Taipain Publishing’s Adam Lass says investors should be wary of luxury retailers that claim they will emerge unscathed from the current economic downturn.

Real incomes and real private spending are falling, inflation is ticking upwards and consumer confidence is in the gutter.

This makes Tiffany & Co. (NYSE:TIF) – with its overly optimistic earnings expectations for Christmas spending – ripe for shorting.

This from Adam:

The song does not say, “A couple of pairs of designer jeans, an L.L. Bean backpack and a new Trapper Keeper are a girl’s best friend.”

No, the line made famous by such wonderful exemplars of pulchritude as Anita Loos, Marilyn Monroe and Nicole Kidman tells us that it is diamonds that women prefer. And in these treacherous times, that most famous of Fifth Avenue jewelers, Tiffany & Co., finds that sentiment quite reassuring.

Unlike most other retailers, Tiffany doesn’t really give a hoot about the strength of back-to-school sales. So unlike most of its brethren, it’s not trying to spin the disappointing retail figures that are trickling in.

Since Tiffany doesn’t sell notebooks, it doesn’t have to respond to the fact that mothers across the nation are taking sponges and cleanser to last year’s supplies. Without pots and pans clogging up their shelves and warehouses, Tiffany doesn’t have to fret about the department stores’ alarming decline in same-store sales and burgeoning excess inventory.

What’s more, the suits in Tiffany corner office claim that they don’t have to worry about the tumbleweeds rolling across auto showroom floors. Tiffany doesn’t sell overpriced coffee, so it apparently need not concern itself about the number of storefronts that Starbucks is boarding up.

Tiffany sells jewelry, a girl’s best friend, so the heck with September. Christmas is its winter wonderland, its Elysian field, its Vegas jackpot.

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And so Tiffany seems to be entirely convinced that it will make a mint this year come the holidays. In fact, while cheapskate mall outfits like Zales (NYSE:ZLC) are lauding the fact they simply didn’t lose as much money as they thought they might, Tiffany is claiming better-than-expected profits in the recent quarter and has raised the bar for the year as well.

They figure that Christmas is in the bag, out the door and in the till already. As a result of these bold presentiments, shares in Tiffany and Zales gapped up 12% and 22%, respectively, last week.

We have heard stories like this before, wherein a business figures that it is special, unique, completely immune to the prevailing winds. Just a few short months ago, FedEx (NYSE:FDX) announced that it was in the soup.

Recession was impeding sales and inflation was jacking costs. But management was refreshingly forthright, and warned that while this year just wouldn’t be the shipper’s best, it would do what it took to survive and eventually things would get better.

However, the market seldom rewards such honesty, and FDX shares have been punished with a 25% decline. When cross-state rival United Parcel Service (NYSE:UPS) saw how FedEx’s honesty was treated, it chose the opposite tack.

UPS management claimed that it would not suffer in the least from declining sales or rising costs, and stuck by its quarterly and annual profit figures. And when its quarterly guesstimates proved fallacious, it stuck by its nigh-impossible annual number for another 90 days. One was forced to wonder if its trucks ran on water?

In the end, UPS lost a boatload of money, just like its compadres, and the idiots who believed their fairy stories and bought their shares in the face of clearly impossible odds lost millions.

Yes, I know that truckers are somewhat more prosaic than jewelers, and a FedEx envelope is not quite as desired under the tree as a little blue Tiffany box. But the parable still holds up.

Real consumer spending fell 0.4% in July. This is the biggest drop since June 2004. Personal income fell 0.7%, the biggest drop since August 2005. Real disposable incomes fell 1.7%, making for the second straight large monthly drop.

Meanwhile, inflation surged again in July. Core personal consumption expenditure price index rose 0.3% in July compared with June and is up 2.4% in the past year.

This gain (the largest in the inflation rate since September 2006) apparently completely stymied Wall Street’s pet economists, who had been touting an expected 0.4% decline in incomes, a 0.2% gain in nominal spending and a 0.3% rise in the core PCE.

That, my friends, is a massive prevailing headwind that ought to chill the hearts of anyone in retail long before winter winds chill hands and feet. In point of fact, even Tiffany’s U.S. same-store sales declined 4% last quarter. Virtually all the recent reported profits were scored overseas as a weak dollar encouraged European and Asian shoppers to avail themselves of Tiff’s discounted goodies.

Unfortunately, U.S. inflation is now lapping up on those same foreign shores, and while U.S. consumers are not looking any stronger, Asian and European shoppers look like they are ready to take a break.

But don’t expect to hear this from any retailer. They will tell you that all is well for as long as they possibly can, until they tread the thin line between insane optimism and simple fraud.

Most retailers are already in the tank. But TIF has gapped to the upside on this fantasy. My suggestion? Short ’em now and short ’em hard. And use the profits to buy your girl a diamond ring during the post-holiday sales. And if you have real sense of humor, buy it from Tiffany.

Source: Retail’s Prevailing Winds Are Cold and Getting Colder