Cutting Back: It All Starts With the Babysitter

 |  Includes: FMCC, FNMA, HMRZF, TGT, WMT
by: Andrew Corn

I spoke to several couples in the last few weeks who canceled plans to go out in order to save a few bucks before spring break. They have no rational reason to fear for their income, but in these uncertain times, their mindset is important. Who else is influenced by feelings of uncertainty?

By staying home, these couples hurt restaurants, nightlife, and obviously taxi drivers. Let us look at the bigger and more typical consumer chain of events. Had a couple gone out rather than stay in, they would have hired a babysitter. This young woman, usually a college student (in our world), would have ordered out for dinner with the kids providing a restaurant with business. Without her Saturday night job, she will have less disposable income, and perhaps a feeling that less work is coming. Her reaction: one less download from iTunes (NASDAQ:AAPL), one less trip to H&M (OTCPK:HMRZF) or the mall, one less candy bar or fewer searches on Google (NASDAQ:GOOG) for that perfect pair of shoes. Each action has a cumulative effect. Her biggest action based on this event? It is talking about the cancelation. By talking about her lost income, the babysitter will create more uneasy people.

This chain reaction is normal, yet with media hype, even these innocent college kids are talking the "R" word fueling the fire further.

Not spending is not limited to consumers or college kids right now. According to data compiled by S&P, corporate America is sitting on $611 billion in cash, a near record. That cash should be invested in new products, infrastructure upgrades, marketing or strategic acquisitions. But companies right now are acting like consumers.

There's no denying that shoppers are determined to keep a tight lid on spending, and we expect retail sales to generally remain weaker and deteriorate through the rest of the year, says Frank Badillo, senior economist for TNS Retail Forward, a Columbus, Ohio-based retail consultant.

In its most recent ShopperScape survey, the data from TNS demonstrates that the cutting back trend is strongest among lower income households. 31% of down-market shoppers in its survey say they plan to spend less than last year, compared with 28% of middle market households, and 25% of affluent households; all these cut backs begin with high gasoline and food prices. These numbers of planned cut backs are astounding, and can push us towards a recession by themselves.

On Thursday, retailers posted dismal same store sales across numerous categories sending stocks in the sector down. In February, only a few discounters benefited. Wal-Mart (NYSE:WMT) reported same-store sales results that outperformed the market, gaining 2.5% in the U.S. over the prior year. Sales were also up at Target (NYSE:TGT), which reported same-store sales up 0.5% slightly beating its forecast.

Floyd Norris over at the New York Times (NYSE:NYT) published: "Aversion to Risk Deepens Credit Woes." This connects the tight wallet mindset to the credit markets.

The credit markets came under renewed stress Thursday as investors sought absolute safety and even moved away from debt issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage lending enterprises.

The intensifying credit crisis came as one regulator, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse.

"The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning," Mr. Geithner said in a speech to the Council on Foreign Relations. "This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions."

Fannie Mae (FNM) and Freddie Mac (FRE), whose debt has been viewed as almost as safe as that of the government itself, have played an essential role in keeping the mortgage markets functioning. That is because many mortgage companies have gone out of business and investors have been unwilling to buy mortgage-backed securities unless the government, or one of the enterprises, guaranteed the mortgages.

The lack of credit is being felt in Statehouses, municipalities, hospitals and others who regularly roll over notes and other debt instruments. The buyers, regardless of the credit worthiness of the issuers have almost dried up. There is some fire behind all of this smoke in the mortgage market.

The Mortgage Bankers Association reported that the proportion of borrowers more than 30 days delinquent rose to 5.82 percent, the highest since 1985. The situation was worst among subprime borrowers who had taken out adjustable rate mortgages, but the proportion of prime mortgages that were delinquent also rose, to 3.24 percent.

The government has not sat by idly. President Bush is trying to put some cash in every pock in the form of a tax rebate. The bigger move has been by the Fed reducing interest rates. That has not impressed the media or the stock market. As observed by Paul Lim also of the New York Times, history is not exactly repeating itself since the beginning of rate cuts last fall.

Since 1954, the Standard & Poor's 500-stock index has surged 13 percent, on average, in the six months after the first in a series of Fed rate cuts.

Well, nearly half a year has passed since the Fed began to lower short-term rates, last Sept. 18. But this time, the S.& P. 500 has lost more than 12 percent of its value.

What's more, virtually every market sector has fallen since mid-September, in many cases significantly so. Financial stocks have plummeted 26 percent, on average; telecommunications stocks are down 21 percent; and technology shares are down 14 percent. If this market lived up to historical patterns, all 10 sectors of the market should have rallied sharply.

Investors have sent the market down materially in the last six trading days. It seems there is no place to hide. Of course that is not factual. There have been positive trading days. It only feels like the market is consistently down.

I am not suggesting that consumers go out and spend or that corporations immediately tap into their stockpiles of cash just to help the market. The vast majority of consumers with decent jobs should go about their lives without media induced stress. Companies should strategically invest in their future; R&D, infrastructure, new products and markets and logical acquisitions. Together these actions will soften the current downturn, and help lead the nation back to growth.

Perhaps we all need to do what my babysitter does when she is stressed - take a yoga class and go shopping.

Smile, and most of all, have a stress-free weekend.