Retail Bravado Reminds of January's Home Builders

The University of Michigan released its consumer sentiment index reading for the month of May, and the measure beat estimates. The reading of 88.7 exceeded economists' consensus view for 86.2 (compiled by Bloomberg) and was above April's 87.1 measure. The result, higher than expectations has enthused trading today. However, and you know I will look deeper than the surface, consider the trend in sentiment this year: Jan-98.0; Feb-93.3; Mar-88.8; April-86.2; May-88.7. Also, the reading, though stronger than anticipated is not much higher than the average reading of 88.1 since the U. of Michigan began its work in 1978. There is a positive here that the result exceeded economists views, but let's not get overly enthusiastic, as trends, like stocks, are not likely to present perfectly straight lines.

The National Retail Association indicated that rising gasoline prices are a growing worry for consumers and retailers. Gasoline prices are rising on an almost daily basis, and consumers expect the price to reach $3.32 by Father's Day, according to the association's report released today. The report indicates that consumers are driving less frequently to dine and shop. WalMart's (WMT) earnings report supports this information, but three retailers that just reported earnings differ with this view.

In fact, the view expressed by retailers Kohl's (KSS), J.C. Penney (JCP) and Nordstrom Inc. (JWN), after their respective earnings reports, sounded to me an awful lot like the home builders did this past January. Recall, many were loudly proclaiming confidence in their businesses, and one in particular even suggested estimates could be exceeded. Just a couple months later, guidance has been pulled and the market has been described as "it sucks" by two separate CEOs, including the one who anticipated strong results.

The biased views of corporate managers make me chuckle sometimes. You'll almost never see a less than stellar corporate outlook at the many conferences and events where corporate management teams present their story. Often times, young or naive analysts, and occasionally even seasoned ones, get sucked in. It helps to play the devil's advocate, anticipate risks, question forecasts. I remember once, early in my career, I questioned a CEO at an analysts' day about his use of capital in chasing ancillary business opportunities. I questioned his small management team's ability to handle the various efforts outside of their core strength and experience, and how it might take focus away from the primary reinsurance business. Though he treated me like a fool at the conference, he ended up playing the fool in the year that followed.

Then there are the managers I would follow into the most dismal of companies. I watched James Wright, now CEO of Tractor Supply (TSCO), come in as COO and turn an underachieving management team and unreliable operation into a model for success. Over the years, I admired Manuel Perez de la Mesa, CEO of SCP Pool Corp. (POOL), and his skill in growing the less than sexy swimming pool supply and equipment distribution business he runs. Those are two of the best managers I may ever encounter, and I may never uncover a better stock than POOL was for me and my clients as a "strong buy" recommendation. However, I note, when I left my firm in mid-2005, I had already downgraded the shares based on concerns for valuation, interest rates and housing. The tide impacts all ships...

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

Bloomberg: May Michigan Consumer Sentiment
CNN Money: Gas Pressures Consumers
AP/Yahoo!: Retailers Sounding Like Home Builders Did in January
Bloomberg: China Economic Restraints Fall Short of Mark
Schwab Insights: Liz Ann Echoes Yesterday's Greek View of Estimates
Yahoo! Earnings Calendar
AP/Yahoo!: Microsoft Pays Big for AQuantive
CNBC: Oil Steady Today
CNN: Immigration Compromise Reached
BBC: Democracy is Doorway for Islamic Revolution in Pakistan
BBC: EU Holds Russia Accountable for its Pressure Tactics
Iran Daily: Tales from the Dark Side

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