A Sea Change for the Consumer?
Growth Report


Have You Seen This?

Have You Seen This?


*****Happy Halloween

*****A Sea Change for the Consumer?

*****Chesapeake’s $2.85 Billion Surprise



*****The rally that started Tuesday and continued on Thursday might have investors feeling like the worst is past. But I can’t help but think we haven’t seen the last of the declines.


I don’t mean to sound like a perma-bear. Just yesterday, I was noticing that some stability has returned to the stock market. And today’s nice move higher came after we saw some bad news on U.S. GDP.


Yesterday’s GDP number clearly shows that the economy went into recession during the last quarter (July – September). And given the complete business standstill in October, there’s no doubt the 4th quarter GDP will be another negative number.


But then, we knew that.


Stocks wouldn’t be rallying if investors didn’t believe that stocks were  priced for the slowdown.


*****GDP declined 0.3% in the last quarter. Expectations were for a 0.5% decline. I suppose you could say today’s number was good news. Or at least you could say it was be not-as-bad-as-we-thought-it-would-be news.  


But this drop in GDP involves the first decline in consumer spending in 17 years. And at 3.1%, it was the biggest drop in spending in nearly 28 years. That’s significant.


The U.S. economy was in recession in 2001-2002. But that recession was marked mostly by a huge cut in corporate spending. Consumer spending slowed, but it didn’t shrink. Now, the consumer is leading the decline.


*****People can’t spend what they don’t have. The 3rd quarter GDP report showed that Americans discretionary income fell 8.7%. That’s the biggest drop since they started tracking discretionary income in 1947.


And job losses are mounting. American Express (NYSE:AXP) is laying off 7,000 employees. And the proposed merger between Chrysler and GM (NYSE:GM) is expected to cost 75,000 jobs. That could lead to another 50,000 jobs lost in the auto parts industry. Throw in advertising and shipping and we could be talking 200,000 jobs.


As I’ve noted, unemployment could hit 8%-9% next year. Numbers like that don’t suggest a quick turnaround for discretionary income or consumer spending.


I’m now seeing 4th quarter GDP estimates of -1% to -5%. Again, given what we’ve seen in October, the first month of the quarter, investors expect a negative number. -1% might even seem like good news.


But -5%? It’s hard to imagine investors shrugging off a number that big.


*****It’s pretty clear that investors aren’t looking too far ahead. Stocks may be priced properly for the next couple of months. I can’t help but wonder if we might be in the midst of a true sea change for consumer sentiment.


My grandfather grew up in the tail end of the Depression. He was tight like no one I’ve ever met before. I remember he would stand outside the bathroom and time your showers so you didn’t use too much water. A dinner out was a trip to the S&S Cafeteria. He never shook the spendthrift habits he learned when he was young.


It’s often said that you should never underestimate the strength of the American consumer. We’ll spend like there’s no tomorrow. Massive credit expansion over the last 15 or so years has certainly helped perpetuate that image of the American consumer.


But now, Americans have $900 billion in credit card debt. 6.8% of credit card balances are being written off by banks. And believe it or not, some banks are now begging the U.S. government to allow them to forgive up to 40% of some customers’ debt, just to keep those customers making monthly payments. Those banks are afraid these customers might just walk away from their obligations.


Take staggering debt, throw in 9% unemployment, impossible to get credit, falling home values and more stock market declines, and you just might start to see the kind of environment that forces us Americans to permanently change our spending habits.    


Of course, it would take a few quarters for any such trend to show itself. I’ll be watching retail sales numbers just as closely as I watch unemployment numbers.


*****Don’t let my pessimistic analysis make you think that there won’t be any good profit opportunities in the stock market. If anything, difficult economic times make good research even more rewarding.


For some good news, it’s nice to see that companies still know how to use derivatives. Chesapeake Energy (NYSE:CHK) reported a massive earnings gain due hedges it placed on its natural gas and oil sales.


Including the derivatives gains, Chesapeake earned $3.25 billion in the 3rd quarter, compared with $346 million a year ago. Without the phenomenal one-time gain, Chesapeake still earned an impressive $486 million. That missed estimates by 3 cents, but investors seem to be focused on the $2.85 billion profit form the hedging activity.


Not only is that $2.95 billion a nice boost to the bottom line, it shows that management is paying attention. They apparently foresaw falling natural gas prices and took steps to insulate the business. Well done.


I first discussed Chesapeake on October 16. The stock closed at $18.35 that day. Yesterday, the stock finished at $22.07. It’s up 20% in two weeks. And it looks like more gains are on the way. 



Best Regards,


Ian Waytt


Growth Report


Posted 11-04-2008 1:50 PM by Ian Wyatt