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Five Things You Need to Know: Setback for Wal-Mart's Doctorin' and Healin' Potion Shops


Remember Wal-Mart's ambitious, if slightly weird, plan to open low-cost health clinics in its stores?


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

1. High-Yield Spreads Widening

Yields on junk bonds relative to Treasuries are rising at the fastest pace in at least 11 years, according to Bloomberg. People are increasingly talking about "rising junk bond spreads" on Wall Street, but what does this mean?

First, we need to understand what "junk bonds" are, then we can look at why the yield difference between junk bonds and Treasuries (the so-called "spread") is important. In simplest terms, a high-yield bond, or "junk bond," is a bond that typically pay the holder of the bond, the investor, a high yield to make it attractive.

The benchmark for bond yields is the yield paid by Treasuries. Why is this the benchmark? Well, think about it. In the grand scheme of things, the U.S. government is the least likely entity to go out of business or find itself unable to pay the interest on the money it borrows. Arguably, some companies with the highest credit rating are better bets to pay debt holders than the U.S. government, but that's a story for another day. The important thing is that Treasuries are considered the safest debt. Companies that issue debt are rated by the risk that they will not be able to issue debt.

High yield bonds are bonds issued by companies that have a relatively high degree of risk compared to the U.S. government. The difference between the yield of junk bonds and Treasuries is called the "spread." If the difference is small, then this is a sign that investors have a high degree of confidence in the riskier companies' ability to pay their debt. If the difference is getting larger, then it means investors are losing confidence in the ability of these companies to repay bondholders and are therefore demanding a higher yield to compensate for the increased risk.

The article on Bloomberg today notes that junk bonds are off to their worst start since 1990. So far this month junk bond prices, which move inversely to yields, have fallen 1.8%, triggering billions of dollars in losses.

The point of the article on Bloomberg is to draw the parallel between current movements in junk bond prices and the similar movements in 1990 which foreshadowed a recession that followed shortly thereafter. During a recession, investors demand higher yield on junk bonds, and on average the yield widens from 7 percentage points to 10 percentage points, Michael Parks,a managing director at TCW Group told Bloomberg. This spread was at a record low of 2.41 percentage points as recently as June. Clearly, since then, things have changed.

2. Economic Data Roundup: One for Hoofy, One for Boo, One Draw

This morning the economic data produced one data point for Hoofy, one for Boo, and basically a draw.

  • Hoofy likes the fact Durable Goods orders came in well above expectations. It gives him ammunition to argue against the broad based economic slowdown Boo has been focused on.
  • Today's 5.2% increase in orders was the largest rise since July... you know, back during the pre-credit crunch good ol' days.
  • Also in Hoofy's favor was an uptick in bookings for non-defense capital goods excluding aircraft.
  • This category, obscure as it sounds, is viewed as a proxy for future capital spending.
  • Bookings in this category are 4.4%, the most since March of last year.
  • Meanwhile, on Boo's side, the S&P/Case-Shiller home-price index fell 7.7 percent year-over-year, more than an expected 7.1% decline.
  • That's the biggest decline in the index's brief history (it began in 2000) and marked the 11th month in a row the median home price has fallen
  • Finally, this morning a report from The Conference Board showed consumer confidence declined to a two-year low.
  • That may sound like it should go in the Boo column, but the fact is consumer confidence has been surprisingly resilient.
  • The Conference Board's index of confidence decreased less than forecast to 87.9, the lowest since 2006, but that wasn't such a bad year.

3. Setback for Wal-Mart's Doctorin' and Healin' Potion Shops

Remember Wal-Mart's (WMT) ambitious, if slightly weird, plan to open low-cost health clinics in its stores? Turns out CheckUps, one of the companies leasing space in Wal-Mart stores has shut 23 of of its walk-in clinics after running short of cash.

CheckUps, based in New York, fell behind in paying its nurses and other vendors late last year, according to the New York Times, and stopped paying some of its nurse practitioners in late December. Nurses arriving for work at the clinics on Jan. 18 found them to be closed.

Wal-Mart has leased space to about 80 clinics in stores across the country, all operated by independent firms. Operators say their main clients are mothers with small children, and that about 30 percent do not have a family doctor, the Times said.

Hoofy and Boo predicted this months ago:

click above to watch

4. The Rise of Pawn Shops and Fringe Banking

Ran across an interesting article that was in the weekend's Financial Times. Turns out the undercurrent of hard times in the US is benefiting at least one category of business: pawnbrokers.

According to the FT, Dave Adelman, president of the National Pawnbrokers Association, said the number of loans at US pawn shops had risen 15-20% since October. A direct beneficiary of this is the public company, Cash America (CSH), the largest pawnbroker chain in the U.S. with 942 locations. The company last week said its profits rose 21% in the fourth quarter.

This goes hand-in-hand with the expansion of a two-tiered economy and increasing divide between Haves and Have-Nots. As Alan Fishbein of the Consumer Federation of America explained to the FT, pawnbrokers and other "fringe" banking operations have grown rapidly as banks withdraw from poorer areas.

An estimated 10 million households are thought to be outside the banking system, according to the Federal Deposit Insurance Corporation, the FT reported. The National Pawnbrokers Association estimates there are 12,000 to 14,000 pawnbroker shops in the US.

5. Expansion of Sports Betting and Gambling

With the price of homes continuing to deflate across the country, governors are finding it necessary to both propose big budget cuts and seek out alternative revenue opportunities.

I debated making Gambling Expansion one of my Five Themes for 2008, but ultimately decided that would likely be more of a 2009-2010 issue. States I think will ultimately expand gambling just as they did with lotteries in the late 1980s and early 1990s, an effort to tap different sources of revenue when under economic stress.

State tax revenues generally are derived from three primary sources: personal income, profits, and sales. Local tax revenues come almost exclusively from property taxes. A key difference now, as opposed to 2001, the last time states ran into fiscal difficulty, is that the decline is larger and more widespread than the unwinding of the dotcom boom.

Expect to see a push toward legalized sports betting and an expansion beyond Las Vegas, currently the only location in the country with legalized sports betting. The last time this was discussed was around the bottom (naturally) of the first bear market leg down in stocks, the end of 2002.

It is estimated that illegal sports betting in the U.S. is a $400 billion business. As states scramble to make ends meet, there will be enormous pressure to legalize all forms of gaming to bring in revenues. This will likely exceed the 2003 pressure to do so simply because the real estate tax erosion caused by declining values will exert far more pressure on states and municipalities than the dotcom unwind did.

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