We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are

Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

Thursday, July 27, 2006

Is Anyone on Wall Street Safe From America’s Sinking Paychecks?

By Christopher Hancock July 26, 2006

What does $53 a day buy you?

For many Americans, it’s got to cover all the basic necessities: food, clothing, electricity, heat, car payments, phone service. It’s a real issue for a lot of households. It’s going to be a real dilemma for a lot of equities, too.

Here’s the problem.

The average household that shops at Wal-Mart earns about $40,000 annually.

After subtracting federal taxes (excluding any credits, such as the standard deduction, mortgage deductions, etc.), the family is left with $34,730. That comes out to $2,894 dollars a month, or a mere $723 dollars a week.

Let’s assume this average household is a family of four. And let’s assume they have a mortgage. The median U.S. home price in 2003 was $180,000. That figure soared 21% since then, but we’ll stick with 2003 data to be fair. Using a 3% fixed mortgage, our family’s total monthly payment (including property taxes and homeowner’s insurance) will be $987 a month.

And let’s assume they own two cars. With U.S. gas prices averaging $3.00 a gallon, two midsize sedans are going to cost our family roughly $100 a week, or $400 a month. And that’s assuming they go to the pumps no more than once a week.

So before factoring in anything else, the average Wal-Mart household is left with a meager $1,507 a month, $376 a week, or $53.82 a day.

Even if we granted our family exemption from federal income taxes, altogether, they would still only be left with roughly $70 a day. Two trips to McDonalds alone would eat up nearly half of that.

Frankly, I don’t know how the average American family does it.

As I’ve written before, I believe the inflation rate is much greater than the 3.55% the government reports.
If the Bureau of Labor Statistics measured the Consumer Price Index (CPI) by the same standards used in the 1970s, today’s inflation rate would more than double from 3.55% to 8%. Furthermore, at the pace we’re going, the 1970s method would propel the projected 2006 annual inflation rate well into the double digits.

But I’m not going to waste my breath and your time, dear reader, extrapolating the actual rate of inflation.

You know it’s there. It’s more severe than the government would have you believe. You see it on every bank statement, credit-card bill, and restaurant check.

My advice to you: Keep an eye out on stocks dependent on the American consumer. He’s becoming cautious, tight-fisted… unable to spend more than he earns much longer.

Be especially concerned with the retail sector…

UPS just reported disappointing second-quarter earnings. Chief financial officer Scott Davis said retail customers were showing signs of weakness.

Shares of Amazon.com, a customer of UPS, are down as much as 22% today on reports of a dramatic fall in net income. Higher operating expenses are taking their toll. Shipping promotions are having a significant impact on the bottom line. Free shipping saves a pricey trip to the store. But that can’t last forever.

The point is: People are trying to stretch that $53 a week further and further. I took my car to be serviced this weekend. The station attendant told me he didn’t have the proper oil filter. I asked him why it wasn’t in stock.

He told me that people were requesting oil changes without replacing the oil filter. They’re saving any way they can, he said.

So when I read that tire companies issued profit warnings today, I wasn’t surprised. “There’s an inclination to run tires a little balder,” according to Saul Ludwig, analyst at KeyBanc Capital Markets.

As long as oil prices stay at record levels, industries especially sensitive to the American consumer look to struggle. Take special note to industries with low gross margins.

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