Retail stocks are getting destroyed this week as market
participants come around to the fact that the U.S. consumer hasn't
fully recovered from the Great Recession. Since its April peak the
Retail Holders Index (
) has been crushed -15% (
click on chart to enlarge
). Market pundits are furiously downgrading retail names and
talking about "persistent weakness" in the U.S. consumer. That was
not the case just two months ago when just about everyone was
convinced that the consumer was back and healthy as ever.
On April 16th I posted a relatively controversial piece claiming
that the market had become disconnected from reality. Exhibit A was
the retail index which had executed an astounding v-shaped recovery
despite almost no evidence that the U.S. consumer was healed.
But where do we sit now? We are beginning to see some glaring
disconnects between the market and reality. There are very real
improvements versus where we were just one year ago. The recovery
is here and it has been stronger than I expected. But there are
also signs of irrationality on the fray. This is nowhere more
apparent than it is in the consumer sector. The retail holders
index is one of the few indices that has experienced a full-blown
v-shaped recovery. Just how wide is the disconnect between the
consumer and retail stocks. Let's compare and contrast 2007 and
- We have lost 7.8 million jobs since then.
- The unemployment rate is 9.7% versus 4.5%.
- Total unemployed workers are now 15.7 million versus 6.5
- Real personal income less government transfers is lower
by 6.5%, or $624 billion.
- Real retail sales have rebounded just 4% from their lows
and are still down 9% from the 2007 peak.
- Consumer credit for February showed another sharp
retrenchment of -5.6B.
- Consumer bankruptcies for March were the highest level
- There is a glaring $1.5 TRILLION hole in the consumer
- Home foreclosures surged 19% last month and are at their
highest level since 2005.
- The consumer's largest asset (housing) is down 33% since
Meanwhile, the retail holders index (
) is back at its pre-recession highs. Granted, the market is a
discounting mechanism and this index has benefited greatly from
retail expansion and improved corporate efficiency, but operating
income at the index's top 25 holdings is down 4.5% from 2007 and
new stores! This doesn't rhyme with a near all-time high in the
retail index. This price action is acting as if the consumer is
(or will become) whole again - which I believe is undeniably
false. Is the consumer on the mend and willing to spend again?
Most certainly. Whether this is a good thing is a whole different
debate, but as of now there are still few signs that the consumer
is back to full strength or even close despite the market acting
as though Goldilocks is here and ready to party.
I do not point this out to toot my own horn, but rather, to show
a real-time case of an extreme disconnect between reality and
price. Careers have been built on the idea that the market is an
efficient system. That it is a perfect discounting mechanism that
is never wrong.
I wholeheartedly disagree
Any market is simply the summation of its participants'
decisions. Humans, by nature, are irrational creatures. The
summation of irrational decisions by no means makes them all
rational. This irrationality results in inefficiencies which
creates opportunity for those who are able to look beyond the
current price action and intelligently understand the underlying
forces that are driving it. As simple as this story might sound,
the rejection of the efficient market hypothesis might very well be
the most important thing you ever do in achieving investment
From Canadian Vantage Point, The World Isn't