U.S. Retail Sector Now at Worst Level Since Summer 2009

U.S. Retail SectorThe retail sector reports that sales for June, for stores open at least one year, gained an anemic 0.1%, the slowest rise since August 2009.

This was the third month in a row of significant weakness in the retail sector!

When compared to the 6.7% rise in sales in the same period last year for the retail sector, this 0.1% rise in retail sales from last month reveals how weak consumer spending in this supposed economic recovery is. Remember, dear reader: 70% of gross domestic product (GDP) is composed of consumer spending.

The retail sector uses this measure—stores open at least one year—because stores that are shutting down and new store openings tend to skew the data, so taking stores that are open for at least a year provides a more accurate reading of the retail sector and consumer spending patterns.

At least 15 of the 20 big U.S. retailers within the retail sector missed their sales estimates for the month of June, highlighting the weakness in consumer spending.

Some of the retail sector companies reporting weak results include Target Corporation (NYSE/TGT), Walgreen Co. (NYSE/WAG), and Costco Wholesale Corporation (NASDAQ/COST).

Clothing discount stores and low-end retailers within the retail sector, such as Ross Stores, Inc. (NASDAQ/ROST), experienced stronger growth in their sales numbers, as consumer spending hampered by low real discretionary income meant that people sought more bargains. (Source: New York Times, July 5, 2012.)

The management at Family Dollar Stores, Inc. (NYSE/FDO) noted that more and more of its customers were living paycheck to paycheck. This is why the low-end retailers are performing better within the retail sector and why consumer spending will have a very difficult time growing as we move into the second half of 2012.

Of course, if consumer spending is non-existent, this will not only affect the retail sector, but also the economy in general. For the second quarter of 2012, 94 companies within the S&P 500 have provided downside earnings preannouncements, while only 26 companies have provided upside surprises. (Source: The Wall Street Journal, July 2, 2012.)

According to Thomson Reuters, which tracks the number of upside to downside surprises, this was the worst showing since 2001!

As I’ve been warning in recent issues of Profit Confidential, the area these negative preannouncements are centered on is weaker revenue growth.

Consumer spending patterns and the retail sector are telling us that corporate revenue growth will continue to be weaker, putting into the question the economic recovery and turning the conversation to a possible recession here in the U.S.

Be careful with that stock market. The talk in some circles is about how cheap it is selling at. But if more and more companies, including those in the retail sector, come in with weaker earnings, the stock market will look expensive very quickly.

Michael’s Personal Notes:

Only a week after the City of Stockton, California, declared bankruptcy, the small ski resort town of Mammoth Lakes, California, filed for bankruptcy.

The city’s largest creditor, Mammoth Lakes Land Acquisition, won a court judgment for $43.0 million, which meant the city needed to come up with the money immediately. The city of Mammoth Lakes could not pay due to its expanding budget deficit and so bankruptcy was the only alternative left.

Mammoth Lakes Land Acquisition offered the City of Mammoth Lakes a 30-year repayment option at $2.7 million per year, but the budget deficit at Mammoth Lakes is so impossible to close that the city felt it had no option but to finally leave it to the courts to decide how to fix the budget deficit.

More cities in California are becoming desperate, as their budget deficits threaten to lead them down the same path as Stockton and Mammoth Lakes.

Obviously, the biggest revenue generator for Californian municipalities consists of taxes from homeowners. Since the housing market disintegrated in 2008, these tax revenues have been cut dramatically, worsening the budget deficits.

Now California’s Fontana, Ontario, and San Bernardino County have jointly decided on a new approach to the housing market in hopes of closing out their budget deficits. This new approach simply highlights the desperation on the part of municipalities to increase tax revenue and so close out their budget deficits.

The municipalities want to take the mortgages within the housing market that are currently at less than the value of the home from the banks, have the courts decide what the value of the home currently is, force the banks to take the principal loss on the home, and resell a new mortgage to the current homeowner at the reduced price. (Source: The Wall Street Journal, July 5, 2012.)

This means, for example, taking a $300,000 mortgage, forcing the banks to take a $100,000 loss on it and allowing the homeowners to remain in the home with a new $200,000 mortgage, which would reflect current prices in the housing market.

The banks, of course, are not happy about this idea. Others proclaim that it will prevent further lending by the banks in the housing market and will depress housing prices further.

The housing market needs relief and reducing principal is certainly an excellent way of helping revitalize the housing market. However, arguments won’t matter in this case, because to be eligible, homeowners within the housing market must be current on their mortgage payments and they must hold mortgages that are not federally guaranteed.

Only 10% of all mortgages in the U.S. are not federally guaranteed within the housing market.

As this represents such a small portion of the housing market, debate is irrelevant. What’s worse is that those behind on their mortgage payments are the ones who need the principal relief within the housing market.

Regardless, this highlights the desperation among municipalities to increase their revenue bases to cover their budget deficits and also dispels the myth that the housing market is recovering.

Reducing principal in the housing market is one of the only ways to revitalize it, but this plan has such limited scope that it will have very little effect, especially as there is no obligation to accept such programs.

Where the Market Stands; Where it’s Headed:

Slowly, very slowly, the stock market moves lower. The bulls are calling for higher stock prices, because stocks are trading “cheaply” based on price-earnings multiples.

The bears like me are calling for lower stock prices because of a brewing global recession that will sharply reduce the earnings of American corporations.

The only thing left is for the Fed to announce a third round of quantitative easing (QE3). But at this point, I don’t know if the stock market’s reaction to such a move would be overly positive.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in Profit Confidential, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Chairman Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.