Why don't they read the papers?

The market is shocked, shocked I tell you(!) by today's retail sales release. Brace yourselves, dear readers, but retail sales for the month of December were down 2.7%. If you're asking yourself how this could possibly be, you haven't been reading this blog long enough. Catch up please, we can't hold up the entire class just for you.

Did we not have chain store sales for the month of December released last Thursday? And were they not abysmal? Yes, yes we did and yes they were. I know, I didn't blog about it. I was too depressed. Anyway, here we are yet again with a big market sell off because of a number that a kindergartner with a little training could have predicted a week ago.

I suppose there's a little ray of sunshine in the numbers - if you took gasoline sales out of the equation, retail sales for the month of December were only down 1.4%. That's what happens when gas prices fall 15.9%... even if you sell more gasoline, it's almost impossible to make up that much of a price decline. Then think about all the clothing discounts we've seen at the mall over the past couple of months - it shouldn't be a surprise that the clothing sales dropped 2.5%. In fact, it's a bit of a miracle it wasn't worse. Deflation is here folks, as previously stated. You read it here, maybe even first.

Try to keep up, please

Times, they are a changin'. It was just about 6 months ago that I sat down with Costco management and heard things that gave me chills. Part of it, I'm sure, was the fact that it was the day before they preannounced a Q4 (August fiscal year end) earnings shortfall, so they were glum anyway (although we didn't know about that until 12 hours later).

Back in July the discussion was all about inflation: food inflation, gas inflation. Remember that it was mid-July that gas prices peaked nationwide. Gas prices are now down 58% from that level. Fifty. Eight. Percent. Today on their first quarter conference call Costco confirmed that they are now also getting price concessions from suppliers on goods that had gone up significantly just a few months ago. While I want to be clear that they didn't specify where they are currently getting concessions, some of the major price increases had been for goods that used petroleum products (plastics, etc). You can bet those prices are headed down. In fact, it was a source of great pain for them that they had to take the price on their rotesserie chickens up from $4.99 to $5.49 to $5.99 all within the course of 6 weeks because of food price inflation. Guess what? They're back down again.

Gas, which was a source of huge LIFO charges because of inflation (if you want an explanation of how and why that accounting even exists, you'll need to find someone smarter to explain it), has now swung completely the other way. And whereas it was at best a teeny profit margin (perhaps even sometimes a bit of an unintentional loss leader) in July and August, it was for a bit of time these last few months 'wildly profitable' according to Costco. (Because they sell so much gas, they buy gas cheaper faster as the price is dropping, but can still stay at really cheap prices to consumers while their cost drops faster.)

There's been a lot of consternation about the huge amount of economic stimulus the government has been pumping into the economy in the name of stabilization, mostly because the great fear of further inflation. Eventually that may happen. Heck, look at what happen when they took interest rates down and flooded cash into the market at the turn of the century (see my August 2008 Post Modern fairy tale for more information). But I'm here to tell you, we can't see the whites of inflation's eyes from this vantage point. We'll remain vigilant. But in a really quick turn of events, we're much more troubled by the looming deflation at this point.