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Chart Of The Day - What's up with Retail?
Retail stocks are down, and CDS spreads are blowing out...
Retail in Crisis: credit events usually happen one of two ways — either completely out of the blue e.g. the covid crash, or “slowly at first, then all of a sudden”. I was just looking at CDS pricing (Credit Default Swaps, which are basically insurance against a credit event) across the various sectors, and Retail falls firmly into that second category… a slow and steady uptrend, but now priced as if a credit crisis is in progress.
In fairness, the CDS market is notoriously illiquid and has been subject to manipulation in the past, but the fact that the black line in the chart below has been on a steady uptrend gives it some veracity (not to mention that retail stocks have underperformed the S&P500 by about -13% this year).
But what’s driving it, and why now? Firstly, we all know retail has been under pressure from the rise of ecommerce, and then of course covid threw things into disarray — with one hangover being a glut of inventory (not to mention lingering shifts in behavior e.g. work-from-home), but also the cost of living crisis and at least by media accounts a rolling crimewave with companies even noting shrinkage as a major issue in earnings reports.
And it’s unlikely to get better, consumers have run down the cash they stocked up during the pandemic stimulus, mortgage rates are putting pressure on those who weren’t lucky enough to fix (and putting those who did lock-in low rates in “mortgage jail”) — but also putting pressure on landlords to lift rents, and then you have the student loan payment pause rolling off shortly… and if that wasn’t enough, energy prices are rising again (WTI crude oil up 20% off the lows) after SPR releases previously provided some relief.
So maybe I’m missing something to confound or cancel out all that, but I have to say it doesn’t look good for the retail sector.
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