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Everybody loves a good consipracy theory / The teen retailer falling knife

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July 07, 2008 – Comments (10) | RELATED TICKERS: AEO , ANF , ZUMZ

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?

 

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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.

Deej

No position in any company mentioned

10 Comments – Post Your Own

#1) On July 07, 2008 at 3:57 PM, madcowmonkey (< 20) wrote:

What prison is the Abercrombie & Finch at? Why is it all barred up? Usually the windows look better than the inside to me, but not in that photo.

Junior High kids could give a jello pudding pop less about how high gas is:) Go out west and every mall is packed. Why, because it is hot as a  corn dog right out of the frier at lunch time. If they are not buying junk at the store, look for them at the beach, lake, skate park, and whatever else the community has for them.

In 2002, Piper Jaffray was fined $25 million by state and federal regulators to settle charges that it provided biased stock ratings. Other firms, such as JP Morgan and Goldman Sachs were also fined for similar reasons. The firm agreed to make structural changes relating to its research and investment banking program in order to restore confidence in its business.[4] TAKEN FROM WIKIPEDIA LINK 

I am not giving a reason for A&F's "ghost town" environment, but it is summer and if kids are spending less for the 2008 year, I think we should praise them for learning and cutting back on how much money they waste on clothes that their parents don't have. Unlike the other generations before them:) I take kids cutting back on buying clothes as a good sign, now if I could get my kids to stop riding me about getting DQ every time we go by:)

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#2) On July 07, 2008 at 4:14 PM, EScroogeJr (< 20) wrote:

Does anybody know the mortgage rates in the Eurozone? I don't quite understand how Europe could choose strong euro and the cheap oil that comes with it over the expensive housing that comes with low mortgage rates. If anyone's housing bubble will pop without central bank's support, it's theirs.

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#3) On July 07, 2008 at 4:45 PM, GS751 (27.28) wrote:

last time I check Inflation was not at the heart of Nicolas Sarkozy's agenda for the EU.

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#4) On July 07, 2008 at 5:17 PM, TMFDeej (99.43) wrote:

Nicolas Sarkozy's star is dropping faster than ARod's pants at Madonna's pad.  He has been able to get very little done since taking office.  I personally would be surprised if Trichet gave a hoot what he said, but I guess we'll see.

Deej

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#5) On July 07, 2008 at 5:51 PM, RussWild (< 20) wrote:

Nice Post Deej. I have a underperform position in RL at the moment that hasn't paid well, but i'm not closing nonethelss.

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#6) On July 07, 2008 at 6:33 PM, Tastylunch (29.18) wrote:

I dunno Madcow,  I have a feeling those kids aren't cutting back due to learning to save but due to a shortage of disposable income....My guess if they somehow get money again they'll go right out and blow it.

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#7) On July 08, 2008 at 12:32 AM, SapphireSeas (74.87) wrote:

Agree, Deej.  The jobs numbers do not lie.

It will take a lot more pain than we are currently experiencing to "teach" any Tween generation to conserve and save - it's just not something that comes naturally to the vast majority of youth in our time of "plenty".

As for crude prices, we're probably seeing everyone catch their collective wind after placing covering positions for the long July 4th weekend.  Don't know if we'll see $200 ppb this year; demand is not contracting - and will not.  More fertile ground for speculators, which all adds up to additional pain for the average American at the pump...and an estimated $1 BILLION a day EXTRA spent on fuel by Americans than ever before.

Pain?  That's $1B of discretionary income out of a shrinking economy every single day, and getting worse.  Yes, those vast sums are sucked up by the Market's energy sector, but there does not appear to be much trickle down or re-investment apparent to our wider economy.  Consider also our continuing credit ills, food / consumables inflation, and likely decreases in Defense spending on the horizon, and our true threshold for pain appears to be much higher than currently trending.

Anyone see some light at the end of this darkening tunnel?

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#8) On July 08, 2008 at 5:58 AM, TMFDeej (99.43) wrote:

Thanks Russ.  I have a feeling that relatively expensive clothing stores will continue to do poorly despite how badly they have been hammered.  I'd say that they will continue to underperform, but it's tough to do worse than the major indicies are doing right now.

Deej 

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#9) On July 08, 2008 at 6:00 AM, TMFDeej (99.43) wrote:

Hey Sapphire, you're not making it any easier for me to be more positive ;).  Too bad you're right.

Deej 

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#10) On July 08, 2008 at 1:02 PM, Sqwii (< 20) wrote:

Hi TMFDeej !

 

Look at my last blog as i mentioned to you before.

 

Sqwii

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