US consumer’s pullback hits global firms

Early Wednesday morning WPP the largest advertising agency in the world started the markets with their earnings.

The agency led by Martin Sorrell reported slowing growth in North American ad spending on consumer staples from larges companies including Procter & Gamble, Nestlé, Unilever and Anheuser-Busch.

“In volume terms these companies are flat or falling,”  Sorrell said in an interview. “When volumes fall in packaged-goods companies that’s a big wake-up call: It means you have less consumers and that’s the beginning of serious problems.”

This is the second quarter in a row that WPP has cited slow ad spending in America on staple products, which the consumer is pulling back on.

I have written extensively on the changing habits of the American consumer and this is but another nail in the coffin. 

The growing revenue of off-price brands at discount grocery centers like WalMart and Target, the use of credit cards for mid-week purchases and the rash of grocery store chain closings all point to a troubled economy outside the pockets of prosperity in this country.

The fact that this condition has worked its way all the through the supply chain to hit a London advertising conglomerate with offices globally is to say it’s more than a trend. It’s epidemic and I can’t see how the US economy can grow with so many not being able to afford basic necessities. 

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Stock answer is we don’t know about next 6 months

How can the equity markets trade looking six months out — as is the traditional metric — when it doesn’t know what the next six minutes will bring?

The Dow Jones traded down 274 Thursday on, pick your poison:

  1. Terrorist attack in Barcelona,
  2. White House finance chief Gary Cohen’s departure.
  3. Algos in control since its August
  4. All of the above

It has to be near impossible to be able to formulate an earnings picture looking out the next quarter, when a 140-character tweet can throw all the analysis into the trash bin.

Here’s a analyst’s note on Friday morning, explaining very succinctly what he is up against when figuring direction of the market:

“In a week where we started by worrying about nuclear war, markets have quickly moved on from this, with yesterday’s weak session more of a response to fears that Mr Trump’s strategy for the economy and business is falling apart and later the terrible terrorist attack in Barcelona,”
Deutsche Bank analyst Jim Reid.

So off of that note we have  stocks marginally down for the week. I say that’s not a bad performance even without mentioning the civil unrest in Virginia last weekend.

Consumers credit crunch changes retail picture more than Amazon

The state of the consumer can be summed up in two pieces of data that were released this week.

First, total US household debt was $12.84 trillion in the three months to June, up $552 billion from a year ago, according to the New York Federal Reserve Bank report published on Tuesday. Almost 5% of that sum or $600 billion of that debt is in default.

Secondly, the only retailers to have decent earnings this week were the off-price stores. TJ Maxx, which owns that brand along with Marshall’s and Home Goods, beat profit estimates and guided higher, while being one of the few retail chains to be opening new stores.

Target was the other bright spot for the retail sector as it also beat the Street’s revenue and profit forecasts by remodeling stores and ramping up 2-day delivery services.

The off-price retail sector is booming when you compare it to Macy’s, Nordstrom and other department stores, as consumers look to price versus brands. While Amazon’s pricing could be included in the sector, it has less to do with the department’s stores demise than the credit crunch.

A line in the Fed report sticks out to me, which said the growing number of credit cards balances maxed out “ticked up notably.” This is the canary for cash-strapped consumers, who earlier reports from the Fed said were making more credit card purchases for everyday staples like gas and groceries.

Is this a matter of convenience or is the credit card used as a bridge to pick up milk on the Wednesday before payday?

Not sure if an answer to that can be derived, but it points in an ominous direction when you take into account that real wages have been flat on an inflation basis for over a decade at the very least.

 

Used auto sales are getting the hook

Here’s one job that’s sure to be hiring, but you will not see it on the Bureau of Labor Statistics employment data for August.

It’s the Repo Man.

All those subprime auto loans for eight years, 0 percent down and no credit check, were not all that secure, but then again the car makers sold the vehicle and put the risk on someone’s’ books.

Much like the housing crisis, the finance companies making these risky loans securitized the loans and sold the bonds to investors, which are creating some cracks in the $1.2 trillion market for auto financing.

Investors starving for yield are grabbing these securities with two fists. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion exchanged hands, according to a Wells Fargo report.

However, the glut of vehicles arriving on the back of tow trucks onto lots has accelerated leading to a 4.1% price decline on used cars in August.

Also with so many cheaper cars on the lot that are only one or two years old, new car sales are hurting. July’s sales numbers were stunning when compares to the record number of 17.5 million cars sold in 2016.

General Motors reported a 15.4% sales decline in July compared to the same period a year ago, selling 226,107 cars and trucks. Ford Motor said sales slid 7.4% last month to 199,318 vehicles. Fiat Chrysler posted a 10% decline in July, selling 161,477 vehicles.

“So, what i can I do to put you in this beauty?”

“Not much obviously. Give me that one-page loan form, I’ll sign it and pick up the car tomorrow. Maybe I’ll be back in six months to pick up a different model.”

Does sound like another recipe for disaster.

Goldman may be running its own “Storage Wars”

How close are we to seeing Goldman Sachs CEO Lloyd Blankfein standing in front of storage unit telling perspective bidders, “You can just look in, don’t touch, don’t go in.”

That the mental image I have from a story moving Thursday morning of Goldman repossessing a 217-ft luxury yacht from a former (i assume) client down in Palm Beach, Fla., according to a WSJ.com story.

Goldman, Morgan Stanley and UBS wealth management units have been active in lending cash to their clients against some esoteric belongings, such as wine collections, art collections and equity portfolios.

These banks are pushing these loans for two very specific reasons. They have an existing relationship with the client and knows his asset holdings. The banks also keep more of the profits from these loans, since there are little broker fees or other charges against the loan.

Goldman’s private bank has quadrupled its overall lending balances since 2012 to $29 billion. Morgan Stanley wealth-loan balances are up 420% since 2012 to $74 billion, according to the article.

To get back to the yacht, the luxury boat is listed for $39.9 million, according to broker​. The outstanding balance of the loan owed to Goldman is roughly $28 million. So there is some wiggle room to haggle with Lloyd.