Retail Sales Confirm Economy Is Contracting - Holiday Spending May Be In Trouble

Includes: PMR, RETL, RTH, XRT
by: Dave Kranzler

For retailers other than grocery stores, it's been a long-standing tradition to close on Thanksgiving. Within the last few years, several big box retailers like Walmart (NYSE:WMT) began to kick-off Black Friday shopping by opening at midnight. But now several retailers, led by Macy's (NYSE:M), Kohls (NYSE:KSS), J.C. Penney (NYSE:JCP), K-Mart and Sears (NASDAQ:SHLD) have announced that they will be open on Thanksgiving day. K-Mart announced Tuesday that they will actually open at 6 a.m. on Thanksgiving.

I see this as a very troubling sign on just how weak the real economy is beneath the seasonally-adjusted, year over year headlines which misleadingly paint a picture of strength. In fact, when I look at hard retail sales numbers, combined with negatively comp'ing month to month housing and auto sales, the fact that retailers are now opening on Thanksgiving tells me that the holiday sales season could be quite problematic for everyone expecting another robust spending season. The "open-on-Thanksgiving" signal tells me that big retailers are also expecting a rough holiday season for sales. Because of this, I believe that investors can take advantage of what I believe are over-inflated stock prices relative to the true underlying realities of the economy.

I first started thinking about holiday sales back in mid-October when I saw an article in which the National Retail Federation (NRF) was forecasting that Halloween spending would drop by $1 billion this year from 2012. While the final Halloween-connected sales figures have not been released yet, the NRF has also released a survey in which they expect that consumers will spend less per capita than last year: Consumers To Trim Holiday Gift Budgets. Please note that while the overall nominal amount of sales is expected to increase by 3.9%, that figure includes estimates for population growth and inflation. The projected decline in the amount spent per person is a more important reflection of the weak underlying economy. I actually think that, net of the effects of inflation, combined with heavy discounting which is already being observed in some large retailers like The Gap (NYSE:GPS), 2013 holiday retail sales could actually be flat or slightly negative vs. 2012.

The latest measures of retail spending seem to confirm my view. On Tuesday the weekly ICSC-Goldman index of comparable store sales showed a -.6% index reading vs. -.4% the previous week. To be sure, the year over year reading registered a 1.9% gain, but inflation is built into nominal retail sales numbers. The negative reading for week to week comparable store sales is considered a much more significant indicator of sales. Also, this index is considered to be the most comprehensive reading of general merchandise retail sales. One more point to note on this, the Government shutdown is being widely used by companies who have reported Q3 results already as an excuse for disappointing numbers, but this particular metric measures retail sales for the week ending November 2. Given that the general expectation was that there would be a "snap-back" affect after the shutdown ended on October 16th, the negative comp store sales for the last two weeks of October reflects particularly bearish implications for retail spending trends.

Two more pieces of data were released Tuesday and today which reinforce my view that retail sales are slowing and that holiday sales will likely suffer. First, Gallup released its Economic Confidence Index for October, which dropped a startling 16 points from September. To be sure, there is no doubt some affect from the Government shutdown reflected in that decline in confidence. But this is the largest monthly drop in the history of the index going back to 2008, when Gallup began tracking "confidence" on a daily basis.

The second item is the release of Abercrombie & Fitches Q3 comp store sales (NYSE:ANF), which declined significantly more than expected. The retailer also announced that it expects that its Q4 holiday sales will fall more than expected and it's closing a small 30-store retail chain that it owns and operates (obviously this will add to unemployment). Given that ANF's stock has plunged 11.5% today, it's pretty clear, at least to me, that the stock market has excessively high expectations built into the stock prices of big retailers, especially with regard to the level of holiday sales this year that the market is expecting.

As I have laid out, it is likely that holiday retail sales are going to disappoint vs market expectations. Because of this, the retail sector of stocks, in my view, is overvalued and money can be made making bearish bets on these stocks. The easiest way to do this is to short, or buy puts on the Market Vectors Retail ETF (NYSEARCA:RTH). This index has been highly correlated with the continuous move higher in the S&P 500 and I believe it is set-up to fall hard after this year's holiday sales are tallied. I leave it to readers to sift through Seeking Alpha to find analysis on potentially overvalued individual retail stocks. I will note that RTH open down today (Thursday) and is currently trading down 1.3%, despite the big opening gap higher by the overall stock market and despite the release of the Thomson-Reuters chain store sales metric for October which showed a better than expected slight gain for October (it measures about 10% of the total chain store retail sales).

But my overarching theme here is that a disappointingly weak retail sector reflects a much weaker than expected economy. On this basis I believe that overall stock is overvalued. Although I think shorting the SPX will be rewarded with patience, it's tough to "fight the Fed" right now. However, as a bet on a very weak economy, shorting the homebuilders has been rewarding and will continue to reward. The Dow Jones U.S. Home Construction Index (DJUSHB) is diverging from the upward movement in the SPX and I continue advocate shorting homebuilders on every bounce. Today is a perfect example, as the DJUSHB gapped up 6 points (1.5%) with the rest of the stock market at the open, but actually sold off into negative when the SPX pulled back. You can pull up my previous posts on this sector to see which stocks I like for bearish bets and see in-depth analysis on the sector.

Disclosure: I am short DHI, KBH. 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.

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