(UNEDITED)
April retail sales were weaker than economists expected. The Commerce Department's monthly report showed April sales declined 0.1%, while retail sales excluding autos fell 0.9%. Economists were expecting an increase of 0.4% and 0.2% respectively. The 0.9% decline in ex-auto sales was the largest decline since September 2001 and one of only eleven declines greater than 0.5% over the past ten years. Part of the weakness is due to the huge gains in March when retail sales increased 2.3%, with ex-auto climbing 1.5%. There are only two months since 1992 that ex-auto retail sales grew faster than in March 2003 (April 2002 matched the 1.5% increase). The weaker sectors of the economy according to the government report were clothing and accessories stores (-3.2%) and gasoline stations (-5.9%). The decline in gasoline station sales is almost purely due to the decline in gasoline prices, the average price in April was down 5.8% from March.
On a year-over-year basis, ex-auto retail sales increased 2.8%, which is the lowest year-over-year increase since February 2002. But here again it is compared to a very strong prior period. Last year, April sales were very strong (+1.5% month-over-month). April retail data was already cloudy due to the war and the shift of Easter compared to last year. The strong comparable periods only make Aprils sales that mush more difficult to analyze.
It is interesting that the government retail sales report is almost mirror opposite of the index of monthly sales that I maintain. While the government report showed March being much stronger than April, the retailers I track had a much bigger April than March. On a year-over-year basis, total sales for my retail basket increased 8.0% vs. an increase of 5.2% in March. Wal-Mart continues to dominate retailing. Wal-Mart accounts for almost half of the total sales of the combined 22 different retailers and accounted for over 70% in the total sales growth in April.
While the April retail sales report was weaker than expected, it is too early to say the consumer has rolled over, although the future does not look bright. Retailers started reporting first quarter earnings this week. Hopefully, the retailers will have better vision of the economy and how their customers are behaving than the majority of the industrial companies that offered little guidance when they reported just a month ago. It is concerning that cheap financing that everyone is offering is not have the affect it did earlier. Just as the zero percent financing is losing steam; it appears the lure of easy money is having a diminishing return on the economy.
The rebound in confidence resulting from the end of the war appears to be AWOL. Most economists expected a post-war rally in the stock market to spill over into consumer confidence. After an initial surge after the war, the weekly ABC News/ Money Magazine Consumer Comfort Index has fallen for the third consecutive week and is only four points away from the low set in late March. Ironically, with the stock market climbing over 17% since mid-March, the personal finances component has declined the most, from a peak of 20 to 4. This recent reading matches the lows set in late January.
Last week, I touched upon the short squeeze that has developed in the market. I received some inquiries about the short squeeze and since it continues to be the dominate aspect of the current market I spent a little more time looking at various short stocks.
The short squeeze continues to wreck havoc on short sellers. Just using the small sample size of the ten stocks I mentioned last week showed a dramatic outperformance. During the past five trading days, those stocks were up by 5.6% on average, more than five times the gain of the S&P 500 since last Wednesday. Two stocks declined in price, but four were up double digits and AmeriCredit rose 21%! Today (Wednesday), all the major indexes were down about 0.3%, however, the basket of short stocks rose 0.2% today. Not only are the short stocks not going down as much as the market, but are generally increasing more when the market is rallying. Last Friday, the market rose 1.4% while the short stocks added 1.9%.
During the beginning of the year short stocks were performing along with the overall market. Short stocks were down about 8% along with the S&P 500. NASDAQ has been the best performing broad index this year. It only declined about 5% before starting to rally. During the rally, short stocks have dramatically outperformed the overall market, soaring almost 40% versus the 17% return for the S&P 500 and 21% for the NASDAQ. There are two separate phenomenons that happen during a squeeze that causes short managers grief. The first is the rolling nature of a squeeze. It is usually just a matter of time until a highly shorted stock gets squeezed. This leads managers to think their portfolio is withstanding the squeeze for a period of time. Also, once a squeeze starts, stocks rarely decline enough to provide a psychological point to cover the position. Because of these two market dynamics, the best way to combat a short squeeze is to cover across the board, and if short exposure is required (similar to our situation), add exposure to out of the fray stocks that are not highly shorted. Granted this is much easier said than done, especially since the short stocks are the stocks managers and analyst have the most conviction on and are generally very good long-term short ideas.
The idea of squeezing shorts to increase performance is common among hedge fund managers. Another research boutique published a report back in mid-March discussing how high short interest stocks get a boost during market rallies. At that time, they published a list of 25 stocks that their model ranked a buy and had a high short interest ratio (shares short vs. average trading volume). This week, they revisited the theme and pointed out that those 25 stocks rose 14% on average since March 21, 8% better than the S&P 500 over the same time frame.
Currently, most of the money that is invested in short sales is done in long/short hedge funds. Usually these funds do not have a net position more than 25% either long or short. They attempt to find "alpha" through stock picking and not by market timing. These funds typically sell themselves as lower risk vehicles that will earn 1% to 2% per month without any large monthly drawdowns. The recent market activity plays havoc on these funds since the short stocks are outperforming the rest of the market by a considerable degree.
The question now becomes, when does the rally end? I have to admit, my crystal ball is a bit cloudy, but as long as the short stocks continue to outperform, it does not bode well for those holding large short positions. For those keeping score at home, our fund has declined 14.9% since the rally started in mid-March.
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