I think we have arrived at a crossroads -- one at which I arrived weeks ago -- at which it pays to do three things: (1) try and trade headlines; (2) short the market; (3) stay the heck out of it altogether.
It shouldn't be a surprise that I am mouthing any of this handy advice. Figure it this way: The programmed machines, and the dying art that is floor trading, are finally starting to realize that the economy is quickly approaching a lose-lose, short-term-death spot. The market has been quietly warning of this impending rough patch, but one just had to be cognizant of where to look. For me, it came over a week ago, when consumer discretionary stocks began to technically disintegrate and transports were doing next to zilch as most market participants gorged on misguided euphoria juice.
So, instead of forcing any unwarranted market call, I thought it best to add a little value by decoding the U.S. consumer. Very soon, the stories of the final days of the holiday season will be told, and they will confirm the poor action in the stocks -- or so I believe, since Mr. Market is a blood brother. Here are bunches of behind-the-scenes notes I have concocted to unleash in coming weeks, including at 30-and-under parties this weekend.
Fiscal-cliff fever has reached Main Street. I sensed it permeating the minds of many on Black Friday, and it seems to have escalated ever since. I can't explain how I know; just trust me. I've been doing this for a while.
Call: Consumer-Stock Sector
On Cyber Monday, I made the decision to exit all consumer-facing stocks for clients -- which, incidentally, explains why I've hardly made any mentions in this area. If there is one lesson I have learned through the years, it's that one shouldn't be married to consumer stocks when there is a strong conviction of an impending sentiment shift.
In this case, my view was that Cyber Monday would be the climax in terms of holiday enthusiasm, and that the season would progressively worsen from the standpoint of sales and sentiment. If you have exposure to this sector, I suggest you cut bait and mitigate further losses, as we are staring into a double storm. The first phase of it is that market sentiment will slam stocks, signaling soft conclusions to the fourth quarter. Next, as fourth-quarter outlooks are issued in early January, stocks will be whacked again.
High End vs. Low End
The high-end is a different story, though it's no great shakes either. This area is able to tap into three powerful, beneficial forces that have come about in 2012 to maintain holiday spending plans: rising home values, rising stock prices and better jobs for those with a more advanced education. I don't think there will be a 2008-to-2008-like slaughter in high-end consumption for the holidays, but I would bring the following areas to your attention.
Tiffany (TIF) issued another dreadful earnings-guidance range last week, and the stock got pummeled. The main problem: sales weakness in items prices under $500. This area is usually ripe for sales to "aspirational luxury shoppers," or those who can't really afford something but buy it anyway.
Away from that, I've seen really disturbing price action in luxury retail stocks since Black Friday. The key names to look at are Nordstrom (JWN); Macy's (M), which owns Bloomingdale's; Coach (COH); and Michael Kors (KORS). The two favorable outliers have been Saks (SKS) and American Express (AXP), and that makes me think upper-upper-end consumers will have a normal holiday season. (I assume that, in terms of tax-planning, they are well taken care and are the ones that have truly benefited from rising stock prices and so on.)
How to be Actionable
Remember, I personally am uninvolved. But if you are a cowboy or cowgirl, keep trading around odd, positive stories. Best Buy (BBY) still strikes me as having upside potential off a possible deal (see my recent posts on Columnist Conversation). Also, it's Saks as opposed to American Express, and J.C Penney's price action hints at rare, respectable holiday news: play the rumor and dump at earnings time.
Fun Talking Points to Have Handy
- The majority of consumer stocks are flat to down from when Black Friday/Cyber Monday data were issued.
- Michigan consumer sentiment is 10 points away from the average of the most recent recession.
- Lululemon's (LULU) new puffer jacket line was actually met with price resistance; the price needs to be re-ticketed.