Retail is collapsing... The report Wall Street is most worried about... 'Teetering on the precipice of a recession'?... The first decline in at least 10 years...
As Porter mentioned near the close of Friday's Digest, retail stocks are collapsing. And some economists are confused...
One of the expected "benefits" of the recent crash in oil prices was a boost in consumer spending. The idea was that the money Americans "saved" on gasoline and oil-related products would be spent on more "stuff."
But the latest data suggest that may not be the case today...
According to the U.S. Department of Commerce, U.S. retail sales barely increased last month. From an article in the Wall Street Journal...
A protracted slide in oil prices is delivering little of the expected benefit to U.S. retailers, putting investors on notice for a potentially rocky holiday-shopping season.
U.S. retail sales barely edged up in October after stalling for two months, according to Commerce Department data released Friday, extending the lackluster performance seen throughout the year. Consumer spending at retailers climbed just 1.7% since October 2014, compared with a 4.7% annual increase the year before that.
With U.S. manufacturing in a rut due to weakness overseas, the strength of the domestic economy hinges largely on consumers ramping up spending in coming months. But cheap gasoline... has failed to rev up consumer spending as much as retailers and economists expected.
And recent earnings announcements from retail stocks appear to confirm this trend...
On Wednesday afternoon, department store Macy's (M) kicked off retailer earnings by reporting a sharp decline in sales and an unexpected drop in foot traffic to its stores. It also lowered its financial targets for the rest of the year, and said it is predicting a "challenging" holiday period. Shares plunged 14% in after-hours trading and have drifted lower since.
The store blamed unseasonably warm weather (keeping shoppers from buying winter clothes and accessories) and a strong U.S. dollar (leading to fewer foreign tourists) for the drop in business.
A handful of other companies, like discount department store Kohl's (KSS) and fashion accessory retailer Fossil (FOSL), reported similarly disappointing earnings. But Wall Street analysts are particularly concerned about the report from Macy's competitor, Nordstrom (JWN).
On Thursday, Nordstrom also reported disappointing third-quarter earnings. And it, too, cut its profit and sales forecasts for the rest of the year. Shares plunged more than 20% in after-hours trading that afternoon to a new 52-week low.
According to a separate article in the Journal, the company said sales began to slow in August "across all categories, regions and channels," and it doesn't expect an improvement in the fourth quarter. And unlike Macy's, the company didn't blame the slowdown on the weather. From the article...
Nordstrom executives didn't have a ready explanation for the falloff beyond saying there were fewer people buying clothes in the period than they had expected. The retailer moved quickly to mark down goods that weren't selling, and as a result it didn't end the period with excess merchandise similar to some of its peers.
"It's just a traffic thing," said Jamie Nordstrom, president of stores. "We've got less people buying clothes this quarter than we expected. And there's really nothing else to point to."
Why is Nordstrom so important?
Unlike many other "brick-and-mortar" retailers, Nordstrom has a more diversified business. While critics could argue that the slowdown at Macy's and other department stores was less about the economy and more about a change in consumer trends (toward discount and/or online retailers), this is less likely to be the case with Nordstrom.
As analysts at Deutsche Bank explained in a note to clients on Thursday (via financial-news website Business Insider)...
With a superior business model, in our view, that is half high-end department store, 30% off-price, and 20% online, this level of deceleration is a potential cautionary tale of the U.S. consumer's health.
In other words, with its higher-end Nordstrom stores, discount Nordstrom Rack locations, and online presence, Nordstrom should be more resilient to changes in consumer trends... and is likely a better indicator of the true health of the economy.
So seeing Nordstrom slow along with other retailers is a big concern. Or as one Wall Street analyst put it, "We think we are either seeing the impact of one of the warmest fall selling seasons in recent history... or we are teetering on the precipice of a recession."
We'll likely get more information this week as several other retailers – including Wal-Mart (WMT), Home Depot (HD), Target (TGT), Lowe's (LOW), and more – report earnings. We'll let you know what they have to say.
Unfortunately, it isn't just retailers that could be sending a warning about the U.S. economy...
Last week, we discussed a potential warning for the global economy, noting shipping "bellwether" A.P. Moller-Maersk is seeing a slowdown in global trade. Now there are similar signs that the economy could be slowing here in the U.S., too.
Over the weekend, another article from the Journal shared some worrisome data from America's biggest seaports. In short, for the first time in at least a decade, U.S. ports are reporting a slowdown in imports during the "peak" shipping season. (This time of year is known as peak shipping season because imports typically surge as retailers and other businesses prepare for the holiday shopping season.)
According to the report, imports at the shipping terminals at the ports of Los Angeles, Long Beach, California, and New York – which handle more than half of all imports coming into the U.S. by sea – fell more than 10% between August and October.
Seeing U.S. imports not only slow, but actually decline, is concerning... and could be a warning of even more bad news ahead. From the article...
Troubles at U.S. retailers can quickly go global, as stores still working through last year's inventory may delay new orders from factories overseas.
"Instead of taking that extra money that [low fuel prices] are generating and going on a shopping spree, consumers are being more conservative," said Rosalyn Wilson, a supply-chain analyst with Parsons Corp. "It's bad for the global economy because it means we're not purchasing."
Fernando Rios, who owns Orion Intermodal, a fleet of eight trucks that transports shipping containers from the docks at the port terminals in Elizabeth, N.J., says this September was the slowest he has seen in 25 years in the business.
"At this time it's supposed to be very busy, but it's not," he said. Only five of his eight trucks are currently running, and he has had to turn away drivers looking for work. Last year in September, he was moving 25 to 30 containers a week; this year it has been between 8 and 12.
If you've been with us for long, you know we've been extremely cautious about the stock market for the past several months.
The historic crash in oil prices, the bear market in emerging-market stocks, and the growing risks in the corporate-bond market – particularly the decline in high-yield (or "junk") bonds – have all played a role in the volatility in U.S. stocks.
But through all of these troubles, one of the relative bright spots has been the U.S. economy. Month after month, the data have shown the economy here at home has been slowly "grinding" higher.
But now, we could be seeing the first signs of a slowdown here. And if the U.S. begins to slow – or worse, falls into a recession – it would be a major new headwind for stocks.
We continue to urge caution.
New 52-week highs (as of 11/13/15): short position in Santander Consumer USA (SC).
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Regards,
Justin Brill
Baltimore, Maryland
November 16, 2015
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