Ben S Fine Wine And Spirits
Economic and Market Update – March 26 by Keith Springer
Economic and Market Update – March 26
Internationally Recognized Money Management in Sacramento CA
For recent TV appearances and media commentary,
please visit http://www.KeithSpringer.com – “Keith in the Media”
Critical Economic and Market Commentary
- Reasons to be cheerful, Part 3
- Demographic Update
- I’m off to Miami
Reasons to be cheerful, Part 3. I’ve been dying to say that and thankfully the market has given me the opportunity. This is of course from the Grand Master Flash hit. However, we have had a number of new developments for our economy. In essence, all the kings’ horses and all the kings’ men certainly can put Humpty back together again….with an unlimited budget! The Fed showed brave action by throwing yet more money at the fiscal crises. Last week’s $1B mortgage infusion and this week’s $1B toxic asset purchase plan lives up to helicopter Ben’s reputation. Bernanke got the rep by making a claim that if we ever went through a period like the Depression, he would drop money out of helicopters.
For the short term, this is great news. It’s hard to fathom that all this money will not have a positive effect on the economy. Looking back at history we can see how the markets and economy reacted when this was tried before. In 1932 the Fed began aggressively buying government securities: the economy responded and actually expanded by 9.5% from 1933 -1937. And the stock market in 1933 had its second best year on record, with the Dow Jones Industrial Average gaining +66.7%.
Naysayers could easily respond by pointing out the big gain in 1933, also followed four years of huge losses, which would be accurate. But also keep in mind that during the first four years of the depression the Government kept interest rates high and the money supply fell by 25%, the wrong policy. That is not the case today. We learned from that lesson and have jumped ahead to applying what worked then, monetary expansion.
For those believing that the worst is yet to come, consider this: the broad indexes were as far below their 200 day trend as they had been at any time since 1938! It is very common for indexes during an ongoing bear market, to fall, only to rally back to their downward sloping 200 day moving average, before falling again. Most of the indexes would have to rally from here +25% to +40% just to get back to their 200 day moving average.
I’m purposely not going to ruin the party and talk about the possible problems longer term, so don’t think I am not aware of potential hyper inflation, devaluation and currency devaluation. I’m tired of being Dr. Doom, so let’s see what happens first.
The Demographics of Wine, Motorcycles, and the Risqué
The financial crisis and recession have had a way accelerating some demographic trends while actually slowing down others. Consumption of Wine And Spirits remains strong in late middle age, in terms of price and quality if not in terms of total volume. The young man who enjoys a can of Budweiser and a cigarette with the boys eventually matures into the middle-aged gentleman who prefers a nice single-malt scotch and cigar with his golfing buddies or a glass of Red Wine with his wife. This is an overly simplified stereotype, of course, but demographic buying patterns do tend to confirm it. Interestingly, we find in the Financial Times that the financial crisis has, at least temporarily, crimped demand for wine:
“UK Loses Thirst for Bordeaux Wines” “British merchants are selling fine wine back to counterparts in Bordeaux and exporting it to Asia as domestic demand for the most Expensive Wine slumps”
Across the board, prices are falling for high-end wines. Some of this, no doubt, is due to the fact that wine prices had become unreasonably high in previous years due to interest from “collectors” and “investors” such as niche hedge funds that specialize in Vintage Wines. The bear market and financial crisis have purged much of this nonsense, and the result has been a depression in wine prices, particularly at the high end. Regardless of what happens to wine as an asset class, demand should remain strong for wine that is actually drunk, in home and in restaurants. Recessions hurt luxuries, even affordable ones like a medium-priced bottle of wine. But demographic trends do suggest that the sector will recover strongly in the years to come.
Meanwhile, we are not nearly as enthusiastic about Harley Davidson’s prospects. As the New York Times writes, “Harley, You’re Not Getting Any Younger”
After riding high for two decades, the company that makes the hulky bikes that devoted riders affectionately call Hogs is sputtering. Harley’s core customers are graying baby boomers, whose savings, in many cases, have gone up in smoke in the market downturn. Few are in the mood to shell out up to $20,000 or more for something that is basically a big toy, and the company, in turn, has not captured much of the younger market.
Few consumer products display as pronounced a demographic pattern as “hogs.” The buyer is generally a white male in his late 40s. This was a phenomenal market to sell to over the past 20 years, as it continually got bigger year after year. But now, as the Times continues, “Its core customers have grayed, and they are buying new bikes less often. The average age of a Harley rider is 49, up from 42 five years ago. But company executives don’t seem outwardly worried by the lackluster growth among those 35 and younger.”
And why isn’t Harley worried? Because “the baby-boom generation has 15 more years of riding life” left in them. They may or may not have 15 years of riding left, but they almost certainly do not have 15 years of buying left in them. We believe Harley’s management is playing the part of the proverbial ostrich with its head buried in the sand. Harley will likely fall on times as hard as those the company faced during its flirtation with bankruptcy in the 1980s-before the Boomer buying spree (and the Federal Government) bailed them out.
Meanwhile, the Financial Times reports that, despite the downturn, lingerie sales remain strong with “with sales of more risqué products holding up well.” While overall retail sales are expected to be down 4% in 2009, lingerie sales are expected to decline only mildly: “Lingerie Wears Well in Recession”. According to Garry Hogarth, chief executive of Agent Provocateur, “as couples stayed at home, rather than going out, to save money, more women were tending to invest in adventurous apparel to add spice to their relationships.” The FT writes that lingerie retailer Ann Summers “also attributed its recent growth to people spending more time at home. In a trading statement last week, it said it had broken all of its sales records around Valentine’s Day.”
While we do not doubt that the recession has created incentives for more inexpensive forms of recreation, we would argue that demographics have a significant role to play as well. The Echo Boomers, the enormous generation that encompasses the children of the Baby Boomers, are rapidly entering their peak years for marriage and family formation. Whether or not the Echo Boomers follow the pattern of their parents (courtship, marriage, children, divorce, new courtship, second marriage, possibly second divorce), the fact remains that a large portion of the population will be at the prime age and stage of life to keep the likes of Agent Provocateur, Ann Summers, Victoria’s Secret, and other lingerie retailers in business.
Off to Miami next week
I will be heading out to Miami for a conference, and then to spend a few days with friends for a much needed few days of R&R. Let’s hope for a continuation of the rally so I can actually take this off my mind for even a few days.
If you have any questions on the economy, the markets or simply would like a free 2nd opinion of your portfolio, just let me know.
Cheers -Keith
About the Author
President Capital Financial Advisory Services in Sacramento
Cuisine Populaire 2009 Reel
