Don't Buy into Consumer Confusion

Based on the hype of headlines from Black Friday through the holiday weekend and Cyber week, you would think consumers had been surprisingly free-spending of late. As that superficial view stirred my stomach into an acidic storm, I was compelled to take a closer look, plus an antacid tablet.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Consumer Confusion

Over the course of the last few weeks, we received data on the state of the consumer mindset, on November chain store sales, including the activity through the big bargain days, and motor vehicle sales. If you perused the headlines covering Black Friday and Cyber Monday, you noted so many “records” you might have gotten your old DJ equipment spinning again. It’s my belief that the press on the subject single-handedly stirred the stock market into a reckless rally. Investors bought into a phantom American buyer, while ignoring Fitch’s downgrade of the American outlook and S&P’s cutting of U.S. banks with international exposure and its warnings to France and Germany. The market also blew off a panic-stricken economic warning from the OECD as well. Neither did it mind that the European Union and U.S. Congress look set to stay divided until the end of us all!

The week ago period brought with it the monthly chain store sales data for November. Thomson Reuters reported that same-store sales for stores open for at least a year rose 3.1% in November year-to-year (3.2% based on ICSC data). Surprisingly enough, the growth was only about in line with analysts’ expectations, based on Thomson Reuters’ data. Furthermore, when taking into account population growth, the rate itself is not so impressive. Actually, the more I think about and analyze it, the less impressed I am.

Over the course of the last several years we’ve seen a move of shoppers down the ladder of value, with an increasing portion of America’s spending occurring in discount store chains and even deep discount or “dollar” stores. Indeed, Costco (Nasdaq: COST) noted 9% same-store sales growth for November last week. Wal-Mart (NYSE: WMT) does not report monthly, but we expect that given its decision to stay open on Thanksgiving and to start sales at 10:00 PM, it appears it did relatively well. Looking for shoes, I perused a Wal-Mart store and was surprised to see a passable pair of sneakers selling for just $15. If not for my concerns about long-term mobility and osteoporosis, I may have indulged in some frugal futility. Shoes, however, are a critical tool for a motivated entrepreneur, and cannot be sacrificed for savings.

At the other extreme, the luxury retail market has been recovering since panic eased among the richest of the rich post that March 2009 scare. There was also a brief period around the time Bernie Madoff topped the headlines, in which some of the rich were especially careful not to flaunt their wealth. However, in November, Saks (NYSE: SKS) posted same-store sales growth of 9.3% and Nordstrom saw sales soar 5.6%, each exceeding analysts’ expectations. With securities and alternative investment markets stabilized and much higher off those aforementioned panic-level lows, the rich feel free to spend again.

There’s now a deeper division though between the rich and the poor, leaving the middle ground retailers scrapping for profits. You’ll find department stores sourcing more goods at lower cost and driving more sales via creative marketing. Macy’s (NYSE: M) seems to have gotten ahead, doing well in recent years after a soft patch around the aforementioned economic turmoil. In November, Macy’s, which operates its stores by the same name and upscale brand Bloomingdales, saw same-store sales growth of 4.8%, also above expectations. However, J.C. Penney (NYSE: JCP), which held to its laurels and refrained from Thanksgiving infringement, suffered because of it. Its November same-store sales declined 2.0%. Still, opening early didn’t save Target (NYSE: TGT), which posted November chain store sales growth of just 1.8%, short of expectations. Perhaps the bad publicity around its Thanksgiving Day Grinch game plan and its disgruntled petition-signing employees kept shoppers away.

November’s sales growth may only highlight that shift we’re talking about in the number of shoppers desperate for value. In other words, many shoppers may be done now. They may have filled not only their holiday needs, but may very likely have cured all their current needs. We could very well see that illustrated in a dearth of shopping that could occur through December and into 2012 as a result. The latest ICSC Weekly Same-Store Sales data supports this view, as week-to-week sales dropped a sharp 2.3% in the post Black Friday period.

Analysts are waiting to see how the discounting that drove sales may have impacted profit margins. Also, given the early starting hours at the nation’s discounter, Wal-Mart (NYSE: WMT) and its rival Target (NYSE: TGT), their sales may have actually taken a bite out of economic value, not to mention bitten into the sales of department stores and specialists.

Yet, according to the popular press, consumers are feeling better for some unexplained reason. The most recent Conference Board reporting of Consumer Confidence showed a dramatic improvement, but from dire levels in October. The Board showed its Consumer Confidence Index gained to a mark of 56.0 in November, up from an obscene 40.9 in October. Much of the gains came in future expectations, which jumped to 67.8, from 50.0 in the prior month. I’m always wary of gains that come due to the volatile expectations query, since they are based on hope and prayer. Perhaps the holiday cheer got to some foolish folks, or too much eggnog fogged the view.

The press will point to the improvement in the unemployment rate in November, but half of that superficial gain was driven by a large drop in the workforce. While some speculate that this is due to demographics, or the retirement of our aging population, I say it’s more likely due to the depression of our long-term unemployed. The strict requirements of the check circulators can easily lead a depressed fellow to fall out of favor. Once cut off, he’s out for good, yet just as unemployed as he was the day before.

But motor vehicle sales surged in November, they’ll say, as Toyota (+6.7% NYSE: TM), Chrysler (+45%), GM (+6.9% NYSE: GM), Ford (+13% NYSE: F) and Nissan (+19% OTC: NSANY) reportedly did especially better than last year. Overall, the annual rate of motor vehicle sales was 13.6 million, up just a bit from 13.3 million in October. Domestic vehicle sales ran at an annual rate of 10.3 million, up from October’s 10.1 million pace, but short of expectations for 10.4 million, based on Bloomberg’s survey of experts. Given that interest rates are incredibly low, and the aging of vehicles on the road through the economic slug, I do not see a blockbuster pace of activity here. The improvement is notable, but not so awesome.

In summary, I suggest investors temper their enthusiasm tied to the latest consumer data. Instead, money minders might look at what is unfolding economically speaking across the Atlantic, where 20%+ of U.S. exports are sold. Political gridlock, both in Europe and in the United States, threatens to test the rating agencies, who hold too great a power at this critical juncture. Their untimely threats against European bookends, and their overhanging threat clouding the American sovereign rating, are not just reflections of current reality. They are also determinants of future upheaval. While the markets may rally on appetizing actions taken in Europe, the longer term seems, at least to me, to hold an unsavory entree’ in store. Therefore, take the latest consumer data lightly, and instead look at what might kill those hopeful expectations and spending in the near enough future.

Article interests investors in: S&P Retail ETF (NYSE: XRT), Wal-Mart (NYSE: WMT), Pier 1 Imports (NYSE: PIR), Ethan Allen (NYSE: ETH), Hooker Furniture (Nasdaq: HOFT), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Apple (Nasdaq: AAPL), Best Buy (NYSE: BBY), The Limited (NYSE: LTD), Chicos (NYSE: CHS), Ann Taylor (NYSE: ANN), The Gap (NYSE: GPS), Macy’s (NYSE: M), JC Penney (NYSE: JCP), Nordstrom (NYSE: JWN), TJX Company (NYSE: TJX), Kohls (NYSE: KSS), Costco (Nasdaq: COST), Target (NYSE: TGT), Wet Seal (Nasdaq: WTSLA), Hot Topic (Nasdaq: HOTT), American Eagle Outfitters (NYSE: AEO), Aeropostale (NYSE: ARO), Abercrombie & Fitch (NYSE: ANF), Saks (NYSE: SAK), Tiffany (NYSE: TIF), Talbots (NYSE: TLB), Lumber Liquidators (NYSE: LL), Builders Firstsource (Nasdaq: BLDR), Fortune Brands (NYSE: FO), Leggett & Platt (NYSE: LEG), Tempur-Pedic International (NYSE: TPX), Acuity Brands (NYSE: AYI), La-Z-Boy (NYSE: LZB), Select Comfort (Nasdaq: SCSS), Sleepy’s (NYSE: ZZ), Furniture Brands (NYSE: FBN), Natuzzi (NYSE: NTZ), Sears (Nasdaq: SHLD), Dillard’s (NYSE: DDS), Bon-Ton (Nasdaq: BONT), Cost Plus (Nasdaq: CPWM), Baker’s Footwear (Nasdaq: BKRS.OB), Bebe Stores (Nasdaq: BEBE), The Buckle (NYSE: BKE), Cache (Nasdaq: CACH), Casual Male (Nasdaq: CMRG), Cato (Nasdaq: CATO), Christopher & Banks (NYSE: CBK), Citi Trends (Nasdaq: CTRN), Collective Brands (NYSE: PSS), Destination Maternity (Nasdaq: DEST), Dress Barn (Nasdaq: DBRN), DSW (NYSE: DSW), Finish Line (Nasdaq: FINL), Footlocker (NYSE: FL), Gymboree (Nasdaq: GYMB), Guess (NYSE: GES), J. Crew (NYSE: JCG), Jones New York (NYSE: JNY), Jos. A Banks (Nasdaq: JOSB), New York & Co. (NYSE: NWY), Men’s Wearhouse (NYSE: MW), Syms (Nasdaq: SYMS), The Children’s Place (Nasdaq: PLCE).

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