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2015-03-Faces-BannerTematica Chief Macro Strategist Lenore Hawkins provides regular insights and musings into today’s markets, economics and politics, while fighting for liberty with great wine & music, scores of stilettos and an excessive love of dogs

 

 

Volatility remains under-priced and safety plays more attractive

Volatility remains under-priced and safety plays more attractive

 

Well, last week was fun.

  • Monday oil markets went nuts.
  • Tuesday the overnight funding markets broke down and the Fed took a few tries to get their (now rusty) open market operations up and running to resolve the liquidity crunch for the first time since the financial crisis — TBD if the week’s liquidity crunch was “idiosyncratic” as many pundits claim. FedEx (FDX) results gave everyone a bit more to worry about with respect to the global economy as if we needed that.
  • Wednesday the Fed both met expectations and simultaneously confused the hell out of markets.
  • Friday China took their toys and went home rather than head to a farm in Montana for more trade talks — what a surprise! I refer you to the chart on trade at the open of my last Context & Perspective.

Let’s dig into the details . . .

 

Turmoil in the Middle East (Again)

The biggest market move was ignited when the (claimed) Yemeni Houthi rebels (aka Iran?) attacked the Saudi Aramco Abqaiq oil processing facility. That attack on what is the largest such facility in the world led to Brent crude oil prices rising as much as 19.5%, a record intraday spike. US West Texas Intermediate (WTI) futures rose as much as 15.5%, the biggest jump since December 2008. The attack took an estimated 5% of global oil production (around 5.7 million barrels per day) offline, more than the Iraq invasion of Kuwait in August 1990, which was a loss of 4 million barrels a day and the hit to Iranian production in 1979 during the Islamic revolution. The Saudis are claiming it was no big deal and all will be resolved in a matter of weeks.

Currently, the US and Saudi Arabia are claiming that there is conclusive proof that Iran was actually behind the attack. The US has been following a policy of maximum pressure on Iran and in response, Iran has been following a policy of maximum chaos from attacks in Strait of Hormuz to (potentially) this latest attack on a vital input to the global economy. With all the geopolitical stability (sarcasm), the world really needed this jolt of additional risk.

We will never really know just how severe the strike was as that would be a clear security risk for Saudi Arabia — why show those who attacked what they got right and what they missed so they can improve on another round? Only time will tell if they are able to get production up as quickly as has been promised, with most back online by October. I did mention last time that volatility was seriously underpriced!

 

US Dollar Liquidity Warning Signs

I’ve been warning for quite some time that we would likely see significant liquidity strains in the coming months as the Treasury issues an unprecedented volume of bonds, the baby boomers take their forced seasonal minimum distributions and the impact of higher bank reserve requirements is more acutely felt thanks to the Fed’s tapering. Last week we saw what may be the first hints of problems to come as with the price of oil spiking higher, the demand for US dollars spiked as well. Starting last Tuesday, the Federal Reserve had to provide liquidity four consecutive days in a row, pumping around $200 billion into the US financial system, something we haven’t seen since just prior to the 2008 financial crisis.

There is no clear consensus on what is causing this and there wasn’t back in 2008 either. Many are claiming this is an isolated event due to a combination of unique circumstances from the strike on Saudi Arabia and tax filings this month. If you’d like more details, I highly recommend this read. Only time will tell if this truly was idiosyncratic or if we are seeing warning signs of liquidity problems — I’ll be watching this one closely. Last Friday the Fed announced that it would extend overnight repo operations of “at least $75 billion” each day until mid-October — that doesn’t read idiosyncratic to me.

 

Major Moves in Bonds

Looking at longer-dated bonds using the Merrill Lynch 10+ Year US Treasury Index as a proxy, we see that August enjoyed the best monthly gains since December 2008. As equities were taking it on the chin, long bonds were getting a lot of love. But then, in the first ten trading days of September, long-term Treasuries lost 6.5% — the worst ten-day start to a month going all the way back to at least 1987. I say at least 1987, because that’s when daily data begins, so we cannot go back farther. In a period of just six weeks, longer-dated Treasuries saw their best monthly gain in almost eleven years followed by the worst start to a month since daily data began – at least thirty years! These are not normal bull market moves.

As I’ve mentioned in prior issues, the Treasury has been issuing massive amounts of debt. When the federal government hit the debt ceiling, its deficit spending was funded by the Treasury’s general fund account – its piggy bank. Now that the debt ceiling issue has been punted, the Treasury is issuing bonds to both refill its piggy bank and fund the government’s ever-growing fiscal deficit. As those bonds are issued, they are financed in the short-term by the repo markets.

The most recent Bank of America Merrill Lynch Fund Manager Survey gives some color to the dramatic moves in bonds. The survey found that 38% of respondents expect a recession within the next year, up from 34% in August. The biggest tail risk concern for the group (40%) was the trade war with China. Bond allocation for the group dropped to a net 36% underweight after having August’s allocation reach the highest since September 2011. Overall long US Treasury remains the most crowded area for the fourth consecutive month.

Last week the Federal Reserve cut the funds rate by (as expected) 25 basis points to a 1.75-2.00% range. What wasn’t expected was the lack of agreement amongst members with two dissents, Esther George and Eric Rosengren preferring no cut. And then there was Jim Bullard preferring a 50-basis point cut. Five FOMC members want to raise rates again before the end of the year (really!?) with another five wanting to go on hold and seven want to cut one more time. No one is looking for more than one more cut before 2020. In response, the yield curve flattened and President Trump took to Twitter to express his disapproval.

 

Equity Bumping Against the Ceiling

We are now seeing equity markets both in the US and Europe bumping up against some major overhead resistance.

  • The Stoxx 600 has failed to push up above 392.5 five different times in the past fifteen months, three in the past three months alone. Yet another failure here likely means dropping down to test the 200-day moving average.
  • The S&P 500 is also getting quite a headache, having trouble breaking through the same 3,025 level from July. We’ve now had two rate cuts and yet the S&P 500 cannot break into new highs. Seasonality is not on the side of the bulls.

The major US indices have little to show over the past year. Since the beginning of September 2018 the S&P 500 has gained all of +3.1%, the Nasdaq a whopping +0.1%, the Dow Jones Industrial Average +3.7%, the NYSE Composite +0.6% and the small cap Russell 2000 has lost -10.4% – some bull market. The S&P 500 remains in a rather profound consolidation mode.

That said, overall breadth looks decent as all eleven S&P 500 sectors have more than 55% of their component companies above their 50-day moving average. The past week four out of five days the S&P 500 Advance/Decline line has been negative – so breadth has been weakening. We’ve seen strength in the last hour of trading, which is typically a bullish sign as investors are willing to take on overnight risk despite the potential headline or tweet risk. On the other hand, the defensive Utility and Real Estate sectors both have 100% over their 50-day while the cyclical Energy, Industrials and Financial sectors, which had previously been headwinds for the major indices are now more supportive with more than 80% of their components trading above their 50-day. When Utilities are consistently outperforming, do you really call that a bull market?

Taking a step back to look at the bigger picture of equities and bonds, I see a rather troubling picture, shown below (click to enlarge). Looking at the long-term trendlines for the S&P 500 on a weekly basis versus the spread between the US 10-year Treasury yield and the US 3-month yield, major market turning points tend to happen when that spread is negative (shaded in light grey in the S&P 500 weekly). Before anyone gets apoplectic over this one, no person nor any chart for that matter ought to be relied upon to divine the future. We can only deal in probabilities, so we look at a wide range of data points to see if there is a consistent story being told.

It is also interesting to see that this past week General Motors (GM) suffered its first strike since 2008. The car manufacturer is not alone. Strikes of 1,000 or more workers are expected to affect more than half a million workers this year, the most since 1986 and an increase over last year’s multi-decade high. This coming at a time when earnings growth for many companies has become more and more of a challenge.

This past week FedEx (FDX) reported its second-biggest earnings decline since 2001 after missing its EPS estimates and lowering its guidance. From a macro perspective, the shipping company’s growth has historically closely tracked US GDP – another concerning data point. The company’s quarterly revenues were down slightly year-over-year for the first time since its June 2009 report. The company lowered its full-year 2020 EPS estimates from $14.62 to between $11 and $13, citing the US-China trade war.

 

The Bottom Line

While the economic data for the US came in stronger last week, with the one exception for the Empire Manufacturing report, overall the economy is on a slower (slowing) trajectory, highly dependent on consumer spending fueled by falling savings rates. A recent Gallup poll found that more American’s think the economy is getting worse than better. The US-China trade war, coupled with rising geopolitical tensions and uncertainty (Brexit), is hampering growth around the world as execs from the multinationals and many small business look to hunker down until the dust clears. Volatility remains under-priced and the safety plays more attractive for the time being.

 

September’s Start Gives Investors Whiplash

September’s Start Gives Investors Whiplash

The markets closed last week in a bullish mood on the news that (stop me if you’ve heard this one before) the US and China will be back at the negotiating table in October. You don’t say! Oh but this time we have schedules and a list of attendees so it is totally different.

h/t @StockCats

The past three days of bullishness have been in sharp contrast to the chaos of August during which global stock markets lost around $3 trillion in market cap thanks to the ongoing trade wars and more data pointing to global slowing. As of Friday’s close, over the past year, the S&P 500 is up 3.7%, the Nasdaq 2.5%, Dow Jones Industrial Average up 3.4%, the NYSE Composite Index up 0.17% and the Russell 2000 is down -12.1%. During August 2,930 acted as a resistance level for the S&P 500 multiple times, but the index managed to break through that level last week, which is typically a bullish signal.

As the markets have taken an immediate about-face on the reignited hopes for progress in the trade wars, we’ve seen a profound flip-flop in equity performance which gave many a portfolio whiplash.

  • Those stocks with the lowest P/E ratios that were pummeled in August are up an average of 5.3% since last Tuesday’s close.
  • The stocks that held up best in August are barely breakeven over the final three trading days last week while those that were soundly beaten down in August are up the most so far in September.
  • Stocks with the most international revenue exposure are materially outperforming those with primarily domestic revenue exposure.

While corporate buybacks have been a major source of support for share prices in recent years, corporate insiders have been big sellers in 2019 selling an average of $600 million worth of stock every trading day in August, per TrimTabs Investment Research. Insider selling has totaled over $10 billion in five out of the first eight months of 2019. The only other time we’ve seen so much insider selling was in 2006 and 2007.

Bonds

August saw an additional $3 trillion of bonds drop into negative territory. We are now up to $17 trillion in negative-yielding bonds globally, with $1 trillion of that corporate bonds – talk about weak growth expectations! We also saw the yield on the 30-year Treasury bond drop below the dividend yield for the S&P 500 recently. The last time that happened was in 2008.

The yield on the 10-year Treasury dipped below the 2-year multiple times during the trading day in August but closed for the first time inverted on August 26th. August 27th the spread between the 10-year Treasury yield and the 2-year rate fell to negative 5 basis points, its lowest level since 2007. Overall the yield on the 10-year Treasury note fell 52 basis points during the month of August – that’s a big deal. The last time we saw a fall of that magnitude in such a short period of time was in 2011 when fears of a double-dip recession were on the table. Currently, the real yield on US 10-year is sitting in negative territory which says a lot about the bond market’s expectations for growth in the coming years. Keep that in mind as you look at the PE multiple for the S&P 500 after having two consecutive quarters of contracting EPS.

A growing number of countries have their 10-year dropping into negative territory:

  • Switzerland first in January 2015
  • Japan in February 2016
  • Germany and Netherlands in the Summer of 2016
  • Finland and Denmark in the Fall of 2016
  • Ireland, Latvia, Slovakia, Belgium, Sweden, Austria, France all negative

The US is now the only nation in the developed world with any sovereign rate above 2% (h/t @Charlie Bilello). My bets are that we are the outlier that won’t stay an outlier indefinitely.

Recently the Italian 10-year bond dropped to new all-time lows as Cinque Stelle (5 Star) movement managed to team up with the center-left Democratic Party of former Prime Minister Matteo Renzi. Don’t expect this new odd-couple coalition to last long as these two parties have basically nothing in common save for their loathing of Matteo Salvini and the League, but for now, the markets have been pacified. These two parties detest one another and were trading insults via Twitter up until about a month ago. This marriage of convenience is unlikely to last long.

The European Central Bank meets on September 12th, giving them one week head start versus the Federal Reserve’s Open Market Committee meeting, which is September 17th & 18th, kicking off the next round of the central bank race to the bottom. The ECB needs to pull out some serious moves to prop up Eurozone banks, which are near all-time lows relative to the broader market. We’ll next hear from the eternally-pushing-on-a-string Bank of Japan on September 19th.

Currency

Dollar Strength continues to be a problem across the globe. The US Trade Weighted Broad Dollar Index recently reached new all-time highs, something I have warned about in prior Context & Perspective pieces as being highly likely. It’s happened and this is big – really big when you consider the sheer volume of dollar-denominated debt coming due in the next few years and that this recent move is likely setting the stage for significant further moves to the upside.

In the context of the ongoing trade war with China, the renminbi dropped 3.7% against the dollar in August, putting it on track for the biggest monthly drop in more than a quarter of a century as Beijing is likely hunkering down for a protracted trade war with the US, despite what the sporadically hopefully headlines may say.

Make no mistake, this is about a lot more than just terms of trade. This is about China reestablishing itself as a major player on the world stage if not the dominant one. For much of the past two millennia, China and India together accounted for at least half of global GDP. The past few centuries of western dominance have been a historical aberration.

As the uncertainty around Brexit continues to worsen (more on this later), the British pound last week dropped to its lowest level against the dollar in 35 years, apart from a brief plunge in 2016 likely for technical reasons.

Domestic Economy

The US economy continues to flash warning signs, but there remain some areas of strength.

The Good:

  • Consumer Spending rose +0.4% month-over-month in July, beating expectations for an increase of +0.3%.
  • Average hourly earnings for August increased by 0.4% month-over-month and 3.2% year-over-year, each beat expectations by 0.1%.
  • ADP private nonfarm payrolls increased by 195,000 in August versus expectations for 148,000.
  • Unemployment rates for black and Hispanic workers hit record lows.
  • The prime-age (25-54) employment-population ratio hit a new high for this business cycle, still below the peak of both the prior and 1990s expansion peaks, but still an improvement.
  • While employment growth is slowing, jobs continue to grow faster than the population.
  • Despite the weakest ISM Manufacturing report in years, the ISM Non-Manufacturing report painted a much rosier picture of at least the service sector. While expectations were for an increase to 54.0 from 53.7 in July, the actual reading came in well above at 56.4. In contrast to the ISM Manufacturing report, New Orders were much stronger than the prior month and only slightly below the year-ago level.
  • The Citi Economic Surprise Index (CESI) has continued to recover, moving above zero (meaning more surprises to the upside than down) for the first time in 140 days after having been in negative territory for a record 357 days.

The Bad:

  • Nonfarm payrolls increased by only 130,000 versus consensus estimates for 163,000 and only 96,000 of those jobs came from the private sector – the slowest pace since February. Both July and June job figures have been revised lower, which is basically what we have been seeing in 2019. A long string of revisions to the downside means there is a material shift in the labor market. Total nonfarm payroll employment increased by 130,000 in August.
  • Job growth has averaged 158,000 per month in 2019, below the average monthly gain of 223,000 in 2018.
  • University of Michigan Consumer Confidence survey total contradicted the Conference Board’s findings with its main index falling the most since 2012 in August, dropping to the lowest level since President Trump took office. Concerns over tariffs were spontaneously mentioned by 1/3 of the respondents. The most concerning data from the survey where Household Expectations for personal finances one year from now experienced the biggest one month drop since 1978, falling 14 points.
  • Consumer spending doesn’t look so great when you look at the drop in the Personal Savings rate from 8.0% in June to 7.7% in July, which means that 75% of the increase in spending was at the cost of savings. Net income only rose 0.1% in nominal terms in July versus expectations for a 0.3% increase – not at all consistent with the narrative of a strong labor market.
  • The Chicago Fed’s Midwest state economy survey found that the number of firms cutting jobs rose to 21% in August from just 6% in July while those hiring dropped to 25% from 36%.
  • The Quinnipiac University poll found that for the first time since President Trump took office, more Americans believe the economy is getting worse (37%) than believe it is improving (31%).
  • Camper van sales dropped 23% year-over-year in July. This has historically been a pretty accurate leading indicator of future consumer spending.
  • The Duncan Leading Indicator (by Wallace Duncan of the Dallas Fed in 1977) has turned negative year-over-year for the first time since 2010. A Morgan Stanley study found that when this indicator has turned negative, a recession began on average four quarters later, with only one false positive out of seven going back to the late 1960s.
  • While expectations were for the ISM Manufacturing Index to increase from 51.2 to 51.3 in August, the reading came in at 49.1 (below 50 indicates contraction), the fifth consecutive monthly decline in the index and the first time the index has dropped into contraction in three years. Even worse, the only sub-index not in contraction was supplier deliveries. New Orders (the most forward-looking of all sub-indices) hasn’t been this weak since April 2009.
  • Durable Goods New Orders and Sales are improving but remain in contraction territory while Inventories are rising at around a 5% annual pace – that’s a problem.
  • US Producer Prices experienced their first decline in 18 months.
  • The Atlanta Fed’s GDPNow estimate for the third quarter has fallen to 1.5%.

The Ugly:

  • US Freight rates have fallen 20% from the June 2018 high. Even more dire warning comes from freight orders, which dropped 69% in June from June 2018.

Europe

That nation that has been the region’s strongest economy is struggling as the fallout from the US-China trade war expands around the world.

  • The German unemployment rate rose for the fourth consecutive month.
  • German retail sales took a bigger battering than expected in July, falling 2.2% from June to reveal the biggest drop this year in the latest indication that Europe’s largest economy may well slide into recession. Since February, monthly retail sales figures have either declined or been flat, with the exception of the 3% gain in June.
  • A recent survey revealed that employers are posting fewer jobs, intensifying fears that the downturn in the country’s manufacturing industry has spread into the wider economy.
  • Manufacturing orders came in weaker than expected, declining -5.6% versus expectations for -4.2%.
  • Construction activity has contracted at the fastest rate since June 2014.
  • Germany’s export-dependent economy shrank 0.1% in the second quarter while the central bank warned this month that a recession is likely.

The rest of Europe continues to weaken.

  • Italian industrial orders fell -0.9% in June, making for a -4.8% year-over-year contraction
  • French consumer spending is up all of +0.1% year-over-year.
  • Spain’s flash CPI has fallen from 0.5% year-over-year in July to 0.3% in August year-over-year.
  • Switzerland’s year-over-year-GDP growth has fallen to 0.2% versus expectations for 0.9% – treading water here.
  • Brexit has turned into an utter mess as Prime Minister Boris Johnson has lost his majority in Parliament. Novels could and likely will be written on this mind-boggling drama in what was once one of the most stable democracies in the world. Rather than put you through that, as they say, a picture is worth a thousand words.

The challenge for anyone negotiating terms for Brexit with the Eurozone basically comes down to this.

Talk about a Sisyphean effort

Understanding this impossible reality, here is what to expect in the coming weeks.

For those who may not be convinced that this is a material problem, this is an estimate of the impact of a hard Brexit on the Eurozone alone.

Bottom Line

Around 70% of the world’s major economies have their Purchasing Managers Index in contraction territory (below 50) – that is a lot of slowing going on. Much of the world is drowning in debt with excess productive capacity – a highly deflationary combination.

We are witnessing a major turning point in the global economy and geopolitical landscape. The past 60 post-WWII years have primarily consisted of US economic and military dominance, increasing levels of globalization and relatively low levels of geopolitical tension.

Today we are seeing a shift away from an optimistic world of highly interconnected global supply chains towards one driven by xenophobia and nationalism. We are seeing rising economic and political tensions between not only traditional rivals but also between long-term allies. In the coming decades, the US economy will no longer be the singular global economic and military powerhouse, which will have a material impact on the world’s geopolitical balance of power.

The big question facing investors is whether the US and much of the rest of the world are heading into a recession. Many leading indicators that have proven themselves reliable in the past indicate that this is highly likely but today really is different.

Never before in modern history have we had these levels and types of central bank influence. Never before have we had such a long expansion period. Never before have we had this much debt, particularly at the corporate level. Never before have we had such profound demographic headwinds. On top of all that, we have a directional shift away from globalization that is forcibly dismantling international supply chains that were decades in the making with no clarity on future trade rules.

Will central bankers be able to engineer a way to extend this expansion? No one who is intellectually honest can answer that question with a high level of confidence as we are in completely uncharted territory. This means investors need to be agile and put on portfolio protection while it remains relatively cheap thanks to historically low volatility levels.

I’ll leave you with a more upbeat note, my favorite headline of the week.

The Datafication of Everything

The Datafication of Everything

Another aspect of our Connected Society is the datafication of nearly every aspect of our lives and the use of that data. As the cost of data storage and transmission rapidly slides towards zero and the cost of data collection devices also declines dramatically, more and more of our daily activities are being turned into opportunities for data collection.

A recent article on Bloomberg discussed how the aggregate number of mobile phone signals is being used to provide insight not just on consumer behavior, but on manufacturing plants and oil refineries.

While most geolocation data use has focused on consumer-facing businesses such as retailers, hotels and amusement parks, “valuable insights can be gleaned from the data by examining activity at specific manufacturing facilities,” said Octavio Marenzi, co-founder of Opimas LLC, a capital markets management consultant. Thasos Group has used the data to show increases in shifts at Tesla Inc.’s factory in Fremont, California, the Wall Street Journal reported.

As more and more data is produced from our every day activities and the devices that improve our lives, industries are developing to turn that data into actionable information. These are companies that sit at the intersection of our Connected Society and Disruptive Innovators investing themes.

Source: Oil Traders Are Now Watching Workers’ Phones to Spot Problems at Refineries

Airbnb outpaces Hilton

Airbnb outpaces Hilton

A recent post on Recode reported that,

US consumers spent more money on Airbnb last year than they did on Hilton and its subsidiary brands like DoubleTree and Embassy Suites, according to new data from Second Measure, a company that analyzes billions of dollars in anonymized debit and credit card purchases. Their Airbnb spending is even catching up to Marriott, the world’s largest hotel company, which added to its revenue by acquiring Starwood hotels in 2016.

Airbnb, which is expected to go public next year, sits at the intersection of our Connected Society and Middle-Class Squeeze investing themes and illustrates that while we continue to point out why investors need to we aware of rising risk levels in the stock market, there are still plenty of areas that are experiencing significant growth.

According to data from Second Measure, Airbnb experience 30% growth in the US consumer market, with much of that growth coming from travels who live in the heartland area of the US with only a third of US consumers coming from the coastal states such as California and New York.

Even more impressive is that while many of these tech unicorns have failed to breakeven, Airbnb has reportedly generated positive EBITDA for two years.

While the overall markets look to be overpriced relative to fundamentals and if history is any teacher, the overall outlook for equity returns in the coming years is likely to be grim. That being said, there are still plenty of areas that will benefit from the long-term and powerful tailwinds in our investing themes.,

Source: Airbnb just beat Hilton in US consumer spending  – Recode

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

Retirement Plans Disappear When Parents And The Kids Return Home

Retirement Plans Disappear When Parents And The Kids Return Home

A recent Wall Street Journal article points out that the American dream is further out of reach for a growing number as plans for retirement go up in smoke thanks to the needs of aging parents and their adult children.

A 2014 study by the Pew Research Center found 52% of U.S. residents in their 60s—17.4 million people—are financially supporting either a parent or an adult child, up from 45% in 2005. Among them, about 1.2 million support both a parent and a child, more than double the number a decade earlier, according to an analysis of the Pew findings and census data.

Rather than enjoying the fruits of their decades of labor, many are finding that their household burdens are growing as they enter their sunset years.

More Americans find themselves housing two generations simultaneously, just when they thought they could kick back and retire. Instead, they face the strain of added expenses, constant caregiving and derailed dreams.

This pressure is coming as our Aging of the Population investment theme sees more senior citizens with inadequate savings and a healthcare system that is unable to provide the care they need at a price they can afford. On the other end of the spectrum, adult children are struggling with student debt levels the likes of which this country has never before seen and years of lackluster wage growth.

The squeeze is coming from both ends. With lifespans growing longer, the number of 60-somethings with living parents has more than doubled since 1998, to about 10 million, according to an Urban Institute analysis of University of Michigan data, and they are increasingly expensive to care for. At the same time, many boomers are helping their children deal with career or health problems, or are sharing the heavy burden of student loans.

This helps explain why discount retailers are expecting their customer base to continue to expand. Those companies that are able to help consumers push their dollars further [such as Amazon (AMZN), Costco (COST), Walmart (WMT)] have a growing set of tailwinds supporting them.

Source: ‘I Was Hoping to Be Retired’: The Cost of Supporting Parents and Adult Children – WSJ

The Disruptive Tech in Down Dog

The Disruptive Tech in Down Dog

I’ve written a few times this week here and here about how disruptive technologies can upend industries, quickly tossing leading companies into the back of the pack. Given that it is Friday afternoon where I am in Genova, Italy and we’ve had a week of horrendous storms, I’m looking forward to a relaxing weekend that will see me spending a decent amount of time curled on the couch working through my required weekly reading. That brings me to the subject of this post, the disruptive technology of yoga pants.

Yoga pants? Seriously? Yep. I just read an article in Bloomberg entitled How America Became a Nation of Yoga Pants.

I personally think that all clothing ought to have at least some sort of stretch so yoga pants are right up my alley for everything from down dog to walking the dog to lounging when I’m dog tired and loving some doggone good wine. But I digress. How can yoga pants possibly reflect disruptive tech you ask? Bloomberg answers.

In 2014, teenagers began to prefer leggings over jeans. Then people started wearing athletic clothing (or athleisure, but it’s mostly just yoga pants) to run errands. Now they’re wearing yoga pants to the office. U.S. imports of women’s elastic knit pants last year surpassed those of jeans for the first time ever, according to the U.S. Census Bureau.

To be fair, this preference for “elastic knit pants” may have some correlation to the health challenges of the American public resulting in expanding waistbands. But part of the shift in preferences is also reflective of our Clean Living (focusing on living a healthier lifestyle) and Guilty Pleasures investing themes. If you’ve seen the price of Lululemon Athletica (LULU) clothing you understand the guilt.  Bloomberg reports that,

Yoga pants have similarly managed to plunge denim into an existential crisis, threatening Levi Strauss & Co. so deeply that it had to scramble to adapt. The company added stretch and contouring to its jeans while hoping to retain some of their rugged essence.

So where is the disruptive tech involved?

“Consumers expect a lot more,” said Sun Choe, chief product officer at Lululemon. “They’re washing their garments more and more, and from a quality standpoint, it needs to stand up. They’re expecting some versatility in their product. They expect to be able to wear that pant or tight to Whole Foods or brunch.”

Ok, so that doesn’t sound terribly impressive, but then there is this.

Now there are fabric labs, especially in the athletic-wear space. Lululemon’s research arm does motion-capture testing and uses pressure sensors that allow researchers to test how garments work as they move. The team can even test “hand feel” to help it figure out how to “engineer sensations” for that critical commercial moment when you feel the fabric for the first time, said Plante.

 

Those labs have a large customer base to impress.

What was once a simple stretchy legging, it seems, has become an engineering marvel. Not too surprising, though, when you realize that about $48 billion is being spent on activewear in the U.S. every year.

Those yoga pants account for a large portion of that spend.

Active bottoms and leggings are now a $1 billion industry, according to NPD Group analyst Marshal Cohen.

With a phenomenal range of available options.

These days, there are more than 11,000 kinds of yoga-specific pants available at retailers worldwide, according to data from retail research firm Edited, across both men’s and women’s apparel.

The bottom line is that no industry, business model or product is immune from the threat of disruptive technology.

Source: How America Became a Nation of Yoga Pants – Bloomberg

Is that a Robot on Isle 9?

Is that a Robot on Isle 9?

We’ve all heard endlessly about the death of brick and mortar, (we discuss how that death is overstated in our podcast with Katherine Cullen of the National Retail Federation next week) as online retailing continues to gain market share and is nearly equal that of brick and mortar as a percent of consumers’ spending. While online retailing has made enormous gains, brick and mortar is far from dead, but rather is evolving and disruptive technologies are part of that evolution, even in your local grocery store. A recent Wall Street Journal article revealed that an enormous amount of capital is being invested in improving the way the grocery industry operated, (emphasis mine).

Grocers are stocking their warehouses with robots and artificial intelligence to increase efficiency as competition for consumer spending on food picks up. Robots are relatively new to the food industry, where customer interaction is common and many goods like fruit are fragile and perishable. Startups are vying to sell supermarkets an array of robots that perform different tasks. Venture-capital firms have invested more than $1.2 billion in grocery technology this year, according to PitchBook, a financial-market data provider, double the total for 2017.

Online groceries retailing has been a relatively weak area for growth in online retail, despite the early efforts of now-defunct Webvan and HomeGrocer. But that looks like it will be changing as investments in disruptive technologies are increasing.

Altogether, spending on technology by many of the biggest U.S. food retailers could accelerate the adoption of online ordering for groceries. Deutsche Bank expects online orders to represent roughly 10% of the $800 billion grocery market by 2023, up from 3% today.

Learning from those who tried in the early dotcom era and failed, the WSJ article reports that according to Narayan Iyengar, senior vice president at Albertsons Cos., the second-biggest U.S. supermarket chain,

“We have to find a model where we can deliver groceries to customers’ homes and do it in a more profitable way,”

Beyond robotics, companies like Kroger are also getting into delivery.

Kroger also is testing a driverless grocery van with autonomous vehicle company Nuro Inc., and it entered the crowded meal-kit distribution market through a $700 million deal with startup Home Chef. The deals are expected to advance Kroger’s online prowess, but have hurt the company’s profits and weighed on recent earnings.

The bottom line is those disruptive technologies can and have upended all aspects of our lives. Our Disruptive Technology investing theme focuses on those companies providing the technologies that completely change the way we communicate, shop, eat, work, exercise and even play.

Source: Grocers Enlist Robots to Chase E-Commerce – WSJ

Kroger going the way of the Jetsons with robots

Kroger going the way of the Jetsons with robots

One of our investing themes is focused on Disruptive Innovators, those companies that are utterly upending the way the world works. This week we saw more signals concerning the major changes taking place in an industry infamous for its brutally low margins, grocery stores…. and it entails robots.

Kroger (KR) is working on improving its operations, and defending itself against Tematica Research all-star Amazon (AMZN), which in turn ought to translate into better cost management by replacing people with robots – a trend that is occurring across a wide range of industries and geographies. A recent article on Reuters reported that

Through the deal with its largest partner, Ocado will ratchet up its delivery business by building robotically operated warehouses for Kroger in the United States, raising the stakes in the battle with Amazon.com Inc. The Kroger deal is Ocado’s biggest yet, exceeding all of the warehouses the firm has built or plans to build with Morrisons in Britain, Casino in France, Sobeys in Canada and ICA Group in Sweden. … Kroger is expected to order 20 CFCs over the first three years of the agreement. Ocado shares rose as much as 6 percent on Tuesday, taking gains over the last year to 195 percent.

Source: Kroger set to place warehouse order with partner Ocado

Failing Infrastructure Costs Dozens Their Lives in Italy

Failing Infrastructure Costs Dozens Their Lives in Italy

 

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Successful investing requires distancing oneself from emotion and from political biases, letting the data do the talking while attempting to be as objective as possible in assessing the potential risks versus rewards. This week I am failing miserably at this.

This week my second home since 2012, Genoa, Italy, made headlines around the world for the worst of all possible reasons. At least 39 people died because a bridge I have traveled across countless times crumbled. Many of those who were on the bridge fell 150 feet to their death and those below the bridge when it collapsed, I cannot even imagine what they experienced. When I think of what it will be like to see that pile of rubble when I return, I alternate between wanting to throw up and scream at the top of my lungs at those who I hold responsible. This should never have happened. The loss of life was thankfully less than it could have been given that a good portion of the city’s residents had already fled the heat during the August holiday period.

Today politicians in Italy are doing what politicians all over the world do after a tragedy, engaging in a public covering of their own backsides while angrily pronouncing that those at fault will be discovered and held accountable. The same old song as it were.

Here is the situation as I know it, which I am sharing as it helps to understand the challenges with infrastructure investment, something that the U.S. is failing at as well.

The Morandi bridge was completed in 1967 and along with much of the surrounding toll roads, (the route from the A10 onto the A26 and the first part of the A7) is operated by Autostrade per l’Italia which is 88% owned by Atlantia (ATASF:OTC), a company that also manages highways in India, Brazil, and Chile, airports in France and Italy, and jointly controls a Spanish toll-road operator. Atlantia is in turn effectively controlled by the Benetton family, the largest shareholder at over 30% of the outstanding shares through the SPV (Special Purpose Vehicle) Sintonia. An oddity of the Italian markets is that often you will have a publicly traded company’s traded shares represent only a non-controlling stake in the company, with the control remaining in the hands of one or more of the wealthier families. While the shares are publicly traded, investors have no real say in the public entity’s governance.

It turns out that the bridge’s designer, Riccardo Morandi may have been a brilliant architect, but not so great of a civil engineer. This bridge has had problems from the beginning and has required much more maintenance expenditures than is typical. This is where things get ugly. For years and years many qualified engineers have been warning of the bridge’s imminent collapse. It’s operator, Autostrade per l’Italia, has proposed alternatives to reduce stress, meaning traffic, on what was known to be a faulty bridge. All efforts were to no avail.

Enter the awkward coalition between the 5-Star Movement, (Movimento 5 Stelle) and Lega. Two political parties that joined forces to gain a controlling majority in Italy, but whose positions often are at extreme odds. Forza Italia, the Democrats and most importantly Lega have all been in favor of La Gronda. La Gronda is Genovese (Genoa’s regional dialect) for eves, such as you would have on a house. La Gronda was a project that was to connect the port at Voltri directly to the A26. Voltri is the container terminal where those big metal containers you see go to/from ships to/from (mostly) trucks and then get onto the A7. The 5-Star Movement has been vehemently opposed to La Gronda, calling it “La favoletta,” the big fairy tale, with a formal “No Gronda” campaign in 2013. La Gronda was one of the biggest conflicts between the two parties.

Previously policy statements concerning Genoa (Genova in Italian) and La Gronda were on the 5-Star Movement’s website. That was changed quickly immediately following the bridge’s collapse, but thanks to the beauty of the internet being forever, archived versions of those pages can be found. One such copy can be viewed here. There is a lovely video of Beppe Grillo, (the founder of the 5-Star Movement) railing against La Gonda in 2009 on YouTube. The start of this video has a charming little Italian girl carrying one of the “No Gronda” flags. Pretty sure her parents aren’t feeling so great these days. If you enjoy reading from irate Italians, I also recommend searching for #NoGronda on Twitter. Very few nations can do rage quite like Italy. So far Lega is wisely keeping quiet as 5-Star hangs themselves scrambles, yelling and screaming about how they were never really against La Gronda. I’m telling you, this stuff would make Pinocchio squirm.

This week Atlantia (the owner of the operating company for the bridge) is handling the situation so poorly that I’m nearly speechless – not an easy task as anyone who knows me can attest. The press releases on the company’s website as of August 16thought to be an utter embarrassment to the management team and the Benetton family and a business school case study in precisely what not to do when tragedy strikes. Alitalia shares fell 22% in Milan on Thursday, their worst-ever decline. The company has lost around $6.2 billion in market cap since the bridge collapsed. This is likely only going to make the recovery process longer and more painful.

Italy, a nation with the eighth largest economy in the world, has had public spending account for around half of the nation’s GDP over the past decade yet its infrastructure spending has been well below that of its neighbors. Take a look at a topographical map of Italy and one of France, then look at the infrastructure spending of the two. Argh! Italy is pretty much all mountains and valleys so roads are all about bridges and tunnels. France is a pancake in comparison yet they spend more on all those flat roads! Taking into account the percent of GDP that the government spends, clearly this isn’t an issue of a government not having enough funds, the question has been where is it spending?

Infographic: Italy Has Notably Cut Investment In Infrastructure | Statista You will find more infographics at Statista

The challenge is that infrastructure is basically the IT department of government. Rarely does anyone from the C suite walk down to the IT department of a company to say, “Good job, no hackers were successful today and all our tech ran smoothly.” Politicians get reelected by making people happy. Maintenance of existing bridges and roads doesn’t make for great photo ops and is often met with resistance by the electorate – NoGronda!

Think this kind of thing can’t happen in the USA? Think again. In August 2007, the I-35W Mississippi River Bridge in Minneapolis collasped, killing 13 and injuring 45. A decade later, things haven’t improved.

Infographic: Thousands Of American Bridges Are Falling Apart | Statista You will find more infographics at Statista

 

What happened in Italy, yes it did happen here and could happen again.

Infographic: Could The Genoa Disaster Happen In The U.S.? | Statista You will find more infographics at Statista

 

It isn’t just our bridges that are endangering the nation. Our airports, dams, schools, sewer treatment facilities, energy grid, waterways, levees, ports, parks, roads, drinking water, and hazardous waste facilities are all in need of investment with the nation’s infrastructure getting a D+ in 2017 from the American Society of Civil Engineers.

Hopefully, the current administration and/or those in Congress will use this tragedy to focus on America’s infrastructure needs. We’ve heard a lot of talk out of the current Administration about just this, and I hope this serves as a catalyst for the country. A weak infrastructure is a significant headwind to the economy while a modern and robust one becomes a tailwind. This is an area of great opportunity for those in D.C. to do what is necessary, for investors when we see this issue get the attention it deserves, which is the basis for our Rebuilding America index, and for Americans who would reap benefits across many aspects of our lives including less time wasted commuting to and from work or in air travel, less wear and tear on our cars, and lower prices for the things we buy thanks to reduced transportation costs.

Personally, it would be really nice to be able to drive around my other home base in San Diego, California without regularly blowing tires and soaking my car seats with coffee thanks to the ubiquitous craterlike potholes.