Reply #1: Market WrapUp: A Lump Of Coal?

[ozymandius]

BY BRIAN PRETTI

As we approach the holidays, there is no question that all eyes will be on retail sales stats. Already, retail industry consultants and assorted fortune tellers are counseling those who listen not to expect fireworks, but rather a moderate 4% year over year increase. C’mon, let’s face it, that kind of a number isn’t even keeping up with the reality of inflation. So are we to expect a lump of coal this holiday season from the up until now indefatigable US consumer? To be honest, a lump of coal may no longer be a bad thing given global energy dynamics. Although holiday sales may be a temporary perceptual marker, the importance of watching retail trends ahead goes far beyond holiday seasonality. If you don’t mind, a few thoughts and observations of the moment.

First, I’ve been arguing for some time that watching the discretionary components of the retail sales numbers is the current analytical key. A consumer under pressure is going to back off on discretionary purchases first. A Starbucks vente latte anyone? Well at least according to Starbucks stock price, apparently not. As you know, the October retail sales report recently hit the Street. Outside of auto and gas sales during October, only building materials, food and beverage stores, and food services and drinking places showed any month over month strength. Let's face it, building materials sales have been beaten into the ground over the past year plus. A one-month up tick is meaningless until a firm and longer-term change in trend is firmly established, and I’m not holding my breath here. Food sales strength in both grocery stores and restaurants? Certainly a good bit of this is plain old inflation in food prices, plus the grocery store end is really not discretionary. The PPI and CPI are corroborating the food price inflation picture (this is going to be a longer term theme of importance). Furniture and home furnishings showed us negative month over month sales growth. General merchandise was negative, and electronics, appliance, and clothing sales flat. When looking back over the past three months, weakness in discretionary retail sales growth is clearly evident. It stands out like a sore thumb. And it's telling us an important story regarding the US consumer. And at least as of the recent action in the financial markets, it appears the equity markets are starting to listen to what we are already seeing in retail trends.

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