Nearly half of the decline in overall retail sales during December was due to a 16% decline in gas station receipts (largely price-related) but that didn’t do much to assuage investors’ concerns. Every component within the report showed a decline, even the eating, drinking component – an area heretofore that had been upbeat during this period of substantial consumer weakness.
The broad market has now given back half of the rally that drove the S&P 500 24% above the multi-year low hit on November 20. So much for the so-called January Effect and the supposed euphoria over the much talked about stimulus proposal.
Decliners whipped advancers by nine-to-one margin on the NYSE Composite; volume was somewhat light with 1.3 billion shares traded.
Market Activity for January 14, 2009
We did talk about an expected pullback in the January 5 letter as predictions that the S&P 500 was going hit pre-Lehman collapse levels (1250 on that index) hit a crescendo. There was just too much data we had to get through. Besides, the market was destined to take a breather after the December run.
We’ll be stuck in a trading range for some while (wish I could define that in actual time), based on what is currently known. However, we do have a decent potential of hitting 1050 on the S&P 500 – that would get us to a market multiple of 22 times what we see as trough earnings on the index.
Such a multiple is at the low-end for a trough earnings P/E, but one should not expect a mid or high range level based on the challenges we face now that the government is so involved and both economic and geopolitical risks abound.
I suppose it will take a hugely positive financial sector event to free us of this range-bound scenario, or a bold tax-rate strategy – yes, I’ll keep dreaming.
In the meantime, we’ll count the number of times the same financial institutions must be rescued before regulators decide to eliminate mark-to-market accounting standards. It was an enormous mistake to implement this accounting rule in November 2007; it has greatly exacerbated the current situation.
Mortgage Applications
The Mortgage Bankers Association reported mortgage applications jumped 15.8% in the week ended January 9 as the 15-year fixed mortgage rates fell to 4.63% and the 30-year fell to a record low of 4.89%.
Refinancing activity drove the index higher as this segment jumped 25.6% last week. Unfortunately, home purchasing activity didn’t follow the trend, falling 14.1% -- ending three weeks of increase.
A wave of refinancing will help to put more money in consumers’ pockets, which appears to be very much needed as we’ll discuss another ugly retail sales report below. However, we need purchases to make a comeback in order to boost investor sentiment. Lower mortgages rates will undoubtedly help, but the tough labor market conditions will delay a sustained rebound in home sales.
Retail Sales (December)
U.S. retail sales fell twice has hard as expected in December as job losses combined with a desire among consumers to boost cash savings (as their two primary savings vehicles, homes and stocks, decline) to crush activity.
Overall sales fell 2.7% in December, which follows a downwardly revised 2.1% decline in November – originally reported as a 1.8% decline. This marks the sixth month of decline for overall retail sales, which has not been seen since these records began in 1992. Prior to this stretch of weakness, the previous record was two months of decline.
Excluding auto, retail sales fell 3.1%, which follows a 2.5% drop in November and a 2.9% in October.
Falling prices are certainly playing a role here, especially with regard to pump prices (gasoline station sales were down 15.9% in December, some of which was price-related). However, the weakness was broad-based with every major category posting a decline.
Over the past three months, retail sales have collapsed, plummeting 28.35% at an annual pace. While gasoline sales account for much of this decline (gas station receipts plunged 87.3% three-months annualized) retail sales ex gasoline is still down 13.9% at an annual rate for the quarter.
Sales less autos, gasoline and building materials – the figure that flows directly into the personal consumption component of GDP – fell 1.4% in November and is down a massive 8.8% for the fourth quarter. A GDP reading of as least -5.5% (that’s at a real annual rate) seems assured based on this rate of decline.
Import Prices
The Labor Department announced import prices posted another big decline, down 4.2% for the month and 9.3% over the past 12 months.
The sharp decline in this data has been driven by petroleum-price activity; this component of the report fell 21.4% in December and 47% for the past year. This is a massive shift as the component was up 47% on a year-over-year basis as recently as September.
Excluding petro, import prices fell 1.1% in December and are up 0.9% year-over-year.
While the Fed seems confident, based on the latest meeting’s notes, that inflation will remain tame, we do not agree. Some even fear a sustained deflationary event. If this were the case all components of the data would be showing large negative readings, which is not the case – instead it is petroleum prices coming off of the spike that occurred last summer that is causing the large negative reading for the overall inflation gauges.
Once banks begin to push Fed cash injection into the economy via increased lending activity (whenever that may be) this will combine with a fiscal stimulus that will reach $1 trillion ($500 billion in the first year of implementation) to drive commodity prices higher and thus overall rates of inflation. While the Fed is focused on other things, if they do not confront this threat in its early stages, our expectation is we’ll then have a longer-term inflation problem to deal with. But that is down the road.
Have a great day!
Brent Vondera, Senior Analyst
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