“Every day that we read the news we have the possibility of being confronted with a fact about our world that is wildly different from what we thought we knew.”
- Samuel Arbesman, The Half-life of Facts
The first Early Look I wrote a couple years back carried the theme of Uncertainty. As I said back then, if I had to pick one Hedgeye-ism that has always rung most true to me as it relates to my analytical and decision-making process for both investing and life, it's "Embrace Uncertainty".
As a species we tend to gravitate towards those who say things as if they know them for certain and have all the answers. Yet ultimately, those voices often can be the ones we least want to listen to.
Even in investing, we seek out conviction. How many times have you heard the phrase “management sounded great” in a bullish pitch? Sometimes that observed conviction comes from a lot of information, analysis, and process behind. Sometimes it doesn’t.
Regardless of the level of conviction displayed, the observer should know there is always a significant amount of underlying uncertainty. The quote above from The Half-life of Facts communicates the conundrum.
We all think we know a lot, but what we think we know always changes so that our knowledge becomes greater. Therefore what we know at any given point in time is actually very little, and less than we will know tomorrow.
Pondering that too long might make you wonder why you would make any choice today when you’ll likely be better suited to make it tomorrow. Well, decisions are required to be made every day. You simply have to Embrace the Uncertainty, use available time to turn some of the stuff you don't know into stuff you do know (or at least know better) and make a process driven probabilistic decision (think Annie Duke’s How To Decide).
As we head into a somewhat unprecedented moment in the consumer realm, it’s important to recognize and embrace the uncertainty.
Back to the Retail Macro Grind…
On the uncertainty debate, I tweeted out two quotes yesterday from retail management teams framing up their current outlooks. One from the apparel brand owner/retailer Oxford Industries (OXM) and one from Ollie’s Bargain Outlets (OLLI). Both came right around the same time on earnings calls Wednesday after the close, yet they carry very different tones about forward consumption.
Here they are:
OXM: "There's a lot of cash out there, and we just haven't seen any indication to date that people are slowing down in their spending."
OLLI: " I don't think we've seen the trade down effect hit us yet, but I got a real strong feeling that's coming pretty soon once people start putting gas in their tanks for the 3,4,5 weeks in a row and pay for groceries, pay higher utility cost. I believe it's coming, and it's something that everyone's going to see here in very short order."
Two very different views hinting about how things might play out in the coming months. It’s interesting because we had two conversations with Retail subscribers in early January where they had similarly opposing outlook commentary. We wanted to find more information, which is why we did a deep dive into the consumer income and consumption setup in 2022 and held a “Retail Themes” presentation in mid January for institutional and Retail Pro subscribers with our findings.
As a side note, we have penciled in April 14th for an update to those Themes here in 2Q, which will be accessible for Retail Pro subscribers.
The full quote from OXM is actually a bit more specific, stating:
“you've no doubt seen all the macro stats on the level of demand deposits in the United States. And I think there's $2.5 trillion more in checking account or the demand deposit accounts more than there was at this point in 2019. There's a lot of cash out there…”
We analyzed this exact data point in our January presentation. The number we have from FRED is actually $2.4Tn in incremental household checkable deposits and currency, but that’s ~$7,200 per person. Big spending tailwind, right? Yes and no. The Chart Of The Day highlights the breakdown of the deposits build.
$800bn of it is with the top 1% of households, another $800bn is with the next 9% of households, $600bn with the next 40%, and $100bn to the bottom 50%. That translates to very different deposit builds on a per capita basis across income groups when compared to the $7200 average. As Keith likes to say, it’s not the average of things, it’s the particular thing.
Homing in on those particulars for the not top 10%, there’s $800 per capita for the bottom 50% of households, and $4500 for the next 40%. That starts to look a lot smaller when you factor in inflationary pressures on necessities. Gas is up about 40% to 50% YY, and the average driver spends ~$2000/yr on gas. Plus food and shelter are trending up 9% and 5% respectively.
As for the top 10%, on the Retail Team we like to say that that high-end consumer almost always has the capacity to consume (deposit trends support that currently), it’s more a matter of whether they want to consume at a given point in time.
Financials analyst Josh Steiner highlighted on The Call yesterday that there were some new date points from Morning Consult suggesting a notable drop-off in consumer sentiment for the $100k plus consumer. The punchline, high end consumers are looking less hurried to consume, so expect some deferred purchases.
It's a bit funny we put so much credence into management forward outlooks, especially now. A year ago at this time few, if any, consumer management teams were giving detailed guidance. They saw too much uncertainty around how the pandemic and consumption would play out in 2021.
It ended up meaning a massive ramp in goods consumption at incredible margin levels, fueled by unprecedented consumer discretionary income from transfer payments and slow supply chains. The earnings blowout was massive. Not surprising management teams couldn’t see that.
Now lapping that environment of abnormally high unit consumption, with the highest inflation rates of my lifetime, consumer sentiment falling below April 2020 levels, and a Fed talking hawkish; somehow we think management teams have any idea what will happen over the next 9 months? Are we not again facing high levels of uncertainty?
I don’t know what will happen. But our analysis on both the Hedgeye Retail and Hedgeye Macro teams suggests the OLLI outlook is a more probable outcome than that of OXM.
The coming weeks will be interesting, as OLLI’s CFO said on the call “we're coming into the heat of stimulus from a year ago. So the next 4 to 5 weeks were super strong last year because of that stimulus. And so hence, we've got a long way to go…”
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.37-2.60% (bullish)
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DAX 13,607-14,605 (bearish)
VIX 20.15-33.86 (bullish)
USD 97.88-99.45 (bullish)
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Nat Gas 4.55-5.71 (bullish)
Gold 1 (bullish)
Copper 4.47-4.84 (bullish)
Keep your eye on the ball, and finish balanced.
Jeremy McLean
Retail analyst
