Wall Street reacted by not shopping for retail stocks

BY  | FROM  | 2015-11-16 10:18

It doesn’t look like it’s going to be a good holiday shopping season for brick-and-mortar retail stores, as Wall Street reacted by not shopping for retail stocks.  Not that today’s forecast is representative of tomorrow’s actual results, but talking down sales (with some blaming the weather) is never a good sign.  On the other hand, the talk pushed down prices and expectations, setting the stage for stores to beat those expectations later in the year.  I’m not sure a mathematician would agree with the logic—reducing estimates by 20% and then beating them by 10% still leaves you with a 12% decline—however, Wall Street, while numerically skilled, does sometimes appear to be logically impaired.  Adding to the hype and rumor was a buildup in inventories and the sighting of pre-Black Friday sales, which reduce margins and add to customer expectations.  While some conservation groups (supported by big-box stores) have put Black Friday on the endangered list via later openings and restricted bargain sales, the cat-and-mouse game between retailers and shoppers seems to have begun. 

The personal impression I get from a local shopping expert (my wife), which seems to be reflected in Street opinions, is that bargains will continue, with stores needing to reduce inventories.  Consumers will continue to buy, but the emphasis may be on need more than want—and for the higher-end retailers, on price.  Given the length of the shopping season, we should not expect to know who was the true turkey by Thanksgiving (November 26, 2015) or Cyber Monday (November 30, 2015), and we should be prepared for quick store actions (incentives, bargains, add-ons) later in the season if things are not as merry as retailers hoped for.  As for this week, there was no joy on Wall Street, as energy prices, along with oil and commodities, beat out retail stores in a race to see who could decline more; a race in which being number two is not a prize, as the six-week run of gains stopped with the broadest weekly decline since August. Economic news was plentiful and descriptive of conditions for investors. 

Year-over-year, Chinese exports in October declined 6.9% (September declined 3.7%), as imports fell 18.8% year-over-year (compared with a 20.4% decline in September); the Chinese Trade Surplus increased to USD 61.6 billion from September’s USD 60.3 billion.  Chinese year-over-year October Consumer Inflation came in at 1.3%, down from the September 1.6%, as Producers Prices declined 5.9%.  U.S. October Retail Sales disappointed investors, as they came in up 0.1%, when a 0.3% gain was expected.  Adding to the concern was a series of poor retail earnings reports and lower forecasts.  The October PPI came in with 0.4% decline, when a 0.2% gain was expected, and the year-over-year change was -1.6%.  The PPI less food and energy posted a -0.3% change when a 0.1% gain was expected, as the year-over-year change was up 0.1%. 

The weekly EIA Petroleum report showed a 4.2 million barrel increase in crude oil inventories, which was much higher than the expected 2.6 million, with the market pushing oil down to under USD 42.  China said it would increase stock margin requirements, reducing the amount you could borrow on stock purchases to the amount you put up (put up USD 1 and borrow USD 1) from the prior two-to-one limit (put up USD 1 and you could borrow USD 2). In M&A, timber products issue Weyerhaeuser (WY; off 3.8% for the week) said it would buy competitor Plum Creek Timber (PCL; up 14.6% for the week) for USD 7 billion.  Phone maker Ericsson (ERIC; off 6.0% for the week) and chip maker Cisco Systems (CSCO; off 7.9% for the week) formed a wide alliance.  Deals put on the table this week included oil and gas explorer Apache (APA; up 2.7% for the week), which said it received interest in a takeover from Anadarko Petroleum (APC; off 12.5% for the week).  Railroad holding issue Norfolk Southern (NSC; up 11.4% for the week) was rumored to be a target by Canadian Pacific (CP; up 1.3% for the week). 

Apparently taken off the table was Mylan N.V.’s (MYL; up 8.5% for the week) hostile USD 26 billion offer for Perrigo (PRGO; off 9.5% for the week), when only 40% of Perrigo’s holders tendered their shares to Mylan. On an issue level, pharmaceutical issue Mallinckrodt (MNK) fell 18.5% for the week, as short-seller Cireon (which started the Valeant Pharmaceutical decline) said the shares could fall. Alibaba (BABA) booked USD 14.3 billion in gross sales for the Chinese Single’s Day, as the issue closed down 9.3% for the week. Department store owner Macy's (M) missed sales and forecast declining results for the holiday season, declining 20.0% for the week.  Macy’s, similar to McDonald’s (MCD; off 2.9% for the week), said it would not do a spin-off of its real estate assets. Upscale apparel store Nordstrom (JWN; off 18.0% for the week) and Fossil Group (FOSL; off 41.2% for the week) also missed on earnings and lowered their estimate. Automaker Volkswagen (VOW3; off 0.9% for the week) offered 482,000 diesel units affected by the emissions problem a gift of USD 1,000 for cars—which appeared to please no one. Earnings centered on retail issues, which, in general, were not good, with the forecasts for the holiday season worse.  The retail focus will intensify next week, as Wal-Mart, Home Depot, Best Buy and others will report, with issues expected to react to the forecast more than the results. 

Overall, Q3 2015, with 92% reported, is winding down, as the Q4 2015 game of updating estimates is starting to come into play.  The market posted its first down week after six weeks of gains (8.69%), as it posted a broad 3.63% decline to close at 2,023.04.  It was the worst week since the 5.77% weekly decline that started the mid-August declines.  Four of the five days declined, as Tuesday’s reprieve was only a 0.15% gain; Thursday’s 1.40% and Friday’s 1.12% declines were inspired by retail and oil.  The market turned negative for the year-to-date, off 1.74%, as the relatively low change hid the high issue variance: year-to-date 59% of the issues have moved at least 10% year-to-date (110 up and 188 down). Breadth turned strongly negative after six weeks of market gains, as 49 issues gained for the week, which was down from last week’s 291 issues, and 456 issues declined, compared with 213 issues last week.  Two issues gained at least 10% (13 did last week), and another three issues were up at least 5% (48 were last week).  Thirty-four issues declined at least 10% (only two did so last week), and another 109 issues lost at least 5% (29 last week). 

Nine of the ten sectors declined, compared with only three decliners last week, as the six-week run came to an end.  Utilities was the only gainer, up 0.33%, as safety was seen in the sector, even though higher interest rates were seen as hurting it; year-to-date, the sector is off 10.53.  Energy did the worst, off 5.97%, as oil declined to USD 40.76 on reports of higher inventories; the sector is off 17.57% year-to-date, the worst group in the index.  Consumer discretionary declined 4.59%, as brick-and-mortar issues came under pressure when Macy’s (M), Nordstrom’s (JWN) and Fossil (FOSL) reported poor earnings and said their holiday season would not be as joyful as hoped. The sector remains up 7.59% year-to-date, the best of any group. Trading declined 6% for the week, as trading in retail issues increased and earnings releases (in general declined), as remained 7% higher than the one-year average.  Thursday’s trading, when the market fell 1.40%, was the heaviest of the week, as retail re-allocation appeared to be active.  Measurable volatility (the high-over-low price variance) increased, as prices declined, coming in at 3.69%, up from last week’s 1.72% and above the one-year 2.66% average. 

The VIX traded up for the week, as concern over the holiday shopping season and the expected Fed interest rate increase left it at 20.31, up from last week’s 14.33 (the prior week was 15.07).  Interest rates moved again this week, as the likelihood of a December interest rate hike by the Fed grew to be almost certain (at least as determined by 92% of the economists surveyed).  The 10-year U.S. Treasury closed at 2.28%, down from the prior week’s 2.32% (2.14% the week before that); the 30-year U.S. Treasury, however, closed at 3.06%, down from last week’s 3.09%. Oil moved down as reserves increased, breaking out of its mid-USD 40 area, and it closed down at USD 40.76 from last week’s USD 44.52 and the prior week’s USD 46.39.  Gold continued to decline, closing at USD 1,081.20, down from last week’s USD 1,088.90 and the prior week’s USD 1,141.70.  The dollar stabilized after its prior week’s run up, as the euro closed at 1.0752, down from the prior week’s 1.0742.  The pound was at 1.5227, down from the previous week’s 1.5049, and the yen (quoted in yen-to-U.S. dollar, so higher is weaker) was at 122.66, which was down from the prior week’s 123.16. 

The yuan closed at 6.3734, up from last week’s 6.3515. S&P Dow Jones Indices announced that it would add consumer financial services issue Synchrony Financial (SYF) to the S&P 500 and remove Genworth Financial (GNW) after the close of business on November 17, 2015. S&P will also add genetic health care issue Illumina (ILMN) to the S&P 500 after the close of November 18, 2015, and remove Sigma-Aldrich (GNW).  Economic reports next week will focus on the CPI, Industrial Production, and housing (NAHB and then Starts, Permits, and Completions).  Next week, 22 issues are scheduled to report earnings.  Retail earnings will give insight into consumer spending, with company guidance also shedding light on the upcoming holiday season.  Home improvement stores Home Depot (HD) and Lowes (LOW), as well as electronics store Best Buy (BBY), will report, as will the more general retailers Wal-Mart (WMT), Macy’s (M), and Target (TGT).  Information and analysis provider salesforce.com (CRM) will also report.

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