Tuesday, September 15, 2009

The Retail Sector

is in trouble from a fundamental perspective. The secular turn in attitudes toward consumption is underway and this leaves many retailers with a murky future. Don't anticipate having a Starbucks on every corner 3 years from now. Best Buy is hanging in there in part because some of its competitors are folding. Home Depot is hard to sell as a long-term growth story once the "Flip that House" and "use your home as an ATM and investment" concepts disappear from the American consciousness.

Retail sales have been lousy and the anticipated back-to-school sales ramp that happens every year failed to materialize this year. As with almost every other stock sector, retailers have been ignoring reality and moving higher with the general markets, but their bear market rally is getting rather "overripe."

Here's a long-term chart from the non-federal, for-profit, federal reserve corporation website showing the historic trend in retail sales from the late 1940s through the early 2000s (discontinued data series) in log scale format:

And here's a more recent and "newer" data series on retail sales from 1992 through the most recent data point of 9-15-09 (I chose a data series that excludes auto sales to remove the distortion created by "cash for clunkers"), also on a log scale:

And here's a non-seasonally adjusted (i.e. most of the jaggedness of the chart plot is due to normal seasonal trends) 10 year linear chart of a newer E-commerce retail sales series, also updated this month:

As unemployment continues to rise and unemployment insurance runs out for many who have been unemployed for a while now, retailers will feel it. As more and more people feel "trapped" by an underwater mortgage, retailers will feel it. And the new trend of saving more money because much of your paper wealth is gone due to the stock market and real estate melt downs, which are far from over, retailers will feel it. These are longer-term, fundamental trends that will weigh on retailers for at least the next few years. Many more will go out of business, which will also weigh on the overbuilt and overleveraged commercial real estate sector and the banking system that holds the loans on these properties.

Here's a 7 year weekly log-scale chart of the S&P Retail Index ($RLX):

And here's a 6 month daily candlestick chart of the $RLX:

And for those who are going to pretend to be shocked when it happens, let me save them the drama: Christmas retail sales this year are going to be bad - shockingly bad. I don't know how much longer the retail sector will hold up, but this is one of the sectors that will clearly be making lower lows before this bear market is over. And without the conspicuous American consumer behind it, many other sectors of the economy will feel the pain going forward as well.

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