Insights & Advice

|

Bernanke to the Rescue

“After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” so said Ben Bernanke, Chairman of the Federal Reserve Bank on Friday. Once his statement was released, the stock market never looked back.

The pullback in the beginning of the week was all but forgotten. The sell-off, which took the S& P 500 Index (as well as the other averages) down over 2.3% on Monday, was triggered by declines overseas. A 5% decline last Sunday night in Chinese stocks spooked global markets and engineered Monday’s sell-off. Investors believe that China is, and will continue to be, key to our own recovery. You see, China is not only a big buyer of our Treasury bonds but is also a leading buyer of most of the world’s commodities and other products. It is the furnace of the world where raw goods go in one end and cheap, consumer products come out the other in the form of massive exports fueled by a cheap currency. Last year while we plummeted into recession, China experienced at most a slow down in their torrid economic growth rate.

Given that, our stock market’s rally off the March lows pales in comparison to the 100%-plus gains in Shanghai over the same time period. To me, the recent 20% pullback in the Chinese stock market was natural and long overdue; yet I admit it could be disconcerting to investors, especially when it happens over the course of just two weeks.

All of those fears seemed a bit overdone, however, and when the Chinese markets snapped back and began to improve later in the week. It was up and away here at home. The pace of existing home sales also helped. U.S. home sales jumped 7.2% in July, which was the fastest in two years. It lifted investor’s hopes that the recovery in housing activity is gathering momentum. Naysayers warn that most of the increase in housing sales is due to the government’s tax credit incentive and when it expires on December 1, housing prices will slump.

Our take is, that like the auto industry ‘cash for clunkers’ program, the government’s $8,000 tax credit incentive for first time home buyers is simply another arrow in the government’s quiver. It will be followed (as necessary) by additional incentives until the private sector can take over and the economy can grow without government help. A case in point is the recently launched cash for appliance incentives that are designed to help stimulate the consumer staples sector.

I expect the next number investors will be watching is the retail sector’s back-to-school sales. It is the second largest retail event after Christmas and it will be a good measure of the mood in consumer spending. Analysts are all over the map on this one ranging from down 8% to mildly positive versus last year’s sales. Although purely anecdotal, I made a few calls to neighborhood stores, focusing on those who compete on price, and this is what I found out.

“Stable overall, but we’re definitely seeing an increase in school supply sales over last year,” says Jennifer, co-manager of Wal-Mart in Hudson, N.Y.

However, “Jennifer,” who wouldn’t give a last name, isn’t seeing a spill-over to other areas such as clothing, computers or furniture for college dorms. Over in Wal-Mart’s Pittsfield, MA, store, a spokesperson did see some spill-over.

“We are seeing a pick-up in sales overall across the boards, including clothes,” she claimed.

I also called Prime Outlets in Lee, MA, which boasts over 60 retail stores ranging from clothing to cap guns, and spoke to Carolyn Edwards, the outlet’s senior marketing manager. Since the outlet benefits from shopper traffic from Connecticut, Massachusetts and New York, I suspected she would have a good perspective on the buying mood in the Berkshires.

“July traffic was up but sales were moderate at best, despite the rain,” she said, “but it’s too early to predict back-to-school, since Labor Day arrives later this year.”
She explained that the back-to-school season, which normally ends in August, will peak later in September this year because of that.
“We think that the kids will hold off buying, go back to school next week, see what everyone is wearing and then go shopping during the Labor Day weekend.”
However, she has seen few signs that the consumer has changed his behavior.
“They are still delaying purchases, and when they shop they are looking for value. Fortunately, that’s what we are all about.”
Although it was just a smattering of calls, what is interesting to me is that none of the retailers I questioned reported anything worse than flat sales. That should give the markets hope if we here in the Berkshires are any indication.

Posted in A Few Dollars More, At the Market