Bi-polar markets!

Posted by Eric LeRiche | July 8, 2010 .

“It was the best of times, it was the worst of times…”

I know it’s a bit saddle-worn, but old Chas. Dickens was 1 heck of a student of humanity, and his opening to A Tale of Two Cities, what with its dichotomous wisdom, foolishness, belief and incredulity, just seemed too apropos to pass on today.

If you’ve been watching the newswires at all lately, then I imagine you’re a tad cross-eyed correct about now. The Service sector is intended to become our biggest economic driver, providing some 80% of the action here within the States. And Retail is supposed to become the single biggest slice of the Service pie.

So one can only imagine the tension this week as we await a number of reports which are intended to reveal how nicely or poorly Service and Retail are doing, particularly when 1 considers the lousy employment news the markets had to swallow last week.

So how are these “engines of the economy” doing?

Dueling Experts

They’re up – that is great! Unless of course they’re not, which would be bad.

Should you were to ask a intended expert such as Federal Reserve Bank of Richmond President Jeffrey Lacker, he would tell you that consumer spending is “moderately strong,” and might be expected to sustain the economic recovery.

But should you were to ask Lacker’s compadré the same question (and an enterprising Nikkei reporter did just that), Dallas Federal Reserve Bank President Richard Fisher would cavil that “cautious households” could be expected to “cool” growth for the rest of this year.

Confused? You ought to be.

The Numbers Breakdown

On my desk in front of me are two wire service reports. One claims “U.S. Retailers Revenue Rise at Fastest Pace in 4 Years.” The other speaks towards the “U.S Service Sector Slipping in June.”

As usual, one has to dig a bit deeper to find the nuggets of truth that lie buried in the all the blather. Let’s begin with the second from the two, which addresses the numbers coming out of the Institute for Supply Management, a trade group composed primarily of Purchasers.

In May, the ISM’s index tracking service-oriented businesses hit its post-recession peak of 55.4. (Fifty is the index’s break point, with any reading above indicating growth, whilst results below that benchmark read as recessionary.)

Now ISM is reporting that its June Support index figure has slid back to 53.8. Whilst this is still barely holding on in positive territory, it does reveal a marked misstep in this index’s post-recession forward march.

Dig even deeper into ISM’s latest information dump, and you will find that its Employment Index did dip below the break line, dropping from 50.1 in Might to 49.7 in June. Looking forward, ISM tells us that many of its pollees report that they’re cutting future hiring plans.

Which End Is Up?

So how can Retail be performing so nicely, and yet not support its overall category? For that, we should investigate just how well Retail is performing.

You will find a number of major reports on this topic due over transom in the next five or six days, including revenue figures from Nordstrom (JWN:NYSE) and Kohl’s (KSS:NYSE), as well as the Census Bureau’s June Retail Trade report.

The “information” that was delivered under that oh-so-optimistic headline wasn’t really fresh news at all. Rather, it was yet another trade group, the “International Council of Shopping Centers,” reiterating its rosy numbers from the first five months of 2010, wherein, they note, revenue “probably expanded at a monthly average rate of 4%.”

Alarming Dark Spaces

As I sat to write to you today, the wire services had yet to disgorge actual June revenue figures. So I thought I might ramble about the “Retail Space” and find it on my own. What I discovered instead was anything but heartening.

Over the next few days, you’ll probably hear a great bit about sales at existing stores – that’s to say, the joints that have managed to survive the first leg of the “Great Recession.” But those figures do not necessarily paint a true picture.

According to actual estate information firm Reis Inc., vacancies at retail shopping centers are proliferating at an alarming rate. Reis’ Q2 2010 figure rose to 10.9%, higher than Q2 2009’s 10%, and approaching par with the all-time record of 11.1% back in 1990.

In other words, same store revenue may very nicely report up. But the rise could simply be the result of consumers having markedly fewer places to shop.

Capitalizing the Next Leg

Now I should be fair and confess I already advised members of the VIP portfolio to short Kohl’s (KSS:NYSE) shares, among other retailers, to the tune of some 137% gains as I sit to write. And just last week, I suggested put choice contracts against the hardware chain Home Depot (HD:NYSE), which is doubly exposed to both retail and actual estate headwinds.

So to be honest, I am banking much more than a bit on the idea that retail is indeed leading us into the next leg from the “Great Recession.”

If you haven’t taken advantage of the free trial just go there now and sign up today. You have nothing to lose and everything to gain.

http://www.InvestorRules.com/VIP-Portfolio.html

Eric Leriche

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