Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

April 2012 Devastating for Retailers

Thursday, May 10th, 2012
By for Profit Confidential

consumer confidenceJust how bad is it getting out there?

There is no question that the U.S. east coast just experienced the warmest winter in decades. And, as a result, shoppers who were normally held back by cold weather were free to visit their favorite local store to shop and the retail sector welcomed them with open arms.

As strong retail sales—when compared to the previous year when we actually had a winter—rolled in during January, February and March of this year, some were claiming that this was proof of consumer confidence…that the economic recovery finally had some traction…that the retail sector looked great.

That theory hit a roadblock this past April. The retail sector missed sales estimates for the first time in five months this April (source: Reuters, May 3, 2012).

Also in April, McDonald’s Corporation (NYSE/MCD), the world’s largest fast food chain, came in with weaker than expected same-stores sales. The company says the weak sales reflect a difficult economic environment with challenged consumer confidence.

In Europe, Germany was supposed to have escaped recession…

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But retail sales in Germany fell at the fastest rate in April in over 18 months (source: Markit Economics, April 27, 2012). Operating margins were under pressure in the retail sector and retailers felt they needed to provide deep discounts to get sales going. Not a good sign of consumer confidence in Germany.

In France, retail sales plunged to their lowest level on record in April (they started keeping records only in 2004). Oddly enough, this was the biggest falloff in 18 months and the retail sector in France had to discount, which squeezed margins; certainly not the backdrop for strong consumer confidence.

In Italy, retail sales fell at the second-highest year-over-year annual rate in history in April. The retail sector laid off a record number of employees in the month as well.

With these pressures, the eurozone retail sales figures fell to their second-lowest level on record, continuing a trend of falling retail sales that has been in place since June 2011. The retail sector continues to suffer in the eurozone from disappearing consumer confidence.

The U.S. is off to a weak start in the second quarter, as highlighted by the retail sector. Without real disposable income growth, consumer confidence and retail sales will continue to come under pressure.

Meanwhile, Europe’s retail sector is living through difficult times, as the economic slowdown there is gaining traction on the downside. The winds of recession are slowly crossing the Pond.

Michael’s Personal Notes:

Germany has lost its dance partner…

Francois Hollande is France’s first elected socialist president in 17 years. He has stated that he will reduce the government’s budget deficit while increasing taxes and increasing spending. He believes he can eliminate the budget deficit by 2017.

Just the kind of guy France needs…

Because of the European economy’s recession, France’s budget deficit is already worse than it was a year ago because of lower tax revenue. Hollande wants to spend €20 billion to get the economy going, lower the retirement age back to 60, and raise taxes on businesses and the rich.

The problem is that Hollande doesn’t spell out how France is going to pay for this spending and how he will be able to increase spending and reduce the budget deficit at the same time.

Let’s get real…

The wealthy and corporations in France are going to have little incentive to invest and create jobs if they know their tax rates are going to rise. Their profit margins are going to be squeezed by higher taxes.

These “disincentives” to business come at the worst possible time for France, which needs to create jobs in order to grow with the European economy’s recession hanging over them.

Hollande wants to meet with the Chancellor of Germany, Angela Merkel, to ratify the European fiscal pact, which focuses on austerity measures and reducing budget deficits through fiscal discipline. (I’m sure Merkel can’t wait to have a serious discussion with France’s new leader.) Hollande has explicitly said he will not go along with the fiscal pact of reducing budget deficits unless there are growth provisions added to it to help the European economy.

Over the past few years, it was France’s previous president, Nicolas Sarkozy, who agreed with Merkel regarding the fiscal pact and budget deficits. He convinced the other European members to go along, while the European economy was falling into a recession.

Even if Merkel and Hollande come to some agreement on the fiscal pact, the big test is just a few months away—this summer.

Hollande will present his budget and how he plans to reduce the budget deficit while increasing spending. If the bond market is not convinced by his policies, I believe interest rates on France’s bonds will rise to the levels currently seen in Italy and Spain.

To make things worse, the rating agencies may threaten further downgrades if Hollande’s policies don’t bring down the budget deficits.

Who will buy France’s bonds if interest rates rise, as its budget deficit policies are not seen as attainable by the bond market? With the European economy in a recession, it will have to be Germany that helps France out in some capacity. But now that France no longer wants to play by Germany’s rules, will Germany help?

Back at the ranch, America is far too complacent about the crisis situation in Europe. China’s economy is slowing. Japan is printing money again. What a mess. But have no fear; the Dow Jones Industrial Average is back at 13,000!

Where the Market Stands; Where it’s Headed:

Last year, I made a crazy prediction that stocks would start to fall in mid-April of 2012. I was two weeks too early. Since the beginning of May, the Dow Jones Industrial Average has lost about 500 points…four percent gone, very quickly.

As the stock market continues to fall, get ready for QE3. I bought more gold-related investments earlier this week.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

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  • Randi

    So is that inflation? I'm taikng a finance class this quarter and loving how all these cryptic terms are finally starting to come together. It's a corporate finance class, so we don't get into the macro and micro econ concepts so much, but I'm getting there.Either way, it's good to see some traction on the Dow to make up for 2008 and 2009.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles