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Five Things You Need to Know: Poor Retail Sales Surprise Everyone Except People Who Buy Things; Capacity Utilization, the Fed and You; Bad Day at Northern Rock; Housing Nearing the Bottom Again; The Greatest Generation


What you need to know (and what it means)!


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

1. Poor Retail Sales Surprise Everyone Except People Who Buy Things

Retail Sales in the U.S. came in far worse than forecast in August, surprising nearly everyone except people who work for a living and habitually check their bank accounts and paychecks against their debt obligations and declining home values.

  • Retail sales (which account for almost half of all consumer spending) were projected by a Bloomberg survey of economists to rise 0.5%.
  • The biggest "surprise" was in Retail Sales Ex Autos, which came in far below expectations, down 0.4% in August from July.
  • Expectations were for an increase of 0.2%.
  • Year-over-year Retail Sales Ex Autos were up 4.4%.
  • As one would guess, the biggest area of weakness was in Building Material & Garden Equipment & Supplies Dealers, off 1.5% year-over-year.
  • Department Stores were also weak,however, down 0.8% year-over-year.
  • There was also surprising weakness month-over-month in Clothing and Clothing Accessories Stores, off 0.1% after rising 6.4% in July.
  • And it appears that even though we aren't gardening, we're definitely not eating out much, Food Services and Drinking Places came in flat following July's gains.
  • According to an article in today's New York Times, the only people unaware that consumers are cutting back are economists: Annie Cox, who runs a diner in Oklahoma City, told the Times she's seen a dropoff in certain drink orders - to her, always a harbinger of a recession.
  • "When they start ordering water instead of tea or Pepsi, that means they're cutting back," Ms. Cox told the Times.

2. Capacity Utilization, the Fed and You


Question - is there any historical precedent for a FOMC cutting rates into a utilization rate above 82% and rising? I hear almost nothing of this in the press; in fact I think the FOMC is the only body that has openly mentioned it. Am I off the mark in thinking that this utilization rate should give some member or members a moment of pause in the race to ease?

  • What is Capacity Utilization?
  • Capacity Utilization is a measure of how much of the nation's productive capacity is actually in current use producing stuff.
  • In overly simplistic terms, if demand for goods is rising, capacity utilization rises as producers make stuff to meet that demand; if demand weakens, producers cut back production and capacity utilization weakens.
  • The fear is that a rising capacity utilization rate can lead to inflationary pressures.
  • Indeed, Federal Reserve officials sometimes cite a rising capacity utilization rate as an argument for raising the Federal Funds target rate.
  • But here's the deal: the Fed's capacity utilization rate is only for the Manufacturing, Mining and Utilities industries, and those industries account for a diminishing amount of total economic output.
  • The bottom line is that despite today's reported capacity utilization rate at 82.2%, the Fed should have very little difficulty rationalizing a rate cut next week.
  • Past instances where the Fed lowered the Federal Funds rate even with capacity utilization running above 82% were:
    1) 1990 - five quarter-point rate cuts took the Fed Funds rate from 8.25% to 7%.
    2) 1995 - two quarter-point late-year rate cuts took back an earlier 50 basis point hike and moved the Fed Funds rate from 6% to 5.5%.
    3) 1998 - three quarter-point rate cuts took Fed Funds rate from 5.5% to 4.75%.

3. Bad Day at Northern Rock

A day after the Bank of England denounced the "moral hazard" of central banks rescuing investors who made " bad decisions," the Bank of England announced it has decided to rescue investors who made bad decisions.

  • The Bank of England today said it has agreed to provide emergency funding to Northern Rock, the United Kingdom's fifth-largest mortgage lender.
  • Northern Rock is the first institution to be propped up since the Bank, in 1998, revised the rules under which it will act as a lender of last resort to banks in financial difficulty, according to the Financial Times.
  • Northern Rock funds its lending activities by borrowing from other financial institutions rather than through customer deposits, and said recent cash hoarding among large banks has made it difficult to raise the money necessary to continue operations.
  • Based in Newcastle, Northern Rock has 76 branches around the UK and about 1.4 million savers, 800,000 mortgage customers and retail deposits of £24 billion, according to the Telegraph.
  • Many of those savers lined up today to take money out of Northern Rock, a classic "run on the bank," despite assurances from the Bank of England that the bank would remain solvent.
  • Meanwhile, the Global Blame Game took another step forward as Alistair Darling, chancellor of the exchequer, told Radio 4's Today program, "Perhaps if someone in America had looked more closely at who they were lending to... perhaps some of these problems would have been avoided."
  • Perhaps. But what we found more interesting was this statement in the FT from Northern Rock CEO Adam Applegarth: "The way to get the [credit] freeze to thaw is for banks to come out and show what's on their balance sheet," he said.
  • True enough. But for now, the standoff continues precisely because banks are afraid to come out ans show what's on their balance sheet.

4. Housing Nearing the Bottom Again

Hovnanian Enterprises (HOV) Chief Executive Officer Ara Hovnanian said the bottom of the housing market is "very near,'' according to Bloomberg, and to prove it he announced a three-day sale offering "unprecedented savings" on homes with prices slashed by as much as $100,000.

  • Ara Hovnanian said, "The bottom is very near but I think its going to stay along the bottom for a while before a recovery,'' according to Bloomberg.
  • Meanwhile, Hovnanian said the credit crunch hasn't limited the ability of prime borrowers to get mortgages.
  • "If you've got reasonable credit and are willing to show income documents and you're not trying to put zero down, there is really an adequate supply of credit,'' Hovnanian said.
  • The problem is that subprime homebuyers have always made up a significant portion of Hovnanian buyers, as much as 18% in 2006.
  • Overall subprime mortgages accounted for about 20% of all mortgages last year.

5. The Gratest Generation

With the first Baby boomers now turning 60, the rest of us can prepare for an onslaught of generational-targeted marketing and products... or if the debt bubble begins to fully unwind, an onslaught of finger-pointing over who is responsible for our financial irresponsibility. Who exactly is the "rest of us" though? Are we Generation X? Generation Y?

  • What do these generation names even mean?
  • What characterizes a Baby Boomer from a Generation Xer?
  • Minyanville decided to find out.
  • Below are some key generational demographics to help you decide which generation you belong in:
    Baby Boomers: People born during the period of increased birth rates following World War II.
    Baby Busters: People born just after the Boomers but not scheduled to receive any social security payments.
    Generation X: People born following the peak of the post-World War II baby boom and charged with purchasing all remaining Baby Boomer vinyl LPs.
    Generation Y: People born immediately after "Generation X" and who now largely act as their employers.
    Boomerangers: Anyone born after 1977 who owns a tie-dyed t-shirt and a collection of "tobacco pipe" screens.
    Crazy Kids: Anyone born five or more years after you.
    Selfish Bastards: Anyone born 10 or more years before you.
    Twixters: That 38-year old dude who works in the bookstore part-time while promoting indie rock bands on the weekends.
    Millenials: Actors and extras in Star Trek: The Next Generation television series.
    Generation Z: Future Earth-bound slave colony inhabitants born post 1999.
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