Consumer Confidence & LEI’s Flash Warning

Consumer Confidence & LEI’s Flash Warning

Consumer Confidence for September declined a bit more than expected, falling to 119.8 from 120.4, versus expectations for a decline to 120. While that doesn’t sound all that meaningful as it is still well above the long-term average of 93.9, we see something occurring beneath the headlines that warrants further attention and is particularly concerning – relative confidence levels by age group.

 

As one would expect, confidence among younger consumers is almost always better than amongst older consumers, (less time alive means less time for regrets and a perception of more time to accomplish one’s goals) which is why this month’s Consumer Confidence report is so remarkable. This month middle-aged consumers, those 35-54 years of age, have a higher level of confidence at 128.2 than younger consumers, those under 35 years of age, who have dropped to 120.9 from 126.6. This divergence is quite rare, but even more concerning is the magnitude of the reversal. Going all the way back to 1980, the negative 7.1 spread in confidence between those middle-aged and those in the younger cohort has never been greater. The low rates of household formation coupled with the well above average rates of college grads living with mom and dad put the Millenial generation deep in our Cash Strapped Consumer investing theme.

 

We also saw something with respect to confidence levels by income that could be a concern for the current administration. While confidence levels for consumers with incomes over $50,000 and those with incomes under $35,000 rose, confidence for consumers with incomes between $35,000 and $50,000 dropped to the lowest level since last October. Given that a large portion of President Trump’s base is in that cohort, don’t expect to see an improvement is his approval ratings anytime soon.

For investors, this means that President Trump may have an even more difficult time passing the legislation he promised on the campaign trail. Low approval ratings make it less appealing for legislators to reach across the aisle and increase the perceived potential risk versus reward for those in his own party to be staunch supporters of any Trump-led legislation. Repeal/replace of Obamacare and tax reform, let alone that much-promised infrastructure spending is more challenging when fewer and fewer support the current administration.

 

The Consumer Confidence report also revealed weaker plans to spend, with autos falling to a 14-month low and housing dropping to 6.9 from 7.3. On the other hand, the trend to remodel versus trade up continues as plans to buy a major appliance jumped to 54.0 from 50.5, the highest level since May 2009. This bodes well for shares of Home Depot (HD) and Lowe’s (LOW).

 

The Chicago Fed National Activity Index (CFNAI) gave us ample cause for concern as 50 of the 85 variables it measures across the national economy were in contraction mode for August with the 3-month moving average dropping to -0.04 in August from +0.15 in June. Personal Consumption & Housing was in the red at -0.06 and has now been negative for 123 consecutive months – more evidence of our Cash Strapped Consumer.

 

Finally, the ECRI leading index smoothed growth rate has fallen for seven consecutive weeks, stalling last week after having growth at nearly a 12% pace at the beginning of 2017. We haven’t seen growth this weak since March of 2016.

 

The bottom line is we see a continued disconnect between sentiment, the hard data and the market’s enthusiasm coupled with a profound “meh” when it comes to political and geopolitical risks. However, as we noted earlier, expensive stocks can get more expensive and the market isn’t giving us any signs of an imminent reversal, particularly as we see an increasing number of stocks moving above their 50-day moving averages.

WEEKLY ISSUE: The Market Impact of Hurricane Harvey

WEEKLY ISSUE: The Market Impact of Hurricane Harvey

Key Points from this Alert

Several days after Hurricane Harvey initially hit Houston, the storm continues to dump massive amounts of rain on Texas and Louisiana.  As the waters are just now beginning to recede, we are still getting estimates as to the extent of the damage that has been done. With rain slated to continue until tomorrow, those estimates look like a moving target in the upward direction.

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

One of the wisest words I’ve heard in the investing world is to be “cold-blooded” when it comes to one’s investments – don’t fall in love with your holdings, and in times of uncertainty or tragedy remain focused. In the case of the Hurricane Harvey disaster, the people of Houston are in all of our thoughts here at Tematica, but we also realize the rebuilding effort to come over the ensuing months will be massive. Near-term, we’re likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in the economy in September and into October. If Accuweather’s eye-popping estimate is correct, Harvey would cost nearly as much to the economy as Hurricanes Katrina and Superstorm Sandy combined. In other words, expect those GDP forecasts to be revised lower, and we could see the Fed hold off embarking on unwinding its balance sheet a tad longer.

Before too long and as the water recedes, however, we’ll see rebuilding efforts spring forth and that has us eyeing Home Depot (HD), which has numerous stores located in and around the Houston area. We’re also looking at HD Supply (HDS), the sister company that focuses on more so on contractors, government entities, maintenance professionals, home builders and industrial businesses than Home Depot. We could look at shares of Lowe’s Companies (LOW) as well, but Home Depot has been handily beating it delivering faster top and bottom line growth, and Lowe’s lacks the “professional” exposure found at Home Depot Supply.

One of our favorite investment strategies is to “buy the bullets, not the guns,” but in this case, we see Home Depot as a central repository for the things contractors and individuals will need to rebuild – lumber, wallboard, paint, hardware and so on. In assessing the potential for call options between Home Depot and HD Supply, the ones for HD Supply are simply too thinly traded to make them viable. That leaves us to focus on Home Depot calls, and in looking to capture the wave of rebuilding that will begin to occur in the coming months it means a strike date in early 2018.

Putting all of these pieces together ahead of what is likely to be upward revenue and EPS revisions for Home Depot in the coming days and weeks, we’re adding the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List. In keeping with our view that September could be a volatile month – check recent Monday Morning Kickoff and Tematica Investing issues for more on this – we will set a 2.00 stop loss, with the intent of moving that protection up as Home Depot’s business benefits from the Harvey disaster.

In Summary:

  • We are issuing a Buy on the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List.
  • We would be buyers up to 5.00, and we are setting a stop loss at 2.00, which we intend to move up as the calls appreciate in the coming weeks.

 

Waiting for August Sales Data

Tomorrow we enter September, and that means the usual start of the month data. Among that flow, we’ll get the August Car & Truck sales data and given our short position in General Motors (GM) shares we’ll be dissecting that when it hits. We expect the recent trend of slower than expected sales and rising incentives to continue, but in keeping with our comments on Harvey above, in the coming months, we could see a wave of car and truck replacement activity. I’ll continue to keep close tabs on this short position, looking to cover at the proper time.

  • We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.

 

Next week we should get the August sales data for Costco Wholesale (COST), and given our October calls positions we will also be paying close attention to the results. Candidly speaking, we here at Tematica are rather frustrated with this position as I suspect you are. Even after delivering stellar July same-store sales results and continuing to open additional locations, a key driver of membership fee income, COST shares have been unchanged over the last month and that has weighed on the calls. The culprit is the market’s view of Amazon (AMZN) acquiring Whole Foods Market (WFM), but the mistake it is making is equating Costco’s business to that of Kroger (KR) and other grocers.

As frustrating as this misconception is to watch, we’ll continue to hold the Costco calls for now. Should they get some lift on the company’s next sales report, we’ll look to limit our losses, but if we are languishing at current levels a more prudent move might be to let the calls expire. More on this after the next report from Costco.

 

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

This morning we received the Challenger Job Cuts Report as well as ADP’s view on May job creation for the private sector. While ADP’s take that 253,000 jobs were created during the month, a nice boost from April and more in line with 1Q 2017 levels, we were reminded that all is not peachy keen with Challenger’s May findings. That report showed just under 52,000 jobs were cut during the month, a large step up from 36,600 in April, with the bulk of the increase due unsurprisingly to retail and auto companies.

As Challenger noted in the report, nearly 40% of the May layoffs were due to Ford (F), but the balance was wide across the retail landscape with big cuts at Macy’s (M), The Limited, Sears (SHLD), JC Penney (JCP) and Lowe’s (LOW) as well as others like Hhgregg and Wet Seal that have announced bankruptcy. In total, retailers continued to announce the most job cuts this year with just under 56,000 for the first five months of 2017. With yesterday’s news that Michael Kors (KORS) will shut 100 full-price retail locations over the next two years, we continue to see more pain ahead at the mall and fewer retail jobs to be had.

Sticking with the Challenger report, one of the items that jumped out to us was the call out that,

“Grocery stores are no longer immune from online shopping. Meal delivery services and Amazon are competing with traditional grocers, and Amazon announced it is opening its first ever brick-and mortar store in Seattle. Amazon Go, which mixes online technology and the in-store experience, is something to keep an eye on since it may potentially change the grocery store shopping experience considerably, “

 

In our view, this means the creative destruction that has plagued print media and retail brought on by Amazon (AMZN) is set to disrupt yet another industry, and it’s one of the reasons we’ve opted out of both grocery and retail stocks. The likely question on subscriber minds is what does this mean for our Amplify Snack Brands (BETR) position? In our view, we see little threat to Amplify’s business; if anything we see it’s mix of shipments skewing more toward online over time. Not a bad thing from a cost perspective. We’d also note that United Natural Foods (UNFI) is a partner with Amazon as well.

  • Our price target on Amazon (AMZN) remains $1,100 and offers more than 10% upside from current levels.
  • Amplify Snack Brands (BETR) has an $11 price target and is a Buy at current levels.
  • Our target on United Natual Foods (UNFI) is $65, and the recent pullback over the last six weeks enhances the long-term upside to be had.

We’d also note comments from Chipotle Mexican Grill (CMG) that its recent cybersecurity attack hit most Chipotle restaurants allowing hackers to steal credit card information from customers. In a recent blog post, Chipotle copped to the fact the malware that it was hit with infected cash registers, capturing information stored on the magnetic strip on credit cards. Chipotle said that “track data” sometimes includes the cardholder’s name, card number, expiration date and internal verification code. We see this as another reminder of the down side of what we call both our increasingly connected society and the shift toward cashless consumption. It also serves as a reminder of the long-tail demand associated with cyber security, and a nice confirmation point for the position PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

Virtual Reality to Educate Cash-strapped Consumers on Home Remodeling

Virtual Reality to Educate Cash-strapped Consumers on Home Remodeling

Our collective Tematica hats are off to Lowe’s Companies as it steps up its virtual reality efforts to move past design visualization to skills training. Imagine taking classes on different remodeling projects ahead of tackling that project in your own home. This embracement of Disruptive Technologies could empower Cash-strapped Consumer to become the next set of Do-It-Yourself (DIY) customers for Lowe’s, Home Depot, Ace Hardware and others.

Lowe’s Cos. is embarking on the next chapter of its virtual reality journey.

Starting Tuesday, March 7, the home improvement chain’s store in Framingham, Massachusetts, debuted its “Holoroom How To,” Lowe’s first-ever virtual reality DIY skills-training clinic. As consumers enter the interactive virtual reality (VR)-based environment, they wear an HTC Vive headset to receive “hands-on” tutorials on basic DIY skills, including supplies and steps, needed to complete a project.

“This allows us to teach our customers in a way that we could have never previously imagined, and give them the confidence they need to undertake a daunting renovation,” according to Lowe’s Innovation Labs.

The chain’s prior virtual reality programs helped customers visualize their kitchen and bath renovations, “but we have found a unique opportunity to use the VR platform for skills training,” according to the chain.

Source: Home improvement chain debuts VR-based ‘how to’ classes | Chain Store Age

HHGregg’s Connected Society Pivot to Appliances Hasn’t Paid Off, Will Shut 40% of Locations

HHGregg’s Connected Society Pivot to Appliances Hasn’t Paid Off, Will Shut 40% of Locations

Most tend to focus on the Connected Society headwind that is rippling through brick & mortar retail apparel companies like Macy’s and Kohl’s, but there are other retailers that are being hit. Consumer electronics retailers, like Best Buy and HHGregg, have seen their business raked over the Amazon coals and pivoted to appliances, an already competitive landscape with Lowe’s, Home Depot, Sears, Sears Hometown and Wal-Mart. While HHGregg attempted to bob and weave against the Connected Society headwind that is serving as Amazon’s tailwind, it jumped from the frying pan into the fire as it traded one competitive landscape for another.

Struggling appliance and electronics retailer HHGregg is planning to close 88 of its weakest stores as part of an effort to stay afloat.The Indianapolis-based company on Thursday announced it would shutter stores in 15 states and close three distribution centers.

The closings, which do not include any Indiana stores, will be completed by mid-April and result in about 1,500 layoffs. HHGregg has about 5,000 employees.

HHGregg’s decision to eliminate 40 percent of its stores is the latest move in an increasingly desperate attempt to right the company’s course. It comes just three days after the New York Stock Exchange delisted HHGregg for failing to meet the minimum listing requirement.

The company in recent months has tried to reinvent itself as a high-end appliance store. It’s the seventh-largest appliance retailer in the U.S. behind  according to the consumer electronics trade publication Twice.

Source: HHGregg closing 88 stores amid bankruptcy rumors