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Five Things You Need to Know: Retail Sales Show Upside Surprise


After the smoke from those rebate checks burning holes in our pockets clears, however, we'll be right back where we started; stagnant wages, a tougher job climate and higher costs for food and energy.


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

1. Retail Sales Show Upside Surprise

Only days after Federal Reserve Chairman Ben Bernanke hammered the first nail into the recession coffin with his "substantial downturn" risk has receded speech, Retail Sales for May hammered a couple of nails of their own, coming in far better than even the most bullish economists expected.

Retail Sales last month rose 1%, the most since November, according to the Commerce Department. April sales also were revised higher to 0.4%, after previously being reported as -0.2%. The "core retail sales," which excludes auto sales, came in at 0.8%.

There is no question the increase in retail sales was broad-based, and with $56 billion in rebate checks having been passed out to consumers during the period, some of that money clearly made its way into the data. This is a good reminder, given surveys showing people were intent on saving those checks or paying debts with them, that while we talk a good game with savings and debt reduction we have a tougher time walking the walk.

2. Gentle Reminder

Of course, it's worth keeping in mind that the economic stimulus checks are, in fact, temporary. Kudos go to retailers such as Wal-Mart (WMT) and even JCPenney (JCP) for devising ways to get consumers in the door with sales campaigns specifically targeting rebate checks. After the smoke from those checks burning holes in our pockets clears, however, we'll be right back where we started; namely, with stagnant wages, a tougher job climate and higher costs for food and energy.

For a refresher course, let's revisit what some retailers were saying just last week.

Wal-Mart (WMT): "During the May period, the strongest business units remained grocery, health and wellness and entertainment. Our focus on price leadership continues to drive the performance in grocery. Strong sales in certain categories indicate that customers are dining, entertaining and spending more time at home."

JC Penney (JCP): "While the stimulus checks may provide some boost to consumers' discretionary spending over the next few months, we expect any such benefits will be modest and temporary."

Saks (SKS): "The consumer is operating as if we're in a recession, whether we're technically in one or not."

Target (TGT): "The merchandise categories with the strongest comparable store sales growth during the month included healthcare, electronics, and consumable perishables. The categories with the weakest comparable store sales performance for the month included men's apparel, jewelry and accessories, and lawn and patio."

Costco (COST): "Moving on to our merchandising categories, within our Food and Sundries category we saw strength in Deli, Cooler, Candy and Foods. Overall, our Food business continues to be very strong with reported comp sales increases in the high-single digits. We are of, course, benefiting from some inflation on the Food side as a result of the recent run-up in the cost of commodities and the continued run-up in the price of oil and gasoline, which is affecting the cost of many food and other consumable products. Within our Softlines category we had our best results in Small Appliances and in media, and somewhat softer negative sales in Housewares, Home Furnishings and in Apparel. The softwares – Softlines category continues to be the most challenging area of our business."

3. OCC Banks Tighten Lending Standards

Meanwhile, also in reality, there's the fact that banks continue to tighten lending standards, reducing access to credit at a rapid pace. The Office of the Comptroller of the Currency today released its annual Survey of Credit Underwriting Practices and reported that commercial and retail underwriting standards tightened after four consecutive years of easing underwriting standards.

Some nuggets from the report, which can be found here:

  • The majority of the banks surveyed tightened underwriting standards for both commercial and retail loans.
  • Primary reasons for tightened standards included the overall economic outlook, the downturn in residential real estate, a changing risk appetite, and a decrease in market liquidity.
  • Key factors that contributed to the rise in product and portfolio credit risk were the weakening economy, rising energy costs, turbulence in the secondary credit markets, the downturn in the housing market, and the anticipated impact of relaxed underwriting standards over the past few years on payment performance.

But wait, there's more. While banks are deleveraging (cf. Lehman Brothers (LEH)), their deleveraging is forcing hedge funds to do the same. According to the report, banks have tightened credit terms related to counterparty credit exposure to hedge funds. While only 7 out of the 62 banks surveyed have such exposure, the OCC says, "those that do are systemically important institutions." Six of the 62 have direct credit exposure.

Click to enlarge

4. Wait, There's a Silver Lining!

From the Cleveland Plain-Dealer Business Blog covering the two-day Federal Reserve Bank of Cleveland's annual Community Development Policy Summit, turns out there is a silver lining to this mortgage cloud; a crackdown on lending that will prevent future abuse.

The only problem with that view is explained by Fed Governor Randall Kroszner at the conference:

"The use of credit in today's society is almost a necessity, said Randall Kroszner, a member of the Board of Governors of the Federal Reserve System in Washington, D.C. He noted that three-fourths of all consumers have some kind of debt, whether it's a mortgage, a car loan, a student loan or credit card bills. Credit "is the lifeblood of our economy," he said."

Almost right. The reality is that EASY credit is the lifeblood of the economy. That blood is quickly being drained away. Just ask the OCC.

5. Socionomics of Debt: We're Like Alcoholics, But for Debt

Perhaps Mr. Kroszner should understand exactly what the credit lifeblood is mutating into; namely, a full-blown debt crisis and repudiation of credit. How else to explain the following:

From the Wall Street Journal:

"In the debt-soaked economic slump of 2008, growing numbers of in-hock Americans are finding solace, and sometimes solutions, in support groups for the overextended."

", a Web site that organizes physical and virtual meetings, says it now serves 138 groups who gather in person to talk about debt management, up from 24 a year ago. Debtors Anonymous -- a cousin of Alcoholics Anonymous -- reports greater demand particularly in Southern California and Arizona, areas hit hard by the downturn. Activity is rising online: Postings are up 81% this year on the debt-related message boards of iVillage, a women-oriented site owned by General Electric Co.'s NBC Universal."

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