We, at Evolution have been suggesting a correction is coming in the market. We feel more strongly after studying the latest retail data. Our conclusion will be quite controversial. In previous pieces, our prediction was for the market to turn downward after the first of the new year. The timing could be wrong. However, the realization for the market as to what we see now, will not only cause a correction, but a huge drop in market price and evaluations.
How we see this play out...
We begin with the retail data. From a quick glance, it appears great. It is not.
Total sales were up 8.6%. Gains were made by both internet and in-store. Online sales rose a huge 11%. Brick and mortar gained 8.1%. Looking deeper, apparel surprised with 47.3% gain in sales. Electronics saw a 16.2% rise and jewelry posted a whopping 32% rise. If you compare the year-over-year price action, it is all positive. So, why the long face, you ask?
We believe this is the first signs of stagflation (economy stagnates while inflation roars). When consumers feel that inflation is prevalent like it has been showing for the last two years, people buy because they fear that the items that they wanted will only cost more. This is reflected in the positive data. However, the consumers stop buying at a point, this is where the economy stagnates.
Why we say this?
If you take a look at Amazon, the leading retailer, you discover the signs. A year ago, Amazon made $108 billion in the fourth quarter. This year they will make $138 billion. Looks good, doesn't it. Well, it isn't. Why, you ask? With the previous year sales, Amazon made $15 per share. This year, even with the higher revenue, they will only make $4 a share. They are eating the inflation cost. It won't continue, but their timing will not jive with the consumer's. Higher prices will drive away spending.
We have seen this movie before.
Retail giant Home Depot is the best performing stock on the market. Share price is up 50%. There are only so many homes that can be made ready for sale at any given time. You buy the parts, do the work and then, sell the home into the marketplace. This has been going on since the recovery of 2008. It is coming to an end. Why again, you ask? Because we are realist. A plot for a happy ending must have an obstacle to overcome. This film starts will positive news. It can only lead to a sad ending. Nothing goes up forever.
Then, we see this change in retail and many other industries.
Robots!
They will cause more unemployment as firms have been suffering from labor shortages. Retail and restaurants are getting into robots to fill the labor problems. They also see this as a way to solve the higher expectations by labor for wages. For example, Sam's Club uses robots to scrub floors, scan inventory and eliminate cashiers. Dinners are getting their tables, menus and orders from machines. Even the small dog walking entrepreneurs will face competition from robot dog walkers. Walgreens is filling their prescriptions with automation. I see lawsuits a coming. There will be no George Bailey to watch Mr. Gower at the pharmacy. I don't like this trend, but Brain Corp is making a fortune with its software. Their sales to retail are up 40%. They saw a gain of 69% to airports and 113% to malls with their robot software.
Second Opinion?
Remember Michael Burry of the "Big Short" fame? He sees some of the same things that we see. His prediction for 2022 is scary, too. He says, "More speculation than the 1920s. More overevaluation than the 1990s. More geopolitical and economic strife than the 1970s." Remember what we showed you in our last piece. The Fed with its easy money has led to highest corporate debt while at the same time the quality is at its lowest. It is like the old joke which follows the news that 2022 is the year of the Tiger under the Chinese zodiac. Two guys are walking in the jungle. They see a tiger. The first, a reader of Evolution, begins to run. The second stands saying, "You can't outrun a tiger." He hears this, "You're right! But I only have to outrun you." ...Peace and hopefully, a Happy New Year!
