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The Wall Street Ponzi At Work - The Stock Pumping Swindle Behind Four Retail Zombies

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

In the nearby column Jim Quinn debunks Wall Street’s latest claim that the American consumer is bounding back. He points out that on an inflation-adjusted basis retail sales are barely higher than they were a year ago, and, for that matter, are still only 4% greater in real terms than they were way back in November 2007.

That’s right. Nearly eight years and $3.5 trillion of Fed money printing later, yet the vaunted American consumer is struggling to stay above the flat line, not shopping up a storm.

And there is no mystery as to why. After a 40-year borrowing spree culminating in the final mortgage credit blow-off on the eve of the great financial crisis, the US household sector had reached peak debt. It was tapped out with $13 trillion of mortgages, credit cards, auto, student and other loans —–a colossal financial burden that amounted to nearly 220% of wage and salary income or nearly triple the leverage ratio that had prevailed before 1971.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

So, as is evident from the graph above, we are now in a completely different economic ball game than the consumer debt binge cycle that culminated in 2008. Households are deleveraging out of necessity, and that means that consumer spending is tethered to the tepid growth of national output and wage income.

Yet sell side economists and the financial press are so desperate for factoids that confirm the Keynesian “recovery” narrative——that is, the false claim that the US economy has been successfully lifted out of a growth rut by mega-injections of fiscal and monetary “stimulus”—— that they get just plain giddy about Washington’s seasonally maladjusted, endlessly revised monthly data squiggles.

Thus, in response to the 0.6% gain in July retail sales, The Wall Street Journal’s headline proclaimed, “In a Show of Confidence, Americans Boost Spending”.

Even that was fair and balanced compared to the typical economist’s fare. Opined Richard Moody of Regions Financial Corp:

“The July retail sales report should help allay any remaining concerns as to the state, and psyche, of U.S. consumers…… “U.S. consumers are just fine.”

Oh, c’mon. The July retail sales number was barely 1% higher than it was in November 2014, and has been up, down and around the barn in the nine months since then. Indeed, the “signal” in July’s monthly “noise” was that the American consumer remains stranded on the sidelines, and that consumption driven “escape velocity” isn’t going to materialize no matter how long the Fed dispenses zero or near-zero cost money to the Wall Street casino.

Instead of gumming about the last 30 days of heavily medicated preliminary “advanced” retail sales data, the sell side bulls would do well to look at the last 25 years of inflation-adjusted retail spending. In a word, the trend has drastically decelerated, and, in fact, has nearly lapsed to stall speed since households hit peak debt seven years ago.

Compared to a 3.3% annualized rate of gain in the 1990s recovery cycle (when household leverage ratios were racing upwards) and 1.9% during the 2001-2007 Greenspan housing bubble, real retail sales have only grown at only a 0.5% rate since the November 2007 pre-crisis peak. After 93 months that is not a recession induced, transient dislocation; it’s a deeply embedded trend.

Indeed, this business expansion is already long in the tooth at 74 months compared to a post war-average of 61 months. So given the 2% +/- real growth trends of the last few years, there is no chance whatsoever that retail spending will rebound to historic rates of over-the-cycle gain before the next recession takes its toll.

Real Retail Sales

Real Retail Sales

This radical downshift in the trend rate of real retail sales surely demonstrates that the radical dose of QE and ZIRP hurtled at the American consumer by the Fed has not worked. But it also points to the actual blatant deformations that it has inflicted on the financial markets in the process.

To wit, the last thing that you would expect in an environment were the consumer sector is dramatically and visibly stalling is a rampage of borrowing to open new retail stores and to fund the buyback of gobs of retailer stock.

But the fact is, debt financed retail leases are so cheap that new capacity never stops coming. At the same time, some of the nation’s largest retailers, faced by withering competition from what amounts to Fed subsidized supply expansion, have been loading-up their balance sheets with the very same kind of cheap debt in order to buy back stock at rates which far exceed their faltering net income. It goes without saying that this development is reckless in the extreme in light of their imperiled business circumstances.

To illustrate the dodgy condition of the debt-strapped American consumer, Jim Quinn dissected the most recent financial results of four of the largest US mall retailers——Macy’s, Kohl’s, Sears and J.C. Penney. Their combined sales in the most recent quarter of $19.1 billion were down 10% from the prior year; and even when you take Eddie Lambert’s trainwreck at Sears out of the basket, the results are not much better. Sales are flat versus the year ago quarter and combined net income of the other three retailers amounts to a piddling 1.4% of sales.

To be sure, these results are not surprising in the face of a tepid consumer and shift of sales to on-line venues. Department stores sales in July, for example, were down by 2.6% from prior year, and now stand 18% below their pre-recession level. But what is surprising is that the four hardest hit among these once and former retail kings have spent years feeding the Wall Street casino with prodigious sums of cash via stock buybacks and dividends.

In fact, during the 10 years between 2005 and 2014, these four retailers spent $34 billion on stock buybacks and dividends. But, alas, their cumulative net income during the period was only $13 billion.

So they pumped 2.6X more into the casino than they earned!

Again, it wasn’t just Eddie Lambert and his hedge fund pals sucking the life out of Sears. On a combined basis, J.C. Penney, Macy’s and Kohl’s pumped $28 billion into the stock market in the form of buybacks and dividends during a period when they posted cumulative net income of just $16.5 billion.

In a market where the price of debt is not falsified and where the C-suite is not rewarded for mortgaging company balance sheets to feed the fast money speculators and thereby goose short-term share prices and their stock option winnings, nothing remotely this reckless could happen.

Instead, in the face of the powerful secular shift of main street consumers to the internet and new retail concepts, companies on an honest free market in finance would plough their cash flow into debt reduction and  into investments to improve the competitive viability of their stores, not massive financial engineering.

In fact, these four companies raised their combined debt from the equivalent of $6 billion in 2005 (adjusted for sale of their credit card receivables operations to third parties) to nearly $19 billion in the most recent reporting period. Given the overall-trend in department stores sales versus one-line retailing shown in the graph below, this is nothing short of a death wish.

Needless to say, J.C. Penney’s and Sears are already on deaths door and the other two are stuck with $10 billion of debt and seriously eroding cash flow. In fact, during the first half of this year, Kohl’s and Macy’s reported operating free cash flow of negative $250 million, representing nearly a billion dollar adverse swing from the $725 million of positive free cash flow reported during the first half of 2014.

So here’s the long and short of it. Owing to the Fed’s bubble finance, traditional retailers like the four zombies spotlighted above face endless competition from internet competitors like Amazon and every manner of new bricks and mortar retail concept that entrepreneurs and financiers can dream-up. But much of that new age competition is not on the level economically because it is based on ultra-cheap capital available in both the equity and debt markets.

It does not take much analysis to see that this fantastic proliferation of retail capacity—-both on-line and in the mall—does not represent sustainable prosperity unfolding across the land. For example, around 1990 real median income was $56k per household and now, 25 years later, its just $53k—-meaning that main street living standards have plunged by about 6% during the last quarter century.

But what has not dropped is the opportunity for Americans to drop shopping: square footage per capita during the same period more than doubled, rising from 19 square feet per capita at the earlier date to 47 square feet for each and every American at present.

This complete contradiction—declining real living standards and soaring investment in retail space—did not occur due to some embedded irrational impulse in America to speculate in real estate, or because capitalism has an inherent tendency to go off the deep-end. The fact that in equally “prosperous” Germany today there is only 12 square feet of retail space per capita is an obvious tip-off, and this is not a teutonic aberration. America’s prize-winning number of 47 square feet of retail space per capita is 3-8X higher than anywhere else in the developed world!

When the aggregate level of shopping space is looked at during the above longer-term time frame, the aberration is even more apparent. At the time of the S&L fiasco around 1990 there were only about 5 billion square feet of shopping space in the nation—meaning that capacity tripled during the subsequent a quarter century. Yet this was a period when the real incomes of the middle class were essentially dead in the water. So what market signals could have possibly given rise to such a disconnect?

The answer is the relentless drive for yield among fixed income investors during a period when time and again the Fed intervened in financial markets to prevent the benchmark rate—that is, the 10 year treasury note—-  from finding its natural economic price/yield in what was becoming a savings parched economy.

Accordingly, there developed a massive tidal wave called “retail operating leases” that quenched this thirst for yield—helped along by accounting loopholes which allowed trillions of these operating leases to be kept off borrower balance sheets and which thrived on the illusion that the proliferating chains of new retail concepts served up by the Wall Street IPO machine were “national credit tenants”.

These overnight sensations were peddled on the basis of allegedly solid and sustainable “business models”, implying blue chip credit status. This meant, in turn, that retailers were afforded such attractive terms (10-15 years) and razor thin leasing spreads over benchmark rates that retail occupancy costs were dirt cheap relative to the true long-run economics and risks.

Suffice it to say that operating leases and national credit tenant financing by banks and institutional fixed income investors like insurance companies and pension funds account for virtually all of the stupendous gain of 10 billion square feet of retail space since 1990. And all of the cheap debt which funded this vast deformation will not be found on the balance sheet of any known retailer.

Thus, during the last 25 years when overall retail space was rising from 5 billion square feet to 15 billion square feet, the total number of shopping centers—–and especially cheap debt driven strip malls (under 100,000 square feet)—–and total footage has also soared.

 

 

 

Needless to say, vacancy rates have steadily risen and mall rents have started to roll over. Yet the market for retail space doesn’t clear because the Fed’s drastic, sustained financial repression keeps cash flowing to faltering incumbents and dodgy new competitors alike.

So the dance of the zombies goes on. Sears shows how it is done, but it’s only an advanced case.

In that episode, Eddie Lambert was the willing agent of its demise, but the casino momo games among the hedge funds which clambered onboard in the early days when massive amounts of cash were being sucked out of the company, and its ability to access cheap debt markets during the long years when the disaster was unfolding, were enabled by the mad money printers in the Eccles Building.

SHLD Net Income (TTM) Chart

 

In short, last week’s tepid retail reports were not only a reminder that QE and ZIRP have by-passed main street entirely. The faltering department store sector is also a reminder that the monumental amount of Fed confected cash pooling-up in the canyons of Wall Street is breeding debt-laden zombies throughout the length and breadth of the land.
 

 

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Mon, 08/17/2015 - 18:15 | 6437116 Blythes Master
Blythes Master's picture

The consumer is double tapped out.

Game over.

Mon, 08/17/2015 - 18:23 | 6437126 El Oregonian
El Oregonian's picture

J.C. (lost all their) PENNY

Mon, 08/17/2015 - 19:01 | 6437221 Secret Treaties
Secret Treaties's picture

YoY rate of change in real retail sales per capita . . .

 

https://research.stlouisfed.org/fred2/graph/?g=1E1Q

 

And a good discussion of it . . .

 

http://www.advisorperspectives.com/dshort/updates/Real-Retail-Sales-Per-...

Mon, 08/17/2015 - 18:29 | 6437151 Normalcy Bias
Normalcy Bias's picture

Who'da thought that an economy based 70%+ on Consumer Spending wouldn't work out, right?

Mon, 08/17/2015 - 19:02 | 6437228 PrimalScream
PrimalScream's picture

AMEN!!  Whooda' thunk it?

Mon, 08/17/2015 - 20:59 | 6437552 CheapBastard
CheapBastard's picture

I'm awed.

Tue, 08/18/2015 - 07:19 | 6438364 de3de8
de3de8's picture

Amazon

Tue, 08/18/2015 - 07:50 | 6438426 Not Goldman Sachs
Not Goldman Sachs's picture

But, but Alibaba, Amazon,  must have excellent PE's???  What? Not so? Hmphf.

Mon, 08/17/2015 - 18:30 | 6437119 Ham-bone
Ham-bone's picture

Compare and contrast the charts in Stockmans piece with the massive declines in 0-14yr/old populations around the globe vs. unbelievable debt increases (link below)...these massively smaller young populations represent the crumbling foundation of our economic present and future

http://econimica.blogspot.com/2015/08/young-vs-debtthe-young-never-had-chance.html

The likely outcome is a long-term, spiraling, depopulating depression.  Our choice is to manage it or let it manage us.

Mon, 08/17/2015 - 19:20 | 6437283 Spitzer
Spitzer's picture

1 sentance in and I knew it was David Stockman. I love this guys style.

Read or listen to his book. Its a 34 hour long epic Stockman rant.

Mon, 08/17/2015 - 18:23 | 6437136 Winston Churchill
Winston Churchill's picture

Must be a good CMBS short in there somewhere.

Mon, 08/17/2015 - 18:24 | 6437141 Dre4dwolf
Dre4dwolf's picture

The Government should pass consumption tax breaks, for every dollar you spend on consumption, you get 50cents worth of tax credits, with no limit.

Mon, 08/17/2015 - 18:25 | 6437142 Rainman
Rainman's picture

Meanwhile, there are almost as many payday lenders as McDonalds and Starbucks.

                             http://www.washingtonpost.com/news/wonkblog/wp/2014/03/26/there-are-almost-as-many-payday-lenders-as-mcdonalds-and-starbucks-no-really/

Mon, 08/17/2015 - 18:27 | 6437146 Chuck Knoblauch
Chuck Knoblauch's picture

Cannot close the doors and lie about online sales.

Especially when FedEx ans UPS are hurting too.

LOLOL.................

Stop laundering Jeb's drug money!

Mon, 08/17/2015 - 18:32 | 6437155 buzzsaw99
buzzsaw99's picture

don't worry about eddie, he got plenty.

Mon, 08/17/2015 - 18:38 | 6437169 rosiescenario
rosiescenario's picture

What I would really like to see is an article on these 4 retailers which analyses how many options mangement and their boards received, exercised, and made money from while their company's balance sheets were being loaded with debt to do stock buybacks to make these options worth something.

Mon, 08/17/2015 - 18:39 | 6437170 ejmoosa
ejmoosa's picture

I've got too much crap as it it.  If something breaks I can do without for a while.  After a while I find I did not need it in the first place....

Then I take those $$$ seved and convert them to useless relics...

Mon, 08/17/2015 - 18:42 | 6437176 EurGold
Mon, 08/17/2015 - 21:27 | 6437633 Pemaquid
Pemaquid's picture

With shipping to US: $26. Such a bargain! /sarc

Mon, 08/17/2015 - 18:42 | 6437180 q99x2
q99x2's picture

He makes his point. ugh.

Mon, 08/17/2015 - 18:57 | 6437210 i_call_you_my_base
i_call_you_my_base's picture

It's going to be lack of credit, overcapacity, and rising housing, health care, and education spending. Those things are going to take priority and consumer stuff is going to take a dive. And deflation in food and energy (if there is any) is not going to offset those three costs.

Mon, 08/17/2015 - 19:01 | 6437223 PrimalScream
PrimalScream's picture

to be SPECIFIC - they are simply using corporate debt to BUY their own stocks ... and so push up the price of the stock.  And why???  Because CEO's and CFO's are paid mega-bonuses based on the stock price. 

YOU CAN certainly blame the Fed for creating a period of ultra-low interest rates.  It has spawned a huge explosion in corporate borrowing.

YOU CAN ALSO blame stock holders directly, and the Boards who are running these companies.  WHAT IDIOT would agree to a contract that rewards the CEO for this kind of behavior, when the actual revenues don't justify the stock prices?????

Moral of the Story - If you behave like idiots, don't be surprised if your company is bankrupt one day.  Sooner, rather than later!!

Tue, 08/18/2015 - 08:56 | 6438619 rpboxster
rpboxster's picture

But, by then, the C-suite has moved on to the next host via a golden parachute.  Only the minions and the mall and the surrounding area suffer.  I'm not sure what the answer is.  I'm not for the gov't putting controls in this behavior, but shareholders sure as hell aren't awake/organized.

Mon, 08/17/2015 - 19:08 | 6437250 Chad_the_short_...
Chad_the_short_seller's picture

KSS is the next JCP. They've blown several billions on stock buybacks to inflate their eps and stock but sales are eroding now so they'll have to stop so that means........time to tank tank tank from here on out. Oh, and yes i am short KSS. Probably my fav short on the entire market right now.

Mon, 08/17/2015 - 19:57 | 6437377 Caviar Emptor
Caviar Emptor's picture

I and TPTB command that you shop!
Every recent crisis has been faced down by Americans going shopping.
911: Rudy Guiliani told New Yorkers to shop.
2008: Dubya told Americans to shop.
Be an American hero

Mon, 08/17/2015 - 21:15 | 6437601 Stormtrooper
Stormtrooper's picture

I have been shopping till I drop but ammo has become so expensive that I've been forced to cut back.

Mon, 08/17/2015 - 20:20 | 6437434 I Write Code
I Write Code's picture

>Macy’s, Kohl’s, Sears and J.C. Penney

Oh, get over yourself, these four have been in downtrends for ten years and more and are just managing their declines in semi-responsible ways.

Retail has been bombed by Amazon and the Internet, and by big box stores Target, Walmart, and Costco, at the same time that real incomes have continued declines, illegal immigration has soared, so per capita discretionary spending especially will have tumbled further.

A lot of this is also the Chinese dumping of low-priced junk on America, actually giving us a bit more for our money and allowing spending to go to non-retail channels, from entertainment to cars and rents.

 

Mon, 08/17/2015 - 20:27 | 6437448 Temerity Trader
Temerity Trader's picture

Right. So you figure you’ll short a few hundred shares of these zombie retailers and make some bucks as they one-by-one file for bankruptcy. Only a funny thing happens as you start to see some nice returns. The Fed announces more QE or just hints at no rate hikes EVER. So, instead of panic selling, the lemmings know the Fed has their backsides and more massive QE will get consumers borrowing and spending…profits will soar. Yep, they keep buying shares and you are f***ed. You just can’t believe the fools are buying that crap as you are stopped out of your short positions.

 The oligarchs and bankers are NOT gonna let it all fall apart without a fight…and more to come. If the markets crash, it is all over…our cities will burn. Basically EVERYTHING is now dependent upon the stock market and property bubbles staying inflated. They cannot let them return to their old normal non-intervention levels of maybe ½ where they are now.

Can they fool all the people all of the time? So far yes, and the bears have been repeatedly gored. They can print to infinity, and likely will…

 

Mon, 08/17/2015 - 21:12 | 6437591 JoWazzoo
JoWazzoo's picture

QE has NOT benefited Jand & John Doe consumer.  Not one wit.  More will NOT help them.  If QE could work, it WOULD have done so.  Here AND in Japan wher it is an abysmal failure.

Mon, 08/17/2015 - 22:56 | 6437841 FIAT CON
FIAT CON's picture

Remember during the crisis of 08 they banned shorting of certain companies

 

Mon, 08/17/2015 - 20:51 | 6437511 ebworthen
ebworthen's picture

There it is again..."...since 1971..."

Yup, since unhinging from the Gold standard and revving up the:  financial engineering machine, the 401K/IRA defined contribution scam, and the gutting of pension plans.

Welcome to the Ponziconomy!

Mon, 08/17/2015 - 22:00 | 6437714 KashNCarry
KashNCarry's picture

They have to build ever bigger malls/stores in order to warehouse the shit that keeps coming from abroad aboard ever larger container ships...

Mon, 08/17/2015 - 22:08 | 6437733 FIAT CON
FIAT CON's picture

I thought that the game of monopoly was over when all the bankers had all the money!

 But in the new game of monopoly the Fed is involved and prints more money and gives it straight to the bankers driving up asset prices and they wonder why no one is left to play the game.

Tue, 08/18/2015 - 00:22 | 6438006 Angry Plant
Angry Plant's picture

Waiting tell the fed just mails eveyone a thousand dollar check.

Giving money to the top has failed completely and handing $ to the middle class is likely the only solutuin to the impending global depression that is forming.

 

Tue, 08/18/2015 - 01:08 | 6438072 DonutBoy
DonutBoy's picture

"the radical dose of QE and ZIRP hurtled at the American consumer by the Fed has not worked"

hurtled at the consumer?  Not so much

Tue, 08/18/2015 - 01:19 | 6438093 Kreditanstalt
Kreditanstalt's picture

As usual, it's all about the FLOW, not the stock.   Any company that can show a cash flow, however unsustainably, will find idiot "investors" chasing that cash flow. 

Yield-chasers are now DESPERATE.

Tue, 08/18/2015 - 06:30 | 6438291 overmedicatedun...
overmedicatedundersexed's picture

funny, some here still think debt is as real as a .45 round..the majic trick is debt default..greece is not allowed this option as it might give others ahem  italy spain france ..ideas. the lesseer majic is monetary printing and giving same to those near default, with of course profits given to BK banks as a side effect. co's that are now bk we used to call zombie corps, walking dead, but with all the printing of debt - we are all walking dead.

look at countries that defaulted on debt time and again..they are still here, the international banks still live..

it (finance and economy) is an illusion the thin vale before our eyes- and reptiles have understood this illusion can be used for gain and control..so the game is pushed to hights of debt never dreamed of- now in multi-trillions..power concentrated in secret hands acting to maintain the illusion is also more effective and advanced to levels never seen in human history. nsa, cia and others not to be printed here.

in the end the reptiles own production and own natural resources own whole countries- the people cannot see the eden that is possible without this illusion of fiat and economic hocus pocus used to protect the rulers many of whom are unk to most of us.

THEY LIVE.

Tue, 08/18/2015 - 07:51 | 6438428 eucalyptus
eucalyptus's picture

This is a beautiful post. The carnage is coming and it will be real.

Tue, 08/18/2015 - 08:45 | 6438577 Loophole
Loophole's picture

When the govt prints money someone gets the use or benefit of the newly created money and others get inflation.

It's just wealth transfer, that is, stealing.

Why would anyone expect it to bring prosperity?

Do NOT follow this link or you will be banned from the site!