Failing Jobs Poison Retail's Soup
By Adam Lass
A major meme bubbling about at the top of the great soup pot this week is "jobs".
Investors are hanging breathlessly onto each and every press release out of Washington, various private think tanks, and such employment outfits as Challenger and Gray.
Not that this is situation is really but so new. For the past couple of years, one out of every ten souls who wants a job is instead leaning up against a post down on the corner. And another one out of ten is way overqualified for their gig serving up fries at the local drive-thru burger joint.
So it comes as no shock that "jobs" has been a dominant "top class" idea that's driving the herd to question the economy's ability to power stocks higher. This situation offers us two interesting disparities that will define market action for some time to come.
The Final Keynesian Screw-up
Economically speaking, the government is stuck between a rock and a hard place.
The Democrats must find a way to get unemployment down below 7% within the next 90 to 120 days if they are to have any hope at retaining the White House and any majority at all in Congress come November 2012.
These Keynesians only know one trick when it comes to jacking up the pace of economic growth: increasing cash in circulation via borrowing and printing.
However, this trick has backfired in the most awful way.
Eventually, inflation spoils the Keynesians' party when the rising cost of goods brings growth to a halt. But every now and then, the rising curve of cost is too steep; it peaks before excess cash can create growth or new jobs, much like 70s-style stagflation.
We are staring down the barrel of that gun right now. Well, two guns really...
Put a Fork in Us: We're Done
Costs continue to rise. May's 0.2% increase in producer prices and 0.4% increase in consumer prices were double analysts' expectations. On the other side of the equation, job creation pretty much ground to a halt and unemployment actually rose again to an acknowledged 9.1% and suspected 22.3%.
Needless to say, the economists are having very public meltdowns, as they face down this Morton's Fork.
If Washington floods the country with more specie — "QE3" or whatever deceptive horse hockey label they slap on this go-round — the dollar will continue to fall and cost of goods will continue to rise. But maybe, if they are really lucky, they will peel a couple of points off unemployment. (Probably not.)
If they hold back on QE3, then the cost of goods might come down.... or not. Once inflationary get started spirals get started, it takes an act of God to break them.
In the end, the Democrats will most certainly lose the White House, warming the hearts of Republicans everywhere.
Meanwhile, this very public "lose-lose" proposition has twisted the great herd's knickers into one hell of a knot.
If you study search term trends (not the be-all or end-all of memetic analytic technique, but still a damned handy reference), you find "jobs" hitting at roughly double the rate of an averaged basket of retail memes... and climbing!
This herd anxiety expressed in two critical ways in May: Folks pretty much stopped buying consumer goods — and investors quit buying blue chip stocks.
The Commerce Department tells us retail sales in general fell some 0.2% in May. (They also revised April down to -0.3%), the first such drops in some 11 months. Major players like JC Penney (NYSE: JCP) and Bon Tons (NasdaqGS: BONT) have just reported specific sales drops of 3.3% and 2.9%, respectively.
This breakdown is reflected in most every blue chip sector chart.
But its implications are most intriguing for the Consumer Discretionary Select SPDR (NYSEArca: XLY).
Retail consumer stocks reflect the false promise of the Obama Recovery more than most. The broad market's recent highs only recovered some 83% of October 2007's high (OEX 846) and 72% of the March 2000 high (OEX 734).
But retail stocks have far exceeded any reasonable expectation of economic growth when the XLY ETF actually matched — and briefly exceeded — its all-time high last month!
Unfortunately for all those folks who got in at these grossly exaggerated prices, the collapse at this new high represents the single starkest technical indication: a double-top failure.
This setup offers us:
- A high probability of a retrenchment to XLY $34.01 (10.05%),
- A reasonable probability of a drop to XLY $29.90 (-20.92%),
- And an outside possibility of a calamitous hemorrhage as low as XLY $26.62 (-29.60%).
We can increase our odds of a successful short play by perusing the XLY's list for a victim who appears even weaker than the index as a whole.
Take a gander at the chart for discount retailer Kohls (NYSE: KSS), which represents some 1.2% of the XLY's total weight. When the rest of retail was setting new highs, poor KSS was only managing a descending series of progressively weaker highs that have only served to carry price to a critical failed test at $56.75.
With a clear break down signal in hand, we can posit:
- A high probability of a drop to support at KSS $46.78.
- Looking beyond this initial reaction, we can anticipate a reasonably probable move to KSS $42.47 (-14.32%),
- And we might quite possibly see a dramatic slide as low as KSS $38.22 (-22.90%).
Here's how to leverage these moves: As I sit to write, the KSS October 52.50 put is being offered at $4.60, with a posted Delta of 0.6206.
Our first target of $46.78 would push this contract up to $6.52 for gains of 42%. A drop to KSS $42.47 would bump that to $9.20 for 99.97% — close enough to a double in my book.
And our Fat Tail target of KSS $38.22 might just let us get to all the way to $11.84 for gains exceeding 157%...
The Vigorish (a Little Something Extra)
Now, I know that many of you folks stick pretty darn close to your home patch of hard assets — land, gas, copper, gold and the like. And I'd be the last one to tell you that this is in any way wrong, at least from an investing point of view...
But I have to tell you straight up this market is looking rather dotty right now. We could easily see broad retrenchments ranging anywhere from a mere 5% or 6% to 30% or even 60% in the very near future.
And pretty much the only way to make good money in a diving market like that is put options.
Good luck and good hunting,
Editor, Wealth Daily
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