Friday, 23 April 2010 04:18

What We're Looking For To Go Splat! Part 1

We have started picking new companies for forensic analysis, along with the ongoing study of the Pan-European Debt Crisis. Below you will find a sneak peak of what we have unearthed but first, the obligatory romp through recent news...

Bankrupt Consumers LOVE iPads: WSJ

  • Consumers are filing for Chapter 7 bankruptcy more than ever, choosing to liquidate their assets and be free of their debtors over signing debt repayment plans as encouraged under Chapter 13 bankruptcy
  • Personal bankruptcies reached 1.41 million last year, up nearly a third from 2008 (but the recession is over, don’t worrythis particular stat is a non-issue in a jobless, V shaped recovery)
  • Regulations that sought to keep consumers from liquidating at the expense of keeping some debt are not working, as the consumer is clearly rejecting the opportunity cost of having any debt

Consumers Deleverage: Reuters

  • Consumer credit unexpectedly took a sharp turn lower, and revolving credit fell at a 13% annual rate
  • Consumers are throwing away credit cards, yet retail sales data continues to rise, watch pending homes data on Monday for further development.

Those companies that serve and rely on these very same consumers' ability to spend are quite sensitive to the macro environment. Notice, I said the companies, not necessarily the companies' securities - at least not yet. So, what does the macro/fundamental outlook look like? Let's glance at personal consumption over the 12 years or so...

[caption id="attachment_1389" align="alignnone" width="655" caption="Notice that the only real recovery is in the volatile energy sector, and that is not discretionary! Automobiles, clothing, furnishing, etc. are looking yucky!"]Notice that the only real recovery is in the volatile energy sector, and that is not discretionary! Automobiles, clothing, furnishing, etc. are looking yucky![/caption]

This is an interesting development, for unemployment (real unemployment that is) is still rampant. The federal government is effectively funding and financing deficit state unemployment rolls (see below for more detail). With record bankruptcies, deleveraging consumers, and rampant unemployment combined with drastic drops in consumer expenditures, guess what retail stocks are doing??? Yep, you guessed it.

According to retail stocks, the consumer is BOOMING! Credit issues are non-existent! They aren't drowning in debt (that is both the vendors and the consumers), and employment is maxed out at an all time high. Hey, we can't even spell Bankruptcy, and consumers are releveraging versus deleveraging since the banks are giving out all of those ultra low rate credit cards like candy! After all, if there is anything that the banks want to do now it is increase there credit card exposure at the same time they are allowing these Ipad-aholics to max out home equity lines in order to buy more worthless stuff! According to retail stocks, the consumer is BOOMING! Credit issues are non-existent! They aren't drowning in debt (that is both the vendors and the consumers), and employment is maxed out at an all time high. Hey, we can't even spell Bankruptcy, and consumers are releveraging versus deleveraging since the banks are giving out all of those ultra low rate credit cards like candy! After all, if there is anything that the banks want to do now it is increase there credit card exposure at the same time they are allowing these Ipad-aholics to max out home equity lines in order to buy more worthless stuff consumer retail products!

Are the Effects of Unemployment About To Shoot Through the Roof? I wrote this piece late last year, and thus far it appears to be on point.

…The Bureau of Labor Statistics reported the total number of unemployed at 15.6 million and the unemployment rate at 10% in Dec 2010. With serious doubts being raised about the reported figures of the insured unemployed that forms a substantial portion of total unemployed (nearly 69% in Dec 2010, based on reported figures), the total unemployment figures reported by the government is most likely severely understated.

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The grave unemployment situation not only undermines the economic health and recovery hopes, but is also acting as a major source of financial strain on the Fed’s books.

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The increased pressure on the Fed books can be largely explained when we look into UI programs that are currently being administered by the government. There are two major UI programs – Regular state programs and Emergency Unemployment Compensation (EUC). While the former has to be funded through tax collection by the state (with any deficit financed by the Fed through loans), the latter is 100% funded by the Fed. EUC is a Federal, temporary extension of unemployment compensation for unemployed individuals who have already collected all regular state benefits for which they were eligible. The program was started in June 2008 and was due to expire in December, 2009. The claims under the program have risen at a phenomenal rate and now accounts for nearly 50% of the total insured unemployed claims. Thus, the Fed has been financing the extension of UI benefits of those which are no longer covered under the regular state programs. As per the last reported figures as of Dec 19, 2009, while the claims under the regular state programs have come down due to the expiration of claims, the same was more than offset by the massive jump in insured unemployed under the federal EUC program. The claims under the regular state programs were down 4.3% (y-o-y) while the claims under EUC were up nearly 200% which led to a nearly 51% increase in total insured unemployed. Insured unemployed are not able to get jobs and with claims expiring under the regular state programs, they are increasingly applying to the Federal’s EUC program for extended benefits.

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Looking at the initial job claims under the regular state programs, while the markets rejoiced the decline in seasonally adjusted figure, the non-seasonally adjusted figures (which are the actual claims) continue to inch up. For the week ended Jan 02, 2010, the initial jobless claims (NSA) increased 88,000 (w-o-w) to reach 645,571. Looking at the two year trend of the seasonal adjustment does call into question the validity and accuracy of the adjustments, no?

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With the total number of insured unemployed (under the state and federal programs combined) continuing to increase as well as no respite coming from the initial jobless claims (looking at the real figures which are not seasonally adjusted), the unemployment situation is far from improving. Further, with serious questions being raised about the validity of the reported number of insured unemployed, the gravity of the situation is definitely underrated. The Fed is pumping in enormous sums of money to underpin the problem – an amount that may rival the TARP. However, with claims expiring under the regular UI state programs and the temporary aid provided by EUC expected to taper in the coming months, unemployment is going to increasingly weigh on aggregate demand and further delay the economic recovery.

Many of the retailers that we looked at are strapped for cash, cash flow sparse and/or heavily indebted. We expect to see a roiling in the fixed income markets, starting out of Europe any minute now.

The European Sovereign Debt Crisis, about to kick into full gear any minute now, will create so much competition, fear and loathing in the fixed income markets that those heavily indebted retail stocks flying high on Macro-Meth fumes will have to implode sooner or later.

The Pan-European Sovereign Debt Crisis, to date:

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  6. The Beginning of the Endgame is Coming???
  7. I Think It’s Confirmed, Greece Will Be the First Domino to Fall
  8. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  9. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  10. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  11. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…
  12. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino
  13. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis
  14. Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?
  15. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  16. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  17. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
  18. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
  19. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight
  20. Grecian News and its Relevance to My Analysis
  21. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis
  22. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
  23. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?
  24. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
  25. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

Latest Euro-related subscription content:

Part 2 of this post will deal with specific companies...

Last modified on Saturday, 24 April 2010 04:34

1 comment

  • Comment Link Mark Hankins Friday, 23 April 2010 12:25 posted by Mark Hankins

    The "deleveraging" of consumers should probably be more accurately termed "defaulting" since charged-off credit cards are no longer counted as assets by the banks, and both Moody's and Fitch see credit card charge-off rates in excess of 11% through the summer.

    Chapters 7 and 13 bay be the only available yardsticks of consumer financial distress, but they do not capture the swath of consumers who eschew the chapters and instead pursue "informal bankruptcy" (as described by Dawsey & Ausubel), or what in the old days was termed "being a deadbeat."

    Because this topic is apropos of my book, I'll mention it here. It's called "Debt Hope: Down and Dirty Survival Strategies" and it's available for the Kindle and as a .PDF. However, just this morning I was offered a deal to put it in print. Depending how that goes, it may soon be available in hardcopy form.

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