A Surprising Advance for this Stock Sector

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Tiffany & Co., the luxury retailer, announced this morning that it made 140 million dollars in profit in its fourth quarter, up from 30 million dollars a year ago.

Looks like the rich are back at buying luxury items again after a big scare in 2008. Or is retail in general that is picking up?

Also this morning, Williams-Sonoma, what I would call a mid-market retailer, announced it made 88 million dollars in its fourth quarter, up from only 12 million dollars in the same period of 2008.

So what gives with retail? Are consumers starting to buy again?

With retail companies, it is tricky to see what is really happening, because a retailer can often improve earnings by working its inventory, closing stores, firing staff, etc. What is important to economists is if retail sales in general are rising. And, in the case of both Tiffany and Williams-Sonoma, their sales rose 17% and 8.1%, respectively, in the fourth quarter.

Consumers are definitely spending again, led by luxury items.

It is extremely important to note that the Dow Jones U.S. Retail Stock Index is only 12% away from breaking its high of 2007. There are few other sectors that can make this call except hot sectors like gold mining.

Did investors dump retail stocks too quickly going into the recession? The answer is more than likely, yes. The chart of the Dow Jones U.S. Retail Stock Index looks well positioned to break above its 2007 high. And I wouldn’t be surprised to see that happen before the bear market rally in stocks is over.

Michael’s Personal Notes:

You haven’t heard much from me lately, as I just got back this weekend from a one-week trip in Europe. I’ll be writing plenty about my trip in upcoming editions of PROFIT CONFIDENTIAL. But, if there was one take-home message for me it was twofold:

The economic crisis of 2008 hit Europe much harder than it hit the United States. Secondly, I am convinced, more than ever, that the euro will not become an alternative currency to the U.S. dollar.

Yes, I believe the U.S. dollar will lose its status as the world’s reserve currency, but it will not be replaced by the euro.

Where the Market Stands:

The Dow Jones Industrial Average opens this week up three percent for the year. Having spent the weekend reading stock and economic research reports, it is surprising to see how many analysts are presenting arguments for why the stock market shouldn’t go up. In my experience, when that happens, stocks just ride the wall of worry higher.

Making stock market predictions can get analysts like me in trouble if we are wrong simply because we lose credibility. I was one of the few to predict that the Dow Jones would surpass the 10,000 level (I said this when the Dow Jones was under 9,000) and I am probably the only one out there predicting that the Dow Jones will pass through the 11,000 level.

The bear market rally that started in March of 2009 is alive and well.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices falling for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.