💳 The Overleveraged American Consumer

POWERED BY PEG AND AWL

THE STREET SAYS

RESULTS: Last week we asked: Who's to blame for the nation’s baby formula shortage? The government or the manufacturers?

58% of you said the GOVERNMENT, while 42% of you said, MANUFACTURERS. Meanwhile, since we last published, Abbott Labs has struck a deal with the FDA to reopen its baby formula plant in Michigan.

NEXT UP: Have you ever used a buy-now-pay-later service to purchase an item? Keep scrolling to see why we ask and click here to vote.

REVIEW

US stocks were mixed Friday, as a strong opening for the Dow kicked off a volatile session, with the blue-chip average ultimately closing out its eighth-straight negative week.

Equities seemed to get a boost in morning trading after China’s central bank lowered interest rates in an attempt to stimulate growth. Zooming out, however, some investors remain concerned about the health of the US and global economy.

The S&P 500 continues to flirt with bear market territory, while selling has been the dominant trend on Wall Street for the past few months. Another theme last week involved consumer spending and the sense the retail sector is starting to feel the pinch from inflation. Walmart and Target both posted downbeat reports, generating significant attention.

Tech stocks have also been taking a beating in the rising-rate environment. Meanwhile, the Fed signaled it remains committed to hiking interest rates further in an attempt to rein in rising prices.

International benchmark Brent crude saw its price per barrel rise slightly to close out the week.

On the economic front, a study from the New York Life Insurance company suggests US adults are saving less in order to make ends meet. Around one-third of respondents say they’ve cut contributions to their emergency fund in order to cover everyday expenses.

In company-specific news, new legislation that has bipartisan support in Congress aims to force Alphabet’s Google to break up its digital advertising business.

Canada announced it will ban 5G gear from China’s Huawei Technologies and ZTE in an effort to protect national security, joining the so-called Five Eyes intelligence-sharing network.

Ross Stores saw its share price plummet, becoming the latest name in retail to post a downbeat report after its CEO said sales underperformed in the most recent quarter.

On the flipside, ​​Palo Alto Networks saw its share price pop after it beat analyst expectations for revenue.

For the week as a whole, the Dow Jones Industrial Average shed about 935 points or 2.9%. The S&P 500 lost 3.1%. The Nasdaq Composite declined 3.8%.

PREVIEW

Tomorrow, there's no major economic data scheduled for release.

Tuesday, be on the lookout for April’s new home sales. The number fell 8.6% in March on an annual basis. Meanwhile, the median price of a new home rose 21.4% from a year ago, which analysts attribute to extremely tight supply. S&P Global’s US manufacturing and services PMI is also due for May.

Wednesday, the Federal Open Market Committee will release the minutes from its most recent meeting, during which the central bank enacted its second rate hike in just several months. It was also the sharpest rate increase since 2000 as the Fed is attempting to rein in record inflation. Durable goods and capital equipment orders are also set to be published for April as well.

Thursday, weekly jobless claims are due, which have been on an uptick recently. Last week the number of initial claims was at its highest level since January while existing unemployment claims hit a 53-year low.

Friday, the Fed’s preferred method of measuring inflation will be released as the April PCE is set to be published. The Personal Consumption Expenditures index is a broad measure of changing prices and how consumer behavior is responding. In March the index rose by 5.2% year-over-year, further diminishing Americans’ spending power. It also represented a 40-year high.

On the earnings front, keep an eye out for reports from Advance Auto Parts (AAP), Nordstrom (JWN), NVIDIA (NVDA), Costco (COST), and Big Lots (BIG). We have our eyes on Costco, which is set to report earnings on Thursday after rivals Walmart (WMT) and Target (TGT) shared that higher fuel and labor costs were eating into their bottom lines. A false rumor also circulated last week that Costco had raised the price of a hot dog and soda combo in its food court, as a result of inflation.

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The Overleveraged American Consumer

Consumer Debt Bubble Incoming

Despite inflation being at a 40-year high, soaring gasoline prices, and rising interest rates, US consumers' penchant for purchasing things on credit continues unabated. In the first quarter, the Federal Reserve reported consumer debt and credit hit $15.84 billion, a 1.7% increase year-over-year. Mortgage debt led the surge, increasing 10% from the same period in 2021 to $11.18 trillion.

Credit card balances are up 9% from last year and student loan debt climbed 6.5% to $14 billion. The only category to see a decline was auto loans, potentially due to the fact that finding cars has been difficult due to supply chain snags. It seems many consumers are shrugging off rising rates and overleveraging themselves across many areas of their lives.

BNPL Bust

Buying things – almost anything – has never been easier. Amazon (AMZN) has same-day shipping. And if you can’t afford what you want right now, don’t worry. There are now a plethora of “buy now, pay later” options at check-out. These BNPL schemes are particularly popular with younger consumers.

Experian (EXPGY), the credit scoring company, reports that four out of every five (four out of five!) consumers currently use BNPL. In the majority of cases this allows them to make purchases they otherwise wouldn’t be able to afford.

A recent LendingTree survey found that 42% of BNPL consumers made a late payment on at least one of their loans. Additionally, 70% admitted to spending more because of the smaller upfront payment.

Even if BNPL programs work, they don’t appear to be cultivating a financially disciplined culture. Soft personal habits find a way of leaking into society as a whole, and before you know it you have strippers taking out adjustable-rate mortgages on “five houses... and a condo.”

The Solution? Go to Work

US consumers haven’t fully adjusted to the fact that historically low interest rates have started to rise. This realization is starting to set in, but there’s a lag based on what we’re seeing on the personal debt side.

The economy is entering a period during which borrowing is more expensive. This leaves people who are carrying loads of debt in a vulnerable position. It could set the stage for a massive borrowing bubble that pops, leaving many struggling to pay the bills on various loan products.

Here’s how this time is different, however. In December 2007, the national unemployment rate was 5.0 percent. Today it's 3.6%. In December 2007, the Job Openings and Labor Turnover Survey showed that there were 4 million job openings in the US. In April there were 11 million! You’ve undoubtedly heard this referred to as The Great Resignation.

Therefore, even though the labor market is tight, there is a historically high rate of unfilled job openings. Ultimately, if and when people start missing monthly loan payments, they do have options to make money to pay the interest and principal.

It’s hard to tell what will come first: the consumer debt bubble, which causes people to go back to work and fill those 11 million positions. Or, will the overextended feel the heat, return to work, and help us avoid the pop. If the Great Financial Crisis is any indicator, we might be in for a rude surprise.

Marriott's New Media Network

Selling Ads to Travelers

Marriott International (MAR), the world’s largest hotel chain, is looking to take some business away from Meta Platform’s (FB) Facebook as well as Amazon (AMZN). The company believes its access to guests’ data can help them secure a piece of the multi-billion-dollar digital advertising pie.

Later this month the hotel chain operator is teaming up with Yahoo to launch Marriott Media Network, a side business that will enable brands to place ads on hotel websites and apps. The idea is to eventually serve up targeted ads on hotel room TVs, using the data Marriott amasses on its guests. This could include things travelers may need while on vacation, such as forgotten-to-pack toiletries, local excursions and entertainment, or ground transportation.

Difficulty Targeting Consumers

Marriott wants to capitalize on a shift in the way marketers access data on consumers. Apple (AAPL) and Google are enforcing new privacy rules making it harder for brands to get first party data. As a result, there’s a need to come up with new ways to learn about customer habits. That presents an opportunity for companies like Marriott, as it looks to make money off all the data it has on vacationers.

Walmart (WMT), DoorDash (DASH), Kroger (KR), and CVS Health (CVS) have all created media networks, giving advertisers access to shopping information on their customers. It's a potentially lucrative space for these types of companies. According to Insider Intelligence, retail media advertising in the US is poised to reach $60 billion by 2024. That’s up from $41 billion in 2022.

Small Slice Is Enough

Marriott’s media network will first operate as a pilot program in the US and Canada on its website and mobile channels. Yahoo will run the media network, acting as the portal for advertisers to shop for ads. It will also find advertisers for Marriott.

Marriott is no fool when it comes to taking on the likes of Amazon and Facebook in the digital ad space. It likely knows it doesn’t have the reach to supplant anyone, or even make a dent in market share. Some argue Marriott doesn’t need to dominate to make money. According to Insider Intelligence principal analyst Andrew Lipsman, even one percentage point of the retail media market means nearly $500 million in revenue

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Citizens Financial Wants to Shed the Regional Bank Label

Scrappy Citizens’ Lofty Aspirations

Bank of America (BAC) and JPMorgan (JPM) are getting new competition, and it's not from another large financial institution. Citizens Financial Group (CFG), the regional bank, wants to take them on by offering customers more than just loans and savings accounts.

It could make sense in the current market. To succeed in the banking industry scale matters. As a bank grows out its services, customers are better served. In this case, Citizens is looking to start offering digital banking, wealth management, and even investment banking. While these are typically the dominion of so-called big banks, Citizens believes expansion in these areas will help it grow and better compete with its larger competitors.

Buying Spree Drives Growth

To meet that end, Citizens has been on a buying spree. The company recently acquired the east coast retail operations of HSBC (HSBC), spent $3.5 billion last month to buy Investors Bancorp, and purchased investment banking firm JMP Group last year. Those acquisitions, in particular HSBC, gave Citizens a presence in the New York and New Jersey metro markets. Citizens now has branches in 14 states across the Northeast, Midwest, mid-Atlantic, and in Florida.

The company’s acquisitions also expanded its digital offering and further diversified its revenue stream. Citizen’s acquisition of JMP helped it gain a larger investment banking footprint in the financial, healthcare, real estate, and tech industries.

Bigger is Better

Morphing into a bigger player isn’t without risk. Sometimes investors seem sensitive to such ambitions. Citizen's share price is down roughly 18% in 2022, worse than the SPDR S&P BankKBE ETF (KBE) which is 16% lower by comparison. Citizens said it could make more buys this year, but is more focused on integrating the companies it has already acquired. If it is able to deliver on the goals for those purchases it could increase investor confidence and drive up the stock price.

It’s worth noting the stock is cheap compared to some of its rivals, trading at 8.3 times 12-month forward earnings. Rivals Fifth Third (FITB) and Huntington (HBAN) trade for 9.3 and 8.9 times forward earnings, respectively. Citizen’s big bank aspirations aren’t without risk, but investors may be rewarded if the plan is successfully pulled off.