Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Steak Houses Struggle as Big
Spenders Start to Feel the Pinch

Friday, September 28th, 2012
By for Profit Confidential

Steak Houses Struggle as BigConsumer spending is the fuel of the U.S. economy. When consumers spend more, businesses grow and, in return, the economy grows. As we all know, the current U.S. economy lacks consumer spending and thus it lacks growth.

Since the financial crisis of 2008, the U.S. economy has been sailing in rough seas. The financial crisis left the U.S. economy in a dire state and the so-called “recovery” has been the worst post-recession rebound since the Great Depression.

As elementary as it sounds, in a growing U.S. economy, when consumer spending goes up, consumers are more inclined to go to a good restaurant, buy a steak dinner, purchase that better smelling cologne, and buy the better looking car. In the current U.S. economy, this is certainly not happening—mid-market restaurants are facing challenges and luxury good and service providers are getting hit by the economic slowdown except for those at the very high end of the market.

And it’s not only the middle class that has been squeezed; the high income earners are looking at their pockets as well.

The Knapp-Track Index, which has monitored U.S. restaurant sales since 1970, reports that steakhouse operators are seeing weak sales. (Source: Bloomberg, September 19, 2012.) For example, at Capital Grille, a premium brand steakhouse owned by Darden Restaurants, Inc. (NYSE/DRI), sales for the quarter ended May 27, 2012, were at their lowest level since 2010.

The pullback in sales at fine-dining restaurants can be attributed to higher income earners feeling less confident about the economy and thus holding back on their spending. The luxury restaurants are seeing wild swings in their sales and it has been very difficult for them to have consistent growth in 2012. The popular steakhouse Morton’s has started offering lower-priced items on its traditionally high-priced menu.

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A healthy stock market rally usually triggers consumer spending in mid-market consumer retail markets, like steakhouses, but there is no evidence of that occurring in this current U.S. economy—even though key stock indices have risen significantly.

Tiffany & Co. (NYSE/TIF), the upscale jewelry retailer, has already warned about its fight within the current economic conditions. Tiffany decreased its outlook for 2012. Consumer spending at luxury goods and service providers is decreasing in the U.S. economy—the opposite of what is supposed to happen during an economic growth period.

While others have been busy waiting for more help from the central banks of the world, I have been stressing the following for months: consumer spending has to increase first before the U.S. economy will start to see any economic growth.

The pockets of the average American in the U.S. economy have been getting emptier each passing day in this post-recession recovery. Add in inflation, uncertainty over the end to the Bush era-tax cuts, worry over the credit crisis in Europe and the slowing global economy, and record government debt, and consumers have every right to be worried. Wouldn’t you be?

Michael’s Personal Notes:

An old adage holds: “A penny saved is a penny earned.” Does that really hold true anymore? Well, in Canada, pennies certainly don’t count anymore. Inflation has killed the penny.

The Canadian government will no longer mint pennies. The Royal Canadian Mint made the last Canadian penny on May 4, 2012.

As a tribute to the end of the era of the penny, the Royal Canadian mint is offering silver and gold pennies for people to buy as collectables—a memory of the penny and what inflation can do to money.

Why would the Canadian government do such a thing in getting rid of the penny? Should we eliminate the penny from the U.S. economy as well?

The Canadian government says it’s too expensive to keep making pennies due to inflation. It costs more to make a penny today than its actual value and the coins take up too much space in our pockets and wallets. But let’s just face the facts: inflation has made pennies almost worthless in respect to what they can buy.

The pennies made in the U.S. economy between 1909 and 1982 had 95% copper content, but any penny made after 1982 only has 2.5% copper content. (Source: Coinflation, September 25, 2012.) Just as the Romans did to create more money, the West learned to put less of the real stuff in their coins so they could circulate more.

Those of us senior enough to remember the good old days can recall buying candy from a corner store for one cent…now an impossibility. Chocolate bars used to cost $0.25. That’s not the case either anymore. Prices have increased in the U.S. economy as the value of the dollar has decreased significantly; the after-effects of inflation.

The penny is simply an obstacle in the way of higher inflation. Once the penny gets out of circulation, prices will have to be adjusted higher; to the closest $0.05. Then eventually the nickel becomes the new penny and the vicious cycle continues—inflation with fiat money is inevitable. The more printing of paper money there is, the greater the risk of hyperinflation—making pennies worthless.

Dear reader, my point here is that inflation has really taken a toll on the U.S. economy. The Canadian government stopping the manufacturing of pennies is at least a step in the right direction of a government acknowledging these coins aren’t worth anything if they are not 100% copper as they were initially meant to be.

There is only one form of currency that central banks and governments cannot alter the form of regardless of what inflation does. I’m talking about gold, of course. If you are as concerned as me about what all this “money out of thin air” will do to prices in the future, if you are worried about hyperinflation in the future as I am, you will ensure your investment portfolio has exposure to gold-related investments.

Where the Market Stands; Where it’s Headed:

Looks like the euphoria of the QE3 (a third round of quantitative easing) announcement has worn off. The focus is now back on the slowing Chinese economy, the credit crisis in Europe, the pullback in U.S. corporate earnings, and revenue growth. The reality of the fact that QE3 does very little to help the average American is setting in and the stock market rally is quickly losing its steam.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in Profit Confidential, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

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Steak Houses Struggle as Big
Spenders Start to Feel the Pinch
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  • Mike Scarpiello

    Hmmm. You haven't been to Chicago lately. Every steak house is packed every night.

  • nooneuno

    hahahah.. oh ya with obama supporters from the windy city i bet.. Retard. do you think anyone else reading this cant look out their own front door and see this for themselves.

  • noseitall

    Umm… no, not everyone else can "look out their own front door and see this for themselves" that steak houses in Chicago are packed. Including you. And you can stop calling other people 'retards', when you are the one making ignorant statements.
    .

  • garrisongetar

    The term 'retard' hasn't been socially acceptable for quite some time but, unfortunately, some people don't know what 'socially aceptable'
    means. Smarten up, Jethro.

  • Teri Davis Newman

    Morton's was packed the last time I was there on a Tuesday night, but Ruth's Chris in St Louis was half empty on a Saturday night. People are afraid to spend money in this economy because no one knows what the Commie Obama will do next. He rules by executive fiat and ignores the checks and balances in the government and none of the candy-ass RINOs do anything about it. He's been taking foreign donations and no one does a thing. No one has called for him to unseal his school records. No one asks why his SS number says he is ineligible to work in the USA. Someone needs to step up and ask these questions. Hopefully President Romney will go after him for his illegal actions because the Justice Department could NOT care less about enforcing the law.

  • Mike

    It's over for America!

  • TryThinking1956

    I am so sorry to hear that restaurants charging $60 for a freaking NY Strip steak, $12 – $15 extra for each side order (think mashed potatoes or string beans) and $20/glass for the house wine, are seeing a slowing of their profits. And when you do decide to bite the bullet, if you don't have a reservation a week in advance, you can't get in! I love how all these conservatives are moaning about the President, when their hog-livin' is continuing very nicely, thank you. I live in the Virginia horse country, and trust me…no one has had to put down Trigger!

  • Ruth Caron

    your'e an idiot an uneducated

  • bill

    There is no incentive to save and the interest rates are at near zero it's government planning all the way.

  • Mondo

    That's because it's 29.00 dollars for a 8oz choice cut at a cheap place.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

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