Episode 5: US Consumer weakness and Black Friday

[00:00:04] This is before and after from Refinitiv. I'm your host, Roger Hirst and today we examine some possible positions and insights in the US and European markets as we look at the upcoming U.S. Conference Board consumer confidence and the earnings of French wine and spirit maker Remy Cointreau. Let's get right into our before segments. The Conference Board of US consumer confidence is still close to the 20 year highs, but when it turns lower, it can do so in dramatic fashion. Consumption accounts for about 70 percent of U.S. GDP and over the last five years, 85 percent of U.S. GDP growth. Investors are looking for any signs that the consumer is coming under pressure and that the slowdown in manufacturing is spreading to the wider economy. There have been some recent hints that the outlook has deteriorated. But so far, this key indicator has remained resilient. Now the economy of the US is disproportionately dependent on consumer confidence to counterbalance the stall in business investment and a contraction in exports. Last month, in October, the consumer confidence number failed to rebound from the September slump and it marked three straight months of declines in the figure. Though, to keep that in perspective, this was from near to the multi-year highs. But just how important of an economic number is it? Donald Trump tweeted that it was very good when it hit 126 in October. But this is also a data point that can fall off a cliff, as it did prior to the last three U.S. recessions. So what is the bottom line? Well, we've seen two straight consumer confidence readings come in below median estimates. Most analysts have priced a small bounce off the October number to 127 this time round and after last month's weaker number, TLT, which the US government 20 year bond ETF rallied 2.8 percent in three days trading. That's a pretty impressive move for the BOND ETF. It's also a clear sign that if consumer confidence collapses, so will rates in the US; i.e. bonds will rally and yields will fall. TLT is still currently around the 140 level, which is where it rallied to a month ago after the last report. A reading above 130 on consumer confidence, which will be a big shock to the upside, would see TLT sell off back towards those November lows of 135. But another weak number and TLT will be off to the races on the upside for the remainder of 2019, challenging the highs of 147. And overall? Well, no one really wants to see this number breaking down because that would imply that one of the foundations of the U.S. economy is starting to shake. Remy Cointreau, the venerable French spirits company known the world over for top shelf brands such as Remy Martin and Louis XIII cognac, reports earnings later this week on the twenty eighth of November. Remy Cointreau makes and distributes premium wines and spirits worldwide. Its second largest market is Asia, where there are concerns the slowdown in China and the unrest in Hong Kong have been hitting the sales of many luxury brands. This weekend's interest from LVMH for U.S. jewelry maker Tiffany shows there's life in the sector. Though Remy had very little reaction to that news. Remy had been underperforming other global luxury names over the last few weeks, and a breach of the 115 level could open the door to significant further declines in the stock. Why do we care? Well, Remy is a luxury consumer brand that will tell us a lot about the top end of the market and how it's spending right now. The last bastion of economic strength is usually the luxury consumer, which is probably why these names often carry such a lofty premium. In the case of Remy, it's a whopping PE of 37 and luxury brands such as Remy have a particular reliance on the rise of the Chinese millionaire, but protests in Hong Kong are compounding an already lethargic mainland Chinese environment. And all this could show up in the earnings reports. Asia itself accounts for over a quarter of Remy's total revenue and a significant percentage of the revenue growth projections. Europe? Sales there are already in decline. It's not really where the action is at And Remy itself dodged a bullet last month as their top selling brand, Remy Martin Cognac, managed to escape U.S. tariffs levied on European imports. The U.S. announced seven point five billion US dollars in tariffs as tensions over Boeing spilled over. Now, they may be safe for now, but of course, that can still change in a single tweet. With Remy Martin cognac accounting for 70 percent of sales in the US, Remy Cointreau would take a direct hit if tariffs are imposed on French cognac and there's no rhyme or reason for which liqueurs are being targeted. For example, whiskey from Northern Ireland and Scotland are being tarrifed but Irish whiskey is not. So the company has the uncertainty of Asia and the unpredictability of tariffs and at nearly four times brook and with that bulging PE over 30; this stock is not cheap. Add to that a debt to common equity ratio of 36 percent, and it's no wonder the short sellers are starting to circle Remy .Short interest is now 20 percent of the float. It's always tricky to play the bearish side on a stock with a high short interest and dour expectations and this is where an understanding of whether you're in it for the trade or the longer term play is absolutely crucial. If the stock beats and surprises, those crowded shorts are going to get squeezed. The average one day move after earnings for Remy is two point two percent over the last eight quarters, but implied volatility around this week's report expects a move that could be almost double that. Now after the recent steep sell off ,16 percent since September, there could be fireworks. If they beat, which is less likely, they've missed on five out of the last eight reports than we can expect an outsized move to the upside, i.e. larger than 4 percent that's expected by the options market. If your long term bearish on the name, however, then that would be a nice place to reduce inventory and get short. And if they miss again, well watch out for that key support level. Has there been a rebound in global manufacturing? The preliminary market manufacturing PMIs are out. Do the US. PMI continue to defy the weakness shown in the ISM and manufacturing data and hold above that expand contract pivot of 50?  Yes, it did. It turns out the number was stronger than expected at 52.2 versus 51.5 expected. It was, in fact, a seven month high, potentially signaling a short term bottom in U.S. manufacturing data. But the markets themselves yawned at the reaction with bonds little changed and equities just slightly bid. Perhaps, in fact, the recent risk on environment has appropriately priced in the bottom and therefore the surprise is minimal. Or perhaps investors are now focusing their attentions on the fortunes of the consumer. There it is, U.S. consumer confidence and France's Remy Cointreau in the Before. U.S. market manufacturing PMI in the After. Refinitiv data throughout. This has been the Tuesday episode of Before and After. Please be sure to like, subscribe and hit the notification bell. Share us with your friends and I'll be back on Friday.