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Canary in the Coal Mine

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/22/2006 3:48 PM EDT;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

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Before everyone takes off for the holidays, I wanted to bring a few items to your attention about about the upcoming weekend’s Retail Sales:

Today's Michigan Consumer Sentiment came in soft, but I tend to ignore what consumers say (we're nervous!), and pay closer attention to what they do (shop!). 

Speaking of nervous, many retailers are aggressively cutting prices before Thanksgiving even begins! Wal Mart has a 42" plasma screen for $999; Best Buy is advertising a 52" screen for $1699. These doorbusters are about half of last year's prices. Its a combination of economies of scale and loss leaders to get people into the stores. Wal-Mart cuts food prices ahead of holidays, with some foods marked down by as much as 20 percent. Target has decided to match Wal-Mart's generic drug prescriptions for $4 -- rolling their program out in all 50 states.  (Ain't competition grand?) I read this as a very significant sign of a lack of confidence in how the shopping season will go.

This year, I expect the Holiday Retail season could very well end up being the “canary in the coal mine” -- for the economy, as well as the stock market.

A weak consumer spending season bodes poorly for the start of 2007.

That said, let's delve into the specifics: I am looking for a gain in holiday sales (year over year) that are 2.5 - 3.5% over 2005. This is comparable (only slightly softer) than last year's holiday gains. Last year, our forecast was for 3-4%, and the final number was 3.5%. 

Despite the overall slowing, and the fading of the Housing ATM, the Retail sector has had a terrific run since the summer. The iShares Dow Jones Consumer Goods (IYK) chart nearby is at record levles. That does not leave alot of room for error.

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iShares Dow Jones Consumer Goods (IYK) 2 year chart

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The good news is that lowered energy/gas prices has put a little more jingle in consumers’ pockets. And, retailers have been very aggressive in discounting very early.

The bad news:  That nervousness is based on good reason. Various surveys have found that 1/3 of holiday shoppers say they plan on spending less this year than last; (Consumer Federation of America and the Credit Union National Association)

Also on shopper’s holiday lists: an increasing use of credit cards. We try to be careful in not reading too much into this: it reflects a) an increase in online shopping, b) convenience, and c) perhaps an addition of even more consumer debt. Given the decrease in mortgage application sdespite lower rates, this is definitely something to watch more carefully.

One strange detail worth noting:  For first time in 4 years, Retail Theft has increased. Whether its due to customer shoplifting or employee shrinkage, I’m not sure what to read into it -- other that major changes like that are often harbingers of additional shifts.

Lastly, my favorite odd statistics:

-Five percent of Americans have already completed their shopping for the holidays. (I don’t know who these anal retentive people are)

-Each Hour You Shop Will Equal 15 Minutes of Wrapping (at least for my wife, who calls shopping economic research)

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Two short updates on Micro-Islet:

I made plans to interview both the founder of the firm, and current execs next week. I am updating the prior research report, and from what I have seen, there has been no fundamental change in the story. If there are major changes, we will do a full report, otherwise, a simple update should cover it.   

Secondly, I hear through trader sources that the firm that had the blow up and was dumping shares is nearing the end of its selling. The stock seems to have stabilized, and one hopes would be behaving better once this forced liquidation is over. Large shareholders long time I have spoken to have accumulated stock ont he way down.

We should get a much clearer picture by next week.

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Have a safe and happy holiday

-Barry Ritholtz
November 22, 2006

Wednesday, November 22, 2006 | 03:48 PM | Permalink | Comments (0) | TrackBack (1)
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