NBER plays Grinch

By: Chad Hudson | Wed, Nov 28, 2001
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Retailers must really hate the timing of the NBER declaring a recession. Just in time to kick off the holiday shopping season. Coupled with lower than expected consumer confidence, the holiday shopping season will likely be extremely challenging for retailers. The employment situation continues to unnerve consumers, and is getting worse. Only 17% thought jobs were plentiful in November compared to almost 21% last month, and 60% see jobs as not so plentiful, verses 58.5% in October. Adding insult to injury is a report from the Bureau of Labor Statistics indicating 72% of employers that have laid off workers do not anticipate recalling workers. It actually might be worse now, as those sentiments were from June. As everyone knows the economy has been slowing ever since, plus the terrorist attack spurred additional layoffs.

The International Council of Shopping Centers reported that sales over the Thanksgiving weekend were down 1.5%, but traffic in malls was even worse. According to RCT Systems, mall traffic fell by 7.4%, with department stores posting a larger 11.7% decline from 2000. Consumers are shifting their buying habits from malls and department stores to discount stores and strip centers. Retailers are promoting heavily, with reports indicating that consumers are Even Kohl’s, which is doing much better than most retailers is offering $10 coupons via mailers. Another sign of lower spending came from Wal-Mart. Besides having its largest one-day sales of $1.25 billion last Friday, Wal-Mart indicated that the average receipt per customer was down from year ago levels. This week, Men’s Warehouse exemplified how difficult the current environment is for apparel retailers. Men’s Warehouse slashed its fourth quarter earnings guidance by half to 0.35 to 0.45, and lowered the fiscal-year earnings for the fourth time since summer.

Economists are hoping that the consumer can continue to spend until companies get in a position to start spending to help grow the economy. However, much of the current strength in the consumer is based on increased debt and pulling forward future sales. There has been a massive influx of stimulus injected into the economy over the past six-months, and the consumers’ propensity to spend is getting less and less. Bigger and better deals are necessary to entice shoppers to part with their hard-earned dollars. The tax-rebate checks were mostly used to pay down debt. It took auto-dealers to offer the best deal on cars ever to unload excess inventory. The zero-percent financing offer worked and led to one of the best months ever for auto sales, but the continuation of incentives into November is having a diminished effect. John Casesa, auto analyst at Merrill Lynch, commented that "the effectiveness of these programs is fading and December’s sales pace is likely to be slower." Not only will December be lower, but also there was probably close to 750k vehicles that were pulled forward. With several analysts already forecasting auto sales in 2002 to be below the breakeven point for the Big Three, it is highly likely that the high fixed cost structure of the auto industry will prove problematic as vehicles sales stagnate.

Overcapacity throughout the economy will limit the strength of any recovery as companies will not need to undertake additional capital projects. EMC is a great example of the degree of over-investment companies undertook during the boom, especially technology companies. Yesterday, EMC stated that if has reduced its break-even point down to about $6.5 billion in revenue. In 1999, EMC posted revenue of $6.7 billion and made over $1.3 billion in pre-tax income. Now the same about of revenue would yield nothing! Merrill Lynch estimates 2002 revenue of almost $7 billion with operating income of only $100 million. And, EMC still trades at 4.5 times revenue, no growth revenue at that.

Chip companies continue to push out projects. Micron is holding off investing in 12-inch processing equipment for at least a year, and NEC scrapped its 12-inch plans all together for one of its plants and retooled it for non-DRAM products.

IPC released October’s printed circuit board book-to-bill ratio, which showed the industry remains weak, without any signs of recovery. Sales declines are actually accelerating as sales in October 2001 decreased 47.5% from October 2000, verses September’s year-over-year decline of 41.6% and August’s decline of 36.5%. Orders fell even more, 51.8% from October 2000, but at least it did show marginal improvement over September’s 56.1% decline, but worse than the 50.7% decline posted in August.

Nokia cut its 2001 forecast to 380 million handsets sold industry-wide from 390 million units. With a little over a month left in the year a substantial amount of the 380 million units are already sold, it does not look like Santa will be dropping to many cell phones in stockings this year. Jorma Ollila, CEO of Nokia, is "looking for a rebound in the U.S. economy in the fourth quarter…We are definitely not more optimistic than that. I don’t think there will be any good news from Europe in the coming months." The comment about Europe is actually very insightful, since it is much further ahead with the development of 3G networks. Nokia is working under the assumption that over half the phones sold next year will be upgrades. 3G is the main reason cell phone users would upgrade their phone. If Nokia does not see any meaningful growth coming from Europe, there is a high probability that 3G will be pushed back even more, if at all.

Inflation is creeping up all over the Internet. AT&T announced plans to discontinue its $4.95 per month service that offered 150 hours of on-line time and will automatically move customers to a $10.50 per month plan that allows 50 hours. Now there is a deal! If customers what to maintain 150 hours of on-line time the cost will be $16.95 a month, or for $21.95 they can signup for an unlimited use plan. Also, Dismal.com, one of my favorite sites moved to a subscription based site. It has long been hypothesized that the business plan for a lot of site was to try and build a base of users then once they get hooked make’em pay. Hmmmm, $100 per year per user = Hmmmm, maybe they are on to something.

If you have not yet read the New York Times article discussing Conseco and problems with easy money for sub-prime borrowers, it is a must read. Trailer Owners and Conseco Are Haunted by Risky Loans

Also the Guest Analysis by Clifford S. Asness, The Bubble has not Popped, is a must read.


Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis

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