Tuesday, October 14, 2008

Time to Jump In? Consumer Discretionary...

"The Life Guard Blew the Whistle, Everybody can get Back into the Pool." This is what one of the guests said on CNBC this morning. After all, the government just announced that it was spending $250,000,000,000 to purchase preferred shares in eight of the nation's largest banks. Not only will these purchases add much needed liquidity, it will allow banks to purchase smaller-struggling banks at a mere pittance. I like to think of this as a closeout store where customers can purchase damaged and defective products at a huge discount. This was the first of Treasury's installments. There will be two more installments equaling $500,000,000,000.00 to be announced at a later date. As usual, CNBC hosts and guests were ear to ear smiles.

Which banks may get the most under Paulson's Plan
Citigroup $25 billion
J.P. Morgan $25 billion
Bank of America $12.5 Billion
Merrill Lynch $12.5 Billion
Goldman Sachs $10 Billion
Morgan Stanley $ 10 Billion
State Street Bank $3 Billion
Bank of New York $ 3 Billion (1)

I have always been told that “You never want to Make Uncle Sam a Partner in your Business.” An over-involved government tends to destroy creative thinking and limit future progress. While there is no doubt that the government has a vested interest in the success of U.S. companies, now these financial institutions are almost guaranteed by the tax payers. A little freedom has been sacrificed in lieu of security…

Is There a Doctor in the House?
One might find it ironic that the guest speakers were both questioned by CNBC hosts.
CNBC “Have we bottomed?”

Guest 1 “I will not call a bottom as we have risen too far, too fast, with too little resistance.”

Guest 2 “The truth is, we have at least another 12 months of horrific earnings to go… Unemployment will add another 2,000,000 claims over the next year. Companies will need to demonstrate where their earnings are coming from.”

The Rest of the Story
A little honesty is nice… Even though this conversation bordered on honesty a time or two, the bottom line it that neither party got to the heart of the matter… This rally is not much less than a shot of adrenalin while a patient is in cardiac arrest. If the GDP is based on consumer spending, then it will need to find another growth engine… It is my belief that the unemployment prediction is low… and with high unemployment, we are looking at a number of scenarios. For instance:

GMAC has tightened credit requirement on anyone who is interested in buying a car. They will only work with scores of 700 or better. It looks like the used car market will prosper… used car parts like Auto Zone may be a winner here… Does J.D. By-Rider have a ticker symbol? Regardless, financing will be tight for tier two credit applicants!

Restaurants like DDI (Durden Restaurants) who also own Pottery Barn will have a difficult time weathering the storm. As will several smaller operations like the Build a Bear Workshop (BBW).

If readers like to gamble, then the time is right to bet against anything that deals with discretionary consumer spending. For instance WYNN, clearly shows that Las Vegas is not a recession proof city. After eight quarters of weakening profits, Wynn announced that year over year number will be lower than last fiscal year. By the way, Las Vegas’ foreclosure rate is up 169% from last year’s horrific numbers.

Along the lines of consumer discretionary spending, WSM is the maker of high end consumer appliances which will not do well in a tighter market. SKS can be added to that list as well. If the theme is a dead consumer and tight retail margins, then we must give tribute to the commercial real estate sector which could be in for the rudest of awakenings. More of that next time…

Sources Referenced


AX said...

Notice how retail and homebuilding managed to sit it out the last few days? Attempted multiple times to buy RYL puts today, but we'll get our chance. I would still like to see another panic sell in good stocks before we'd consider buying and the ones you mentioned are ripe to go to zero if unemployment approaches 8%.

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