Being Street Smart

Sy Harding

THIS BLACK FRIDAY WILL BE MORE IMPORTANT THAN MOST!  November 20, 2009.

The day after the Thanksgiving holiday in the U.S., known as Black Friday, traditionally marks the beginning of the holiday shopping season in the U.S.

It’s said to be the biggest day of the year for retail sales. It isn’t. As far as actual sales go that honor usually goes to the day before Christmas. But Black Friday is the busiest day for store ‘traffic’. Retailers open early, sometimes several hours early. Prices are slashed on popular items. Crowds line up early, sometimes camped out all night to be among the first in line to get at the bargains.

The term ‘Black Friday’ originated in the 1960’s in Philadelphia, and referred to the traffic jams on the streets. But over the last 20 years it has come to mean the day when many retailers see their profits move into the black for the year, after struggling in the red through the summer.

Black Friday is important as one of the earliest indications of how the overall holiday shopping season is going to turn out. And with consumers now accounting for 70% of the nation’s economy, this holiday shopping season will be particularly important. It will go a long way toward either confirming that the economy is recovering nicely from the recession, or will support concerns that the recovery in the third quarter was only temporary, and a slide back into recession is possible.

Meanwhile, trying to obtain guidance from the economic reports for October and the first half of November has not been very fruitful, given the mixed picture they paint.

For instance, on the positive side, the Conference Board reported on Thursday that its Leading Economic Indicators rose 0.3% in October, not as large as the 1% improvement in September, but still the seventh consecutive positive month. The LEI are designed to try to forecast the economy six months out. Also, the Philadelphia Mfg Index, often seen as a precursor of the national report to come out later, rose to 16.7 in the first half of November from 11.5 in October, its fourth consecutive month of improvement.

But manufacturing contributes only fractionally to the economy compared to consumer spending. And much of the improvement in manufacturing activity was reported to be inventory building for the holiday shopping season. That merchandise will have to move off the shelves.

On the consumer spending side of the picture, retail sales rose 1.4% in October, but with auto sales removed, rose only 0.2%. And they were not signing up for new homes as evidenced by the 10.6% plunge in new home starts in October and 4% decline in permits for future starts.

So the mixed picture has markets nervous and looking to Black Friday for guidance.

I suspect though that the elephant in the retail sector, WalMart, has skewed how the results will come out. WalMart announced a week ago that it was pulling its Black Friday big-ticket item pricing ahead by a week (creating a Black Week?). And from the number of flyers in my mailbox from its big-box competitors a few days later announcing “Black Friday NOW”, its competitors had no choice but to follow the leader.

It’s hard to say what spreading a portion of the sales over the prior week might do to the Black Friday indicator that traders and investors are waiting to see.

However, on the positive side, the market is now in its traditional favorable season when it makes most of its gains each year.

This has been a rare year in which the market’s seasonality didn’t show up. The market continued to rally right through the summer, when it typically experiences most of its corrections, especially when it is in an overbought condition, as was the situation this summer.

It’s very interesting, and informative, that the same thing happened in 2003, and probably for the same reason; massive excess liquidity flooded into the financial system in an economic stimulus effort.

Looking back at 2003, in 2002, the prior year, Washington had launched what was then a record super-sized economic stimulus package in an effort to pull the economy out of the 2001 recession, a recession that had been exacerbated by the 9/11 terrorist attacks.

In late 2002 and early 2003 the stock market had serious concerns about whether those stimulus efforts were going to work, since the economy seemed to still be in trouble. So exactly as it did this year, in 2003 the stock market declined in what is typically its favorable season, to a low in early March.

Also exactly identical to this year, the market then launched off that early March low in 2003 into an impressive rally that continued through the summer, typically the market’s unfavorable season.

It will be interesting to see if the similarities continue, since once November, 2003 arrived, the beginning of the market’s next favorable season, the stock market rally actually accelerated, and didn’t end until March of the following year.  

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.syhardingblog.com.