Busy Weekend at Retail

Venturing out to retail stores this weekend, I saw more people out shopping than I had seen on weekends in August and September. But while people were eagerly shopping, they did not seem to be in a spending mood. The busiest places I saw were Goodwill and Starbucks, and even there, people were being choosy about what they bought. There was plenty of traffic on the roads, so other stores I didn’t visit must also have been busy.

Falling gasoline prices are part of the reason people are shopping again, and fading concern about the flu season may be another reason. The U.S. flu season appears to have peaked around a month ago, and the new H1N1 flu is becoming more familiar and less worrisome to people as time passes.

Post-Clunkers Drop-Off Not As Big As Feared

People kept buying cars in September, even though the Cash for Clunkers incentive program was over. September sales figures were only about 10 to 15 percent lower, as the noise surrounding the Clunkers program had people thinking about cars. But this still means the pace of sales was much lower than last year — typically 15 percent lower. General Motors had the largest decline, off 45 percent from last year, while Kia and Hyundai bucked the trend with 24 and 27 percent increases from a year ago.

Industry analysts are expecting October sales to bounce back to summer-like levels, but that’s probably just wishful thinking. With cars out of the news and consumer incomes squeezed further, October auto sales could easily fall to a new low.

Arctic Ice: a New Era

If it happens three times, it’s a pattern. The ice melt on the Arctic Ocean has followed almost the same pattern for the last three years, but it’s a pattern that had never been seen before 2007. It is a new era in the Arctic, and the experience of Arctic ice through 2006 can probably be disregarded, as the pattern of 2007–2009 appears to represent the new normal. Here’s how much has changed:

• Arctic ice is generally about 1 to 2 meters thick. Previously, it was mostly 2 to 8 meters thick. Into 2007, there was a sharp distinction between first-year ice, which had just formed, and multi-year ice, which would grow thicker every winter for at least 6 years. That distinction no longer meant much by the winter of 2008, as the ocean now apparently remains warm enough in winter to melt away the underside of thicker ice.
• Summer offshore breezes prevent ice from building up near the mainland of a continent in late summer. An onshore wind pattern may allow ice to pile up against the coast, but it will melt again when the wind blows offshore. The open coastline of Asia, Alaska, and Northwest Territories now tends to be ice-free in September. Previously, you could only count on this pattern along the European coast. Barring a persistent onshore wind pattern, the north coast of Asia is open to commercial traffic in September.
• Arctic ice is no longer effectively anchored. Through 2006, you could count on Arctic sea ice being solidly attached to the far northern points of North American and Asia. This limited its movement, especially in winter; the wind would blow the ice around, but the ice could not go far. Since 2007, Arctic ice has been too thin to anchor effectively. When the wind changes direction, the ice can move halfway across the ocean.
• With more ice movement, more ice is being ejected from the Arctic Ocean into the Atlantic Ocean. Previously, ice was ejected mostly east of Greenland. Now, a substantial amount of ice is also being ejected along the west coast of Greenland.
• Summer ice that is less than 1 meter thick blows around easily and tends to jam up straits and channels. This makes cargo traffic through the Northwest Passage somewhat doubtful.
• The ocean surface is refreezing later in the fall. One effect of this is that much of the fall snowfall is falling into the water. With less snow to provide insulation between the ice and the air, the thinnest ice can grow thicker quickly during the winter.

How long will this era of Arctic ice last? Not very long, I’m afraid. With ice only 1 to 2 meters thick it will take only one year of strange summer weather to clear substantially all of the ice out of the Arctic Ocean. This could be as simple as the wind blowing in just the right direction in July to carry the ice out to the Atlantic to melt. Or it could be a pattern of stormy weather that breaks the ice into smaller pieces and stirs it around.

There’s no telling when something like this might happen because it all depends on the weather — it could be next year, for all we know. However it happens, if most of the waters of the Arctic Ocean are directly exposed to sunlight in August and September, it will increase the ocean water temperature in a way that we’ve never seen before. New ice will still form that fall, but it will surely not look quite like the ice we are seeing now.

This Week in Bank Failures

Bank of America CEO Ken Lewis is resigning at the end of the year, two years earlier than previously planned. Usually the surprise departure of a CEO would hurt the stock of a company, but in this case, stockholders saw it as a positive step. It seems that the fatigue of managing the world’s most top-heavy bank was the deciding factor in Lewis’ decision.

With Bank of America still in a state of crisis, the new CEO is likely to be an insider who already understands the bank’s operations and challenges. Some of the candidates being suggested have previous experience as senior executives of banks that Bank of America acquired.

Facing the possibility of running out of cash as soon as next month, the FDIC has proposed to collect the next three years of deposit insurance fees in advance. The FDIC is hoping those advance payments will be almost enough to get it through the current run of bank failures. Realistically, though, this approach is likely to buy the FDIC no more than a few more months. With bank failures expected to run at historically high levels for the next three years or longer, the FDIC will need many times the funding that its usual insurance fees could bring in.

Troubled business lender CIT Group has drawn up a bankruptcy plan. CIT still hopes to restructure its debt outside of bankruptcy, but it is running out of time to do so, and the bondholders who would need to approve the restructuring are skeptical of CIT’s plans. If CIT goes into bankruptcy this month, that could limit retailers’ ability to finance Christmas-season inventory.

Warren Bank, of Warren, Michigan, was the first bank failure announced tonight. Warren Bank was already in desperate financial condition in July, when the Fed rejected its capital restoration plan and issued a Prompt Corrective Action directing the bank to raise capital immediately. The bank at that point had $501 million in deposits and only $37 million more in assets. It had six locations in eastern Michigan.

The Huntington National Bank is purchasing the deposits, paying a slight premium, but is purchasing only 15 percent of the bank’s assets, a ratio so low that it probably does not include any of Warren Bank’s loans. Huntington is a regional bank that already had a strong presence in eastern Michigan, including six offices in Warren.

The FDIC will sell Warren Bank’s loan portfolio at a later date. The FDIC estimates its costs will be $275 million.

There were small bank failures in Minnesota and Colorado. These failures cost the FDIC an estimated $18 million.

• Jennings State Bank; two offices in Spring Grove, Minnesota, and Stillwater, Minnesota, farm country along the state’s eastern border; $52 million in deposits. Deposits and 67 percent of assets purchased by Central Bank, based in Stillwater, with locations across the Minneapolis metro area. Stillwater is on the fringes of the metro area, and residential real estate development loans in this area ran into trouble. Jennings State Bank also had substantial losses from loan participations, in which it bought shares of other banks’ loans.
• Southern Colorado National Bank; two offices west of Pueblo, Colorado; $32 million in deposits. Legacy Bank purchased the deposits and assets, paying a 1 percent premium for the deposits. The latest blow to SCNB came three weeks ago when the municipal government of Pueblo West voted to pull its deposits out because of concern over the bank’s financial condition.

Yesterday morning, the NCUA closed two credit unions:

• The Members’ Own Federal Credit Union, Victorville, California; $85 million in assets, 11,000 members. Share accounts were transferred to Alaska USA Federal Credit Union, which already had a presence in California.
• West Texas Credit Union; $78 million in assets, 25,000 members. Share accounts were transferred to Security Service Federal Credit Union, which is based in San Antonio and operates nationally.

Price Cuts Boost Video Games

If you are in the video game business, how do you compete with The Beatles Rock Band? When it was released on September 9, most in the industry expected it to be the biggest video game release in history, but sales are far ahead of those lofty expectations. The publisher warned last week that the limited edition package of the game is likely to sell out before the Christmas shopping season arrives.

Most of the video game industry, though, is still trying to sell the previous generation of video games, which are based on a lower level of interactivity, and they’re hard to sell when customers can choose the new games instead. Video game sales in August were 1/6 less than a year before, and Movie Gallery was discouraged enough to decide to close the Game Crazy video game departments in 200 of its stores.

Faced with all these challenges, game publishers and stores have come to the conclusion that low-interactivity games will not be able to command quite the same prices that they have sold for in the past. Experiments with price cuts have showed that customers are responding to price cuts around 20 percent. The game hardware makers that tried price cuts at the end of August were the only ones that showed a year-over-year increase in sales that month. And now, new games with lower price points are crowding out the game releases that are sticking to the previous price points.

The move to lower price points is likely to stick, but this puts new pressure on game developers. Already hard pressed to develop profitable games, they will be under that much more pressure if 20 percent of their revenue goes away. Developers will have to come up with more productive ways to develop games, and they will probably have to make fewer of them.