Why I think Cramer is Wrong on the Consumer

Jim’s Best Buy Bonanza discusses
BBY’s quarter — as proof of the health of the U.S. consumer.

I beg to differ.

Every weekend, I get these Best Buy circulars running giant financings.

Here’s
what they look like
: Buy any Plasma TV (> $999), and make no interest and just 1%
principle payments — for 3 years!

Heres’ their disclosure info on the financing — its just Prime Rate + 14.4
percentage points on fixed, and prime plus 17.4% on variable!

No Interest for 36 Months on Home Theater $999 & Up

Required minimum monthly payment is greater of $10 or 1% of balance plus
billed finance charges plus any late fees (if applicable). Interest will be
charged to your account from the date of purchase if plan balance is not paid in
full within 36 months or if minimum monthly payments are not made.

Deferred Interest Info: Program A: Variable Standard APR = Prime Rate + 14.4
percentage pts. (22.65% as of 09/01/2006).
Variable Default APR = Prime Rate +
18.4 percentage pts. (26.65% as of 09/01/2006).
Standard Min. APR 19.8%. Default
Min. APR 23.8%.

Program B:

Variable Standard APR = Prime Rate + 17.4 percentage pts. (25.65%
as of 09/01/2006).
Variable Default APR = Prime Rate + 21.4 percentage pts.
(29.65% as of 09/01/2006).
Standard Min. APR 23.15%. Default Min. APR 27.15%.

Unfortunately, the fine print informs us the consumer still accrues interest over the
entire 36 months
— they just defer them during that period. Pay it off in 3 years, no interest. BUT, in month 37, they must make the minimum payment (1%) of the total outstanding balance, including interest of either 22.65% or 25.65% — on the full purchase price.

If anything, it shows that consumers are not being very frugal or responsible
with their spending. This is exactly why the savings rate has slid to a
negative.

A friend noted:   

I’m still wondering about the cash out refi.  I could use some nice speakers to
go with my flat screen, but I’m a little short right now.  If I could just pull
some money out of the equity in my flat screen, I’d be set.  Can you get a 30
year?  That would be sweet.

 

>

UPDATE:  September 14 6:19 am

I went back and reread the fine print — If you pay off the entire amount before 36 months elapse, then you pay zero interest — none. It is essentially a 3-year, interest-free loan. For the discplined consumer, its a good deal. A $5,000 home theater is $138 mo for 36 mos — and that is interest free.

The deal turns sour if you do not pay it off before month 37. Then, all that (usurious) interest accrues and comes due . But its free money if you do not run past the 36 months . . .

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  1. Mike M commented on Sep 13

    Debt, Debt, and more debt. It’s funny, fundamentally we have severe long term problems. Everybody knows it but nobody cares. The market just keeps chugging along. I keep asking myself what am I missing? I just don’t get it!

  2. LAWMAN commented on Sep 13

    I disagree to a point on this one…I bought a big screen tv using BBY’s no interest financing….I pay the 1% min every month to BBY, and put the rest of the payment into a 5.15% savings account. I’m using BBY’s money to make a $2000 purchase and making interest on the money to boot.

  3. Josh commented on Sep 13

    So a typical flat panel home theatre could go for $3500? That’s only $35/month…who can’t afford that right? After the 36 months, $1260 is paid off and then the interest hits at probably 24%. Ball park you’re looking at $1800 right on top of the balance ($2250)gives you around $4k. Yet another negative amortization loan. Then your payments will go to probably 3% of the balance which is $120 of which your paying about $80 towards the interest on the original balance and back dated interest.

    Just one question…can the mortgage brokers get in on this? Sounds like an option ARM on home entertainment.

    These are back of the envelope figures I would work out as a consumer. Not too bad for only $35/month.

  4. wcw commented on Sep 13

    In re debt, I am not as worried as some outside of home prices. Cf my note on the financial obligations ratio. Short story shorter, for renters the FOR has been going down since hitting a historic high of 31% of disposable income in 2001Q4, at 24% as of Q1. For homeowners, the FOR is up since, but still well under 20%.

    Paying out a fourth or less of disposable income isn’t ideal, but that alone isn’t bankrupting anyone.

  5. bob commented on Sep 13

    It could be offtipic, please forgive me.

    Suppose I’m an investor who beleives that real estate will crash badly. Is there any securities in the market that should profit from that? Any mutual funds? Any ETFs?

    I’m not intersted in shorting or buying puts, it’s not something I want or can do.

    I saw the “Short Real Estate ProFund”, SRPIX, but I’m not impressed with its performance. Do you know anything else?

    Thanks!

  6. Mike M commented on Sep 13

    Exactly Josh. I’m sure the the new fridge, granite countertops, and ATVs are “paid for” the same way. In 2015, I expect my TV to be fully paid for!!

  7. j d ess commented on Sep 13

    i don’t see how this offer is much different from others i’ve seen over the past 3 – 5 years.

  8. Robert Coté commented on Sep 13

    Damn. With my new plasma I swear I saw that same tie on the rack at the St. Vincent DePaul Thrift Store in Oxnard where I shop. Seriously, I wore a $16 outfit to a $1000/person politcal soiree last night in West LA. Price and terms and resultant outcomes are no longer reliable.

    There’s so much substitution going on I’m not so sure the usurious tactics of Best Buy are reliable indicators of the apocalypse. Notice that theater attendance is down by revenue and down a lot by eyeballs. If you are a newly minted homeslave DVDs can be a substitution can they not? These deals are great for those who know how to manage their finances provided they don’t get involved with Best Buy. Best Buy makes their money in the back room. $27 for express processing of your 0% payment? Come on. Prime plus 21.4%? Youse wanna vermicelli and bandages fer yer kneecaps wit dat? Actually I wouldn’t be surprised to find the Fed was behind this plasma push to justify their hedonic adjustment formulas. Of course Cramer is wrong. As he says; “Hey I’m Cramer!” Consumer credit in this nation is being tested to destruction and it annoys me that there’s no way to cash in on the obvious outcome.

  9. M.Z. Forrest commented on Sep 13

    wcw,

    Something tells me if one were to take the ratio of discretionary income to debt versus using the disposable income, the numbers wouldn’t be near as pretty. Health costs have cut significantly into discretionary.

  10. Charles commented on Sep 13

    I don’t know, maybe I’m missing something, but this doesn’t seem like such a bad deal.

    The interest doesn’t kick in unless you are NOT paid off in full at the end of 36 months… So if you buy an $1800 TV set, that’s $50 a month (+tax?) for 36 months. Much easier that ponying up $1800 up front, plus it saves you money by taking advantage of inflation and the ability to earn interest on the money you are saving by not paying up front. I’ve done this in the past when I purchased my most recent computer (only 6 months no interest, but still easier than a lump sum).

    Maybe I’m naive, but I can’t imagine that there are a whole lot of people buying these types of things who aren’t planning on having them completely paid off by the time the 15%+ interest rates kick in 3 years down the road. I sure as hell wouldn’t.

  11. Dirge commented on Sep 13

    One way to cash in on the overextended consumer is to undercut the loansharks on Prosper.com. Tons of people taking out loans at 10-20% to pay off debts with 25%+ rates. Obviously some will default, but with diversification the returns are still healthy. This wasn’t meant to be a plug for the site, I assume some competitors to it will pop up soon.

  12. Chief Tomahawk commented on Sep 13

    Had an interesting conversation with a CostCo.com rep two weekends ago with regard to buying a plasma through them. First, there is much more selection available online from CostCo than what one sees in the stores. Second, the return policy (at this moment) is bordeline ridiculous. Specifically, you are able to return it for any reason whenever down the road. To which I said, plasmas are known to lose their brightness over time. So 3 years down the road can I return the tv and get my money back? She didn’t know about the brightness issues, but said the answer is yes. I said I believe folks will be returning sets with regularity (or exchanging them) to get new ones down the road. She said as of now that phoenomenon hasn’t been a problem but could someday be, as they had the same policy on computers and found folks were returning them after a few years. So on pcs, the policy is now 6 months. So I asked what if I buy a plasma now and they put in a change to the return policy in a few months? She said I would be grandfathered in and still receive the same policy as of my time of purchase. In addition, if you buy over the internet and they deliver it, they will come to pick it up at their expense. Knowing this, why would anyone buy a high end tv at Best Buy versus CostCo?

  13. muckdog commented on Sep 13

    Cramer always seems a bit late to the move, IMHO.

    Retailers are rebounding because energy prices have come down. Why? Maybe the terror premium of Israeli bombs or Iranian nukes has eased, maybe the threat of hurricanes is waning, maybe the economy has slowed, or maybe summer driving season is over.

    Some combination of that.

    This results in “extra” cash in the consumer’s wallets, that they are now spending on retail. Expect SBUX and CAKE to do better now, too. People love to spend money, and now they have more than they did when oil was near $80.

    Oh by the way, before we all celebrate and buy stocks, remember that falling energy prices act like a tax cut on the economy, and will stimulate it. You-know-who is always on the lookout for inflation, and if the economy is starting to roll again then Wall St might hit speed bump Bernanke soon…

    Regarding comments that all this spending comes from maxing out credit cards, remember that a growing economy always sees expanding credit. People feel good about the economy, go out and spend cash, credit, and whatever it takes because they have an optimistic outlook for tomorrow.

    Just thinking out loud.

  14. eli commented on Sep 13

    Charles,

    You aren’t missing anything.. (as far as how Barry described it). So, if you are buying a fancy $3600 Plasma screen anyhow, just get one of these no interest deals, divide the total cost by 36 and pay that every month..

    Even better, invest the $3600 however you see fit (depending on your risk profile). Pay the monthly minimum until the last month and then cover the remaining balance.

    That’s a pretty good gig. $3600 Television—65% of it paid for with 2009 dollars and the rest paid for by the $36 minimum monthly payments. It’s especially good if you believe inflation will be raging near the end of 2009 AND that you will be financially better off at that point in time.

    I guess if you’re scared of deflation, it would be a bad idea.

    If you were really wild in the eyes-sicko abritraguer, you could buy lots of these TVs and sell them at a discount to less savvy individuals. The discount would depend on what you estimated to be your savings due to inflation plus interest potentially earned from whatever you stuck their cash in.

  15. Jim Bergsten commented on Sep 13

    My two observations:

    1. It is very easy for a consumer to be in default of the (probably) incomprehensible terms and thus get bounced into the penalty zone. One day late? Lost in the mail? Excessively short “pay-by” (bill comes one day before due if at all). One wonders if there are billing cycles statistically guaranteed to cause more defaults (say totally out of sync with typical payroll periods). Do you know that you can be in default if your FICO score changes? (and one way for it to change is to have a new loan added to your report with a nice full balance — the purchase of the TV).

    2. The financing terms are confusing and barely intelligible even to those “schooled in the state of the art” of finance. What chance does the average Joe have to make an informed decision? Is all this stuff immune to the “fair disclosure” laws?

    Where is the financing coming from anyway?

  16. DBLWYO commented on Sep 13

    Interesting discussion but it highlights two implications:
    1. This readership with it’s abilities to do ‘back of the envelope’ calc is such a measurably insignificant part of the consumer world. THAT implies that the vast bulk of these purchases are being made by folks who’re only evaluating the $35/month against their own budgets. What happens when the chickens come home to roost ?

    2. One could characterize this as deceptive marketing on the part of a major retailer who’s stock in trade is really customer trust. Now consider if BBY, Costco, et.al. are really only making money on finance (& after-market services contracts) – what does that imply for their l.t. profitability and growth. As Sun Tzu puts it – walk softly on dangerous ground.

  17. Jim Bergsten commented on Sep 13

    With a smidgen of research, I sort of answered one of my questions (from the BestBuy website)…

    Financing Info:
    Subject to credit approval on Best Buy consumer credit card by HSBC Bank Nevada, N.A. Min. finance charge = $2. Certain rules apply to the allocation of payments and Finance Charges on your promotional purchase if you make more than one purchase on your credit card. Call 1-888-367-4310 or review your cardholder agreement for info.

    “Cardholder agreement”? What card? See? It just gets deeper and deeper.

  18. Jim Bergsten commented on Sep 13

    To further illustrate how much I am trying to avoid what I should be doing today, I rooted around and found at least one HSBC cardholder agreement online.

    It contains the following sentence:

    “. We have the right to change your APRs, fees, and other terms at any time, for any reason including, but not limited to, any change in your credit history, credit obligations, account performance, use of your credit lines with us or any creditor, or our financial return. Any changes will be in accordance with your Cardmember Agreement and applicable law. ”

    Yeah, I know. I’m just being paranoid. Go on. Rush out and buy them TV sets, bunches of them, one for each wall of your house. Tune ’em all to reality TV shows.

  19. other_ss commented on Sep 13

    With online bill payment offered by almost all banks/credit unions, it is possible to setup the minimum monthly payments and the final payment.

    Final payment may be scheduled one month before the promotion expiration date to avoid any sort of problem/penalty.

    I love the free use of these retailer’s money.

  20. eli commented on Sep 13

    Jim,

    You’re probably right about the “we can change the terms” clause. I watched Citibank goose my lovely girlfriend’s APR from 8% to 23% based on some “re-evaluation” of her account. She’s making 6 figures and paying down past debt as fast as possible (bad choices in the past when she wasn’t making 6 figures). Never late on a payment, no violations, etc.

    Well, after she transferred the balance to a ~6% (balance transfer) APR card (if she’s such a bad customer, why would someone give her that APR?), Citibank sure called back quick with a much lower rate.. ‘FU Citi. Cancel my account.’. I’m sure they just count on people not trying to leave.

    So… I don’t doubt HSBC and BBY will be screwing people left and right even if they pay on time every month. How do you ‘leave’ this scenario? They will have already screwed you by injecting the accrued interest. “We re-evaluated your credit. You are a risk and we will factor in the interest now.”.

    e

  21. S commented on Sep 13

    BBY is offering initially seductive financing (that turns toxic under certain conditions) in order to pull flat screen sales forward. Just like we’ve seen in the autos and housing, once consumers become conditioned to incentives, they are hard to turn off. So, not only is BBY “stealing” sales from the future, but it is conditioning its customers to EXPECT sweet deals which can’t be good for margins.

    And what kind of due diligence will BBY do to grant this credit? Likely not much more than verify a FICO score.

    I remember Lucent started extending vendor financing like mad to a bunch of CLEC’s in 1999-2000 to book revenues. The result was that LU wrote off BILLIONS of those loans after the CLECs went bankrupt.

    It’s not a stretch to see similarties between what LU did then to push telecom equipment and what BBY is doing now to push flat screen sales.

    Just throwing it out there for consideration.

  22. Jim Bergsten commented on Sep 13

    The thing of it is, BBY isn’t the creditor HSBC is. So, BBY gets valid bookable sales and (in theory) is paid up front by HSBC minus some percentage, just like any other credit card transaction. Everybody else up the food chain also gets bookable sales.

    HSBC presumably makes money on the vigorish, excuse me, interest and penalties.

    The consumer presumably gets to fill his house with “flats,” and gets to be on MTV Cribs.

    Winners all round! Is this a great country, or what?

  23. James C. commented on Sep 13

    “You aren’t missing anything.. (as far as how Barry described it). So, if you are buying a fancy $3600 Plasma screen anyhow, just get one of these no interest deals, divide the total cost by 36 and pay that every month.. ”

    Actually, Marc Lichtenfeld on Real Money described just this method for taking advantage of the BB deal (ie, invest the cost for three years, waiting for month 36 to pay BB, pocket the earnings from the investment), a method I believe BR stated was a misreading of the offer. I read it exactly as Marc and Eli and a few others above.

    My advice to anyone looking into this is to call first!

  24. ac commented on Sep 13

    I had a friend who was a big Jim Cramer fan back in the dot.com days.

    He’s dead now.

  25. CDizzle commented on Sep 13

    I got stopped out of my short position in BBY yesterday on the big runup…what do ‘we’ think about the direction of the stock price moving forward?

  26. empty spaces commented on Sep 14

    regarding the question of buying at Costco vs BBY:

    costco usually stocks premium brands, so only well-off people shop there. look at the cars parked in the lot of costco vs walmart, you’ll see a 20-40k difference per car!!

    once you’ve mounted a tv on the wall, its a huge hassle to take it back to the store, which is why most people probably won’t return it. I have a friend who’s notorious for gaming every return policy in history. He was going to return the plasma after a year. its been 2 yrs, prices have dropped 50% but he still hasn’t returned it!

  27. Bob A commented on Sep 14

    Sorry, but as far as I’m concerned Cramer is no more relevant than Oprah or Jerry Springer. Just one big obnoxious media clown.

  28. yertlert commented on Sep 14

    The bigger question is How does BBY recognize this income. When the TV is delivered or when the consumer repays the loan? My guess…..when the consumer takes delivery of the TV. Inflating earnings with no real increase in cash flows.

  29. Mike commented on Sep 14

    I agree with several folks here that if you pay it off before the 36 mos are up, it’s a good deal (if you were buying the TV anyway). Even so, the point here is that BB is having to go to huge incentives to keep the electronics flying off the shelves. It’s the same idea as those teaser ARM mortgages – low payments now, just “take care of it” before it resets and clobbers you. That’s great if you can take care of it (pay off here, refi in mortgage land), but if you’re strained already, this’ll just make it worse.

    Mike

  30. eli commented on Sep 14

    Yertlert,

    I bet you the most expensive plasma tv from BestBuy that they’re booking these units right now–just like mortgage lenders are booking the “full payment” on their option arms. They’re pretty certain they’ll see all of the cash they’re owed. Why would consumers not pay up? No way to lose!

    Mike,

    Yes, the main points are: Best Buy is in a tight spot. The consumer is in a tight spot. The spot is so tight that Best Buy is practically giving away expensive electronics just to make the numbers on the paper grow bigger.

    One might be concerned that this entire economic narrative could end in some drastic and upsetting manner.

    e

  31. ron commented on Sep 15

    the “peer pressure” to own an HDTV flat screen is pretty high these days. I’ve almost succumbed. But I know at the same time next year the sets will be better and 30% cheaper and to me actually at the pricepoint that I think they are worth – 32-36″ and under $1000 bucks.

  32. mayo commented on Sep 16

    Cramer is leading pigs to the slaughter! I can only hope they don’t deserve it.

  33. bby commented on Sep 17

    If they get enough, BBY will be able to package these loans and sell them. Nice.

  34. Michael Quick commented on Sep 18

    I’ve read your summary of how much stuff cost’s
    my reply is short and sweet –
    I bet the loan last longer than the TV.
    China has been flooding the globe with Garbage and we are eating it up . check the UL (United Labs) rating and you will see… 12 – 24 rating usually mean no more than 36 months of life – So the joke is on you the buyer

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