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Stocks Continue Higher – Showrooming Is Here To Stay

Inside we report on this week's market activity and comment on the the emerging trend of "Showrooming" & the Cost\Benefit of College. See how this affects you.

Stocks Record Gains For The Second Week In A Row

The stock markets began the week by selling off on Monday and Tuesday on fears that Congressional leaders and the White House would not come to an agreement on the Fiscal Cliff anytime soon. However the markets recovered on Wednesday morning and from that point on worked themselves higher and ended up closing at their highs for the week on Friday. The S&P 500 closed at 1,417 which works out to a 0.50% gain for the week.

Friday was also the last trading day for November. At the beginning of the month, the markets sold off after the election and reached their lowest point in five months on November 15th. Since the low on November 15th, the S&P 500 has rallied 4.6% and is now 48 points away from it’s five years highs that were attained on September 14th.

In the Photo Section is a chart of the S&P 500 that shows the performance for the first 11 months of 2012.

 

(See Chart of The S&P 500 in The Photo Section)

 

The stock markets are now entering December which historically is the best month of the year. Over the past century, the stock markets have recorded gains 70% of the time for the month of December. This year might prove to be more challenging with the unresolved Fiscal Cliff overhang and it’s potential to induce a greater amount of investors selling their gains as people lock in the 15% capital gains rate.

On the Economic front – 3rd quarter Gross Domestic Product (also known as GDP which measures the total value of all goods and services produced in the USA) was revised higher to 2.7%. This is one of the stronger quarters economically speaking since the Financial Crises of 2007 – 2008.

In the Photo Section is a 10 year chart of GDP for the USA.

 

(See the 10 Year Chart of The GDP in The Photo Section)

 

The USA labor markets needs GDP growth of at least 2.5% for 3-5 years to significantly reduce the unemployment and under-employment rates back down to their historical levels.

 

People Are Now Shopping Less & “Showrooming” More

This Black Friday (or maybe it should be referred to as Black Thursday with all the stores openings now on Thanksgiving?) shopping weekend has concluded and the initial results are that it was a record weekend – however not for the retail stores.

Initial reports are that mall foot traffic was up 3.8% over 2011. Macy’s and several other retailers also reported record foot traffic for the Holiday weekend, so it should follow that the major retailers such as Macy’s. Target, Nordstroms & Kohls should have reported record gains in year over year sales for the holiday weekend.  However they did not.  Most retailers saw small gains year over year – Kohl’s actually saw a 5.9% decrease yet they also reported record foot traffic inside their stores.

So what is happening here where a record amount of shoppers are showing up in stores against a backstop of the best economy in four years yet not spending as much? Well apparently retailing and retail shoppers have entered a new paradigm where the activity of shopping is being replaced by the activity of “Showrooming”. And 2012 will be known as the year when showrooming broke out into the mainstream.

Showrooming is where a shopper first finds and tryout an item inside a store and then goes on-line to make the purchase of the item at a better price somewhere else.

Showrooming behavior by shoppers is a primary behavior that is driving Best Buy towards bankruptcy. For the past few years, people have been visiting their local Best Buy to shop and sample the electronics they want. Then they go online to buy the electronics item at a cheaper price somewhere else.

Retailers such as Target have started to respond to Showrooming by offering to match on-line prices inside the store.

How big of a new phenomenon is Showrooming?  IDC Retail Insights  – a retail market research firm  – estimates that 48 million people will showroom items found inside stores this holiday season, up from 20.5 million people in 2011.

Also the results from VISA Card Incorporated confirms that Showrooming is the new trend in shopping. Visa reported that the total amount charged to  Visa Cards for on-line purchases over the holiday weekend was 20% higher than in 2011.  20% is a significant increase. Much of that 20% year over year increase in on-line sales came from people standing inside a store looking at the item they were now purchasing on-line at a better price than inside the store.

Like all things Ecommerce – Showrooming takes away more of the power from the seller and places it firmly in the hands – or handhelds – of the buyer.

 

Cost of College Degrees Rises  While the Wages Earned by College Graduates Falls

In it’s latest quarterly report released this week, the New York Fed reported a troubling statistic. Student Loan Debt for the first time ever has now passed credit card debt as the largest consumer debt at a total of $956 Billion owed.

Student Loan debt is also unique among debt in that it might be the most difficult of all debts to walk away from. Even in a full bankruptcy, I believe that student loan debt is not forgiven.

The primary reason why student loan debt is so high is because the cost of college education has risen more than most anything else over the past 30 years  – significantly more than gasoline, food, insurance and even health care.

So as the cost of a college education has risen much faster than inflation, more students are responding by taking out larger amount of student loans to pay for their education.

Here is a chart prepared by Citibank research that shows the cost of a college degree compared with the wages earned by a person with a college degree from the year 2000 through 2012.

Since the year 2000, the cost of college has increased by 72%.  However since the year 2000, the wages earned by a college graduate between the ages of 25 – 34 have fallen by 15%.

In the Photo Section is a chart of the comparison of the cost of college with the wages earned by college graduates:

 

(See The Chart Comparing The Cost of College Vs. Annual Earnings of College Graduates in The Photo Section)

 

It is estimated that somewhere between 33% – 39% of recent college graduates are currently working in jobs that do not require a college degree. There are several factors that contribute to this high number of people with college degrees working in jobs that do not require a college degree. However the primary factor is that the universities are turning out too many college graduates with the type of college degrees that today’s economy has no jobs for and not enough college degrees in the math, CAD aided machinists, computer sciences, engineering,  mining, agriculture and geology where current job openings go unfilled.

People have always and will always receive many great benefits from a college education. If an individual wants to go to college to study a major for their  intellectual and personal growth reasons then a college degree will be a wise use of their time. Also, even though college graduates are making less money than they were a decade ago, the unemployment rate for people with a college degrees is still significantly lower that the unemployment rate for people with high school diplomas.

However, the new reality of today’s economy is that people should not go away to college with the expectation of a good paying job at the end of their four or more years of study. For today’s labor market it would be prudent to evaluate the current economy need of a persons field of study before the significant investment of time and money is made in attaining a college degree. This is especially true if a person will be borrowing  a large amount of money to finance their college education.

In today’s internet age that is changing everything (see “Showrooming” above)  – there are new resources available where anyone can study college level courses for free such as this resource here.

 

Closing Thoughts

We continue to expect the Fiscal Cliff to be the macro driver of the direction of the stock market throughout December. Unfortunately for the citizens of the USA, Congress is living up to our low expectations by resolving nothing so far this year. In the past week,  both political parties were only successful at moving their automobiles in position for another high stakes game of economic chicken – just as Congress did during the debt ceiling crises of 2011.

Our expectations are that if anything is resolved by congress for resolving the Fiscal Cliff, it will come with just ticks of the clock left in 2012.

John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC  a Registered Investment Advisor Firm.

 

This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision.  We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.

 

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Jerry Gropp Architect AIA December 04, 2012 at 11:29 PM
. A well written "Local Voice" on a most pertinent subject. I hope we'll see more of these- as things progress. JG-
Jason Hastie December 05, 2012 at 12:08 AM
Thanks for the post! The cliff has me sitting in bond opportunities.
John Patrick Bray December 05, 2012 at 07:08 PM
Jerry & Jason - Thank you for your comments and for reading the article.
Jerry Gropp Architect AIA December 05, 2012 at 08:00 PM
. It's only natural that "Showrooming" is rapidly becoming the smart way to go these days. J-
John Patrick Bray December 06, 2012 at 05:00 AM
Yes - And there will be Winners and Losers from the shopping behavior known as Showrooming: Winners: 1 Consumers - The biggest winners - as they are able to prices compare easily and choose to make their purchases at the lowest prices anywhere the item is available: 2. Businesses: Amazon.com - Big winner already - ask Best Buy Walmart - already the low price leader on everything - CEO was out in the press last week encouraging people to "Showrooming" EBAY - Twice winner - Once with the Auction site & again with Paypal. UPS & FEDEX - These companies will be doing the deliveries of all these Showrooming Purchases. LOSERS Small Businesses who already cannot compete on price with the Retail Big Box stores such as Costco and Home Depot and most certainly can't compete on price with the pure Internet retailers.

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