As we first documented last week in “Mega-Bears Smell Blood As Mall REITs Tumble” and as Bloomberg followed up yesterday, looking at CMBS on the Mall REIT space, many have set their sights on mall REITs as the “next big short.” However, an obvious question that has emerged is whether it is too late to go all in on this particular short, or whether as some have suggested, the bottom is in. “The short feels crowded to us,” said Matthew Weinstein, principal at Axonic Capital, a hedge fund that specializes in structured products. “If these defaults start happening soon, the short will work, but if the defaults do not occur quickly, the first guy out could drive the market meaningfully higher.”
On the other hand, one particular chart revealed in the latest monthly Bank of America debit and credit card spending report shows that things may be about to get a whole lot worse for America’s department stores, as well as malls where they are for the most part the anchor tenants. Of note: while official US retail sales data will be released tomorrow (BofA data always comes several days ahead of the official release), what is especially ominous is that the collapse in department store spending was the biggest on record.
The collapse in department store spending in February took place in the context of broad weakness across the entire retail universe, with BofA reported that retail sales ex auto declined 0.2% seasonally adjusted. Since that was not accepetable, BofA decided to smooth out large swings over the prior two months, leaving it with retail sales ex-autos running at an average 3 month pace of 0.1% mom SA. As the chart below shows, even that suggests a far weaker than expected retail sales report tomorrow, just hours before the Fed’s rate hike announcement: “Given that the BAC data trends closely with the Census Bureau, we think our data points to a soft report when it is released on Wednesday the 15th.”
Breaking down the headline number into components shows a notable decline across virtually all subsegments, with the exception of Cruise Ships (clearly not a concern for much of middle-class America), Home improvement stores and Home goods. Everything else was flat to down substantially.
To be sure, Bank of America tries to explain the sudden February weakness with the previously documented delay in tax refunds, although that hypothesis does not conform with last week’s Gallup survey according to which February Consumer spending was the highest since 2008. This is what BofA says: “We believe that a delay in tax refunds likely biased spending lower in February relative to prior years.
Comparing debit and credit card spend is a good indication since presumably usage of debit cards should be more sensitive to the tax refund (proxy for cash) than credit cards (leverage). Indeed, we found that retail sales ex-autos for debit cards declined 1.7% mom while credit card spending was up 1.8% mom. The second test we looked at was by income cohort — the tax changes are more likely to impact the lower income households given that the EITC and ACTC are aimed at assisting lower-income households. We see this clearly in our data where the lowest income quintile reduced spending by 3.4% while the highest income quintile actually increased spending by 0.9% mom. We combine these two factors in the Chart of the Month to show weaker debit card spending, particularly for lower income households.
Alas, even if one believes this explanation, the next charts below show that no matter what – if anything – prompted the February spending collapse, when it comes to secular trends across various key spending segments, the deterioration has been taking place for years. First looking at restaurant sales, there has been a decisive slowing in spending at restaurants over the past two years with weakness concentrated in the larger / chain restaurants.
The same is obvious in the chart showing spending on “food service and drinking places”…
… as well as spending at food and beverage stores, as well as luxury designer goods, all of which are plunging.
And while we await tomorrow’s government data, all appropriately seasonally adjusted to eliminate outlier data points, two things become clear from the charts above: the pervasive consumption weakness, which only accelerated recently, shows that the retail weakness is far more profound that can be merely explained with “everyone is shifting to Amazon“, and more importantly, the US consumer continues to retrench with every passing month, spending less on discretionary products as well as traditional pastimes as eating out, or aspirational purchases like luxury goods.
As for what it was that “snapped” in department stores, we may need a “bigger short” soon, should the recent trend be indicative of just how bad things truly are.
Source: Bank of America
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