Wall Street Journal: Diamonds and Furs at Pawn Shops

Includes: CSH, EZPW
by: TraderMark

Occasionally you get a thesis correct, but can't seem to find the horse to profit from. I've been on the pawn shop bandwagon since mid-summer since I thought the economy would be far worse than the punditry. [Jul 24: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP] [Jul 10: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]

I avoided Cash America (CSH) correctly - the Jim Cramer pick (ahem) [Oct 20: Cramer Jumps on Pawn Shop Bandwagon] - due to its heavier reliance on cash advance stores which have regulatory threats coming down the pike.

I went with EZCORP (EZPW) which is doing nothing but executing business-wise [Nov 6: EZCORP - Executing Well, Raising Guidance for '09], but thus far in half a year we have a whopping gain of $300 in the name. In the pursuit of perfection that's a bit frustrating. It is making a series of higher lows which is bullish but ... $300?

Meanwhile, another name I considered (I decided against buying a basket of names and just picked 1 stock) has taken off of late, adding insult to injury. Granted its chart was looking like CSH until a few weeks ago, so I would not have been sitting in it subject to a waterfall selloff, but cmon EZPW - give a guy a rally.

Thanks to a reader for sending this story; we had a story 2 months ago about how even the upper branches of society were reaching out for pawn shops [Nov 8: Bloomberg - Even Pawn Shops in Beverly Hills are Booming], but this story targets my favorite American shopper; the aspirational spender! He/she who drives his/her BMW on his/her weekly trips to Coach (COH) or Whole Food Markets (WFMI). He/she who has taken out ridiculous mortgages for houses the size of which they never even enter 4 rooms in the house during a 12 month period (but it's just go to be bigger than the neighbors' - better lawn too). Of course it never rains in his/her neighborhood, or else one would need to save for said rainy day. Live (spend!) like it's the last day of your life - that's happiness! (source: self help inspirational books that fill Borders).

When things go wrong, the rest of America will be coming to the rescue in 2009-2011 so he/she shall retain his/her house and more importantly retain the cars, shopping trips, and if all goes well - get the $2500 watch back from the pawn shop. The horror of any of his dates seeing a watch of under $1000 on his arm! How can a man live like that?

Speaking as a person who has felt guilt buying the $49 watch, never owned a new car, and lives in a 70 year old house 1/4th the size of Mr./Mrs. Aspirational- I look forward (with glee) to helping these folks out from my wallet. It's the neighborly thing to do - although I live many neighborhoods away.

Now let me be clear, if you've got it - spend it; the trickle down economy needs you. But these people did not have it; they just pulled it (from the house ATM), and now the savers will be subsidizing them - all in the spirit of helping thy neighbor! Looking forward to it - I mean all I can get in a savings account is like 1% nowadays. (thanks Ben!)

As an aside, part of this story involves small business owners who are stuck going to pawn shops to fund their business as credit dries up; a beautiful overlay to the elite 0.02% of America getting their multi million bonuses while flying their jets and worrying if this year's bonus will have to be deferred to 2009 so it won't "look bad in the press" while accepting many billions of tax dollars to keep their lending institutions afloat. Meanwhile, small business? Not to worry - pawn shops are for you! Cramerica - for the corporation, by the corporation.

  • At Society Hill Loan, a pawnshop in a middle-class neighborhood here, a steady rain fell outside as a fashionably dressed young man parked his Cadillac Escalade outside. Looking around warily, he came in to speak with Nat Leonard, co-owner of the store. The visitor was a 29-year-old engineer who was laid off earlier this year from one of the local chemical companies. Since then, he's been cleaning planes at the airport for less than half the salary he was earning a year ago. Now he needs a $2,500 loan on his watch -- a Movado Fiero with a diamond bezel -- to pay his mortgage note. (these are the fellas we're going to give 4.5% - heck maybe 4.0% if Ben B can manage it fixed rate loans; you sucker who has been paying your mortgage the past 7 years? hahah- sorry - no soup for you)
  • Typically, pawnshop customers have a household income of about $29,000, according to Dave Adelman, president of the 2,400-member National Pawnbrokers Association. But operators around the country say they are seeing a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit and unexpected layoffs. In areas dogged by high unemployment and foreclosure rates, the pawn business is especially robust.
  • While some pawnshops -- like Beverly Loan Co. in Beverly Hills -- have discreetly served the wealthy for decades, more stores, such as Society Hill, are newly awash with furs, diamonds and other baubles from the bubble. At places like Society Hill, transactions are up by as much as 40% in recent months.
  • Lee Amberg, owner of AA Classic Windy City Jewelry & Loan in affluent Evanston, Ill., said he's been seeing Cartier watches, two-carat diamonds, David Yurman jewelry and pieces from Tiffany's. One client, he said, brought in a fur coat from Saks Fifth Avenue that retailed at $9,000. She told him she needed a loan to help buy private-school uniforms for her child.
  • Diamond Exchange USA is more of a hybrid store. In addition to selling its own pieces, it makes loans against customers' goods and purchases used jewelry too. Located on a major thoroughfare in Bethesda, Md., it has a constant stream of Mercedes-Benzes, BMWs and other luxury cars pulling into the lot. Virtually all of the clientele are women. Many come to sell their gold or diamond jewelry.
  • On a recent weekday morning, a line stretched from the front counter at Lewiston Pawn Shop. Mr. LaChappelle and his Lewiston, Maine, staff turned away many customers with less-than-desirable goods.

The end of the story has some anecdotes about small construction company owners forced to the pawn shop due to the credit crisis; hopefully by the time we give away all the pork of New Deal 2.0 (of course they promise NO PORK!) to the large corporate firms whose lobbyists are firmly implanted ... well you know where... there will be a few crumbs left for the small business guys.

Anyhow, moral of the story: I'd like EZCORP to go up so any owner of EZCORPcan make capital gains to help fund the bailouts of said Escalade owners. Thank you.

Disclosure:Long EZCORP in fund; no personal position