The conventional wisdom of a year ago was that we would have a soft landing in housing. Today, the stock market message is a hard landing for housing, with clear damage to consumer discretionary spending.
-Robert J. Barbera, chief economist of the Investment Technology Group
That's a quote from a NYT article on the intersection of home builders and department stores: This Time, Housing Is Taking Department Stores Down With It.
Depending upon who you believe, the impact of this is either: 1) temporary consumer weakness blamed on energy costs; 2) signs of an ongoing sentiment decay in the US, partially blamed on the Iraq War; 3) the long awaited impact of the housing slowdown on US consumption; 4) warnings of a greater economic slowdown or even recession; 5) some combination of all of the above.
As the prices of the Department Store sector reveal, these are relatively new developments in the Retail space.
The fascinating thing about this is how foreseeable it actually was -- way, way in advance -- and how long it has taken to actually play out in the real world.
What's different now that has enhanced the impact of the Housing Sector onto Retail?
Back in 2006, when home builders’ stocks plunged, the watchword was "Contained." The working assumption on Wall Street was none of these problems would have spilled over into the larger economy. Even as the Homebuilders stocks cratered, department stores rose steadily.
As Floyd Norris points out, "Not this time around." As the Housing stocks have fallen to new multi-yera lows, they have dragged the department store stocks with them. Since April 2007, "the country’s biggest department store chains have fallen by about 30 percent:"
With the sagging prices, investors have rendered a harsh judgment on the coming holiday shopping season, predicting that consumers will severely cut back on spending. The gloom since April 20 has been spread evenly across the big chains: shares of J. C. Penney are down 33 percent, Macy’s by 27 percent, Kohl’s by 28 percent and Sears by 28 percent.
In interviews, retail executives conceded that the slumping housing market was taking its toll. “We are in the window-covering business, and you don’t cover windows in houses you don’t build,” said Myron E. Ullman III, the chief executive of J. C. Penney.
Don't assume its all glum. There are strata of growth -- depending on who the retailers' customers are:
Some executives remain at least a little upbeat, complaining that investors are lumping the department stores together.
“I believe in the fourth quarter people will continue to buy,” said Terry J. Lundgren, the chief executive of Macy’s. Analysts, he said, “are speculating that the consumer is going to withdraw and not spend at the same levels as she has in the past several seasons.”
And over at Saks, the view is that the housing and credit crisis is somebody else’s problem. “The underlying strength in the luxury market is there,” said Stephen I. Sadove, the chief executive. “That consumer is driven more by confidence in the stock market than in the housing market.”
Investors also appear less certain that Saks will suffer. Its shares are off just 7 percent since April 20.
The risk to these stores is what I have ibn the past called Retail Slumming: when consumers who can afford to shop at better stores go down market anyway -- to save a few bucks, or as a psychological salve. According to Bill Dreher, an analyst at Deutsche Bank Securities, some of the economic issues are "creeping up the consumer food chain.”
Why is spending slowing? The ubiq-cerpt:™
Those who think Americans are likely to reduce their spending point to two related factors. First, in recent years the amount of home equity loans rose by as much as $180 billion a year, with much of the money going to consumption. New loans of that variety are much harder to get now that banks have tightened credit standards and home values are falling in many areas.
Second, the wealth effect of seeing that a house had risen in value helped to encourage spending, even if the money did not come directly from a mortgage loan. Now there may be a reverse effect, as worries about home values lead to a reluctance to spend.
If consumers do cut back, it stands to reason that department stores like Macy’s and Nordstrom may lose market share to lower-priced merchants. That could explain the smaller declines in shares of those chains.
The chart below show what happened in 2006 forward: As housing troubles became increasingly apparent,the home builders plunged, while department store held their value. In 2006, even as the home building stocks plunged, the rest of the market, including department stores, kept rising. The home builders had a bounce back in late 2006. Today, the same forces affecting Home Builders are now impacting Department Stores:
The overall stock market has held up fairly well. The S&P500 hit a record high earlier this month and has since lost only a small part of its value. That performance, however, may reflect better on the health of American companies than on the American economy. A rising share of profits is coming from foreign operations, while domestic earnings are weak for many companies.
graphic courtesy of NYT
Good stuff from Floyd Norris . . . Perhaps I am not the only one who is trenchant . . .
UPDATE: October 28, 2007 8:32am
I see that Dougie has been making the same observation that many strategist and economists are still in a state of denial on the impact of Housing:
From my perch, the bulls continue to ignore the ramifications of the housing market's depression not only on the economy but the spillover and contagion in the credit markets.
For example, ignored in last night's conversation was how the subprime fiasco has devastated the credit markets, as evidenced by the continued structured investment vehicle problems and the huge writeoffs of permanent capital at the leading money-center banks and investment bankers.
It is astonishing to me that the subprime-/housing-induced inflection point in credit, from credit expansion to credit contraction, continues to be ignored by market and economic bulls."
There's more good stuff at the full piece, which is a post-mortem of Doug's recent Kudlow appearance.
This Time, Housing Is Taking Department Stores Down With It
FLOYD NORRIS and MICHAEL BARBARO
Off the Charts
NYT, October 27, 2007
RealMoney, 10/25/2007 3:14 PM EDT