For years, many people got away with being irresponsible
with their finances, as a
soaring housing marketand low interest rates bailed them
out time after time. Now that easy credit has come to an end,
however, it appears that spendthrift borrowers have finally
learned their lesson.
Digging out of debt
The Federal Reserve announced Wednesday that the total
amount of
consumer creditoutstanding fell at an annualized rate of
5.8% in August, continuing a streak of lower monthly figures
that began in February. Over that span, consumer credit has
dropped by more than 4%.
More importantly for household budgets, it appears that
consumers are focusing on shedding the most damaging types of
debt. Revolving credit, which primarily includes credit
cards, fell at more than a 13% annualized pace in August, and
has fallen nearly 6.7% over the past seven months.
Clearly, from the perspective of your own personal
finances, getting your
debt under controlis the best move you can make. When
tough times put your finances in jeopardy and uncertainty
threatens your ability to keep your job, the last thing you
can afford is to pay outrageous finance charges. Conversely,
being smart with your debt not only gives you some peace of
mind -- it also frees up much-needed cash that can be used
for such things as creating a savings fund for
emergencies.
An investing scorecard for lower debt
Many worry, however, that although the long-term impact
of lower debt on the overall economy may well be positive,
the
reduced spendingthat it implies could have a negative
effect in the near term. With that in mind, let's look at who
stands to win or lose from consumers doing the right thing
with their debt.
Card issuers
For companies that
issue credit cards, like
Bank of America (NYSE: BAC) and
JPMorgan Chase (NYSE: JPM), lower transaction
volumes mean less income. Although more people paying down
their balances may result in fewer delinquencies and
write-offs for the card issuers, the extra interest lost from
lower outstanding balances could more than offset that
savings. Issuers will have to rely more on fees like
late-payment charges for income.
Car companies
Automakers like
Ford (NYSE: F),
General Motors , and
Honda Motor (NYSE: HMC) would ordinarily
expect weaker results when consumers are pinching their
pennies. But the
Cash for Clunkers programhelped to slow the descent of
nonrevolving debt, which includes auto loans. Nevertheless,
with the program now over, automakers will likely need to
wait for a stronger recovery in employment for sales numbers
to rise permanently.
Retailers
Similarly, among retailers, the mood is restrained. In
its annual forecast for the holiday season, the National
Retail Federation said it expects sales to drop about 1%,
bringing the overall decline for all of 2009 to about 3%. Yet
while that's bad news for everyone, falling credit card use
among the financially strapped hits lower-end retailers like
Wal-Mart Stores (NYSE: WMT) and
Target (NYSE: TGT) harder than luxury sellers
like
Tiffany (NYSE: TIF), which arguably don't
rely as much on card-carrying shoppers who carry balances
from month to month.
What to do now
As an investor, you need to be aware of which stocks
stand to get hurt from increased consumer responsibility. If
people truly do rein in their spending on a sustained basis,
then you'll want to identify companies that sell products
that consumers simply can't live without. They're likely to
thrive no matter what happens to consumer spending overall --
and their stocks should deliver nice returns to their
shareholders. Those that depend on selling things people
don't absolutely need, however, could see their problems
continue for some time.
Think the tough times are just getting started for
consumers? Read Ilan Moscovitz's list of
stocks you should avoid in a recession.
This article was originally published as
This Is the Right Thing to Do Nowon
Fool.com
Copyright 2009 The Motley Fool, LLC. All rights
reserved.
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