Perhaps because I am based in South Florida -- ground zero for the housing downturn and the rise in foreclosures -- I am quite concerned about the subprime lending debacle's impact on the overall economy.
For the past year, we've been hearing that a popped housing bubble would crater consumer spending, since people presumably would feel poorer amid declining home values. But all but the most bearish investors have to admit that the decline in real estate has not dragged the economy -- nor consumer spending -- down with it.
Now the latest worry is that the housing troubles may finally take their toll on shoppers. But retailers have held up well so far, and the subprime troubles likely won't do much to damage that strength.
To be sure, families who bought more house than they could afford at ridiculously attractive teaser rates are having trouble meeting their obligations now that those rates have adjusted upward. That ostensibly means they are likely making fewer trips to midscale dining chains like
, forgoing the latest gadget from
and skipping a new outfit at
Nationally, foreclosures were up 12% in February over the year-ago period. Retail earnings, however, were not horrible during the fourth quarter, and February same-store sales held up as well. In March, restaurant comps were mixed, although some, such as
Red Lobster, came off monster numbers the year before.
Mike Darda, chief economist and director of research with MKM Partners, believes that concerns about housing's impact on the economy are overblown.
"The vast majority of households aren't impacted," he says. "Unemployment is the key."
If that's true, retail should in fact be a strong performer. Friday, the Labor Department said the unemployment rate dipped to 4.4%, the lowest level in five years, while nonfarm payrolls jumped by 180,000.
Most major retail chains should show continued strength for March when they report sales data Thursday. Thomson Financial expects its index to show average same-store sales growth of 4.2% for the month. Eliminate a lackluster
from the equation and the figure increases to a very strong 6.3%.
The growth is projected across all levels of the market.
American Eagle Outfitters
, which serve different market segments, are all expected to post double-digit gains.
Restaurant expert Malcolm Knapp says that while strapped homeowners are being squeezed, they're shopping at the supermarket and forgoing trips to fast-food restaurants like
and family restaurants such as
. However, once those consumers lose their homes, they go back to renting more-affordable domiciles and return to their Big Macs and Bacon Double Cheeseburgers.
"Fast food won't get beat up as much as you think they will," Knapp says.
Brad Ruderman of Ruderman Capital Management also is not overly concerned about subprime's effect on retail.
"We've been hearing that this would cause a problem for the consumer for two years," he says. "The subprime borrower probably wasn't drawing equity anyhow."
Ruderman believes the bifurcation between high-end retailers and others will continue. Retailers and restaurants that cater to the wealthy have performed extremely well recently.
reported flat earnings for its fourth quarter due to one-time charges, same-store sales rocketed 8% higher in the quarter.
Ruth's Chris Steak House
are other examples of companies whose moneyed clientele has spent freely at their establishments.
But I suspect low-end retail stands to benefit from the subprime mess. Shoppers who are feeling pinched are likely to watch their nickels and dimes more carefully and shop at Wal-Mart and dollar stores like
On the flip side, while the prices per unit at
BJ's Wholesale Club
are economical, cash-strapped consumers may avoid the warehouse clubs. If Heidi Homeowner is worried about making this month's mortgage payment, she's not likely going spend an extra five dollars in order to save 50 cents per jar on a three-pack of mayonnaise that her family might not get through until Christmas.
Just because homeowners are not taking the equity out of their homes or upgrading to larger ones doesn't mean spending has dried up or will dry up. As long as Americans are employed, they will continue to spend. I don't expect the subprime woes to do any real damage to the retail or restaurant sector until the jobless rate creeps higher.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.