It's the moment of truth for the market: could it handle the removal of the word "patient" by the Federal Reserve at its first meeting of 2015? Oh yes, that's right folks, the new buzzword being used by the Fed may have just been a short-term measure to appease investors and prevent a big sell-off into year-end 2014.
Why, you ask? The labor market is clearly gaining momentum, as seen in today's December employment report and upward revisions. The job situation is such as to suggest the Fed lifts rates a quarter point definitely at its second meeting of the year, in which case it articulates that finality at it the initial meeting. In my view, there is still speculation in the market that the Fed does not move on rates this year.
To get a handle on whether this will go down, pay careful attention to how the hot, sexy names of 2015 like GoPro (GPRO), Tesla (TSLA) and Facebook (FB) trade today. In a rising interest rate environment, I think you will see an unwind of high leveraged bets in the tech sector, bets that underlie the strength in the aforementioned richly valued names. BTW, I did like the manufacturing number in the jobs report-- it seemed to nicely counter the weak global PMIs we have received.
Retail Store Closures
So it's certainly odd to see more retail store closures (this has been going on since 2009) amid stronger U.S. job creation, right? Well, first some background. J.C. Penney (JCP) quietly announced on Wednesday that will be closing 40 stores, or 4% of its store base, in 2015. By the end of 2016, J.C. Penney will likely have 1,000 stores, down from the projected 1,020 to end 2015. Thursday brought with it the announcement of 14 Macy's (M) store closures. Abercrombie & Fitch (ANF), Aeropostale (ARO), American Eagle Outfitters (AEO), Sears (SHLD), Target (TGT), and even Wal-Mart (WMT) are next up to announce closures when they report holiday earnings in February.
The wildcard of the group: Best Buy (BBY). My conversations with the company have led me to believe it's comfortable with its store base at current levels, could see some closures, but not massive ones (I think the company does exit all international operations by the end of 2017).
Here is why this is happening -- other than it has to, in order to thin out the herd.
- Mall owners are driving up rents in top locations to pay for pricey, multi-year remodels. Those remodels include complete food court overhauls to install sit-down eateries, improved flooring, lighting and other fixtures. Bye-bye McDonald's (MCD), hello P.F. Chang's. Mall owners are in a prime position to extract more rent from tenants in their best malls because hey, tenants are closing up shop at malls with poor traffic trends.
- The massive shift to tablet and mobile buying is requiring a capital reallocation on the part of retailers. Names like Abercrombie, Gap (GPS) and Target have to cut funds from opening and operating physical stores and reinvest them in laying critical digital infrastructure. I assure you, the infrastructures of countless retailers are ill-equipped both against hacks and new shipping capabilities. I honestly think we will get outright website failures in the next few years, failures meaning the site of a major retailer gets shut down for days due to a catastrophic event such as a hack or an overwhelming number of orders.
- The U.S. consumers, years after the recession ended, are still not shopping as they have in the past. While I am seeing signs that consumers are willing and able to spend more when they are forced to (back to school, holidays), the days of buy, buy, buy, every time something new arrives in the mall are gone. I am unsure if those days of leveraging up one's credit card full of frivolous items will return over the life of a retailer's store lease (many of which are for five years, and are coming up for renewal in droves right now industry-wide). Hence, execs are taking a critical look at what an ideal store base should be for the year 2020, and concluding it's fewer by hundreds than there are in operation today.