Slip-Sliding Away

Remember when we thought the financial system was on the precipice of disaster? Well, fears of widespread systemic failure may have passed, but investors are now worried about the economy—big time. It seems that all of the TARPs, EESAs, rate reductions and bailout plans have left us exactly where we were a month ago—at the depths of market lows with little confidence that relief is coming.

Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.

Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.

It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.

Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.

Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.

Adios Carrie Bradshaw

Watching re-runs of “Sex and the City” seems so retro amid the financial melt-down of 2008. The program that debuted in 1998 and concluded in 2004, followed the lives of four single women in New York City, as they obsessed about men (well, that’s actually not retro, that is thoroughly now) and spent hundreds of dollars on shoes. The program that put shoemakers Manolo Blahnik and Jimmy Choo on the map (see Season 6, Episode 9: A Woman's Right to Shoes, original air date 8/17/03) now seems positively passé as Americans alter their spending patterns to meet the new reality of a recession.

Last week, the Commerce Department reported that retail sales fell by 2.8% in October, surpassing the old mark of a 2.65% drop in November 2001 in the wake of the terrorist attacks. It was the largest drop on record and the fourth consecutive monthly decline. The weakness in retail sales was led by a 5.5% plunge in autos, the biggest drop since August 2005. Carmakers said that last month was the worst in 17 years as potential buyers were spooked by the financial crisis and tightening credit conditions. Even without cars, sales of everything from furniture to clothing dropped off a cliff. Excluding autos, retail sales fell by 2.2%, also a record decline, underscoring the widespread weakness. Sales at general merchandise stores like Wal-Mart and large department stores fell by 0.4%, while sales at specialty clothing stores (the kinds that the women in “Sex and the City” used to frequent) were down a bigger 1.4%.

There were only slight glimmers in all of the gloomy data: mega-discounter Wal-Mart has fared better than most as its massive size allows it to pressure vendors for even cheaper prices. According to the International Council of Shopping Centers, for every dollar spent on goods other than cars in the US over the last twelve months, 8.2 cents went to Wal-Mart or its warehouse sister store, Sam’s Club. That is a staggering market share, but it’s certainly not surprising that with house prices in the toilet, the stock market down 40% and 1.2 million jobs lost in 2008, that consumers are in full-fledged retreat. These folks are seeking the cheapest possible alternatives and thus far, they are finding those values at Wal-Mart.

Here is another glimmer of hope: the data confirms that consumers have woken up from their drunken stupor and have FINALLY stopped spending. With all due respect to the characters on Sex and the City, one has to wonder how a struggling freelance writer like Carrie Bradshaw could afford the $495 pair of shoes. If Carrie were with us today, she would be paying down debt and saving money to rebuild her balance sheet. Of course that is not the stuff of a particularly entertaining series, but it would help curb the excesses of the past two decades and allow our start to take control over her financial destiny. The never-to-be-produced sequel to “Sex and the City” would be “Parsimony across America”…not too catchy, but indeed, the bitter medicine that will help cure the nation’s economy. Adios Carrie Bradshaw!

Livin’ on a Prayer

“Whooah, were half way there
Livin on a prayer
Take my hand and well make it - I swear
Livin on a prayer.”

-Jon Bon Jovi

I kept humming this song as I thought about US consumers. Earlier this week, I discussed the urgent need to save more for retirement (“Payback Approaches”, June 17, 2008) but I should have started with a simple statement: WAKE UP AND STOP SPENDING! This is obviously not directed towards everyone reading, but there are indeed a few who might take this to heart—the ones who have spent their tax rebate checks not on gas, but on stuff or even worse, the folks that continue to use home equity lines of credit to postpone their day of reckoning.

These people seem to be living on a prayer—and not just one. The prayer here is multi-fold and it includes lower prices at the pumps; a rebound in real estate; a rise in wages; and lower interest rates on everything from school loans to mortgages. Let’s examine the possibility of each of these prayers and determine whether they will be answered.

Price at the pumps: This one may actually turn into reality. Although crude oil has gone parabolic and has caused great pain at the nation’s pumps just as the summer driving season arrives, there is evidence that demand is weakening among developed nations. Some suggest that oil prices will finally crack after the Olympics. The reason is that in advance of the games, China has idled most of their coal plants to clear the skies. With coal offline, China’s demand for oil has increased. Once the Olympics passes and coal plants re-start, we may see a dip in Chinese demand, which would help prices globally.

A rebound in real estate: Data has thus far not been too rosy, but there will eventually be a bottoming in housing. The problem is that the amount of housing inventory suggests that even if prices stop falling, they are unlikely to rise any time soon.

A rise in wages: As corporations feel the pinch of the slowdown, there is very little hope for this one. For most, not losing the low-paying job you have may be a victory in and of itself.


Lower interest rates: When inflation is the headline across the nation’s papers, you can pretty much count of interest rates rising. Despite inflation concerns, I do not think that the Fed will raise short-term rates any time soon, nor do I think that despite persistent economic weakness, that they will lower rates. That said, longer term rates have already started to climb. Because mortgages and student loans tend to be tied to longer term rates, the outlook for consumers on the rate front is that we may have already passed the cheapest rates of the cycle.

If any one of those prayers turned into reality, it would be great, but the way people are spending indicates that all would need to turn simultaneously to justify the rate of spending that is still occurring.