Guest Post: Could Tomorrow's Retail Sales Kill Faith In The Recovery?

Submitted by Thermidor

It's not hard to believe that the correlation between NFP and initial claims has been over 75% over the last 27 years. However, that's what made the massive divergence we'd seen since December so odd.  NFP was exploding higher implying claims in the 300K range and yet they remained depressingly flat at 450k. Well on the 2nd the headline NFP number plunged from +433k to -125k and in one month we re-established the relationship with claims. The timing of the drop, which coincided with the end of census jobs, seemed to explain the reason divergence although as I pointed out at the time it's a little odd we'd never seen these type of divergences in 1990 or 2000 i.e. other census years.

This massive one month drop didn't worry the market unduly at the time because we were braced for a fall in the headline and were focused instead on the private sector job creation. However, it's this headline no. that most interests me when it comes to retail sales. The reason is simply that I follow a very simple rule when I look at American consumers 'if they have it, they spend it'. Indeed, I think its fair to assume that census workers who this year were heavily drawn from the ranks of the unemployed or students almost certainly have the highest marginal propensity to consume amongst any workers. So bottom line I think we are going to see the fall in jobs materially impact retail sales especially, as the correlation between YoY retail sales growth and NFP since 1993 is 82% as you can see below. What I particularly like about this chart is that as NFP headline has recovered retail sales have followed tick for tick driving the 5yr correlation to just under 92%. So now NFP has dropped so hard how far could retail sales fall?

Well the chart suggests if we see retail sales follow the same precipitous one month drop of NFP, the YoY rate should drop from last months 6.9% to ZERO. Last June the index of retail sales was 343.1 vs. last month's 362.52 so zero YoY would mean that the monthly rate, expected to print -0.3% on Wednesday would in fact print -5.4%. Now that frankly seems like an inconceivable no. as it would be the worst number we've seen since the series started in 93. However, I have to think that even if we make up the divergence over a couple of months something like -2% tomorrow would cause people to fundamentally question the recovery. Personally, I think all we are doing is remove a lot of the noise created in the data by the census jobs and we should see retail sales drop back to the levels suggested by claims and possibly even the ABC consumer buying climate question. Unfortunately, that should cause people to question the recovery!

Retail sales vs. claims

Retail sales vs. ABC buying question

In terms of trades I believe this would trigger full scale risk off! On that basis I'd suggest taking a look at my 7 longer term risk off trades, which updated for the latest data suggest:

1)       30yr fair value is 3.3%

2)       S&P = 875 and is 18% overvalued

3)       $/KRW = 1400 and is 16% undervalued

4)       $/MXN = 14.25 ie 11% undervalued

5)       NZD TWI 112.00 using CEERNZD index ie 8.5% overvalued

6)       $/ZAR = 10.00 this is a favourite as it's 30% undervalued. Also
now the World Cup is over flows should abate and the domestic economy is already weak and the central bank is cutting

7)       BMW stock to 25 Euro's from today's 41+...PS you could do a basket of auto stocks

Comments

[HelluvaEngineer]

Any time a post title ends with a question mark, the answer is "NO".

[Pamela Anderson]

Regardless of the rally... energy sector is weak: OIH good short

[Cpl Hicks]

So you believe in the recovery?

[midtowng]

How can the consumer keep buying sh*t if they don't have jobs and income?

At some point this has to show up in the retail numbers.

[economessed]

"Faith in the recovery"  FAITH being the key word here, since actual evidence that our economic health is on the mend is woefully lacking.

Hope, belief, faith -- all great psychological crutches for politicians and policy wonks.  But recoveries are built from jobs, growth in incomes, and credit expansion -- ALL ABSENT.

[Boilermaker]

Even if you don't have 'FAITH', you will be strapped down and have a faith feeding tube ramrodded down your neck.

[Tense INDIAN]

i hope it does....

[papaswamp]

Whoa gold!

[NOTW777]

LOL no coverage this morning of the price action in AAPL

[Edna R. Rider]

what's up with AAPL?  Any news?

[HelluvaEngineer]

The new iPhone is apparently a piece of crap.  Aside from that, no.

[RockyRacoon]

They'll put some racing stripes on it and issue it as a new phone and folks will line up to buy as Pavlov proves.  No problems, mate!

[-1Delta]

i love the 30yr fair value... it implies credit contraction for the next decade... not out of the question... forget lending to people without jobs... go figure

[NOTW777]

AAPL  minus 10 and falling

[Tense INDIAN]

so the broad markets should collapse

[Sudden Debt]

It should

It would

BUT IT WON'T!!

[Sudden Debt]

NOTHING WILL STOP THIS PARTY ONCE THE DOPE DEALERS SHOW UP!

WHOEHAHAHAHA!!!

1999 BITCHES!!

[Zina]

SPX will be 1,300 soon. Unless a big bank go bankrupt somewhere, or a sovereign debt default occurs...

Until the numbers from the "real economy" start to show "catastrophe" by mid August, early September, the cocaine bulls will be in charge.

[RockyRacoon]

The assassin is sneaking up on Archduke Ferdinand!

Watch out for those exogenous events.

[Sausagemaker]

+1, eyes peeled...

[DeweyLeon]

Reading this made me think of the following qoute:

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor--your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money, Is this what you consider evil? "

Francisco d'Anconia

Atlas Shrugged

[traderjoe]

Yea, I too wonder what that number or catalyst will be to the market waking up to the reality facing it (as I see it, anyways). To me, the physics of the debt overhang are impossible. There is NO way the world can roll the debt in the next 2-3 years. Greece comes out of it's bailout at a worse debt/GDP ratio? The EU $1 trillion bailout is nothing more than packaging a bunch of BBB's and trying to get a AAA. And then the bailout SIV has to go borrow money in a crisis? 

There's any number of massive issues out there waiting to seriously upset the market. But, the market rolls on. As Leo would say - the PTB will do whatever it takes to keep things going. How long? They've been successful so far...wouldn't want to be with them (reality will catch up some day), but wow...

[RockyRacoon]

"Wheeeee!  This employment stuff is easy!" (Apologies to the Mogambo.)

Keynes based his 1936 treatise The General Theory of Employment, Interest and Money on one key assumption, that involuntary unemployment is a possible market-equilibrium outcome. He defines involuntary unemployment in this way:

Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.[1]

Next, Keynes describes the basic elements of his theory:

This theory can be summed up in the following propositions:

1. In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.

2. The relationship between the community's income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume.

3. The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.

4. Since D1 + D2 = D = φ(N), where φ is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write χ(N), depending on the propensity to consume, it follows that φ(N) − χ(N) = D2.

Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, φ, (ii) the propensity to consume, χ, and (iii) the volume of investment, D2. This is the essence of the General Theory of Employment.

[Sam Clemens]

Keep in mind, the US has implemented Keynes's philosophy no better than we have implemented Smith or Mises.  Keynesian economic philosophy is just like the ideas of Mises, Smith, and Marx.  They're all genious on paper...but somehow they just never get implemented the way they are academically argued.  The problem?  Humans get in the way of theory....

[Joe Shmoe]

You know what's obvious, but funny?  Bernanke's PPT investments are BAD INVESTMENTS.  No one else would buy in at this point.  It's so ridiculous... imagine if you had many billions to invest and you didn't give a shit about anything like, say, the return on those investments.  The guy needs a better broker.  I know that's not profound or nothing... but it is sort of humorous.

[NOTW777]

maybe ben will consider an apple bailout if theres a recall;  ben buys almost anything

[Oh regional Indian]

I bought a toy today. A balloon powered helicopter.

You blow up the balloon as hard as you want, it always came back down to earth.

Such is how it is with all things, like retail sales, credit this and credit that en-flamed retail sales at that.

The up wave is definitely over, now only the pros will survive the ride down the pipe.

ORI

http://aadivaahan.wordpress.com

[wiskeyrunner]

Now that they have some momentuim on the upside they will just lie. How will the banks be able to report great profits if stock are not going up.

They can't say we have been short since May. They have to move the market up. Amazing how fast it recovered when there has been no economic data.

[firstdivision]

We are setting up for a large melt up from the looks of it.  Well only if all major companies "beat" estimates.  Forget the true economic news.

http://img204.imageshack.us/img204/8052/stockn.jpg

[goldfreak]

same thing happened in 08. They kept propping up the market and then eventually BOOOM!

It will be the same this time. Eventually GS and JP will get out of the way, go short and let it collapse

Are  all the negative numbers in the CAPTCHA ZH's way to prepare us for the new economy?

-75% retail sales plus -54 retail sales for the previous month =?

[walküre]

2008 is so like 2 years ago.

The ifad Obama's gonna fill my tank and pay my mortgage America's got talent but no money crowd has forgotten and will be surprised - again - just like they were in 2008.

Funny actually. Watched this movie "Kovak's box" last night and thought to myself, what if Americans already have the implant that will make 'em commit suicide when they hear ""Gloomy Sunday" over and over..

Americans are a happy crowd. Happy pills and happy meals. Happy, happy, happy. Even the loosers are happy.

You ask what Ben is doing with all the stocks he's buying? Why? He's going to offload his stocks like the pumper he is when enough suckers and idiots come back to buy stocks. Simple pump & dump execution.

[Implicit simplicit]

Looking foward to going long shorts again very soon as this bogus market pretends to be healthy. I just hope these wimpy ass bulls can ramp it up a little higher.

[Kina]

In actual fact in watching these melt ups we are really watching BB's daily masturbation.

[Bankster T Cubed]

we all must remind ourselves to never look at a chart

because nothing matters

the markets are rigged

the only edge one can have is to know what the banksters have scripted

nothing else matters AT ALL

nothing

[wiskeyrunner]

Offers being pulled in ES and they tap it with 1 lot. It's like magic!

[Bankster T Cubed]

the buyer is the seller!

what a great """"""market""""""

[Bankster T Cubed]

horrible retail sales is more likely to result in a massive mark-up in stocks than in a sell off

because we live in the age of farce

with treasury secretaries who openly whore for corrupt too-big-to-fail banks

[Kina]

Surely there cannot be a person left on the planet that doesn't know the US markets are thouroughly corrupt.

Listen BB the game is up, we know you lot are faking it, don't waste your time.

Is there anything that hasn't been corrupted by this lot?

[Joe Shmoe]

I still wonder if we're all just kidding ourselves: that this thing could go up for weeks.  And why not?  There are no sellers in the market anymore, so there's no energy to send it down.  Other than some HFT driven eruption, this thing may have hit a la la land that it can dwell in for ages.

But then, every time I really begin to doubt my bearishness, just when I'm almost about to jump back on the long side for fear of missing the party, the thing turns south and craps out hard.

[Blano]

I have the opposite problem too.  Shorted Lennar last week at what turned out to be the low.  I can't see why homebuilders are going up, up, up but they are.

If I go long now, does that mean the crap out is coming??  I can't tell.

[Joe Shmoe]

Hey Blanco:

If I go long now, does that mean the crap out is coming??  I can't tell.

Yes.  Me too. Whatever my anxiety tells me to do is exactly the wrong thing to do.  But, then, my brain tells me the market will tank, but...

[IEVI]

"Last June the index of retail sales was 343.1 vs. last month's 362.52 so zero YoY would mean that the monthly rate, expected to print -0.3% on Wednesday would in fact print -5.4%."

YoY sales may be less than zero....a friend told me the major US clothing retailer he works for has seen YoY sales drop in the last quarter. Of course none of the employees understand what is happening in the economy and believe the hype spewed by the GOV/MSM, so they can't figure out why their sales have dropped when the economy is rebounding. The employees, worried that it is just their department's sales that are down, are now attempting to hide the bad results from their superiors.

How many people are making bad business decision based on the lies?

[Mark Beck]

Link:

http://www.census.gov/retail/

I have been looking at this myself. But, like you said the correlation is not 100%.

Mark Beck

[Grand Supercycle]

As warned about earlier, DOW/SP500 remains bullish for now ...

http://stockmarket618.wordpress.com

[Ripped Chunk]

They should.

So expect a rally!

[johngaltfla]

This recovery? L

Or the mythical

"V"

-:)

[herry]

Really this is a great post from an expert and thank you very much for sharing this valuable information with us................ windows vps | cheap vps | cheap hosting | forex vps