The August explosion in Macau has lifted September expectations off the charts, especially given it is the first easy comparison. Not so fast. Business has been slow so far.
My Macau guys are telling me to slow down on my September expections. Business has been surprisingly slow so far in September, nothing like August. We’re not exactly sure why yet but walk-throughs and conversations with mid-level casino employees suggest that there has been a marked slowdown in traffic, in both the Mass and VIP segments.
One explanation could be related to Hong Kong. A lot of the growth in August was from Hong Kong. You could see it at the pools which were packed in August. Chinese mainlanders don’t go to the pools. With families in back-to-school mode, the Hong Kong kicker is gone.
Another factor, as suggested by a client of mine, might be customers delaying their Macau trip until October. There are more holiday days in October of this year versus last year and, of course, the celebration of the 50th anniversary of the founding of The People's Republic of China begins October 1st.
Investor expectations are pretty high for September given the August boom, despite 40% growth last year, and the September comp is the first easy one in a long time. The volatility of the stocks to short term catalysts make this a tricky trade. September is likely to disappoint lofty expectations, but October could be a big month, although expectations are pretty high for that month already.
“The better part of valor is discretion”
– William Shakespeare
Thanks Bill, and the better or necessary part of consumer spending is the staples. Necessity is why staples are also called non-discretionary. With their discretion, will consumers be so valorous as to empty their wallets for things they want, rather than need? The almost vertical trajectory of discretionary consumer stocks suggests yes. On the contrary, sound analysis indicates that consumers face an almost impenetrable ceiling, triple fortified by the Three S’s: Savings rate, Stagflation, and Share of wallet. I’d add consumer credit (bad) to the mix but it doesn’t begin with an S, we like 3s, and our macro team will be addressing this topic shortly.
So while Geithner may say that “things are better than 3 months ago, 6 months ago, before this recession began”, I would ask two questions: By what metric and for whom? Geithner’s preferred metric lately, it appears, is the rate of change or the “less bad” thesis that Research Edge was espousing when everyone else thought the world was falling apart (March 9th ring a bell?). The stock market has already discounted “less bad”, then “stability”, and now is viewing the consumer as in “recovery” mode. This is what scares me.
“Recovery mode” implies, well…recovery. I’m certainly not seeing it in the consumer discretionary sectors of gaming, lodging, and leisure that comprise my analytical vertical. Is business less bad? Maybe, but I think the comparisons are just getting easier. The consumer is not necessarily getting stronger.
“Recovery mode” also implies some lasting duration. We are very worried about Q4 from a macro and consumer perspective. The threat of stagflation is real, maybe coming as soon as Q4. Stagflation is a consumer killer. In a stagflation environment, fewer consumers have jobs and the ones that do can’t buy as much as before. Will you take credit for that too, Mr. Geithner, when it happens? Your policies and your predecessor’s policies (as well as the Bernanke constant) have created a fertile environment for potentially massive inflation, yet unemployment continues to grow. Sure unemployment is growing at a slower rate (10% but it could’ve been 10.5%!). Congratulations - pop the champagne – at least the French consumer discretionary industry will benefit.
So if I’m out of work (thankfully I’m not) and my purchasing power begins to decline at an accelerating rate (rate of change cuts both ways Tim), am I really going to buy that 2nd boat, 8th Coach bag, or book that 3rd cruise this year, or will I feed my family. Want versus need.
This also gets us to the share of the wallet question. In an inflationary economy, a larger part of consumer spending will go to non-discretionary items. With stagflation, the size of the wallet shrinks. One of my industries has a third problem: even within the consumer discretionary segment, casino spending is shrinking as a % of Personal Consumption Expenditures (PCE) for the first time in 25 years. Now that’s a triple whammy!
So what do we do? Be careful and manage risk. We can’t ignore the warning signs just because the stock market and consumer stocks are going up. Timing, as always, is critical. This is where I defer to our timing tutor, Keith McCullough.
On a separate note, I will be taking many moments of silence today to contemplate what happened exactly 8 years ago on a beautiful, sunny Tuesday morning. The events of 9/11 had an impact on virtually every American. The impact was personal for many of us living/working in NYC that day. We move forward in part by looking back.
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The week of the 14th through the 18th will be busy, with a large number of economic data points scheduled for release in North America and Europe (while Asia will have a relatively light schedule). Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Monday September 14
Q2 Capacity Utilization for Canada will be released at 8:30 am.
Eurozone Industrial Production data for July will be released in the morning.
Revised Industrial Production data for Japan will be released in the morning while in Australia the notes from the September RBA meeting will be released at 9:30 PM.
Tuesday September 15
August PPI and Retail Sales data will be announced at 8:30 AM while July Business Inventory figures will be released at 10. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released at normal scheduled times. In Canada July vehicle sales and Q2 Labor Productivity figures will be released on Tuesday morning.
Eurozone Q2 labor costs will be released on Tuesday morning as will French CPI and German ZEW sentiment indices. In the UK, August CPI and Retail Sales Data will be released at 4:30 AM as will DCLG House Prices for July.
Wednesday September 16
Wednesday morning will be busy with August CPI, Industrial Production and Capacity Utilization scheduled for release as well as Q2 Current Account data. Weekly MBA Mortgage application data will be released on Wednesday morning along with EIA oil gas and distillate stock levels. NAHB Housing Market Index levels will be announced at 1 PM for September. In Canada Manufacturing Shipments, Orders and Inventories for July will be released at 8:30 AM.
August CPI data will be released in the morning for both the Eurozone and Italy , while in the UK August Claimiant and July Unemployment will be published. Germany will auction 10 year bunds.
August Unemployment will be released in South Korea on Wednesday morning while July Tertiary Index levels for July will be released in Japan in the evening.
Thursday September 17
After a slight decline last week, the market will be focused on Initial Claims data for the week of the 28th when it is released at 8:30 AM. ISM Non-Manufacturing and Priced data for August will be released at 10 AM, while weekly Natural Gas stock data will be announced at 10:35 by the EIA (a closely followed data point in the wake of the prior week’s bearish reading). Also on Thursday morning the Treasury Department will announce 3, 10 and 30 years.
Eurozone July Trade data will be announced While in Switzerland the Scheduled SNB Monetray Assessment wile b held at 8 Am. In the UK August Retail sales data will be released while Her Majesty’s Treasury will offer 5.25 GBP Billion of 2014 Gilt at 2.25%).
Another light schedule with Weekly Wholesale Inflation data from India and August Unemployment rate levels for August slated for release.
Friday September 18
In Canada Wholesale Trade figures for July will be released at 8:30 AM.
Eurozone Current account figures for July will be released on Friday morning, as will Italian Industrial Orders and Sales data for July and German PPI for August. In the UK August M4, Net Borrowing and CML Gross Mortgage figures will eb announced.
On Friday morning Leading and Coincident Index levels for July will be released in Japan
Keith likes to remind us that everything that matters in macro happens on the margin –and that being good at what we do means being vigilant for signs of change and that, while we invest in the present we must keep an eye on the horizon at all times. The horizon for US consumer spending looks bleak based on multiple overlapping demographic factors.
In the charts below I have illustrated two potentially peaking long-term drivers for consumer spending. In the first chart, we see the age breakout of the work force estimated by the Department of Labor. The imprint of the baby boom is clearly seen, cresting in successive peaks roughly a decade apart.
The second chart shows the long term view of US consumer leverage. The Federal Reserve reported Tuesday that consumer credit declined in July by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. In the midst of the great recession it’s clear that consumers are accessing fewer loans (whether by design or because of reluctant lenders) and spending less.
Taken in unison, the two illustrations indicate an easy to understand trend for the coming years: the number of people in the US labor force who are at optimal earning age has peaked and will be steadily decreasing while, simultaneously, consumer credit is declining. If you combine this long tails data with the points we hammered on in our unemployment post on Wednesday (“Stagflation: Where the Pain is”) in which we discussed how current unemployment trends were being felt most heavily by the oldest and youngest components of the work force, the picture becomes increasingly grim. Not only are there fewer young people entering the work force, they are having difficulty finding employment and when laid off are taking much longer to find new positions.
As Todd Jordan pointed out in a recent post on gaming industry trends, prior to the consumer downturn beginning in the fall 2008 personal consumption expenditures were on a steep twenty-year incline. With consumer spending accounting for roughly 70% of GDP the implication is clear: the higher one goes, the more pertinent gravity becomes and keeping rates at zero or buying clunkers can only delay the inevitable. Gravity always wins.
Attached below is the morning note from our Healthcare team, Tom Tobin and Christian Drake. In it are some data points that we thought would be interesting:
I look through a lot of news items every morning and because of some of the work I was doing yesterday, it stuck out. It was an item about how Liz Fowler, former insurance insider and current Baucus aid, had written the Baucus proposal circulated earlier this week. I was on the phone with a health insurance actuary trying to figure out what some of the language meant in the Baucus release for underwriting a health policy and what additional proposals could mean for Managed Care under Health Reform (that is assuming it gets done). The conclusion is that Liz Fowler’s background shows; the Baucus proposal looks favorable to Managed Care. The key point is the flexibility in how the price of a premium is built out of the cost of services and the risk factors listed, such as age and smoker, the inclusion of a mandate, and some other provisions.
There were other points we touched on regarding the current state of the market both positive (premiums are accelerating) and negative (adverse selection) which we will be discussing in a note later today. If the Research Edge Macro call on Inflation is right, we’ll see pressure on consumption, including healthcare consumption, and higher investment income returns. If Mr. Geithner is right, we’ll see job growth next year and enrollment growth. If Health Reform passes, the least likely outcome, a whole new leg of enrollment growth becomes available.
The beta side of healthcare dominated as healthcare outperformed the market for a 3rd consecutive day on continued higher volume. Inflation backed off & Cost of Capital led negative correlation factors as 10 yr. Treasury yields got smoked. Mirroring the markets ongoing inflation-deflation debate, Balance sheet & inflation related factors have been inconsistent as price drivers. This inconsistency, when married to our macro call for inflation & cost of capital to accelerate as we move through the back half of the year, represents opportunity as analyst/economist prognostications have yet to be backed by the conviction of capital commitments. We’re hosting a Healthcare-Macro Call on Monday where we’ll expound on the healthcare investment implications of our 4Q & 2010 Macro Theses. (contact if you’d like to join the call).
Daryl G. Jones
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.