Showing posts with label Consumer Sentiment. Show all posts
Showing posts with label Consumer Sentiment. Show all posts

Monday, December 25, 2017

Northeast Forecast To Get Big Winter Blast

Three days ago, we asked: Is A Major Winter Blast Coming To The East Coast This Christmas? Despite all the chatter from global warming alarmists this year, there is a chance, some in the Northeast could experience a white Christmas.



Ed Vallee, a private weather forecaster based in Connecticut, reports merging storms will spread snow, rain, and mixed conditions from the central Appalachians to New England. The system will start on Sunday night and continue into Monday. Snow totals are forecasted to bring 2-8″ for parts of the Northeast (shown below). 



Vallee discusses the risks associated with the storm, along with more details into the timing of this system.



AccuWeather Senior Meteorologist Brett Anderson, confirms Vallee’s forecast and said, there will be “enough snow to shovel and plow is likely from western and northern Pennsylvania and southern Ontario to Maine, New Brunswick, and Nova Scotia.”



Here are the highways that could be heavily impacted by the storm include Interstate 70, I-76, I-78, I-80, I-81, I-84, I-86, I-87, I-88, I-89, I-90, I-91, I-93, I-95, and I-390. AccuWeather’s team expects delays at airports in Pittsburgh, New York City, and Boston.


Also, the National Weather Service has issued a deluge of winter weather advisories and warnings for the Northeast (as of 12-24).



The National Oceanic and Atmospheric Administration (NOAA) provides an animated Gif depicting the trajectory of the system with the different types of precipitation probabilities.



 


Accuweather sheds more color on the storm:




From just north and east of Philadelphia to New York City, Providence, Rhode Island, and New Bedford, Massachusetts, just enough snow may fall to cover the ground, just in time for a White Christmas.


 


Farther south and west from Atlantic City, New Jersey to Baltimore and Salisbury, Maryland, and Washington, D.C., little or no snow is likely. Little or no rain may fall as well due to a gap in the storm.




Winter weather for the Northeast comes at no surprise considering the La Niña reading on the Oceanic Niño Index (ONI). La Niña conditions formed last month, indicating the Northern Hemisphere could be due for an abundance of winter weather (See: She’s Back! La Niña Is Here For The Second Consecutive Year).



BAMWX.com notes, the pattern is about to change in a huge way and it may begin on Christmas eve! Accumulating snow is on the table between Dec 24th-Jan 5th in a big way.



Obviously, if the winter blast does erupt, it is a perfect excuse for lagging spending, despite consumer sentiment at lofty levels.



Let’s just hope, the weather models above are as bad as Dennis Gartman’s market forecasts.









Friday, December 15, 2017

Chicken Wing Spot Prices Collapse 30% As NFL Protests Take Their Toll

Back in November, shortly after Trump ignited a war with the NFL over player protests of the National Anthem, Papa John"s insisted that their sales were getting crushed by a backlash from fans who decided to boycott games (we covered it here: Papa John"s Pulls NFL Ads Due To "Negative Consumer Sentiment").  That said, the complaint from Papa John"s was seemingly discredited as a convenient excuse for poor earnings the very next day when Pizza Hut said they had seen no impact from the NFL protests.


Of course, with all of the noise of seasonality, weather and random accounting games played by CFO"s, it"s almost impossible to know if, or by how much, declining NFL viewership actually impacted Papa John"s earnings...any conclusions would be ambiguous at best.


That said, what doesn"t seem to be all that ambiguous, and probably should lend some credence to the original claims from Papa John"s, is the startling collapse in chicken wings prices that coincided perfectly with Trump"s first NFL protest tweets back in September.  According to the Bloomberg data below, wing prices started dropping almost immediately after Trump"s first tweets and have fallen a staggering 30% since.



Meanwhile, the collapse in wing prices was at least partially blamed for the abysmal earnings posted by one of the largest poultry producers, Sanderson Farms, earlier this this morning.


Asked for their profit outlook for 2018, SAFM management, whose stock tumbled 12% on the day, seemed to be somewhat optimistic aside from crushing traffic declines at wing restaurants which they said are being attributed to the NFL protests.








Analyst: That"s helpful. And then when you look at your pricing outlook and your profit per pound outlook for 2018 versus 2017. Any color in terms of pricing and your profit per pound?


 


SAFM Management: Based on what we, the productions, we think is coming in 2018. You never know who"s going to be running features on chicken and tenders. But the only thing that is puzzling me right now wings, we this – the wing, we have been talking to our wing customers and they"re the ones that are telling us that they"re seeing less traffic in their stores and they attribute that to the NFL.




So what say you...just more scapegoating for a bad quarter or is the NFL taking a bite out of the wing market?









Friday, December 8, 2017

As Stocks Soar To Record High, Americans" Consumer Confidence Tumbles In November

Despite soaring stock market values and an endless array of postive survey data from various estabishment-based entities, University of Michigan confidence tumbled in November.


Consumer sentiment in the U.S. cooled for a second month. While current conditions managed to improve, expectations for the future slumped...



“Perhaps the most important changes in early December were higher income expectations as well as a higher expected inflation rate in the year-ahead,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement.



“The rise in inflation expectations in early December was a surprise, and confidence in this finding must await confirmation in the months ahead before any inferences are drawn.”









Wednesday, November 22, 2017

UMich Consumer Confidence Slides In November As Faith In Stocks Falters

Having hit the highest level since Jan 2004 in October, November"s final print shows the University of Michigan Consumer Sentiment index fell from 100.7 to 98.5, as both hope and current conditions slipped.



Expewctations for inflation dipped. Consumers saw inflation rate in the next year at 2.5 percent after 2.4 percent the prior month. Inflation rate over next five to 10 years seen at 2.4 percent, lowest since May, after 2.5 percent in October








“Increased certainty about future income and job prospects has become a key factor that has supported discretionary purchases,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement.


 


“The data indicate that neither changes in fiscal nor monetary policies have yet had any noticeable impact on consumer expectations.”



The data signal consumer spending will rise 2.7 percent in 2018, adjusted for inflation, as well as “the best runup to the holiday shopping season in a decade,” the report said.


Finally we note that faith in the stock market faltered modestly...










7 Reasons Why Stocks No Longer Care About Political Shocks, And 2 Why They Should

From Nicholas Colas of DataTrek Research


Why do global equity markets ignore political shocks like Brexit, President Trump’s election or the news that Angela Merkel failed to form a government in Germany? There are plenty of good reasons, actually, which we review below.


News that German Chancellor Angela Merkel failed to form a new government was the big shock of the day. It is unclear if the country will have a minority coalition or call fresh snap elections. The New York Times quoted a Der Spiegel deputy bureau head as saying “This is Germany’s Brexit moment, its Trump moment”.


Capital markets agreed with the Trump/Brexit comparison, sending the DAX up 0.5% on the day. Every other major European bourse closed in the green as well. As did the US.


All of this got us thinking (again) about why stock markets ignore politics and government when it comes to “Crisis moments”. It wasn’t too hard to come up with several explanations.


Reason #1: The Brexit vote and Trump election are fresh in investors’ minds, and they feel they know the “Crisis playbook” well at this point. Buy any notionally negative political headline first, look for the silver linings later. Muscle memory is a powerful behavioral force.


Reason #2: Global equities remain in rally mode, with investors still more afraid of missing out than looking for reasons to sell. Every major global index (S&P, EAFE, Emerging Markets) is either at or near their one-year highs. And with just a few more weeks left in the year, plenty of investors are playing catch up to their ever-rising benchmarks.


Reason #3: US corporate earnings still enjoy positive momentum. With Q3 earnings season almost over, FactSet reports that the most recent quarter showed 6.2% earnings growth. The companies of the S&P 500 even managed to show a little margin expansion (10 bp) in the quarter, and Q4 estimates still show a 10% bottom line growth rate.


Reason #4: Any political crisis is a potential catalyst for central banks (especially the ECB in the case of today’s headlines) to remain accommodative, with Eurozone QE supporting ultra-low long term interest rates and equity valuations. German 10 Year Bunds still yield just 36 basis points, well off their July highs of 60bp. Today’s news was worth all of 0.3 bp to the German yield curve.


Reason #5: Consumer confidence is still good across the US and Europe. Markets rightly feel that any “Crisis” that leaves consumer sentiment untouched is no crisis at all. OECD data on German confidence shows it at one-year highs as of October after drifting lower in prior months.


Reason #6: Energy prices are still moderate. The one sort of crisis that gets investor attention ties headline-worthy events to the price of gasoline. Despite rumblings out of the Middle East, WTI crude prices are still comfortably below $60/barrel.


Reason #7: Tech stocks have driven a lot of the performance in large cap US and EM this year, and this sector enjoys strong secular tailwinds. As we have outlined in prior reports, the Technology sector represents 25% of the S&P 500 by weighting, and 30% of the MSCI Emerging Markets Index. Neither the US President nor the German Chancellor (or any other global leader we can think of) have any impact on how many people stream videos, use social media, shop online, or buy new smart phones.


* * *


Now, does all this mean global markets will remain impervious to political headlines? Of course not. A few thoughts on what might shift the market’s sentiment:


Real Crisis #1: An absence of global leadership on tough geopolitical problems. With Angela Merkel sidelined, Europe has no single political figure to guide the region’s policy on global issues. President Trump, while still popular with his base, is a divisive figure abroad. China’s President Xi is trying to step into the role of a truly global leader, but that’s a tall ask when it comes to American or European democratic sensibilities.


So who is in charge when if/when a geopolitical crisis arises? For the moment, this is not a question investors seem to ponder much. That doesn’t mean it’s not important. It’s just not important right now. Once North Korea/Iran/some other problem gets to a boil, things will be different.


Real Crisis #2: Political fissures can swallow up positive catalysts. As we outlined in yesterday’s note, the Democrats may be able to retake the majority in the House during midterm elections. That makes passage of tax reform in the current Congress an imperative for US equity markets. Past November 2018, Washington may be back in gridlock mode until January 2020.


Summing up, there are plenty of reasons why notional “Crises” have so little effect on global equity prices. Overall economic conditions are still good enough to spur profit growth, and interest rates remain low. Yes, things seem brittle on the political front everywhere from Stuttgart to Seattle. But until a real crisis comes along to break investor confidence, it is hard to see global equities letting any crisis go to waste









Friday, November 10, 2017

Consumer Confidence Unexpectedly Drops On Inflation, Rate-Hike Fears

UMich consumer sentiment declined from 100.7 to 97.8 in the preliminary November print, disappointing expectations of a small rise as anticipation of a pickup in inflation and higher interest rates weighed on the gauge.



Even with the decline, sentiment was the second-highest since January, reinforcing other reports that Americans remain optimistic about employment and the economy.


Other highlights include:


  • Consumers saw the inflation rate in the next year at 2.6 percent, up from 2.4 percent the prior month

  • Consumers expected an annual income gain of 2.1 percent for the second straight month, the best two-period average since 2008

  • Inflation rate over next five to 10 years held at 2.5 percent

  • Six in 10 consumers saw stock-market gains as likely in the year ahead

  • References to low mortgage rates fell to 32 percent in early November from 40 percent last month

Consumers (and policy makers) have four key concerns: prospective trends in jobs, wages, inflation, and interest rates. An improving labor market was spontaneously mentioned by a record number of consumers in early November, and anticipated wage gains recorded their highest two-month level in a decade. These favorable trends were countered by a slight rise in year-ahead inflation expectations and a growing consensus that interest rates will increase during the year ahead.


Americans are as exuberant about their wealth effect as they were at the peak ahead of the last crisis...



“While the majority judged current conditions in the economy favorably and consumers anticipated continued growth on balance, consumers judged the outlook less satisfactory, and were equally divided about whether the expansion would last another five years,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement.









Sunday, October 22, 2017

Examining The Most Hated Bull Market Ever

Authored by Lance Roberts via RealInvestmehtAdvice.com,


From last week:


“The seemingly “impervious” advance since the election last November, has had an interesting “stair step” pattern with each advance commencing from a breakout of a several month 3%-ish consolidation range. Furthermore, each advance then pushes to a 3-standard deviation extreme, black circles, of the 50-dma before beginning the next consolidation trading range.”




The last leg higher has been directly responsive to the ramp up in the political “marketing surge” surrounding “tax cuts and tax reform.” With the House having already passed their respective budget resolutions, late Thursday, the Senate passed a budget blueprint for the next fiscal year. With both of the “budget resolutions” in place, it was seen as clearing a hurdle to the goal of overhauling the tax code.


This is not new, of course, as the entire rally for the markets since the election has been driven by hopes of lower taxes, despite disaster, floods, fires and Central Bank threats of liquidity extraction.



The bulls are clearly in charge which keeps us allocated to towards equity risk currently.


Do not be mistaken, this “rally” IS all about tax cuts. Despite many who are suggesting this has been a “rational rise” due to strong earnings growth, that is simply not the case as shown below. (I only use “reported earnings” which includes all the “bad stuff.” Any analysis using “operating earnings” is misleading.)



Since 2014, the stock market has risen (capital appreciation only) by 35% while reported earnings growth has risen by a whopping 2%. A 2% growth in earnings over the last 3-years hardly justifies a 33% premium over earnings. 


Of course, even reported earnings is somewhat misleading due to the heavy use of share repurchases to artificially inflate reported earnings on a per share basis. However, corporate profits after tax give us a better idea of what profits actually were since that is the amount left over after those taxes were paid.



Again we see the same picture of a 32% premium over a 3% cumulative growth in corporate profits after tax. There is little justification to be found to support the idea that earnings growth is the main driver behind asset prices currently.


We can also use the data above to construct a valuation measure of price divided by corporate profits after tax. As with all valuation measures we have discussed as of late, and forward return expectations from such levels, the P/CPATAX ratio just hit the second highest level in history.



The reality, of course, is that investors are simply chasing asset prices higher as exuberance overtakes logic and their actions prove the case.  According to data from FactSet, stock-based exchange-traded funds have seen nearly $16 billion in inflows over the past week, which represents an acceleration from recent positioning. Over the past month, about $31.3 billion has gone into stock-based ETFs. The chart below of data from ICI shows much of the same with monthly equity ETF inflows surging since the election.



The same is seen when we also add in equity mutual funds for a look at total equity asset flows.



Not surprisingly, those actions have been backed by their massive elevation in bullish sentiment.



As UMich noted:


“Consumer sentiment surged in early October, reaching its highest level since the start of 2004. The October gain was broadly shared, occurring among all age and income subgroups and across all partisan viewpoints.


 


There is an unmistakable sense among consumers that economic prospects are now about as ‘good as it gets."”



Most hated bull market ever…hardly.


Historically speaking, you only witness such exuberance in the latter stages of an expansion, not the beginnings of one. The latest survey indicates that consumers do not anticipate an economic downturn anytime in the foreseeable future, which from a contrarian perspective may be a clear warning sign.


Clearly, the expected benefits of tax cuts and reforms is leading investors to overpay for something today they are hoping will become fairly valued tomorrow. In other words, instead of prices catching “down” to market fundamentals, investors are hoping fundamentals will “catch up” to prices.


Unfortunately, there isn’t a previous case in history where this has been the case.



Also, when we look at 20-year trailing returns, there is sufficient historical evidence to suggest total, real returns, will decline towards zero over the next 3-years from 7% annualized currently. 


(These are trailing 20-year total real returns, not forward)


Re-read that last sentence again and look closely at the chart above. From current valuation levels, the annualized return on stocks by the end of the current 20-year cycle will be close to 0%. A decline in the next 3-years of only 30%, the average drawdown during a recession, will achieve that goal. 


For investors, this is crucially important. In the article “Apathy & The Death Of Your Financial Goals,” I discussed the reality of the damage caused by market drawdowns. As I stated:


“Crashes matter, a lot.” 



While investors may “get back to even,” eventually, following a crash, the shortfall from their actual financial goal continues to build.


This is why using some method of risk management, such as a simple moving average crossover, can help alleviate some of the financial damage caused by drawdowns.


  • YES! You will miss out on some gains in the market.

  • YES! Sometimes you will be “stopped out” and have to “buy back in.” 

  • YES! You will be much more successful in obtaining your financial goals long-term.

After all, isn’t that why you invest in the first place?


What I can assure you of is that you WILL be wrong from time to time and you WILL lose money. But that is the inherent nature of investing. It is a “RISK” based endeavor.


However, I can absolutely guarantee that trying to “passively index” in the current market environment will absolutely wind up screwing up your long-term goals.


Think about it this way. IF investing was as easy as just buying a bunch of stuff and sitting on it, then why are so many Americans dependent on Social Security for retirement? Via Jared Dillian:



  • 19.7% of retirees get 100% of their income from Social Security.

  • A full third (33.4%) depend on it for 90% of their income.

  • And 61.1% get at least half their income from Social Security.

The federal government’s unfunded 75-year liability for Social Security and Medicare combined is $46.7 trillion.


Are you absolutely sure you want to rely on the Government for your retirement?


Think about it the next time someone tells you to just “buy and hold.”









Friday, September 15, 2017

New York Fed, Atlanta Fed, & Goldman Slash Q3 GDP Forecasts

As "hard" economic data in America crashes to its weakest since Feb 2009, so The New York Fed has slashed its economic growth forecasts for Q3 and Q4 dramatically.



The drivers of the collapse are hurricane-impacted data from Industrial production and Retail Sales this morning...



For those hoping for a "broken window fallacy" rebound in Q4, forget it!



source: NYFed


And now The Atlanta Fed has joined the downgrade party...





The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 2.2 percent on September 15, down from 3.0 percent on September 8. The forecasts of real consumer spending growth and real private fixed investment growth fell from 2.7 percent and 2.6 percent, respectively, to 2.0 percent and 1.4 percent, respectively, after this morning"s retail sales release from the U.S. Census Bureau and this morning"s report on industrial production and capacity utilization from the Federal Reserve Board of Governors.



From 4% a month ago to just 2.2% now!!



source: AtlantaFed



Putting the recent data in context, here is the "Hard" economic data surprise index.




And then, the cherry on top came from Goldman Sachs which just slashed its hurricane-impacted Q3 GDP forecast from 2.0% (it was 2.8% just one week ago) to 1.6%. To wit:





Industrial production fell sharply in August, but the report explicitly indicated that Hurricane Harvey likely contributed the bulk of the decline. University of Michigan consumer sentiment declined a bit less than expected in the preliminary September report, and the survey’s measure of longer-run inflation expectations moved back up to 2.6%. Taken together, today’s real activity data represents strong evidence that hurricanes have significantly reduced the pace of US growth in the third quarter. Accordingly, we revised down our Q3 GDP tracking estimate by four tenths to +1.6% (qoq ar), on top of the -0.8pp revision we made last week



We believe today’s weaker-than-expected retail sales and industrial production data increase the likelihood of a meaningful drag on August economic activity from Hurricane Harvey. And given the possibility of sustained weakness in September due to Hurricane Irma, we now expect an even larger drag on growth in the third quarter. We are reducing our tracking estimate for Q3 GDP by four tenths to +1.6% (qoq ar), on top of the -0.8pp revision we made last week in anticipation of Hurricane effects. We expect some of this weakness to reverse in the fourth quarter as economic activity rebounds in storm-affected regions.



So - NY Fed Staff Nowcast Q3 2017: 1.34% (Prev. 2.1%); Q4 2017 at 1.83% (Prev 2.6%)


Which means that, if NY Fed is correct, and one adds the actual GDPs of 1.2% in Q1 and 3.0% in Q2, full year 2017 GDP Growth wil be just 1.8%! 


Just blame it on the hurricanes.

Friday, July 7, 2017

Fed Warns "Valuation Pressures Have Increased Further" In Latest Monetary Policy Report

Moments ago the Fed released its July Monetary Policy Report which forms the basis of Janet Yellen"s testimony to Congress next week, and while it does not traditionally discuss monetary policy it does provide a snapshot of the Fed"s take of the economy and capital markets at any given moment. Here are some of the highlights courtesy of BBG:


  • Federal Reserve says bond liquidity ample despite lower market-maker inventory, in monetary policy report in Washington.

  • Fed sees little evidence of liquidity impairment in corp bonds

  • Fed says financial markets recently performed well under stress

  • Fed says financial system vulnerabilities stayed modest

  • Fed notes liquidity mismatch at FHLBs as funding-strain risk

  • Fed warns that  valuation pressures are up in bonds, equities, com real estate

  • Fed says term-premium rise poses downside risk to long bond prices

  • Fed sees signs of tightening credit in commercial real estate

  • Fed defends its opposition to rules-based monetary policy

And some further details, first on the the global productivity slowdown.





"Over the past decade, labor productivity growth both in the United States and in other advanced economies has slowed markedly. This slowdown may reflect a waning of the effects from advances in information technology in the 1990s and early 2000s. Productivity growth may also be low because of the severity of the Global Financial Crisis, in part because spending for research and development was muted. Some of the factors restraining productivity growth may eventually fade, but it is difficult to ascertain whether the recent subdued performance of productivity represents a new normal"



On labor markets and wage growth:





"The labor market has strengthened further so far this year. Over the first five months of 2017, payroll employment increased 162,000 per month, on average, somewhat slower than the average monthly increase for 2016 but still more than enough to absorb new entrants into the labor force. The unemployment rate fell from 4.7 percent in December to 4.3 percent in May—modestly below the median of FOMC participants’ estimates of its longer-run normal level. Other measures of labor utilization are also consistent with a relatively tight labor market. However, despite the broad-based strength in measures of employment, wage growth has been only modest, possibly held down by the weak pace of productivity growth in recent years."



On education and climing the social ladder:





"Education, particularly a college degree, is often seen as a path to improved economic opportunities. However, despite the fact that young blacks and Hispanics have increased their educational attainment over the past quarter-century, their representation in the top 25 percent of the income distribution for young people has not materially increased. In part, this outcome has occurred because educational attainment has increased for young non-Hispanic whites and Asians as well. While education continues to be an important determinant of whether one can climb the economic ladder, sizable differences in economic outcomes across race and ethnicity remain even after controlling for educational attainment."



On ecomomic growth:





"Real gross domestic product (GDP) is reported to have risen at an annual rate of about 1½ percent in the first quarter of 2017, but more recent data suggest growth stepped back up in the second quarter. Consumer spending was sluggish in the early part of the year but appears to have rebounded recently, supported by job gains, rising household wealth, and favorable consumer sentiment. Business investment has turned up this year after having been weak for much of 2016, and indicators of business sentiment have been strong. The housing market continues its gradual recovery. Economic growth has also been supported by recent strength in foreign activity."



On the risk of a spike in term premiums (i.e., if central banks stop buying):





"Term premiums on Treasury securities continue to be in the lower part of their historical distribution. A sudden rise in term premiums to more normal levels poses a downside risk to long-maturity Treasury prices, which could in turn affect the prices of other assets.""



On liquidity in corporate bond markets:





"A series of changes, including regulatory reforms, since the Global Financial Crisis have likely altered financial institutions’ incentives to provide liquidity. Many market participants are particularly concerned with liquidity in markets for corporate bonds. However, the available evidence suggests that financial markets have performed well in recent years, with minimal impairment in liquidity, either in the market for corporate bonds or in markets for other assets."



On balance sheet policy:





"To help maintain accommodative financial conditions, the Committee has continued its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and rolling over maturing Treasury securities at auction. In June, the FOMC issued an Addendum to the Policy Normalization Principles and Plans that provides additional details regarding the approach the FOMC intends to follow to reduce the Federal Reserve’s holdings of Treasury and agency securities in a gradual and predictable manner. The Committee currently expects to begin implementing the balance sheet normalization program this year provided that the economy evolves broadly as anticipated."



And last but not least, the usual warning about high asset values:





Valuation pressures across a range of assets and several indicators of investor risk appetite have increased further since mid-February. However, these developments in asset markets have not been accompanied by increased leverage in the financial sector, according to available metrics, or increased borrowing in the nonfinancial sector. Household debt as a share of GDP continues to be subdued, and debt owed by nonfinancial businesses, although elevated, has been either flat or falling in the past two years.



Maybe not in the financial sector, but these development have been accompanied by a material increase in leverage in the public sector, the same sector which will soon see substantial deleveraging if central banks are to be believed.


Full report below (link):

Friday, June 9, 2017

The Marlboro Red Consumer Sentiment Indicator

After last earnings season I noted without a strong rebound in consumer spending, I expect aggregate earnings growth to slow later this year (especially if declining energy prices cause credit to tighten). While asset inflation remains unchecked, consumer spending does not appear to be responding or accelerating. Two consumer companies on my possible buy list announced earnings this week – both suggest the operating environment remains challenging.


Casey General Stores (CASY), the convenience store operator, reported results on Monday with sales and earnings that were less than expected. Specifically EPS declined to $0.76 from $1.19 during the quarter and $4.48 vs. $5.73 for the year. During the quarter, same-store fuel gallons declined -0.5%, while grocery same-store comps increased 1.5% and prepared food/fountain comps were up 3.2%.


Management noted that similar to others in its sector, Casey’s “experienced downward pressure on customer traffic which had virtually impacted same-store sales across all of our categories.” Management blamed decelerating customer traffic on the weak agricultural economy, the difference in food away and food at home prices, and competitor promotional activities.


Management commented further on the agriculture economy saying, “The USDA anticipates either a flat to slightly declining farm income in calendar 2017. So we’d anticipate this piece of the challenging environment to continue to at least to the end of the calendar year.”


Labor costs were also discussed, with management calling labor very tight and wage pressures challenging. I thought the following comment was interesting, “It’s not uncommon for people to jump ship for $0.25 raise here and there, and so that has been a challenge.”


One of my favorite economic reports, the Marlboro Red Consumer Sentiment Indicator (MRCSI), was mentioned again this quarter and continued to suggest the consumer remains cautious.





Management commented, “I mean one of the things that we faced in the cigarette category, we do see, albeit it’s gradual but it’s been continuing for the next several quarters, a movement away from carton to pack purchasing. We’ve also seen it moving away from full value purchasing to a more discounted brand, which could be a generic brand.”



And finally, management had some interesting comments on their fiscal 2017 expectations versus actual results. Management explains, “…there’s no question that when we put our goals out for fiscal 2017, I’m not sure we fully anticipated the customer response, the consumer response I should say in relation to the economic conditions.” Management went on to note they are taking economic conditions into account more this year than they did last year.


Although Casey’s stock declined 8% on the news, trading at 18x EV/EBIT, it continues to trade over my estimated business valuation. Casey’s is one of the many high-quality companies I follow and like, but in my opinion, remains too expensive to generate future adequate absolute returns. Hence, it remains on my possible buy list, but not in my portfolio.


United Natural Foods (UNFI), the distributor of natural and organic foods, also announced earnings results this week. Although results appeared as expected, annual sales guidance was revised lower and its stock declined -4%.


Management noted the grocery environment remains challenging (side note: Isn’t it interesting restaurants often blame grocery stores for taking market share, yet grocers continue to struggle? Maybe it’s not where the consumer is spending, but how much the consumer has to spend).


Specifically, management stated,





Net sales finished below our expectations in the third quarter driven by broad-based retail softness, the rationalization of business in conjunction with our margin initiatives and lack of inflation.”



“Same-store sales in many of our retail customers were under pressure or negative during the quarter. Our retail customers are facing competitive pressure not only from other food retailers but also from many channels now carrying assortment of better-for-you products.”



“…when you look at general same-store sales and year-over-year, quarter-over-quarter, many of the retailers across most of the channels are facing some real headwinds in terms of growth. And as part of that, we’ve seen certainly a fair number of store closings as retailers are coming together. And so in the near term, that’s been a real headwind for us.”



Kroger reports next week, hopefully providing us with more useful grocery and consumer data points. That said, for those waiting for the consumer to get the U.S. economy out of its 1-2% growth funk, further patience may be required. From a bottom-up perspective, I’m not seeing it.

Thursday, May 25, 2017

The Genesis Of The Bubble's Bubble - "It's Financial Civil War, How Much You Bleed Is Up To You"

Authored by Richard Rosso via RealInvestmentAdvice.com,


The financial services industry is headed for the greatest debate in recent history.


Regardless of what occurs from here –a continued stock market bullish trend or reversion to long-term averages which chronicles back to 2000 levels, the confines of discussion, the heated verbal and written volleys tossed deep from the roots of philosophical differences will forge a permanent rift between the steadfast buy-and-hold brethren and the stewards who manage risk by preserving capital (the dreaded group with a market escape plan), through the forthcoming bear cycle.


The stakes are higher than I can recall.


Future generations: Those we are depending on to lift the globe from the depths of a demographic malaise, groups nowhere near as ostentatious as Baby Boomers; generations that savor experience over product and have been wary of the risk in stocks, are beginning to relent and take notice of this bull market trajectory.


How they experience the ride in stocks and what occurs from here will shape their investment philosophy. I fear Millennials to Gen Y are going to get fooled, taken out. Smacked in the face.


Betrayed.


The buy-and-hold side, ‘the setters and forgetters,’ which I’ll explain, appear to be winning this battle so far and that’s part of the reason for my concern and ironically, a matter-of-fact bullishness.


For now and the near future it’ll be hunky dory. You see, I think we are in the midst of witnessing the greatest market bull stampede since 1995 through 1999. I believe it’ll eventually make the tech bubble explosion sound and feel like a 5-year old throwing down in joy, a bang pop noise maker on hot cement through a humid-heavy July 4th.


However, this is just my humble opinion.


I hold the utmost respect for the market as it’s designed to fool me as much as possible and at every gyration. I’m open-minded and with the assistance of our no-spin, in-house data crunching at Real Investment Advice, I remain more eagle, or eye witness, as opposed to a ‘bull’ or ‘bear.’ And I observe here, the beginning of the “bubble’s bubble.”


The break out of a long-term sideways market cycle which began in 2013, stalled in early January 2015 when the S&P 500 closed at 2058. On November 9, 2016, it stood at 2163. Watching paint dry through the summer of ’16 would have been more exciting than the market action. It was torturous. I described it to Lance Roberts at the time as suspended animation.


Then the presidential election happened and the rest is history…


I’m hesitant to refer to the current market as a bubble. I refer to it as the boom that leads to a bubble. See, my definition, perception, differs from market soothsayers. It isn’t in a textbook. It emerges from my boyhood summer activities on a New York street. The greatest bubbles I recall were the largest ones, most magnificent, right before they burst in a soapy, rainbow mess, stung my eyes like slimy razors, and forced me to lament through a wince:





“Wow – that was freakin’ incredible!”



The current Shiller Price-Earnings Ratio stands at 29X; the tech-wreck Shiller was a hair short of 45X in December 1999. My definition of bubble begins at the apex of the ‘pop’ of the previous high. From there, I believe only if or when we exceed that limit, that the market should be deemed the “bubble’s bubble.”


For now, I’m going to outline the factors or input that is breathing sustainability into this phenomenon.


Don’t misunderstand: My belief is when this market adjusts, there’s going to be stinging eyes from tears spilled over brokerage statements and the mutter of “I got suckered again,” over and over.


You see, every bubble differs in composition. The boom-bust cycle feedback loop we’re traveling now isn’t fueled by an industry or sector. It’s greater in scope. The wind in the proverbial sails is a confluence of factors fueled by post-election animal spirits and a lower-than-longer interest rate environment which is the prime food source or hive for the bull.


Poor demographics, below-average productivity which keeps the Federal Reserve and yield curve captive in a flat wasteland of inertia, a new generation of financial professionals who never experienced a bear market, an overwhelming number of passive preachers who believe indexing (without regard to risk management), is some form of financial nirvana, a brokerage industry under pressure to comply with a looming Department of Labor fiduciary standard slated implementation on June 9, stirred with the hope of corporate tax reform ‘sometime in the future, (it’ll be big)’, boils a seductive porridge the bubble’s bubble can’t get enough of.


Regardless of the possible repeal or modification of the DOL ruling under the current presidential administration, investors are demanding a greater standard of care from those who assist them.


Big box financial retailers are desperately scrambling to create procedures designed to reduce possible liabilities that come from taking on fiduciary responsibilities. The last thing on their minds is to “do what’s in the highest best care of the client.” The paramount concern is to work with their cadre of lawyers to minimize business risk for themselves. The investment risk you absorb will remain of little concern except for how thinly they determine your ‘risk profile.’ As long as your responses to risk queries are recorded, you’re screwed.


A method I know is growing popular with several financial behemoths is to take the portfolio decisions out of the hands of otherwise knowledgeable employees and place them with a group in a centralized location thus creating a homogenized, factory assembly-line process allegedly for closer monitoring.


Strangely, and perhaps insidiously, I wholeheartedly believe the intention is to build closer ties to the firm thus severing the relationship with the adviser, who is always deemed a flight risk. This method also frees up frontline professionals to sell more packaged asset-allocation product or you got it, feed the profit-margin beast.


The next bubble pop may be a game changer for the industry again and motivate financial professionals who do a magnificent job of selling products or outsourcing money management which ostensibly distances themselves from ground zero of an imminent explosion (hey, it’s the market, not me), to possibly re-think their careers. Take on a fiduciary calling.


Perhaps a bubble or at the least, a severe bear market is required to cleanse the system, drain the swamp, by migrating miscreants to more fitting livelihoods like pushing phone service deals at T-Mobile or taking roles as activities directors for Carnival Cruise Lines. We’re due.



The best activities director on a cruise ship: Julie from The Love Boat.


It’s a romantic notion. A nice thought. Meh, it keeps me motivated to consistently provide what I consider ‘full circle’ financial guidance, the complete story, pros & cons, and planning for risk markets that we strive for at Real Investment Advice.




While we await comeuppance, let’s review what stirs inside the bubble’s bubble.


The ‘passive’ revolution we’re witnessing is to provide a portfolio solution which is based on the demand for the products, regardless of how expensive the products may be.


To be clear, I’m an advocate for index investments and lower internal portfolio costs. I was one of the first financial professionals at my former employer to use market cap weighted exchange-traded funds in client portfolios to replace mutual funds.


My beef is how indexing is perceived by unsuspecting investors as safe and insidiously branded or allowed to be positioned by the buy-and-hold faction, as the ultimate never-sell strategy.


Not because it’s best for the investor; well, that’s a convenient half-truth. Mostly, it’s optimum for the adviser under pressure who can offer a pretty asset allocation solution in a package and move on to the next notch on the sales belt.


The front-line consultant of a publicly-traded big box financial retailer is under never-ending intense pressure to increase margins for shareholders. The performance of the stock price is the priority. I was provided this wisdom, which I have never forgotten, from a former regional manager at Charles Schwab – “It’s shareholders first; then follows the rest of us, including clients.”


If passive is what clients want, passive is what they shall receive, but in a manner that can be delivered and scalable by a financial retailer in a CYA/fiduciary manner. It’s time efficient to get cash fully invested in an asset allocation at once; buy full in to the story that it’s time in the market not timing the market, regardless of current valuations         or expected returns, especially as corrections appear more as distant memory than reality. READ: The Deck is Stacked: Putting Risk and Reward into Perspective.


Here’s how I see it as the bull rages on:


The asset allocator factory box designers are diligent at work, creating neat, easy-breezy investment packages positioned as products or “solutions,” thus forging a path perhaps we haven’t walked so passionately before.


The demand for these attractive boxes filled with a colorful palate of panacea in the form of passive investments, may drive valuations higher than we’ve seen, even greater than the tech bubble, which will leave investment veterans perplexed.


Market this sausage to a new breed of adviser who perceives passive as safe, has rarely witnessed a correction or bear market working in the trenches with clients, and serve it up on the finest wrapper Wall Street marketing has to offer, and God help us.


Why?


The investment vs. valuation connection is aggressively being severed. Asset-allocation solutions are being positioned to ‘pros’ as simple, third-party adjuncts to an overall financial planning experience. The intoxicating promise of ease and low cost which places what you pay in the form of valuations in a clean-up spot, or makes it an afterthought (if that), is incredibly alluring. Buy it up now, let it grow, harvest later. Simple.


After all, stock valuations are as easy to comprehend as nebulae millions of light years away.


So why bother?


Just buy the box. Open in 20 years. Hopefully, just hopefully, there’s something in there to show for it.


The demand for the product of stocks to market and maintain aggregate static asset allocation programs overrides the price paid for that product.


One of the best blogs I’ve read about “earningless” bull markets and the overall demand for stocks comes from www.philosophicaleconomics.com in a piece penned The Single Greatest Predictor of Future Stock Market Returns.


At this juncture, a lack of viable alternatives, the massive growth of robotic allocations of passive investments packaged and sold, and the aversion of the corporate sector to issue new equity has created a demand for stocks similar to the demand for a product, like an IPhone. Regardless of price, if the IPhone is in demand, you’ll stand on line for days to get it. It doesn’t need to make sense, don’t try to rationalize it.


From the blog post:


Ultimately, the price of equity is determined in the same way that the price of everything is determined–via the forces of supply and demand.  For any given stock (or for the space of stocks in aggregate), price is always and everywhere produced by the coming together of those that don’t own the stock and want to allocate their wealth into it, and those that do own the stock and want to allocate their wealth out of it.  


It’s all up to the allocators–they decide how much of their wealth they are going to allocate into stocks, how much exposure they are going to take on.  Their preferences–or rather, their efforts to put those preferences in place, by buying and selling–set the price.  Valuation is a byproduct of this process, not a rule that it has to follow.  





Buy-and-hold is painted as the informed, responsible, pro-American thing to do with a portfolio.  But, in terms of financial stability, it can actually be a very destructive behavior.  Consider the classic buy-and-hold allocation recommendation: 60% to stocks, 40% to bonds (or cash). What rule says that there has to be a sufficient supply of equity, at a “fair” or “reasonable” valuation, for everyone to be able to allocate their portfolios in this ratio?  There is no rule



If everyone were to jump on the buy-and-hold bandwagon, and decide to allocate 60/40, but equities were not already 60% of total financial assets, then they would necessarily become 60% of total financial assets.  The excess bidding would not stop until they reached that level.  It doesn’t matter that the associated price increase would cause the P/E ratio to rise to an obscenely high value.  The supply-demand dynamic would force it to go there.  



If aggregate demand for stocks continues, then valuations will be an afterthought. However, there is a risk to this rosy scenario. Currently, household equity percentages among individual investors stand at their highest level in two years at 67.6% per the March AAII Asset Allocation Survey. Prior bull cycles have seen equity allocations exceed 70%. Granted. Yet, consumer sentiment or the ‘feel good factor’ is at thresholds we haven’t crossed since 2004. Confusing.


Keep in mind, stocks don’t need to correct exclusively in price, they can in time. In other words, the higher valuations our team calculates for stocks can even out over the next few years ostensibly pulling down the long-term averages of stocks to 2%, maybe less.


And the reward for stock risk flies in the face of Warren Buffett’s commentary that “bonds are lousy investments.” Let’s see – 2% with 100% probability of recovering my principal at the end of a period or 2% return with a tremendous chance of loss at the roulette wheel. Hmm…


The demand for risk assets is going to require several conditions to remain consistent. I’ll cover what I consider the most important.


Which gets me to:


Passive investing is exploding in popularity. I’m concerned about the true reasons why.


From a recent article in the L.A. Times:





When money flows into conventional index funds, they must buy the stocks in their index regardless of the underlying companies’ financial health or outlook.


“Of course it distorts things,” said Rob Arnott, who has pioneered a fundamentals-based form of indexing at Research Affiliates in Newport Beach. “Price discovery,” the term for research that gets to the heart of a stock’s relative value, “is diminished as fewer and fewer investors care about the fundamentals,” Arnott said.



The migration to passive investments is indeed exploding. Currently, 42% of all U.S. stock funds are in passive vehicles.


One reason is indeed lower costs. Indexing is definitely a bargain TYPE of investment (more on this coming), when compared to many actively-managed funds.  Low internal fees is a positive for investors.


Unfortunately, I believe the overwhelming reason for the massive popularity of passive investments is performance or outperformance when compared to their actively-managed colleagues; the market momentum we’ve been experiencing since 2009 fueled by strong tailwinds of prolonged low rates, multiple quantitative easing programs, corporate share buybacks, and companies that operate lean and mean (it’s always a recession in corporate America when it comes to employee headcount), have forged accelerants to market increases.


However, cycles do change. Yet, nothing about that fact from passive preachers. Zero about bearing the full brunt of stock market risk. Nada about the math of loss.



Which gets me to:


Passive investing is not safe. Not by a long shot. To clarify: Passive is an investment type. It is NOT an investing process nor a manner to which RISK is managed.


The clearest thought I can conjure up about passive investments and bear markets is I have the finest potential to lose money at low internal costs. Never forget – Once wealth is allocated to stocks, it’s active. On occasion, radioactive. Plain and simple. Index positions must be risk managed. They bear the full risk of markets. The highs and the lows. There’s no escape-risk-free card for you.


The passive preachers make it sound like once you’re indexing there’s no need to manage risk. Diversification is supposedly the only means to do so, but beware. How you define diversification differs from how your broker does. READ: Never Look at Diversification the Same Way Again.


The granddaddy of indexing Jack Bogle of Vanguard readily tells the media that stocks are ‘overpriced.’ Future returns will be below average. In the next breath, he’ll suggest go all in because there’s nothing else you can do. If anything, that’s a pretty dangerous passive attitude to have considering the wealth carnage from math of loss, which again, is a topic that is never discussed.


Go for it. Select your own index or exchange-traded funds or work with a fiduciary to create an asset allocation plan. Regardless, a rules-based approach to rebalance overheated asset classes or exit stocks surgically through market derails as identified in Lance Roberts’ weekly newsletter, should be part of the process. That’s a full-circle approach to investing – The buy, the hold and the other four-letter word – Sell.


I’d keep the “sell” word on the “down low” with your passive friends. Go slow. Perhaps you can enlighten them. Help them redefine how passive should be perceived in the real world.


The current economic conditions handcuff the Fed and holds captive an upside move in rates which in turn, makes the bubble’s bubble a closer reality.


I’m no Lance Roberts however, I do believe stocks and bonds do vie for capital attention. Not based on an interest rate vs. equity earnings yield comparison, mind you. That’s just an ingenious Enron-like mathematical travail financial analysts devised to lead your portfolio into a high-risk, low-return trap and appear intelligent doing it. READ: Do Low Rates Justify Higher Valuations?


I am referring to the enduring nature of TINA, or “There Is No Alternative,” to stocks when the hefty lid on bond yields is considered. Warren Buffett on CNBC a few weeks ago called bonds “a lousy investment.” Why? Because who wants to extend their financial neck for a U.S. Treasury Note paying 2% plus for a decade?


No doubt interest rates can remain low for extremely long spans. Several prolonged periods are mind boggling to comprehend as outlined in this chart from Lance Roberts.


Some wines are shorter to age.



From the 1981 peak to 2003, yields of prime corporate and long duration government bonds declined by a thousand basis points.


Intermediate and long-term interest rates are a function of economic growth and inflation. As economic activity heats up, so does the demand for credit. As wages increase, so does the ability of a household to meet or take on additional monthly debt obligations. Unfortunately, wage growth has been stubbornly stagnant for 17 years.


Sentier Research, a powerhouse of information which reflects the financial state of the American household, offers a monthly data for household incomes.



Adjusted for inflation which is most important, median household real income peaked at the beginning of the Great Recession. Sadly, inflation-adjusted income is still .7% below the beginning of the year 2000.


Inflation has been trending at roughly 2%; GDP growth which was disappointing for Q1 2017 is due for a big pick up in Q2 per the Atlanta’s Fed GDP Now’s forecasting model which is estimating as of May 16, a 4.1% annual rate. We’ll be monitoring at Real Investment Advice as this model is updated six or seven times a month with at least one update following seven economic data revisions from the BEA.




The Real Investment Advice estimate for GDP growth isn’t as optimistic as the Atlanta Fed’s. In addition, we have witnessed how the GDPNow forecast gets revised lower repeatedly as economic data is released.


In the United States, we have experienced a prolonged period of below-average economic growth since 2000 that may endure through 2022, when a positive demographic cycle emerges. Read: The Long View – Rates, GDP & Challenges.


Structural headwinds will keep longer duration yields subdued and the Fed handcuffed to raise short-term rates as quickly as they prefer. I’ve been a broken record with this commentary since I began to study Japan’s economy in 2009.


The book “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession,” by economist Richard Koo, enlightened me to the similarities between the U.S. and Japan. The aftermath of deep recessions where household balance sheets are damaged combined with poor demographics, is a lethal structural blow to economic prosperity.


Overly accommodative central bank policies attempt to accelerate (they’re far from successful) or at the least, don’t stand in the way of recovery, which comes down to, for the U.S., a continued period of low interest rates.


The environment is perfect, as long as economic conditions just trudge along and the Fed is stuck, for the TINA monster to feed. Blame it on the demographics of an aging population, not enough young people forming households, excess debt, or poor savings rates. Pick your position. The backdrop is perfect for stocks to continue higher with sights near of the bubble’s bubble.


The continued positive momentum for stocks is a poor reason to let your guard down. On the contrary. More than ever as an investor, one must remain vigilant to take profits and rebalance. Stay humble. Understand the territory your wealth travels today can fall into a sink hole real fast.


Every long-term market cycle forges a unique path. Who knows how this one will crescendo.  For now, I am sticking with the bubble’s bubble theory as I still observe too many Main Street investors who have some form of “spidey-sense” or talk doom when markets take in a short breath, which tells me after toiling in this industry since 1989, that the wall of worry that stocks climb, albeit aging like the nation’s infrastructure, is still intact.


However, when it crumbles, you can’t afford to get crushed.


I’m first and foremost a financial life planner, not a market analyst. However, when partnering with a client to create a retirement income distribution strategy, I fear now more than any other period since 2000, that sequence of return risk or a prolonged period of poor or zero portfolio returns, is a strong possibility in the future. After all, whether it’s through price or time, risk assets revert. It’s never different. As life goes, so do markets ebb and flow.


Oh, and the battle between the buy-and-holders and the risk managers?


It’ll be our financial civil war to fight; as an investor, whether choose to be or not, you will be pulled in unfortunately, by proxy. You see, your wealth will be on the line, the weapons chosen.


Yet again, we will fight.


You will bleed.


How much is up to you.