Spending, Production Slowing: Happy Holidays, You're Fired

Roughly two thirds of the American economy is based on consumer spending on items like new cars, home improvement items, electronics, and other common goods and services. When consumers start slowing down in their buying, the companies that produce and sell these items make less money and slow down their production. Slowing production means that these companies don’t need as many workers and that means that unemployment rises. With more people out of work, fewer people are making purchases of items that are considered luxuries or that can be postponed until better days. This is the self-reinforcing cycle in which the American economy now finds itself.

The unemployment rate at the end of October was 6.5%. The National Association for Business Economics (NABE) is forecasting that rate to hit 7.5% by the end of 2009 with increasing job losses through at least the third quarter of next year. NABE went further and said that it was likely that the US was headed for a long recession that will last well into 2009. We only have to look at store closings from the likes of Circuit City (CCTYQ.PK) and Starbucks (SBUX), and the rough shape of the automobile industry for evidence of slowing sales.

As for mounting job losses, we are hearing major announcements almost every day as one company after another is slashing its work force. This week brings news from Citigroup (C) and JP Morgan (JPM). CNBC reported that Citigroup may eliminate more than 50,000 workers from its payrolls, while it is estimated that JP Morgan may reduce its workforce by 10% or about 3,000 jobs. It’s a pretty good bet that few of those 53,000 people who will be losing their jobs are going to rush out and buy a new SUV or start a big home improvement project in the next few months.

The Wall Street Journal on Monday reported that home improvement giant Lowes’ CEO Robert Niblock sees it the same way. “We expect continued, broad-based external pressures on our industry, as rising unemployment, falling home prices, tight credit and volatile equity markets continue to erode consumer confidence and impact sales," he said. That pressure on sales is likely to extend to holiday shopping as well. Many retailers and manufacturers are so highly focused on holiday sales that as much as 70-80% of the company’s annual profit may be made during the October to December selling season. If the sales fail to materialize this year, we may see more dire announcements from retailers in the first quarter of 2009. Indeed Best Buy (BBY) has already issued a statement saying, “Rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen.”

While most consumers will be cutting back on spending this holiday season, those who do venture out to the stores may find prices slashed as retailers attempt to draw more buyers back. Unfortunately, slashed prices mean very little if any profit for those retailers. Savvy investors, too, will find little reason to make purchases of retail stocks for the next quarter or two as well, although there may be some bargains early next year as some of these stocks begin to bottom out or a few niche retailers announce better than expected holiday results.

Disclosure: no positions

Comments

[MichaelZZ:]

GM should go through a "packaged" Chap. 11 re-organization to include:

1) Adjustments in pay - union and white collar

2) Strict control over management's salaries and bonuses

3) A massive, but rational, reduction in legacy responsibilities

4) A 100% loss for all common and preferred shareholders

5) At least an 80% loss for bond holders, other than GMAC holders, to be paid for with new common stock

6) An infusion of the People's funds in the form of preferred stock with "business-like&qu.... parameters, such as 10% dividends, a very healthy option to convert into new common, and a serious number of long-term warrants to purchase new common

7) Reduce obligations to suppliers by 30% with the reduced amount paid in new common

The above is a good starting-point of discussions



Michael Z.
Sherman Oaks
[e-mail]
[e-mail]

2008 Nov 18 06:08 AM

[Smarty_Pants:]

MikeZ: If all shareholders take a 100% loss then who winds up 'owning' the company?

The current shareholders have already paid for the shares. They own a piece of the company. Period. What that piece is worth is determined on the market by voluntary bids for purchase. The only way to "give" shareholders a 100% 'loss' is to take away their ownership.

If that's part of the 'package', who winds up with those shares?

2008 Nov 18 11:30 AM

[icy:]

In the context of a bankruptcy, stock holders lose.

This Mike Z's understood premise is: "in an unavoidable GM bankruptcy, how can we limit damage to the economy, and to a lesser exent, our comrade workers"


On Nov 18 11:30 AM Smarty_Pants wrote:

> MikeZ: If all shareholders take a 100% loss then who winds up 'owning'
> the company?
>
> The current shareholders have already paid for the shares. They own
> a piece of the company. Period. What that piece is worth is determined
> on the market by voluntary bids for purchase. The only way to "give"
> shareholders a 100% 'loss' is to take away their ownership.
>
> If that's part of the 'package', who winds up with those shares?

2008 Nov 18 02:07 PM