No Quit in the Consumer

 | Feb 26, 2014 | 1:58 PM EST
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Don't bet against the consumer -- it's a sucker's bet. That's what we learned today when we look at what's roaring, which is pretty much everywhere we shop. And it is terrific news for a stock market that needed to be more grounded in reality.

Ever since this year began, there's been a cloud over this market. That cloud has been the consumer. We've heard non-stop bad news. Consider the litany of what's challenged the shopper.

First, we know that jobs have been hard to come by, right? Two punk non-farm payroll numbers in a row is the definition of what hurts consumer spending. You don't spend when you are losing your job, or worried about losing your job, or can't find one. The big macro numbers, the government tallies, made us feel heartsick about the consumer's ability to spend, and two-thirds, that's right, two-thirds of our economy is driven by the consumer -- much higher than pretty much every other nation in the world because, alas, we are a nation of shoppers, or at least we were.

Second, the federal government failed to extend long-term unemployment benefits while at the same time cutting back food-stamp allocations, two of the most important backstops for consumer spending. That's a nationwide drain on purchasing power.

But not as big as the third impediment: the heating bill. Most U.S. homes are heated by natural gas and natural gas has spiked; in many cases, it has doubled. That's a huge hit to the consumer's pocket; some say bills have gone up on average of $300 a month since this miserable winter began.

Fourth, speaking of the miserable winter, we know that the nation had its worst winter in 37 years. That's right, the national weather picture kept people from going out, kept stores and malls closed, and generally derailed normal spending patterns. When merchandise isn't sold, it gets marked down, which means profits get hurt, and when profits get hurt, stocks go lower and the entire economy stalls.

Fifth, the competition seems to have stiffened to the point that even the quality retailers are struggling. Wasn't that one of the takeaways when Whole Foods (WFM) reported and couldn't make its own projections? Maybe consumers were no longer paying up for the natural and organic foods they seemed to have craved or, perhaps, there were too many stores vying for the same consumer. Whatever, this growth sector of the economy, one of the brightest lights, seemed to dim, perhaps not for just a brief period.

Sixth, Wal-Mart (WMT), the nation's largest retailer, missed numbers big. A hundred million people shop at Wal-Mart for heaven's sakes, so it can't be Wal-Mart, right? It has to be the consumer -- the consumer's not even spending at the biggest discounter around. How slow is this economy? It must be nastier out there than we thought.

Seventh, seasoned executives like AutoNation (AN) CEO Michael Jackson told us that the country's largest car dealer's lots were brimming with unsold cars. "Higher inventories, market-share ambitions, slowing growing market -- the tinder is there this year," Jackson told us from the Detroit auto show earlier this year. Holy cow, autos have been hugely important to the growth of the U.S. economy and now there's too much inventory? Weather or not (no pun intended), what could be worse news than that? The consumer's love affair with cars, one of the driving forces of the nation's comeback, has cooled. What's next? Layoffs in this hiring machine?

Eighth, we had been hearing that even as consumers have stopped buying clothes ages ago, they are still buying video games, stereo equipment and televisions, all of that cool stuff sold by GameStop (GME) and Best Buy (BBY), right? Not so fast. Both lowered the boom on earnings far more than anyone thought possible. Two darlings eviscerated. Destroyed. Then, insult to injury; Conn's (CONN), the only hard-goods retailer we thought was doing well, got blown away, cut in half -- not a two-for-one split -- when it announced earnings. Of course, what were we thinking, the consumer's dead but still buying great speakers and beautiful big-screens? The consumer isn't spending on wardrobe and not spending on the home either? Makes sense, housing has slowed -- those darned higher rates -- and nobody's going out of their apartments to buy new homes anyway! If your house isn't going any higher in value any longer, why make it nicer?

Ninth, Target (TGT), one of our favorite discounters, reported a terrible security breach, thereby assuring that still another national retailer, a rival to Wal-Mart from the old days, was going to fold up like a cheap K-Mart suit. Oh, and how about K-Mart and Sears (SHLD)? Nothing good there, either.

Finally, the coup de grace, Amazon (AMZN). Not only did people decide they weren't going to the mall this winter, maybe they weren't going back ever. Or at least a big percentage of them. Amazon, while not delivering the greatest top-line numbers in its history, did more than any other company to wreck the notion that we still like to shop. Using Amazon is an admission that we hate to shop and, remember, shopping is two-thirds of our economy.

With the market trying so hard to break into the black for the year after being down about 6%, we came into this week with a level of trepidation about retail that was off the charts, just when the majority of retailers were reporting. How bad could this be? A disaster in the making?

And then it starts looking real bad Tuesday. First, a disappointment from Home Depot (HD) -- boy, it's been a while since we have seen that happen. Minutes later, Macy's (M) hits the tape. This, the last good department store chain, misses and even tells us that January was very disappointing. This is CEO Terry Lundgren, one of the bankable 21 from Get Rich Carefully for heaven's sake, saying negative things?

How badly will we be hit? The stocks are looking down a couple of percent before the opening. Then as we get closer to the morning bell, they are down only a percent, they open barely down, and then they soar. They soar? Why? Because all of these stocks have gone down or done nothing ever since the 10-point drumbeat got drilled through our heads. Was it an aberration? Nope, today Dollar Tree (DLTR) misses and it rallies. Target does a terrible number, but no more terrible than we thought. Lowe's (LOW) actually proves to be doing much better than last time. Plus Macy's and Home Depot roar again? What the heck? Is the market nuts? No, it just turns out that the stocks reflected only the negatives and none of the positives, positives like the stronger home sales we got this morning.

Retailer after retailer confirmed that spending on homes remains strong. Appliances, paints, electric, plumbing -- they turned out to be OK after all. Positives like good sales since Valentine's Day, as many of these companies cited, which meant fewer markdowns and giveaways, so profits aren't being hurt. Positives like decent spending on apparel, women's' clothes, perfumes, expensive handbags -- the stuff no one counted on.

It turns out that, once again, the consumer just won't quit, even as so many short-selling funds and mutual funds stopped believing. The result? We get the magnificent rally in the group and a sigh of relief that even extends to beat up auto stocks and industrials connected with residential housing. Maybe, just maybe, things just aren't as bad as we think with the most important two-thirds of the country. Perhaps it is indeed rational to see the cheapest part of the market rally and take the rest of the averages with it.

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