Five Things You Need to Know: Poor Retail Sales Surprise

Five Things You Need to Know: Poor Retail
Sales Surprise Everyone Except People Who Buy Things; Capacity
Utilization, the Fed and You; Bad Day at Northern Rock; Housing Nearing
the Bottom Again; The Gratest Generation

Kevin Depew Sep 14, 2007 12:56 pm


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Poor Retail Sales Surprise Everyone Except People Who Buy Things
Retail Sales
in the U.S. came in far worse than forecast in August, surprising
nearly everyone except people who work for a living and habitually
check their bank accounts and paychecks against their debt obligations
and declining home values.

• Retail sales (which account for almost half of all consumer spending) were projected by a Bloomberg survey of economists to rise 0.5%.
  
• The biggest "surprise" was in Retail Sales Ex Autos, which came in far below expectations, down 0.4% in August from July.
  
• Expectations were for an increase of 0.2%.
  
• Year-over-year Retail Sales Ex Autos were up 4.4%.
  
• As
  one would guess, the biggest area of weakness was in Building Material
  & Garden Equipment & Supplies Dealers, off 1.5% year-over-year.
  
• Department Stores were also weak,however, down 0.8% year-over-year.
  
• There
  was also surprising weakness month-over-month in Clothing and Clothing
  Accessories Stores, off 0.1% after rising 6.4% in July.
  
• And
  it appears that even though we aren't gardening, we're definitely not
  eating out much, Food Services and Drinking Places came in flat
  following July's gains.
  
• According to an article in today's New York Times,
  the only people unaware that consumers are cutting back are
  economists: Annie Cox, who runs a diner in Oklahoma City, told the
  Times she's seen a dropoff in certain drink orders - to her, always a
  harbinger of a recession.
  
• "When they start ordering water instead of tea or Pepsi, that means they’re cutting back,” Ms. Cox told the Times.
  

2. Capacity Utilization, the Fed and You
Kevin,
Question - is there any historical precedent for a FOMC cutting
rates into a utilization rate above 82% and rising? I hear almost
nothing of this in the press; in fact I think the FOMC is the only body
that has openly mentioned it. Am I off the mark in thinking that this
utilization rate should give some member or members a moment of pause
in the race to ease?

• What is Capacity Utilization?
  
• Capacity Utilization is a measure of how much of the nation's productive capacity is actually in current use producing stuff.
  
• In
  overly simplistic terms, if demand for goods is rising, capacity
  utilization rises as producers make stuff to meet that demand; if
  demand weakens, producers cut back production and capacity utilization
  weakens.
  
• The fear is that a rising capacity utilization rate can lead to inflationary pressures.
  
• Indeed,
  Federal Reserve officials sometimes cite a rising capacity utilization
  rate as an argument for raising the Federal Funds target rate.
  
• But
  here's the deal: the Fed's capacity utilization rate is only for the
  Manufacturing, Mining and Utilities industries, and those industries
  account for a diminishing amount of total economic output.
  
• The
  bottom line is that despite today's reported capacity utilization rate
  at 82.2%, the Fed should have very little difficulty rationalizing a
  rate cut next week.
  
• Past instances where the Fed lowered the Federal Funds rate even with capacity utilization running above 82% were:
  1) 1990 - five quarter-point rate cuts took the Fed Funds rate from 8.25% to 7%.
  2)
  1995 - two quarter-point late-year rate cuts took back an earlier 50
  basis point hike and moved the Fed Funds rate from 6% to 5.5%.
  3) 1998 - three quarter-point rate cuts took Fed Funds rate from 5.5% to 4.75%.
  

3. Bad Day at Northern Rock
A day after Bank of England denounced the "moral hazard" of central
banks rescuing investors who made " bad decisions," the Bank of England
announced it has decided to rescue investors who made bad decisions.

• The Bank of England today said it has agreed to provide
  emergency funding to Northern Rock, the United Kingdom's fifth-largest
  mortgage lender.
  
• Northern Rock is the first
  institution to be propped up since the Bank, in 1998, revised the rules
  under which it will act as a lender of last resort to banks in
  financial difficulty, according to the Financial Times.
  
• Northern
  Rock funds its lending activities by borrowing from other financial
  institutions rather than through customer deposits, and said recent
  cash hoarding among large banks has made it difficult to raise the
  money necessary to continue operations.
  
• Based in
  Newcastle, Northern Rock has 76 branches around the UK and about 1.4
  million savers, 800,000 mortgage customers and retail deposits of £24
  billion, according to the Telegraph.
  
• Many
  of those savers lined up today to take money out of Northern Rock, a
  classic "run on the bank," despite assurances from the Bank of England
  that the bank would remain solvent.
  
• Meanwhile, the
  Global Blame Game took another step forward as Alistair Darling,
  chancellor of the exchequer, told Radio 4’s Today program, ”Perhaps if
  someone in America had looked more closely at who they were lending
  to... perhaps some of these problems would have been avoided.”
  
• Perhaps.
  But what we found more interesting was this statement in the FT from
  Northern Rock CEO Adam Applegarth: "The way to get the [credit] freeze
  to thaw is for banks to come out and show what’s on their balance
  sheet,” he said.
  
• True enough. But for now, the standoff continues precisely because banks are afraid to come out ans show what's on their balance sheet.
  

4. Housing Nearing the Bottom Again
Hovnanian Enterprises (HOV) Chief Executive Officer
Ara Hovnanian said the bottom of the housing market is "very
near,'' according to Bloomberg, and to prove it he announced a
three-day sale offering "unprecedented savings" on homes with prices
slashed by as much as $100,000.

• Ara Hovnanian said, "The bottom is very near but I think
  its going to stay along the bottom for a while before a recovery,''
  according to Bloomberg.
  
• Meanwhile, Hovnanian said the credit crunch hasn't limited the ability of prime borrowers to get mortgages.
  
• "If
  you've got reasonable credit and are willing to show income documents
  and you're not trying to put zero down, there is really an adequate
  supply of credit,'' Hovnanian said.
  
• The problem is that subprime homebuyers have always made up a significant portion of Hovnanian buyers, as much as 18% in 2006.
  
• Overall subprime mortgages accounted for about 20% of all mortgages last year.
  

5. The Gratest Generation
With the first Baby boomers now turning 60, the rest of us can
prepare for an onslaught of generational-targeted marketing and
products... or if the debt bubble begins to fully unwind, an onslaught
of finger-pointing over who is responsible for our financial
irresponsibility. Who exactly is the "rest of us" though? Are we Generation X? Generation Y?

• What do these generation names even mean?
  
• What characterizes a Baby Boomer from a Generation Xer?
  
• Minyanville decided to find out.
  
• Below are some key generational demographics to help you decide which generation you belong in:
  Baby Boomers: People born during the period of increased birth rates following World War II.
  Baby Busters: People born just after the Boomers but not scheduled to receive any social security payments.
  Generation X:
  People born following the peak of the post-World War II baby boom and
  charged with purchasing all remaining Baby Boomer vinyl LPs.
  Generation Y: People born immediately after "Generation X" and who now largely act as their employers.
  Boomerangers: Anyone born after 1977 who owns a tie-dyed t-shirt and a collection of "tobacco pipe" screens.
  Crazy Kids: Anyone born five or more years after you.
  Selfish Bastards: Anyone born 10 or more years before you.
  Twixters: That 38-year old dude who works in the bookstore part-time while promoting indie rock bands on the weekends.
  Millenials: Actors and extras in Star Trek: The Next Generation television series.
  Generation Z: Future Earth-bound slave colony inhabitants born post 1999.
  
•