C.M.O. 4.23.2010

Credit Market Overview

April 23, 2010

Oscar Wilde wrote in his essay The Decay of Lying in 1889 that “Life imitates Art far more than Art imitates life”.  To the extent that we consider those things on the small screen “art” than it would appear that the art we are most beginning to imitate is Eva’s.

I’m not talking about Eva Peron who was a soap opera star in Argentina long before she was the First Lady of that country but Eva Gabor or more appropriately her character Lisa Douglas on the TV show Green Acres.

For all of you who are lucky enough to be too young to have seen the show, the opening scene always featured Eddie Albert and Eva Gabor, as Mr. & Mrs. Oliver Wendell Douglas singing about their respective loves of the country and city with Eva singing: “New York is where I’d rather stay.  I get allergic smelling hay.  I just adore a penthouse view.  Dah-ling I love you but give me Park Avenue.”

March was the seventh consecutive month of increasing retail-sales growth (+0.6%) with luxury sales rising 22.7% according to MasterCard Spending-Pulse.  Thomas Chauvet of Citigroup says high-end purchases tend to increase three times as fast as any increase in real global output and Gina Martin, a strategist at Wells Fargo, found recently that consumer sentiment in households with $50,000 or more of annual income has improved much more than in lower-income groups since early 2009.

“Eva-dence” of this can be found in gem sales as exports of polished diamonds from Antwerp, Belgium (Europe’s diamond capital) increased 55% to $737MM in 1Q10.  Much of the demand for Antwerp’s stones is coming from China but Des Kielea, a London-based diamond analyst for RBC Capital Markets says this makes sense because, “Antwerp is reasonably well situated to compete in China because it has the infrastructure already set up as a trading hub”.

The relationship between Antwerp and China appears to be neither new nor unique as Citi’s Chauvet says luxury goods makers generate about 50% of their revenue from emerging markets, including tourism effects.

Further evidence was provided by the results of a recent survey by the Affluence Collaborative, run by the luxury-ad experts Agency Saks, which polled 900 people with incomes of $75,000 or more.   Of those with incomes of $75,000 – $200,000 about 20% said they felt “extremely optimistic” about their financial situation but about half of those with incomes over $500,000 were in the “extremely optimistic” category.

With the demand for luxury coming back so should retailer’s margins, at least according to UBS’s Roxanne Meyer who thinks that “lean inventories, pent-up demand and better fashion should enable better full-price selling”.  Roxanne believes median operating margins could hit 11.2% in 2010 after shrinking to 7.9% in 2008.

It would appear that the Eva’s are active at every income level as Bon-Ton Stores (BONT) recently attributed their improvement in fiscal 4Q09 earning and margins to “a reduction of clearance inventory as a percentage of the overall mix”.  Foot Locker Inc. (FL) reported that “average footwear selling prices in the U.S. increased low-to-mid single digits in the fourth quarter, while J. Crew’s CFO, James Scully said margins were “significantly better than anticipated”.

What is spurring all of this spending? A couple of statistics might supply the answer.  Household net worth increased 1.3% in 4Q09 rising to $54.18 Trillion while household debt decreased 1.7% in 2009 which was the first annual drop since record-keeping began in 1945.

It would appear then, that the Eva’s of the Green Acres variety are rocking and looking at diamond sales that could be taken literally.

As for the growing population of the other Eva’s in this country; that seek to follow the policies of the Peronist’s; they need only to see the results to know that redistribution doesn’t work.

Enjoy the week.

Jim Delaney

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