Moderator: Global Moderator
ERIC REGULY EUROPEAN BUREAU CHIEF
PUBLISHED 10 HOURS AGO
UPDATED MAY 21, 2018 FOR SUBSCRIBERS
Manhattan’s Broadway, one of the most famous avenues in the world, is a shopping mecca that bustles with energy. Or it used to. The stretch between 48th and 57th streets looks like it was hit by a neutron bomb. Along those nine blocks, only one store has been open recently; it sells drones. Excluding a few bank branches and fast-food outlets, the rest of the storefronts are boarded up.
What happened? Amazon and other digital retailers happened, that’s what.
Manhattan is not the only victim. While Amazon’s popularity has pushed its stock market value to more than 700-billion, it is cutting swaths through main streets from Los Angeles to Rome and gutting suburban malls. Last year saw record retail defaults in the United States, and 2018 could set another record, according to S&P Global Ratings.
Why should you care? Because the ease of online shopping may come at an unexpected price: watching your property taxes go up. They may not have gone up yet because of the Amazon effect, but Amazon is just getting started. The CEO of one of the world’s top real estate companies, who did not want to be quoted by name, says he thinks governments will be forced to raise property taxes to overcome the inevitable tax shortfall from the ailing retail sector.
In North America and Europe, the traditional retailing industry isn’t just a huge employer, typically ranked second, third or fourth, but it is also a huge spinner of property taxes. When retailers go bust, their tax payments collapse, too.
How will city and regional governments make up the lost revenue? The obvious targets are residential and office real estate.
If your city’s property tax is a percentage of assessed value, the rate might rise. Or land transfer taxes might go up. Or both.
Governments will not allow themselves to go broke while Amazon chomps its way through the retail landscape.
Retail everywhere is under pressure.
Last year, Bill Ackman, CEO of the Pershing Square activist hedge fund, which took baths on large investments in shops and malls, pronounced the traditional department store dead.
The numbers suggest he is not exaggerating by much, and the wildly overbuilt American retail market is more vulnerable to implosion than those elsewhere.
PwC has estimated there is 24 square feet of retailing space per person in the United States. The European figure is a mere two to five. Another survey puts Canada at 14 square feet. The U.S. retail glut is partly due to private equity funds, which bought chains like J.Crew, loaded them with debt and expanded them to pump up sales. Now those overextended chains are in trouble as Amazon comes on strong.
Challenger Gray & Christmas, a U.S. employment firm, reports that retailing is now the top job-cutting sector. In the first three months of this year, retailers slashed 56,500 jobs, almost 50 per cent more than the same period in 2018. In recent quarters, retail job losses have exceeded gains, according to the U.S. Bureau of Labor Statistics. And the pace of store closures may be far from peaking out. In 2011, Amazon and its smaller e-commerce competitors took just 5.1 per cent of total American retail sales. Today, they account for 10 per cent.
City and regional governments everywhere must be getting worried. In the United States and Canada, property tax is paid by the owner of a property, not the tenant. When a shop goes vacant, the landlord still has to pay the tax, in theory.
In practice, owners often cut deals with governments to reduce or suspend the tax payments until that property is reoccupied. In Toronto, until recently, owners of vacant stores could apply for property tax rebates. But the program is a cash drain, and the city is winding it up.
In the United Kingdom, the government tax loss when a store closes is particularly nasty, because the so-called “business rates” charged on commercial properties are hefty. The tax is usually about half of the value of annual rent, and it raised 29-billion the 2016-17 fiscal year, equivalent to 4.5 per cent of the total national tax take. Governments bill tenants, and if the tax isn’t paid, the action is taken against the occupier, not the landlord. If there is no tenant, no business rate can be charged.
The trouble is that the alternative to granting tax relief is tax default, which leaves governments with nothing. Cutting deals with mall owners will continue as more retail chains shrink or go bust, as Sears Canada and Toys “R” Us have.
If traditional retailers continue to be ground down, no government is going to raise income taxes to fill the hole that would be a vote killer. But property taxes are a different matter. Notice how they never go down, even in the best of times? With traditional retailers on their way out, watch property owners pick up the tax slack.
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SCOTT BARLOW MARKET STRATEGIST
PUBLISHED 55 MINUTES AGO
UPDATED JUNE 25, 2018 FOR Utopia
A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
The best way for investors is to let other investors make them – particularly otherwise successful money managers – and read about that. Michael Batnick has written an entire book on this theme and the best takeaways are summarized by the Ivanhoff blog,
“‘Professional win points. Amateurs lose points,’ therefore professionals should play to win and amateurs should play not to lose (try to make fewer mistakes) … ‘A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.’ and ‘Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.’”
“Ten Lessons from Michael Batnick’s Book ‘Big Mistakes’” – Ivanhoff
Trade war news dominates this morning after reports indicated that the U.S. is preparing new limitations on technology trade with China. This is, surprising to many, an area where the White House has a point although this realization doesn’t mean tariffs are an appropriate or geopolitically advisable solution,
“amid the hysteria surrounding these two companies, we may be missing a less obvious but potentially more impactful challenge: China’s ambitions to radically overhaul the internet… n late April, just days after the Commerce Department announced the denial order against ZTE, Xi Jinping, the president of China, gave a major speech laying out his vision to turn his country into a “cyber superpower.” His speech, along with other statements and policies he has made since assuming power, outlines his government’s ambition not just for independence from foreign technology, but its mission to write the rules for global cyber governance—rules that look very different from those of market economies of the West.”
“Beijing Wants to Rewrite the Rules of the Internet” – The Atlantic
“U.S. plans limits on Chinese investment in U.S. technology firms” – Reuters
Crude prices are lower Monday but since I’ve been away for a week and still catching up, I’ll just post relevant links instead of trying to offer context,
“Oil drops after OPEC output deal, but markets to stay tight” – Report on Business
“Global #oil benchmarks are clashing in the aftermath of OPEC’s meeting in Vienna” – Bloomberg
Goldman Sachs strategist David Kostin notes the consensus view that U.S. telecom and industrial stocks will outperform for the remainder of 2018, but he believes U.S. banks and technology stocks (despite the trade issues) offer the best risk adjusted returns,
“Consensus expects Telecom Services and Industrials will deliver the strongest prospective risk-adjusted returns … We recommend investors overweight Financials, which has the fourth highest prospective risk-adjusted return among S&P 500 sectors (0.6). The median Financials stock offers 13% upside to consensus target prices … vs. 6-month implied volatility of 22. We expect the sector to outperform as 10-year Treasury yields rise to 3.6% by year-end 2019. … Financials stocks with the highest prospective risk-adjusted returns include AMG, PRU , C, … and MS.”
“@SBarlow_ROB Consensus likes US TComs and industrials but GS likes banks and tech” – (research excerpt) Twitter
The cows produce milk - that is your income.
The cows also produce calves. The calves are the growth, as they will grow to increase the number of cows you have and, subsequently, the amount of milk you generate.
If you can cover your expenses using just the milk produced it would be best. You will always have a known amount of milk, or income.
However, if you reduce the amount of cows (taking more money out of your account than is generated), then you not only reduce your income, but also your growth potential. You need to be aware that if you keep reducing cows over time, there will be less income and little growth.
As market nears its longest-ever bull run, six things that will signal it’s about to end
PUBLISHED JUNE 29, 2018
UPDATED 46 MINUTES AGO
The global trade system may be stumbling toward collapse. The stock market, though, appears remarkably unconcerned.
During the first half of the year, North American stocks managed to shrug off trade-war rumblings and tirades from U.S. President Donald Trump. In Canada, the S&P/TSX composite finished June at essentially the same level it started the year. In the United States, the S&P 500 advanced modestly, gaining 6.2 per cent in Canadian dollar terms.
The question for the second half is whether stocks can continue to remain impervious to the new reality of rising tariffs. The answer hinges on whether economics, history or politics will dominate investors’ minds.
Open this photo in gallery
Specialist Jay Woods, centre, works with traders on the floor of the New York Stock Exchange on Thursday.
If it’s economics, stocks should continue along their placid course. Following huge tax cuts unleashed by Congress late last year, the U.S. is booming. Unemployment has fallen to its lowest level since 2000. Corporate profits are on a tear. While you can disagree with the rationale for the tax cuts, and worry about the deficits they will leave behind, there’s no reason to think the market-boosting impact of all that stimulus will suddenly fade between now and Christmas.
On the other hand, people who know their history should be cautious. Wall Street has advanced for more than nine years without suffering a 20-per-cent drop, the usual definition of a bear market. This extended period of investor bliss is on track to become the longest bull market in U.S. history on Aug. 21, according to Howard Silverblatt of S&P Dow Jones Indices.
You have to wonder how much longer this geriatric bull can run. Politics could be the blow that finally brings it to a halt.
Mr. Trump’s ferocious defence of his highly personal “America First” interpretation of macroeconomics has already soured relations between the U.S. and its major allies as well as China. Further escalation of the current conflict, especially a showdown between Washington and Beijing, could send stock prices tumbling worldwide.
Investors should remain on high alert. To help, we’ve assembled a six-pack of key indicators that can help guide you through the current chaos – or at least gain a bit more insight into some of the forces at play.
THE LONG AND SHORT OF IT
Only bond geeks normally pay much attention to the yield curve, a measure of the difference between short-term and long-term borrowing costs. But this obscure yardstick has emerged from the shadows in recent months – and for good reason. Over the past half-century in the United States, it has provided remarkably accurate warnings of trouble ahead.
The danger comes when the yield curve inverts its normal shape. It almost always costs more to borrow money for 10 years than it does for two years. But on the rare occasions when two-year rates on U.S. Treasury bonds move higher than the equivalent 10-year rates, a recession typically follows within six months to two years.
Why is an inverted yield curve so ominous? In part, it’s because it suggests financial institutions will have to pay more in interest on short-term deposits than they can make by lending the money for longer periods. That has a chilling effect on lending and on business in general.
The yield curve is still not inverted, but the gap between short-term and long-term rates has narrowed to its tightest level since 2007, just before the financial crisis. At a mere 33 basis points – there are 100 basis points in one percentage point – the yield curve is essentially flat.
If the U.S. Federal Reserve continues to hike short-term rates, and long-term rates remain at historically low levels, the yield curve will invert. If that happens, brace yourself for a stampede of investors out of the market.
GOOD NEWS IN STORES
Not everyone finds the yield curve all that persuasive, especially right now. Skeptics argue that massive bond buying by the Fed and other central banks has artificially depressed long-term rates.
If you’re seeking further clues to what lies ahead, a look at consumer spending can provide some help. Most of the time, sales at U.S. stores and restaurants grow in real, or after-inflation, terms. When year-over-year growth stops and real sales shrink, a recession is often starting.
To be sure, this isn’t an infallible indicator. There are occasions when growth touches zero or falls below that line without a recession beginning. But the combination of two signals – a recently inverted yield curve and anemic retail sales growth – usually indicates a serious downturn is brewing.
Right now, real retail sales growth tells a positive tale. In the most recent report, for May, U.S. retail and food-services sales expanded at a 3.1-per-cent annual clip. At least by this measure, there is little need to worry about a recession any time soon.
SAFE AS HOUSES
Of course, not all potential problems emanate from the United States. In Canada, one big question is what home prices will do next. Stagnating or falling house prices would hurt a large swath of the economy, from mortgage lenders to construction workers to real-estate agents.
The Teranet-National Bank National Composite House Price Index offers a convenient way to track what’s happening across Canada. After advancing without a break since the financial crisis, the index has struggled to make new gains since last August. However, in May, the benchmark advanced 1 per cent from the previous month.
For now, that suggests trade fears and new mortgage rules are having only a limited effect on this key sector of the Canadian economy. That sanguine view gibes with a recent report from Moody’s Analytics, which predicts minor falls in Toronto and Vancouver home prices, but argues an extended national decline is unlikely.
However, if the Teranet index starts sliding again, and keeps sliding for more than a few months, all bets are off. Investors could well take that as a cue to start selling Canadian stocks.
Teranet Composite 11 Index for the 11 biggest cities in Canada
Index base value of 100 = June 2005
THE GLOBE AND MAIL, SOURCE: TERANET-NATIONAL BANK
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The question that hangs over markets everywhere is whether global commerce is heading for a big freeze. Three indicators can help you monitor whether the current head-butting on tariffs is merely an annoyance or something more ominous.
For starters, there’s the CSI 300 Index, which tracks the top 300 stocks on the Shanghai and Shenzhen exchanges. It’s a notoriously volatile benchmark, but it offers a useful window on the state of mind of Chinese investors and what they foresee for the trade showdown between Washington and Beijing. The index has been sliding since late January as the rhetoric grows increasingly fierce.
On the other side of the world, the S&P SmallCap 600 Index offers a complementary viewpoint. This benchmark of smaller U.S. companies has soared over the past year as investors have reacted to trade concerns by flocking to businesses that are less exposed to international markets. The index has declined in recent days, suggesting that some people, at least, may be growing more optimistic about the outcome of trade talks.
Finally, there’s the yield on the 10-year Italian government bond. It’s a good indicator of the state of euro zone tensions, with a higher yield indicating elevated stress. The yield soared in May, shooting from below 1.8 per cent to almost 3.2 per cent, as worries grew over Italy’s new populist government. It has since subsided to about 2.7 per cent, but any new surge would signal a fresh worry for investors.
WHERE TO FIND IT
You can track the current state of the yield curve by going to FRED, the economic data site maintained by the Federal Reserve Bank of St. Louis (fred.stlouisfed.org). Search for “10-year minus two-year” and you’ll see the current difference between the two yields.
FRED will also give you the latest on U.S. retail sales. Search for “advance real retail and food services sales,” then use the edit button to display the number as a percentage change from a year ago.
The Teranet house price index can be found at housepriceindex.ca. Turn to Google for the stock market indexes and Italian bond yield.
Take shelter investors: Trump is not a bluffer on trade and all indications now suggest big trouble ahead for stocks
SPECIAL TO UTOPIA
PUBLISHED July 6 2018
The U.S. launched a trade war with China on Friday as President Donald Trump’s threats continue to turn into reality.
Somewhat surprisingly, the stock markets didn’t blink, with both New York and Toronto finishing higher. But that bravado may not last much longer. Investors will eventually realize that Mr. Trump is not bluffing when it comes to trade. So far, he has followed up every threat with action. If he continues – and there is no reason to expect him to stop any time soon – he’ll wreak havoc with the world economy.
Just look at his record. He has been steadily escalating the tariff wars for the past several months. His administration has slapped tariffs on washing machines, solar panels, newsprint, softwood lumber, Bombardier jets, steel, aluminum, and a range of Chinese exports. And there is a lot more remaining in his arsenal.
The President strongly believes that the U.S. will be the winner in any trade war. And if winning means losing less than the other guys, he is probably right. In a war of attrition, the whole world will suffer but reports we are seeing now from economists around the world suggest the U.S. will suffer less when it comes to job losses and diminished GDP growth.
There is one thing the markets need to understand about Mr. Trump. When he proclaims “America first” - he means it. He is not interested in win-win scenarios. He does not give a damn about the damage he inflicts on other countries, even his closest neighbours, Canada and Mexico. He is only interested in winning at whatever cost.
That’s why we need to pay close attention to his rhetoric. When he says he will escalate the trade war with China if they retaliate (which they have done) he means it. If he blusters about imposing crippling tariffs on car imports, he means it. He’s convinced he’s right, even if his actions fly in the face of all economic logic. And he has surrounded himself with sycophants who reinforce his beliefs. All the naysayers have fled the stage.
As might be expected, his targets are responding. China is matching the U.S. tariffs dollar for dollar. If Mr. Trump raises the ante, Beijing says it will respond in kind.
That’s the same line Canada and the EU are taking. You hit our exports, we’ll hit yours, dollar for dollar. The President has made it clear he doesn’t like that response. It appears he expects the rest of the world to suck it up and roll over. That’s not going to happen.
I was interviewed on a radio show last week. The host suggested that perhaps all this is political posturing by Mr. Trump in the run-up to the mid-term elections in November. After that, the President may be more reasonable, she suggested.
I disagreed, mainly because Mr. Trump, in his own mind, thinks the U.S. is being reasonable. His actions, he believes, are simply redressing long-standing abuses in the global trading system. It angers him that his trading partners don’t see it that way.
This has all the earmarks of an escalating 1930s style trade war, in which nations continued to raise tariff barriers in order, they thought, to protect their own economies. The end result was a massive drop in world trade, plunging GDPs, wide-scale unemployment, an increase in unrest, the growth of militarism, and, in the end, World War II.
Hopefully, this cycle doesn’t end in World War III. But it almost certainly will end with more people out of work, higher inflation, and broken alliances.
The U.S. stock markets haven’t seemed overly perturbed by all this, perhaps because the American economy continues to be strong and the U.S. is more self-sufficient than most countries. But the numbers suggest concerns are increasing. Despite finishing in the black on Friday, the Dow Jones Industrial Average is down 1.1 per cent for the year. The S&P 500 is still in the black at +3.2 per cent, but that is a tepid advance in the face of a robust U.S. economy, strong earnings reports, and the huge financial benefit of the corporate tax cuts.
Here at home, the TSX is up a modest one per cent year to date but that’s mainly due to the surge in oil prices. As a result, the energy sector, the second-largest component of the index, is ahead 7.4 per cent year to date.
The escalating trade war is now a clear and present danger, but it isn’t the only thing investors should be worried about. There are other warning signs out there. They include:
An aging bull market. This bull traces its origins back to March 2009, when the market hit bottom after the fall-out from the Great Recession. That’s the second-longest bull in history. It has to come to an end sometime.
High valuations. The P/E ratio of the S&P 500 stood at 25.12 at the end of trading on July 6. The median, going all the way back to the 19th century, is 14.69. The P/E ratios on the Dow and the Nasdaq 100 are in the same range. In short, stocks are expensive by historical standards.
Rising interest rates. The U.S. Federal Reserve Board is in a tightening mood and another two or three rate hikes seem likely this year. Even the Bank of Canada appears ready to act, despite our weaker economy. Rising interest rates normally have a negative impact on stocks.
A flattening yield curve. The Wall Street Journal reported last week that the difference between yields on two- and ten-year U.S. Treasury bonds had fallen to its lowest level in 11 years. A flat to inverted yield curve is usually a precursor to a recession.
All the indications suggest that stocks are heading for a fall. I can’t predict when: tomorrow, next month, next year – we’ll only know in hindsight. But the reckoning is coming at some point and we should be prepared.
That means taking some profits, building cash reserves, maintaining some quality fixed income securities, and avoiding speculative stocks.
I’ve said this so often before that it probably seems like I’m beating a dead horse. But this horse is anything but dead. It’s very much alive and galloping frantically towards what I fear is a cliff.
SCOTT BARLOW MARKET STRATEGIST
PUBLISHED 2 HOURS AGO
UPDATED AUGUST 7, 2018 FOR Utopia Members
A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
The Behavioural Value Investor published a useful checklist for investors looking to buy individual equities for the long term. There are 10 questions to answer before committing capital starting with “Do I understand this business well enough to approximately estimate its key economic characteristics in 5 to 10 years?” and including “What would it take for this company to have profits below their current level in 5 years?,”
“Analysts rarely model companies to have declining profits short of the most obvious cases where the business is already in decline. The typical Wall Street forecast for long-term growth is approximately twice the realized rate, in no small part due to a substantial minority of outcomes having declining long-term profitability. Answering this question will get you to think about a more realistic negative scenario”
“The Skeptic’s Checklist” – Behavioural Value Investor
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The potential expansion in electric vehicles sales had investors racing to own lithium and cobalt mining stocks, who provide essential ingredients for lithium ion batteries. Morgan Stanley, however, is warning of an approaching glut in both materials,
“Battery raw materials prices are falling – cobalt has shed 30% from its mid-March peak (LME $30/lb); China's spot lithium carbonate price is down 41% over the same period ($12,300/t VAT-adj) – a move that can only be partly explained by the weakening yuan. Both markets had been trading close to record highs in recent months, suggesting inventory building as EV-fever took hold… lithium supply also continues to expand – the most recent new entrants being Tawana Resources' 20ktpa LCE Bald Hill + Altura Mining's 26ktpa Pilgangoora Lithium. Cobalt supply is also growing as Glencore's 30ktpa Katanga mine ramps (guiding 11kt 2018) + Sherritt's cyclonedamaged Ambatovy mine (4ktpa) recovers.”
“@SBarlow_ROB MS: oversupply looms in lithium, cobalt” – (research excerpt) Twitter
Related: “Dr Copper's gloomy message is being amplified by new fund friends” – Reuters
“The world's second largest copper mine is set to cut output by 55% next year” – Bloomberg
The S&P 500 remains close to all-time highs, but the gloom from analysts and strategists continues unabated,
“'We’re starting to see a much more challenging picture from a very high level; we are starting to see very narrow markets; we’ve got very high expectations and we’ve got high valuations. That’s a pretty horrible concoction to have effectively in terms of markets,'” Roger Jones, head of equities at London Capital, told CNBC’s “Squawk Box Europe.””
As a side note, web traffic statistics for Report on Business indicated a big jump in reader interest in negative market forecasts in the wake of Facebook’s disappointing earnings report.
“Stock markets are facing a 'horrible concoction' of risks and are in need of a reset, strategist warns” – CNBC
“@Callu*m_Thomas [U.S.] Earnings surprise indicator highest since 2009” – (chart) Twitter
Tweet of the Day:
· 6 Aug
@ScottTerrioHMA h**ps://twitter.com/mi_investments/status/1026428558971944960 …
Yep. Seniors are the fastest-growing insolvency-filing age cohort in Canada. Big problems coming, potentially.
9:51 AM - Aug 6, 2018
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Diversion: “The Cognitive Biases Tricking Your Brain” – The Atlantic (from September magazine edition)
ROB CARRICK PERSONAL FINANCE COLUMNIST
UPDATED AUGUST 9, 2018 FOR Utopia
Investment adviser Cliff Broetz had a recent conversation with a client who was “ready to pounce” on a market-linked GIC offered by a bank.
So he researched the information provided to advisers for that particular GIC. The results surprised him so much he wrote me to share his findings and conclusion. Basically, it’s that market-linked GICs are engineered to target people who are “terrified of the stock market,” as the Parksville, B.C.-based Mr. Broetz put it in an e-mail.
Market-linked GICs offer the opportunity to make returns tied to various stock indexes or baskets of stocks with zero risk of losing money. You’d buy one of these GICs in hopes of doing better than a conventional GIC paying current interest rates.
It’s well known that market-linked GICs are for timid investors. But the extent to which they’re designed to advantage the bank issuing them over investors may not be fully understood. The GIC that Mr. Broetz looked had a four-year term and a maximum return of 28 per cent. His client thought that meant 7 per cent a year, but it actually means 6.37 per cent on a compound annual basis.
That’s actually the least of the issues with this particular GIC. According to Mr. Broetz, 10 of the previous 18 issues of this product have shown a zero rate of return to date. The other eight in the series are all under 4 per cent as a cumulative return and most are under 3 per cent.
The GIC that Mr. Broetz’s client found is linked to the performance of a basket of stocks that he described as “often excellent dividend payers and sometimes dividend growers.” He pointed out that dividends account for a significant portion of the returns from investing in the stock market over the long term. Unfortunately, no dividends are paid to holders of this market-linked GIC.
Mr. Broetz said the guarantee offered by market-linked GICs is meaningful to conservative investors, yet misunderstood. True, these GICs cannot lose money if the stock market crashes. But, as the GIC researched by Mr. Broetz shows, it’s easily possible to make a return that is below what a traditional interest-paying GIC offers.
“These linked products prey on those that cannot understand the nuances of the product,” he wrote. “If you want a GIC, go get one.”
PUBLISHED AUGUST 13, 2018
Warm weather, the World Cup and a royal wedding have lifted spirits across Britain this summer and given the economy a slight boost. But nothing has helped clear the gloom from the country’s retail sector, which is on track for its worst year ever and set to shed close to 70,000 jobs.
On Friday, one of the country’s biggest department-store chains, House of Fraser, filed for bankruptcy protection from creditors, threatening 16,000 jobs. The chain was bought within hours of filing for £90-million ($150.48-million), by British sporting-goods giant Sports Direct International PLC, which is expected to close dozens of outlets. The House of Fraser transaction came a day after hardware retailer Homebase announced plans to close 60 of its 249 stores, affecting 1,000 employees.
So far this year, nearly 2,000 stores have closed across Britain, putting 28,000 people out of work. That’s already the highest number of store closings in five years, and the total tally is expected to climb much higher, with analysts estimating another 40,000 jobs will be lost. More than a dozen high-profile names, including Mothercare, Maplin, Poundworld, Marks & Spencer, Toys "R" Us and Debenhams, have either filed for bankruptcy protection, shut outlets or drastically cut costs.
"This is a critical period for the retail industry, caused by a perfect storm of pressures including rising costs and new technology changing how people shop,” said Helen Dickinson, chief executive of the British Retail Consortium.
Sales by high-street merchants have been falling steadily for months as inflation creeps up, Brexit concerns rise and consumer confidence remains shaky. Inflation has reached 2.4 per cent, above the target of the Bank of England, and concerns the country could leave the European Union next year without a trade agreement, have raised concerns the economy could slow and decrease consumer spending.
Monthly tracking by consultants at the London office of BDO LLP shows that in-store sales fell 1.1 per cent in July, marking the sixth negative month in a row and the worst start to a year in more than a decade. Weak sales have persisted despite a slight pickup in the overall economy, which grew by 0.4 per cent in the second quarter compared with 0.2 per cent in the first three months of 2018. “The bleak and crippling start to the year shows no sign of abating, with deep discounting set to eat into margins that are already being stretched paper-thin by poor sales and rising costs,” BDO retail analyst Sophie Michael said in a recent report.
Richard Hyman, a London-based retail consultant, said the trend isn’t changing any time soon. “We are only at the beginning of the downturn,” he said in an interview on Friday. “There are too many websites, too many stores, too many retail companies, and a lot of them just aren’t good enough. They don’t understand their customers well enough and they are not good enough at inspiring people such that there’s a reason for them to visit their stores.”
Indeed, figures in a comprehensive study of Britain’s retail sector released last month by former retailing executive Bill Grimsey indicated that 6,000 more retailers will fail by 2020.
Mr. Grimsey and others point to a host of reasons for the decline, notably the move to online shopping which has hurt standalone stores. Internet sales as a proportion of retail sales have increased from 10.4 per cent in 2013 to 17.9 per cent in 2018 and the figure is expected to reach 30 per cent by 2025, according to Mr. Grimsey. And while Britain’s population has increased by 0.7 per cent annually, the number of people visiting high streets has fallen by 17 per cent in the past five years.
The result has been a transformation of many downtown areas. The number of shops opening in Britain has fallen by 11.4 per cent since 2013, while the store-closing rate has increased by 1.1 per cent, according to Mr. Grimsey’s report. Those stores have been replaced largely by restaurants and bars, as well as health and beauty shops. “The fundamental structure of Britain’s town centres has changed from goods transaction to one of consumption of food and experiential services including health and beauty,” the report said. It noted that only large shopping malls are showing a growth in sales, and that’s partly because they offer restaurants and entertainment along with shopping.
Mr. Grimsey made a series of recommendations to bring shoppers back downtown, including relatively simple changes such as increasing the amount of public WiFi, making parking easier through the use of apps and offering more space for cyclists and pedestrians. But Mr. Hyman said the sector is facing a long-term challenge. “This is structural,” he said. “What we’re seeing is the result of far too much [retail] supply and not enough demand. We’re in for a rough time I’m afraid.”
SCOTT BARLOW MARKET STRATEGIST
PUBLISHED AUGUST 15, 2018
UPDATED 4 MINUTES AGO
A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Are commodity prices the next rolling bear market?
Morgan Stanley strategists Andrew Sheets and Michael Wilson predicted a series of rolling bear markets in 2018 as popular investment themes are taken out to the woodshed one by one. They have been proven accurate in light of the early year collapse of volatility-related investments and most recently the FAANG-related plunge for Facebook.
Wednesday morning markets are characterized by sharp weakness in copper prices and the broad industrials metals and mining sectors,
“Copper prices fell to their lowest level in over a year on Wednesday, as the emerging market sell-off boosted the dollar and raised concerns about a hit to global economic growth… The sell-off in Turkey’s lira and emerging market shares has propelled the dollar to a 13-month high against major currencies, making commodities more expensive for non-US consumers. At the same time, recent economic data point to a slowing Chinese economy, which consumes around 40 per cent of the world’s copper.”
“Copper hits 13-month low as dollar strengthens on EM sell-off” – Financial Times (paywall)
“@tbiesheuvel Another ugly day for the miners” – (chart) Twitter
“Copper collapses below $6,000 as investors flee from commodities “ – Bloomberg
“Canadian stocks at risk from emerging-market turmoil if it intensifies beyond Turkey” – Barlow, Inside the Market
The big corporate news domestically is that Constellation Brands, owners of the Corona beer brand, appears dead set on diversifying their line of self-stupefying offerings by increasing their stake in Canopy Growth Corp.,
“Constellation Brands has signed a deal to invest $5-billion in Canopy Growth Corp. to increase its stake in the marijuana company to 38 per cent and make it its exclusive global cannabis partner. Under the agreement, Constellation, a global producer of beer, wine and spirits, will acquire 104.5 million Canopy shares at a price of $48.60 per share.”
“Constellation Brands to invest $5-billion to boost stake in Canopy Growth” – Report on Business
“Corona beer maker Constellation ups bet on cannabis with $4 billion investment in Canopy Growth” - CNBC
Moody’s has calculated that domestic banks can withstand a 35-per-cent decline in Canadian housing prices,
“Canada’s six biggest banks and Quebec’s Desjardins Group “incrementally improved" their capital buffers to absorb C$14.3 billion ($10.9 billion) in mortgage losses from such an economic shock, which would also include a 10 percent loss for foreclosure costs,”
“Canadian Banks Can Withstand a Housing Shock, Moody’s Says” – Bloomberg
Tweet of the Day: (From CIO of asset management company with US$265-billion under management)
This week is showing us once again exogenous forces can spill into other markets. Contagion from the Thai baht decline in 1997 led to a global crisis….the collapse in the Turkish Lira (and problems in Italy, Argentina, India, and trade war rumblings) will run a similar course.
1:07 PM - Aug 14, 2018
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Diversion: Easily the best (and most wide ranging) interview with a magician I’ve ever read,
“In Conversation: Penn Jillette Talking magic, truth, and Trump’s alleged Apprentice Tapes.” – Vulture
FOLLOW SCOTT BARLOW ON TWITTER @SBARLOW_ROB
TICKERS MENTIONED IN THIS STORY
SYMBOL NAME LAST CHANGE % CHANGE
STZ Constellation Brands Inc 203.00 -18.81decrease -8.48%decrease
WEED-T Canopy Growth Corp 42.23 +10.08increase
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ME..Well written IMO
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SCOTT BARLOW MARKET STRATEGIST
PUBLISHED DECEMBER 4, 2018
The Financial Times’ (see linc below to read) Alphaville site discussed the most important question for global investors in a Dec. 3 column in “Is the global economy “late cycle”?”
The end of the market cycle and the beginning of a sustained, painful bear market is a momentous occasion for investors, particularly those close to retirement. We have been told time and again that timing the market is impossible and not to be attempted under any circumstances, but this is little consolation for investors caught with holdings that included more downside risk than they expected, and take steep losses as bear markets begin.
Alphaville author Colby Smith was unable to come to a firm conclusion as to whether the rally is on its last legs and I’ll discuss why I think that is below. The evidence is mixed, as Mr. Smith points out,
“Lofty valuations, soaring profit margins, a flattening yield curve and a Federal Reserve tightening in the face of (admittedly muted) inflationary pressures… make an easy narrative. So much so that most analysts are already baking in the next recession.”
Furthermore, for the pessimist side of the ledger,
“Beyond the economy, George Gonclaves of Nomura says it’s not just the flattening yield curve (perhaps the most popular recession signal) that is pointing to the late cycle. Financial markets are as well. Take household net worth as a ratio of GDP and the total value of the S&P 500 as a percentage of GDP. Gonclaves points out that tracking the wealth effect from rising asset values says a lot about the business cycle. As his chart … shows, both of these ratios sit near record highs.”
But on the other hand,
“According to [UBS analysts Pierre Lafourcade and Arend Kapteyn], accelerating private consumption, investment growth and strides in productivity, among other gauges, suggest that the global economy is not yet late cycle.“
There will always be conflicting investing signals from both markets and the global economy – there has never been a time when all data pointed to the exact same conclusion. That said, I am expecting more forecasting confusion than usual as the closest analogue to the past decade is the 1930s when the global economy was completely different.
I highly recommend --see below..“How The Economic Machine Works,” a video made by hedge fund titan Ray Dalio, founder of Bridgewater Associates. Mr. Dalio argues that there are little debt cycles, occurring every five to eight years, and big cycles that take 75 to 100 years. The little cycles end in what economists call ‘usual post-War recessions’ where slowdowns act as corrections to excess credit and business expansion.
The scale of the 2007-2008 crisis makes it the end of a big cycle, in Mr. Dalio’s template. Historically, what follows is an extended debt deleveraging process that causes severe drops in economic growth as it did in the 1930s. But over the past decade, central banks have tried to prevent a similar downward economic spiral with unprecedented monetary stimulus.
The global economy is in uncharted waters to a significant extent. The recession of the early 1990s, for instance, will offer little precedent because that was a conventional small cycle correction. The 1930s doesn’t offer much help either because of globalization, technology, the importance of intellectual property as a profit margin generator, and many, many other factors.
There are recession indicators I’m following closely – notably corporate debt spreads and the shape of the yield curve. At the same time, because the global economy has rarely – if ever – been in a similar situation, I’m open to the possibility we won’t see the bear market coming until it’s happened.
-- Scott Barlow, Globe and Mail market strategist
I highly recommend “How The Economic Machine Works,” a video made by hedge fund titan Ray Dalio, founder of Bridgewater Associates. Mr. Dalio argues that there are little debt cycles, occurring every five to eight years, and big cycles that take 75 to 100 years. The little cycles end in what economists call ‘usual post-War recessions’ where slowdowns act as corrections to excess credit and business expansion.
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