It’s not just Amazon gutting retail

There’s so much talk of Amazon bringing doom to all things retail that I think it’s fair to take a step back and look at the bigger picture. A massive downsizing of US retail was inevitable. We have 600%+ more retail space in shops, malls and megastores than any other first world country. That’s a big tell.

Adding to that, as Americans we tend to overspend, beyond our means, and use debt to drive that consumption forward. That is to say, we can’t collectively always afford what we’re buying, so we tend borrow to buy. That cycle of debt-driven overconsumption did not end well in 2007-2008. Since then we’ve seen mid-tier and low-tier discretionary spending trends at many retail stores flat to down as consumers try to deleverage.

It’s also becoming more obvious that online shopping is driving sales away from brick and mortar companies who haven’t had the wherewithal to create a cohesive online shopping experience — or who have failed to effectively solidify customer loyalty. Further, as companies like Amazon grow and offer a sort of “Walmart of the Internet” approach to allow someone to do most of their shopping on a single website, ill prepared stores will suffer, losing more sales and customers.

But I feel that there are much bigger catalysts at work here as well. We’re confronting a generational shift from tangible consumerism to intangible consumerism. Retail stores have trouble selling intangibles. An example of that would be GameStop, who should be flourishing in the age of electronic sports and online gaming, but is instead collapsing in on itself due to its inability to execute online. Meanwhile, companies like Activision Blizzard, Valve, EA Games and others have created extremely lucrative online game distribution platforms, tying together the purchasing, social and gaming experience.

The same is true of application spending. Surely no customer is going to trek out to a store to download an application on to their phone, tablet or computer. That used to be the case, however, as software was too bulky to download and vendors were cautious to distribute online for fear of piracy. But much has changed since the early days of software distribution.

How we buy, what we buy and whom we buy it from are all changing. This appears to be a generational shift perhaps almost as much as it is a correction in retail overabundance to more normalized levels.

Full disclosure: Short the NASDAQ 100.

US new-home sales drop 9.4% in July

Uh oh! Is the new housing bubble beginning to deflate? My thought is yes, but let’s not move to hastily to that conclusion before walking through some facts:

1: Many lenders were / are offering mortgage down payments from 1-3% (sometimes as low as 0%). This means that even if a buyer is not able to save money such that they can make a reasonable down payment (or have money set aside if they lose their job, have to make a major repair, etc) they can still be granted a mortgage to buy a property that they make default on.

2: Home values have reached levels near or beyond the highs of 2007 (depending on which region one examines). This means that for most working people buying a home is not something that they can reasonably afford. And if they can they do so under extreme financial stress, making debtors who acquire a mortgage on a property more prone to defaulting.

3: The millennial student debt bubble has grown to over $1.4T. These poor souls who were overcharged for an education that may not lead to better income prospects have little chance of obtaining a mortgage for a home if they are hamstrung by so much debt, poor job prospects and potentially low credit scores. In addition, many millennials have opted to downsize and live in smaller spaces (micro apartments, studios, pods in the parents’ backyard, etc).

4: Many people whom are intending to buy a new house must also sell their existing property. It is more and more difficult to do so with prices on the rise. Somewhere either demand must rise to the higher prices or the supply must fall to more reasonable prices. I suspect the latter will happen given the current macroeconomic environment (final stages of current business cycle).

5: A lot of quasi-affordable housing stock is being leveled and replaced with gaudy, poor quality McMansions by rabid speculators. These housing units tend to have shorter lifespans before major repairs are necessary since builders prioritize quantity over quality. As a result, housing stock that is the most desirable to middle class buyers is being eviscerated while unaffordable, low quality and undesirable housing stock is growing. This is a large, and mostly unrealized problem as of yet.

Without near zero interest rates, and the Fed holding an enormous amount of defunct MBS (mortgage backed security) notes there would be no housing bubble right now. But because we are in an artificially low interest rate environment with massive stimulus in the mortgage market, there is likely a large bubble in real estate valuations that is extremely perilous.

Trump threatens government shutdown over wall

First we were told Mexico would pay for it before the project started. Then we were told they would pay for it later after it was built. Now we’re told that our government will be shut down if we, the American tax payers, don’t fund this ridiculous and counterproductive project.

I don’t tend to post political content on here often, but since this administration seems dead set on creating intractable political turmoil I believe some attention is warranted.

President Trump has, at least in the initial 6 months of his presidency, provided a positive catalyst for US equities. Whereas the underlying theme was deregulation, tax cuts, corporate favoritism (as if we needed much more of that) and a promise of infrastructure spending.

Thus far just about none of that has materialized in any meaningful way. In fact, I think it’s fair to say that the US equity, bond and global forex markets are beginning to realize this as volatility ratchets up.

I fear that President Trump has set the stage for a steep decline in equities due to the market disappointment of having his policies unrealized combined with the realization that in all likelihood he is unable to effectively execute his duties as President.

Full disclosure: Short NASDAQ 100.

Ad spending drops as majors pull back

Advertising isn’t what it used to be as spending is continuing to plunge. Earnings of large digital advertising companies, such as Google, Facebook, Microsoft and Verizon are under threat (with the former two being the most concentrated risks due to their large exposure).

When major consumer staples pull back on hundreds of millions of dollars in ad spending I think it’s take to take notice. These trend setting marketing departments may just be the first dominoes to fall in the realization that advertising spending for well known brands may not actually lead to increased sales.

Further, there remains the question as to whether digital marketing is producing value for money spent. Personally I feel that in the last few years we’ve entered a period of hyperoptimism about the future of digital advertising. There are enormous problems that break the existing revenue model if they are to be realized by customers. Yet there is very little effort by large digital advertising companies to curb them because doing so would significantly impact earnings and growth. So it appears as though customers are departing en masse instead.

Full disclosure: Short NASDAQ 100.

Stock selling likely to turn in to correction

Equities in the US are expensive, so it wouldn’t be unheard of to see some selling build in to the recent down days. The record setting highs of late were set on ever decreasing buying volume, record margin debt and with stocks that were already priced to perfection. If I had to guess, the path of least resistance for the short term is lower.

It’s healthy in any bull market to see a correction. This particular bull market hasn’t had too many, which has been somewhat unusual. However, the buy the dip mentality is firmly baked in. So I would not be surprised to see a big dip aggressively bought. Whether that creates a higher high or a lower high (in technical terms) remains to be seen — and will be interesting to determine the trend from here.

Full disclosure: I am short the NASDAQ 100.

NASDAQ negative despite positive Apple earnings

At 10:31 am EST the NASDAQ is sinking lower, despite Apple’s massive rally following positive earnings. Other techs are notably soft and weakening. This, to me, is a very disconcerting sign for those who may be long growth technology stocks.

Meanwhile, the VIX started below $10 today, which seems to be relatively accurate gauge of market participant complacency. I don’t think enough money managers are hedging risk as the market continues to make all time highs.

I seem to remember a similar feeling of market euphoria where nothing could possibly go wrong back in 2007. I’m not saying that this is a market top, but there’s really no way to tell until later.

Full disclosure: Short NASDAQ 100. May increase short over next 48 hours.