U.S. Retail Figures Pull a Fast One

Bill is traveling for the rest of the week, but fear not – we will muddle through without him.

A good bit of activity in the markets since yesterday. The financials rallied in pre-market trade on the news that Goldman Sachs reported $1.8 billion first-quarter profit, and set plans to raise $5 billion through a sale of stock in order to repay its Troubled Asset Relief Program (TARP) loan. (More about this, below.)

Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on “Four Questions about the Financial Crisis” this afternoon.

Hmmm…he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions…

CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing.”

The ‘signs’ he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles.

“A leveling out of economic activity is the first step toward recovery,” said Big Ben. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month.

However, it turns out that retail numbers pulled a fast one – and showed a drop in sales for last month.

Two months of gains has boosted hopes that March’s numbers would follow suit, building a rebound in consumer spending.

But, not so much. The Commerce Department showed that March’s retail sales were down for almost every type of store except necessities, such as food and drugs.

MarketWatch reports: “Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008.

“Economist David Rosenberg of Bank of America’s Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter.”

“The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.”

In other words…outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back…and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out…make do with last year’s summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer…just in case.

This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We’ll have to wait and see.

Now, we turn to Addison, with a report on what news has investors in a tizzy:

“The U.S. stock market dodged another bullet yesterday,” writes Addison in today’s issue of The 5 Min. Forecast. “Goldman Sachs announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

“That’s $3.39 a share, more than twice as much as the market had anticipated.

“Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009.

“The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains.

“Curious how the markets work, though, isn’t it?

“In reality, Goldman benefited from a quirk in its new reporting schedule. ‘Its fourth quarter ended in November 2008,’ reports the Financial Times, ‘but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.’

“So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

“And since their stock is so ‘strong,’ Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

“Oh boy, ‘buyer beware,’ warns our short side specialist Dan Amoss. ‘The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.’

“‘Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.’”

And back to Kate, reporting from a blustery Baltimore:

“I hear that the government’s turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years,” writes our good buddy Chuck Butler in today’s issue of The Daily Pfennig. “And we all know what happens when consumers get money in their hands: they spend it!”

Very true…but will the American consumer have anywhere left to spend their tax return?

A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat.

The report, done by New York-based real estate research firm Reis, shows that “In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.”

The report goes on to show that “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

Are we still surprised at the disappointing March retail figures?

Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999.

Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31.

But as Addison pointed out, above, Goldman did benefit from a ‘quirk’ in their new reporting schedule.

“Leave it to the clever boys at Goldman Sachs to turn dross into gold,” says our friend Barry Ritholtz in a post on his blog, The Big Picture today.

“The bulk of their profits had come from AIG transfer payments – the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. ‘For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.’”

Wondering how this is possible? Well…that’s where the beneficial ‘quirk’ comes into play…

From the NYT:

“Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

“The orphan month featured – surprise – lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

“Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?”

“Truly astounding,” writes Barry, “the word Chutzpah simply does not do it justice.”

Until tomorrow,

Kate Incontrera
The Daily Reckoning