Tuesday, January 29, 2008

The Rise of Pawn Shops and Fringe Banking

This is probably one of the very few sectors in the US financial system with a very bright future.....Hat tip to Minyanville for digging this from the FT

Das Geschäft der Pfandleihhäuser dürfte eines der wenigen Sektoren im US Finanzsystem mit glänzenden Zukunftsperspektiven sein.... Dank geht an Minyanville für das ausgraben dieser Geschichte der FT.


US pawnbrokers benefit from hard times FT
Hard times in the US are benefiting pawnbrokers as beleaguered consumers pledge jewels, electronics and other goods in return for loans with interest rates running as high as 300 per cent a year.

Dave Adelman, president of the National Pawnbrokers Association, said the number of loans at US pawn shops had risen 15-20 per cent since October. He attributed the increase to rising fuel prices and deteriorating economic conditions – an assessment echoed by other industry executives.

“Brief and shallow downturns in the economy may benefit our business model,” said Daniel Feehan, chief executive of Cash America, the biggest US pawnbroker chain, with 942 locations. ( Cash America Presentation )

> Probably no coincident that they have entered the UK market in mid 2007....

> Sicher kein Zufall das die Mitte 2007 in den UK Markt eingetreten sind......

Pawnbrokers offer loans in return for personal items. Customers can buy back their property for the value of the loan plus a fee, which works out to an interest rate that can reach 300 per cent on an annualised basis, according to the NPA. If borrowers do not pay off the loan in a given time, the unredeemed item can be sold.

> Here comes the definition from "Cash Advance " & "Pawn" via Cash America
> Hier die Definition der Begriffe vie Cash America


Cash America said on Thursday its profits had risen 21 per cent to $26.3m in the fourth quarter, reflecting higher sales of pawned goods and more loans.

Alan Fishbein of the Consumer Federation of America said pawnbrokers and other “fringe” banking operations – such as those making loans against future pay cheques or car titles – had grown as banks had withdrawn from poorer areas. About $48bn in payday loans are made every year and the revenues in the whole fringe banking industry are an estimated $12bn-$15bn, according to Dennis Telzrow, a consumer finance analyst at Stephens, an investment bank.

An estimated 10m US households are thought to be outside the banking system, according to the Federal Deposit Insurance Corporation. The NPA estimates there are 12,000 to 14,000 pawnbroker shops in the US.

On Manhattan’s 47th Street, the New York block through which about 90 per cent of US diamonds are sourced, some merchants report a sharp uptick in the amount of jewellery being brought in for sale.

“Its real sad – they don’t want to sell,” said Ruben, a 52-year-old street hawker who buys jewellery from passers-by in the diamond district.

“They might have paid $150,000 for a necklace but they will get back $25,000 or $30,000 at most. But it’s either that or lose their house.”

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8 Comments:

Anonymous traderboy said...

"They might have paid $150,000 for a necklace..."

wtf?? anyone stupid enough to do this, especially one who by the sounds of it had other debt, deserves to lose everything...bring it on.

12:17 AM  
Anonymous eh said...

J-M,

They're not that common. Growing up in the suburbs (and America is primarily a suburban country), I never saw one (a 'pawn shop'). You see them in run-down neighborhoods in big cities, maybe now and then in strip malls in poorer suburban areas (like East LA). I don't expect that to change. People in the suburbs might hold a 'garage sale' -- where they put a lot of stuff up for sale on their driveway, or in the their garage. There are people who like to troll garage sales on weekends; if you visit enough, all together it's like a Flohmarkt. In fact, it would be a lot more common for a suburban area to have a place where, on the weekend, there was an organized 'flea market'. Even San Jose, the (self-named) 'Capital of Silicon Valley', and a very prosperous area generally (one that will likely be less affected by the housing downturn), has a long standing, popular, and well organized flea market. It's been operating on the east side of the city for a long time; that side ist immer noch relativ arm (aber nur 'relativ').

12:23 AM  
Blogger jmf said...

Moin Traderboy,

yup!

Moin Eh,

thanks for the insight.

I will monitor the news coming out from CSH and will put in on my WL. What i find interesting is that despite the numbers the stock is close to the lows.

Need some more time to digg into the details but this could become a momentum stock.

12:47 AM  
Anonymous traderboy said...

i wonder how well a pawnbrokers does in a severe downturn, if no-one is buying the assets they are getting in exchange for lending? i suppose if the haircut is big enough they are ok.

i see from mid-1998 to end-2001 the stock dropped ~80%, from 20 to 4.

then from early-2003 to early-2007 the stock went from ~8 to ~45.

and now down 30-35% from those highs.

looks like a cyclical business to me?

also, market cap ~$913mm, and 942 stores, that's saying each store is worth $1mm. I'm trying to think if that is high or not.

1:47 AM  
Blogger jmf said...

Moin Traderboy,

thanks for the info.

"if no-one is buying the assets they are getting in exchange for lending"

I was thinking the same thing. They claim that 50 percent of their pawn business is jewellery/precious metal related. But this segment is growing only 9 percent.

I think the problem is the Cash Advanced segment growing 100 percent....

I think the loss rate on this unsecured segment will have the potential for major pain....

If the US will hit a major recession i assume their models are only slightly better than from the rating agencies or Countrywide & Co.........

Reminds me somehow of MBIA, AMBAC etc that have an excellent business modell ( insuring muni bonds) with fantastic margins and have moved to CDO´s & structured finance

The same could be true with CSH. Pawn business fantastic, Cash Advence could be the equivalant of CDO´s during the next downturn....

So i think i´ll move them quite a bit lower on my WL...

2:12 AM  
Anonymous Anonymous said...

The middle class is using ebay.

4:18 AM  
Anonymous traderboy said...

"So i think i´ll move them quite a bit lower on my WL..."

:)


sounded like a good idea at first, i guess the devil is always in the details

5:50 AM  
Blogger Joseph said...

Pawnshop can be of great help to people with financial problem. Most items for sale are cheaper. They can be good in urban areas.




Jojo @ Pawn Shop Websites

2:35 AM  

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