“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:
Standard & Poor’s 500 home-building index versus S&P500 department store index
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.
>
Sources:
This Time, Housing Is Taking Department Stores Down With It
FLOYD NORRIS and MICHAEL BARBARO
Off the Charts
NYT, October 27, 2007
http://www.nytimes.com/2007/10/27/business/27charts.html
They’re Still Not Getting It on Housing
Doug Kass
RealMoney, 10/25/2007 3:14 PM EDT
http://www.thestreet.com/s/kass-theyre-still-not-getting-it-on-housing/newsanalysis/newsonthego/10386473.html?
Up and Down and all around
Fundamental reasoning cannot be found
No matter what the bears say
The trend swirls the 200 DMA
Up-Traders Lie in Wait
For silly ass bears to cross the gate
With CNBC Trumpets Blaring
The elephants stampede
Bludgeoning the shorts
Who quickly retreat with Big Picture Snorts
The Emperor’s new jester
has put out the word
move your money to China
ahead of the herd
Doug is on-stage once again
encouraging the fools to try his game
December approaches with Santa in tow
the season of cheer instills a warm glow
Father Ben and Pat Paulson know all too well
that if Santa fails to call,
the bears will roam on broad and wall
What is TICKER SYMBOL on the S+P Department Store Index???
The Financial Sector is obviously another victim via the mortgage fiasco. The Semiconductor Index has been under pressure. Considering that IT derives 25% of its business from the Financial Sector, this is not surprising. So the chain reaction continues.
I posted the SOX Index vs Core Capital Equipment Orders and there seems to be an impemding drop comming.
FSO Editorial No Recession in Sight by Paul Kasriel 10-15-2007.htm
When looking at both components the lending capacity of the banking system (citi bank anemic results are alleged to be driven by poor consumers credits) and the solvency ratio of the US consumer; the performance of Sachs is the only segment of distribution with better days.
As usual Mr Kasriel comments are worth studying as they meet with the economists of Merril Lynch studies whom are well respected and accurate since long.
Blam – love the poem. Well crafted and well-argued. Thanks for putting that up.
The downdrift of dept.store stocks makes sense if you believe, as I do, that consumer spending will be accelerating it’s slowdown. The reactions of the rest of the market continue to puzzle me as GDP slowdowns => profit slowdowns => earnings slowdown. Having taken a look at four different data sources the same answer came out.
But the optimistic outlook it turns out is reflected in the S&P sector earnings outlook – in fact Con. Discretionary is projected to show the most amazing recovery in ’08 and most of the other sectors do well, with the truly amazing being Tech & Telecomm.
Now that all hangs together if you think our current growth recession is going to be followed by a gradual U-shaped return to better growth, if Housing doesn’t get worse and there are no impacts from the credit problems nor oil nor….
One of several parts of the EPS conundrum are posted here: http://tinyurl.com/2bbumt
FWIW.
While this probably doesn’t explain much, one of the traction mechanisms in this is that too much money is siphoned, effectively from consumers’ pockets, and thus from the “real” economy, into unproductive money-shuffling activities.
There are several ways of how it happens in detail, but the essence of much of it is seller-side pricing leverage in nondiscretionary goods and services. When healthcare and other executives walk away with billions, and companies serving the needs of the public face few obstacles for mergers and price gouging, then there should be little surprise the discretionary spending budgets are drained.
And one can presume the mortgage crisis puts a damper on credit availability, and perhaps for once credit demand.
And cm, it’s those unproductive segments that are failing to see the problem. The rest of us know very well that the recession is here already or else very near indeed.
The one percenters had best start watching their oxen – they will be gored soon enough now.
Something not commented on much in the US is the potential for Canadian and other international cross border (and internet) shopping to partially obscure a deterioration in US retail.
Canadian retail sales are obviously a small fraction of US sales, but a large majority of Canadians live within 100 miles or so of the US border, and crossings have increased dramatically as CAD crossed par with the USD. Most Canadian prices (eg. books) still reflect older CAD values, and this has attracted considerable publicity in Canada recently.
In some border states, this could materially distort YoY retail sales numbers upward.
Estragon – good point. And since consumption inside America using converted foreign currencies is a “positive” (nevermind the debased dollar) to the export column – “reducing” the foreign trade deficit – cross border shopping seems potentially to skew other important statistics.
Another factor that is seldom discussed is high-end retail vs. low end. There is good reason to believe that the wealthy are keeping the consumer numbers from looking as bad as they are. Like the scenario of Bill Gates walking into a bar raising the “median” net worth of everyone in the room by millions.
I think “who can afford to buy what” matters.
Does that make sense?
COH is a high end retailer that recently lowered expectations for the holiday season. I’ve traded in and out of it a couple of times since 2003. I can’t remember it ever trading as cheaply as it is now on a forward earnings basis.
Perhaps wrongly, I interpret the apparent “cheapness” in the shares as investors looking past the anticipated weak holiday selling season and discounting a less robust ’08 which implies ’08 estimates are going to be cut soon.
I don’t follow JWN, another quasi high end retailer. But it got taken down when COH lowered holiday sales expectations. JWN’s chart looks alot like COH’s since this past spring. They’re both down about 30% in the past 6 months.
Barry- I think the housing problems are just about over, consumer spending on halloween was good. However, the oil and inflation bubble is going to get real bad.
P/B,P/S COH ain’t cheap. I’ve been in and out a couple of times as well.
I don’t know anything about COH except that it has a chart that looks like a death mask at present. Contrast that with OSTK which I haven’t even looked at in 2 years (and then only as a possible short play)- pretty remarkable resiliency even during the July-August debacle and mostly parabolic since then. I suppose the gap down a week or two ago was due to ugly rumor that the MILF who does the everything-in-white ads would not be featured this xmas. [joke, exhale]. And no, I am not pumping, I have quit chasing individual stocks at all.
Wednesday should be the bears’ last stand this year. If a 25 or better cut comes thru, then only the long survive until at least January. If not, then the cut comes a couple of weeks later followed by another one in December and bears are still screwed. That’s just the way the game is evolving.
==whipsaw==
“I think the housing problems are just about over”
Must be a time warp loop.
.
pugg squaar: To some extent yes, but a (relatively) few forking over for higher-end or luxury stuff/services will not have that much “bang” in supporting “real” economic activity as would spending the same amount of money on more mainstream volume or perhaps even different goods/service categories.
I’m willing to believe a $1000 piece of garment requires more labor input (and higher-grade material, which presumably also represents higher labor input) to produce than the $100 version, but not 10 times as much, and neither will it be 10 times better.
And then the question is, would the $1000 variety in its degree of sophistication exist without the $100 one?
In many industries the higher end “piggybacks” on the run-of-the-mill stuff in good measure. What is the best of the crop always correlates with what is the average. How do you develop best practices other than from good practices? Same for availability of competent staff, equipment, and input materials. If the average is better, the best will be better too, up to some point.
The highest bidder will always get the best the economy can offer. But consider the standard of healthcare, housing, or transportation for the richest 100+ years ago. It wasn’t all that great.
Fingers of Instability part2?
Introduction This week we revisit some ideas on how change occurs. We are in a transition in the world