Weak Retail Sales
The market gave up on the rally yesterday. What was more concerning was the weakness in the broader base Russell that gave up. I am still expecting that we don’t crack down below the critical support levels prior to the mid-term and believe the Fed has their hand on the printing press button. However, that doesn’t mean that I have ignore the probability in the short-term and I certainly think the risk of a larger correction is elevated.
Weak Retail Sales
The last several Market Previews we have focused on fundamental domestic economic issues. On August 5th, the Preview Tale of Two Cities focused on the difference domestically between the Luxury and general Retail. August 8th, was Fundamental Reality focusing on the three core drivers of economic growth (luxury, emerging markets, and western markets). Yesterday was Small Business NFIB, which gave us a far better look and resolution as to the tepid growth domestically.
The point I want to make very clear is that if we only give weight to a single “headline” economic data point, like the 4% GDP growth, we have a skewed view of reality. We must continue to look at ALL the data, whether it is government generated or private data like the ADP or NFIB. Additionally, regardless of the source of data we must always ask WHY and HOW. Accepting any headline data, government or not, is not understanding HOW or the WHY. Yeah, it requires some work, some more reading, some math, but anything worth knowing requires a little more work than reading headlines.
Courtesy of wikipedia
My father and mother were school teachers, their one big complaint about public education is that we no longer teach “problem solving” skills and instead teach to the test, because schools are incentivized to get high test scores. As children we ask why and how all the time, sometimes so much so that for a parent it gets bothersome, I know I have a 10 year old. However, we must continue to encourage this inquisitive nature and we must help teach them how to solve their questions rather than just give them the answers. We must heed the proverb; “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” Something the entitled generation and current administration seems to have forgotten, along with all those that blindly trust in headline data like the 4% GDP.
Stringing information together and asking the how and why, it should have come as NO SURPRISE to anyone that July Retails sales are falling flat. One only had to put the pieces of the puzzle together; one piece was weaker domestic same-store sales, another was top-line revenue misses in domestic reliant retail earnings, another piece was the weakness in the NFIB survey, in fact there was many pieces that once put together created a big picture of weaker domestic growth. Yet main-stream media and even economic reporters like Steve Liesman treat each data point as a singularity and any real good data point or surprising one, like the 4% GDP becomes their single “go-to” piece of data to justify their view that the economy is doing better. I don’t think Steve was ever a problem solver, just a headline reader.
July Weak Retail Sales
US retail sales (for those of us that have been paying attention) were expectedly weaker in July. They came in flat, after only a .2% growth in June. Weak sales were reported across the board from auto sellers to electronics. However, if one were to only read the 4% GDP headline number as fact and the single end-all be-all data point for the economy, today’s US retail sales data comes as a complete surprise. In fact this morning those on TV are trying to explain away the slow down as an anomaly and of course one even citied the 4% GDP growth. See my report on the GDP (GDP Kool-Aid).
If we peer into the number, the “core sales” that strip out autos, gas, building and food, was up only .1% and June was revised lower from .6% to .5%. Auto sales fell .2% a second month of decline, online sales declined .1%, and electronics fell .1%. The only real strength came from clothing retailers, up .4% but this was even lower than expected with pre-school sales.
However if we look at the retail sales chart, it looks pretty good.
Courtesy of FRED
However, once we add in the governments measure of inflation (CPI), we quickly see REALITY. We have been in a tepid economic growth period ever since the 2008-2009 crash.
Retail Sales adjusted by CPI “inflation”
Courtesy of FRED
The above graphs were generated at the Federal Reserve Economic Data (FRED) website. Of course the Fed sees the same stuff we do and of course they apply their CPI model to adjust. The problem is the like’s of Steve Liesman (CNBC economics reporter) as well as Politicians will always favor the better looking data, cherry pick what fits their ideology or message. Yet we need to always look at the WHOLE picture. You might be able to cherry pick data, but you can’t spin math.
Can you imagine if we ran the pre-1990 CPI model, this chart would be heading lower.
Looking back at the GDP 4% growth, remember I mentioned that 1.66 GDP points came from inventory loading. Inventory loading does NOT constitute sales, but the GDP still counts it. If you had been following the inventory trend in the 3rd quarter of 2013 we saw loading heading into the 4th quarter holiday sales. However, holiday sales were far weaker than expected, that meant that stores had huge inventories on hand coming into the 1st quarter and we saw steep discounting to move inventory. Add in the winter storms and a weak consumer, it took a long time before we saw inventory loads depleted. In fact it wasn’t until late in the 1st quarter and early 2nd quarter where we saw them replenish stocks at steeper discounts from wholesalers who had expected that retailers would inventory load after January post-holiday sales, which didn’t happen. So if we strip out the massive discounted loading in inventories of 1.66 points, the GDP grew at 2.34% a far more realistic number.
Courtesy of wikipedia
Need more proof about the weak consumer and tepid growth? Another earnings report this morning reported weaker demand and lowered forecasts. Macy’s (M) cut full-year same-store sales to 1.5 to 2% down from 2.5 to 3%, that’s a significant cut in growth. The company closed two stores, but looks to open one mix-use store in mid-2016. There was some good news, sales rose slightly after two consecutive declining quarters and net income rose, but fell slightly short of expectations. The stock was down significantly in the pre-market.
Not all Doom and Gloom
If we try to remain objective not all is really that bad, there is some growth despite the administration’s policies of more taxes, more regulation, rising costs, fines, and Obamacare. In fact I think in general that the broad domestic economy is not bad at all and is growing very modestly. My issue is not with the weakness of the consumer, which can be corrected with a change to fiscal, monetary, and regulatory policies. What does concern me is the massive increase in leverage, the hidden inflation, and zero interest rates.
If one were to measure the economy solely by the stock market, you would think our economy is growing for a few years at 4%. However, Greenspan had pointed out back in the heady days of the Dot.com era, stock prices are not indicative of economic health and in fact coined the famous phrase “irrational exuberance”. Just like leading up to 2008, everyone living in their interest-only McMansion with two leased cars, huge debt, and negative savings – everything SEEMED fine if we solely measured economic growth on perception.
Additionally the BRICs are emerging markets continue to growth solidly as billions of consumers come online, while that could certainly slow down, it will not come to a screeching halt. Additionally, minus the Ebola outbreak in West Africa, the continent is seeing huge influx of growth in manufacturing and basic resource mining/farming/processing.
The West is weak and will remain weak until we truly unwind the debt and leverage, but what IS fueling the fire is the lack of responsible fiscal policies by our government coupled with uber-easy monetary policies by the western central banks. It’s ironic and sad that the government foils private sector growth while the Fed stokes the fire of inflation and leverage. You can’t build growth on borrowed money; it all comes crashing down in the end.
Support & Resistance
This remains support and we are in a consolidation zone testing the 16,600 level. Retail sales were very weak, but the pre-market futures are seemingly ignoring the data.
The pre-market futures seem to be getting a solid push and we could see a vacuum gap rally up to 3950 before resistance sets in.
SPX 1930 – 1940
This is a Ping-Pong short-term range to test to see if we can break-out and get back to 1960+ or if we fall back down below 1930 into the consolidation zone again. The VIX could break below 14 and fall into the low 13 range today.
The Russell is at the top of the consolidation zone and under a little pressure. This index will see either sellers step away and strong move higher or buyers step away and a fall back down into the 1120 bottom of the consolidation zone. The Russell was very weak yesterday, when compared to the other indices. I think we watch the Russell’s move from 1135 to determine if we can break higher out of consolidation or if we are stuck in here for a few more days.
Fischer’s Spin or Truth?
Could Vice-Chair Stanley Fischer’s remarks about a very weak U.S. economy, weak labor force, and long-term GDP growth more like 2% sending hope into the market that interest rates will remain at zero and accommodation is just a flick of the switch when needed?
His remarks from Monday are getting more coverage in the markets and economic circles. I can’t help wonder if they were just strategically planted remarks to sell a little hope and curb the sell-off or if he actually really believed what he was saying. I of course agree with his assessment and the NFIB survey, along with earnings, same-store sales, and consumer data concurs as well – despite the headline 4% GDP number.
Regardless if he believes them or if they were sprinkled into the market to halt a correction or perhaps set-up the market for some more accommodation heading into the mid-terms, the fact is the Fed is certainly not on page with GDP 4% sustainable growth nor do they plan on raising rates.
GDP 4% and headline U3 unemployment numbers are for political window dressing; even the Fed doesn’t believe it.