TV Pricing Bloodbath Threatens Already Razor-Thin Retailer Margins, Will Send Japanese FX Interventions Into Overdrive

So much for the 3D TV craze... and for overestimating the indiscriminate purchasing power of the US consumer. After much fanfare, and visions for record sales, TV makers such as Sony, Samsung and LG have gotten reacquainted with gravity, and are now gearing up for a "miserable" Christmas as an all out price war confirms the US consumer, even if not paying mortgage bills, refuses to purchase indiscriminately. The result: price drops of over 25% for the upcoming holiday season, huge margin cuts for already margin lite retailers (read Amazon), and an increasing reliance on corporate sales to pick up for the sudden and dramatic consumer slack. But the biggest hit will be to Japanese and Korean exporters, who will soon need to add to a dramatic decline in end demand, such factors as a ramp in Rare Earth Minerals: a key component to flat screen TV production, and, of course, record expensive currencies. All in all, it is shaping up for a miserable existence for the Japanese export economy, and we are very confident that a tsunami of export-led anger is about to be unleashed on Kan's government, demanding to at least moderate the one variable that is under Japanese control: the FX rate. Which means that many more USDJPY interventions are coming as soon as next week, when the Fed's QE2 announcement is sure to send the FX pair far below 80. In other words, QE2, in addition to confirming that the Fed cares little about the dollar's purchasing power, is about to set the FX, and trade wars, into overdrive.

Bloomberg describes the upcoming carnage in TV sales:

TVs are about to get cheaper.

Sony Corp. gave up yesterday on a goal to profit from televisions this fiscal year and Panasonic Corp. forecast price drops will deepen this quarter. Earlier, Samsung Electronics Co. predicted “severe” competition for the year-end season, echoing comments from LG Electronics Inc. a day earlier.

Projections from the world’s four largest TV makers signal the industry will fail to capitalize on the biggest sales quarter of the year, with some analysts predicting price declines of as much as 25 percent in 2010. Companies from Microsoft Corp. to Intel Corp. are increasingly counting on corporate demand as consumers are reluctant to shop.

“There’s going to be a price war this Christmas season and there’s no way around that,” said Tsutomu Yamada, a market analyst at kabu.com Securities Co. in Tokyo. “The whole strategy this year is ‘sell earlier and sell for less.’ That makes life miserable for the manufacturers.”

TV makers were betting earlier this year that pricier LED TVs with brighter screens or 3-D sets would keep prices from falling the typical 20 percent to 25 percent annually, according to Atul Goyal, a senior research analyst at CLSA Asia-Pacific Markets in Singapore. That bet hasn’t materialized as pessimism has increased recently and shoppers in the U.S. aren’t willing to pay extra for higher quality sets.

This is very bad news for Amazon, whose already razor thin margins are about to go negative as it strives to keep in the price war to the bottom with other retailers:

U.S. retailers such as Target Corp. and Wal-Mart Stores Inc. are sweetening discounts ahead of the holiday season to move merchandise as joblessness hovers near a 26-year high. Target, the second-biggest discount retailer behind Wal-Mart, said this month it would lower prices on more than 1,000 toys to attract shoppers. Wal-Mart responded with its own discounts.

 

The imminent Japanese response: far more FX intervention. It cost japan $20 billion or so to get the USDJPY back to 85 for about 2 weeks. We expect about $100 billion to be spent over the next 3 months to obtain the same impact. This is money which, when sterilized, will not end up going into US Treasurys, and will force the Fed to bid up even more of the lost UST demand by Japan (and soon, others).

Panasonic, the world’s biggest maker of plasma TVs, said yesterday falling prices, the stronger yen and more expensive raw materials prevented the maker of Viera TVs from raising its full-year profit forecast even though earnings during the first half exceeded the company’s projections. The yen trading near a 15-year high against the dollar isn’t helping.

“The strong yen will be a major hurdle in the TV business in the second half,” Hideaki Kawai, the executive officer in charge of finance and accounting at Panasonic, said in Osaka yesterday. “It’s an extremely severe situation.”

South Korea’s Samsung and LG, the world’s two-biggest TV makers, have voiced similar concerns after the advantage of having a weaker won, the worst-performing major Asian currency from April to June, dissipated. The won’s 5.3 percent gain against the dollar since September makes it the region’s best performer during the period.

And lastly, the massive inventory restocking that was enough to boost Q3 preliminary GDP by well over 1%, is about to actually start taking a toll on GDP as the number slides coupled with accelerated inventory liquidations:

“We expect increased oversupply and price declines in the memory market, as well we possible further declines in LCD panels,” said Robert Yi, vice president of investor relations at Samsung. “Combining these with a possible appreciation of the won, we expect the overall fourth-quarter business conditions to be difficult.”

The following summary of why John Taylor is right and a sell off in November is likely immiment is absolutely spot on:

“The Christmas season makes or breaks you and this year you’ve got unemployment and deflation,” said Yamada of kabu.com Securities.

And Yamada did not even think about the rampant inflation in products in which commodity input costs can not be offset. Altogether, for everyone except the richest 1% of America, this holiday season will likely be ugly, even as the economy contracts, and the global economic system retrenches in anticipation of all out trade war. Good luck QE2.