We recently looked at how Retail was doing. Given the noise yesterday from Home Depot (HD) and Sears Holdings (SHLD), warning about poor earnings and lowering guidance, let’s revisit the subject on what the consumer is up to:
The amount of cash people can pull out of their homes has obviously declined, due to 3 factors: 1) Decreasing home values; 2) Tightening credit standards; and 3) Rising mortgage rates.
With the ability to tap Home Equity impaired, the consumer has now turned to Credit cards. The Federal Reserve confirmed this earlier in the week, noting that US Revolving Credit had jumped 9.8% in May:
"The Federal Reserve reported its monthly G.19 Consumer Credit statistics today for the month of May 2007. Consumer credit increased at an annual rate of 6-1/2 percent in May. Revolving credit rose at an annual rate of 9-3/4 percent, and nonrevolving credit rose at an annual rate of 4-1/2 percent. Revolving credit outstanding now totals $894.8 billion."
This is what’s driving the softness at Home Depot and Sears (although Sears may be more company specific). I suspect that when people tap into their homes for cash, they are comfortable spending that equity on improving the house — essentially converting home equity into enhanced home value. Plus, they get to enjoy the improvements while they live there.
Certainly, some people used their Home Equity ATMs to buy cars, plasma screens, and vacations. But I suspect that much of the MEW we saw was spent on the homestead itself. Compared with other MEW spending, it is a form of spending that is quite rational, and is in many cases a mere conversion.
But we need to put this into some context: The total amounts of consumer borrowing rose by $12.9 billion to a seasonally adjusted $2.441 trillion, That represents a 4.7% increase form a year ago. So even as Home Equity Withdrawal is fading, the revolving credit usage (i.e., credit-cards) is rocketing at an annual rate of 9.8% (to $894.8 billion).
As noted back in January, the beneficiaries of this are/will be the credit card companies. As we discussed with Paul Kangas and Susie Gharib:
Sectors to avoid: Electronics Retailers, Durable Goods makers, Mortgage Underwriters, and the Sub-prime mortgage lenders.
With new Mortgages and refis down — and revolving credit use up —
the credit card companies have become much more attractive. Also well
positioned are the big caps and exporters who can take advantage of the
The only question I have now is whether the credit card companies have had their full run or not. Mastercard (MA), which I mentioned favorably on that January show as a buy, is up 50% since then. I am not sure how much more room there is for the stock to run . . .
Federal Reserve, July 9, 2007
Credit-Card Use Lifts Consumer Borrowing
WSJ, July 10, 2007; Page A2