Category Archives: Econ. Acceleration / Deceleration

US Housing market plauged by lack of housing supply and capable buyers as prices climb

US Housing market plauged by lack of housing supply and capable buyers as prices climb

Tematica’s Chief Macro Strategist Lenore Hawkins has been rather vocal on the two issues hitting the domestic housing market – a lack of supply and escalating prices that are shrinking the pool of potential buyers.

While one would think homebuilders would respond with more affordable housing, they are also contending with increases to their own cost structure as commodity prices for steel, aluminum, copper and lumber rise. Some of that increase can be traced back to tariff and trade talks, but given limited supply of these materials there is also the Rise of the New Middle Class factor as well.

Usually when there is a paint point such as this, there is or tends to be an eventual solution. This has and will hold true as well, but it likely means the housing multiplier effect on the economy won’t be what it was in the past… and that’s not counting the demographic impact to be had associated with our Aging of the Population investing theme.

Lest I forget, prospects for continued housing price increases will add wood to the inflation hawk fire. Team Tematica will be looking for signs of this not only in the regular data we watch, but also in the Fed’s comments.


After losing over a third of their value a decade ago, which led to the financial crisis and a deep recession, U.S. house prices have regained those losses.

But supply has not been able to keep up with rising demand, making homeownership less affordable.

Annual average earnings growth has remained below 3 percent even as house price rises have averaged more than 5 percent over the last few years.

The latest poll of nearly 45 analysts taken May 16-June 5 showed the S&P/Case Shiller composite index of home prices in 20 cities is expected to gain a further 5.7 percent this year.

That compared to predictions for average earnings growth of 2.8 percent and inflation of 2.5 percent 2018, according to a separate Reuters poll of economists. [ECILT/US]U.S. house prices are then forecast to rise 4.3 percent next year and 3.6 percent in 2020.

A further breakdown of the April data showed the inventory of existing homes had declined for 35 straight months on an annual basis while the median house price was up for a 74th consecutive month.

Source: U.S. house prices to rise at twice the speed of inflation and pay: Reuters poll | Reuters

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

It’s that time again, an update on the degree of consumer borrowing as tallied by Federal Reserve data. For those of us that have been watching other consumer spending, debt and savings metrics, the results come  as little surprise and serve to confirm not only our Cash-strapped or Middle-Class Squeeze investing theme. The data also lends support to the growing concern over the ability of the consumer to thrust the consumer spending led US economy ahead as the Federal Reserve continues to boost interest rates in the coming quarters.


Americans owe $1.5 trillion in student loans

We hit this milestone during the first quarter of 2018, according to Federal Reserve data.

Outstanding student debt currently exceeds auto loan debt ($1.1 trillion) and credit card debt ($977 billion).

42% of people who’ve gone to college took out debt

A majority of them took out student loans, but 30% had some other form of debt, like credit card debt or a home equity line of credit, according to a Federal Reserve report based on a 2017 survey.

Average new grad owes $28,400Among those who finished a bachelor’s degree in 2016 with debt, the average amount was $28,400, according to The College Board. That’s up from $22,100 in 2001 (reported in 2016 dollars).


Source: Student loan debt just hit $1.5 trillion. Women hold most of it

Q1 GDP Report Shows Infrastructure Investment Still Lacking

Q1 GDP Report Shows Infrastructure Investment Still Lacking

Friday’s GDP report saw stronger growth than was expected, coming in at 2.3% versus expectations for 2.0%, but below the 2.9% rate from the prior quarter. Growth has now slowed from a 3.2% rate in the third quarter to 2.9% in the fourth and 2.3% in first quarter – not seeing the acceleration, are we? The biggest drag on GDP growth this quarter came from Personal Consumption Expenditures, which slowed to just 0.73%, the slowest rate since Q2 2012. This decline came from the goods purchased category – mainly durable goods, especially automobiles and in the non-durable category – clothing and shoes. This rather dramatic decline is likely a function of two things: first the rising ratio of consumer debt to disposable income and second, the base-effects of the forced spending in Q4 due to the damage caused by the twin hurricanes in the east and fires in the west.

The biggest contributor to growth came from Gross Domestic Investment, which was primarily from non-residential construction and an increase in non-farm inventories. The spike in non-residential construction was to be expected given the damage from the hurricanes and fires.

On the other hand, government investment in fixed asset investment (infrastructure) is at historical lows. The chart below, from Topdown Charts, illustrates this quite clearly.

“The points to note on US government investment and long-term GDP growth trends are: -US government fixed asset investment remains around record lows as a percentage of GDP.-The decline in government investment seems to mirror the long-term decline in US economic growth.-More recently the decline in long-term GDP growth rates looks to have bottomed, and this lines up with the bottom in US government bond yields.-Private investor interest in infrastructure assets appears to be growing, which is important given the decline in government investment spending.”

As we discuss regularly here at Tematica, the growth of an economy is a function of just two things:

  • Growth in the Labor Pool
  • Growth in Productivity

Crumbling highways, bridges, and roads and outdated airports (just to name a few) reduce productivity and increase costs. For more robust economic growth, these investments – be they through tax and debt-funded public coffers, or the private sector – must be made to keep America competitive.

As Topdown Charts points out, this is an area to which investors ought to pay attention –

“Thinking about trends in US government fixed asset investment, and the need for infrastructure upgrades and modernization, and what was an initial false start for an infrastructure spending plan (which now seems likely to be tabled for serious discussion after the US mid-term elections later this year), it’s interesting to note the rise in popularity of infrastructure ETFs.”

Source: Infrastructure Investment, Long-Term GDP Growth, and US Bond Yields | Topdown Charts | Chart driven macro insights

Debt, Debt and More Debt

Debt, Debt and More Debt


While U.S. Consumer credit increased less than expected in January, we are concerned with what we are seeing in consumer loans and debt in general across the world.

Auto Loans

With our Cash-Strapped Consumer investing theme, the average amount financed and the duration of new auto loans continues to rise – same car, bigger loan and for longer means a more highly leveraged car owner.

Credit Cards

We also see warnings sign with credit card debt as our Cash-Strapped Consumers struggle to make ends meet. At small banks, the share of outstanding card balances written off as a loss after consumers failed to pay hit 7.2% in the fourth quarter of 2017, up from 4.5% a year ago, according to Federal Reserve data. While overall card losses across all banks remain below the historical average of the last 30 years, they’ve been slowly climbing in the last two years. We believe these smaller banks are canaries in the coal mine as the average charge-off rate at those smaller banks is near an eight-year high, while the 3.5% loss rate at large banks remains well below the 10.6% seen in 2010.

If an effort to compete with the large and increasingly larger banks, some smaller banks have taken to lowering lending standards, which means their credit cards are held by those that are first to feel economic angst. The subprime borrower is always the first to get hit when the economy weakens. For years, wage growth has been slower than the growth in expenditures, forcing many families to take on credit card debt just to pay for necessities. The rising charge-off rates indicate that these folks are in a perilous economic condition if wage growth doesn’t accelerate sufficiently and soon.

Student debt

Education debt swelled to nearly $1.38 trillion at the end of 2017, with 11% of borrowers 90 days or more delinquent, according to the New York Fed. The U.S. federal government now owns over 30% of total consumer debt in the U.S., thanks to its utter dominance of the enormous student loan industry. Prior to the financial crisis, that number was less than 5%. Think about what that means concerning the reduced firepower of the federal government in the case of another financial crisis.

This area of lending reminds us of the dynamics in the housing market that led to the subprime mortgage disaster. The problem in subprime was that too many players had no real skin in the game. Thanks to various legislative acts, the banks issuing mortgages were incentivized to immediately turn around and sell them to Fannie Mae or Freddie Mac – particularly the subprime loans. This meant the issuing bank had no real interest in the quality of the loan.

With student loans, the student or prospective student has little ability to estimate the relative earnings advantage potential for any particular education. The seller of the education, the college or university, is financially indifferent as to whether the student will ever be able to pay off the loans and with the way student loans work, has no incentive to tie the cost of tuition to the improvement in future earnings it provides through its curriculum. This creates an entirely new generation of Cash-Strapped Consumers that start off their young lives already saddled with brutal debt levels, which often postpones the traditional cycle of car and home purchases as well as starting a family.

Emerging Market Debt

It isn’t just domestic debt that has us concerned. Another area of concern that we are watching has been in emerging market debt which has helped generate the Rise of the Middle Class investing theme in these economies. The 26 largest emerging markets monitored by the Institute of International Finance have seen their sovereign debt load rise from 148% at the end of 2008 to 211% of GDP at the end of the third quarter of 2017. Couple that with the pricing perversions driven by investors’ search for yield that have the 10-year Kenyan bond trading at 7.5% and the Dominican Republic 30-year at 6.5% while the 10-year and 30-year U.S. Treasury bonds trade at 2.87% and 3.15% respectively. Really? Not a whole lot of risk premium priced in there.

Then there is the incredible size of China’s financial system. As of the end of last year, assets in Chinese commercial banks were approximately $40 trillion, which is around 51% of global GDP. The highest the U.S. every reached was 32% of global GDP in 1985 and Japan at 27% in 1994. For additional perspective, at the end of last year, in the United States, that number was $17.4 trillion versus U.S. GDP of $19.4 trillion while China’s GDP is around $13.1 trillion. This is wholly unprecedented in the history of global finance.

Let’s not forget that over the weekend China removed term limits for Xi Jinping, allowing him to possibly rule for life. History tells us that a nation, controlled by a single leader, who is no longer bound by any sort of accountability thanks to his/her ability to rule for life, rarely experiences increasing individual freedoms, increased open trade and responsible debt management – yet another geopolitical concern to add to the pile.

The bottom line is the world has been awash in a whole heck of a lot of liquidity thanks to the concerted efforts of the world’s major central bankers. The intention was to suppress interest rates, thus induce borrowing. Well, it worked. The secondary effect, which was also intentional, was to inflate assets prices so as to induce the so-called wealth effect.

Done! Thanks to stock prices rising at a much faster rate than the economy, household wealth as a percentage of disposable income has reached a new record high.

The Federal Reserve is now attempting to increase interest rates and take away that liquidity and asset-price-inflating punchbowl without any major disruptions.  The European Central Bank may join in here soon too as all are concerning that this post-financial crisis party may shift into inflation-mode, which no one wants. This too is wholly unprecedented in human history. While the mainstream financial media is all about the Goldilocks outcome, we remain skeptical and wary of highly leverage assets or those whose risks are significantly underpriced.

Bulls v Bears: Accelerating with the Brakes On

Bulls v Bears: Accelerating with the Brakes On

It is no wonder the stock market has been having fits given we have fiscal policy stepping on the accelerator while monetary policy looks to be putting both feet squarely on the breaks. On the fiscal side, we have a roughly $1.5 trillion tax cut with an additional $300 billion spending plan which is looking to take the deficit to $1.2 trillion or about 5.4% of GDP. President Trump proposed today a $4.4 trillion budget that would widen the federal deficit to $984 billion in the next fiscal year, which begins September 30th. Analysts estimate that after tax cuts and the two-year budget deal, the deficit will be above $1 trillion next year.

On the monetary policy side, in December the market was pricing in 3 hikes during 2018 at just 30%. That’s increased to about 70%. The Federal Reserve is unwinding its massive balance sheet on top of those rate hikes, which means not only will Fed rates be higher, but the supply of bonds in the marketplace will be increasing both from the deficit spending as well as the Fed’s balance sheet unwind. The new Federal Reserve Chair Powell is giving signals that he is unlikely to provide quite the safety blanket that Chair Yellen did for asset prices.

The monetary brakes aren’t just here in the U.S. The Bank of England is set to increase rates at a less gradual pace with the European Central Bank not to far behind and shortly to be (most likely) run by a German instead of an Italian – a meaningful difference. In Japan the economy appears to have escaped deflation and is expanding, making the 10-year Japanese bond yield at zero difficult to maintain for much longer.

(Hat tip to WSJ The Daily Shot for chart below)

Add in that we’ve seen record flows into equity ETFs recently, many in the markets today have never experienced a real downturn and the market has been trained, for nearly a decade, to buy the dips as central bankers will always step in to push asset prices back up, and it is no wonder the 14-day change in the 14-day RSI was the biggest in recorded history. Volatility is coming back to play!

GDP not quite the blockbuster

GDP not quite the blockbuster


This morning we got the advanced Q4 GDP estimate, which saw the growth rate for Gross Domestic Product come in weaker than consensus estimates, a surprise to no one who regularly reads our work. Yesterday, the Atlanta Fed’s GDPNow model forecast was for 3.4% in Q4 while the Wall Street Journal survey of economists pinned the number at 2.9%. The reality was 2.6% is a solid number, but a decline from the 3.2% in Q3 and 3.1% in Q2. Overall 2017 saw the strongest growth rate since 2014, when GDP rose 2.7%.

Looking into the details here is what I found:

  • The biggest driver of growth was consumption, adding 2.6% to GDP, versus adding 1.5% in Q3. Durable goods demand was quite strong, but some of that is a result of the string of brutal natural disasters which damaged/destroyed homes and autos. We also saw stronger spending on clothes and restaurants.
  • Investment added just 0.6% to GDP versus 1.2% in Q3. The rate of fixed investment growth nearly tripled from Q3 but inventory dropped from adding 0.8% in Q3 to subtracting -0.7% in Q4.
  • Trade was the big whopper here, removing 1.1% from GDP versus adding 0.4% in Q3. The export of goods was strong, rising to 1% in Q4 from 0.2% in Q3, but Imports detracted 2% from GDP, despite those stronger exports. The goods trade deficit made a new high, the largest since Q3 2008.
  • Finally, government spending added 0.5% to GDP versus just 0.1% in Q3. The growth was at both the state/local and the federal level.

The bottom line is that growth in the fourth quarter was utterly consumer-dependent and the average consumer is financially stressed. The year over year growth in real earnings for roughly 80% of the population has been less than 1% over the past year, the personal savings rate has dropped to a decade low of 2.9%, and credit card debt has again reached record highs. Without material gains in wages, the current rate of spending growth cannot be maintained.

Rising consumer credit card debt to be a headwind to GDP in 2018

We are starting to get not only holiday sales results from the likes of Kohl’s (KSS) and others, but also December same-store-sales results from Tematica Investing Select List resident Costco Wholesale (COST) and its retail brethren. Thus far the results are positive and in some cases much better than expected, but when we see we think about the other shoe to drop. In this case, that is “How are consumers paying for all of this given that wages barely budged in 2017?” 

The answer is they have been turning to their credit cards. Before the holidays began, the Federal Reserve found consumer credit card debt hit $808 billion exiting September. Now let’s add findings from MagnifyMoney that “people who used credit cards for holiday purchases charged an average of $1,054, about 5%  more than last year.” This helps support the view that consumer credit card debt will eclipse $1 trillion this year.

For us here at Tematica, it’s more reason to think consumers, especially Cash-Strapped Consumers, are likely to use the benefits of tax reform to get their financial houses in order, pay down debt and spend less than the Wall Street herd is thinking. In other words, we see this supporting views that were laid out by Chris Versace and Lenore Hawkins on last week’s Cocktail Investing podcast, and that’s before we factor in potential Fed rate hikes this year.


“The scary number — $1 trillion — we’ll definitely hit in 2018,” said Jill Gonzalez, an analyst with WalletHub. “It seems to say a lot of American consumers did not learn their lesson from the recession and are returning to living beyond their means.”

Credit card debt stood at $808 billion on Sept. 30, the end of the third quarter, according to the most recent data from the Federal Reserve Bank of New York. That’s $280 billion more than the previous high hit in 2008, at the height of the financial crisis that led to the Great Recession.

As consumers keep spending away on their credit cards — which typically come with interest rates starting at about 16 percent — the Federal Reserve is expected to have two or three quarter-point hikes this year to a key rate that affects consumer debt. It did so three times in 2017.”Every time there is a Federal Reserve rate hike, that adds about $1.5 billion to our collective financing rates,” Gonzalez said. “That has to do with these delinquency rates rising. And when you factor in mortgages, student loans and auto loans, that becomes a scary picture.”

Source: How to knock out holiday credit card debt

The Tematica take on Fed hikes, balance sheet contraction and other works of creative fiction

The Tematica take on Fed hikes, balance sheet contraction and other works of creative fiction

As we all know by now, the Fed exited its September monetary policy meeting yesterday. Chairwoman Janet Yellen said that in the Fed’s view, the domestic economy is on solid enough footing to handle another Fed rate increase before the end of the year as well as the initiation of the Fed’s plan to unwind its $4.5 trillion balance sheet. This view effectively brushes aside the fact that the Fed’s inflation target has yet to be realized, despite its herculean monetary policy efforts, and in the near-term, the economy is headed for a tumble following hurricanes Harvey and Irma, and maybe more depending on how Hurricane Maria develops.

In recent days, we’ve seen several cuts to GDP expectations for the current quarter, including from the Atlanta Federal Reserve as well as several investment bank economists. The general thinking is that Hurricanes Harvey and Irma trimmed roughly 1% off of economic activity. With the bulk of the damage coming in September, including what we have yet to experience with Maria, we’ll have a fuller sense of the trifecta’s extent in October when we get the September data.

The market reaction to the FOMC statement is that it was more hawkish than what had already been priced in. While the market was priced at a 50/50 chance for a rate hike before the end of the year, the now infamous dot-plot shows that 12 of the 16 members expect one more hike this year, with one expecting two. In sharing the committee’s view Chairwoman Yellen remarked, “The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, 2.7 percent at the end of 2019, and 2.9 percent in 2020.”

This means the next rate hike, which is now likely to occur in December,  will be a quarter point in nature, and based on the Fed’s forecast the three targeted rate hikes in 2018 are likely to be of the same magnitude. As Yellen shared this, she once again cautioned the Fed will remain “data dependent” in its thinking. As the markets recalibrate from a 50% likelihood to the new 70% that we will see another hike in 2017, gold lost $10 per ounce, the dollar gained some strength and the yield on the 2-year rose 4 basis points while the long bond has barely moved, flattening the yield curve.

From our perspective, with a recovery that is increasingly long in the tooth (something that is not likely lost on Yellen and the Fed heads), we see the Fed looking to regain monetary stimulus firepower ahead of the next eventual recession. To be clear, we’re not calling for one, just recognizing that at some point one will happen – it’s the nature of the business cycle. As we share that reality, we’d also note that historically the Fed has a very good track record of boosting rates as the economy heads into a recession.

We’d like to point out that while most are viewing these minutes as more hawkish than expected, the phrasing of their economic analysis has become more sedate. Oh for the days when we didn’t need to analyze every little word out of the Fed like a bunch of teenagers assessing the meaning of their crush’s every utterance! The Fed’s assessment of unemployment has dropped the reference to “has declined,” leaving just “unemployment rate has stayed low.” With respect to spending, the wording has gone from “continued to expand” in July to “expanding at a moderate rate.” As for the dot plots, of the four FOMC members who expected two more hikes in 2017, only one remains.

As much as the Fed will likely try to avoid that and preserve Yellen’s time as chairwoman, it’s different this time. Next month, the Fed will begin unwinding its balance sheet that bulked as a result of its quantitative easing measures. The Fed admits to “months of careful preparation,” but let’s be real here, this is unlike anything we have seen before as the Fed expects to boost interest rates further. Yes, the Fed will baby step with its balance sheet as its targets selling no more than “$6 billion per month in Treasuries and $4 billion per month for agencies” in 2017. In 2018, however, those caps will rise to “maximums of $30 billion per month for treasuries and $20 billion per month for agency securities.” Given the Fed’s balance sheet weighs in at a hefty $4.5 trillion, this is poised to be a lengthy process and we suspect that as well intended as the Fed’s thinking on this is, odds are there are likely to be some unintended consequences.

The question we continue to ponder is whether the economy is strong enough to not falter as the Fed ramps its selling while boosting rates. Even the Fed sees GPD falling from its 2.4% forecast this year to “about 2 percent in 2018 and 2019. By 2020, the median growth projection moderates to 1.8 percent.” To get to that 2.4%, we need the Atlanta Fed’s GDPNow forecast for 2.2% in Q3 to materialize, which we think is going to be tough given the impact of this season of insane storms, as well as at least a 3% bump in Q4. Our bets are that’s about as likely as either of us giving up chocolate.

As we mull this forecast vs. the business cycle, we must keep in mind the Fed is ever the cheerleader for the economy and tends to be optimistic with its GDP forecasts. We prefer to be Rhonda Realist vs. Debbie Downer or Cheery Charles, and when we triangulate the Fed’s comments, we continue to think it’s underlying strategy is to re-arm itself for the next downturn.




SPECIAL ALERT – Adding LSI Industries to the Tematica Investing Select List

SPECIAL ALERT – Adding LSI Industries to the Tematica Investing Select List

  • We issuing a Buy rating on shares of LSI Industries (LYTS) as we add them to the Tematica Investing Select List with a $10 price target.

  • LSI Industries is poised to benefit from post-hurricane rebuilding as well as the overall shift to light emitting diode (LED) lighting vs. conventional lighting technologies.

  • Given the sharp move higher last week – more than 17% – we would not chase the shares much past $7.25; rather we will be patient and look to improve our cost basis should the shares fall back to Earth near $6.00


Yes, we’re in a buying mood this morning. After issuing a Buy rating on Nokia (NOK) earlier this morning, we’re back again with a second new Buy rating, this time on a firm poised to see a surge in demand as the rebuilding process takes hold in Florida and Texas.

Over the last few weeks, we’ve heard quite a bit about the destruction following the one-two punch of Hurricanes Harvey and Irma. People are without electricity, water, food and other essentials and we’re starting to see the economic impact reflected in GDP forecasts for the current quarter. Late last week, the Atlanta Fed joined with forecasters from Bank of America (BAC) and Barclays (BCS) in reducing their GDP estimates by 0.8 percentage points. The dourest is Goldman Sachs (GS), which lowered its forecast by 0.4 percentage points, to 1.6% growth in the quarter.

The somewhat silver lining in all of this is the flooding and other damage means having to replace homes, offices, cars, clothing, and electronics as well as rebuilding affected infrastructure. We’re hearing reports of damage to wastewater systems, which means a shift in capital spending there as water utilities aim to bring clean drinking water back online. The same rebuilding spending will include lighting both in homes, offices and other nonresidential construction as well as signage and other lighting applications.


This brings us to LSI Industries

LSI Industries (LYTS) derives the bulk of its revenue from its lighting and graphics businesses. Its lighting segment manufactures and markets outdoor and indoor lighting and lighting controls for the commercial, industrial and multi-site retail markets, including the quick-service and automotive markets. The Graphics segment manufactures and sells exterior and interior visual image elements related to signage and graphics, including integrated digital solutions. Markets served include automotive, grocery, quick service restaurant, parking garage, banking, petroleum retail stores, and retail among others. Representative customers include Burger King (QSR), Wendy’s (WEN), Costco Wholesale (COST), Walmart (WMT), Kohl’s (KSS), Lowe’s (LOW), Chevron (CVX), Toyota (TMC), US Bank (USB), Nasdaq (NDAQ) and Coca-Cola (KO). While we acknowledge the long-term prospects for a number of retailers is questionable given headwinds associated with our Connected Society theme, near-term rebuilding by these and other customers bodes well for LSI in the coming quarters.

Across those two businesses, LSI utilizes light emitting diode (LED) technology that is far more power efficient than other forms of lighting (incandescent, cathode ray tube), is solid state (which reduces breakage and offers a far longer life than other lighting technologies) and emits far less heat. Applications for the technology range from signage to general illumination and others that have long life cycle requirements. Even though the technology has been around for years, it is still disrupting the existing lighting market and will continue to do so as LED prices continue to come down. Those price erosions drive lower replacement costs compared to those other lighting technologies. We’ve mentioned this disruption to subscribers before in comparing the expected adoption of organic light emitting diodes that is driving our Universal Display (OLED) and Applied Materials (AMAT) shares. Near-term OLEDs will disrupt smartphones, TVs, wearables and interior automotive applications, but it will be some time before the technology matches the brightness strides that have been made with LEDs.

As you might be thinking, LEDs are a far more “green” friendly form of lighting. We’ve seen massive investment in LED technology over the last several years, including ramping manufacturing capacity in China. This has led to significant price erosion for LED lighting, which has opened up a number of applications as LED pricing approaches parity with other lighting technologies. This bodes well for LSI’s project input costs, margins, and EPS.


Why We Think the Timing is Right for LYTS Shares

What makes this an even more interesting addition to the portfolio is the recent hit to LYTS shares following disappointing guidance. But here’s the thing, the company missed EPS by 2 cents a share and revenue by less than 4% relative to expectations. It still delivered positive growth year over year. The result, as we’ve come to expect was a clobbering in the shares, which fell to nearly $5 from almost $9 several weeks prior. We’ve seen the shares rebound of late, and we attribute that not only to the potential hurricane spending to be had, but also LSI’s quarterly dividend. Historically LSI shares bottomed out near a dividend yield of 2.6% over the last four years. The current dividend yield is 3.0%, which in our view confirms the recent fall off is more than overdone and the eventual post-hurricane rebuilding should serve as a positive catalyst for the shares.

As such, we are beginning this position today with a $10 price target. That figure equates to a dividend yield of 2% vs. the 1.5%-2.0% dividend yield the shares have peaked at over the last several years. In our view, the looming pick-up in rebuilding activity as well as the overall shift to LED lighting bodes well for the company’s business and should leave it well positioned to deliver meaningful EPS growth in the coming quarters. As such, we are adding LYTS shares to the Tematica Select List with a Buy rating. Given the sharp move higher last week – more than 17% – we would not chase the shares much past $7.25; rather we will be patient and look to improve our cost basis should the shares fall back to Earth near $6.00.

Harvey, Irma and Trump – Strong Tailwinds For Infrastructure Stocks

Harvey, Irma and Trump – Strong Tailwinds For Infrastructure Stocks

A little more than 10 days after Hurricane Harvey hit Houston, we are still getting estimates as to the extent of the damage that has been done. We not only discussed the extent of the devastation caused by Hurricane Harvey on last week’s Cocktail Investing podcast, we also put it into proper context given its size and scope, plus the fact that it hit the fourth largest city in the U.S. Now we’re putting some greater thought into what it could mean for investors.

Initial estimates put the damage from Hurrican Harvey into the billions of dollars — Hannover Re, one of the largest re-insurers in the world, predicted a price tag of $3 billion on insured losses. That’s just what’s insured. A more encompassing estimate from Enki Research, a group that calculates risks and costs of hurricanes, tsunamis, and other natural disasters, pegs the “middle-of-the-road” estimate for Harvey costs at anywhere from $48 to $75 billion. Over the coming days and weeks, we will get a far firmer picture as to how much it will cost Houston and its surrounding areas to recover from this tragedy.



As uncomfortable as it might be, we must view this storm as investors

One of the wisest words I’ve heard in the investing world is to be “cold-blooded” when it comes to one’s investments – don’t fall in love with your holdings, and in times of uncertainty or tragedy remain focused. In the case of the Hurricane Harvey disaster, the people of Houston are in all of our thoughts here at Tematica Research, but we also realize the rebuilding effort to come over the ensuing months will be massive.

Near-term, we’re likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in the economy in September and into October. If Accuweather’s eye-popping estimate is correct, Harvey would cost nearly as much to the economy as Hurricanes Katrina and Superstorm Sandy combined. In other words, expect third quarter 2017 GDP forecasts to be revised lower, and we could see the Fed hold off embarking on unwinding its balance sheet a tad longer.

Before too long and as the water clears, however, we’ll see rebuilding efforts spring forth. When we look at the situation through our thematic investment lens, the most obvious choice would be Home Depot (HD), which has numerous stores located in and around the Houston area. We’re also looking at HD Supply (HDS), the sister company that focuses more so on contractors, government entities, maintenance professionals, home builders and industrial businesses than Home Depot. We could look at shares of Lowe’s Companies (LOW) as well, but Home Depot has been handily beating it, delivering faster top and bottom line growth, and Lowe’s lacks the “professional” exposure found at Home Depot Supply. Other retail and distributor candidates to benefit from the eventual rebuilding effort include Builder’s FirstSource (BLDR) and BMC Stock Holdings (BMCH).

As we like to say at Tematica Research, one of our investment strategies is always to “buy the bullets, not the guns.” In this case, companies like Home Depot and Lowes are the “rebuilding guns”. What we have done is dig into the category and identify the “rebuilding bullets.” What we’re talking about are things such as wallboard, paint and other coatings, carpeting, as well as fixtures and related hardware. In keeping with that other prospects that could benefit from the rebuilding of homes, office space and infrastructure include:

  • Lumber and Wood: Lumber Liquidators (LL), Weyerhaeuser (WY), and Universal Forest Products (UFPI).
  • Cement, Concrete, and Aggregate Suppliers: US Concrete (USCR), Eagle Materials (EXP), Lafarge SA (LFRGY) and Vulcan Materials (VMC)
  • Wallboard Manufacturers and Construction Materials: USG Corp. (USG), Continental Building Products (CBPX), Armstrong World Industries (AWI), and Summit Materials (SUM)
  • Paint and Coatings: Sherwin Williams (SHW), and PPG Industries (PPG)
  • Plumbing, Cabinetry, Door and Flooring Products – Masco Corp. (MAS), Fortune Brands Home & Security (FBHS), American Woodmark (AMWD), Masonite International (DOOR), and Mohawk Industries (MHK).


These Investment Tailwinds Extends Beyond Just Rebuilding Houston

Potentially adding to the pain inflicted by Hurrican Harvey is the latest storm, Hurricane Irma, which as we write this has been upgraded to a category 5 as she continues to strengthen. Based on current models, Irma looks to slam into northeastern Caribbean islands and Puerto Rico by Wednesday, September 6 before possibly taking aim at the US mainland. Already states of emergency have been called in Puerto Rico and Florida. We’ll continue to monitor the situation to gauge the degree of destruction to be had from Irma, and what it means in terms of incremental rebuilding following Harvey.

The combination of these two storms is likely to rekindle the larger need to rebuild domestic infrastructure, a key tenant of Candidate Trumps 2016 election platform. To date, President Trump has been focused on healthcare reform and is on the cusp of potential tax reform. These two Hurricanes, however, bring the need to address the country’s crumbling infrastructure back into the limelight. Candidly, domestic infrastructure has been a mess even before these two storms, receiving a grade of D or D+ from the American Society of Civil Engineers for the last 19 years. Over the last two decades, with the exception of Rail, every category has received a failing grade. This implies two things:

  • There has been little progress in rebuilding domestic infrastructure.
  • The incremental cost to properly update bridges, tunnels, roads, dams, schools, ports, and waterways has continued to move higher.

The latest figures from the American Society of Civil Engineers estimate $4.6 trillion is needed to adequately address the U.S.’s infrastructure needs over the 2016-2025 period. The good news is $2.5 trillion has been corralled in estimated funding, but that still leaves a $2.1 trillion funding gap. President Trump has issued an executive order aimed at speeding up approvals for infrastructure projects. The order aims to shrink the environmental permitting process to as little as two years, down from an average of seven years for “complex” highway projects, and ensure that just one federal agency serves as the point of contact for each project’s paperwork. While that is a positive first step, there are much more that must follow in order to put meat on those infrastructure rebuilding bones.

We will continue to monitor developments aimed at progressing his $1 trillion initiative that aims to address the nation’s roads, tunnels, and bridges. For now, we’ll place each these and other candidates on our Thematic Watch List. In the coming weeks and months, as the rebuilding process in Texas and Louisiana begins, we will also be assessing each of these stocks through our thematic lens. As more comes to light on the eventual rebuilding of Houston and surrounding areas as well as Irma related damage and rebuilding aging domestic infrastructure, we’ll share with Tematica Investing subscribers, which candidates make the cut and make it to the Tematica Select List.