The Week Ahead: Retail Focus

Back when I was just a tadpole meandering through financial market experiences and making mistakes, I would have been dumbfounded by the stock market's rally since July 15th. However, now that I'm a wise toad, I understand that while fundamentals move stocks over the long-term, in shorter periods, capital flows often play an even more important role. 

Unemployment moves upward to 5.7%, weekly initial jobless claims begin to take off (last week hitting 455,000), and corporate news from Merrill Lynch (NYSE: MER) to AIG (NYSE: AIG) to Wal-Mart (NYSE: WMT) all seem to imply there's more trouble ahead. Yet, the broader stock market rose last week, and the most since April -- on the Dow Jones Industrials chart anyhow. The Dow jumped 3.6% last week, while the S&P 500 moved 2.9% higher and Nasdaq rocketed 4.5%.

"Greek," you're saying, "it was the FOMC meeting man... the boys indicated they would leave rates unchanged (and stocks unhampered) for a while longer... and investors are enthused about softening oil prices." Yes, of course these fundamental positives are playing a role, but we also know consumer spending should tail off through the rest of this year and unemployment is rising. So why are stocks psyched then? If there was just one factor we could look toward, which would it be then...

I think it's the dollar, more than anything else, that is driving the machine these days. The Fed's next move is expected to be a hike, and the stock market has given its approval for it since nobody wants to see inflation weigh on the backs of everything. Meanwhile, Jean-Claude Trichet and the rest of the gang over there had to back track a bit last week. European economies have deteriorated significantly since the ECB's muscle flexing move to raise interest rates a quarter point. Last week, Jeannie had to hold key rates steady, as did the Bank of England, in light of rapidly deteriorating euro zone economies, and a similarly crashing housing market in the U.K. On an aside, congrats to Barclay's (NYSE: BCS) for putting in a decent showing; keep your eye on BCS, as it may be eyeing up an American asset on the cheap.

Back to topic... the dollar. Momentum took the euro/dollar exchange rate so far, that as the fundamentals shift, capital is unwinding out of the trade in a hurry. And with the dollar tied to oil prices, the same goes for the crude pit. As a result of this and new fears of global economic decline, the commodity bubble is now confirmed to be bursting. That said, we found ourselves shaking our head in agreement with an oil trader who is viewable within our weekly video piece, "Georgia Russia War Overshadows Olympics." He insisted that momentum seems to be running from crude now, but at any moment, a geopolitical event could change everything.

All that capital has to find a place to go, and if U.S. rates are rising, and institutions like General Motors (NYSE: GM), Ford (NYSE: F) and others are projected to go under (by one analysts' estimate last week), well then, bonds wouldn't look too hot an option either. So, money is flowing into equities it seems.

Money flow, folks, drives price. It's the old supply/demand lecture we all fell asleep through while working on our undergraduate degrees, and it's playing out in living color before our eyes; it ain't so boring in the real world is it...

Here's the problem... According to AMG Data Services, money moved out of equity funds, into money market, taxable bond and municipal bond funds over the four weeks ended last Wednesday. The chart seems to indicate that last week was no different. "Why Greek?," I ask myself.

My conclusion is (besides that I need to stop talking to myself), that there's no inconsistency here. Money may have moved out of those funds, but that's because it takes the retail investor and retirement saver some time to catch up to the new trend. Meanwhile, portfolio managers and institutions are likely shifting capital destinations out of crude and commodities, and related stocks, and into bargain priced equities. The money is flowing, that's for certain, and stocks are rising while other investments lose value. Thus, I believe my argument is based in truth.

The Week Ahead

This coming week is not heavy on economic reports, but sports a good deal of retail industry earnings reports. Outside of the capital flow theme that we couldn't pass on, the week really has a retail focus to it.  

The most important news of the week might arrive on Wednesday in the Retail Sales Report for July. The economists' consensus sees no change in monthly sales, but when excluding the big ticket AND distressed auto sector, sales are seen increasing 0.5%. Sales that included autos rose just 0.1% in June, but auto weakness should play a significant role in the figure this time around.

We heard a retail analyst who was interviewed on Friday say something silly. She said that she thought consumers may have stashed their stimulus checks away, and that they might spend the money when needed most, like during the "back to school" shopping season. We view "back to school" as a clear seasonal factor that will drive August stronger than the months heading into it. We think this has nothing to do with the stashing away of cash, but more to do with parents' views regarding the purchase of necessary tools for their childrens' education. That said, we anticipate less money will be spent for apparel this year than might have been spent otherwise. Still, don't forget that the population has grown, and so there is natural growth to be offset by the impact of economic softness. 

The War

 The illegal activities that Russia is engaged with in the Republic of Georgia, under the premise of "protection of Russian citizens," is likely to dominate non-Olympics related news this week. While Russian aircraft terrorize civilians and Georgian forces indiscriminately, representatives from North and South Ossetia are expected to hold a news conference on Monday. That seems to imply some sort of declaration of independence as a "free" nation, actually operated by Russia, but then again, why would Russia set itself up for future trouble like that...

Employment & CPI 

Thursday offers two power packed reports, more than making up for the light overall data load. Weekly Initial Jobless Claims jumped last week to 455K, and has been running much hotter lately. Recent data seems to indicate that companies have done their best to limit worker hours, but have stretched that tool to the limit. This means more layoffs could be in store for the months ahead; this is because public companies are under shareholder pressure to maximize shareholder return, i.e. earnings.

The Consumer Price Index is due for release for the month of July. Inflation seems to be falling right into the hands of Ben Bernanke, with the whole economic scenario painting him a genius. We have not decided if he would be an accidental genius or pure one, but we have to admit, the situation seems to be playing out as he noted it should. The Headline CPI is seen rising 0.4%, with the core (ex-food and energy) expected to increase 0.2%. In June, prices rose 1.1% and 0.3%, respectively.

Comments

[adan:]

no mention here of the # of stores that've lowered expectations, that have closed, or the increase in the savings rate (geez, we're not spending as much ?)

2008 Aug 11 08:57 AM