Retailers Battle Sales Slump… Bank Of England Battles Recession… Russia And Ukraine Battle Each Other
Thursday, January 8, 2009
by Marc Lichtenfeld, Senior Analyst & Healthcare Specialist, Smart Profits Report
and Martin Denholm, Managing Editor, Smart Profits Report
Dear Smart Profits Report Reader,
If you read our column yesterday, the dismal December retail figures released this morning should come as no surprise.
With stores tripping over themselves to offer steep holiday season discounts, their efforts were largely in vain, as many consumers simply weren’t financially able to take full advantage.
Even the beast that is Wal-Mart (NYSE: WMT) struggled to make much headway. As we reported yesterday, Thomson-Reuters projected a 2.8% same-store sales rise for the firm in December. But the actual results proved otherwise.
Considered to be a beneficiary of the tightened household budgets, the company reported a paltry 1.7% increase in same-store sales. As a result, it cut its earnings outlook.
Thomson-Reuters was right about one thing, though: Higher-end retailers got spanked - some of them quite dramatically. For example, Saks (NYSE: SKS) posted a 20% decline in same-store sales, while Gap (NYSE: GPS) sales sank by 14%.
So how can investors play this? If you’re like me, when bad news hits, you look to snap up quality companies on the cheap. But retail stocks are just too dangerous right now. While taking the opposite approach of the main sentiment often pays off, I expect retail to head lower for the next few months.
If you’re looking for bargains, buy the retailers’ goods, not their stocks.
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Another Bank Job
Two pieces of big news from Europe today…
First up, the Bank of England (BoE) hacked another 0.5% off U.K. interest rates this morning, taking the base rate to 1.5% - the lowest level in its 315-year history.
Ho-hum. As the U.S. Federal Reserve does, so does the BoE, as both central banks desperately scramble to stifle deepening recessions. As recently as October, the base rate stood at 5%, but with the BoE in full-court press mode, it’s made four reductions since then.
But manufacturing association EEF said the bank should have cut rates more heavily, while Ernst & Young believes the bank should continue cutting from here.
From the bank’s point of view, while the MPC (Monetary Policy Committee) most likely did discuss whacking rates to zero, as the Fed has done here, the bankers wouldn’t have any more wiggle room in future - and no more market-jolting announcements to make. In addition, the bank doesn’t exactly want to cripple the pound - not all at once anyway. So for now, expect a steady trip to zero, rather than the bank going “all in.”
The bottom line is that neither the Fed here nor the BoE in Britain really knows whether its aggressive stimulus measures will work. They both like to give the appearance of being in control of the situation, but this recession is a different animal from previous downturns. It’s spread across many areas… it’s deep… it’s severe… and is likely to last for several more months. Policy makers are essentially hedging their bets to combat it. But remember… amid the gloom, this recession will end.
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A New Cold War
No progress.
That’s the verdict from the latest round of talks aimed at solving the increasing crisis over Russia’s decision to cut off gas supplies to the Ukraine - one that is affecting gas supplies throughout Europe in the depths of winter.
European Union officials, plus those from Russia and the Ukraine were set for more negotiation in Brussels today, but those talks were cancelled, despite a meeting between Russia’s Gazprom CEO Alexei Miller and Oleg Dubyna of Ukrainian firm Naftogaz in Moscow on Wednesday evening.
The dispute stems from a disagreement over prices, contracts, unpaid bills from the Ukraine to Russia in 2008, and Russia’s accusations that the Ukraine has stolen gas from pipelines that pass through the country. And as tensions have risen, Russia shut the taps off a week ago - a move that has resulted in some EU nations (mostly in eastern and central Europe) seeing their gas supplies dramatically curtailed, or cut off entirely, because Russia accounts for about 25% of EU gas supplies - 80% of which are pumped through the Ukraine, according to the BBC.
Countries not receiving any gas at all from the Ukraine include the Czech Republic, Romania, Greece, Austria, Bulgaria, Hungary and Croatia.
Flash back two years and you’ll find a mirror image of the situation today, when Gazprom and Ukraine battled over gas supplies and caused shortages in several EU nations.
This dispute will eventually be resolved, but with much of the EU in the midst of a brutal cold spell, it can’t come soon enough. Meantime, Gazprom has vowed to pump extra supplies to the EU through other non-Ukrainian pipelines.
Best regards,
Marc Lichtenfeld & Martin Denholm
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