Wednesday, January 14, 2009

Retail Sales Plummet, More Trouble in Banks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Retail sales dropped 2.7% in December, far more than Wall Street's prediction of 1.2% (just another example of how to this day Wall Street is continually underestimating the impact of the Credit Crisis on the economy). For the year, retail sales were down 0.1%, the first drop since the series has been reported by the government. Since retail sales have accounted for approximately 72% of the U.S. economic activity in recent years, whether or not they rise or fall has a strong impact on GDP. Since the Credit Crisis is by no means over yet, clearly indicated by today's news about Citibank, HSBC and Deutsche Bank, retail sales are likely to continue to be weak into the foreseeable future.

The drop in retail sales in December was a record sixth drop in a row. Virtually all areas of retail sales showed declines. Auto sales fell by 0.7 percent and are down 22.4 percent year over year. Excluding autos, retail sales were down 3.1%, the most ever since the report has been published. Retail sales did not drop during the recession of 2001, the only recession in history where this unlikely condition took place (this was only possible because of vast consumer credit expansion at that time which we are now paying for with the current Credit Crisis). When interpreting retail sales figures, it is important to realize that they are not adjusted for inflation. Gasoline sales dropped by 15.9% in December, but this is the result of falling oil prices, not a big decline in actual sales. While some of the drop in the December report took place because of lower prices, most of it did not. On the other hand, much of the gain reported in retail sales in the last several years has been a consequence of price rises and not a better economy.

The Credit Crisis backdrop is not likely to improve any time soon either. Three international banks made the news today. Deutsche Bank announced it expected a $6.4 billion loss for the fourth quarter. A brokerage report cited the need for global bank HSBC to raise up to $30 billion in new capital, citing 57% of its loan exposure was in the troubled UK and US markets. Finally in a deal between the dead and the dying, Citigroup and Morgan Stanley are creating a new business entity consisting of Citigroup's Smith Barney's unit and Morgan Stanley's wealth management (some would say mismanagement) business. Morgan Stanley gets a controlling interest and Citigroup gets $2.7 billion in desperately needed cash.

For many years, Citibank was the largest bank in the United States. If the U.S. government hadn't bailed it out both behind the scenes and more publicly in November 2008, it would possibly already be out of business. Citigroup was created by a merger of Citibank and Traveler's Insurance in 1998. This was hailed as a brilliant move by Wall Street. Only four years later Citigroup spun off Travelers Insurance (many things Wall Street considers brilliant fall apart within a few years or so). Ten years later the financial supermarket approach that Citibank built itself on is disintegrating, much like the entire global banking system.

NEXT: The Real Deflation is Taking Place in Bank Stocks

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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