Investors May Be Too Optimistic About Consumer Recovery

[RedEarth]

The most accurate banking analyst, Meredith Whitney, has warned that banks are likely to continue to restrict consumer credit, particularly if reforms to end "gotcha" practices, like universal default and double-cycle billing, are implemented. Credit card issuers shifted their model away from one where they earned a reasonable return from all types of customers – sporadic users, active but "pay in full" types, the somewhat in debt and the chronically indebted. Indeed, in the stone ages of the 1980s, banks were really not too keen on having permanent balance carriers as customers. But lower interest rates (meaning much higher spreads on deadbeats), more aggressive fees, and more favorable bankruptcy laws made the not-quite-a-deadbeat their very best customer. With their fees from this group curtailed, banks are likely to cut credit to risky borrowers even beyond what they would have done in a risk-averse environment.

Separately, many economists foresee either an L shaped recession or an anemic recovery.

This Reuters piece suggests that stock investors may be discounting a stronger recovery than is in the cards:

Consumer consumption, long an engine of the U.S. economy, is poised to contract the most since World War Two and may impede a fast recovery that many equity investors are counting on.

U.S. stocks have rallied about 17 percent since sliding to 11-year lows in late November on the belief the worst of the deepest post-war bear market on record may be over.

But unlike every recession since the Depression, a boost in consumer spending -- primed by a lowering of interest rates -- will not lead to a sharp recovery, several investors at this week's Reuters Investment Outlook Summit 2009 said.

After a buying binge that pushed consumer spending to five times the rate of economic growth for this decade, the American consumer is tapped out and needs to shore up finances.

"I don't see fast growth in the United States for several years," said John Taylor, chairman and chief investment officer of hedge fund FX Concepts Inc, which oversees $14 billion in assets.

"People need to get their personal finances back in order," he said....

Morgan Stanley estimates the slowdown in real consumption will be a negative 1.6 percent in the 12 months ended June 30, 2009, a post-World War Two record. World growth, at 1.7 percent, will be the weakest rate since 1991, the bank said.

Growth in consumer spending over the next several years will be about 1 to 1 1/2 percentage points less than the 3.5 percent clip during the decade ending 2007, it said.

That slowdown could lead to a slow and long recovery, and change the outlook for capital markets in the years to come, especially retail and other consumer-oriented securities.

Investors do not appreciate yet how long the downturn in the U.S. retail industry may last, said Shawn Kravetz, president of Boston-based hedge fund Esplanade Capital LLC.

"We don't think that people have fully factored in this general level of malignancy going on for a year, 18 months, maybe two years," he said at the summit.

The consumer recession will be so "deep and brutal" the U.S. retail industry could lose one out of every 10 stores in coming years, Kravetz said.

Consumers, businesses and investors all are rushing to reduce risk amid a broad deleveraging, said Mohamed El-Erian, co-chief of fixed-income powerhouse Pacific Investment Management Co in Newport Beach, California.

Investors pushing a rally in equity markets after stocks slumped in November to lows last seen in 1997 may be too optimistic as more bottoms are likely, El-Erian said.

"It puzzles me that people feel confident to declare the bottom," said El-Erian...

"What we're looking at is a very bumpy journey that will continue well into 2009. We're looking at multiple bottoms."...

As a percentage of GDP, private debt has soared to close to 250 percent last year from about 10 percent in 1952, according to Ned Davis Research.

After paying food, energy, debt service, health care and taxes, the American consumer has little left, Atteberry said.

"This person is starting to get very, very stressed, and their ability to pay off is virtually impossible," he said.

"There are only two ways to repair the balance sheet; sell the asset and pay down the debt, or you're going to spend less than you earn. There is no third choice," Atteberry said.

"We see this recession lasting into 2010."

http://www.nakedcapitalism.com/2008/12/investors-may-be-too-optimistic-about.html

[Hissyspit]

1. So should I sell my Wachovia?

:)

Not really a joke. I just inherited it from my father. I am not overly optimistic. It's Wells Fargo now, of course.

[Citizen Number 9]

2. It is a long road into 2010

Not all those corporations are going to make it there.

If you can tell which ones will and which ones won't, then, by all means, invest in the ones you think will survive, particularly if they are relatively cheap right now.

Banks, for example have been hit hard and most have had an opportunity to work out the issues. I am investing there. Very carefully.

What we haven't seen yet is the full impact of 9% or 10% unemployment on the rest of the companies and only the new administration has the ability to stem that tide.