Consumers have not stopped spending (especially on eating food away from home); while overall growth remains challenged and today’s MACRO data points suggest that the environment for consumer-facing businesses is difficult. Little or no growth in jobs or income, volatile stock prices, falling house prices, higher gasoline prices y/y, and low confidence are among the chief concerns.
Although the consumer is under pressure, the most important question to focus on is where will the discretionary income that is available be allocated. While it’s still early in the 3Q11 earnings season restaurant demand appears to be one of the sectors that is holding up well. The third quarter was not kind to the restaurant space. To the extent that this underperformance was related to fears around the top-line, it appears that sales are holding up slightly better than investors may have been anticipating.
Within the domestic casual dining space, 10 concepts have reported same-store sales results for the third (calendar) quarter. Of those, two have reported negative comps and five have reported sequential decelerations in two –year average trends. Within the domestic QSR space, five concepts have reported same-store sales results for the third (calendar) quarter. Of those, three (YUM) have reported negative comps and two have reported sequential decelerations in two-year average trends.
The quantitative set up for the Hedgeye sector models have all nine sectors bullish from an immediate-term TRADE perspective. Yesterday, Healthcare (XLV) joined four other sectors in the Bullish TRADE and TREND camp.
Keith models have the top three sectors on the long side are Utilities (+10.8% YTD), Consumer Discretionary (+6.7% YTD) and Healthcare (+6.7% YTD). Market prices and the current earnings season are saying that the consumer looks good, but the MACRO data continues to look challenged. With the MACRO set up for the consumer is depressing and potentially decelerating, could things get margionally worse from here.
MACRO CONSUMER FEARS ACCELERATE TO THE DOWNSIDE
SALES TRENDS - Today, after four weeks of little change, the ICSC chain store index surprised by posting a sizable decline and came despite seasonably cool weather, which should have supported sales trends. The 0.8% decline brought year-over-year growth to 2.4%, its lowest reading since mid-June. The ICSC noted weak customer traffic at all types of retailers during the week. Year-over-year growth softened as well, although it will take more than one soft week to suggest a change in behavior. Trend spending growth is nearly 3%, where it has been much of the year, with the exception of a dip in June and a jump in July.
HOUSING – The Hedgeye Financials team published a note today titled, “Case-Shiller Better, But Not Good Enough”. The Case-Shiller Home Price Index posted a -3.8% decline y/y in August versus -4.2% y/y in July on a non-seasonally-adjusted basis. This sequential improvement wasn't enough to live up to expectations, which were looking for a -3.5% y/y decline. Drilling down to the city level, 17 of the 20 cities showed improvement on a year-over-year basis between July and August. Atlanta, Las Vegas, and Miami were the exceptions. The Financials team likes ITB as a good short it is the US Home Construction ETF. It is similar to XHB but has a larger exposure to the builders themselves as opposed to home goods retailers and other non-builder components.
Looking at the Hedgeye Consumer Sub-Sector Divergence table the Homebuilders have seen significant out-performance relative to nearly every other consumer sub-sector.
CONFIDENCE – This morning’s print was a bomb, clearly. The Conference Board’s Consumer Confidence Index decreased to 39.8 from a revised 46.4 reading in September. Tellingly, this month’s reading was less than the most pessimistic forecast in the Bloomberg survey. The expectations component fell to 48.7 from 55.1 (previously 54). The present situation component fell to 26.3 from 33.3 (previously 32.5).
RICHMOND FED - The composite index was unchanged from September at -6. Details of the survey said that the employment declined for the first time since September 2010, as the index plummeted 14 points to -7 - the lowest level since November 2009.
The market seems hyper-focused on the European debacle and, by comparison, the issues in the United States may seem less threatening. The macro trends are not encouraging and earnings season, which is far from over of course, has been less than reassuring with results from 3M this morning not corroborating with the view many are holding that fears of sluggish economic growth are overblown. The company said on its earnings call this morning that it expects sales trends 4Q to be flat versus 3Q.