Banking crises, retailing downturn and stretched consumers

The Globe and Mail recently published two interesting articles outlining the Canadian retailing market condition and its consumers' profile. With so much negativity in the media, it is hard to find any silver lining with the global stock markets.

History is not a perfect indicator, but it's worth noting that value of any stock market is usually based on future expectations and fundamentals in the long term. More importantly, high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals.

I thought Canadian banks and consumers are more disciplined than its south boarder partner, the United States.

However, it's interesting to note that:

[In Canada,] ratio of household debt to disposable income has soared to 130 per cent, moving past that of the United States.

In the meantime:

Outstanding credit card balances, have risen to $80-billion, up 40 per cent since 2004, and delinquent payments - those late by 90 days or more - are rising.

And:

Bankruptcy filings by consumers soared 51 per cent in December from the year before, Industry Canada said earlier this week. In all, 8,299 consumer and business bankruptcies were filed in December, compared with 5,659 a year earlier.

Canadian consumers in general:

“We are seeing changes in our customers' shopping habits,” said Caryn Lerner, chief executive of Holt Renfrew. “We're seeing a shift in brand preferences and in price point preferences. People across all levels of spending have pulled back.”

She said consumers don't want to be too overt in wearing pricey labels, and instead prefer understated outfits. To respond to the shifting tastes, Holt's is stocking its shelves with fashions that are less flashy. And it's trying to get shoppers in the spending mood with a complementary cappucino or bouquet of flowers.

The efforts are in response to sales that fell “in the single digits” over the past six months at the privately held retailer, Ms. Lerner said. She expects similar results this year. “Canadian retail has held up reasonably well,” Mr. Rosen [CEO of Harry Rosen] said.

Over-leveraged public companies are taking a beating right now because their financial imprudence, and its no difference to these individuals that are feeling the same pressure when economy took a severe downtown.

Consumerism has been the primary GDP growth factor since post-war. It seems that we are getting to a point with too much wants and over supply of goods, compounded by easy credits. I believe there is a good chance that the slowdown in consumer spending will bring an economy havoc that is bigger than any of the current issues such as the banking crises, sub-prime mortgages, stock market meltdown, and devalued asset classes.

Confidence is a big issue, and governments around the world are looking for ways to restore it at all costs. I hope consumerism can held our last leg up, but we could be living in the most difficult economy environment in the last 25 years. I do believe profits can still be achieve with business owners, but critical structural reform is needed for a better future. However, governments around the world are still sticking to the same methodology with the same group of decision makers that we have in the past. It's hard to get excited about any of the stimulus plans because they are similar to what was done in the past, only with more debt.

As an individual, there is no better time than now to recheck your financial score card. Those who stayed prudent and living within their mean will have ample opportunities down the road to find attractive bargains in all asset classes because others are forced to liquidate. Now it is not too late to start the preparation and be ready for the next 2-5 years.

This time around, the rush to bankruptcy gets a lot faster

Purveyors of luxury goods, services start to tiptoe down-market