Boxing Day Blues for Retail

December 26, 2008

392

Retail Sales Plummet!

That's the front page, huge font headline in the WSJ this morning. "Discounts Don't Revive Holiday Spending; High End Walloped" is written below that in the font size that is usually used for headlines. And the numbers were, in fact, beyond awful – with luxury goods sales down 35% and electronic sales down 27% with a big bah, humbug to gift cards as 40% less of those were purchased this year and that does not bode well for January sales either.

We expected as much as we've been running our annual PSW Holiday Retail Survey for a month and our channel checks across the country painted a grim picture for retail BUT – is it really as grim as the headlines would have us believe? The FACT is, when gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales. This is right in-line with what we noted in our survey, that shoppers were done early this year and the markdown mania we saw at the malls – ESPECIALLY AT LUXURY STORES – made it seem pointless to rush into purchases as things only seem like they will be cheaper if we wait a little.

Since Luxury goods and Electronics/Appliances are often the kind of big ticket items you are often buying for your own family, it makes sense that many parents made the decision to wait. I myself was about to buy a really cool rock band kit for my kids for the Wii, which has a guitar and a drum set that works like Guitar Hero but it wasn't on sale and a few days before Christmas I saw stacks and stacks of them (a little high ticket at $189) so I decided I'd wait and see what they would sell for next week (we did get the Wii-Fit pad, which is excellent). That's the basis of a deflationary cycle, consumers put off purchases with the expectation that prices will fall in the future. As long as the purchasing power of the dollars they don't spend keeps increasing, the process reinforces itself as it continues.

So whether it's rock star games or another pair of earrings, a washing machine or even a new car – if you don't NEED a big ticket item on Christmas Day then it's less hassle to wait and if it's also probably going to be cheaper, then the retailers really have no chance on the big ticket items. So DESPITE the TERRIBLE numbers on the high end, OVERALL retail sales were down only 4%. The Retail Sector however (RTH), is trading 30% off last year's highs and that is after a nice recovery to 75, after falling all the way to 60 in the November market panic. As I keep saying, things are indeed bad, but they are not 40% off bad!

Like any unnecessary luxury item, sales of stock certificates have been off 40% from last year with buyers disincentified as prices keep dropping and the bargains don't look like they are going away anytime soon. As with any product purchase, if the general belief of the consumer is that it pays to wait, then waiting is what they will do. Meanwhile, also like retail, some people are simply holding too much merchandise and need to clear out inventory so, on a fairly regular basis, if you keep your eyes open, there are big discount sales as one retailer or another flushes his inventory.

That's why we keep getting offered AAPL at $85, GOOG at $300, F at $2, C at $6, DRYS at $7.50 and LVS at $5… There is lots of stock out there and until the losing retailers (funds) dump their excess inventory, there will be sale after sale after sale. The game we've been playing this quarter is finding the bottom on our selected favorites and doing a little fishing whenever we get there. 8,200 on the Dow has served us well and now we have raised our expectations to make 8,650 the mid-point. That means that we expect the Dow to respect the range from 5% down (8,217) to 5% up (9,082) and, with little exception, that is EXACTLY what it has been doing since we called that range back in November.

Also per our expectations, the VIX has been dropping as the Dow and other indexes become more range-bound. We are surely consolidating for a breakout one way or the other and we generally do expect to get a move up, perhaps to 9,500 where we will hope to establish a higher base. The question is – can it be sustained through Jan 20th and will Obama's inauguration further boost the market or will it be the "sell on the news" event that takes the market lower should Wall Street reject the New, New Deal we are anticipating in Q1?

None of this is a break in our roller coaster model yet, starting next week, we are in stimulus anticipation mode as it's widely expected that Obama will be writing a $1Tn check almost as soon as he gets the Presidential Pen and I think the numbers announced in his first 100 days will be higher than that. So things are not so bad and they may actually get better but that doesn't stop retail holders of both merchandise and stock certificates from panicking and, until the sales stop coming – the buyers are not going to feel any particular urgency to jump back in. As I've been saying for months, this country is suffering from a crisis of confidence and a lack of leadership – with any luck, much of that will be resolved in the new year and we can get to work rebuilding our economy.

AMZN, who we could not believe was being offered to us below $40 back in November, just announced that the 2008 holiday season "finished as its best ever," selling over 6.3M items on thier peak day which was, as we noted in our Holiday Survey – December 15th. AMZN's top electronics sellers were all high-end: The Samsung 52-inch TV, the IPod Touch and Aspire 8.9-inch notebooks. "We are extremely grateful to our customers," said Amazon Chief Executive and founder Jeff Bezos. AMZN was one of the easiest bargains we picked up this holiday season and is a great example of how stocks are being sold off in panics despite all rational fundamental evidence to the contrary.

Fundamental evidence in China points to a massive slowdown as 9% less electricity was consumed this November compared to last. The Hang Seng is closed and had a poor open but jumped back over the 14,000 line and finished flat yesterday at 14,200 while the Shanghai fell 0.3% today, barely holding 200 at 200.73. The Nikkei bucked the trend in Asia and closed up 1.6%, following through to break 2.5% up at 8,739 after bouncing off 8,500 on Wednesday. Global trading is very thin and we're not going to read much into the action. Our main concern is the S&P, which is currently down 41.5% for the year and it would be nice to get back under 40% before we roll the calendar.

"We would have to get busy to get up to slow" – said Bob Pasani on CNBC this morning, ahead of the US open. In addition to Hong Kong – Australia, the UK, Germany and France all have a market holiday today. One thing that is trading in Europe is the Ruble but, unfortunately, it is all sellers and no buyers as Russia's currency falls to a 3-year low against the Dollar and an all-time low against the Euro and, of course, the mighty, mighty Yen. The only reason gold isn't flying yet is because Russians can't afford gold but it won't be long before panic sets in if the Ruble doesn't find a floor.

That floor may be Jim Cramer's proverbial linoleum floor if Russia collapses. There are still three things, each of which may take us 20% lower in the future: The collapse of a major bank (much less likely thanks to government intervention), the collapse of GM (on hold until March at the moment) or the collapse of a medium country and there we have quite a list with Russia as our leading contender closely followed by Venezuela, Pakistan, Iran and Spain to name a few of the biggies.

Last year, I rightly declared that US equities would be the "least sucky place" to put your money in 2008 but I did not realize how sucky the year would actually be for the rest of the world. I my "Index Round-Up of 2007" I said: "We have many burstable bubbles that may join the housing bubble in decline including oil and metals as well as Asian markets if we get a stall over there" and boy, do I wish I was wrong about that! Still, we are getting everything we expected – the fall of commodities, the popping of the BRIC bubble and a slow, painful rotation back to US equities but, due to the financial crisis, the bottom may be a lot longer and flatter than we had hoped.

My play of the day is to watch BBY for an early sell-off on the poor retail headlines as, like AMZN, they have a corner on their end of the market and by far, the biggest lines I saw at any retailer all season were at BBY so it's a little anecdotal but getting an opportunity to pick this stock up around $26.50 and selling the Feb $25 calls for $3.65 and the Feb $25 puts for $2.10 puts you in the stock for net $20.75 and, if called away at $25 on Feb 20th, you gain 20% and, if the stock is put to you at $25, your average entry is going to be $22.88, a 14% discount off today's price.