Consensus Advisors: X(mas) Factors
Commentary by Michael A. O’Hara
Through a special arrangement, presented here for discussion is a summary
of a current article from Consensus Advisors, a boutique investment and advisory
firm specializing in the retail industry.
As we consider the stream of macro news stories arriving daily and last week’s
election results, it makes sense to explore some of the x-factors that could
cause actual results to differ materially, positively or negatively, from these
projections.
Possible Negative Stimulants:
Geopolitical Activity. Recent news of foiled terrorism plots still
remind us that there are people out there who gain from unsettling our culture,
and the ultimate goal of these people is not to blow up one synagogue or subway
station, but to permanently alter our way of living.
Commercial Real Estate. There has been much discussion in the press
about the re-valuing of home mortgage assets held by banks, but the average
American has no visibility into the value of commercial real estate (office,
industrial, multi-family housing and retail) loans held by lending institutions.
We hope that these assets are also now properly booked but beware if some high
profile property collapses a few weeks before Christmas. The wrong story could
trigger broad-based discussion of a double-dip recession in the press and among
the consuming public.
Residential Real Estate. It is hard to imagine any good news coming
from this sector over the coming two months. The best we can hope for is the
absence of more bad news of significance.
Unemployment: While the release of unemployment statistics in November
and December are likely not to deepen shopper anxiety this holiday, new layoff
announcements at the local level can have geometric effects regionally.
Possible Positive Stimulants:
The November Elections. The economy should benefit if the political
parties in Washington can come to an agreement on ways to address unemployment
and grow the GDP.
Income Taxes. If anything is done to avoid a tax increase or even
cut taxes over the next month, it is likely to have a positive effect on the
private sector consumer’s sense of his or her wealth.
Corporate Earnings and the Stock Market. Most of the third-quarter
earnings reports from major public companies are good or at least as expected. The
Dow Jones Industrial Average has climbed over 11 percent since August 26. With
careful inventory management, cost cutting measures and the value of the U.S.
dollar helping our exporters, corporations and the stock market may well offer
the perception of stock portfolio stability (or possibly gain) to shoppers
as they enter the mall on Black Friday.
Technology. Three years ago, when I sat in my easy chair, I was pretty
much limited to reading the newspaper or a book. Today, I can do that plus
search the web, download music, listen to a radio channel that plays songs
geared specifically to my taste, watch videos, chat with my friends, check
my work calendar, monitor the Celtics game, plan a vacation and work on a spreadsheet,
all through a magical device called the iPad. These devices will stimulate
the consumer’s imagination during the holidays this year like never before.
Discussion Questions: What would be your positive and negative X factors
that could make or break the upcoming holiday selling season? Are there others
you would add that may have been missing in the article?
Barring something catastrophic, the situation with extending/not extending the current tax rates would seem to be the most direct and wide reaching for US consumers.
If the rates are extended it will provide a measure of stability which could buoy sales. If they are not addressed or the rates are not extended, then the uncertainty or negative impact could dampen the overall results.
Michael has a very rich list. To me, the factor with the biggest potential upside is the election. If the 535 individuals in Washington can figure out how to achieve some form of stability and predictability in their activities, the chances are good that corporate management would deploy some of the almost $2 trillion in cash on their balance sheet, employment would go up, and we could have a very strong holiday season. Yes, I know it’s unlikely, but hey, a person can dream, can’t they?
Michael’s list may be rich, but it’s missing something very important–the combination of high unemployment and too much inventory making for itchy retail executives.
The inventory number has been very hard to quantify, since we hear many conflicting stories in the media and anecdotally…however, it seems inventory is up way more than projected sales increases are (based on port statistics). A weekend’s bad sales trend will cause nervous retail executives to pull the discount trigger sooner and often. The effect will be to perhaps sell the same # of units, but at a depressed rate.
Paula makes a good point. Depending upon early season indicators, merchants may find this year’s game of “markdown chicken” so fraught with anxiety that they jump too soon.
I also believe our pundits have tended to underestimate the enduring social damage that has been wrought by the past few years of economic woes. The unemployment rate seems thankfully to be stabilizing, but it only reveals part of the picture. Families are frayed; prospects look grim for graduates. The working class is hanging on in quiet desperation – laboring harder and longer to support their less valuable homes and service their revolving debts which have been brutally restructured by the banks. Much of the nation is confronting what feels like a permanent downward change in their future prospects. I’d forecast a rather thrifty holiday season for those folks, early retail markdowns notwithstanding.
The recent Fed efforts to weaken the dollar will drive the cost of imports up. This will likely have little effect on the pricing for the holiday season as much of that inventory is already in the country or on the way.
The biggest negative factor will be the consumer’s continuing effort to reduce debt. Reducing debt does not mean staying even, it means less money to spend. Consumer debt fell in the third quarter by $110 billion, making eight straight quarters of decline. Overall, U.S. consumer indebtedness has declined by nearly $1 trillion over the past two years. Yet, it is still can be cut by $4 to $5 trillion to get to the level that it was in 2000.
For those consumers with a job and discretionary income this will be a normal spending season unless there’s a national disaster. This group tends to welcome early holiday merchandising since gives them a sense of what’s happening and they want to be in there with it.
For those without a job or with very little discretionary income, early exposure to what you can’t participate in fully is a depression.
What would be a big boost to the Christmas selling season would be a huge uptick in jobs and a much greater sense of certainty about what the Fed will be doing in 2011 about taxes and other things that could affect our lives.
This information is from a report on The Wall Street Journal site. A survey by BDO USA of 100 chief marketing officers at retail found an average increase in inventory of just under three percent for the holiday season. One in three said inventory had “measurably increased” compared to last year while 16 percent said they were carry less than in 2009.
The last two holiday seasons, just about everybody thought if there was going to be a surprise with how sales ended up it would be a downside surprise. And rightly so. This year, while I’m certainly stressing to my clients to remain cautious and prudent, if there is a surprise, I think it will be on the upside. For all of the challenges that still exist in the economy, my sense (and it’s only a sense) is that the psychology is changing and that holiday sales could be better than expected.