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FRED
07-19-06, 10:07 AM
Target: The Canary in the Economy? (http://tinyurl.com/kyr2j)
July 18, 2006 (BusinessWeek)

Many fear the slowdown in the retailer's sales is a harbinger for reduced consumer spending—and that business can't pick up the slack

Cheap-chic retailer Target suffered a one-two punch from higher gas prices and the cooling housing market as shoppers pared down visits to the store.

"We believe the weakening housing market and prospects of high oil and gasoline prices, along with other negatives, will during the next few quarters pressure same-store sales for Target and other retailers," A.G. Edwards analyst Robert Buchanan wrote in a research report as he downgraded Target and several other retail stocks to hold from buy (see BW Online, 5/17/06, "Could Consumers Call it Quits").

AntiSpin: Stagflation eventually had to hit the heart of the economy, consumer spending that represents 70% of the US economy. This appears to be happening now, a good six months after energy prices and borrowing costs increased significantly while wages, except for the top 20% of wage earners (http://www.itulip.com/itulip_income_distribution_chart.html), either stagnated or declined in real terms.

The thing to keep in mind when watching the economy is that there are often long delays between changes to inputs (prices, jobs, wages, etc.) and measurable changes, often six months to a year, such as between the time energy prices increased and declining housing related wealth, cash and credit resulted in a decrease in consumer spending. That's because consumers don't behave according to the CPI, interest rate and housing price numbers reported in the financial press. They react eventually and reluctantly to the observation over time that they have less wealth than before and less money to spend. At first they compensate by increasing their borrowing, even at higher borrowing costs, in the hope that the problem is temporary. They resist changing their behavior, delay an adjustment to a lower standard of living, because that is an acknowledgement that they are in fact now poorer, a painful thing for any person to admit even if it's largely not that person's fault. Their mistake was to believe that the housing bubble "wealth" like the tech stock bubble "wealth" before it was ever real.

Eventually consumers do admit that they are poorer, have less money to spend. If that adjustment is rapid and painful enough, consumers -- who are also voters -- begin to look for someone to blame. In times of rising gasoline prices, oil companies are always a good scapegoat. (But don't blame your local gas station. You'll notice them going out of business in your neighborhood if you haven't already. The reason is that retail sales of gasoline is a very low margin business. When gasoline prices are high, people buy less but the gas station owner is stuck paying high prices from distributors. If the station owner hasn't been watching cashflow carefully, a couple of months of slow sales can wipe him or her out. We've lost two in our area, and there is now only one station within 10 miles open on a Sunday evening.) As property taxes rise, the town's managers are also handy scapegoats, but no one was complaining about the rocketing housing prices that inspired the lavish spending plans that drove those tax increases.

The real culprit is, of course, the policy makers responsible for the poilicies that made the US economy dependent on credit and consumption versus savings, foreign borrowing and the trade in inflated assets versus production, in the first place. Greenspan got out of Dodge last year, but the guys on Capitol Hill are sitting ducks.

BK
07-19-06, 12:11 PM
USA Today had the following article http://www.usatoday.com/money/industries/food/2006-07-18-casual-slide-usat_x.htm
on the slow down in Casual Dining.

Of course Casual Dining Chains and Retail Chains have been two of the biggest areas of over-investment in the last ten years. This has to lead to a real slow down in the REIT space.
Profit opportunity of the future - shorting REITS?

nikki
07-19-06, 02:45 PM
Personally I think that some of the comments coming from Congress (of course worried about their own butts in Nov) are facilitating this apparently dovish stance Bernanke is taking--he says it's data-dependent, but when core CPI is still rocking, he's implying a pause, at least according to the stock and bond markets. Could he be telling them what they want to hear, because it's hard for me to see how inflation pressures have subsided in any way, period. While you mention economic growth is slowly moderating and there is a lag, doesn't the wealth effect (illusion) that was created by the housing boom have the potential to prolong the pain even more as people hang on to hope for next spring? I think the expectation (delusion) that some homeowners (and the real estate shills) have that the market will rebound next year will allow for continued strong spending and a strong Christmas season, because we apparently have a new plateau for home prices, if you listen to them talk. It won't be until housing truly tanks and they realize that the easy money is gone that the consumer pulls back significantly. The "(Still) Coming slowdown" (http://www.industryweek.com/ReadArticle.aspx?ArticleID=12213&SectionID=3)piece you featured a few weeks back says that growth won't truly slow until credit is tightened, and that's not happening. It would appear the Fed is willing to take the risk of rampant inflation to see if energy prices moderate?

ChessMan
07-19-06, 03:15 PM
As bearish and contrarian as I am, I largely agree with Bernanke in that there's been a lot of tightening. The effects of which are still in the pipeline and yet to be seen.

Given the tendency of the Fed to overtighten, the smart play now is to strongly consider pausing.

I think pausing is the right play for now.

Disclaimer: My comments are not in any way meant to condone the practice of central banking. I think it's a fraud.

nikki
07-19-06, 04:07 PM
So when they say "data-dependent" they mean which data, exactly? There has been a long enough period of high energy costs that they have barely begun to be passed along to consumers at the core level, so I think that is also in the pipeline, so to speak. And now we've got a bit of wage growth detected, with the 0.6% inflation-adjusted rate the most since November (http://bloomberg.com/apps/news?pid=20601087&sid=aV39OPux8Sb8&refer=home). Cause for concern?

SeanO
07-19-06, 05:00 PM
...It won't be until housing truly tanks and they realize that the easy money is gone that the consumer pulls back significantly...

While housing is certainly adjusting to new interest rate levels, tightening of credit, and speculators exiting in some areas, I would not expect housing to "truly tank" until the employment picture begins to change. I believe that the desire to be a homeowner is currently so strong that people will continue to pay even if they are upside down... for a while.

Further I don't expect the consumer to pull back "significantly" until home equity has been sucked dry. Note that per the feds Q1 flow of funds there is still another $7.3 trillion of home equity to spend if everyone were to finance to 80% LTV. That number will shrink as home prices decline, but home equity spending won't disappear overnight.

Housing will suck for a while, but I think oil and inflation are the 1000lb gorillas for now.

jk
07-19-06, 06:52 PM
USA Today had the following article http://www.usatoday.com/money/industries/food/2006-07-18-casual-slide-usat_x.htm
on the slow down in Casual Dining.

Of course Casual Dining Chains and Retail Chains have been two of the biggest areas of over-investment in the last ten years. This has to lead to a real slow down in the REIT space.
Profit opportunity of the future - shorting REITS?

the problem with shorting reits is that then you've got to pay their distributions. i've run into the same thing with afbix- a fund that is short junk bonds. i'm just getting back to even as spreads have widened recently. i'm looking for spreads to widen a lot more, but in the meantime the junk bond payouts are a constant drag.

jk
07-19-06, 06:59 PM
So when they say "data-dependent" they mean which data, exactly? There has been a long enough period of high energy costs that they have barely begun to be passed along to consumers at the core level, so I think that is also in the pipeline, so to speak. And now we've got a bit of wage growth detected, with the 0.6% inflation-adjusted rate the most since November (http://bloomberg.com/apps/news?pid=20601087&sid=aV39OPux8Sb8&refer=home). Cause for concern?

re "which data exactly?" see
http://www.bloomberg.com/apps/news?pid=20601039&sid=ah0Na9vIqqL0&refer=columnist_baum

i think the fed is caught between a rock and a hard place. yes, slowing is in the pipeline. and yes, inflation is in the pipeline. given bernanke's [well founded] fear of deflation [because of all the debt] he'll tighten some, go "eyeball to eyeball" with inflation, but he'll always blink and lean towards ease. i think we have many years of this pattern ahead, if we're lucky. if we're not lucky we'll have a more focused crisis, likely in the dollar.

nikki
07-19-06, 07:08 PM
While housing is certainly adjusting to new interest rate levels, tightening of credit, and speculators exiting in some areas, I would not expect housing to "truly tank" until the employment picture begins to change. I believe that the desire to be a homeowner is currently so strong that people will continue to pay even if they are upside down... for a while.

Further I don't expect the consumer to pull back "significantly" until home equity has been sucked dry. Note that per the feds Q1 flow of funds there is still another $7.3 trillion of home equity to spend if everyone were to finance to 80% LTV. That number will shrink as home prices decline, but home equity spending won't disappear overnight.

Housing will suck for a while, but I think oil and inflation are the 1000lb gorillas for now.


As far as credit tightening goes, I'm seeing lots of "jumped", "leaped" and "expanded" in the underlined portions of this nice "Credit Bubble Bulletin (http://prudentbear.com/creditbubblebulletin.asp)", and Mike Shedlock concurs (http://globaleconomicanalysis.blogspot.com/2006_06_28_globaleconomicanalysis_archive.html)... so that part I'm still waiting for. But apparently inflation isn't that big of a problem for us, despite $73 oil without a hurricane, rising rents and the biggest real wage jump in 7 months.