If Holiday Retail Stats Don't Have Economists Saying "Humbug," Tuesday's GDP Report Certainly Will

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

If it’s good enough for Wal-Mart…

Looks like the discounting model pioneered by Wal-Mart Stores Inc. (WMT), the Bentonville, Ark.-based retailing giant, will make its way to some rather unlikely high-end retailers: Barney’s New York Inc. and Neiman Marcus Inc. have announced significant price reductions (up to 75%) over the next few days to avoid a disastrous holiday shopping season.

For optimists, the message here is that all hope for holiday retail sales is not yet lost. A National Retail Federation survey showed that only 47% of consumers have finished their holiday shopping and another 19% have not even started.  As a dismal 2008 comes to a close, the last die-hard eternal optimists are calling for a year-end Santa Claus Rally, as the government bailouts and U.S. Federal Reserve actions give investors some hope for 2009 and beyond.

But such blind optimism too often ignores a key point or two. The Dallas-based Neiman Marcus, for instance, just announced that its third-quarter earnings plunged 84% because of its aggressive discounting, the Dallas Morning News reported. And since the discounting will continue, so will the decline in profits, the high-end retailer conceded.

With even luxury retailers discounting to try and salvage something from the holiday shopping season, the outlook for lackluster sales and even-more-lackluster earnings feeds into an already dour outlook for the U.S. economy. 

And if that doesn’t squelch the optimists’ ardor, then a looming revision in the third-quarter gross domestic product (GDP) – last reported as minus 0.5% – will almost certainly bring them back to the realities of the sluggish economy.

It may even force those optimistic economists to finally say: “Bah Humbug.”

That GDP report is due out tomorrow (Tuesday).

Market Matters

Though perhaps it’s wishful thinking, there are some analysts who point out that one or more of any number catalysts could jump-start the economy and the financial markets in the New Year, putting the past few miserable months in the rearview mirror.  They argue that the trillions of dollars in bailout money pumped into the financial system should finally start to provide badly needed liquidity; the Fed seems intent to do “whatever it takes” to reverse, or at least blunt, the current downturn (even if runaway inflation may be a repercussion down the road); an “Obamanomics” stimulus plan could create new jobs, while enhancing the country’s aging infrastructure; risk-free Treasury yields at 0.00% should start to look less and less attractive, prompting investors to look into stocks and non-government bonds again. Just a few last minute items to add to the holiday investment-shopping wish list. 

Sadly, Bernie Madoff saw to it that his investors will have a holiday season to forget as the list of prominent victims grew each day: Real estate mogul Mort Zuckerman, U.S. Sen. Frank R. Lautenberg, D-N.J., Hollywood movie mogul Steven Spielberg, Spanish bank Banco Santander SA (ADR: STD), France’s BNP Paribas SA, Nomura Holdings Inc. (ADR: NMR), and many charitable foundations and non-profit organization were among the people and institutions victimized.

Plenty of finger-pointing has been directed at the U.S. Securities and Exchange Commission (SEC) for failing to uncover some rather obvious signs of wrongdoing through the years. As Money Morning reported even before the official announcement was made, U.S. President-elect Barack Obama tapped FINRA Chief Executive Officer Mary L. Schapiro to head the SEC during this time of turmoil. Congrats on the appointment, I guess? 

The Detroit Big Three automakers received early holiday cheer as the U.S. Treasury Department will release $17.4 billion of Troubled Asset Relief Program (TARP) money in return for potential equity stakes and other concessions from management and unions.  General Motors Corp. (GM) and Chrysler LLC will be the recipients, while Ford Motor Co. (F) pursues – for now – the go-it-alone strategy. Meanwhile, Chrysler will be shutting down all of its North American production plants for at least a month and also will begin charging dealers large fees on unsold cars that remain on their lots after prolonged periods.  In perhaps a sign of things to come, a consortium of 14 companies – including 3M Co. (MMM) and Johnson Controls Inc. (JCI) – have asked for $1 billion in government funding to begin manufacturing state-of-the-art batteries for electric cars.  The move is reminiscent of action taken by computer chip firms decades ago that helped make the industry more competitive domestically. (Johnson Controls also announced last week that it would invest $90 million to open a lead-acid-battery-production plant in China’s green-power energy industrial center in Changxing Economic Development Zone of Zhejiang province, Alibaba.com reported).

Energy traders disregarded the decision by the Organization of Petroleum Exporting Countries (OPEC) to cut production by a record 2.2 million barrels a day, fearing lack of compliance by its members. Instead, traders chose to focus on the shrinking demand in the sluggish economy as oil prices briefly fell below $35a barrel to levels not seen since 2004.  

Goldman Sachs Group Inc. (GS) reported its first-ever quarterly loss and Morgan Stanley (MS) followed with a shortfall of its own.

FedEx Corp. (FDX) posted a higher profit, but gave a dire outlook and announced major compensation cuts for senior management (and benefits cuts for the rank and file).  Stocks were relatively flat as investors digested the latest on Madoff, the auto bailout, and significant Fed actions.

Economically Speaking

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."

Too bad Fed Chief Ben S. Bernanke couldn’t punctuate that last statement with a hearty “Ho, ho, ho – happy holidays.”

After setting the target for the Federal Funds rate at 0.00% to 0.25%, the Federal Open Market Committee (FOMC) policymakers revealed they are studying other measures and may purchase U.S. Treasuries at some point in an effort to stimulate the financial markets.

There are already some signs that the central bank’s action already are working. Mortgage rates have dropped dramatically and borrowers are taking advantage of refinancing opportunities to save on future interest payments.  Investors are finding value in corporate and municipal securities, as certain high-quality issues are yielding more than 6% more than comparable Treasuries. Meanwhile, Japan’s central bank followed suit with a rate cut (to 0.1%) of its own.

More details of the Obama stimulus plan emerged during the week and his economic team pegs the total package at about $800 billion (or more than $1 trillion by the time Congress adds its required “pork.”).  Tax cuts of up to $100 billion will serve as the most immediate stimuli, with construction (infrastructure), energy and healthcare among the industries that will benefit the most over time.

The data of the week revealed that his package can not arrive soon enough.  Housing starts fell by 18.9%, to a record low, and declining building permits did not offer much promise for future construction. Another forecasting release, leading economic indicators, fell for the second consecutive month; in fact, over the past six months, the index has experienced its worst decline since 1991.

The inflation picture remains favorable, though naysayers find pessimistic views in that data as well.  The November consumer price index (CPI) fell 1.7%, the largest decline on record (since 1947), as gasoline prices plummeted by 29.5%. While the deflation-mongers claim that falling prices will force consumers to delay purchases (for when they become even cheaper), others point out that gas purchases can not be delayed, as people have to get to work (and few are choosing to ride their bikes or shift into mass transportation).  In reality, plunging gasoline serves as a stimulus package without any government interaction (though OPEC is getting involved). 

Weekly Economic Calendar

News and Related Story Links:

• Money Morning News Analysis:
  Why Fed Policies and Treasury Department Bailouts Will Lead to Inflation Rather Than Deflation.

• iStockAnalyst:
  Neiman Marcus Earnings Slide 84%.

• Money Morning News Analysis:
  Obamanomics: President-Elect Taps Career Regulator Mary Schapiro to Head SEC, Proposes $775 Billion Stimulus.

• Money Morning News:
  Obama, Paulson May Ask for a Combined $1.2 Trillion from Skeptical Congress.

• Money Morning News Analysis:
  Fed Slashes Interest Rates to a 0.0% to 0.25% Target Range … But Now What?

• Money Morning Market Commentary:
  How to Avoid Madoff Mayhem.

• Money Morning Special News Report:
  Career Regulator Mary Schapiro – a “Strong Investor Advocate” – is Reportedly Obama’s Choice for SEC Chief,

• Money Morning News Analysis:
  White House Approves $13.4 Billion in Loans for GM and Chrysler.

• Money Morning News:
  Big Three to Shutter 59 Plants – Chrysler Forces Dealers to Sell at a Loss.

• Alibaba.com:
  Johnson Controls to set up auto battery plant in China.

• Money Morning News Analysis:
  OPEC Production Cut Fails to Inspire Oil Market; Oil Drops to Four-Year Low.

• Money Morning News Analysis:
  With New Home Construction Down, Obama Team Plans ‘Bailout for the Masses’.

• National Retail Federation Survey:
  Average Person Has Completed Far Less Holiday Shopping Than in Previous Years, According to NRF.