Outside the theater, no Katniss Everdeens to be found

April 24, 2012  

Ward Davis of Caerus Global Investors explains the irrational optimism of the one percent.

   
   Ward Davis

By Ward Davis

Last Thursday evening my thirteen-year-old daughter coerced me into seeing the midnight premier of the new blockbuster film, The Hunger Games. The big screen adaptation of the immensely popular young adult novel opened to an enormous $153 million gross in its first weekend, third all-time. The story depicts a post-apocalyptic world where the privileged few living in the Capitol (read the 1%) hold all the power over the poor, struggling masses (read the 99%) living in twelve surrounding districts. The Hunger Games are an annual event in which one boy and one girl from each of the districts are selected by lottery to compete in a televised battle in which only one person can survive; a gruesome fight to the death, all for the amusement of the more fortunate Capitol dwellers.

I hadn't been to a midnight movie since a 1982 showing of The Rocky Horror Picture Show. I'm not sure which experience was freakier. The hoards of hyper teens, college students, young and middle-aged adults decked out as Hunger Game characters were quite a spectacle. What was even more interesting was watching the entire audience become transfixed by the main character, Katniss Everdeen. Katniss, a young girl from a poverty stricken mining district, not only succeeds in combat, but her non-conforming ways during the televised fight sequences rouse the masses and enrage the upper crust audience. By the movie's end a class struggle rebellion seems inevitable. The audience in the theater cheered, exited then most seemed to hop into their awaiting town cars.

The Hunger Games economy of polarized extremes and elite complacency may be closer to the current real world example than many believe. Over the last few weeks there has been a growing sense that the economy is improving. Macro economic data have been decidedly mixed, but the positive reports have received far more attention in the press. This feel good mood has permeated into investor sentiment, which has climbed from near max bearish last fall to decidedly bullish in the most recent readings. Complacency has taken root again and appears surprisingly high as measured by the VIX (volatility index), which has sunk back to the pre-European debt crisis lows. The stock market has rallied sharply on pure multiple expansion. Earnings estimates for the average company in our universe have actually gone down, as we have reported in prior letters. The extraordinarily warm end to winter/beginning of spring has consumers feeling good too. Luxury goods spending and white table dining trends have been robust. The 1% Capitol dwellers, at least, are feeling pretty good.

The same can't be said for the rest of the economy. Prices for summer rentals in the Hamptons are up sharply this year fueling a sense on Wall Street that housing is in a recovery mode. Yet, the Case Schiller Home Price Index continues to track lower. New Home Sales fell to annualized SAAR of 313,000, close to the trough recession lows. Mortgage applications are falling because of rising rates. The S&P 500 Index is up 12.5% so far this year, and was up over 3% in March alone. Market participants are feeling pretty good. Personal Consumption for February recently came in better than expectations at a positive 1.9% year-over-year. But, the average Joe without a personal trading account isn't faring quite as well. Average Hourly Earnings were up a scant 1.9% year-over-year for the month of February, and have remained in a downward trajectory since mid 2011. Disposable Personal Income increased just 0.2% for February. Not surprisingly, the savings rate fell from 4.3% in January to just 3.7% in February, the lowest level since August 2009. Meanwhile gasoline prices have recently surged through the critical $4.00 per gallon barrier just in time for the spring/summer driving season. So, let's not get too giddy over the market's strong start to the year. The lower end of the economy is still struggling and not really feeling the improving trends. At least the 99 percenters don't have to send their sons and daughters into a televised fight to the death. But where are the Katnisses of the world when you really need them?

Ward Davis is founder and portfolio manger at Caerus Global Investors, a consumer-focused long/short equity hedge fund firm in New York that managed $212 million at yearend 2011.



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