Trouble for Retail and U.S. Banks

I have decided to do a weekend piece and take some more time to put together a somewhat more informative piece. Trying to do something informative daily is too tasking and too limiting, so this is the first of what I expect to be a two to three part piece. No promises at the moment on how quickly these will come out, but I am aiming to do them all this weekend. For the no promises piece, let me explain.

In addition to working full time, adopting a two year old son three weeks ago, having a five year old daughter, having my sister visiting with her four and six year olds and needing to walk and feed the dog, I have not had the optimal amount of time to do my financial reading, much less posting. So I have decided to take the weekend for this grouping as I have been reading some very significant pieces and am a bit worried about a few possibilities, short, medium and long term.

Let me begin with installment one, and let me begin with the number 40.

40 and Counting

I just checked the FDIC website (Friday night at 10:15) and three more banks down. That makes 40 this year down, with three this week. They seem to be falling fast. With mounting problems in:

• commercial real estate;
• alt-A mortgage defaults;
• prime mortgage defaults; and
• increasing credit card defaults

It is no wonder that small and regional banks are quickly becoming toast. I have noted before, but it is worth repeating, prime mortgages involve bigger dollars than subprime so their increasing default rate, while smaller in the number of defaults, can still be big for banks in terms of dollars. Just ask Calculated Risk.

But hey, the dollar is toast, so who cares if you are losing dollars.

The Dollar is Toast You Say?!

As Graham Summers at Seeking Alpha puts it, when everyone seems to be going out of their way to say the dollar is fine, it is time to figure out why they need to be reassuring us.

Now what happens if investors start forgetting what these people are saying and decide to flee the U.S. dollar? Not a good scenario. We have trading partners with trillions invested in Treasuries that could become very very bad investments quickly if the dollar devalues, and they know it. If the devaluation begins in any serious fashion, they are heading for the lifeboats and the dollar sinks while this government's ability to fund any further fiscal stimulus evaporates. Kinda scary, ain't it?

Retail in Big Time Trouble

I went to our local mall on Thursday. Overall, there were several empty spaces, but only about 5%. I was impressed it was not worse; no major stores gone. Now I am in New Hampshire where unemployment and other problems are not as severe, but I was still impressed. Nonetheless, what I did notice for the remaining stores was that virtually every store had a sale. And when I say sale, I am not talking 10% off. We are talking 30-70% off. A lot of clearance signs around. Disney (DIS) had a significant sale. My wife and mother-in-law had been there the week before buying thing for my new son and the woman there was very busy bringing them dozens of on sale items my son would like (I know - I asked when I got home if anything was left in the store). Not a big surprise for me to learn Thursday that CDS protection on Disney was up significantly last week - as it was on a number of companies.

Indeed, it would seem that credit protection on a number of companies was up a lot last week. For many, it was the most up in months. Yep, in my mind that spells recovery - not. After all, especially on the retail side, you have the consumer prices down the most in my lifetime - year-over-year - so there is no price support. Commodities over the past couple of months have risen, as has oil, due in no small part to a weakening dollar (see above) so the manufacturers and retailers are not getting cheaper products to support their cheaper prices. In short, retailers are likely now or soon paying more for products due to a weak dollar yet they have to severely discount the prices to get sales. So why are retailers doing so poorly, let us count the ways:

• As I said above their prices wholesale are likely increasing while their prices retail are decreasing, so they are in survival mode;
• Unemployment is still on the rise and is nearing double digits on a national scale. In many states it is already there. Either way it is still climbing and people with job security spend less;
• People, due to job issues or otherwise, are reducing debt on an individual level. Individuals had debt at record levels and this is needed but, unfortunately, has just begun. It will take years, not days, weeks or months. (Let me note here that individuals reducing debt is probably our only possibility for salvation here); and
• Credit companies reducing credit lines and/or increasing rates is making borrowing more difficult for individuals and small businesses. For small businesses in particular this will have a serious knock-on effect.

Post two of this series will hopefully follow tomorrow.

Disclosures: None.

Comments

[Mad Hedge F...:]

There are strong views down South. I had to listen to Midsouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds and home of the world’s greatest étouffée and shrimp gumbo. He says that “Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again….Free enterprise has to have the right to fail….Allan Greenspan and his administration have some problems they have to ‘fess up to.” With the current system of megabanks “they get the gain and we get the pain….I’m regulated now by 13 agencies of the US government and I don’t know that I need a 14th.” There’s no one who can read you a riot act like a Southern regional banker.

Jun 21 09:52 AM