Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Tuesday, July 22, 2008

AmEx Misses: The Bear Trap Thickens

Monday evening American Express (AXP) reported a 37% drop in profits for the second quarter, the third consecutive quarter in which profits fell for the supreme credit card issuer. The second course at this summer’s secular bear market feast is now served. Enjoy.

The consensus of $.86 a share was missed – by a lot. The actual number was $.58 a share, a stunning $385 million dollars off, or $.28 cents a share. Furthermore, Bloomberg reported, Kenneth Chenault, Chief Executive Office said on yesterday’s conference call, American Express is “no longer tracking” a prior forecast of 4% and until the U.S. economy improves, the company will not meet longer term targets.

I believe this is significant because American Express exemplifies the best-of-breed of American credit card issuers. If defaults are rising in this luxurious consumer area, then any remaining doubters or non-believers of this crisis' intensity should perform a financial autopsy on one of America’s signature haute cove for the affluent for confirmation.

This secular bear market is moving slowly across the land, destroying all in its path. The insidious part about this grizzly is that it’s part of an even larger menace. We’re now in the throes of a global downturn of unknown dimensions and ramifications. As the federal government rashly insures $5 trillion dollars of mortgages and refusing to raise interest rates, hoping to achieve a soft landing, the rest of the world is hiking short–term rates, while in a knife fight with inflation, hoping to avoid economic ruin.

Our decision to focus on recession, which is a natural part of the business cycle, versus inflation, a more discretionary and destructive economic occurrence, is a less valuable target to annihilate. Fighting recession will make inflation worse. Will we have the strength, wherewithal, and resolve, in 2009 and 2010, to seriously fight hat-size inflation of 7% or 8%?

Fed Chairman Ben Bernanke testified before congress last Tuesday. In his opening remarks, the following passage is most salient and succinct:

“Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

Bloomberg reported that a private survey conducted by the National Association of Business Economics found that more companies will increase prices and limit hiring because of surging raw material costs are reducing profits. Seventy-one percent of the companies responding stated last quarter their costs rose. That was up from 65% of companies reporting experiencing higher costs the previous three months.

Also, the Labor Department last week reported that wages, adjusted for inflation, were down 2.4 percent for the past 12 months ending in June. Wage inflation is the final crucial element missing from current economic data that guarantees full blown inflation. The total number of new jobs created year-to-date in this economy is a negative 600,000 plus, and rising.

The rationale behind the $1.2 trillion in tax cuts, approved by Congress in 2001 for the wealthy, was that they could invest those dollars wisely and create jobs for the economy. Now would be an excellent moment for the upper crust of society to wave their magic wand and produce 200,000 jobs each month.

Our anemic domestic growth rate of 0.6% in the 4th quarter 2007 and 1.0% in the 1st quarter of 2008 faces formidable challenges in the 3rd and 4th quarters of 2008. Economies in Europe, Asia, and Latin America are in the process of reexamining both their monetary and fiscal policies. Going forward, if they are successful in lowering their respective growth rates will exacerbate our weakening economic condition. Likewise, if trade subsides between partners, some of the inflation embedded in the costs of raw materials that’s exported in finished products, before it evaporates in due course, will remain here long enough adding to our higher inflation figures.The bears can’t wait until the third course is served. Bon appetite!

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