May 12th, 2016 4:50 pm
Via Barrons:
Retailers routinely advertise markdowns of 40% or 50%, but every shopper knows that’s off of phony “original” prices that nobody actually pays. Retailers’ shares Wednesday were subjected to markdowns that ran into double digits — but from actual prices.
The proximate causes for the retail rout were the disappointing results and even poorer outlook at Macy’s (ticker: M), whose shares had a 15%-off sale, which brought them down a whopping 57% from last year’s peak. The declines spread throughout the sector, hitting retailers from the hale and hearty, such as TJX Cos. ( TJX ), down 3.4%, to the hopeless, like Sears Holdings ( SHLD ), off 5.3%.
The problem was that consumers just weren’t spending — despite growing employment, rising wages (however slowly), improving household finances and, of course, the steep drop in energy costs. Macy’s also cited a drop-off in spending by tourists from abroad owing to the strong dollar, which is an important factor for its iconic Herald Square store in New York. But the anecdotal evidence is that Manhattan is teeming with tourists from the U.S. of A., who probably are spending their bucks on Broadway shows or sightseeing instead of shopping.
Then there was the all-purpose excuse, the weather, which is always too hot, too cool, too rainy or too nice when retailers don’t hit their numbers. And it didn’t escape notice that Amazon.com ( AMZN ) hit a record while traditional brick-and-mortar retail chains’ stocks were tumbling. Among those households with $99-a-year Amazon Prime memberships (upwards of 61 million, according to Piper Jaffray estimates), there’s little reason to shop elsewhere when virtually everything is available via a tap on a smartphone or a click of a mouse.
But for months, Stephanie Pomboy has been jumping up and down and waving her arms (figuratively, of course) in her MacroMavens advisory for discerning institutional investors. Retail sales have been meh while inventories have been piling up — but consumer discretionary stocks nonetheless kept climbing.
In one of her self-described rants last month, she declared:
“To this very day, there is still ZERO discussion about the possibility that something bigger is at work. There is no serious thought — on Wall Street or at the Fed — that we may be witnessing a generational shift in consumer behavior. Pay no attention to six years of statistical proof.
“Apparently it’s going to take a major accident to wring this acknowledgement. With inventories and never-before-witnessed extremes, that accident is just around the bend.”
Just last week, Steph again was yelling from the ramparts about the disparity between near-record stocks and the sharp high-yield bond risk spreads since the beginning of the year with economic fundamentals.
“But nothing betrays investor confidence in the durability of the U.S. recovery like the performance of consumer-discretionary stocks,” she writes, alongside a chart of flat retail sales excluding food and energy versus the steadily ascending Standard & Poor’s Consumer Discretionary Index.
“To my endless surprise and frustration, the absence of a consumer awakening has yet to lead to an investor awakening,” she continued. Over the first three months of 2016, retail sales have shown, respectively, a drop of 0.5%, no change, and a decline of 0.3% – which followed seven lousy months that constituted the worst stretch since the Great Recession. But the gap between the sales data and stocks’ performance grew wider still.
Until Wednesday, apparently.
At the heart of the problem is the overhang of debt, plus the millennials’ vows not to make the mistakes of their parents’ generation — just as Steph’s grandmother’s generation did after the Great Depression. And they didn’t have the costs of new smartphones every year or two and their hefty monthly tabs.
And as for the one strong spot for spending, automobiles, that’s been boosted by aggressive financing that lets just about anybody lease the car or truck of their dreams for a few hundred bucks a month, which smacks of subprime redux.
“One would think that the fact that one of the warmest winters in 122 years, robust job growth and tax refunds — and $32 trillion in asset gains (!!) — failed to persuade consumers to accelerate their spending would spur a rethink” on the part of investors, Steph wrote a week ago.
Maybe Wednesday’s retail stock rout was a start of a reappraisal. But it goes beyond that, she concludes.
“The weakness in the economy and corporate profits is not a fleeting function of the dollar and oil. They are just contributing factors. The real problem is weaker consumptions growth. And that problem isn’t going away.”
Given that consumer spending amounts to roughly 70% of gross domestic product, it is hard to see how a hibernating consumer bodes well for economic growth.
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