Retail and Banking: Beginning of a Positive Feedback Loop

(This article has been published on Seeking Alpha: http://seekingalpha.com/article/196282-a-positive-feedback-loop-in-retail-and-banking)

The last credit crisis was extremely dangerous, because the potential collaps of the financial system can create a chain reaction of negative feedback loops in the real economy. Unable to line up financing or refinance existing debts, companies were forced to dramatically cut back and sell assets, just to survive the credit crunch. Many businesses failed because of this, and because their customers suddently found themselves unable to pay, even in the short term. The problems with these businesses in turn hit their bankers or creditors hard.

So both the financial and the real sides of the economy went down together, and their problems feed on each other. Only the government had the power to step in and break the loops.

Now as the financial markets and the real economies stabilize, these same feedback mechanisms have started to turn to the other direction, i.e. the positive feedback loops. We can now readily see it in the retail sector and commercial lending. We discuss a particular example here to illustrate.

Select Comfort (SCSS), a highend bed manufacturer known for its Sleep Number beds, struggled mightily during the credit crisis. It almost went under, and relied on very costly private equity money to survive. Today, the company announced a new credit agreement with Wells Fargo (WFC). The credit agreement, which has a term through June 2012 and provides a commitment of up to $20 million, replaces an existing credit facility with a syndicate of banks.

"Our sustained improvement in sales and profit performance – along with increased cash generation, a stronger balance sheet and our positive cash position – have provided us the opportunity to replace our existing facility,” said Jim Raabe, chief financial officer, Select Comfort Corporation. “The new facility significantly lowers the company’s borrowing costs and fees and provides more financial flexibility as compared to the existing agreement.”

This is certainly a great news for Select Comfort. The stock went up 10% on the news, which signaled a further easing of credit restriction. At the same time, it also confirms the positive outlook of the company from the credit standpoint.

On the flip side of this agreement, it also signals an increased willingness of a conservative commercial bank to lend to recovering retailers. Many of these large banks have experienced difficulty finding qualified borrowers to lend money to. Now, as consumers return to the mall, retailers have reported improved sales and profitabilities. That will increasingly help these banks find qualified borrowers, putting the banking business on a firmer footing.

And as banking profits improve, their capital positions will be further enhanced, and they'll be able to lend more.

Of course, this positive relationship is dependent on consumers being confident enough to spend. And here, we're waiting to see the mother of all positive feedback loops to start to turn: More jobs and incomes lead to more spending, which in turn leads to more hiring; more hiring leads to more consumer lending and higher purchasing power; etc.

With some luck, we may actually get to see some sign of it this coming Good Friday in the employment report.