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Five Things You Need to Know: Retailers Gear Up for Massive Rebate Check Relief Effort


The problem is only three-in-ten plan to actually spend those rebate checks


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Why So Glum, Chum?

This morning the Reuters/University of Michigan index of consumer sentiment came in at a meager 62.6 reading. You gotta go all the way back to 1982 to mark the last time we felt such collective gloom.

Why so glum, chum? Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers, summed it up in the press release: "Rising uncertainty about future living standards has caused consumers to adopt more prudent spending plans and become more wary of incurring new debt."

But have no fear, doomsters, the Treasury Department is riding to the rescue with the early release of all those economic stimulus checks. That's good news, right? I mean, we're spending those tax rebate checks in our mind right now; new shoes, one of those blu-ray machines, an Apple (AAPL) iPhone, designer sock hangers, etc. Well, maybe not. According to the Reuters/UofM survey, just three-in-ten plan to actually spend those rebate checks.

"With the current high levels of economic uncertainty, most consumers favor adding to their
reserve funds to increase their financial latitude as a safeguard against worsening future conditions," Curtin said.

Hey, adding to reserves to preserve financial latitude: That makes us exactly like the big banks!

2. Retailers Gear Up for Massive Stimulus Check Relief Effort

Ok, maybe you're one of the three-in-ten actually planning on spending your rebate check. You are, after all, a patriot. And, as we know, patriots spend every last nickel in the service of the greater good. Well, friend, have we got a deal for you!

From May 14 to July 19, Sears (SHLD), the company that owns Kmart and Lands' End stores, will let customers cash in their tax rebate checks for a gift card in the amount of the check plus 10%.

Kroger (KR) grocery stores will also add 10% to the value of rebate checks when customers use them in $300 increments to buy Kroger gift cards.

Wal-Mart (WMT) will reportedly follow suit with a similar program in a few days.

Meanwhile, in an effort to capitalize (literally) on widespread environmental hysteria and the worship of all things consumable labeled green (including money), the savvy marketing team at Home Depot (HD) has formulated a bizarre "green" program linking the rebate checks to protecting the environment through the purchase of compact fluorescent light bulbs and Energy Star appliances, which, fortunately, they just so happen to sell.

3. Unpaid Utility Bills Soaring

Speaking of light bulbs and appliances, Home Depot apparently missed the news in USA Today this morning that pretty soon we won't have use for light bulbs and appliances anyway because we've pretty much stopped paying our utility bills.

According to the newspaper, Xcel Energy says 17%-19% of its 1.1 million Minnesota customers and its 280,000 Wisconsin customers are behind on their utility bills. While that's about the same number as a year ago, the balances owed are up 10% in Minnesota and up 20% in Wisconsin.

"Obviously the economy is playing a very big role in the disposable income that folks have," Pat Boland, Xcel's credit policy manager, told the newspaper.

See? And you were worried about the destructive effects of electrical appliances on the environment. In the great circle of life all things eventually come together in harmony and work themselves out.

4. Sacrificial Pawns?

Everybody listens to the big-time earnings reports - the Microsofts (MSFT), Amazons (AMZN) and Fortune 500 companies - so that's why we prefer to listen to conference calls coming from companies that are largely under the radar.

Take Cash America (CSH), for example. You may drive by Cash America stores every day on your way to and from work without noticing them. Unless you are in the market for a pawn loan you would really have no reason to notice them. Anyway, the company reported solid upside surprises in earning yesterday driven by three things:

1) Pawn loans written and renewed last quarter were higher than expected.
2) Pawn loan balances were higher than expected.
3) Revenues associated with those loans were higher than expected.

Now, the question is how much of that upside surprise is being driven by tough economic times. CSH management doesn't pretend to have its head in the sand about how their business model may be perceived as a last resort for financially weak households in tough positions. They specifically addressed this on the call yesterday:

"The intuitive assumption being made by most in the media is that our business must be booming since the economic downturn is creating hardship all across Middle America. The proposition advanced to us is that the combination of rising unemployment, falling home values, inflationary pressure from energy and food cost, and a contracting credit market has served to greatly restrict other credit alternatives for most Americans," Daniel R. Feehan, Chief Executive Officer and President, said during the call. "[W]hile there is some element of insight in this proposition, the correlation of our business prospects with a challenging economic environment is less linear and more complex than gut intuition might allow," he added.

Ah yes, well done, that's the glossy finish. Now for the unvarnished bit: "I do believe a decelerating economy drives more people to our doors and websites seeking assistance as they adjust their spending patterns," Feehan said.

Meanwhile, what is this world coming to when credit tightening begins to take hold at the pawn level? "[W]hile we believe the softening economy is spurring demand for short-term cash advances, we have elected to process this demand cautiously and adjust our underwriting criteria in a way that hopefully limits our exposure to escalating loss rates," Feehan said. "Such a strategy obviously limits loan volume and revenue growth, but we believe focusing on marginal profitability is the smart approach in an uncertain economy, so in this sense one might argue that a softening economy may be working against us at the top line in our cash advance business."

As always, no good deed ever goes unpunished, and the good deed of providing short-term cash at high interest rates to desperate borrowers does have its eventual downside.

Whoa, easy killer, we're talking about the cash borrowing needs of banks like Citigroup (C), Bank of America (BAC) and JP Morgan (JPM). Wait, did you think we were talking about cash borrowing needs of those taking out short-term payday loans?

Ho ho. The difference is merely in the scale & magnitude of the loans, not in the fear & desperation of the borrowers.

5. Socionomics of Consumption: Opting Out of the Game

We ran across an interesting article in the Economist magazine on the economics of social status. Research by Erik Hurst, Kerwin Charles, and Nick Roussanov found many people view their consumption as a signal to others, especially among black and Hispanic Americans.

Their theory is that wealth is unobservable so visibly expensive goods act as a signal to peers that wealth and status have been achieved. Perversely, the reason visible spending may be less common in wealthier communities is that, at a certain point, conspicuous consumption becomes associated with being poor.

What is interesting about the studies cited in the article is how they relate to social mood and the larger trend toward anti-consumption. Through the back door of conventional economic theory and analysis the following conclusion is reached: "[As] Ray Fisman suggests, it may be because communities with higher levels of income may also experience greater income disparity. The authors define a community as people of the same race living in the same state. A poorer white person is more likely to find himself in richer community. If he can not compete economically he may simply opt out of the game."

Racial inequality aside, the underlying socioniomic trend toward "opting out" of the consumption merry-go-round is only just beginning; it goes hand-in-hand with debt aversion, a revaluation of priorities and deflationary pressures on those who sell consumer discretionary goods and services.

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