No bank branch, no problem

No bank branch, no problem

Several of us here at Tematica have been waiting for the day when banks would recognize that if they embraced our Digital Lifestyle investing theme, the bank branch would one day go the way of the cassette tape – a fond memory of a bygone era. While banks have made strides over the years between direct deposit and ACH payments that have shrunk the need to visit a bank branch, the debut of online-only banks, such as Chase’s Finn, and mobile payment platforms such as Apple Pay and PayPal’s Venmo have eliminated a number of reasons people used to go to the physical bank. We’ve even seen Capital One partner with Peet’s Coffee & Tea as well as other coffee shops and other non-branch locations.

To us, the long-term question is what will these banks and related institutions do with all of the existing bank branches? You may want to see what kinds of properties your REIT investments are holding.

While Bank of America Corp. and JPMorgan Chase & Co. were gobbling up cheap deposits at their thousands of branches around the U.S., Citigroup was shrinking its footprint, focusing on a handful of big cities to right itself after its near-collapse.

Now the bank’s executives are convinced that many U.S. consumers are finally ready to leave the branch behind and fully embrace digital banking. Citigroup added roughly $1 billion in digital deposits in the first quarter, more than all of last year. About two-thirds of that total came from new customers, and a little more than half came from people who don’t live near any of the bank’s roughly 700 branches.

In recent months, the bank has reorganized its consumer unit, knocking down walls between banking and cards. It rolled out a new account through its mobile app aimed at credit-card customers. And it is targeting potential customers with mobile-banking offers tied to the rewards they get for cards.

“For the 21st century, we are glad we never got the ballast of an extra 4,000 branches,” said Stephen Bird, the bank’s chief executive of global consumer banking. “I’m certain it’s going to turn out to be a very fortuitous thing.”

Other big banks are ramping up their digital offerings too, but they are doing it alongside their giant branch networks. Citigroup is wagering that many of those locations—more than 4,000 each for JPMorgan and Bank of America—will become burdensome.

Source: No Branch, No Problem. Citigroup Bets Big on Digital Banking. – WSJ

Tematica’s Take on the February Jobs Report, and What It Means for the Fed and Stocks

Tematica’s Take on the February Jobs Report, and What It Means for the Fed and Stocks

This morning the Bureau of Labor Statistics published the February Employment Report. One of the last few indicators economists, market watchers and the Fed will get ahead of next week’s Federal Open Market Committee meeting came in better than expected on several fronts. Over the last few week’s we’ve seen a rising expectation for a March rate hike, but more recently we’ve gotten conflicting signals in a variety of data points. While the February reports for the both the Producer and Consumer Price Indices and Retail Sales will be published early next week, barring any major snafus in those reports the February Employment Report clears the way for the Fed to nudge interest rates higher next week.

 

The details of the February Employment Report how it stacked up against expectations

 

 

Nonfarm payrolls came in at 235K besting expectations for 190K-200K depending on the source, and the Unemployment rate held steady at 4.7 percent.  A nice beat, but job growth slipped month over month compared to the 238K revised number of jobs created in January. Overall payrolls are up around 1.6 percent over the past year as we’ve seen the 12-month trend slowing over the past few years, which is to be expected in the later stages of this cycle. Job gains were reported in in construction, private educational services, manufacturing, health care, and mining, which was offset by job losses in retail.

 

 

In looking at several other metrics in the report, the Labor Force Participation Ratio edged up a tick month over month to hit 63.0 percent in February and we saw another sequential decline in the Not in Labor Force category. The percent of Americans actually working has reached 60 percent for the first time since 2009. In our view, those metrics are moving in the right direction.

 

We also like seeing the median duration of unemployment has been continually declining since its peak in 2010. Today that number has dropped to around 10 weeks.

 

 

Since the recovery, job growth has been concentrated primarily in lower-paying jobs in sectors such as retail, hospitality, education and food service. Recently we have seen higher-paying sectors such as manufacturing and construction posting material gains. While every sector outside of retail and utilities experienced gains, manufacturing grew 28,000, the largest increase in that sector since August 2013. Construction also surged by 58,000 jobs which was the biggest gain since March 2007 and has now added 177,000 to payroll in the past six months, a likely positive sign for housing.

If we were to pick one fly in the jobs report ointment it would be the sharp increase in the number of people with multiple jobs, which climbed to 5.3 percent of total employed, up from 5.0 percent a year ago. To us, this signals that more people are under the gun when it comes to helping make ends meet due to higher health care costs, soaring student debt levels or the need to boost savings levels, especially for retirement. From a thematic perspective, we see the pick up in multiple jobholders as a confirming data point for our Cash-strapped Consumer investing theme. More about that in a few paragraphs.

 

So what do all these employment “tea leaves” tell us about what the Fed might be thinking?

As Team Tematica discussed on this week’s Cocktail Investing Podcast, retail job losses were anticipated given the growing number of store closing announcements over the last several weeks from the likes of  Macy’s (M), Kohl’s (KSS), JC Penney (JCP), hhgregg (HGG), Crocs (CROX) and others. All of these companies are contending with the downside of our increasingly Connected Society that has consumers increasingly shifting toward digital shopping.  Given the relatively mild winter weather, the pick up in construction work likely bodes well for the housing market, which is one we keep tabs on as part of our Rise & Fall of the Middle Class investing theme. From an exchange traded fund perspective, the mix of jobs created in February likely means a higher share price for SPDR S&P Homebuilders ETF (XHB) and PowerShares Dynamic Building & Construction Portfolio ETF (PKB) are to be had while SPDR S&P Retail ETF (XRT) get left behind.

As Tematica’s Chief Investment Officer, Chris Versace, reminds his graduate students at the NJCU School of Business, the Fed has a dual mandate that focuses on the speed of the economy AND inflation. The one item that is bound to catch the Fed’s attention is wage growth, which rose even though hours worked remain unchanged in February vs. January. Per the report, “In February, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $26.09, following a 5-cent increase in January.”

While that wage growth likely reflects some impact from rising minimum wages, the mix shift in job creation toward higher paying jobs in mining, construction and manufacturing and away from lower-paying retail jobs was the primary driver. If we had to guess the one line item that could get some attention at the Fed, it would be the combined January-February wage growth, which equates to a 2.8 percent increase year over year – near the fastest pace of growth during the current expansion, and better than the expected 2.7 percent, but still well below the rate of growth prior to the financial crisis.

However, on a monthly basis, average hourly earnings for private-sector workers rose 0.2 percent during February, which was below expectations for 0.3 percent. If we dig a bit deeper, that 2.8 percent year-over-year growth is an overall number. Wages for nonsupervisory and production employees comprise about 80 percent of the workforce and that group saw their hourly and weekly wages rise by about 2.48 percent on a year over year basis – this group isn’t getting quite the gains that their supervisors are enjoying. Additionally, this metric is not adjusted for inflation and guess what….the most recent inflation rate as measured by the consumer price index was (drum roll) … 2.5 percent. So post-inflation, no real gains. Once we again, it pays to read more than just the headlines when deciphering a report like this.

That being said, in our view, this month Employment Report helps pave the way for the Fed to nudge interest rates higher next week. We expect financials, including shares of banks such as Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C) to name a few to trade higher today and lead the market higher. It goes without saying that means Financial Select Sector SPDR Fund (XLF) shares are likely to trade higher.

As the likelihood of higher interest rates are upon us, we have to consider what the incrementally higher borrowing costs could mean to consumers that have taken on considerably more debt in 2016? Team Tematica touched on this and what it likely means in this week’s podcast. While we’ve seen decent wage growth thus far in 2017, a new study from WalletHub shows that “US consumers racked up $89.2 billion in credit card debt during 2016, pushing outstanding balances to $978.9 billion, which is roughly $3 billion below the all-time record set in 2007.” This would certainly help explain the year over year increase in multiple jobholders we talked about several paragraphs above.

For an economy whose growth is tied rather heavily to consumer spending, higher interest rates could crimp the health of that economic engine when consumers start to look at their credit card interest rates. Add in higher gas prices and odds are Cash-strapped Consumers will be with us once the euphoria of today’s February Employment Report dies down. We’ll be watching credit card transaction levels at Visa (V) and MasterCard (MA) to gauge consumer debt levels and whether average transaction sizes are shrinking.

— Tematica’s Chief Macro Strategist, Lenore Elle Hawkins contributed to this article. 

June Market & Economic Overview – A Tale of Central Banking

June Market & Economic Overview – A Tale of Central Banking

“The Future Ain’t What it Used to Be” Yogi Berra

Much of the recent economic data has been well below the hopes and expectations of governments and market pundits around the world. First quarter US GDP growth was revised down from +0.1% to an actual contraction of -2.9%, making the first quarter of 2014 the worst quarter since the first quarter of 2009, in the heart of the recession. The bulk of the revision came from weaker than expected personal consumption and a bigger than expected decline in exports. It is rare to see such a substantial decline without the economy being in a recession. That being said, most of the macro data for Q2 is looking like we’ll see a rebound with the economy gaining momentum rather than entering a recession, but we are paying close attention.

 

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European GDP growth was also decidedly lackluster, with Japan the only pleasant surprise, but its strong growth in Q1 is likely just pulled forward from Q2 when the nation’s VAT increased 60%, from 5% to 8%. When a tax increase like that is approaching, people tend to buy things in advance and stock up knowing that prices are going to increase in the near future, distorting quarterly purchasing data (which frankly irks your meticulous author who has an arguably unhealthy love for clean data). China’s growth in Q1 also fell below the government’s target and grew at the slowest rate since quarterly data was first made available starting in Q4 2010. Meanwhile geopolitical tensions continue to mount, putting the U.S. in the odd position of now potentially working with Iran in order to improve the situation in Iraq. The saying that politics can make for strange bedfellows comes to mind!

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In response to the continued economic weakness, the monetary policy positions of the four biggest central banks, the US Federal Reserve (Fed), The European Central Bank (ECB) the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) remain quite easy (in monetary terms), with some even easing further in the belief that this will raise asset prices. This in turn is believed to be necessary to get the wheels of their respective economic engines moving faster. These regions represent about 60% of world GDP and 70% of the world’s equity capitalization, thus their actions have an ability to dominate the markets. The chart above shows just how dramatically interest rates have been suppressed. This suppression has generated all kinds of wonky market ramifications as reasonable yield becomes more and more of a mythical unicorn.

“Financial markets are euphoric, in the grip of an aggressive search for yield…and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain.” Claudio Borio, the head of the BIS’s monetary and economic department.

On June 5th, the ECB announced that it will cut its deposit rate to -0.1%, which means it now charges banks for holding excess cash, an ironic move given the concerns over the quality of European bank balance sheets. It’s a rather bi-polar relationship there with demands for the banks to clean up the quality of their loans on the one hand, and then penalizing them for not loaning out more on the other. Sounds like the makings of a central bank themed Lifetime channel movie! By Friday of that week yields on Italian and Spanish debt touched all-time lows. By the following Monday, Spain joined several other European countries, including Ireland, France and Germany, whose debt has lower yields than that of 10-year Treasuries. The markets appear to be following Salvador Dali’s advice, “What is important is to spread confusion, not eliminate it.” On that note, the riddle of this relentlessly rising market has left many bewildered, with trading volumes, or the lack thereof, attesting to the consternation. Volatility has also plummeted, thanks in no small part to central bankers around the world who are hell-bent on driving asset prices up while purely by coincidence, (without a trace of sarcasm from your author) making sovereign debt easier to bear. We aren’t the only ones to have noticed this and to be concerned.

“Volatility on the financial markets in the advanced economies has subsided to well below the historic norm, reaching levels that in the past sometimes preceded rapid changes in the orientation of investors.” – Ignazio Visco, Governor of the Bank of Italy The lack of volatility is “eerily reminiscent” of the run-up to the financial crisis in 2007-2008. – Charles Bean, Bank of England Deputy Governor

The S&P 500 has not dropped below its 200-day moving average since early November of 2012. It has continued to set a series of record peaks and has left volatility in the dust. The 10-Day A/D line (Advance/Decline Line) has been at extremely elevated levels (+2,500) since 5/30, excluding the first two trading days of June. As of June 30th, the S&P 500 has gone 409 days without going below its 200-day moving average. This has broken the previous record over the past 50 years of going 385 days without testing the 200 day-moving-average in 1995-1996.

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There isn’t much conviction around these highs, as the volume of trading has been quite low, illustrated in the chart at right. JP Morgan recently warned that its trading volume will likely be down by as much as 20% while Citigroup’s CFO announced that he expects Q2 trading revenue to fall by as much as 25% compared to last year. Recently the performance of the iShares US Broker-Dealer ETF (IAI) has diverged dramatically from the S&P’s upward march, illustrating this concern. Last quarter S&P 500 profits grew by all of 2% over a year ago, while stock prices continued to move up more aggresively, despite consensus estimates for an 8.5% increase in profits. The pattern of stock returns by size is also concerning. In general, stocks with higher market capitalization are performing far better than those with smaller capitalizations.

Year-to-Date Style Returns:  Morningstar indexes

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So profits aren’t great, which isn’t terribly surprising given the dismal GDP growth rate for Q1 and larger capitalized companies are outperforming smaller. If we look a little deeper into just who is doing the buying, we find an explanation for some of this. Turns out, that the usual buyers of stocks such as hedge funds, pension funds, mutual funds etc. have been in aggregate net sellers, the big buyers have been the companies themselves! Hold on a minute. Stock prices have been going up because companies are buying back their own stocks? S&P 500 companies bought back $160 billion of their own stocks in just the first quarter of 2014. Now there isn’t anything innately wrong with companies buying back their own stock and in fact we are often quite in favor of it, but there is a reason to be concerned when it appears that these buybacks are a significant driver of upward market momentum! We’ve seen a disturbing trend with these large companies issuing bonds in order to buyback their own stock, which we are sure has nothing to do with executive compensation packages tied to stock performance, (not even attempting to hide the snarky undertone here) such as with Monstanto, Apple, Cisco, and Fedex. As of February 26th 2014, companies had already raised at least $11 billion worth of debt in 2014 after having raised $19 billion in 2013 to help finance stock repurchases, according to the Financial Times.

Bottom Line: Stock price gains generated through repurchase programs funded by companies borrowing large amounts courtesy of central bank sponsored insanely low interest rates is something that ought to make everyone nervous. (Ok, so that was a mouthful, but it is an important point.)

Housing is Officially in a Double-Dip

Housing is Officially in a Double-Dip

The most widely-followed home price index, the S&P/Case-Shiller index, just came out on 5/31 and showed that we are officially in a double dip.  The report found that home prices in Q1 are now 2.9% below the previous quarterly bottom in Q1 of 2009.  So much for that home buyer tax credit!  All those gains have now been wiped out.  Both the 20-City composite index and the 10-City Composite Index show housing prices are back to their summer 2003 levels.

Only Washington D.C. shows an improvement in housing year over year.

Home prices have now fallen more than they did during the Great Depression.  The drop in home values means also mean that the banks’ portfolio of loans is worth less.  If this continues, banks will be forced to take further markdowns.  The further prices fall, the more the banks stand to suffer, which could imply, according to Chris Whalen of Institutional Risk Analytics, solvency issues for firms like Bank of America, Wells Fargo, JPMorgan and Citigroup as well as big losses for the U.S. government and private investors.

This provides further reason to believe that the Fed will not be raising rates anytime soon.