While I hate to be the bearer of bad news, something is suddenly happening in the luxury high-end consumer market that stock analysts and economists have failed to pick up on.
Coach, Inc. (NYSE/COH), a seller of high-end leather handbags and a stock I follow closely to monitor consumer spending patterns on luxury items, yesterday reported that it made $303 million in its latest quarter on $1.26 billion in sales. Same-store sales climbed 13% and the company announced a $1.5-billion stock buyback program.
Looking at Coach’s results, one would think the luxury high-end consumer is back to his/her 2007 spending habits and that the luxury market is back big-time. But one thing is terribly wrong with this picture. Even though Coach’s sales were strong, even though they beat analyst expectations and even though they are buying their stock back because management believes it is such a great deal, the stock is quickly moving down in price.
Coach’s stock reached a 52-week high of $58.55 in mid-December 2010. Since then, the stock has been coming down. In fact, it’s down 9.3% since then to $53.09. We all know January has been great for stocks, with the Dow Jones Industrials up 3.5% in January, so why is a high-end luxury company (with great earnings) seeing its stock price decline?
Well, Coach is not alone. If we look at the stock of Tiffany & Co. (NYSE/TIF), the high-end retail store operation, we see the same picture: Tiffany’s stock traded at $65.76 in mid-December 2010. Despite better than expected earnings from Tiffany as well, Tiffany’s stock is down 11% since mid-December to $58.60 today.
Hence, we have two bellwether consumer luxury item retailers down about 10% in the past four to six weeks, while the stock market continues to rally. In my opinion, the price action of these stocks smells of trouble ahead.
I’m a big believer in stock prices being a leading indicator. And if I didn’t know better, I’d say that the price action of these two stocks is telling us that the high-end consumer market will suddenly be cooling spending in the months ahead—something very few analysts and economists are predicting today.
Another signal of a market top coming and economic trouble ahead? Unfortunately, that is what the price action of these two well-known luxury brand stocks are telling us.
Michael’s Personal Notes:
Words of wisdom released Monday from my highly respected colleague, Robert Appel:
“We get that, after some 10 years of anguish, readers want to hear good news, but unfortunately we have a policy of telling the truth, at least as we see it. Stocks are holding up only because Mr. Bernanke has prioritized the market as against all other asset classes. Bully for him.
Gold is consolidating for a time -- we did call this for you, but this too shall pass…and provides an opportunity to increase positions.
A lot of potential bad news is on the way. This includes Euro debt, the collapse of bonds, unsold inventory in housing that is not being disclosed, the collapse of cities and states, massive food inflation, general inflation, and more unpredictable weather. There could be a major heat wave this summer -- which will additionally interfere with the growing cycle.
And labor unrest -- the working man is actually the “canary in the mineshaft;” he is told by the media that there is no inflation, but he knows precisely what it costs him to feed and care for this family. The news should hit no later than late spring.”
In specific to gold bullion, Appel says:
“There are no absolutes here. In 2010, we saw the gold complex take what we called the ‘Death of a Thousand Cuts’ over a period of many months before rocketing in the fall, and making a lot of money for our readers. The year 2011 is NOT going to follow that pattern, we think. There appears to be the fast pushing of a negative pall (down move) over the entire gold/silver market which will drive away all but the most determined and act as the setup for a much bigger up push to come.
We still expect $2,000 gold by next year and remind you that, unlike many others, we have never talked to you about $5,000 or $10,000 or $20,000 gold because the powers that run the world would sooner have a collective root canal than allow that to happen. But $2,000 gold in very doable and would reward those nations (Russia, China) that have been accumulating, while Britain and the U.S. have been dumping.
In the meantime, watch the $1,265-per-ounce level, which should provide an interesting test of a local bottom, while at the same time being enough of a drop from the $1,400-plus range to mystify the weak traders who will, by then, be hiding under their beds.”
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this morning up 3.5% for the year. There is no doubt about it; stocks are off to a great start in 2011. I’ve been writing in these pages throughout December 2010 and January that, in the immediate term, stocks would rise. And that is exactly what has been happening. Dow Jones Industrials 12,000, here we come.
But the air of optimism is getting too thick for me. Last night, when I was listening to President Obama’s State of the Union address, the President made specific mention of the stock market “being back up.” Too many investors and analysts are turning bullish. While we may be a few weeks away still from a market top, the bullishness I see amongst market participants is characteristic of the type of investor sentiment we see when the stock market is topping out.
What He Said:
“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.
The power of a few large-cap companies to sway stock market sentiment is great. As recent corporate events illustrate, not only does good earnings news move the market, but, increasingly, dividend news is moving share prices. This is big and it’s a sign of the new age of austerity among corporations and individual investors.
Dividend investing is a growth industry because of demographics, interest rates that are historically low, and the fact that a lot of big corporations have excess cash to play with. In fact, the cash hoard among many large, brand-name companies is growing and investors can expect much more news related to increased dividends and share buybacks.
Corporations and individuals with money have the same problem. There are very few places to invest that offer a decent return. Investors seeking income can’t find the kind of inflation-adjusted returns in virtually any other capital market other than equities. Corporations with excess cash can’t invest that money and make a decent return with interest rates so low. Accordingly, they’re returning the cash to shareholders in the form of share buybacks and dividends.
Frankly, it’s a good time to be a dividend investor, especially if you expect the economy to grow modestly over the coming years. While I’m not an advocate for taking on new positions in the stock market at this time, the performance of a number of my benchmark companies has been tremendous in recent history—and most of these companies pay shareholders a respectable dividend (DD, CAT, UTX, MMM, CMI, ADP, and PEP, for example.) Just like in the fashion industry, trends change. Over the next several years, I think that large-cap, higher-dividend-paying stocks are going to outperform. I know that history suggests that small-cap companies outperform coming out of a recession, but not this time. The business cycle this time around favors large-cap, international companies with excess cash and pricing power. Domestic small-caps won’t be able to compete.
I would even go so far as to advocate investing in those dividend-paying large-caps that have already experienced major upward moves in their share prices. In a way, it’s kind of like momentum investing in dividend-paying stocks. I’d rather own a proven winner over a large-cap, dividend-paying company whose stock price is in the doldrums. I like value in growing small-cap companies, but I like a proven track record in large-cap investing. Value here is less important in this business cycle.
I know a lot of investors who spend a lot of time looking for income-generating securities. It’s going to be a growth industry for investment banks. My grandmother never owned a stock her entire life and only bought CDs to sock away some money. She liked the security. But with interest rates so low (even if they go up later in the year), she might think twice nowadays with a company like PepsiCo yielding around three percent and a long-term track record of solid capital appreciation.
There is optimism on Wall Street, but be careful as there is also risk. You need to understand the concept of risk management as a key element to investing success. The reason why I want to discuss risk management is my sense that there are some of you who probably fail to incorporate some sort of risk-management strategy. If you do have one, that’s fantastic and you are probably sleeping well at night. If you have been delinquent in this area, be careful.
I have been involved in the markets for over 20 years. After reading the strategies of some of the world’s best traders, a commonality surfaces: the most important tenet in trading is preserving your investable capital via the use of risk management. The last thing you want to happen to you is to trade sloppily and lose your tradable capital. Instead of being a player in the exciting world of trading, you would be relegated to watching from the sidelines. But guess what? You can avoid this by following some simple strategies.
When the price of a stock trends higher, you should always think about a potential exit strategy. This does not mean liquidating profitable trades, but rather protecting your unrealized gains.
If you have a price target for your stock, you can sell the stock when it reaches that target. Alternatively, if the gains are significant, you can take profits on a portion of the position and let the remaining portion ride. For instance, if a stock rises by 100%, you can liquidate 50% of the position and let the remaining half ride. Under this simple strategy, you realize some profits but at the same time create a zero-cost trade, as you have already recouped your original investment. You can view the remaining half as your risk capital.
Another strategy that needs to be considered is the use of mental or physical stop-loss limits. The reality that is no one is perfect in trading. I have made mistakes and so have many of you. If you can accept this, then that’s half of the battle. To protect against mistakes, you should use stop-losses on your positions. Where to place the stop depends on how much capital you are comfortable with risking. Stops can range from three percent below the purchase price to as much as 15% or more. Setting a close stop can take you out quickly in a fast market. Conversely setting the stop too low can entail large losses.
Stops should also be used when a stock is trending higher. These stops are referred to as trailing stops and are constantly adjusted as the price of the stock rises. This can easily be done in a spreadsheet or by hand. Adapting trailing stops helps to protect your gains as the stock rises.
Some of you may be wondering if the stop-loss should be a mental or physical stop. I prefer the physical stop, as it effectively eliminates the potential influence that emotion can play when you trade. I’m going to say it here. EMOTION kills good trades and often makes you keep your losers. Keeping losers is counterproductive and will make you a viewer from the sidelines. EMOTION has no role in trading.
I consider EMOTION the cancer of trading and it needs to be eradicated!
And for those of you familiar with options, you can employ a “Put Hedge” or “Protective Put” to help minimize the downside loss. If you own mutual funds, you can buy the appropriate index Put by determining the type of fund it is (e.g. small-cap, blue chip, S&P 500, technology, etc.).
If your portfolio is 50% technology, 30% large-cap, and 20% small-cap, you can hedge the risk by allocating 50% to Puts on the NASDAQ 100, 30% to S&P 500 Puts, and 20% to Russell 2000 or S&P 600 Small Cap Puts. If you hold only a few large positions, say Microsoft, Pfizer, General Electric, Citigroup and Home Depot, you can simply buy corresponding Puts to match.
If you are already adhering to risk-management strategies, good for you! Otherwise, learning them will make you a better and more successful trader and investor.
