CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS

It comes as no surprise that the Conference Board index of Consumer Confidence fell by 3.2 points in June to 58.5 on top of the 4.3 point decline in May.  The consumer fundamentals remain soft and, at least judging by the market’s reaction, confidence missing the consensus number of 61.0 is consensus.  The two-day rally in the S&P 500 and, more pertinently, Consumer Discretionary, of 1.80% and 2.5%, respectively, is indicative of that. 

An erosion of consumer confidence is expected amidst concerns over declining asset values, inflation, rising energy costs, geopolitical flashpoints, the availability and cost of credit, and rising unemployment.  The Conference Board Consumer Confidence Index is at its lowest level since November 2010.  The expectations component once again led the decline, falling to 72.4 from 76.7 (previously 75.2); the present situation component dipped to 37.6 from 39.3.

Declining house prices continues to be another burden for the consumer to bear (despite today’s seasonal uptick which looks to be temporary and scant consolation for homeowners).  Today, the Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  As our Financials team noted today “there is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June ... Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.” 

Housing is slowly capturing more attention in the media, particularly as other bearish data points emerge and resonate with what has been playing out in housing – in line with Hedgeye Financials’ call – for some time.

Without the corporate sector adding any significant contribution to payrolls, wage income is growing at an all-too-anemic pace.  Disposable income is holding up, but only due to the temporarily reduced payroll tax withholdings, offset by the “gas tax” Gasoline prices remain a constraint, although recent trends are making life a little easier.  Over the last week, gas prices have dropped by 2.4% and 11% from the high set back in early May.  Year-over-year gas prices are now up 29%.  The consumer’s response to increasing gas prices, declining equity markets, and the disappointing trend in home prices, caused a reduction in real spending in both April and May.

In today’s environment no one is immune from some sort of economic malaise:

  1. High energy prices particularly hurt “lower-income” households as they spend a disproportionate share of their income on energy needs.
  2. The decline is housing seems to hurts everyone but the “middle-income” are likely effected the most.
  3. The recent stock market weakness hurts “high-income” households

Not all consumer companies are created equal.  While Nike is helping the Leading the XLY higher today, the stock that are leading the charge over the past 5 days are car retailer CarMax and AutoNation.  The powerhouse retails brands Chipotle, Starbucks and Bed Bath & Beyond round out the top five.  Not surprisingly, the big ugly retail names like Sears, Target and JC Penney are some of the worst performing names in the past five days.

In the Hedgeye virtual portfolio we are currently LONG COSI, SBUX, PNK and Healthcare (XLV).  On the SHORT side, we have UA, CBRL, HSIC, RL and DKS in the portfolio.

Howard Penney

Managing Director

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board confidence

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board expectations

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board pres situation