Economic Potpourri December 27, 2008

The barrage of noteworthy economic news continues through the holiday season. Here are a few headline news reports of interest from the past couple days.

Bargain-Hunting Shoppers Turn Up Noses at Post-Christmas Sales

Retailers, which started offering discounts of 50 percent or more weeks ago, had been counting on post-Christmas sales to help rescue what will probably be the worst holiday season in four decades. That�s not going to happen, said Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York.

�This week isn�t going to do it,� Flickinger said in a Bloomberg Television interview. �Consumers are more cash- and credit-constrained than ever before. After a 25-year spending tsunami, they�ve shifted from spending to savings.�

Discounts of 70 percent off or more by Macy�s Inc., AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the last two months of 2008, according to data from SpendingPulse, owned by MasterCard Advisors. Including fuel, sales tumbled as much as 8 percent.

That�s the steepest drop since it started tracking the data in 2002, said Michael McNamara, MasterCard Advisors vice president of research and analysis. He estimates sales, excluding autos and gasoline, fell 2 percent to 4 percent from Nov. 1 to Dec. 24.

�It is the worst kind of picture,� Michael Niemira, chief economist for New York-based ICSC, said in a Bloomberg TV interview.

"It's the best picture," says Mish. We need to stop spending and start saving in the worst kind of way. Better late than never.

Retailers Brace for Major Change

The good news for retailers reeling from the holiday sales season is that 2008 is almost over. The bad news: The fallout in 2009 could be worse.

This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures.

The first retail casualty of the weak holiday season could be Goody's Family Clothing Inc., a Southeast apparel retailer. The 287-store ... Rest By Subscription

Doors close at about 200 Woolworths in Britain

About 200 Woolworths stores in Britain [a quarter of Woolworths stores] have shut their doors for good.

The stores that closed Saturday represent about a quarter of the company's shops. The rest of the stores are to close within about a week unless a last-minute buyer is found for the failed retailer. It filed for a form of bankruptcy protection last month. About 27,000 people are expected to lose their jobs.

The company's current debt-laden predicament is a far cry from the clamor that greeted the first British store, which opened in Liverpool, northern England, in 1909 under the FW Woolworths brand -- a subsidiary of the U.S. company.

The British retail company has outlasted its original U.S. parent, which closed its final Woolworths stores in 1997.

Holiday Shoppers Shun Gift Cards on Closing Concerns

Spending on holiday gift cards in the U.S. may fall 5.3 percent to $24.9 billion this year, while overall sales increase, according to the National Retail Federation trade group. Gift-card sales growth slowed to 5.8 percent last year from 34 percent in 2006, according to NRF data.

People can buy, sell or trade gift cards at http://www.plasticjungle.com, for as much as 40 percent less than face value. The site�s traffic has risen in the last two months, said Marc Gendron, the site�s vice president of marketing.

Talbots and Michaels Stores Inc. are among merchants whose cards trade most on the site. A Talbots gift card with a value of $800.30 is on sale for $500. A $206.46 Michaels gift card is being offered for $151.

Michaels is �committed to our gift-card program,� and is seeking ways to expand distribution, Chief Marketing Officer Stuart Aitken said in an e-mail.

Circuit City cards go quickly, Gendron said. Almost 60 were sold at the start of December, he said.

�The default rate is going to go up and the bankruptcy rate will increase,� Edward Henderson, a senior analyst at Moody�s Investors Service, said today in an interview on Bloomberg Television. �It will start in January.� Mary Delk, the director of Deloitte Consulting, agreed in a separate interview on Bloomberg Radio.

�Cash is going to be king next year, and if a retailer doesn�t have cash and has got debt to pay off, I think you may see a few more move into Chapter 11, or at worst, Chapter 7� liquidation, she said.

There's lots more to see in the article. AnnTaylor is complaining about fear-mongering emails, Circuit City and Gap remain committed to gift cards, but time is rapidly running out for gift cards at Linnens 'n Things and KB Toys.

Germany Struggles With the Idea of a Bigger Bailout

The German government appears determined to resist calls to spend another 40 billion euros to fight its way out of the recession, according to officials who attended a meeting in the Chancellery in the last week.

Chancellor Angela Merkel is being pulled in different directions as she plans a meeting on Jan. 5 at which government officials, business executives and union leaders will discuss ways to counter the recession.

The business community, leaders of German states and other European Union countries are calling for the additional spending, which would amount to $56 billion. Industry chiefs, meanwhile, are calling for tax cuts.

Mrs. Merkel, facing federal elections in September, said the focus of any spending measures must be preserving jobs. At an earlier meeting, industry lobbyists promised to go along on that point, but now they have backed away even as they exert more pressure on her.

In addition to seeking more federal spending, the Federation of German Industry has repeatedly called on Mrs. Merkel to cut taxes, especially employers� contributions to the social welfare system, to encourage more consumer spending.

The dispute over taxes has even led to a wedge between the two conservative parties that support Mrs. Merkel, her Christian Democratic Union and its allied party in Bavaria, the Christian Social Union. Taxes must be lowered immediately, the Bavarian party said. Mrs. Merkel said she preferred to wait until after the federal elections.

After a meeting Tuesday of representatives from the 16 federal states and Mrs. Merkel�s chief of staff, Thomas de Maizi�re, it appeared that the government wanted to limit spending to keep it well within the limits of Europe�s Stability and Growth Pact, according to politicians present. The pact limits deficit spending to 3 percent of gross domestic product, so the limit in Germany�s case amounts to about 80 billion euros.

Congratulations are in order for anyone who resists the temptation to try and spend one's way out of recession. Such tactics are doomed to fail.

Pimco High Income Fund Removes Limit on Derivatives

Pacific Investment Management Co., the largest U.S. bond manager, lifted investment limits for its Pimco High Income closed-end fund to allow its managers to expand the use of swaps and other derivatives.

Pimco High Income is removing a 20 percent restriction on illiquid debt and a 25 percent cap on derivatives, Allianz Global Investors Fund Management LLC, the fund�s owner, said in a statement today. Newport Beach, California-based Pimco is subadviser to the fund.

The fund, with an asset value of $636 million, last month delayed scheduled dividend payments as it fell below a required assets-to-borrowing ratio. It can now expand its investments in credit-default swaps, contracts conceived to shield investors against default. The cost of agreements to protect holders of U.S. corporate bonds rose to a record this month as investors shunned all but the safest government-backed debt.

Hydro power shows signs of comeback

America's search for cleaner electricity has developers studying dozens of government flood-control dams from North Carolina to Oregon to see if it makes financial sense to retrofit them with hydroelectric turbines.

The studies are part of a broader trend that has developers looking at everything from millpond dams in New England to locks and dams on navigable waterways such as the Mississippi and Ohio rivers.

Factors ranging from the difficulty in obtaining permits for new coal-fired power plants to government renewable energy mandates and tax credits have created a potential market for new hydroelectric projects.

Sinclair says government dams often lend themselves to hydropower. Some, such as the Tygart Dam near Grafton, were even built with hydropower in mind: the Corps of Engineers' designed it in the 1930s with twin 15-foot-diameter tunnels. The tunnels have been capped ever since, but Sinclair's company is studying whether it's economical to pull the plugs, install turbines and start generating electricity.

"I could kiss the engineer that did that," Sinclair said.

Despite its advantages, Tygart is no sure thing for conversion. Neither are dozens of other government dams. The process requires years of careful planning, chiefly to avoid disturbing a dam's original purpose or from damaging the environment.

Developers have been trying for years to develop the Corps' Bluestone Dam near Hinton, for instance, and have yet to get past the initial stages despite government support.

"There's a reason that hydro isn't on a lot of these dams right now," said John Seebach, who directs the hydropower reform initiative for Washington, D.C.-based environmental group American Rivers. "It was because it just didn't make financial sense."

Whether or not it makes any financial sense may not matter much to Obama who is hoping to create 3 million jobs.

GM Sues Partsmaker Cadence Over Turnover of Tooling

General Motors Corp. sued bankrupt supplier Cadence Innovation LLC for breach of contract, accusing the partsmaker of refusing to turn over GM-owned machinery needed to make �essential� car parts.

GM could be forced to shut some assembly operations if closely held Cadence, which is liquidating, doesn�t turn over the tooling as required under an earlier financing deal, the Detroit- based automaker said in a complaint filed Dec. 24 in U.S. Bankruptcy Court in Wilmington, Delaware.

�Debtors are holding hostage tooling and equipment critical to the manufacture of parts for GM vehicles,� the automaker said in court papers. �GM�s right to possession of the tooling and equipment is indisputable.�

Cadence, based in Troy, Michigan, filed for bankruptcy for the second time on Aug. 26, blaming reduced demand for its vehicle-interior parts. The company is liquidating after failing to find a buyer for the business.

�The damages GM would sustain from such a shutdown would be in the millions of dollars per plant per day,� GM said in the complaint. New tooling �cannot be manufactured in time to prevent a production interruption at GM assembly plants,� GM said.

Military recruiters having no trouble filling quotas

In a crumbling economy, jobs disappear and opportunities fade. But one employer always has openings: the U.S. military.

Just four years after South Florida recruiters struggled to meet even half their quotas, the Army is exceeding enlistment goals by appealing to a wide range of candidates who see limited job options in the civilian world.

Working for low pay on the evening shift at a West Palm Beach International House of Pancakes influenced Cheyenne DaSilva's decision to enlist, even before the 17-year-old completes her senior year at Forest Hill Community High School.

Dasilva received an $8,000 signing bonus when she enlisted for three-and-a-half years. She chose the military police as her specialty. "It's something exciting, and a guaranteed job," DaSilva said.

But the military's appeal extends well beyond career-hunting teenagers. Also expecting to ship out to boot camp next month is Alex Otero, who is 41 years old, speaks three languages and owns an electrical contracting business.

Slipping in just under the Army's maximum enlistment age, Otero scored high on the military's aptitude test, and, when his paperwork is completed this month, plans to choose training in communications or linguistics. His signing bonus will help pay off credit card debt.

"My mom didn't want me to go. She wanted me to study engineering at Palm Beach Community College," said Martinez, 17, a classmate of DaSilva who is also in Forest Hill's Junior ROTC.

But by enlisting early, and qualifying for a military job as a mechanic, Martinez earned a $14,000 signing bonus. He said he may have found a career. "They are just worried," he said of his parents. "But I talked them through it. If I have to go to war, I'll be happy serving my country."

This is a sad state of affairs. We should be cutting military spending not increasing it.

As Energy Stocks Rise, Funds Hesitate

Even as oil prices plummet to lows, energy stocks are rebounding. But natural-resources fund managers aren't ready to snap up the shares.

They say they still believe in the growth of emerging markets and have their favorite stocks, but they aren't convinced oil prices are headed up soon. After volatility and losses in commodities this year, they said they are waiting to see a recovery in global demand and solutions to the credit crunch before buying stocks.

They also may be facing a cash crunch themselves as investors pull out amid dismal returns for the year. Rest By Subscription.

This could very well be a contrary indicator. Nervous hedge fund managers and bullish divergences (stocks ignoring bad news like falling Natural Gas and Crude prices) could speak well for the energy sector.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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