Did Retail Sales Really Increase 1% in November?

I have to admit -- Wednesday's retail sales number has been bugging me since it was released. Part of this is because it completely disrupts my personal thesis for the economy -- that the US economy is teetering on the edge of a recession largely due to housing. No one likes to have to actually rethink their position -- or God forbid admit they were wrong. (Please read that with a dose of extreme sarcasm).

So, let's go back to a couple of categories in the retail sames number to see what the internals say and compare those number to some other readily available retail sales numbers.

Let's start with the Bank of Tokyo Mitsubihi's Chain Store Sales Report. According to this survey, the seasonally adjusted month-to-month percent change in same store sales was -1%. October's number was slightly better at a -.6% drop. The year-over-year percent change in the number was 2.1%, which was the lowest reading of 2006 except for March when the number was 2%. We run into a problem with the Census data at this point because the Census states, "Data not adjusted for seasonal variations, holiday, trading-day differences, and price changes." So, read that as a disclaimer. However, most of the other retail data released is seasonally adjusted. So we have to work with what we have to figure this situation out.

Continuing our look at the BTM numbers for specific categories of retailers, specialty apparel, general merchandise and drug stores all advanced, but not at greatly accelerated rates. Specialty apparel increased 2.4%, general merchandise increased 1.6% and drug stores increased 8.4%. None of these numbers were radically higher than any previous months. In fact, general merchandise sales decreased sharply in October and November.

The Census data says that "Building material & garden eq. & supplies dealers" increased from (in millions) $29,289 to $29,817 The BTM survey says home supply sales sales decreased 15.7%. It's also important to remember the housing market is in a slump right now. Sales are down, inventory is up. Is this a real estate market where building materials and supplies sales will increase 1.8%?

According to the census data, car sales increased from (in millions) $77,197 to $77,906. This data is not seasonally adjusted. However, according to motor intelligence, the seasonally adjusted annual rate of US car sales decreased from 16.16 million in October to 16.04 million in November. This is the lowest seasonally adjusted annual rate for car sales this year.

In November WalMart reported their November sales decreased .1%, the first drop since April 1996. Other retailers showed increases. However, Wal-Mart is far bigger than their competitors.

So, while the Census data says retail sales increased at a high rate in November, all other surveys say sales of various retail sales components decreased. There is an important difference in methodology in the other reports because they are seasonally adjusted. However, using the old Sesame Street game "One of these things is not like the other one" we come to the conclusion the Census will probably lower their numbers for November.

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Your Weekend Weimar

Go out and have fun.

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It's The Money Stupid

Buried beneath the media hype over the report into Princess Diana's death, was news that the Serious Fraud Office (SFO) has decided to drop its investigation into BAE Systems over the Al-Yamamah deal.

The government intervened in this long running investigation, and proclaimed that "national and international security" took precedence.

The probe, which focused on alleged slush funds for senior Saudis, had caused a major diplomatic row and threatened billions of pounds worth of British arms trade with Saudi Arabia.

The SFO said:

"This decision has been taken following representations that have been made both to the attorney general and the director of the SFO concerning the need to safeguard national and international security

It has been necessary to balance the need to maintain the rule of law against the wider public interest. No weight has been given to commercial interests or to the national economic interest."

Despite further assurances that this was a "national security matter" from the Prime Minister, who had earlier been interviewed by police in the cash for honours scandal (the first serving prime minister to ever be interviewed by police), cynics are of the view that economic considerations played a very large part in the ditching of this investigation.

Britain's reputation for financial probity is easy to squander, but will be very hard to earn back.

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Bernanke Looking Golden Right Now

Ever since the Fed stopped raising interest rates, they have included a statement in the FOMC statement to the effect that a slowing economy will lower inflation.

From the last FED statement:

However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

The inflation numbers have born out this possibility.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in November, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 201.5 (1982-84=100) was 2.0 percent higher than in November 2005.

The all items number decreased .5% in September and October, right when the Fed started using the above referenced statement.

I will admit I was incredibly skeptical of Bernanke's statements and predictions. However the record thus far is undeniable.

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Does Today's Rally Make Sense?

From Bloomberg

U.S. stocks resumed their fourth- quarter rally, pushing the Dow Jones Industrial Average to a record, after companies reported profits that beat analysts' estimates and the number of claims for jobless benefits fell.

Advanced Micro Devices Inc., the world's second-biggest maker of computer processors, had its steepest gain in two years after raising its earnings forecast. Bear Stearns Cos. climbed to an all-time high after the investment bank reported record net income. Costco Wholesale Corp., the largest U.S. warehouse club, led retailers higher on results that beat forecasts.

The rise in profits shows that companies are withstanding a slowdown in manufacturing and housing. The drop in jobless claims, along with data this week showing a rebound in retail sales, signaled consumer spending will keep driving growth.

``Corporate earnings are continuing to be strong,'' said Patrick Becker, who helps manage $2.3 billion as chief investment officer at Becker Capital Management in Portland, Oregon. ``The slowdown isn't here in any major way. That's part of the reason we're seeing moves up."

Let's look at what happened.

Bear Stearns and Lehman Brothers reported record earnings. Earlier this week, Goldman Sacks reported good earnings. Yesterday we had a strong retail sales report -- although some economists are questioning the strength reported.

But, against that backdrop we have GDP decelerating to a revised 2.2% in the 3rd Q. We have a housing market in serious trouble. Employment growth is good, but not great. Earnings are up, but largely because energy inflation is down. In addition, OPEC reported they will again cut production on February 1. This could increase energy inflation, again cutting into earnings.

Is this the environment for a record Dow? Clearly, the market is buying the soft-landing scenario.

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OPEC Agrees on Producton Cut

OPEC ministers agreed earlier, at a closed meeting of the 11-nation cartel in Abuja, Nigeria, to leave oil production unchanged for now but to lower it by 500,000 bpd from Feb 1, 2007

The decision was confirmed by OPEC President Edmund Daukoru

Oil prices rose in response although they were up by nearly a dollar ahead of the announcement. Jim Ritterbusch, President of Ritterbusch & Associates said the 500,000 barrel cut had been partly discounted at around 62 usd

1.) The agreement gives OPEC some wiggle-room. The cut is not immediate, but will occur in February. If the market changes radically they may consider changing their decision.

2.) I would guess this would put a floor on oil at roughly $60/bbl (more or less). That could have inflationary implications for the US.

3.) I haven't seen anything about how the last OPEC cut is being implemented. So, I don't know if it was all talk or whether there was any action as well.

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Weekly Unemployment Claims Down 20,000

From the Department of Labor

In the week ending Dec. 9, the advance figure for seasonally adjusted initial claims was 304,000, a decrease of 20,000 from the previous week's unrevised figure of 324,000. The 4-week moving average was 327,250, a decrease of 1,500 from the previous week's unrevised average of 328,750.

The 4-week average notched down, but it's still in a small uptrend. However, here's what I'm interested in:

13 states had 1000 or more lay-offs in construction. This is the second week in the last month with a lot of construction lay-offs. Winter construction lay-offs are standard practice. The question is, "will there people get rehired"?

Construction related employment was stagnant for most of this year, as this graph from the BLS indicates:



The graph indicates construction employment has topped and will now go into a decline, especially as the housing market continues to cool. Given the present set of economic variables, it's more likely this months lay-offs won't be rehired in the spring.

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Import Prices Up .2%

From the BLS

Import prices rose 0.2 percent in November following the petroleum driven declines of 2.3 percent and 2.2 percent in October and September, respectively. The index for overall imports increased 1.2 percent over the past 12 months. Petroleum prices fell a more modest 1.6 percent in November compared to the double-digit declines recorded in the prior two months. Despite the recent downturn, petroleum prices advanced 1.5 percent for the year ended in November. Nonpetroleum prices resumed an upward trend in November, following a 0.5 percent decline in October, rising 0.7 percent for the month and 1.3 percent over the past year.

Oil is obviously the most variable part of this number. Oil decreased 10.9% in September, 10.1% in October and 1.6% last month. This decrease is the primary reason for the decrease in import prices over the last few months.

Oil is the central problem with oil prices. I've said it before, and frankly I'll keep saying it probably for the rest of my life. So long as the US is a major oil importer, we are one geo-political crisis away from major problems.

The .2% increase should help to calm any fears of a Fed raising. However, the .7% rise ex-oil may lead to a different conclusion. However, total imports are about 13% of the US economy. In other words, this is a number to keep you eyes on, but don't overstate its importance.

Gold Star For Redfish. From Bloomberg:

Import prices rose 0.2 percent after falling more than 2 percent in each of the two prior months, the Labor Department said today in Washington. Excluding petroleum, the index rose 0.7 percent following a 0.5 percent decline the prior month.

Prices of natural gas, which is in the non-petroleum category, soared 30.3 percent, the biggest increase since November 2004. A weaker dollar also boosted the tab on imports. The Federal Reserve this week kept its benchmark rate unchanged for a fourth consecutive policy meeting and said ``inflation risks'' remained.

``The recent sharp drop in the dollar suggests some upside risk to trade prices through year-end and into early 2007,'' Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report.

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Weak Day in the Markets

I subscribe to a bunch of market letters. There is uniform commentary today about the market's weakness. For example, from Investor Guide Daily

Equities ended the day largely unchanged as the blue chip Dow Jones Industrial Average closed 1.92 points higher and the tech heavy NASDAQ rose less than a point. Stocks were given a boost in early morning trading by a strong November retail sales report and a wave of speculation about mergers in the airline industry which sent the stocks of a number of airlines including Continental (CAL: Charts, News, Offers) and AirTran (AAI: Charts, News, Offers) up. However, stocks failed to build on that early momentum on a day when trading volume on the NYSE was pretty light. A report which showed that crude oil inventories fell greater than expected also unnerved traders a little bit. Bond prices fell while the dollar gained on both the euro and the yen.

From Harry Boxer at the Tech Trader:

The markets barely made any headway today. But the start was strong. The futures were up on strong pre session economic news, and the market opened higher, but that was about it. They sold off sharply in the morning, held secondary support, and then bounced back and forth in a coiling-type pattern. In the last hour they attempted a rally and did break out, but there was very little follow-through and they backed and filled into the close.

From The Street.com:

Merger talk in the airline sector gave stocks an early boost Wednesday, but the major averages pulled back amid rising oil prices and a selloff in the chip sector to finish the session little changed.

After touching a new intraday high of 12,368.61, the Dow Jones Industrial Average reversed ground and closed with a gain of 1.92 points, or 0.02%, to 12,317.50. The Dow received limited support from gains of 1.3% or more in components McDonald's (MCD - news - Cramer's Take - Rating), American Express (AXP - news - Cramer's Take - Rating) and Exxon Mobil (XOM - news - Cramer's Take - Rating).

Notice the phrase, "after touching an intra-day high". Traders like to see markets advance through highs and close above them. That indicates traders are confident prices will move higher. When prices don't close above new highs, it indicates hesitation and concern; traders don't want to carry those new positions overnight for fear that news will create selling pressure in the morning.

Also, considering the strength of today's retail sales report, volume could have been stronger.

Food for thought.

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Late Mortgage Payments Increase in 3Q

From the AP

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Wednesday, reported that the percentage of mortgage payments that were 30 or more days past due for all loans tracked jumped to 4.67 percent in the July-to-September quarter.

That marked a sharp rise from the second quarter's delinquency rate of 4.39 percent and was the worst showing since the final quarter of last year, when delinquent payments climbed to a 2 1/2-year high in the aftermath of the devastating Gulf Coast hurricanes.

These numbers are coming off of some very low readings. So while the jump is important to note, it's also important to remember where we are in the cycle. That being said...

Delinquency rates in the third quarter were considerably higher for "subprime" borrowers -- people with weaker credit records who are considered higher risks -- especially those who have adjustable-rate mortgages.

Subprime borrowers had a delinquency rate of 12.56 percent in the third quarter, the highest in more than three years. The delinquency rate for these borrowers holding adjustable-rate mortgages was even higher -- at 13.22 percent in the third quarter, also the worst reading in more than three years.

Those are some high numbers. What's really important to remember is next year between $700 billion and $1 trillion (depending on which news source you base the estimate on) of ARMS will reset -- most a higher rate. That means going into next year the subprime market could experience some really ugly developments.

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