Five Things You Need to Know: "Ultrarich" Getting a Workout
The ultrarich, they're just like us!
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. "Upside" Surprise for Retail Sales?
The Consumer is Dead; Long Live the Consumer.
Both sides of the consumer's coin were on display this morning as the Commerce Department reported March Retail Sales that beat many economists' dismal expectations. What the report failed to mention, however, is that whichever side of the coin you choose to polish, it's the consumer's one last coin that's getting a shine. We're running on pocket lint here.
Retail Sales rose 0.2% last month after a 0.4% decline in February, the Commerce Department reported. The median forecast of economists surveyed by Bloomberg called for no change.
Not surprisingly, gasoline station sales led the increase, jumping 1.1% in March, but we're more interested in the true consumer discretionary categories, such as General Merchandise Stores and Clothing. Below are two charts courtesy of TheChartStore.com:
CLICK TO ENLARGE
2. Et Tu, Wachovia?
This morning Wachovia (WB) posted its first quarterly loss since 2001 and "right-sized" (CEO Ken Thompson's euphemism) its dividend down to 27.5 cents a share from 64 cents a share.
Minyanville's Andrew Jeffrey already gave us an early morning look at the bank's anouncement (see his article here), but we wanted to focus on another aspect of the story: risk aversion. As CEO Thompson noted, the move to raise $7 billion isn't simply "to fill a hole" in Wachovia's balance sheet, but to "increase sharply our capital ratios." Why? Risk aversion.
"Over the past year, we've witnessed a consistent pattern of deterioration in credit statistics in our mortgage portfolio in stressed areas of the country," Thompson said. "If the housing market continues its decline and if borrower behavior continues, our credit losses will be manageable but materially higher than we previously expected," he added. Thus, the bank is implementing a new risk model that Thompson characterized as more conservative.
Why this newfound conservatism, and more important, what does it mean for us? The heart of the matter is what the bank perceives as a dramatic shift in consumer behavior. Wachovia discovered in February and March what happens when home equity approaches zero.
"I don't know where the tipping point is but somewhere when a borrower crosses the 100% loan to value, somewhat north of that and they presumably run into some sort of cash flow [issue] - whether it's reduced income or normal things in life that has created past dues before, they're propensity to just default and stop building their mortgage rises dramatically and I mean, really accelerates up," Wachovia's Chief Risk Officer Don Truslo said on the conference call.
But wait, there's more. Here's the chilling part: "it's almost regardless of how they scored, say in FICO or other kinds of credit character," Truslo added.
In other words, the bank's prior risk model failed to account for how top-rated FICO scorers would respond to a zero home equity situation; they, like borrowers rated as higher credit risks, are simply defaulting on their mortgages.
Wachovia is among the first in its peer group to recognize that their previous risk models are not prepared to deal with higher default rates among their best credit quality customers. Expect others to follow. The bottom line is increased risk aversion on the part of banks means tighter credit conditions for consumers... at precisely the wrong time.
3. "Ultrarich" Getting a Workout
This morning, even as Wachovia CEO Ken Thompson said the bank was preparing for an economy that could be "worse than expected," we found not one, but two (2) articles in major U.S. newspapers devoted to covering some aspect of the "ultrarich."
The first article was a New York Times piece observing that "despite tough times, ultrarich keep spending." As David Monn, an event planner, told the Times, "short of our country going on food stamps, I don't think we're doing anything differently."
Meanwhile, USA Today took a slightly different mo' money, mo' problems tack in their article on the ultrarich. The Yellowstone Club, a private retreat for the ultrarich, is apparently in turmoil thanks to a bitter divorce fight between the club's billionire founders, the newspaper reported. See? The ultrarich, they're just like us!
4. Department of Least Effective Economic Stimulus Ever: Harry's Bar to Help America's Subprime "Victims of Subprime"
All this talk of problems facing the ultrarich put us in a deep & thirsty funk, the kind of dry-mouthed pessimism that could only be slated with a refreshing cocktail served at Harry's Bar in Venice, Italy.
Despite what the Times says about undaunted ultrarich spending, however, Harry's Bar is reporting a 5-10% drop in spending by Americans at the bar and restaurant Ernest Hemmingway made famous.
"Since the start of January, we noticed a drop in (American) customers of between five and 10 percent and now that we are in April its looks really frightening," Arrigo Cipriani, Harry's owner, told Reuters.
That's the kind of drop-off in demand that only some kind of laser-focused economic stimulus package can correct. Fortunately, Harry's Bar has a plan. A sign posted outside the restaurant at the weekend reads:
"Harry's Bar of Venice, in an effort to make the American victims of subprime loans happier, has decided to give them a special 20 percent discount on all items of the menu during the short term of their recovery."
5. Point/Counterpoint: Are the Rich More Skilled Than the Poor?
All this talk about the ultrarich while income inequality in America is at its greatest since the late 1920s set us to wondering: is the gap between haves and have not's simply a "skills gap" as President Bush has asserted? In other words, do the ultrarich have a particular set of skills, a specific talent for getting ultrarich, that the rest of us do not? For a closer look at this issue, Minyanville Presents: Point/Counterpoint.
I Am Simply More Skilled Than You
By Edward Stentmantle Van Fauntlethorpe, Ultrarich Guy
Let's face the facts. My tremendous wealth, the value of which places me squarely among the top 1% of all income earners in America, is a reflection of my skill set. In plain terms, I am simply more skilled than you.
I have worked hard to get where I am. Whether it was the years spent learning Latin and Sanskrit at the Cheshire Wentworth Pre-Kindergarten Preparatory Academy, or all those summers spent learning management skills at my father's Italian vineyard, or the opportunities I forged for myself at Brown, and later at Harvard in Business Management School, it's difficult to say.
Of course, being tremendously wealthy carries its own set of responsibilities. In addition to earning seven figures introducing investment bankers and real estate developers to one another at high level cocktail parties, I supervise a staff of more than 15 people who together manage our three properties, take care of the paperwork on our various trusts and investment vehicles and see to it that the children are fed, clothed and provided for emotionally.
These are skills my family has instilled in generations of Van Fauntlethorpes dating back to the English conquest of Wales in the 1200s. One doesn't develop the skill to appreciate a fine 1968 Bordeaux overnight, just as one doesn't learn how to effortlessly manipulate a Ferrari through the Swiss alps without discussing acceleration techniques with the great-great nephew of the man who practically invented high-performance clutching for grand prix auto racing.
Naturally, the measure of a man is not by the size of his bank account. We are not vulgarians. My great grandfather, a swordsman of no small repute, once told me that the true measure of a man is his skill in the collective arts of chess, fencing and countryside skeet shooting. I have found that to be largely the case in my various encounters among my peers. Ultimately, we go to the grave with our skills having been displayed upon a great stage of peer-to-peer competition. The true judge will be the monuments, institutions and plaques left behind imprinted with our name.
You Are More Skilled Than Me In Everything Except Maybe Armed Robbery
By About 5'11" With Dark Hooded Sweatshirt and What May Have Been A Revolver, I Was Too Scared to Look to Confirm
It is difficult to refute the fact that your skills in the areas you mention are far greater then mine. I certainly didn't attend a kindergarten preparatory academy. But what about armed robbery? I have a feeling I may be slightly more skilled at that than you are. While you're thinking about it, give me your wallet. Also, your watch.
I admit, I'm not much on wine. I prefer a cold Bud, and wouldn't know a fine 68 Bordeaux if it was right under my nose. Speaking of wine, what size shoe do you wear? 9 1/2? What a coincidence! Me too. Now, give me your shoes.
The weird part about our differences is I've never driven a Ferrari, but is that yours parked outside? Then toss me the keys please! Hope it's an automatic, I don't know anything about high performance clutching techniques!
You know, I guess in the end what it all comes down to is you taking your pants off, lying down on the ground and counting to 1000 before getting up while I drive away in your car with your wallet, watch and shoes.
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