The Consumer is Knocked Out

The odds that we're entering a recession just went up.

Retail sales are a leading economic indicator so when a bell weather company like Wal-Mart leaks that poor sales its a big deal.

"In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.... That points to our competitive landscape, which means everyone is suffering and probably worse than we are”

It gets better:

“We have to fight against the tougher economic environment to earn a bigger share of a smaller consumer spending pie"

Now today from JC Penny reports horrific earnings:

• Q4 EPS: ($1.95), Exp. ($0.19) - No, there was no decimal comma error here.
• Q4 Revenues: $3.884 billion, Exp. $4.09 billion. This includes a "free" 53rd week in the year which generated $163 million. Ex this, Q4 revenue was $3.721 billion.
• Q4 Comp store sales excluding the 53rd week were down 31.7%
• Q4 Interent sales down 34.4%  - must be the store layout's fault
• Q4 Gross margin: 23.8%, Exp. 30.9%;  (30.2% last); "Gross margin was impacted by lower than expected sales and a higher level of clearance merchandise sales related to inventory reductions in 2012"
• The company's cash declined by $577 million, which is now down to just $930 million. More than all of the company's cash came from Inventory (net working capital) which generated some $1.021 billion in the quarter. 
• 2012 cash burn was a gargantuan $906 million; this compares to cash flow of +$23 million in 2011.
• Company is down to $2.3 billion in inventory. We wonder how the credit facility will feel about this.
• Speaking of credit facility, JCP had no borrowings under its 2012 Revolver, and about $1.3 billion available net of L/Cs. Expect these numbers to change.

Just a reminder, the fourth quarter of 2012 we posted a negative GDP. Now, things seem to be worsening.

CNBC reports:

Faced with delayed tax refunds, an increased paycheck tax bite and higher gas prices, U.S. consumers are proceeding cautiously and scaling back, a trend that has already impacted one large retailer's bottom line.

Nearly three-quarters of those polled by the National Retail Federation said their spending plans are taking a hit due to the expiration of a two-percent cut in payroll taxes that made consumers do a double-take on their paychecks at the start of the year. Lower-income consumers are already feeling the pinch, analysts said.

"We see there's three meaningful headwinds on the lower-income consumer this year that are taking place right now and in order of importance, I'd put it first on the delay in tax refunds," said Peter Keith, a senior research analyst at Piper Jaffray. "Secondly, I'd put it on the payroll tax cut expiration that was mentioned earlier. And lastly, we're starting to see gas prices go up."

To compensate, 46 percent of consumers said they plan to spend less overall while 35 percent plan to watch for sales more often, the NRF said. Dining out and "little luxuries," such as coffee shop visits and manicures, were two other areas where some consumers aimed to cut back on.

The payroll tax will be a significant headwind for retailers this year, said Kimberly Greenberger, a retail analyst at Morgan Stanley who downgraded the retail sector to "cautious" early last month.

So we have a payroll cut, higher gas prices and a possible sequestration that will reduce government spending. The stock market has been moving both up and down by 100+ points each day. Its beginning to remind me of 2007. So will stocks hit new highs? Maybe. But I have a feeling it will be followed by a sharp correction.

What Gold & Silver Bifurcation Looks Like.

I haven't been in much of a mood to write lately but I wanted to point out the divergence between the recent gold and silver smack down in the paper markets and the real demand for physical. Its somewhat anecdotal but I think it makes the point for one of my main themes here at MWP.

Below you can see that even as gold was crushed by paper selling the demand for physical gold remained very strong.

The entire post from Zerohedge is shown below:

20 Signs the US Economy is Headed for Trouble

Great post by Michael Snyder of The Economic Collapse Blog

Is the U.S. economy about to experience a major downturn?  Unfortunately, there are a whole bunch of signs that economic activity in the United States is really slowing down right now.  Freight volumes and freight expenditures are way down, consumer confidence has declined sharply, major retail chains all over America are closing hundreds of stores, and the "sequester" threatens to give the American people their first significant opportunity to experience what "austerity" tastes like.  Gas prices are going up rapidly, corporate insiders are dumping massive amounts of stock and there are high profile corporate bankruptcies in the news almost every single day now.  In many ways, what we are going through right now feels very similar to 2008 before the crash happened.  Back then the warning signs of economic trouble were very obvious, but our politicians and the mainstream media insisted that everything was just fine, and the stock market was very much detached from reality.  When the stock market did finally catch up with reality, it happened very, very rapidly.  Sadly, most people do not appear to have learned any lessons from the crisis of 2008.  Americans continue to rack up staggering amounts of debt, and Wall Street is more reckless than ever.  As a society, we seem to have concluded that 2008 was just a temporary malfunction rather than an indication that our entire system was fundamentally flawed.  In the end, we will pay a great price for our overconfidence and our recklessness.

So what will the rest of 2013 bring?

Things are Heating Up

I'll have more tomorrow about today's gold and silver action/attack but for now I just wanted to share this from Peak Prosperity Blog. I think there is more going on in the markets and a realization that fundamentals do not reflect the stock market's steady rise to all time highs. Keep in mind that in 2008 gold got pummeled along with stocks but then made a very strong recovery.


Submitted by Adam Taggart of Peak Prosperity blog,

Not everyone is a morning person. And few people like Mondays.

But if you're a precious metals investor, mornings – especially Mondays – are brutal.

The Evidence

CNBC: Is the Dollar Dying?

I have to admit I'm quite surprised to see the following article on CNBC. Often the channel is mockingly referred to as "bubblevision" for their bullish cheer leading of stocks and nothing but talk of the ever elusive "green shoots" that will usher in the end of our economic malaise and a new era of inevitable prosperity. So I certainly take notice when a writer actually points out that the Emperor Has No Clothes! One wonders if this could be a turning point in public perceptions. Anyway, its good information so I present it below:

The U.S dollar is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end.

When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.

While the American currency still reigns supreme -- it constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world's central banks -- the Japanese yen, Swiss franc and what the IMF classifies as "other currencies" such as the Chinese yuan are gaining.

(Read More: Hedge Funds Reap Billions on Yen Bets)
"Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown," Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note. "But it will be, and this defrocking may occur in as short a period as five to 10 years."

Bove uses several metrics to make his point, focusing on the dollar as a percentage of total world money supply.That total has plunged from nearly 90 percent in 1952 to closer to 15 percent now. He also notes that the Chinese yuan, the yen and the euro each have a greater share of that total.

"To the degree that China succeeds in increasing its market share of the world's currency market, the United States is the loser," Bove said. "For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans."

For a country with a budget deficit in excess of $1 trillion a year, the consequences of losing standing as the world's reserve currency would be dire.
(Read More: US Credit Risk Appetite Signals a 'Sell'?)

"If the dollar loses status as the world's most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt," Bove said. "The ratings agencies are already arguing that the government's debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility."

Bove is not the only one sounding the reserve currency alarm, though the issue has fallen off the front pages as hopes for a sustained U.S. recovery have taken hold and the stock market has surged to near-record highs.

But the looming battle over budget sequestration in Washington could revive long-standing fears of fiscal stability.

"If (dollars) no longer offer the safety that investors have come to expect, they will not function as the stable collateral required by bank funding markets," Barry Eichengreen, a professor at the University of California, Berkley, warned in a Financial Times commentary late last year. "They will not be regarded as an attractive form in which to hold international reserves. And they will not be seen as a convenient vehicle for merchandise transactions."

To be sure, the markets at this point are not acting like the dollar is in severe trouble. The greenback has maintained its position as a general safe haven in times of trouble.
(Read More: Russia: Don't Compete Through Currency Devaluations)

"Longer term, of course, countries are going to diversify away from the dollar if they can. There are more favorable investment opportunities out there if you can catch yield," said Christopher Vecchio, currency analyst at DailyFX, a trading firm. "Despite the increase in risk to the U.S. dollar and Treasury, investors still feel safest at home."

But the Federal Reserve's successive quantitative easing programs, which have created $3 trillion in new greenbacks, continue to spur worry over the dollar's status.

"The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world's reserve currency," said Michael Pento, president of Pento Portfolio Strategies. "It's a thousand times more important than a nuclear bomb being tested by North Korea. It's a thousand times more important that we keep the dollar as the world's reserve currency, and yet we are doing everything to abuse that status."

The dollar's seemingly precarious status is why Pento remains bullish on gold and believes the dollar's demise as the premier reserve currency could end even sooner than Bove predicts -- perhaps by 2015.

"Five to 10 years -- that would be an outlier," he said. "I would say 2015, 2016, that would be the time when it becomes a particularly salient issue. When we're spending 30 to 50 percent of our revenue on debt service payments, we enter into a bond market crisis. The dollar starts to drop along with bond prices. That would set off the whole thing."

BIS Rejects Gold as Tier 1 Asset (For Now)

In posts here and here I've discussed what had been the possibility that the Bank of International Settlements would modify the Basel III accord to include gold as a Tier 1 asset. This would have meant that banks could value gold at 100% of its value rather than the 50% for the purpose of calculating its capital levels. In 2008 during the crisis banks were often forced to liquidate gold holdings to meet capital requirements as other assets (generally real estate securities) declined in value. If the BIS had elevated gold to a Tier 1 asset it would have been international recognition that gold is money. You may recall 18 months ago that Ben Bernanke, the US Fed chair, answered "no" that gold was not money.

The change as proposed would have gone into effect January of this year. There had been much written about it in the last year so I was surprised not to read anything this year about the change. When I dug around the BIS website I could find no press releases announcing this monumental change in banking. Turns out for good reason. It didn't happen.

China's Huge Progress in Gold Backed Yuan/Renminbi

Back in November in a post titled, "China Prefers Gold to US Treasuries" I noted China had imported a massive 582 tons of gold year to date in 2012. I followed up last month with a post titled, "Yes, China Will Back their Currency with Gold", where I described how China is preparing for the destruction of the US dollar as well as Western fiat currencies. Today, I have an update on China's total gold imported from Hong Kong. But before I do I want to point out two things:

What is the REAL Growth Rate and What Does it Mean?

Earlier this week I commented that the negative U.S. GDP print for the fourth quarter of 2012 was not unexpected, at least by those of us who were paying attention. The media was apparently "surprised" and "stunned". Either through bias, ignorance or just a healthy optimism that is misplaced, the media has for four years put a positive spin on any and every bit of economic data that comes out. Its understandable that the Fed and the administration would want to put their best spin on poor data; the Fed because they are trying to increase confidence and the administration because there is an ever present political element to showing progress. But for those of us who are either managing wealth for others or are trying to preserve our own wealth for a sound economic future, we must look at the reality beyond the "noise" of the pundits and media so that we can make sound decisions.