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Episode 5: US Consumer weakness and Black Friday

Episode 5 - Part 1

Is the US Consumer showing signs of weakness?

Published on: November 26th, 2019 • Duration: 7 minutes

This week, Roger Hirst investigates whether the U.S. consumer is showing signs of weakness, resulting from the slowdown in manufacturing spreading its effects across the economy. He looks at a particular stock, Rémy Cointreau, as an indicator of a slowing momentum in luxury consumption products. Finally, he reviews the new numbers for the U.S. Manufacturing PMI.

  • [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. 


Episode 5 - Part 2

How critical Is Black Friday to the economic narrative?

Published on: November 29th, 2019 Duration 7 minutes

This week, we discuss how retailers are anticipating blow-out sales this weekend for Black Friday and how investors are keeping an eye out for any indicator of weakness in the U.S. consumer. we also share how price movement in Amazon’s stock over the next few days will be perceived as a signal of strength in U.S. consumers. Finally, we review the new numbers for the U.S. Consumer Confidence Index.

  • [00:00:04]   This is before and after from Refinitiv, and I'm your host, Roger Hirst. Today, we take a slightly deeper dove into the importance of Black Friday for the US retail sector and the health of the US consumer, who are the engine of US growth. In the after section, we stick with that theme, reviewing this week's consumer confidence. So let's jump right into our before segment. Black Friday is the overhyped Friday after Thanksgiving in the US, where shoppers scramble to scoop up deals for the holidays. In many ways, Black Friday is a holiday in its own right. A day that celebrates the consumer engine that drives the economy. In the 1980s, retailers in the US began to use Black Friday as a marketing tool, which has now led to the creation of Cyber Monday, providing consumers a seamless shopping experience and interconnecting physical and digital into an omnichannel experience. These days, black Friday occurs in over 20 countries, including Mexico and Russia and it's a crucial day for U.S. retailers and for some it can make or break their fourth quarter profits. Supposedly it turns red ink into black on the ledgers and hence the name. And of all the retailers, the department stores might be relying the most on having a great Black Friday to match or exceed their quarterly estimates. According to analysis by Refinitiv in collaboration with Stylesage, over 60 percent of the merchandise at mid-tier department stores will be on sale this year, which could further continue to hurt profits. Featuring they're both the largest number of bargains and the deepest discounts. The value sector, on the other hand, has the fewest bargains and the smallest discounts. Items at Target and Wal-Mart already at low prices and these retailers typically don't tend to approach Black Friday with as much energy. According to Refinitiv and IBIS data, this year's same store sales winners are expected to be those companies which are focused on household goods such as LoveSac and American Eagle, but without too many company specific problems. The losers, as mentioned, generally have some ongoing company specific issues to deal with. J.C. Penney and Gap would be in that group. So amongst all the hype that surrounds Black Friday, are there any patterns of short term U.S. stock performances that we can identify and exploit? Well, of note, the best U.S. sector from one week before to one week after Black Friday is the retail sector. From 2007 to 2017, a grouping of the S&P 500 retail stocks posted a 5 percent return compared to the average 3 percent return for the S&P 500 over that same period. And for all 10 years, this basket of retail stocks has traded positively for that 10 day period. Now, although some estimates expect same store sales to be down on 2018, overall retail sales and cyber sales are expected to be up markedly in 2019 from Thanksgiving through to Cyber Monday. Retailers are expected to bring in one hundred thirty seven billion dollars this year versus 132 billion in 2018. And cyber sales are expected at 28 billion vs. 23.6 last year. If you remember last year, we went into the holiday shopping season in much gloomier and more uncertain mood. The market hadn't yet commenced its year end collapse. But there were multiple double digit corrections in the fourth quarter as trade war fears were at an extreme and emerging market instability dominated the market discussion. This year, we're entering the period on a much more solid footing. So how do you play Black Friday? By trading Amazon of course. People are known to window shop in the big box retailers and then pull the trigger at Amazon in 2018 from the close of trading on Wednesday before Thanksgiving until it peaked six trading days later on December the 3rd. Amazon stocks rallied 18 percent. Now, that's a remarkable performance given the overall sluggish Black Friday Cyber Monday total sales, which reflected a consumer who is much more vulnerable to external shocks from trade. So what to expect this year? Well, with the market steaming ahead, it's hard to see Amazon, one of the most amazing stock performers of the last decade, slowing down. It's up a staggering 1220%  in the 2010s versus the S&P 500 up 172%. Now, sure, the stock is expensive on a multiple basis, but it always has been. But anyone who hasn't bought Amazon due to its PE, just hasn't adapted to the modern market and it's not every day you see a trillion dollar company. But to grow their sales at 30 percent a year in North America, still is something to behold. The bottom line, when you fade Amazon at your peril. It can't go any higher as surely some of the most famous last words you've heard. A strong Black Friday/Cyber Monday will see the markets go into full blown Santa Chase mode led by Amazon, which should challenge the all time highs. The negative scenario to watch for, well check for this potential price action. If Black Friday sales are strong, but Amazon just can't rally and the stock stays below the 1850 tops from September, well, that could be a drag on the NASDAQ. It would suggest that all the equity market buying may have already been done and it might now be time to think about profit taking or protection across the broader market into year end. Consumer confidence came in marginally weaker than expected at 125 versus a forecast of a bounceback to 127. However, it was actually the fourth straight decline, which is the longest stretch since 2012. In absolute terms, it remains at the upper end of the 30 year range. What do the markets do? Well, the S&P did very little, up 10 basis points. But TLT, the bond ETF, it promptly rallied through the November highs and traded solidly above the 141 level, setting the stage for potential further gains. But again, we must be cognizant that we're in this. Good news is good news and bad news is good news sort of climate for stocks here at year end. As long as the Fed has weak data to keep the bond yields doveish, then one could expect TLT to stay firm. But the stock market did just shrug off what could be the early stages of a protracted decline in consumer confidence. And take note, the year on year change in a key subcomponent, the labor differential between jobs plentiful and jobs hard to get has just dropped below zero, which you did prior to the last three recessions. And also remember when the headline number of consumer confidence turns, it can do so in dramatic fashion. But as we noted in the previous section, the real vote on the health of the consumer should be coming up over the next few days with the critical Black Friday/Cyber Monday shopping spree. If that goes well, well this number will be quickly forgotten. There it is, the Black Friday bonanza in the before, US consumer confidence in the after and Refinitiv data throughout. This has been the Friday episode of Before and After. Please be sure to like subscribe and hit the notification bell shares with your friends and we'll be back on Tuesday.