Malls Aren't Dead Yet - Bezek's Daily Briefing

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Includes: AMZN, CPB, DIA, KHC, MDLZ, QQQ, USO, XLU, XRT
by: Ian Bezek

Summary

Markets take another tumble; the back and forth action continues.

The Amazon threat isn't quite as bad as the media is making it out to be.

Don't assume brick and mortar is dead just yet.

Markets slumped on Tuesday. Volatility has picked up, it feels like we get an almost 200 point up or down day on the Dow (NYSEARCA:DIA) every single day lately.

Despite enthusiasm in the commodity sector, the rest of the market couldn't find any strength. Even with oil (NYSEARCA:USO) nearing $50, it wasn't enough to cheer the markets. The Nasdaq (NASDAQ:QQQ) led the way down 1.25% while the other indices dropped a percent each.

With the exception of oil companies and a handful of the banks, it was a pretty much red session all across the board with little spared from the selling.

Yield-sensitive names really took it hard. Utilities (NYSEARCA:XLU) got hit for 2% losses across the board; REITs generally dropped sharply, and the consumer staples also got smacked. Mondelez (NASDAQ:MDLZ), Campbell Soup (NYSE:CPB), and Kraft Heinz (NASDAQ:KHC) were all off 3% or more; it was a day that the market took to selling the higher-yielders.

The result of the sell-off left the Dow Jones at its lowest point in almost two months. Even robust commodity pricing hasn't been enough to relieve investors' concerns over the slowing economy, weak retail sales, and underwhelming corporate profits. The Fly sums up why this market is struggling to reach new highs:

There isn't going to be a great big breakout. This isn't the beginning of a new bull market. What you're trading is late cycle economic waste, in the middle of a Presidential election cycle. How do I know this?

[T]he market has risen, almost without pause, since 2009. Since then, we've doubled the debt of this country, enacted psychotic central bank policies, transferred enormous wealth from west to east under the guise of globalization, all for the sake of trying to achieve 3% growth.

All we've got to show for the effort is $20 Trill[ion] in debt and a whole bunch of service jobs.

The market, and Fed, are caught between a rock and a hard place. On the one hand, economic growth is anemic. Real wages are flat to falling except for the elites. The economic "recovery" of the last few years has mostly been a wealth transfer to the top of society. According to Gallup polling, only 52% of Americans owned stocks in April, the lowest figure in 19 years; the stock market boom has passed many people by.

The stimulus isn't doing much outside of propping up financial assets, and it's unclear what moves could cause more solid growth in the US economy. It seems increasingly likely that the economy needs a recession to reset before a more solid recovery can ensue. The Fed is reaching the limits of what it could possibly hope to achieve with easy money. Despite the souring economic indicators, the Fed was out talking about more rate hikes; many people want policy normalization at this point, regardless of the consequences.

You've got falling corporate profits, stagnant wages and retail sales, slowing GDP growth, and a Fed that isn't eager to stimulate further. Stocks might make a nominal new high at some point this year, but the case for a breakout and big move higher looks pretty weak. Keep focused on risk management with a wary eye for opportunities here and there where they pop up.

I did add a new stock - the first in months - to my primary long-term portfolio Tuesday. At a sub-14 P/E ratio, more than 4% yield, and with a track record of 22 dividend hikes in the last 23 years, it's nice to get to buy something back at its January lows. But in general, even after this selloff, it's still a good time to hold some cash and see how things develop.

Amazon Isn't Crushing Everything

The Amazon (NASDAQ:AMZN) will kill all retailers as we do all our shopping in sweatpants theme is reaching critical mass. Fortunately, or unfortunately depending on your point of view, it isn't true. Quick, before I reveal the actual data, take a guess. What percent of sales occur online in the US? 20%? 50%?

If you guessed something in the single digits you win. For all the fretting about online cannibalizing absolutely everything that we've heard over the last year, realize that online makes up just 7.3% of US sales, weighing in at just $341 billion out of the total $4.7 trillion of retail sales:

Consider this, since 2011, total brick and mortar sales are up by about $350 billion, which slightly exceeds the entirety of the e-commerce market in 2015. That's right, just the 4 years of brick and mortar sales growth since 2011 are larger than the entire online market at this point.

None of this is to deny that e-commerce is a growing part of the overall picture. However, it's up from just 3.6% to 7.3% of the total market since 2008. That means it took 7 years to double. E-commerce had previously doubled in 5 years, growing from 1.7% to 3.6% of the market between 2003 and 2008.

If e-commerce keeps doubling its overall share every 7 years, in 2030, online would make up 30% of the total retail sales market; which would make Amazon or whoever dominated online very powerful. But brick and mortar would still control 70% of the overall (by then much larger) pie. If you're selling all your department store stocks and mall REITs, I urge you to consider if you're acting prematurely.

The delta between Amazon and other retailers (NYSEARCA:XRT) has moved to an extreme level recently. Over the past year, Amazon is up 60%, and retailers as a group are down 20%:

Click to enlarge

I'm not saying to short Amazon and buy traditional retailers tomorrow. It's hard to call when these sentiment trends will reach their peak and switch direction. But let me assure you; the death of retail call is getting a bit overdone. Online sales are 7.3% of the total market and are growing at a modest pace; Wal-Mart isn't going out of business anytime soon.

Disclosure: I am/we are long WMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.