Friday, September 12, 2008

Tapped Consumer/Lehman

Good Morning Everyone!

Stocks are mixed this morning. They should be plunging based on the news that came out today!

The Lehman story is big, but the bigger news to me this morning was the data on the consumer. Retail sales for August were out today and they were awful. Here is the news from Market Watch:

"WASHINGTON (MarketWatch) -- U.S. retail sales unexpectedly fell in August, pushed lower by plunging gasoline prices, according to Commerce Department data released Friday.

Seasonally adjusted retail sales dropped 0.3%, much worse than the 0.4% increase that economists surveyed by MarketWatch had been looking for. See Economic Calendar.
Sales in June and July were also revised lower by a total of 0.6 of a percentage point, making consumer spending significantly weaker this summer than earlier believed despite the infusion of about $100 billion into consumers' pocketbooks from Washington.

Consumer spending will probably shrink in the third quarter for the first time since the 1991 recession, RDQ Economics wrote. "The only bright spot for the consumer is the recent decline in energy prices," said RDQ economists John Ryding and Conrad DeQuadros.

Sales are up 1.6% in the past year. The figures are not adjusted for price changes. Read the full report.

Sales in August were boosted by a rebound in automotive sales, which rose 1.9%, the biggest increase in a year. Excluding autos, retail sales fell 0.7% -- the worst performance this year.
Sales at gas stations dropped 2.5%, a reflection of lower prices. Excluding gas, retail sales were unchanged in August and are down 0.7% in the past year.

In a separate report Friday, the Labor Department said producer prices fell 0.9% in August as energy prices fell 4.6%. See full story.

Excluding gas and cars, retail sales fell 0.4% in August, the biggest drop since December.
The drop in gasoline prices over the past two months has boosted consumers' confidence, but anecdotal reports from retailers show they aren't spending the freed-up cash at the malls. After eight months of declining employment and more than a year of falling house prices, consumers remain anxious about their finances."

My Take:

Gee do you think J6P's credit cards might be tapped out? This is a huge miss folks. -.4 versus the +.3 that was expected. The consumer contracted despite the combination of lower gas prices and $100 billion of government stimulus!

This number should have jumped up based on the relief they received in August. The consumer is 70% of GDP folks and it appears they are running on fumes! Consider this to be an ominous sign of whats to come.

Lehman

The Lehman story is slowly turning into a giant cluster f*ck. Paulson is adamant that no government funds will be used to bailout Lehman. Could our government finally be coming to their senses? Here is the news from Reuters:

"WASHINGTON (Reuters) - Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

The source said Lehman (LEH.N: Quote, Profile, Research, Stock Buzz) already has substantial support from the Federal Reserve as it races to negotiate with potential buyers.

"There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," the source told Reuters.

"Given these things, (Paulson) is adamant that there will not be government money used in the resolution of the situation," the source added.

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

The source said Lehman (LEH.N: Quote, Profile, Research, Stock Buzz) already has substantial support from the Federal Reserve as it races to negotiate with potential buyers.

"There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," the source told Reuters.

"Given these things, (Paulson) is adamant that there will not be government money used in the resolution of the situation," the source added."

My Take:

I'll believe it when I see it. My guess is this is a signal to Wall St. telling them to get together and fix this problems themselves. My guess is some sort of consortium will be setup. If the Fed does let them fail I see it as a good sign.

Maybe they took a look at the Fed's balance sheet and finally realized they can't keep bailing everyone out. I am also wondering if Washington Mutual is affecting Lehman. They look dead as a doornail, and its going to take a lot of money to make the depositors whole here.

A WAMU failure will pretty much wipeout the FDIC which will force them to go to the Treasury for more cash. As I said last night, this economic ship has leaks everywhere and the Fed and Treasury need to start picking their battles.

Bottom Line:

Keep an eye on the news. I think a decision on Lehman is immanent. The banks could decide to not help Lehman via consortium and let them die. I am sure they are looking at their exposures to Lehman and trying to decide which option is better for them: Letting them die or taking the hits on their counterparty risk.

If Lehman dies, it will be a devastating blow to Wall St. It appears the street has already written them off and is trying to conduct business in usual. I don't know how they can do this. We lose two of our big investment banks and its no big deal? Denial is a powerful emotion!

WAMU and Lehman will be the catalysts for the market short term. Lets see how this all plays out.

Long term, expect the financial explosions to continue. Next up in my view? Mighty Merrill.

6 comments:

Minton Mckarkquey said...

I was shocked the consumer news didn't have more impact, but it often seems that bad news on a Friday doesn't have nearly the same impact as a Monday.

I think at this point Lehman is being ignored by everybody - which is a good sign - so hopefully they can fold without the Bernanke getting all excited.

In many way the WAMU story is more concerning since - as you accurately point out - FDIC will be one more empty barrel is it collapses. Looks like another weekend of uncertainty is upon us!

Anonymous said...

Anyone notice the subtle word change over the last couple hours concerning Lehman and the Fed. This morning it was 'the Fed will not use govt funds.' Now it is 'the Fed should not use govt funds.' Maybe I am making too much out of this but I have seen two articles that seemed to have changed their wording. What's next 'the Fed might use govt funds.'

Minton Mckarkquey said...

I've spoken to a number of recruiters today and people who work at these banks and they're obviously shell-shocked.

Beyond the total lack of usefulness of folks like Dick Fuld, clearly there are thousands of people with families that will have problems (the piece by Reuters that showed Lehman payroll to be 3 times their net value is classic Reuters btw).

In your blog, in the six months I've read it, you've correctly positioned and predicted the markets. It's time for the guessing game to pass and these companies (and the Fed) need to fess-up on what the hell is going on. I think the gears need to shift to make this happen.

While I want private banks that have screwed up through fraud to fail, I want to see transparency, honestly, and a sense of good guidance to follow through in the aftermath.

Sadly, this looks like it ain't gonna happen....

Minton Mckarkquey said...

And then...

http://ap.google.com/article/ALeqM5j12hiaDX0-3jvsfNj247sUyBiqHgD935FRT80

Avl Guy said...

MintonM, RE: "It's time for the guessing game to pass and these companies (and the Fed) need to fess-up on what the hell is going on."

Wall Street is proving that they truly believe with all their might (ruby red slippers including) that
DeNial is only a big river in Africa.

Jeff said...

Great points guys. Minton transparency is a must here. Well said.

I am away this weekend so it will be quiet on here.

I agree that the arrogance of the pigmen is out of control. Its like they have to be told that the game is over but yet they refuse to accept it.

I think investors are not even close to pricing in what has happened.

I think they are in as much denial as Wall St.