Stock in pawnbrokers is increasing as the recession continues. Image: Pink Moose/Flickr/CC BY

As the recession continues, stock is rising in industries that profit from hard times. Pawn brokers, payday lenders, debt collectors and discount stores are more profitable than ever. Brokers are recommending buying stock in these sorts of companies rather than traditionally higher-end investments.

Recession continues as employment falls

The unemployment rate rose to 9.2 percent in June, making many stocks plummet. The number of people living below the poverty line has risen to one in seven, the highest since 1994. Consumer spending has dropped for two months in a row. Times are hard, and nobody knows if or when they will get better.

Profiting from hard times

Some industries profit from bad times. Stocks for many pawnbrokers, payday lenders, discount stores and debt collectors are on the rise. And while that may raise ethical issues for some, stock brokers are recommending buying stocks from many of these companies.

David Rosenberg, an economist at the money management firm Gluskin Sheff, said, “People are broke. They’re all chasing value. It’s a seismic shift in mindset.”

Pawnbrokers and payday lenders on the rise

John Coffey Jr., an analyst with Sterne, issued a report in June urging stock buyers to seek out Ezcorp (EZWP), a firm that owns pawn shops and makes payday loans. The stock has gone up an average of 48 percent for the last five years. Coffey argued that the stocks were worth more than than their cost by a third and would most certainly go up. Within a few hours, the stock rose by 7 percent and is now worth double what it was a year ago.

Payday lenders are increasingly becoming a good investment. Advance America Cash Advance Centers (AEA),  has seen the price of its stock double in the last year. Cash America International Inc. (CSH) is up 64 percent from a year ago.

Debt collectors also making a profit

The same holds true for many other companies that thrive on financial hardship. The profits for San Diego based debt collector Encore Capital Group (ECPG) are up 59 percent from last year. This is despite the fact that the company has faced class action lawsuits in many states concerning its debt collection practices.

Some experts disagree

Some experts believe that investing in these kinds of companies is not as safe as it may seem. They say the stocks are as likely to fall as to rise. Should the economy recover and fewer people become financially stressed, stock for these companies will drop drastically. And if the economy should continue to slip, even those companies will find less traffic.

Sources

Huffington Post
Cox

Encore Capital Group

February job losses did not result in any significant change in the number of unemployed persons, and the official government unemployment rate remains at 9.7%. Had the job economists been right, the unemployment rate for February would have increased to 9.8%.

The revolving door of unemployment

Taking the February unemployment report to a level that matters, 36,000 people lost jobs in February and about that many found jobs. Many thousands of previously unemployed workers will at last start bringing home paychecks and in just a short time, they’ll also be able to obtain short term personal loans and emergency money when needed. Just as many recently employed workers will be out of luck, however, and may eventually find themselves in serious need of credit repair.

Unemployment rates can depend on the weather

This may be of no consolation whatsoever to those 36,000 newly unemployed workers, but unemployment rates are fickle things: They can depend on the weather. Severe winter storms on the east coast last month may have affected the government’s unemployment report.

According to the CNNMoney article, the Labor Department conducted its job survey in the middle of February when blizzards were blanketing the area with several feet of snow. Businesses were temporarily closed because of the storms and snowed-in workers, especially retail, manufacturing, and construction employees, who did not work and went without pay were not included in the government’s payroll survey.

Underemployment rates can depend on the weather, too

Underemployment, apparently, can also depend on the weather. Snows in the east may have skewed the number of people working only part-time hours while seeking full-time employment. The underemployment figure for February rose by nearly 400,000, resulting in an underemployment rate increase from 16.5% in January to 16.8% in February.

Today, the unemployed sector cuts through a very broad cross-section of the country. Since late 2007, some 8 million jobs have vanished, and the end is not yet in sight. The ranks of the unemployed have now swelled to nearly 16 million people.

In the past, recessions have resulted primarily in blue-collar and low-level retail job losses, with white-collar layoffs accounting for only about 30 percent of total losses. By way of contrast, in the current downturn, nearly 50% of the vanished jobs have been managerial, professional, and skilled white-collar positions. For many upper-echelon workers who are scrambling for cash now, the current recession has changed the world overnight.

Who has been hardest hit?

In past recessions, minorities have been the hardest hit group, and that hasn’t changed. According to current Labor Department statistics, the nationwide unemployment rate in November was 10%, but joblessness among African-Americans, for example, was 15.5%. Interestingly, the unemployment rate among men is 11.9%, compared to 8.1% for women, the widest unemployment gender gap in more than half a century. Older workers are being laid off at a faster rate than younger workers.

Are unemployed people finding new jobs?

The unemployed are staying that way for unusually long stretches of time. Nearly 25% of  jobless persons have been unemployed for more than six months, the highest long-term unemployment level since the Great Depression. And that 25% long-term unemployment figure doesn’t include “discouraged workers” — people who have given up looking for work – and people who have settled for part-time work. In hard-hit regions of the country, long stretches of joblessness coincide with elevated suicide rates, mounting depression, and family conflicts.

But aren’t layoffs in a recession cyclical?

In most recessions, job losses result from temporary contractions of businesses that are producing more than the economy can absorb. The losses are therefore cyclical. Typically, businesses lay off employees until demand picks back up, and then start hiring again. The current economic downturn, however, is more foundational; that is, some industrial segments appear to have undergone permanent shrinkage – home construction, vehicle manufacturing, and newsprint publishing, for example.

New-home construction busts amid the housing crisis across the country have shifted many construction-worker families from affluence to poverty, or at best, survival mode. It’s difficult to believe that home construction industry will ever see boom years again.  For that matter, there’s no reason to suspect that vehicle manufacturing will ever return to a glorious era of unthinking tunnel vision, or that two-inch-thick newspapers will ever again grace the breakfast table of every American home.

How do long-term unemployed people get by?

They sell off cars, get rid of extra phones, cancel health club memberships, and bid vacations farewell. They scrounge for any income they can find. Most workers who qualify for unemployment pay receive about 60% of their former wages, but unless Congress extends their benefits, they expire after 26 weeks. But even unemployment benefit extensions eventually expire, at which point people may become eligible for welfare benefits and food stamps. A family of four might receive $900 per month, which won’t begin to cover such basic things as food, housing, and health care. From there, without family or friends to take up the slack, it’s a short step to soup kitchens and private charities. For manylong-term unemployed persons, the prospects are little better than grim.

Will new jobs ever be created?

It’s a question without an answer. Some politicians are eager to ramp up spending to salvage shrinking industries, but that’s more a bandage than a cure. And there is talk of replacing shrinking industries like vehicle manufacturing with “green” industries that will create a new economic boom, but turning such talk into reality would require billions in private or government investments as well as more years than today’s unemployed population can even hope to live. Not all displaced workers can learn new skills quickly. And even for those who can, chances are good that they won’t be returning to any semblance of their former pay. This is especially true for older workers or those who have extensive experience in specialized fields.

Will current job losses become permanent?

It is a sad thing to admit that many people who have lost jobs in the past year or two may never return to their former occupations or ever again reach their former income levels, but there seems to be no immediate way to avoid such a conclusion. Barring something truly unforeseeable, such as the creation of a whole new economy, we are likely to see an unprecedented recessionary shift toward permanent job losses.

Banks have suffered through the recession with huge mortgage industry defaults, but a new fear that credit cards will do the same is looming. Ken Lewis, Bank of America CEO, stated he believes that despite the government’s $700 billion rescue program, it will be “an awful year” for credit cards and companies that issue them.

It’s estimated there are almost $76 billion in credit card loans, and more than half of that debt is held by Bank of America, JPMorgan Chase and Citigroup.

The charge-off rate

Already setting the stage for disaster is the banking industry’s estimate that  their charge-off accounts have reached a historic high of 7.73 percent. Most experts anticipate that figure will increase, as the unemployment rate is still dangerously high.  This rate is commonly accepted as the most accurate indicator of future losses in the banking, mortgage and credit card industries.

Analyst Mike Taiano believes that the charge-off rate could be higher than 10 percent by year’s end. “With the economy the way it is, most consumers are still struggling. … Though there are some indicators that we are through the recession, there is still a long way to go to recover,” he said.

Bracing for the loss

Unlike the recession of the ’80s, when unemployment rates ran high also, this generation brings its own set of problems. First, new proposed legislation is set to allow consumers to request their banks reduce their mortgage debt if they have filed bankruptcy. Experts are fearful that this will cause more people to file bankruptcy so they can default on credit cards and other outstanding debts.

On the brighter side

David Robertson, publisher of the Nilson Report, stated that it’s “encouraging” that banks are adept at maneuvering recessionary periods after “years of practice.” When facing credit card losses, they know what cautionary actions to take.

For example, banks are slashing limits already and raising interest rates to bring in as much revenue as possible.  They are also working their customer service teams exceptionally hard, encouraging communication with customers. American Express is a leader in the mitigation process and recently offered their credit card holding customers a $300 cash-back return if they paid their account balances off and the closed their accounts before April.

Citibank

There is also news that Citibank is joining the ranks of a banks coming up with strategies to mitigate loss.  The company is looking to work out a joint venture for its private credit card division that serves retailers, as a way of moving out of the credit card business altogether.  However, experts say Citibank is alone in wanting to distance themselves from the credit card industry.

Most banks know they will have a difficult time attracting a completely new set of customers and would rather work hard to keep the ones they have, while easing their own risk.  Stuart Gunn, director of Bridge Strategy Group, stated: “If you want to be the retail bank of choice, it means you have to have CDs, debit cards, home equity loans and credit cards. Do you really want to exit one of the major lines of business?”

Production is on the rise

If you need easy loans just to make it from paycheck to paycheck, and even then you could still use some extra cash, take heart. Recently there have been hopeful signs that the current recession is coming to an end.

At the end of July, the government reported that the real gross domestic product (GDP) fell at an annual rate of only 1% in the second quarter. Manufacturing activity rose to its highest level in the last year. Car sales jumped 15% and manufacturers are ramping up production. Based on the data now available for July, experts are predicting that the GDP will increase by as much as 3% in the second quarter.

Home sales are on the rise

Another encouraging trend is that existing home sales are on the rise. Between April and May, the S&P/Case-Shiller 20-city index of house prices fell just 0.2%, the smallest decline in the past two years. Stabilizing house prices are expected to reduce mortgage-loan defaults, shore up bank balance-sheets and improve the flow of credit.

Oddly, unemployment is also on the rise

Employment, however, is the single most important economic benchmark, and the outlook on that front remains grim. Unemployment rates are still on the rise, which is surprising given that economists generally predict that an increase in the GDP will be accompanied by a decrease in the unemployment rate.

The accuracy of this rule of economics, called Okun’s law, has been disputed, however; and according to Michael Feroli, an economist at JPMorgan Chase, Okun’s law would have predicted a national unemployment rate of only 8.6% during the second quarter of this year, whereas the actual rate averaged 9.3%.

Many factors influence the rising unemployment rate

Several factors may be at work in the discrepancy between the improving GDP and the worsening unemployment rate. Last week, the government revised earlier data to show that the GDP has declined a cumulative 3.7% (rather than 2.5%) since the end of 2007, tying with 1957-58 as the deepest recession since the Great Depression.

Also, expanded unemployment-insurance benefits are encouraging some workers to keep looking for jobs rather than drop out of the workforce altogether, which according to the government, could add as much as a half percentage point to the unemployment rate. Similarly, dissipation of wealth is driving people to look for employment rather than retire or stay at home with the children.

Another factor may be that employers have been quick to slash payrolls. Businesses are budgeting more conservatively because of the credit crunch, and many are pessimistic about an eventual economic recovery.

Whatever the explanation, productivity is rising and so is unemployment. According to a recent article in The Economist, Robert Hall of Stanford University, head of the academic committee that identifies and assigns time frames to recessions, says Okun devised his law in an era when productivity usually fell during recessions: “When productivity rises, the law fails.” Okun’s law, he says, is “obsolete.”

The rise in production may be a false reading

Employers are not likely to do much hiring until it seems reasonably certain that the new growth in production will continue. And some economists are doubtful that what we are seeing is real growth. These experts attribute the recent increase in production to the replenishment of inventory after an extended period of filling new orders from existing inventory in idle factories. They point out that inventory replenishment gives production a temporary boost without a corresponding increase in consumer demand.

The federal cash-for-clunkers program may also have given production an artificial boost. Recent car sales have been strong, in large part because of the program, which offers subsidies of as much as $4,500 to people trading in older, higher-emissions vehicles for newer, more fuel-efficient cars. But the $1 billion set aside for the program, which was supposed to run for several months, was depleted within the first week. The House of Representatives has now voted to spend an additional $2 billion and the Senate is expected to do likewise. But cars bought now will mean fewer cars bought later.

Numbers have a way of changing

And one more qualification: Government figures are notoriously subject to revision. Even the Great Depression is getting worse. According to the latest revisions, the GDP fell 26.7% (rather than 26.6%) between 1929 and 1933. In another 50 or 60 years, or as soon as next week – who can say? — today’s fresh new growth in production may never have happened.