Takeaway: 55% voted YES; 45% voted NO.
In today’s Morning Newsletter, U.S. macro analyst Christian Drake pointed out that the spike in credit card debt in April occurred alongside very weak consumer spending and housing data – weakness that extended into May. “Tapping credit to purchase everyday essentials because cost inflation is running at multiples of income growth,” he wrote, “is not reflective of a resurgent consumer driving an accelerating, sustainable consumption recovery.”
It is important to note that this is only one preliminary data point that is volatile and subject to significant revision, we should have a better sense of the legitimacy of it when the card companies report May data next week.
We wanted to know what you think. Today’s poll asked: Are U.S. consumers maxed out?
At the time of this post, 55% voted YES; 45% voted NO.
Voters who believe YES, U.S. consumers are maxed out, had this to say:
- Most investors don't understand how to interpret credit card debt. Counter intuitively, it's procyclical and tends to be a reflection of confidence, i.e., debt grows as confidence is rising. Not the other way around. Yes, there are obviously some who use it as a stop gap for essentials or unexpected crises, unfortunately. But most of the actual balance growth comes from affluent people who use it for projects, vacations, etc. I voted yes on this question not because I think credit card is signaling consumers being tapped out, but because the youngest cohort of the economy is tapped out for an entirely different reason, student loans. That's the real elephant in the room…
- I'm as good a proxy as any consumer, as I thoroughly enjoy consuming. Just dropped $7500 in moving expenses and definitely feeling it. $3500 broker fee for 15 mins of work on their end. Brutal. I might actually have to pare back my Bud Light consumption this weekend!
- Yes, but only because they're undisciplined in adjusting spending habits; cost of groceries are up, so where else can they save; most don't want to give anything up, and that's where it starts to fall apart.
Those who voted NO reasoned:
- We are not there yet. Certainly some are maxed out but those who are probably find themselves in that situation more often than not regardless of economic conditions. Until there is a real downturn in the economy it is doubtful that we will reach the debt limits of the recent past.
- There's nothing to indicate this is the case; if and when there's a serious market correction, and people start losing jobs, and if the cost of various goods continue to go up, then people will get themselves in trouble, but we're not there yet.
- Coupled with improving labor market conditions this is a sign of confidence that a fundamental improvement is occurring #rolltide
Takeaway: The U.S. consumer is feeling the squeeze of rising inflation, a weak dollar, and ripping oil prices.
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James Grant, founder and editor of Grant's Interest Rate Observer, explains to Hedgeye CEO Keith McCullough the reasons why investors ought to seriously consider adding gold to their portfolios in this edition of "Real Conversations."
Takeaway: For those of you looking for an entry point on the short side, you found it today
This is hardly worth a note, so we'll keep it short. The market is driving YELP up 12% on the OPEN acquisition. YELP isn't a viable acquisition target; there are two simple reasons why.
- YELP IS NOT OPEN: YELP's business model is predicated on driving new account growth in excess of the absurd attrition it experiences on an annual basis; it does so through aggressive salesforce expansion (there is no leverage in the model). YELP trades at almost 3x OPEN's market cap, so there aren't that many potential acquirers that can afford to pay a premium on top of YELP's bloated $4.7 billion market cap. OPEN on the otherhand, has a corner on the Electronic Reservation Book (ERB) Market with 99% customer retention, and found a buyer who operates the same model in a different industry.
- BANKER SUICIDE: Remember that in any M&A deal, the advisors to the potential acquirer will get an in depth look at YELP's financials. That means a detailed look at YELP's customer profile, including who they are, and how long they have been doing business with the company. Management can dodge our collective questions all they want on its customer retention issues, but it will not have that luxury if its in discussions to be acquired. If a banker and/or advisor somehow successfully pitches YELP to an acquirer (by not disclosing its attrition issues), that will likely be the last deal they do together. Given there are only so many companies that could afford to do a deal of this size, that would be one very large M&A client to lose.
If you have any questions, or would like to discuss in more detail, let us know.
Hesham Shaaban, CFA
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