Consumers to Campbell's: No Soup For You!

This post first appeared on Minyanville.

Given that Americans are embracing thrift, cutting corners and getting by on less, one could logically conclude canned-soup sales would be booming, as families opt to eat in rather than out. Logic, however, often fails.

According to the Wall Street Journal, consumer spending on food fell an inflation-adjusted 3.7% in the fourth quarter of 2008, the biggest drop since World War II. And it’s not just that consumers are turning to lower-priced options - they’re buying less, period.

Campbell’s Soup (CPB), a classic recession play for its affordable dinner options, is scrambling to realign its product offerings with changing consumer preferences. For example, a sales campaign offering 10 cans of condensed soup for $10 didn't boost sales as much as the company hoped. Research showed that while buyers liked the per-can price, they were reluctant to shell out more than was necessary for meals in the immediate future. In short, making rent takes priority over stocking the pantry.

Campbell’s, along with Kraft Foods (KFT), is trying to appeal to a clientele that wants to save a few pennies without settling for the same old boring fare every night. The Journal reports Kraft now has an iPhone (AAPL) application to help users manage shopping lists and search recipes, and Campbell’s is coming out with fancier canned soup options to appeal to a broader array of potential buyers.

This trend away from bomb-shelter grocery shopping and general extravagance may not just be some passing fad. Shoppers are stretching budgets further - not just by buying cheaper items but by simply spending less. And with the economic future cloudy at best, a swift return to gastronomic luxury is unlikely.

Budgets are back in vogue, and purchasing in bulk to save a few bucks isn’t as viable a grocery strategy as it used to be. This doesn’t bode well for Costco (COST), which banks on customers buying more soap, cereal or frozen chicken breasts than any normal family could possibly consume in months.

Credit, once the lifeblood of consumer spending, is well-nigh impossible to find. Coupled with the broadening repudiation of debt in general, frugality could be here to stay.

Pass the Spam.

Thrift Takes Hold, Rich Take Cover

This post first appeared on Minyanville.

While AIG (AIG) isn’t the only company eager to send its executives to swanky retreats at lavish resorts, other firms have taken note of the decidedly negative press generated by its transgressions.

As a result, they're scaling back expenditures, canceling conferences, and generally demanding their employees adopt a lower profile in the T&E (travel and entertainment) department.

Goldman Sachs (GS) recently announced its business travelers would no longer be put up at the Ritz Carlton. BB&T (BBT), a recipient of $3.1 billion in bailout money, also shunned the Ritz, canceling a March event for top sales people.

This trend bodes ill for states like Florida, a popular vacation destination for firms looking to reward star employees. According to the Wall Street Journal, in the last quarter of 2008, Florida tourism dropped more than it has at any point since the period following September 11. Hotels are receiving cancellation requests from companies wary of showering employees with expensive trips as others lay them off in droves.

Stranger still, this new allergy to perks extends even to language. One client of Amelia Island Plantation, an upscale resort north of Jacksonville, even told the hotel it wouldn’t consider a location whose name had the word “spa” or “resort” in it. Another bold customer even asked the hotel to drop the word “Island” from its moniker. (Oddly enough, the word "plantation" didn't sound any alarms.)

Welcome to the Age of Austerity, the polar opposite of our recent love affair with bling for the sake of bling.

Already, we're hearing anecdotes of shoppers uncomfortable with carrying bags emblazoned with the logo of high-end stores like Saks (SKS) or Nordstroms (JWN). Leering onlookers, disgusted at such lavishness, are shaming the well-to-do into buying their overpriced trinkets online. 2009's version of the "walk of shame" isn't down Frat Row on a brisk Sunday morning, but down Madison Avenue during the midtown lunch rush carrying bags from Prada or Coach (COH).

Purveyors of the inessential are hoping this is just a passing fad, that fast times and big budgets will be back faster than you can say AmEx Black Card.

Others, however, are shouting paradigm shift, as credit has distinctly disappeared from the American spending arsenal. Just how long it will be unavailable is anyone's guess. But as the rich are scorned and public displays of wealth are decried, the Age of Austerity rambles on, gaining momentum.

The next thing you know, that little blue box from Tiffany (TIF) will cease to carry the near-magical power to make up for that really really stupid thing you did once you were 12 beers in.

Wish Lists Shrink, Happiness Expands

This post first appeared on Minyanville.

No, you can't always get what you want
You can't always get what you want
You can't always get what you want
But if you try sometimes you might find
You get what you need.
- The Rolling Stones

The holiday shopping season, aside from being the raison d’être for retailers across the country, serves as a barometer for the whims and fancies of the American consumer.

Whether it’s the latest iteration Grant Theft Auto (TTWO), a big screen HDTV, or a sparkling amulet from Zales (ZLC), tallying up December receipts is an easy way to find out what the public deems important. After all, buying stuff is a reflection of the natural human inclination to maximize economic utility - or, in layman's terms, happiness.

For anyone paying attention to recent media reports of empty stores and vacant strip malls, however, it seems Americans are becoming nihilists: We care about nothing.

One can’t open the newspaper without reading about some company laying off thousands, postponing new hires, or shutting down altogether. The Grinch, no doubt, is giddy.

But, amidst the dire warnings and grim prognostications, there's hope some of these changes may be for the better.

The New York Times reported this morning that mothers are forgoing purchases for themselves this year to shower their kids with holiday cheer. One young Floridian will receive a new play kitchen and Elmo doll, while her mom makes do with the same old jeans as last year. Denim couturier Diesel will no doubt rue the decision, but Wal-Mart (WMT) will be happy to see Elmo fly off its shelves.

Other parents are taking thrift a step further, gathering like-minded neighbors to swap old toys, DVDs and discarded playthings of holidays past. Some are even resorting to the time-honored tradition of the White Elephant exchange, where gifts are passed around according to numbers drawn from a hat.

These trends may reduce the piles of superfluous electronic gadgets under Christmas trees and Hanukkah bushes, but they also encourage thoughtfulness, selflessness and a wholesale rejection of the rampant consumerism that's come to define our country - particularly around the holidays.

This is a welcome trend.

To be sure, Best Buy (BBY) and its ilk could miss profit estimates, and MasterCard (MA) may process fewer transactions, but in the long run, the country will be healthier for it.

Many scientists believe caloric restriction is the only thing that extends life in and of itself. We should eat less, they argue, since a body that processes less will hold up longer. The economy, itself a massive and deeply complex organism, is not dissimilar.

Like the body, it’s constantly growing, changing, evolving to adapt to the prevailing environment. Thriving on efficiency and shunning excess, it operates at peak performance when waste is kept to a minimum.

That's not to say there's no place for luxury in an economy - but during recessions, goods and services wanted by too few people simply disappear. Uncompetitive firms die off, making room for new entrepreneurs and innovation.

This cleansing process is what allows an economy to grow healthier and stronger. Sure, we may not get everything on our wish list this year - but maybe you shouldn't always get what you want.

Insurance Companies Position Themselves for Bailout

This post first appeared on Minyanville.

Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.

According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.

Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.

Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.

Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.

The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.

And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.

In the last month, however, Met Life shares have lost almost 50% of their value.

And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.

The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?

Everyone Agrees: Worst. Economy. Ever.

This post first appeared on Minyanville.

As the global economy continues to melt down, the use of superlatives is on the rise.

According to economists surveyed by Bloomberg, “The drought in consumer spending may be the worst ever.”

Meanwhile, Best Buy (BBY) CEO Brad Anderson, after reporting disappointing earnings and offering a dour forecast for profits going forward, said “Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen.”

Not to be outdone, Jeffrey Frankel, of the National Bureau of Economic Research told Bloomberg Monday, “We’re in for a pretty serious recession - there’s a chance it’ll be the worst postwar recession.”

As data from last month begins to trickle out, it’s becoming clear the global economy basically shut off at the end of September, and went on outright hiatus during October. Despite massive, coordinated efforts by the world’s central bankers and lawmakers, fears of a worldwide economic slowdown are becoming a reality.

Circuit City (CC) filed for bankruptcy

protection Monday, retail-sales data is bleak, and regulators shut down 2 more American banks over the weekend. Las Vegas Sands (LVS) is fighting for its survival and facing a cash crunch; most agree General Motors (GM), Ford (F) and Chrysler won’t survive without a federal bailout.

Commodity prices are tumbling and miners, steelmakers and industrialists are scrambling to adapt to the rapidly shifting economic landscape.

What many once believed would be contained to the small, esoteric world of subprime mortgage-backed securities has spread like wildfire, as years of lax lending and easy credit is being unwound in a manner of months. Firms are slashing jobs at an astounding rate, policymakers still can’t seem to get a handle on the housing mess and the effects of the financial crisis are rippling through the global economy.

Estimates for economic growth over the next 6 months are abysmal at best, as American consumers lead the trend towards thrift - both voluntary and involuntary. Most economists agree the holiday shopping season will be the worst in years, and the US economy could contract by as much as 3%.

Gloom and doom are ubiquitous.

What's notably missing -- and this should be considered marginally positive -- is hope. Hindsight often tells us that when the news is at its worst, expectations at their lowest, and when fear trumps rationality at every turn, the worst may be over.

Unfortunately, we've heard that story before. It has yet to come true.

This May, in an ominous prediction, Ellen Hughes-Cromwick, chief economist at Ford and president of the National Association of Business Economists, offered that the entire US economy will "slowly return to health" this year.

Ms. Hughes-Cromwick may have been just a bit premature in her rosy outlook.

FDIC Passes Around Collection Plate

This post first appeared on Minyanville.

Poor, poor FDIC - ever the Treasury Department’s whipping boy.

The latter gets to smack the former around like a badminton birdie because the FDIC’s primary responsibility is to clean up the Treasury’s messes. And these days, there are messes aplenty.

It goes like this: The Treasury oversees a regulatory body called the Office of Thrift Supervision, or OTS, that’s tasked with keeping tabs on federal thrifts (which are just mortgage companies moonlighting as federally chartered banks).

Until recently, the OTS was responsible for monitoring IndyMac Bancorp, which collapsed last month under the weight of misplaced mortgage bets. The FDIC is now sorting out the mess. The OTS also oversees such thriving institutions as Washington Mutual (WM), BankUnited (BKUNA) and Downey Savings (DSL).

Since the OTS’s idea of regulation is apparently to wake up late, sip a latte and spend the day diligently ignoring the wildly unsafe lending practices of its member banks, the FDIC is up to its ears in barely solvent financial institutions.

The FDIC charges deposit-taking institutions fees about $0.05 per $100 in deposits to display the group’s goofy logo (which dates to its Depression-era roots). This is meant to assure customers their money's safe, even if the bank’s risk management policies aren't.

When banks go belly up, the FDIC steps in and covers depositors up to $100,000. In the case of IndyMac, this could cost up to $8 billion. The FDIC’s insurance fund stood at just $53 billion pre-IndyMac, and is now so low it’s been forced to come up with an action plan to raise more money.

The options aren't exactly palatable.

It could jack up the fees it charges member banks, but with so many teetering on the edge of insolvency, they don’t exactly have a lot of cash to spare. The FDIC also has a $30 billion line of credit from the Treasury Department, but it’s loath to tap into it, lest it appear desperate.

Finally, it could borrow from the Federal Reserve, and join other flailing institutions like Lehman Brothers (LEH) and Merrill Lynch (MER), both of which have submerged themselves the warm bath of cheap Federal money.

As the credit crunch migrates outward from its epicenter on Wall Street and infects Main Street, local banks and thrifts are becoming ensnared in troubles previously reserved for complex securities firms. Small banks are often heavily levered to construction firms, small businesses and individuals in their surrounding communities, and are particularly vulnerable to regionalized economic slowdowns.

Downey Savings (in Orange County) and BankUnited (in South Florida), for example, are at the heart of the housing bust. Their local economies are sagging under the weight of job losses in both the construction and mortgage industries, as well as fallout from plummeting home prices. Both banks bet heavily on ill-fated Option ARMs during the boom, and neither is likely to survive the current crisis.

Now, the FDIC's challenge is to raise sufficient funds to cover the coming wave of bank failures - without putting undue stress on the already shaky banking system or igniting fears that it would need to tap taxpayers' money to protect, well, taxpayers' money.