Consumer Deleveraging & December Retail Sales ~ market folly

Monday, January 12, 2009

Consumer Deleveraging & December Retail Sales

We've mentioned many times before that the consumer has a rough 2009 ahead of them and that discretionary retailers could be in the house of pain. The following data simply backs up this thesis. We recently looked at consumer spending during recessions, and you might be slightly surprised at the findings. Courtesy of the NY Times, we see that retail sales in December were weak, especially at discretionary retailers.

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You'll also take note that Walmart (WMT) continues to be one of the lone bright spots in a dark consumer world. All along, we have advocated getting short discretionary retailers and going long the likes of Walmart (WMT) and McDonald's (MCD) as a hedge. The thesis here has always been that the consumer will trade down to cheaper alternatives and thus those companies will not suffer as much as normal, non discount retailers. And, after all, its merely a hedge to our overall bearish consumer bias.

Then, courtesy of the Big Picture, we see that consumer deleveraging has actually just really begun. As this trend continues, look for things to possibly get even worse in the retail world.

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As a result of the deleveraging, we've said that the consumer savings rate will have to rise. And, lastly, as the consumer struggles along, they'll turn to their credit cards to get by once they run out of cash. Thus, the credit card squeeze begins and companies with a lot of credit card/consumer debt exposure, like Capital One (COF), will continue to see a rise in delinquencies and charge-offs.

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