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THE AMERICAN CONSUMER

For the times they are a-changin'.

Bob Dylan

The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 

How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!

THE AMERICAN CONSUMER - consumer

All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 

Right now as I look at my screen the S&P 500 is at 836 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.

Howard Penney


A Tough Visual To Argue With

Yes, Personal consumption stinks – but it reeks less than it has in prior months. Check out the chart below that Zach Brown whipped up – it’s a tough one to argue with. Personal consumption expenditures have bounced about half a percent off the bottom, but home furnishings and softlines are both up 2% over that same period. As this delta in spending gets better, and coincides with tight inventories, a favorable 300bp downshift in SG&A, and capex growth going from +12% last year to -8% in ’09. Now we've got some powerful shifts in China to kick start exports and open up capacity for lower-priced goods (esp shoes and apparel) by improving economics for local manufacturers. This shifts the balance of power back into the US supply chain as capacity opens up again, and bolsters my view that 2H09-1Q10 will show free cash flow growth revert from -80% today yy to +20%.

A Tough Visual To Argue With - American Consumer Chart

Names I like best in retail include BBBY, RL, LULU, PSS, LIZ, UA, and DKS. I don’t like those who are cutting into bone to print profit, such as Ross Stores, Gap, Iconix, Sears, Carter’s, and Jones.

For more detail, see my note from March 31 titled “Retail Narratives Don’t Get Much More Powerful Than This.”


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THE AMERICAN CONSUMER

For the times they are a-changin'.
Bob Dylan

 

The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 

 

How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!

 

All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 

 

Right now as I look at my screen the S&P 500 is at 839 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.

 

Howard Penney

THE AMERICAN CONSUMER - amer


LVS: COST CUTTING CONTINUES

The recent LVS news has been positive, as has our stance on the stock.  However, following the Bill Weidner and Brad Stone departures, it seems that Mark Brown, President of both Sands Macau and Venetian Macau, has been dismissed from the company.  We’re all for cost cutting but is the knife penetrating too deep?

We continue to believe LVS is worth more than where the stock is trading, even after the 200% move off the March 9th bottom.  However, the number of senior management departures is starting to trouble us a bit, especially as they come at a time when LVS appears to be turning a corner.  Asset sales and refinancing now looks more likely, LVS is outperforming in both Las Vegas and Macau, and Sheldon is putting his money where his mouth is.

Sheldon needs to communicate how he will replenish the management ranks to keep this positive momentum going.  The Venetian Macau and Sands Macau can’t run themselves, neither can LVS corporate.


Breaking The Buck Can Break German Exports...

German plant and machinery orders for February were reported yesterday and the number confirms our negative outlook on Europe’s largest economy.

 

Orders fell -49% Y/Y, a sequential decline from the -42% reported in January on an annual basis. For the export-dependent economy (last year exports accounted for 47.2% of GDP), plant and machinery orders are a critical metric and this decline adds to the bearish fundamentals we’re tracking.

 

Unemployment in March rose to 8.1%, up 0.1% from February; inflation slowed to 0.6% last month (from 1.2% in February) and consumer confidence is ticking downward sequentially M/M.  We’re certain that Chancellor Merkel will be called to answer at the G20 meetings the status of the recovery for the Euro Zone’s largest economy.

 

Domestically Merkel and Co. are wrestling with the government’s purchase of a 8.7% stake in Hypo Real Estate and the outlook for German carmaker Opel, which GM is prepared to give up, yet neither Merkel nor a private buyer have come forward to foot the price tag. In the balance hangs upwards of 25,000 German jobs. Both decisions will weigh heavily on Merkel’s political prospects as she contends against Foreign Minister Frank-Walter Steinmeier for the Chancellorship in September. 

 

In the meantime, a broken buck will give the Euro a reflation bid – one that German exporters can’t afford to see…

 

Matthew Hedrick
Analyst

Breaking The Buck Can Break German Exports...  - ager


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