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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Rarebird who wrote (26806)	1/6/2006 1:45:02 PM
From: stockman_scott	Respond to of 57684

Debt-laden consumers present problems for economy By Jesse Eisinger The Wall Street Journal Wednesday, January 04, 2006 Any wise forecaster knows to never attach a time and a specific number to any prediction. One or the other, but never both. I like to avoid forecasting altogether. So, what follows aren't year-ahead predictions, but rather some key market themes for the next, say, 11 1/2 months. -- They Walk the Earth: In the aftermath of Japan's burst bubble during the 1990s, the country was plagued by "zombie companies," firms that weren't viable but which banks refused to cut off entirely for fear of revealing how many bad loans they had on their books. In the U.S., we will have Zombie Consumers. George A. Romero's classic "Dawn of the Dead" anticipated this 30 years ago when he set his movie in a shopping mall. Zombies had returned to the mall after their deaths by instinct because, as one character explains, "it was an important place in their lives." The biggest and most underrated development in the U.S. economy over the past year is that the personal-savings rate went negative. In other words, Americans spent more money than they made last year -- for the first time since, oh, the Great Depression. The average worker hasn't participated in the economic recovery. Inflation-adjusted hourly and weekly wages are still below where they were at the start of the recovery in November 2001, points out the Economic Policy Institute. As we all know, people made up for this by borrowing more, primarily from their homes. As short-term rates rose, however, home-equity loans and low-cost mortgages became less attractive. Home prices seem to be stalling out. The consensus among economists is that consumer overextension isn't much to worry about. Their thinking: American consumers have never stopped spending before. Why should they now? In a fashion, the consensus may turn out to be right. There doesn't need to be a consumer implosion any time soon. Companies may be able to delay any implosion. Corporations will take extreme measures to keep their patients alive. Rather than write off bad loans, financial companies will extend more credit, improve terms, lower interest-rate payments and try to offload troubled loans to the financial markets. That happens already to some degree, but the efforts will accelerate. Credit-card companies several years ago fell over themselves to keep loans good by adjusting minimum payment options and other terms. Even though regulators cracked down on some of these practices last year, companies will find new ways to enable their debt-laden customers to at least pay something. In retail, we have already seen the first glimmerings of zombie consumerist behavior. The walking dead keep coming back to the auto showroom for one more Hemi engine and thousands of dollars in cash back. As General Motors can attest, it's not enough. Instead of suffering slowing or falling sales, retailers will try to improve on the Detroit model: They will discount their products even more deeply than they already have and market them more. Wal-Mart Stores assaulted Christmas with a monster marketing campaign. The effort left the titan with its weakest same-store sales growth since 2000, but it was growth. Investors will have to wait to see how Wal-Mart margins come in. Companies are where the profits and growth in the economy are. That's the vulnerable area. They will sacrifice their margin this year to keep customers coming in the door. Lumbering Giants: One of the striking aspects of the market is that some of the most important companies in America are trading at significant discounts to either their historical valuations or the market: Anheuser-Busch, Dell, McDonald's, Microsoft, Nike, Pfizer and the aforementioned Wal-Mart. Unloved and cheap. What might a struggling consumer mean for the stock market? It's hard to see stocks rallying as a result. Share buybacks and dividends rose by a third in 2005, but they didn't boost stock prices much. The big, flush titans will increase their givebacks to shareholders again this year, or face shareholder pressure. But after all that activity, their shares will remain moribund. Billions Served: The market is broken when it comes to CEO pay. Multiple studies show that CEO pay is not only rising faster than average salaries and much faster than inflation, but also that the rate of growth is accelerating. The only force that can stop out-of-control compensation: shareholders. Regulators don't have the ability and moral suasion ain't working. Hedge funds have been leading the activist charge in the past couple of years. That activism will continue in a rough market. Activists have been focused on capital allocation and the hoards of cash on corporate balance sheets. They will begin to take their cue from British institutional investors and turn their focus to the pay of underperforming CEOs. The problem: Will anyone listen to grossly wealthy hedge-fund managers who keep more than 20 percent of their gains when they complain about excess compensation? Pac-Man: Hedge funds and private-equity firms have emerged as the most powerful force in the public markets. Will they suffer their comeuppance? For hedge funds, the field gets ever more crowded and with all the cash sloshing around, good returns become ever more elusive. The result? Mergers and acquisitions -- of themselves. Highbridge and Ospraie led the way, selling pieces of themselves to Wall Street investment banks. Look for more such deals and caveat emptor.