As if 2020 was not scary enough, Halloween is now upon us. As a kid the excitement of free candy consumed most of October. When the day finally arrived we could not get through supper fast enough to hit the streets and get our share of the goodies being dispensed. Early on we learned that paper sacks were woefully inadequate and often burst open spilling the loot we had amassed. Mom’s best pillow cases were really the best to use in our search. They never broke and when they got too heavy it was easy to drag them on the sidewalk without losing any of our stash. The consumption of sugar for three days after, until we were almost comatose, made life miserable for our school teachers who had to put up with the sugar withdrawals during the day and our parents at night when we bounced off the walls. Ah the memories.
Consumer spending continues to rise at a moderate pace. The Redbook Index which measures same store/outlet sales both month over month and year over year. For October the index is at 2.5%. Since a big jump in late August due to pre-school buys, 4.6%, the index has been steady in the 2% range of growth. This is a steady, stable, sustainable growth level. Beyond the normal staple of necessity items this includes sporting goods, electronics and other discretionary purchases.
Significant demand has built up in a number of retail areas that are supporting consumer spending right now. Many are purchasing exercise equipment as a replacement for gym memberships. Wait times on certain popular brands are now extended over a month. Sporting goods supplies are experiencing shortages throughout. This includes guns and ammunition, a demand spike caused by the instability and unrest that has occurred. Outside of sporting goods utility items like washers, dryers, stoves and refrigerators are in short supply. With the strong housing starts as well as significant sales of existing housing, new owners are stocking or at least trying to stock their new purchase with updated durable goods. All indicators show continued consumer confidence into the first quarter of 2021.
Bloomberg had an interesting article on Friday. The piece entitled, A Chasim Deepens in America’s Credit Markets Swallowing Smaller Firms, focused on how small business has been cut out of the ability to get credit during the Covid crisis. But the article missed some bigger picture items. First, many small businesses do not qualify for new loans as they have no sufficient cash flow to repay the debt. What they need is grants, not loans. With sales down due to capacity issues or being shut down altogether, another loan that has to be paid back makes no sense. You cannot blame the banks for declining a loan request that will not be repaid.
The article also discussed how larger firms were able to dive into the bond market to get funding. They discussed how these firms were able to raise large amounts of cash via bond sales that the Federal Reserve in some cases purchased. This allowed the firms to stay open or bridge the gap until they could re-open or at least stabilize themselves. The article missed a concerning longer term impact here. Can these firms repay the bond obligation? If the economy has to shut down again or the companies are hit with a lower capacity requirement in operations, can they still make the payments that are due? If not, the bond holders are looking at a pending default which would mean they lost their investment. Worse, the underlying banks that hold the secured debt on the companies would call a default on their loans forcing a liquidation. This is similar to the GM default and bankruptcy 10 years ago.
The concern is that if these larger firms default, the ripple effect could wipe out the small businesses that provide services or products to them. One company listed in the article is Sea World. Think of the impact on all the suppliers to Sea World if they are unable to stay open or maintain an activity level that is over a breakeven point. Just like the small businesses that need a grant not a loan, the same could be true for these larger entities. What the Fed did was likely just kick the can down the road by providing the CARES Bond Program purchases. Keep an eye on this over the next year or two.
Have a great week.
