With only six more shopping days until Christmas, investors are busy navigating the often conflicting reports to assess the strength of the holiday shopping season.
ComScore reports that European eCommerce sites saw continued growth in early December. While the selling season began slowly for German shoppers, activity in Germany has rebounded, while France and the UK continue to see healthy online shopping. Electronics retailers were strong across all three countries. Toy and computer gaming sites gained robust traffic in the UK, while department store Arcandor led in online visits among both French and German users.
Video game consoles continue to be among the top gifts for 2007. And, while industry analysts are predicting a strong comeback for Sony’s Playstation 3 in 2008, it’s clear that, despite production woes, Nintendo’s Wii is dominating the field right now. According to Compete analyst Max Freiert:
Comparing this holiday season to last, the Wii has captured shoppers at levels consistently higher than during it’s launch week, for the last 4 weeks (approximately 1.4 million shoppers per week).
An emerging trend in eCommerce is the adoption of social shopping sites. Social shopping sites utilize user-generated content to drive purchases. Sites like Kaboodle and StyleHive allow users to share their preferences with like-minded peers, create wishlists and use bookmarking to see what others have recommended. According to Hitwise, while these sites today account for just a trickle of Internet traffic, their influence is growing. Says Hitwise research director Heather Dougherty:
Traffic to the custom category of Social Shopping sites was up 447% for the week ending Dec. 15, 2007 over the previous year. Among the social shopping sites, the leader is currently Kaboodle, with a 68% market share of total US visits to the category and traffic has increased 210% over the same week last year.
On the bricks and mortar front, leading electronics retailer Best Buy posted healthy third quarter results, with profit up 52% over the same period last year. Results were helped by more modest discounting and the calendar, which created an extra week’s worth of post-Thanksgiving shopping in the quarter. The Best Buy story is one of the few bright spots in the segment, as Circuit City is expected to announce a 3rd quarter loss this Friday, while CompUSA announced the shuttering of its remaining stores. BMO Capital Markets analyst Rick Weinhart, while recognizing Best Buy’s strong performance in the quarter warns of tougher times to come:
4Q sales are expected to slow from 3Q’s bllstering pace, and we are increasingly concerned about what the sales environment will look like after the holiday gifting period ends and consumers have less of a reason to shop.
Spending on women’s apparel dropped nearly 6% during the first half of the Christmas season, compared with the same period last year, according to MasterCard Advisors, a division of the credit card company.
Analysts quoted by the New York Times blamed a rough economy, which has discouraged women — and mothers, in particular — from splurging on clothing for themselves and a lack of compelling fashions this winter.
The drop-off, which the credit card company described Sunday as “surprising,” bodes poorly for chains like Chico’s FAS and Ann Taylor, which specialize in women’s clothing, and could result in steeper-than-expected discounts on their merchandise in the final week before Christmas. In contrast, sales of men’s clothing rose 4.5 %.
MasterCard found that online spending had surged about 30% between Nov 23, known as Black Friday, and Dec 12, well above the average growth this year, and consistent with earlier reports from comScore. Spending on luxury items is up 10.8% and purchases of electronics rose a healthy 5.8%
Over all, holiday spending is expected to grow just 4% this year, the slowest growth rate in five years, according to the National Retail Federation.
The side-effects of the subprime mortgage crisis are seeping into the municipal bond market, raising the cost of capital and likely slowing state and local government spending next year, according to CreditSights.
As if the market did not have enough to worry about between CDOs, ABCP, SIVs, and all the rest, another two ingredients in the structured finance alphabet soup have been making waves in recent weeks, CreditSights writes in The Muni Meltdown – Are TOBs the Next SIVs?
“The often-overlooked muni market has managed to join the mix with its TOBs (tender option bonds) and VRDOs (variable rate demand obligations), the municipal cousins of ABCP conduits and SIVs which together represent more than $400 billion of muni debt outstanding.
The same issues that have plagued ABCP and SIVs this year – including short-term indebtedness that was always supposed to roll at maturity, bank and broker liquidity facilities that were never supposed to be drawn upon, and monoline guarantees that were never supposed to be exercised – are all present in one form or another in the TOB and VRDO mess.
Suspicions about the quality of monoline guarantees and liquidity facilities have pushed muni yields into record territory relative to US Treasury securities, with tax-free muni yields in some tenors even trading north of taxable UST yields in recent weeks, CridtSights writes. “The aggressive provision of liquidity from the major central banks appears to have helped stage a modest recovery in the muni market over the last week or so, and the TOBs and VRDOs do not appear set to roil the markets to anywhere near the same degree as SIVs upset the markets in recent months.”
Still, the potential financial and economic impact of a worst-case muni market scenario of widespread exercises of the embedded puts in the TOBs and VRDOs is one more financial danger zone of which investors should at least be aware going into 2008.
CreditSights writes that munis should be able to fund themselves in the term debt market, although at a higher cost of capital. “This higher cost will have a negative economic impact, however, and we expect the reduced availability of municipal finance to reduce public sector investment to some degree.”
The ultimate impact on the US economy should not be too extreme – perhaps knocking 0.2% to 0.3% off of US GDP growth next year – but a slowdown in state and local investment spending would be just one more example of the recessionary contagion from the global credit crunch.
Major European property companies and Real Estate Investment Trusts have pursued conservative funding strategies in recent years, leaving them with sound balance sheets and good liquidity to face the uncertain property markets of 2008 and beyond, according to Fitch Ratings.
Fitch’s overall view for the ratings in its universe of European property companies is broadly stable, with one main exception, Meinl European Land Ltd (MEL), which is currently on Rating Watch Negative.
The agency’s review of liquidity positions among rated property companies demonstrates that they are well placed to meet short-term debt repayment and capital commitments such as staged payments on developments. Furthermore, such companies do not need to sell assets to create liquidity.
Fitch expects property valuations to continue to decline, particularly secondary stock and as the investment market and funding avenues such as commercial mortgage backed securities (CMBS) are not conducive to distressed valuation evidence. Furthermore, the various property companies and REITs that Fitch rates in Europe are not highly leveraged at this stage in the cycle and continue to have interest coverage ratios of between 1.4x and 3.6x. They can therefore weather a moderate downturn and be able to meet interest payments on a timely basis.
In the current difficult banking environment Fitch believes that lenders and equity investors should be more prepared to back REITs and property companies with prime property assets (in terms of location, specification and tenant covenant), benefiting from regular long-term lease income supported by a tangible asset. In a poor property investment market, rental quality will continue to be a key rating issue.
Fitch says the UK major property companies and REITs have ample committed standby facilities and comfortable liquidity positions. The liquidity available to these companies should allow them to avoid the difficulties currently being faced by certain property unit trusts, which have had to suspend redemptions. It should also mean that they can avoid the prospect of forced sales into uncertain and liquidity-short markets.
Although UK REITs shares are suffering from significant discounts to net asset values, the ‘event risk’ of predator action is not included in credit ratings. For bondholders, change of control protection mechanisms exist for most companies with public bonds.
The report, European Property Company Outlook-Peaking but Well Prepared, is available for purchase.
Carbon “cap-and-trade” markets may be headed for a period of expansion as a global consensus emerges in favor of more climate regulation, according to Oxford Analytica.
With the recent round of UN climate negotiations in Bali, the international community is committed to drafting a successor to the Kyoto Protocol by 2009. However, this will prove extremely difficult, OxAn notes in PROSPECTS 2008: Climate regulation will expand.
“Next year may be pivotal for international climate policy and carbon markets — considerable political momentum has been built, and many key countries, and the wider international community, are poised to expand climate regulation.”
An area receiving less media attention, but possibly of greater immediate importance is expansion in financial sector activity around carbon markets:
While activity in the past has been confined largely to smaller, niche firms, possibilities of market expansion are attracting larger mainstream financial services companies.
Carbon financial services may enter a period of expansion in 2008, with an increase in merger and acquisition activity, OxAn concludes.
Global initial public offering (IPO) activity has reached a record high this year, paced by emerging countries, especially China, according to figures from Ernst & Young.
Capital raised hit at an all-time high and the number of companies choosing to go public in the first 11 months of this year exceeded the whole of 2006,
From January through November 2007, $255 billion was raised globally through 1739 IPOs – compared to $246 billion raised in 1729 deals in the whole of 2006. The year-end spike in IPO activity seen in 2006 looks likely to be repeated in 2007 with preliminary data for the first two weeks of December indicating a further $18 billion raised in 91 IPOs.
This record level of activity has been achieved despite the absence in 2007 of the mega-deals seen in recent years. The largest IPO of 2007 to date was Russia’s VTB Bank, which raised $8.0 billion, some way short of Chinese bank ICBC’s $22 billion, the largest IPO of last year.
Despite ongoing market uncertainty, the pipeline of IPO-ready companies looking to list in 2008 looks healthy, especially across the emerging markets.
IPO activity continues to be driven by the emerging markets, which accounted for the majority of the largest deals of the year – 14 out of the top 20 IPOs, compared with nine of the top 20 in 2006. By industry, financial companies continue to dominate, representing one-quarter of all funds raised. Industrial and real estate also accounted for some of the biggest deals of 2006.
Brazil, Russia, India and China – the so-called BRIC countries – have raised $106.5 billion in 382 deals so far this year, compared with $89.6 billion raised in 302 deals in the same period of 2006. Of that group China generated more IPOs (209) than Russia, Brazil and India combined (173).
Worldwide, China, the US and Brazil were the market share leaders by capital raised with $52.6 billion, $38.7 billion and $29.0 billion raised respectively. China also led the way in terms of the number of listings with 209, ahead of Australia and the US with 189 and 178 IPOs respectively.
Asia-Pacific accounted for 46% of IPOs worldwide, ahead of Europe, the Middle East, and Africa (EMEA) with 35%, and North America with 14%. EMEA and Asia-Pacific have the greatest market share of capital raised with 38% and 32% respectively, eclipsing North America (16%) and Central & South America (14%).
The financial markets have a vested interest in preventing the monoline bond insurance industry from imploding, because widespread downgrades in the sector would have a far-reaching impact, according to CreditSights.
Now that the markets have pilloried the sector for the better half of the year, the rating agencies are once again in reactive rather than proactive mode, CreditSights says in a new report. Both FGIC and SCA (XL Capital Assurance) are on review for a possible downgrade by Moody’s and MBIA and CIFG were hit with negative outlooks.
While the market has deteriorated at a rate far faster and wider than we and most other investors had expected, it has been clear for some time now that industry as a whole simply does not hold sufficient capital to absorb a fat tail structured default event.
- The loss of the AAA monoline business model could potentially force banks to consider taking write-downs on the value of their monoline wraps.
- A sustained lack of credible monoline wraps for structured finance deals could keep structured finance new issuance at a minimum for several more months, further jeopardizing the economic sectors such as housing and commercial real estate that grew so dependent on structured finance in recent years.
- Monoline downgrades could also create more turmoil in the municipal bond market, a market which is critical to fixed investment in the US and which is highly dependent on monoline wraps.
Given the extent of the financial system’s exposure to the monoline sector, it is easy to see that a large number of stakeholders have a large vested interest in preserving the monoline AAA model, CreditSights says.
Does this mean that there could be some form of superfund bailout for the industry? At this point, chatter of this possibility has been limited but it does seem to us that the markets have a vested interest in preventing the industry from imploding.
MBIA has already received a $1 billion infusion from Warburg Pincus and Ambac also has announced capital-raising plans. The Financial Times reports that private equity firms see the need for bond insurers and other financial firms to shore up their balance sheets as an attractive investment opportunity.
The CreditSights report Monoline Monitor: Thinking the Unthinkable, includes Status Updates for each of the monoline insurers and is available for purchase.
US online spending surged to a record $881 million on December 10, dubbed “Green Monday” by eBay and touted as the heaviest online spending day of the holiday season.
According the latest data from comScore, the surge boosted spending for the holiday season to date by 19% from last year to top $20 billion. ComScore is forecasting total holiday season spending to increase by 20% over 2006.
Meanwhile, Deloitte’s Leading Index of Consumer Spending fell sharply this month, primarily due to continued falling home prices.
We continue to have a modest outlook for the holiday season, and expect continued uncertainty headed into the new year.
The index, comprising four components—tax burden, initial unemployment claims, real wages and real home prices—fell to 2.64%, from an upwardly revised loss of 3.47% a month ago.
Deloitte recommends retailers declare an official Gift Card Redemption Day, when using a gift card entitles shoppers to a percentage off, a free gift or another promotion.
Gift Card Redemption Day will enable retailers to recognize the revenues from unredeemed gift cards, while encouraging consumers to use the gift cards they receive during this holiday season as well as unused cards they have received previously.
Not suprisingly given the rash of recent developments, subprime-related topics dominated the Research Recap hit list this week, taking all top five spots.
It was a good week for NERA Economic Consulting, whose Primer on Subprime Mortgage Accounting Allegations led the pack and its Subprime Mortgage Lending Primer from June came in at number four.
Runner up was the multi-sourced Monoline Bond Insurers Under the Spotlight with the IMF’s Bank Ratio Data Can Foreshadow Systemic Banking Crises in third place.
Rounding out the top five was UBS Writedown Research Roundup.
The Superfund designed to salvage Structured Investment Vehicles continues to struggle to attract participants, the Wall Street Journal Reports. This will come as no surprise to readers of Research Recap, which first flagged the lack of enthusiasm for the M-LEC SuperSIV in October.
Meanwhile, CreditSights suggests that while the fallout of the SIV’s woes may be widespread and long-lasting, the need for the Superfund is diminishing.
The WSJ says that in recent weeks, a number of SIVs have opted to find their own solutions to the credit crunch rather than waiting for the super fund, which is expected to start in mid-January. HSBC has bailed out its own funds, taking $45 billion in mortgage-backed securities and other assets onto its balance sheet. Similar actions have been taken by Société Générale, Standard Chartered and Rabobank Group. Citigroup Inc., which managed nearly $100 billion in SIV assets in August, has sold off about a third of those assets.
Meanwhile, Gordian Knot, which runs one of the largest SIV funds, has informed the banks it doesn’t intend to sell assets into the super fund, according to a person familiar with the situation.
And the decision by Citigroup, one of the three lead sponsors of the SuperSIV, to bail out its own SIVs to the tune of $49 billion, could be the final nail in the plan’s coffin.
CreditSights notes that SIVs have reduced their holdings by more than 25% since August and that ignores the $80+ billion that banks have brought home on their own balance sheets – which has contributed to the banks’ woes.
The larger that latter number gets, the less the risk there is to the market that massive amounts of assets will be dumped and the less of a need there is for the infamous Super-SIV.
“Amidst news of structured finance operating companies experiencing declining volumes and being wound down, we would make the observation that these entities are the tip of the structured finance iceberg. They represent a visible and widespread investor base given their historic low vol, low risk, low yield nature. However, we note that their underpinnings are virtually identical to that of other structured finance entities and that as ratings models are revised across the structured finance universe, we feel that more of the glacier will be revealed. “
CreditSights notes that the 25% decline in holdings has resulted in a NAV drop of some 47 percentage points. SIVs were hit by a double whammy that affected both sides of their balance sheet. On the asset side, problems in their holdings stemming from mortgages and other credit-related instruments caused them to look much more risky to investors, which in turn affected their liability side. On the liability side, risk-averse investors were not attracted to the relatively low yields offered by the vehicles’ funding arms to compensate them for the questionable asset quality. When you lose on both sides, you lose big.”
The CreditSights report Its Not the AAAssets, Its the MethoDDDology – The SIV Saga Continues is available for purchase.
More than half of US B2B marketers anticipate increasing their 2008 budgets next year according to a new survey from Forrester Research. The average budget is expected to increase by 28%.
As part of a joint study with MarketingProfs, Forrester surveyed 369 B2B marketing professionals in firms with annual revenues ranging from less than $20 million to more than $5 billion.
Online and event marketing are poised for the biggest gains with marketers expected to target their increased resources in the following ways:
- More than half of respondents using online video, search, Web seminars, and Web 2.0 tactics like RSS feeds and social networks say they plan to increase spending on these tactics in 2008.
- Among traditional tactics, B2B marketers say they plan to invest more in PR and intimate, executive-only events like breakfast briefings, roundtables, and private suites for shows or sporting events.
- Fewer than 13% of marketers say they use television, radio, and outdoor media to advertise, and fewer than a quarter of those that use these tactics say they will spend more on them in 2008.
More than 85% of B2B marketers say they use email to communicate with existing customers, but they also continue to rely on conventional influence or awareness-building tactics including public relations, tradeshows, and direct mail to get their messages out to prospects.
Although more marketers used email, search marketing, and Webinars, the digital transformation in B2B has a long way to go.
Compared to last year, online display ads lost the most ground: only 44% of respondents reported using this tactic in 2007 compared with 62% in 2006. Despite popular coverage in the press and trade journals, blogs, online video, podcasts, and other emerging media only garnered support from about one third of survey participants.
The Forrester report B2B Marketers’ 2008 Budget Trends is available for purchase.