Thursday, November 6, 2008

Retail Sales Hit a 30 Year Low as the Recession Deepens

Good Evening Folks!

Stocks were beaten senseless once again today as earnings reports and concerns over the economy continue to worsen. This was the worse two day drop in the markets since the famed 1987 crash.

The retail sales data for October was horrifying. Retailers reported the worst October sales in over 30 years:

" NEW YORK (Reuters) - Retail chains posted the worst October sales results in more than three decades as consumers cut spending sharply, stunned by a financial crisis that has derailed the U.S. economy.

The International Council of Shopping Centers called the retail sales environment "simply awful" and said the October results were the worst it had seen for that month in 35 years.

The ICSC said it pared its forecast for what were already expected to be dismal holiday season sales. It now expect sales in November and December to rise 1 percent, down from its prior view for a gain of 1.7 percent.

"The great unknown is just how much lower can consumer spending go?" said Piper Jaffray analyst Jeff Klinefelter. "With savings rates at historic lows and constraints on the availability of consumer credit, I just think there's concern that the perfect storm is brewing."

Quick Take:

What can I say? The consumer is tapped folks. We all knew this was coming. It looks like Christmas is going to be an absolute disaster this year. This data offers us more proof that the economy came to a standstill in October.

Disney's earnings miss also provided more proof that the consumer is toast :

"Nov. 6 (Bloomberg) -- Walt Disney Co., the world's biggest theme-park operator, said fourth-quarter profit fell 13 percent, as a slowdown in U.S. consumer spending caused earnings to decline at four of its five business units. The shares dropped.

Net income declined to $760 million, or 40 cents a share, from $877 million, or 44 cents, a year earlier, Burbank, California-based Disney said today in a statement. Excluding one-time items such as bad debt from Lehman Brothers Holdings Inc.'s bankruptcy, profit of 43 cents missed the 49-cent average estimate of 19 analysts compiled by Bloomberg.

Profit fell at Disney's television and radio business, theme parks, film division and the merchandise unit. Park bookings have ``slowed meaningfully,'' Chief Executive Officer Robert Iger said on a conference call, as he announced discounts to attract visitors. Media competitors News Corp., CBS Corp. and Viacom Inc. have also lowered forecasts.

``The quarter was uglier than anyone anticipated'' at Disney, Janna Sampson, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois, said in an interview. ``Going forward, it becomes a question of how long and how deep this economic recession will last. And that's very, very difficult to predict.''

Jobless Claims

Total jobless rolls rose to a 25 year high as initial jobless claims came in higher than expected:

"Nov. 6 (Bloomberg) -- More Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of the labor market.

Some 481,000 workers filed initial claims in the week ended Nov. 1, the Labor Department said today in Washington, exceeding the 477,000 projected by economists surveyed by Bloomberg News. The number of people staying on benefit rolls was the most since February 1983."

Bottom Line:

There are clear signs of deterioration in all areas of the economy. There was so much bad news today that I really didn't know where to start. I mean for example, the 10-year yield rose on a day when yields should have dropped. As I have explained before, investors usually flock to the safety of treasuries when the market tanks. The fact that they are avoiding the 10 year tells you there are concerns about our debt and the economy in the bond market.

Another thing that was announced today was the Fed's balance sheet is now over $2 trillion dollars. No wonder the 10 year doesn't look so safe anymore!

California announced that it wants to raise taxes by $4.4 billion dollars. This is what you gotta do when your state is about to go bankrupt. This will put further pressure on the consumer as their take home pay takes a hit. The housing market and anything consumer related will take another blow if these taxes are approved. Homebuyers will have less income from which to buy a house. The California dreamin is slowly turning into the California nightmare.

Folks, its getting hard to even watch the news right now its so depressing. I think I need to start popping a Prozac before I start blogging. I didn't even get a chance to mention the big 3 auto summit with Nancy Pelosi that's going on tonight. GM is hangin on by a thread and losing more than $1 billion a month. They are on their hands and knees begging the government for help.

CNBC reported today that 2.5 million jobs will be lost if there is a 50% reduction in the automotive industry. That would be catastrophic for the Midwest. I would guess you will see a bailout here but that doesn't mean you won't see a 50 percent reduction among the big 3.

If people aren't buying cars then they aren't going to make them. They can get bailed out all they want, the production lines ain't going to be moving if there are no orders. Expect major job losses in this area as a result.

I wish I had better news folks. Now that most of the October numbers are in, we can officially declare that this month was a total disaster for the economy. We are now staring into the abyss and the market hates uncertainty. Investors are now asking themselves one question:. Was October the beginning of a depression or a one month anomaly?

Put me in the "severe recession/depression" camp in terms of where we go from here.

As for trading, I held my shorts into the close. I didn't add to my positions. There are no good entry points at these levels.

Tomorrow is all about the jobs report. If its horrific, we could plunge for a third day in a row. I would also keep an eye out for any automotive summit news. Oh and don't forget, keep an eye on treasury yields. I have deep concerns about the bond market.

Stay tuned!


Minton Mckarkquey said...

There simply isn't any good news at all out there. At this point I can see a 3-5 year prolonged recession, and a permanent change in the credit and housing situation. Americans will have to adjust to a new era of high-cost living, with everything from food to credit being pricey, and pay-raises becoming a tale to tell their grandkids. Until the Dow hits 6000-6500, I don't think we'll be anywhere near sensible stock valuations. Bleak, bleak bleak...

Jeff said...

Hey Minton

Nice to see you!

Its ugly out there isn't it? I agree. The cheap money days are long gone. Consumer is tapped. Mortgage applications were down 20%. Rates are rising which are making things worse. I heard the 20% drop in mortgage apps is what really rocked the street on Wed.

I think many of them were hoping lending would resume as the Libor rate came down post "world bailout". this ugly mortgage app # blew that theory right out of the water. The banks aren't lending and there is no demand for money. Thats a bad combo

Its going to be a rough transition for the many who have never seen what a real recession looks like.

I can't be a buyer either until we get down around those levels. DOW 6000 brings us back to the early 1990's levels which is when this debt bubble really got going.

Short term I think its highly likely that we go down and retest the low of 8175 set last month.

Today was a big failure for the bulls when the DOW closed below 9000. If we retest the lows it might setup a short term bottom. Longer term I think we go down to the levels you suggest.

Time will tell. This is quite a mess!

johndaniels said...

The problem is the banks are pulling back credit card lines. Without credit there can be no consumption. Thats what has sustained us and now its really over; those lines of credit wont come back. Its clear what the banks are doing: they are purposefully exacerbating the deflationary cycle so they can sell their assets while acquiring more fiat, they they suddenly buy everything up, jacking up the prices...leaving savers screwed. The "new money" provided by the 850 Billion bailout is hoarded, cheapening existing money, but before the new money enters the system the banks will simultaneously sell off and buy.

Jeff said...


Totally agree. The bankers always end up with the money in the end.

If you noticed today, the BofE dropped rates 1.5% and mortgage rates in the UK didn't budge.

This totally jacked off the government over there. They wanted rates to drop and if anything they rose or stayed flat.

Banks can borrow at a much reduced rate and lend at higher rates yet they refuse to do so.

Like you said, the pigmen will pick these assets up for pennies after deflation destroys the asset vaules and make a fortune on the next upturn.

I guess pigmen will always be pigs.

Anonymous said...

GM just came out and said they won't make it to the end of the year without a generous handout from the US government.

Brinkmanship or are they actually hurting that bad?

I would like to see GM execs suspending their own pay to try to save the company before we start throwing money at them.

It seems like GM was the most stable of the three. Now they are calling off talks of merger with Chrysler because they are spiraling down the drain.

I think the odds are pretty good of there not being an American owned car manufacturer by the end of 2009.

Even if the govt does give them a big chunk of money there is no light at the end of the tunnel for any of the car manufacturers.

This parallels the banking/financial crisis - how much, if any, money should the govt be throwing at an insolvent company that has little(no?) hope of surviving even with massive help.

I need to replace my vehicle pretty soon here - bet I will get a sweet deal sometime next year. Already saw a deal through GM that you can purchase a new 2008 Silverado pickup truck that would have cost you $24,000 last year for $8,200. Imagine the deals when they are running their 'Going Out Of Business' sales.

Jeff said...


I know did you see those losses they reported? My god. $7 bucks a share. Even worse, they are burning through $2.5 million a month.

They will be out of cash in 3 months according to GM. They have 20 billion in the bank and need 12 billion to operate.

I say no bailout unless they completely overhaul the whole company and shred it down to the pieces that are actually making money.

Bailing them out in their current form as they lose billions every quarter is moronic in my view.

In terms of buying a Silverado I don't know anon.

If they go BK after you buy it you have no warranty. What about parts? That could be a hassle if you pull the trigger.

That being said thet is a hell of a deal!

Good Luck either way!

Jeff said...

oops burn rate for GM
is$2.5 billion/monthillion

Anonymous said...

Hi everyone,

Given the market/economy condition, most people agree it is best to stay out of the stock market and stay in cash. Nouriel Roubini has predicted that the US recession will last through 2009. If you look into your crystal ball, when do think we will get out of the recession?

Right now we are in the deflation cycle. If you look into your crystal ball again, when do you think we will reach the inflation cycle?

Instead of sitting on cash, you decide to open CD accounts to earn some interests while waiting for the market capitulation. But you don't want to miss opportunity to buy good stocks near or at the bottom. From everything I have read, the general consensus is that the market will recover in the L-shape rather than V-shape. In such scenario, would you open a 6-month, 1-year, or 2-year CD term?

Would love to hear feedback from everyone. I started the investment in the stock market around the summer of 2006. Thus it has been an eye popping and nerve-racking experience to watch DJ dropping from 14K.

Jeff said...


Its been very eye popping to say the least. I am sorry that your investment career started right when the stock market began to full apart.

Regarding the recession we don't see a recovery until at least 2010. I don't think anyone really knows at this point. The whole financial system is still in total chaos.

Regarding inflation, this will be a problem down the road because of all of the bailouts and increased spending by the government.

I wouldn't worry about inflation right now. Thats a ways away in my book unless the government defaults on itself. I would play the deflation card until we see signs of inflation in things like commodities, gold, and treasuries.

My best guess is this will definately be an L shaped recession.

If you want to have cash available for investing and want to go into CD's short term I suggest that you stagger your CD's.

Buy a CD once a month in smaller amounts versus putting it all in at once. This way your CD's mature every 30 days which gives you cash available for investing.

Hope this helps and good luck.

Anonymous said...

Hi Jeff,

Thank you for the feedback. BTW, this blog has saved me from bigger stock losses. I follow your posts daily and the information help me to stay well informed and out of the market. Thank god I avoided the media talking heads because they give nothing but false sense of hope. You have to seek the truth from the blogs.

Personally, I am so sicked of the stock market. In the past year, there has been nothing but lies and more lies from corporate executives and the Fed/Treasury. The trust is completely gone.

I thought about the CD laddering. But my gut feeling says the Fed will probably drop and keep the interest rate at 0% throughout 2009. That will reduce the CD earning. So I am taking the chance on opening the accounts now. Hopefully my crystal ball won't betray me unlike the Fed or SEC.

Jeff said...


I am glad you were able to avoid some losses.

I think the stock market has made us all a bit sick. There manipulation seen in this cesspool has reached historic levels. At some point its going to come back and bite them.

I wish I knew when that day was! Be careful with your accounts. Stay diversified and good luck!

Anonymous said...


Given the higher than expected unemployment rate today, it is surprising to see such rally. It is hard to invest logically in an irrational market. You just have no idea which direction it will move. As others posted, this is all crap shoot.

In your gut feeling, do you still strongly believe that the bottom has not reached and capitulation will come one day?

Jeff said...


I have a post going up in 5 minutes that addresses all of your concerns.