This might be our favorite headline of the past year: “Free ketchup off the menu as companies stay focused on costs.”

The article relates the story of a Houston, Texas hamburger joint that charges 15 cents per extra packet of ketchup.  Some other examples of Spartan cost cutting:

Across Houston, this downsizing has taken many subtle forms. Some pizza delivery companies now ask take-out customers if they want crushed red pepper and Parmesan cheese with their orders, instead of just throwing them in the bag. Some have started giving customers just one napkin, instead of a stack.

Dentists who before the downturn gave customers fluoride treatments as part of their annual cleaning are charging $30 (£18) extra for the cavity prevention.

The New York Times also had an interesting example of changing pricing and spending patterns: “The sky used to be the limit for the price of designer jeans.  Now the sky is falling.”  It appears the bubble in jeans prices has officially burst.

The NY Times writes,

The $300 pair of designer jeans is now, courtesy of the recession, the $200 pair of designer jeans…  Like any commodity that becomes overpriced, there eventually comes a market correction. And denim’s day of reckoning was long overdue…

But the denim bubble has burst, and only a handful of such extravagantly priced jeans remain at the jeans bar…   During the modern gilded age, the spiraling prices of designer clothes had more to do with driving profits than the actual design or construction of a garment. Designers found they could charge a lot for the perception of prestige. Dresses and suits and handbags were priced like cars, and consumers didn’t blink. But with jeans, it just felt more obvious that some kind of game was being played; the basic elements, after all, had not changed substantially in decades: five pockets, cotton, some rivets.

Oddly enough, even with the price implosion of the ludicrous designer jeans market (isn’t the whole point of jeans comfort and the idea of simple ruggedness?), total sales remain high.  As the Times continues, “though average prices were down 1 percent, according to the research firm NPD — the pricing shift is reflective of a broader reset taking place in luxury stores.”

We like the term “pricing reset,” and we think the writer is on to something there.  We have our own word for it: deflation.  When demand falls, so do prices — and profits.  At any rate, we are not completely bearish on the luxury sector.  The Baby Boomers are now in their 50s — a prime age for many luxury purchases.   Demand in emerging markets has also proven to be robust.  Still, the recession did a fine job of taking some of the froth out of the luxury market.  The well-to-do might still spend some of their discretionary income on the finer things — but absurdities like $600 blue jeans will likely not make the list.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The above title was for an article written in the WSJ, October 20, 2009.

This is a topic we have been harping on for a long time.  Earnings are beating forecasts, but in general (excluding Apple) they are far below previous years.  Even then, those earnings were notched by reducing costs, which is a nice way of saying “firing people.”  This is nothing new, so I won’t spend a lot of time on it; I just want to make sure that we are keeping our eye on the ball here.

What is new, or rather what is subtle, is the change that is happening before our eyes.  For more than 20 years we have been talking about the change in consumption that would happen as our largest cohort (boomers) passed the age of peak spending.  We tried many times to paint a picture of what that world might look like.  In my mind, we always fell short.  Readers and listeners were always left with the impression that everything goes down, and must decline in a straight line.  It doesn’t happen, and isn’t happening, that way. 

What we’ve done is lower consumption, that much is true.  We have also changed what we consume.  Gone are the big ticket items that scream financial success (bigger, newer cars, for example), but also require a lot of financing.  It might not feel like it to the individual, but the minute we stop using debt to finance, we cut off one of the main sources of lifeblood to the economy.  We might still spend close to every nickel we have.  We might continue to eat out and buy new clothes. Without the turbo-charged effects of credit, the economy will still soften.  If we actually add savings on a continued basis, the effects are even greater.

The outcome remains the same - unemployment.  Which is the premise of separate but related article in the Journal today, “Firms Keep the Brakes on Hiring“  (the title is a little different online than in print).  Why wouldn’t they?  Demand has not returned, no matter what the MSM says.  Our current measure of hours worked in a week in the US is 33, the lowest on record (since the 60s).  When business picks up modestly there is no need to hire more people, just increase hours worked a little bit.

Less demand, less employment, the same or rising expenses (cost of living, debt payments, etc.).  This is not a recipe for a quick recovery. 

I say this mostly in jest, of course.  Though I did start to wonder this weekend when I couldn’t find a parking place at the local outlet mall.  Patrons were parked in the grass, behind the dumpsters, and on the medians — which was odd given that it wasn’t a holiday weekend, the Christmas season is still a few weeks away, and there were no major sales to speak of.

The weak dollar has had its benefits for South Florida.  Though the local economy has been in the tank (one of the worst in the country) the relative weakness of the dollar has encouraged foreign tourists to frequent the area’s many high-end outlet malls.  But this past weekend, it was only the familiar Chicagoland and New Jersey snowbird accents that could be heard.

Even stranger was the fact that this increased mass of people were pursuing a diminished stockpile of goods that are now selling at much less attractive prices.  The phenomenal sales of a year ago are no longer to be found, and neither is the selection.

So…is this is?  Is the recession over? Read the rest of this entry »

The Census Bureau Retail Sales Report reported nothing new under the sun (download here).

Auto sales plummeted immediately after the Federal “cash for clunkers” program expired (see chart below), and total sales ex-auto, while up slightly from August, were down significantly from the previous September.

Across the board, virtually all product segments saw declines from September 2008.   Food, general merchandise, and sporting goods were more or less flat and health products were up slightly. But everything else was down, and generally by a lot.

So, while things are improving, we are still a LONG way from a full recovery.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The funeral industry was long viewed as being the most recession-proof industry in the world outside of basic staples like food.  As Ben Franklin told us, along with taxes, death is the only real certainty in life.  But in this most unusual of recessions, even the business of burying the dead is suffering.  Consider this headline from today’s FT: “Death is certain, but it is far from recession-proof.”

The FT writes,

However grand or modest, everyone must have a funeral and publicly listed “death care providers” offer a way to profit from nature taking its course.

Yet even this $15bn a year business has not been recession-proof. Operating earnings of the four largest vertically integrated operators of funeral homes and cemeteries fell by between 10 and 38 per cent over the past six months, compared with a year earlier.

The FT tells us that survivors of the deceased are not the ones pinching pennies.  It is the deceased themselves, while still alive, that are cutting back on prepayments.   There is an entire sub-industry dedicated to prepaying future funerals and investing the proceeds.

At any rate, the Great Recession has only exacerbated a much bigger and more significant trend:  there are fewer people dying.   This is great news, of course (unless you’re a funeral director).   But it has nothing to do with Americans living longer or being healthier.

As you might expect, demographics provide the answer.  We are currently experiencing a “death trough.”   The Boomers are still far too young to be meeting their Maker en masse.  At the same time, the bulk of the Greatest Generation (the World War II generation) has already left us.   This means that the generation now in their golden years is the much smaller Silent Generation, the generation that was too young for WWII but too old for Vietnam.

Fewer people born means fewer people to die — and less business for funeral operators.

The funeral industry will have another decade or two of tight conditions.   But when the Boomers begin to enter their 70s and 80s, business should boom again.

Will many Boomers, reminiscing about their hippie past, opt to be cremated and have their ashes scattered at Woodstock?  Maybe.  But the Boomer generation is so large, it won’t matter.  Even if a smaller percentage of Boomers opt for traditional burial, the shear number of Boomers will insure that business will be good.

In life, the Baby Boomers have been the proverbial “pig passing through a python,” making fortunes for marketers smart enough anticipate what they will buy next.  And the same will be true in death.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Barron’s relates a description of Japan’s future by a hedge fund manager familiar with the country:

Within 50 years or so…high-tech aircraft will be taking Chinese and American tourists on fly-overs there to view the dilapidated remains of what was once the world’s second-largest economy.  By then, all that survives will be blighted metropolises like Tokyo, populated mostly by the elderly, and decaying, weed-choked highways, bridges and bullet-train right-of-ways, spectral reminders of a once-vibrant society that lost its way.  (From “Is the Sun Setting On Japan?“)

This is a theme that HS Dent has been covering for years, and for good reason.  We see something along these lines befalling parts of Europe and, to a lesser extent, even the United States. (The U.S. will get older, though it will not actually shrink any time soon).  As Barron’s continues, “The old saw about demographics being destiny certainly applies to Japan, which is graying at an alarming rate because of longtime low fertility rates; its post-World War II baby boom petered out almost a decade before America’s ended in the mid-1960s.”

Demographics certainly are destiny; they are the future that has already been written.  And this future, as Japan has proved, is one of less consumer spending and a higher rate of savings.  This — combined with the hangover from a bursting debt bubble — should insure that the U.S. economy will grow at more modest rates in the decade ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

You have to love the Japanese language — they have a word for pretty much everything.

A fine example is choiwaru oyaji — defined as a middle-aged man who is “slightly bad,” in a recent article.

Everyone knows the type: the naughty old guy in the office who likes to flirt with the receptionist and tell the occasional off-color joke at the water cooler.  He’s not a “dirty old man” per se, but more of a rascally little boy who never fully grew up.  He’s in his 50s but still young at heart, and he takes care of himself — he usually has a good haircut and will generally not be seen in public without a sports jacket and a classy pair of shoes.  He’s certainly no beaten-down, everyman slob like Al Bundy (or Al’s Japanese equivalent).

Give credit to the Japanese for inventing a phrase that encapsulates this mental image! Read the rest of this entry »

The Wall Street Journal had a in interesting graphic this morning:

The graphic is from “The Stimulus Didn’t Work,” a scathing criticism of the stimulus plans of early 2009.  The spikes in the blue line represent the boost in “spendable” money in Americans’ hands due to government stimulus, and the red line is actual consumer spending. Read the rest of this entry »

The Census Bureau released the latest retail sales figures, and at first glance, they don’t look that bad.  Sales were up nearly 3% over July’s numbers — implying, perhaps, that the consumer is starting to dust off his wallet and shop again (See chart below).  A closer look at the report quickly extinguishes this hope. Read the rest of this entry »

Paying down debts and deferring purchases that might have gone on the credit card two years ago has become the “new normal” according to the Financial Times, echoing our own sentiments in this blog (see prior post).  The FT calls this “smart shopping” (whereas before the easy-credit insanity of the past two decades, such applied common sense was just called “shopping,” and incurring debts to fund current, disposable consumption was considered wasteful and irresponsible, but we digress…).  While we can’t help but poke fun at people who “discover” with wide-eyed surprise what their grandparents took to be standard truths of how to manage your life, it is good to see fiscal restraint returning to America, even if our government has failed to get the memo.

The problem, of course, is that this new sense of prudence will mean a lower economic growth rate going forward, even in the best case scenario.  As Bloomberg writes, “The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.”

Welcome to the New Normal, where expectations will be a little lower and the rate of growth a little slower.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy