Everybody loves a good consipracy theory / The teen retailer falling knife
Early Thursday morning I blogged about how the June employment report would likely be a mess and that the European Central Bank's would likely raise interest rates by a quarter point. Both of these predictions, neither of them exactly going out on a limb, came true. However, I went on to add that this would be bad news for the U.S. dollar. Boy was that wrong. The dollar has taken off like a rocket since then.
The question is, why? A bad jobs number, which was made to look better than it really is by the good old BLS, will certainly prevent the Federal Reserve from raising interest rates in the near future. So that won't help the dollar. Ahhhh, yes the markets must believe that the European Central Bank's rate hike was one and done. Come on people, you're better than that. Does anyone really think that one lousy quarter point move is going to do anything to slow the raging inflation that Europe has been experiencing? They shouldn't, because it won't. The ECB's sole mandate of fighting inflation hasn't changed, its next move will almost certainly be higher.
Noted dollar bear Chuck Butler, president of EverBank, posted an interesting conspiracy theory on this subject in his blog this morning, Daily Pfenning - 7/7/2008. Keep in mind of course, that EverBank is a U.S. company that enables consumers to diversify their currency holdings, so it is in its best interest for the dollar to be a mess. Still Butler's theory makes a lot of sense because a number of central banks themselves have hinted on numerous occations lately that they are in communication with each other. Here's what he has to say:
"I believe in my heart of hearts that Big Ben Bernanke and Treasury Sec. Paulson, sent ECB President, Trichet, a memo. The memo said... "please help us out here... You are going to raise rates and talk hawkish on the same day we are going to post a huge negative jobs number, thus telling the markets the Fed is NOT going to raise rates soon... Could you please not sound so hawkish? That would help us greatly... Thanks, Big Ben and Hank"
Trichet "got the message"... That's how I truly believe the day went."
Interesting theory and it certainly is possible. Perthaps the dovish talk was just the ECB bowing slightly to political pressure from its member nations. It will be interesting to see what it does with interest rates in the coming months with the economies of its members rapidly slowing. Will it uphold its inflation-fighting mandate, or will it cave into political pressure?
Bloomberg posted a great article last week on how teens are cutting back on their purchases of clothing (see article: Teens Skip $50 Jeans in Squeeze of Gas, Job Shortage). As someone who went to the mall just yesterday, I can attest that the stores mentioned in this piece, including Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and Zumiez Inc. (ZUMZ) were indeed ghost towns.
The reasons why are actually pretty obvious if you think about it. When I was a teenager, and gas was a tenth of the price that it is today, filling up the car to go out on the town or on a date still ate up a considerable portion of my disposable income. The unbelievably high gas prices that we are seeing today are taking their toll on teenagers. Combine this with a weak jobs market for teens and college students and less money being handed down from mom and dad who are hurting as well and this is not a recipe for teen retailer success.
In May, the unemployment rate for 16 to 19 year-olds had its largest single month increase since the government begain tracking it in 1948, rising to 18.7% percent, from 15.4% in April. Similarly, according to a forecast by Northeastern University's Center for Labor Market Studies, the percentage of teenagers with summer jobs this year is expected to fall to 34.2%, down from last year's record low level of 34.4% and 45% during the summer of 2000.
According to a recent survey by Piper Jaffray, teenagers said in April that they will likely spend $1,183 on clothes in 2008, down 19% from 2007 and down 23% from 2006. And this is before things got really bad with the economy or gas.
These stocks have been hammered by Mr. Market. The question is, how much pain has been priced into them. In my opinion, not enough for the likely worse than expected earnings results that they are likely to produce towards the end of the year. If you are a long-term buy and hold investor, like many of us are, you may eventually end up coming out fine by purchasing shares of these companies and holding onto them for a decade, but I personally am going to wait.
No position in any company mentioned