by Addison Wiggin & Ian Mathias
- A.F. analysts clash… can the niche retailer survive the credit crunch?
- Crisis begets steadfast citizens… Americans move about the country at lowest rate in 47 years
- A long-term outlook on the American stock market
- The latest sector to catch Chris Mayer’s attention
- U.K. launches historic spending spree, hikes taxes to 50%
If the credit-strapped suburban mall culture is truly on the rocks, how long do you think this can survive:
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Lady Amaranth, Goth Temptress
Among our analysts, a debate brews at the heart of the current consumer conundrum:
“Cutting-edge apparel retailer Hot Topic,” writes Wayne Burritt, about the purveyor of goth clothing and lip-piercing paraphernalia, “is loaded with attractive fundamentals and technicals, while its call options offer an oversized premium. Hot Topic is a mall and Web-based specialty retailer that has a proven track record in the often-fickle teen and pop retail space.
“For the fiscal quarter that ended Jan. 31, sales jumped an impressive 8%, to $238 million, while profits shot up a whopping 19%, to $14 million. And that’s no fluke: For the year, the company’s bottom line surged a staggering 23%, to $20 million. In addition, sales in stores open at least a year — a key measurement of retail success — rose a solid 5% during the first quarter.
“No doubt about it: Those are solid fundamentals. I guess someone forgot to tell Hot Topic that we’re in the midst of a recession!”
“Hot Topic is in an industry with substantial and growing overcapacity,” argues Dan Amoss, our short side analyst. “This stock is hot because the market is myopically focused on a recent, fleeting success and ignoring reality. The reality, as you’re well aware, is ugly — especially in retail. And it’s extremely ugly for retailers that sell trendy clothing and accessories. The day of reckoning has arrived for this wildly overbuilt industry, and now it’s a brutal competition for survival.
“The long list of specialty retailers that will be fighting over what’s left of teenagers’ discretionary spending dollars includes Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Charlotte Russe, Claire’s Stores, Forever 21, Pacific Sunwear, Spencer Gifts, H&M, Buckle, Wet Seal, Urban Outfitters and Zumiez.
“Hot Topic Inc. is a specialty apparel retailer with lackluster prospects for sales and earnings growth. Yet the stock trades at the rich valuation — especially for this market — of 23 times trailing earnings. HOTT stock is priced for disappointment.”
Hmmmn… if you put a gun to our head, we’d have to go short with Amoss. But then, that’s what makes trading fun and interesting, isn’t it?
Existing home sales fell 3% in March after a faux rally in February, the National Association of Realtors admitted this morning. Within the anemic annual sales rate of 4.5 million units, “distressed properties” accounted for over half of March’s sales.
The median price for an existing home is down 12% since last year, from $200,100 to $175,200.
The credit crisis has stymied a unique feature of American society. According to the Census Bureau, 35.2 million people changed their residence from March 2008 to March 2009 — the lowest number since 1962. And back then, there were 120 million fewer Americans.
The New York Times does a rather unremarkable job analyzing the trend under way, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up… old people move less often than the young.
But probably the most telling trend under way: Two-income families have become more common and increasingly necessary to maintain a middle-class lifestyle. “Finding employment for both spouses in a new location can be challenging,” says the Times.
And in this environment, it’s getting more challenging all the time. The line of Americans seeking jobless benefits grew even longer last week, the Labor Dept. says today. Their gauge of continuing claims — that’s people seeking unemployment benefits for more than a week — rose to a new record 6.13 million. New claims inched up 27,000, to 640,000, last week — not a record, but close.
While these numbers look awful — and they are — they’ll be a nonevent in trading today… this latest report was right in line with Wall Street expectations.
The stock market suffered through a wobbly trading day yesterday. Major indexes started down around 1% on not-so-great earnings. After some big swings, all the way up to 2% gains, the Dow and S&P 500 ended back down where they began. They ended the day down 1%, more or less.
And today, they’re off to another finicky start. Tech stocks are jamming, lead by a blockbuster earnings report from Apple. But with the jobless numbers and housing data… we can’t blame traders for being a bit squeamish. Most indexes opened around break-even this morning.
“Is the bounce still bouncing?” Bill Bonner asks, no doubt with a longer time frame in mind. “We don’t know. But we don’t trust it. They say the stock market ‘looks ahead.’ So it is possible for it to see things we can’t see. On the other hand, what was it looking at two years ago? Didn’t it see the economy going over a cliff? Apparently not.
“But investors tend to believe what they want to believe. And what they want to believe is that the stock market has had its vision corrected and now sees a recovery.
“Our guess is that they are wrong on both scores. The stock market is just as blind now as it was in early 2007… and there is no recovery coming anytime soon. By our reckoning, this is not a recession… this is a depression. In a recession, the bull market formula still works. It just needs a little time to rest… catch its breath… work off inventories… and rebuild cash accounts. But in a depression, the formula stops working.
“The feds have responded with zero interest rates… and $13 trillion worth of bailouts and boondoggles. But the old magic doesn’t seem to work anymore. This time, the formula no longer works. Consumers already have too much stuff — and no way to pay for it all. They have no choice; they have to cut back. This is not a pause in the long cycle of increasing consumption, debt and speculation. It is a reversal of the cycle — with less consumption and less debt (more savings). This is a depression.
“If left alone, this cycle will see falling asset prices, falling bond prices and rising savings for many years. Stocks should sell down to levels where they are attractive again — at average P/Es below 8… 7… or even 6. And with dividend yields above 5%.”
The dollar is down today, thanks mostly to some positive data from the eurozone. The European purchasing managers index beat expectations and printed at its highest level in six months this morning, which accelerated the recent profit taking the dollar’s been suffering. The euro regained the $1.30 mark, which helped push the dollar index back down to 86. The pound goes for $1.45 today, and one greenback will still score you 98 yen.
That dollar weakness has helped gold inch out of its recent trading range. With a few exceptions, the spot price had been bouncing between $880-890 this week. This morning, it’s just below $895.
“I’ve been following the agricultural scene of late with more than the usual interest,” says Chris Mayer. “I don’t think investors have yet grasped the extent to which drought and the financial crisis are going to hurt this year’s harvest in just about everything.
“We’re already seeing some muted effects in certain items, like tea. Tea prices are set to surpass the all-time highs reached last year. Drought is the main cause. Yields in tea-exporting countries such as India, Sri Lanka and Kenya have all fallen. These three countries produce half of the world’s tea export.
“In Sri Lanka, the world’s biggest tea exporter, drought will push tea production to a seven-year low. The financial crisis also led farmers to be more conservative about buying things like fertilizer, which adds to the low-yield woes.
“In Kenya’s Rift Valley, another tea-rich region, drought will also lower production. Auction prices in Mombasa — the global benchmark — are already 15% higher this year. Usually, the key time of year for tea is March-May, so perhaps it is the canary in the coal mine as for what we can expect. But tea is just the beginning.”
British researchers have developed a stem cell therapy that cures blindness. Scientists at the Institute of Ophthalmology at University College London say they’ve found an effective therapy for age-related macular degeneration (AMD), the most common cause of blindness. According to sources at The Sunday Times, at its current trajectory, the therapy will be a routine one-hour procedure available to patients in about six years. Pfizer has announced a plan to bring the therapy to patients.
You may recall our series of discussions on stem cell technology earlier this year. Our technology analyst, Patrick Cox, is as bullish as ever on the future of stem cell technology, and we’re inclined to agree. For better or worse, it seems like these technologies are quickly coming to fruition.
For a full array of stem cell picks, including one that just today became a target of a record level of SC funding, be sure to check out Patrick’s Breakthrough Technology Alert… but do it quickly: There are just 13 spots left in this month’s offering.
Drug companies are going to have to do their bit before governments around the world completely crowd out productive capital investment. Case in point:
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Mr. Brown unveiled a plan of unprecedented deficit spending and tax hikes for the U.K. yesterday. His plan for this year and next would exceed the combined borrowing by all British governments since the Bank of England was founded in the late 17th century.
The Brown government’s latest budget plans to pump over $1 trillion into the U.K. economy over the next five years.
Should that plan come to fruition, the U.K. ratio of debt to GDP would hit nearly 80% by 2013 — likely topping even the U.S.’ (Still got nothin’ on Japan’s debt to GDP of nearly 200%.)
And just as many fear here in the U.S., Brown declared the rich will be funding this public spending spree. His government ordered to hike the tax rate on the country’s top earners by another 5%, to a stunning 50% rate. While that breathtaking rate will confiscate half the income of those earning over $216,750 a year, it will raise enough extra revenue to cover only 3% of Brown’s trillion-dollar spending plan.
“I heard you are updating your book Financial Reckoning Day,” a reader writes. “I read the first edition and look forward to the new one.
“In the new edition, you will probably make the comparison of the U.S. and Japan. I hope you will also address the issue in a post by Eric Fry. Here is an except from his post. It is the critical question that must be addressed for your readers:
“‘So we think it’s fair — and prudent — to wonder what sort of war we are fighting. Is the stock market of 2008 like 1974 — a market that dropped 45% from its high and then advanced, more or less, for the next 30 years? Or is 2008 like 1929, a market that fell 40% from its peak, bounced a little, then erased another 50% of its peak value before hitting its ultimate low?’
“I think it is more relevant to compare and contrast 1929, 1974 and 2008 in the U.S. than making the comparison with Japan. I foresee a chart that lists several economic conditions on the left vertical axis and 1929, 1974 and 2008 along the top, horizontally. The chart would be followed by a narrative discussion of each condition and the situation that existed during the three periods. This would be an entire chapter (or more) in the book. How are the periods the same/different? What predictions can be made from this analysis?
“The above analysis will either strengthen his case or result in a modification of it. Will we end up somewhere between what happened in 1929 and 1974, or is 1929 the situation we should expect?
The 5: Given the earnings rout on the S&P 500, and government spending on overdrive, we suspect 1929 — or worse — is what you can expect. But as you suggest, we’ll endeavor to give a more analytical answer in the book.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S. Wayne Burritt, he who argues you should be long HOTT above, has an interesting strategy for wringing extra income out of the stocks you already own in your portfolio. It works in up and down markets, regardless of your feelings about pasty white skin, black lipstick or pierced eyebrows. Today we’re beginning a quick discounted offer on his product Income on Demand, because we think it’s worth your attention… please read the following to gain your 33% discount today.