Retail Sales - lets take it apart

This morning the headline was retail sales "were up huge". Really? You know at Rebeltraders we don’t just listen to a headline, we take it apart.

The retail data today was issued by the US Census Department and the number issued was a 1.2% increase from the previous month. The Census department says that they adjust for seasonal variations and holidays. But the calendar effects are likely imposing an upward bias to these numbers today. There is an extra week added to the retail fiscal calendar in November, which boosted the sales report for the month. Even though the Census says they take into account the seasonal adjustments are prone to errors and typically result in revisions later. Surveys from private survey companies showed that holiday spending after the first week (black Friday) slowed. So the stronger retail numbers reported this morning may be have been borrowed from the December sales.

Additionally, in those retail numbers is sales by gas stations, which was much higher as the price of gas has been increasing again. Gas station retail sales was 6.8 for November and was only 3.1 the month before. Also, Fuel Oil dealers are included in the retail sales numbers the Government issues. And that number was 1.9 in November and was only 0.4 last month. So we have a retail sales number today that is inflated by energy costs. If you remove the gasoline and fuel oil sales then the retail sales data that was released this morning would have only been 0.6% growth from last month. Not so impressive anymore , is it?

On the subject of household income, the trend has been decreasing since March 2007, extend this trend out into the future and you see a continuing decrease in disposable income. Now add in today’s PPI data which showed the cost of goods skyrocketing, now your making consumers who have less household income spend more for the goods they need. Money left over for other things is being put on credit more and more as the data reveals and was shown in the chart I presented a few days ago.

The University of Michigan Consumer Sentiment Index has been dropping steadily from last year. When confidence drops substantially, which it has, the happy go lucky spending will be cut back by the average middle class families who are struggling with the high cost of goods, lowering household income, and the ever increasing debt.

According to the ICSC Redbook, same store sales data for week ending December 8th was 0.2%. In the five previous years the growth for this same reporting period was 0.9%. So this years same store sales growth is roughly 20% of what it was in the previous 5 years. At this time it still appears to us that this years holiday shopping season will be one of the weakest in at least 4 years.

So the headline and the talking heads said "retails sales strong", but the retail sector today in the stock market was in the red. It is no surprise to us, because other investors ignored the headlines and went inside the data. Once inside the headline is tarnished.

Source of data: Moodys.com, Economy.com, and the US Department of Commerce

Market Close

This day’s action was nothing to write home about, but we didn’t take a nose dive, either.  Personally, I think there’s a little bit of trader weariness (and yes, uncertainty) going on here.   The financial system is in trouble, the market is in trouble, and yet few seem to want to believe it.  So much information and wild swings in the indices has all of our heads spinning.

The XLF was weak today and closed in the red.  That little run-up at the end was unimpressive.  There were a few “runners” today, but overall just very lackluster.  Lehman’s earnings report surely weighed on the financial sector.  Greenspan says he sees a 50% chance of a US recession, but seriously, does anybody really care what he says anymore.  I’m not saying he isn’t smart, but he has no credibility with me.

CPI number comes out tomorrow and many believe it will be to the upside, just like the PPI today.  Chuck will have some charts and analysis on certain sectors tonight, so check back with us.

Market Update

We’re heading into afternoon trading with the indices barely holding on to session supports, but they are holding.  There hasn’t been any real reaction to any of the economic data or Lehman’s earnings report.  Well, Lehman’s (LEH) report wasn’t exactly encouraging and the conference call seemed to me to contain a lot of gibberish.  XLF continues to weaken today.  There’s either extreme volatility in the market, or it’s like watching grass grow.  Maybe everyone’s just a bit worn out from being jerked around.

Pre Market - December 13th 2007

Producer Price Index (PPI) data was released this morning and the part that stands out the most is the cost of goods is continuing to rise which will continue to put down ward pressure on the average person. As the cost of goods rises faster than income then you continue to build a ‘tipping point’ situation where the consumer is forced to cut back on discretionary spending. And that adds to the chances of an economic recession which is induced by the consumer.

The big jump in the PPI data this morning was a mostly a result of the cost of home heating oil and gasoline escalating by large amounts.

Home Heating Oil: 31.5 (two months ago it was 2.0)

Gasoline: 34.8 (two months ago 8.4)

Our view on PPI data is that higher the wholesale inflation is, the greater the chances of a consumer induced recession.

Weekly jobless claim were also released this morning and were down by 7K. No significant event in either direction yet, but I still anticipate unemployment will edge up in the near future.

This morning H & R Block reported:

Said in its Q2 report filed with the SEC that it doesn’t expect it will be in compliance with an OTS order to meet a 3% minimum ration of adjusted tangible capital to adjusted total assets.

Company disclosed that it doesn’t expect to meet the minimum ratio by April, and said the OTS could require the company to pay civil monetary penalties and sell assets. If it doesn’t cure the deficiencies and if its operating results continue to below its revised capital plan, "a resulting failure could impair our ability to repurchase shares of our common stock, acquire businesses or pay dividends,"

Lehman (LEH) reported a better than expected earnings for the quarter, however the stock continues to sell down in pre market as the confidence and trust in financial companies continues to be erased.

Retail sales data was better than anticipated, BUT, the important thing to remember here is that year over year it is lower. When the talking heads on TV say "retail sales were great" you must remember that the context is on expectations, which have already been lowered. So even though numbers were better than expected, it is lower than what we had last year. Slowing consumer spending remains our concern for the economy. And the higher cost of goods will impact this even further.

Countrywide Financial (CFC) said this morning that mortgage funding for November was down $23 Billion (40%)

Japan’s Nikkei Average

I wanted to highlight what the Japanese market is doing and how it too is on the cusp of turning into a down ward trend. And if the Nikkei turns to a down trend then it is additional weight pulling ours down as well. See the chart of the Nikkei below…

The Nikkei has broken below a multi year trend. A drop below 15500 would signal a down ward trend is likely.