A squeeze around the middle

Sometimes a squeeze around the middle is a nice thing. I personally like it when my husband or kids come up and give me a hug. But when the squeeze is put on me in a business sense, not so much.

One of my loyal readers asked in the comments of another post how credit terms had changed for some of the retailers recently. Interesting question, and one that I have spent some time working on recently. In the interest of full disclosure, I'm discussing this from an outside perspective. I've not worked in the credit area of a supplier or in the buying organization for a retailer... but I know people who have and/or do.

Under normal times retailers (we're talking big retailers here, not the mom & pops) order goods from a supplier. The supplier produces the goods and when they ship they bill. Terms differ, but are usually net 30, net 45, something like that. The retailers usually negotiate additional other terms they want such as markdown allowances, etc.

From what I'm hearing on multiple fronts, the retailers are getting more than a little bit bolder on the terms that they're demanding. They're not only asking for higher allowances, but they're also extending out their payments. In fact, numerous retailers are actually highlighting their accounts payable as a percentage of inventories on their earnings calls. Additionally, for goods shipped from overseas historically the retailer was said to have possession of the goods when they shipped, so the time on the ocean counted in the payment terms. That just got changed by a number of large retailers recently.

Suppliers have a few ways to fight back. Some retailers are obviously cash strapped, and that's taken into account by the credit managers at the suppliers when orders are placed. I'm hearing that credit terms are especially strict these days. Credit managers are pouring through financials, trying to make sure that they're not taking on too much risk. As one friend put it, "Just because you're a big company doesn't mean you can't go bankrupt on me." I know of one particularly fiesty credit manager who refused to sell to a certain large retailer because they were asking for ridiculous terms. The line "you have to sell to us because we're _______" doesn't hold much weight right now. Also, JP Morgan (and others, I'm sure) have developed some financial hedging products to allow suppliers to protect themselves against the potential bankruptcy of retailers with whom they do business.

Cheery, no?

Ironic: rhymes with moronic

I'm not a political person. I really just don't have any interest in the whole realm, generally speaking. But that doesn't stop me from appreciating good irony.

The furor over the AIG bonuses has been all over the news of late. The whole thing goes beyond stupid into realms of idiocy.

The argument that AIG was contractually obligated to pay the bonuses? Bogus.

The exaggerated attempts by politicians all over the Eastern seaboard who actually put specific language into legislation that approved the bonuses to look innocent of any misdeeds? Bogus.

The administration's posturing regarding the bonuses when they obviously had a responsibility to be watching over this kind of stuff? Bogus.

The article published by Bloomberg yesterday that shows that Freddie Mac and Fannie Mae, currently run by the US government, have retention bonuses in place not unlike those being decried at AIG? Priceless.

One foot on the banana peel

Oh dear, here we go again. More announced store closings, and the prospect of others.

Ritz Cameras, currently in bankruptcy proceedings, got permission today to liquidate their 129 Boater's World stores. They will also be closing roughly half of their 800 camera stores. The small (5 stores) shopping center right across the street from my office has a Boater's World. The owner of the center just had to replace Computer City with a PetSmart. Now the space next to PetSmart will soon be open. The pain for commercial real estate is starting to get real.

Also, Eddie Bauer just announced that things aren't looking so good in their neck of the woods (all puns intended). They've apparently agreed to new terms on their debt, and those terms rarely come with an interest rate reduction. The CEO says it gives them more flexibility regarding loan covenants through first quarter of 2010. I hope that's long enough. The market apparently isn't sure either - the stock was down a mere 48% today.

Are we having fun yet?

AHA!

As you might remember, I was confounded by the retail sales numbers last week. The number was higher than I expected, especially for apparel which was +2.8% from January.

Today the clouds parted and all became clear. Turns out the culprit was inflation. The apparel component in the consumer price index was up 1.3% for the month of February. I'm not 100% sure WHERE the prices were up, since it sure seems like apparel prices where I'm looking are falling... or at least discounted by huge amounts.

Factoids and cheerleading

In the midst of preparing a talk for a recession workshop next Tuesday morning, I came across an updated factoid that made my stomach turn. Never one to keep pain to myself, I had to share with all y'all.

My friends at the Mortgage Bankers Association (okay, they're not really friends, especially lately, but I'm trying to be nice here) track seriously delinquent loans as a percentage of total loans outstanding. Even through early 2007 the percentage was right around 2%. Unfortunately, then it decided that it wasn't afraid of heights. The number as of the end of the year (it's a delayed but quarterly release) is... sit down... 6.3%.



I could say more, but do I really have to? Okay, if you insist. Can I remind you of this graph that shows how many ugly loans still have to be worked through over the next year or two? Okay. Now I'm done with that.

I was never a cheerleader in school. It just wasn't me. At all. (Those of you who knew me will say "duh.") So I still have a problem with excessive enthusiasm, especially when it's totally misplaced ... and I don't care if it's a bad football team or an even worse economy. So you can imagine my joy as I watch the rah-rah antics of the current administration.

Larry Summers was quoted today saying "It is modestly encouraging that since it began to take shape, consumer spending in the United States, which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized." Ummm, dude, it didn't fall as much as expected, but it did fall. And the consumer is so far in debt that they shouldn't be spending at all!

President Obama was waving his pom-poms today too. "If we are keeping focused on all of the fundamentally sound aspects of our economy, all the outstanding companies, workers, all of the innovation and dynamism in this economy then we're going to get through this. I'm very confident about that."

And if I hear one more talking head blather about how wonderful it is for the market that Uncle Ben is going to be on 60 Minutes this Sunday, I'm going to burn somebody's pom-poms in protest.

It all kind of reminds me of this quote:

"I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States—that is, prosperity."

Who said that last bit of verbosity?

Oh, that was just Herbert Hoover in May of 1930.

Scratching my head

There are times in this business that are rougher than others. Watching the market go up from the sidelines this week is one of those times. It feels like it would be great to jump in, but I'm not sure that the water is a comfortable temperature. I'd just dip a toe in to test the temperature, but I'm not sure that aren't piranhas waiting to nibble off an appendage or two.

Despite the "good" retail sales report this morning, I'm still very much of the belief that this crisis isn't over yet. I think I might have said that once or twice before. The retail sales numbers were better than expected. But if you looked deeply, a lot of the happiness came from retail sales of gasoline. Since the PRICE of gasoline was up over 5% during the month and sales were only up 3.4%, perhaps we should rein in some of that enthusiasm. I'll admit though that the 2.7% increase in clothing purchases has me a bit flummoxed, given how lackluster the same store sales were last week. For now, I'm going to consider it a bit of fluke, but watch it carefully.

One of the reasons that I'm pretty certain that we're not anywhere near out of the woods was the release of the Federal Reserve's measure of U.S. household wealth. During Q4 it only dropped $5.1 trillion. A trillion here, a trillion there... pretty soon we're talking real money. Is it any wonder that consumers are cutting back, saving more, and scared to death? Nah, I didn't think so either.

In other news, there's still a lot of short covering going on in the market. Tonight I did a survey of the short interest on the individual stocks within the S&P 500. (Have I mentioned lately how much I love my Bloomberg terminal? I do. Truly I do.) Anyway, doesn't matter if you take the average or the median of the number of days needed to cover the short positions, it comes out to about 2 days. Anyone want to be that the rally continues for another day or two before fizzling when reality sets in?

One day does not a bull market make

I suppose I now know what the bulls have felt like for the past 6+ months. I don't know about them, but for me today made me question what I believe. I suppose a bit of healthy skepticism is a good thing, but it sure doesn't feel so good.

I hear that a lot of what happened on the floor today was short-covering, thanks to Barney Frank saying that he wants to reinstate the uptick rule as well as the threat to make short sellers show their hands. I totally agree with both of those moves, by the way.

If we are indeed in the Super Bear Market that I believe we're in, this isn't going to be long-lived. Reality will rear its ugly head, the economy will still suck, and we'll put in the lows down where I think they belong.

I don't know if anyone caught this, but Jeremy Grantham who had been known as a perma-bear is telling everyone that will listen that it's time to get into the market before you miss the big rally, while Benjamin Graham's methodology says the market is still overvalued by about 27% (that was yesterday... so I suppose it's closer to 33% now).

I'm going with the dead cat bounce theory for now, but I'm watching it all pretty closely.

Be careful out there.