Market Commentary for the week of November 4, 2013

A la carte.
We’re in the midst of a rather interesting earnings season, one in which many companies are recording record profits and new highs in their share prices.  Not so unusual, that, except many of these earnings derive from a new phenomenon:  a la carte pricing.  Consider that banks segregate, at a price, costs and services which once were part of their overall service package.  Airlines, too, are charging for seating assignments, early boarding, crackers, etc.  Who knows, next thing might be a special charge for takeoff or landing?

Nickel-and-dimeing is not new.  But multinational corporations that expand their revenue base by charging you, their consumer, for “standardized” industry practices…that’s something new entirely.

 And Wall Street falls for this gambit.

Analysts actually look at these revenues not as an onerous excursion into price gouging but as a logical decoupling from excessive costs that companies can’t afford to absorb to please you, their satisfied customer.  “Satisfied” is anything but how consumers feel about a la carte pricing.  Portions are smaller in restaurants, seating is smaller in airplanes, no one “rolls down” their car windows anymore (am I dating myself?), while gadgets and gizmos are added-on (at a cost) to your cellular phone.  In fact, basic cable television has supplanted analog, over the airwaves, communication at a cost.

And what do corporations do with these new-found pennies of aggregate revenue?  In many cases we are seeing share buy-backs in record proportions, which only enhances the upside value of a companies’ stock and its scarcity.  In effect, there is an upside reversion to the mean, rather than downwards, when times are tough but companies sit with plenty of cash reserves.  This, then, is reverse engineering of traditional accounting practices, and what I once referred to as “Rapunzel Economics”, spinning gold out of nothing.

Alchemy and economics are diametric cousins, and have no place sitting at the same table.

Full speed.

As a result, the market gleefully hangs on for dear life, looking better and better (price) while engineers and marketing departments run the vision into the ground.

I asked you 2 weeks ago to name 6 companies that have high demand, consistent earnings, increasing share valuation, and which solve a “social” function of providing for the common good, for the benefit of us first, before their shareholders?  I’m still waiting for an answer.

In all, the end game is always profits.  But at what cost?  As the markets make new highs more of us acknowledge the former and care less about the latter.  That’s what makes the quantification (sustainability) of this data so unique today.  We don’t want or wish for the market to shock back to earth, but we also don’t want companies to profit without explanation or justification of their costs.

Consider that the market’s success is great for your 401-k and your psyche, but its not great for the economy at large if the gap between valuation and sustainability becomes untenable.  The correlation between corporate greed and our sense of participation has always been part of the corporate/societal compact that makes capitalism work.  We expect cyclical dips in the economy, as well as dips in the risky financial markets.  No one expects linearity either in earnings, prices, costs or happiness.

I am convinced that we have turned an economic corner following the last man-made economic synapse in 2007.  I am less convinced, however, that, as evidenced by a la carte pricing, we have turned a moral corner about the respect given to the consumer.

P. T. Barnum:  “There’s a sucker born every minute.”