Author Archives: Lenore Hawkins, Chief Macro Strategist

About Lenore Hawkins, Chief Macro Strategist

Lenore Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, strategic planning, risk management, asset valuation and operations optimization, her focus is primarily on macroeconomic influences and identification of those long-term themes that create investing headwinds or tailwinds.
Markets Stalling Despite Central Banks’ Support

Markets Stalling Despite Central Banks’ Support


The early equity market strength in 2019 has many on financial television claiming we are off to the races yet again (shock) but taking a step back and looking at both the internals of the markets and the longer-term economic and geopolitical trends, we see more signs of weakness and rising risks.

  • Sideways Equity Markets Persist as First Quarter GDP Growth Expectations Remain Poor and Yields Fall
  • Brexit Uncertainty Worse Today with Just Two Week Until Brexit Day (March 29th)
  • Further Signs of Both Domestic and Global Slowing
  • Labor Market Concerns
  • The Impact of Record Levels of Corporate Debt


Equity and Fixed Income Markets Diverge

While the early part of 2019 the markets were going like gangbusters after the worst December in decades, the markets have been directionless in recent weeks.

For all the talk of an ongoing bull market that the prior chart would support, the total return for the index is basically flat since late January 2018 – nearly 14 months of nada. Not quite so exciting for the long-term investor when you take a step back even though the ups and downs have offered traders short-term opportunities.

During that same time, the yield on the 10-year US Treasury has fallen, after having risen to over 3.2% last November. Today it sits a mere 10 basis points above the high end of the Federal Reserve’s target Fed Funds rate, which means the bond market is pricing in negligible economic growth. That’s a cue for the Atlanta Fed GDPNow forecast for the current quarter that clocks in at all of 0.4%, well below the 1.4% consensus tallied by The Wall Street Journal. The 10-year Treasury yield is near its 2019 low while the S&P 500 hits a 2019 high – that ought to have your attention.

The biggest driver for equity markets lately has been expectations around the Federal Reserve’s next steps and the push-pull on a US-China trade deal. Rather than being in the midst of a rate hike cycle, as was the case towards the end of last year, the Fed funds futures market is pricing in 25% odds of a rate cut by year’s end versus just 7% odds a month ago. A very different outlook compared to this time last year, and one that suggests the market is increasingly concerned about the speed of the economy and the rising risk of the next recession.

The Russell 2000, a small cap index, whose constituent’s revenues are more domestically driven than the S&P 500 also reflects the markets low expectations for economic growth as the index remains nearly 11% below its August 2018 high and sits about where it was at the end of November of 2017. The message here is don’t be lulled into a false sense of security given the near 15% increase in that index thus far in 2019.

The Nasdaq Transportation Index paints a similar picture.


Bumbling Brexit

In this time of political polarization across much of the developed world, from riots in Paris to efforts to secede in Spain, I think there is one thing we can all agree upon – the UK’s Prime Minister Theresa May is having a bad year. Much of the developed world is facing a rise of populism, driven by the forces behind our Middle-Class Squeeze investment theme, as the countless promises political leaders have been making for decades are not being fulfilled and people, particularly those mounting financial pressures, are angry. In the UK that manifested itself in a desire for more autonomy with a side helping of anti-immigrant nationalism.

After Mrs. May suffered a record-breaking 230-margin rejection of her Brexit deal in January, she endured yet another defeat this week by a margin of 149 votes in the House of Commons. The uncertainty around Brexit has never been higher.

Confused by it all? You aren’t alone as I’m pretty sure many members of Parliament are as well! Here is the short(ish) version of what it all means.

The deal Mrs. May has worked out with the European Union has been utterly rejected and on March 13th Parliament voted that it will not exit the European Union without an agreement. So, they won’t agree to her deal – the only deal on the table – nor will they leave without some sort of deal. Eh? What this means is that now the UK has to go back to the EU leadership and ask for an extension to Article 50, the formal exit process which set the deadline for March 29.

EU leadership has indicated that they aren’t terribly excited about granting an extension if there is no clear reason to believe that an extension will actually be useful. If the same folks are just going to make the same arguments with the same non-negotiables, then what’s the point? Does your head hurt like mine?

Anything is possible now from a hard-Brexit in which the UK is forced to exit the EU under Article 50 without any deal because the EU won’t grant an extension to an extension that leads to a new referendum that results in the UK remaining in the EU.

The bottom line is that the market has absolutely no idea how to price in anything about this mess. Depending on what happens in the next few days, the markets could get suddenly quite volatile as we get closer to that deadline without any resolution.


Domestic and Global Slowing

Last week the European Central Bank cuts its guess estimate for 2019 GDP growth to 1.1% from 1.7% with ECB President Mario Draghi shifting towards easier monetary policy by reviving the “Targeted Longer-Term Refinancing Operations,” which is a lending program with favorable interest rates that props up the weak and weakening banking system  supports liquidity in the region. In a testament to his own genius, Draghi stated that negative rates “have been very successful for the ECB and were a powerful instrument in fostering a recovery.” For a discussion on just how destructive helpful this policy has been in the region, listen to this Tematica’s Cocktail Investing podcast late last year to hear boots on the ground stories of the havoc stimulus these policies provide.

On the plus side, Eurozone Industrial Production surprised to the upside at 1.4% versus 1% with the Citibank Economic Surprise Index for the region showing signs of improvement after having been in negative territory for over two years with the exception of a brief foray above zero in the August/September period in 2018.

Forecasts for US growth in the first quarter from the Atlanta Fed have ranged from 0.2% to 0.5% during the month to sit at 0.4% as of March 13th. The range of estimates from the Blue Chip survey is between slightly over 2% to 0.7%.

The stalling out trade talks with China provide an additional headwind to a domestic economy that is already forced to contend with weakening global growth.

The utter mess of Brexit provides even more headwinds.

Taking a step back to look at the world’s major economies, if we look at the US, Canada, Brazil, Italy, Germany, the UK, France, India, China, and Japan, 9 out of those 10 were experiencing growth in the last quarter of 2018. The one exception being Italy. The problem is that growth was weaker than the prior year. The only country that saw acceleration was the US, and the tailwinds for that are fading.

A full 8 of the 10 experienced slower real year-over-year GDP last quarter and Italy is in official recession territory. In Canada final domestic demand has fallen for two consecutive quarters – the last time we saw this the Bank of Canada cut rates twice for the year.

How long can the US fight off the slowing of the rest of the world?


Labor Market – Should We Worry?

Payroll reports in February reverse the January contradiction which we discussed in this prior issue of Context and Perspectives. In January the Payroll report was quite strong while the Household Survey was weak – for February the two reversed rolls and we saw some obvious impacts from weather and the end of the government shutdown. Taking a step back we get a broader, longer-term picture of the two. Of the 255k added to the Household survey payrolls in January, 90% held just a high-school education. In February that 255k gain reversed to a 251k loss. On a bright note, those working part-time for economic reasons fell 837k, the single biggest decline in that metric since January 1994 – great! But then on the downside, the 25-54 years-old cohort has seen its payroll ranks decline by 52k in the past four months – not so great.

While the February headline payroll number saw just a gain of 20k versus expectations for 180k – the weakest gain since September 2017 – January’s numbers were revised up from 304k to 311k and December’s were also revised up from 222k to 227k. Those are solid numbers. But then (you knew this was coming, right?) aggregate hours worked decline -0.3% in February to the lowest level in 3 months. Rising hours worked indicate future payroll growth while falling hours, not so much.

Overall the labor market looks like growth has been or is topping out. Employers are feeling the pressure, which isn’t necessarily a good thing for households as Jonathan Pain points out on Twitter.

Corporate Margins Under Pressure

Wage growth in February hit 3.4% year-over-year in February, which means pressure on corporate margins, but that isn’t the only thing pressuring margins. A recent OECD report revealed that over $4 trillion in non-financial corporate debt will be rolling over in the next three years out of the total $13 trillion outstanding (31%). Net issuance of non-financial corporate debt fell to the lowest volume since 20008 and the net issuance of non-investment grade turned negative in 2018. The only other time this has happened in the past 20 years was in 2000. The overall share of BBB rated bonds has reached 54%, the highest ever on record going back to 1980.

So, what does that all mean? That at a point of slowing global growth, companies are facing higher labor costs and are having to roll over some 31% of total outstanding debt in the next few years at higher rates – further pressuring margins.


The Bottom Line – Details Matter

The bottom line is the prevailing narrative is that the recent “soft patch” of economic data is temporary and that what really matters to the economy and the markets is the Federal Reserve. While the S&P 500 has pushed through 2,800 again (just barely) the first time it did so in early 2018 one quarter of the stocks in the index were making new 52-week highs. Today less than 9% are in that territory. Back then the average S&P 500 stock was 5% below its high. Today it is 14% below.

Not convinced? Last week’s Fed Beige Book reported that Broadway ticket prices, one of the most reliable leading indicators, “were down 5-6 percent from a year earlier.” The last time a drop of this magnitude happened was December 2007 when “Average ticket prices for Broadway shows rose less than usual this past December and were down more than 5 percent from a year earlier.”

Still thinking this is a temporary patch of weakness? How about the Federal Reserve’s Lael Brainard speech on March 7th which she concluded with, “The most likely path for the economy appears to have softened against a backdrop of greater downside risks.”

To paraphrase Eric Clapton, not even Lael will ease my worried mind.

Liquidity Trumps Fundamentals

Liquidity Trumps Fundamentals


The market has been back in risk-on mode but with some strange internals as well as an ongoing disconnect with fundamentals. It has priced in a joyous cornucopia of Goldilocks assumptions:

  • A return to global central bank liquidity and price supports
  • A reversal of China’s deleveraging campaign with an abundance of stimulus measures
  • A peaceful and prosperous end to global trade wars
  • An elegant resolution to Brexit
  • Never mind India and Pakistan


The Party is Back On, But the Music Sounds Off

Heading into the last month of the quarter, let’s review what we’ve seen over the past few months. Just over 50 days ago the Nasdaq was in a bear market, but in the past two months it has shot up over 21% to sit about 7% below the September high and is currently above both its 50-day and 200-day moving averages which is typically viewed as being in a solid uptrend. As of the US market’s close on Thursday the Dow Jones Industrial Average was up nearly 19% from the December low (3.4% below its high), the S&P 500 up nearly 19% (5.0% below its high) and the broader NYSE Composite Index up just under 18% (4.5% below its high).

All the major indices remain below their Fall 2018 highs but are within range. However, upward momentum has stalled recently with the majority of the major US indices relatively flat or down since last Friday. This looks to be the fourth failed attempt by the S&P 500 to break 2,800 in the past four months indicating a significant overhead resistance level.

As we can observe in the chart above, the domestic stock market indices experienced the worst December since 1931 followed by the best January since 1987, leaving many with a general sense of unease. Let me be clear, these moves are not indicative of market normalcy. Something is very different, and it doesn’t feel quite right to me or to Tematica’ Chief Investment Officer Chris Versace. For example, it doesn’t feel like a normal bull market when Utilities have outperformed transports over the past year by over 15%. It doesn’t feel like a normal market when a growing number of companies are slashing their dividends while share prices continue to move upwards.

Then there is the disconnect with earnings and yields. As of the end of last week, 89% of companies in the S&P 500 had reported results for the December quarter with 69% reporting EPS above estimates, below the 5-year average. Analyst expectations for 2019 are for a decline in first quarter earnings of -2.7% with a meager 0.7% increase in the second quarter and just 2.2% growth in the third. For 2019 in full, the S&P 500 group of companies are now only expected to grow their collective EPS by 4.7%, more than 50% below forecasted levels at the start of the December quarter, yet share prices are rising.

We’ll also just have to ignore that the Citi Global Economic Surprise Index is right around where it was at the December market lows and has now been below zero for over 230 days, a record exceeded only during the financial crisis. The nominal manufacturing and non-manufacturing ISM has declined for the past 3 consecutive months and sits 13% below where it was when the 2008 recession began and is 19% below the 2000 recession.

In the battle between fundamentals and central bank liquidity so far, the bankers are winning big.

While this last one is certainly utterly useless as far an indicator of when a market may turn, it does put the current state of the stock market into perspective. The last time the market was in such heady territory the overall, (in the dotcom mania of 1999-2000) returns for the stock market for the following decade were quite grim with positive returns more dependent on specific asset selection than overall market bullishness – one of the reasons we are so focused on powerful long-term investment themes driven by structural changes.

The stock market rally thus far in 2019 hasn’t been just in the US as European stocks are enjoying their best start to a year since 2015, despite slowing economies and the mess of Brexit. The Stoxx Europe 600 has gained over 10% so far this year, gaining nearly as much as the S&P 500. We’ll also just have to ignore that Europe’s largest bank, HSBC, reported results earlier this month that missed analysts’ expectations with the bank’s CEO stating that revenues “collapsed” at the end of the year. There I go again with fundamentals!


Taking a Dip Back in that Central Bank Pool

While the markets have cheered the Fed’s cessation of its rate hike plans, it is worth keeping in mind that the US Federal Reserve has never stopped tightening with a funds rate this low. More than 10 years after the depths of the financial crisis and the economy cannot withstand getting near normal interest rates.

“And so, you know, when I think about the projection, I’m projecting 2 percent growth right now for 2019. That’s a number that is quite a bit slower than last year, which looks like – you know, barring any big surprises in the fourth quarter looks to come in around 3 percent. So that would be a percentage point difference in last year and 2019. That’s a pretty substantial slowdown…..If the economy evolves as I just said I expect it to – 2% growth, 1.9 % inflation, no sense that it’s going up, no sense that we have any acceleration – then I think the case for rate increases is not there. “

– Mary Daly, head of San Francisco Fed in WSJ interview


The markets are embracing the Fed’s far more dovish view on rate hikes that is driven by the Fed’s concern the US economy will return to its significantly weaker growth rate. That doesn’t sound like a great reason to break out the bubbly. We will be watching for signs that the better-than-expected fourth quarter GDP growth of 2.6% gives the Fed reason to believe higher rates are possible knowing that they’d like to get rates up higher to have more arrows in the quiver for the inevitable downturn. Given the data of late, however, the odds at least in the near-term for an additional rate hike seem rather low.

One of the major challenges facing the Fed when it comes to raising rates is part of our Aging of the Population investing theme – the reality that Social Security is expected to run out of money in 12 years, according to the Congressional Budget Office. The problem with raising rates is that the US is running exceptionally large fiscal deficits. Higher rates mean more of the budget goes to interest expense, bringing the problems with Social Security even more quickly.

Central banks around the world continue to feel the need to support asset prices after one of the longest bull markets in history and one of the longest periods in history without a recession, (in part because of the rampant levels of deficit spending and unfunded payables to their nation’s retirees). Call me crazy, but that doesn’t sound fundamentally bullish.

“There might be scope for another TLTRO.”

– European Central Bank Board member (and one of Mario Draghi’s possible successors when the latter’s term runs out on October 31) when discussing the idea of issuing new multi-year cheap loans to banks when the current Targeted Long-Term Refinancing Operation (TLTRO) nears its repayment date in 2020.

Once again investors have been taught that dips are a buying opportunity and implementing portfolio protection can go very wrong. Investors have been getting this lesson pounded into them for over 10 years now with many in the markets never having experienced a sustained market downturn. That is worrisome if you believe at all in reversion to the mean. Equity price growth has grossly outpaced economic growth – how long can that last? In today’s market to not participate is to seriously risk missing out, but just when do we pay the piper and are enough market participants paying attention to the rising risks?

While investors are keeping their eyes on the markets, our Middle-Class Squeeze investment theme continues to illustrate that all is not rosy for many as is evidenced by the rising populism around the world.


China’s Policy Shifts into Reverse

Last year China was working to deleverage its highly leveraged economy, just how highly leveraged is up for debate as its leadership isn’t exactly keen on transparency. China’s leadership is eternally under pressure to keep economic growth robust, making the nation one of the participants in our New Global Middle-Class investment themes.

The deleveraging efforts, the trade war with the US and the overall slowing global economy led to China’s economy growing at the slowest pace in nearly 30 years in 2018. China’s February manufacturing PMI fell to its weakest level since early 2016 and was the third consecutive month of contraction. Export orders are now slowing at the fastest pace since the global financial crisis and imports PMI is at the lowest level in over a decade.

With all that weakness China has reversed course on its deleveraging, but not everyone is on board with efforts that led to record lending of $530 billion in new loans in January alone. We saw a rare public row between the central bank and Premier Li Keqiang with the former stating clearly that it will continue efforts to deleverage while the latter argued that a sharp rise in rates creates new potential risks.

Both China and the US, the two largest economies in the world, have witnessed public rows between national leaders and central banks concerning risks around leverage and economic weakness.

The markets are unsurprisingly placing their bets with rising liquidity as Chinese stocks enjoyed their best day since 2015 earlier this week. The biggest concern regarding financial stability and future economic growth potential is China’s ballooning debt. Its official corporate debt level is among the highest in the world and its public debt is equally astounding.

But then who cares about debt these days…


Trade Wars Running Hot and Cold

On the China trade front, things are looking better as this week US Trade Representative Robert Lighthizer stated that the US is (at least for now) shelving its threat to raise tariffs to 25% on $200 billion of Chinese good. President Trump’s willingness to walk out on talks with North Korea’s Kim Jung Un this week may have been a signal to China that he could also walk out on President Xi if he doesn’t get what he wants. I wouldn’t want to place too many bets on this one working out smoothly from this point onwards. And let’s remember that should we get a trade deal in the coming days or weeks, investors will need to look past the headlines and dig into the details of the agreement to ascertain its true impact.

While the upcoming talks between the US and China are getting most of the headlines, as the Wall Street Journal put it, “America car buyers are facing sticker shock as President Trump weights new tariffs on imported vehicles and auto parts.” Even buyers of domestically produced cars would be affected as between 40% and 50% of the average US-built car uses imported components, according to the Center for Automotive Research. Potentially a second shoe to drop for auto companies following the data concerning falling auto loan demand that I shared just a few weeks ago.

The reality is that thousands and thousands of companies in Europe alone have been bracing themselves, (which means for many cost-cutting programs) for the ongoing impacts of the US-China trade war, fallout from rising populism in the Eu and the mind-boggling mess that Brexit has become. In Germany, long the economic engine of the EU, the government expected GDP growth to slow to just 1% in 2019.


Brexit A Mess of Historical Proportions

When it comes to Brexit, the mess just keeps growing. Long, long, long story short, essentially the divorce technically has a hard and fast move-out date at the end of March yet there has been no agreement on the terms of the divorce. There is talk of another referendum which could possibly reverse the 2016 vote, but that would be so very un-British to go back on a decision like that and Prime Minister Theresa May has said this is a no-go for her. This mess has left companies from the tiny local grocer to the major multi-national without any guidance on how their businesses will be affected in just one month’s time. The impact has the potential to be brutal with estimates that the UK’s economy, with a hard exit, could contract on the order of nearly 10%. This is something without any precedent in modern global politics and is a serious headwind to growth in the region. Perhaps the Brits will be wooed back into the European Union by the Breunion Boys – do yourself a favor and click on that link, you’ll thank me.

While we are on the topic of messes in Europe, an aspect of our Safety and Security investing theme is on display as Facebook (FB) faces yet another privacy investigation, this time 10 investigations lead by Ireland’s privacy regulator concerning potential violations of European Union privacy law.


India and Pakistan Ignite

A tailwind for our Safety and Security investing theme is rising global tensions as economies around the world struggle to maintain growth rates necessary to keep their populations feeling good about the future. When people have little hope for a better economic future, violence tends to follow whether it be against a neighboring nation or other members of their own society.

The US this week urged India and Pakistan to refrain from further military action as international pressure is building to de-escalate the most serious flare-up between the long-standing rivals in decades with fighter jets from both nations being shot down. We have not had such tit-for-tat air strikes between the two nations since 1971. We’ll continue to watch this potential powder keg of a situation, which if it escalates further it could very well move to the forefront of investor concerns.


The Bottom Line

Equity markets have once again diverged materially from fundamentals as the perception of the central bank put from the world’s biggest economies overrides fundamentals. I’ve been admittedly surprised by how long this has been going on and how wide the divergence has become, but we are seeing now seeing substantial overhead resistance level for the S&P 500 at a time when challenging fundamentals are growing.


Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters


The evolution of mobile payments in emerging economies sits right at the intersection of our Digital Lifestyle and New Global Middle Class investing themes. Just as we saw emerging economies able to leapfrog with communication infrastructure thanks to the advent of the mobile phone, so are we now seeing them leapfrog with retail banking options. A recent article on Reuters describes what is happening just south of the border where “Mexico’s new leftist government is betting on financial technology to help lift people out of poverty.”

“In the future, it will no longer be necessary to have a bank in the sense of a traditional, established bank,” said Arturo Herrera, Mexico’s deputy finance minister. “Mobile phones will become banks.”Phone-based banking has proven a hit among the poor in other emerging markets such as China, India and Kenya. Those efforts have been driven by private sector companies that offer user-friendly, affordable apps.

This is similar to what we are seeing in India as that nation also looks to take advantage of mobile technology to provide banking services to the hundreds of millions of its citizens that are currently unbanked, giving them an ability to work their way out of poverty that would have otherwise been impossible.

Our investing themes look towards those companies providing the technology that allows for such implementations and those companies that will benefit as these implementations are rolled out.

Source: Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

Signs of Slowing Economy Continue to Mount

Signs of Slowing Economy Continue to Mount


The market is now back in a bullish mood that is driven primarily by the “not gonna happen” news flow hopes. Rate hike? Not gonna happen. Government shutdown repeat? Not gonna happen. China trade war escalation? Not gonna happen. The question is, just how long can the “not gonna happen” hopes keep pumping hot air into a market when we are staring down a likely earnings recession amidst a global economic slowdown?

  • Housing remains a miserable mess – just look on Zillow at the breadth of the price reductions.
  • The employment picture isn’t quite what the headlines would lead one to believe.
  • Consumer confidence looks to have peaked and is falling.
  • Consumer credit trends and retail sales are flashing warning signals.
  • Corporate earnings and loan demand are also flashing warning signs as are shipping rates.
  • Geopolitical risks are profuse and profound ranging from no-deal Brexit fallout to Italy’s ongoing battles in the EU to US-China trade relations to rising military tensions between the US and Russia to relations between Italy and France at lows not seen since WWII.
  • The level of bullish sentiment is no longer a contrarian positive with the AAII poll of individual investors putting the bull camp at 40% versus 32% last week and the highest level in the past three months. Bears are down to an 8-month low of 23% versus 50% back in December. Even the CNN Money Fear & Greed index is back in greed mode after hitting fear one month ago.

Housing Headwind

More than 12 years after the US housing market started an epic crash in 2007, an unprecedented number of homes are still underwater (meaning the outstanding mortgage on the home is at least 25% above the home’s current market value), according to a real-estate market report from ATTOM Data Solutions. This is clearly a consumer headwind that is part of our Middle-Class Squeeze investment theme. The states with the highest share of mortgages include Louisiana (21%), Mississippi (17%), Arkansas (16%) and Iowa (15%). Of the over 7,500 zip codes having a minimum of 2,500 properties examined in the report, 27 had more than half of all properties underwater including zip codes in cities such as Chicago, Cleveland, Trenton, Memphis, Saint Louis, Virginia Beach and Detroit. If you’re a real estate investor, you should be taking note and as is often said with stocks, you should be building your shopping list.


Job Picture Not So Rosy

This week we received the Job Openings and Labor Turnover Summary for December from the Bureau of Labor Statistics (BLS) which revealed a record high 7.335 million job openings. The unemployment rate has risen from the November low of 3.7% to 3.9% in December and 4.0% in January – possibly indicating that we are now on an uptrend. There are now 1.17 job openings for every job seeker, with December slightly below November’s all-time record high of 1.19 job openings.

We are also seeing a record high length of time to hire someone, which is derived by taking the number of job openings and dividing it by the number of hires. Prior to the financial crisis, this metric was always less than one month, but in August 2014 it broke above a month for the first time in recorded history and has been rising ever since then to a new high in December of 1.24 months. We see this as confirming that employers are having an increasingly difficult time finding the right talent for the position.

This would make one think that the consumer is doing great, but as always, digging below the surface reveals a different picture. At the start of February, the January Payroll report got a lot of attention as job growth utterly blew away estimates, coming in at 304,000 new jobs versus expectations for just 170,000. However, the other employment survey from the Bureau of Labor Statistics (BLS), the Household Survey, rather than providing confirming view of the labor market revealed a very different picture, click here to read about how the two differ in the data they track.

The Household Survey found that employment dropped 251,000 in January, the first such decline in five months, some of which can be attributed to the government shutdown. But employment for the prime working-age population declined 46,000 in January after an 11,000 drop in December and 48,000 in November – more of that Middle-Class Squeeze investment theme at work.

The last time we saw employment in this demographic decline for three consecutive months was in October 2009. The number of full-time jobs declined 76,000 while the number of people working part-time for economic reasons rose 10.5% to 5.145 million which is a 16-month high. The number who are working part-time because of “slack work business conditions” rose a whopping 19.4% to 3.45 million which is a 23-month high. For both metrics this was the biggest one-month change since September of 2001 – a month no one can forget – and before that February 1982, both times the economy was in a recession. The Household Survey also revealed that the largest category of hiring was for those with a high-school education or less, which may explain why average hourly earnings rose the smallest amount since October 2017 at just 0.1%.


Consumer Credit Warning Signs

The latest Senior Loan Office Survey found that demand for auto loans, credit card loans, GSE-eligible mortgage loans, qualified jumbo mortgage loans, non-qualified mortgage jumbo loans, non-qualified mortgage non-jumbo mortgage loans, government mortgage loans, and consumer loans ex-credit card and ex-auto all are in contraction mode. In a nutshell – folks are not interested in borrowing any more than they already have. That is not what we typically see during economic expansion. We are also seeing a record high 7 million Americans are 90-days or more behind on their auto loan payments – yet more Middle-Class Squeeze.


Consumer Confidence Falling

With the job market not quite as rosy as the headlines would suggest coupled with the trends in consumer credit, it wasn’t a big surprise to see the Conference Board’s Consumer Confidence index fall to an 18-month low in January, dropping to 120.2 from 126.6 in December versus expectations for 124.0. The January reading also marked the third consecutive decline after hitting an 18-year high of 137.8 in October. Gluskin Sheff’s David Rosenberg summed up the results quite succinctly in his tweet.

Retail Sales Take Biggest Hit Since 2009

US Retail sales saw the biggest one-month drop in December since September 2009 with even ecommerce sales suffering as retail sales fell -1.3% month-over-month and up just 2.1% year-over-year. Retail sales ex-gasoline stations fell -0.9% in December and even the typically strong non-store retailers, which includes mail-order and ecommerce as are part of our Digital Lifestyle investment theme, saw sales decline -3.9%. However online players such as Amazon (AMZN) – a Tematica Research all-star – and eBay (EBAY) still enjoyed strong sales gains through the holiday season.

That’s the sequential comparison. On a year over year basis, retail sales in December 2018 rose 2.1% year over year with stronger gains registered at Clothing & Clothing Accessories Stores (+4.7%), Food Services & Drinking Places (+4.0%), Nonstore retailers (+3.7%) and Auto & other motor vehicles (+3.4%). That’s not to say there weren’t some sore spots in the report – there were, but they are also the ones that have been taking lumps for most of 2018. Sporting goods, hobby, musical instrument, & bookstores fell 13% year over year in December, bringing the December quarter drop to 11% overall. Department Stores also took it on the chin in December as their retail sales fell 2.8% year over year.

While that’s a more favorable view, the reality is December Retail Sales came in weaker than expected. Between the government shutdown, falling equity prices, global trade wars and ballooning debt levels, folks opted to keep their wallets in their pockets this past holiday season. In keeping with our Middle-Class squeeze investing theme, consumers looked to stretch the dollars they had to spend, which helps explains Costco Wholesale’s (COST) eye-popping, by comparison, December 2018 same-store sales of 7.5% in December (7.1% excluding gasoline prices and foreign exchange). Those consumer wallet share gains, which likely continued into January with Costco’s same-store sales of 6.6% (7.3% excluding gasoline prices and foreign exchange), and its expanding warehouse footprint are why Costco is Tematica’s Middle-class Squeeze leader.


Corporate Earnings and Confidence Weakening

The earnings outlook for companies in the S&P 500 continues to deteriorate with expectations down to 1% year-over-year growth for 2019 versus 5% just a few months ago. The last Federal Reserve Beige Book found that 25% of the US is in contraction with the remaining 75% expanding at only a modest to moderate pace. The corporate outlook isn’t all that rosy either as venture capital investors are advising their start-ups to hold onto more cash. For example, Index Ventures is reportedly telling their entrepreneurs they need 18 to 24 months’ of coverage versus 9 to 12 months’ worth a year ago according to an article in the Financial Times.

It isn’t just the big guys that are struggling. Economic confidence for small companies declined during most of 2018 and in January reached its lowest level since President Trump was elected according to a monthly survey for the Wall Street Journal by Vistage Worldwide. The report noted that for the first time since the presidential election, small firms were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment. In January 2018, 83% of the firms surveyed expected to grow revenues over the coming year versus 66% by January 2019. This decline was affirmed by the ISM non-manufacturing PMI report which found that the share with growth dropped from 94.4% last September to 50% today – the lowest since January 2016. The share contracting rose to 44.4%, the highest level since January 2016.


Corporate Loan Demand Echoing Consumer Weakness

Just as we saw demand for consumer credit declining, so has demand for corporate credit been on the wane. Demand for commercial and industrial loans from large and middle-market firms has been flat or in contraction in 10 of the past 13 quarters. For smaller firms, demand has been flat or in contraction in 9 of the past 13 quarters. Demand for commercial real estate loans for construction and land development has been in contraction since the first quarter of 2017.


No Love in the Eurozone

On Valentine’s Day we learned that economic growth in the eurozone was a meager 0.2% quarter over quarter in the fourth quarter of 2018 – so basically flat. Year-over-year growth stood at just 1.2% for the final quarter of 2018. This came after news that the eurozone economic powerhouse Germany had no growth itself in the fourth quarter after a contraction of -0.2% in the third quarter – narrowly missing a recession. Italy experienced its second consecutive quarter of economic contraction, putting it in a technical recession. All this put further downward pressure on the euro versus the US dollar.

Another major headwind in the Eurozone that has consequences far beyond the region is the lack of any Brexit deal. To put the situation in perspective, nations in the Eurozone have been trading with the United Kingdom for 30 years, resulting in highly integrated economies and corporations. Imagine being a grocery store manager in Edinburgh, Scotland and not knowing how your near-daily imports of fruits and vegetables from France are going to be affected or being a Swede working in London, who owns a home there and having no idea how your residency or work situation may be altered.

Without a long-term free trade agreement between the UK and the EU, new trade barriers will have to be introduced at borders and the prospect of different rules on standards and safety could make it harder and more expensive for companies to import and export. The cost of a no-deal Brexit will also affect consumers. The UK imports 30% of its food from within the EU. While companies can build up inventories in advance, there is a limit to what can be done given the shelf-life of some products and raw materials and limits to storage capacity. On top of that, all the additional storage and inventory represents additional business costs, diverting resources from investment in the company and its employees.

There is also no love lost these days between France and Italy, with relations between the two nations at levels not seen since the end of WWII. Italy’s relationship with the Eurozone, in general, has been challenging as its per capita GDP has grown all of 1% in the nearly two decades since it joined the unified currency while France has enjoyed 17% growth, Spain 23% and Germany 29%. For reference, the United States has seen per capita GDP grow 25% during this time.

Relations between the two traditionally close allies that are France and Italy have been degrading since mid-2018 when Italy’s Deputy Prime Minister Luigi Di Maio and Matteo Salvini of the League part starting firing pot-shots at Macron and France over immigration policies. Macron has occasionally fired back, for example, to criticize Salvini when he refused to allow a boatful of migrants rescued in the Mediterranean to step on Italian soil, forcing them to remain on the boat while it was docked. The group has since been moved out of Italy and Salvini has been sued by the court of Catania (where the ship was docked) for the kidnapping of minors. Good times.

Earlier this month France recalled its ambassador to Italy, something it last did in 1945 after Italy’s Deputy Prime Minister Luigi Di Maio – who is also the head of the anti-establishment 5-Star Movement (Cinque Stelle) – met with members of France’s Gilet Jaune (Yellow Jacket) movement. These are the folks who have been protesting in France and amongst other acts of violence, have set fires in cities all across the nation including Paris. To say they have been vexing France’s President Macron would be a massive understatement.

This tension could not be coming at a worse time when the no-deal Brexit crisis looming.


Global Shipping Confirms Weaker Growth

The Baltic Dry Index (BDI), which tracks the cost of moving bulk commodities and is considered a leading indicator of global trade, is down more than 50% since the start of the year. Shipping brokers in Singapore and London have reported capsized vessels, the largest ships that move bulk commodities like iron ore, coal and aluminum, had been chartered in the spot market for as low as $8,200 a day last week. Break-even costs for carriers can be as high as $15,000 a day, and daily rates in the capesize market hovered above $20,000 last year. That’s a serious drop-off in demand, and the BDI tends to be a leading indicators investors and traders watch closely much the way we also watch rail traffic and truck tonnage data.


The Bottom Line

Signs of slowing continue to mount both domestically and internationally, alongside rising geopolitical risks and excessive bullishness in domestic equity markets. This is a good time for investors to put together a shopping list of those stocks that will enjoy long-term tailwinds despite global economic slowing and add them to your portfolio when they reach an attractive price point as we are likely to see a pullback in the markets soon.


Late Car Payments Hit Record High

Late Car Payments Hit Record High

Today the Washington Post featured a piece that highlights what we at Tematica have been saying for months and is highlighted in our Middle-Class Squeeze investment theme. All is not well in many American households at a time when unemployment is at a 50-year low, there are more job openings than there are job seekers and the powers that be keep telling us how great things are. The Post article noted:

A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis era.

This is particularly concerning given that a car is often more important than even making a mortgage payment or a credit card minimum payment as it is how most people get to work.

A car loan is typically the first payment people make because a vehicle is critical to getting to work and someone can live in a car if all else fails. When car loan delinquencies rise, it’s a sign of significant duress among low-income and working-class Americans.

Given that the population has increased since the Financial Crisis, the actual percent of auto loan borrowers that were 3-months or more behind on their payments is at 4.5% versus the peak of 5.3% in late 2010, but the record high number is concerning at a time when the economy is supposedly firing on all cylinders. What happens when it really does slow?

We are seeing similar worrying signs in the recent Federal Reserve Senior Loan Officer Survey which found that demand for consumer loans is in full-on contraction. This is not something you see when the economy is strong and people are confident about their financial future.

We will be discussing this and much more in our Context and Perspectives piece to be released later this week.

Source: A record 7 million Americans are 3 months behind on their car payments, a red flag for the economy – The Washington Post

Is Everyone Looking the Wrong Way?

Is Everyone Looking the Wrong Way?


Over the past few months, the investing markets have considered Federal Reserve Chairman Powell enemy number one. Earlier this week the markets once again showed that America’s central bank drives sentiment more than any other factor, forget trade wars, forget earnings, forget political drama, it is the Fed and only the Fed that matters. That may sound somewhat simplistic to all the fundamental analysts and market technicians out there, but let’s face facts – it’s true.

Even the end of the 35-day long government shutdown barely generated a response from the markets.

What did generate interest was the rumor that the Fed may be considering ending its $50 billion-a-month drawdown of its balance sheet.

The afternoon of Wednesday, January 30th, after a much more dovish tone out of Powell, the stock market closed up for the first time after the past eight FOMC meetings – the longest post-FOMC losing streak on record. The prior meeting on December 19th was followed by a gut-wrenching 1,800-point crash in the Dow over the following four sessions. As we were nearing the end of 2018, it looked and smelled like the Fed went too far yet again, as it had done in 10 of the past 13 post-WWII hikes – so much for the narrative of the omniscient central banker. As Mark Twain wrote, “History doesn’t repeat itself, but it does rhyme.”

Investing is all about finding an inflection point, where the market is wrong – pricing an asset too high or too low, believing a policy to be beneficial when it isn’t or vice versa. Given the ubiquitous nature of the belief that the Fed is the central bank that really matters to the market, what if that supposition is wrong?

What if everyone is looking in the wrong direction with the wrong set of expectations? What if everyone ought to be looking in the direction of our New Global Middle Class investing theme? We will start to explore that idea in this week’s piece along with an assessment of the domestic and global economy.

As Chris Versace and I wrote in our book Cocktail Investing, there are three major participants in an economy: consumers, business and government. To understand what is happening in an economy one needs to understand the vector and the velocity associated with each one of these participants.


Households’ Outlook Dims

Our Middle-Class Squeeze investing theme was again front and center this week in the domestic economy. This week we got a rather dour report on how the Household sector of the economy is feeling about the future with the University of Michigan’s monthly index of Consumer Sentiment, which gauges American’s view on their own financial condition as well as the economy in general. In January U.S. Consumer Confidence dropped to 90.7 versus expectations for 96.8, hitting an 18-month low despite initial jobless claims dropping to a 49-year low, likely thanks to the double-whammy of the partial government shutdown and the recent volatility in the financial markets.

The decline was driven primarily by deteriorating expectations about the future, with that portion of the index declining 11% in January after falling 13% in December. On the other end of the spectrum, consumer’s assessment of current conditions is a mere 2% below the August peak which puts the spread between consumer’s outlook for the future and their present situation at nearly the largest since 1967. The only period in which the spread was greater was January through March of 2001 – the recession began in March 2001. Hat tip to David Rosenberg of Gluskin Sheff for the chart below.

We will be watching this metric particularly closely in February as well as the February Manufacturing Index given the recent drop in the 6-month view.

The rather glum outlook continues to be a headwind to the housing sector. House sales, excluding newly built homes, fell by 10% in December compared with the same month in 2017, according to the National Association of Realtors. Interestingly, this sharp fall off occurred despite the late 2018 rollover in mortgage rates, which as any a home buyer knows makes for a lower cost of total home ownership.


Slowing Corporate Sector

We are knee deep in the December 2018 quarter earnings season with around one-third of the S&P 500 companies having reported so far with an aggregate increase of 14.2% in earnings per share on an increase of 5.6% in revenue. While that sounds pretty good at first glance, what concerns us is that the beat ratio so far is the lowest since 2014, despite having the second most aggressive estimate cuts in the months going into this season since the depths of the financial crisis. On top of that, expectations for 2019 are being materially scaled back with expected EPS growth having fallen to just 1.6% year-over-year in the March quarter, driven in large part by weakening revenues for those companies with a lot of international sales exposure. As we’ve heard from a growing number of companies over the last few weeks, they are feeling the pinch of the trade war as well as the strong dollar.

One theme that keeps rearing its head is the impact of weakness in China, which is no small matter given that according to the US Census Bureau, America’s exports to China have doubled over the 10 years through 2017 to reach $130 billion a year. Companies ranging from Caterpillar (CAT) to Apple (AAPL), NVIDIA (NVDA) to Stanley Black & Decker (SWK) and 3M (MMM) have commented on the impact of a Chinese slowdown.

Caterpillar expects its Chinese markets to be flat in 2019. NVIDIA reported weaker Chinese demand for its computer chips and gaming consoles. H.B. Fuller Co (FUL) reported that weaker demand from China will reduce its profits by $20 million this year. PPG Industries (PPG) reported sales of its coatings for cars made in China fell 15% in the December quarter.

Despite these declines, however, luxury goods associated with our Living the Life investing theme continue to boom in China according to LVMH-Moet Hennessy Louis Vuitton (LVMHF). During its earnings conference call, the company shared that “growth in China has accelerated in Q4 compared to the previous quarters and the beginning of this year is the same.” That strength was corroborated by Ferrari (RACE) that reported its sales in China, Hong Kong and Taiwan rose nearly 13% year over year in the December quarter, and forecasted a pickup in its China business during the first half of 2019. Some of this may reflect the non-US nature of those companies, but the more pronounced driver is more than likely demographic in nature as captured by the rising middle class in China and the allure of aspirational goods, but also the rapid rise in wealthy and ultra-wealthy Chinese, a key cohort when it comes to the Living the Life tailwind.



While the partial government shutdown has finally come to an end, at least temporarily, inside the beltway is increasingly looking like a kindergarten class that has missed its afternoon nap. The US federal deficit continues to be quite large compared to post WWII norms.

The sheer size of the federal deficit combined with the Federal Reserve program to reduce its balance sheet means that roughly $1.3 trillion is being pulled away from the private sector. The more money the government needs, which means increased Treasury bond supply, the less money is available to be spent in the private sector – this is referred to as the crowding out effect of large government deficits. The Fed’s actions along with the increase deficit spending are one of the factors behind the recent drop is equity prices as the money has to come from somewhere. Less money in the private sector means demand for private sector assets declines which impacts prices. What about China? Well, it is no longer a buyer of US debt and may well have become a net seller.


Global Economy

In 2017 the world’s leading economies accelerated in sync, boosting equity prices. In 2018 the U.S. economy surged on thanks in part to fiscal stimulus in the form of tax cuts and increased government spending while the rest of the world slowed. In 2019 the world looks to be once again syncing up to slow down. The IMF warned that “the global expansion is weakening and at a rate that is somewhat faster than expected”. The fund revised down its forecasts, particularly for advanced economies with the world’s economy forecast to grow by 3.6% in 2020. Although that is stronger than in some previous years, the IMF thinks “the risks to more significant downward corrections are rising”, in part because of tensions over trade and uncertainty about Brexit.

The Global Zentrum fur Europaische Wirtschaftsforschung (ZEW) Economic Sentiment Index echoes what we’ve seen from the Michigan Consumer Sentiment Index.

Italy has now had two consecutive quarters of contracting GDP, which means that technically Italians are breaking out the Barolo and sadly toasting to their latest recession. Germany, which has been the strongest economy in the Eurozone, saw its economy contract 0.2% in the third quarter of last year, its industrial production decline 1.9% in November, and retail sales crash 4.3% in December, sparking fears that the country is on the brink of a recession as well. Recent federal statistics have Germany’s economy growing by just 1.5% in 2018 versus 2.2% in 2017 with the IMF forecasting just 1.3% in 2019. According to data published by IHS Markit, France’s Composite Output Index that reflects its manufacturing and services economy remained in contraction mode at 47.9 in January, down from 48.7 in December. As a reminder, a reading below 50 indicates a contraction, while one above 50 indicates growth. Against that backdrop, it’s not shocking to read that European Central Bank President Mario Draghi say “The European Central Bank is ready to use all its policy tools to support Europe’s softening economy, including by restarting a recently shelved bond-buying program.” As for the U.K., consumer confidence with respect to the economic outlook fell to a 7-year low in January.


China Slows

China has the second largest economy in the world and will soon replace the US as the world’s largest retail market as it benefits from the tailwinds in our New Global Middle Class investing theme. What happens in China matters to the rest of the world. For example, China has become the largest importer of wood in the world and the largest exporter of things made from wood, ranging from furniture to flooring. While China’s economy will eclipse that of the US, growth doesn’t come in a straight line and we are seeing warning signs:

  • China’s economy has slowed 6.4% in the fourth quarter of 2018, the third consecutive deceleration. Growth slowed to 6.6% in 2018, the slowest growth since 1990 when sanctions were imposed following the Tiananmen Square massacre.
  • Manufacturing PMI in January stood at 49.5 and was 49.4 in December, showing 2 consecutive months of contraction.
  • Property sales, which had been a reliable source of growth which took advantage of borrowing opportunities have been slowing.
  • The growth in retail sales has fallen to its lowest level in more than 15 years.
  • Sales of cars fell last year for the first time in more than two decades.
  • Companies have started cutting back hiring and incomes are growing more slowly, weighing on consumer sentiment. The middle three quintiles of China’s population by income distribution saw earnings increase by only about 2% last year in real terms.
  • Defaults are on the rise. Corporate bond defaults reached 19 billion yuan in the first half of 2018 versus 14 billion in the same period of 2017. Smaller banks in rural areas, which would be the first to feel the pain, are seeing rising levels of bad loans.

As a result, China is letting up on its drive to deleverage its economy and Chinese investment into Europe and America fell by 73% in 2018. China has already pivoted towards more supportive economic policies. It has sped up spending on infrastructure, trimmed income taxes and relaxed some restraints on bank lending. China has a massive population that it needs to keep employed and was the world’s engine during the last financial crisis, providing a floor under demand as much of the rest of the world was crashing.


What If They Are Wrong?

The US today has the highest non-financial private sector debt to GDP ratio in history. Overall the global debt to GDP ratio is the highest we’ve ever seen. Most likely the Fed tightening cycle has come to an end and the next thing we are most likely to see is easing, but this time perhaps that cure is already used up?

We’ve already seen materially diminishing returns from Fed stimulus efforts in the past.

What if this time around the only central bank that truly matters is China’s?

What if China decides to alter its monetary policy, its peg to the dollar, to help its slowing economy thereby creating a cascade across the east as its neighbors scramble to respond?

What if the only bank in the world that can affect asset prices this time, that can actually create inflation is the one for the biggest consumer of raw materials in the world, the one in the East at the People’s Bank of China while everyone is looking the other way?

What if indeed…

How many investors are factoring that into their thinking? Is President Trump contemplating that as US-China trade talks continue? We’ll be watching so stay tuned.



India’s Mobile Monsoon

India’s Mobile Monsoon


An article in this week’s Economist points out some phenomenal data that speaks to our Global Rise of the Middle Class investing theme. While the Middle Class in many developed nations is under pressure, part of our Middle-Class Squeeze investing theme, we are seeing technology help leapfrog infrastructure needs in many emerging markets. In India, mobile data is giving people access to the global economy in ways that was utterly impossible just a few years ago.

Just three years ago there were only about 125m broadband internet connections in India; by last November the number had reached 512m. New connections are growing at a rate of 16m per month, almost all on mobile phones. The average Indian phone user now consumes more mobile data than most Europeans.

Incredible economies of scale possible in the most populous nation on earth make for business models that are not feasible elsewhere.

So as not to limit the market to people who can afford smartphones, Jio also launched its own 4g feature-phone, the JioPhone, which it says is “effectively free”. Customers pay only a refundable deposit of 1,500 rupees ($21) for the device, with which they can use WhatsApp, watch YouTube and take pictures. As Mr Ambani said last year, for most users their Jio connection “is not only their pehla [first] phone but also their pehla radio and music player, pehla tv, pehla camera and pehla Internet”.

Which has lead to incredible adoption rates.

Data in India now cost less than in any other country. On average Jio’s users each download 11 gigabytes each month.

The opportunities here are staggering, but as we’ve seen pushback on globalization in much of the developed world, so too is India looking to protect is domestic companies from foreign competition. Draft rules revealed last July would require internet firms to store data exclusively in India. Another set of rules that went live last October require financial firms to store data locally, too. On December 26th India passed rules that hit hard at Amazon (AMZN) and Walmart (WMT), which dominate e-commerce there, preventing them from owning inventory in an attempt to protect local digital and traditional retailers.

Investors are well served to look beyond just the U.S. economy which is facing growth headwinds from slowing population growth, aging demographics and enormous debt loads with a mountain of unfunded liabilities across pensions and Social Security. In India, a country with a massive population that is relatively young and with productivity levels well below those of developed economies, small improvements can generate enormous returns for both its citizens and investors.

Source: Mukesh Ambani wants to be India’s first internet tycoon – India’s new Jiography

The World’s Biggest Brands Going Green With Refillables

The World’s Biggest Brands Going Green With Refillables

We are seeing yet another shift in consumer products at the intersection of our Clean Living and Disruptive Innovators investing themes wherein the world’s biggest consumer brands are looking to provide their products to consumers in refillable containers so as to reduce waste. This creates a tailwind behind those providing the containers and the refilling services.

A recent Wall Street Journal article discussed the massive potential impact of this change.


Refillables once dominated industries such as beer and soft drinks but lost out to convenient, affordable single-use containers. In 1947, refillables made up 100% of soft-drink containers by volume and 86% of beer containers, according to the Container Recycling Institute, a nonprofit. By 1998 those figures dropped to 0.4% and 3.3%, respectively.

Our Clean Living investing theme goes beyond just what we put into and on our bodies to our impact on our environment. The WSJ article points out that those companies that provide the more environmentally friendly offerings will be able to attract those consumers who value that feature, an ever-growing portion of households.

Critics question whether the project will achieve scale in the face of high costs and entrenched consumer behavior. But, if successful, the companies say the efforts will reduce waste from single-use packaging. It could also be a way to woo eco-conscious consumers, glean data and foster brand loyalty.

We are still in the early stages of this, so your team at Tematica will be keeping a close eye on how this progresses and which companies are best poised to take advantage of the new packaging and fulfillment needs.

Unilever will sell nine brands in refillable containers as part of the initiative, which will be run by recycling company TerraCycle Inc. and start with 5,000 shoppers in New York and Paris in May. The pilot will extend to London later this year and cities including Toronto and Tokyo next year, according to TerraCycle.

Do I really use 100 of these over 8 years?

Unilever estimates a refillable steel container for its Axe and Dove stick deodorants will last eight years—long enough to prevent the disposal of as many as 100 traditional deodorant packages.

The range of products to be offered is quite extensive.

PepsiCo will sell its Tropicana orange juice in a glass bottle and Quaker Chocolate Cruesli cereal in a stainless-steel container as part of the trial.

P&G will sell 10 brands, including Pantene shampoo in an aluminum bottle, Tide laundry detergent in a stainless-steel container and an Oral B toothbrush with a durable handle and a replaceable head.

This can also be a way to increase switching costs, which will serve to improve brand and product loyalty.

“It’s really about a new delivery system and making sure once people are hooked into this they stay with the product,” said P&G’s chief sustainability officer, Virginie Helias.

The bottom line here is consumer tastes are ever evolving. Successful investing requires looking towards what features consumers will be wanting in the future and how they will want them fulfilled.

Source: The World’s Biggest Brands Want You to Refill Your Orange Juice and Deodorant – WSJ

Less Booze, More Kombucha?

Less Booze, More Kombucha?

We’ve all read the statistics on just how chubby Americans have become and all the lovely little health problems that come along with those extra pounds, from diabetes to heart disease not to mention the physical discomfort of lugging extra pounds around. Making healthier eating and drinking choices is part of our Clean Living investment theme and this week the Wall Street Journal ran an article discussing how as Americans increasingly lay off the booze, the world’s biggest brewers and liquor companies are having to push beyond their traditional fare and roll out teas, energy drinks, and nonalcoholic spirits.

As a confirmed wine lover who owns more wine fridges than I’m willing to publicly admit and who is also known to enjoy a great glass of scotch (travel tip British Airways offers Johnnie Walker Blue in first class)  or a gin and tonic, (new favorite gin is Darjeeling) I’m struggling to wrap my head around kombucha or spiked coconut water (who knew there was such a thing) to replace the heaven of pouring a glass of Barolo, but I applaud the effort by a nation that clearly has room for improvement on the health front.

According to the Wall Street Journal,

Americans’ consumption of ethanol, or pure alcohol, has declined sharply over the past couple of decades. Alcohol consumption stood at 8.65 liters per person in 2017—the most recent year for which data is available—compared with 10.34 liters in 1980, according to research firm Bernstein….


New data show that U.S. alcohol volumes dropped 0.8% last year, slightly steeper than the 0.7% decline in 2017. Beer was worst hit, with volumes down 1.5% in 2018, compared with a 1.1% decline in 2017, while growth in wine and spirits slowed, according to data compiled for The Wall Street Journal by industry tracker IWSR.

Way to go America!

From an investors standpoint…

IWSR forecasts low- and no-alcohol products in the U.S.—still a small slice of the market—to grow 32.1% between 2018 and 2022, triple the category’s growth over the past five years.

And this trend has legs…

Diageo Chief Executive Ivan Menezes said last year that adults opting for lower alcohol options was “an important trend over the next many years” and that the company was “putting a lot of focus behind it.”

The bottom line is as consumers look to make healthier choices, companies are forced to respond by altering their offerings. Those that recognize the change and take advantage of it are part of our Clean Living investing theme, those that don’t… well … remember Blockbuster?

For the entire article go to: As Americans Drink Less Alcohol, Booze Makers Look Beyond the Barrel – WSJ

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

Market Reversal

So far in 2019, we are seeing a reversal of the heavily oversold conditions from the end of 2018. Those stocks that were hit the hardest in 2018 are materially outperforming the broader market in 2019. For example, through the close on January 16, 62% of stocks in the Financial sector were above their 50-day moving average, the highest of any sector, versus 44% for the S&P 500 overall. To put that into perspective, Financials have not been the top performer for this metric in 273 trading days, the second-longest such streak since 2001 and only the fourth streak ever of more than 200 trading days. It isn’t just financials as the Energy sector, which was the worst performing sector in 2018, has the third highest percent of stocks above their 50-day in 2019.

While impressive looking, this shift doesn’t necessarily bode well for the Financial sector, nor for the broader market according to data compiled by Bespoke Investment Group.


Stock Performance After Streaks Ended



This recent outperformance by Financials in 2019 is particularly fascinating when I talk to my colleagues at various major financial institutions. Here are a few of the comments I’ve been hearing, paraphrased and without attribution for obvious reasons:

“This deal is way too small for you guys, but I wanted to let you know that our team is working on it.” –  (M&A consultant)

Send it over.We are so late in the cycle that we are looking at damn near anything.” –  (Partner at one of the largest global private equity firms)

“What can we do to better serve your company? We are making a major push this year into better serving companies of this size.” –  (Partner at one of biggest investment banks to a very surprised member of the Board of Directors of a recently IPO’d company whose market cap would have normally left it well below the bank’s radar. After some investigation, many other board members for companies of a similar size in the sector have been getting the same phone calls from this bank.)

The big financial institutions are having to work their way downstream to find things to work on – that’s a major peak cycle indicator and does not bode well for margins. It also doesn’t bode well for the small and medium-sized institutions that will likely need to become more price competitive to win deals in this new more competitive playing field.

We have also seen some wild moves in a few of our favorites such as Thematic Leader Netflix (NFLX), which reported its earnings after the close on January 17th. Netflix sits at the intersection of our Digital Lifestyle and Disruptive Innovators investing themes and has seen its share price fall over 40% from the July 2018 all-time highs to bottom out on December 24th. Since then, as of market’s close on January 17, shares gained nearly 50% – in around all of 100 trading hours! While about 10% of that can be attributed to the recent price increase that will amount to about $2 or so per month for subscribers, there are greater forces at work for a move of such magnitude. No one can argue that either direction was based on fundamentals, but rather a market that is experiencing major changes.

One of the most important leading indicators as we start the Q4 earnings seasons was the miss by FedEx (FDX) and the negative guidance the company provided for the upcoming quarters. FedEx’s competitor United Parcel Service (UPS) is part of our Digital Lifestyle investing theme – how are all those online and mobile purchases going to get to you? Both FedEx and UPS are critical leading indicator because they touch all aspects of the economy and transportation services, in general, have been posting some weak numbers lately in terms of both jobs and latest price data.

In what could be reflective of both our Middle Class Squeeze investing theme, Vail Resorts (MTN) also gave a negative pre-announcement, stating that its pre-holiday period saw much lower volumes than anticipated despite good weather conditions and more open trains. The sour end of the year in the investment markets and the weakness we’ve seen in markets around the world may have led many decided to forgo some fun in the snow. We’ll be keeping a close eye on consumer spending patterns, particularly by income level in the months to come.

Investor Sentiment Slips

According to the American Association of Individual Investors, bearish investor sentiment peaked at 50.3% on December 26, right after the market bottomed. Bullish sentiment over the past month rose from 20.9% to 38.5% but then stalled this week, falling back to 33.5% as the markets reached resistance levels. Bullish sentiment is now back below the historic average but still well above the December lows. Bearish sentiment, on the other hand, is on the rise, up to 36.3% from last week’s 29.4%. This is just further indication that much of what we’ve seen so far in 2019 is a recovery from the earlier oversold conditions.

As we look at the unusual pace at which the major indices lost ground in the latter part of 2018 and the sharp reversal in recent weeks, I can’t help but think of one of the many aspects of our Aging of the Population investment theme. A large portion of the most powerful demographic of asset owners is either in or shortly moving into retirement. Many already had their retirement materially postponed by the losses incurred during the financial crisis. They are now 10+ years older, which means they have less time to recover from any losses and have not forgotten the damage done in the last market correction. I suspect that we are likely to see more unusual market movements in the years to come than we have since the Boomer generation entered into the asset gathering phase of life back in the 60s and 70s. Today this group has a shorter investment horizon and cannot afford the kinds of losses they could 20+ years ago.

The Shutdown and the Fed

Aside from a rebound against the oversold conditions, another dynamic that has the market in a more optimistic mood, at least for the near term, is the narrative that the government shutdown is good news for interest rates as it will likely keep the Federal Reserve on hold. Given that estimates are this shutdown will cost the economy roughly 0.5% of GDP per month, it would be reasonable for the Fed to stay its hand.

Inflation certainly isn’t putting pressure on the Fed. US Producer Prices fell -0.2% last month versus expectations for a -0.1% decline. The bigger surprise came from core ex-food and ex-energy index which fell -0.1% versus expectations for an increase of +0.2%. Keep in mind that core PPI declines less than 15% of the time, so this is meaningful and gives Powell and the rest of the FOMC ample cover to hold off on any hikes at the next meeting.

US import prices fell -1% month-over-month in December after a -1.9% decline in November, putting the year-over-year trend at -0.6%. That’s the first negative year-over-year print since August 2014. Yet another sign that inflation is rolling over.


Economy Flashing Warning Signs

Despite all the hoopla earlier this month over the December’s job’s report, this month’s Job Openings and Labor Turnover Survey (JOLTS) report showed that for the first time since the end of 2017 and just the 6thtime in this business cycle, hirings, job openings and voluntary quits fell while layoffs increased in November.

By digging further into the details of the Household survey as well we see that people holding onto more than one job rose +117k in December, accounting for over 80% of the total employment gain. On top of that, the number of unincorporated self-employed rose +126k. These two are things we normally see when times are tough, not when the economy is firing on all cylinders. Not to be a Negative Nancy or Debbie Downer here, but the prime-working-age (25-54) employment shrunk -11k in December on top of 48k the month before. This was before things started to get really scary for many workers with the government shutdown. Imagine how many more are now looking for a second job to make ends meet while they wait for those inside the beltway to work this mess out.

We also got a materially weak New York Empire Manufacturing survey report this week that saw New Orders decline for the second consecutive month and a sharp drop in the 6-month expectation index. The New York Federal Reserve’s recession risk model is now placing odds of a recession by the end of 2019 at over 21%, having more than doubled since this time last year and having reached the highest level in 10 years. Powell and his team at the Fed have plenty of reasons to hold off on hikes. I wouldn’t be surprised if their next move is actually to cut.


NY Fed Recession Probability


Risks, what risks, we don’t see no stinking risks

US economy isn’t as strong as the headlines would make you think. The political dialogue going back and forth while on the one hand entertaining in a reality TV I-cannot-believe-he/she-just-said-that kind of way isn’t so funny when we look at the severity of problems that need to be addressed – excessive debt loads, a bankrupt social security program, a mess of a healthcare sector – just to name a few. The market today isn’t pricing much of this in, and based on the year to date move in the major market indices, particularly not the potential economic damage the government shutdown if the situation worsens.

If we look outside the US, the market’s indifference is impressive. UK Prime Minister Theresa May’s Brexit plan suffered a blistering defeat in Parliament, the largest such defeat on record for over 100 years, leaving the entire Brexit question more uncertain than ever and it is scheduled to occur just over two months away. In the two days post the Brexit vote back in 2016 the Dow lost 870 points and the CBOE Volatility Index (VIX) rose 49%. This time around the equity markets were utterly disinterested and the VIX actually fell 3.5% – go figure. A messy Brexit has the potential to have a material impact on global trade and yet we basically just got a yawn from the stock market.

Over in Europe flat is the new up with Germany’s GDP expected to come in every so slightly positive and this is a nation that accounts for around one-third of all output in the euro area – with China a major customer. Overall, Eurozone imports and exports fell -2% in November.

The other major exporter, Japan, just saw its machinery orders fall -18.3% in December after falling -17% in November. Japan already had a negative GDP quarter in Q3 and the latest data we’ve seen on income and spending aren’t giving us much to be positive about for the nation.

The Trade War continues with some lip service on either side occasionally giving the markets brief moments to cheer on some potential (rather than actual) signs of progress. The overall global slowing coupled with the trade wars is having an effect. China’s exports for December were far worse than expected, -4.4% from year-ago levels vs expectations for +2%. Last week Reuters reported that China has lowered its GDP target for 2019 to a range of 6% to 6.5%, which is well below the 6.6% reported output gain widely expected last year which itself is the weakest figure since 1990. Retail sales growth has fallen to a 15-year low as auto sales contracted 4.1% in 2018, the first annual decline in 28 years. With a massive level of leverage in its economy, banking assets of $39.1 trillion as of Sept. 30, and nearly half of the $80.7 trillion 2017 world GDP, (according to the World Bank) waning economic growth could be a very big problem and not just for China. We’ll be watching this as it develops given our Rise of the New Middle-class and Living the Life investing themes.

The bottom line is we’ve been seeing the markets bounce off seriously oversold conditions after a breathtakingly rapid descent. The fundamentals both domestically and internationally are not giving us reason to think that this bounce is the start of another major bull run. With all the uncertainty out there, despite the market’s recent “feel good” attitude, we expect to see rising volatility in the months to come as these problems are not going to be easily sorted out.