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By William Patalon III
Money Morning/The Money Map Report
We warned you not to believe the gloom-and-doomers.
Retailers opened their doors early [a Kohl's store near my home north of Baltimore opened its doors at 4 a.m.; another chain hosted a "Midnight Madness" sale], promoted their top toys and electronic gadgets, and discounted heavily – all to lure shoppers.
Shoppers spent $10.3 billion on holiday purchases on "Black Friday," the nickname for the day of shopping insanity that follows Thanksgiving Thursday – called that because at one time it was considered the day retailers turned profitable for the year. That outlay was actually 8.3% more than a year earlier, reported ShopperTrak RCT Corp., a Chicago-based research firm.
Super-resilient consumers showed that they were willing to shrug off high oil prices, a declining dollar, volatile stock prices and a host of other economic uncertainties, demonstrating once again that Americans will spend money for the holidays, as long at the job outlook is upbeat, said Joel Naroff, chief economist of Naroff Economic Research, a Holland, Pa.-based econometric-research firm.
Black Friday typically accounts for between 4.5% and 5.0% of all holiday sales – which themselves account for between 40% and 60% of a retailer's sales for the year.
According to ShopperTrak, which measures foot traffic in shopping centers and malls using more than 50,000 video devices, holiday sales will increase 3.6% this year, which would trail the 4.8% gain for last season. But retailers are undaunted by such tepid forecasts: They've already responded by offering discounts on flat-panel TVs and diamond necklaces to lure shoppers, Bloomberg News reported.
"It's an extraordinary number, beyond what we anticipated," Bill Martin, co-founder of ShopperTrak, told Bloomberg. "I think there was pent-up demand given the slow sales in October and November because of unseasonably warm weather, and people want to find value for their dollar and reacted to the specials."
ShopperTrak estimates customer visits to stores will drop 2.5% this holiday season, which covers the 32 days between Thanksgiving Day and Christmas.
Sales in November and December may rise 4%, the slowest gain since 2002, according to the National Retail Federation in Washington. About 55% of shoppers said they would spend less this year than in 2006, according to a Discover Financial Services survey.
Consumers stormed the Toys "R" Us Inc., Wal-Mart Stores Inc. (WMT), Macy's Inc. (M) and other retailers in the pre-dawn hours of Black Friday to find bargains on Nintendo Co.'s Wii gaming consoles and sterling-silver jewelry.
Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting firm, says the best deals are "yet to come."
"You've got to move product," Davidowitz said last week. "And retailers are on a terrible sales trend, so there is no choice but to sell the inventory at what you can sell it at."
Tom Engle, manager of an Elder-Beerman's retail location, said sales were comparable to last year and that "traffic was pretty good" in the store. Engle said several items such as jewelry, the Garmin Ltd. (GRMN) and TomTom NV GPS navigation systems, and MP3 players went fast. In fact some sales items flew off the shelves at a record pace. The Wii gaming system went very quickly at many stores as did other items.
"There were several items we sold out of," Engle told Crescent News.com.
As investors, the question we have is simple: What does this fairly quick start to the holiday shopping season mean for stock prices.
While the gimmicks are working so far, it's going to take hard facts and so-called "empirical evidence" [strong increases in same-store sales come to mind] before we make an educated forecast for where share prices are headed.
Investors have a habit of getting the jitters. Take last year. Worried that consumer spending was eroding, sent the Dow Jones Industrial Average down 1.2% on the first full session after Thanksgiving. But stocks later rebounded after investment experts decided that the outlook was better than they'd first thought.
Five times in the past 10 years – in 1998, 1999, 2001, 2002 and 2004 – the Dow ended lower on the first Monday after Thanksgiving, according to a Philadelphia Inquirer report. It finished higher in 1997, 2000, and 2003. The biggest post-Black Friday surge during the last 10 years was in 2003, when the blue-chip index soared 1.16%. But the big run-up was due more to some highly favorable economic reports than to strong retail sales, according to experts.
The odds of a retreat are higher because stocks tend to run up in advance of Black Friday and then sell off afterward. Since the decade opened, the Dow has only shown declines in 2000, 2001 and 2006. Analysts say that could represent some bullishness by investors ahead of holiday sales data, and because the week of Thanksgiving tends to have light trading.
In the face of a horrid housing market, and credit markets that are getting worse by the day, the major stock indices declined amid worries these problems are destined to spill over into the broader economy. The Dow fell 1.49% during the week, the Standard & Poor's 500 Index shed 1.24%, and the Nasdaq Composite Index dropped 1.54%.
Peter Dunay, investment strategist at Leeb Capital Management, said Wall Street was actually far too preoccupied with the credit-market turmoil to worry about holiday shopping. So far, the nation's biggest banks have written down about $75 billion worth of securities tied to debt backed by subprime mortgages, and that number could grow as the fourth quarter closes.
"We're always hoping for good news from the consumer," Dunay said. "But it doesn't matter how much consumers spend when you're talking about . . . $80 billion of write-downs.
Last week, the Standard & Poor's 500 index had lost all its 2007 gains before recovering Friday. It is up 1.58% this year. The Dow is up 4.15%, and the Nasdaq Composite Index is up 7.51%.
No matter what happens, Money Morning and its investment gurus will always do three things for you. We will:
- Find ways to help you understand what's really happening.
- Explain what's still to come.
- And show you how to profit from both.
As an example, Money Morning has recently released three reports highlighting investment opportunities among all the uncertainty. For instance, Money Morning:
- Over the weekend released a Special Investment Research Report, "Nine Ways to Profit From the Diving Dollar." To access this just-released report, .
- Late last week, we published a report aimed at helping you profit from already-soaring gold prices. But what experts at an affiliate did was to identify several so-called "junior minors," or "juniors," in the gold and silver sectors that haven't run up in price, yet. To read that report, "Eight 'Juniors' to Play for Major Profits in the Gold and Silver Sectors," please click here.
- And just a week ago, we also created a report looking at the Canadian Dollar, which has soared against the U.S. greenback, creating eight profit opportunities that we've highlighted for you. To access that report, please click here.
All our reports are free of charge. Let's now take a look at last week's economic activity.
10 yr Treasury (Yield)
It's beginning to look a lot like Christmas [or insert your favorite religious/secular holiday here]. As the day after Thanksgiving [known in retail circles as "Black Friday"] finally arrived and passed, the same old signs of the holidays and discussions about upcoming consumer activity [or, rather, inactivity] reappear each year.
Kids make those crucial decisions to change their behavior patterns from "naughty to nice" for that "crucial" four-week stretch run. Parents reevaluate their budgets as the latest in those "must have" electronic devices and "soon-to-be-recalled" Chinese-made toys come to market [For a fascinating Contrarian look at the China-recall controversy, and what it really says about the evolving global economy, please click here to read Money Morning investment guru Keith Fitz-Gerald's commentary, "Mattel Recalls Signal China's Arrival"].
Decorations bedeck and illuminate the nation's shopping centers and malls as Main Street USA looks a bit like the neon-lighted Las Vegas Strip. And retailers always predict "gloom and doom" for the holiday season, as if to warn those analysts not to be overly optimistic about future revenue. [One year, those retailers will be right…. after all, even a stopped clock is still correct twice a day].
This year seems no different, as investors remain concerned that the weak housing market and escalating oil prices will put a damper on consumer activity.
Target Corp. (TGT) did not get out of the blocks with much holiday cheer as the discounter reported lower-than-expected earnings on sluggish sales of its high-margin [and most profitable] products. Lowe's Cos. Inc. (LOW) confirmed any rebound in housing is still a distant hope as its profits fell 10% in the third-quarter. Techs may prove to be the savings grace this year as Hewlett-Packard Co. (HPQ) announced strong earnings that topped analysts' estimates and also accelerated its share buyback program [a sign of management optimism].
Shifting gears to financials (please…anything but that!!!!), government-sponsored enterprise (GSE) Freddie Mac (FRE) lost $2 billion last quarter and warned that it may need to raise additional capital. The lender is also expected to cut its dividend. Because of the significant roles that both Freddie Mac and Fannie Mae (FNM) play in supporting the entire residential housing industry, these challenges must be watched closely. It is certainly one thing for a New Century Financial Corp. (NEWCQ), a Countrywide Financial Corp. (CFC), or even a Bear Stearns Cos. Inc. (BSC) to suffer significant losses, but a company with an implied government backing is another story altogether (can you say bailout … AGAIN?). A Goldman Sachs Group Inc. (GS) on Citigroup Inc. (C), and also warned that he expects the large bank to incur write-downs of $15 billion in risky mortgage loans. The key analyst also reduced his price targets on Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS), Lehman Bros. Holdings Inc. (LEH), JP Morgan Chase & Co. (JPM), and Bear Stearns (and virtually every other Goldman competitor).
All eyes remain on oil prices, as the $100 level became a foregone conclusion. Members of the Oil Producing and Exporting Countries (OPEC) cartel expressed ongoing concerns about the value of the U.S. dollar and even discussed shifting reserves to the "more stable" European euro. [Thanks bunches to Messrs Ahmadinejad of Iran and Chavez of Venezuela for sharing your "totally objective" opinions. The little controversy that this "dynamic duo of the dollar" has stirred up is making an already-fragile greenback even weaker. For a Money Morning research report that details three ways to profit from this controversy, please click here. Like our other reports, this one is totally free of charge].
On that note, don't expect any significant production increases by the cartel anytime soon. In fact, some "experts" believe such a move would not have a dramatic impact on crude oil prices as the plummeting dollar and (hedge fund) speculation may be driving the energy surge far more than any supply issues.
Investors took off early for the holidays so the recent equity bearishness may be exaggerated by the lighter trading volume. Clearly, folks are concerned about the economy and oil prices. In such times, small-cap issues often suffer more than their larger counterparts; the increasingly negative year-to-date return on the Russell 2000 bears that out. The yield on the 10-year fell below 4% for the first time in two years on the popular flight-to-quality trade. Here's hoping the busier-than-anticipated Black Friday carries through the rest of the holiday shopping season – and beyond.
Weekly Economic Calendar
The Week Ahead
Consumer Confidence (11/07)
Durable Goods Orders (10/07)
Existing Home Sales (10/07)
GDP (3rd qtr)
New Home Sales (10/07)
Initial Jobless Claims (11/24/07)
Personal Income/Spending (10/07)
Construction Spending (10/07)
What are economists most thankful for this year? For one thing, folks seem to like the newly mandated candor of the Ben S. Bernanke-led Federal Reserve that shared a new forecast this week, as well as minutes from the last policy meeting. [But then, again, the combined insight was as contradictory as ever.] On one hand, the minutes revealed that the decision to cut the Federal Funds Rate in late October was a "close call," meaning that the Fed may take a wait-and-see attitude before acting again. On the other hand, the forecast showed that Dr. B. and friends believe the economy will slow next year to a gross domestic product (GDP) of around 2.0%, the jobless rate will tick up to 4.8%, and inflationary fears will subside as energy prices move lower to more "reasonable" levels. Last week, the U.S. economy took a few more hits as single-family housing starts suffered their worst showing in 16 years and the index of leading economic indicators fell to a two-year low. [The smart money still seems to be on a December rate cut, though that "close call" comment add a bit of uncertainty.]
Historically, Black Friday has represented the approximate date that retailers move "into the black" and begin adding to their profits for the year. The holiday shopping season from Thanksgiving through Christmas can "make or break" a retailer's entire year, so expect some analysis and over-analysis each time a retail exec, analyst, Fed official, or TV pundit even thinks about making a prediction. Then again, the naysayers typically lead the pack this time of year, so take all of the "gloom-and-doom" warnings with a grain of salt. And be thankful you don't have Ben Bernanke's job.
News and Related Story Notes:
- Money Morning Special Investment Report:
Nine Ways to Profit From the Diving Dollar.
- Investment Research Report:
Three Pathways to Global Profits Despite Our "Worthless Pieces of (Green) Paper."
- Money Morning News:
Freddie Mac Takes a $2 Billion Hit, Stock Drops Nearly 30%.
- Money Morning News Analysis:
Axis of Unity' Provides Dollar Dissent at OPEC Summit.
- Money Morning News Analysis: .
- Money Morning Economic Analysis and Commentary:
Mattel Recalls Signal China's Arrival.
- Money Morning Investment Analysis:
Eight "Juniors" to Play for Major Profits in the Gold and Silver Sectors.
- Money Morning Commentary:
Where Should We Invade to Bring Down Oil Prices?
- Money Morning News Analysis:
Federal Reserve to Increase Disclosure, Will Now Publish Economic Forecasts Quarterly.
- Money Morning News Analysis:
Born to Shop: Holiday Retail Season Could Be Better Than Experts Think.
- Bloomberg News:
U.S. Sales Rose 8.3% Day After Thanksgiving, ShopperTrak Says.
Shoppers buck blue predictions for Black Friday.
- Philadelphia Inquirer:
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.