The Inelastic Mouse

  • Consumers struggle, but theme parks don’t. What gives?
  • The man behind today’s merger news is a genius… but is his firm a sound investment?
  • You read it here first: IMF brings Chinese yuan a step closer to its “big day”
  • The dollar on a tear… a mixed bag of economic numbers… reader accuses us of a “something for nothing” appeal… and more!

  The word is “inelastic.”
“An economic term,” says Investopedia, “used to describe the situation in which the supply and demand for a good or service are unaffected when the price of that good or service changes.”
Inelastic demand is the reason consumer staples stocks hold up better than other stocks during an economic downturn; people don’t stop using toothpaste and toilet paper.
But it’s not only the necessities of life that enjoy inelastic demand. As evidence, we submit The Walt Disney Co.’s decision in February to jack up Disney World ticket prices past $100 for the first time — a far cry from the $3.50 price when it opened in 1971…

Right, you say, but what about inflation? A fair question. Let’s take a look. Yes, we’re using the government’s bogus inflation numbers, but it’s a convenient point of reference…

The biggest jump by far came during the 1980s, when the inflation-adjusted price more than doubled. But the leap since 2001 — the year the president urged people to go to Disney World after Sept. 11 — is nearly as impressive.
That’s inelastic demand for you. Disney’s latest quarterly earnings report beat the vaunted “analyst expectations.” Profit at the theme park division was up 24% year over year. And theme park revenue rose more than 13% for the quarter.
  “The fact that Disney can raise prices at its parks and still have customers clamoring for tickets (in the off-season, no less) is a testament to just how strong the market is for theme parks this year,” says our income specialist Zach Scheidt.
Yeah, we know. We’ve chronicled it in our virtual pages. The mighty American consumer is struggling. Retail sales stink, even when you factor out the drop in gas prices compared with a year ago. Midmarket malls are in trouble because, as the retail consultant Howard Davidowitz put it succinctly, “The customers don’t have the [expletive deleted] money.”
But theme parks? Inelastic demand. “Theme park family vacations are an American tradition,” says Zach. “And this year, more families than ever are expected to visit destination theme parks.”
Alas, theme parks make up only about a third of Disney’s business. The rest is everything from Lucasfilm to Marvel Entertainment to the $6.00 a month on your cable bill that goes for ESPN, whether you’re a sports fan or not. And dividends? Forget it — DIS yields a paltry 1.1%.
There are only three “pure plays” if you want to invest in theme parks. Zach picked one as his most recent recommendation in Lifetime Income Report. Out of respect to his paying subscribers, we’ll withhold the name today. But it sports a 5.4% dividend yield and confers some nifty tax advantages.
[Ed. note: Every new subscriber to Lifetime Income Report gets the skinny on Canada’s version of Social Security and how Americans can piggyback the program to collect monthly checks anywhere between $400 and $4,700.
The Canada Pension Plan is managed by professional investors, runs a surplus and is set to quadruple its reserves by 2040.
Zach knows of a fellow from Arizona, retired after a career in sales, who collects an average $3,800 a month — more than triple the typical Social Security payment. And you can do likewise. Zach walks you through a simple three-step process that gets you started when you follow this link.]
  To the markets… where a rising dollar is putting a hurt on stocks and commodities alike.

There’s been more Greece-related noise in Europe. We’ll spare you the details because — well — it’s noise. But it’s sent the euro down. The yen is down too. So the U.S. dollar index rests this morning at 97.2, the highest in a month.
And with that, all the major U.S. stock indexes are down about 1%. The S&P 500 has slipped 20 points as we write, to 2,106.
Gold? Back below $1,200, at $1,189. Crude is off more than 2%, at $58.48.
But Treasuries are rallying, sending yields down. At last check, the yield on a 10-year note was 2.18%.
  “You can go broke betting against John Malone, but I don’t like the industry,” says our Chris Mayer about this morning’s big merger buzz.
Charter Communications is merging with Time Warner Cable — and buying Bright House Networks to boot. Result — a cable company with 24 million customers, nearly as many as Comcast’s 27 million.
The big cheese in Charter is John Malone, who made his fortune with the TCI cable provider before selling out to AT&T in 1999. Clearly, Malone still sees a future in cable, and he’s a smart cookie… but Chris is skeptical.
“Charter is highly levered and will have to borrow billions more for this deal,” Chris tells me by email this morning. “And the stock is already expensive, with the Malone premium well accounted for.
“Competitive threats are all over cable and profit margins are narrow — Netflix, Hulu, Google Fiber. One reason the cable guys are consolidating is that they’re in trouble. They need to combine forces and hope they can stem the flow against them.
“The merger is like two leaky boats tying up — it doesn’t make for a more seaworthy vessel.”
  Also in the market mix today — a motley collection of economic numbers.

  • Durable goods orders: Down 0.5% in April — not as weak as the “expert consensus” was counting on. If you throw out the volatile category of civilian aircraft, the number looks stronger still
  • New home sales: Up 6.8% in April. The South was the strongest region
  • Case-Shiller home price index: Up 1% in March, and up 5% year over year. Among the 20 cities making up the index, bombed-out Detroit turned in the strongest performance — which usually bodes well for the rest of the country.

  The Chinese yuan is a step closer to inclusion in the International Monetary Fund’s “super currency” later this year.

The IMF has declared the currency “no longer undervalued” — a move we hinted at three weeks ago. The yuan rose against all the world’s other major currencies over the last year.
The agency is still pushing China to let the yuan float freely against other currencies within the next two or three years — for the moment, it’s loosely pegged to the dollar — but make no mistake, today’s declaration is a milestone.
The next one is the one our Jim Rickards suggests is in store this fall — when the IMF adds the yuan to the basket of currencies making up the “special drawing right.” The SDR is the “super currency” the IMF issues to central banks and governments during financial crises.
If Jim’s forecast plays out, he expects a weaker dollar in the following years… and more inflation in the United States.
[Special notice for Jim Rickards’ readers: You got an email today at noon EDT that demands your immediate attention. This is the special announcement I was hinting at last week. It’s not a book, or a special report, or a newsletter or a trading service. And it could be literally invaluable.
Again, it went out at noon EDT today. If you haven’t seen it yet, take a moment to double-check your inbox right now.]
  “You state,” a reader writes in reply to last Friday’s episode, “that the average person who retired in 1980 put $96,000 into Social Security and received $203,000 in benefits, as if he were robbing the country.
“Assuming that this person’s working life was 45 years, and further presuming that he puts in an equal $177.77 per month during that 45-year period, the return on his investment is puny 2.98%. Is the government proud of the great stewardship by the custodians of the citizens’ money?
“If he was earning just 5.0% interest annually on his contribution, he would only have had to pay $100.18 per month, leaving him with an extra $77.59 per month to spend on cigarettes and whiskey.”
The 5: Huh? All we were saying is that the person who retired in 1980 got a positive return from Social Security while the person retiring in 2035 will put more into the system than he takes out.
  “I’ve been an Agora customer for quite a few years,” a reader prefaces a long and thoughtful note. “This means I have also been a longtime lab rat for Agora copywriting as different writers compete to sell the newsletter du jour.
“Lately, the copywriting has taken sort of a disturbing turn. Specifically, the latest promos re piggybacking the Canadian Pension Plan.
“The ad starts out with ‘neighbors to the north are laughing at us.’ It’s sort of true. We are continually amused by goings-on in the U.S., but we are not laughing at you guys because you spent the money that was supposed to fund your retirement. We laugh at you because you select from 50 contestants for Miss USA but only two for president. And we laugh at you (a lot!) because of the Kardashians and American reality TV.
“We don’t laugh at your government’s financial ineptitude. Please clarify that point to your readers. Our politicians are every bit as stupid and corrupt as yours. The joke in Canada is that we have the best politicians money can buy.
“The ad copy then continues on in a manner that appeals directly to that segment of society that wants something they have not earned and are not entitled to. This is the part of your marketing strategy that bothers me.
“I know the reality is that the promo is just about copying various investments, and there is nothing wrong with that. I also know that experienced fisherman like yourselves choose their bait very carefully depending on their quarry. The bait you guys are using shows your intended catch is that segment of society that is relatively unencumbered with honesty, morals or a sense of fair play. The ad copy is all about getting even for being laughed at and making money off Canada’s Pension Plan (which obviously no American is entitled to).
“What’s up with that?
“Is Agora trying to attract more readers who don’t have an issue with taking something they have no right to take? Sad if true. Has your prior marketing proved this approach works on your existing customers? Even sadder if that is the company I am keeping by being a subscriber.
“Or have you hired a bunch of new copywriters who have an entitlement mindset themselves and therefore think everyone does too?”
The 5: We respectfully reject your assertion that the copy implies something for nothing, or that we’re appealing to readers’ baser instincts.
The appeal is, in fact, a timeless one. A working stiff struggling to get ahead, looking for any angle that will help. Here’s a solution that hadn’t previously come to his attention, carrying the promise of a more secure retirement. It’s something that works for Canadians, and with modifications that can work for Americans too.
What’s not to like?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. If you’re still not hip to what the controversy’s all about — and you want to judge for yourself — here’s the scoop.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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