upgrades to outperform from market perform.
Colgate-Palmolive (CL) posts $0.91, vs. $0.78 a year ago, fourth quarter operating EPS on 13% sales rise. It expects 2008 gross profit margin, excl. restructuring charges, to be up within targeted range of 75 basis points to 125 basis points. S&P maintains strong buy.
Bristol-Myers Squibb (BMY) posts $0.07 fourth quarter GAAP loss per share, vs. $0.09 loss on 33% revenue rise [including 5% favorable forex]. It revises 2008 GAAP EPS guidance to $1.36-$1.46 from $1.44-$1.54, primarily reflecting impact from sale of the Medical Imaging business. Notes guidance includes estimated charges of about $500 million related to implementation of the Productivity Transformation Initiative, which will be dependent on timing of implementation and accounting treatment.
MasterCard (MA) posts $2.26 [including after-tax gain of $1.37], vs. $0.30 a year ago, fourth quarter EPS on 28% revenue rise.
Cadence Design Systems (CDNS) posts fourth quarter EPS [non-GAAP] of $0.46 vs. $0.38 a year ago, on 6.2% revenue rise. It sees first quarter non-GAAP EPS of $0.03-$0.05 on revenue of $280-$290 million and fiscal year 2008 EPS of $1.11-$1.19. JP Morgan reportedly downgrades to underweight from neutral.
TurboChef Technologies (OVEN) says one of its customers announced modification of its North America food program which utilizes TurboChef ovens, which will reduce that customer's previously anticipated contribution to OVEN's 2008 results. OVEN says it comfortable with its previously announced commercial revenue guidance for 2008.
Advanced Medical Optics (EYE) says it has entered into deal with Bausch & Lomb, Inc. regarding AMO's patent relate to peristaltic pump fluidics used in phacoemulsification systems. Bausch & Lomb will pay AMO a royalty under the agreement. All other terms of the agreement are confidential.
JK Acquisition (JKA) postpones a special meeting of its stockholders from 10:00 a.m. CDT today to 5:00 p.m. CST today, in order to give JKA more time to solicit proxies and its stockholders more time to consider and vote on JKA's proposed merger with Multi-Shot LLC.
Starwood Hotels & Resorts Worldwide (HOT) posts $0.74, vs. $0.93 a year ago, fourth quarter EPS despite 2.4% revenue rise. Adjusts guidance to reflect economic uncertainty, possibility of slowdown in U.S. lodging demand. Now sees $0.22-$0.26 first quarter EPS, $2.32-$2.57 2008 EPS [both before special items].
ImClone Systems (IMCL) posts $0.23 fourth quarter loss per share, vs. $0.53 EPS a year ago, as patent litigation settlement expense, other items offset 14% rise in revenue. Posts $0.41 non-GAAP EPS [excluding items].
Cirrus Logic (CRUS) posts lower-than-expected $0.05, vs. $0.04 a year ago, third quarter EPS on 8.0% revenue rise. It says third quarter gross margin narrowed to 56% vs. 61% in the year-ago quarter. Sets $150 million stock buyback. It sees $44-$47 million fourth quarter revenue, gross margin of 55%-58%.
Alliant Techsystems (ATK) posts $1.65, vs. $1.53 a year ago, third quarter EPS on 17% sales rise. Based on continued strength in all three business groups, increasing visibility, ut raises fiscal year 2008 EPS guidance to $6.25-$6.35, expects sales in excess of $4.1 billion. It sees fiscal year 2009 EPS of $7.10-$7.30, expects sales of approximately $4.5 billion.
credted by: BusinessWeek.com
2008-02-03
The Billion-Dollar Losers
Big-name U.S. CEOs have taken a bath, but not the kind that leaves you feeling warm and relaxed.
As the bears took over Wall Street, chief executives, rewarded handsomely in years past with stock options, have seen the value of their holdings plummet.
The continuing financial crisis and fears of a U.S. recession have sent the broad Standard & Poor's 500-stock index down 15% since its peak in October. BusinessWeek asked financial information provider Capital IQ to analyze how this stock market correction has affected CEOs of major U.S. companies. [Capital IQ, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).]
The resulting data show that market forces have chewed up the portfolios of even the savviest chief executives. Capital IQ estimates that since October, five CEOs have lost more than $1 billion through holdings of their companies' stock: Larry Ellison of Oracle (ORCL), Michael Dell of Dell (DELL), Micky Arison of Carnival Corp. (CCL), Jeffrey Bezos of Amazon.com (AMZN), and Rupert Murdoch of News Corp. (NWS).
More than 20 CEOs on the list have lost more than $100 million. The pain is widespread, too. Of the 450 major company CEOs analyzed, only about 60 escaped the last three months without losses. The markets were so difficult that only five of that group were able to achieve what these CEOs would typically take for granted -- gains of more than $10 million each.
The methodology: Capital IQ analyzed the change in the value of CEO holdings in their firms' stock from the market peak on Oct. 11, 2007, through Jan. 29, 2008. The estimates are based on each company's annual disclosures of CEO stock holdings, so it does not reflect any buying and selling by CEOs since their last reports.
But the estimates do show how quickly CEO fortunes have shrunk in three months. In total, the bear-trapped CEOs identified by Capital IQ lost a combined $16.1 billion.
The Financial Storm
The U.S. economy's troubles began in the financial sector last summer, as bad mortgage debt caused havoc in the credit markets. As a result, some of the biggest losers are CEOs in the financial sector. The portfolio losses of top financial CEOs on the list total $1.8 billion.
Those at the center of the financial storm have been hit hardest.
Countrywide Financial (CFC) CEO Angelo Mozilo has seen his stock lose nearly two-thirds of its value, costing him more than $100 million. [Mozilo will step down as Countrywide's chief after the planned acquisition of the company by Bank of America (BAC) is completed.] Politicians, including Senator Hillary Clinton [D-N.Y.], have called Countrywide, the U.S.'s largest mortgage lender, a major culprit in the loose lending standards that led to the subprime crisis.
Subprime debt has also devastated the holdings of CEOs of bond insurers. Gary Dunton of MBIA (MBI) lost 76% of his holdings during the survey period, or $24.7 million, while Ambac Financial Group (ABK) CEO Michael Callen took an 82% haircut, bringing the value of his holdings in company stock down to little more than $400,000.
Performance Pay
Don't reach for the Kleenex just yet. Despite the recent market turbulence, CEOs are still quite wealthy in company stock. Capital IQ identified 16 CEOs who still own more than $1 billion in their firm's shares, and 73 who owned more than $100 million.
In the past, base salary was a much larger part of executive compensation, but starting in the 1990s corporate boards began to add a lot more stock to pay packages. Shareholder groups had argued that the interests of CEOs and shareholders weren't properly aligned, says David Leach, managing director of compensation consulting firm Strategic Apex Group. "Conventional wisdom says an owner is going to take care of something better than someone who is renting," he says.
By paying CEOs in stock or stock options, "the concept is they get paid for the performance of the organization overall," says Don Lindner of WorldatWork, a human resources nonprofit.
But this doesn't always work perfectly. When the economy is booming and the stock market is rising, even lackluster CEOs get rewarded. But now, while a recession threatens, CEOs of even top performers are hurt. For example, Amazon.com's Bezos has doubled profits in the past year, yet he has lost $1.6 billion since October. Bezos didn't fare too well when the company reported fourth-quarter results on Jan. 30 [BusinessWeek.com, 1/31/08]. Investors' concerns about the impact of an economic slowdown sent the stock tumbling 12%, to $65.29.
Tech Losses
The poor performance of technology holdings is a prime example of how broadly the stock market gloom has spread from its origins in the financial sector. While a few tech CEOs, such as Steven Ballmer of Microsoft (MSFT), have resisted the undertow, in total, top tech CEOs have lost more than $5.6 billion since October. The average U.S. tech CEO's portfolio has fallen 19% since October, according to the Capital IQ screen, not much better than the 20% drop for financial CEOs.
Part of the problem for these CEOs is Silicon Valley's love of stock options. Tech firms have typically used much more equity in pay packages than other companies. Tech chiefs have lost a lot, but past bull markets have made billionaires of Bezos, Ellison, and many tech executives. Also, tech losses are exaggerated a bit by the time frame of the analysis. Tech companies have faltered lately, but most had put in stellar 2007 performances up until November or so.
Still, the huge tech losses show there has been nowhere to hide from the recent stock market turbulence. Investors fled even from sectors that are traditionally havens in a tough economy. CEOs of health-care and consumer staples firms have also lost money -- an average of 6% and 7%, respectively -- though not nearly as much as in other sectors.
The Biggest Losers [and Winners]
Take a look at the accompanying slide shows for examples of CEOs who have won or lost big lately in the stock market. The biggest losers include some of the world's best known executives, including Apple's (AAPL) Steve Jobs, Howard Schultz of Starbucks (SBUX), and Google's (GOOG) Eric Schmidt. Concern about the U.S. economy and online ad spending pummeled Google's shares when it reported fourth-quarter earnings on Jan. 31 [BusinessWeek.com, 2/1/08].
The list of CEOs includes a variety of executives who have somehow found a way to make money in a tough market. Their outperformance usually reflects extraordinary circumstances: Surprisingly strong results that bucked an industry trend, or an outlook that suddenly turned from poor to favorable.
Of course, in today's volatile markets, the current winners could wind up in the company of their unlucky brethren in a heartbeat.
Check out the BusinessWeek.com slide shows for more about the CEOs who have lost the most and CEOs who have gained the most.
credted by: BusinessWeek.com
As the bears took over Wall Street, chief executives, rewarded handsomely in years past with stock options, have seen the value of their holdings plummet.
The continuing financial crisis and fears of a U.S. recession have sent the broad Standard & Poor's 500-stock index down 15% since its peak in October. BusinessWeek asked financial information provider Capital IQ to analyze how this stock market correction has affected CEOs of major U.S. companies. [Capital IQ, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).]
The resulting data show that market forces have chewed up the portfolios of even the savviest chief executives. Capital IQ estimates that since October, five CEOs have lost more than $1 billion through holdings of their companies' stock: Larry Ellison of Oracle (ORCL), Michael Dell of Dell (DELL), Micky Arison of Carnival Corp. (CCL), Jeffrey Bezos of Amazon.com (AMZN), and Rupert Murdoch of News Corp. (NWS).
More than 20 CEOs on the list have lost more than $100 million. The pain is widespread, too. Of the 450 major company CEOs analyzed, only about 60 escaped the last three months without losses. The markets were so difficult that only five of that group were able to achieve what these CEOs would typically take for granted -- gains of more than $10 million each.
The methodology: Capital IQ analyzed the change in the value of CEO holdings in their firms' stock from the market peak on Oct. 11, 2007, through Jan. 29, 2008. The estimates are based on each company's annual disclosures of CEO stock holdings, so it does not reflect any buying and selling by CEOs since their last reports.
But the estimates do show how quickly CEO fortunes have shrunk in three months. In total, the bear-trapped CEOs identified by Capital IQ lost a combined $16.1 billion.
The Financial Storm
The U.S. economy's troubles began in the financial sector last summer, as bad mortgage debt caused havoc in the credit markets. As a result, some of the biggest losers are CEOs in the financial sector. The portfolio losses of top financial CEOs on the list total $1.8 billion.
Those at the center of the financial storm have been hit hardest.
Countrywide Financial (CFC) CEO Angelo Mozilo has seen his stock lose nearly two-thirds of its value, costing him more than $100 million. [Mozilo will step down as Countrywide's chief after the planned acquisition of the company by Bank of America (BAC) is completed.] Politicians, including Senator Hillary Clinton [D-N.Y.], have called Countrywide, the U.S.'s largest mortgage lender, a major culprit in the loose lending standards that led to the subprime crisis.
Subprime debt has also devastated the holdings of CEOs of bond insurers. Gary Dunton of MBIA (MBI) lost 76% of his holdings during the survey period, or $24.7 million, while Ambac Financial Group (ABK) CEO Michael Callen took an 82% haircut, bringing the value of his holdings in company stock down to little more than $400,000.
Performance Pay
Don't reach for the Kleenex just yet. Despite the recent market turbulence, CEOs are still quite wealthy in company stock. Capital IQ identified 16 CEOs who still own more than $1 billion in their firm's shares, and 73 who owned more than $100 million.
In the past, base salary was a much larger part of executive compensation, but starting in the 1990s corporate boards began to add a lot more stock to pay packages. Shareholder groups had argued that the interests of CEOs and shareholders weren't properly aligned, says David Leach, managing director of compensation consulting firm Strategic Apex Group. "Conventional wisdom says an owner is going to take care of something better than someone who is renting," he says.
By paying CEOs in stock or stock options, "the concept is they get paid for the performance of the organization overall," says Don Lindner of WorldatWork, a human resources nonprofit.
But this doesn't always work perfectly. When the economy is booming and the stock market is rising, even lackluster CEOs get rewarded. But now, while a recession threatens, CEOs of even top performers are hurt. For example, Amazon.com's Bezos has doubled profits in the past year, yet he has lost $1.6 billion since October. Bezos didn't fare too well when the company reported fourth-quarter results on Jan. 30 [BusinessWeek.com, 1/31/08]. Investors' concerns about the impact of an economic slowdown sent the stock tumbling 12%, to $65.29.
Tech Losses
The poor performance of technology holdings is a prime example of how broadly the stock market gloom has spread from its origins in the financial sector. While a few tech CEOs, such as Steven Ballmer of Microsoft (MSFT), have resisted the undertow, in total, top tech CEOs have lost more than $5.6 billion since October. The average U.S. tech CEO's portfolio has fallen 19% since October, according to the Capital IQ screen, not much better than the 20% drop for financial CEOs.
Part of the problem for these CEOs is Silicon Valley's love of stock options. Tech firms have typically used much more equity in pay packages than other companies. Tech chiefs have lost a lot, but past bull markets have made billionaires of Bezos, Ellison, and many tech executives. Also, tech losses are exaggerated a bit by the time frame of the analysis. Tech companies have faltered lately, but most had put in stellar 2007 performances up until November or so.
Still, the huge tech losses show there has been nowhere to hide from the recent stock market turbulence. Investors fled even from sectors that are traditionally havens in a tough economy. CEOs of health-care and consumer staples firms have also lost money -- an average of 6% and 7%, respectively -- though not nearly as much as in other sectors.
The Biggest Losers [and Winners]
Take a look at the accompanying slide shows for examples of CEOs who have won or lost big lately in the stock market. The biggest losers include some of the world's best known executives, including Apple's (AAPL) Steve Jobs, Howard Schultz of Starbucks (SBUX), and Google's (GOOG) Eric Schmidt. Concern about the U.S. economy and online ad spending pummeled Google's shares when it reported fourth-quarter earnings on Jan. 31 [BusinessWeek.com, 2/1/08].
The list of CEOs includes a variety of executives who have somehow found a way to make money in a tough market. Their outperformance usually reflects extraordinary circumstances: Surprisingly strong results that bucked an industry trend, or an outlook that suddenly turned from poor to favorable.
Of course, in today's volatile markets, the current winners could wind up in the company of their unlucky brethren in a heartbeat.
Check out the BusinessWeek.com slide shows for more about the CEOs who have lost the most and CEOs who have gained the most.
credted by: BusinessWeek.com
2008-01-31
Are You Ready for 'Stagflation-Lite'?
Is another big name from the 1970s attempting a comeback? Stagflation, the worst-of-both-worlds scenario in which weak growth is accompanied by robust inflation, may be on the radar again. It's enough to conjure memories of President Gerald Ford's ill-fated campaign to talk down prices through a "Whip Inflation Now" [WIN] campaign. The risk is evident in the latest economic numbers. Indeed, Marc Faber, the widely followed global investment adviser based in Asia believes that "we're already in stagflation: no real economic growth -- or recession -- amidst inflation" in his latest Gloom Boom & Doom Report.
Certainly, the economy is teetering on the edge of recession. Government statisticians reported on Jan. 30 that gross domestic product, dragged down by the declining home market, grew at an anemic 0.6% in the final three months of 2007. The 2.2% rate for all of 2007 was the worst performance in five years.
GDP Numbers Signal Trouble
With releases like the GDP report pointing to a weakening U.S. economy, the Federal Reserve is aggressively easing monetary policy to offset the gathering recessionary forces. The central bank cut its benchmark interest rate to 3% from 3.5% on Jan. 30. The sense of urgency for policymakers is clear: The Fed has slashed rates by a dramatic 1.25% in a mere eight days.
Yet inflation is also running hot. The GDP report has the prices of goods paid for by consumers during the fourth quarter increasing by 3.8%, up sharply from the 1.8% pace of the previous three months. The cost of living as measured by the more widely followed consumer price index rose by a steep 4.1% last year -- its highest rate in 17 years -- while in the last quarter of last year the CPI surged by 5.6%. No matter how it's measured, consumer inflation is well above the Fed's target range of 1% to 2%.
What if 4% is a CPI floor rather than a cost-of-living ceiling? It's possible, considering the Fed has eased so much that its benchmark interest rate is below the rate of inflation, a signal that inflation pressures could erupt later. Meanwhile, the weak dollar, combined with higher energy, food, and commodity prices, is exerting upward pressure on overall inflation. "We're in an environment of greater-than-average inflation risk," says James Paulsen, chief investment strategist at Wells Capital Management.
Fed "Can Keep Inflation Under Control"
To be sure, few prognosticators worry about a reprise of double-digit inflation rates of the 1970s. The international competition for goods and services is a force for lower prices. So is the current meltdown in the housing market.
Perhaps most important, considering the painful monetary lessons of the '70s, most economists believe the Fed wouldn't tolerate a repeat performance. "Philosophically, the Fed is much more attuned to the problem of inflation compared to the 1970s," says Mark Thoma, an economist at the University of Oregon. Adds James Hamilton, an economist at the University of California, San Diego: "The Fed is not an omnipotent institution, but it can keep inflation under control."
That could prove cold comfort. The risk for business, consumers, and investors is the emergence of a different kind of stagflation -- call it "stagflation-lite." It would be defined by higher-than-expected inflation rates [say, a 5.6% increase in the CPI] and lower-than-expected growth rates [like a 0.6% economic expansion].
Fickle Productivity Forecasts
A close look at the economy in the '70s gives pause. With the benefit of hindsight, it's clear that the Fed acted responsibly with the data available to it at the time, but the central bank's army of economists badly misread the tea leaves. Specifically, the Fed was aware that productivity had risen at a heady 2.7% average annual rate between 1948 and 1973. When the productivity growth rate plunged in the early 1970s, most economists expected it would bounce back. Instead, productivity fell to a less than 1% annual rate between 1973 and 1979, and to 0.32% from 1979 to 1982. [The figures are from Edward Fulton's Trends in American Economic Growth, 1929-1982.]
And that was the big problem for the Fed. Monetary policy was too expansive for an economy with deteriorating productive capacity, calculates Athanasios Orphanides, an economist at the Federal Reserve who has delved into central bank policy during that troublesome era. [The research paper is "Activist Stabilization Policy and Inflation: The Taylor Rule in the 1970s," February, 2000.]
America's productivity growth rate is similarly suspect today. Productivity growth has averaged a healthy 2.6% over the past decade. Yet since midyear 2004, it has come in at a much lower, 1.6% pace. Some economists expect productivity will take another haircut as consumers' borrowing zeal of recent years cools off [BusinessWeek, 1/23/08]. Still, it could be a long time before the trend in productivity is clear, raising the risk that the Fed overestimates the economy's speed limit and, like the 1970s, ends up with a too-loose monetary policy that results in higher rates of inflation.
Investors Hedge Against Inflation
It's striking how investors are snapping up assets that boomed during the inflationary '70s, pushing them to high levels -- and even record prices. For instance, while the dollar is trading at low levels in the international currency markets, gold, a classic hedge against inflation, is near its record price, now at $919 an ounce. Prices for key commodities such as oil, food, and platinum, are at nosebleed levels. The stocks of companies in industries with a history of "pricing power" such as cereal makers and electric utilities are attracting investor interest. Indeed, almost all the traditional safe havens against the ravages of spiraling inflation are doing well. And the last time real estate values and stock market prices declined sharply together was 1974 -- a period of both recession and inflation.
That said, it's strange that bond prices are up and bond yields down despite the recent high inflation figures. One interpretation: Investors aren't worried about inflation. However, it could be that lower yields reflect a global flight to financial security rather than a lack of concern over higher prices.
The Fed, Wall Street, and Washington are primarily concerned about recession right now. The Fed's press release after the Jan. 30 Federal Open Market Committee meeting gives a strong impression that more cuts are coming: "[D]ownside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
Yet it might not be long before inflation starts climbing a wall of worry. When that happens, expect to hear a lot more about the return of stagflation.
credited by: BusinessWeek.com
Certainly, the economy is teetering on the edge of recession. Government statisticians reported on Jan. 30 that gross domestic product, dragged down by the declining home market, grew at an anemic 0.6% in the final three months of 2007. The 2.2% rate for all of 2007 was the worst performance in five years.
GDP Numbers Signal Trouble
With releases like the GDP report pointing to a weakening U.S. economy, the Federal Reserve is aggressively easing monetary policy to offset the gathering recessionary forces. The central bank cut its benchmark interest rate to 3% from 3.5% on Jan. 30. The sense of urgency for policymakers is clear: The Fed has slashed rates by a dramatic 1.25% in a mere eight days.
Yet inflation is also running hot. The GDP report has the prices of goods paid for by consumers during the fourth quarter increasing by 3.8%, up sharply from the 1.8% pace of the previous three months. The cost of living as measured by the more widely followed consumer price index rose by a steep 4.1% last year -- its highest rate in 17 years -- while in the last quarter of last year the CPI surged by 5.6%. No matter how it's measured, consumer inflation is well above the Fed's target range of 1% to 2%.
What if 4% is a CPI floor rather than a cost-of-living ceiling? It's possible, considering the Fed has eased so much that its benchmark interest rate is below the rate of inflation, a signal that inflation pressures could erupt later. Meanwhile, the weak dollar, combined with higher energy, food, and commodity prices, is exerting upward pressure on overall inflation. "We're in an environment of greater-than-average inflation risk," says James Paulsen, chief investment strategist at Wells Capital Management.
Fed "Can Keep Inflation Under Control"
To be sure, few prognosticators worry about a reprise of double-digit inflation rates of the 1970s. The international competition for goods and services is a force for lower prices. So is the current meltdown in the housing market.
Perhaps most important, considering the painful monetary lessons of the '70s, most economists believe the Fed wouldn't tolerate a repeat performance. "Philosophically, the Fed is much more attuned to the problem of inflation compared to the 1970s," says Mark Thoma, an economist at the University of Oregon. Adds James Hamilton, an economist at the University of California, San Diego: "The Fed is not an omnipotent institution, but it can keep inflation under control."
That could prove cold comfort. The risk for business, consumers, and investors is the emergence of a different kind of stagflation -- call it "stagflation-lite." It would be defined by higher-than-expected inflation rates [say, a 5.6% increase in the CPI] and lower-than-expected growth rates [like a 0.6% economic expansion].
Fickle Productivity Forecasts
A close look at the economy in the '70s gives pause. With the benefit of hindsight, it's clear that the Fed acted responsibly with the data available to it at the time, but the central bank's army of economists badly misread the tea leaves. Specifically, the Fed was aware that productivity had risen at a heady 2.7% average annual rate between 1948 and 1973. When the productivity growth rate plunged in the early 1970s, most economists expected it would bounce back. Instead, productivity fell to a less than 1% annual rate between 1973 and 1979, and to 0.32% from 1979 to 1982. [The figures are from Edward Fulton's Trends in American Economic Growth, 1929-1982.]
And that was the big problem for the Fed. Monetary policy was too expansive for an economy with deteriorating productive capacity, calculates Athanasios Orphanides, an economist at the Federal Reserve who has delved into central bank policy during that troublesome era. [The research paper is "Activist Stabilization Policy and Inflation: The Taylor Rule in the 1970s," February, 2000.]
America's productivity growth rate is similarly suspect today. Productivity growth has averaged a healthy 2.6% over the past decade. Yet since midyear 2004, it has come in at a much lower, 1.6% pace. Some economists expect productivity will take another haircut as consumers' borrowing zeal of recent years cools off [BusinessWeek, 1/23/08]. Still, it could be a long time before the trend in productivity is clear, raising the risk that the Fed overestimates the economy's speed limit and, like the 1970s, ends up with a too-loose monetary policy that results in higher rates of inflation.
Investors Hedge Against Inflation
It's striking how investors are snapping up assets that boomed during the inflationary '70s, pushing them to high levels -- and even record prices. For instance, while the dollar is trading at low levels in the international currency markets, gold, a classic hedge against inflation, is near its record price, now at $919 an ounce. Prices for key commodities such as oil, food, and platinum, are at nosebleed levels. The stocks of companies in industries with a history of "pricing power" such as cereal makers and electric utilities are attracting investor interest. Indeed, almost all the traditional safe havens against the ravages of spiraling inflation are doing well. And the last time real estate values and stock market prices declined sharply together was 1974 -- a period of both recession and inflation.
That said, it's strange that bond prices are up and bond yields down despite the recent high inflation figures. One interpretation: Investors aren't worried about inflation. However, it could be that lower yields reflect a global flight to financial security rather than a lack of concern over higher prices.
The Fed, Wall Street, and Washington are primarily concerned about recession right now. The Fed's press release after the Jan. 30 Federal Open Market Committee meeting gives a strong impression that more cuts are coming: "[D]ownside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
Yet it might not be long before inflation starts climbing a wall of worry. When that happens, expect to hear a lot more about the return of stagflation.
credited by: BusinessWeek.com
Nordstrom's offers a sneak peek
Nordstrom's first full-line department store in Hawaii will feature a third of an acre of shoes and the largest sunglass and women's petites departments in the retailer's chain.
Nordstrom executives gave a preview of its new Ala Moana Center store on Thursday.
The interior of the new three-level building on Kapiolani Boulevard is nearly completed, although empty of merchandise, with marble tile aisles, carpeted sales floors and wood-and-glass shelving and display cases throughout the store. Merchandise will be brought in over the next several weeks in advance of the 210,000-square-foot store's March 7 opening.
The store's five shoe departments -- three for women and juniors, one for men and one for children -- will carry about 50 percent more shoes than the Nordstrom shoe store at Ward Center, said spokeswoman Brooke White.
Women's apparel takes up the entire top floor, while the men's and children's departments are on the street level, along with a cafe restaurant.
The new store also will have two espresso bars and a gelato bar.
credited by: bizjournals.com
Nordstrom executives gave a preview of its new Ala Moana Center store on Thursday.
The interior of the new three-level building on Kapiolani Boulevard is nearly completed, although empty of merchandise, with marble tile aisles, carpeted sales floors and wood-and-glass shelving and display cases throughout the store. Merchandise will be brought in over the next several weeks in advance of the 210,000-square-foot store's March 7 opening.
The store's five shoe departments -- three for women and juniors, one for men and one for children -- will carry about 50 percent more shoes than the Nordstrom shoe store at Ward Center, said spokeswoman Brooke White.
Women's apparel takes up the entire top floor, while the men's and children's departments are on the street level, along with a cafe restaurant.
The new store also will have two espresso bars and a gelato bar.
credited by: bizjournals.com
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