Consumers Are Still Tapped Out
10/01/2009 12:01 pm EST
Michael Shulman, editor of ChangeWave Shorts, says consumers just can’t power the economy and the markets, and some stocks look particularly vulnerable.
The spending binge is over. And it's not coming back for a decade or more, if ever. And Wall Street refuses to believe this "new math" despite its simplicity and obviousness.
Aggregate national income has fallen like a rock due to unemployment, the shrinking work week, stagnant wages, and rising health care costs. This matters because income is the building block of consumer spending and the driver of the current contraction in consumer spending.
Aggregate credit available to consumers will have fallen by more than $4 trillion by the end of this year. Further, in less than ten years, consumer debt more than doubled as a percentage of income, and is now roughly $2.5 trillion. Lastly, debt fell more than $21 billion in July—$21 billion that wasn't spent by consumers, but rather saved—and at this rate, consumers will have the same debt load in 2014 that they had a decade or more ago.
I know an attorney making more than $2 million a year who can't get a loan to renovate his condo; an ad man wealthier than the attorney who just had an American Express card limit reduced for no apparent reason, and I just got told that my credit score was too low to get preferential rates on a lease for a new Honda. I've never missed a bill payment and could pay cash for the car if I wished to. These are all examples of the new economy.
Falling income will not reverse itself anytime soon; wealth is crushed because it will take five to ten years for home prices to approach 2007 levels, and who knows about the stock market? Of course, easy credit is not coming back any time soon, either.
So, how is the consumer supposed to lead the economy back from the recession? He and she won't!
That sets the stage for the weakest companies to get hammered—and here's how to identify them.
First, identify "need" versus "want." Companies selling the higher-end goods that people want but can do without are vulnerable. Tiffany (NYSE: TIF) and Harley-Davidson (NYSE: HOG) are great examples of this vulnerability. So, are the higher-end casual dining restaurants like Ruby Tuesday (NYSE: RT), P.F. Chang's China Bistro (Nasdaq: PFCB) and the Cheesecake Factory (Nasdaq: CAKE).
Second, we'll find the companies with weak balance sheets that need to see increased revenue growth and profitability in order to service their debt—and being able to service their debt is something that's unlikely to happen. Macy’s (NYSE: M) and Harley-Davidson are great examples.
Right now the Street still loves many of these guys and erroneously sees value in their brands. It even assumes that their worst-case-scenario growth for next year is 2% to 3%—led, of course, by the consumer. That isn't going to happen, and when these stocks break, they are really going to fall hard.