How Does Recession Affect Retail Stocks

| January 14, 2008 | 0 Comments

Do you know the names Ralph Schneider and Frank McNamara?  If you don’t, you’re not alone.  In the 1950s these two men came up with the concept of a general purpose credit card.  Their idea blossomed into The Diners Club, the first independent credit card company in the world.

Before this novel concept, consumers received credit from individual stores.  This meant a different card for every store.  When people traveled, they needed to carry lots of cash because stores were wary of issuing credit to people they didn’t know.  Ralph and Frank solved these problems by consolidating credit down to a single card that could be used anywhere.  They singlehandedly started the credit card industry.

Diners Club was an immediate success.  Seeing opportunity, American Express quickly entered the market followed closely by Carte Blanche. These cards became a symbol of status and wealth in society.  As time passed, more and more retailers signed up to accept credit cards.  With greater acceptance, the number of consumers using credit cards exploded.

Fast forward a few years.

Today, credit cards are everywhere.  You’d be hard pressed to find something that you can’t buy with credit cards.  Incentives even exist for cardholders to charge basics like food and gas.  As credit levels increase, even larger purchases like cars and boats are not unheard of.

Credit cards have moved us into a cashless society.  Think about how often you break out your card to pay for something.  I used mine several times this weekend, even for a $3.19 vegetable purchase.

Credit cards are so widespread that they’ve become an easy way to measure consumer confidence.  In our November 12th report, “Why Consumer Confidence Matters” we noted that reduced consumer spending would be bad not only for the retail industry but for the entire economy.

Our concerns have been confirmed.  Witness the recent news:

“American Express Company (NYSE:AXP) said today that it is seeing signs of a weaker U.S. economy, as Cardmember spending began to slow and delinquencies and loan write-offs trended upward during December.”

In that same news item, American Express added that their delinquency rate is up more than 10% in the fourth quarter.  Basically, consumers are spending less.  To add fuel to the fire, the number of consumers not paying their bills is also up.

This bad news has some serious implications.  As the economy slows and the signs of a recession become more prevalent, I believe that the retail industry will continue to suffer.

Macy’s (M), JC Penney (JCP), and Nordstrom (JWN) just finished confirming poor December results.  I would expect these same retailers to struggle in the first quarter of 2008.

I would stay away from retail stocks as poor performance in the industry is likely to continue.  Aggressive investors may look to establish put options on some of the worst performers.  Look for things to change once retailers start beating analyst estimates again . . . probably not until the second half of the year.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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