MorningWord 12/26/12: A Tale of Two Cities – $AAPL, $AMZN

by Dan December 26, 2012 9:23 am • Commentary

MorningWord 12/26/12:   Back to the grind, well not really, as we are fully expecting the last 4 trading days of 2012 to be fairly uneventful, despite anticipation of near term resolution to the “fiscal cliff” debate.  We are in the camp that a cliff deal will not necessarily be viewed as positive for the markets, as the reality of austerity sets in and the fear of any initial short covering rally has been cleared from the markets. While we don’t style ourselves as skilled “Washington Watchers” it seems fairly obvious to us that market participants will likely be focused on the results of austerity on the economy for months to come. Although, if a deal were to include short term stimulus and really kick the austerity can down the road, the market could pop on something that hasn’t been priced in.

So in the interim most investors/traders are probably best served focusing on fundamentals of individual companies as we head into Q4 earnings season that starts in earnest the week of Jan 14th , as most of the large banks and brokers report (JPM, C, BAC & GS) and a couple tech heavyweights (EBAY & GOOG).  Prior to earnings though, next Thursday on Jan 3rd, we will get a an early look into Holiday retail sales as a laundry list (KSS, TJX, SKS, TGT, M, GPS, JWN, COST & LTD to name a few) of retailers will report same store sales for December.  My sense would be this could be a market moving day, as Q4 is generally a make or break for many retailers year, and early reads suggest that year over year sales increases lagged that of last year by a large margin, and that the worst reading since Dec 2008 could be signaling an “as good as it gets” situation for many retailers well into 2013.

If my household was any indication, our holidays gifts were dominated by 2 retailers, AAPL & AMZN.  While AAPL gifts were bought at full retail, most of what we bought was on AMZN, and was at rockbottom prices with free shipping.  A bit of a “tale of two cities” so to speak.  As a bit of an exercise, I took a walk through a nice mall in Dallas, Texas (visting family) on Dec 23rd and 24th, which is full of high and middle end apparel and dept stores, plus AAPL of course.  I would say that the traffic was brisk, but not overwhelming as I have felt in years past, but the the thing that stuck out to me was the MASSIVE discounting prior to the Holiday.  Wasn’t the age old retail business model to gouge shoppers prior to Christmas and then discount the crap out of unsold inventory after?  Now it seems that you can get 25-50% off prior and 50-75% off after.  Purely anecdotally, but from where I am sitting, retail is screwed for the time being, especially when you consider the period of austerity that our nation is headed for, but lets leave that for another convo.  AAPL got all my margin dollars, and AMZN took market share from bricks and mortar retail as a result of my patronage, but for little to no profit I can assure.  We will get a good sense for how unprofitable AMZN’s Q4 was when they report in late Jan, but my sense this was not the quarter where the company finally realizes that “operating leverage” they have been dangling in front of investors noses for years.

With the SPX near multi year highs, I thought it would be interesting to get a sense for how closely consumer confidence tracks the performance of the stock market index.  As I said above, it appears that this years holiday sales growth may end up being the worst since Dec 2008 when our nation was in the throws of the “Great Recession”, but does the recent decline in consumer confidence signal and impending stock market decline?

[caption id="attachment_21014" align="aligncenter" width="490" caption="5 yr SPX vs U. of Mich Consumer Confidence from Bloomberg"][/caption]


While it is clear the readings track fairly closely, it is not entirely clear which tail is wagging the dog.  On any meaningful pullback in equities, confidence tracks, but was interesting last year was how negative consumer confidence got relative to what was a very mild pullback compared to 2008/2009.  With consumer confidence coming off of a 2012 print that marked 5 year highs, where are we headed now??

Obviously there is nothing scientific here, as Consumer Confidence is backward looking, but I guess my point here is to think about your own spending habits over the holidays, and project out a bit how you feel about where and what you will buy in the next 3-6 months.  When I do this exercise, and consider what will most definitely be a period of higher taxes and less spending, I am hard pressed to see a market that will be generous to consumer and retail multiples that are starting to look a tad stretched in many instances.  I want to short consumer discretionary names that are extended on both a price basis and a multiple basis, while I also think crowded longs in names like COST could come undone early in the new year.