3/14 Kelly Letter Topics
Weekly market review
Fed oversees banks
EU bails out Greece
China likes Treasurys
Consumers still down
CT suing Moody's, S&P
US AAA rating at risk
Strong retail sales
Topping oil prices
Index chart patterns
Households suffering
Market at 1150
What range top means
FMD shooting higher
Bluefin tuna ban
2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
You know what all the analysts are predicting. You know how down in the dumps the stock market has been. You know how every year for the first three weeks of November economists say that the American consumer is dead.
Let's prove them all wrong, yet again. Today is Black Friday, the busiest shopping day of the year. Get out and do your part! Buy something, then buy something else, then something else, and just when you think you've bought enough, buy more!
If you're reading this at home now, you may already be too late for the early-bird specials, though. Despite the dour predictions, consumers have already headed to the malls to get ready for the big day.
Luigi sent this yesterday:
I have been notified by a friend that there are people camped in tents in the parking lot of a local BestBuy. Beats spending Thanksgiving at home, I suppose, and all those bargains tomorrow will make up for the mortgage they couldn't afford.
Right, and there's nothing like a good shopping spree to get over depression about the falling value of a home. In any event, with all the bankruptcies on the way, folks might as well use it before they lose it -- credit, that is.
Run the charges to the moon, send retail stocks climbing when they beat their low earnings estimates, sell shares in those stocks, hide the proceeds, and declare bankruptcy. If ever there was a recipe for a strong economy, surely that's it.
This just in: stores are open right now! Stop reading, put all your credit cards in your pocket, and head out the door.
BusinessWeek's current cover story, The Consumer Crunch by Michael Mandel, struck a chord with many readers. Mr. Mandel contends that consumer spending is finally going to come down this time, to the tune of $200 to $300 billion, because the sub-prime crisis is ending the "borrow-and-buy boom" that people created with credit. In essence, now that it's harder to borrow money to buy a home, and it will soon be harder to get a credit card, shopping will slow way down.
There's a simple way to test this: apply for a new credit card. You'll have it almost immediately. Just look at what's available with a few clicks of your mouse. Credit Land is even offering "credit cards for fall shopping" to help the economy out.
Mr. Mandel says this free-for-all is over: "But executives from Capital One Financial (COF ), Bank of America (BAC ), Discover Card (DFS ), Washington Mutual (WM ), and others have told investors in recent conference calls that they are using more caution in extending credit."
Ha! There's a laugh. How could they use less? When you read that lenders are "tightening standards" and "using caution" just know that it means they now require both first and last names on the applications. New credit cards and higher credit limits are still about as easy to get as a drink of water.
I have mixed emotions about all this. In my personal finance book and countless articles, I advised readers to avoid credit card debt. I never carry a balance on credit cards, and neither should you. Smart readers of mine long ago learned to see through the shiny lures of cash back plans, mileage plans, point systems, and other goofiness to trick the unsophisticated into running up the balance and then paying usurious interest. So, in a way, I'm in favor of the great shopping spigot getting turned off.
I just don't believe it will happen. Frankly, people are too financially stupid to ever get it. They always have been, and that's why a multi-billion dollar economy based on credit rose up around us. What's more, it's not going to disappear because a small portion of banking business is encountering a small portion of customers who can't pay. That's all sub-prime is, folks. It doesn't affect all mortgages, much less all of finance, much less all of the economy.
Another thing to keep in mind is that people in debt, people with bad credit, are not new. They didn't just pop up last spring when the phrase "sub-prime" entered the popular lexicon. I've been lecturing to them for more than ten years -- to no avail. There are more than 34 million Americans with poor or "damaged" payment history, and banks do a brisk business figuring out how to make money off of them in second and third attempts, even being brash enough to define financial sophistication as the ability to go into debt in more ways than one! "Get the new Pyrillium card exclusively for the finer lifestyle that you deserve." Flexible payment plans, no interest for a year plans, swap land for credit plans, you name it and it's been tried.
In fact, the root of sub-prime trouble lies in the creativity and boldness of financial companies. Who else would have ever lit upon the idea of lending mortgage money to people who can't afford a house? More frightening, look at how many morons took it. So, now a portion of the morons are in trouble and the holders of the loans are in trouble, and for that we're to believe that decades of making people believe they're entitled to the good life is simply over?
I don't think so. I wish so, but I don't think so.
Even Mr. Mandel admits that his call for the end of the consumer is a cry of wolf we've heard for the past 25 years:
Truth is, economists have been complaining about excessive borrowing and spending since the early 1980s. Journalists began writing about consumers being "tapped out," "profligate," and "spendthrift." Magazines and newspapers regularly ran stories about debt-ridden Americans not being able to buy holiday presents for their kids.
Yet, the holiday presents were bought, new cards were issued, new homes were built, the internet happened, and somehow all those borrowing and buying morons were even convinced that they needed to drive SUVs getting 14 miles to the gallon, and not even $3 gasoline could convince them otherwise.
I'm afraid it's time we admit that nothing will ever stop the American consumer. We've demonstrated that we're willing to kill for what we want, literally. Look at headlines from the Middle East sometime. More apropos, people have been overpaying for coffee, cars, houses, clothes, jewelry, handbags, shoes, and cosmetics for longer than I've been alive. That's America. That's how people want to live and it will not stop.
I know Mr. Mandel thinks that it's different this time, but the numbers from stores don't support that so far this year, any more than they did in years past, as I wrote last Thursday. Wal-Mart says all's well. Last night, Nordstrom beat earnings estimates and issued a positive forecast. People are employed. Incomes are growing at 7% year-over-year. We might just have, yet again, a holiday season better than expected.
You want to know one reason why? Because all the credit cards that have already been issued carry untapped credit worth $4 trillion. Combine that with America's insatiable desire to buy and we might just get one heck of a shopping spree.
There are plenty of reasons to be nervous heading into this holiday shopping season if you're a retailer. Consumer confidence fell in October for the third month in a row. Income growth is sluggish. Energy prices are soaring. No surprise, then, that the winter gift-buying season, when retailers traditionally book most of their profit for the year, is looking less than jolly. Sales at stores open at least a year will increase a modest 3.5% in November and December, down from 4% last year and well below the 5%-plus growth rates of the late '90s, estimates the International Council of Shopping Centers.
Now, can you guess when Business Week reported that? You would be forgiven for mistaking it as current news, but the date was November 8, 2004.
I can't remember a holiday season that was rung in with good cheer in the financial media. It's always a story about America's strapped consumer finally reaching the end of his or her spending ability for the same list of reasons. Confidence is low. Inflation, often from energy, is high and that's mopping up discretionary dollars. Incomes are down.
What happened after that dismal prediction in November 2004? The Dow gained 4.9% and the Nasdaq gained 6.7% by year-end, and Business Week reported on January 10, 2005:
The momentum continued as 2004 ended. The Conference Board reported that its index of consumer confidence jumped almost 10 points in December to the highest level in five months. Monthly data through November and holiday sales reports suggest real consumer spending grew at an annual rate of 3% to 4% in the fourth quarter. Strong buying just before and right after Christmas also helped retailers' fortunes.
Here at The Kelly Letter, we are keenly aware of seasonal trends and market history. You should be, too. Don't let what others believe to be "new" headlines scare you away from profits.
Remember this simple fact: news is usually frightening, yet the market usually rises.
Every year at about this time, we hear that the American consumer is tapped out. This year the refrain came with gusto because of the sub-prime crisis. The ability to withdraw cash via home equity lines of credit is now gone, goes the argument, so Christmas shoppers will fail to show.
Funny thing is, we heard that last year. The year before that, it was credit card debt that was going to shut down the holiday season. The year before that, it was comments from T. Boone Pickens predicting that we'd seen $40 oil for the last time and that we'd one day get to $60. Such high oil prices were bound to eat up all the extra money in consumers' pockets, so they'd have less for shopping. Sound familiar?
In each case, consumers showed up beyond everybody's wildest expectations and all was well. That didn't necessarily spare individual companies. Last year, for instance, was Wal-Mart's worst holiday season on record, but that didn't kill the rest of consumer stocks nor the overall market.
Lo' and behold, Wal-Mart's looking a lot better this year. Yesterday, it posted third-quarter earnings of $2.86 billion, an 8 percent rise that beat Wall Street expectations. President and Chief Executive Officer Lee Scott said, "During the Christmas and holiday season, our price leadership position will benefit both our customers and the company. We have set the stage for a successful fourth quarter."
Expectations are so low for consumer turnout, and stock prices already so low in anticipation of it, that The Kelly Letter is finding bargains in the consumer sector. We bought a leading casual dining restaurant on the cheap, and are looking to buy the leading coffee seller at the right price.
