Bookkeeping: Closing some Retail Names - Big Lots (BIG) and BJ's Wholesale Club (BJ)

Submitted By Trader Mark
The economic news, which has been ignored for weeks (since the awful labor report) as we focus on systematic risk to the entire financial system, continues to degrade. Yesterday's existing home sales, and today's new home sales are a complete disaster. Today's weekly unemployment claims are nearing 500K for the first time. This is the 2nd worst reading in 20 years.

New claims for unemployment benefits jumped last week to their highest level in seven years due to the impact of a slowing economy and Hurricanes Ike and Gustav, the Labor Department reported Thursday.
The department said new requests for jobless benefits for the week ending Sept. 20 increased by 32,000 to a seasonally-adjusted 493,000, much higher than analysts' expectations of 445,000.
The level of new claims was the highest since shortly after the 9/11 attacks, when it reached 517,000.
David Resler, chief economist at Nomura Securities, said Thursday's figure is the second-highest since July 1992. Claims have topped 500,000 only a handful of times in the past twenty years, he said, and were consistently above that level during the 1991 recession.
Weekly claims have now topped 400,000 for ten straight weeks, a level economists consider a sign of recession. A year ago, claims stood at 309,000.

Remember we were assured in the spring that around 400K in weekly claims the numbers were clearly showing us there was no recession and why were the Chicken Littles (such as me) clucking about a recession - well that arguement is now out the door. They'll say it's all due to the hurricanes and when this number falls to mid 400Ks in the next few weeks they'll say "told you so" and when it gets back up to 500K range in 6 weeks they'll say "that's ok it's still not a recession because the US population is larger, hence there will be more people unemployed than 20 years ago". We'll continue to shake our head at their abject punditry and Kool Aid consumption. We have a whole lot of financial workers to add to this list in the coming weeks.

The merits of this mother of all bailouts are up for debate but even if it does "succeed" we are still left with an economy that is driven 70% by US consumer, 15% by exports, and 15% by government spending. With the US consumer in his first recession since the early 80s and the rest of the world slowing... well that leaves us with part of 15% of the economy - federal government spending. And the way we are going at some point the rest of the world will stop financing our drunken orgy of federal spending at some point. The local/state spending is already falling off a cliff - see Michael Bloomberg NYC mayor who unlike 98% of politicians is PROACTIVE and not REACTIVE - cutting NYC budget by $1.5 billion.

Confronting a rapidly worsening fiscal situation, Mayor Michael R. Bloomberg’s budget director ordered agency directors on Tuesday to cut spending by a total of $1.5 billion over two fiscal years, starting with the current fiscal year, which began on July 1.
The spending reductions come as the mayor is floating the idea of a 7 percent property tax increase on homeowners, a move that could generate an additional $600 million in revenue each year.
The cuts drew praise from City Comptroller William C. Thompson Jr., who is likely to run for mayor next year. “Couple the problems on Wall Street with the looming budget gap in fiscal year 2010 and larger gaps in the years to follow, and we find ourselves in a dire financial situation,” he said in a statement. “It is responsible to take action now to address this problem and it is my hope that any reductions will be managed in a way that minimizes the impact on critical services provided to New Yorkers.”

We've talked about this over and over - state governments will either need to slash spending or raise taxes on its citizens (or both). Citizens who are already struggling with myriad problems. Most local governments will be forced into similar actions after the emergency is upon them. Again we are going to be heading into an ugly time in the economy (not everyone, its a regional recession) in a country based on consumer spending and building homes. I've been on record saying in 2007 that 2008 will be the worst year for auto sales in decades (which is coming true) and I'll go on record saying this will be the worst Christmas season in many years. Folks, I still believe the stock market is in denial and should be materially lower. I expect it to be over the coming months/quarters. I keep thinking with my heart (instead of mind) that things are not going to be so bad as my mind tells me, as I'm trying to hold out hope I'm missing something to the upside. But just about all the things I've outlined from 2007 [Reviewing December 2007's Roadmap & Views] are coming to fruition one after the other, which pains me from the basis of - they are not good things for Americans. So we're going to have our oversold rallies here and there but it's going to be rough for a while here.

I did not believe in the consumer discretionary rebound, but the hedge funds did and they drove up retail stocks on the "as gas drops 50 cents the American consumer is back". Remember, reality does not matter in the stock market - only perception. Maybe they will keep running these names up, but I'm following the same pattern I've done in all other sectors - reduce the number of names in each sector. We still own a few names exposed to the consumer but for now both these charts show signs of strain, so out of the handful of stocks we own exposed to the US consumer, I'm going to stick with the stocks whose charts are better. We had already cut both of these exposures way back so we're simply doing the final deed and closing them out today.

Big Lots (BIG) is sort of a poor man's Walmart (WMT) - it was a name I pointed out a lot in the spring as a "Pooring of America" beneficiary [Dec 26: Target Shoppers Turning into Walmart Shoppers] but by the time I jumped on board I had missed the move (it appears). It has run from lo3 $20s to mid $30s this year. Perhaps it is just consolidating before the next move up, but it has had a huge year and I'm going to sit it out for now and assess later. The stock move might already be reflecting the benefits as more middle class American consumers are forced "downward" into stores they don't normally shop at. We're closing the remaining 0.2% stake in this position in the $30.40s that we started on August 6th for a $2400 loss. Technically the stock has been stuck in between 2 moving averages so it is sort of in no man's land.

Similar thought process with BJ's Wholesale Club (BJ) - we probably missed a good part of the move. All things being equal these are the type of "downscale" stores that will be doing ok "relatively speaking" but I should of jumped in earlier. We are closing the remaining 0.1% stake just under $39 that we started on August 20th for a $100 gain.

I continue to use all rallies to lighten up, and we will stick to a high cash exposure. The trick for the coming months is to try to avoid being overweight short ETFs during the huge oversold rallies of 2-3-4% (easier said than done) as that has been killing performance. Each of the 3-4% down days we've been doing fine of late, but on the 2-3-4% up days we trail by a country mile. Outside of healthcare, most everything else in the portfolio to the long side will be shorter term trades as the market swings without rhyme or reason day to day. For now we have room up to S&P500 level 1250 or so, so I'm going to assume the mother of bailouts will cheer participants up that level, at which point (if we get there) we'll be more aggressive on the short side. It remains a traders market, not an investors market.