Tuesday, July 28, 2009

Somehow, Chain Stores' Customers Still Haven't Heard About Green Shoots

This is getting monotonous. In what gets no media attention, probably because it is proprietary, the Johnson Redbook survey of chain retail stores are reported by David Rosenberg of Gluskin Sheff to have disappointed yet again. Per Dr. Rosenberg:

" . . . today's news that chain store sales, as per the Redbook survey, is (SIC) running at -5.6% YoY (versus -5.0% expected) and -1.6% on a MoM basis (-0.9% expected) through the first three weeks of July is certainly cause for pause. These spending numbers are going to have to turn around if the widely anticipated 3Q inventory bounce is to go down as anything more than a one-quarter wonder."

We are almost 5 months since the (in)famous green shoots comment by Dr. Bernanke. This comment, and the 60 Minutes interview, was part of a so-far successful campaign to recapitalize the busted banking system. Things are going according to plan. The $23.7 Trillion expenditure of cash and guarantees by the Fed and the Feds is having its effect. However, one thing that is inessential is an especially high level of stock prices. If they are high enough to attract buyers for newly-issued shares, then the authorities are satisfied.

Wells Fargo Advisors reports that as of the end of last week, over 90% of NASDAQ stocks and well over 80% of S&P 500 stocks were selling above their 200 day moving average, and that the yield on the S&P was 2.5% . If you bought shares and have even a 10% gain in a short time, you have received the equivalent of several year's interest on a CD or Treasury security. How many of these recent buyers will want to lock in profits, whether or not Q3 GDP is up?

Let's put it another way. The stock averages are in nominal terms where they were 6 years ago, when the country was emerging from a prolonged recession or period of slow growth. If the average investor had been told that the entire expansion would be built on the sand of manic and largely hidden leverage, with oil hitting $145/barrel and the world entering in only 4 years an economic collapse so bad that several major central banks would lower short-term rates to zero, and Sweden would lower retail savings rates to a negative level, how many investors would have felt that their expectations would have been met?

Actually, adjusted for the inflation of the past 6 years, the Dow around 9000 is about equal to its low of the prior cycle. And this after a wild rally fueled by unprecedented money-printing, moral suasion, bail-outs of badly-run but important industries. I hope I'm wrong, but structurally it still appears to be the opposite of the break-out of the markets in the 1980s and 1990s, when the surprises were generally to the upside and stock prices had short sharp breaks back to a rising trendline a la the scares of 1987 and 1990-91 recession.

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