Why Higher-priced Purses Make Sense for Investors

This morning, the U.S. Commerce Department reported that U.S. retailers saw a 0.4% increase in July sales, the first increase after two months of downward sales. Most of the gains came from auto sales.

Given that the summer months are a relatively slow period for retailers (“back to school” buying doesn’t really start until late August, early September), the increase in retail sales, although anemic, is on track for an economy coming out of a severe recession.

Retailer Dillard’s, Inc. (NYSE/DDS) reported this morning that its second-quarter income turned positive from a loss in the same period one year ago, with net sales up 2.7% for Dillard’s. J. C. Penny Company, Inc. (NYSE/JCP) also returned to a profit in the second quarter, from a loss in the same period in 2009.

Unfortunately, the Dow Jones U.S. General Retailers Stock Index doesn’t share the sales turnaround at the retailers. After topping at 380 in April of this year, this index is down 17% to 314 today. Why the sharp decline in retail stock prices, and, more importantly, are they a buy now?

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There are still many deep-rooted problems with economy; the biggest for retailers being the unemployment rate. With millions of Americans out of work, retail sales will remain flat. The uncertainty about the “Recession Double Dip” has instilled a cautious attitude in other shoppers. And of course it doesn’t help that American retailers have trained consumers to shop at “big savings event” sales.

Let’s face it; for cheap, lower-end retailers, unless you are Wal-Mart, it will difficult to make money, as consumers continue to hold back, product margins are reduced, and competition is fierce.

In this sector, I like the high-end retailers. Look at the price chart of Coach, Inc. (NYSE/COH), a high-end retailer of women’s purses and shoes. The stock is up 39% from a year ago, and has become a favorite among investors, because the brand is so strong.

Would you rather own the stock of a company that sells $50.00 purses or $300.00 purses? If the $300.00 purse is in big demand, because it is a recognized brand and delivers a fashion statement, this would be the way to go.

Now, if only one could buy a stock that directly reflected the profit of the “Louis Vuitton” brand…that would be one great stock to own.

Michael’s Personal Notes:

The Labor Department reported today that U.S. consumer prices rose 0.3% in July, the biggest gain since 2009. The core rate of inflation, which excludes food and energy prices, rose 0.1% in July.

While economists tend to focus on the core rate of inflation, I like to look at the overall rate, as food and energy are things that consumers need, things they have to pay for, thus excluding them doesn’t represent a family’s true increase in cost of living.

Many of my associates have been writing about the fear of deflation. Inya Ivkovic wrote a great article on these pages this past Wednesday comparing the deflationary “lost decade” of Japan to where the U.S. may be headed today.

I believe that deflation was a problem in 2005-2007. Since then, the housing market busted and the stock market dropped to a 12-year low (March 200), thus the worst of deflation may be behind us. I’m more concerned with inflation.

The amount of U.S. dollars in the system, the amount of U.S. debt, zero interest rates, and the Federal Reserve now starting to buy government debt: for me, that is cause for fear of inflation. As the U.S. dollar continues its downward spiral against other world currencies, will it not require more dollars to buy goods, thus pushing up inflation?

Gold, known throughout the world as an inflation hedge, is at an all-time price high. We need to ask ourselves an important question: would gold be rising if deflation was in the cards? If we want to look at the Japanese case, during Japan’s “lost decade,” gold in Japan did not rise in value.

Where the Market Stands:

It’s been a choppy past couple of days for the stock market, but I’m sticking with the belief that we continue to operate in the confines of a bear market rally. The Dow Jones Industrial Average starts today down one percent for 2010.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.