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Trade-Up Insights Support Our Home Furnishing Call

The most recent list of Top 10 consumer trade ups as tracked by The Boston Consulting Group appears to support our belief that consumers expect to spend more time at home in 2009. Over the last four years, there has been a significant change in consumer focus. Big ticket items such as home/ apartment purchases, furniture, and travel/ vacations no longer top the list. Matter of fact, they no longer make it.


Instead, in-home items such bedding and home entertainment have moved into the top 5 and food that can be prepared at home (meat, fruits and vegetables, and fish and seafood) is an area of greater importance. Therefore, it’s no surprise that sit-down restaurants have also dropped down on the list.


The consumer purchasing survey simply reaffirms our view that investments are increasingly “need-based” versus “want-based.” As a result, consumers looking to spend more on their existing homes. We expect companies such as BBBY, WSM, and WMT to be the beneficiaries (see our 4/8 post “Our Home Furnishings Call is Getting Tough to Argue With”).


Trade-Up Insights Support Our Home Furnishing Call - 4 13 2009 10 05 26 PM


UK: Don’t Ignore the Facts

While I’ve gotten quite bullish on the US retail supply chain, it’s tough for me to say the same about just about any part of Europe. That said, I’m not going to turn a blind eye to data points that suggest that just maybe we’re in the process of hitting bottom.

 

Several indicators suggest a less bearish trend…  the Consumer Confidence report, Consumer Credit Lending, Consumer Household Goods Consumption, and M&S results (Marks and Spencer).

 

The Consumer Survey for UK Spending Confidence on Household Goods is still ugly by most measures, but marked a bottom in January and has risen moderately over the past two months. 

 

The single largest move in the “Good time to buy” index occurred between November and December of 2008.  Consumers’ access to credit seems to have found a bottom in the same time period. 

 

M&S did better than bad with UK sales down 0.3% and same store sales down 3.7% in Food and 4.8% in Clothing and Home.

 

I’ll go to the mat with anyone that tries to label me a UK bull. But lining up the factors above can’t be ignored.

 

Zach Brown

Research Edge

 

UK: Don’t Ignore the Facts - UK Consumer Conf Chart

 

UK: Don’t Ignore the Facts - UK Spending

 

UK: Don’t Ignore the Facts - M S chart

 


Known Knowns: Taking Stock of Recent Data Points in Oil

Position: We are long oil via the etf, USO

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” –Donald Rumsfeld

 

Oil opened down sharply this morning on the back of newly released projections for global oil demand from the International Energy Administration.  The IEA cut its world demand for oil by 1MM barrels a day, down to 84.5MM barrels, which is down 2.8% y-o-y.  The bulk of this decline comes from the OECD, which the IEA predicts will see a 760K barrel decline in demand y-o-y to the 45.2MM barrel level, which is down 4.9% from 2008.  The non-OECD, or emerging economies, are projected to use 38.3MM barrels per day, down 0.1% y-o-y.

 

Obviously, IEA projections should be considered a lagging indicator as the economic information that underscores their projections is well known.  That said, given the rapid rise in the price of oil over the last four weeks, and the positive increase year-to-date, the commodity is obviously vulnerable to bad news.

 

These newly revised projections from the IEA coincide with some recent negative data points in the U.S. relating to the oil market.  First, in its “This Week in Energy” update the Department of Energy stated:

 

“Consider just gasoline and distillate, which together represent over 70 percent of refinery output from crude oil. Energy Information Administration weekly data indicate that for the first quarter, demand for these two products fell more than 3 percent in total, (with gasoline declining 1.5 percent and distillate demand falling 6.7 percent). Distillate demand, which is mainly driven by heavy-duty trucking, has been hit hard by the slowing economy.”

 

In the same report, the DOE reported days supply nationally of petroleum products, and for the second week in a row it came in at 25.4 days, which was more inventory than expected and an increase of 14.9% y-o-y.  This inventory build is not surprising given the aforementioned decline in demand, but will be concerning if we do not see the drawdown in gasoline this summer in the driving season.

 

The data points above are coincident with a front page article on the Wall Street Journal today, entitled: “Oil Industry Braces for Drop in U.S. Thirst For Gasoline.”  The basic premise of the article is that demand for gasoline in the U.S. may have peaked due to a combination of more fuel efficient cars, increased use of ethanol based fuels, and less overall commuting by Americans.   In the article, Scott Nauman, Exxon’s head of energy forecasting, predicted that “U.S. fuel demand to keep cars, SUVs and pickups moving will shrink 22% between now and 2030.”  This is meaningful since “transportation” in the U.S. accounts for 2/3s of all oil use.

 

While the data points above are new, the question is whether they are actually incremental, or as Rumsfeld said, are these datapoints “known knowns.” The Oil market has shaken off negative fundamental data points consistently year-to-date and is now trading off the lows of the day despite the lowered expectations for global demand from IEA this morning.

 

Obviously, the question we must ask ourselves—to once again borrow from Rumsfeld—what are the unknown unknowns that may be currently sustaining oil prices well above prior lows? Is it massive money supply growth globally? Heightened geopolitical risk implications? The likelihood is that there are a number of drivers, most of which will only be known after the fact.

 

In the aforementioned Wall Street Journal article, China is also noted as a region of long term growth of oil demand.  Longer term, the Client (as we like to call China) may in fact be the dominant factor.  While headlines and articles about Chinese energy demand were rampant during the heady days of $140 per barrel oil, they are now largely non-existent, even though the long term demand implications from China have not changed. 

 

Currently, there are 250MM registered cars in the United States, which equates to cars per capita of ~0.83.  China may never get close to that number, but at a current population of ~1.3BN people and only ~57MM registered vehicles on the road, or 0.04 per capita, the Client obviously has a long run way of growing energy demand, in just the transportation segment.  Ultimately, as always, price rules.  As of now oil is largely looking past short term bearish data points and seems to be, once again, endorsing the longer term bullish case, even though this investment case is absent from the headlines.

 

Daryl G. Jones
Managing Director


Early Look

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Squeezy The Shark: SP500 Levels, Refreshed...

Today is one of those days where there is a whole lot of nothing to do. My Partner, Rebecca Runkle, labeled it “The Calm Before The Storm” in her Technology note this morning, and that is exactly what this feels like.

 

All the while, the most important move today is the US Dollar breaking down through what I have as intermediate TREND line support. With the USD Index down -1.1% on its lows for the day, the SP500 is threatening to go green on the day. REFLATION remains a powerful force – one that remains somewhat misunderstood.

 

With today’s recovery from the opening lows, we have ourselves higher lows – this is, of course, another bullish indicator. I see no upside resistance until the dotted red line in the chart below at 868.

 

There is a very short term momentum line that is baking itself into this short squeeze cake at 830 SPX (dotted green line), and underneath that remains Squeezy The Shark, who is challenging anyone in the short selling community to press shorts on the way down to 821.

 

Keith R. McCullough
Chief Executive Officer

Squeezy The Shark: SP500 Levels, Refreshed...  - SPX

 


Gushing Chinese Credit...

Credit is flowing rapidly in China as Beijing gets growth back on track, creating positive momentum…

 

Media interviews of Wen Jiabao reportedly conducted in Thailand prior to the cancellation of the ASEAN summit this weekend outlined the bullish case for the Chinese economy, with the premier confidently cataloguing signs that expanding credit and stimulus projects have started to fuel a rebound in industrial demand. At +38% YTD, Chinese stocks shot to new 2009 highs on the “news”.

 

Increased credit liquidity flowing from the People’s Bank of China (PBC) has been a critical foundation for Beijing’s recovery plan. All signs indicate that this loosening has had a rapid and massive impact with PBC new loans increasing by 1.89 trillion Yuan in March and Friday’s M2 release showing an increase of 25.43% Y/Y for the same period.

 

PBC leaders now find themselves balancing the political pressures to help fuel a rebound in growth with a practical need to avoid any further increase in non-performing loans.  This tightrope is underscored in the awkward language of the PBC’s press release this week in which they pledged to continue to “implement moderately loose monetary policy and maintain the continuity and stability of policy”.

 

Officially, non performing loans accounted of under 2.5% of the total on the books of the major commercial banks in Q4 of last year, but as we noted in our note on April 3rd (“Ticking Time Bomb?”) the rising use of “special mention” classification for troubled loans and the restructuring of the Asset Management Corporations have muddied the picture so much that it is impossible to ascertain what the true percentage of loans that are non performing is.

 

The critical factor in preventing a bubble as credit expands and works through the system will be regulation –which has been an Achilles heel for the Chinese financial system. Up to now, reform of the financial system has been carried out cautiously and gradually as the desperate need for better controls for smaller banks has been balanced against political measures designed to protect more fragile institutions and to prevent competition. As such, although the banking system has evolved and made progress there are substantial bank vulnerabilities that remain. Even after the reforms instituted after bad loans reached nearly 20% of those on the books at commercial banks in 2004, the Chinese financial system still lacks the fundamental ability to efficiently allocate credit through the economy, making this sudden flow of credit a source of great risk. 

 

In the near term we are confident that the stimulus provided to the Chinese economy by this massive liquidity event will have the desired effect and drive rebounding internal demand. On the horizon however, we will be carefully watching developments in the opaque banking sector there for any signs of trouble.

 

Andrew Barber
Director

 

Gushing Chinese Credit...  - leck1


Japanese Yen: We're Negative...

Summary investment conclusion

 

We are negative on the yen from a quantitative perspective with current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticipated support above 98.21.

 

From a fundamental perspective, Japan policy makers, as we outline below, really have no choice but to aggressively implement a weak Yen policy.

 

Overview

 

Media reports this morning predicted that the third stimulus program, which will be unveiled on Friday by Prime Minister Taro Aso, will total more than 15.4 trillion Yen as Aso and his LDP colleagues respond to the continuing downward slide in the Japanese economy and their plummeting approval ratings. With September elections looming, the public reception of the stimulus will be critical as it moves to the opposition controlled upper house for approval (it took nearly four months to pass the previous plan). The Japanese politicians face a problem common to their counterparts across the globe, not implementing a large enough stimulus package, fast enough to arrest a substantial economic contraction driven by concurrent external and internal factors of a magnitude not seen since the Great Depression.

 

Recent Background: Equities & the Yen

 

The relationship between the Yen and Japanese equities is uniquely interdependent due to the overlapping importance of export industries and the heavily concentrated equity exposure of the Japanese banking system. As such, the relationship is a two way street, with the yen showing a greater sensitivity to domestic equity market valuation than any other major economy’s currency.

 

Japanese Yen: We're Negative...  - f1

 

In January Finance Minister Kaoru Yosano announced that the government would inject liquidity into three regional banks to the tune of 121 billion ¥ and the option of direct purchases in the equity markets to arrest the fall in the Nikkei 225, which had tumbled to a 26 year low. This announcement came on the heels of  a proposed 100 billion ¥ preferred share purchase in three banks announced in December as part of a program to inject as much as 12 trillion ¥ into domestic banks in an effort to provide liquidity to the banks with the objective that they will extend credit to prevent corporate bankruptcies. In The wake of these announcement the equity markets continues to slide in the face of strengthening Yen.

 

It was only the initial announcement of the third stimulus program in March, combined with an increase in the BOJ program of Purchasing Treasury bonds, which reversed the equity markets slide. Since the second week of March the Nikkei had rebounded by more than 25% and the yen simultaneously weakened as this “shadow quantitative easing” helped inspire greater confidence in future export prospects and asset allocation eased upwards pressure on the Currency in turn.

 

Conclusion: Only One Path Out

 

The new stimulus program is heavily weighted towards inducements for increased domestic consumption. The prospects of reversing the savings trend and inducing the consumers back into market in the face of rising unemployment do not look promising. The Economic and Social Research Institute’s (ERSI) consumer confidence index continued its modest upward trend in February, rising to 26.7, incrementally higher than January’s 26.4 index but still hovering near the survey’s lowest reading on record, of 26.2 in December. Surveyed households, asked to provide their outlook, six months forward, of the four categories in the survey; overall livelihood, income growth, employment, and willingness to buy durable goods, registered levels showing that perceptions of income growth and employment continued to decrease for the month. With registered auto sales declining 32.4% Y/Y for March, the stimulus plan provisions for hybrid rebates seems particularly anemic –with prospects of making up the difference in domestic sales unlikely, let alone the drop off in external demand.

 

Prospects for the other major source of Japanese economic activity, exports, continue to look grim in the face of decimated North American and European demand. On an absolute Yen basis February exports, while a marginal improvement over January, still registered at levels lower than any pre 2009 figures since August 1996. Industrial production contracted by 37.66% Y/Y in February following months of extreme contraction in output as well as shipments and capacity utilization.

 

Japanese Yen: We're Negative...  - f2

 

The the modest uptick in machinery orders for February reported by the cabinet office today: up 1.37% M/M and -30.21% Y/Y ( a sequential improvement over January), seem to be an unconvincing sign of a bottom in production prior to confirmation by March export data.

 

Even is the stimulus program to be announced on Friday does accomplish increased in internal conumption, the heavy weighting towrads tax incentives and other government reveues rather than direct monetary injectiosn leaves a strong perception that the cupboard, at last, is bare. Japanese government leaders are now operating with the fact that any ability to implement more fiscal stimulus is restricted by a debt burden now estimated by the OECD at approximately 197.3% of GDP for 2010. A large and growing fiscal deficit, coupled with large sovereign debt obligations and credit agencies reeling from the ongoing perception of their ineptness, leaves us with the conclusion that the impact of increases debt levels going forward on Japan’s sovereign credit rating must be .

 

Taking all of this into account, the only logical policy left open to the Japanese government appears to be the pursuit of a weaker Yen despite all negative consequences.

 

Levels

 

As tactical investors, we balance our fundamental view with a quantitaive approach to near term market positions. Our current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticpated support above 98.21.

 

Andrew Barber
Director

 

Japanese Yen: We're Negative...  - f3


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