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.