Coult it be? Really? Finally? No...maybe! Is it finally time to bet against the unnerving vigor of American spender...the true stalwart of the economy? We know all the arguments about household debt, lack of savings, rising energy prices, slack employment, and a workforce nearing mass retirment, but these arguments have been available for years, and there's no money in being early. So who's gonna step up to the plate and say, ok this time the consumer is really in trouble? David Jackson at The Retail Stock Blog pulls this interesting quote from this weekend's Barron's:
…the consumer is broke and he doesn’t know it yet. But he is about to find out. All the buckets that propelled consumer spending are empty now, whether it is the increase in mortgage debt, the increase in consumer debt or the reduction in the savings rate. No one statistic will tip the scale at the end of the day. But one very obvious and very curious statistic is that we have dipped into a negative savings rate for the first time. That is not only unsustainable, it is sustainable only for a few months. That’s important to note because it tells you consumers are borrowing money to make debt payments. The U.S. consumer has become payment driven. He is driven not by the aggregate amount of debt he possesses but by the amount of the payment. And now the consumer has not only taken his savings rate to nothing, it has turned negative.
That's from dedicated short seller Lee Mikles. The wholea rticle is good, and if you're not a Barron's subscriber, you should be. Here's some more, this time about housing:
The argument is really pretty simplistic. If you consider housing as an asset class, then it makes sense to run the math as you would on any other asset class. It costs about 8% in the current environment to carry a home: That's mortgage, insurance, taxes, maintenance and ultimately a disposition cost. That's a conservative estimate. What it means is the home has to double every nine years for that consumer to stay even. Every year that house doesn't appreciate 8%, the consumer is losing ground if he is going to call it an investment. With wage growth at 2%, that's unsustainable. Common sense tells you house prices and wage growth have to track one another. All of a sudden they have monstrously decoupled. Just look at San Diego. House prices there are up over 150% since 1996. Wage growth during the same period in the same metropolitan area is up 22%. In the last five years we have the biggest disconnect we have ever had since these statistics have been compiled.
So, it may be time to seriously assemble a short portfolio. They're interested in the Auto (LEA, VC, & DPH), Airline (AMR) and consumer finance (NFI, NEW) sectors. The Stalwart has made the case that the homebuilders are a strong candidate as well. In fact, that call was very close to a top in the homebuilders index which has since pulled back dramatically. However, according to this blog, the index has roared back, and shorts may have a second opportunity.
Besides, the whole "borrowing to pay back debt" phenomenon, the unsustainability of which is self-evident, there's one more major story looming on the horizon, which suggests that the consumer's glorious end could run now. In October, the new bankruptcy laws will kick in, making it much harder to declare personal bankruptcy. Strapped consumers still have a few weeks to declare it before the window closes. Many will rush to do so, and lender reports in the following quarters may reflect this event, providing the necessary spooking to reverse the fortunes of many companies.
We wish you good luck in whatever you attempt to do.
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Posted by: Cell | July 31, 2006 at 03:07 AM