The retail sector can return some amazing gains as we have witnessed since the recession ended—but it can also provide periods of anxiety.
How the retail sector performs is dependent on many variables, including the economy, jobs, housing, consumer confidence, interest rates, and even the weather, as we witnessed this winter.
There is no tried-and-tested rule on what areas of the retail sector do well. For instance, if you think discount and big-box stores always fare the best, while high-end luxury-brand stocks underperform during times of economic uncertainty, then you are likely off the mark.
The reality is that the past years of massive wealth creation in the stock market and a rebounding housing market have helped to create wealth, and with this comes the desire to spend. There have been some 300,000 new millionaires created in the country in 2013, and that means a propensity to want to spend specifically on higher-end goods and services.
The rationale supports why luxury stocks, such as Michael Kors Holdings Limited (NYSE/KORS) and Tiffany & Co. (NYSE/TIF), have done so well over the past few years. In the luxury retail sector space, Michael Kors continues to be one of my favorite retail sector stocks.
Chart courtesy of www.StockCharts.com
Meanwhile, the bottom end of the retail sector, which includes the discount and big-box stores, has provided mixed results; albeit, these stocks have made investors a lot of money.
One of my favorite discount stocks in the retail sector is Family Dollar Stores, Inc. (NYSE/FDO). But the company recently reported a soft fiscal second quarter, in which same-store sales fell 3.8% in the quarter; year-over-year, … Read More
The U.S. economy is weak. Everyone knows it. We just don’t know where to lay the blame. Businesses on the S&P 500 have been using the weather as an economic scapegoat. And not a small number, either.
Between January 1 and March 12, 2014, 195 companies on the S&P 500 used the term “weather” at least once in their conference calls. This represents an 81% increase over the 108 companies that mentioned the weather in their conference calls in the same period last year. (Source: “How many S&P 500 companies have commented on the weather?” FactSet, March 14, 2014.)
And if you want to not-so-subtly warn investors things aren’t looking too good, just blame the weather. The estimated earnings growth rate for the S&P 500 this week is an anemic 0.3%. That’s down slightly from a growth rate for the S&P 500 stocks of 0.4% last week, but it’s like night and day when compared to the December 31, 2013 Q1 earnings growth rate forecast of 4.4%.
Not a big surprise when you consider 84% of all companies on the S&P 500 that have issued earnings-per-share (EPS) guidance have revised it lower. That’s well above the five-year average of 64%. And, for comparison’s sake, during the first quarter of 2013, 78% of companies on the S&P 500 did so.
Weather aside, it’s quite possible S&P 500 companies aren’t doing that well because the U.S. economy just isn’t gaining traction. Unemployment remains high, wages are stagnant, consumer confidence levels are down, personal debt levels are up, and housing and auto sales have been disappointing.
Even though February retail sales were up … Read More
Another month of cold weather is being blamed for the most recent weak consumer confidence numbers. Consumer confidence levels for the Thomson Reuters/University of Michigan preliminary index fell from 81.6 in February to 79.9 in March—the lowest level in four months. (Source: Lange, J., “U.S. consumer sentiment slips; bad weather eyed,” Reuters, March 14, 2014.)
Economists had forecast March consumer confidence levels to climb to 82. Instead of celebrating a barely there increase, economists are waxing eloquence on the two-percent decline and two-point gulf between expectations and reality.
In spite of living in North America and having to deal with the cold winter weather that affects most of us, analysts still expected consumer confidence to improve in March…and they seem surprised that it didn’t.
Analysts basically think consumers are too depressed by the weather to shop. This would, of course, bolster their opinion that the U.S. economy is only temporarily stuck and sunnier skies will prevail.
But who can say, really? March’s weak consumer confidence numbers mark the eighth miss in the last 10 months. In all of 2013, consumer confidence numbers beat forecasts only three times.
Maybe the weather can’t take all the blame. In spite of the winter storms, the average U.S. temperature for January was normal, with the warmer West Coast weather offsetting the cooler East Coast weather. The average was 30.3 degrees Fahrenheit, which is only 1/10 of a degree below normal for the month. Things weren’t much different in February and consumer confidence levels actually increased to 81.2 from a projected 80.6. (Source: “National US temperature for January normal despite winter storms,” The Guardian, February … Read More
Thanks to a number of different factors, airline sector stocks have been on a tear. And thanks to an inverse relationship with the price of oil, strengthening consumer sentiment, the expected increase in business travel, and the (eventual) arrival of spring and summer, the airline sector looks poised for further gains.
Oil prices experienced sharp gains between 2007 and mid-2008, subsequently tanking in step with the stock market and bottoming in early 2009. Since 2010, oil prices have risen in the shadows of the sputtering U.S. economy—neither soaring nor really pulling back.
That said, oil futures slid last week immediately after weekly data came out that showed U.S. crude oil supplies were up more than forecast. Analysts had expected crude oil inventories to climb from 1.4 million barrels in the last week of February to 2.1 million barrels for the week ended March 7. Instead, oil inventories surged to 6.2 million barrels. (Source: “Summary of Weekly Petroleum Data for the Week Ending March 7, 2014,” U.S. Energy Information Administration web site, March 12, 2014.)
Oil prices are also down after the U.S. said it would hold its first test sale of crude oil from its emergency stockpile since 1990. While the government insists its modest offering of 5.0 million barrels of crude is a result of the dramatic increase in domestic crude oil production…others think it might be a subtle nod to Russia. The markets don’t seem to care either way. Oil prices are down 6.5% since the beginning of March, trading near $98.00 per barrel.
Now granted, the price of crude oil will rebound. That said, the airline sector … Read More
Consumer spending is highly correlated with consumer sentiment. It makes sense that when consumers believe their jobs are in trouble or they won’t have enough money going forward, they pull back on their spending and only buy what they need. On the contrary, if they believe all is well—they expect a raise at work and have savings—they will go out and buy things they want. This phenomenon increases consumer spending.
As it stands, consumer confidence in the U.S. economy is decreasing, which suggests consumer spending will be in trouble.
Let me explain…
The Conference Board Consumer Confidence Index tracks how consumers are feeling in the U.S. economy. The Board asks individuals how they currently feel about the current state of the U.S. economy, their jobs, and so on and if they believe things will change in the next little while.
In February, we found that the index declined 1.6% from the previous month. The Consumer Confidence Index sits at 78.1 this month compared to 79.4 in January. (Source: “The Conference Board Consumer Confidence Index Declines Moderately,” The Conference Board web site, February 25, 2014.)
The Conference Board Expectations Index, which tracks what consumers think will happen in the next six months, also dropped significantly. This index stood at 75.7 this month, down 6.3% from 80.8 in January.
These aren’t the only indicators that suggest consumer confidence in the U.S. economy is declining. The Bloomberg Consumer Comfort Index suggests the same. This weekly index is based on how consumers feel about the U.S. economy, their personal finances, and their buying plans.
In its latest results, the Bloomberg Consumer Comfort Index stood … Read More
While most astute investors would point to a weak U.S. economy as the reason for the recent lackluster U.S. employment data, economists, in their infinite wisdom, point to Mother Nature. She seems to shoulder a lot of the economic blame in this country.
In January, the U.S. economy added just 113,000 new jobs, far fewer than the expected 180,000 jobs. Freezing winter weather is being blamed for the weak U.S. unemployment data. This is the second straight month of disappointing jobs data from the U.S. Department of Labor.
Last month, the U.S. economy added just 74,000 jobs—far, far below the forecasted 200,000 jobs. The back-to-back weak employment numbers continue to fuel fears that the so-called U.S. economic recovery might be stalling…if one could ever really say the U.S. economy took off.
The new unemployment data shows that 10.2 million Americans in the U.S. economy have work. While the number of people who have been out of work for more than 27 weeks declined by more than 200,000, the number was probably impacted by the 1.7 million Americans who lost their extended federal unemployment benefits at the end of December.
Last Thursday, attempts to revive a program aimed at extending unemployment benefits by three months for the long-term unemployed failed, being supported by just 59 of the 60 senators needed to pass the motion. At the end of the day, in this U.S. economy, 3.6 million Americans, or 35.8% of the unemployed, are stuck in long-term unemployment limbo.
And they might be stuck there for a long time. A recent experiment conducted by a visiting scholar at the Boston Fed found … Read More
Despite assurances from analysts, economists, and central bankers, the U.S. economy isn’t faring so well—and the markets are finally beginning to see what we’ve been warning about in these pages all last year.
For sustainable growth, the U.S. economy needs to be reporting consistently strong fiscals. But it isn’t. For starters, the key stock indices, a reflection of the U.S. economy, have extended their sharp January losses. The S&P 500 is down 5.6% year-to-date, the Dow Jones Industrial Average has lost more than seven percent of its value so far this year, the NYSE is down roughly six percent, and the NASDAQ is in the red by four percent.
Every quarter since the beginning of 2013, an increasingly larger number of S&P 500-listed companies have revised their quarterly earnings lower. During the first quarter of 2013, the number stood at 78%. This time around, 81% of S&P 500 companies have revised their first-quarter earnings lower.
Why the big losses? That depends on whom you talk to. The Bank of America, without even a hint of a smirk, blames the much colder-than-expected weather for the weak U.S. economy, meaning the U.S. economy and global markets are performing poorly because of a snow storm…
I suggest the U.S. economy is doing poorly and the U.S. markets are tanking for entirely different reasons. For starters, the U.S. economy needs steady jobs and earnings growth. Instead, the U.S. economy is facing high unemployment and stagnant wages. For the week ended January 25, jobless claims jumped more than forecast to a seasonally adjusted 348,000.
And a record number of Americans rely on food stamps. Interestingly, … Read More
If January is any indication of the stock market action in 2014, we’re in for a long year. After a scorching year, the key stock indices are ending the first month of 2014 in the red. As we say goodbye to January, it’s worth noting that the S&P 500, after notching up five-percent in the first month of 2013, gave up three percent of its value during the first month of 2014.
The other indices aren’t faring any better. The NYSE posted a 3.8% gain in January 2013, but lost 3.2% of its value in January 2014. The Dow Jones Industrial Average gained six percent in January 2013, but at the close of January 2014, it’s down almost five percent.
But, if you listen to the overly optimistic statisticians, a bad January does not necessarily portend a bad year. Since 1962, in January, the S&P 500 has fallen by more than four percent nine times. But, when that occurs, the S&P 500 is actually up between February and the end of the year—though barely. During those nine years with losing Januarys, the average February–year-end returns tallied 1.08%. (Source: Ratner, J., “A weak January for stocks isn’t as bad as you think,” Financial Post, January 31, 2014.)
Though, there are some statistical anomalies in there that might just be helping the so-called as-goes-January seasonal anomaly, in two of the nine years (1968 and 2009), the S&P 500 reported double-digit gains over the final 11 months of the year. In 1968, the S&P 500 was up 12.1%; in 2009, it was up 35.3%.
In the same time, the S&P 500 saw a … Read More
Back in December, Bernanke decided the U.S. economy was on solid footing and initiated the first round of quantitative easing cutbacks to begin in January. Instead of dumping $85.0 billion into the U.S. economy, the Fed added just $75.0 billion.
Last Wednesday, in his final hurray as chairman of the Federal Reserve, Ben Bernanke initiated the second round of tapering. Citing growing strength in the broader U.S. economy, Bernanke slashed the Federal Reserve’s quantitative easing program to $65.0 billion a month starting in February.
At this pace, the Federal Reserve will be out of the bond buying business by Labor Day. As for interest rates, Bernanke reiterated the Federal Reserve’s guidance; short-term interest rates will remain near zero until the jobless rate hits 6.5%. But not even that is an automatic trigger. When unemployment does hit 6.5%, it will take inflation, the state of the labor market, and the state of the financial markets into consideration.
In light of the current U.S. economic environment, I’m not so sure I’d hang my hat on the so-called “growing strength in the broader economy.”
For starters, U.S. unemployment remains high. It dropped unexpectedly to 6.7% in December, but that number was skewed by a large number of long-term unemployed workers abandoning their search for new jobs. Of those who did find jobs, most were in the retail industry.
Those working in low-salary jobs don’t have much to look forward to. Wages are stagnant. In fact, workers’ wages and salaries are growing at the lowest rate relative to corporate profits in U.S. history.
Furthermore, for the first time ever, working-age people make up the … Read More
It seems the global economy is taking a wrong turn. If it continues on the path it’s on now, it will not be a surprise to see a pullback in its growth. As a result of this, U.S.-based global companies may see their revenues and profits fall, which eventually leads to lower stock prices. You have to keep in mind that the U.S. economy is highly correlated with the global economy.
First, it seems that the demand in the global economy is slowing down as we enter into 2014. One of the indicators of demand in the global economy I look at is the Baltic Dry Index (BDI). The BDI is an index that tracks the shipping price of raw materials. If the index declines, it means demand in the global economy is slowing. If the BDI increases, it suggests the global economy may see an influx in demand. Below is the chart of the BDI. Note that since the beginning of this year, the index has collapsed more than 32% (as indicated by the circled area in the chart below).
Chart courtesy of www.StockCharts.com
But that isn’t all. We continue to see dismal economic data out of the major economic hubs of the global economy, too.
China, the second-biggest economic hub in the global economy, is showing signs of slowing down. The Chinese economy in the fourth quarter of 2013 grew at an annual pace of 7.7%. In the third quarter, this growth rate was 7.8%. (Source: “China’s Expansion Loses Momentum in Fourth Quarter,” Bloomberg, January 20, 2014.) Although this growth rate may sound very impressive when compared to … Read More
If you listen to the Wall Street analysts, January consumer confidence numbers weren’t really all that bad. The preliminary University of Michigan Consumer Confidence index came in at 80.4 versus a forecast of 83.4—and down from 82.5 in December. (Source: “Tale of two consumers continues as US consumer sentiment slips,” CNBC, January 17, 2014.)
Some attributed the blip to the polar vortex that swept through most of North America earlier in the month. The warmer winds of February are expected to pick up the disappointing slack in U.S. consumer confidence levels next month.
But I’m not so sure. Friday’s consumer confidence numbers missed expectations by the widest margin in eight years. It also marks the seventh miss in the last eight months. Throughout 2013, consumer confidence numbers only beat projected forecasts three times, which (surprise!) means Wall Street doesn’t really have its finger on the pulse of Main Street America.
What isn’t surprising is that upper-income households have increased consumer confidence, having benefited the most from strong gains in income levels, the stock market, and housing values. On the other hand, low- and middle-income households that are not heavily invested in the stock market are being weighed down by stagnant wages and embarrassingly high unemployment.
And, since there are more middle- and low-income earners than high-income earners in the U.S., and 70% of our gross domestic product (GDP) comes from consumer spending, it’s fair to say that both consumer confidence levels and the economic outlook for the majority of Americans is bleak.
It’s not as if the disappointing consumer confidence levels have come out of a vacuum. A raft of … Read More
We expect American consumers to do a lot in this country; not least of which is to be the nation’s economic engine, after all, 70% of our gross domestic product (GDP) comes from consumer spending.
After years of strong stock market gains, America is still being bogged down with stagnant wages, high unemployment, and near-record-high food stamp usage—not the best formula for a nation that relies on consumers to spend, spend, spend. However, it is also contingent upon us being able to continually pay our bills. It’s the ebb and flow of consumerism.
But that flow is becoming more and more constricted. While banks are more than willing to increase high-interest credit card and loan limits to maxed-out consumers, they’re beginning to fear that this money might never be paid back.
According to the latest quarterly survey, American and Canadian bank managers’ expectations for delinquencies on auto sales loans have hit their highest level since the end of 2012; expectations for delinquencies on credit cards reached a two-year high; and 34% of respondents expect auto sales loan delinquencies to climb in the next six months, while 28% expect delinquencies on credit cards to rise.
Despite these findings, the report also found that consumer borrowing (and spending) shows no signs of slowing down! In fact, 58% of bankers said they expect the average credit card balance to increase over the next six months—only six percent expect balances to go down. On top of that, 44% of polled bankers say they expect the amount of credit extended to consumers to increase—only 14% think it will decrease.
These findings run in step with … Read More
Investors are a surprising lot. Since May, any suggestions about tapering by the current Federal Reserve chairman, Ben Bernanke, or even one of the dozen district Federal Reserve economists, sent the markets reeling.
Back in May, just the whisper of a hint from the Fed that it might consider tapering its $85.0-billion-per-month bond buying program was enough to stop the bull market in its tracks. It recovered, of course, but only after Bernanke soothed the markets by saying he had no intention of pulling back on the Fed’s quantitative easing (QE) policy anytime soon.
The general fear, of course, was that any reduction in QE would translate into an immediate rise in interest rates. Having kept interest rates artificially low (near zero), the Fed made it cheaper for people to borrow. As a result, these artificially low interest rates are generally recognized as being the fuel that’s been propelling the stock market increasingly higher.
The Federal Reserve quashed those fears last week after announcing a $10.0-billion monthly cut in its QE strategy by telling investors it wouldn’t raise interest rates until unemployment hits 6.5%. By the Fed’s own estimates, the country will not hit this target until late 2014 to mid-2015. So, artificially low interest rates live on.
The assurance of cheap money kept the markets upbeat; so much so that the following day, the Dow Jones Industrial Average and S&P 500 opened at record highs, and the NASDAQ opened at a 13-year high.
News on a few key economic indicators released last Thursday, the day after the Federal Reserve’s announcement, probably didn’t hurt either, as these indicators suggested the … Read More
“Just give up being so negative; there’s economic growth in the U.S. economy.”
These were the exact words of my good old friend, Mr. Speculator. Over the weekend, when I received a call from him, he added, “You see the average American is better off than before. There are jobs; and no matter where you look, you won’t find much negativity. Look at the stock markets; they probably will show a 30% increase for 2013.”
Sadly, Mr. Speculator has become a victim of the false assumptions that seem to prevail in the markets these days. He’s basing his conclusion on just a few indicators that he looked at from just the surface, not looking much into the details. For example, the stock market doesn’t really portray the real image of the U.S. economy, but it’s used as one of the indicators.
Here’s what is really happening in the U.S. economy that keeps me skeptical.
First of all, jobs growth in the U.S. economy has been center stage for some time. I agree that the unemployment rate has gone down, but I ask where the jobs were created. In November, for example, we saw the unemployment rate in the U.S. economy reach seven percent, and it sent a wave of optimism across the mainstream. Sadly, a major portion of the jobs created for that month were in the low-wage-paying industries. Mind you; this has been the trend for some time now. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, December 6, 2013.) In periods of real economic growth, you want equal jobs creation, which we are clearly missing in … Read More
If you think you can judge a book by its cover, then you must believe the U.S. economy is doing really, really well. After all, consumer confidence is up and misery is down. However, looking past the cover, the pages of underlying economic indicators suggest the average American investor should be a little concerned.
But first, the good news! The U.S. Misery Index has fallen to a four-year low. The Misery Index is calculated by adding a country’s unemployment rate to the inflation rate, the logic being that we understand what stubbornly high unemployment mixed with the soaring price of goods translates into—misery.
The higher the score, the more miserable we are. For example, in August 2008, when the U.S. stock markets started to tank, the Misery Index stood at 11.47; when President Obama came to office in January 2009, it registered at 7.83; during the debt ceiling crisis in the summer of 2011, the index topped 12.87. Over the last three consecutive months, it’s been on the decline. In July, it came in at 9.36 and in October, it was 8.3. (Source: “Misery Index by Month,” United States Misery Index web site, last accessed December 13, 2013.)
According to the widely followed Thomas Reuters/University of Michigan preliminary December consumer confidence index, consumer confidence rose to 82.5—the strongest reading since July. In November, consumer confidence was 75.1, according to the index; economists were predicting a reading of 76.0.
Why the increased optimism? American consumer confidence levels are improving thanks to the better-than-expected drop in November unemployment, improved non-farm employment numbers, and strong preliminary gross domestic product (GDP) results. Stronger-than-expected consumer … Read More
The central bank of Japan has taken center stage when it comes to using extraordinary measures to revive growth in an economy. In an effort to boost the Japanese economy, the central bank has resorted to quantitative easing. And unlike the U.S. Federal Reserve, Japan is also involved in buying exchange-traded funds (ETFs) and real estate investment trusts (REITs), not just government bonds and mortgage securities.
Unfortunately, the central bank is outright failing. One of the main goals of the Bank of Japan is to inject inflation into the Japanese economy through money printing, aiming for an inflation rate of two percent. Sadly, this isn’t happening; inflation in the Japanese economy is running far below the targeted level, and there may not even be light at the end of the tunnel.
“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” said Takahiro Mitani, manager of the Government Pension Investment Fund of Japan (GPIF), the world’s largest pension fund. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.” (Source: Winkler, M., “World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation,” Bloomberg web site, December 4, 2013.)
Consumption is one of the factors that can help bring inflation into an economy. Sadly, the Japanese economy is seeing hardships here as well, as consumer confidence, one of the best indicators of where consumer spending will go, is declining. Between September and November, consumer confidence in the Japanese economy declined more than eight percent. The index tracking consumer confidence stood at 45.7 in September and 41.9 in … Read More
Consumer confidence in the U.S. economy is bleak, and if it doesn’t pick up, the economic growth in the U.S. economy will be in jeopardy, and those who are highly affected by it—companies in the consumer discretionary sector—will face troubles.
What many forget is that consumer confidence and consumer spending have a direct relationship; if consumer confidence declines, we generally see consumer spending decline as well. As consumers become worried about their jobs, financial conditions, and/or general economic conditions, they tend to pull back on their spending. Would you go buy a luxury car or big household items if you knew that your job was in jeopardy, or you had no or very little savings?
The Conference Board Consumer Confidence Index, an index that tracks the sentiment of consumers in the U.S. economy, continued its slide in November after sharply declining in October. In November, it sat at 70.4, 2.8% lower from the previous month, when it was 72.4. (Source: “Consumer Confidence Declines Again in November,” The Conference Board web site, November 26, 2013.)
This isn’t all for consumer confidence. One of the clearest examples of bleak consumer confidence was just last week, at the Black Friday sales. We saw consumers become very cost-savvy, which resulted in retailers opening stores early and providing very deep discounts. Early indicators from the National Retail Federation state that consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)
What does it mean for investors?
Investors have to keep a few important factors in mind … Read More
Despite the retail sector’s every attempt to generate sales this Thanksgiving, from sharp discounts to being open earlier than ever, their efforts fell flat. It’s further evidence that the U.S. economic recovery is not as entrenched as many think it is, and once again shows the economic disconnect between Wall Street and Main Street.
In spite of high unemployment, stagnant wages, consumer confidence at a seven-month low, and a smaller number of people forecast to hit the shops over the Thanksgiving weekend, the National Retail Federation still predicted sales to grow 3.9% from last year. (Source: Banjo, S., “Holiday Sales Sag Despite Blitz of Deals,” Yahoo.com, December 2, 2013.)
Over the Black Friday weekend in 2012, U.S. shoppers spent roughly $60.0 billion in the retail sector, but this year, it was a different story altogether. While the final numbers have yet to be tallied, early indicators show that total U.S. retail sector spending over the Thanksgiving weekend fell to $57.4 billion. It’s also the first time that retail sector spending over the Thanksgiving weekend has dipped in at least four years.
Even during the worst of the recession and the beginning of the so-called economic recovery, U.S. shoppers were willing to spend, buoyed by optimism. Five years into the so-called economic recovery, and shoppers are tightening their belts, weighed down by pessimism.
But it didn’t start out that way; in fact, most U.S. retail sector stocks were initially quite enthusiastic about their prospects. Wal-Mart Stores, Inc. (NYSE/WMT) had originally planned to open its doors at 8:00 p.m. Thursday night, but instead opened its doors at 6:00 p.m. Target Corporation (NYSE/TGT) … Read More
The 2014 Winter Olympics in Sochi, Russia may be just around the corner, but when it comes to breaking records—for better or worse—Wall Street remains the gold-medal champion.
Thanks to the Federal Reserve, interest rates are at record lows, and will stay there for the foreseeable future. The U.S. national debt is at a record $17.1 trillion, while at the other end of the scale, the S&P 500 and Dow Jones Industrial Average recently posted record highs.
This is in spite of economic indicators that suggest the markets should be moving in the opposite direction: high unemployment, high debt, weak consumer confidence, a record 47.6 million Americans—one-sixth of the population—receiving food stamps, etc.
Under this umbrella, the markets have been going higher, in spite of an increasingly large number of companies warning investors they are not going to meet projections—and, in fact, have been revising earnings-per-share (EPS) guidance lower all year.
In the third quarter, a record 83% of S&P 500 companies revised their EPS guidance lower. How about the fourth quarter? So far, 83.5% of reporting companies on the S&P 500 have issued negative EPS guidance. In October, analysts lowered earnings estimates by 1.5%, below the one-, five-, and 10-year averages for the first month of a quarter.
Again, in spite of the record number of S&P 500 companies revising their EPS guidance lower and weak October analyst expectations, the S&P 500 continues to notch up fabulous gains—roughly 25% year-to-date and 4.5% in October alone.
Interestingly, this marks the seventh time in the last nine quarters that earnings estimates fell while the value of the underlying index increased during … Read More
While many retailers in the United States might be having visions of sugar plums, a lot will be left holding a chunk of coal. And in spite of the economic pressures facing American retail stocks, this piece of coal will not turn into a diamond.
Even though the U.S. economy is reportedly on stronger footing, you wouldn’t be able to tell by the number of people out shopping. Traffic to U.S. retail stores is expected to slip 1.4% this November and December. In the last two months of 2012, traffic increased by 2.5% after falling 3.1% in 2011. (Source: Wohl, J., “U.S. holiday sales expected to rise less than last year: Reuters web site,” September 17, 2013.)
This cannot help but translate into weaker-than-expected sales. In fact, sales at U.S. stores are projected to rise just 2.4% in November and December, compared to three percent for the same period in 2012, four percent in 2011, and 3.8% in 2010.
Granted, these miserly 2013 holiday sales projections came out ahead of recent economic data that showed the U.S. added more jobs than expected in October. However, even that observation is missing the bigger picture; after all, shoppers need money to shop.
In 2012, the country’s supplemental poverty rate was 16%; despite the great strides made on Wall Street over the last two years, the supplemental poverty rate remained unchanged from 2011. The 2012 official poverty rate in the U.S. was 15%, unchanged from 2011. (Source: “Supplemental Measure of Poverty Remains Unchanged,” U.S. Census Bureau web site, November 6, 2013.)
The supplemental poverty measure accounts for the impact of different benefits and … Read More
Consumer spending is very critical to the U.S. economy, as it makes up a significant portion of the gross domestic product (GDP). If consumer spending declines, then U.S. GDP growth becomes very questionable; when it increases, it can provide an idea about where the U.S. economy is heading.
I look at consumer confidence as one of the indicators of consumer spending. The logic behind this is that if consumers are confident, they will most likely spend more, compared to when they are pessimistic.
Sadly, the consumer confidence in the U.S. economy seems to be deteriorating these days. This is definitely not a good sign if we want the U.S. economy to improve going forward.
Look at the Conference Board Consumer Confidence Index, for example; in October, it witnessed a slide of more than 11%, having stood at 71.2 in October from 80.2 in September. The Consumer Expectations Index declined 15.5% in the same period. (Source: “Consumer Confidence Decreases Sharply in October,” The Conference Board web site, October 29, 2013.)
Some will blame the decline in consumer confidence on the U.S. government shutdown. This may not be completely true, however, as we have been seeing continuous deterioration in consumer confidence. Please look at the chart of the University of Michigan Consumer Sentiment Index below.
Chart courtesy of www.StockCharts.com
The University of Michigan Consumer Sentiment Index stands at the lowest level of 2013 in October. It has been declining since July.
Currently, we are seeing too much attention being paid to the key stock indices making new highs each day, but not to the underlying factors that affect them.
Consumer confidence declining … Read More
Despite Congress miraculously pulling the U.S. back from the brink of destruction by temporarily raising the debt ceiling and ending the U.S. government shutdown, Americans continue to be a pessimistic bunch. But can you blame us?
According to Gallup’s U.S. Economic Confidence Index, consumer sentiment remains in negative territory. After falling to -39 during the recent standoff in Washington, U.S. economic confidence has improved to -36. To use the term “improved” is being generous; in late May, the index was at -3. (Source: “U.S. Economic Confidence Index [Weekly],” Gallup web site, October 14, 2013.)
While the brinksmanship in Washington is (temporarily) over, our pessimism isn’t. According to another poll, 71% said economic conditions right now are poor, while just 29% said economic conditions are good—the lowest level of the year. Now granted, it takes time for economic confidence to return; following the debt negotiations in 2011, it took economic confidence five months to recover. (Source: Steinhauser, P., “CNN Poll: After shutdown, America is less optimistic about economy,” CNN web site, October 22, 2013.)
Unfortunately, it could be worse this time, thanks in large part to high unemployment and stagnant income and wages. And there’s also the fact that Washington only agreed to fund the government through to January 15, 2014 and extend the debt ceiling through February 7, 2014. Americans can’t get too optimistic about the economy knowing the government is just taking time to reload.
Fortunately, there are economic lands where optimism is blooming in light of real economic change. Economic optimism in the eurozone improved for the fifth straight month and hit a two-year high in September. The … Read More
Each day, there’s growing evidence that suggests the American economy isn’t experiencing any economic growth. Unequal job creation is just one of the main topics discussed in the mainstream, but sadly, there are many other facts and figures that show a gruesome image of the U.S. economy as well.
Consider this: since the financial crisis struck in the U.S. economy, the number of people using food stamps has been increasing. In 2007, there were 26.3 million Americans who were using food stamps; fast-forward to July 2013, and that number had enlarged to 47.6 million, an increase of almost 81% at the rate of roughly 13.5% per year. (Source: “Program Data,” United States Department of Agriculture web site, last accessed October 21, 2013.)
Food stamp use in the U.S. economy is a key indicator of economic growth, showing how Americans are relying on the government to help them with even food, the most basic of needs. This is very contradictory to economic growth; if there was growth in the U.S. economy, then we would see this number decline.
Unfortunately, the horror story that is the U.S. economy just doesn’t end there.
Consumers in the U.S. economy aren’t happy. According to the Thomson Reuters/University of Michigan’s consumer sentiment index preliminary results, consumer confidence in the U.S. economy declined to a nine-month low in October. The index, which gauges how consumers feel in the U.S. economy, collapsed to 75.2 in October, from 77.5 in September. (Source: Leong, R., “Washington drives U.S. consumer sentiment to nine-month low,” Reuters web site, October 11, 2013.)
Consumer confidence is another key indicator of economic growth in the … Read More
The numbers are in, and we are not optimistic. The preliminary results of the University of Michigan’s October consumer confidence survey were released Friday, falling to 75.2, the weakest reading since April. October’s preliminary forecast was for a more modest decline to 77.2 over September’s 77.5 reading.
The ongoing erosion has been exacerbated by the U.S. government shutdown. Polls from both Gallup and the Rasmussen Consumer Index show consumer confidence has tanked since the beginning of October.
According to Gallup’s U.S. Economic Confidence Index, consumer sentiment fell 12 points for the week ended October 6 to -34. That represents the largest weekly drop since September 2008, when the index fell 15 points after Lehman Brothers collapsed. (Source: “Weekly Drop in U.S. Economic Confidence Largest Since ’08,” Gallup web site, October 8, 2013.)
By October 11, the end of the second full week of the U.S. government shutdown, the Rasmussen Consumer Index’s daily measure had slipped to 89.7, the lowest reading of the year. Consumer confidence is down 12 points since the U.S. government shutdown began and is down 13 points month-over-month. (Source: “Rasmussen Consumer Index,” Rasmussen Reports web site, October 11, 2013.)
American consumers may be resilient, but even these low readings, assuming they don’t get any worse, will still take a number of months to rebound. That could make Halloween, one of the biggest holidays next to Christmas, scary for U.S. retailers—and those ripples could extend into the December holiday season.
Even without the U.S. government shutdown, U.S. consumer confidence levels have been, for the most part, weak all year. But that can’t possibly be a surprise to Wall … Read More
It’s not a hidden fact that the biggest force that drives the U.S. economy is consumer spending. If it declines, you can say the odds of a slowdown in the U.S. economy are increasing. Consumer spending roughly makes up 70% of U.S. gross domestic product (GDP), so you can imagine how a small change can make a huge difference.
Well, this is exactly what the U.S. economy is going through. Consumer spending is at stake, so it shouldn’t be a surprise that economic growth is on the line.
One of the key indicators of consumer spending is consumer confidence. The logic is very simple: if consumers feel good, they will go out and spend. When paranoid or afraid of change, they will do the opposite and step back, reducing their spending.
The Conference Board Consumer Confidence Index, a key indicator of where consumer spending is headed, declined in September, dragging down almost 2.5%, from 81.8% in August to 79.7% now. (Source: “The Conference Board Consumer Confidence Index Falls Slightly,” Conference Board web site, September 24, 2013.)
Unfortunately, we are already starting to see early indications of deteriorating consumer spending.
In August, new orders for durable goods in the U.S. economy, excluding transportation, declined 0.1%. At the same time, the inventory levels at the manufacturers of durable goods continue to increase. In August, they increased $0.3 billion, or 0.1 %, to $379.1 billion; this was the highest level since this data was first published. You don’t want to see this combination of declining orders and increasing inventory when you are hoping for economic growth. (Source: “Advance Report on Durable Goods Manufacturers’ … Read More
It’s a simple scientific principle: what goes up must come down. Well, the same principle applies to the stock market. As we know, the stock markets have kept near their record highs for most of this fiscal year. However, the Conference Board announced on Tuesday that its consumer confidence index slipped to 79.7 in September, down from a revised 81.8 in August and below the 80.0 estimate. Tuesday’s consumer confidence numbers also represent the weakest reading since May.
The consumer confidence numbers shouldn’t be a total surprise to anyone who has been paying attention to U.S economic data. Even though the U.S. unemployment rate dropped to 7.3% in August from 7.4% in July, most of those jobs were in low-paying industries. Also, more and more Americans left the workforce because they were tired of looking for work.
Stubbornly high unemployment means consumers are increasingly pessimistic about finding work. Coupled with stagnant wages, weaker consumer confidence means Americans will probably cut back on spending as we head into the all-important holiday season. It’s not the best fuel for the world’s largest economy, especially one in which consumer spending makes up about 70% of all gross domestic product (GDP).
But again, this can’t be a surprise to Wall Street, either. Thanks to weakening consumer confidence numbers, S&P 500 companies have been warning investors all year long that they can’t meet projections. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, while 81% issued negative guidance during the second quarter.
Ahead of the third quarter, 88 companies (82%) have issued negative EPS guidance. This worsening trend … Read More
As consumers, we don’t always do what we say we do. Consumer confidence is, by all accounts, down, but spending in some areas is up. According to the Michigan Index, U.S. consumer confidence slipped in August from a six-year high. The Bloomberg Consumer Comfort Index, meanwhile, plummeted for four straight weeks to its lowest reading since April.
Yet interestingly, August auto sales were the strongest in over six years—proof, on some level, that low consumer confidence and optimism don’t portend weak consumer spending. But that doesn’t mean that we’re necessarily spending smartly—after all, lots of people spend money when they’re depressed—and with wages stagnant, high unemployment, and a record number of Americans on food stamps, we have plenty of reason to spend.
According to some, consumer confidence is unrelated to spending and is more closely aligned to our political affiliation. In fact, self-proclaimed Democrats and Republicans are showing the weakest correlation on the direction of the economy since 1990. (Source: Jamrisko, M., “Confidence Measures Show It’s the Politics, Stupid,” Bloomberg web site, September 10, 2013.)
Where zero indicates no trend and one shows them moving in step, the correlation between the confidence of Republicans and Democrats is 0.25 since Obama started his first term. During George W. Bush’s two terms, it was 0.55, and Americans of every political persuasion were in virtual agreement on the direction of the U.S. economy during the Clinton era at 0.95.
Up until the beginning of September, Democratic voters had been more confident overall than Republicans for 75 straight weeks. Their rose-colored glasses, on the other hand, couldn’t find the same disciplined focus when it … Read More
Consumer confidence seems to be deteriorating in the U.S. economy, and if it diminishes further, any economic growth will become questionable. When consumers are confident, they go out and spend, resulting in an increase in the consumer spending, which makes up 70% of the gross domestic product (GDP) of the U.S. economy.
Recently, clothing store chain Abercrombie & Fitch Co. (NYSE/ANF) reported that the company’s corporate earnings fell 33% in the second quarter of this year from the same period a year ago. The company’s same store sales declined 11% in the U.S. economy; this resulted in Abercrombie & Fitch lowering its outlook for the third quarter’s corporate earnings. (Source: “Abercrombie & Fitch Profit Slides, Cuts Outlook,” The Wall Street Journal, August 22, 2013.)
Sadly, when it comes to clothing stores, Abercrombie & Fitch wasn’t the only one that became the victim of diminishing consumer confidence; Aeropostale, Inc. (NYSE/ARO) faced scrutiny as well. The company registered a loss of $37.0 million in the second quarter, with the same store sales for the company declining 15%. Aeropostale was also hesitant about its outlook: “Our negative outlook for the third quarter reflects the challenges of a highly promotional and competitive teen retail environment which we expect will continue,” said Thomas P. Johnson, the company’s CEO. (Source: Ibid.)
While the above companies were mainly clothing stores, other retail giants like Wal-Mart Stores, Inc. (NYSE/WMT) and Macy’s, Inc. (NYSE/M) complained about consumer confidence as well, citing an increasingly tough business environment.
Here’s what you need to know: Companies, especially retailers of any sort, see trends in consumer confidence through their sales. If consumer confidence … Read More
Consumers like to purchase stuff, whether they need it or not. In the United States, this tendency to buy is our economic engine, driving 70% of all U.S. economic growth. In 2012, $11.119 trillion of the $15.685 trillion produced in the U.S. went towards household purchases. (Source: Amadeo, K., “What Are the Components of GDP?” About.com, April 25, 2013.)
With that much at stake, it’s easy to see why consumer confidence levels are one of the best economic indicators we have. If consumers are optimistic, they’ll spend more, and the economy expands; if they’re pessimistic, they rein in their discretionary spending, and the economy grinds down.
While Wall Street may be riding high, most of Main Street isn’t, and you can see that reflected in the consumer confidence numbers. High unemployment, high debt levels, and the idea of higher interest rates and slower economic growth have put a damper on America’s desire to spend the country out of its recession.
U.S. consumer confidence levels fell in August, just one month after reporting a six-year high. According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment slipped to 80.0 from 85.1 in July, the highest since July 2007. Wall Street economists, who clearly have their pulse on the heartbeat of the average American, were expecting August consumer confidence levels to actually increase to 85.5. (Source: “U.S. consumer sentiment weakens in August,” Reuters web site, August 16, 2013.)
It was a different story in the eurozone: consumer confidence levels there rose in August to their highest level in more than two years. During the second quarter, it was reported that the … Read More
American investors are sitting on a lot of money. According to the Investment Company Institute, total U.S. money market mutual fund assets for the week ended July 31 came in at $2.612 trillion. Of that total, 65%, or $1.69336 trillion, is attributed to institutional investors, while $918.93 billion belongs to retail investors. (Source: “Money Market Mutual Fund Assets,” ICI.org, August 1, 2013.)
Even though the stock market has been bullish since early 2009, with the S&P 500 advancing around 140%, investors sitting on the sideline remain skeptical. And on one hand, it’s not hard to see why: the financial crisis that led to the Great Recession may have started back in 2007, but the ripple effects are still being felt today.
U.S. unemployment has been above seven percent for over four years, underemployment has been at least 14% since 2009, and the minimum wage hasn’t budged from $7.25 an hour since July 2009. On top of that, personal debt is up, disposable income is a myth, and consumer confidence is down.
Hints that the Federal Reserve could begin tapering its $85.0-billion-per-month bond-buying program have also made global investors jittery, resulting in markets that are increasingly volatile—and for good reason.
On May 22, the Federal Reserve hinted it might scale back its quantitative easing policy. Over the following weeks, the S&P 500 lost 6.5% of its value. After clawing back the losses throughout July, the S&P 500 took another hit in early August after two Federal Reserve Bank presidents said it was possible the bond-buying program could end in September.
For many Americans, risk in the stock and bond markets is … Read More
The S&P 500 and Dow Jones Industrial Average may be trading at record highs, but not everyone is enjoying the so-called signs of economic growth. In fact, there isn’t too much for the average American to cheer about when it comes to the U.S. economy.
Fortunately, investors looking to benefit from real economic growth may consider diversifying their investing boundaries and looking at exchange-traded funds (ETFs) with exposure to one of the most mature economies in the world: the United Kingdom.
As Wall Street and the Federal Reserve celebrate economic growth in America, here are a couple numbers to consider: U.S. unemployment remains stubbornly high at 7.4% (and has been above seven percent for over four years now) and the underemployment rate is at an eye-watering 14% (and has been at least 14% since 2009). On top of that, wages are flat (minimum wage has been stuck at $7.25 an hour since July 24, 2009), personal debt is up, the growth rate of real disposable income is at its lowest levels in decades, and, not surprisingly, July’s consumer confidence numbers slipped.
Many point to housing as a sure sign of economic growth; however, U.S. home ownership is at its lowest level in 18 years and U.S. housing prices are still 25% below their 2006 highs. Those who lost their homes or are unable to get a foot on the property ladder are left paying all-time record-high rent prices.
The long-running bull market has more to do with the Federal Reserve’s $85.0-billion-per-month stimulus package and artificially low interest rates. Real economic recovery is rooted in economic growth and jobs, not downward … Read More
As consumer spending in the U.S. economy improves, investors may be able to profit from exchange-traded funds (ETFs) like the Consumer Discretionary Select Sector SPDR (NYSEArca/ XLY) and consumer discretionary companies.
In the aftermath of the financial crisis, consumer spending in the U.S. economy stalled. The reasons behind it were obvious: there was a surge in foreclosures and rampant job cuts.
But consumers in the U.S. economy seem to be spending once again.
In June, retail and food services sales increased 0.4% over May to $422.8 billion. While this may sound minute, it makes the big picture clearer: consumer spending on retail and food services has increased 4.6% in the second quarter of this year compared to last year, and is up 5.7% from June of 2012. (Source: U.S. Census Bureau, July 15, 2013.)
Consumers are also buying cars again. In June, 1.4 million cars and light trucks were sold in the U.S. economy. At an annual pace of 15.96 million vehicles, June was the best month for car sales since November of 2007. Auto sales in the U.S. economy have increased nine percent from a year ago. (Source: Klayman, B. and Woodall, B., “U.S. auto industry posts best sales month since 2007,” The Globe and Mail, July 2, 2013.)
Consumer confidence is also increasing in the U.S. economy. Consider the chart below of The University of Michigan Consumer Sentiment Index. In June, consumer sentiment registered at 84.1—one of the best levels since late 2008.
Chart courtesy of www.StockCharts.com
Consumer confidence is one of the best indicators of consumer spending. Once the consumer feels confident, they think the economy is … Read More
In May, the Thomson Reuters/University of Michigan’s preliminary consumer sentiment index, an early gauge of consumer confidence in the U.S. economy, registered at 83.7, up from 76.4 in April. This is the highest the index has been since July of 2007. Economists were expecting the index to register at 78. (Source: Schnurr, L., “May consumer sentiment highest in nearly six years,” Reuters, May 17, 2013.)
Why is consumer confidence important? It is often said that consumer confidence can be a good indicator of where the key stock indices in the U.S. are headed next. The reasoning behind this is that the U.S. economy thrives on consumer spending—meaning the more Americans spend, the more the economic growth.
If consumers are pessimistic, they will spend less. Think of it this way: if you find that businesses in the industry you work in are cutting jobs—say, because of recession—would you be spending as much? Or would you hoard and save as much as you can? This phenomenon may result in lower corporate profits and a decline in the stock market.
Similarly, if consumers are confident—for example, they think their jobs are going to be there for a while—they will not be hesitant to spend, meaning higher profits leading to a higher stock market.
Take a look at the chart below:
Chart courtesy of www.StockCharts.com
Consumer confidence (red line in the chart above) and the stock market/S&P 500 (green line) seem to be heading in similar directions. Looking at the chart above, the hypothesis that the stock market goes higher as the consumer sentiment increases seems to be true. The S&P 500 and consumer … Read More
The crippling recession has made it more difficult than ever to foresee where the economy is headed and where unpredictable investors are going to send the stock market.
Some stocks respond positively when the economy is weak. Most do well when the economy is chugging along. Others start to perform well when the economy begins to recover.
Since the start of the Great Recession, North Americans have been clutching their wallets a little tighter. That does not bode well for firms that rely on discretionary income and consumer confidence.
Despite the economic strain of high gas prices, North Americans continue to take to the highways. On the commercial front, the trucking industry is the driving force behind the U.S. economy, with as many as 750,000 interstate motor carriers.
Until we can replace “fill ’er up” with “beam me up,” we’ll continue to pay whatever it costs at the pumps.
TravelCenters of America LLC (NYSE/TA) operates and franchises travel centers primarily along the United States interstate highway system. The company’s network of more than 235 interstate highway travel centers in 41 U.S. states and Ontario, Canada is one of the largest in North America. Its “TCA” and “Petro” locations provide fuel, sit-down restaurants, fast food restaurants, convenience stores, and lodging. With professional truck drivers as its main customers, some outlets also offer “trucker-only” services, including: laundry and shower facilities, TV rooms, and truck repair services.
The company has a market cap of $222 million, $102 million in cash, and $96.4 million in long-term debt. Currently trading near $7.70 per share, TravelCenters has a book value of $12.33 per share.
On November … Read More