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 It's Beginning to Look a Lot Like Christmas
(But Don't Buy into the 'Bah, Humbug' Hype) |
[http://www.streetauthority.com/includes/article-top-ao.htm]Published:
November 3, 2008
Conventional wisdom is usually wrong, and it's always the
enemy of the successful investor. Learn to combat Wall
Street's herd mentality, and you can leverage your
contrarian views into massive portfolio gains -- even as the
rest of the market crumbles.
History -- not just Wall Street lore -- is replete with
examples. To illustrate the point, we'll turn to one of my
favorite historical figures, Gen. George S. Patton Jr.
Patton surveyed the European theater in late 1944. After
routing the Germans in North Africa, he'd gone on to chase
them through Italy and across Europe. Both sides were worn
thin, tired and undersupplied. Morale was weakening as it
looked like the troops would be spending Christmas camped in
the snowy Ardennes Forest rather than by their firesides at
home. Plus Patton, a keen student of history, knew the
Germans hadn't mounted a major offensive in the snow since
Frederick the Great.
Conventional wisdom suggested the Germans would hold their
position.
But holding positions had never made any sense to Patton.
"Fixed fortifications," he said, "are monuments to the
stupidity of man." He didn't accept the prevailing view
because he knew he would never stand still in a fight,
especially if he were cornered. So Patton considered the
whole chessboard. What would he do if he were commanding a
Panzer division?
Patton knew the Allies' tanks were outnumbered and certainly
outgunned. That, combined with the Germans mounting
desperation led him to conclude a major offensive -- an
unexpected last-ditch attack for control of Europe -- was
imminent. Few initially agreed. But Patton was right. When
the German "bulge" advanced across the Allied line, the
gun-slinging general was prepared.
Patton's shrewd battlefield assessment, his firm grasp of
history -- and his constant and utter refusal to accept
conventional wisdom -- put him in good stead. He led Allied
troops to victory in one of the greatest military triumphs
of all time. Berlin fell five months later.
But this isn't just a history lesson. Savvy investors must
emulate Patton. They must hone their insight, learn to
divorce themselves from the herd mentality and
dispassionately consider the situation and all their
options. They must see the financial reality for what it is
-- not for what it feels like, and not for what it sounds
like on the nightly news.
The prevailing sentiment on Wall Street is that we're in for
a terrible holiday shopping season. In fact, there seems to
be near-universal agreement that it's going to be the
bleakest season in years -- more Charles Darwin than Charles
Dickens, to steal a line from the Wall Street Journal.
But when I hear universal agreement, I feel like a restive
Patton, ordering his staff to make plans to head to Bastogne.
It may seem logical, this notion of a weak holiday season. I
can see where the naysayers are coming from. But I like to
see the data and look at the whole board. And when I do -- I
must say I have to disagree with this element of
conventional wisdom.
That being said, smart investors can't survive without dumb
investors, so thank heavens for the dimwitted. After all, if
everyone wasn't mindlessly spouting this gibberish, then the
prices in the retail sector likely wouldn't have fallen (see
chart, below), and
the remarkable buying opportunities among some of these
major retailers wouldn't
exist.
|
Retail
Security |
YTD Share
Performance |
P/E |
|
Urban Outfitters
(URBN) |
-21.6% |
18 |
|
Bed Bath & Beyond
(BBBY) |
-25.4% |
13 |
|
Limited Brands (LTD) |
-37.1% |
7 |
|
The Gap (GPS) |
-41.1% |
10 |
|
Sears Holding (SHLD) |
-44.3% |
17 |
|
Best Buy
(BBY) |
-45.6% |
9 |
|
American Eagle (AEO) |
-46.4% |
7 |
|
Barnes & Noble
(BKS) |
-47.5% |
9 |
|
J.C. Penney
(JCP) |
-48.2% |
5 |
|
Macy's (M) |
-54.0% |
7 |
|
Nordstrom
(JWN) |
-54.7% |
6 |
|
Gamestop
(GME) |
-56.1% |
13 |
|
Abercrombie
(ANF) |
-64.1% |
5 |
|
To add a point of reference, the S&P 500 is
trading at 21 earnings and the Dow is selling at 11 times
earnings, both of which are below average for these indices.
A lousy holiday season certainly has been priced into these
stocks already.
Let them sell, let them sell, let them sell
Tomorrow, the nation will pick the next president. And
regardless of whom you support, there's one outcome of this
election that will satisfy voters of every political
persuasion: The race will be over and the airwaves will be
freed from the merciless grip of negative campaign ads.
Without this constant barrage of 30-second snippets of
economic doom and gloom, Americans will begin to feel better
about the economy.
On top of that, prices at the pump have dropped sharply.
High gas prices have a pervasive and insidious ripple effect
throughout the economy by eating into discretionary
spending. Some people feel strapped and some truly are.
Either way, expensive gas alters behavior. Between the end
of the campaign and lower gas prices, people will begin to
feel better. That's point one.
Point two is consumer debt. Consumer debt slipped -0.305% in
August for the first time since 1998 and by the largest
amount since December 1990. Consumer debt, statistically
speaking, simply doesn't go down.
Here's a look at the stack of IOUs U.S. consumers have been
piling up for the past generation:
The third point is retail sales. They, too, have slipped.
Now, admittedly, this happens all the time; retail sales are
more volatile than overall consumer debt. But retail sales
do not typically fall for consecutive months, and they
haven't fallen for three straight months, as they just did,
since 1992.
Now, when retail sales slip for consecutive months,
you can bet a big increase is in the offing. To wit: Since
1992, total retail sales have only posted consecutive
monthly declines eight times. In July 1998, for example,
sales dropped 0.595% and fell another 0.392% in August.
They then expanded for 22 straight months, growing by
+14% before posting a modest decline.
A more recent example was mid-2001. Sales fell in June and
July, rose slightly in August and plummeted in September
after the terrorist attacks. But by the end of the month,
Americans were tired of hiding out, eating in and hunkering
down. They came out spending. Retail sales in October 2001
grew by an astonishing, unprecedented +6.6% --more than 15
times the average retail sales growth rate.
The key take-away here is that after a consecutive monthly
decline, the average bounce in the third month is a gain of
+0.958%, roughly twice the average monthly movement for the
past 15 years. What's more, sales usually continue to post
increases for an additional three months. Those might seem
to be pretty eensy gains, but this data gets charted in
millions (See below). So adding 1% to September's sales
reading would amount to a dollar gain of nearly $4 billion,
and adding in a post-9/11 like bounce adds up to $25
billion.
Still, this is pretty macro. So let's look at the
details behind the data. After all, broad economic indicators don't tell you much
unless you examine the data behind them. We
can accept that
sales fell, sure, but what was the
decline attributable to?
Two things: People bought 25% fewer cars and they
spent less on gasoline because the price fell. Outside of that, consumers cut back on
food, clothing and furniture -- all nonessentials if
we presume the drop in food was from fewer people
eating out. And yet housing,
household operations, medical care -- that all
stayed the same or increased, according to the latest data.
That's my fourth point.
So let's review. Americans have pared their debt.
They've started
doing without some things they're accustomed to. Gas prices
have dropped and the negative economic messages on TV are
about to end. And though retail sales fell,
personal
income still rose. People aren't spending less
because they have less, they are spending less because don't
feel like spending. That is not a feeling that lasts very
long in these United States.
What does all this mean?
It means consumers are headed into the holiday
season with more cash in their pockets and more credit on
their cards. On top of that, the data shows us that consumers have been restrained for an
extremely rare three-month stretch. They're tired of doing
without. And now, as campaign ads
about the economy are being replaced with commercials for
electronics, clothing and toys, the conventional wisdom
says consumers are going to continue keeping their wallets
clamped?
Please!
This, my friends, is the perfect retail storm. Americans are
going to go large this holiday season. The conventional
wisdom is wrong. Who are you going to believe: A few traders
unloading retailers' shares in a bear market, or the data
showing typical consumer behavior for the past generation?
Good investing!
Andy Obermueller
Co-editor
StreetAuthority Investor Update
http://www.StreetAuthority.com
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