The Coming Shakeout in Retail

07/28/2009 12:04 pm EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says the recession is causing big changes in the way consumers spend money, and that will change retail forever.

There are a lot of things that consumers do not want or need and that they can ill afford. The prices of these items will fall.

Housing-related items—be that construction supplies (lumber, etc.) or furnishings—will not find much demand, and prices will fall. Clothing (which is in serious oversupply), expensive restaurant meals, foreign automobiles that are now built to satisfactorily last 200,000 miles with little problem, and “foo-foo” impulse items will all find few buyers.

Dollar stores will become dime stores once again. Folks will be more apt to buy used items, especially cars and other durable, big-ticket items. Unnecessary services will suffer. People will clean their own houses and mow their own lawns. The vacation business and states like Montana that rely on tourism would be wise to adjust their expectations.

The retail industry has been designed to sell what folks do not need, and that is going to change. Excess, non-essential inventory will sit on the shelves and collect dust until the 100,000-square-foot box stores close and a new retail vision takes over. Frankly, I think that vision includes a major shift to online commerce. Margins will suffer some in this strategy, but survival will be enhanced. Wal-Mart Stores (NYSE: WMT) needs to make a few adjustments, but they are close to having it right. It remains to be seen if they can continue to grow their profits, however. They need to focus on survival. (The stock closed below $49 Monday—Editor.)

On the other hand, those items that we have no choice about using or bills we have no choice about paying will grow more expensive. Insurance costs will rise, health care costs will rise, and education will be more expensive. Your taxes are not going to fall. Increasingly scarce raw materials finding increasing demand elsewhere in the world are going to become pricier, and energy costs will continue to increase. Thus, pricing is going to be a mixed bag. What can be done without will be sacrificed to pay for that which cannot be done without. In the meantime, the dollar will continue to sink, along with the rest of the fiat currencies of the world as nations vie within a swirl of economic chaos to fund their rescue programs.

Government stimulus will be absorbed and may provide temporary improvement, but there is nothing out there that I can see that can fuel a sustained economic recovery. The Obama rally seems to have gotten some traction again of late, [but it] is now on borrowed time and will lead to a high in August. The August high will mark the culmination of the move off the March lows. The next significant move in the averages will be down to new lows. Use strength to liquidate paper-related assets.

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