A Massive Bubble In Retail Stocks

Retail, especially the “concept” retailers, are going parabolic. It makes no sense given the declining rate of personal consumption, retail sales, etc. The kinkiest names like RH, RL and W are going up like the dot.com stocks went up in late 1999/early 2000. The move in these stocks reflects either mindless optimism or momentum-rampaging by hedge fund bots – or both. The hedge fund trading flow can turn on a dime and go the other way. I suspect this will happen and, as it does, squeeze even more mindless optimism out of the market.

The cost of gasoline has to be hammering disposable income for most households. On top of this is the rising cost of monthly debt service for the average household.  Non-essential consumerism is dying on a vine.

Fundamentally the retail sector is not recovering. If anything, the economic variables which support retail sales are deteriorating. I think some of the shares caught a bid on better than expected earnings derived from the one-time bump in GAAP non-cash income from the tax law changes reported by numerous companies in Q1. I just don’t see how it’s possible, given the negative wage, consumption, credit and retail sales reports that the sector has “recovered.”

In just the last eight trading days, XRT has outperformed both the Dow and S&P 500 by a significant margin. It has all indications of a blow-off top in process. You can see that, with industry fundamentals deteriorating, XRT’s current level now exceeds the top it hit at the end of January, which is when the stock market drop began. The RSI has run back into “overbought” status.

Some of the “kinkiest” retail concept stocks, like Lululemon (LULU), Five Below (FIVE) and Restoration Hardware (RH), soared after reporting the customary, well-orchestrated GAAP/non-GAAP earnings “beat.”  Of course, RH’s revenues declined year over year for the quarter it just reported.  But it used debt plus cash generated from reducing inventories to buyback $1 billion worth of shares in the last 12 months.  Yes, of course, insiders greedily sold shares into the buybacks. (Note: If insiders were working for shareholders other than themselves, companies would pay large, one-time special dividends to ALL shareholders rather than buyback shares to goose the stock price)

The retail stocks are setting up a great opportunity for bears like me to make a lot of money shorting the most egregiously overvalued shares in the sector.  Timing is always an issue.  But complacency has enveloped the stock market once again, as hedge funds have settled back to aggressively shorting volatility.

It won’t take much to tip the market over again.  Only this time around I expect the low-close of February 8th (2,581 on the SPX) to be exceeded to the downside by a considerable margin.

The above commentary was partially excerpted from the the latest issue of the Short Seller’s Journal.  It’s not easy shorting the market right now – for now – but there have been plenty of short-term opportunities to “scalp” stocks using short term puts. I cover both short term trading ideas and long term positioning ideas.  You can learn more  about this newsletter here:  Short Seller’s Journal information.

 

6 thoughts on “A Massive Bubble In Retail Stocks

    1. Yes, I’ve been writing for a few years about the numbers Snyder highlights. I present actual source-data
      in my Short Seller’s Journal which shows the truth.

      1. Dave, I have been reading your site for years and the purpose
        of adding the “Zero Hedge'”link was intended to demonstrate
        your accuracy and how many are now just coming to understand
        the enormity of the problem. Snyder is a tool who has the propensity
        to glom on to others work and publish it as his own when it is fashionable
        to do so. The post was meant as a compliment to your insight and due diligence.

        Peace out homie.

  1. The CPI report from yesterday shows a line item for “Health Insurance premium” and the inflation for last 12 months on that, drumroll, less than 1%.
    Now, for most people, the insurance premium might be the single largest expenditure for a family, outside of property taxes (taxes not in CPI anyway)

    Daves mentioned Lumber prices are up 100% since beginning of 2017-lumber is roughly 25% of hte cost of a house, so then whey are “equivalent rents” in shelter cost up 3.5%.

    quick 3 items vastly understate real inflation or cost of living increased costs.
    Chapwood and Shadow Stats have been 8-10% for years–how do you like that Social Security Beneficiaries who have had benefits capped for 25 years due to artificially low “CPI”.

  2. Facts don’t matter. Only the narrative matters. As of now, the exonomy is allegedly strong and consumers are confident and that’s that.

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