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Five Things You Need to Know: Dozen States Anticipating Temporary Relief From Subprime Woes; Mind if I Take 10?; Lenders of Last Resort; RE: Contagion (Was Contained); What Aren't We Buying With Our Credit Cards?


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. Dozen States Anticipating Temporary Relief From Subprime Woes

The jackpot for the Mega Millions multistate lottery rose to a near-record $325 million after no winners were produced by last night's drawing, according to Bloomberg.

  • The August 31 Mega Millions drawing is eagerly anticipated in the dozen states that sell the tickets - California, Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Texas, Virginia and Washington - the hope being it will provide at least temporary relief from record foreclosures amid a deepening housing slump.
  • The biggest jackpot in U.S. lottery history, $390 million before taxes, was awarded in a March 6 Mega Millions drawing.
  • "When jackpots get this big, we can expect sales at their height Friday approaching the drawing to approach $1 million an hour,'' John Charlson, a spokesman for the New York Lottery, told Bloomberg.
  • Yes, that's one million dollars PER HOUR... in New York alone... which leads us to today's Number Two...

2. Mind if I Take 10? Seriously. Just 10 Minutes. Please. All I Need is 10 Minutes.

The top private-equity and hedge fund managers made more in 10 minutes last year than the average U.S. worker made the entire year.

  • The 20 highest-paid fund managers made an average of $657.5 million, or 22,255 times the U.S. average annual salary of $29,500, a study released today said.
  • The study, released by the Institute for Policy Studies and United for a Fair Economy, cited data from the U.S. Labor Department and Forbes magazine, Bloomberg said.
  • So, what's the big deal?
  • The solution is simple.
  • Every time one of these highly paid hedge fund or private equity guys goes to the bathroom for 10 minutes, why not let an average American fill in and answer phones, take messages, make a few trades?
  • Then, when the manager comes back, just undo the trades, return the messages, pay the average American $30 grand for filling in and everybody's happy!

3. Credit Cards: Lenders of Last Resort

US consumers are defaulting on credit card payments at a significantly higher rate than last year, the Financial Times reported.

  • According to data from Moody's Investors Service, credit card companies wrote off 4.58% of payments between January and May, up nearly 30% from the same period last year.
  • But so what, right? The defaults are still near record lows.
  • Meanwhile, according to the Administrative Office of the U.S. Courts, in the first quarter of 2007 there were 187,361 non-business bankruptcy filings, up 66% from a year earlier.
  • But again, so what?
  • That follows a year in which bankruptcies fell to their lowest level since 1988, according to the American Bankruptcy Institute.
  • Well, the first concern is that higher default rate by credit card borrowers could be a precursor, similar to subprime mortgage woes, and undermine the value of related debt products backed by credit-card securities, which brings us to today's Number Four...

4. RE: Contagion (Was Contained)

As we noted (Five Things August 21, Numbers 2,3,4), credit market issues are not isolated to subprime. Everything from Asset-Backed Commercial Paper to Alt-A and even Prime mortgages have been affected.

  • The most vulnerable links in the chain are always the first to buckle.
  • Subprime borrowers, and by extension those filing for bankruptcy protection and defaulting on credit cards are, by definition, the weakest links in the credit chain.
  • The implicit assumption, and we believe it is a faulty one, is that everyone else in the credit chain is "smarter" than the most vulnerable borrowers.
  • What if the same factors that led borrowers to demand credit, and lenders to meet those demands, at the subprime level, are precisely the same factors that led borrowers to demand credit, and lenders to meet those demands, at all other levels throughout the chain?
  • What if the factors creating an appetite for risk and driving credit demand at the subprime level are the same factors creating an appetite for risk and driving credit demand at all other levels?
  • Minyan Peter wrote yesterday, "one statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth - a key sign that the consumer is stretched."
  • In normal times, aggregate credit card balance growth runs about in line with GDP and retail sales growth.
  • This year it is running almost 2.5 times that, he added.
  • So it would appear that many consumers are relying on credit cards as the lender of last resort.
  • And this takes us to today's Number Five...

5. What Aren't We Buying With Our Credit Cards?

Williams-Sonoma (WSM) reported reduced profit that exceeded analyst estimates this morning, largely due to Pottery Barn "revitalization efforts." The stock is up, so what do these "revitalization efforts" and this talk of "reduced" profits mean?

  • Williams-Sonoma this morning said profit fell 27%, but the good news is this actually beat analyst expectations, and so the stock is higher.
  • "They were terrific numbers, much better than expected,'' Joe Feldman, a Telsey Advisory Group analyst, gushed to Bloomberg.
  • "Pottery Barn had a strong performance due to the initiatives they have in place to really drive the business," he added.
  • And what initiatives are those?
  • The Pottery Barn "revitalization initiatives" that helped drive the "improving trend," according to CEO Howard Lester.
  • Pottery Barn's a 190-store chain accounts for half of Williams-Sonoma revenues.
  • After showing declining sales for four consecutive quarters the chain showed a 1.8% gain in sales.
  • How did they do it?
  • They reduced or eliminated shipping charges for some Pottery Barn items.
  • They reduced advertising expenditures for Pottery Barn.
  • They increased markdowns of Pottery Barn items, some by as much as 75%.
  • Meanwhile, merchandise inventories are projected to be running in a range of $750-775 million for the third quarter, compared to $661 million in the third quarter last year, nearly 15% higher.
  • Did they open a bunch of new stores? No, in fact, some stores are being closed for remodeling.
  • Are they anticipating 15% revenue growth? No, actually they are projecting about half that.
  • Rising inventories amid weaker sales growth, price cuts, rising credit card balances, rising credit card defaults?
  • We're not buying it... literally.
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