One of America's key industries just gave us another warning sign…

Last Wednesday, stock in Macy's (M)—the largest department store in the U.S. and an iconic American brand—plunged 15%.

The next day, department store Kohl's (KSS) fell 9%…

And on Friday, high-end retailer Nordstrom (JWN) joined the bloodbath, dropping 13%.

The massive selloff—which the media is calling the “Retail Wreck”—was due to terrible first-quarter results.

This is the latest bad news in what's been an extremely ugly earnings season.

As you may know, earnings season is when companies tell investors if earnings grew or shrank last quarter. A strong earnings season can send stocks higher. A bad one—like we're in right now—can cause stocks to crash.

Companies in the S&P 500 are on track to show a 7.1% decline in earnings. That would mark the fourth straight quarter that earnings have fallen. That hasn’t happened since the 2008-2009 financial crisis.

• Retail companies have been some of the biggest losers this earnings season…

Macy’s reported a 5.6% drop in its “same-store sales” last week. This metric measures how much sales rose or fell at stores that have been open for at least a year. Because it strips out the sales bump from opening new stores, same-store sales can tell us more about the health of a company than total sales.

Macy’s sales decline last quarter was its biggest since 2009.

As we mentioned, Kohl’s also had a poor quarter. Its same-store sales fell 3.9%, its biggest decline since 2009. And Nordstrom reported a 1.7% decline in same-store sales.

• The retail sector can tell us a lot about the U.S. economy…

This industry is a reliable economic indicator. It often flashes early warning signs when trouble is ahead.

It's not hard to see why. Consumer spending makes up 67% of the U.S. economy.

When the economy slows, folks will stop buying designer jeans and expensive cologne to make sure they don't miss a mortgage payment. They'll hold off on buying a new watch to save money for the essentials.

Today, many of America’s biggest retailers are trading like we’re in a recession.

Macy’s is down 56% over the past year. Nordstrom is down 51%. Kohl’s is down 48%.

• We don’t think these companies will recover anytime soon, either

If you’ve been reading the Dispatch, you know we think the U.S. economy is stalling out. The signs are all around.

Corporate profits are drying up. Huge companies are laying off workers by the thousands. Global trade has practically come to a standstill.

A slowing economy is bad for most companies. It’s especially bad for companies that sell “want” items—or things people would like to buy, but don’t need. “Want” items are the first place people cut spending when the economy slows. They buy off the clearance rack rather than the latest fashions.

Nordstrom customers are already starting to cut back. Business Insider reported last week:

Comparable sales for Nordstrom's full-price businesses fell 5.4%, including a 7.7% drop at its US department stores…

While sales are plunging in Nordstrom's full-price business, comparable sales for the company's off-price brands, including Nordstrom Rack—which sells steeply discounting clothes and accessories—grew 4.6%.

According to Investment bank Morgan Stanley (MS), Nordstrom customers aren’t the only ones changing their spending habits. Business Insider continues:

“Notably, this shortfall was entirely driven by lower trips/transactions,” Morgan Stanley analysts wrote in a note ominously titled “High-End Recession.”

The declines confirm a terrifying new reality for high-end retailers: Wealthy shoppers are reining in spending and, along with the rest of American consumers, refusing to pay full price for anything.

• Americans aren't spending money like they used to…

Macy’s and Kohl’s both blamed their bad results on the weather. They said folks bought fewer coats and scarves due to an “unfavorably warm winter.”

Companies often blame the weather or other things beyond their control when they have a poor quarter. It’s much easier to do this than admit business is bad.

We aren’t buying this excuse. Retail companies have much bigger problems than a warm winter. For one, Americans aren’t spending money like they used to. Fortune reported last week:

Department store operators have been hit in the past year as consumers choose to spend on smartphones and electronics, dining out and travel, and invest in assets such as vehicles and homes.

• Retail giant Amazon (AMZN) is eating “brick-and-mortar” retailers alive…

Amazon isn’t your traditional retailer. It doesn’t own huge stores or employ thousands of cashiers. It runs an online store where you can buy just about anything with a few clicks of a mouse.

It’s also one of the world’s most dominant companies. Its sales have increased for 77 consecutive quarters. Last year, the company’s sales topped $100 billion for the first time.

Amazon has changed how people shop. That’s bad news for traditional retailers like Macy’s, Nordstrom, and Kohl’s. The chart below says it all…

Last quarter, earnings for department stores in the S&P 500 plunged 48%. Meanwhile, earnings for large online retailers jumped 143%. Online retailers are stealing business from companies like Macy’s and Nordstrom. Amazon is the big reason why.

• E.B. Tucker, editor of The Casey Report, warned the retail industry was in trouble in November…

Retail stocks were still hot at the time.

The SPDR S&P Retail ETF (XRT), which holds 99 major retailers, was up 408% since March 2009. That was more than double the S&P 500’s 203% return in the same period.

E.B. said retail sales were slowing, and warned that the retail stocks would soon rollover. He also warned that problems in the retail sector would soon show up in other parts of the economy:

Consumers cut back spending on mostly unnecessary items first. Pretty soon, Americans are going to stop buying steak and start buying hamburger. When the economy sours, every penny counts.

Before you know it, people are pawning off all the expensive junk they bought with cheap credit since the last financial crisis. That’s one way markets unwind seven years of excess borrowing and spending.

Several major American retailers have tanked since E.B. made this warning. Watch maker Fossil (FOSL) is down 21%. Department store Sears (SHLD) is down 49%. Furniture company Restoration Hardware (RH) has plunged 64%.

• E.B. is still worried about the economy…

He’s advising Casey Report readers to “crisis-proof” their portfolios.

E.B. recommends holding cash and physical gold. A cash reserve will save you from losing money if stocks sell off. It will also prepare you for the next big buying opportunity in stocks.

Owning gold is another simple way to protect your wealth. That’s because it’s the ultimate safe-haven asset. It’s served as money for centuries. It’s protected wealth through history’s worst financial crises.

And gold could also make you a lot of money if stocks crash. It’s already starting to take off…

This year, the price of gold has jumped 21%. It’s at its highest price since January 2015.

E.B. recommends you keep 10% to 15% of your wealth in gold to protect your portfolio against a stock crash or financial crisis.

• E.B. isn’t avoiding stocks completely…

He recommends owning companies that “feed the masses.”

E.B. likes these stocks for a simple reason: people have to eat. Unlike retailers that sell “want” items, companies that sell food can do well no matter what happens with the economy.

One of those stocks, Archer Daniels Midland (ADM), is up 21% since January. E.B. thinks ADM will keep rising even if the economy continues to struggle.

That said, E.B. doesn’t recommend buying the stock at current prices. He rates ADM as a Hold after its big jump.

But if you want to profit from “feeding the masses,” E.B. has another stock you can buy today. It’s a world-class agricultural product company with an impressive dividend history. You probably have this company’s top brand in your pantry right now…

This stock is up 14% since January. It’s also paying a 5.4% dividend yield. That’s more than double the S&P 500’s 2.1% dividend yield.

You can invest alongside E.B. by signing up for The Casey Report. Click here to begin your risk-free trial.

• REMINDER: Today is your last chance to sign up for our Crisis Investing workshop

If you’ve been reading the Dispatch, you know we’re hosting a very special training event tomorrow.

During this training series, you will learn one of the most powerful wealth-building strategies. Legendary investors like Warren Buffett, Jim Rogers, and even our own Doug Casey all used this strategy to build their fortunes.

For the first time ever, Doug will share this great wealth-building secret in a free series of online training videos. You’ll also discover why this strategy has never been more crucial. It could up end being one of the most important events in our company’s history.

If you’re interested, don’t wait to sign up. After today, we will close the doors to this free training series. Click here to reserve your spot.

Chart of the Day

Amazon hasn’t just crushed retailers. It’s crushed the entire stock market.

Today’s chart shows the performance of Amazon over the past seven years. As you can see, the stock has been ripping higher. It’s up 935% since March 2009. That’s more than five times the return of the S&P 500.

Chris Wood, editor of Extraordinary Technology, thinks Amazon will keep rising…but that doesn’t mean you should buy it at today's levels. Here's Chris:

I like Amazon a lot as a long-term investment.

It’s the seventh largest company in the U.S. in terms of market cap. Companies this huge often have trouble growing. But Amazon is growing as quickly as a much smaller company.

Still, if you’re the type of investor who hold stocks for a year or less, I'd recommend staying away from Amazon right now.

The stock has been making higher highs and higher lows since late March. This indicates a clear uptrend, which is a good thing. But the stock is getting expensive…

Its price-to-sales ratio is up to 2.9, which is well above its five-year historical average of 2.1. In other words, investors are paying more for each dollar of Amazon’s sales today than they have in the past.

Investors are paying a “premium” even though Amazon’s sales aren’t growing as fast as they have been. Annual revenue growth over the past year was 20%. That’s well below its five-year average of 26%.

Slowing sales and a high valuation aren’t the only reasons to avoid Amazon in the near term. Chris explains:

Another thing to consider is insiders selling Amazon’s stock. An insider is a person who knows more about a company than the general public. Think CEOs, board members, and upper management.

Insiders sell stock for a lot of reasons. They might sell to diversify their holdings, pay for medical care, or take a nice vacation. They may also sell if they think the stock is going down.

Amazon insiders have sold 2.2 million shares of Amazon stock over the past year, while buying exactly zero shares on the open market. Just this month, CEO Jeff Bezos sold more than $670 million worth of Amazon stock.

There’s no way to know why these insiders are dumping Amazon stock. But it’s another reason to not buy Amazon at current prices. We’ll likely get the opportunity to buy Amazon at much better prices over the next few quarters.

Regards,

Justin Spittler
Delray Beach, Florida
May 18, 2016

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