The Magic 8-Ball Market

The Magic 8-Ball Market

Last week ended with equity markets taking another dive that accelerated into Friday’s close as the trade war with China intensified heading into its eighteenth month with China announcing that it will impose retaliatory tariffs on US goods. The S&P 500 closed down 2.5% for the third time this month. After the close President Trump launched a twitter storm to announce additional retaliatory tariffs in response to China’s. So that’s going well.

Investors face challenging times as the major market movers have simply been words (tweets) coming from politicians and bureaucrats, the prediction of which is akin to assessing the next missive from a Magic 8-Ball.

While many continue to talk about the ongoing bull market, the major US equity market indices have seen four consecutive weekly declines and are all in the red over the past year with the small cap Russell 2000 down well over 10%, sitting solidly in correction territory. On the other hand, this year has seen the strongest performance out of long-maturity Treasuries since at least 1987.

Source: Bespoke Investment Group

How many bull markets see the total return for the long bond outpace the S&P 500 by over 16%.

This comes at a time when the domestic economy is in it 121st month, the longest is post-war history, which means that many have not lived through a recession as an adult.

Yield Curve

As the adage goes, expansions don’t die of old age, but their footing becomes less sure over time and we are seeing signs of rockier terrain. One sign comes from the yield curve which has been flattening steadily since October 2018 with the spread between the 10-year and the 3-month falling from over 100 basis points to -39. The most widely watched part of the curve, between the 10-year and 2-year, has inverted four times in the past few weeks.

This 2-10 inversion is most closely watched as over the past 50 years it has preceded all seven recessions. Credit Suisse has found that on average a recession hit 22 months after the 2-10 inversion occurred.

The third of August’s four inversions came as Kansas City Federal Reserve President Esther George and Philadelphia Fed President Patrick Harker stated in a CNBC interview that they don’t see the case for additional interest rate cuts following the cut in July. Mr. Market was not looking to hear that.

This past week we also received the meeting minutes from the prior Fed meeting with led to July’s 25 basis point cut which gave the impression of a Fed far less inclined to cut than the market was expecting with most Fed participants seeing July’s cut as part of a recalibration but not part of a pre-set course for future cuts. Keep in mind that central bank rate cuts are a relative game and ECB officials have been signaling a high likelihood of significant accommodative measures at the September meeting, saying the ECB “will announce a package of stimulus measures at its next policy meeting in September that should overshoot investors’ expectations.”


Another source of bumps on the economic road comes from the manufacturing sector, both domestic and international. A recent IHS Markit report found that the US manufacturing sector is in contraction for the first time in nearly a decade as the index fell from 50.4 in July to a 119-month low of 49.9 in August – readings below 50 indicate contraction.

According to the Institute for Supply Management, US manufacturing activity has slowed to a nearly three-year low in July. By August New Orders (a key leading indicator) had dropped by the most in 10 years with export sales falling to the lowest level since August 2009.

New business growth has slowed to its weakest rate in a decade, particularly across the service sector. Survey respondents mentioned headwinds from weak corporate spending based on slower growth expectations both domestically and internationally – likely caused by the ongoing trade war that got much, much worse this past week.

In a note to clients on August 11th, Goldman Sachs stated that fears of the US-China trade war leading to a recession are increasing and that the firm no longer expects a trade deal between the two before the 2020 US election. The firm also lowered its GDP forecast for the US in the fourth quarter by 20 basis points to 1.8%.

Global manufacturing has also been slowing, with just two of the G7 nations, Canada and France, currently showing expansion in the sector. In July, China’s industrial output growth slowed to the weakest level in 17 years.

Germany is seeing the most pronounced contraction with its manufacturing PMI dropping from 63.3 in December 2017 to 43.6 this month. German car production has fallen to the levels last seen during the financial crisis.

Overall, we see no sign of stabilization in global manufacturing as global trade volumes look to be rolling over, leaving the economy heavily dependent on growth in the Consumer and the Service sectors. Keep in mind that the last time global trade volumes rolled over like this was back in 2008.

The Consumer

The consumer is yet another source of bumps on the economic road. Ms. Pomboy’s tweet is perfect.

As for that debt, Citigroup recently reported that its credit-card delinquency rate had risen to 2.91% in July from 2.56% in June versus its three-month average of just 1.54%. With all the positive stock moves we’ve seen in retail, keep in mind that the story for many has been more about earnings than actual growth.

For example, Nordstrom (JWN) shares rose 21% after it delivered stronger-than-expected earnings, but that was off of weaker than expected revenue of $3.87 billion versus expectations for $3.93 billion. Nordstrom also slashed net sales guidance for the fiscal year as well as earnings guidance. Management forecast net sales for the year to decrease by about 2%. It previously estimated sales would be flat to 2% down. It also slightly lowered guidance on earnings per share to a range of $3.25 to $3.50, compared with the prior guidance of between $3.25 to $3.65. Did I mention shares rose 21%?

US Consumer sentiment fell to 92.1 in August, the lowest reading for 2019, versus expectations for 97 and down from 98.4 in July. If sentiment continues to degrade, how long will the consumer continue to load up credit cards in order to spend?


It isn’t just the consumer that is taking on more debt – yet more economic bumps. The federal government deficit rose by $183 billion to $867 billion during just the first 10 months of this fiscal year as spending grew at more than twice the rate of tax collections. The Congressional Budget Office expects the annual budget deficit to be more than 1 TRILLION dollars a year starting in 2022. Total public debt, which includes federal, state and local has reached a record 121% of GDP in 2019, up from 69% in 2000 and 43% in 1980.

Keep in mind that debt is pulling resources out of the private sector and at such high levels, fiscal stimulus becomes more challenging in times of economic weakness. The only time debt to GDP has been higher was after WWII, but back then we had relatively young population and a rapidly growing labor force compared to today.

I’ve mentioned before that I am concerned with the strengthening dollar. Dollar denominated on balance sheet debt is over $12 trillion with roughly an additional $14 trillion in off-balance sheet dollar denominated debt – that’s a huge short USD position. The recent resolution of the debt ceiling issue means that the US Treasury now needs to rapidly rebuild its cash position as I had been funding the government through its reserves. This means that we will see a drain on global liquidity from the issue of over $200 billion in Treasury bills.

I’ve also written many times in the past concerning the dangers that lie in the enormous levels of corporate debt with negative yielding corporate debt rising from just $20 billion in January to pass the $1 trillion mark recently – more bumps on the road.

Bottom Line

As I said at the start of this piece, this expansion is the longest in post-war history which doesn’t itself mean a recession is imminent, but it does mean that the economy is likely to be more vulnerable. Looking next at the economic indicators we see quite a few that also imply a recession is increasingly likely.

The President’s twitter storm in response to China’s tariffs and the continually rising geopolitical uncertainties that create a strong headwind to any expansions in the private sector only increase risks further. Perhaps by the time you read this piece some part of the rapid escalation of the trade war will have been reversed, as foreign policy has become increasingly volatile day-to-day, but either way, the view from here is getting ugly.

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

Another headache for retailers, US credit card delinquencies on the rise 

Another headache for retailers, US credit card delinquencies on the rise 

We’ve talked a quite a bit about rising consumer debt levels despite stagnant wage growth over the last several months. Now we’re starting to see the fallout when consumers rack up too much debt and they can’t make their monthly payments – rising delinquency rates. In our view, this makes an already challenging situation for Cash-Strapped Consumers even more so and poses an additional risk to already struggling retailers. Keep in mind, we’re already seeing rising sub-prime auto loan defaults. Taken together, this paints an ominous picture for the upcoming holiday shopping season and is a reason to think Deloitte’s retail holiday sales forecast of up 4%-4.5% year over year could be overly optimistic.


According to a news report in The Wall Street Journal, Capital One, Synchrony and Alliance Data Systems have all seen the rate of delinquencies among credit card holders increase as a percentage of their overall loans during the last few months. The three companies, noted the Wall Street Journal, provide credit cards to consumers with less-than-stellar credit histories. Synchrony and Alliance Data are focused on the store-branded, private label credit card market.

The Wall Street Journal stated that Capital One is seeing loans that are more than 30 days delinquent increase to 4 percent of overall loans in August. In April, that rate was at 3.5 percent, noted the report. For Synchrony, the rate increased to 4.5 percent from 4.1 percent in the same time period and 5.3 percent from 4.7 percent for Alliance Data. The Wall Street Journal said the levels are among the highest the credit card market has seen in some years. For Alliance Data, the rate is at the highest since Feb. 2011.

Source: US Credit Card Delinquencies On The Rise |

Consumer Finances Getting Stretched

Consumer Finances Getting Stretched

The recent economic data coupled with what we are hearing this earnings season paint a picture of consumer finances getting seriously stretched.

Yesterday we learned that personal income growth stalled out in June, unchanged from May. The 3-month moving average shows slowing in income growth.

With the decline in income, we have also seen consumers spending less, although still at relatively strong levels, stronger than income growth would suggest.

Without incremental income to support spending, consumers have reduced their savings rate well below historical norms.

But the story doesn’t end here. While the mainstream financial media keeps telling us how great the consumer is doing, ignore the prior charts (cough, cough), we are seeing loan loss provisions on the rise. The average charge-off rate for large U.S. card issuers increased to 3.3 percent in the second quarter, the highest level in four years and the fifth consecutive quarter of year-over-year increases. All nine of the largest issuers: JPMorgan Chase (JPM), Citigroup (C), Capital One Financial (COF), Discover (DFS), U.S. Bank (USB), Wells Fargo (WFC), Bank of America (BAC), Synchrony Financial (SYF) and American Express (AXP) experienced increases for the quarter.

Capital One Financial beat expectations for both revenue and earnings but increased its charge off rate to 5.11 percent from 4.07 percent in the same quarter last year. The company elected to not provide guidance for anticipated defaults for the coming year.

Synchrony Financial, the largest store credit card issuers in the U.S., reported second-quarter earnings that beat Wall Street estimates largely due to consumers taking on more debt. Despite a strong showing last quarter, loan losses continued to worsen and were a big topic during the earnings call. The company’s net charge-off rate rose to 5.42 percent from 4.51 percent the prior year. Provision for loan losses in the second quarter rose 30 percent over the prior year.

American express saw loan loss provisions growth 26 percent year-over-year.

Bottom Line: Spending can only grow by earning more or borrowing more. With the savings rate in decline and default rates on the rise while income growth continues to weaken, we are seeing additional evidence that we are in the later stages of the business cycle.


Home No So Sweet Home

Home No So Sweet Home

We have written extensively on the pages about weak household spending. As we’ve mentioned before, the only way to increase spending is either through higher incomes or through more borrowing. The borrowing looks to have decidedly peaked.


Wages growth has been weak as well, although yesterday’s quarterly report on median weekly real earnings showed some signs of improving.

One of the aspects affecting how and where consumers spend is likely related to what we see happening with home ownership versus renting. Home ownership levels are today at levels not seen in many decades.

Instead, consumers are opting to rent.

Over the past 10+ years we’ve seen the number of households that are homeowners decline, while the number of households renting has grown.

It isn’t just the Millenials either who are preferring to rent versus own.


With this rather profound increase in households opting to rent versus own, rising rental rates will have a bigger impact on aggregate spending abilities.


Rental rate increases so far in 2017 are on track to see the biggest gains since 2007, leaving consumers in a tough spot with wages up just 0.8 percent in June while rents are up 3.8 percent on an annualized basis over the past couple of months. Housing costs are having a greater impact on overall inflation than we’ve seen in quite a few years.


While rising rental rates may make buying a home look relatively more attractive, home prices have been rising a much faster rate than wages as the inventory of homes on the market has been at exceptionally low levels. If the Fed is successful in raising longer-term interest rates, the increase in mortgage costs will put home ownership further out of reach for some who may be hesitant to take that risk in the first place.

Which brings us to how the various generations choose to spend, with Millennials living up to their reputation by spending a greater portion of their income on restaurants, groceries, technology and clothing.


Bottom Line:

Many consumers still have mortgage/home ownership PTSD after the unprecedented pain felt during the financial crisis. The decades of rising rates of homeownership, induced in large part by federal policies and legislation, has mostly been wiped out. This data illustrates how the generations most affected by the financial crisis have shifted to a more asset-light lifestyle. This shift is a tailwind to those companies providing goods and/or services consistent the sharing economy.



Improving Data? Income or Tax Receipts

Improving Data? Income or Tax Receipts

This morning we learned that Real Disposable Personal Income rose at the fastest month-over-month rate since April 2015, up 0.6 percent.

Looking at a year-over-year basis, real Disposable Personal Income rose at the fastest rate since October 2016. That growth in income however, didn’t translate into spending with Personal Consumption Expenditures nearly flat, with an increase of just 0.055 percent on a month-over-month basis.

On a year-over-year basis, May’s spending was up 4.2 percent, although the rate of increase has been slowing since March.


Rising income levels are supported as well by recent comments we’ve seen.

“Labor, we continue to see some pretty good inflationary pressure…there’s 3% to 4% wage inflation in our labor number, right now; we’re able to offset some of that with productivity enhancements. But labor continues to be something that we’re focused on” —Darden CEO Gene Lee (Restaurants)

This is consistent with the Consumer Confidence data we’ve been seeing that show strong sentiment for Current Conditions, but Expectations have been trending down significantly. Folks feel pretty good about their situation today, which makes sense if incomes are rising at a faster rather, but aren’t too confident in the future, which would reasonably result in less spending and more saving.

Looking at federal tax receipts gives us a different image and shows an economy in no way accelerating, which is consistent with much of the data we have been discussing recently, but contrasts with today’s income data. In fact, individual income taxes on are track to drop by 0.2 percent of GDP this year.

Back to the positive side, the recent Cass Freight Index Report gives us cause for optimism. Cass shows that both Shipment and Expenditures have been positive for five consecutive months and even more importantly, look to be accelerating. This index had been in negative territory for 20 months, breaking out back in last October, making it one of the first indicators that a recovery in freight had begun.

If we look at the typical trends during a year, 2017 is shaping up to look pretty good as well.

This more optimistic view is supported by the Baltic Dry Index.

However, we do have some concerns when we look at the Index today. After having moved up since February 2016, with a few bumps along the road, we now see the 50-day moving average has turned negative and the 200-day moving average looks to be flatlining. The 50-day had turned negative earlier this year, then reverted, but this is the first time we’ve seen the 200-day flatlining since the start of this uptick, which could indicate a material change in direction. This could then be reflected later in the Cash Freight as this index revealed an upturn prior to Cass and could be foreshadowing a directional change again.

Bottom Line: Consumers feel good about today which makes sense with improving incomes. They are nervous about the future though, so spending isn’t keeping up with incomes. When we look at other data coming in, we see that businesses have excessive levels of inventory on hand, which is more problematic when spending declines. How long can transports look good when businesses have too much inventory and consumers are spending less? 

Taking a step back we recall that 1.5 million baby boomers are hitting 70 every year for the next 15 years and most don’t have enough in savings and on top of that, Millenials are saddled with record levels of student loan debt. 


Economic Data Continues to Paint Peaking Picture

Economic Data Continues to Paint Peaking Picture

This view never gets old.

This view never gets old.While this was a shortened week with the Memorial Day holiday, it was certainly packed with economic data. Yours truly fell a bit behind coupled with the short week and another one of my trips from Southern California back to my other home base in Italy, so this is a longer than usual post. No matter how many times I do that trip, and my frequent flier miles balance can attest to the level of insanity, I am endlessly amazed at how I can get into a steel tube in one part of the world and end up, after just one tube change in London, roughly 7,000 miles away without much fuss. Hat tip to British Airways for a lovely trip despite the pain felt by tens thousands over the holiday weekend – our thoughts on that calamity were shared on last week’s Cocktail Investing Podcast. The view from 30,000 this week was quite useful given the onslaught of data!

The week started with the Bureau of Economic Analysis inflation report which was in-line with expectations, showing the Personal Consumption Expenditures, price index was up just 1.7 percent on a year-over-year basis.

The Core PCE Price Index, which excludes food and energy, was also lower from prior periods, up just 1.5 percent year-over-year versus an increase of 1.8 percent at the beginning of the year. As we expected and called out a few times, the base effects are wearing off.

Real Personal Consumption Expenditures, which is a measure of consumer spending, weakened on a year-over-year basis, down from 3.1 percent in March to 2.6 percent in April. The peak for these expenditures during the current business cycle was back in January 2015 at 4 percent, which was below the prior business cycle peak of 4.7 percent in February 2004. We see this as confirming our Cash-Strapped Consumer theme remains solidly in the forefront of the economy.

Yes spending has been muted, but more concerning for the longer-term growth potential of the country is the ever-weakening population growth rate. The Bureau of Economic Analysis’ most recent data showed yet another drop in the growth rate to the lowest level on record with the BEA, at 0.7 percent, reinforcing our Aging of the Population theme. Over 600,000 people dropped out of the labor force just last year.

Keep in mind when you hear talk about expanding GDP growth rates that,

There are only two core factors that impact the potential growth of an economy, growth of labor and improvements in productivity.

Shipping looks to be strengthening, which is a good gauge of growth in the overall economy, but remains below longer-term normal levels and is still within the muted growth rate we’ve seen during this business cycle.


The Conference Board measure of Consumer Confidence fell more than expected in May, after having declined in April as well, although overall optimism is still relatively high. The index dropped to 117.9 in May versus expectations for 119.8, down from its peak of 125.6 in March, the highest level since December 2000.

The exceptionally large spread between “soft” sentiment data and the actual hard data has been narrowing, but that has been primarily driven by declining sentiment data.



Housing prices remain strong with the S&P/Case-Shiller Home price index coming in with 5.9 percent annual growth rate versus expectations for 5.7 percent, driven in part by exceptionally low inventories. We’d argue that this is consistent with our Asset-Light investing theme, as Millenials, in particular, show a great affinity for renting homes and using ride-sharing services than owning such assets, particularly those like cars that have inherently low utilization levels.



The US Pending Home Sales number disappointed in April, falling below last year’s levels with a 1.3 percent decline. The National Association of Realtors Existing Home Sales index was 3.3 percent lower this April than in April 2017.


The rate of price increases in homes is well above the annual rate of wage growth, which makes the current pace unsustainable unless we see wages start to catch up. We may just start to see that with the improvement in job creation we saw this week from ADP, with Private Nonfarm payrolls rising 253,000 versus expectations for 180,000. The report saw jobs in construction and professional/business services rise notably, with the later experiencing is the largest one-month increase in around three years.

So things were looking pretty good on the jobs front until Friday’s payroll report from the Bureau of Labor Statistics which came in well below expectations at 138,000 new jobs versus expectations for 185,000. The Labor Force Participation rate dropped from 62.9 percent to 62.7 percent and to add insult to injury, the BLS revised the April job creation numbers down from 211,000 to 174,000.

While payrolls in construction rose in the ADP report, the Census Bureau was more in line with the weaker BLS report when it reported a month-over-month decline in US Construction Spending, falling 1.4 percent versus expectations for an increase of 0.5 percent. On a year-over-year basis, spending is up 6.7 percent, with that increase coming from residential, which rose 15.6 percent in April on a year-over-year basis while total public construction spending was down 4.4 percent in April on a year-over-year basis. Residential construction is rising on a year-over-year percent basis, but the overall level is still subdued compared to what we’ve seen in prior business cycles.


Despite weaker inflation data and the weaker jobs report, the CME fed fund futures market is still predicting, with over 90 percent probability, that the Fed will raise rates at the June meeting to a target of between 100 and 125 basis points. The probably of an additional September hike is now below 25 percent. YOU SHOULD SAY WHY YOU AGREE THE FED WILL HIKE EVEN THOUGH THE EMPLOYMENT REPORT WASN’T “GOOD ENOUGH” (OR WAS IT?)

The manufacturing PMI from the Institute for Supply Management (ISM) came in slightly better than expectations, at 54.9 from 54.8 in April versus expectations for 54.5 with New Orders, Employment and Inventories rising versus weaker Production.


However, the Markit survey presents a slightly different picture, with US Manufacturing PMI down to 52.7 in May from 52.8 in April, sitting at the lowest level in 8 months with a moderate improvement in New Business.


Both surveys agreed on falling input prices for manufacturers as inflation looks to be easing across the board. That sound you hear is falling prices, not us patting ourselves on the back for seeing this ahead of the herd.

Auto sales continue to decline in May with sales coming in at the second weakest in the past 26 months, surpassed only by March’s weaker read. Unit volumes are at a roughly 11 percent decline versus Q1, which experienced a 17.5 percent decline.


Bottom Line on the economy is that the data is still mixed, but when we distil it all down, we see an economy that is highly unlikely to accelerate to the upside from here with distinct indications that we are nearing the end of this business cycle. This view is further reinforced when we see President Trump’s approval rating at 40 percent with a disapproval rate at 54 percent. Much hope was based on campaign promises that will be difficult to pass through Congress without support from the other side of the isle, support that is less likely with those kinds of approval ratings given the number of Democrats up for reelection at the mid-term.

Auto Sales Miss Again

Auto Sales Miss Again

While the mainstream financial media does its darndest to convince investors that the weak Q1 GDP was once again due to “seasonal” factors, the Cash-Strapped Consumer showed up again this morning as auto sales for April came in weaker than expected again, after a rough March.

With about 84 percent of the industry reporting at this point, the overall sales pace is tracking at 16.67mm SAAR versus expectations for 17.10mm. Here is the breakout by company:

  • Ford (F) down 7.2 percent yoy
  • Toyota (TM) down 4.4 percent yoy
  • General Motors (GM) down 5.8 percent yoy
  • Fiat-Chrysler (FCUA) down 6.6  percent yoy
  • Nissan (NSANY) down 1.5  percent yoy
  • Mercedes (DDAIY) down 7.9  percent yoy
  • Mazda (MZDAF) down 7.8 percent yoy
  • Honda (HMC) down 7.0  percent yoy
  • Volvo (VOLVF) up 15.4 percent yoy
  • Volkswagen (VW) up 1.6  percent yoy

With only two companies reporting better sales on a year-over-year basis, April was another rough month. We did see one slightly bright spot out of Ford (F) where overall sales of trucks were up 7.4 percent year-to-date over last year. These could be a barometer for the health of small businesses, which we’ve seen have been more optimistic of late on hopes for tax reform in their favor.

So far consumer income and overall spending have been disappointments, and now auto sales came in weaker than expected. That argument for “seasonal” weakness in Q1 isn’t looking too strong.

Markets and auto sales in reverse

Markets and auto sales in reverse

Last week the S&P 500 lost 1.4 percent, the largest weekly loss since the week before the election. No wonder investors pulled $9.1 billion net out of mutual funds, resulting in the steepest weekly redemption rate since last June’s Brexit freak-out. This move reverses about 10 percent of the some $90 billion of inflows since the election as the Trump Trade loses steam in the face of weakening hard data. When we look at what happened in March versus January and February, we can see how investors could get spooked.

In January and February, most everything was moving up, save for the energy sector.

XLY Chart

By March sector performance has shifted around significantly, with most every sector now in the red for the month.

XLY Chart


Looking into the details a bit, we see that the 50 stocks in the S&P 500 with the largest exposure to domestic sales fell 4.2 percent in March while those with the most global exposure were flat – a stark contrast from the earlier narrative of deregulation and protectionism which boosted small cap stocks with a heavy domestic focus. We are also seeing a move back into quality and liquidity with the largest 50 companies in the S&P 500 outperforming the smallest 50 by 3.6 percent in March. We’re also seeing more defensively positioned companies, like real estate investment trusts (REITs) and other dividend stalwarts come back into favor.

Aside from equities, we’ve seen bond yields cease their upward climb as the dollar has rolled over and even the Mexican peso is now up 15 percent year-to-date in an apparent refutation of a NAFTA rethink. While the mainstream financial media may be jawboning about growth that is right around the corner, core capital spending orders are flat year-to-date and up all of 1.3 percent year-over-year from 2016’s painfully depressed levels.

For all that talk of the consumer in a giddy mood with the Michigan Consumer Confidence Index hitting a record high, real consumer spending just experienced its worst three-month rate of change since 2012.

Oh and remember how we’ve been hammering about how if things are oh so rosy why is the auto sector having a rough go of it? Well, it just got rougher. With about 80 percent of the auto industry reporting so far this morning, sales are tracking to be coming in at the lightest pace in almost three years. So much for accelerating spending.

  • Honda (HMC) started the reporting off with a miss, down 0.7 percent. This miss is particularly painful as March 2017 has a more favorable sales calendar and day trade adjustment than 2016.
  • Nissan (NSANF) and Mazda (MZDAF) did better, up 3-5 percent year over year.
  • Ford missed big time, down 7.2 percent year over year versus expectations for 5.9 percent decline.
  • GM (GM) missed estimates as well, up 1.6 percent versus 7 percent expected.
  • Fiat-Chrysler (FCAU) missed with a 5 percent volume drop versus expectations for roughly no change.
  • Toyota (TM) sales in the U.S. fell 2.1 percent.

Our Cash Strapped Consumer may be feeling better, per sentiment surveys, but they certainly aren’t out buying and unless we see some real wage gains or (and this is decidedly not a long-term solution) consumer credit starts flowing more freely, spending can’t get much more robust. In many respects these sentiment and confidence surveys are like watching a person consume an excess amount of alcohol – at one point they are feeling great and all is well with the world, but it’s only a matter of time before they are reaching for Drinkwell, Alka Seltzer and other hangover remedies as they contend with the next day’s reality.

Consumer Spending – it isn’t all about Confidence

Consumer Spending – it isn’t all about Confidence

There was a time, in a life long, long ago, when my view of shoes was purely functional. I mostly had black ones, with no interest in wasteful spending on frivolity. What doesn’t go with black? Sandles, flats, pumps, all black, I kept it simple. Then I started to work for extended periods in Italy and after a few months, my colleagues here agreed with me that yes, California girls don’t do the whole shoe, purse, put together ensemble bit at the level that Italian women do so effortlessly. Oh really? Game on! And that is how I met two of my great loves Jimmy (Choo) and Christian (Louboutin) and found just what kind of confidence a great pair of stilettos can provide, even when all else is going to hell.

I pondered this phenomenon of stiletto-induced confidence in the face of a perilous Italian cobblestone street or a sleep-deprived workweek over my morning cup of coffee as I reviewed this week’s Michigan Consumer Confidence report and its impact on spending.

With roughly 70 percent of GDP attributed to consumer spending, expectations for more robust growth rely on expectations of increased spending. The catch is that spending is simply a function of income and credit, not confidence. If you want to spend more, you must either earn more or borrow more – pretty simple.

Earlier this week Consumer Confidence for March blew away expectations, with the index reaching 125.6, its highest level since December 2000, versus expectations for 114. Confidence levels have now surpassed those seen in the last expansion period which ended in the financial crisis.


Interestingly we are seeing the difference in the confidence levels by income grow increasingly wider, with those at higher income levels rising much faster and higher than those at lower income levels. Confidence is typically higher the higher one’s income level, but the spread has been growing.

Income expectations have also been rising rapidly and are reaching levels last seen during the peak of the prior expansion, which has those in mainstream financial media giddy over spending expectations. Those of us at Tematica find this fascinating given the actual trends in income over the past two years. The following chart shows the year-over-year change in real person income, seasonally adjusted, as reported by the BEA (Bureau of Economic Analysis) which defines such as,

Personal income is the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.


While confidence in income gains is rising, income growth has been slowing for years. As of December 2016, personal income was growing at less than half the rate it had been growing two years earlier in December 2014. This Friday we’ll get the latest numbers and will be quite keen to see if this trend has continued.

Recall that a few weeks ago we pointed out that

From February 2016 to February 2017, real average hourly earnings decreased 0.3 percent, seasonally adjusted. The decrease in real average hourly earnings combined with no change in the average workweek resulted in a 0.4-percent decrease in real average weekly earnings over this period.

So the income story is not one that is improving, but how about credit?

Credit card standards? Tightening. Our Cash-Strapped Consumer is going to have a tougher time putting anything more than those Affordable Luxuries on plastic.


Auto Loan standards? Tightening.


Ok, forget credit cards and auto loans, what about everything else? Tightening.


How about banks’ willingness to extend credit? Argh, not looking so rosy either.


This isn’t exactly bullish for financials, and we’ve seen the Financial Select Sector SPDR ETF (XLF) go from being one of the stronger sector performers to sitting in the bottom three recently. On the other hand, a slowing economy is bullish for the iShares 20+ Year Treasury Bond ETF (TLT), which was hit when post-election inflation expectations spiked.

With income growth slowing, work-weeks shrinking and credit tightening, yours truly is rather skeptical that we will see this boom in spending, no matter how confident consumers may be feeling, even if I’ve got my mojo overflowing thanks to a pair of strappy Jimmy’s.