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Morning Commentary

Fanned Into Oblivion

By Charles Payne, CEO & Principal Analyst
5/16/2012 8:16 AM

Question of the Week

I make it a habit to ask about sales no matter where I shop and I would expect them at a discount department store like JC Penny's. Can stores succeed without coupons and sales?

Post your answer below.
And "Envy is like a fly that passes all the body's sounder parts, and dwells upon the sores."
Arthur Chapman

I've warned everyone at every turn about the seductive power of getting even with those with more than you. It's a dangerous thing, envy, as it can lead to any kind of destruction from relationships to sparking wars. It can even lead to the destruction of the greatest nation on the planet. In part to their inability to heal and grow the economy, this administration has been fanning the flames of anger, envy and hate to a boiling point. This week they've added to the cauldron the JP Morgan story. Apparently, JP Morgan losing $2.0 billion of their money is worst than MF Global losing a similar amount of customer money. That story got no mention in the mainstream media, and the ladies on the View never discussed it.

Of course, MF Global was headed by a giant in the Democratic Party; a man Joe Biden said had no peers when it came to understanding finance, the former governor of New Jersey- Jon Corzine. That money vanished and I didn't hear about a slew of investigations and outrage. It's truly amazing. With that said, it's all a smoke screen. The reality is our government is addicted to power and spending, and the only way to continue both is to deflect attention. But you can't make someone feel better about their own dismal economic condition, so you elevate another emotion that deflects the blame from the real source of our misery.

I've searched for the answer, but there are many as to the most powerful of emotions. One website (Kingdom Hearts) ranked emotions from a survey:

* Anger 40.0%
* Fear 13.3%
* Other 13.3%
* Happiness 10.0%
* Sadness 10.0%
* Envy 6.6%
* Hope 6.6%

It's easy to glean from the survey, if you wanted to lead at any expense, selling "hope" might not snare as many people as selling anger and other negative emotions. And so the average person on the street knows JP Morgan lost a couple billion but not that it was 2% of a position. Just as they hear Warren Buffet pays less taxes than his secretary, when in fact his income has a lower rate, but the check is a lot more.
By the same token, there was no demonization when MF Global could not find its customers' money. The double standards are despicable and nauseating.

Fanning the flames of fear are dangerous and not only to its intended targets, or as I call them great Americans that worked hard and climbed the ladder of success. In the end, just as envy eats at a person's soul, we are all going to burn from losing track of the true reason our government is changing the meaning of this nation as a "melting pot." Our spiritual wings are singed and can't flap so our economy remains grounded. But it doesn't stop there—it's insidious just as our government's desires for power and money. If you buy into this premise that somehow successful people are the reason there aren't more successful people.

The public relations campaign to make people hate or envy those with more has been a success. To what degree, I'm not sure, but more and more people are okay with taxing businesses and the rich. While this campaign has been in our face nonstop so, too, has spending been going on nonstop. The Federal debt is now equal to our annual economic output and several states are in danger of melting. But they will not stop spending so they must increase the intensity of propaganda. You have to be angrier than you were yesterday and somehow JP Morgan losing money in a position does the trick.

While you were stewing about a Wall Street bank losing money something monumental occurred. The definition of rich changed, again, and yes it's a lot lower. In Maryland the state's Senate passed a series of tax hikes to pay for its profligate spending.

Hundred Thousandaires Watch Out

Maryland is in the process of hiking taxes from 5 to 15% on individuals whose income exceeds $100,000. Yes, it is official; the "millionaires" tax is now impacting those making the lowest six figure income. Money made north of $100,000 would be taxed at 5.0% while incomes above $500,000 would be hit by 5.75%. There would be similar increases for couples as well. The question is how will this help business? How will this help or encourage investment? Layer on the $36.0 million in taxes on commercial mortgages, and it's pretty clear Maryland is in deep trouble. Why would any productive couple stay in the state when it's so much cheaper in neighboring states?

There will be more tax hikes in Maryland covering everything from cigars to loopholes for small businesses. If you earn or hope to earn a six figure income in life, you should be appalled. If you want your children to make six figure incomes, then you should redirect that feeling of anger back to its true source. That would mean directing it against a powerful wind. This is dangerous stuff in so many ways. I tend to focus on the individual impact because without strong individuals we never will rebound as a nation.'

In the meantime, the economic impact is obvious. The only thing worse than smart austerity is dumb and irresponsible spending. If you're rooting for more taxes on the rich, you better know it's only a smoke screen and your taxes will increase, too, unless you completely drop out and live on the government dole.

"Above all, you must fight conceit, envy and every kind of ill-feelings in your heart."
Abraham Cahan

Yesterday's Session

I'm really shook up about yesterday's session because the market got hit twice on news from Greece that really shouldn't have been news as it wasn't new or unexpected. The idea these guys couldn't put together a government wasn't news, I bet the Vegas odds were 1,000 to 1 they would come together. Still, the market recoiled on Greek election results despite strong upside bias ahead of the open. Nonetheless, the market rebounded only to be crushed by news that €700.0 million has fled Greek banks. Again, I say, of course it has—who is going to wait for the Drachma?

Last summer we had to deal with all of this stuff every Monday; the market getting hammered because Greece couldn't pay its bills and refused to be contrite about it. Now it looks like the communists are going to take over in June. They will make waves and cause trouble, but I don't think they have the guts to bolt the Euro. Yet, after watching how the American stock market reacted yesterday, these Communists understand their power and will drive a hard bargain. It's an odd world when the borrower has all the leverage over the lender. It's an odd world when a country that is 0.40 of global GDP can roil markets and destroy prosperity.

It's an odd and dangerous world. The reaction of our market may mask other concerns as well. There is a giant tax hike lurking at the turn of the calendar and there is a giant election between now and then. Economic data is lurching lower and people are really concerned and confused. There is an amazing amount of value in the market but we know cheap stocks can get cheaper. This is the time to hold great companies, bite the bullet on those that are struggling and to be prepared to pounce once the market turns.

Celebrity Worship

I've often warned of celebrity worship on Wall Street. It's different than Main Street celebrity worship where people can get famous for doing nothing, at least on the street you have to have some success. But the mistake is assuming these people will always do great and always make shareholders money.

Rob Johnson took over at JC Penney (JCP) in November 2011 and the stock was in an upswing from a low of $23.00 (the announcement was made in June), trading at $32 and soon hit $43.00 a share. Everyone was excited that Johnson, architect of the Apple store, would weave his magic at a department store that needed Merlin, Houdini and a couple of witch doctors.

The company posted an earnings number so disappointing yesterday that management rescinded its dividend. Johnson is livid, but still confident having already said it would take four years to make the transformation. According to the WSJ, he's trying to wean shoppers off the "drug" he calls coupons and make this giant Titanic a bunch of wave runners. In the meantime, same store sales were off 19% while gross margin shrank to 37.6%.

Today's Session

The major indices have broken well below their 50-day moving averages and now look vulnerable to test the 200-day moving average. The problem is what could be the catalyst(s). I will say inflation data leaves open the possibility of more money-printing and the market is getting low enough to force the Fed's hand.

If the prices are right, I think they could pull it off. Kohl's is perceived to hike up their "original" price to be able to add deep discounts. As long as JCP's price tag is competitive with the discounted prices at Kohl's and other similar stores, they might be onto something. It gets old waiting for the 30% off and free shipping sales. If the price was lowest to begin with, people might not be able to resist. I'm curious to see how low they really go.

On the other hand, part of me thinks it is a disaster waiting to happen. Some people love to brag about the percent off they got. We'll see!

Tamara on 5/16/2012 10:04:57 AM
Hi Charles! Regarding coupons and sales, I believe it depends on the stores' target demo and the location. In my town (Buffalo, NY) people brag about how little they paid for something. "Sucha deal PLUS a coupon!" This is a TJ Maxx town. It's a great feeling like you got something for nothing. Macy's, Lord & Taylor, JCP all coupon to the point that I have not purchased something I wanted, because I didn't have a coupon at the time. Now, there are certain people who will pay retail for something they really want. That's a smaller % and I've been guilty of that when I'm short on time and really want an item. I just can't wait for a sale or a coupon. But that's at higher end stores with quality merchandise...not a JCP.

Interestingly, I've noticed a shift in the last couple of years to less coupons and sales at these stores, now that Canadians are coming to shop here in droves. They are willing to pay full retail for anything, so the stores are not offering as many discounts. They just don't have to. The merchandise options have expanded and improved, too.

Jen on 5/16/2012 10:28:45 AM
Service still plays an important part in it. Even though I'm not a 1%er I'm maybe a 10%er. But I'll still drive by a store that seems to be bothered by my walking in to get to one that thanks me for my business.

Jim Monroe on 5/16/2012 11:17:15 AM
Ninety percent of the time "sales" are merely a bait to lure you into the store. Look at the national mattress chain stores with their unending "sales". The best way to get a "deal" is offer cash and "no sales tax, no paperwork needed" strategy. Z

z on 5/16/2012 11:20:50 AM
Of course. It will take a while to break the couponing habit as it is an addiction. But what 80% of us want is simple honest pricing consistently applied. The auto business is learning exactly this right now.

kevin kehoe on 5/16/2012 11:40:16 AM
Mr. Payne,

Maryland's largest county, being the ever 'Progressive' state (quite the oxymoron that identifier's become) enacted last year by government force mind you - combined both alternative and standard energy usage for homes. Again with no public vote, input.

Resulting in an exponential increase in energy bills. As expected.

Maryland's Gov O'Malley also calls Md's illegal alien population, 'new Americans'.

Lastly, Md boasts of possessing the 'highest public education test scores nationwide' for some years now.

Though agin their biggest county provides, 'waivers' to their students who don't/ can't pass the assessment test to graduate high school AND/OR whose attendance is so abysmal in which catching up is next to impossible.

You'll never guess who the 'lucky recipients' of this 'Progressive idea' are.

Scary stuff, times we live in, Mr. Payne.

markit8dude on 5/16/2012 12:24:09 PM
The elderly shop at "this store" on Tuesdays and "that store" on Thursdays for the senior discounts available. More and more people ar getting wise to "discount" stores' pricing schemes and have begun to shop more at Salvation Army and Goodwill.
If we get four more years of "hope and change", all we'll be left with is pennies.

Gary on 5/16/2012 1:17:05 PM
Yes, they can because all retail merchandise is marked-up and, sometimes, by hundreds. Even the Dollar Store, marks-up their merchandise to cover expenses, and to assume a profit. (They probably buy in bulk and for pennies.)

Grace on 5/16/2012 1:33:16 PM
'no discount' delves into treacherous territory

Sumo on 5/16/2012 2:15:17 PM

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