Yep, he saw his shadow all right

So I know I'm a couple of days late, but on Monday Punxsutawney Phil (the most famous groundhog ever) saw his shadow, thus predicting another six weeks of winter.

Interestingly, in a similar ceremony held this morning in Issaquah, Washington, my friends at Costco confirmed Phil's bleak outlook. The company came out with comparable store sales of -2% ... not horrid when you consider that gasoline price declines hurt sales by 4% in the US and the strong dollar accounted for an 18% (yes, eighteen percent, that's not a typo) swing in International comparable sales from 9% in local currencies to -9% in dollars. But still, not good. Even worse, earnings for this quarter are going to be 'significantly' below the $0.70 estimated by Wall Street pundits and the company is withdrawing guidance for the rest of the year. 'Significantly' translated to 10% below expectations last quarter... but the company isn't offering interpretations this quarter. Let's just call it yucky and move on.

More of an issue than sales were margins on discretionary items. Let's face it, even though Costco got good pricing on some fabulous items, they were competing against mainstream retailers that were quite literally willing to give away the shirts on their racks in order to clear inventory. One example is the cashmere sweaters they had in the Issaquah store. They arrived in November with a price of about $69. Normally, they would have sold like hot cakes at the original price, but these are not, if you haven't noticed, normal times. By Christmas they were about $49. The killer, though, was that in mid to late January there were STILL cashmere sweaters for sale. Maybe cashmere is 'out' right now. I noticed it wasn't selling well at Macy's either. But more likely, Costco's 'bargain' price didn't look as bargain-ish when compared to the discounts the mainline retailers offered. Thank goodness they sell food too, which drove the frequency of customer visits to a high 4%.

Bottom line for me, though, is that if Costco which sells food/staples (~60% of revenue) and discounted discretionary items (~40% of revenue) is having issues, we are obviously still smack dab in the winter of our discontent. It doesn't appear likely that the sun, my friends, is going to shine on the consumer in the near term - literally or figuratively.

More from the NRF conference

No, not the National Rifle Federation, although I'm sure there are some investors who wish they had a rifle if they still own retail stocks. I'm talking about the National Retail Federation conference. Women's Wear Daily, again, is saying the following this morning:

The prospect of a new consumer order was echoed by Carl Steidtmann, chief economist at Deloitte, who addressed global trends and forecasting at a subsequent NRF session. “The recession will create a very different economy when we come out of it than the one we had when we went into it,” he said. “Real wages are up 6 percent since July. Consumers have the means to spend, they just don’t have the will.”

You're right that there's a new world order coming out of this. But the comment about the wages. All I can do is shake my head. Dude, consumers are digging out from years of over spending. Did you conveniently forget that?

Just because more money is coming in doesn't mean that they can spend it. Consumers spent this year's "means" 5 years ago trying to keep up with the Jones'. And now the credit card companies are starting to look a little like Guido the Enforcer (or is that Carlo the Collector?) They want their money NOW, thankyouverymuch. We're reliving my favorite line in one of my favorite movies, Trading Places: "Margin call, gentlemen."

Apparently Lee Scott reads my blog

Women's Wear Daily is reporting the following:

The economy will turn around some day — but don’t expect conspicuous consumption to make a comeback.

So believes H. Lee Scott, chief executive officer of Wal-Mart Stores Inc., noting the dismal economy has caused a permanent and fundamental change in consumer behavior.

The fact that people still need to be told that this is the case is rather interesting to me. (If they'd only read my blog earlier...) This isn't something new, and it's going to get worse before it gets better.

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.

Not your father's recession

Maybe I'm a total pessimist. Maybe. But I don't think so.

Last week I watched so much financial TV that my head came close to exploding. The message, repeated ad nauseum, was that it's time to buy because things are so cheap and the recession must be close to over. Okay. If you think so. But let me give you a few things to think about before you bet your entire retirement account on black.

Yes, the last two recessions have lasted about 8 months. And yes, we're already 12 months into this little piece of recessional happiness. So, that means we're almost done, right? Nope. Why not? Keep reading.

Most recessions come from inventory build-ups. Think back to the year 2000. What tanked technology? All the parts everyone needed to build out the internet were in short supply, so everyone double/triple/quadruple ordered. And then the factories were actually able to deliver what had been ordered... and those who had ordered only needed a fraction of the stuff the other companies were trying to deliver to them. In other words lots of inventory, few corporate buyers. This usual scenario then leads to companies cutting jobs because they have to make less stuff. At this point, the consumer starts feeling the pain and cutting back... and we're almost out of the woods.

This time it's different. Really. It is. Let's look at this recession. Corporate inventory levels haven't been an issue, at least until recently. We got here differently this time. This time what fell apart first? Homes. Who owns homes? Consumers. So, instead of starting with industry and then having the issues filter through to the consumers at the end, we're leading with the consumer.

Let's review what Joe and Jane Consumer have had to deal with over the past couple of years:

• Their home has lost at least 15% of it's value... but more likely somewhere between 25-50% of it's value.
• Their retirement accounts have lost 40% or more of their value.
• The company holding their home equity loan has put the kibosh on further withdrawals.
• Their credit card companies have cut their credit limits and/or raised their interest rates... unless the darn things just got canceled outright.
• Gas and food prices went up astronomically. I'll give you that gas prices are now down at 5 year lows, but with their balance sheets evaporated and their credit essentially maxed out, low gas prices are nice but not enough to make much of a difference at all for the majority of U.S. consumers.
• Oh yeah, and then there was the (un)employment report last Friday. Worst in 30-some-odd years. Sure, employment is a lagging indicator. But it's still falling. And more companies are laying people off.

So, while Black Friday sales were up nicely and Cyber Monday sales were up even better, my interviews with consumers ... and my common sense... tell me that they're buying on deep deep sales when they buy. Holiday sales (oh, heck, can we just call if Christmas please?) are probably going to fall this year. Fall. That's not good. And it will have ripple effects throughout the economy.

Hmmm. Then there's the problems in Detroit. And the still-mostly-frozen credit markets. I'm not very political. But I've been impressed by what Mr. Obama has been putting in place for the future... and by his pragmatic approach to this whole mess. But I have a very strong feeling that around March or so everyone is going to figure out that he doesn't have a magic wand, he can't make it all better quickly... and this market is going to take another dive for the floor.

Remember, stocks are only cheap on a Price/Earnings basis if you know what the earnings are going to be. Forward P/Es are based on someone's best guess of the future. But if that future isn't getting better, it's getting worse, are you really sure about that valuation?

Enjoy this Santa Claus rally. Play it if you want. But don't stay too long at the party, 'cause despite the hair of the dog that everyone seems to think is yummy right now, the hangover isn't anywhere near done.

Thanks, that was helpful

Today we have been treated to what my husband calls a blinding glimpse of the obvious: the National Bureau of Economic Research has officially declared this economic malaise to be a recession. Even better? The recession started in December 2007. Today is the first day of December 2008. The insight that the NBER has provided is astounding. The whole thing brings to mind women who supposedly never knew they were pregnant until they gave birth. Quite literally unbelievable.

So, how does this information change your life and mine? Well, I suppose the upside is that now that a recession has actually been declared, we're certainly closer to the end than we were before. Don't mistake what I just wrote - I am NOT saying the end of the recession is near. What I am saying is that getting past denial is the first step to recovery. How long recovery takes depends on the severity of the original illness.

Beyond that? Carry on. Nothing much to see here.