The Economy Is So Bad, Even Pawn Shops Are Suffering

I am just shaking my head at this mirage of prosperity we are living in... all due to the "stock market telling us things are just dandy". You should know from October 2007 that the stock market is a lousy indicator of the coming 4-6 months, but this dogma is now so ingrained. I'd say the same for commodities, especially in this era when hedge funds and banks are buying crude to store and playing the futures against it. [Jun 8: Dennis Gartman Short Term Bearish in Oil]

Recently, commodities bulls have been aided by the Federal Reserve keeping rates low and banks' short-term funding flowing. This facilitates commodities trading and stokes fears of inflation. As cash flows into oil futures, their prices rise relative to spot prices. That makes it profitable to buy physical oil, store it and sell it forward.

Energy economist Phil Verleger demonstrates how lucrative this can be. On March 1, the cash price of light, sweet crude was $40.15 a barrel, while the 12-month forward contract sold for $50.26. Assume an investor bought the physical barrel borrowing 80% of the money at a rate of 3%, sold it forward, and paid 50 cents a month for storage. The resulting profit of $3.15 a barrel equates to a 39% return on investment.

So our central bank has once again created excellent times for market participants... prices for commodities no longer need to rely on supply/demand. They can rely simply on a central bank willing to make money nearly free, and banks willing to lend to hedgies (and use that money themselves) for strategic asset exploitation. We're all winners here - and oh yes, let's use that asset exploitation as a "sign post" of the soon to be flush global economy.

*******************

Unfortunately, said exploitation of assets of the commodity-type actually impacts the real economy. Look here, EZCORP (EZPW) which is one of the best-operated pawn shops/cash advance companies in the country just lowered guidance saying this:

Commenting on the revised earnings expectations, President and Chief Executive Officer, Joe Rotunda, stated, "As we have moved through our June quarter, we have seen lower than anticipated levels of demand in our U.S. operations for our loan products and previously owned merchandise. The continuing depressed economic environment is having an effect on our business that is not consistent with traditional or expected patterns. The revenue impact of these lower levels of demand has caused us to be more conservative in our earnings expectations for the June quarter and the balance of the year. We are fortunate that during these economic times we continue to have earnings growth, strong cash flows and a sound balance sheet."

When pawn shops are suffering, either (a) the economy is accelerating into a green shoot nirvana to such a degree their services are no longer needed.... or (b) things are deteriorating to the point that even these guys - who should benefit from hard times - are stagnating. I am sure you can determine where I stand... but I talk from Main Street. If it was just the cash advance business I'd say, less people are employed so less people have checks to advance... but since it's both business lines, it takes on a darker tone.

The ivory tower set will continue to use commodity inflation (created by Western central banks gone hog wild) and Chinese economic reports (with a banking system willing to disperse loans to anyone and everyone because their export partners are moribund) to dictate the "prosperity" they see coming over the horizon. "They" have been "right" for 3 months

insofar as stock & commodity prices at least, so let's respect it. But please don't believe the propaganda about any of it as a signal of the soon to be joyous US consumer - the world's driver the past 2+ decades. We've had a multitude of these head fakes in latter 2007 and throughout 2008. This one is only longer in duration and has the turbo charging of quantitative easing behind it to inflate asset values. We are going to create selected bubbles - again, and those will burst - again, causing more emergencies in the future.

Not only do we not learn from mistakes (tech stock bubbles, real estate bubbles, commodities explosion) via earlier easy money policies, we are copying and making them even bigger on each iteration as we desperately try to hide reality. Great for speculators... irrelevant for most of the peasantry (other than they will be on the hook for the next round of clean up as well).

As gas prices churn upward, and interest rates percolate ... the sickly US consumer will become very abundant when we look back in 4-6 months I believe. But it only matters when it matters. Until then...Kool Aid. And as speculators, we appear to "the chosen" since we can benefit from the next bubbles. Boo and Yah.

Disclosure: No position

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Comments

[Lars39:]

Maybe Pawn Shops are slow because the desperate have already pawned everything they have.

Jun 15 09:28 AM

[Graham and ...:]

Pawn shops. The "ultimate" indicator.

Jun 15 09:50 AM

[Dave Wrixon:]

Come on you guys even you must know that in Green Shoots Land that pawn shops are a lagging indicator.

Jun 15 10:12 AM

[najdorf:]

In all of this talk about oil market manipulation, people tend to forget that futures transactions are real transactions that have two sides. No one can profit off storing oil unless there is a real buyer who wants to pay a higher price for future oil. There are plenty of rational reasons a buyer might want to do so - expected inflation, expected increase in demand, need to hedge exposure to oil prices in order to reduce cost risk, etc. The oil will eventually be bought by a consumer and used at a price driven primarily by supply and demand - the dickering about what it costs along the way mostly affects market participants.

Jun 15 12:26 PM

[billddrummer:]

In my opinion, loan demand is off because of what Lars39 said: All the good stuff has already been pawned, and the retail side of the business is suffering just like traditional retailers.

Pawnshops here (northern NV) have started to decline loans on construction tools. Many former construction workers have left the industry altogether, and couldn't redeem their tickets. As a result, the pawned merchandise fell into store inventory. Since construction here is still moribund, there's little demand for tools, either new or used. So tool inventory sits, finding no buyers.

Jewelry that was pawned earlier this year is still sitting, and lower end pieces that used to be welcomed are getting squeezed on advances. People who used to count on higher tip income in the spring and summer to redeem their goods are being forced to continually renew their tickets if they want to keep their items.

So the low end consumer is hurting much more than anyone thought possible. And it's probably going to get worse.

Jun 15 03:50 PM

[JeffDB:]

True najdorf,

It seems to me as though whether "the speculators" are doing a service or a disservice to the consumer hinges upon whether they are correct in their prognostications of upcoming prices - supply & demand.

If they are predicting higher prices and demand has indeed gone up, or supply has gone down they will have helped the consumer in several ways, despite the fact that they in effect took some product off the market in the short term and thereby caused prices to go up in the here and now.

Those higher prices will, of course, contribute to some demand destruction or at a minimum impede the pace of increase. It will also help to keep supply higher than it would otherwise have been.

Then when the crunch comes later and the prices rise, there will be that much more supply ready and waiting to come online, assuming the futures prices at that time aren't significantly higher yet.

The overall effect would be to smooth out the peaks and valleys in prices. People may not like having the valleys shallower, but would probably prefer that if it helps shave off some of the peaks.


On Jun 15 12:26 PM najdorf wrote:

> The oil will eventually
> be bought by a consumer and used at a price driven primarily by supply
> and demand - the dickering about what it costs along the way mostly
> affects market participants.

Jun 15 05:26 PM

[Alphameister:]

The stock market has not been saying, during the past three months, that "happy days are here again." That's a convenient straw man for those with bearish views. The stock market has been breathing a huge sigh of relief that the plunge into a black hole so widely feared at the lows has, at a minimum, been put on hold. It's been overdue for a correction, and it appears that correction has now arrived on relatively low volume. The best gains have been seen, and further progress seems likely to be much more subdued.

Jun 16 01:51 PM

[noviceinvestor:]

Could "Cash4Gold" and Ebay be stealing business from the pawn shops?

Jun 16 03:09 PM

[TraderMark:]

Anything EBAY is doing would not of hurt them in the past 3 months. EBAY has been around for a decade+.

I dont think most people pawn gold; they mostly pawn items like TVs watches, power tools anything of that sort. Jewelry is big but of course the idea is you get the pawned item BACK when you have your money. Once you sell it to a gold place they buy it and melt it I am sure :) You wont get it back.


On Jun 16 03:09 PM noviceinvestor wrote:

> Could "Cash4Gold" and Ebay be stealing business from the pawn shops?

Jun 16 06:08 PM

[fatcat:]

Pawn shops have been closing in our area(NC),many after years in business.Gold prices forced jewelry prices up,killing sales,and demand for tools is off as well.

What saves it...you can scrap the gold jewelry for twice what you loaned or bought it for.If people give out of gold,the pawn business is dead.

You can't make it on TVs and DVD players....

Jun 16 06:29 PM

[billddrummer:]

To TraderMark,

Pawnshops here have about 85-90% of their tickets (by dollar volume) issued against jewelry. The remainder is all the other stuff: TVs, stereo equipment, tools, musical instruments, appliances, bikes and the like.

Watch out though--Senate Bill 500 would cap the interest rate on all loans at 36% annually, including fees. Another 'consumer protection' gambit to pander to the masses. If it passes, the pawn, small loan, payday loan, and auto title loan industries will crash, throwing additional people out of work, and eliminating access to credit for millions of lower income Americans who can't qualify for bank loans or traditional credit cards.

Some people are intimidated by banks, and don't trust them (no kidding!). Some people have sporadic income, and can't document it. Those folks have access to credit through the outlets I named above, but the new bill will make it impossible for those businesses to operate profitably, largely because of the high losses they experience. Factor in that many payday loan places are now in strip malls, and the end of high interest loans means even more vacancies, and it's potentially a recipe for (continuing) disaster.

I expect nothing but bad to come of this bill if it passes.

Jun 19 12:24 PM

[TraderMark:]

Thanks interesting point on the "dollar value" versus "pure volume of stuff"

I agree on the cash advance, but I do think some of the rates are atrocious. I actually looked pretty closely at the business and based on default even 40-50% interest rate makes it impossible to make a profit because of the type of credit risk the customers bring. But I've seen effective 500-700% in some cases which seems a bit overboard.

I asked someone once what did people do before cash advance places, the answer was they borrowed from the guy who broke your leg when you didnt pay back. Alrighty then!


On Jun 19 12:24 PM billddrummer wrote:

> To TraderMark,
>
> Pawnshops here have about 85-90% of their tickets (by dollar volume)
> issued against jewelry. The remainder is all the other stuff: TVs,
> stereo equipment, tools, musical instruments, appliances, bikes and
> the like.
>
> Watch out though--Senate Bill 500 would cap the interest rate on
> all loans at 36% annually, including fees. Another 'consumer protection'
> gambit to pander to the masses. If it passes, the pawn, small loan,
> payday loan, and auto title loan industries will crash, throwing
> additional people out of work, and eliminating access to credit for
> millions of lower income Americans who can't qualify for bank loans
> or traditional credit cards.
>
> Some people are intimidated by banks, and don't trust them (no kidding!).
> Some people have sporadic income, and can't document it. Those folks
> have access to credit through the outlets I named above, but the
> new bill will make it impossible for those businesses to operate
> profitably, largely because of the high losses they experience.
> Factor in that many payday loan places are now in strip malls, and
> the end of high interest loans means even more vacancies, and it's
> potentially a recipe for (continuing) disaster.
>
> I expect nothing but bad to come of this bill if it passes.

Jun 19 04:15 PM

[billddrummer:]

To TraderMark,

The average APR on payday loans in NV is 469% (no usury law here). And that's if you pay them off right away, which usually doesn't happen.

I'm sad to say that I'm paying off some payday loans that I got a year ago. The shops took me to court, threatened to garnish my wages, etc. etc.

As a consequence, I'm living quite small this year. The good news is that the loans aren't much money. The bad news is I can't use the money for anything else.

Jun 20 09:21 PM