Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

RETAILING

WHERE’S WALDO?

Trends in employment (+2.0% YoY), working hours (0.0%), and hourly wages (+2.5%) together provide a good proxy for current labor income growth of around +4.5% YoY. With overall inflation at zero, real labor income growth is also around +4.5% YoY. The savings rate in Q3 was unchanged from last year. Gas prices are down more than $1/gallon (-30%) from last year and food-at-home inflation is a low +0.8% YoY.

Why is it then that discretionary spending looks so weak? Has the U.S. consumer, always so ready to fulfill his/her patriotic shop-and-spend obligation changed so much? Even as we approach the annual pilgrimages to the malls? Where’s Waldo the American consumer?

Understanding and analysing retail sales has become tricky given the many cross-currents within the retail trade (e.g. on-line growth, market share shifts) and the high divergences in inflation trends by categories due to falling commodity prices and the rising dollar. Seasonal adjustments have also become suspect given the recent wide fluctuations in the economy and the weather.

This is some of the stuff that you might have read from the various analysis of Friday’s retail sales report:

  • Consumer spending at retailers climbed just 1.7% since October 2014, compared with a 4.7% annual increase the year before that.
  • Following a 0.1% dip in September, ‘control group’ retail sales rose just 0.2% (half the expected 0.4% rise).
  • Retail and Food service sales ex-gasoline increased by 4.1% on a YoY basis (1.7% for all retail sales including gasoline).
  • Excluding motor vehicles, sales were up 0.2% in October. And excluding gasoline, sales rose 0.1%. When excluding both categories, sales were up 0.3% last month and a healthy 3.5% from a year earlier.
  • Core sales, the figures that are used to calculate gross domestic product and which exclude categories such as autos, gasoline stations and building materials, climbed 0.2 percent last month, less than the 0.4 percent median forecast of economists surveyed by Bloomberg. The readings for September were revised up to show a 0.1 percent gain compared with a previously recorded 0.1 percent drop.
  • Falling gasoline and food prices probably also restrained the core readings. Sales at general merchandise stores, which include warehouse big-box merchants that also sell gasoline, fell 0.4 percent. Grocery stores, which typically see receipts rise, saw a 0.3 percent decrease.
  • The rate of purchases last month was also held back by a 0.5 percent decrease at auto dealers.
  • Sales at nonstore retailers jumped 1.4% last month, and are up 7.1% from a year ago, the strongest of any retail category. That helped keep the overall sales figure in positive territory in October from a month earlier, up 0.1%, despite a 0.5% slump in auto sales and parts—even as unit sales of cars rose—and a 0.9% decline at gas stations.
  • Large retail chains, including Macy’s Inc. and Nordstrom Inc., warned this week of an unexpected slowdown in spending at their stores. Their disappointing performance sent shares of major retailers tumbling.
  • Nordstrom executives were at a loss to explain a sudden deceleration in sales that began in August and continued through October. “We’ve got less people buying clothes this quarter than we expected, and there’s really nothing else to point to,” Jamie Nordstrom, the company’s president of stores said on a conference call Thursday.

    Nordstrom said its business slowed across all regions, categories and channels, including online, where it had been growing strongly. The slump forced the company to discount more than usual to clear unsold goods.

And the clincher which scared many:

  • The Last Two Times Retail Sales Were This Bad, The US Was In A Recession.

In the confusion, the S&P 500’s consumer-discretionary sector, which includes several retailers, was the biggest decliner on Friday with a loss of 2.7%. The sector fell 4.6% for the week, its largest loss since late August. The S&P Retail Sector ETF is down almost 9% in the last 8 days. That is the fastest collapse in this bellwether industry since August 2011.

Let’s look at this in a dispassionate, organized way using YoY rates of change to avoid the more iffy seasonal adjustments and applying specific inflation measures to get a better read of volume trends:

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  • Discretionary spending is +4.7% in October, +4.6% last 3 months with apparent inflation +1.0%. Apparent volume is thus +3.6%.
  • Car sales are +6.2%, +6.6% last 3 months, virtually no inflation. Apparent volume +6.1%.
  • Housing-related spending is in the +4.0-6.0% range in real terms.
  • “Other goods” may look weak until we understand that their wares are generally deflating.
  • Even apparel looks better when considering declining prices and unseasonal weather.
  • Restaurant sales are strong.

In all, these are no recessionary data, quite the opposite in fact.

Then we have the “general merchants” which include department stores. Their nominal sales are up only 1.6% when “CPI ex-food, shelter and energy” is up 1.0% and CPI-apparel is –1.4%. Hard to say what volume is but it is not negative in my view. The fact is that these big department stores, from Nordstrom to Sears to Walmart, are dinosaurs trying to survive in a rapidly changing world.The whole specie is getting killed by the “non-store retailers” and the shrewd discounters such as TJX. Those still able to fight are mainly trying (able) to eat their congeners.

Investors were rattled by Macy’s –3.9% same-store-sales in Q3 but that came after -2.1% in Q2 and -0.7% in Q1. Why the surprise? This followed lackluster WMT sales trends which are also primarily company specific problems.

Meanwhile, JC Penney, not such a terrific merchant but with new leadership, rang sss of +6.4% in Q3, +4.1% in Q2 and +3.4% in Q1. And even with slow traffic in recent months, Nordstrom was able to get +3.5% sss growth in Q3. With goods inflation generally negative, volume is pretty decent.

Amazon’s North American revenues grew 28% YoY in Q3 after +25% in Q2 and +24% in Q1. Quarterly growth averaged 23% in 2014. Costco U.S. comps are up 4% YoY ex-gazoline and FX in October and +6% in September-October. During Costco’s fourth quarter ended in August, comps were also up 6%, as for all of its F2015. No slowdown there and no recessionary trends there as well. Amazon and Costco are not hot newcomers with low sales base.

Waldo is clearly shopping and spending but he’s seemingly tough to find in “dinostores”.

This CalculatedRisk’s chart that simply ex-outs sharply deflating gasoline sales is a good reflection of the actual, meaningful trends, especially if you consider that inflation is close to zero or even negative on core goods: 

Gift with a bow Gallup‘s November update of Americans’ 2015 holiday spending intentions finds U.S. adults planning to spend $830 on Christmas gifts this year, on average. That is up sharply from the $720 recorded a year ago, and is significantly higher than what consumers have indicated in any November since 2007.

Americans' Christmas Spending Estimate From November of Each Year

Gallup’s initial measure of 2015 holiday spending plans, conducted in October, also showed consumers poised to splurge this Christmas, as that month’s $812 average spending figure was the highest Gallup had seen in any October since 2007. The consistency between the two months is a bit unusual, as Gallup typically finds Americans scaling back their spending plans between October and November.

According to Gallup’s modeling of how prior years’ spending forecasts compare with the final November-December retail sales figures for each year, Americans’ latest Christmas spending data point to an estimated increase of between 5.1% and 5.8% in U.S. holiday retail sales.

If Waldo carries on spending, the inventory glut will quickly disappear and the manufacturing sector will soon see rising orders and production, much to the surprise of the doomsayers.

We now have 92% of Q3 earnings in and Consumer Discretionary companies are expected to show EPS growth of 14.7% in Q3, up from +11.4% expected on October 1 and better than the +12.5% recorded in Q2.

In total, S&P 500 companies are on track to register Q3 EPS of $30.05 vs $30.04 in Q3’14 in spite of all the headwinds encountered (see “Questions” within the Nov. 10 New$ & View$). Mid-quarter, pre-announcements for Q4 earnings are positive for 23 companies vs 18 at the same time last year and negative for 66 companies (68 last year). So far, so good.

Factset calculates that ex-Energy, S&P 500 EPs would be up 5.0% in Q3 on revenues rising +1.1%. Margins are not contracting just yet.

If the Energy sector is excluded from the growth calculations for Q4 2015, the estimated earnings growth rate for the quarter would be 1.6%, and the estimated revenue growth rate would be 1.2%. If the Energy sector is excluded from the growth calculations for CY 2015, the estimated earnings growth rate for the year would be 6.9%, and the estimated revenue growth rate would be 1.9%.

At the end of Q3, trailing 12-month EPS are $119.28, up 0.4% from 2014 EPS even with Energy down some 60% and Materials down 5%. The big drag from Energy will peak in Q4 and completely end in Q2 if current estimates are right.

At 2025, the S&P 500 is selling at 17x TTM EPS and 18.9x on the Rule of 20 scale. Upside to fair value of 2157 is 6.5%. Downside to the two recent lows of 17.8x (1900) would be –6.2%.

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NEW$ & VIEW$ (12 NOVEMBER 2015)

Busy day for Fed followers:

Here’s a round-up of who’s speaking and when (all times ET):

  • 9:05 – 9:45 a.m. St. Louis Fed President James Bullard.
  • 9:30 a.m. Fed Chair Janet Yellen.
  • 9:45 – 11:00 a.m. Richmond Fed’s Jeffrey Lacker on panel at CATO Institute.
  • 10:15 a.m. Chicago Fed President Charles Evans.
  • 12:15 p.m. NY Fed President William Dudley.
  • 6:00 p.m. Fed Vice Chair Stanley Fischer.

Right after Draghi set the stage for the ECB’s December meeting:

Mario Draghi signaled that the European Central Bank is ready to boost stimulus at its December meeting at a hearing in the European Parliament this morning. He said that signs of a turnaround in core inflation have somewhat weakened and downside risks are visible.

Macy’s cuts full-year forecast, sends shivers through retail

Warm weather, low spending by tourists and a pileup of unsold inventory prompted Macy’s Inc (M.N) to cut its full-year forecast on Wednesday, raising wide concerns about the retail sector’s financial health. (…)

Sales at stores open at least a year fell 3.6 percent in their third straight quarterly decline.

Good lengthy piece by the WSJ helping understand what’s going on at Macy’s and other dept. stores. That chart sums it up:

A Record Share of Young Women Are Living at Home

A larger share of young American women are living with family now than at any time since the 1940s, as more of them forgo early marriage for higher education, Pew found.(…) Recent data shows college students are significantly more likely to live with family than young adults who aren’t in school.

Marriage prompted many young women to fly the coop in 1940, when the typical woman first married at age 21.5. By 2014, the median age at first marriage had risen to 27 for women. And the share of married young women had dropped by half, from 62% in 1940 to 30% in 2013, according to Pew.

The data tell a similar story for young men. Last year 42.8% of men lived at home—higher than women, but not at its 1940 peak, when 47.5% of them lived at home. Back then, the lingering effects of the Great Depression–including an unemployment rate of nearly 15%–likely kept more of them at home.

A July Pew report from Pew showed that a higher percentage of millennials—adults born in 1981 or later—were living with parents than in 2010, despite earning close to their prerecession wages. Declining marriage rates, higher rental costs and rising student debt may all be partly to blame.

China Learns What Pushing on a String Feels Like

Data out Thursday showed lending in October to be decidedly lackluster. Banks extended 513.6 billion yuan ($80.7 billion) of new loans, down 3.3% from a year earlier. Total social financing, a broader measure of credit that includes various kinds of shadow loans, was also weak. Total credit outstanding was up just 12% from a year earlier, close to its slowest pace in over a decade. (…)

Capital outflows are also making the PBOC’s job harder. Figures out on Wednesday indicated that there was a massive $224 billion of investment outflows in the third quarter.

Facing this, the PBOC has been intervening to keep the currency from depreciating, selling off dollars and buying up yuan. Unfortunately this shrinks the domestic money supply, thus counteracting much of the PBOC’s easing measures. (…)

The outflow situation appeared to improve in October. The PBOC’s forex reserves unexpectedly ticked up for the month, suggesting it didn’t have to intervene as much in the currency markets. (…)

China Speeds Up Fiscal Spending in October to Support Growth

Fiscal spending jumped 36.1 percent from a year earlier to 1.35 trillion yuan ($210 billion), while fiscal revenue rose 8.7 percent to 1.44 trillion yuan, the Finance Ministry said Thursday. In the first ten months of the year, spending advanced 18.1 percent and revenue increased 7.7 percent. (…)

“With downward economic pressure and structural tax and fee cuts, fiscal revenue will face considerable difficulties in the next two months,” the Ministry of Finance said in the statement. “As revenue growth slows, fiscal expenditure has clearly been expedited to ensure that all key spending is completed.” (…)

Eurozone Industrial Output Falls

(…) The European Union’s statistics agency said industrial output was down 0.3% from August, but up 1.7% from a year earlier. (…)

The decline in output was concentrated in Germany, the eurozone’s largest member and its export powerhouse. Eurostat recorded a 1.2% drop in German output, but increases in other large members of the currency area, including 0.2% rises in both France and Italy, and a 1.4% rise in Spain.

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Markit’s PMI for October provides some hope:

Output growth ticked higher during the latest survey month, underpinned by a slightly sharper increase in new orders. Intakes of new export business* also rose at a moderately faster pace, the quickest since June. The strongest rates of output growth were signalled in the Netherlands, Italy and Austria, which were also the only nations to report faster rates of expansion than September. Germany and Ireland also reported relatively solid expansions of output, whereas as growth was comparatively modest in France and Spain.

Also, things improved in Germany as the month of October progressed:

The improvement in the headline index between its flash and final estimates was largely centred on Germany, where the PMI rose by 0.5 points since its first publication through stronger trends in the output (+0.5) and new orders (+1.1) components.

GREEN SHOOTS

The JPMorgan Global PMI, compiled by Markit, regained some poise in October after slipping to a nine-month low in September, rising to 53.4. However, the survey merely signals a rate of worldwide GDP growth of just over 2% per annum.

Services continued to drive the upturn, as has been the case throughout much of the past two years, though an upturn in the goods-producing sector meant the divergence narrowed. The latter is especially welcome as it hints at a potential upturn in global trade flows, weakness in which has been a key factor behind this year’s slowdown in many countries. Global exports grew at the fastest rate for ten months, rising for the first time since June.

Growth slowed in the US in Q3 (down to 0.4%, or 1.5% annualised), as flagged ahead by Markit’s US PMI surveys, but domestic demand showed encouraging signs of resilience. The PMI surveys also signalled a continuation of the moderate growth trend at the start of the fourth quarter. An upturn in exports helped allay global growth worries and the pace of expansion in services remained robust. Non-farm payrolls also impressed and wage growth accelerated, fuelling expectations of the Fed hiking interest rates in December.

Emerging markets continued to act as a brake on global growth in October, albeit with the drag easing. At 49.7, the Emerging Market PMI remained below the neutral 50.0 level for the fourth time in the past five months. Although the data point to a pick-up from what has been the worst performance since 2009, the emerging market index is still signalling GDP growth of less than 4%.

China remained mired in weakness, contributing to ongoing malaise across much of Asia. At 49.9, the ‘all-sector’ Caixin (Markit-compiled) PMI for Chinac learly indicates a risk that GDP growth will slow further from the 6.9% pace seen in Q3. However, the manufacturing downturn eased amid better export demand, the rate of decline having been the most severe for six-and-a-half years in September. Growth meanwhile picked up slightly in the service sector, which once again provided the main thrust to the economy.

Japan’s goods producers reported renewed signs of life as exports picked up. Together with an upturn in services growth, the Nikkei PMI survey indicates that Japan has enjoyed a growth upturn in Q3 which has gathered pace at the start of Q4. The stronger survey data support the Bank of Japan’s recent decision to keep policy on hold rather than inject more stimulus.

The Eurozone PMI edged higher in October to signal a 0.4% rate of GDP growth at the start of Q4, matching the pace indicated for Q3. Spain continued to lead the upturn, followed by Germany and Italy, with France once again trailing but nevertheless showing renewed signs of life. However, with inflation remaining absent, the ECB talked up the possibility of further QE by the end of the year.

China’s successful rebalancing is very important for world economies. Chinese retail sales rose 11.0% YoY in October. Given current retail sales of 2.7T yuan, this is a 0.3T yuan ($47B) increase in sales. Back in 2007 when retail sales were growing 14% YoY, it meant +0.1T yuan in additional demand. For perspective, U.S. retail sales rose by $10B YoY in October.

China’s IPOs Will Return a ‘Conservative’ 300%, Chinese Bank Says