Per-Capita Adjusted Retail Sales: Not Such a Bright Picture

Earlier today Calculated Risk posted about an improvement in total retail sales. I was interested in how these numbers would look once adjusted to their per-capita numbers. Obviously the population estimates (from the Census Bureau) might have a little bit of an error margin, but I wanted to see how the spending trends of Americans had, or had not, changed. In essence, I wanted to know if people were really spending more, or if the growth in total sales was just a by-product of population growth.

This doesn't say much about the retail sector, because it isn't adjusted to account for store openings and closings, in other words, as stores close and sales keep steady, revenue per store is increasing, but it does give us some clues as to whether there is upcoming expansion in the retail sector as the recovery takes hold. From what I gather from these graphs, I'd say an expansion in the number retail outlets is not something we should be expecting any time soon, which is bad news for REITs that operate shopping centers.

There is no adjustments for price levels, because of auto-correlation. Please feel free to submit questions, comments, or sector-specific requests.

I look forward to, in the future, making all my data sources available so they can be reviewed by anyone who may have any doubts about my methods. Just hold on a bit for that.

This is not progress: Move Your Politician’s Money?

 From The Baseline Scenario:

what happens when the location of political candidates'own money starts to matter. As early as this fall's primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?

Make them put the money where their mouth is? Seems plausible for demand deposits, notes and revolvers; however, who you gonna call when you need to place $3B of callable notes in the muni mkt? Hopefully not your friendly neighborhood credit union. Investment Banking: somebody gotta do it.

Don't government agencies have to use the service provider of least-cost that meets all of the stated deliverables? What happens when Mayor Joe Corrupto decides to do all the town banking through the local Bank that his biggest campaign donor is heading?

Don't get me wrong, I think the idea makes a tiny bit of sense. But only if local banks can provide the same or better service for equal or lesser cost than TBTF banks. Any other way is just begging for favoritism and corruption.

Chinese Money Supply

When China announced on January 12, 2010 that they were going to raise reserve requirements by 50 basis points everyone broke out in a panic about it. People speculated there would be crashes, that that there was a crazy China bubble or that the Chinese banks were driving asset-price bubbles through insane leverage. While the Chines Money Supply has indeed been growing faster than before as of late, that makes sense. Last year assets were depressed, leaving room for upside, and credit was hard to get. The Chinese central bank dropped reserve requirements by 50 basis points, which encouraged lending. As things settled down people resumed lending and borrowing. Nothing really crazy is going on. If you are part of the Minsky club, like I am, you consider a significant credit boom an essential part of a bubble. So, let's see if there really is some crazy Chinese bubble or if the Central Bank was just returning things to normal.
Please also note how high their reserves are. American banks keep only 10% of reserves on their transaction deposits (checking accounts). Savings accounts, and CDs are time deposits and have no mandated reserve requirement. Do your homework people. It's not that hard.
Sources:
People's Bank of China
Reserve Requirements (NY Fed)

Derivatives and zero-sum games

Futures, forwards, options, swaps; no matter what you call them they fall under one broader label: derivatives. Derivative products, like their name indicates, are products where the return is derived from another instrument. While credit-default swaps have been the most prominent in the news during the The Panic of '08/'09, they are not much different from the rest in one fundamental way: they are a zero-sum game. By zero-sum game, I mean a situation where net losses must always equal net gains. In particular, I am going to talk about options. Today I'm going to illustrate this with options.

For our example, we are going to use a call option sold on Conglomerate A Inc., for expiration in July 2009 at a strike price of $10 and at a cost of $1. That means that the purchaser will have the right to buy from the seller 100 shares of Conglomerate A Inc., for $10 a share until July 2009 if they pay the seller $100 today. If you think that Conglomerate A Inc, is going to be worth $15 in July, you can buy this call option and, if you are right, you'll be able to buy 100 shares at $10 in July and sell then in the open market for $15, netting a cool $400 (remember, you paid $100 for the option). The seller, on the other hand, was obligated to sell you his shares at a discount and lost $400. There is many ways this can play out, but one things is sure, for every dollar a person makes, another person loses a dollar.

I have no problem with options, in fact, I frequently use them to manage volatility and risk, but that doesn't change the facts. For every dollar someone gains, someone else loses $1. This would all be well and good, but every investor knows that, even though they don't exist in economics textbooks, transaction costs are very real in the form of ticket charges and/or commissions. Let's now play out the same scenario under a more realistic setting:

1. John writes 10 Conglomerate A Inc. calls with a $10 strike price at $1 for gross proceeds of $1,000. After paying a $25 ticket charge and $1 per contract fee, the net proceeds to John's account are $965. 
2. Daphne is very bullish in Conglomerate A Inc. and wants a leveraged play, but wants to limit her losses, so she buys the 10 calls for $1000 plus $35 in transaction costs for a total of $1035 net cash outflow.
3. Daphne is spot-on and the share price of Conglomerate A Inc., rises to $15. She exercises the option, buying the shares from John for a total of $10,000 (1 contract = 100 shares) and immediately sells the in the open market for $15,000, netting her a handsome profit of $3965 after factoring in the $1035 paid for the option and fees.
4. John, unfortunately, had to sell the shares at a loss of $5000, minus the $965 he received for the option, leaving him with a net loss of $4035.
5. Daphne made $3965, and John lost $4035. This is a zero-sum game, so where did the other $70 go? To your broker dealer. The financial industry facilitated this exchange for you, at no risk, and made $70, or 7% of your total transaction.

After fees, we have a less than zero-sum game, meaning your probability-adjusted payout is negative from the beginning. Remember that the next time you buy or sell options.