Everybody Has A Coupon

Friday evening the wife and I ventured out for dinner, coupon in hand. Besides the usual question I pose, what do you feel like eating tonight, I now add another, what coupons do we have? We chose Olive Garden because the local Italian eateries didn't stick a coupon in front of us this week. As we finished ordering, my wife announced to the waiter "we have a coupon." "Everyone has a coupon tonight" was the response.

Americans are becoming their grandparents and it is about time! We are finally saving more and spending less. What is being spent is being spent wiser. This is a nationwide phenomenom. My Oliver Garden meal was in Omaha, Nebraska, an area minimally affected by the national real estate meltdown. But everyone needed a coupon to part with their cash. The prior weekend I was at our winter home in Florida and not only did all diners and shoppers carry coupons, there were not very many people in the restaurants and stores. Wal-Mart's parking lot was packed, but strip centers were empty. America is changing for the better, but it is going to be a miserable transition.

The transition from easy credit and spending future income to saving before you spend will be a difficult process as we won't need as much retail space or manufacturing facilities. Slower growth for our companies will mean lower valuations for stocks. Less spending means less sales tax revenue for the always voracious government entities. Goverments will attempt to tax away our frugality so they can continue their spending habits.

Just as our forefathers survived the Depression years, Americans will come through our current malaise. It has begun to sink in that good times are not just around the corner. Change in behavior is necessary and our society as starting to adapt and take personal responsibility. Our governments need to be forced to accept that same reality. Deficits need to be reduced through cost and program cutting, not tax increases. It is no longer business as usual in the American family and "tax and spend" cannot continue at any government level.

Our coupon society will lead to lower valuations as growth will be hard to come by. Cost cutting can't result in increased net income beyond an initial burst and flat earnings aren't worth much of a P/E. All companies will not fall victim to lackluster sales, but those with heavy debt loads will. Except for companies with exceptional niches, the only ones with growth potential will be the debt free that are still generating lots of free cashflow and can become larger through acquisitions. Now is the time to shed companies with debt. Not only will they not be able to participate in M&A, they will likely have difficulty rolling over maturities as bankers become more cautious.

The stock market has rebounded nicely over the past several months and may go higher as vacations end and investors return. But, the "new normal" would suggest that equity positions be trimmed in companies with diminished growth opportunity and significant debt levels. If an investor has an appetite to stay long, own the acquirers as they are the only ones with a chance of P/E stability.

Conspicuous Consumption Is Dead; WalMart & McDonalds Rule

The elimination of home equity, HELOC availability, home equity cashouts, consumer credit card lines, small business credit card lines, and unbridled commercial real estate lending has caused a generational shift in spending and lifestyle. Consumers are attempting to save more and spend less. The spending that is occuring is going downscale. Our economy has changed.

The past three days I've been driving through the South, heading back to Nebraska for the Summer, trying to avoid viscous Spring storms that have blanketed the mid-section of the South. My path has taken me through parts of Florida, Alabama, Mississippi, Louisiana, Arkansas, Missouri, Iowa and tommorrow, Nebraska. My observations have been consistent. WalMarts and McDonalds are packed with customers while enclosed shopping malls and Starbucks aren't. America has traded down.

I'm not talking about just the unemployed or those that have experienced housing and credit problems. All of my acquaintances have been spending less and re-evaluating their lifestyles. Net Worths are still large and incomes, though reduced, very adequate. Still all feel compelled to spend less and wiser. This is good for our future, but going to be difficult for the present. The entire country is reverting to a Warren Buffett lifestyle. America is starting to live within its means.

The market has been bouncing back with avengence lately, although it does appear to be driven more by short covering than conviction buying. The move has been especially good to low priced stocks. Little thought has been given to the change that I have described. Many old, worthy companies will not be worthy of the bounce back as the consumer isn't going to participate like he/she has the past decade. 

I don't think the rally will last, but if I'm wrong I think the safest bet is to go downscale and own those names that are attractive to a newly wise consumer, low, middle, or upper income.