I saw the sign of the coming apocalypse burning bright against a dark sky this morning… and the number of the beast was $4.00.
Okay, that was a tad overly dramatic (and quite possibly insulting to more orthodox readers), but unfortunately, still mostly true.
On the way into the office this morning, I watched in horror as the sullen teenaged clerk at my local gas station posted the latest price hike on his sign: $4.00/gallon.
One might quibble that this was for high octane fuel, which I haven’t really needed since my wife made me swap my ’66 Mustang for something “more sensible.”
But then again, this was the “El-Cheapo Royale” station at the far end of town. I haven’t dared to trod the lanes of the name-brand outfits in months now for fear of a fatal shock.
Average things out across the country, and folks are shelling out some 33% more for gas at the pump over the last year.
That’s an additional $108.9 billion dollars missing from our aggregate wallets purses.
In our sister newsletter, I suggested you dip a bucket into this mighty Mississippi of money by purchasing select Energy Select Sector SPDR (XLE: NYSE) calls.
Today, however, I ‘d like to focus on where those billions aren’t going.
For the past few days, the flacks who tout shopping stocks have been all full of piss and vinegar about a supposed 14.01% increase in retail sales between February and March. They’ve used this spike as confirmation for some of the crazy valuations in this sector, which is currently selling on par with its pre-recession highs.
Yeah that’s right — retail stocks are supposedly just as valuable today as they were in 2007, some five minutes before spiking energy costs shoved the entire planet off a cliff. And back then, gasoline was only $2.87 a gallon!
However, there are critical details to this supposed increase in retail sales that those Wall Street wise guys are ignoring…
If you dig a little deeper into the very report Wall Street is flogging, you’ll find where the government finally got around to factoring in the inflation we have been seeing lately.
All of sudden, that massive 14% sales spike becomes a paltry 0.39% increase in volume. Most all the rest of the increase was simply more dollars being shelled out for less stuff.
But wait… The fraud goes even deeper!
Lies, Damn Lies, and Hedonics
Every couple of decades or so, Washington is forced to concede that inflation is getting out of hand. In times past, they have coped by such various methods as whining, price controls, and lapel buttons exhorting us to “Whip Inflation Now”.
And once a long time ago, a guy named Volcker actually stepped up and did something about it. But that sort of draconian action has become the exception to the rule.
Back in the bad old Clinton days, when the markets were climbing year after year (after year), Washington got real creative about inflation and began using an odd method of book keeping called Hedonics.
A Whole New Shell Game
Hedonics states if the value of an asset increases, you might feel free to ignore any increase in selling cost.
This was initially applied to computers, which were doubling in power — and price — every 18 months. Washington coped with this spike by declaring that so far as inflation was concerned, the price of computers was actually falling!
And when no one important whined about this particular application of Hedonics, Washington began to apply it to all sorts of things — cars, houses, and maybe even hot dogs.
If it could somehow be construed as vaguely “better,” any price hike was just wiped off the board…
In fact sometimes these cuts were even pushed deep into the negative so as to zero out other rising prices in the government’s CPI shopping basket.
Now before any you folks to the left of center get your knickers in a knot, I should point out that the Republican Bush White House simply adored Clintonian Hedonics, and continued happily papering over inflation just as their Democratic predecessors had done.
The Real Inflation Story
Now there is a fellow by the name of John Williams who has done his level best to strip away the Hedonic fraud and recalculate inflation the old fashioned way.
According to Williams, we just popped up and over the 10% marker and are currently deep into an inflationary spiral that Jimmy Carter would find horrifyingly familiar. Factor in William’s 10% inflation, and suddenly you are looking at a 0.71% DROP in retail unit sales.
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Please stop to think about this for a moment. Inflation is slowly sucking the life out of retail, as folks are forced to pay more and more for gasoline and the necessities of life that are carried to market on truck, train, and plane…
But retail stocks are priced as if sales were never better!
Quite frankly, today’s trading idea is not based on a established memetic tipping point; however, the memetic core is present in that the idea of retail stocks is firmly established in the public’s group conscious.
When we look to the technical chart for the Consumer Discretionary Select Sector SPDR (NYSE: XLY), we can see that we are fast approaching a point of major resistance in the 2007 high of $40.70.
This may be T/A with a thick black crayon, but this sort of historically significant price point almost always causes investors to review the theorems undergirding their positions in a particular asset.
By applying two slightly more advanced techniques — stacked money flow sell signals and a Fibonacci retracement grid based on the 2003-2007 retail rally — we can establish a probable retracement at $35.87, a reasonable retracement at $33.02, and a possible downside target at $30.57.
I recommend looking to the XLY September 38 Put (XLY1117I38), offered as I sit to write for $251 with a posted Delta of 0.6896. Our initial target of XLY $35.87 is more than enough to push this contract to $459 for a gain exceeding 82%.
Now please understand that I don’t know for a fact that retail is about to blow a hole in its own foot…
But given the current set up, the odds certainly favor at least a moderate drop.
For those greedy souls who need to know just how high this thing could run if the situation really starts to unravel, my “possible” target of XLY $30.57 would see this put contract move as high as $824 for gains cresting 228%.
Editor, Wealth Daily