Please Listen to Nassim Taleb

He is BRILLIANT!

I really cannot believe he is making the television rounds. 

Please note the music played over his voice for the last 90 seconds:

Psychology in the Economic Marketplace, Part I

Ben Bernanke needs some help. This is my contribution:

In 1969 Elisabeth Kubler-Ross described, with great specificity, the five stages human beings go through to cope with tragedy and grief, especially in regards to terminal illness. This led to ground-breaking research and new treatment models throughout the medical diaspora, and is now taught as an essential part of any Psychology 101 class.

The following are the five stages, more universally known as DABDA:

Stage 1 Denial "This isn't happening to me"

Stage 2 Anger "Why me?"

Stage 3 Bargaining "I'll do anything if I can live on."

Stage 4 Depression "Why should I do anything? It wont matter."

Stage 5 Acceptance "This is inevitable. I will make the most of what's left."

Before reviewing current economic conditions through the lens of these five stages, understand the terminal patient in our model is the old Western Financial Model, not America, which will re-emerge. 

Stage 1 - Denial

It is quite simple to point at Summer 2008 as America's "period of denial", though I have a differing theory.

The Denial Stage started in September of 2006, a month after home prices peaked, sending lenders (Banking Institutions) into an industry-wide panic as to how to fight off the inevitable fall in the Housing Sector/Recession, sure to occur during that year's 4th Quarter or the 1st Quarter of 2007.

The solution these lenders came up with was to open up the housing market to the only people in America that did not currently own the housing they lived in, people unable to afford to the costs of making such a large purchase, many of which where low-income racial minorities.

As ridiculous as it sounds (Literally giving money to people that CANNOT repay the loan), the rush of new home buyers had the duel effect of: continuing the home building boom in the country (intended), while simultaneously causing prices of existing housing inventory  to rise precipitously (unintended).

The bad loans were securitized (bundled, chopped up and re-bundled) by the lending institutions, then sold to others on the world financial market, thus leaving the lenders with zero risk for the very risky, highly predatory loans.

The endgame was set before the first loan was made. The system's death sentence was set before the first loan was made. This was the ultimate form of denial.

Stage 2 - Anger

The Anger Stage set in as you started to hear reports of "waitresses buying million dollar homes." Although the wider public had no idea of what was coming down the road, the lending institutions started putting the onus of impending doom on the people at the bottom of America's totem pole, the working-class.

"Why did they take such big loans?", they asked. "What were these people thinking?", newspaper headlines screamed. The term "sub-prime" entered the lexicon of American public as a negative connotation for, not the predatory lenders, but instead, the borrowers.

False outrage from the banking institutions gave rise to real outrage in communities throughout America, as home-owners began to find it harder to sell their homes.

Whether the  difficulty arose from lack of interest from new home-buyers, sliding home values due to unkempt or abandoned vacancies in their neighborhoods, or the lack of loans available to those that truly qualified, home-owners with inventory to sell found themselves at the front line of a problem they could never have seen coming.

To home-owners, anger was the only rational reaction to the unpredictable circumstance which had befallen them. To lending institutions, faux anger was the only way to keep the public eye off trail of the actual culprits.

Stage 3 - Bargaining

The Bargaining Stage is perhaps the most perilous stage in the process. In is the stage the full extent of the problem crystallizes, which in turn often leads to drastic measures being taken to improve the diagnosis.

The Bargaining Stage for this financial crisis was characterized by the Federal Reserve making steady cuts to the Interest Rate, all the way down to virtually nothing, to help reverse the future which was set in motion so long ago. Additionally, the TARP ($700 billion) bill was passed in haste by Congress and signed by the President, and an additional $2 trillion dollars in "emergency loans" was issued by the Treasury Department to the same lending institutions that brought the crisis to bear. The thinking being, everything was on the table to save the old system.

For home-owners the bargaining stage was disastrous, characterized by actions that only worsened their collective situations.

Upon the first evidence of a slow-down in the housing market, instead of reporting the origins and culprits of the problem, media cranked up their output of their perceived solution to the problem, home improvement. The HGTV network best exemplifies the new attitude, changing the majority of it's programming from a theme in line with What You Get For the Money - a show built around sharing how much home you can buy for the same price in several different cities, to more programming like Curb Appeal - a show about enhancing you ability to sell your home by making minor changes to your home. And for the most part, home-owners went for it wholesale.

Even with a downturn in the housing market, retailers such as Home Depot, Lowes and Menard's saw brisk business through the entirety of 2007 and the very early part of 2008.  Americans decided a new marble kitchen and/ or luxury bathroom would change their fortunes, with many taking out equity loans to make the necessary changes. 

When home improvements did not work, home-owners turned to incentives in hopes of unloading their unwanted property. Covering closing costs, down-payment assistance, new paint budgeting and assessment deferrals became the norm. The problem with incentives was individual owners could not compete with Developers, who were giving the same incentives, in addition to free scooters, cars, upgraded appliances and gift cards. The problem remained unchanged.

Lastly, and begrudgingly, home-owners started to accept their ability to sell their homes at asking prices was illusory, so they started to discount the prices of the houses.

This is what the media called the "bubble" bursting.

With home prices peaking in August of 2006, many major cities had not seen an even 10% correction (price drop to reality) as of April 2008. However massive discounting across the country led the national average to see a drop in the high teens by June of that year.

Two months later, in August of 2008, banks had stopped lending money, even to qualified applicants, and the die was cast.

Home-owners were left with a home the did not want, at a price they could not pay, worth  a lot less than was paid for it, and a home equity loan taken out to pay for the improvements and incentives offered to the increasingly shrinking home-buyer pool that found it virtually impossible qualify for a loan of any kind.

This led to the Stock Market failure in September and then, ultimately, to...

Stage 4 - Depression

In many ways, this is the stage we are currently in as of this writing. 

There is so much confusion about what happened, why nothing is seeming to have an impact on the situation and how to move forward, Americans for the most part have chosen to just tune out.

We would rather just ignore this mess, not talk about it. "This to shall pass", seems to be the refrain of the moment.

The is unanimity in the understanding of where we are in our history, however there is no real mobilization by the leadership. Has anyone asked of us to sacrifice anything since this crisis began? We were told to, "get out there and grab those bargains" for Christmas.

The collective depression has led to stagnation in the housing market, with sellers holding firm on prices at hat are admittedly overly-inflated, buyers looking for new homes at foreclosure pricing, financially overly-extended families literally packing up and walking away from homes their kids grew up in, and banks too busy predating themselves to open up the credit instruments necessary to get the economy moving again.

We are all collectively stung...and depressed.

Stage 5 - Acceptance

The very final stage before transition, though it is not necessarily guaranteed that everyone makes it here, as depression can be a mutha!

The Acceptance Stage is so critical, in that it is made possible by accepting the idea of transitioning from what we have known and grown comfortable with, to something unknown, yet inevitable. The peace that comes in this stage derives from gaining the knowledge that what we have experienced is no longer possible.

For the American public, acceptance will come when we decide: 

• That things cannot go back to the way they were in the 1990's.
  
• The house we own is going to be worth about 30-45% of it's 2006 value.
  
• Owning a home in their lifetime will not be a reality for a large number of people.
  
• There will be a rise in unemployment and an (almost) across the board reduction in wages in the near future.
  
• The ability to buy a new car, let alone every 4 years,  has already been altered for a large number of the populace.
  
• Volunteerism, social activism and local purchasing decisions are going to be required to assist in this turnaround, and I mean from everyone.
  
• Government is not gong to solve this, at least not exclusively.
  
• Wild expansion & profiteering is a thing of the past, slow growth is the new way forward.
  
• Rampant consumerism does not have to go away, but needs to at least slow down in the interim.
  

All things that I would never hope for, but are required to find the peace we need as a country to move forward and regain our footing.

Four decades ago Elisabeth Kubler-Ross changed the way the medical profession deals with the aggrieved, including those with terminal illnesses. Perhaps, using her ingenious model, we can find our way, as a country, out of the darkness of our current situation.

Can we do it?

With apologies to Bob the Builder and the President-elect, Yes We Can!

Many Happy Returns

I was reading Ray A. Smith's article (U.S. Retailers to Report Grim Results)  on the Wall Street Journal website regarding the much anticipated December retail numbers due out Thursday and something sparked a memory of an unusual experience I had yesterday. 

Allow me to share and expand.

I went to my neighborhood Costco (a retailer who's praises I have sung on numerous occasions) yesterday and, as I approached the doors, saw something I have never witnessed before, a line to get in.

Mind you, yesterday's weather in Chicago was in the upper 20's, maybe 30, maybe.

Yet and still there were about 8-12 people standing in an orderly line outside the store. As I moved closer and closer I noticed the line extended some ways inside the store as well.  While walking and searching my wallet for the always misplaced membership card required to enter, I started wondering if the few items I needed was really worth standing in freezing weather.

Just as I resigned myself to the idea, I noticed the line was not to get inside the store, but an extension of the "Returns" line that was now, literally, winding outside the store.

The sight of that line and the thought, sparked by Mr. Smith's article, drove home a point I had not considered, how tough January business is in the retailing business.

This January, much like this December, is sure to be perhaps the worst month for retailing in, excusing the hyperbole, modern history.

Three things are needed to make a Perfect Storm in retailing:

• First, an uncertain economy. A bad economy is one thing, but "better the devil you know", they say. In bad economy, people have already made adjustments and pared down their spending habits. In uncertain economy, which is really a bad economy where people refuse to accept that reality, people attempt to maintain their lifestyles regardless of how difficult the reality of doing so is. This leads to large spending expenditures, followed by mass returns, pawning and borrowing. Sound familiar?

• Secondly, you need swollen inventories. Swollen inventories take up room needed to show new goods, inhibit buying teams from investing in newer, more relevant merchandise and forestall payments to vendors, banks and other creditors. If you consider we just came through the worst holiday season on record, and 4th quarter is when retail inventories swell to their highest levels, inventories are now HUGE, everywhere. This is why you are seeing, "Buy 1 Get 2 Free" signs in place of, "66% Off" signs popping up in stores. They seem to be the same thing,and while the latter gives customers merchandise for 1/3 the price, the former gives customers merchandise at 1/3 the price, but additionally removes two more items from the store's inventory. Inventory is a major problem at virtually every retailer right now.

• Lastly, you need reduced consumer foot-traffic. This point is not as obvious as it seems. Of course January is going to be infinitely slower than pre-Holiday business. However this January is sure to be slower than most because of something I wrote about in November, the greatly reduced number of gift cards sold this past Holiday Season. Gift cards ensure future business, period. When customers decided to steer clear from purchasing gift cards over the holidays, the message was clear, "We are not sure if we will be back, or if you we will be here when we do." The combination of loaded gift cards and huge discounts would have made for a festive January in retailing, instead we have the opposite effect.
  

Coupling these three factors with record rates of merchandise returns brings the problems many retailers face more clearly into focus.

A Perfect Storm has descended on the entire retail landscape and will have a disastrous impact on this, the last fiscal month of the calendar year. Look for Thursday's numbers to be bad, and this month's numbers to only accelerate the inevitable thinning of the retail herd.

Headlines vs Reality

There seems to be a bit more chatter in the press about a "new economic outlook" for the country. Some economists are even talking about a "mid-year turnaround" (read THIS).

Well I did a cursory search on the housing website hotpads.com for "foreclosed property" in my zipcode (60607, click through HERE), and WOW!!!!! I discovered something I could not have known: my neighbors are feeling the absolute crush of the economic downturn already. There is no denying this fact when there are 40 foreclosures within a 6 square block area.

The map below is startling, with each red house representing a foreclosed residential property (CLICK FOR LARGER IMAGE):

Well over 600 foreclosures in 8 of the best neighborhoods in Chicago: Streeterville, Gold Coast, Loop, West Loop, River West, West Town, New East and (oh my goodness!!!!!!!!!!!!!) South Loop, which is starting to get national attention for it's housing woes. 

Read a bit more about South Loop HERE (read the comment section as well, there a few people I truly respect that weigh in on the topic).

This does not even aggregate all the foreclosure data available. There are lots and lots more, but to stare at in visual form on a map just brings the scale of the problem into focus.

Hunker down people, in the world of economist and newspaper people, alternate reality is the new reality. I am not young and I have never lived through what we have experienced thus far, let alone what cometh.

Thinning Profits (and the Herd!)

The following are photos from my monthly walk along Michigan Avenue, Rush and Oak Streets. This two mile stretch has every store, covering every niche, in the entirety of the retail marketplace. What I decided to do is document what I saw, where I saw it and, just to get 2009 on everyone's mind, share what I think the fate of the particular retailer holds in the near future.

Before we start, please understand this very important fact:

With VERY few exceptions, when a store sells something for 50% off, they are losing money on the item. Yes, I know all about margin builders and the like, but those are a very rare exception in the overall assortment.

The reason for the loss is simple, here is an example:

Store A buys a dress for $40
Store A decides to sell the dress for $100 (a 55-60 mark being about industry norm).
If they sell the $100 dress for 50% off at $50 it would seem they made $10 profit, right?

Wrong!

Store a had to pay for the trip to New York for it's buying teams.
Pay for the paper to write the order on.
Pay the salary of the buyer that makes such decisions.
Pay for advertising, in-store signing and and the like.
Pay for medical, dental, 401k and other retirement benefits for their employees.
Pay for the real estate costs, insurance, design and fixture costs for their stores.

There is more: loan repayments, legal fees and market research, but you get the idea.

Such costs cannot be covered from that $10 profit, unless you sell hundreds of millions of those dresses (which is what Walmart is so good at).

That being said, the signs you see below should read as something out of SAW IV, not Happyland.

While this will bode very well for the consumer, it, quite literally, means the end for more than a few of these stores.

As always, all images can be clicked to get a larger, more detailed view.

Let's get it started:

This is Aldo, the shoe store that competes against 9 West when their goods are full price and Payless once they put their goods on sale. They are over saturated and overly dependent on mall traffic to drive sales. When was the last time you heard a friend say, "Hey, let's go to Aldo." I thought not. I see this chain closing 50% of it's locations, and/or seeking bankruptcy protection by May 2009.


Brooks Brothers will be fine. When the economy goes sour, people dress better. Even during the Great Depression this was the case. People without jobs wore suit and tie, just to feel a part of society. Brooks Brothers is an iconic brand that more than a few people will discover a other options from overseas start to disappear. Don't look for expansion, just look for them to make it through the economic downturn in one piece, which is sort of an A- or B+.


Walt Disney stores. During the Great Depression this company was hit so hard it had to do something radical just to remain relevant. What they did was start doing live action films, s Snow White and the like were not really meaningful after the war. This time, Disney is better suited for the though economic climate ahead. The acquisition of Pixar Studios two years ago gives Disney a foothold on smart, cutting edge filmmaking that not only deals with tough issues and ideas, but seeks them out. That being said, they SHOULD close their stores, but won't. Tourism to the Disney family of theme parks will plummet, so giving your child a little piece of Disney, if even in the form of a Happy Meal, may become all the more important. We'll see, but Toys, as a category, took a bath this holiday.



Sak's Fifth Avenue is going away. If not altogether, much like the sign below, 75% of it will. Someone has to convince me why not. See, you can't, can you? Saks has long thought itself Neiman's and run itself like Enron. If someone peeped behind the curtain, OOPS! you got us. This holiday season should pretty much end what has been a 6-7 year flirtation with a $5 stock price. Credit is tightening, so look for investors to pull of their roots and  go elsewhere. Sak's is nice, but not necessary. This will be one of the biggest, in name, casualties of this economic downturn. Obama Stimulus, or not.


Neiman Marcus is really in a class by itself. The brand represents the pinnacle of the American retail marketplace. They will benefit more from Saks' demise than anyone beside, perhaps, Nordstrom. Without the presence of Sak's, Neimans should see better gross margins due to not having to price match/ compete in many of their markets, which will lead to more profitability. Neiman's would be one of my real winners for 2009, save for one mistake...and it ain't small.

Why they decided to open up so many of these CUSP boutiques is beyond me. They are aimed at just the market niche that is most impacted by, first the housing collapse and now, the Great Recession. The combination of $600 blue jeans, $1800 driving jackets and long-term mall leases does not make for a good recipe for the future we face. This ultimately will be a VERY costly drag on the company and expect them to exit the idea entirely by the beginning of 2010.

BCBG, the retailer that never really was, will go back to selling it's goods in stores exclusively. For the life of me I cannot think of a more gracious thing to say, other than the sooner the better. 50% reduction by the beginning of 2010, perhaps entirely. They still have a strong, desirable brand for young adults, though.


Juicy Couture, in short will be in big trouble. Rapid expansion, usually means rapid reduction. Juicy has a great brand, but they are waaaaay overextended as far as different balls in the air. Look for them to rapidly shift to licensing, if that is an available option. Store closings and a return to being a vendor, not a retailer.



Yves Saint Laurent will be fine. I just wanted to illustrate the point that EVERYONE is on sale.



Children's clothing boutiques will be one of the first to get wiped out. Over the last decade no category has had faster growth and prices within this category have not been tied to anything sane. $100 shirts, $125 jeans and $70 t-shirts have become the norm from NEW DESIGNERS, not even luxury brands.

All things related to children will see growth, as people will think of their kids before themselves, but most Childrens boutiques will take a back seat to the Target's and Kohls's of the world. This has actually already started, evidence being the bath toy's took this December.



Home related stores are already in deep trouble (see Home Depot), though few really know by how much. To get a grasp of the outlook for this segment of retailing you need only one fact: January is the second most important month of the year for furniture-makers. So many home stores will go under within the first half of this year, survival will come down to how long you can hold on? If you can make it to July, and less than 50% will, you may have a chance at getting through the year flat. Habit will drive people to stores in the first quarter of the year, but I cannot think of a segment of retail so heavily dependent on credit, save automobiles. This obviously is a recipe for disaster.



Bye-Bye...



Those in the know understand why I included this photo, as a "sale" sign at this company is virtually unheard of. The early part of this economic downturn will benefit "stay-at-home" stores which related to: cooking at home instead of going out, watching dvd's at home as opposed to going to movies and buying liquor for home gathering as opposed to going out to bars and clubs.

What happens after the summer within these categories is anyones guess at the moment. If things start to rebound (which I don't see) they will maintain their balance. Though should there be no clear vision of an end to the downturn, look for them to be hit hard by September, complete with lots of closings and bankruptcies.



Not enough stores at MaxMara to have mass closings, but they will feel the realities of the economy, hardcore. Light inventory and staff cuts are in their very near future.



When you sell everything in your store for $20, as H&M does, you cannot survive by selling everything for $10. Margins are too thin at this company to help pay for what has been a very rapid expansion. Look for LOTS of store closings for this European company, same goes for Forever 21 and Charlotte Russe. Bankruptcy is not out of the question for any of them.



Let's be real. Borders is in big trouble. Not liquidation trouble, but trouble nonetheless. Immediate store closings after the new year, staff reductions at other locations and possibly bankruptcy protection for reorganization purposes. The good news for them is they have been putting out fires for 6-8 months at the company, so they are a bit further along in their planning than other retailers.



Ralph Lauren is on SALE!!!!! Run, don't walk!!! Their strong department store business will carry them for the next few years, one of the few companies with such a luxury.



Banana Republic (Gap and Old Navy) are in some very big trouble. Over-saturation in every market, irrelevant fashion assortments and long-range turnaround plans aimed at fashion, not efficiency mean bad news. Look for lots of closings, lots and lots of corporate lay-offs and a possible split of the company, which might be best. Banana, however, will be hit the hardest. It participates in the niche with the most competition, 20-40 year-old new professionals. Zara is going to dominate this market once it gets set with it's expansion, Express has more money and focus (though they are already suffering) and their clientele is already starting to dip into the XXI's and Junior departments at larger retailers in search of discounted merchandise.



Bye-Bye Talbot's! I don't see how they will emerge from this in one piece. Immediate store closings, immediate mass lay-offs and perhaps even liquidation.



As I stated earlier, Limited Brands (Express, Limited, Express Men) is going to take a significant hit. They have too many stores to begin with, but the fact they control the entire process (from design, textiles, maufacture and shipping) of everything in their stores may save them in the long run. Wexler is smart and visionary, so we will see if he was able to make the necessary adjustments to his machine before September, if not....ouch!



Very hard to write these words, but Crate & Barrel may not make it. I am a Chicagoan, so I grew up alongside this company. Going to the first store with my mother when I was small boy. That aside, the company has become less relevant with each passing year due to more copycats, with lower prices. In the movie It's A Wonderful Life, Clarence the angel tells George Bailey, "every time a bell rings, an angel gets its' wings." Well in the non-celluliod world, every time an Ikea opens a Crate & Barrel loses it's wings, or appeal.

I am pulling for you C&B, I just don't see how you emerge from this unscathed.



Ann Taylor closing are a given. Too many stores, reduction in clientele (less job holders means less clothes needed), loads of competition at every conceivable price-point and bloated inventory levels all point to bad times ahead. Look for quick moves to bankruptcy protection and, ultimately, a BIG downsizing by the middle of next year.



These types of stores (H20 and Bath and Body) are basically gone. They can only operate profitably when selling goods at full price, which is no longer an option. So take this test, will you spend the $15 you have on a new shirt, sweater, groceries or six ounces of green-apple bubble bath. Thought so!



The question for retailers like Levi's becomes, will their customer base continue to buy jeans from their boutiques at $90-$145, or start buying the lesser-weight versions from Kohls for $19.99-$40.00? I think the latter is more probable, so that is not good news for the store side of Levi's.



Ditto for Kenneth Cole. This is value-brand that has never been priced at value. So as a retailer, good-bye! As a vendor, you have a bright future.



Ditto Emporio Armani. The good thing for this company is there are not many of their stores to close, but close they will.

Stores that are not on Michigan Ave. that face major problems:

Sears - Kohls is kicking their butt and will continue to do so. Tightening credit means far less major appliance sales, less home-building means fewer tool sales. How can they withstand a double-hit like that in their two main areas of strength?

Macy's - Contraction is inevitable. Look for closings of 75-200 stores rather quickly. Bankruptcy is not out of the question, as they have massive debt payments due in the first half of 2009. Swollen inventories and lease obligations spell bad news.

All Jewelers - Contraction in this market will be unrelenting. A bad 4th quarter (-35%) will only make the thinning less merciful. Look for the elimination of 25-50% of all mall-based jewelers by June.

The Coldest Winter Ever

"Habit is habit, and not to be flung out of the window by any man, but coaxed down-stairs a step at a time."

-Mark Twain (Pudd'nhead Wilson)

Americans, like all people, are creatures of habit. The greatest difference in the American habit and those of other cultures, is our national habit is shopping. We like to spend. What one owns, or wears, or drives, or goes to school, or lives, or vacations, or get their hair cut, or gets married, or goes to eat when dining out defines them in American Society. 

Oft times we make the mistake of believing it's how much money a person makes that defines them, which may be true to a small few. However, for the rest of us, that too is just a means to an end. We want to make money, so we can turn around and spend it. This is why Americans are the most debt-riddled people in Western Civilization. We know what great is and we deserve it, right?

This is the unshakeable truth that the financial markets have been faced with since late-August, when small fissures in the credit dam began to express themselves. Around the clock internal meetings ensued at most large banks around the world, as their leadership began to prepare reporting 3rd Quarter figures to the world. "My God, we will be the laughing stock of the banking community", they thought. For not even the sharpest of pencils, that means you Jamie Dimon, could have thought their situation was not unique.

As the reporting period began in early-September, the trickle of bad news began to emerge. Massive mortgage debt, record foreclosures, delinquent car loans leading to widespread repossession, individual credit-card payments slowing down, record personal bankruptcy filings, small business loans having to be renegotiated, large commercial real estate loans being defaulted on and massive insurance pay-outs from Hurricane Ike. For the trickle was now a full blown tsunami. 

The markets, being unprepared for such overwhelming bad news, and from so many different arenas, did what anyone would do in such situations, it collapsed.

While I cannot profess to have lived through the market crash that started "The Great Depression", I can say for certain, there were never less stable days in America, financially speaking, than those of September 15-17. That is, of course, excepting those of October 1-10 when they New York Stock Exchange (and thusly the American Investment community) lost 22% of it's wealth.

The uncertainty of those days in mid-September days produced a plethora of bad ideas as to how to fix the problem (hello $800 billion bailout). However, two main ideas that emerged are what now clearly going to have major negative, long-term repercussions for the American public.

The first idea was the focus by the Federal Reserve and the Treasury Department on how to stabilize the markets until Thanksgiving, a time when most Americans stop paying attention to affairs that do not involve their families. Usually, market "corrections" happen in October, which gave rise to this dandy from Mark Twain:

"October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February."

Every economist is trained as to how to deal with such problems and the entirety of their training matrix is based on the dreaded "October Surprise."

What threw Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, was the "surprise" came not only in September, but early-September. This meant all their training on how to control a downturn for 4-6 weeks, was staring down the barrel of a finish line minimally 11 weeks away. This is what created so much uncertainty. And said uncertainty is what really rocked the market harder and harder as time wore on.

The Financial Market's hare is now coasting to certain victory, while the Economy's turtle plods along. 

Well, now that the hare is finally and exasperatedly near the "finish line", prepare for the fan to start kicking out a rather familiar foul odor. Bad news, even in great economic times, is saved and distributed, like so many secret santa gifts, for the period between Thanksgiving and Christmas. 65% of all lay-offs happen during this period, most companies that are going to change leadership do so, companies settle lawsuits that have dragged on for years and the like. All because they know that spirits are high and we are not paying attention. 

Unfortunately for most, attention will be payed like no time in our prior history a a nation. Hopefully, we can bear the weight of what is surely coming.

The second and more unfortunate idea to emerge is the unbelievably misguided theory of the core problem afflicting the economy, bad mortgages. That is a problem, but one that has been silently stalking us since late-2003, early-2004. Bad mortgages were a problem before they starting lending to sub-prime borrowers. Tales of bus drivers taking out loans to buy million dollar homes with swimming pools are greatly exaggerated. Bad debt was spread around in many directions.

Start-up small businesses were given billions of dollars in bad loans. The evidence is on display in every American neighborhood, expressed by the growing number of "Store For Rent" and "Commercial Space Available" signs on display. The unfortunate reality of their failure is a great many of these new small business owners leverage their homes to borrow for the new enterprise, making a bad situation into a crisis, all in one fell swoop.

Large Corporations were given massive loans to re-tool factories and invest in additional materials for a burgeoning market that did not, and does not, exist. This is the problem that expressed itself in the form of the trouble Ford and General Motors finds themselves in at the moment. Both have invested in infrastructure for 2009 model-year cars, when both have seen 2008 inventories balloon well beyond record levels.

These examples are just a small glance at the behemoth clogging the pistons of America's Economic Engine. However unseemly all these scenarios appear to be, the real core issue affecting everyone in this country, every company in this country, every trading partner with this country, is credit.

We are a credit society. We have been a credit society since at least the dawn of the 1980's, and a case could be made for earlier. Before then, people who wanted things, saved up their money and bought those things, or did well enough without them. Television re-runs of Archie Bunker yelling at Edith about her spending the family savings on a new dress, do not ring as credible or accessible to anyone under 40 years of age. Today's sitcom is more inclined to revolve around a wife hiding a credit-card bill for something she has already purchased. Herein lies the problem, fully and naked-as-can-be.

Americans have been resistant to living on a pay-as-you-go economy. Families forced to do so would surely have dramatic lifestyle changes. Older (I'm sorry, Certified "Pre-owned") cars would be di rigeur, hand-me-downs would a more familiar reality and, while I can't say they would not be as beautiful, family homes would be much, much smaller than they are at present. Think about it, when was the last time you met a kid that shared their bedroom with a sibling. How about the last time you saw a kid on television share a bedroom. Large is who we have become, in lifestyle and as individuals.

Businesses are in the same boat. When facing pay-as-you-go economics, the ability to adjust to a rapidly changing marketplace are fantastically diminished, almost to nil. Every bet, and I mean that literally, has to be a correct estimation, which pays off in expected dividends or beyond. The smallest misstep would create a cascading snowball effect, damaging the company in ways that would threaten it's existence. This would naturally lead to much more cautious leadership, less innovation and winnowing of options in the consumer marketplace.

This is a very realistic depiction of the American future should Financial Institutions continue upon the path of "correction they are on. The problem facing this country is the lack of available credit to the individual. Unsold housing inventory, as well as automobile inventory continue to swell, due to the Financial Community's decision to sit on it's hands and not loan money at present.

There is certainly a conversation in the offing for American's and American Business Leaders, about how to manage our existence within new boundaries. However, no is not the time.

This Holiday Season is going to be hard on a bunch of families, which means it will trickle up to have a tremendous negative impact on Retailers. This Thanksgiving weekend is the movie trailer to a new, terrifying Horror classic in the name of December.

Recognizing the "stakes" will not be enough for the Fed and Treasury. Identifying the problem on the ground and re-stimulating those at ground zero is the only way out of this economic morass. 

Turn the pipes back on!

Funneling Information

Lunch is great. For me, business lunches are even better.

I have, for the last 2 years, hosted a monthly luncheon with eight retail managers from 4 major retailers and two specialty retailers. These casual affairs are generally an open forum, with my refraining from asking questions, allowing for conversation to flow more freely as opposed to shaped discussion. 

It is during these lunches that I have been able to forecast several retail trends, though strangely, those at the meetings have not had similar success.

 A sampling of such trends include:

• Tightening Credit- Almost everyone complained in April/ May about not meeting new credit goals.
  
• Death of Group Think - No longer were items driving businesses, bespoke is now everything.
  
• Guess Work at Merchandising Level - This had more to do with lack of strong item call from consumers.
  
• Trouble for Men's Categories - When most companies saw men's shoe business slow in October '07, the rest of the men's business unit was sure to follow. Which led to...
  
• Women' Career Clothing Issues - It took until the beginning of the Spring, but nobody doubts how devastating this has been across the board.
  

Having a group of highly-intelligent, business savvy merchants from so many companies is a luxury I wish upon any consultant/analyst. I am regularly blown away by the shear magnitude of useful information and ideas that come from our meetings. However, the meeting we held last Thursday was both illuminating and troubling.

It was the first time I felt the group was completely out of touch. Not with retail trends, but REALITY!

They spoke of "hiring up" for the holiday season, "loads" of new merchandise flowing into the stores, "huge" upcoming events that "were going to drive business" and the like. I decided to break protocol and ask a few questions.

1. Had any of the participants been told to watch their staffing levels, especially for post-Thanksgiving business?
   
2. Had anyone been talked to about the many challenges that lie ahead after the Holiday season?
   
3. Had anyone been given instruction this year that differed greatly from last year's game plan?
   
4. Had anyone seen a significant shift in the amount of merchandise arriving at stores so far this season?
   

The answer for each was a resounding and unanimous NO! I can tell you that I am not easily shocked, but this, literally, took my breath away.

The problems facing the retail industry right now are much akin to a Perfect Storm. An economy that has been progressively slowing, a severely tightening credit market, record household debt, record home-foreclosures, joblessness claims at record levels, new credit-card legislation on the horizon and public promising to spend less than the previous year for the first time in years. Perhaps worst of all, a high profile, historic election that distracted the entire public from these realities..., until now. 

Every major retailer has been disappointing with Sales figures for months, and most have done major downgrades on earning forecasts for the 4th quarter. All of this leads one to believe that the upper-level executives at these companies are aware of the tough environment they are facing. So the question that begs out is, why this sentiment is not being filtered down to the store level?

Keeping the stores in the dark may prove easier, or more comfortable, as nobody wants to cause panic at the disco, ultimately though, the lack of full disclosure will lead to less success this season and failure during the first half of 2009.

What can be done now? For starters, communication between the merchant teams and stores has to take place every day. Floor rotations and staffing levels should be worked out via team effort, and done to reflect short trend lines (3-7 days, max).

1. Buyers need to STOP BUYING! On hand inventory is the only important factor right now. If sales stay on the track they have been over the last 30 days, there is no chance you will have money or space for new arrivals come January. I have spoken with executives and store managers at several discount/ off-price retailers, the consensus seems to be that they have too much merchandise coming in right now. This is great for the discount chains (Filene's, TJX, Nordstrom Rack), but ultimately the reason for the surplus is bad purchasing decisions in the regular retailers.
2. Cut store promotions (wine & cheese, celebrity appearances/ signings), as consumers have shown this is exclusively a price-driven retail environment. 
3. The urgency within the stores, should be similar to what executives feel when they are expressing regret for the continual downward revisions of earnings estimates.
4. Focus of moving merchandise like the next seven weeks are your last in business. 

You may come out of this holiday season in good shape, ready to take advantage of the tremendous value on new spring merchandise sure to be awaiting the survivors.

There are too many analysts betting against the Retail Sector this season. The winners that emerge will do so stronger, and in better shape to meet the many challenges of 2009.

Layaway No Longer a Laughing Matter

For easily the last 30 years, the word "layaway" has carried a negative, almost comic, connotation with it. Comics from Richard Pryor to Chris Rock, even George Carlin, have found humor in this most "common" way of purchasing items. That is, over a period of time, before taking them home.

Oh how times have changed. Layaway is making a comeback!

Walmart, the worlds largest retailer, ceremoniously ended their layaway program in September of 2006, a move the smartest retailer in the world has to be re-evaluating at this very hour. K-Mart never suspended it's program and now, in fact, is heavily promoting layaway in it's 1380 stores.

The culprit? A dramatic downturn in the economy, but most importantly, a freeze on credit throughout every almost every industry.

Most are well-versed of the growing nightmare of home mortgage delinquencies, but few have paid attention to the staggering amount of personal credit card defaults which are rising at an alarming rate. This has made credit card-issuers highly-selective at a time of year when consumers are most likely looking to increase their credit lines, the holiday shopping season.

The solution, at some savvy retailers, seems to lie in having consumers start paying for those holiday purchases before the holidays, in stark contrast to the usual "No Money 'til January 2030" ads we see each November and December.

There may even be a move towards attempting to make layaway more mainstream. 

In October of 2007 I came across this nugget on a business journal site I like to watch. Dieon Sanders, of Professional Football fame, was teaming up with a company that did not seem to fit the "branding" model of most pro athletes. The company? eLayaway, a company that offers layaway on items from over 250 merchant stores. They do not sell merchandise, they are primarily just the servicer of payments to those merchants. Using this model, I foresee a tremendous growth in the next 6-12 months in merchant membership, primarily because it could furnish anonymity to a participating merchant at the store level. A consumer could pay over time at eLayaway, then walk through the doors of say, Abercrombie and Fitch, to pick up their merchandise, all without any sign, within the store, of the transaction being consummated through layaway.

Don't expect to see this in your local Nordstrom, Sak's or Neiman's any time soon, but as more Americans come face to face with the reality of this economic crisis, look for layaway to, perhaps, take on a new persona, wide cultural acceptance.