Consumer Trends - 1 hour Not 24

If you don’t have teenagers in your household perhaps you can’t appreciate the TV show 24. It takes Kiefer Sutherland 24 hours to assess the landscape, identify both the problems and opportunities, develop a plan to win, and execute upon it – all while tackling volatile changes in the day-to-day operational climate. Keith McCullough does it for our clients in one hour. The Research Edge morning meeting is scheduled to last one hour (but with diatribes it can easily turn into more), with Keith using the first 20 minutes to create a mosaic of how the world is intertwined from an investment standpoint. Appreciating the Research Edge Trend vs. Trade mentality, Keith is clearly more constructive recently on the US than most strategists. His note on 11/12/08 “Beware of the Squeeze” had nine factors that work the bullish scenario and he increased his weighting in the US market. At Research Edge, we now stand at US Cash 67%, US Equities 14%, and International Equities 19%…

As a consumer analyst that is the only hour in the day that I feel better about the market and the direction we are headed. I don’t need to patronize Keith, but for the first 20 minutes his Marco narrative as the facts stand today can actually make you feel much better about where we are in the cycle, and that the worst of the destruction in the market is behind us. As an aside, 99% of the people reading this note don’t get the benefit of that hour, but it can happen if you so desire (I’ll save those details for another forum).

Coming out of the morning meeting I’m determined to find some name in my group that is going to work on the long side. Unfortunately, it does not take long before reality starts to set in – the consumer is in real trouble. I end up looking for companies where the news flow is “less bad” and all I can hope for is a short squeeze. That is no way to invest and a great way to lose money. Unfortunately, basic Graham and Dodd analysis is not holding up, it does not matter if you are buying a stock on the basis of asset value, free cash flow yield or an EBITDA multiple; no metric seems to be working. The root of the problem is that sales continue to disappoint and margins are being squeezed to levels that are impossible to model. But Keith would say “US Consumer Discretionary stocks have been crashing for longer/further (peak to trough decline from 07’ is now -55%), and now the Street is bearish on spending!” I know I see that every day, but when is the consumer going to start spending again?

In my lifetime, changes in economic activity have been closely related to growth in consumer credit and the biggest driver of incremental consumer credit has been the growth in residential mortgages. Those days are over. Given the actions the government has taken it’s easy to argue that the appropriate steps have been taken to stabilize the financial system, which should invigorate the credit markets and allow businesses to lend so consumers start spending again – but when? Where are they going to get the money? If consumers have equity in their homes today, the last thing these people are going to do is borrow more to spend! In fact the opposite is happening as more banks are requiring consumers to put more equity in their homes.

I know gas prices at the pump are approaching $2, which will put more money in the consumer’s pocket, but job losses and higher mortgage rates can eat that benefit up in a heartbeat. I can easily give you a list of 10 companies that need to see an immediate reversal (next six months) in consumer spending or they will need to shrink significantly in order to survive. As more companies shrink to stop the bleeding, more consumers will be out of work and the further we get from the bottom of the economic cycle. It’s hard to paint a picture on how we get out of this destructive downward cycle.

Yes, my day-to-day conversations with companies, suppliers and industry insiders are downright depressing. I realize, however, that most industry executives lack the foresight to see an inflection point when business will turn – for better or for worse. This is when marrying a Macro process with Micro analysis matters most.

I really want to be wrong this time on my industry outlook and I’m looking forward to 8:30 am so I can get out of this funk even if it’s only for an hour!


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more