E-motions: Vol. No. 1, Issue No. 6, August 29, 2005

Brought to you by California News Tech (OTC BB: CNTE)

A Weak Economy Drives Down Stock Prices … And Hemlines

1. Emotions in Focus: Financial Fears Translate into Feel-Good Purchases

    It has been said many times that hemlines go up and down with the stock market. While this saying contains some historical truth, the relationship between the retail sales of fashion and the health of the economy goes far beyond the length of women’s skirts. In fact, the public’s sentiment about economic conditions can dictate not only how much people shop, but also what they buy. In general, style experts suggest that when people are feeling prosperous and confident in the economy, they favor wilder, more revealing trends. The exaggerated styles, bright colors and daringly short skirts of boththe late 1960s and the late 1980s are examples of the kinds of trends of women’s fashion trends that have emerged from a bullish American economy. Conversely, when people feel insecure about their jobs and investments, they opt for safer, more modest styles. In particular, the style of the recessionary early 1980s epitomizes this kind of reaction. During that recessionary period, women favored drabber colors, more basic items and much more conservative cuts. Many hemlines down to the floor.

    This trend, however, was not so simple as people spending less on clothes. Behind the early 80s were fashion retailers pushing the idea of so-called “investment dressing”. In order to combat the popular sentiments at the time about shopping, the high end retailers with the most to lose from the recession pushed the idea of buying expensive classics to keep for a life-time. The kinds of clothing items they were pushing fit in with the idea that these important clothing “investments” were important elements of maintaining one’s image in the work place and in social circles. For instance, in that time period Donna Karan made a fortune with her “Seven Easy Pieces”, which were minimalist all-black women’s separates. The line was supposed to consist of wardrobe basics that could be mixed and matched in order to simplify the life of the modern female professional. By billing the Donna Karan line as an essential life style change, rather than as just more expensive clothing, the brand made an end run around any existing hesitance about pricey shopping.

    It is still the case today that any clothing retailer with a formula to overcome people’s unwillingness to spend in a period when retail is down has a major chance at success. Currently fashion trends and company successes reflect some, but not all, of the elements of the early 1980s investment dressing phenomenon. Currently, retail sales in the United States are at their lowest since 2001, and for fashion in particular, the Women’s Wear Daily index of women’s clothing lines shows that the sector has been down for the past several weeks. There are, however, striking exceptions to this negative fashion retail trend. Last week Coach, Inc. (NYSE: COH) was up sharply on Wednesday, and a number of high-end department stores were also performing well. All of last year Luxury goods conglomerate Moët Hennessy Louis Vuitton reported higher profits world wide, including in the United States. In all of these cases, these high-end goods are outperforming retail as a whole, but what they are selling is an entry-level, toned down version of luxury. For Coach, Inc. its success likely rides on the fact that, while the company produces luxury leather goods, they are in a slightly lower price range than the leather goods of many other big name designers. Meanwhile, LVHM, the conglomerate behind many of the world’s most costly and exclusive brands, is actually making most of its money this year on a new, more affordable denim line, and fragrances and cosmetics, not its bigger ticket items. In the case of high-end department stores such as Nordstrom and Neiman Marcus, the jewels in their crowns are their more-affordable private label items. Like in the early 1980s, consumers are interested in spending less, but still associating themselves with the status of luxury brands, but unlike the age of investment dressing, they are not necessarily saving up for wardrobe classics.

    After the boundless economic enthusiasm of the late 1990s, with younger people getting richer faster, everyone began to feel entitled to the good life and to having what they wanted when they wanted it. Consumers today like the feeling of being able to still go to the kinds of retailers they might have gone to in more optimistic economic times and buy something to make themselves feel better. A slightly-cheaper brand name hand bag, perfume from a label with unattainable couture clothing, or trendy designer jeans, instead of a multi-thousand dollar suit, are what people want. Thus, companies that can offer these kind of fun purchases, are winning big. Americans are getting tired of the more restrained economic climate, and now are willing, despite problems in retail over all and general trends towards more conservative clothing, to spend more on impulse-buy, feel-good items.

2. The Big Movers and Why

    In the past two weeks out of the stocks for which MediaSentiment Heads Up™ made thumbs up / thumbs down trading recommendations, based on the sentiment behind company quarterly reports, there were some notable “big movers” in fashion retail. The most surprising “big mover”, or stock that changed a large percent in value in the direction predicted by MediaSentiment Heads Up™, was Genesco, Inc. (NYSE: GCO). Genesco, which produces Johnston and Murphy Shoes, Dockers shoes, and a number of lines of novelty hats rallied dramatically on 8/24 based on moderately positive earnings reports. At closing last Monday, the stock was up 10.12%. While this company initially does not seem like it should be very sexy to consumers or investors, with another perspective, it become apparent that Genesco captures both the fashion conservatism of uncertain economies with sensible Johnston & Murphy and Dockers shoes, as well as the impulsiveness of the current climate with feel-good products like silly hats. Overall, Genesco, Inc. really captures the public feeling about fashion and the economy.

    A counter example from the previous week is negative “big mover” Hot Topic, Inc. (Nasdaq: HOTT), down on a thumbs down MediaSentiment Heads Up™ recommendation on 8/17 because profits were down 11.8%, in the same direction as the last several quarters. Hot Topic is a company, that during the affluence of the late 1990s attracted intense investor enthusiasm because of its shocking, rebellious clothes. Several years ago, making rock and roll and rebellion available at the mall to young teens with average allowances increasing each year seemed like a strategy that would let Hot Topic, Inc. keep on winning. Investors taken with the idea of harnessing the youth market drove stock prices way above the company’s value, only to experience the shock about a year later of Hot Topic clothing going out of style. Today, with young people, also sensitive to the economic uncertainty in popular sentiment, favor a more “preppy”, or conservative style of dressing, Hot Topic profits went down, while sporty rival youth fashion company Abercrombie & Fitch went up in the same week.

3. How to Use the News

    In the future, when examining stocks of companies that have interests in fashion or retail, it is important to keep in mind what sentiment about the economy, especially retail, is as a whole, and consequently, where fashion might be headed. Look at the charts on the www.mediasentiment.com homepage. If the MediaSentiment Index™ shows that sentiment on major indices, such as the S&P 500, the Dow Jones and the NASDAQ is frequently negative, it is likely that the public mood about the economy is not positive either. Use MediaSentiment Trend™ to follow the sentiment behind news stories about major retailers and clothing manufactures to get a sense of where different brands’ profits stand. From there, you can build a sense of how positive or negative the economic mood is and how daring or conservative fashion has become. If you see a major discrepancy, there may be a major buying opportunity. For instance, looking at the earnings reports for a stock like Genesco on MediaSentiment Heads Up™, you might be able to predict that the stock will rally, or outperform its market projections. In the big picture, if the economy starts to look more like the period of extreme inflation that occurred in the early 1980s, fashion may start looking less frivolous, and even more like the extremely cautious trend of investment dressing.

4. Last Week in Media Sentiment

    Last week's correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up rated companies and subsequent trading volume show a strong relationship. The correlation between ratings for MediaSentiment.com selected stocks and their increased trading volume the next day over their three month average is 75%, explaining a majority of the variation in volume. Therefore, this week, MediaSentiment™ gave an edge up to 75% to smart investors who used Heads Up™ recommendations to trade on volume!

    All figures reflect all MediaSentiment Heads Up™ recommendations for the week of August 22, 2005 through August 26, 2005, rating companies on the day of their quarterly earnings releases correlated with their stock highs, lows, closing prices and daily volumes for the subsequent day.

5. Links you can use

IF YOU WISH TO BE REMOVED FROM OUR MAILING LIST, PLEASE SEND US AN EMAIL WITH "UNSUBSCRIBE" IN THE SUBJECTLINE. YOUR EMAIL ADDRESS WILL BE REMOVED WITHIN 72 HOURS.