Expect Retail Bankruptcies in January

Well I have been through five gift openings at four locations so far and just two more to go. The last will be back home when we finally return. I do not remember all this house-to-house gift opening as a child, but, then again, I don't remember this many gifts either. Anyhoo, it will be nice to get home. I enjoy seeing family, but there is a lot to be said for home-sweet-home.

Santa Scrooge

Despite all the gifts I saw, it appears that this was a rather slow season for retailers. Despite massive discounts, the customers were just not coming in the doors. I know this is bad news for retailers, but they will have to get used to lean times for some time to come. Those that can survive it will do well in the long run, those that cannot, well, cannot, which apparently explains some predictions for massive bankruptcies in 2009 and 2010 in the retail sector. If you have returns to do, the sooner the better as January is a big month for retailers filing bankruptcy. Undoubtedly they are waiting to see if a good holiday season helps bail them out. Well, this year it ain't likely, so get ready.

The good news is that at least some U.S. consumers are hunkering down and doing some deleveraging. Consumer debt reached an all time high a few months back in relation to income and we must, I repeat must, stay within our incomes. Americans need to pay down personal debt and increase savings. Doing so will be a painful exercise for both the consumer and retailer, but it is a necessary evil.

Now I am not saying all these consumers suddenly woke up and learned how to be frugal overnight. I suspect most simply are at a point where they are given no choice. Credit card limits are being reduced, home equity lines are gone and incomes are being reduced. Without credit or cash you are really given no choice but to spend less. Some day folks may thank the credit card companies for reducing their credit lines or their mortgage company for eliminating the home equity line. That may be hard to imagine now, but some day they will be better off because of it. Until then, most will have a few choice words for their banks.

Then again, the market was up Friday, so go figure. Bloomberg attributes it in part to GMAC qualifying as a bank and, accordingly, qualifying for government aid. Given the very thin trading volume Friday, I would try to avoid reading too much into this either way.

Disclosures: None.

Comments

[SteveTheHawk:]

I don't carry a balance on my credit cards, and the credit limit on one of my cards was just raised, for unknown reasons. I have had no credit limit reductions and it seems that my line of lenders is trying their best to get me to borrow and spend. Even my HELOC vendor is in regular contact and is apparently concerned that I haven't borrowed any money in some time.

Our household is not overly affluent, but we do have top-notch credit scores. From my small corner of the world it seems then that many who are seeing reduced access to credit probably need that reduction.

My wife and I are blessed with jobs (and pensions) and I truly feel for those who through no fault of their own are in poor financial condition. The fact is though that many people have been riding the fantasy credit bus for too long. The retailers and lenders have been there for them, driving the buses. That reality is coming home to roost is not a surprise. Retailers are going to feel the reality pinch for some time. The abuse of credit has created a surplus of retailers. Certainly, some will close but the strong will survive to sell another day. In the meantime, we will get along just fine without the large flat-screen TV.

2008 Dec 28 09:42 AM

[notsosmart:]

everyone has too much stuff. how much stuff do you need? pay off your credit cards,cars,house,& heloc.if the jones's dont like it forget them.this whole crash has not affected me.i too dnt have a flat screen.but i sleep at night.there is no granite counter here(emmiting radon gas) but the kitchen still works.

2008 Dec 28 11:42 AM

[D. McHattie:]

You could see this retailer bankruptcy train coming from a mile away. Proshares has an ultrashort etf (SCC) that shorts the whole consumer services sector (retailers, hotels, restaurants, airlines).

The only question in my mind is, with many of companies in the consumer services sector already having experienced massive declines in their stock prices, will they all, on average, fall further? I have to think that the answer is 'yes'.

I expect that when the preliminary december numbers come out we'll know exactly which retailers are doomed, even if it takes a few months for that doom reach fruition. Continued stock price declines in this sector in january should precede the actual chapter 11 declarations in feb, mar, apr.

2008 Dec 28 12:27 PM

[John Polomny:]

Who in particular is going to go bankrupt? Very little analysis here.

2008 Dec 29 02:16 AM