MorningWord 12/19/16: There are levels of survival we are prepared to accept

by Dan December 19, 2016 10:21 am • FREE ACCESS

In the days following the U.S. election in early November, investors got it in their head almost immediately that the outcome didn’t mean some newfound economic populism and trade wars, but traditional Republican supply side economic policy of lower taxes, stimulative deficit spending and de-regulation. The easiest way to immediately benefit from this conclusion was to buy U.S. stocks. That conclusion was right.

Since then, we’ve seen rotations into and out of sectors and sub-sectors that would benefit most from a supply side regime. The assumption being that that fiscal policy can finally grab the baton from the last 8 years of crisis monetary policy of Quantitative Easing and Zero Interest Rate Policy. In a way this was the fiscal Keynesian boost that was lacking somewhat over the past few years as once the immediate impact of the financial crisis was in the rear view mirror, the country quickly turned from stimulus to fiscal restraint culminating in the sequester. The result was a country that survived the financial crisis better than everyone else in the world, but basically passed the buck to the Federal Reserve to deliver us a boring recovery without a double dip recession.

So now we’re in a situation where the Federal Reserve is backing off, while there’s an assumption that supply side fiscal policy takes over. That assumption can be seen across the entire broad market. Yes, yes, banks, industrials, energy etc, are all the best performing stocks by a long shot since November 9th, but it was the short-lived enthusiasm for retail stocks that caught my eye. And that makes Friday’s bloodbath in department stores that much more interesting. Macy’s (M) down 6.6%, JW Nordstrom (JWN) down 8.6%, JC Penny (JCP) down 7% and Kohl’s (KSS) down 8% on the session.

It makes perfect sense that if corp and personal taxes are lower in the future than consumers will have more to spend and companies will likely put more people to work and this should benefit retail spending. But who knows when all this happens and what else is going on at the same time?

It’s my sense that this sort of short term momentum reversal might find its ways into other sectors early in the New Year that face fundamental headwinds like retail. This is what it looks like on a short term basis when blind faith gives way to fundamentals in the stock market:

Macy’s 50 day chart from Bloomberg

On a longer term basis, the reason for bricks and mortar retail market value decline is fairly obvious,, (per Whitney Tilson’s weekly letter, via Yahoo Finance):

I guess the main take-away is that there is no magic bullet to reverse long standing secular trends, especially not the promise of a new economic Utopia. But, Best Buy (BBY) a company that was widely believed to be the next retailer to go extinct behind the bookstore, and nearly did, is actually up 300% from its 2012 lows, and only down 20% from its all time highs made in mid 2006:

BBY 10 year chart from Bloomberg

Make no mistake, things were dicey for a while after their main competitor on the ground Circuit City filed for bankruptcy in 2008 and closed most of its stores, but the lack of competition in the physical world has afforded the company an opportunity to be cede revenue to AMZN while being more profitable on the sales they do have. For instance, in calendar year 2012 BBY booked record sales of $55 billion and eps of $3.69, also a record. In 2016 they are expected to book nearly $40 billion in sales, 27% below its 2012 peak and print eps of $3.41, 7% below the 2012 peak.

As department and big box stores wrestle with their unknowable future outside the digital world, it might make sense for them to consider what level of survival they are willing to accept as the architect of all of their pain pushes forward with their plan for global machine dominance.  There need to be far fewer retail chains and brands, plain and simple. And the ones that do survive may be able to find one of the few niches that Amazon is unable (or doesn’t care) to fill.