The Steak House Update 9/21/16

Before we sink our teeth into this weeks filet mignon, permit me a quick comment about the FED.   Today at 11:00 am (Pacific) the FED released their latest rate decision:  As I expected, NO CHANGE.   Here’s an excerpt from the FEDs press release:

“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

If you need a refresher on the SHI, or it’s purpose and methodology, open and read the original BLOG: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)

Why You Should Care: The US BEA publishes the most recent GDP figures the instant they’re available. Unfortunately for us, it is a trailing index. The data is old news, a lagging indicator.

Year to date in 2016, the real US GDP is trending at only 1.0%. A lackluster reading at best. Will Q3 be better? I’d sure like to know in advance, wouldn’t you??

Personal consumption expenditures, or PCE, was the strongest component of the last GDP reading. In fact the vast majority of the latest quarter 1.2% GDP increase came from consumer spending. Clearly this is an important metric to track.

The SHI may help us do just that. I intend the SHI is to be predictive, helping us anticipate when the economy is going to move in a different direction – up or down. Giving us the ability to take action early – not when course corrections might be too late.

Taking action: Just keep up with the weekly column. If the index changes appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

Trending is very important…and we’ll watch the trend.

THE BLOG:   For obvious reasons, inflation continues to be a topic de jour at the FED.  For good reason.   Have you ever wondered how the BLS tracks inflation?  How important is any one item is in the calculation?

The BLS produces a detailed analysis answering this question.   Called “Table 2:  Consumer Price Index for All Urban Consumers (CPI-U) by detailed expenditure category” this chart has impressive detail.   Here’s the URL:  http://www.bls.gov/news.release/cpi.t02.htm#cpipress2.f.9

Take a look at the “Relative Importance” column.  You’ll see it equals (totals) 100…or 100%.    As it should be, “Shelter” in a large component, weighing in at 33.3%; Food is 13.7%; Prescription drugs, 1.42%.   Trust, me, it’s probably a good thing prescription drugs are such a small part of the CPI.

Last week, US drug maker Novum Pharmaceutical, raised the price (again) for one of their products, an acne cream called ‘Aloquin Gel,’ to $9,561.  This is a 128% price increase.   No, you don’t get a year’s supply for that price.  Just one tube.  A single 60 gram tube.

60 grams equals 2.116 ounces.   Today one ounce of gold sells for about $1,330.  Which means, at $4,518 per ounce, the price for Aloquin Gel is about 3.5 times the price of gold!

In May of 2015, Aloquin sold for $241.50.   After Novum acquired the drug from the previous owner, Primus, Novum raised the price by 1,100% the next day!    What does Novum say about the price hike?  I hope you haven’t taken a bite of your filet mignon yet – I don’t want you to choke:  The company has said it will invest the increased revenue in ways to ensure more patients could access the medicine.

Sure, this product isn’t for seniors – a group which certainly spends far more than 1.42% of their annual budget on prescriptions.   Which might explain why unlike Mylan and their “EpiPen” firestorm, we haven’t seen much in the media.  Say what you want about capitalism, Obama Care, business ethics, medical costs in general, one thing is clear:   The prescription drug system is irreparably broken.   This, my friends, is a very sad state of affairs.

Looking below, clearly we should be investing in prescription drugs as opposed to government bonds.   With over 70% of sovereign bonds yielding less than 1%, there’s not much profit here.  Courtesy of JP Morgan:

OK, ready for a steak? 

This week our SHI softened slightly – we fell from a positive 9 last week to a negative (-5).   Of course, we don’t need to talk about The Capital Grille, or as I like to think of them, “The Lonely Purveyors of Undesirable Beef.”  Mastros, on the other hand, continues its strong performance.   And our mid-market pair, Ruths and Mortons, remain in moderate demand, if subdued a bit this week.  Here are the last two “Open Table” reservation results:

Here’s the updated trend chart:

This SHI reading continues to reflect a rate of consumer spending and economic strength well in line with the past 10 or 12 readings.  Once again, I believe the SHI is telling us the economy is now, as before, remaining on a slow simmer.

After the FED release today, Janet Yellen held a press conference.   There she said their decision did not reflect a lack of confidence in the economy.   But with “labor market slack being taken up slowly,” and inflation remaining under the 2% target, they decided to hold rates steady for now.

As I expected.  The next FED meeting ends on November 2.  The presidential election will take place on the 8th.   Absent a major change between now and November 2nd, even though the FED is “apolitical” in theory, I suspect there’s a -0-% chance of a rate change in November.   But I continue to forecast a 0.25% increase in December.   Stay tuned!

• Terry Liebman