New Market Crash Warning Sign Begins to Flash

Forget Thanksgiving here in the US.

It seems as though the most important day of the entire year for Americans is the day that follows Thanksgiving.

That day time is ‘Black Friday’.

Thanksgiving is a secular vacation rather than a religious holiday. Dark Friday is a secular event too.

But it’s a different kind of event. Black Friday isn’t about spending time with family…it comes down to spending time fighting through the crowds of people at the malls to get the best sales items.

However, based on recent years, the actual fighting has been less fierce. So what will this year’s Dark Friday tell us about the real strength of the US economy?

According towards the National Retail Federation, Black Friday sales have fallen within the last two years. The recent peak with regard to Black Friday was in Next year, when Americans spent nearly US$60 billion:

Source: National Retail Federation, Bloomberg

By 2014, that number had fallen to US$50.9 billion.

And if retailers hope for better this year, they may be disappointed. According to Bloomberg:

‘The idea that consumers won’t spend without a few serious enticement got a increase on Wednesday, when Commerce Department figures showed household spending rose less than forecast in October. Purchases increased 0.1 percent for a second month, while the median predict of 74 economists in a Bloomberg survey called for a 0.3 percent advance.‘

As the statement says, more discounting is good information for consumers. But discounting means lower profit margins. That should also mean lower earnings many and lower stock prices.

It turns out that’s exactly what’s happening…

There’s a lot of red in there

When it comes to looking at the market, real analysis is better than guesswork.

So, all of us looked at seven popular All of us retailers: Macy’s Inc [NYSE:M], Kohl’s Corporation [NYSE:KSS], Target Corp [NYSE:TGT], Wal-Mart Corporation [NYSE:WMT], Nordstrom Inc [NYSE:JWN], Abercrombie & Fitch [NYSE:ANF], and Foot Looker Inc [NYSE:FL].

We’ve put these stocks into a table. It shows EBITDA margin (earnings before interest, tax, devaluation, and amortisation margin).

We’ve chosen EBITDA border rather than net profit, because EBITDA doesn’t include taxes and non-cash items such as depreciation and amortisation, which can are more of an accounting item than a cashflow item.

Here’s the table:

Source: Bloomberg

2012 is our starting place. After that, if the cell is green it means that seasons EBITDA Margin is greater than the previous year’s.

If the cell is actually red, it means that year’s EBITDA Margin is less than the prior year’s. If the cell is white (except the 2012 column), it means that seasons EBITDA Margin is the same as the previous year’s.

As you can see, there’s a lot of red through 2013 to 2015. And there’s a lot of red forecast for 2016 and 2017.

It helps explain why the actual ETF of US retail shares, the SPDR S&P Retail ETF [NYSE:XRT], has started to fall because the middle of this year:

Source: Bloomberg

That’s a bad sign.

The case is building for trouble ahead

Even worse of these retailers is the potential for the united states Federal Reserve to raise interest rates within December.

EBITDA doesn’t include interest. So EBITDA won’t show any kind of change to these retailers’ interest expenses.

However, it will show the impact better interest rates in another way. That is, higher interest rates affect the spending habits of consumers. But higher rates of interest may affect supplier as well as input costs too.

For example, if consumers have to set aside more of their salaries in the direction of higher interest repayments, which leaves them with less disposable income.

And if suppliers or even transport companies try to spread higher costs, that will affect these retailers’ EBITDA Margins too.

In short, this year we’ve brought numerous potential warning signs to your interest. You can add this to the checklist. On their own, none of them is a certain sign of a market crash. But combined, it’s building a case for trouble ahead.

Stay razor-sharp. The next few weeks could be among the most volatile of the year.

Cheers,
Kris