Tuesday, December 30, 2008

That's why we invited you...

When I was a little girl, one of the songs my mother used to sing to me when I was being cranky went something like:

"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.


lmauzy said...


Is that 73,000 US stores closing? The organization you cite is international and it could be a broader estimate. But then again, according to their website, that's about how many members they have. If they weren't polling members, then where is the data from? My first thought is to question the forecast.

OK, so I'm the girl who was invited to the party because I could come up with fun things to do when all else was dull.

I agree with you. Many stores will close, there are too many of them, and the consumer is not coming back soon with the debt load we have. But, valuations on large cap US equities are favorable now for longer term buyers. That's what the guy was saying this morning. Even if you trim corporate profits, multiples of 10x are attractive, especially with some dividend yields in excess of 4%. I think the optimists are making an asset class call, that equities will do better than bonds or cash. I'm hopeful they will.

Patty Edwards said...

Here's a link to one of the articles quoting the Chief Economist of ICSC on the 73,000 stores closing:


I don't think he's that far off. If you lose a couple of big chains, which I think we will, have several concept/brand extensions close and a bunch of mom & pop stores go away, and you're there.

At 10x earnings, the market would be attractive. But mean estimates for next year's S&P earnings are currently at $64.69 with a level of 890.64, which puts it at 13.8x next year's earnings. You trim estimates and we're really not done. Just one woman's opinion.

The bet that I'm working on right now is the timing on going long credit risk (corporates or munis) and shorting Treasuries. I just don't have the guts to pull the trigger on it yet.