Retail: some perspective on the positive July figures has assembled charts showing that, adjusted for inflation and population growth, sales have only half recovered from the last recession. Sales are comparable to those of a decade ago, which is probably a healthier level than what we experienced at the height of the credit boom: 

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It’s a beautiful day for shorting. My picks: Wal-Mart & Costco

I wouldn’t be surprised if the market ends down on the week (maybe even the day). This morning’s little bailout* blip just offers shorts another chance to set up some trades we may have missed in the bounce since July. (*For a dissection of the bailout, here’s Mish).

Why short leading discount big-box retailers? Although they sell stuff cheaply, they have come to rely on Americans buying lots of cheap stuff. American’s have a habit of viewing low prices as an opportunity** to buy more of something, not to buy the same amount and save the difference. The aisles of these stores are packed with discretionary goods: a myriad of toys, cosmetics, housewares, sporting equipment, and all kinds of footwear and clothing. People’s homes are overflowing with decades worth of junk: enough clothing for a couple of generations, and used toys, tools and appliances galore.

These stocks are priced for perfection, as if the consumer binge will continue in perpetuity and the companies will continue to open new stores in new exurbs. Unfortunately, many of those new developments will be ghost-towns before long, and the stores will be big, empty cleanup liabilities.

Let’s take a look at the numbers:

Wal-Mart: Price: $61; P/E: 18; Dividend yield: 1.6%; Earnings growth, 2005-2007: 6.5%

Costco: Price: $70; P/E: 24; Dividend yield: 0.9%; Earnings growth, 2005-2007: 0.94%

By any Graham and Dodd style evaluation, these two are massively overpriced, Costco more so than Wal-Mart. However, I like the short odds on Wal-Mart just as much because it is so overbought and near a 52-week high in a sort of nifty-fifty bubble (hence, I picked up some puts this morning — I’ve had long-term puts on COST for a while).

Yes, same store sales may be up, but that is largely on account of groceries and gas. The profits are in discretionary items. Over the next 12 months, watch for sales to go flat and margins to shrink, before sales drop outright.


**People don’t apply this logic to investment purchases, hence the securities and real estate markets are inefficient.

Happy days are here again!

From a brief glance at Bloomberg today, I get the feeling that the bounce has about run its course. The talk is all about being “contrarian” by buying financials (um, wouldn’t that have been to buy them a month ago?), buying retail because the July sales report will probably be ugly, and to buy airlines (up 12% today) because oil is falling. The dollar is strong and even gold is down $33 to a six month low (about $820).

I am not surprised by the dollar’s bounce, and I’ve been calling for gold and oil to fall for some time now, but their decline is not a good sign. For oil to fall after total world production has peaked means that demand is drying up as the economy slows. For gold to fall signals that the credit inflation of recent years is over, and that cash is the new king (though it will be a short reign if Bernanke and Obama’s masters can help it). The strength in the dollar just reflects the weakness of Asia and the Eurozone and falling rates in their currencies.

Other signs that the end is neigh are the compressed VIX (near 20 again) and the ridiculous intra-day and intra-week volatility. Sustainable bullish moves are not this choppy, but bounces are, and particularly so near the top.

Time to batten down the hatches. This was just an eye of the storm, and the strongest winds are straight ahead: hundreds of bank failures and double digit unemployment within a year: