The Tycoon Report

Main Street Gets It, But What About Wall Street?

Friday, May 23, 2008 | Ethan Roberts

A few weeks ago, I wrote about the government tax rebate checks, and asked Tycoon readers what they planned to do with the money.  The majority of readers indicated that they would pay down debt, or save and invest the money. 

Since then, there have been three separate surveys in which consumers told pollsters that they plan to use their stimulus checks to simply pay off debt, buy gasoline, and buy food.  In other words, the consumer has slapped the government in the face (payback is a you-know-what), by not using the stimulus money to run amok at the retail outlets, which was the objective when the stimulus plan was proposed.  Many respondents said they are putting off all purchases of clothing, electronics, and automobiles for quite awhile.

This will not come as good news to stores such as Sears, Kmart, or Land's End.  They are offering customers a deal in which you convert your stimulus check to one of their gift cards, and they will give you another gift card worth 10% of the value of your check.  These and other retailers have been counting on the stimulus checks to help recent slow sales rebound.

Other stores have deals of their own.  Supervalu, Food Lion, and Kroger, three nationwide grocery chains with thousands of stores, will add an additional $30 for each $300 gift card purchase made with a stimulus check.  Lowe's, Wal-Mart and Sam's Club will cash the checks for free, with no purchase required.  But as long as you're in the store, and with all that money in your pockets...

Coincidentally, these consumer surveys were taken at the same time that the Federal Reserve was releasing statistics on Consumer Credit trends.  The FED stated that Consumer credit usage increased at an annual rate of 5.5% in the first quarter of 2008.  Breaking that down between Revolving Credit (e.g. credit cards, Home Equity Lines of credit) and NonRevolving Credit (e.g. auto and student loans), Revolving credit increased at an annual rate of 6.75%, and Nonrevolving credit increased at an annual rate of 4.5%.  In March, consumer credit increased at an annual rate of 7.25%.  Put in money terms, the total amount of outstanding consumer credit was 2558.4 Billion dollars in March alone.  By comparison, in 2003, the corresponding figure was 2104 Billion.  

Upper management at Visa and Master Card must be licking their lips.......

The other day, I sat in my car and watched as a number of Average Joe's entered either the local pawn shop or the Advance America, a pay day advance loan center with 300 locations in 37 states.  Advance America and other similar companies make their money by charging extremely high interest rates on short term consumer loans.  In Florida, if you borrow $100 for 14 days, the fee they charge is $15.  Now that may not sound like much, but if you annualize that amount, the APR comes to 391.07%!!!  Well, every cloud has a silver lining.  Florida is still not as bad as New Hampshire, where the APR would be an outrageous 521.43%! 


"Sign" of the times......"Check 'n Go", another payday lender with over 1,000 stores nationwide, is open for business, but is surrounded by several vacant storefronts.......

Given the facts just stated, you might think that recessionary times would be terrific for companies like Advance America.  Unfortunately for Advance America, there is now a bill pending in Ohio that would cap the annual interest rate on payday loan advance companies at 28%.  In other words, instead of charging $15 for the $100 two-week loan, the amount would be capped at $1.08.  Advance America has recently announced that if this bill passes, they will have to close all 246 centers they operate in Ohio.  They have already pulled out of Oregon, Georgia, and North Carolina, and are about to close 66 shops in Pennsylvania.  There seems to be a trend emerging that will not be good for payday loan companies going forward. 

(That's symbol AEA for all you people who like to short stocks!  Just be careful, because the stock has already plummeted from 9.50 in early May, to near 7.30 a share as I write this.  Volume has been heavy on the downside, but we may be approaching oversold levels, meaning a short term bounce could temporarily bring the price back up, most likely to the 50-day moving average around 8.00.)

Nevertheless,  Average Joe is drowning financially, and he needs a life preserver.  The smarter companies understand what's going on in America today, and are responding to it.  Yum Brands (YUM) gets it.  USA Today reports that their Taco Bell stores have now introduced a "Why Pay More" value menu, featuring 10 items priced between 79 and 99 cents.  Taco Bell states their target for the 79 cent items are the 16-20 year old males, who couldn't care less about nutrition, just so long as the food is cheap!  KFC, another Yum Brands subsidiary, already has 99 cent food items.  YUM stock has risen from $33 in January, to a current price near $42.

Never to be outdone, McDonald's has risen to the challenges of the economy.  They are selling double cheeseburgers in some markets for just one dollar.  In addition, they are gearing up a promotion in which they will give out 8 million free samples of their new "Southern Style" chicken biscuits and sandwiches.  Subway and Quiznos are selling $5 foot-long subs (that's Southern talk for "Grinders" if you live in Connecticut, "Hoagies" in Philadelphia, or "Heros" in New York).  McDonald's (MCD) is another company, whose stock has done very well recently, rising from $50 in February, to a recent high near $62.

Now I'm as cynical as the next fellow, having spent the first 30-something years of my life living in the area just outside of New York City.  So I realize that these companies care more about their bottom line than they do about being altruistic, and lending a hand to Average Joe.  The simple truth is that Main Street is running scared, with empty storefronts, restaurants closing, and no end in sight to rising gasoline prices.  Taco Bell realizes that when they lure you in to buy the 79 cent item, you will still buy the $1.29 Pepsi that costs them maybe a dime.  Ditto for McDonald's and their seductive plan to super size you on the French fries.

McDonald's benevolence is particularly interesting right now, in light of the announcement by Tyson Foods and Pilgrim's Pride Corp this past week that they are raising chicken prices, in order to offset their higher feed costs, due to.......you guessed it, our extensive use of corn to create ethanol!  Yes, the recent demand for corn to make ethanol has been driving up the price of livestock feed.  Our national desire to become environmentally green is going to mean fewer greens will be growing in your wallet.


With or without Ethanol, the price just keeps rising...

My journey for bargains continues with a trip to Barnes and Noble.  As I walk in the entrance, all one sees are rows and rows of tables with signs that say "Bargain Books".   Barnes and Noble gets it too.  They have figured out that Average Joe is in no mood right now to plunk down $25 for a new book.  Of course, I head for the financial and business section, and what do I see?  Donald Trump's hardcover book, "Think BIG and Kick Ass in Business and Life", originally $26.95, is now selling for only $4.98!  Now that's a BIG savings AND a Kick A-- price! 

But don't cry for The Donald.  He recently told CNBC that despite America being in a recession, he sold his Palm Beach home, a home that he bought for $40 million in a bankruptcy sale, for a cool $100 million.  Real Estate melt down?  Not in Palm Beach.  They may be discounting in Barnes and Noble, but they certainly aren't discounting where the ultra wealthy frolic by the sea!

In the long run, price wars and excessive discounting may hurt the profit margins of these fast food and retail stores.  But in the short run, and with tough economic times, Main Street has decided that discounting will become the modus operandi to ensure that customers do not wander off, or worse, start eating at home!  And that is no small task when consumer confidence levels have now fallen to their lowest level in 28 years.  The Reuters/University of Michigan survey out last week says that the index of confidence fell to 59.5, the lowest level since June, 1980.  In fact their statement pinpointed the problem exactly, saying ...

"Consumer confidence continued to slip in early May due to surging food and fuel prices."

Several questions arise as we consider the actions described here of Main Street :

How will Wall Street view these emerging trends? 

Will the margins of retailers and fast food restaurants be so diminished that the stocks will get trashed when they report their next earnings? 

YUM and MCD have done everything right over the last three months, but can this be sustained with 79 or 99 cent menu items? 

We shall see.

Anyway, people talk about how things are so bad in this economy, but really what could be better than riding your environmentally friendly bicycle over to Taco Bell, then leaning back in your plastic booth, chowing down on a Big Triple Layer Nacho or Melted Three Cheese Roll Up for only 79 cents, while you leisurely flip through the $4.98 pages of "Think Big and Kick Ass In Business and in Life"? 

Look at it this way: at least you won't have to take out a pay day loan to live like this!




Ethan Roberts
Contributing Editor
The Tycoon Report