Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.  These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen.

-Janet Yellen

A part of Janet Yellen’s prepared statement before she testified to the house yesterday included observations on financial conditions that either influenced or reflected the state of the U.S. consumer.

Yellow-Red Flags:

• Broad decline in equity prices, otherwise known as negative wealth effect

• Higher borrowing by riskier borrowers, otherwise known as keeping up with the Joneses

• Appreciation of the dollar, otherwise known as higher prices at Wal-Mart

The auto sales boom is one of the few areas the Fed could argue that its reckless moves have benefited Main Street. Yet upon further review, maybe auto sales are no longer the best gauge for success because the foundation includes longer loan times and more leasing because of economic conditions. There are personal savings rates, which are still way off from historic high levels, but it’s increasing rapidly over the course of the past year.  That’s a lack of confidence and a better gauge of sentiment than established sources on the topic.

Retail Wreck

I get that people are not spending money at upscale places. What about lower-end retailers where sales are down and things like delinquencies are climbing.  Conn’s (CONN) and Rent-A-Center (RCLL) have been crushed as well.

Conn’s

Business Trends

CONN Same store	4Q15	3Q15	2Q15	1Q15	4Q14
Furniture & Mattress	15.2	11.6	6.9	(5.5)	4.7
Home Appliance	(1.2)	0.5	9.2	0.8	6.6
Consumer Products	(13.3)	(9.1)	(5.9)	(2.6)	8.2
Home Office	(11.3)	(28.3)	(12.9)	(28.1)	(21.9)

Quality & Risk Trends

CONN Same store	4Q15	3Q15	2Q15	1Q15	4Q14
60 Day Delinquencies	9.9	10.1	9.2	8.4	9.7
Provisions for Bad Debt		$58.1m	$51.3m	$47.5m	$58.1

Rent-A-Center

Business Trends

RCII Same store	4Q15	3Q15	2Q15	1Q15	4Q14
Core U.S.	(2.2)	(0.2)	1.4	1.0	(0.6)
NOW	13.7	24.5	31.6	34.1	28.4
Total	1.7	5.2	7.5	8.0	4.7

Margins

RCII Gross Margin	4Q15	3Q15	2Q15	1Q15	4Q14
Core U.S.	71.1	65.0	71.0	70.1	72.0
NOW	53.7	51.9	51.8	48.7	57.6

These lower end retailers see higher provisions for bad loans; margin shrinkage, and delinquencies soar.  It tells a story about our bifurcated economy.  It’s worth paying attention to after the carnage of discounters last year, especially in Wal-Mart.

Today’s Session

It’s all about Europe and European banks under tremendous pressure all year and collapsing even further overnight.  We keep hearing about their capitalization and balance sheets, but stock action harkens back to 2008.  It’s more than a red flag, which wasn’t helped when the Fed didn’t assuage fears that dumber rate hikes are on the way.

Credit Suisse posted a quarterly loss of $5.9 billion and is opening down more than 6% this morning after a sustained drubbing:

• 52 weeks -55%
• YTD -37%
• 5 days -19%

Banks have traditionally been canaries in the coal mines for broader economies, but they have issues that often don’t reflect economies because of business practices and mismanagement.  On that note, however, when banks are in trouble, we all suffer.  I can only hope we don’t all pay-again.  I’m especially concerned about European banks, which are doomed operating in a world with socialist tendencies.  Many of these banks have access to emergency funds from our Federal Reserve.

Comments

The auto sales data was sure to be a flash in the pan from the get go. By 2014 the average fleet age for US vehicles reached an all time high. Eventually the duct tape and bailing twine repairs stop working and people have to commit to replacement. At the first sign of slight economic improvement in 2014-15 people charged out and bought. However much like a drowning man all they were doing was to struggle to the surface for a quick gasp of air before being pulled under again. Scott Manahrt on 2/11/2016 10:32:46 AM

I think that is also significant to note that credit availability for small businesses is declining as well. While banks are happy to lend money to companies that don't need capital like Apple, they are not lending money to small business that would add new employees. Additionally, as an owner of several small business units that I have positioned all of my units in a defensive mode, with no plans for expansion. There is no reason to risk capital in the current market. Patrick Webb on 2/11/2016 10:47:29 AM

Many of these banks have access to emergency funds from our Federal Reserve. Do they ever pay them back...or are we on the hook for those too....See a Yellen Market Crash yet??? Is the big one yet to come.... Bonnie on 2/11/2016 4:19:57 PM

Tweet

 

Home | Products & Services | Education | In The Media | Help | About Us | Disclaimer | Privacy Policy | Terms of Use | All Rights Reserved.