Recently, we at the SMF have been spending the majority of our time determining how to allocate capital amongst the ten sectors we have used as a proxy to divvy up the markets. Like any other fund, we're taking extra precautions in which sectors are over-weighted or under-weighted.
One of the more interesting discussions, I think, has revolved around consumer discretionary. We don't need to spend a lot of time discussing what has happened to the consumer over the last eighteen months, but it's worth discussing where the consumer is going. Interesting data was released this past week that, on the top line, indicated the consumer was back. Retail sales from August showed better than expected gains of 2.7%, which was the biggest jump in three years (Is that really much of a contest, anyways?). Of course, last month was spurred by the cash for clunkers deal, which drove the retail numbers. However, after netting out the auto sales numbers, retail still gained 1.1%, well ahead of the 0.4% expected number. So, net-net, it still appears that consumers stumbled back into retail stores and bought stuff.
Predictably, stocks gained on the day (Sept. 15, 2009) and made a new high on the year. Optimism returned to the markets for the first time in quite a while (it helps when Warren Buffett publicly proclaims that he's optimistic as well). But is it rational?
What's not really focused on in the news is the rise in the PPI, indicating possibility of future inflation. Moreover, I just don't trust the consumer number. Sure, buyers found the markets again in August, but was that a sustainable development? Or is it that when people get deals, they like to buy other stuff? So were people buying cars and thinking, well, what's another couple hundred bucks at this point? It's at the very least possible.
Jim Breyer seems to agree, as well as the majority of attendees at this week's Private Equity Analyst conference in New York. Breyer, who sits on the board of Wal-Mart, also expressed doubt about the strength of the consumer. In a Wall Street Journal blog posting, Breyer is quoted as saying that shoppers are still hesitant to part with cash for non-essential items.
Another development to watch is the upcoming resetting of Option ARM's around the country. According to mybudget360.com, there is currently $189 billion in option ARM's outstanding; 70% of those will be resetting in the next 12 months. It goes without saying that this isn't going to help the wallet.
Shopping season is right around the corner. We at the SMF will continue to eye the discretionary sector cautiously as consumer sentiment is extremely hard to predict at the moment.
The Wall Street Journal blog post can be found here:
http://blogs.wsj.com/venturecapital/2009/09/18/jim-breyer-and-tim-draper-at-odds-on-vc-outlook/
Option ARM data can be found here:
http://www.mybudget360.com/option-arm-disaster-arrival-mortgages-more-problematic-than-originally-thought-134-billion-recasting-in-next-two-years-94-percent-made-only-minimum-payment-only-35000-of-the-1-million-option/
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Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.” - Warren Buffet.
ReplyDeleteNow the challenge is what day did he say this? Well it's from an Op-Ed in the NYT on October, 18, 2008 - so the market came and went and went a lot since then, but now it is on it's way back. Clearly this guy is not perfect. So who is, or who has a lock the direction of the economy? One or two months of pretty good data are no guarantee. There were one or two people saying the economy sucked and it was going nowhere back in March. If you were not skating to where the puck was going back then, you missed out on one hell of a rally. The data is better than it was six months ago. Will it be better in another 6? Maybe...
History suggests we should expect more than ten months of industrial expansion following this extended contractionary period. The average is 16.7 months (following double digit months of contraction). Unfortunately the last couple of expansions have not been so smooth. Prior to the 90s, double digit months of contraction were generally met with long expansions. However the last three only received 5, 1 and 8 months of respite after the pullback. The good thing about the more recent expansions is after the initial expansion the next contractions were very short followed by longer expansions.
Now where is that damn puck? I can never follow it all the time...
Great comments, Charlie.
ReplyDeleteMy follow up would point towards a principle-agent problem we're circling around.
You point to a great stat here - ~16 months of industrial expansion following 10 + months of contraction. My question is, does that precede or follow the consumer's return to the market?
The premise underlying my original post is that the consumer retail numbers isn't indicative of a rebound in consumer confidence, but of an organizational behavior issue. In other words, consumers weren't buying because they had more security in their job prospects, or because they were tapping equity in their appreciating-in-value homes. Instead, they were buying cars, and because they were buying cars, they figured a night out to eat wouldn't really kill them, all things considered. Plus, the car needs real hubcaps, so let's pop those puppies on the new Civic.
So do we need consumer activity to rebound first before industrial expansion? Industrial expansion without the consumer could lead to more troubles.
Now, with all that being said, I'm not skating to open space here; my argument is the goalie with the ass on the goalline, deep in the net, trying to stop the bleeding. I guess I could also be the crazy hockey parent, ranting and raving. Either or.