Wednesday, May 27, 2009

Gardening 101

Unemployment is capitalism's way of getting you to plant a garden. ~ Orson Scott Card

If you spend much time watching financial news (which frankly, I don’t recommend), you have probably heard the term ‘green shoots’ too many times to count in recent weeks. For those of you who have been saved from the financial news media, green shoots is the term de juer for glimmers of hope that pundits are trying to find in the dismal economic data, the implication being that before the economy can blossom we have to see signs that the economy will come back like a garden after a hurricane. Hope springs eternal and I don’t begrudge anyone their fantasies but, ignoring reality isn’t going to do anyone any good either.

The stock market’s rally off the March bottoms has been significant but, not unprecedented. In bear markets such as this, explosive rallies are actually quite normal. The problem is that once the general population begins to believe it might be a real rally based on economic fact instead of feelings and false hopes, the professional traders take their profits and head to the sidelines, leaving the Mom & Pop investors holding stocks that are too expensive given the still dismal economic condition.

Two of the economic indicators that the green shoot brigade has cited as reasons to uncork the champagne are both from the Conference Board: the index of leading economic indicators (LEI) and consumer confidence. The biggest positive contributor to the LEI in April, interestingly, was stock prices, which we’ve already discussed. Consumer confidence has also risen in April and May, but until the May reading the level would still be the lowest of any since 1970 if it weren’t for the worse readings in February and March! The ‘high’ May confidence level is now at roughly the same level where some of the nasty recessions of the past 40 years bottomed out. Put another way, the outlook isn’t as bad as it was a few months ago but there’s still a lot of rebuilding to do before we can expect everything in the economic garden to come up roses.

I've said this before, but one of the things that continues to give me pause (really, it pretty much makes me stutter) is the consumer’s debt level. The US economy is almost 70% consumer related expenditures. This has been posted before, but bears reposting: imagine my dismay when I discovered this chart from an ex-banker turned Columbia Business School professor:

The personal debt of U.S. consumers equals U.S. Gross Domestic Product today - for the first time since 1929 – which makes us pretty certain that leaf rot on those green shoots is at least likely if not a sure thing.

The garden in the form of the stock market might look healthy for the next several months – until second quarter earnings are announced and expectations for the rest of the year are given by corporate management teams. It should be a little like waiting for plants to grow and produce fruit, just to find out that we’d been pinning our hopes on weeds.

While I'm not a professional gardener (honestly, I have a black thumb), even I know that in order to have a successful future harvest, the land has to be tilled, the seeds planted, young plants fertilized, the garden weeded and then after an appropriate amount of time, the fruits can be enjoyed. My problem with current circumstances is that it is apparent that fertilizer has been spread far and wide but, over rocky soil that harbors an abundance of weeds. I believe that the economic soil isn’t really ready to grow healthy plants and the plentiful government fertilizer has kept alive numerous noxious weeds (banks, car companies, insurance companies) that are stealing nutrients from companies that managed their businesses well enough for normal times but were caught up in extraordinary circumstances. Eventually the weeding out will happen and some good companies will be thrown on the burn pile along with the nasty weeds, an unfortunate reality of capitalism. Until that weeding is finished however, why not stay out of harm's way? When the garden is full of weeds, it’s time to go to the orchards and other locales for food.

Monday, May 11, 2009

Those who forget history... may be on TV

Wouldn't you think that knowing a bit of financial history would be required for those wishing to anchor on a financial network? I'm a bit flumoxed by the following statement from a certain anchor on a certain network (both of whom will remain nameless): "Come on! Bear market rally? 37% on the S&P? That's one enormous bear." Why yes, darling, this IS one enormous bear. Glad you noticed.

I've prattled enough about all the problems that this economy is facing... deeply rooted systemic problems that can't be overcome so quickly... so I won't do it again. This is what other people much smarter than me have referred to as a super bear market... aka a secular bear market. One of the hallmarks of a super bear market is violent moves to the upside followed by a continuation to the downside. If you want to talk about previous bear market rallies that were bigger, I offer one example out of many possible: May 26, 1970 through April 28, 1971 the market was up 51.2% (not including dividends), yet it was still very much a bear market through 1981.

Moral of the story? A rally doesn't a bull market make. What goes up may come down - harder and faster than you think.

Thursday, May 7, 2009

A steeplechase for Shetland ponies

When I woke up before the crack of dawn this morning to review April's retail sales, I was expecting that things would be better than expected. I didn't get it posted to the blog, but if you're following me on Twitter (see the side bar to the right) you saw my notes from last weekend's mall walk. For the first time in months, malls were busy last weekend. People were parting with cash. Not large amounts of cash. But parking lots were fuller and more bags were being carried in greater quantity than I'd seen in my last 2 months of mall walks. Call it a smallish bounce off the bottom, but whatever you do, don't call it a return to a need for Spendaholics Anonymous.

My view is born out in this morning's comparable store sales numbers. Wal-Mart, bastion of the 'Save Money, Live Better' crowd beat expectations handily. Aeropostale, the poor man's value-conscious shopper's Abercrombie & Fitch, hit it out of the park with a 20% comp gain on the back of a 25% gain this time last year. Amazing. Oh, and the real Abercrombie? Down -22%. Price/value matters, folks. The shopper is spending, but they're being careful about how much and where.

Case in point on that value thingy? Sak's same store sales down over 31%. Nordstrom was 'only' down 10.8%, better than expected and more in line with Macy's (down 9.1%) because JWN has added more offerings at lower price points. Ross, TJX - both up nicely. Kohl's & JCP? Sales down, but not as much as expected... Q1 guidance raised. Thing is, you can only manage inventory and costs so much, eventually you have to have sales or make more drastic adjustments that will cause hate and discontent amongst the shoppers and perhaps shareholders.

The big questions now surround guidance for the second quarter and beyond as well as healthy scrutiny of Wall Street analyst's earnings estimates. The latter worries me more than the former. I've never known a group of folks more likely to take two data points and draw a straight line than the lemmings of Wall Street. It should be intersting to see how many different ways folks can justify owning these stocks at these valuations in this economic environment.

But if the retailers and analysts set the bar low enough, it will be just like a steeplechase for Shetland ponies - such an easy hurdle that almost anyone can get over it. I suppose in that environment you should consider shorting those that still trip themselves up.

By the way, if you're interested in hearing this morning's Bloomberg interview, click here.

Friday, May 1, 2009

No traffic jams here

I spent a number of hours walking a mall and a lifestyle center last Friday and Saturday. What I saw was certainly at odds with what the oh-so-cheerful talking heads are nattering about these days.

Sure, consumer confidence was better than expected yesterday. But it's still more than 5 points below where it most recently peaked in September 08. And I'm not seeing many signs of that confidence in the malls.

Friday I walked the region's best mall with a reporter friend. Between the already empty store fronts, some of which had been vacant for months, and the stores in the process of closing there are roughly 12 vacancies in a mall that has roughly 160 stores. Historically this mall has immediately put up "Coming Soon" signs as soon as a tenant has left. Not so much these days. In fact, the new highly touted Hugo Boss store is going into a store front that has been vacant save for seasonal holiday shops for at least a year.

Some of the stores that were closing had the big bold signs in the windows advertising the fabulous discounts - put Ritz Cameras and Babystyle in this category. Babystyle, by the way, is the last of the maternity stores in the mall as Motherhood vacated awhile ago. Illuminations was trying to play it cool, advertising 50 - 70% off but not announcing their departure (they're part of Yankee Candle and all the Illumnations stores are closing.)

Another thing I noticed was that the only folks that we saw carrying larger bags seemed to have come from stores with major sales going. Gymboree was clearing out old merchandise at 60% off, and the mommy brigade was definitely buying, albeit not as rabidly as we might have seen a year ago. Most of the other bags we saw were small... and lonely. Many shoppers had one little bag, perhaps holding something the size of a headband or scarf, but certainly not anything approaching a whole outfit. JC Penney continues to have their fans - more than the other department stores it seems. There were certainly a number (although not a large number) of medium sized JCP bags being toted about.

In the misses category, the stronger merchandise was earning sales, but where colors or styles were off, sales were missing. Chico’s seems to be doing okay – I’d put this season’s fashion in the ‘okay’ category. J Jill’s current offerings were beautiful, and shoppers seemed to be responding even though the merchandise was clearly meant for warmer weather than we’re currently experiencing up here. Coldwater Creek… ::sigh:: Let’s just call the current offering a miss in my eyes and move on.

Biggest shock of the trip? Abercrombie, which has sworn that they don’t want to be promotional, is apparently eating their own words. Normally the far back corner room of the store is sale merchandise and everything else is full price. Over the last 6-9 months I’d noticed that clearance merchandise had crept out into the back quarter of the store, almost doubling the floor space devoted to it. I almost had to pick my jaw off the ground on Friday, however, when literally 75% of the total floor space was marked down. April sales reported next week should be interesting.

I know there are a lot of folks who have been playing the retail space on the rebound off desperately low levels. And with Macy’s 146% rebound off the November 19th bottom, that’s been a good trading call. This happiness and joy with retail may even last through the next few weeks of earnings season since a lot of the expectations have been set really low. But I think you really need to ask yourself at this point if the consumer is really any healthier than they were 6 months ago … and if these stocks are worth the kind of mutltiples we’re looking at today. Macy’s at 24x forward earnings? Nordstrom at almost 19x forward earnings? Aeropostale, one of the amazing poster children of this recession who has been kicking tush and taking names in the teen space, is up 162% off the bottom and trading at 14x forward earnings.

All I’m saying is an exit strategy isn’t a bad thing to have in your hip pocket.