Hand Job

Everything written in this article is based on economic information gathered on Wednesday, August 10, 2011. All sources for claims made in the article have been hyperlinked for substantiation purposes.

The President is talking about job creation.

The Speaker of the House is talking about job creation.

The Senate Majority is talking about job creation.

Your Mayors, Governors and local governments are talking about job creation.

The reality, my friends, is that they are only talking about it. More jobs are not going to be created in the foreseeable future. I have the proof that will make you second guess your desire to spend money on that Career Coach, drop $40,000-100,000 on going back to school to "be better equipped for the job market," or plan any aggressive move to "get your name out there" in this market.

Regardless of what everyone else is saying about bringing jobs back to America, the reality is ...those jobs which have left, and are gone permanently. How do I know? Read on...

I never rely on what media says about anything to make my mind up, so screw those links I laid out before. Here is what I have been monitoring to make such a bold statement.

Monster

Monster.com is one of the Top 20 most visited destinations on the web, out of over 100,000,000 sites. It is the second most visited job site in America.

So how has Monster been performing in this wonderful, "everyone who is important is talking about jobs" environment?

Their stock price, due to the jobs outlook, has dropped exactly 50% since the beginning of May 2011, or more plainly, the last 3 months. The market snapped another 10% off the online job center in Wednesday's trading. Does that sound like insiders are thinking a furious crush of jobs are about to be thrown the public's way? I don't think so either?

To compound the problem, Manpower, the largest temporary staff solutions provider? employer in the world, is down 45% since the start of May, or, more plainly, in the last three months. Does that sound like great things are in the offing for new job creation? I don' t think so, either.

By watching these two companies, and using them as metrics for the future, it is not hard to surmise, jobs are not in the plans for America's near future. Sorry to break it to you, but as Levar Burton used to say on Saturday mornings: "Knowing is half the battle."

Plan accordingly.

Bull(sh*t) Market

Of note: I am writing this after the close of the bell on Tuesday, August 9, 2011. Therefore, any mention of stock price, metal price or index performance is in relation to the close of business on this day. All highlighted text are hyperlinks to my sources, so feel free to click through for proof of what I am saying. Other than that, I stand by everything you will read in the following article.

This afternoon, in a rally that started 35 minutes before the closing bell, the Dow Jones industrial average closed up 429 points, to end the day at 11,239. And while the world stood up and cheered the magnificent run-up to end the session - and 1,000+ negative swing over the last few trading days - I thought it the worst possible thing that could have ever happened in an uncertain investment environment. Here's why:

The Bizarre

The responsibility for rally lie solely in the lap of the Federal Reserve, whose chairman, Ben Bernanke, made a nationally televised statement centered around two points:

1. The economy is in worse condition that they, the Fed, previously thought.

2. The have seen fit to keep interest rates, for financial institution borrowing, stagnant for the next couple of years.

On point one: The sole job of the Fed is to manage the money supply, ie watch the economy. Nobody in the world has more adept men and women in their job to do just this task. Chairman Bernanke is one of the world's foremost authorities on the subject of economics during the Great Depression. So if he, and they, are telling you that they are in new, unexplored territory, then you are in new, unexplored territory.

On point two: The Fed, which historically (before 2007) addressed the issue of interest rate adjustments once per quarter, has usurped that process by announcing that the rate for institutional borrowing will remain near 0% until at least 2013. In the past, traders had stood breathlessly awaiting the word of the chairman of the Fed on that one Tuesday per quarter where he would announce a rate increase (bad for markets), or decrease (great for markets). The actions of the chairman today were indeed bold and, perhaps, necessary to stave off a market implosion. However, he shot the entire load on this one announcement. There is literally nothing else left in the Monetary Policy bag of tricks to counter whatever roadblock is put in the path to economic recovery later on. This is vastly important to remember, but more on that later.

On a day when markets supposedly "rallied," GOLD closed higher - and not by a little bit. Gold is the place money goes when it is worried about the future. That is why Gold, that closed above $1700 for the second day in a row, has risen 132% since the day President Barack Obama was elected. Don't you find that a strange occurrence during a "rally?"

Here is more bizarre for you: Where does money go to hide in time of uncertainty? Switzerland. The Swiss Franc rose another 2.2% against the U.S. Dollar today, to continue it's steady climb toward parity to the Euro (or death to the Eurozone, should that happen). Why all the interest in Swiss Francs? Because in war and peace, in good times and bad, Swiss banks make good on all accounts; always have, always will. But why, you ask, would this happen during a "rally?"

More bizarre for you: Oil fell nearly 3% on the day, which allowed for the most bizarre news of the day. Exxon, as a result of the oil dip, lost market value at the same time the market darling, Apple, was shooting up. Apple would overtake the energy giant to become the World's Most Valuable Company, if only for a brief moment before close. Now help me understand how, in the midst of a Global Depression, with tightening credit, and massive job loss, and Austerity measures being put in place in every country in the Western world, a consumer products company (Apple) overtakes and energy giant (Exxon) in market cap? IPhone 5, my ass! Yes, Apple makes much desired products. Yes, they have the most anticipated product of 2011 hitting shelves sometime in the next six weeks. But, no, people will not have the money (or should i say "the available credit" to make the splurge. Some will, but I am certain many won't, if only because they can't. Anyone sitting on Apple shares will be crying for mercy come October. $374 will look more like $275, or even $249 (since Apple likes to end prices with nines), but more on this later.

A Few Major Companies Peek Into the Future

GM - They of the Biggest Car Company in this, or any Universe, has announced their doubts about hitting their year-end target for auto sales in the United States. Now that is a pretty odd announcement to make before your brand spanking new 2012 models hit the showrooms later this month. And even before all those great rebates and sales marketing blitzes to clear out the 2011 models have taken place.

What does GM know that the market doesn't? They know that even if you: like the car, love the car, want the car, the bank is not going to approve your loan without a substantial down payment (which you do not have), or a stratospheric credit score (which you also do not have). Banks know you do not have these requirements because if you did have them, you would not be buying a GM vehicle. That is not a joke, and was not meant to be a putdown. It was merely intended to convey the thinking behind the determination made to refuse the vast majority of loan applications that will cross their desk this Autumn. Believe it!

Fossil - The watch company that makes FOSSIL, MICHELE, RELIC, ZODIAC, ADIDAS, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, MARC BY MARC JACOBS and MICHAEL Michael Kors watches, announced that it will be coming up short this year, and shares promptly dropped 12.5%. What does Fossil know that the market doesn't?

They know that purchase orders for 4th Quarter, far and away the busiest time of the year for retailers, are trickling in this time of year, and the ordering is clearly lighter than in years past. Normally a store can write an order and have it filled within 30 days. However, the orders for 4th Quarter are so large, Fossil needs more lead time to make the product, so they require orders to be turned in by mid-July or mid-August, for delivery at the beginning of November. This year's orders must look mighty bleak for them to come out mid-year and say, "we ain't gonna make our number." But, that is exactly what they did.

Bank of America - Yes, that Bank of America. The one that nearly every person on the West Coast has an account with. Bank of America has lost half of it's market value in the last 4.5 months. That is a loss of $77,000,000,000.00 (with a "b") in four months, and oh so quietly has tis taken place. Raise your hand if you knew they are actively being sued by multiple partied to the tune of tens of billions of dollars. It is not a question of if they are going to lose, but how much the company will end up paying in damages. So the Big Five will become the Big Four, and possibly before next Summer. Doesn't seem like a good thing for the market's long term outlook.

Europe in Crisis

I have hollered about the PIIGS countries long enough, so you should be well aware of that problem be now. I will only say, if it weren't for the Arab Spring, you could look at a heat map of all the rioting in non-Islamic countries, and my case would be made. Austerity is not going down too smoothly in Europe.

There are two major stories that have come out in the last week that have not been covered by the American Press, and so here they are:

1. Italian banks, in a move to make themselves more handsome for bailout funds from the EU, have openly stated their intent to give fewer loans in the foreseeable future. That will directly impact the cost of everything at all of the world's favorite luxury goods makers. And right before 4th Quarter production runs begin. Ouch!

1.1. France, the main motor behind the Greek loans just one month ago, is now in the crosshairs for a Rating downgrade. There is a critical need for the government there to reduce their spending through passing Austerity legislation. This would show the EU that they were serious about their debt issue and, perhaps, qualify them for immediate loan assistance from the European Union. One problem: the French don't play that shit. The last time someone tried to thrust Austerity on the French, via "let them eat cake," her head wound up in a bucket. This, though necessary, will not be easy. So it cannot be good for the long term health of the market.

2. Only two (2) traditionally White Western countries are creditors at the moment. Wow, can you repeat that? Yes, I can. Only two (2) traditionally White Western counties are creditors right now.

Only the United Kingdom, which is on the Great Britain Pound, not the Euro, and Germany, which is everyone in the Euro zone is indebted to, are creditor nations in the Western world, at the moment. All of the rest of the European Union and the Americas are indebted to Asian countries (specifically Hong Kong, China and Japan). The Old Boys Club way of settling repayment "issues" out of the public eye is over! There is no more back room dealing to be done; things will not be done publicly, regardless of how embarrassing it may be.

China has already said they are not buying any US Treasury Bonds until they are backed by something other than "good faith." They want assets, and that poses a problem because I am not sure America has any assets. I am serious.

The United States

Which brings us back to the Untied States. The U.S. Credit downgrade was a major embarrassment to the political class, characterized by their flummoxed, rambling, uncoordinated and incoherent response to the news. The one unifying theme that both sides of the political aisle coalesced around was, the Super Congress being put together to look for further deficit reducing implementation strategies to bring the budget more in line. This is exactly why the more the investment community looks into what will come out of this Super Congress, the more uncertain, and unpalatable, the market's future become.

Here are a few factoids you can feel free to bank away:

There will be 12 members on this special committee. Yes, we elected 635 members to Congress to represent us (535 House of Representatives, 100 Senators), but the future of our country will be decided by only 12 members of that body - less than 2.5% of the total - and their decisions will be binding.

The findings, defining up t0 $1,500,000,000,000.00 (that's trillion with a "t!"), must be made public on November 23, 2011. For those keeping score at home, that is the day before Thanksgiving. But more importantly, two days before Black Friday, the most important shopping day of the entire American calendar year. I can't think of a better idea than releasing the most catastrophic slashes, sure to impact every soul in the country, in the nation's history, the day before everyone is meant to go out and spend all the money they do not have. Doesn't sound good for the market, does it. But wait, there is more...

After the Super Congress's determinations are made public the day before Thanksgiving, the law states that they must be voted on by, you guessed it, December 23, 2011 (since Congress does not sit on Christmas Eve or Christmas). So then these massive cuts will be made into law just in time to make it under the Christmas tree of every American, young and old. Historically, the last Saturday before Christmas is the second busiest day on the American shopping calendar. Though, since this year Christmas falls on a Sunday, that will most likely fall to the Friday before Christmas (American store usually close early on Christmas Eve, and I say "usually" with great hesitancy). So what is the date of the Friday before Christmas this year? Yeah, December 23rd. Do you think that bodes well for the market? For anyone? I don't either. But wait, there is still more...

If the Congress decides that they are afraid to vote the recommendations of the Super Congress into law - perhaps because it will be political suicide to have your name attached to this - and so vote them down, or decide not to vote at all, an automatic across-the-board cut of $1,200,000,000,000.00 (with a "t") will go into effect. So it's damned if you do, damned if you don't. Austerity is coming to a Christmas tree near you this holiday season. Which can't be good for the markets, can it?

On a side note, Max Baucus and John Kerry were just named to the Commission, so Democrats can forget it! 75-90% of the cuts will come from your side of the aisle. I'm serious.

In Closing, and Back to That Big "Rally" on Tuesday

The run up to a +429 point win for the Dow took all of 35 minutes. It was done with the full knowledge of everything I just posted ...by a few people. And those people just manipulated the market up so that they might get rid of a few of their more questionable investments. And now that this problem has been solved for those few, what is in store for the rest of us? Investors are not stupid, and they will be up all night, just like me, putting together this puzzle i have just laid out for you. When they walk into work tomorrow (Wednesday) things are going to be crazy!

That fake 400+ point rally has to disappear. So I will share with you that, the worst single day drop in the Dow Jones' history was on September 29, 2008, when it fell by -778 points. Due to the faux run-up on Tuesday afternoon, that number will be eclipsed sometime in the next 8 sessions, or between Wednesday, August 10, 2011 and Thursday, August 18, 2011.

Hold on to your hat.

December's Echo

More shakeout from December retail business (click headline to read story):

Saks To Cut 9% of Workforce

Saks, as previously noted, is one of the company's in BIG trouble. Along with cutting 1100 jobs (most of which I cannot imagine coming from New York, where the company is strongest), the company plans to reduce inventory by 20%, has decided to close it's Club Libby Lu chain entirely and suspended a number of benefits to employees.

Let me be the first to say, it won't be enough. Print it.

Macy's Looking to Make Further Cuts

Macy's is planning to cut their four regional offices down to two, eliminating Miami and Atlanta, with New York and San Francisco remaining.

As I stated last month after their announcement of 11 store closings, this is still the tip of the iceberg. I foresee lots more trimming in the near future, as the longer they wait, the more severe the measures needed to right the ship.

Not all my prognostications for the Retail Sector were negative for the Holiday Season.

Video Game Industry Roars in December

A 9% increase for December year-over-year, and 19% increase YTD 2008! 

That is a "roar", if ever I heard one.

The revenue for the industry also was over $5 BILLION for the month for the 1st time in history.

As stated in November, the value to cost ratio for gaming has no rival, with $30-$60 games providing, literally, weeks of entertainment.

Look for this win streak to continue.

Lastly, while most retailers are still refusing to fully face the realities of the new economy, one (the same as always) retailer stands above all the rest in how they are dealing with the downturn, Walmart.

Walmart Sees New Realities for Retailers

Love 'em or hate 'em, Walmart may not be the prettiest girl in the class, but there can be no doubt they are valedictorian. 

Lee Scott was on Charlie Rose yesterday, in what I think is a must see interview. He discussed the impact the economy is having on Small Businesses and suppliers, which has not been discussed with the degree of specificity Mr. Scott shared. 

As they move forward, the focus at their stores will be continued improvement in customer service (he said this is not a slogan, but a actual goal), a better edited buying selection (less is more in his eyes, which is sooooo smart) and better presentation standards (thus making the store easier to shop for the consumer).

Three simple goals, which will translate into a big win for the world's biggest retailer. 

Not sexy, just smart. A formula to emulate if ever there was one.

Psychology in the Economic Marketplace, Part I

Ben Bernanke needs some help. This is my contribution:

In 1969 Elisabeth Kubler-Ross described, with great specificity, the five stages human beings go through to cope with tragedy and grief, especially in regards to terminal illness. This led to ground-breaking research and new treatment models throughout the medical diaspora, and is now taught as an essential part of any Psychology 101 class.

The following are the five stages, more universally known as DABDA:

Stage 1 Denial "This isn't happening to me"

Stage 2 Anger "Why me?"

Stage 3 Bargaining "I'll do anything if I can live on."

Stage 4 Depression "Why should I do anything? It wont matter."

Stage 5 Acceptance "This is inevitable. I will make the most of what's left."

Before reviewing current economic conditions through the lens of these five stages, understand the terminal patient in our model is the old Western Financial Model, not America, which will re-emerge. 

Stage 1 - Denial

It is quite simple to point at Summer 2008 as America's "period of denial", though I have a differing theory.

The Denial Stage started in September of 2006, a month after home prices peaked, sending lenders (Banking Institutions) into an industry-wide panic as to how to fight off the inevitable fall in the Housing Sector/Recession, sure to occur during that year's 4th Quarter or the 1st Quarter of 2007.

The solution these lenders came up with was to open up the housing market to the only people in America that did not currently own the housing they lived in, people unable to afford to the costs of making such a large purchase, many of which where low-income racial minorities.

As ridiculous as it sounds (Literally giving money to people that CANNOT repay the loan), the rush of new home buyers had the duel effect of: continuing the home building boom in the country (intended), while simultaneously causing prices of existing housing inventory  to rise precipitously (unintended).

The bad loans were securitized (bundled, chopped up and re-bundled) by the lending institutions, then sold to others on the world financial market, thus leaving the lenders with zero risk for the very risky, highly predatory loans.

The endgame was set before the first loan was made. The system's death sentence was set before the first loan was made. This was the ultimate form of denial.

Stage 2 - Anger

The Anger Stage set in as you started to hear reports of "waitresses buying million dollar homes." Although the wider public had no idea of what was coming down the road, the lending institutions started putting the onus of impending doom on the people at the bottom of America's totem pole, the working-class.

"Why did they take such big loans?", they asked. "What were these people thinking?", newspaper headlines screamed. The term "sub-prime" entered the lexicon of American public as a negative connotation for, not the predatory lenders, but instead, the borrowers.

False outrage from the banking institutions gave rise to real outrage in communities throughout America, as home-owners began to find it harder to sell their homes.

Whether the  difficulty arose from lack of interest from new home-buyers, sliding home values due to unkempt or abandoned vacancies in their neighborhoods, or the lack of loans available to those that truly qualified, home-owners with inventory to sell found themselves at the front line of a problem they could never have seen coming.

To home-owners, anger was the only rational reaction to the unpredictable circumstance which had befallen them. To lending institutions, faux anger was the only way to keep the public eye off trail of the actual culprits.

Stage 3 - Bargaining

The Bargaining Stage is perhaps the most perilous stage in the process. In is the stage the full extent of the problem crystallizes, which in turn often leads to drastic measures being taken to improve the diagnosis.

The Bargaining Stage for this financial crisis was characterized by the Federal Reserve making steady cuts to the Interest Rate, all the way down to virtually nothing, to help reverse the future which was set in motion so long ago. Additionally, the TARP ($700 billion) bill was passed in haste by Congress and signed by the President, and an additional $2 trillion dollars in "emergency loans" was issued by the Treasury Department to the same lending institutions that brought the crisis to bear. The thinking being, everything was on the table to save the old system.

For home-owners the bargaining stage was disastrous, characterized by actions that only worsened their collective situations.

Upon the first evidence of a slow-down in the housing market, instead of reporting the origins and culprits of the problem, media cranked up their output of their perceived solution to the problem, home improvement. The HGTV network best exemplifies the new attitude, changing the majority of it's programming from a theme in line with What You Get For the Money - a show built around sharing how much home you can buy for the same price in several different cities, to more programming like Curb Appeal - a show about enhancing you ability to sell your home by making minor changes to your home. And for the most part, home-owners went for it wholesale.

Even with a downturn in the housing market, retailers such as Home Depot, Lowes and Menard's saw brisk business through the entirety of 2007 and the very early part of 2008.  Americans decided a new marble kitchen and/ or luxury bathroom would change their fortunes, with many taking out equity loans to make the necessary changes. 

When home improvements did not work, home-owners turned to incentives in hopes of unloading their unwanted property. Covering closing costs, down-payment assistance, new paint budgeting and assessment deferrals became the norm. The problem with incentives was individual owners could not compete with Developers, who were giving the same incentives, in addition to free scooters, cars, upgraded appliances and gift cards. The problem remained unchanged.

Lastly, and begrudgingly, home-owners started to accept their ability to sell their homes at asking prices was illusory, so they started to discount the prices of the houses.

This is what the media called the "bubble" bursting.

With home prices peaking in August of 2006, many major cities had not seen an even 10% correction (price drop to reality) as of April 2008. However massive discounting across the country led the national average to see a drop in the high teens by June of that year.

Two months later, in August of 2008, banks had stopped lending money, even to qualified applicants, and the die was cast.

Home-owners were left with a home the did not want, at a price they could not pay, worth  a lot less than was paid for it, and a home equity loan taken out to pay for the improvements and incentives offered to the increasingly shrinking home-buyer pool that found it virtually impossible qualify for a loan of any kind.

This led to the Stock Market failure in September and then, ultimately, to...

Stage 4 - Depression

In many ways, this is the stage we are currently in as of this writing. 

There is so much confusion about what happened, why nothing is seeming to have an impact on the situation and how to move forward, Americans for the most part have chosen to just tune out.

We would rather just ignore this mess, not talk about it. "This to shall pass", seems to be the refrain of the moment.

The is unanimity in the understanding of where we are in our history, however there is no real mobilization by the leadership. Has anyone asked of us to sacrifice anything since this crisis began? We were told to, "get out there and grab those bargains" for Christmas.

The collective depression has led to stagnation in the housing market, with sellers holding firm on prices at hat are admittedly overly-inflated, buyers looking for new homes at foreclosure pricing, financially overly-extended families literally packing up and walking away from homes their kids grew up in, and banks too busy predating themselves to open up the credit instruments necessary to get the economy moving again.

We are all collectively stung...and depressed.

Stage 5 - Acceptance

The very final stage before transition, though it is not necessarily guaranteed that everyone makes it here, as depression can be a mutha!

The Acceptance Stage is so critical, in that it is made possible by accepting the idea of transitioning from what we have known and grown comfortable with, to something unknown, yet inevitable. The peace that comes in this stage derives from gaining the knowledge that what we have experienced is no longer possible.

For the American public, acceptance will come when we decide: 

• That things cannot go back to the way they were in the 1990's.
  
• The house we own is going to be worth about 30-45% of it's 2006 value.
  
• Owning a home in their lifetime will not be a reality for a large number of people.
  
• There will be a rise in unemployment and an (almost) across the board reduction in wages in the near future.
  
• The ability to buy a new car, let alone every 4 years,  has already been altered for a large number of the populace.
  
• Volunteerism, social activism and local purchasing decisions are going to be required to assist in this turnaround, and I mean from everyone.
  
• Government is not gong to solve this, at least not exclusively.
  
• Wild expansion & profiteering is a thing of the past, slow growth is the new way forward.
  
• Rampant consumerism does not have to go away, but needs to at least slow down in the interim.
  

All things that I would never hope for, but are required to find the peace we need as a country to move forward and regain our footing.

Four decades ago Elisabeth Kubler-Ross changed the way the medical profession deals with the aggrieved, including those with terminal illnesses. Perhaps, using her ingenious model, we can find our way, as a country, out of the darkness of our current situation.

Can we do it?

With apologies to Bob the Builder and the President-elect, Yes We Can!

Slipping Into Darkness

I promised  today, Thursday, would be a hot day for the press, as retailers reported December figures.

Here are a few stories to illustrate the point (Click Headline to read entire story):

Deep  Discounts Fail to Help Retail Sales

Family Dollar Sees Boost This Year from Use of Food Stamps

The Grinch Stole Christmas: Retail Sales Plunged 4% in December

Macy's to Close 11 Stores Nationwide

Retailers Confirm, 2008 Holiday Season Worst in Decades

Saks December Same-Store Sales Plunge 19.8%

Neiman's Has a Lousy Christmas

This may seem like a lot to read, so I will ask that you only read this one in it's entirety:

A Brutal December for Retailers

Now that we have looked back, barring something spectacular being revealed, I only plan to look forward.

If one is a regular reader of the Oasis, these headlines are not surprising. There seemed to be no question this past holiday season would be horrible, the only question was how bad. 

By Thanksgiving the picture, literally (CLICK HERE), crystalized.

Our new goal, moving forward, is to discuss how to get through the coming downturn, both for retailers and consumers. Additionally, I will spot trends, spotlight innovative practices and continue to provide a lens to the retail marketplace for you, the reader.

Let's Get It Started!

Many Happy Returns

I was reading Ray A. Smith's article (U.S. Retailers to Report Grim Results)  on the Wall Street Journal website regarding the much anticipated December retail numbers due out Thursday and something sparked a memory of an unusual experience I had yesterday. 

Allow me to share and expand.

I went to my neighborhood Costco (a retailer who's praises I have sung on numerous occasions) yesterday and, as I approached the doors, saw something I have never witnessed before, a line to get in.

Mind you, yesterday's weather in Chicago was in the upper 20's, maybe 30, maybe.

Yet and still there were about 8-12 people standing in an orderly line outside the store. As I moved closer and closer I noticed the line extended some ways inside the store as well.  While walking and searching my wallet for the always misplaced membership card required to enter, I started wondering if the few items I needed was really worth standing in freezing weather.

Just as I resigned myself to the idea, I noticed the line was not to get inside the store, but an extension of the "Returns" line that was now, literally, winding outside the store.

The sight of that line and the thought, sparked by Mr. Smith's article, drove home a point I had not considered, how tough January business is in the retailing business.

This January, much like this December, is sure to be perhaps the worst month for retailing in, excusing the hyperbole, modern history.

Three things are needed to make a Perfect Storm in retailing:

• First, an uncertain economy. A bad economy is one thing, but "better the devil you know", they say. In bad economy, people have already made adjustments and pared down their spending habits. In uncertain economy, which is really a bad economy where people refuse to accept that reality, people attempt to maintain their lifestyles regardless of how difficult the reality of doing so is. This leads to large spending expenditures, followed by mass returns, pawning and borrowing. Sound familiar?

• Secondly, you need swollen inventories. Swollen inventories take up room needed to show new goods, inhibit buying teams from investing in newer, more relevant merchandise and forestall payments to vendors, banks and other creditors. If you consider we just came through the worst holiday season on record, and 4th quarter is when retail inventories swell to their highest levels, inventories are now HUGE, everywhere. This is why you are seeing, "Buy 1 Get 2 Free" signs in place of, "66% Off" signs popping up in stores. They seem to be the same thing,and while the latter gives customers merchandise for 1/3 the price, the former gives customers merchandise at 1/3 the price, but additionally removes two more items from the store's inventory. Inventory is a major problem at virtually every retailer right now.

• Lastly, you need reduced consumer foot-traffic. This point is not as obvious as it seems. Of course January is going to be infinitely slower than pre-Holiday business. However this January is sure to be slower than most because of something I wrote about in November, the greatly reduced number of gift cards sold this past Holiday Season. Gift cards ensure future business, period. When customers decided to steer clear from purchasing gift cards over the holidays, the message was clear, "We are not sure if we will be back, or if you we will be here when we do." The combination of loaded gift cards and huge discounts would have made for a festive January in retailing, instead we have the opposite effect.
  

Coupling these three factors with record rates of merchandise returns brings the problems many retailers face more clearly into focus.

A Perfect Storm has descended on the entire retail landscape and will have a disastrous impact on this, the last fiscal month of the calendar year. Look for Thursday's numbers to be bad, and this month's numbers to only accelerate the inevitable thinning of the retail herd.

Headlines vs Reality

There seems to be a bit more chatter in the press about a "new economic outlook" for the country. Some economists are even talking about a "mid-year turnaround" (read THIS).

Well I did a cursory search on the housing website hotpads.com for "foreclosed property" in my zipcode (60607, click through HERE), and WOW!!!!! I discovered something I could not have known: my neighbors are feeling the absolute crush of the economic downturn already. There is no denying this fact when there are 40 foreclosures within a 6 square block area.

The map below is startling, with each red house representing a foreclosed residential property (CLICK FOR LARGER IMAGE):

Well over 600 foreclosures in 8 of the best neighborhoods in Chicago: Streeterville, Gold Coast, Loop, West Loop, River West, West Town, New East and (oh my goodness!!!!!!!!!!!!!) South Loop, which is starting to get national attention for it's housing woes. 

Read a bit more about South Loop HERE (read the comment section as well, there a few people I truly respect that weigh in on the topic).

This does not even aggregate all the foreclosure data available. There are lots and lots more, but to stare at in visual form on a map just brings the scale of the problem into focus.

Hunker down people, in the world of economist and newspaper people, alternate reality is the new reality. I am not young and I have never lived through what we have experienced thus far, let alone what cometh.

Best of Inbox 01.02.09

Here's the best nugget I found in my box today:

I can't believe I am saying this, but NOW is the time to make your move. 

95% off is less than free. Here is the math on my theory.

If item a is $100 and tax is 10%, then your cost to take it out the door is $110.

If that item is 95% off, the math is as follows:

$100 - 95% = $5 and 10% tax of $0.50, so you are paying $5.50.

That is 45% less than the tax you would have paid on the item at the original price.

So as Jean Luc Picard said best: "ENGAGE!"

Required Reading

I implore you to read THIS article.

It deals with a number of themes I have discussed over the last month regarding the mindset of the American consumer and, most interestingly,  our inability to alter our shopping habits.

The title is the tease:

"People Pulling Up to Pawnshops Today Are Driving Cadillacs and BMWs"

And so it continues to begin...

Another Reason To Run...

From retail stocks.

The natural squabbles that arise in crisis are starting to play themselves out. However, this one is huge. Primarily because it deals with what has already happened, as well as the future.

A little known side of retail are the guarantees that vendors make with large stores for their profit margins. Retailers are more likely to buy more merchandise if they know vendors will cover the difference for the items that are sold under the agreed level of profitability, usually in the neighborhood of 40%.

This article (HERE) spells out the "war" playing itself out now between vendors and retailers, due to the tremendous, and early, markdowns taken this holiday season. The thing that makes this so critical is, this is the time of year retailers usually await checks making up the difference in the margins from vendors. This year the opposite is happening, with vendors negotiating to receive re-payment for the unprecedented discounting of their goods by several major retailers.

As Cotten Timberlake at Bloomberg reports:

If vendors succeed, they could recoup $1.2 billion from Macy’s, Penney, Kohl’s, Nordstrom, Dillard’s and Saks Inc. alone, based on analysts’ average estimated fourth-quarter sales of $24.2 billion for those six chains.   (emphasis is mine)

Which means, not only will retailers be hit by much smaller profit margins than anytime in the last 40-50 years, not only will there be no gross margin dollars flowing to them from vendors that usually guarantee those profit margins, but the retailers, after all this bad news is sorted out, will be making payments to these vendors, further reducing profits.

That may be the biggest story in retail so far to emerge from a season of big stories.

Keep an eye out.

Home Alone

From my inbox 12/30/08:

I cannot, for the life of me, ever remember a furniture store doing "additional" percentages off  on clearance. Usually it is a straight mark, with prices reflected on the ticket.

One thing that has always worked for the home market, is really working against it right now. That thing is long leads on delivery. When you ordered a sofa and it took 3 months to deliver that gave the furniture store plenty of time to resource and negotiate, thus ensuring maximum profitability. 

They are now faced with inventory showing up that was ordered in May, June, July, August and even early-September. This has caused a glut in inventory, leading to high storage fees and forced reductions on goods to get them out the door.

If you go 3 posts back on this blog you will see I predict very bad things for all things home, save the cookware category.

The main problem retailers are having now seems to be an enlightened consumer. Everyone knows prices are going to go down further. So those few people with money (and there are only a few) are sitting on their hands until after the new year to see where the pricing game goes.

It Begins!!!

From my 12/28/09 inbox:

There is no reason to panic, this is all expected...if you have been following the blog, that is.

Thinning Profits (and the Herd!)

The following are photos from my monthly walk along Michigan Avenue, Rush and Oak Streets. This two mile stretch has every store, covering every niche, in the entirety of the retail marketplace. What I decided to do is document what I saw, where I saw it and, just to get 2009 on everyone's mind, share what I think the fate of the particular retailer holds in the near future.

Before we start, please understand this very important fact:

With VERY few exceptions, when a store sells something for 50% off, they are losing money on the item. Yes, I know all about margin builders and the like, but those are a very rare exception in the overall assortment.

The reason for the loss is simple, here is an example:

Store A buys a dress for $40
Store A decides to sell the dress for $100 (a 55-60 mark being about industry norm).
If they sell the $100 dress for 50% off at $50 it would seem they made $10 profit, right?

Wrong!

Store a had to pay for the trip to New York for it's buying teams.
Pay for the paper to write the order on.
Pay the salary of the buyer that makes such decisions.
Pay for advertising, in-store signing and and the like.
Pay for medical, dental, 401k and other retirement benefits for their employees.
Pay for the real estate costs, insurance, design and fixture costs for their stores.

There is more: loan repayments, legal fees and market research, but you get the idea.

Such costs cannot be covered from that $10 profit, unless you sell hundreds of millions of those dresses (which is what Walmart is so good at).

That being said, the signs you see below should read as something out of SAW IV, not Happyland.

While this will bode very well for the consumer, it, quite literally, means the end for more than a few of these stores.

As always, all images can be clicked to get a larger, more detailed view.

Let's get it started:

This is Aldo, the shoe store that competes against 9 West when their goods are full price and Payless once they put their goods on sale. They are over saturated and overly dependent on mall traffic to drive sales. When was the last time you heard a friend say, "Hey, let's go to Aldo." I thought not. I see this chain closing 50% of it's locations, and/or seeking bankruptcy protection by May 2009.


Brooks Brothers will be fine. When the economy goes sour, people dress better. Even during the Great Depression this was the case. People without jobs wore suit and tie, just to feel a part of society. Brooks Brothers is an iconic brand that more than a few people will discover a other options from overseas start to disappear. Don't look for expansion, just look for them to make it through the economic downturn in one piece, which is sort of an A- or B+.


Walt Disney stores. During the Great Depression this company was hit so hard it had to do something radical just to remain relevant. What they did was start doing live action films, s Snow White and the like were not really meaningful after the war. This time, Disney is better suited for the though economic climate ahead. The acquisition of Pixar Studios two years ago gives Disney a foothold on smart, cutting edge filmmaking that not only deals with tough issues and ideas, but seeks them out. That being said, they SHOULD close their stores, but won't. Tourism to the Disney family of theme parks will plummet, so giving your child a little piece of Disney, if even in the form of a Happy Meal, may become all the more important. We'll see, but Toys, as a category, took a bath this holiday.



Sak's Fifth Avenue is going away. If not altogether, much like the sign below, 75% of it will. Someone has to convince me why not. See, you can't, can you? Saks has long thought itself Neiman's and run itself like Enron. If someone peeped behind the curtain, OOPS! you got us. This holiday season should pretty much end what has been a 6-7 year flirtation with a $5 stock price. Credit is tightening, so look for investors to pull of their roots and  go elsewhere. Sak's is nice, but not necessary. This will be one of the biggest, in name, casualties of this economic downturn. Obama Stimulus, or not.


Neiman Marcus is really in a class by itself. The brand represents the pinnacle of the American retail marketplace. They will benefit more from Saks' demise than anyone beside, perhaps, Nordstrom. Without the presence of Sak's, Neimans should see better gross margins due to not having to price match/ compete in many of their markets, which will lead to more profitability. Neiman's would be one of my real winners for 2009, save for one mistake...and it ain't small.

Why they decided to open up so many of these CUSP boutiques is beyond me. They are aimed at just the market niche that is most impacted by, first the housing collapse and now, the Great Recession. The combination of $600 blue jeans, $1800 driving jackets and long-term mall leases does not make for a good recipe for the future we face. This ultimately will be a VERY costly drag on the company and expect them to exit the idea entirely by the beginning of 2010.

BCBG, the retailer that never really was, will go back to selling it's goods in stores exclusively. For the life of me I cannot think of a more gracious thing to say, other than the sooner the better. 50% reduction by the beginning of 2010, perhaps entirely. They still have a strong, desirable brand for young adults, though.


Juicy Couture, in short will be in big trouble. Rapid expansion, usually means rapid reduction. Juicy has a great brand, but they are waaaaay overextended as far as different balls in the air. Look for them to rapidly shift to licensing, if that is an available option. Store closings and a return to being a vendor, not a retailer.



Yves Saint Laurent will be fine. I just wanted to illustrate the point that EVERYONE is on sale.



Children's clothing boutiques will be one of the first to get wiped out. Over the last decade no category has had faster growth and prices within this category have not been tied to anything sane. $100 shirts, $125 jeans and $70 t-shirts have become the norm from NEW DESIGNERS, not even luxury brands.

All things related to children will see growth, as people will think of their kids before themselves, but most Childrens boutiques will take a back seat to the Target's and Kohls's of the world. This has actually already started, evidence being the bath toy's took this December.



Home related stores are already in deep trouble (see Home Depot), though few really know by how much. To get a grasp of the outlook for this segment of retailing you need only one fact: January is the second most important month of the year for furniture-makers. So many home stores will go under within the first half of this year, survival will come down to how long you can hold on? If you can make it to July, and less than 50% will, you may have a chance at getting through the year flat. Habit will drive people to stores in the first quarter of the year, but I cannot think of a segment of retail so heavily dependent on credit, save automobiles. This obviously is a recipe for disaster.



Bye-Bye...



Those in the know understand why I included this photo, as a "sale" sign at this company is virtually unheard of. The early part of this economic downturn will benefit "stay-at-home" stores which related to: cooking at home instead of going out, watching dvd's at home as opposed to going to movies and buying liquor for home gathering as opposed to going out to bars and clubs.

What happens after the summer within these categories is anyones guess at the moment. If things start to rebound (which I don't see) they will maintain their balance. Though should there be no clear vision of an end to the downturn, look for them to be hit hard by September, complete with lots of closings and bankruptcies.



Not enough stores at MaxMara to have mass closings, but they will feel the realities of the economy, hardcore. Light inventory and staff cuts are in their very near future.



When you sell everything in your store for $20, as H&M does, you cannot survive by selling everything for $10. Margins are too thin at this company to help pay for what has been a very rapid expansion. Look for LOTS of store closings for this European company, same goes for Forever 21 and Charlotte Russe. Bankruptcy is not out of the question for any of them.



Let's be real. Borders is in big trouble. Not liquidation trouble, but trouble nonetheless. Immediate store closings after the new year, staff reductions at other locations and possibly bankruptcy protection for reorganization purposes. The good news for them is they have been putting out fires for 6-8 months at the company, so they are a bit further along in their planning than other retailers.



Ralph Lauren is on SALE!!!!! Run, don't walk!!! Their strong department store business will carry them for the next few years, one of the few companies with such a luxury.



Banana Republic (Gap and Old Navy) are in some very big trouble. Over-saturation in every market, irrelevant fashion assortments and long-range turnaround plans aimed at fashion, not efficiency mean bad news. Look for lots of closings, lots and lots of corporate lay-offs and a possible split of the company, which might be best. Banana, however, will be hit the hardest. It participates in the niche with the most competition, 20-40 year-old new professionals. Zara is going to dominate this market once it gets set with it's expansion, Express has more money and focus (though they are already suffering) and their clientele is already starting to dip into the XXI's and Junior departments at larger retailers in search of discounted merchandise.



Bye-Bye Talbot's! I don't see how they will emerge from this in one piece. Immediate store closings, immediate mass lay-offs and perhaps even liquidation.



As I stated earlier, Limited Brands (Express, Limited, Express Men) is going to take a significant hit. They have too many stores to begin with, but the fact they control the entire process (from design, textiles, maufacture and shipping) of everything in their stores may save them in the long run. Wexler is smart and visionary, so we will see if he was able to make the necessary adjustments to his machine before September, if not....ouch!



Very hard to write these words, but Crate & Barrel may not make it. I am a Chicagoan, so I grew up alongside this company. Going to the first store with my mother when I was small boy. That aside, the company has become less relevant with each passing year due to more copycats, with lower prices. In the movie It's A Wonderful Life, Clarence the angel tells George Bailey, "every time a bell rings, an angel gets its' wings." Well in the non-celluliod world, every time an Ikea opens a Crate & Barrel loses it's wings, or appeal.

I am pulling for you C&B, I just don't see how you emerge from this unscathed.



Ann Taylor closing are a given. Too many stores, reduction in clientele (less job holders means less clothes needed), loads of competition at every conceivable price-point and bloated inventory levels all point to bad times ahead. Look for quick moves to bankruptcy protection and, ultimately, a BIG downsizing by the middle of next year.



These types of stores (H20 and Bath and Body) are basically gone. They can only operate profitably when selling goods at full price, which is no longer an option. So take this test, will you spend the $15 you have on a new shirt, sweater, groceries or six ounces of green-apple bubble bath. Thought so!



The question for retailers like Levi's becomes, will their customer base continue to buy jeans from their boutiques at $90-$145, or start buying the lesser-weight versions from Kohls for $19.99-$40.00? I think the latter is more probable, so that is not good news for the store side of Levi's.



Ditto for Kenneth Cole. This is value-brand that has never been priced at value. So as a retailer, good-bye! As a vendor, you have a bright future.



Ditto Emporio Armani. The good thing for this company is there are not many of their stores to close, but close they will.

Stores that are not on Michigan Ave. that face major problems:

Sears - Kohls is kicking their butt and will continue to do so. Tightening credit means far less major appliance sales, less home-building means fewer tool sales. How can they withstand a double-hit like that in their two main areas of strength?

Macy's - Contraction is inevitable. Look for closings of 75-200 stores rather quickly. Bankruptcy is not out of the question, as they have massive debt payments due in the first half of 2009. Swollen inventories and lease obligations spell bad news.

All Jewelers - Contraction in this market will be unrelenting. A bad 4th quarter (-35%) will only make the thinning less merciful. Look for the elimination of 25-50% of all mall-based jewelers by June.