Forget The Dips, Sell The Rips – David Stockman’s Contra Corner 08-24-15

Salient to Investors:

David Stockman writes:

  • The S&P 500 has sliced through both the 50-day and 200-day moving averages. 2130 on the S&P 500 will prove to be a generational high.  CAT, China, European luxury brands, the NASDAQ Biotech Index are shorts.
  • Expect the Fed to announce they are well short of the their magic 2% on the PCE deflator and so defer a September rate increase: not because there is too little inflation but because it is scared about the stock market fall. This will catalyze a frenzy of dip buying, claims the market has bounced off support is ready to resume the bull market. Do not buy the dip.
  • In the past 15 years CPI has risen by 2.5% annually if you include housing and rent inflation. The Fed hurts savers and retirees in order to keep Wall Street gamblers in free carry trade money, hoping to generate economic growth by giving the 1%  wealth effect windfalls.
  • The Wilshire 5000 has gained more than $15 trillion of market cap during the last 6 years, while the total value of all corporate equity in the US economy has risen by more than $20 trillion – substantially passing the two earlier stock market bubbles – despite having virtually nothing to do with the long-term trends in the US economy, weak at best.
  • Zero interest rates can do nothing about global deflation caused by massive malinvestment generated by years of zero interest rates and central bank financial repression. The central banks have created a monumental falsification of prices in virtually every asset class, while divorcing the financial market from the real economy.
  • The post-2009 recovery is the final and radical expansion of the growth and capital spending bubble underway around the world since the early 1990s. Since 2013, the massive capital spending bubble driven by central bank policy has begun to roll-over. The cliff-diving phase of commodity and industrial prices and profit margins has only just begun, and worldwide capital spending will be plunging sharply for years to come. Chinese and Korean shipyards will soon be bankrupt, Australia and Brazil are heading for depression.

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U.S. Rate Rise Sends High-Dividend Stocks Lower: EcoPulse – Bloomberg 12-12-13

Salient to Investors:

Brad Kinkelaar at Pimco said:

  • The underperformance of many high-dividend stocks in the past 8 months shows a sentiment shift already is under way. If rates continue to rise through 2014, albeit gradually, telecom, utility and REITs should continue to underperform the market.
  • Look for stocks with attractive dividends, particularly that will benefit from global growth – half the companies in his funds are based outside the US.
  • Avoid the most expensive parts of the domestic market, including shares hardest hit by the increase in interest rates, like toll-road companies in China, Brazil and Italy and US retailers.
  • Money managers with dividend-paying strategies flocked into a scarce menu of attractive-yielding stocks in the US, causing their share prices to increase significantly, but the reverse is now happening.

34 percent of economists expect tapering in December. The median economist predicts the 10-yr T-yield will rise to 3.37 percent by the end of 2014.

Benjamin Brodsky at BlackRock said tapering is inevitable and very likely in 2014 so the key T-yield could rise to a fair value of 3.7 percent by the end of 2014, significantly surprise the market, and add volatility not only in Treasuries but to other asset classes. Brodsky said the Fed will be losing one of its essential tools to control the long end of the market amid signs the recovery is strengthening.

Rob Morgan at Fulcrum Securities said large-cap dividend-paying stocks will be hurt as yields on 10-yr Treasuries continue their rise since May, though swapping equities for fixed-income securities is not imminent.

Jim Stellakis at Technical Alpha said investors have become more aggressive about pulling money out of the dividend index, which is in a general downtrend relative to the S&P 500 total-return index, with lower peaks and troughs indicating people are becoming more impatient and selling sooner. Stellakis said the dividend index falling below the March 2012 trough will indicate further deterioration in investor sentiment.

Eric Teal at First Citizens BancShares said we are in a transition period as equity investors adjust to a rising-rate environment, and as the US economy moves into later stages of the expansion that began in June 2009, investors need to be more selective about the type of dividend-paying stocks they purchase, and differentiate between companies with high-dividend yields relative to the market and those whose payouts may be poised to increase. Teal seeks stocks with growing dividends that are leveraged to an economic recovery, especially on a global basis, like the industrials, which have expanded payouts in recent years. Teal said Treasuries approaching 4 percent will be a trigger for asset-allocation models.

James Bullard of the FRB St. Louis said any tapering should be modest to account for low inflation, and should inflation not return toward target, the Fed could pause tapering at subsequent meetings.

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Drop in Durables Orders Points to Slow Investment: Economy – Bloomberg 11-27-13

Salient to Investors:

Ryan Sweet at Moody’s Analytics said conditions for stronger growth are falling into place for early 2014, and housing will kick in and spur faster growth.

Michelle Girard at RBS Securities expects the shopping season to be OK as employment growth of around 200,000 jobs a month and income growth supports a 2 percent consumer spending pace.

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Sluggish Retail Sales Seen as Bad Sign for Holiday Season – Bloomberg 09-05-13

Salient to Investors:

Retailers from Macy’s to Wal-Mart Stores missed Q2 sales estimates and cut forecasts.

Jennifer Davis at Lazard Capital Markets sees a shift away from spending on apparel and discretionary items to spending on homes and automobiles as consumers feel better, are willing to spend on larger item purchases and are doing without things they can live without. Americans are replacing cars after postponing such purchases for years.

Adrienne Tennant at Janney Montgomery Scott said back-to-school spending so far is anemic at best, and this usually has had a high correlation with holiday sales.

The National Retail Federation estimates US households will spend an average of 7.8 percent less for back-to-school shopping this year because of the bumpy economic recovery.

Ken Perkins at Retail Metrics said aggressive promotions across the mall, particularly over Labor Day weekend, are raising concerns about retailers’ Q3 margins.

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Retail Sales in U.S. Dropped in March by Most in Nine Months – Bloomberg 04-12-13

Salient to Investors:

Economists are projecting consumer spending rose at the fastest pace in 2 years in Q1 and to slow to a 1.8 percent pace in Q2.

Ellen Zentner at Nomura Securities Intl said households are making the difficult spending choices – there is no steam going into Q2.

Ian Shepherdson at Pantheon Macroeconomic Advisors said the payroll tax increase is hurting and expects Q2 spending to rise at a much slower pace.

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Facebook Fatigue Among Teens Should Freak Out Marketers – Bloomberg Businessweek 04-11-13

Salient to Investors:

Piper Jaffray says new research shows:

  • Teens are growing tired of Facebook and YouTube – which could have wide-ranging effects on retail, fashion, gaming, and other youth-oriented industries.
  • The new hot teen channels in social media are Reddit, Twitter, Snapchat, Vine, and 4chan.
  • Abercrombie & Fitch and Best Buy made teens’ top 10 roundup of favorite e-commerce sites a year ago but this year vanished from the list.

Teens are an $819 billion consumer segment, and social media is an increasingly large influence on their purchasing decisions.

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Private Equity’s $36 Billion Retail Bet Not Going So Well – Bloomberg 03-15-13

Salient to Investors:

The private-equity investment of $36 billion in US brick-and-mortar retailers before the recession in 2007 has not turned out well. Of the 8 largest retail private-equity buyouts during that period, only Dollar General has gone public

Leon Nicholas at Kantar Retail said there is nothing special about specialty stores anymore, and their advantages on product assortment, expertise and price have disappeared.

Many of the survivors have dubious futures and depressed stock valuations.

Chris Bertelsen at Global Financial Private Capital said the evidence shows the business model is in trouble and wouldn’t touch a public Toys “R” Us with a 10-foot pole.

Newly frugal consumers flocked to the Web for its ease and lower prices, thus weakening a specialty chain’s profit margins because consumers can comparison shop at will on the Web’s endless aisles.

Paul Swinand at Morningstar said specialty retail is a tough game to play now, competing with discounters like Wal-Mart and Amazon’s selection and service.

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Where to Invest While Markets Remain ‘Risk-On’ – Bloomberg 01-30-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

Investor zeal for yield and disregard for risk favors the junkiest of the junk.

When the grand disconnect between investor focus on the immense liquidity created by central banks and weak and weakening global economies becomes unsustainable, probably after a significant shock, investors should shift from risk on to risk off.

Treasury bonds will benefit from:

  • slow economic growth at best,
  • Fed determination to reduce long-term interest rates.
  • looming deflation,
  • pension funds and life insurers who want to match long-term liabilities with assets of similar maturity,
  • being the haven from trouble in Europe and elsewhere,
  • China’s attempts to cool its economy and stoke weak exports that may cause a hard landing,
  • huge demand from the Fed and central banks and foreign governments.

Buy Treasuries not for their yield but for their appreciation:

  • The 30-yr Treasury bond yield will fall to 2 percent after the grand disconnect ends – a 30 percent total return in one year on a 30-yr coupon Treasury or 44.9 percent on a zero-coupon bond.
  • The 10-yr Treasury note yield will drop to 1 percent – a 10.4 percent  total return on the coupon bond or 11.2 percent on a 10-yr zero-coupon note.

Municipal bonds may benefit from the further decline in Treasury yields, while investment-grade corporates remain attractive for yield and appreciation. Debt service isn’t a problem since non-financial corporations are flush with cash.

Companies with significant dividends are generating real earnings and real cash flow and almost certainly are managed in a prudent and stable manner.

Consumers, especially when hard-pressed, tend to buy the very best of what they can afford, even if low-priced.

Consumer Staples and Food producers’ equities will remain attractive.

The US dollar will strengthen as foreign nations, notably Japan, competitively devalue.

Health care accounted for 17.9 percent of GDP in 2011, and is growing. Major pharma and biotech stocks are attractive. Many health-care companies pay meaningful dividends.

Medical-office buildings and outpatient facilities demand was forecast last year to expand 19 percent by 2019. Physicians are increasingly moving from small practices to hospital campuses and satellite facilities: 53 percent now work for hospitals. Medical-office building values are much less volatile than those of other commercial and residential real estate, and won’t be afflicted by persistent excess capacity, which hinders new construction, as with residential real estate, malls and office buildings.

Rental apartments will continue to benefit from the separation Americans are beginning to make between their homes and their investments. Empty-nesters will move into rental apartments. Rental demand and rental rates are increasing because of tight lending standards for homebuyers, continuing high unemployment and job risks. REITs containing rental apartments are fully priced, but direct ownership of rental apartments is attractive, with overbuilding still some years off.

Tech will rise in 2013 as companies continue to cut costs and promote productivity – increasing profit through price and volume remains difficult, if not impossible.

Conventional North American energy will benefit from the desire to reduce imports. Buy natural-gas producers, pipelines, oil sands, energy services, oil producers, nuclear energy and shale oil and gas. Avoid ethanol, biofuels, wind, solar, geothermal, electric vehicles and other renewable energy because of their heavy dependence on government subsidies.

Commodities are unattractive: prices have been falling since early 2011, amid slow global growth and mounting inventories, especially in China. Industrial commodity prices will be further depressed in 2013 by continuing global economic weakness and rising inventories.

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Cyber Monday Likely to Be Biggest Online Shopping Day in U.S. History – PBS Newshour 11-26-12

Salient to Investors:

Nancy Koehn at Harvard said the boundaries between brick and mortar and online, and between channels is blurring. Koehn said we don’t yet know if online sales adds up to incremental, organic growth, but consumers are much smarter and much more adaptable.

Nariman Behravesh at IHS said the consumer is in a very good mood because income growth is decent and job growth is coming along, housing is doing well, while online sales are growing like gangbusters. Behravesh sees a disconnect between consumers and businesses, who are more worried about the fiscal cliff, Europe, the China slowdown. Behravesh says consumer finances are in much better shape, so their spending is more sustainable – healthier because debt levels are down, not using home equity loans to spend on a car or on a flat-screen TV.

Neil Irwin at The Washington Post said online is not the best indicator of retail and doesn’t tell you what happens to personal consumption as a whole.  Irwin says the American household is gradually fixing its financial problems, with debt service ratios down to 1990s levels and household debt to GDP at early 2000 levels. Irwin said what matters to the overall economy is how much people are spending, not where, but there is not much sign of pent-up demand.

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Male Shoppers Outdo Women as Web Offers Haven From Mall – Bloomberg 10-15-12

Salient to Investors:

Fashion is the fastest-growing segment of online commerce.

Men are flocking to websites, which are capturing a growing part of the $41 billion fashion e-commerce market.

NPD Group says the women’s online clothing market is more than double men’s, but the men’s market is growing at a 13 percent annual rate versus 10 percent for women.

Jeremy Liew at Lightspeed Venture Partners said men make big purchases in one swoop while women often browse recreationally and may not buy.

US Census Bureau says men are staying single longer.

Brian O’Malley at Battery Ventures prefers the more stable revenue stream from ad-supported social networking companies over companies reliant on venture capital that don’t make much from advertising until they have a ton of users.

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