"Every party has a pooper, that's why we invited you, Party Pooper."
I'm finding that this is a role I'm taking on more and more lately. It's not that I enjoy being a wet blanket, really. I'm actually quite fun to be around, as long as we're not talking about the economy. So, what's set me off this time?
The International Council of Shopping Centers has recently released a report calling for 73,000 stores to close their doors during the first half of 2009. The first HALF. Six months. Not shocking to me or you, if you've been reading this blog.
In light of that, though, could someone please explain to me (using small words) how some of the portfolio managers on television can possibly be excited about the market going forward? 73,000 store closings is a little bit more than a pebble dropping in the ocean. If you truly think about everything and everyone that goes into running a single mom & pop type shop, you will quickly realize that we're talking about a lot of unemployed people and lost GDP.
There are roughly 600 good malls in America. Obviously not all of the possible stores closing are in malls, but humor me for a minute. Let's say the average mall has 200 stores, which is probably high. So in my example there are 120,000 mall stores in my world... and 73,000 are turning up their toes and dying. Hmmm. That's not ugly. ::cough::
I'm all about the Darwinian evolution of retail. I have absolutely no problem with bad retailers failing. The culling of the herd is a good thing. What I have a problem with is folks not realizing that those failings will have an impact on the economy. The thought that one guy floated today (had I been more awake I would have noted his name, but it was early out here and I was suffering from a caffeine deficit) was that it was already priced into the market because these were the lowest valuations he'd seen in his thirty year career.
Here I go again, but just because it's the lowest valuations that you've seen in your career doesn't mean that it's as low as they go. A sense of history is important. And a realization that the past 10 years (or more) have been extraordinary times and valuations in the market is also rather useful. With all that the consumer is still facing, I just don't understand how anyone can believe that we're in for any sort of a rebound to recently normal valuation levels. While the US market has traded at roughly 14x earnings in recent history, the longer term valuation level is closer to 10x. And when the pendulum swings, it always goes past center in the other direction.
I understand the theory that you buy stocks before the end of the recession. Retail in particular starts to rally 6 months before the end of the recession. But given the landscape, I just don't see how we are out of this recession in 2009, which means that keeping powder dry is still in order for private clients. We're going to play this rally for as long as it holds, but I don't expect that to be longer than March. Trades to go to majorly defensive positions are going to be teed up and ready to go.